<PAGE> 1
SCHEDULE 14A INFORMATION
(RULE 14A-101)
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
RE CAPITAL CORPORATION
--------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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(2) Aggregate number of securities to which transaction applies:
7,871,956*
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$18.50 PER SHARE OF COMMON STOCK
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(4) Proposed maximum aggregate value of transaction:
$135,135,742**
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(5) Total fee paid:
$27,027
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/X/ Fee paid previously with preliminary materials.
$27,027
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/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$27,027 (filing fee for Preliminary Proxy Statement filed pursuant to
Schedule 14A on
February 8, 1995 and March 21, 1995 -- File No. 1-5429)
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(2) Form, Schedule or Registration Statement No.:
SCHEDULE 14A
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(3) Filing Party:
RE CAPITAL CORPORATION
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(4) Date Filed:
March 27, 1995
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* Consists of 7,111,269 shares of Common Stock to be cancelled in exchange for
the right to receive the Merger Consideration, 743,000 options to purchase
Common Stock and 17,687 stock appreciation rights.
** Includes $3,577,266 representing the aggregate amount to be paid upon
exchange and cancellation of all stock options and stock appreciation rights.
<PAGE> 2
RE CAPITAL CORPORATION
TWO STAMFORD PLAZA
STAMFORD, CONNECTICUT 06904
March 27, 1995
Dear Re Capital Corporation Stockholder:
You are cordially invited to attend a Special Meeting (the "Special
Meeting") of the stockholders of Re Capital Corporation ("Re Cap") to be held on
April 25, 1995 at 10:00 a.m., Eastern Standard time, at 200 Park Avenue, 48th
Floor, New York, New York.
As described in the accompanying Notice of Special Meeting of Stockholders
and Proxy Statement, at this Special Meeting stockholders will be asked to
consider and vote upon a proposed merger (the "Merger") of ZRC Merger-Sub Corp.,
a Delaware corporation ("Merger Sub"), with and into Re Cap, pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated as of January 11,
1995 among Re Cap, Zurich Reinsurance Centre Holdings, Inc., a Delaware
corporation ("ZRC"), and Merger Sub, a wholly-owned subsidiary of ZRC. Upon the
terms and subject to the conditions of the Merger Agreement, Merger Sub will be
merged with and into Re Cap, with Re Cap continuing as the surviving corporation
as a direct wholly-owned subsidiary of ZRC, and each share of Common Stock of Re
Cap (the "Common Stock") (other than shares held (i) by Merger Sub or ZRC, (ii)
in the treasury of Re Cap or by any of its subsidiaries and (iii) by
stockholders who have properly perfected their dissenters' appraisal rights
under the Delaware General Corporation Law) will be converted into the right to
receive $18.50 per share in cash, without interest. As a result of the Merger,
the stockholders of Re Cap will no longer own any capital stock of the surviving
corporation.
Contemporaneously with the execution of the Merger Agreement, John Deere
Insurance Group, Inc. ("Deere Insurance"), the owner of 43.4% of the shares of
Common Stock, entered into an Option and Voting Agreement (the "Voting
Agreement"), dated as of January 11, 1995, with ZRC, pursuant to which Deere
Insurance granted to ZRC an option to purchase all of the shares of Common Stock
held by Deere Insurance under the circumstances specified in the Voting
Agreement at a purchase price of $18.50 per share in cash and agreed to vote all
of its shares of Common Stock (i) in favor of the Merger and (ii) against any
other proposal which provides for any merger, sale of assets or other Third
Party Business Combination (as defined in the Merger Agreement) between Re Cap
(or any subsidiary of Re Cap) and any other person or entity or which is
otherwise inconsistent with the Merger or the Merger Agreement.
THE BOARD OF DIRECTORS OF RE CAP HAS CAREFULLY CONSIDERED THE TERMS OF THE
PROPOSED MERGER AGREEMENT AND THE MERGER AND BELIEVES THAT THE MERGER IS FAIR
TO, AND IN THE BEST INTERESTS OF, RE CAP AND ITS STOCKHOLDERS. THE BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER.
In arriving at its decision, the Board of Directors gave careful
consideration to a number of factors described in the accompanying Proxy
Statement, including the written opinion of Smith Barney Inc. ("Smith Barney"),
financial advisor to Re Cap, to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the consideration
to be received in the Merger by the holders of Common Stock was fair, from a
financial point of view, to such stockholders. A copy of the written opinion of
Smith Barney is included as Appendix C to this Proxy Statement and should be
read carefully in its entirety.
<PAGE> 3
Your vote is very important, regardless of the number of shares of Common
Stock you own. The Merger is conditioned upon, among other things described in
the Proxy Statement, the approval of the holders of a majority of the
outstanding shares of Common Stock. Therefore, it is important that you vote
your proxy as soon as possible. The Board of Directors encourages all
stockholders who do not plan to exercise dissenters' rights to return a proxy as
soon as possible so that a determination can be made at the earliest possible
date whether the Merger will be consummated.
YOU ARE URGED TO READ THE ACCOMPANYING PROXY STATEMENT BEFORE MAKING YOUR
VOTE, WHICH PROVIDES YOU WITH A DESCRIPTION OF THE TERMS OF THE MERGER. A COPY
OF THE MERGER AGREEMENT IS INCLUDED AS APPENDIX A TO THE ENCLOSED PROXY
STATEMENT.
Please mark, sign and date each proxy card you receive and return it in the
postage-paid envelope provided, even if you currently plan to attend the Special
Meeting. This will not prevent you from voting in person, but will ensure that
your vote is counted if you are unable to attend. You may revoke your voted
proxy at any time prior to the Special Meeting or vote in person if you attend
the Special Meeting. I encourage you to vote FOR the Merger Agreement and the
Merger and each of the other proposals described in the Proxy Statement.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS
ADOPTED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK
CERTIFICATES.
Thank you for your interest and participation.
Sincerely,
JAMES E. ROBERTS
President and Chief Executive Officer
<PAGE> 4
RE CAPITAL CORPORATION
TWO STAMFORD PLAZA
STAMFORD, CONNECTICUT 06904
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
MARCH 27, 1995
A Special Meeting (the "Special Meeting") of Stockholders of Re Capital
Corporation, a Delaware corporation ("Re Cap"), will be held on April 25, 1995
at 10:00 a.m., Eastern Standard time, at 200 Park Avenue, 48th Floor, New York,
New York, for the following purposes:
1. To consider and vote upon a proposed merger (the "Merger") of ZRC
Merger-Sub Corp., a Delaware corporation ("Merger Sub"), with and into Re
Cap, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"),
dated as of January 11, 1995, by and among Re Cap, Zurich Reinsurance
Centre Holdings, Inc., a Delaware corporation ("ZRC"), and Merger Sub, a
wholly-owned subsidiary of ZRC. Upon the terms and subject to the
conditions of the Merger Agreement, Merger Sub will be merged with and into
Re Cap, with Re Cap continuing as the surviving corporation as a direct
wholly-owned subsidiary of ZRC, and each share of Common Stock of Re Cap
(the "Common Stock") (other than shares held (i) by Merger Sub or ZRC, (ii)
in the treasury of Re Cap or by any of its subsidiaries and (iii) by
stockholders who have properly perfected their dissenters' appraisal rights
under the Delaware General Corporation Law) will be converted into the
right to receive $18.50 per share in cash, without interest;
2. To transact such other business as may properly be brought before
the meeting and any adjournments and postponements thereof.
A conformed copy of the Merger Agreement appears as Appendix A to, and is
described in, the accompanying Proxy Statement.
Your Board of Directors has determined that the terms of the Merger are
fair to, and in the best interests of, Re Cap and its stockholders, has approved
and adopted the Merger Agreement and the transactions contemplated thereby and
recommends that the stockholders of Re Cap vote FOR the approval of the Merger.
Stockholders of record at the close of business on March 24, 1995 will be
entitled to notice of and to vote at the Special Meeting and any adjournments
and postponements thereof.
Under Delaware law, stockholders of Re Cap have the right to dissent from
the Merger and demand appraisal rights for their shares, provided that the
Merger is consummated and such stockholders comply with the requirements of
Section 262 of the Delaware General Corporation Law. See "Appraisal Rights of
Dissenting Stockholders" in the accompanying Proxy Statement for a description
of the rights of dissenting stockholders and a discussion of the procedures
which must be followed by dissenting stockholders of Re Cap to obtain appraisal
of their shares.
By order of the Board of Directors,
CONOR D. REILLY
Secretary
Dated: March 27, 1995
New York, New York
<PAGE> 5
TO ASSURE YOUR REPRESENTATION AT THE MEETING, WHETHER OR NOT YOU PLAN TO
ATTEND, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT
TO REVOKE SUCH PROXY BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN PERSON AT THE
MEETING. PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR
OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING
A LETTER FROM THE BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL
OWNERSHIP OF THE SHARES AND YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY
ISSUED IN YOUR NAME. IF YOU PLAN TO ATTEND THE MEETING, PLEASE SO INDICATE IN
THE SPACE PROVIDED ON THE PROXY.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY RE CAP OR
ANY OTHER PERSON.
PLEASE DO NOT SEND YOUR COMMON STOCK CERTIFICATES AT THIS TIME. IF THE
MERGER IS CONSUMMATED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF
YOUR STOCK CERTIFICATES.
PLEASE MAIL YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. THE SPECIAL
MEETING DATE IS APRIL 25, 1995.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INTRODUCTION.......................................................................... 1
AVAILABLE INFORMATION................................................................. 2
SUMMARY............................................................................... 3
SUMMARY CONSOLIDATED FINANCIAL DATA................................................... 7
THE SPECIAL MEETING................................................................... 9
Date, Place and Time................................................................ 9
Matters to be Considered at the Special Meeting..................................... 9
Record Date; Voting at the Special Meeting.......................................... 9
Vote Required....................................................................... 9
Solicitation, Revocation and Use of Proxies......................................... 10
THE MERGER............................................................................ 10
Background; Reasons for the Merger.................................................. 10
Recommendation of the Board of Directors............................................ 15
Opinion of the Company's Financial Advisor.......................................... 17
Source of Funds of the Merger Consideration......................................... 20
Regulatory Approval................................................................. 20
Accounting Treatment................................................................ 21
THE MERGER AGREEMENT.................................................................. 21
The Merger; Payment of the Merger Consideration..................................... 21
Representations and Warranties...................................................... 22
Certain Covenants................................................................... 23
Conditions to the Merger............................................................ 25
Agreements with Respect to the Company's Stock Option Plans......................... 26
Agreements with Respect to Certain Employee Matters................................. 26
Indemnification..................................................................... 27
Amendment and Waiver of the Merger Agreement........................................ 27
Termination of the Merger Agreement................................................. 27
CERTAIN OTHER AGREEMENTS.............................................................. 29
The Voting Agreement................................................................ 29
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................................ 30
Deere Insurance..................................................................... 30
Indemnification..................................................................... 30
Employee Issues..................................................................... 31
Investment Advisory Agreement....................................................... 32
FEDERAL INCOME TAX CONSEQUENCES....................................................... 33
Purchase of Shares.................................................................. 33
Backup Withholding.................................................................. 33
General............................................................................. 33
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS........................................... 34
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS.......................................... 36
</TABLE>
i
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS............................................. 37
CERTAIN INFORMATION CONCERNING ZRC AND MERGER SUB..................................... 38
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 39
INDEPENDENT AUDITORS.................................................................. 39
STOCKHOLDER PROPOSALS FOR THE 1995 ANNUAL MEETING..................................... 39
OTHER MATTERS......................................................................... 39
Appendix A -- Agreement and Plan of Merger............................................ A-1
Appendix B -- Option and Voting Agreement............................................. B-1
Appendix C -- Opinion of Smith Barney Inc............................................. C-1
Appendix D -- Section 262 of the Delaware General Corporation Law..................... D-1
Appendix E -- Report of Independent Auditors.......................................... E-1
</TABLE>
ii
<PAGE> 8
RE CAPITAL CORPORATION
TWO STAMFORD PLAZA
STAMFORD, CONNECTICUT 06904-2148
(203) 977-6100
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
APRIL 25, 1995
------------------------
INTRODUCTION
This Proxy Statement is being furnished to holders of Common Stock of Re
Capital Corporation, a Delaware corporation ("Re Cap" or the "Company"), in
connection with the solicitation by Re Cap's Board of Directors (the "Board of
Directors" or the "Board") of proxies for use at the Special Meeting of
Stockholders (the "Special Meeting") and any adjournments or postponements
thereof. The Special Meeting will be held on April 25, 1995 at the time and
place specified in the accompanying Notice. This Proxy Statement is first being
mailed to stockholders of Re Cap on or about March 27, 1995.
At the Special Meeting, stockholders of Re Cap will vote upon a proposed
merger (the "Merger") of ZRC Merger-Sub Corp., a Delaware corporation ("Merger
Sub"), with and into Re Cap, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of January 11, 1995, by and among Re Cap, Zurich
Reinsurance Centre Holdings, Inc., a Delaware corporation ("ZRC"), and Merger
Sub, a wholly-owned subsidiary of ZRC. Upon the terms and subject to the
conditions of the Merger Agreement, Merger Sub will be merged with and into Re
Cap, with Re Cap continuing as the surviving corporation as a direct
wholly-owned subsidiary of ZRC, and each share of Common Stock of Re Cap (the
"Common Stock") (other than shares held (i) by Merger Sub or ZRC, (ii) in the
treasury of Re Cap or by any of its subsidiaries, and (iii) by stockholders who
have properly perfected their dissenters' appraisal rights under the Delaware
General Corporation Law ("DGCL")) will be converted into the right to receive
$18.50 per share in cash ,without interest (the "Merger Consideration"). Upon
consummation of the Merger, stockholders of Re Cap will have no further interest
in the surviving corporation.
Stockholders of record at the close of business on March 24, 1995 (the
"Record Date") will be entitled to notice of and to vote at the Special Meeting
and any adjournments and postponements thereof. At the Record Date there were
outstanding 7,111,269 shares of Common Stock, each of which will be entitled to
one vote on each matter to be acted upon at the Special Meeting and all
adjournments and postponements thereof. The presence, in person or by proxy, of
the holders of a majority of such outstanding shares of Common Stock (i.e.,
3,555,635 shares of Common Stock) is necessary to constitute a quorum. Proxies
will be solicited by mail and by a solicitation agent retained by the Company.
See "THE SPECIAL MEETING -- Solicitation, Revocation and Use of Proxies."
The Board of Directors has authorized and approved the Merger Agreement and
the Merger and unanimously recommends that stockholders vote for the approval of
the Merger.
If the enclosed form of proxy is properly executed and returned to Re Cap
in time to be voted at the Special Meeting, the shares of Common Stock
represented thereby will be voted in accordance with the instructions marked
thereon. Executed but unmarked proxies will be voted FOR the approval of the
Merger.
The presence of a stockholder at the Special Meeting will not automatically
revoke such stockholder's proxy. However, a stockholder may revoke a proxy at
any time prior to its exercise by filing with the Secretary of Re Cap a written
notice of revocation, by delivering to Re Cap a duly executed proxy representing
such shares of Common Stock and bearing a later date, or by voting in person at
the Special Meeting.
The date of this Proxy Statement is March 27, 1995.
<PAGE> 9
The information in this Proxy Statement with respect to the Company has
been supplied by the Company and the information with respect to ZRC and Merger
Sub has been supplied by ZRC. The principal executive offices of the Company are
located at Two Stamford Plaza, Stamford, Connecticut 06904-2148, and its
telephone number is (203) 977-6100. The principal executive offices of ZRC and
Merger Sub are located at One Chase Manhattan Plaza, New York, New York 10005,
and their telephone number is (212) 898-5000.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and should also be available for inspection and copying
at the regional offices of the Commission located at 7 World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such information may be obtained by mail from the public
reference section of the Commission in Washington, D.C. upon payment of certain
fees prescribed by the Commission. This material may also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
2
<PAGE> 10
SUMMARY
The following is a brief summary of certain information included elsewhere
in this Proxy Statement. The summary does not purport to be complete and is
qualified in its entirety by the more detailed information contained in this
Proxy Statement, the appendices and the material incorporated by reference, all
of which should be carefully reviewed. Unless otherwise defined herein,
capitalized terms used in this summary have the respective meanings set forth
elsewhere in this Proxy Statement. Cross-references in this summary refer to
indicated captions or portions of this Proxy Statement.
THE PARTIES
RE CAPITAL CORPORATION..... The Company, through its wholly-owned subsidiary Re
Capital Reinsurance Corporation, a New Jersey
corporation ("RCRC"), provides treaty reinsurance
to domestic property-casualty insurers exclusively
through reinsurance intermediaries. The Company
maintains executive offices at Two Stamford Plaza,
Stamford, Connecticut 06904-2148, and its telephone
number is (203) 977-6100.
ZURICH REINSURANCE CENTRE
HOLDINGS, INC. AND ZRC
MERGER-SUB CORP. ........ ZRC serves as the holding company for Zurich
Reinsurance Centre, Inc. ("Zurich Reinsurance"), a
Connecticut reinsurance company which is engaged in
the business of property and casualty reinsurance
underwriting. Merger Sub is a direct wholly-owned
subsidiary of ZRC, created for the sole purpose of
consummating the Merger. ZRC and Merger Sub
maintain their executive offices at One Chase
Manhattan Plaza, 43rd Floor, New York, New York
10005, and their telephone number is (212)
898-5000. See "Certain Information Concerning ZRC
and Merger Sub."
THE SPECIAL MEETING
DATE, PLACE AND TIME;
MATTERS TO BE CONSIDERED
AT THE SPECIAL MEETING... The Special Meeting will be held on April 25, 1995,
at 10:00 a.m., New York time, at 200 Park Avenue,
48th Floor, New York, New York. See "THE SPECIAL
MEETING -- Date, Place and Time." The purposes of
the Special Meeting are (i) to consider and vote on
the Merger and (ii) to transact any other business
as may properly come before the Special Meeting.
See "THE SPECIAL MEETING -- Matters to be
Considered at the Special Meeting."
RECORD DATE; VOTING AT THE
SPECIAL MEETING.......... Holders of record of shares of Common Stock at the
close of business on March 24, 1995 are entitled to
notice of and to vote at the Special Meeting. At
the Record Date, 7,111,269 shares of Common Stock
were issued and outstanding, each of which will be
entitled to one vote on each matter to be acted
upon at the Special Meeting and all adjournments
and postponements thereof. See "THE SPECIAL
MEETING -- Record Date; Voting at the Meeting."
VOTE REQUIRED.............. The affirmative vote of the holders of a majority
of the outstanding shares of Common Stock is
required under applicable law to approve the
Merger. The Company has been advised that all of
its directors and executive officers intend to vote
all of their shares of Common Stock
3
<PAGE> 11
outstanding and which they can vote (155,326 shares
of Common Stock in the aggregate, or approximately
2.2%) in favor of approval of the Merger. In
addition, pursuant to the Voting Agreement, Deere
Insurance has agreed to vote all of its shares of
Common Stock in favor of the Merger and against any
other proposal which is inconsistent with the
Merger or the Merger Agreement. Accordingly, on the
Record Date the aggregate number of shares of
Common Stock held by Deere Insurance and the
directors and executive officers of the Company
that can be voted at the Special Meeting constitute
approximately 45.6% of the outstanding shares of
Common Stock. See "THE SPECIAL MEETING -- Vote
Required."
SOLICITATION, REVOCATION
AND USE OF PROXIES....... All expenses of the solicitation of the
stockholders of the Company in connection with this
Proxy Statement will be borne by the Company. The
Company has retained MacKenzie Partners, Inc. to
assist in the solicitation of proxies. Any proxy
given pursuant to this solicitation may be revoked
at any time prior to its exercise by the execution
of a proxy signed at a later date, by the filing of
a written notice of revocation with the Secretary
of the Company at any time before the taking of the
vote at the Special Meeting or by voting in person
at the Special Meeting. See "THE SPECIAL
MEETING -- Solicitation; Revocation and Use of
Proxies."
THE MERGER
RECOMMENDATION OF THE BOARD
OF DIRECTORS............. The Board of Directors unanimously approved the
Merger Agreement and the transactions contemplated
thereby and unanimously recommends that the
stockholders of the Company vote FOR the approval
of the Merger. For a discussion of the factors
considered by the Board of Directors in reaching
its decision, see "THE MERGER -- Background;
Reasons for the Merger -- Recommendation of the
Board of Directors."
OPINION OF THE COMPANY'S
FINANCIAL ADVISOR........ Smith Barney Inc. ("Smith Barney"), the Company's
financial advisor, has delivered a written opinion,
dated January 11, 1995, to the Company's Board of
Directors to the effect that, as of the date of
such opinion and based upon and subject to certain
matters stated therein, the Merger Consideration
was fair, from a financial point of view, to the
holders of the Common Stock. The full text of the
written opinion of Smith Barney, which sets forth
the assumptions made, matters considered and review
undertaken, is attached as Appendix C to this Proxy
Statement and should be read carefully in its
entirety. See "THE MERGER -- Opinion of the
Company's Financial Advisor."
INTERESTS OF CERTAIN
PERSONS IN THE MERGER.... In considering the recommendation of the Board of
Directors with respect to the Merger Agreement,
stockholders of the Company should be aware that
certain members of the Board of Directors and of
the Company's management may have certain interests
in the Merger that are in addition to or different
from the interests of stockholders of the Company
in general. See "INTERESTS OF CERTAIN PERSONS IN
THE MERGER." The Board of Directors was aware of
these
4
<PAGE> 12
interests and considered them, among other matters,
in approving and adopting the Merger Agreement.
REGULATORY APPROVAL........ It is a condition to the consummation of the Merger
that (i) the New Jersey Department of Insurance
(the "Insurance Department") approve the Merger;
and (ii) under the HSR Act, notification be given
and certain information be furnished to the FTC and
the Antitrust Division and a specified waiting
period requirement be satisfied. It is anticipated
that the first condition will be satisfied prior to
the date of the Special Meeting. The second
condition was satisfied on March 10, 1995. See "THE
MERGER -- Regulatory Approval."
ACCOUNTING TREATMENT....... The Merger will be accounted for as a "purchase"
under generally accepted accounting principles
("GAAP"). See "THE MERGER -- Accounting Treatment."
THE MERGER AGREEMENT
THE MERGER; PAYMENT OF THE
MERGER CONSIDERATION..... At the Effective Date, if the Merger is
consummated, Merger Sub will
be merged with and into the Company, with the
Company continuing as the surviving corporation as
a wholly-owned subsidiary of ZRC, and each share of
Common Stock (other than shares held (i) by Merger
Sub or ZRC, (ii) in the treasury of the Company or
by any of its subsidiaries, and (iii) by
stockholders who have properly perfected their
dissenters' appraisal rights under the DGCL) will
be converted into the right to receive the Merger
Consideration. See "THE MERGER AGREEMENT -- The
Merger; Payment of Merger Consideration."
EFFECTIVE TIME OF THE
MERGER................... The Merger will become effective when the
Certificate of Merger is duly filed with the
Secretary of State of Delaware (the "Effective
Date"). The filing of the Certificate of Merger
will be made as soon as practicable after all
conditions set forth in the Merger Agreement have
been satisfied or waived. See "THE MERGER
AGREEMENT -- The Merger; Payment of Merger
Consideration."
CONDITIONS TO THE MERGER... The respective obligations of the Company and
Merger Sub to consummate the Merger are each
subject to the satisfaction or, where permissible,
waiver of certain conditions, including approval of
the Company's stockholders holding more than 50% of
the outstanding shares of Common Stock. See "THE
MERGER AGREEMENT -- Conditions to the Merger".
TERMINATION OF THE MERGER
AGREEMENT................ The Merger Agreement may be terminated by the
Company or ZRC under certain circumstances, some of
which require the Company to pay fees and expenses
to ZRC. See "THE MERGER AGREEMENT -- Termination of
the Merger Agreement."
DISSENTERS' RIGHTS......... Under the DGCL, if the Merger is effected, all
holders of shares of Common Stock who take the
required steps to perfect their rights will be
entitled to dissenters' rights of appraisal in
connection with the Merger. See "APPRAISAL RIGHTS
OF DISSENTING STOCKHOLDERS."
5
<PAGE> 13
CERTAIN OTHER AGREEMENTS
VOTING AGREEMENT........... Concurrently upon ZRC and the Company entering into
the Merger Agreement, ZRC and Deere Insurance
entered into the Voting Agreement pursuant to which
Deere Insurance (i) agreed to vote all of its
shares of Common Stock (A) in favor of the Merger
and (B) against any other proposal which provides
for any merger, sale of assets or other Third Party
Business Combination (as defined in the Merger
Agreement) between Re Cap (or any subsidiary of Re
Cap) and any other person or entity or which is
otherwise inconsistent with the Merger or the
Merger Agreement, and (ii) granted ZRC an option to
purchase all of its shares of Common Stock under
the circumstances set forth in the Voting
Agreement. The Voting Agreement may have the effect
of discouraging the making of alternative
acquisition-related proposals and increasing the
likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement.
A copy of the Voting Agreement is attached to this
Proxy Statement as Appendix B. See "CERTAIN OTHER
AGREEMENTS -- The Voting Agreement."
FEDERAL INCOME TAX CONSEQUENCES
FEDERAL INCOME TAX
CONSEQUENCES............. The receipt of the Merger Consideration by the
Company's stockholders will be a taxable
transaction for U.S. Federal income tax purposes.
See "FEDERAL INCOME TAX CONSEQUENCES."
6
<PAGE> 14
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated income statement, cash flow and balance
sheet data for each of the five years ended December 31, 1994 have been derived
from the audited consolidated financial statements of the Company. The
information set forth below is qualified in its entirety by the detailed
information and financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1994, which has been delivered to the
stockholders with this Proxy Statement, and the other information contained or
incorporated by reference elsewhere in this Proxy Statement. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net written premiums.......................... $132,421 $115,814 $121,316 $140,533 $106,615
========= ========= ========= ========= =========
Premiums earned............................... $129,398 $112,681 $118,443 $134,846 $102,523
Net investment income......................... 21,696 18,934 17,270 15,953 12,658
Net realized investment gains (losses)........ 39 694 342 118 (19)
-------- -------- -------- -------- --------
Total revenues................................ 151,133 132,309 136,055 150,917 115,162
Claims and claim expenses..................... 94,795 84,137 92,319 82,239 63,113
Amortization of deferred
acquisition costs........................... 33,272 28,455 34,624 48,612 31,870
Other operating expenses...................... 11,169 9,562 9,798 9,407 8,380
Interest expense.............................. 3,795 2,348 1,363 207 --
-------- -------- -------- -------- --------
Total expenses................................ 143,031 124,502 138,104 140,465 103,363
-------- -------- -------- -------- --------
Income (loss) before income taxes............. 8,102 7,807 (2,049) 10,452 11,799
Income tax expense (benefit).................. 195 (230) (4,358)(1) 1,523 2,027
-------- -------- -------- -------- --------
Net income.................................... $ 7,907 $ 8,037 $ 2,309 $ 8,929 $ 9,772
========= ========= ========= ========= =========
Weighted average shares outstanding
(primary)................................... 6,959 6,834 6,533 7,207 6,797
Primary earnings per share.................... $ 1.14 $ 1.18 $ 0.35(1) $ 1.24 $ 1.44
Weighted average shares outstanding (fully
diluted).................................... 10,974 8,792 7,074 7,326 6,797
Fully diluted earnings per share.............. 0.95 1.06 0.35(1) 1.24 1.44
Cash dividends declared per share............. 0.32 0.28 0.24 0.15 --
CASH FLOW DATA:
Net cash provided by operating
activities.................................. $ 26,824 $ 22,978 $ 2,063 $ 49,834 $ 32,770
BALANCE SHEET DATA(2)
(AT END OF PERIOD):
Investments and cash.......................... $342,894 $344,087 $256,036 $254,040 $192,955
Total assets.................................. 466,232 458,617 366,728 348,692 290,889
Claims and claim expenses..................... 210,397 200,638 184,754 173,397 141,136
Convertible Debentures........................ 69,000 69,000 -- -- --
Short-term borrowings......................... -- -- 14,850 5,500 --
Convertible note payable...................... -- -- 10,000 10,000 --
Total liabilities............................. 345,025 327,844 262,835 239,026 186,763
Total stockholders' equity.................... 121,207 130,773 103,893 109,666 104,126
Outstanding shares of common stock............ 7,050 7,046 6,328 6,826 6,920
Book value per share.......................... 17.19 18.56 16.42 16.07 15.05
CERTAIN SAP INFORMATION(3):
Loss ratio.................................... 73.3% 74.7% 77.8% 61.1% 61.6%
Underwriting expense ratio.................... 31.1% 33.7% 35.4% 40.9% 37.4%
-------- -------- -------- -------- --------
Combined ratio................................ 104.4% 108.4% 113.2% 102.0% 99.0%
========= ========= ========= ========= =========
Net written premiums to surplus............... .79x .74x 1.19x 1.37x 1.25x
Statutory capital and surplus of RCRC......... $166,596 $155,530 $102,088 $102,609 $ 85,328
STATUTORY INDUSTRY DATA(4):
Combined ratio for property and casualty
reinsurers.................................. 106.2% 106.9% 119.0% 107.1% 106.1%
CERTAIN GAAP FINANCIAL RATIOS(5):
Loss ratio.................................... 73.3% 74.7% 77.9% 61.0% 61.6%
Underwriting expense ratio.................... 34.3 31.2 35.1 39.9 36.5%
-------- -------- -------- -------- --------
Combined ratio................................ 107.6% 105.9% 113.0% 100.9% 98.1%
========= ========= ========= ========= =========
Net written premiums to total stockholders'
equity...................................... 1.09x .89x 1.17x 1.28x 1.02x
Net claims and claim expense reserves to total
stockholders' equity........................ 1.66x 1.47x 1.66x 1.49x 1.26x
Ratio of earnings to fixed charges(6)......... 3.0x 3.9x (--)(7) 20.8x 37.9x
</TABLE>
7
<PAGE> 15
---------------
(1) Includes $868,000 or $.13 per share for the cumulative effect of a change in
accounting for income taxes.
(2) 1992 and all prior balances have been restated for comparative purposes to
reflect the provisions of SFAS 113. "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
(3) The statutory information has been derived from the SAP basis financial
statements of RCRC.
(4) Source: RAA Reinsurance Underwriting Reports, total for all reporting
entities in applicable periods.
(5) The GAAP ratios have been derived from the consolidated statements of income
and stockholders' equity of the Company and its subsidiaries.
(6) For the purposes of the computations, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense
and that portion of rental expense representative of a reasonable interest
factor.
(7) In 1992, there was a pre-tax loss in respect to the coverage of fixed
charges -- the deficiency amount was $2,049,000.
8
<PAGE> 16
THE SPECIAL MEETING
DATE, PLACE AND TIME
The Special Meeting will be held on April 25, 1995 at 10:00 a.m., Eastern
Standard time, at 200 Park Avenue, 48th Floor, New York, New York.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company as of the Record
Date will be asked to (i) consider and vote upon a proposal to approve the
Merger and (ii) to transact such other business as may properly come before the
Special Meeting and any adjournments or postponements thereof.
The Board of Directors has unanimously approved the Merger Agreement and
the transactions contemplated thereby and recommends a vote FOR approval of the
Merger by the stockholders of the Company.
RECORD DATE; VOTING AT THE SPECIAL MEETING
The Board of Directors has fixed March 24, 1995 as the Record Date for the
determination of the stockholders of the Company entitled to notice of and to
vote at the Special Meeting and any adjournments or postponements thereof. On
the Record Date, there were 7,111,269 shares of Common Stock outstanding which
shares were held by approximately 241 holders of record. Shares of Common Stock
are the only authorized voting securities of the Company. Each holder of record
of Common Stock on the Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, upon each matter properly
submitted for the vote of the stockholders at the Special Meeting. The presence,
in person or by properly executed proxy, of holders of a majority of the shares
of Common Stock outstanding and entitled to vote at the Special Meeting (i.e.,
3,555,635 shares of Common Stock) is necessary to constitute a quorum at the
Special Meeting.
Holders of Common Stock on the Record Date will be entitled to dissenters'
appraisal rights under the DGCL in connection with the Merger. Stockholders of
the Company who vote in favor of the Merger, however, will waive their
dissenters' appraisal rights. See "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS."
This Proxy Statement is being furnished to stockholders of the Company in
connection with the solicitation of proxies by and on behalf of the Board of
Directors for use at the Special Meeting. All shares of Common Stock that are
entitled to vote and are represented at the Special Meeting by properly executed
proxies received and not duly and timely revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Executed but
unmarked proxies will be voted FOR the approval of the Merger.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required under applicable law for approval of the Merger.
Abstentions and broker non-votes will have the same effect as votes against the
approval of the Merger. An abstention or broker non-vote permits a stockholder
to assert dissenters' appraisal rights. See "APPRAISAL RIGHTS OF DISSENTING
STOCKHOLDERS." The Company intends to use any abstentions and broker non-votes
as a defense to litigation brought by stockholders of the Company, if any, to
the extent permitted by applicable law.
The Company has been advised that all of its directors and executive
officers intend to vote all of their shares of Common Stock outstanding and
which they can vote (155,326 shares of Common Stock in the aggregate, or
approximately 2.2%) in favor of the Merger Agreement and the transactions
contemplated thereby, although none of them have entered into any contractual
commitments in this regard. John Deere Insurance Group, Inc. ("Deere
Insurance"), which owns 3,087,598 of the shares of Common Stock, or
approximately 43.4%, has agreed to vote all of its shares of Common Stock in
favor of the Merger and against any other proposal which is inconsistent with
the Merger or the Merger Agreement pursuant to the Voting
9
<PAGE> 17
Agreement. See "CERTAIN OTHER AGREEMENTS -- Voting Agreement." Accordingly, on
the Record Date the aggregate number of shares of Common Stock held by Deere
Insurance and the directors and executive officers of the Company that can be
voted at the Special Meeting constitute approximately 45.6% of the outstanding
shares of Common Stock. See "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS."
SOLICITATION, REVOCATION AND USE OF PROXIES
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. Arrangements will be
made with custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to the beneficial owners of shares of Common Stock held
of record by such custodians, nominees and fiduciaries and the Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith. In addition, the Company has retained
MacKenzie Partners, Inc. to assist in the solicitation of proxies for a fee of
$3,500 and reimbursement for out-of-pocket expenses.
All shares of Common Stock represented by properly executed proxies will be
voted at the Special Meeting in accordance with the directions indicated on the
proxies unless the proxies have been previously revoked. Unless contrary
direction is given, all shares represented by such proxies will be voted FOR the
Merger and, in the proxy holders' discretion, as to such other matters incident
to the conduct of the Special Meeting as may properly come before stockholders.
The Board of Directors is not aware of any matters other than those
specifically stated in this Proxy Statement which are to be presented for action
at the Special Meeting. If any other matters are properly presented at the
Special Meeting for action, including a question of adjourning the Special
Meeting from time to time, or postponing the Special Meeting, the persons named
in the proxies and acting thereunder will have discretion to vote on those
matters in accordance with their best judgment. Any adjournment or postponement
of the Special Meeting will require the affirmative vote of the holders of at
least a majority of the shares of Common Stock represented at the Special
Meeting (regardless of whether those shares of Common Stock constitute a
quorum).
A stockholder of the Company executing and returning a proxy has the power
to revoke it at any time before it is voted. A stockholder who wishes to revoke
a proxy can do so by executing a later-dated proxy relating to the same shares
of Common Stock and delivering it to the Secretary of the Company prior to the
vote at the Special Meeting, by written notice of revocation or by appearing in
person at the Special Meeting and voting in person the shares of Common Stock to
which the proxy relates. Any written notice of revocation should be sent to the
Company at Two Stamford Plaza, Stamford, Connecticut 06904, Attention:
Secretary, at or before the taking of the vote at the Special Meeting.
THE MERGER
BACKGROUND; REASONS FOR THE MERGER
In late Spring of 1994, senior management and the Board of Directors of the
Company, as part of a strategic review of the Company's prospects, determined
that changes in the reinsurance market in which RCRC competes could require a
strategic change of direction for RCRC and the Company. In particular,
management and the Board of Directors had become concerned that the continuing
trend of ceding insurers seeking to do business with larger reinsurers, combined
with the growth prospects for RCRC's business under its existing business plan,
could increase the competitive pressures on RCRC's business. As part of its
deliberation, in June 1994, the Board of Directors retained the insurance
research firm of Conning & Company ("Conning") to study these matters and to
report to the Board of Directors its assessment of the viability of the
Company's current strategic plan and to develop for the Board of Directors'
consideration a number of strategic options available to the Company. Maurice W.
Slayton, Chairman of the Board of Directors, President and Chief Executive
Officer of Conning, is a director of the Company.
10
<PAGE> 18
Conning presented its report to the Board of Directors on July 26, 1994.
Conning's report confirmed the growing trend among ceding insurers to place
their reinsurance with reinsurers with larger amounts of capital and surplus
than RCRC. The Conning report concluded that RCRC, if it were to remain a viable
competitor, and if the Company's shares of Common Stock were to realize maximum
value for the Company's stockholders, needed to increase materially its capital
and surplus, while continuing to employ that capital and surplus in writing
profitable reinsurance business that resulted in acceptable returns on equity.
The Board of Directors analyzed on a preliminary basis various methods by
which these goals could be accomplished, including a change of business plan
and/or management of the Company, acquisition by the Company of another
reinsurer, increasing RCRC's capital and surplus through capital markets
transactions and/or combinations of the above. After considering such courses of
action, and their anticipated impact on the stockholders of the Company, the
Board of Directors also considered other alternatives, including the
discontinuance of the Company in its present form, such as a liquidation or sale
of the Company, in order to compare the value to the Company's stockholders
likely to result from such actions, as compared to the business continuation
alternatives. The Board of Directors concluded that it should retain a financial
advisor to assist the Board of Directors in exploring further the best possible
way to obtain the maximum value for stockholders.
The Board of Directors discussed the fact that in considering such a
transaction, certain members of the Board of Directors could, with regard to
certain transactions, have interests that were different than the interests of
the public stockholders of the Company. In particular, the Board of Directors
felt that Deere Insurance's interests, by virtue of its insurance relationships
with RCRC (the "Deere Insurance Business") and its 43.8% ownership of the shares
of Common Stock at that time, could potentially differ from the interests of the
other stockholders of the Company. Dennis E. Hoffmann, Chairman of the Board of
Directors, is President and Chief Executive Officer of Deere Insurance, George
G. D'Amato, Jr., a director of the Company, is a director of Deere Insurance,
and Conor D. Reilly, Secretary of the Company and legal advisor to the Company,
is a director of Deere Insurance. Also, by virtue of his employment relationship
with the Company, the Board of Directors believed that James E. Roberts,
President, Chief Executive Officer and a director of the Company, could have
interests divergent from those of other stockholders.
Accordingly, on August 3, 1994, the Board of Directors established a
Special Committee (the "Special Committee"), consisting of all of the members of
the Board of Directors other than Messrs. D'Amato, Hoffmann and Roberts (i.e.,
Donald E. Chisholm, Harold R. Hiser, Jr., Jean R. Perrette, Maurice W. Slayton
and Richard R. West) to investigate strategic options available to the Company.
Also on August 3, 1994, the Special Committee met and selected legal counsel to
advise it, retaining the law firm of Simpson Thacher & Bartlett. Thereafter, the
Special Committee interviewed investment bankers and recommended to the Board of
Directors, and the Board of Directors unanimously approved, the retention of
Smith Barney as financial advisor to the Company and, to the extent that issues
concerning the Special Committee were involved, as financial advisor to the
Special Committee. The Board of Directors requested that Smith Barney evaluate
the Company and its prospects and assist the Board of Directors in its
consideration of alternatives to maximize stockholder value.
On August 18, 1994, representatives of the Special Committee and Smith
Barney met with Deere Insurance and subsequently met with senior management of
the Company to discuss the perspectives of Deere Insurance and the senior
management of the Company with respect to the Company and any merger transaction
that might be considered by the Company, including the potential impact on the
continuation, increase or termination of the Deere Insurance Business. Deere
Insurance indicated that it was not then interested in the sale of its interest
in the Company but that it would not object to the Special Committee exploring
strategic alternatives for the Company. Discussions with senior management
reflected their strong belief that a merger transaction which would result in
greater capital for the combined company was required for continued growth of
RCRC and maximization of stockholder value.
At a meeting of the Board of Directors on September 6, 1994, Smith Barney
reviewed with the Board of Directors the current environment in the public and
private markets for reinsurance companies, the Company's competitive position,
prospects and possible value and alternatives for maximizing stockholder
11
<PAGE> 19
value, including (i) maintaining the status quo, (ii) running off the Company's
existing business, (iii) increasing the scope and strength of the Deere
Insurance Business by modifying its existing agreements with Deere Insurance,
(iv) obtaining additional capital, (v) entering into a strategic merger, (vi)
seeking investment by a partner in conjunction with modified agreements for the
Deere Insurance Business; (vii) entering into a reverse merger transaction with
a privately owned corporation, and (viii) selling the Company for cash or stock.
The Board of Directors also discussed with Smith Barney possible third party
candidates in connection with such alternatives.
Based on the Board of Directors' analysis and Smith Barney's
recommendation, the Board of Directors determined initially to explore the
possibilities of a merger transaction. The Board of Directors concluded that a
merger transaction offered the best available opportunity to maximize the value
of the stockholders' interest in the Company. The Board of Directors believed
that, in the foreseeable future, the business continuation alternatives were
unlikely to result in values to the Company's stockholders comparable to the
values likely to be available in a merger transaction. The Board of Directors
also concluded that a limited and controlled exploratory process regarding a
business combination should be undertaken to minimize the potential adverse
impact that premature disclosure of a potential transaction would have on the
Company's business.
At a meeting of the Board of Directors on September 19, 1994, the Board
decided to initiate discussions with a publicly-owned domestic reinsurer
("Red"), with whom senior management of the Company had previously had
preliminary discussions, and certain other candidates. The Board of Directors
felt that of the various candidates considered, Red initially appeared, based on
its strategic position, to need to enter into a strategic merger or other
corporate transaction and, accordingly, would likely be interested in pursuing a
merger transaction that would maximize stockholder value.
In this meeting, the Board of Directors further determined that
communications with all prospective candidates would be made by both Smith
Barney and Mr. Slayton. In addition, the Board of Directors discussed with its
legal and financial advisors the value to the Company of the Deere Insurance
Business and the terms on which a merger might be proposed. In connection
therewith, Mr. Hoffmann reported that, while Deere Insurance could make no
determination regarding any transaction until it was presented with a firm
proposal, Deere Insurance would more likely be willing to consider a proposal
that contemplated the sale of its position primarily for cash.
During October and November of 1994, the Board of Directors authorized
contacting additional candidates, including another publicly-owned domestic
reinsurer ("Blue") and ZRC.
At a meeting on November 18, 1994, the Special Committee reviewed the
discussions with the parties who had been contacted. In the discussions to date,
the interested candidates were suggesting possible transaction values of between
$17.00 and $18.00 per share of Common Stock, based in part on the assumption
that the Deere Insurance Business would continue with the surviving entity.
Subsequently, the Special Committee, in consultation with Smith Barney,
determined that it would be appropriate to require each of the candidates with
whom discussions were then ongoing (i.e., Red, Blue and ZRC) to present to the
Committee written proposals indicating the terms on which they would be prepared
to explore a transaction with the Company. Each of Red, Blue and ZRC had
executed confidentiality letters with the Company, had reviewed non-public
information regarding the Company and had met with management of the Company as
part of their due diligence regarding the Company. Written proposals were
received from each of Red, Blue and ZRC on or about December 20, 1994 and were
reviewed at a meeting of the Special Committee on December 22, 1994. ZRC's
December 20, 1994 proposal was for a cash payment for the shares of Common Stock
of approximately $17.66 per share, but was subject to a number of material
conditions and contingencies, including adjustment for severance payments
triggered by the acquisition, the Company's outstanding stock options, the
Company's financial results for the fourth quarter of 1994 and transaction
costs.
Between December 22, 1994 and December 29, 1994, the Special Committee and
its legal and financial advisors negotiated with the interested parties and
their legal and financial advisors (including CS First Boston Corporation ("CS
First Boston"), ZRC's financial advisor) the terms of the three expressions of
interest
12
<PAGE> 20
received. These negotiations resulted in revisions to the expressions of
interest, including written revisions from ZRC on December 27, 1994 and December
29, 1994.
ZRC's December 29, 1994 expression of interest provided for payment of
$18.50 cash per share to all stockholders of the Company. However, the stated
price was subject to reduction for the Company's transaction expenses and was
also subject to a number of material conditions and contingencies, including
retention of the Deere Insurance Business for three to five years on terms at
least as favorable as those in effect in 1994 and adjustments to the purchase
price for changes in the market value of RCRC's investment portfolio and the
Company's other fourth quarter 1994 financial results. Deere Insurance had not
indicated to the Special Committee whether the Deere Insurance Business would
remain with the Company were a merger transaction to be effected.
Red's proposal as of December 29, 1994 called for the Company to purchase
Deere Insurance's shares of Common Stock for $18.00 cash per share and for the
other stockholders of the Company to receive common stock of Red, using a value
for the Common Stock of $18.50 per share. However, the Red proposal included a
fixed exchange ratio (which would result in the value of Red common stock to be
received by the non-Deere Insurance stockholders of the Company to float with
Red's common stock price (i) at a floating exchange rate collar range of 12.2%
under, and 6.8% above, the then current market price for Red's common stock, and
(ii) at Red common stock prices more than 9.2% above the then current market
price for Red's common stock). The Red proposal also had a termination fee of
$5,500,000 and envisioned considerable additional due diligence. Red's
transaction structure was also considerably more complicated than that proposed
by Blue and ZRC. A condition of the Red transaction was the approval by the
Insurance Department of an extraordinary dividend from RCRC to fund part of the
purchase price. Other concerns discussed by the Board of Directors with regard
to Red's proposal included equal treatment of the Company's stockholders
(especially were Deere Insurance to receive more per share of Common Stock than
the public) and the terms of the Company's 5 1/2% Convertible Subordinated
Debentures restricting transactions between the Company and its affiliates which
might have been implicated by the Red transaction structure.
The basic terms of Blue's proposal as of December 29, 1994 included the
purchase by Blue of Deere Insurance's shares of Common Stock for $18.00 cash per
share, and for the other stockholders of the Company to receive common stock of
Blue, using a target value for the Common Stock of $18.25 per share, a floating
exchange rate collar range of 17.5% under, and 8.9% above, the then current
market price for Blue's common stock, a termination fee of $3,550,000, a right
of first refusal on the Deere Insurance Business and a timetable which
contemplated completion of due diligence and final documentation by January 13,
1995.
On December 29, 1994, the Special Committee met twice to review the
expressions of interest as they had been negotiated and revised by the
interested parties and, based on the Special Committee's analysis and the
recommendation of Smith Barney relating to the financial aspects of the revised
proposals, decided that the Blue proposal appeared to represent the best
available alternative for the Company's stockholders and should be pursued. The
ZRC proposal of $18.50 per share appeared to offer a lower overall value to the
stockholders of the Company than either the Red or Blue proposals due to the
fact that the stated price was subject to reduction for the Company's
transaction expenses and as a result of the Company's fourth quarter financial
results and in the event that the Deere Insurance Business would not continue on
specified terms following the transaction. While the value to be paid to the
non-Deere Insurance stockholders of the Company was $18.50 per share under the
Red proposal, as opposed to $18.25 per share under the Blue proposal, the
Special Committee determined that the likelihood of successfully and promptly
concluding the Blue transaction was materially higher than the Red transaction,
in light of the conditions of the Red transaction and the anticipated extended
period of time before such transaction would be consummated, if at all. In
addition, the Special Committee considered the fact that the Blue proposal, as
compared to the Red proposal, set forth a more favorable floating exchange rate
collar range for the Company's stock, established a lower termination fee and
provided for the stockholders of the Company to receive, as consideration,
common stock of potentially greater value in light of the respective market
capitalizations and volatility of Red and Blue common stock. Such facts,
combined with the other advantages of the Blue proposal detailed above, led the
Special Committee to its conclusion that it should pursue a transaction with
Blue.
13
<PAGE> 21
In response to Blue's demand that any negotiations with Blue proceed only
on an exclusive basis, Blue was advised that the Special Committee was willing
to enter into exclusive negotiations with Blue until January 13, 1995 unless the
Special Committee determined that such exclusivity period should be terminated
in order to permit the fulfillment of its fiduciary duties.
Thereafter, counsel for the Special Committee and the Company commenced
negotiation with Blue of a definitive merger agreement. After a meeting of the
Blue Board of Directors on January 6, 1995, Blue withdrew the proposal described
above and indicated it would proceed only on the following terms: a target value
to the public of $18.50 per share in Blue stock, a cash price to Deere Insurance
of $18.00, a floating collar range of 14.5% under, and 12.1% above, the market
price for Blue's common stock on December 29, 1994, a termination fee of
$7,100,000, a condition that 18-month non-compete agreements be entered into
with two senior officers of the Company and a requirement that Deere Insurance
grant Blue an irrevocable proxy and agree not to sell its shares until September
30, 1995. Counsel for the Special Committee and the Company continued to
negotiate with Blue and Smith Barney evaluated the financial terms of the
revised offer.
On the morning of January 9, 1995, ZRC submitted to a Special Committee
representative an unsolicited verbal proposal to purchase all outstanding shares
of Common Stock for $18.25 per share in cash. This was followed by the delivery
of a written proposal from ZRC on the afternoon of January 9, 1995 indicating
ZRC's interest in purchasing all of the outstanding shares of Common Stock for
$18.50 per share in cash, subject to a four business-day due diligence review.
This proposal, as opposed to ZRC's earlier proposals, was not subject to any
contingencies relating to severance or transaction costs or the Company's fourth
quarter financial results and was not subject to a requirement to retain the
Deere Insurance Business. ZRC was advised by a representative of the Special
Committee that the Special Committee had an understanding with another party to
negotiate exclusively with such party for a specified period and that, during
such period, the Special Committee could only respond to a complete and
unconditional merger agreement on terms which the Company could accept. Upon
receipt of such a merger agreement, the Special Committee, in the exercise of
its fiduciary duties, would be obligated to consider such a proposal.
At a meeting of the Special Committee in the morning of January 10, 1995,
the Special Committee reviewed events that had occurred since its last meeting,
as well as the changes proposed by Blue described above. Additional issues were
discussed relating to Blue's insistence on a limitation on the ability of the
Company to terminate any merger agreement with Blue to pursue a superior offer,
as well as the circumstances which would trigger a payment to Blue in the event
that the transaction were not consummated. Representatives of Deere Insurance
advised the Special Committee that certain proposed terms of the Blue
transaction requiring the agreement of Deere Insurance were unacceptable to
Deere Insurance.
The Special Committee also discussed the understanding with Blue with
respect to exclusive negotiations and the possibility of having to terminate its
discussions with Blue and bear the risk of having Blue withdraw its proposal if
the Special Committee pursued discussions with ZRC. The Special Committee
discussed its concerns that a complete ZRC proposal might contain onerous terms
with respect to termination fees, unacceptable limitations on the Company's
right to terminate the agreement in the exercise of fiduciary duties or
provisions with respect to Deere Insurance which might be unacceptable to Deere
Insurance.
Discussion then turned to the current terms proposed by Blue. The Special
Committee concluded that the increase in the target value to the public was
outweighed by the change in the collar range and the increase in the termination
fee, especially in light of the possibility that a ZRC cash transaction at
$18.50 might materialize. The Special Committee concluded that for it to pursue
the transaction with Blue it would be necessary for Blue to reinstate the
$3,550,000 termination fee, to maintain the target value to the public
stockholders of the Company at $18.50 per share and to move the collar back to
17.5% below, and 8.9% above, the December 29, 1994 market price of Blue common
stock. In addition, Blue would have to concede the proposed limitations on the
Company's ability to terminate the transaction with Blue pursuant to the
exercise of its fiduciary duties and agree that any termination fee would be
payable only upon the consummation by the Company of an alternative transaction.
Finally, Blue would have to withdraw its request for non-compete
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<PAGE> 22
protection from certain officers of the Company and reach an accommodation with
Deere Insurance as to the treatment of its shares and the Deere Insurance
Business.
Later that morning counsel for the Special Committee requested the
specified changes in the transaction from Blue, indicating that an unsolicited
cash proposal had been received from another party. During the course of the
day, Blue agreed to withdraw its demand for the non-compete protection and
agreed to a partial adjustment in the collar. However, Blue retained its demand
for a limitation on the Company's ability to terminate the transaction with Blue
pursuant to the exercise of its fiduciary duties and reached no agreement as to
the circumstances under which a fee would be payable in the event that the
transaction did not proceed. Blue also indicated to negotiators of the Special
Committee an unwillingness to reduce any termination fee below $6,390,000 and
was still requiring Deere Insurance to agree to certain proposed terms that
Deere Insurance had previously indicated were unacceptable.
On the morning of January 11, 1995, ZRC submitted to the Special Committee
a definitive merger agreement to purchase all shares of the Company for $18.50
per share in cash and indicated that it was prepared to execute the agreement
immediately. The agreement contained an acceptable fiduciary out clause, a
termination fee not to exceed $3,000,000 plus expenses, a final expiration date
of June 30, 1995, and was not subject to any due diligence conditions.
A Board of Directors meeting had been previously scheduled for 12:00 noon
on that date and, at the meeting, the Board of Directors discussed the current
status of the various proposals. The Board of Directors concluded that the terms
of the ZRC proposal, as contained in the merger agreement which had been
submitted, represented the best available alternative for the Company's
stockholders. The ZRC proposal avoided the possibility that Deere Insurance
would obtain a higher value than the public stockholders. Moreover, the cash
price eliminated market risk associated with the acquiror's securities until the
transaction could be consummated. Smith Barney made a financial presentation to
the Board of Directors and advised the Board of Directors that it believed,
based on its work to date, that it would be in a position to render a favorable
opinion once the final terms of a definitive agreement with ZRC were reached.
The meeting was then adjourned to permit the Company's representatives to
negotiate with ZRC. Prior to those negotiations, representatives of Blue were
advised that, in view of the receipt of a definitive agreement to acquire the
Company which the Board of Directors had concluded was a superior proposal, the
Special Committee in its exercise of its fiduciary duties was terminating
exclusive negotiations with Blue to permit the Company to enter into discussions
with the other party.
The Board of Directors reconvened at 6:00 p.m. at which time it determined
that all substantive Company issues (notwithstanding an increase in the
termination fee to $4,500,000 plus expenses (not to exceed $1,000,000), but
subject to a limitation on the circumstances in which such fee would be paid,
such fee being requested by ZRC in response to changes to the Merger Agreement
negotiated by the Company and changes in the Voting Agreement negotiated by
Deere Insurance) had been satisfactorily resolved. In addition, the Board of
Directors was advised that agreement had been reached as to the principal terms
of an option and voting agreement between ZRC and Deere Insurance. Thereafter,
the Board of Directors unanimously approved the transaction with ZRC, subject to
the receipt of a favorable opinion from Smith Barney and resolution of any
remaining matters.
Later that evening, but before the Merger Agreement was executed, the
Special Committee was advised that Blue was withdrawing its offer.
After receipt of the written opinion of Smith Barney, the Merger Agreement
was executed and a public announcement was made to such effect in the morning of
January 12, 1995.
RECOMMENDATION OF THE BOARD OF DIRECTORS
In reaching its decision to enter into the Merger Agreement and not to
remain as an independent company, the Board of Directors considered a number of
factors, including the following:
(i) The written opinion, dated January 11, 1995, of Smith Barney to
the effect that, as of such date and based upon and subject to certain
matters stated therein, the Merger Consideration was fair from a
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<PAGE> 23
financial point of view to the holders of the shares of Common Stock. See
"THE MERGER -- Opinion of the Company's Financial Advisor."
(ii) The relationship of the Merger Consideration to the historical
and current market prices for the shares of Common Stock preceding the
announcement of the Merger, including the fact that the offering price of
$18.50 per share represents a premium of approximately 45% over the $12.75
closing sale price of the shares of Common Stock on January 11, 1995, the
last trading day before the announcement that the Company entered into the
Merger Agreement. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS."
(iii) The business, financial condition and recent results of
operations of the Company (see "SUMMARY CONSOLIDATED FINANCIAL DATA") and
management's best estimates of the prospects of the Company. Specifically,
the Board of Directors believed that unless the Company could materially
increase its capital and surplus, its prospects for successfully competing
for business and achieving acceptable financial returns were poor. See "THE
MERGER -- Background; Reasons for the Merger."
(iv) The current and prospective environment in which the Company
operates, including national and local economic conditions, the competitive
environment for reinsurance companies generally, and the trend toward
consolidation in the reinsurance industry. The Board of Directors felt that
without a merger transaction, the Company would be unlikely to achieve the
growth in capital and surplus demanded by the consolidation trend and
therefore would have great difficulty in continuing to compete
successfully.
(v) The process undertaken to obtain acquisition proposals and
preliminary bids, and the conclusion that ZRC's bid was more likely to
provide values to the stockholders of the Company superior to any of the
other bid indications from the other participants, and the fact that there
had been no indications that any other participant would be willing to make
a cash offer for the Company on terms superior to those contained in ZRC's
bid. See "THE MERGER -- Background; Reasons for the Merger."
(vi) The Board of Directors' review with its legal and financial
advisors of alternatives to the Merger, all of which the Board of Directors
believes to be less favorable to the stockholders of the Company than the
Merger. Specifically, the Board of Directors felt that continuing the
business on its present course, running off the Company's existing business
or seeking to change the Company's business plan were all strategies which
were unlikely in the foreseeable future to result in stockholder values
comparable to the values available in the Merger. See "THE
MERGER -- Background; Reasons for the Merger."
(vii) The fact that the terms of the Merger Agreement were determined
through arms'-length negotiations. See "THE MERGER -- Background; Reasons
for the Merger."
(viii) The Board of Directors' assessment that the terms of the Merger
Agreement are in the best interests of the Company and the holders of the
shares of Common Stock.
(ix) The fact that Deere Insurance, which owns 43.4% of the shares of
Common Stock, was willing to enter into the Voting Agreement pursuant to
which it agreed to vote the shares of Common Stock owned by it in favor of
the Merger; it being noted by the Board of Directors that Deere Insurance
was being treated the same as all other stockholders of the Company in the
Merger. See "CERTAIN OTHER AGREEMENTS -- The Voting Agreement."
(x) The fact that the Merger Agreement permits the Company to
terminate the Merger Agreement if the Board of Directors reasonably
determines that a Business Combination Proposal will result in a Superior
Proposal (subject to the payment to ZRC of certain fees and expenses if the
Company enters into a definitive agreement to effect the Business
Combination Proposal). See "THE MERGER AGREEMENT -- Termination of the
Merger Agreement."
(xi) The Board of Directors' assessment that ZRC has the financial
capability to acquire the Company for the Merger Consideration and
therefore is likely to consummate the Merger, and the fact
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<PAGE> 24
that there are no material financing conditions relating to the Merger. See
"THE MERGER AGREEMENT."
(xii) The Board of Directors' belief, after consultation with its
legal counsel, that the required regulatory approvals could be obtained for
the Merger.
In reaching its decision to enter into the Merger Agreement, the Board of
Directors did not believe there were any material negative factors associated
with the Merger.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Merger, the Board of Directors did not find it
practical to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
Based upon all of these factors, the Board of Directors approved the Merger
Agreement and the transactions contemplated thereby. ACCORDINGLY, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY APPROVE
THE MERGER.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Smith Barney was retained by the Company to act as its financial advisor in
connection with the Merger. In connection with such engagement, the Company
requested that Smith Barney evaluate the fairness, from a financial point of
view, to the holders of the Common Stock of the consideration to be received by
such holders in the Merger. On January 11, 1995, in connection with the
evaluation of the proposed Merger Agreement by the Company's Board of Directors,
Smith Barney delivered a written opinion to the Company's Board of Directors to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinion, the Merger Consideration was fair, from a financial
point of view, to the holders of the Common Stock.
In arriving at its opinion, Smith Barney reviewed the Merger Agreement and
the reserve review dated February 1, 1994 of Tillinghast, a Towers Perrin
Company ("Tillinghast"), relating to the Company (the "Tillinghast Report"), and
held discussions with certain senior officers, directors and other
representatives and advisors of the Company concerning the business, operations
and prospects of the Company. Smith Barney examined certain publicly available
business and financial information relating to the Company as well as certain
financial forecasts and other data for the Company which were provided to Smith
Barney by the management of the Company. Smith Barney reviewed the financial
terms of the Merger as set forth in the Merger Agreement in relation to, among
other things, current and historical market prices and trading volumes of the
Common Stock, the historical and projected earnings of the Company, and the
capitalization and financial condition of the Company. Smith Barney considered,
to the extent publicly available, the financial terms of certain other similar
transactions recently effected which Smith Barney considered comparable to the
Merger and analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose businesses Smith
Barney considered comparable to those of the Company. In addition to the
foregoing, Smith Barney conducted such other analyses and examinations and
considered such other financial, economic and market criteria as Smith Barney
deemed necessary to arrive at its opinion. Smith Barney noted that its opinion
was necessarily based upon information available, and financial, stock market
and other conditions and circumstances existing and disclosed, to Smith Barney
as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information provided to or otherwise reviewed by or discussed with Smith Barney,
the management of the Company advised Smith Barney that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of the Company as to the
future financial performance of the Company. With respect to the Tillinghast
Report, Smith Barney assumed, with the consent of the Board of Directors, that
such valuation was prepared on bases reflecting the best
17
<PAGE> 25
currently available estimates and judgments of Tillinghast. Except for the
Tillinghast Report, Smith Barney did not make or obtain an independent
evaluation or appraisal of the assets, liabilities (contingent or otherwise) or
reserves of the Company nor did Smith Barney make any physical inspection of the
properties or assets of the Company. In connection with its engagement, Smith
Barney approached, and held discussions with, certain third parties to solicit
indications of interest in a possible acquisition of the Company, assisted in
negotiations with those third parties that indicated such interest, and assisted
the Special Committee in evaluating such indications of interest. In addition,
although Smith Barney evaluated the Merger Consideration from a financial point
of view, Smith Barney was not asked to and did not recommend the specific
consideration payable in the Merger. No other limitations were imposed by the
Company on Smith Barney with respect to the investigations made or procedures
followed by Smith Barney in rendering its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY, DATED JANUARY 11,
1995, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED
HEREIN BY REFERENCE. HOLDERS OF THE SHARES OF COMMON STOCK ARE URGED TO READ
THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY
TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW AND
HAS BEEN PROVIDED SOLELY FOR THE USE OF THE BOARD OF DIRECTORS IN ITS EVALUATION
OF THE MERGER, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED
TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF SMITH
BARNEY'S OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion to the Company's Board of Directors, Smith Barney
performed a variety of financial and comparative analyses, and considered a
variety of factors, of which the material analyses and factors are described
below. The preparation of a fairness opinion is a complex analytic process
involving various determinations as to the most appropriate and relevant methods
of financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. The summary of the analyses set forth below does, however,
reflect the material methods of analysis and determinations employed by Smith
Barney in connection with its evaluation of the Merger and the application of
those methods to the facts relevant to the Merger. In arriving at its opinion,
Smith Barney did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Smith Barney believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying such analyses
and its opinion. In its analyses, Smith Barney made numerous assumptions with
respect to the Company, industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond the control
of the Company. The estimates contained in such analyses are not necessarily
indicative of actual values or predicative of future results or values, which
may be significantly more or less favorable than those suggested by such
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
Comparable Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples of
the Company and selected reinsurance companies in the following categories: (i)
large reinsurance companies: American Re Corporation; General Re Corp.; NAC Re
Holdings Corp.; National Re Holding Corp; Transatlantic Holdings Inc.; and ZRC
(the "Large Reinsurers") and (ii) small reinsurance companies: SCOR U.S. Corp.
and Trenwick Group Inc. (the "Small Reinsurers"). Smith Barney compared market
values as multiples of, among other things, latest 12 months fully diluted net
income, estimated 1994 and 1995 earnings (based on the consensus estimates of
selected investment banking firms), fully diluted book value per share computed
in accordance with generally accepted accounting principles ("GAAP"), total
capital, latest fiscal year statutory earnings and latest year-end statutory
surplus. The median multiples of latest 12 months net income, estimated 1994 and
1995 earnings, GAAP book value, total capital, latest fiscal year statutory
earnings and latest year-end statutory surplus for the Large Reinsurers and
Small Reinsurers were 16.7x, 14.5x, 12.5x, 1.6x, 1.4x, 18.9x and 1.9x,
respectively,
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<PAGE> 26
for the Large Reinsurers, and 13.1x, 13.2x, 10.6x, 0.7x, 0.7x, 15.2x and 0.9x,
respectively, for the Small Reinsurers. The multiples of latest 12 months fully
diluted net income, estimated 1994 and 1995 earnings, GAAP book value, total
capital, latest fiscal year statutory earnings and latest year-end statutory
surplus for the Company were 12.6x, 11.4x, 9.0x, 0.7x, 0.7x, 17.5x and 0.8x,
respectively. All multiples were based on closing stock prices as of January 10,
1995. The Merger Consideration, based on a closing sale price for the Common
Stock on January 10, 1995 of $12.63, equated to multiples of latest 12 months
fully diluted net income, estimated 1994 and 1995 earnings, GAAP book value,
total capital, latest fiscal year statutory earnings and latest year-end surplus
earnings for the Company of 18.5x, 16.7x, 13.2x, 1.1x, 1.1x, 26.1x and 1.3x,
respectively.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney analyzed the purchase price and transaction
multiples in the following selected mergers and acquisition transactions in the
reinsurance sector: Constitution Reinsurance Corporation/Exor Group;
International Reinsurance Operations of CIGNA Reinsurance Co./St. Paul
Companies, Inc.; NRG Victory-Reassurance/St. Paul Companies, Inc.; Underwriters
Reinsurance/Alleghany Corp.; American Re-Insurance Co./Kohlberg Kravis &
Roberts; Chartwell Re/Wand Partners Inc.; SCOR U.S. Corporation/Rockleigh
Management; United Public Re/Lawrence Insurance; and National Reinsurance
Corp./National Re Holdings Corp. -- Robert M. Bass Group (collectively, the
"Selected Acquisitions"). Smith Barney compared purchase prices as multiples of
latest 12 months GAAP earnings, estimated GAAP earnings and latest GAAP book
value, and transaction values as multiples of latest fiscal year statutory
earnings and latest year-end statutory surplus. All multiples were based on
information available at the time of announcement of the transaction. The ranges
of purchase price and transaction multiples for the Selected Acquisitions for
which public information was available were as follows: (i) latest 12 months
GAAP earnings: 6.7x to 41.3x (with an average of 14.9x and a median of 9.7x);
(ii) estimated GAAP earnings: 10.6x to 15.2x (with an average of 12.9x and a
median of 12.9x); (iii) latest GAAP book value: 0.8x to 1.5x (with an average of
1.2x and a median of 1.1x); (iv) latest fiscal year statutory earnings: 6.5x to
20.5x (with an average of 11.6x and a median of 10.5x); and (v) latest year-end
statutory surplus: 0.9x to 1.9x (with an average of 1.4x and a median of 1.4x).
The Merger Consideration, based on a closing sale price for the Common Stock on
January 10, 1995 of $12.63, equated to multiples of latest 12 months GAAP
earnings, estimated GAAP earnings, latest GAAP book value, latest fiscal year
statutory earnings and latest year-end statutory surplus for the Company of
18.5x, 16.7x, 1.1x, 26.1x and 1.3x, respectively.
No company, transaction or business used in the comparable company and
selected merger and acquisition transactions analyses as a comparison is
identical to the Company or the Merger. Accordingly, an analysis of the results
of the foregoing is not entirely mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics and other factors that could affect the acquisition or public
trading value of the comparable companies or the business segment or company to
which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a discounted cash
flow analysis of the projected free cash flow of the Company for the fiscal
years ending 1995 through 2002, assuming, among other things, discount rates of
10% through 14% and terminal multiples of net income of 9.0x to 13.0x. Utilizing
these assumptions, Smith Barney arrived at a per share equity valuation
reference range for the Company of $11.49 to $23.28.
Smith Barney also analyzed the present values of the projected free cash
flow of the Company for the fiscal years ending 1995 through 2003 assuming that
the assets of the Company were liquidated in the absence of the proposed Merger
or similar extraordinary transaction. Applying discount rates of 10% through
14%, Smith Barney assumed, among other things, that (i) new and renewal business
of the Company would cease as of January 1, 1995; (ii) all unearned premiums
assumed to be outstanding at December 31, 1994 would be earned during 1995;
(iii) the loss and loss adjustment expense reserves of the Company outstanding
at December 31, 1994 would be sufficient to pay all reported and unreported
claims relating to business written during 1994 and prior years; (iv) the period
in which the Company would be required to pay all reported and unreported claims
arising from business written during 1994 and prior years would be nine years
commencing in 1995 and ending in 2003; (v) the Company would invest 10% of its
free cash flow in short-term investments
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<PAGE> 27
and 90% of its free cash flow in taxable securities earning an average blended
yield ranging from 6.7% in 1995 to 7.7% in 2003; and (vi) underwriting and
corporate overhead expenses of the Company would decline in a manner that would
result in the Company having sufficient resources to run-off the business
written during 1994 and prior years. Utilizing these assumptions, Smith Barney
arrived at a per share equity valuation reference range for the Company of
$12.25 to $14.31.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted other comparative
analyses, including, among other things, a review of (i) historical and
projected financial results of the Company; and (ii) the history of trading
prices for the Common Stock and the relationship between movements of such
common stock, movements of the common stock of the Comparable Companies and
movements in the Standard & Poor's 500 Index.
Pursuant to the terms of Smith Barney's engagement, the Company has agreed
to pay Smith Barney for its services in connection with the Merger an aggregate
financial advisory fee of $2,082,693. The Company also has agreed to reimburse
Smith Barney for travel and out-of-pocket expenses incurred by Smith Barney in
performing its services, including the reasonable fees and expenses of its legal
counsel, and to indemnify Smith Barney and related persons against certain
liabilities, including liabilities under the federal securities laws, arising
out of Smith Barney's engagement.
In the ordinary course of business, Smith Barney may actively trade the
equity and debt securities of the Company and ZRC for its own account and for
the account of its customers and, accordingly, may at any time hold a long or
short position in such securities. Other than this transaction, the Company has
never retained Smith Barney to represent it in any other transactions. In May
1993, Smith Barney, Harris Upham & Co., Incorporated ("SBHU"), an affiliate of
Smith Barney, acted as co-manager for an initial public offering of the common
stock of ZRC. In addition, SBHU, from time to time provides investment banking
services to certain affiliates of ZRC, including Zurich Insurance Company and
Centre Reinsurance Holdings Limited and its subsidiaries.
Smith Barney is a nationally recognized investment firm and was selected by
the Company based on Smith Barney's experience and expertise. Smith Barney
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
SOURCE OF FUNDS OF THE MERGER CONSIDERATION
ZRC has informed the Company that ZRC expects that payment of the Merger
Consideration will be funded from the capital and surplus of RCRC and operating
balances of ZRC and the Company.
REGULATORY APPROVAL
New Jersey Department of Insurance. It is a condition to the consummation
of the Merger that the New Jersey Department of Insurance (the "Insurance
Department") approve the Merger. Application for approval of the Merger by the
Insurance Department (generally known as "Form A") has been made by ZRC. In New
Jersey, the Form A filing triggers a public hearing requirement, which public
hearing must be held within 60 days after the Form A has been filed and deemed
complete by the Insurance Department. A public hearing regarding the Merger was
held on March 17, 1995 and no opposition to approval of the Merger was made at
the hearing. The Company anticipates that the Insurance Department will approve
the Merger prior to the date of the Special Meeting. However, there can be no
assurance that the approval of the Insurance Department can be obtained or that
if it is obtained, it will be obtained by the date of the Special Meeting or the
date specified in the Merger Agreement. The Company and ZRC are not required to
consummate the Merger pursuant to the Merger Agreement unless the approval of
the Insurance Department is obtained by June 30, 1995. See "THE MERGER
AGREEMENT -- Conditions to the Merger" and "-- Termination of the Merger
Agreement."
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HSR Act. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Merger cannot be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "Antitrust
Division") and specified waiting period requirements have been satisfied. This
condition was satisfied on March 10, 1995.
Other than such approvals, the Company is not aware of any Federal or state
regulatory requirements that must be complied with or approval that must be
obtained in connection with the Merger other than the filing with the Commission
of this Proxy Statement and compliance with applicable state securities laws and
regulations. Should any such approval be required, it is currently contemplated
that such approval will be sought.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" under GAAP.
THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
attached as Appendix A to this Proxy Statement and incorporated herein by
reference. The summary of the Merger Agreement is qualified in its entirety by
reference to the complete text of the Merger Agreement. Capitalized terms which
are not otherwise defined in this summary have the meanings set forth in the
Merger Agreement.
THE MERGER; PAYMENT OF THE MERGER CONSIDERATION
The Merger Agreement provides that, subject to the approval of the Merger
by the stockholders of the Company and Merger Sub and the satisfaction or waiver
of the other conditions to the Merger, Merger Sub will be merged with and into
the Company, the separate corporate existence of Merger Sub will cease, and the
Company will continue as the surviving corporation (the Company, in such
capacity, is sometimes referred to as the "Surviving Corporation").
The Merger will become effective at the time (the "Effective Date") of the
filing of a properly executed Certificate of Merger with the Secretary of State
of the State of Delaware or at such later time as is provided in such
Certificate of Merger.
Pursuant to the Merger Agreement, at the Effective Date, Merger Sub will be
merged with and into the Company, with the Company continuing as the Surviving
Corporation as a direct wholly-owned subsidiary of ZRC, and each share of Common
Stock issued and outstanding immediately prior to the Effective Date (other than
shares of Common Stock (i) held by Merger Sub or ZRC (which shares will be
canceled without conversion and without payment of the Merger Consideration),
(ii) held in the treasury of the Company or by any of its subsidiaries (which
shares will be canceled without conversion and without payment of the Merger
Consideration) and (iii) held by stockholders, if any, who properly executed and
perfected their dissenters' appraisal rights under the DGCL) will be converted
into the right to receive $18.50 per share in cash (the "Merger Consideration"),
without interest, payable to the stockholder upon surrender of the certificate
(the "Certificate") representing such shares of Common Stock in the manner
provided below.
Promptly after the Effective Date, letters of transmittal will be mailed by
First Chicago Trust Company of New York, the paying agent selected by ZRC (the
"Paying Agent"), to each holder of record of the Certificates which immediately
prior to the Effective Date represented issued and outstanding shares of Common
Stock, accompanied by instructions for use in effecting the surrender of the
Certificates in exchange for payment of the Merger Consideration. After receipt
of such transmittal letter, each holder of the Certificates should surrender
such Certificates together with a duly executed letter of transmittal, completed
in accordance with the instructions thereto, to the Paying Agent, and each such
holder will be entitled to receive in exchange therefor cash in an amount equal
to the product of the number of shares of Common Stock represented by the
Certificate and the Merger Consideration. The Certificates so surrendered shall
forthwith be canceled.
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Upon consummation of the Merger, until so surrendered and exchanged, each
Certificate will be deemed, for all purposes, to represent only the right to
receive the Merger Consideration in cash in respect of the shares of Common
Stock evidenced by such Certificate, without any interest thereon.
The closing of the Merger Agreement (the "Closing") will be held on the day
that is at least one business day immediately following the date on which the
last of the required conditions to Closing (which include the approval of the
Merger by the holders of a majority of the shares of Common Stock) has been
satisfied or waived, or on such other date as is agreed upon by the Company and
ZRC.
The Merger Agreement also provides that (i) the certificate of
incorporation of Merger Sub, as in effect at the Effective Date, will be the
certificate of incorporation of the Surviving Corporation, until duly amended in
accordance with applicable law, (ii) the by-laws of Merger Sub, as in effect at
the Effective Date, will be the by-laws of the Surviving Corporation, until duly
amended in accordance with applicable law, and (iii) the directors of Merger Sub
immediately prior to the Effective Date will be the directors of the Surviving
Corporation as of the Effective Date.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company as to, among other things: (i) the due organization, existence, good
standing, corporate power and qualification to do business of the Company; (ii)
the capitalization of the Company; (iii) RCRC being the only significant
subsidiary of the Company; (iv) the Company's ownership of all of the
outstanding shares of capital stock of RCRC; (v) the due organization,
existence, good standing, corporate power and qualification of RCRC to do
business; (vi) the corporate power of the Company to enter into the Merger
Agreement, including the execution and delivery of the Merger Agreement and the
validity and enforceability thereof against the Company, and the corporate power
of the Company, subject to stockholder approval, to carry out its obligations
under the Merger Agreement; (vii) the non-contravention as a result of the
execution, delivery and performance of the Merger Agreement by the Company with
(A) the Certificate of Incorporation and By-laws of the Company, or any
indenture or other loan document and (B) any other contract, license, franchise,
permit, order, decree, concession, lease, instrument, judgment, statute, law,
ordinance, rule or regulation applicable to the Company or any of its
subsidiaries or their respective properties or assets, other than, in the case
of (B) above, any breaches, violations, defaults, terminations, cancellations,
accelerations or losses which, either singly or in the aggregate, will not have
a Company Material Adverse Effect or prevent the consummation of the
transactions contemplated by the Merger Agreement; (viii) except as disclosed or
in connection or compliance with certain specified federal and state laws and
regulations, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
the Company of the Merger or the other transactions contemplated thereby, other
than those the failure of which to make or obtain would not have a Company
Material Adverse Effect or prevent the consummation of the transactions
contemplated by the Merger Agreement; (ix) that certain Company SEC Reports
furnished to ZRC and filed with the Commission complied with the Securities Act
of 1933, as amended, and the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such reports; (x) that
such Company SEC Reports are not misleading; (xi) the fair presentation of the
consolidated financial statements of the Company included in or incorporated by
reference into the Company SEC Reports; (xii) that certain Annual Statements and
Quarterly Statements of RCRC delivered to ZRC and filed with the New Jersey
Insurance Department complied with applicable statutory accounting practices;
(xiii) the absence of certain material adverse changes to the Company since
September 30, 1994; (xiv) the absence of adverse material litigation; (xv) the
truth of information in certain disclosure documents, including this Proxy
Statement; (xvi) certain facts regarding employee benefit plans of the Company;
(xvii) the compliance with certain ERISA matters; (xviii) the inapplicability of
certain anti-takeover provisions to the Merger Agreement and the Voting
Agreement and the transactions contemplated thereby; (xix) the Company's taking
of all necessary actions to approve the Merger Agreement and to recommend the
approval of the Merger to the stockholders of the Company and the necessary
steps to render Section 203 of the DGCL inapplicable to the Merger, the Voting
Agreement and the transactions contemplated thereby, and all necessary and
possible steps to render all existing severance compensation agreements between
the Company
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and its executive officers inapplicable to the Merger, the Voting Agreement and
the transactions contemplated thereby; (xx) the receipt by the Company of the
opinion of Smith Barney to the effect that, as of January 11, 1995, the Merger
Consideration is fair to the stockholders of the Company from a financial point
of view; (xxi) certain matters relating to finder's, brokerage or other fees or
commissions in connection with the Merger or the transactions contemplated by
the Merger Agreement and that the fees payable to Smith Barney will not exceed
the aggregate amount set forth in the engagement letter between the Company and
Smith Barney; (xxii) compliance by the Company with applicable laws; (xxiii)
certain tax matters; (xxiv) the absence of default under any material agreements
of the Company; (xxv) certain matters regarding licenses held by the Company and
RCRC; (xxvi) material reinsurance and retrocession agreements of the Company and
RCRC; and (xxvii) that RCRC does not engage in any business other than
reinsurance.
The Merger Agreement also contains various representations and warranties
of ZRC as to, among other things, (i) the due organization, existence, good
standing, corporate power and qualification to do business of ZRC; (ii) the
corporate power of ZRC to enter into the Merger Agreement, including the
authorization, execution and delivery of the Merger Agreement and the
transactions contemplated thereby and the validity and enforceability thereof
against ZRC; (iii) the non-contravention as a result of the execution, delivery
and performance of the Merger Agreement by ZRC with (A) the Certificate of
Incorporation and By-laws of ZRC, or any indenture or other loan document of
ZRC, and (B) any other contract, license, franchise, permit, order, decree,
concession, lease, instrument, judgment, statute, law, ordinance, rule or
regulation applicable to ZRC or any of its subsidiaries or their respective
properties or assets, other than, in the case of (B) above, any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a ZRC Material Adverse
Effect or prevent the consummation of the transactions contemplated by the
Merger Agreement; (iv) except as disclosed or in connection or compliance with
certain specified federal and state laws and regulations, no filing or
registration with, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by ZRC of the Merger, other than
those the failure of which to make or obtain would not have a ZRC Material
Adverse Effect or prevent the consummation of the transactions contemplated by
the Merger Agreement; (v) the truth of all material information supplied by ZRC
or Merger Sub to be included or incorporated by reference in this Proxy
Statement; and (vi) certain matters relating to finder's, brokerage or other
fees or commissions in connection with the Merger or the transactions
contemplated by the Merger Agreement and that the fees payable to CS First
Boston by ZRC will not exceed the aggregate amount set forth in the engagement
letter between ZRC and CS First Boston.
The Merger Agreement also contains various representations and warranties
of Merger Sub as to, among other things, (i) the due organization, existence and
good standing of Merger Sub; (ii) the capitalization of Merger Sub; (iii) the
corporate power of Merger Sub to enter into the Merger Agreement, including the
authorization, execution and delivery of the Merger Agreement and the
transactions contemplated thereby and the validity and enforceability thereof
against the Company; (iv) the non-contravention as a result of the execution,
delivery and performance of the Merger Agreement by Merger Sub with the
Certificate of Incorporation and By-laws of Merger Sub; (v) except as disclosed
or in connection or compliance with certain specified federal and state laws and
regulations, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
Merger Sub of the Merger or the other transactions contemplated thereby, other
than those the failure of which to make or obtain would not prevent the
consummation of the transactions contemplated by the Merger Agreement; (vi)
Merger Sub's taking of all necessary actions to approve the Merger; and (vii)
that Merger Sub was formed solely for the purpose of engaging in the
transactions contemplated by the Merger Agreement and has engaged in no other
business activities.
CERTAIN COVENANTS
Conduct of Business of the Company Pending the Merger. The Merger
Agreement contains various agreements on the part of the Company that restrict
its abilities to operate its business prior to the Effective Date. Subject to
certain materiality requirements, unless ZRC otherwise consents in writing,
these agreements require the Company and its subsidiaries to, among other
things: (i) carry on their respective businesses in the
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usual, regular and ordinary course in substantially the same manner as
heretofore conducted, and use their best reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with customers,
suppliers and others having business dealings with them to the end that their
goodwill and on-going businesses shall be unimpaired at the Effective Date,
except such impairment as would not have a Company Material Adverse Effect; (ii)
maintain insurance coverages and their books, accounts and records in a manner
consistent with prior practices, (iii) comply in all material respects with all
laws, ordinances and regulations of Governmental Entities applicable to them,
(iv) maintain and keep their properties and equipment in good repair, working
order and condition, ordinary wear and tear excepted; (v) perform in all
material respects their obligations under all contracts and commitments to which
they are a party or by which they are bound; and (vi) use their best reasonable
efforts to refrain from taking any action that would, or reasonably might be
expected to, result in any of its representations and warranties set forth in
the Merger Agreement being or becoming untrue in any material respect, or in any
of the conditions to the Merger not being satisfied, or (unless such action is
required by applicable law) which would adversely affect the ability of the
Company to obtain any of the regulatory approvals required to consummate the
Merger.
Further, pursuant to the Merger Agreement, neither the Company nor any of
its subsidiaries may do, or propose to do, any of the following: (i)(A) sell or
pledge or agree to sell or pledge any capital stock owned by it in any of its
subsidiaries, (B) amend its Certificate of Incorporation or By-laws, (C) split,
combine or reclassify its outstanding capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of the capital stock, or, except as contemplated by the
Merger Agreement, declare, set aside or pay any dividend or other distribution
payable in cash, stock or property, other than the Company's regular quarterly
cash dividend of $.08 per share, or (D) directly or indirectly redeem, purchase
or otherwise acquire or agree to redeem, purchase or otherwise acquire any
shares of its capital stock; (ii) (A) except as required by the Merger
Agreement, issue, deliver or sell or agree to issue, deliver or sell any
additional shares of, or stock appreciation rights or rights of any kind to
acquire any shares of, its capital stock of any class, any Company Voting Debt,
or any option, rights or warrants to acquire, or securities convertible into,
shares of capital stock other than (x) issuances of shares of Common Stock
pursuant to the exercise of warrants or stock options outstanding on the date of
the Merger Agreement or pursuant to the Indenture dated as of July 27, 1993
between the Company and Chemical Bank, as trustee (the "Indenture"), or (y) the
grant of employee stock options and the issuance of shares of Common Stock upon
exercise thereof, at fair market value at the time of grant of the options, to
new employees in connection with the commencement of their employment, in each
case in the ordinary course of business and consistent with past practice, (B)
make any material change in the underwriting, establishment of reserves,
investment or claims adjustment policies, principles and practices of the
Company or RCRC, (C) acquire, lease or dispose of or agree to acquire, lease or
dispose of any capital assets or any other assets other than in the ordinary
course of business, (D) incur additional indebtedness or encumber or grant a
security interest in any asset or enter into any other material transaction
other than in each case in the ordinary course of business, (E) acquire or agree
to acquire by merging or consolidating with, or by purchasing a substantial
equity interest in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, in
each case in this clause (E) which are material, individually or in the
aggregate, to the Company and its subsidiaries taken as a whole, or (F) adopt,
enter into, amend or terminate any contract, agreement, commitment or
arrangement with respect to any of the foregoing; (iii) except as required to
comply with applicable law and except as provided with respect to employees of
the Company in the Merger Agreement, (A) adopt, enter into, terminate or amend
any bonus, profit sharing, compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or welfare of
any director, officer or current or former employee, (B) increase in any manner
the compensation or fringe benefits of any director, officer or employee (except
for normal increases in the ordinary course of business that are consistent with
past practice and that, in the aggregate, do not result in a material increase
in benefits or compensation expense to the Company and its subsidiaries relative
to the level in effect prior to such increase), (C) pay any benefit not provided
under any existing plan or arrangement, (D) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan (including, without
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limitation, the grant of stock options, stock appreciation rights, stock based
or stock related awards, performance units or restricted stock, or the removal
of existing restrictions in any benefit plans or agreements or awards made
thereunder) except for (x) payment of year-end bonuses to employees, (y) making
of matching contributions to 401(k) plans, and (z) the grant of employee stock
options and the issuance of shares of Common Stock upon exercise thereof, at
fair market value at the time of grant of the options, to new employees in
connection with the commencement of their employment, in each case in the
ordinary course of business and consistent with past practice, (E) take any
action to fund or in any other way secure the payment of compensation or
benefits under any employee plan, agreement, contract or arrangement or Company
Benefit Plan, other than in the ordinary course of business consistent with past
practice, or (F) adopt, enter into, amend or terminate any contract, agreement,
commitment or arrangement to do any of the foregoing; (iv) make any investments
in non-investment grade securities; and (v) make any change in its accounting
policies or procedures except as required under Statutory Accounting Practices
or GAAP, as applicable.
No Solicitation. Pursuant to the Merger Agreement, the Company has agreed
that, except as contemplated by the Merger Agreement and the Voting Agreement,
the Company will not, nor will any of its subsidiaries, directly or indirectly,
take (nor will the Company authorize or permit its subsidiaries, officers,
directors, employees, representatives, investment bankers, attorneys,
accountants or other agents or affiliates, to take) any action to (i) encourage,
solicit or initiate the submission of any Business Combination Proposal (as
defined in "THE MERGER AGREEMENT -- Termination of the Merger Agreement"), (ii)
enter into any agreement with respect to any Business Combination Proposal, or
(iii) participate in any way in discussions or negotiations with, or furnish any
information to, any person in connection with, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Business Combination Proposal.
Notwithstanding the preceding sentence, the Company may participate in
discussions or negotiations with or furnish information to any Third Party (as
defined in "THE MERGER AGREEMENT -- Termination of the Merger Agreement") which
makes an unencouraged and unsolicited proposal of a transaction which the Board
of Directors reasonably believes will result in a Superior Proposal (as defined
in "THE MERGER AGREEMENT -- Termination of the Merger Agreement") (provided that
any such information so furnished shall at the same time be furnished to ZRC).
In addition, the Board of Directors is not prohibited from recommending to the
stockholders a Business Combination Proposal which it has reasonably determined
will result in a Superior Proposal.
Publicity. Pursuant to the Merger Agreement, so long as the Merger
Agreement is in effect, ZRC, Merger Sub and the Company have agreed to consult
with each other in issuing any press release or otherwise making any public
statement with respect to the transactions contemplated by the Merger Agreement,
and not to issue any press release or make any public statement prior to such
consultation.
CONDITIONS TO THE MERGER
The respective obligations of the Company, ZRC and Merger Sub to effect the
Merger are subject to the fulfillment, or waiver, at or prior to the Effective
Date, of the following conditions: (a) approval of the Merger by the requisite
vote of the holders of the shares of Common Stock; (b) the expiration or
termination of the waiting period applicable to the consummation of the Merger
under the HSR Act, which has occurred (see "THE MERGER -- Regulatory Approval");
(c) receipt of all approvals necessary for the consummation of the transactions
contemplated by the Merger Agreement from the Insurance Commissioners of the
respective Departments of Insurance of the States of New Jersey and Connecticut
(see "THE MERGER -- Regulatory Approval"); and (d) the absence of preliminary or
permanent injunction or other order by any federal or state court in the United
States which prevents the consummation of the Merger.
The obligation of the Company to effect the Merger is also subject to the
fulfillment, or waiver, at or prior to the Effective Date, of the following
additional conditions: (a) performance by ZRC and Merger Sub in all material
respects of their agreements contained in the Merger Agreement required to be
performed on or prior to the Effective Date and the truth, in all material
respects, of representations and warranties of ZRC and Merger Sub contained in
the Merger Agreement when made and on and as of the Effective Date as if made on
and as of such date (except to the extent they relate to the date of the Merger
Agreement or any other particular date), and receipt of a certificate of the
President, Chief Executive Officer or a Vice President of
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ZRC and Merger Sub to that effect; (b) receipt of all permits, consents,
authorizations, approvals, registrations, qualifications, designations and
declarations set forth on the ZRC Disclosure Schedule, and, to the extent
required to be submitted prior to the Effective Date, submission of all filings
and notices set forth on the ZRC Disclosure Schedule; and (c) receipt of a legal
opinion of Willkie Farr & Gallagher, counsel to ZRC and Merger Sub, in form and
substance reasonably satisfactory to the Company.
The obligations of ZRC and Merger Sub to effect the Merger are also subject
to the fulfillment, or waiver, at or prior to the Effective Date, of the
following additional conditions: (a) performance by the Company in all material
respects of its agreements contained in the Merger Agreement required to be
performed on or prior to the Effective Date and the truth, in all material
respects, of representations and warranties of the Company contained in the
Merger Agreement when made and on and as of the Effective Date as if made on and
as of such date (except to the extent they relate to the date of the Merger
Agreement or any other particular date), except as contemplated or permitted by
the Merger Agreement, and receipt of a certificate of the President, Chief
Executive Officer or a Vice President of the Company to that effect; (b) receipt
of all permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth on the Company
Disclosure Schedule and, to the extent required to be submitted prior to the
Effective Date, submission of all filings and notices set forth on the Company
Disclosure Schedule; (c) the absence of (A) amendment, modification, rescission
or repeal of the recommendation of the Board of Directors to the stockholders of
the Company to approve the Merger, and (B) the adoption of any other resolutions
in connection with the Merger Agreement and the transactions contemplated
thereby inconsistent with such recommendation of the consummation of the
transactions contemplated by the Merger Agreement; and (d) receipt of a legal
opinion of Gibson, Dunn & Crutcher, counsel to the Company, in form and
substance reasonably satisfactory to ZRC.
AGREEMENTS WITH RESPECT TO THE COMPANY'S STOCK OPTION PLANS
Pursuant to the Merger Agreement, as of the Effective Date, (i) each
outstanding option to purchase shares of Common Stock (the "Outstanding
Options") granted under the Company's Long-Term Incentive Plan or pursuant to
separate option agreements or stock appreciation rights plans (the "Stock Option
Plans"), whether vested or unvested, will be converted into the right to
receive, as of the Effective Date, an amount equal to the product of the number
of shares of Common Stock subject to such Outstanding Option and the amount by
which $18.50 exceeds the exercise or strike price per share of the shares of
Common Stock subject to such Outstanding Option, and (ii) each Outstanding
Option will be canceled.
AGREEMENTS WITH RESPECT TO CERTAIN EMPLOYEE MATTERS
Pursuant to the Merger Agreement, ZRC has agreed to take all actions
necessary or appropriate to permit the employees of the Company and its
subsidiaries on the Effective Date ("Affected Employees") to participate after
the Effective Date in ZRC's employee benefit programs and to cause the Surviving
Corporation to take all actions necessary or appropriate to adopt ZRC's employee
benefit programs effective as of the Effective Date or to make provision that
the Affected Employees are eligible to participate in ZRC's employee benefit
programs effective as of the Effective Date. In addition, ZRC has agreed to
cause the Surviving Corporation to give each Affected Employee full credit for
service with the Company for purposes of eligibility to participate in, vesting
and payment of benefits under, amounts of and eligibility for any subsidized
benefit provided under, any ZRC employee benefit plan.
The Merger Agreement also provides that, after the Effective Date, ZRC will
have a reasonable period, not to exceed one year (the "Review Period"), in which
to review all of the employee and fringe benefit plans (not including plans
pursuant to which capital stock or options to acquire capital stock are issued
to employees, which plans will be maintained as described in the preceding
paragraph) maintained by the Company or any of its subsidiaries (the "Company
Plans") for compatibility and consistency with ZRC's employee benefit programs.
Pursuant to the Merger Agreement, during the Review Period, ZRC may determine to
have the Surviving Corporation continue in effect any one or more of the Company
Plans, amend or modify any one or more of the Company Plans, merge one or more
of the Company Plans into a comparable Parent employee benefit plan adopted by
the Surviving Corporation or terminate any one or more
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of the Company Plans in its or their entirety. However, the Merger Agreement
provides that any such amendment, modification or termination shall not deprive
any Affected Employee of any accrued benefit or benefit payment to which such
Affected Employee has become entitled to prior to the Effective Date. If the
Surviving Corporation is continuing in effect any of the Company Plans during
the Review Period, then (i) neither it nor ZRC will be obligated to adopt a
comparable ZRC employee benefit plan for Affected Employees, and (ii) the
obligation to have the Surviving Corporation adopt the comparable ZRC employee
benefit plan or program, as described in the preceding paragraph, will arise,
and such adoption shall be effective only as of the date the comparable Company
Plan is discontinued and not as of the Effective Date. The Merger Agreement
further provides that if ZRC does not maintain an employee benefit plan
comparable to one of the Company Plans, then ZRC has no obligation to adopt any
plan or program upon the discontinuance or termination of such Company Plan.
INDEMNIFICATION
The Merger Agreement provides that from and after the Effective Date, ZRC
will indemnify, defend and hold harmless the officers, directors and employees
of the Company (the "Indemnified Parties") against all losses, expenses, claims,
damages or liabilities arising out of the transactions contemplated by the
Merger Agreement to the fullest extent permitted or required under applicable
law, including, without limitation, the advancement of expenses (including
reasonable attorneys' fees). ZRC further agrees that all rights to
indemnification existing in favor of the directors, officers or employees of the
Company as provided in the Company's Certificate of Incorporation, By-laws or
existing indemnification agreements, as in effect as of January 11, 1995, with
respect to matters occurring through the Effective Date, will survive the Merger
and will continue in full force and effect for a period of not less than six
years from the Effective Date, with ZRC guarantying the obligations of the
Company in respect thereof. In addition, ZRC agrees to cause the Surviving
Corporation to maintain in effect for not less than three years after the
Effective Date the current policies of directors' and officers' liability
insurance maintained by the Company with respect to matters occurring prior to
the Effective Date. Notwithstanding the preceding sentence, the Surviving
Corporation is permitted to substitute therefor policies of at least the same
coverage (with carriers comparable to the Company's existing carriers)
containing terms and conditions which are no less advantageous to the
Indemnified Parties and is not required to pay an annual premium for such
insurance in excess of one and one-half times the last annual premium paid prior
to January 11, 1995, subject to the requirement to purchase as much coverage as
possible for such amount.
AMENDMENT AND WAIVER OF THE MERGER AGREEMENT
The Merger Agreement may be amended by the parties thereto, by or pursuant
to action taken by their respective Boards of Directors, at any time before or
after approval thereof by the stockholders of the Company, but, after such
approval, no amendment shall be made which in any way materially adversely
affects the rights of such stockholders, without the further approval of such
stockholders. The Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties thereto.
The Merger Agreement provides that at any time prior to the Effective Date,
the parties thereto, by or pursuant to action taken by their respective Boards
of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (ii) waive any
inaccuracies in the representations and warranties of any other party contained
therein or in any documents delivered pursuant thereto by any other party and
(iii) waive compliance with any of the agreements or conditions contained
therein. However, no such waiver shall materially adversely affect the rights of
the stockholders of the Company or ZRC, as the case may be.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the Merger Agreement by the
stockholders of the Company: (a) by mutual consent of the Board of Directors of
ZRC and the Board of Directors of the Company; (b) by either ZRC or the Company
if
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the Merger will not have been consummated on or before June 30, 1995; (c) by the
Company if any of the conditions to the obligations of the Company have not been
met or waived by the Company, including the failure to obtain any required
approval of the Company's stockholders or the stockholders of ZRC; (d) by ZRC if
any of the conditions to the obligations of ZRC have not been met or waived by
ZRC, including the failure to obtain any required approval of ZRC's stockholders
or the stockholders of the Company; (e) by either ZRC or the Company if there
has been a material breach on the part of the other of any representation,
warranty, covenant or agreement set forth in the Merger Agreement, which breach
has not been cured within fifteen business days following receipt by the
breaching party of written notice of such breach; (f) by either ZRC or the
Company upon written notice to the other party if any governmental entity shall
have issued a final permanent order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the Merger Agreement, and in
any such case the time for appeal or petition for reconsideration of such order
will have expired without such appeal or petition being granted; or (g) by the
Company if the Board of Directors reasonably determines that a Business
Combination Proposal (as defined below) will result in a Superior Proposal (as
defined below) and, in connection therewith, the Company will have entered into
a definitive agreement to effect the Business Combination Proposal and has paid
in full the fees required by the Merger Agreement (described below).
The Merger Agreement provides that if the Merger is consummated or the
Merger Agreement is terminated pursuant to (a), (b), (d) or (f) in the preceding
paragraph, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by ZRC,
including legal and accounting expenses and expenses incurred in connection with
the preparation, filing, printing and mailing of this Proxy Statement.
If the Merger Agreement is terminated by ZRC as provided in (e) of the
first paragraph under "Termination of the Merger Agreement," the Company is
required to pay to ZRC an amount equal to $1,000,000 plus all costs and expenses
(not in excess of $1,000,000) reasonably incurred by ZRC in connection with the
Merger Agreement and the transactions contemplated hereby, including all
reasonable legal, professional and service fees and expenses.
The Merger Agreement also provides that, notwithstanding the preceding
paragraph, if (i) the Merger is not consummated as a result of a material breach
by the Company of its agreement with regard to no solicitation (see "THE MERGER
AGREEMENT -- Certain Covenants"), (ii) the Merger Agreement is terminated by the
Company due to a determination by the Board of Directors that a Business
Combination Proposal will result in a Superior Proposal, or (iii) a transaction
described in subdivisions (A) through (D) of the definition of a Third Party
Business Combination (as defined below) shall occur either prior to the
termination of the Merger Agreement pursuant to (a), (b), (c), (d), (f) or (g)
of the first paragraph under "Termination of the Merger Agreement" or within one
year of the date the Merger Agreement is terminated by ZRC pursuant to (e) of
the first paragraph under "Termination of the Merger Agreement", then the
Company will be required to pay to ZRC an amount equal to $4,500,000 plus all
costs and expenses (not in excess of $1,000,000) reasonably incurred by ZRC in
connection with the Merger Agreement, including all reasonable legal,
professional and service fees and expenses.
"Business Combination Proposal" is defined in the Merger Agreement to mean,
with respect to the Company, any tender or exchange offer, proposal for a
merger, consolidation or other business combination involving the Company or any
Significant Subsidiary of the Company or any other proposal or offer to enter
into the transactions described in subdivisions (A) through (D) of the
definition of a Third Party Business Combination (defined below). "Superior
Proposal" is defined to mean, with respect to the Company, any bona fide
Business Combination Proposal that the Board of Directors reasonably determines
will be more favorable to its stockholders than the Merger. "Third Party
Business Combination" is defined in the Merger Agreement to mean the occurrence
of any of the following events: (A) the Company or any Significant Subsidiary of
the Company is acquired by merger or otherwise by any person or group, other
than ZRC or any affiliate thereof (a "Third Party"); (B) the Company or any
subsidiary of the Company enters into an agreement with a Third Party which
contemplates the acquisition of 20% or more of the total assets of the Company
and its subsidiaries taken as a whole; (C) the Company enters into a merger or
other agreement with a Third Party which contemplates the acquisition of more
than 20% of the outstanding shares of the
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Company's capital stock; (D) a Third Party acquires more than 30% of the total
assets of the Company and its subsidiaries taken as a whole; (E) a Third Party
who owns no shares of the Company's capital stock acquires more than 30% of the
outstanding shares of the Company's capital stock, or any person or group which
beneficially owns (as defined in Rule 13d-3 of the Exchange Act) (or has the
right to acquire) 15% or more of the outstanding shares of the Company's capital
stock acquires 15% or more shares of the Company's capital stock; (F) the
Company adopts a plan of liquidation relating to more than 30% of the total
assets of the Company and its subsidiaries taken as a whole; (G) the Company
repurchases more than 30% of the outstanding shares of the Company's capital
stock; or (H) there is a public announcement or written proposal with respect to
a plan or intention by the Company or a Third Party to effect any of the
foregoing transactions, which transaction is effected during the one year period
following such public announcement or written proposal.
CERTAIN OTHER AGREEMENTS
THE VOTING AGREEMENT
Contemporaneously with the execution of the Merger Agreement, Deere
Insurance entered into a Voting and Option Agreement, dated as of January 11,
1995 (the "Voting Agreement"), with ZRC. Pursuant to the Voting Agreement, Deere
Insurance has agreed, during the term of the Voting Agreement, to vote all of
the shares of Common Stock owned by it and any additional shares of Common Stock
that Deere Insurance may acquire after the date of the Voting Agreement (the
"Option Shares") (i) in favor of the Merger and (ii) against any other proposal
which provides for any merger, sale of assets or other Third Party Business
Combination (as defined in "THE MERGER AGREEMENT -- Termination of the Merger
Agreement") between the Company (or any subsidiary of the Company) and any other
person or entity or which is otherwise inconsistent with the Merger Agreement.
Pursuant to the Voting Agreement, Deere Insurance also granted to ZRC an
option (the "Option") to purchase all, but not less than all, of the Option
Shares at a purchase price of $18.50 per share in cash (the "Purchase Price")
for each share purchased (subject to proportionate adjustment in the event of
any stock dividend, split-up, recapitalization, combination, exchange of shares
of Common stock or the like). ZRC may exercise the Option prior to the
termination of the Voting Agreement if (i) a Third Party Business Combination
occurs, or (ii) the Merger Agreement is terminated and ZRC is entitled to
payment of expenses and a fee thereunder (as described in "THE MERGER AGREEMENT
-- Termination of the Merger Agreement"). If the Option is exercised, the
closing of the purchase would be subject to the expiration or termination of any
applicable waiting period under the HSR Act and the receipt of all necessary
approvals under applicable state insurance laws and regulations.
The Voting Agreement further provides that if, after purchasing the Option
Shares pursuant to the Option, ZRC or any of its affiliates receives any cash or
non-cash consideration in respect of the Option Shares in connection with a
Third Party Business Combination during the period commencing on the date of the
closing of the purchase and ending on the first anniversary of the closing of
the purchase, ZRC will promptly pay over to Deere Insurance, as an addition to
the Purchase Price, (a) the excess, if any, of such consideration over the
aggregate Purchase Price paid for the Option Shares by ZRC less (b) the amount
of any federal, state, local or other tax paid or payable as a result of, or
otherwise attributable to, the sale or other disposition of the Option Shares by
ZRC; provided that, (X) if the consideration received by ZRC or such affiliates
will be securities listed on a national securities exchange or traded on the
NASDAQ National Market ("NASDAQ"), the per share value of such consideration
will be equal to the closing price per share listed on such national securities
exchange or NASDAQ on the date such transaction is consummated and (Y) if the
consideration received by ZRC or such affiliates will be in a form other than
securities, the per share value will be determined in good faith as of the date
such transaction is consummated by ZRC and Deere Insurance, or, if ZRC and Deere
Insurance cannot reach agreement, by a nationally recognized investment banking
firm reasonably acceptable to the parties.
29
<PAGE> 37
Under the Voting Agreement, Deere Insurance also agreed that until the
termination of the Voting Agreement, Deere Insurance would not, directly or
indirectly, through any employee, agent or otherwise: (i) solicit, initiate or
encourage submission of proposals or offers from any person relating to any
acquisition or purchase of all or a material part of the assets of, or any
equity interest in, or any merger, consolidation or business combination with,
the Company or any of its subsidiaries (an "acquisition proposal"), or (ii)
participate in any discussions or negotiations regarding, or furnish to any
other person any information with respect to, or otherwise cooperate in any way
or assist, facilitate or encourage any acquisition proposal by any other person.
The Voting Agreement also provides that it will terminate on the earlier of
(a) the Effective Date and (b) the date of termination of the Merger Agreement
(or 15 days after the Merger Agreement is terminated by ZRC pursuant to the
provisions described in clause (d) or (e) in the first paragraph under "THE
MERGER AGREEMENT -- Termination of the Merger Agreement" or by the Company
pursuant to the provisions described in clause (g) in the first paragraph under
"THE MERGER AGREEMENT -- Termination of the Merger Agreement," provided that if
ZRC delivers written notice of its intent to exercise the Option during such
15-day period the Voting Agreement will terminate six months after termination
of the Merger Agreement).
INTERESTS OF CERTAIN PERSONS IN THE MERGER
DEERE INSURANCE
As of May 1, 1987, RCRC entered into an underwriting and claims services
agreement and two retrocessional contracts (collectively, the "Deere Insurance
Agreements") with John Deere Insurance Company, an Illinois corporation and a
wholly owned subsidiary of Deere Insurance ("Deere Insurance Sub"). Pursuant to
the Deere Insurance Agreements, Deere Insurance Sub appointed RCRC as its
underwriter and claims manager to act on its behalf and in its name in
underwriting and servicing certain lines of treaty reinsurance business. As
amended, the Deere Insurance Agreements provide that Deere Insurance Sub will
cede to RCRC 92.5% of certain casualty and property reinsurance business written
by RCRC in its capacity as Deere Insurance Sub's underwriter, and that RCRC will
cede to Deere Insurance Sub 7.5% of certain other property or casualty treaty
reinsurance business written by RCRC. The Deere Insurance Agreements limit the
amount of reinsurance premiums written by RCRC in its capacity as underwriter
for Deere Insurance Sub to not more than $50 million gross written premium per
year (as reported in conformity with industry standards). The Deere Insurance
Agreements may be terminated by either party if, among other things, there is a
material change in control of the other party.
In addition, Deere Insurance and RCRC are parties to a Right of First
Acceptance Agreement, dated June 9, 1993 (the "Right of First Acceptance
Agreement"), pursuant to which Deere Insurance agreed to cause its subsidiaries
involved in the business of writing property and casualty insurance to offer to
RCRC, subject to certain exceptions, all reinsurance placed by such subsidiaries
relating to property and casualty insurance. The Right of First Acceptance
Agreement may be terminated by either party upon ten days' written notice.
If the Merger is consummated, RCRC's contractual obligations with and to
Deere Insurance will be unaffected, but control of RCRC will rest with ZRC,
rather than with the Company. Dennis E. Hoffmann, Chairman of the Board of
Directors of the Company, is President and a director of Deere Insurance and is
President and Chairman of the Board of Directors of Deere Insurance Sub. George
G. D'Amato, Jr., a director of the Company, and Conor D. Reilly, Secretary of
the Company, are directors of Deere Insurance.
INDEMNIFICATION
Pursuant to the Merger Agreement, each of the Company's directors and
executive officers is indemnified by ZRC under certain circumstances. See "THE
MERGER AGREEMENT -- Indemnification."
30
<PAGE> 38
EMPLOYEE ISSUES
Employment Agreements. Two directors of the Company, James E. Roberts and
Donald E. Chisholm, are currently employed by the Company and all of the
Company's executive officers other than Conor D. Reilly are employed by the
Company. By virtue of their employment and contractual and other compensation
arrangements, each such individual's economic interests are affected by the
Merger other than through the conversion of the shares of Common Stock owned by
them into the Merger Consideration.
The Company has employment agreements with James E. Roberts and David C.
Smith. Mr. Roberts' and Mr. Smith's employment agreements with the Company are
otherwise unaffected by the Merger, although the consummation of the Merger and
subsequent changes to the Surviving Corporation may be construed as a
"Constructive Discharge" under their basic employment agreements, which, if so
construed, would obligate the Company to pay Mr. Roberts and Mr. Smith their
current annual base salaries ($309,000 and $267,000, respectively) through May
31, 1999, less any cash compensation earned by them during that time from other
employment.
Stock Options. Pursuant to the Merger Agreement, as of the Effective Date,
(i) each Outstanding Option granted under the Company's Stock Option Plans,
whether vested or unvested, will be converted into the right to receive, as of
the Effective Date, an amount equal to the product of the number of shares of
Common Stock subject to such Outstanding Option and the amount by which $18.50
exceeds the exercise or strike price per share of the shares of Common Stock
subject to such Outstanding Option, and (ii) each Outstanding Option will be
canceled. See "THE MERGER AGREEMENT -- Agreements with Respect to the Company's
Stock Option Plans." In connection with the consummation of the Merger
Agreement, Mr. Chisholm and the executive officers named below will receive the
following amounts upon exchange and cancellation of their Outstanding Options as
of March 15, 1995:
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT OF
NAME OPTIONS PAYMENT
--------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Donald E. Chisholm (1)............................................... 167,102 $ 1,095,611
James E. Roberts..................................................... 128,013 584,281
R. Richard Mueller................................................... 1,132 4,947
Molly P. Sanders..................................................... 42,008 221,291
Stephen B. Slade..................................................... 76,241 410,607
David C. Smith....................................................... 110,460 533,050
</TABLE>
---------------
(1) Includes $1,025,305 in exchange for Mr. Chisholm's options to purchase
167,102 shares of Common Stock and $70,306 in exchange for his outstanding
stock appreciation rights with regard to 17,687 shares of Common Stock.
Restricted Shares. Subsequent to the execution of the Merger Agreement,
the Compensation Committee of the Company's Board of Directors, with ZRC's
consent, agreed on a formula (the "Formula") pursuant to which the executive
officers and employees of the Company will receive a cash distribution for the
shares of Common Stock (the "Restricted Shares") issued to such individuals
under the Company's Restricted Stock Incentive Compensation Plan (the
"Restricted Stock Plan"), which shares of Common Stock would not yet have vested
in such individuals in the absence of the Merger. Pursuant to the Formula, each
participant in the Restricted Stock Plan who is still employed on the Effective
Date will receive on that date (regardless of such participant's continued
employment with the Surviving Corporation), a cash distribution of 35% of the
value of such participant's Restricted Shares, at a per share price of $18.50.
All Restricted Stock Plan participants who do not receive an offer of regular or
transition employment with ZRC or any of its affiliates will also receive the
remaining 65% of the value of such participant's Restricted Shares at a per
share price of $18.50. All Restricted Stock Plan participants who (i) receive
and accept an offer of transition employment from ZRC or any of its affiliates,
and (ii) who do not leave the employment of ZRC or such affiliate prior to the
end of the agreed transition period, will receive, on or near the end of the
transition period, a cash distribution of the remaining 65% of the value of such
participant's Restricted Shares at a per share price of $18.50. All Restricted
Stock Plan participants who (i) receive and accept an offer of regular
employment with ZRC or any of its affiliates, and (ii) who do not leave the
employment of ZRC or such affiliate prior to December 31, 1995 will receive, on
or near December 31, 1995, a cash distribution of the remaining 65% of the value
of such
31
<PAGE> 39
participant's Restricted Shares, at a per share price of $18.50 (except for Mr.
Slade who will also receive an additional cash distribution, on or near December
31, 1996, of 33% of the value of his Restricted Shares, at a per share price of
$18.50, resulting in an aggregate cash distribution to Mr. Slade of 133% of the
value of his Restricted Shares). Pursuant to the Formula and in connection with
the Merger Agreement, the executive officers of the Company will receive the
following amounts for their Restricted Shares on the Effective Date
(representing 35% of the value of their Restricted Shares at a per share price
of $18.50) and any additional amounts as each executive officer may qualify for
pursuant to the conditions described above:
<TABLE>
<CAPTION>
AMOUNT OF
RESTRICTED PAYMENT ON THE
NAME SHARES EFFECTIVE DATE
--------------------------------------------------------------------- ---------- --------------
<S> <C> <C>
James E. Roberts..................................................... 25,000 $ 161,875
R. Richard Mueller................................................... 8,000 51,800
Molly P. Sanders..................................................... 12,000 77,700
Stephen B. Slade..................................................... 16,000 103,600
David C. Smith....................................................... 17,500 113,313
</TABLE>
Employee Loans. In 1987, the Company made loans to certain of its
employees in connection with their commencing employment with the Company and
purchasing shares of Common Stock. Each such employee will be obligated on the
Effective Date to repay to the Company such individual's outstanding loan
balance. As of March 15, 1995, the executive officers and directors listed below
are obligated to pay the Company the following amounts:
<TABLE>
<CAPTION>
NAME LOAN BALANCE
-------------------------------------------------------------------------------- ------------
<S> <C>
Donald E. Chisholm.............................................................. $ 251,110
James E. Roberts................................................................ 33,297
Molly P. Sanders................................................................ 3,546
Stephen B. Slade................................................................ 1,813
David C. Smith.................................................................. 33,297
</TABLE>
Employment and Severance Arrangements. Pursuant to the Merger Agreement,
ZRC has agreed to take all actions necessary or appropriate to permit the
Affected Employees to participate after the Effective Date in ZRC's employee
benefit programs and to cause the Surviving Corporation to take all actions
necessary or appropriate to adopt ZRC's employee benefit programs effective as
of the Effective Date or to make provision that the Affected Employees are
eligible to participate in ZRC's employee benefit programs effective as of the
Effective Date. In addition, ZRC has agreed to cause the Surviving Corporation
to give each Affected Employee full credit for service with the Company for
purposes of eligibility to participate in, vesting and payment of benefits
under, amounts of and eligibility for any subsidized benefit provided under, any
ZRC employee benefit plan. See "THE MERGER AGREEMENT -- Agreement with Respect
to Certain Employee Matters."
Subsequent to the execution of the Merger Agreement, ZRC adopted a
severance policy for all employees of the Company, including its executive
officers, who are employed by the Company on the Effective Date and are
thereupon terminated, or are terminated at the end of a pre-agreed transition
period, providing for payment to such individuals of two weeks pay for each full
year of service as an employee of the Company, with a minimum severance period
of six weeks, with medical insurance for the full severance period, payment in
full for accrued but unused vacation time and outplacement assistance. The
Company estimates $833,054 and $142,000 as the total amounts ZRC will be
obligated to pay for (i) salary and accrued vacation and (ii) outplacement
assistance, respectively, under the severance policy to the employees of the
Company as a result of the Merger. This does not include amounts which may be
payable to Messrs. Roberts and Smith pursuant to their employment agreements, as
described above.
INVESTMENT ADVISORY AGREEMENT
The Company has an investment advisory agreement with Conning, an
investment firm providing specialty research, trading, consulting, underwriting
and financial advisory services to the insurance industry.
32
<PAGE> 40
Pursuant to such agreement, Conning provides investment advice to RCRC for a fee
equal to .15% of the market value of the first $200 million of its mean invested
assets and .125% percent of the amount of such assets in excess of $200 million.
In 1994, Conning was paid $475,000 pursuant to such agreement. The investment
advisory agreement may be terminated by either party upon written notice and
will likely be terminated by the Surviving Corporation after consummation of the
Merger. Maurice W. Slayton, a director of the Company, is Chairman of the Board
of Directors, President and Chief Executive Officer of Conning.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material United States federal income tax
consequences of the Merger is for general information only. It is based on the
Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
existing and proposed Treasury regulations and judicial and administrative
determinations, all of which are subject to change at any time, possibly on a
retroactive basis. It does not discuss the state, local or foreign tax
consequences of the Merger, nor does it discuss tax consequences to categories
of stockholders that are subject to special rules, such as foreign persons,
tax-exempt organizations, insurance companies, banks, persons who received their
shares of Common Stock as compensation and dealers in stock and securities. Tax
consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service (the "Service") with
respect to the federal income tax consequences of the Merger.
PURCHASE OF SHARES
The receipt of the Merger Consideration pursuant to the Merger will be a
taxable transaction for U.S. federal income tax purposes (and may also be a
taxable transaction under applicable state, local and other income tax laws). In
general, for federal income tax purposes, a stockholder will recognize gain or
loss equal to the difference between his or her adjusted tax basis in his or her
shares of Common Stock and the amount of cash received in exchange therefor.
Such gain or loss generally will be capital gain or loss if the shares of Common
Stock were held as capital assets and will be long-term capital gain or loss if,
on the date of sale, the shares of Common Stock were held for more than one
year.
BACKUP WITHHOLDING
Under the Code, the receipt of Merger Consideration may be subject, under
certain circumstances, to "backup withholding" at a 31% rate. This withholding
generally applies only if the stockholder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN") within a reasonable
time after the request therefor, (ii) furnishes an incorrect TIN, (iii) is
notified by the Service that he or she has failed to report properly interest or
dividends, or (iv) fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that he or she is not subject to backup withholding. Any amount
withheld from a payment to a stockholder under the backup withholding rules is
allowable as a credit against such stockholder's federal income tax liability,
provided that the required information is furnished to the Service. Corporations
and certain other entities described in the Code and Treasury Regulations are
exempt from such withholding if their exempt status is properly established.
Stockholders should consult their tax advisors as to their qualification for
exemption from withholding and the procedure for obtaining such exemption.
GENERAL
The foregoing discussion may not be applicable to stockholders who are
subject to special treatment under U.S. federal income tax law or to holders of
the shares of Common Stock acquired upon the exercise of employee stock options
or otherwise as compensation.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY. STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR TAX
ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM (INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS) OF
THE MERGER.
33
<PAGE> 41
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the DGCL, any stockholder of the Company who does not wish to accept
the Merger Consideration provided for in the Merger Agreement has the right to
dissent from the Merger and to seek an appraisal of, and to be paid the fair
cash value (exclusive of any element of value arising from the accomplishment or
expectation of the Merger) for, his or her shares of Common Stock (the
"Dissenting Shares"), provided that the stockholder complies with the provisions
of Section 262 of the DGCL ("Appraisal Rights").
The following is intended as a brief summary of the material provisions of
the statutory procedures required to be followed by a stockholder in order to
dissent from the Merger and perfect the stockholder's Appraisal Rights. This
summary, however, is not a complete statement of all applicable requirements and
is qualified in its entirety by reference to Section 262 of the DGCL, the text
of which is set forth in Appendix D hereto.
If any stockholder elects to demand appraisal of his or her shares of
Common Stock, the stockholder must satisfy each of the following conditions:
(i) the stockholder must deliver to the Company a written demand for
appraisal of his or her shares of Common Stock before the vote with respect to
the Merger is taken (this written demand for appraisal must be in addition to
and separate from any proxy or vote abstaining from or against the Merger;
voting against or failing to vote for the Merger by itself does not constitute a
demand for appraisal within the meaning of Section 262); and
(ii) the stockholder must not vote in favor of the Merger (an abstention or
failure to vote will satisfy this requirement, but a vote in favor of the
Merger, by proxy or in person, will constitute a waiver of the stockholder's
Appraisal Right in respect of the shares of Common Stock so voted and will
nullify any previously filed written demands for appraisal).
Within ten days after the Effective Date, the Company must give written
notice that the Merger has become effective to each stockholder who so filed a
written demand for appraisal and who did not vote in favor of the Merger. Within
120 days after the Effective Date, but not thereafter, either the Company or any
stockholder who has complied with the requirements of Section 262 of the DGCL
may file a petition in the Delaware Court of Chancery (the "Court") demanding a
determination of the fair value of the shares of Common Stock held by all
stockholders entitled to appraisal. The Company does not presently intend to
file such a petition in the event there are dissenting stockholders. INASMUCH AS
THE COMPANY HAS NO OBLIGATION TO FILE SUCH A PETITION, THE FAILURE OF A
STOCKHOLDER TO DO SO WITHIN THE PERIOD SPECIFIED COULD NULLIFY SUCH
STOCKHOLDER'S PREVIOUSLY WRITTEN DEMAND FOR APPRAISAL. At any time within 60
days after the Effective Date, any stockholder who has demanded appraisal has
the right to withdraw the demand and to accept the payment of the Merger
Consideration pursuant to the Merger Agreement.
If any stockholder fails to comply with the above provisions and the Merger
becomes effective, the stockholder will be entitled to receive the Merger
Consideration as provided for in the Merger Agreement but will have no Appraisal
Rights with respect to his or her shares of Common Stock.
All demands for appraisal should be addressed to Re Capital Corporation,
Two Stamford Plaza, Stamford, Connecticut 06904-2148, Attention: Secretary,
before the vote on the Merger Agreement is taken at the Special Meeting, and
should be executed by, or on behalf of, the holder of record of the shares of
Common Stock. The demand must reasonably inform the Company of the identity of
the stockholder and the intention of the stockholder to demand appraisal of his
or her shares of Common Stock.
To be effective, a demand for appraisal must be made by or in the name of
the registered stockholder, fully and correctly, as the stockholder's name
appears on his or her stock certificate(s) and cannot be made by the beneficial
owner if the beneficial owner does not also hold the shares of Common Stock of
record. The beneficial holder must, in such cases, have the registered owner
submit the required demand in respect of such shares of Common Stock.
34
<PAGE> 42
If shares of Common Stock are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of a demand for appraisal
should be made in such a capacity, and if the shares of Common Stock are owned
of record by more than one person, as in joint tenancy or tenancy in common, the
demand should be executed by or for all joint owners. An authorized agent,
including one for two or more joint owners, may execute the demand for appraisal
for a stockholder of record; however, the agent must identify the record owner
or owners and expressly disclose the fact that, in executing the demand, he or
she is acting as agent for the record owner. A record owner, such as a broker,
who holds shares of Common Stock as a nominee for others, may exercise his or
her right of appraisal with respect to the shares of Common Stock held for one
or more beneficial owners, while not exercising this right for other beneficial
owners. In such case, the written demand should state the number of shares of
Common Stock as to which appraisal is sought. Where no number of shares of
Common Stock is expressly mentioned, the demand will be presumed to cover all
shares of Common Stock held in the name of such record owner.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to the Company, the Company will then be obligated within
20 days thereafter to provide the Court with a duly verified list containing the
names and addresses of all stockholders who have demanded an appraisal of their
shares of Common Stock. After notice to such stockholders, the Court is
empowered to conduct a hearing upon the petition, to determine those
stockholders who have complied with Section 262 of the DGCL and who have become
entitled to Appraisal Rights. The Court may require the stockholders who have
demanded payment for their shares of Common Stock to submit their stock
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings, and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to an appraisal, the Court
will appraise the shares of Common Stock, determining their fair value exclusive
of any element of value arising from the accomplishment or expectation of the
Merger. When the value is so determined, the Court will direct the payment by
the Company of such value, with interest thereon accrued during the pendency of
the proceeding if the Court so determines, to the stockholders entitled to
receive the same, upon surrender to the Company by such holders of the
certificates representing such shares of Common Stock. In determining fair
value, the Court is required to take into account all relevant factors exclusive
of any element of value arising from the accomplishment or expectation of the
Merger.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares of Common Stock determined under Section 262 could be
more, the same or less than the Merger Consideration that they are entitled to
receive pursuant to the Merger Agreement if they do not seek appraisal of their
shares of Common Stock, and that investment banking opinions as to fairness from
a financial point of view are not necessarily opinions as to fair value under
Section 262.
Costs of the appraisal proceeding may be imposed upon the parties thereto
(i.e., the Company and the stockholders participating in the appraisal
proceeding) by the Court as the Court deems equitable in the circumstances. Upon
the application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares of Common Stock entitled to appraisal.
Any stockholder who had demanded Appraisal Rights will not, after the
Effective Date, be entitled to vote shares of Common Stock subject to such
demand for any purpose or to receive payments of dividends or any other
distribution with respect to such shares of Common Stock (other than with
respect to payment as of a record date prior to the Effective Date) or to
receive the Merger Consideration pursuant to the Merger Agreement; however, if
no petition for appraisal is filed within 120 days after the Effective Date, or
if such stockholder delivers a written withdrawal of his or her demand for
appraisal and an acceptance of the Merger, either within 60 days after the
Effective Date, or thereafter with written approval of the Company, then the
right of such stockholder to appraisal will cease and such stockholder will be
entitled to receive the Merger Consideration without interest.
35
<PAGE> 43
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN VIEW OF
THE COMPLEXITY OF SECTION 262 OF THE DGCL, STOCKHOLDERS OF THE COMPANY WHO ARE
CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT THEIR LEGAL ADVISORS.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS
As of the Record Date, there were issued and outstanding 7,111,269 shares
of Common Stock (including 125,000 shares awarded under the Restricted Stock
Plan). The following table sets forth certain information, as of such date,
concerning each person known to the Company to beneficially own more than 5% of
the outstanding shares of Common Stock of the Company and the number of shares
of Common Stock beneficially owned by the directors and executive officers of
the Company and by the directors and executive officers of the Company as a
group. The table does not give effect to the conversion of the Debentures.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
----------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Deere Insurance(1)..................................................... 3,087,598 43.4%
Tweedy, Browne Company L.P.(2)......................................... 568,790 8.0%
Norwest Corporation(3)................................................. 470,000 6.6%
Donald E. Chisholm(4).................................................. 236,465 3.2%
George G. D'Amato, Jr.(5).............................................. 31,203 *
Harold R. Hiser, Jr.(6)................................................ 2,600 *
Dennis E. Hoffmann(7).................................................. 2,500 *
Jean R. Perrette(8).................................................... 600 *
James E. Roberts(9).................................................... 170,353 2.4%
Maurice W. Slayton(10)................................................. 3,600 *
Richard R. West(11).................................................... 6,600 *
R. Richard Mueller(12)................................................. 9,132 *
Molly P. Sanders(13)................................................... 55,152 *
Stephen B. Slade(14)................................................... 94,377 1.3%
David C. Smith(15)..................................................... 146,000 2.0%
Conor D. Reilly(16).................................................... 200 *
All directors and executive officers of the Company as a group (13
persons) (4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)(15)(16).............. 758,782 9.9%
</TABLE>
---------------
* Less than one percent of issued and outstanding shares of Common Stock.
(1) Dennis E. Hoffmann, Chairman of the Board of Directors, is President and
Chief Executive Officer of Deere Insurance. Conor D. Reilly, Secretary of
the Company, and George G. D'Amato, Jr., a director of the Company, are
directors of Deere Insurance. Does not include 2,500 shares owned by Mr.
Hoffmann. Includes 600 restricted shares the restrictions on which are
scheduled to expire on April 15, 1995. Deere Insurance's shares of Common
Stock are subject to the Voting Agreement entered into with ZRC. See
"CERTAIN OTHER AGREEMENTS -- The Voting Agreement." As a result, ZRC may be
deemed to own beneficially (as defined in rule 13d-3 of the Exchange Act)
the shares of Common Stock held by Deere Insurance. ZRC disclaims
beneficial ownership of such shares of Common Stock. Deere Insurance's
principal business address is 3400 80th Street, Moline, Illinois 61265.
(2) 504,390 shares of Common Stock are beneficially owned by Tweedy, Browne
Company L.P. ("TBC"). Such shares of Common Stock are held in the accounts
of various customers of TBC (the "TBC Accounts"), with respect to which
accounts TBC has investment discretion and with respect to some of which it
has obtained sole or shared voting power. Of these shares of Common Stock,
TBC has no power to vote 67,105 shares of Common Stock and sole power to
vote 437,285 shares of Common Stock. 50,000 shares of Common Stock are
beneficially owned by TBK Partners, L.P. ("TBK"). 14,400 shares of Common
Stock are beneficially owned by Vanderbilt Partners, L.P. ("Vanderbilt").
The aggregate
36
<PAGE> 44
number of shares of Common Stock with respect to which TBC, TBK and
Vanderbilt could be deemed to be the beneficial owner is 568,790. Each of
TBC, TBK and Vanderbilt disclaims beneficial ownership of any of the shares
of Common Stock held in the TBC Accounts. TBC's principal business address
is 52 Vanderbilt Avenue, New York, New York 10017.
(3) 235,000 shares of Common Stock are owned by Norwest Growth Fund, Inc., a
wholly-owned subsidiary of Norwest Corporation. 235,000 shares of Common
Stock are owned by Norwest Venture Partners, a limited partnership, the
general partner of which consist of Norwest V.C. Partners, which itself is
a general partnership consisting of certain individuals, and Norwest
Investors, Inc., a wholly-owned subsidiary of Norwest Corporation. All of
the individual general partners of Norwest V.C. Partners are officers or
employees of Norwest Venture Capital Management, Inc., a wholly-owned
subsidiary of Norwest Corporation. Norwest Corporation's principal business
address is 1200 Peavey Building, Minneapolis, Minnesota 55479.
(4) Includes options to purchase 167,102 shares of Common Stock which are
currently exercisable; does not include stock appreciation rights with
regard to 17,687 shares of Common Stock which upon exercise are payable by
the Company in cash and/or shares of Common Stock at the Company's
election.
(5) Does not include any shares of Common Stock held by Deere Insurance. Mr.
D'Amato disclaims beneficial ownership of such shares of Common Stock.
Includes 600 restricted shares the restrictions on which are scheduled to
expire on April 15, 1995.
(6) Includes 600 restricted shares the restrictions on which are scheduled to
expire on April 15, 1995.
(7) Does not include any shares of Common Stock held by Deere Insurance. Mr.
Hoffmann disclaims beneficial ownership of such shares of Common Stock.
(8) Includes 600 restricted shares the restrictions on which are scheduled to
expire on April 15, 1995.
(9) Includes options to purchase 128,013 shares of Common Stock which are
presently exercisable, and includes 25,000 restricted shares of Common
Stock granted to Mr. Roberts under the Restricted Stock Plan.
(10) Includes 600 restricted shares the restrictions on which are scheduled to
expire on April 15, 1995.
(11) Includes 600 restricted shares the restrictions on which are scheduled to
expire on April 15, 1995.
(12) Includes options to purchase 1,132 shares of Common Stock which are
presently exercisable, and includes 8,000 restricted shares granted to Mr.
Mueller under the Restricted Stock Plan.
(13) Includes options to purchase 37,508 shares of Common Stock which are
presently exercisable, and also includes options to purchase 4,500 shares
of Common Stock which vest on November 14, 1995; also includes 12,000
restricted shares granted to Ms. Sanders under the Restricted Stock Plan.
(14) Includes options to purchase 71,741 shares of Common Stock which are
presently exercisable, and also includes options to purchase 4,500 shares
of Common Stock which vest on November 14, 1995; also includes 16,000
restricted shares granted to Mr. Slade under the Restricted Stock Plan.
(15) Includes options to purchase 110,460 of Common Stock shares which are
presently exercisable, and includes 17,500 restricted shares granted to Mr.
Smith under the Restricted Stock Plan.
(16) Includes 200 shares of Common Stock owned jointly by Mr. Reilly and his
wife, as to which shares Mr. Reilly has shared voting and dispositive
power. Does not include any shares held by Deere Insurance. Mr. Reilly
disclaims beneficial ownership of such shares.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Effective June 23, 1993, the shares of Common Stock began trading on NASDAQ
under the symbol "RCAP." Previously the shares of Common Stock were listed and
traded on the American Stock Exchange under the symbol "RCC." The following
table sets forth, for the quarters indicated, the high and low closing
37
<PAGE> 45
sale prices per share of Common Stock and the amount of cash dividends declared
and subsequently paid per share of Common Stock for such quarter.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------ ------ --------
<S> <C> <C> <C>
Fiscal Year Ended 1995:
First Quarter (through March 24, 1995)......................... $18.25 $12.00 $ --
Fiscal Year Ended 1994:
First Quarter.................................................. $14.75 $13.00 $.08
Second Quarter................................................. 14.00 12.25 .08
Third Quarter.................................................. 13.25 12.50 .08
Fourth Quarter................................................. 13.25 12.00 .08
Fiscal Year Ended 1993:
First Quarter.................................................. $16.50 $14.63 $.07
Second Quarter................................................. 15.50 14.00 .07
Third Quarter.................................................. 15.25 13.25 .07
Fourth Quarter................................................. 15.50 13.25 .07
Fiscal Year Ended 1992:
First Quarter.................................................. $16.13 $13.13 $.06
Second Quarter................................................. 16.38 12.88 .06
Third Quarter.................................................. 13.25 12.25 .06
Fourth Quarter................................................. 16.50 13.38 .06
</TABLE>
On January 11, 1995, the last trading day on NASDAQ prior to the public
announcement of the execution of the Merger Agreement, the high and low closing
sale prices for the Common Stock were $12.75 and $12.25, respectively.
On March 24, 1995, the last trading date prior to the date of this Proxy
Statement, the high and low sale prices for the shares of Common Stock were
$18.19 and $18.06, respectively.
Stockholders are urged to obtain current market quotations for the shares
of Common Stock.
Pursuant to the Merger Agreement, the Company agreed not to declare or pay
any dividend or other distribution on the shares of Common Stock prior to the
Effective Date, other than the Company's regular quarterly cash dividend of $.08
per share.
CERTAIN INFORMATION CONCERNING ZRC AND MERGER SUB
ZRC is a Delaware corporation which serves as the holding company for
Zurich Reinsurance, a Connecticut reinsurance company. Zurich Reinsurance is the
principal underwriting affiliate of the Zurich Insurance Company of Zurich,
Switzerland for traditional property and casualty reinsurance products in the
North American market.
Merger Sub is a direct wholly-owned subsidiary of ZRC, created for the sole
purpose of consummating the transactions contemplated by the Merger Agreement.
Merger Sub has not conducted any activities other than those related to its
formation, the preparation of this Proxy Statement and the negotiation of the
Merger Agreement and its obligations thereunder. Pursuant to the terms of the
Merger Agreement, at the Effective Date, Merger Sub will be merged with and into
the Company, with the Company being the surviving corporation.
ZRC and Merger Sub maintain their executive offices at One Chase Manhattan
Plaza, 43rd Floor, New York, New York 10005, and their telephone number is (212)
898-5000.
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<PAGE> 46
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company are
incorporated by reference in this Proxy Statement as of their respective filing
dates:
(1) Annual Report on Form 10-K for the year ended December 31, 1994,
filed pursuant to Section 13 or 15(d) of the Exchange Act; provided,
however, that the information referred to in Item 402(a)(8) of Regulation
S-K promulgated by the Commission shall not be deemed to be specifically
incorporated by reference herein;
(2) Current Report on Form 8-K, filed on January 19, 1995 pursuant to
Section 13 or 15(d) of the Exchange Act;
All reports subsequently filed by the Company pursuant to Sections 13(a),
13(c) or 15(d) of the Exchange Act after the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed incorporated by
reference into this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein, or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy Statement.
This Proxy Statement is accompanied by a copy of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, filed pursuant to
Section 13 or 15(d) of the Exchange Act.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, audited and reported on the
consolidated financial statements of the Company and its subsidiaries for its
fiscal year ended December 31, 1994. Such financial statements have been
incorporated by reference in this Proxy Statement in reliance upon such report.
Representatives of Ernst & Young LLP are expected to be present at the Special
Meeting to respond to appropriate questions of stockholders of the Company and
to make a statement if they so desire.
STOCKHOLDER PROPOSALS FOR THE 1995 ANNUAL MEETING
If the Merger is not consummated, the Company will hold its 1995 Annual
Meeting of the stockholders of the Company in accordance with the Company's
By-laws and Delaware law. Stockholder proposals intended to be presented at the
1995 Annual Meeting of the stockholders must have been received by the Company
not later than January 18, 1995 for inclusion in the proxy materials for the
1995 Annual Meeting.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
at the Special Meeting. If any other business is properly brought before the
Special Meeting, it is intended that proxies in the enclosed form will be voted
in respect thereof in accordance with the judgments of the persons voting the
proxies.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE
URGED TO COMPLETE, SIGN AND RETURN YOUR PROXY PROMPTLY.
By Order of the Board of Directors
CONOR D. REILLY
Secretary
March 27, 1995
New York, New York
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<PAGE> 47
APPENDIX A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
JANUARY 11, 1995
AMONG
ZURICH REINSURANCE CENTRE HOLDINGS, INC.,
ZRC MERGER-SUB CORP.
AND
RE CAPITAL CORPORATION
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER
Section 1.1 The Merger................................................................ 1
Section 1.2 Effective Date of the Merger.............................................. 1
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation.............................................. 1
Section 2.2 By-Laws of the Surviving Corporation...................................... 1
Section 2.3 Board of Directors of the Surviving Corporation........................... 1
Section 2.4 Effects of Merger......................................................... 1
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Merger Consideration...................................................... 2
Section 3.2 Paying Agent.............................................................. 2
Section 3.3 Dissenting Shares......................................................... 2
Section 3.4 Conversion of Sub Securities.............................................. 2
Section 3.5 Stockholders to Have No Further Rights.................................... 3
Section 3.6 Stock Options............................................................. 3
Section 3.7 Warrants.................................................................. 3
Section 3.8 Shareholders' Meeting..................................................... 3
Section 3.9 Closing of the Company's Transfer Books................................... 3
Section 3.10 Assistance in Consummation of the Merger.................................. 3
Section 3.11 Closing................................................................... 3
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Section 4.1 Organization and Qualification............................................ 4
Section 4.2 Authority Relative to this Agreement...................................... 4
Section 4.3 Information in Proxy Statement............................................ 4
Section 4.4 Financial Advisor......................................................... 4
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 Organization and Qualification............................................ 5
Section 5.2 Capitalization............................................................ 5
Section 5.3 Subsidiaries.............................................................. 5
Section 5.4 Authority Relative to this Agreement...................................... 6
Section 5.5 Reports and Financial Statements.......................................... 6
Section 5.6 Absence of Certain Changes or Events...................................... 7
Section 5.7 Litigation................................................................ 7
</TABLE>
A-i
<PAGE> 49
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 5.8 Information in Disclosure Documents....................................... 7
Section 5.9 Employee Benefit Plans.................................................... 8
Section 5.10 ERISA..................................................................... 8
Section 5.11 Takeover Provisions Inapplicable.......................................... 8
Section 5.12 Company Action............................................................ 9
Section 5.13 Fairness Opinion.......................................................... 9
Section 5.14 Financial Advisor......................................................... 9
Section 5.15 Compliance with Applicable Laws........................................... 9
Section 5.16 Taxes..................................................................... 9
Section 5.17 Certain Agreements........................................................ 10
Section 5.18 Licenses.................................................................. 10
Section 5.19 Reinsurance; Retrocession................................................. 10
Section 5.20 No Company Material Adverse Effect........................................ 10
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Section 6.1 Organization.............................................................. 10
Section 6.2 Capitalization............................................................ 10
Section 6.3 Authority Relative to this Agreement...................................... 10
Section 6.4 Sub Action................................................................ 11
Section 6.5 Interim Operations of Sub................................................. 11
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 Conduct of Business by the Company........................................ 11
Section 7.2 Conduct of Business of Sub................................................ 13
Section 7.3 Notice of Breach.......................................................... 13
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Access and Information.................................................... 13
Section 8.2 Proxy Statement........................................................... 13
Section 8.3 Employee Matters.......................................................... 13
Section 8.4 [Intentionally Omitted]................................................... 14
Section 8.5 Indemnification........................................................... 14
Section 8.6 HSR Act................................................................... 14
Section 8.7 Additional Agreements..................................................... 15
Section 8.8 No Solicitation........................................................... 15
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 Conditions to Each Party's Obligation to Effect the Merger................ 16
Section 9.2 Conditions to Obligation of the Company to Effect the Merger.............. 16
Section 9.3 Conditions to Obligations of Parent and Sub to Effect the Merger.......... 16
</TABLE>
A-ii
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination............................................................... 17
Section 10.2 Effect of Termination..................................................... 18
Section 10.3 Amendment................................................................. 18
Section 10.4 Waiver.................................................................... 18
ARTICLE XI
GENERAL PROVISIONS
Section 11.1 Non-Survival of Representations, Warranties and Agreements................ 18
Section 11.2 Notices................................................................... 18
Section 11.3 Expenses; Termination Fees................................................ 19
Section 11.4 Publicity................................................................. 20
Section 11.5 Specific Performance...................................................... 20
Section 11.6 Interpretation............................................................ 20
Section 11.7 Miscellaneous............................................................. 20
</TABLE>
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<PAGE> 51
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January
11, 1995, by and among ZURICH REINSURANCE CENTRE HOLDINGS, INC., a Delaware
corporation ("Parent"), ZRC MERGER-SUB CORP., a Delaware corporation and a
wholly owned subsidiary of Parent ("Sub"), and RE CAPITAL CORPORATION, a
Delaware corporation (the "Company"):
W I T N E S S E T H :
WHEREAS, Parent and the Company desire to effect a business combination by
means of the merger of Sub with and into the Company;
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved, and deem it advisable and in the best interests of their respective
shareholders to consummate, the merger of Sub into the Company (the "Merger"),
upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein the parties hereto
agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
into the Company and the separate existence of Sub shall thereupon cease, and
the Company, as the surviving corporation in the Merger (the "Surviving
Corporation"), shall by virtue of the Merger continue its corporate existence
under the laws of the State of Delaware.
Section 1.2 Effective Date of the Merger. The Merger shall become
effective at the date and time (the "Effective Date") when a properly executed
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Certificate of Incorporation
of Sub, as in effect on the Effective Date, shall be the Certificate of
Incorporation of the Surviving Corporation.
Section 2.2 By-Laws of the Surviving Corporation. The By-laws of the Sub
as in effect on the Effective Date shall be the By-laws of the Surviving
Corporation.
Section 2.3 Board of Directors of the Surviving Corporation. The directors
of Sub immediately prior to the Effective Date, subject to the applicable
provisions of the Certificate of Incorporation and By-Laws of the Surviving
Corporation, shall be the directors of the Surviving Corporation until their
respective successors shall be duly elected or appointed and qualified.
Section 2.4 Effects of Merger. The Merger shall have the effects set forth
in Section 259 of the Delaware General Corporation Law (the "DGCL"). The
corporate existence of the Company, with all its purposes, powers and objects,
shall continue unaffected and unimpaired by the Merger and, as the Surviving
Corporation, it shall be governed by the laws of the State of Delaware and
succeed to all rights, assets, liabilities and obligations of Sub in accordance
with Section 259(a) of the DGCL.
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ARTICLE III
CONVERSION OF SHARES
Section 3.1 Merger Consideration. On the Effective Date, each share (a
"Share") of common stock, par value $0.10 per share, of the Company ("Company
Common Stock") issued and outstanding immediately prior to the Effective Date
(other than (i) Shares held by Parent or Sub, (ii) Shares held in the treasury
of the Company or by any subsidiary of the Company and (iii) Dissenting Shares
(as defined below) in respect of which appraisal rights are properly exercised
and perfected) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive $18.50 per Share
in cash, without interest thereon (the "Merger Consideration"), upon surrender
of the certificate representing such Share (a "Certificate") in the manner
provided in Section 3.2(b). Each Share then held in the treasury of the Company
or by any of its subsidiaries shall be cancelled without conversion and without
payment of consideration and shall cease to exist. Each Share owned beneficially
or of record by the Parent or Sub immediately prior to the Merger, by virtue of
the Merger and without any action on the part of the holder thereof, shall be
cancelled without conversion and without payment of consideration and shall
cease to exist.
Section 3.2 Paying Agent. (a) Prior to the Effective Date, the Company and
Parent shall appoint a bank selected by Parent and reasonably acceptable to the
Company, and having a place of business in New York City, as paying agent (the
"Paying Agent") for purposes of this Agreement.
(b) Promptly after the Effective Date, the Surviving Corporation shall
cause the Paying Agent to mail to each person who was a record holder of Shares
at the Effective Date (other than Parent, Sub, the Company and the Company's
subsidiaries), a form of letter of transmittal and instructions for use in
effecting the surrender for payment of Certificates which immediately prior to
the Effective Date represented Shares. Upon surrender of a Certificate, together
with a duly executed letter of transmittal, the holder of the Certificate shall
be entitled to receive in exchange therefor cash in an amount equal to the
product of the number of Shares represented by the Certificate and the Merger
Consideration. The parties hereto will make available to the Paying Agent at the
Closing funds which will be sufficient to enable the Paying Agent to make
payments (i) with respect to all outstanding Certificates representing Shares
for which the Merger Consideration is payable in accordance with Section 3.2,
promptly after the Certificates are surrendered, and (ii) with respect to all
Outstanding Options and Outstanding Warrants which consideration is payable
pursuant to Sections 3.6 and 3.7 hereof, respectively. No interest will be paid
or accrued on the cash payable upon the surrender of the Certificates. If the
payment is to be made to a person other than the person in whose name a
Certificate surrendered is registered, it shall be a condition of payment that
(x) the Certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that (y) the person requesting such payment shall
pay any transfer or other taxes required by reason of the payment to a person
other than the registered holder of the Certificate surrendered or establish to
the satisfaction of Parent or the Paying Agent that such tax has been paid or is
not applicable. After the Effective Date, until surrendered in accordance with
the provisions of this Section 3.2(b), a Certificate shall represent only the
right to receive the Merger Consideration in cash multiplied by the number of
Shares evidenced by such Certificate, without any interest thereon.
Section 3.3 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, Shares which immediately prior to the Effective Date are held
by stockholders who have properly exercised and perfected appraisal rights under
Section 262 of the DGCL (the "Dissenting Shares") shall not be converted into
the right to receive cash as provided in Section 3.1, but the holders of
Dissenting Shares shall be entitled to receive such consideration as shall be
determined pursuant to Section 262 of the DGCL; provided, however, that, if any
such holder shall have failed to perfect or shall withdraw or lose his right to
appraisal and payment under the DGCL, such holder's Shares shall thereupon be
deemed to have been converted as of the Effective Date into the right to receive
the Merger Consideration, without any interest thereon, as provided in Section
3.1, and such Shares shall no longer be Dissenting Shares.
Section 3.4 Conversion of Sub Securities. At the Effective Date, each
share of common stock, par value $1.00 per share, of Sub issued and outstanding
immediately prior to the Effective Date shall be converted, by
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virtue of the Merger and without any action on the part of the holder thereof,
into one fully paid and nonassessable share of the common stock of the Surviving
Corporation.
Section 3.5 Stockholders to Have No Further Rights. At and after the
Effective Date, the holder of a Certificate shall cease to have any rights as a
stockholder of the Company, except for (i) the right to surrender such
Certificate in exchange for the amount of Merger Consideration to which such
holder is entitled under this Agreement and (ii) the rights available under the
DGCL for Dissenting Shares.
Section 3.6 Stock Options. Each of the options to purchase Company Common
Stock, whether vested or unvested, issued under the Company's 1989 Long Term
Incentive Plan (the "Stock Option Plan"), or pursuant to separate option
agreements or stock appreciation rights plans, and which are (A) listed on
Schedule 3.6 and (B) outstanding as of the Effective Date (the "Outstanding
Options") shall be converted without any action on the part of the holder
thereof into the right to receive, as of the Effective Date, an amount equal to
the product of (i) the number of shares of Company Common Stock subject to such
Outstanding Option and (ii) the amount by which $18.50 exceeds the exercise or
strike price per share of Company Common Stock subject to such Outstanding
Option. The Company shall cause all holders of Outstanding Options to surrender
to the Company their option award agreements for cancellation or provide other
satisfactory evidence of the cancellation of the Outstanding Options, and
thereupon such holders shall receive the requisite cash consideration, subject
to applicable withholding taxes.
Section 3.7 Warrants. Each of the warrants to purchase Company Common
Stock, whether vested or unvested, which are (A) listed on Schedule 3.7, and (B)
outstanding as of the Effective Date (the "Outstanding Warrants") shall be
converted without any action on the part of the holder thereof into the right to
receive, as of the Effective Date, an amount equal to the product of (i) the
number of shares of Company Common Stock subject to such Outstanding Warrant,
and (ii) the amount by which $18.50 exceeds the exercise price per share of
Company Common Stock subject to such Outstanding Warrant. The Company shall
cause all holders of Outstanding Warrants to surrender to the Company their
warrant agreements for cancellation or provide other satisfactory evidence of
the cancellation of the Outstanding Warrants, and thereupon such holders shall
receive the requisite cash consideration, subject to applicable withholding
taxes.
Section 3.8 Shareholders' Meeting. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action to authorize this Agreement and the
transactions contemplated hereby. Subject to its fiduciary duties, as advised by
outside counsel in connection with the receipt by the Company of a Business
Combination Proposal (as defined in Section 8.8) that the Board of Directors of
the Company reasonably believes will result in a Superior Proposal (as defined
in Section 8.8), the Board of Directors of the Company will recommend that
holders of Company Common Stock vote in favor of and approve the Merger and the
adoption of this Agreement at the Company Meeting. At the Company Meeting, all
of the shares of Company Common Stock then owned by Parent, Sub, or any other
subsidiary of Parent, or with respect to which Parent, Sub, or any other
subsidiary of Parent holds the power to direct the voting, will be voted in
favor of approval of the Merger and adoption of this Agreement.
Section 3.9 Closing of the Company's Transfer Books. At the Effective
Date, the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Date, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged for cash as provided in
Section 3.1.
Section 3.10 Assistance in Consummation of the Merger. Each of Parent, Sub
and the Company shall provide all reasonable assistance to, and shall cooperate
with, each other to bring about the consummation of the Merger as soon as
possible in accordance with the terms and conditions of this Agreement. Parent
shall cause Sub to perform all of its obligations in connection with this
Agreement.
Section 3.11 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place (i) at the offices of Parent, One
Chase Manhattan Plaza, 43rd Floor, New York, New York 10005, at 11:59 P.M. local
time on the day which is at least one business day after the day on which the
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last of the conditions set forth in Article IX is fulfilled or waived or (ii) at
such other time and place as Parent and the Company shall agree in writing.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
Section 4.1 Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has the corporate power to carry on its business as it is now being
conducted and currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not, individually or in the aggregate, have a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of Parent and its
subsidiaries taken as a whole (a "Parent Material Adverse Effect").
Section 4.2 Authority Relative to this Agreement. Parent has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by Parent's Board of
Directors. This Agreement constitutes a valid and binding obligation of Parent
enforceable in accordance with its terms except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought. No other corporate
proceedings on the part of Parent are necessary to authorize this Agreement and
the transactions contemplated hereby. Parent is not subject to or obligated
under (i) any charter, by-law, indenture or other loan document provision or
(ii) any other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective properties
or assets, which would be breached or violated, or under which there would be a
default (with or without notice or lapse of time, or both), or under which there
would arise a right of termination, cancellation or acceleration of any
obligation or the loss of a material benefit, by its executing and carrying out
this Agreement other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Parent Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next sentence. Except
as disclosed in Section 4.2 of the Parent Disclosure Schedule or, in connection,
or in compliance, with the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of
1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the corporation, securities or blue sky laws
or regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Parent of the Merger or the other transactions
contemplated by this Agreement, other than filings, registrations,
authorizations, consents or approvals the failure of which to make or obtain
would not have a Parent Material Adverse Effect or prevent the consummation of
the transactions contemplated hereby.
Section 4.3 Information in Proxy Statement. None of the information
supplied by Parent or Sub to be included or incorporated by reference in the
proxy statement of the Company (the "Proxy Statement") required to be mailed to
the shareholders of the Company in connection with the Merger will at the time
of the mailing of the Proxy Statement and any amendments or supplements thereto,
and at the time of the Company Meeting of shareholders to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
Section 4.4 Financial Advisor. Parent represents and warrants that, (i)
except for CS First Boston, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in
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connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Parent, and (ii) the fees and
commissions payable to CS First Boston as contemplated by this Section 4.4 will
not exceed the aggregate amount set forth in that certain letter, dated December
16, 1994, from CS First Boston to Parent.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on its business as it is
now being conducted and currently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified will not have a material adverse effect on
the business, properties, assets, condition (financial or otherwise),
liabilities or operations of the Company and its subsidiaries taken as a whole
(a "Company Material Adverse Effect"). Complete and correct copies as of the
date hereof of the Certificate of Incorporation and By-laws of the Company and
each of its subsidiaries have been delivered to Parent as part of a disclosure
schedule delivered by the Company to Parent on the date of this Agreement (the
"Company Disclosure Schedule").
Section 5.2 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock and 1,000,000 shares of
preferred stock, par value $0.10 per share. As of December 31, 1994, 7,049,890
shares of Company Common Stock were validly issued and outstanding, fully paid
and nonassessable, 2,490,284 shares of Company Common Stock were held in the
Company's treasury, and no shares of preferred stock were outstanding and there
have been no material changes in such numbers through the date hereof. As of the
date hereof, except for the Company's 5 1/2% Convertible Debentures due August
1, 2000 (the "Debentures"), there are no bonds, debentures, notes or other
evidences of indebtedness having the right to vote on any matters on which the
Company's shareholders may vote ("Company Voting Debt") issued or outstanding.
As of December 31, 1994, except for (i) options to acquire 743,000 shares of
Company Common Stock, (ii) 4,014,545 shares issuable upon conversion of the
Debentures, and (iii) 17,687 shares of Company Common Stock issuable pursuant to
outstanding stock appreciation rights, there are no options, warrants, calls or
other rights, agreements or commitments outstanding obligating the Company to
issue, deliver or sell shares of its capital stock or debt securities, or
obligating the Company to grant, extend or enter into any such option, warrant,
call or other such right, agreement or commitment, and there have been no
material changes in such numbers through the date hereof.
Section 5.3 Subsidiaries. The only "Significant Subsidiary" (as such term
is defined in Rule 1-02 of Regulation S-X of the Securities and Exchange
Commission (the "Commission")) of the Company is Re Capital Reinsurance
Corporation ("RCRC"), which has been named in the Company SEC Reports (as
hereinafter defined). RCRC is a corporation duly organized, validly existing and
in good standing under the laws of New Jersey and has the corporate power to
carry on its business as it is now being conducted and currently proposed to be
conducted. RCRC is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified will not
have a Company Material Adverse Effect. All the outstanding shares of capital
stock of RCRC are validly issued, fully paid and nonassessable and are owned by
the Company free and clear of any liens, claims or encumbrances. There are no
existing options, warrants, calls or other rights, agreements or commitments of
any character relating to the issued or unissued capital stock or other
securities of any RCRC. Except as set forth in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 or as disclosed in Section
5.3 of the Company Disclosure Schedule, the Company does not directly or
indirectly own any interest in any other corporation, partnership, joint venture
or other business association or entity.
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Section 5.4 Authority Relative to this Agreement. The Company has the
corporate power to enter into this Agreement and, subject to approval of this
Agreement by the holders of the Company Common Stock, to carry out its
obligations hereunder. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Company's Board of Directors. This Agreement constitutes a valid and
binding obligation of the Company enforceable in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. Except for the approval of the holders of Company Common Stock
described in Section 3.8, no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as set forth in Section 5.4 of the Company
Disclosure Schedule, the Company is not subject to or obligated under (i) any
charter, by-law, indenture or other loan document provision or (ii) any other
contract, license, franchise, permit, order, decree, concession, lease,
instrument, judgment, statute, law, ordinance, rule or regulation applicable to
the Company or any of its subsidiaries or their respective properties or assets
which would be breached or violated, or under which there would be a default
(with or without notice or lapse of time, or both), or under which there would
arise a right of termination, cancellation or acceleration of any obligation or
the loss of a material benefit, by its executing and carrying out this
Agreement, other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next sentence. Except
as disclosed in Section 5.4 of the Company Disclosure Schedule or, in
connection, or in compliance, with the provisions of the HSR Act, the Securities
Act, the Exchange Act, and the corporation, securities or blue sky laws or
regulations of the various states, no filing or registration with, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by the Company of the Merger or the other transactions
contemplated hereby, other than filings, registrations, authorizations, consents
or approvals the failure of which to make or obtain would not have a Company
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby.
Section 5.5 Reports and Financial Statements. (a) The Company has
furnished Parent with true and complete copies of its (i) Annual Reports on Form
10-K for the fiscal years ended December 31, 1992 and December 31, 1993, as
filed with the Commission, (ii) Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1993, June 30, 1993, September 30, 1993, March 31, 1994, June
30, 1994 and September 30, 1994, as filed with the Commission, (iii) proxy
statements related to all meetings of its shareholders (whether annual or
special) held since January 1, 1993 and (iv) all other reports on Forms 8-K (all
of which related to Company Stock repurchase programs) and 11-K and registration
statements declared effective by the Commission since December 31, 1992, except
registration statements on Form S-8 relating to employee benefit plans, which
are all the documents (other than preliminary material) that the Company was
required to file with the Commission since that date (clauses (i) through (iv)
being referred to herein collectively as the "Company SEC Reports"). As of their
respective dates, the Company SEC Reports complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the Commission thereunder applicable to such
Company SEC Reports. As of their respective dates, the Company SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of the Company included in the Company SEC Reports comply as to form
in all material respects with applicable accounting requirements of the
Securities Act and with the published rules and regulations of the Commission
with respect thereto. The financial statements included in the Company SEC
Reports (i) have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as may be indicated therein or
in the notes thereto), (ii) present fairly, in all material respects, the
financial position of the Company and its subsidiaries as at the dates thereof
and the results of their operations and cash flow for the periods then ended
subject, in the case of the unaudited interim financial statements, to normal
year-end audit adjustments and any other adjustments
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described therein and the fact that certain information and notes have been
condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder, and (iii) are in all material respects, in accordance
with the books of account and records of the Company.
(b) The Company has heretofore delivered to Parent true, complete and
correct copies of the Annual Statements (the "Annual Statements") and Quarterly
Statements (the "Quarterly Statements") of RCRC as filed with the New Jersey
Department of Insurance for the three years ended December 31, 1993, December
31, 1992 and December 31, 1991 and for the quarterly periods ended March 31,
1994, June 30, 1994 and September 30, 1994, together with the exhibits,
schedules and notes thereto and any affirmations and certifications filed
therewith. The balance sheet of RCRC as of December 31, 1993, and the related
summaries of operations and statement of cash flows for the year then ended,
included in the Annual Statement, were prepared in conformity with statutory
accounting practices prescribed or permitted by the New Jersey Department of
Insurance ("Statutory Accounting Practices") consistently applied for the period
covered thereby, were prepared in accordance with the books and records of RCRC
and present fairly the statutory financial position of RCRC as at the date
thereof and the statutory results of operations of RCRC and other date contained
therein for the period then ended. The balance sheets of RCRC in respect of any
period ending after December 31, 1993, and the related summaries of operations
and statements of cash flows for the periods then ended included in the
Quarterly Statements, were prepared in conformity with Statutory Accounting
Practices applicable to interim financial statements consistently applied during
the periods involved, subject to normal year-end adjustments, and fairly present
the results of operations of RCRC for the periods then ended. Except as set
forth in the Company Disclosure Schedule, each of such Annual Statements and
Quarterly Statements was correct in every material respect when filed and there
were no material omissions therefrom, subject, in the case of the Quarterly
Statements, to year-end adjustments.
Section 5.6 Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports or as disclosed in Section 5.6 of the Company Disclosure
Schedule, since September 30, 1994, there has not been (i) any transaction,
commitment, dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) individually or in
the aggregate having, or which could reasonably be expected to have, a Company
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability), (ii) any damage, destruction or loss,
whether or not covered by insurance, which, insofar as reasonably can be
foreseen, in the future would have a Company Material Adverse Effect, or (iii)
any entry into any commitment or transaction material to the Company and its
subsidiaries taken as a whole (including, without limitation, any borrowing or
sale of assets) except in the ordinary course of business consistent with past
practice.
Section 5.7 Litigation. Except as disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, or the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994 or as disclosed in
Section 5.7 of the Company Disclosure Schedule or reinsurance claims in the
ordinary course of business of RCRC, there is no claim, suit, action or
proceeding pending or, to the knowledge of the Company, threatened against or
affecting the Company or RCRC which, either alone or in the aggregate, could
reasonably be expected to have a Company Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding
against the Company or RCRC having, or which in the future could reasonably be
expected to have, either alone or in the aggregate, any such Company Material
Adverse Effect.
Section 5.8 Information in Disclosure Documents. None of the information
with respect to the Company or its subsidiaries to be included or incorporated
by reference in the Proxy Statement will at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, at the time of the Company
Meeting of shareholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading; provided,
however, that this provision shall not apply to statements or omissions in the
Proxy Statement based upon information furnished by or on behalf of Parent or
Sub for use therein. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. No representation or warranty made by the Company contained in this
Agreement and no statement
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contained in any certificate, list, exhibit or other instrument specified in
this Agreement, including without limitation the Company Disclosure Schedule,
contains any untrue statement of a material fact or omits or will omit to state
a material fact necessary to make the statements contained therein, in light of
the circumstances under which they were made, not misleading, and no fact or
circumstance exists or has occurred which has, or in the future can reasonably
be expected to have, a Company Material Adverse Effect which has not been
disclosed in this Agreement, the Company Disclosure Schedule or the Company SEC
Reports.
Section 5.9 Employee Benefit Plans. Except as disclosed in the Company SEC
Reports or as disclosed in Section 5.9 of the Company Disclosure Schedule, there
are no material employee benefit or compensation plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3) of
ERISA, and including, but not limited to, plans, agreements or arrangements
relating to former employees, including, but not limited to, retiree medical
plans, maintained by the Company or any of its subsidiaries or material
collective bargaining agreements to which the Company or any of its subsidiaries
is a party (together, the "Company Benefit Plans"). To the best knowledge of the
Company, no default exists with respect to the obligations of the Company or any
of its subsidiaries under any such Company Benefit Plan, which default, either
alone or in the aggregate, would have a Company Material Adverse Effect. Since
January 1, 1993, there have been no disputes or grievances subject to any
grievance procedure, unfair labor practice proceedings, arbitration or
litigation under such Company Benefit Plans, which have not been finally
resolved, settled or otherwise disposed of, nor is there any default, or any
condition which, with notice or lapse of time or both, would constitute such a
default, under any such Company Benefit Plans, by the Company or its
subsidiaries or, to the best knowledge of the Company and its subsidiaries, any
other party thereto, which failure to resolve, settle or otherwise dispose of or
default, either alone or in the aggregate, would have a Company Material Adverse
Effect. Since January 1, 1993 there have been no strikes, lockouts or work
stoppages or slowdowns, or to the best knowledge of the Company and its
subsidiaries, jurisdictional disputes or organizing activity occurring or
threatened with respect to the business or operations of the Company or its
subsidiaries which have had or would have a Company Material Adverse Effect.
Section 5.10 ERISA. All Company Benefit Plans have been administered in
accordance with, and are in compliance with, the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Except as disclosed in Section 5.10 of the Company
Disclosure Schedule, each of the Company Benefit Plans which is intended to meet
the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service to be "qualified," within the meaning of such section
of the Code, and the Company knows of no fact which is likely to have an adverse
effect on the qualified status of such plans. None of the Company Benefit Plans
which are defined benefit pension plans have incurred any "accumulated funding
deficiency" (whether or not waived) as that term is defined in Section 412 of
the Code and the fair market value of the assets of each such plan equal or
exceed the accrued liabilities of such plan. To the best knowledge of the
Company, there are not now nor have there been any non-exempt "prohibited
transactions," as such term is defined in Section 4975 of the Code or Section
406 of ERISA, involving the Company's Benefit Plans which could subject the
Company, its subsidiaries or Parent to the penalty or tax imposed under Section
502(i) of ERISA or Section 4975 of the Code. No Company Benefit Plan which is
subject to Title IV of ERISA has been completely or partially terminated; no
proceedings to completely or partially terminate any Company Benefit Plan have
been instituted within the meaning of Subtitle C of said Title IV of ERISA; and
no reportable event within the meaning of Section 4043(b) of said Subtitle C of
ERISA has occurred with respect to any Company Benefit Plan. Neither the Company
nor any of its subsidiaries has made a complete or partial withdrawal, within
the meaning of Section 4201 of ERISA, from any multiemployer plan which has
resulted in, or is reasonably expected to result in, any withdrawal liability to
the Company or any of its subsidiaries except for any such liability which would
not have a Company Material Adverse Effect. Neither the Company nor any of its
subsidiaries has engaged in any transaction described in Section 4069 of ERISA
within the last five years except for any such transaction which would not have
a Company Material Adverse Effect.
Section 5.11 Takeover Provisions Inapplicable. As of the date hereof and
at all times on or prior to the Effective Date, Section 203 of the DGCL is, and
shall be, inapplicable to the Merger, the Option and Voting
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Agreement, dated as of the date hereof (the "Option"), between John Deere
Insurance Company and Parent, and the transactions contemplated by this
Agreement and the Option.
Section 5.12 Company Action. The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of all directors present
(i) determined that the Merger is advisable and in the best interests of the
Company and its shareholders, (ii) approved the Merger in accordance with the
provisions of Section 251 of the DGCL, (iii) recommended the approval of this
Agreement and the Merger by the holders of the Company Common Stock and directed
that the Merger be submitted for consideration by the Company's shareholders at
the Company Meeting, (iv) taken all necessary steps to render Section 203 of the
DGCL inapplicable to the Merger, the Option and the transactions contemplated by
this Agreement and the Option, (v) taken all necessary steps to render all
existing severance compensation agreements between the Company and its
executives (other than as respects any Constructive Discharge as such term may
be construed pursuant to the Amended and Restated Employment Agreements between
the Company and James E. Roberts and David C. Smith) inapplicable to the Merger,
the Option transactions contemplated by this Agreement and the Option and (vi)
adopted a resolution having the effect of causing the Company not to be subject,
to the extent permitted by applicable law, to any state takeover law that may
purport to be applicable to the Merger and the transactions contemplated by this
Agreement.
Section 5.13 Fairness Opinion. The Company has received the written
opinion of Smith Barney Inc. ("Smith Barney"), financial advisors to the
Company, dated the date hereof, to the effect that the Merger Consideration is
fair to the shareholders of the Company from a financial point of view.
Section 5.14 Financial Advisor. The Company represents and warrants that,
(i) except for Smith Barney, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company, and (ii) the fees and
commissions payable to Smith Barney as contemplated by this Section 5.14 will
not exceed the aggregate amount set forth in the engagement letter between Smith
Barney and the Company.
Section 5.15 Compliance with Applicable Laws. Except as disclosed in the
Company SEC Reports filed prior to the date of this Agreement or in Section 5.15
of the Company Disclosure Schedule, the businesses of the Company and its
subsidiaries are not being conducted in violation of any law, ordinance,
regulation, order or writ of any Governmental Entity, including, without
limitation, applicable state insurance commissions, except for possible
violations which individually or in the aggregate do not and would not have a
Company Material Adverse Effect. Neither the Company nor any of its subsidiaries
has received notice of violation of any law, ordinance, regulation, order or
writ, or is in default with respect to any order, writ, judgment, award,
injunction or decree of any Governmental Entity, which would affect any of their
respective assets, properties or operations, except for such violations or
defaults as would not, individually or in the aggregate, have a Company Material
Adverse Effect. Except as disclosed in Section 5.15 of the Company Disclosure
Schedule, no investigation or review by any Governmental Entity, including,
without limitation, any applicable state insurance commission, with respect to
the Company nor any of its subsidiaries is pending, or, to the knowledge of the
Company, threatened, nor has any Governmental Entity, including, without
limitation, any applicable state insurance commission, indicated an intention to
conduct the same, other than those the outcome of which would not have a Company
Material Adverse Effect.
Section 5.16 Taxes. Each of the Company and its subsidiaries has filed all
tax returns required to be filed by any of them and has paid (or the Company has
paid on its behalf), or has set up an adequate reserve for the payment of, all
taxes required to be paid in respect of the periods covered by such returns
(except where the failure to pay would not have a Company Material Adverse
Effect). The information contained in such tax returns is true, complete and
accurate in all material respects, except where a failure to be so would not
have a Company Material Adverse Effect. Except as disclosed in Section 5.16 of
the Company Disclosure Schedule, neither the Company nor any subsidiary of the
Company is delinquent in the payment of any tax, assessment or governmental
charge, except where such delinquency would not have a Company Material Adverse
Effect. Except as disclosed in Section 5.16 of the Company Disclosure Schedule,
no deficiencies for any taxes have been proposed, asserted or assessed against
the Company or any of its subsidiaries that have not
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been finally settled or paid in full, which would have a Company Material
Adverse Effect, and no requests for waivers of the time to assess any such tax
are pending.
Section 5.17 Certain Agreements. Neither the Company nor any of its
subsidiaries is in default (or would be in default with notice or lapse of time,
or both) under any agreement or instrument filed as an exhibit to any of the
Company SEC Reports, whether or not such default has been waived, which default,
alone or in the aggregate with other such defaults, would have a Company
Material Adverse Effect.
Section 5.18 Licenses. The Company and RCRC have obtained and hold all
permits, licenses, certificates of authorizations, variances, exemptions, orders
and approvals of, and have made all registrations or filings with, all
Governmental Entities, including, without limitation, applicable state insurance
commissions as required in connection with the conduct of the businesses of the
Company and RCRC other than licenses, certificates, permits, the failure of
which to make, obtain or hold would not have a Company Material Adverse Effect
(collectively, the "Licenses"). The Company and RCRC are in compliance with the
terms of the Licenses, except for such failures to comply, which singly or in
the aggregate, would not have a Company Material Adverse Effect. Section 5.18 of
the Company Disclosure Schedules sets forth a true and complete list of the
Company's and RCRC's Licenses (including the jurisdictions in which the Company
and RCRC possess Licenses or other approvals to conduct their insurance
businesses) together with a description of the nature thereof. The Company has
heretofore made available to the Parent true and complete copies of all of such
Licenses as are currently in effect. Neither the Company nor RCRC is improperly
transacting any insurance or reinsurance business in any jurisdiction in which
it is not authorized or permitted to transact such business. No Licenses are the
subject of a proceeding for suspension or revocation or similar proceedings and,
to the knowledge of the Company and RCRC, no threat of any such suspension,
revocation or similar proceeding therefor has been made to the Company or RCRC
by any Governmental Entity. No jurisdiction has demanded or requested that the
Company or RCRC qualify or become licensed as a foreign corporation, except with
respect to their respective insurance or reinsurance business.
Section 5.19 Reinsurance; Retrocession. (a) The Company Disclosure
Schedule sets forth a true and complete list of (i) all material reinsurance
treaties and contracts (including retrocessions assumed) with parties reinsured
by the Company or RCRC and (ii) all retrocessional treaties and contracts
(reinsurance and retrocessions ceded) with parties that reimburse the Company or
RCRC.
(b) RCRC does not engage and has never engaged in any business other than
reinsurance.
Section 5.20 No Company Material Adverse Effect. Except as disclosed in
the Company SEC Reports filed prior to the date hereof or in the Company
Disclosure Schedule, there does not exist any fact or circumstance which, alone
or together with another fact or circumstance, could reasonably be expected to
result in a Company Material Adverse Effect.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the Company
as follows:
Section 6.1 Organization. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Complete
and correct copies as of the date hereof of the Certificate of Incorporation and
By-laws of Sub have been delivered to the Company as part of the Parent
Disclosure Schedule.
Section 6.2 Capitalization. The authorized capital stock of Sub consists
of 1,000 shares of common stock, par value $1.00 per share, all of which shares
are validly issued and outstanding, fully paid and nonassessable and are owned
by Parent free and clear of all liens, claims and encumbrances.
Section 6.3 Authority Relative to this Agreement. Sub has the corporate
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and sole shareholder, and no other corporate proceedings on the part
of Sub are necessary to authorize this
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Agreement and the transactions contemplated hereby. This Agreement constitutes a
valid and binding obligation of Sub enforceable in accordance with its terms
except as enforcement may be limited to bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. Sub is not subject to or obligated under any charter or by-law
provision which would be breached or violated by its executing and carrying out
this Agreement. Except as referred to herein or in connection, or in compliance,
with the provisions of the HSR Act, the Securities Act, the Exchange Act and the
environmental, corporation, securities or blue sky laws or regulations of the
various states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation by
Sub of the Merger or the transactions contemplated by this Agreement, other than
filings, registrations, authorizations, consents or approvals the failure to
make or obtain would not prevent the consummation of the transactions
contemplated hereby.
Section 6.4 Sub Action. The Board of Directors of Sub (at a meeting duly
called and held) has by the requisite vote of all directors present (i)
determined that the Merger is advisable and in the best interests of Sub, (ii)
approved the Merger in accordance with the provisions of Section 251 of the
DGCL, (iii) taken all necessary steps to render Section 203 of the DGCL
inapplicable to the Merger and the transactions contemplated by this Agreement,
and (iv) adopted a resolution having the effect of causing Sub not to be
subject, to the extent permitted by applicable law, to any state takeover law
that may purport to be applicable to the Merger and the transactions
contemplated by this Agreement.
Section 6.5 Interim Operations of Sub. Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 Conduct of Business by the Company. Prior to the Effective
Date, unless Parent shall otherwise agree in writing:
(i) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use their best reasonable efforts to preserve
intact their present business organizations, keep available the services of
their present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except such impairment as would not have a Company Material
Adverse Effect. The Company shall, and shall cause its subsidiaries to, (A)
maintain insurance coverages and its books, accounts and records in a
manner consistent with prior practices, (B) comply in all material respects
with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries, (C) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted, and (D) perform in all material respects
its obligations under all contracts and commitments to which it is a party
or by which it is bound; except in each case where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
not result in a Company Material Adverse Effect;
(ii) the Company shall not, nor shall it propose to, except as
required by this Agreement, (A) sell or pledge or agree to sell or pledge
any capital stock owned by it in any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding capital stock or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of the capital stock, or, except at contemplated by this Agreement,
declare, set aside or pay any dividend or other distribution payable in
cash, stock or property, other than the Company's regular quarterly cash
dividend of $.08 per share, or (D) directly or indirectly redeem, purchase
or otherwise acquire or agree to redeem, purchase or otherwise acquire any
shares of its capital stock, except as
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contemplated by this Agreement or except pursuant to (A) the exercise of
rights granted to such party to repurchase shares of its capital stock from
employees upon termination of employment or (B) contractual obligations
arising under agreements existing on the date hereof and disclosed in the
Company Disclosure Schedule;
(iii) the Company shall not, nor shall it permit any of its
subsidiaries to, (A) except as required by this Agreement, issue, deliver
or sell or agree to issue, deliver or sell any additional shares of, or
stock appreciation rights or rights of any kind to acquire any shares of,
its capital stock of any class, any Company Voting Debt, or any option,
rights or warrants to acquire, or securities convertible into, shares of
capital stock other than (x) issuances of Company Common Stock pursuant to
the exercise of warrants or stock options outstanding on the date hereof or
pursuant to the Indenture, dated as of July 27, 1993, between the Company
and Chemical Bank, as trustee, or (y) the grant of employee stock options
and the issuance of Company Common Stock upon exercise thereof, at fair
market value at the time of grant of the options, to new employees in
connection with the commencement of their employment, in each case in the
ordinary course of business and consistent with past practice, (B) make any
material change in the underwriting, establishment of reserves, investment
or claims adjustment policies, principles and practices of the Company or
RCRC, (C) acquire, lease or dispose or agree to acquire, lease or dispose
of any capital assets or any other assets other than in the ordinary course
of business, (D) incur additional indebtedness or encumber or grant a
security interest in any asset or enter into any other material transaction
other than in each case in the ordinary course of business, (E) acquire or
agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof, in each case in this clause (E) which are material,
individually or in the aggregate, to the Company and its subsidiaries taken
as a whole, or (F) adopt, enter into, amend or terminate any contract,
agreement, commitment or arrangement with respect to any of the foregoing;
(iv) the Company shall not, nor shall it permit any of its
subsidiaries to, except as required to comply with applicable law and
except as provided in Section 8.3 hereof, (A) adopt, enter into, terminate
or amend any bonus, profit sharing, compensation, severance, termination,
stock option, pension, retirement, deferred compensation, employment or
other Company Benefit Plan agreement, trust, fund or other arrangement for
the benefit or welfare of any director, officer or current or former
employee, (B) increase in any manner the compensation or fringe benefits of
any director, officer or employee (except for normal increases in the
ordinary course of business that are consistent with past practice and
that, in the aggregate, do not result in a material increase in benefits or
compensation expense to such party and its subsidiaries relative to the
level in effect prior to such increase), (C) pay any benefit not provided
under any existing plan or arrangement, (D) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Company Benefit Plan (including, without limitation, the grant of stock
options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing
restrictions in any benefit plans or agreements or awards made thereunder)
except for (x) payment of year-end bonuses to employees, (y) making of
matching contributions to 401(k) plans and (z) the grant of employee stock
options and the issuance of Company Common Stock upon exercise thereof, at
fair market value at the time of grant of the options, to new employees in
connection with the commencement of their employment, in each case in the
ordinary course of business and consistent with past practice, (E) take any
action to fund or in any other way secure the payment of compensation or
benefits under any employee plan, agreement, contract or arrangement or
Company Benefit Plan, other than in the ordinary course of business
consistent with past practice, or (F) adopt, enter into, amend or terminate
any contract, agreement, commitment or arrangement to do any of the
foregoing;
(v) the Company shall not, nor shall it permit any of its subsidiaries
to, make any investments in non-investment grade securities;
(vi) the Company shall not, nor shall it permit its subsidiaries to
make any change in its accounting policies or procedures except as required
under Statutory Accounting Practices or GAAP, as applicable; and
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(vii) the Company shall use its best reasonable efforts to refrain
from taking, nor shall it permit any of its subsidiaries to take, any
action that would, or reasonably might be expected to, result in any of its
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect, or in any of the conditions to the
Merger set forth in Article IX not being satisfied, or (unless such action
is required by applicable law) which would adversely affect the ability of
the Company to obtain any of the regulatory approvals required to
consummate the Merger.
Section 7.2 Conduct of Business of Sub. During the period from the date of
this Agreement to the Effective Date, Sub shall not engage in any activities of
any nature except as provided in or contemplated by this Agreement.
Section 7.3 Notice of Breach. Each party shall promptly give written
notice to the other party upon becoming aware of the occurrence or, to its
knowledge, impending or threatened occurrence, of any event which would cause
any of its representations or warranties to be untrue on the Effective Date or
cause a breach of any covenant contained or referenced in this Agreement and
will use its best reasonable efforts to prevent or promptly remedy the same. Any
such notification shall not be deemed an amendment of the Company Disclosure
Schedule or the Parent Disclosure Schedule.
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Access and Information. The Company and its subsidiaries shall
afford to Parent and to Parent's accountants, counsel and other representatives
full access during normal business hours (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all of
its properties, books, contracts, commitments, records and personnel and, during
such period, the Company shall furnish promptly to Parent (i) a copy of each
report, schedule and other document filed or received by it pursuant to the
requirements of federal or state securities and insurance laws, and (ii) all
other information concerning its business, properties and personnel as the other
may reasonably request. Parent shall hold, and shall cause its employees and
agents to hold, in confidence all such information in accordance with the terms
of the Confidentiality Agreement, dated December 6, 1994, between Parent and the
Company (the "Confidentiality Agreement").
Section 8.2 Proxy Statement. (a) As promptly as practicable after the
execution of this Agreement, the Company shall prepare and file with the
Commission preliminary proxy materials with respect to the actions to be taken
at the Company Meeting, which, as to those matters relating to Parent, shall be
in form and substance satisfactory to Parent. As promptly as practicable after
comments are received from the Commission with respect to such preliminary proxy
materials and after the furnishing by the Company of all information required to
be contained therein, the Company shall file with the Commission the definitive
Proxy Statement and the Company shall use its best reasonable efforts to have
the Proxy Statement cleared by the Commission as soon thereafter as practicable.
The Company shall mail the Proxy Statement to its stockholders as promptly as
practicable after clearance by the Commission.
(b) The Company shall retain the services of a proxy soliciting firm
mutually acceptable to Parent and the Company for the purpose of communicating
to the Company's stockholders the recommendation of the Company's Board of
Directors in favor of the Merger and of seeking to ensure that sufficient votes
are cast to satisfy the requirements of Section 3.8 and of applicable law for
the completion of the Merger.
(c) Parent and the Company shall make all necessary filings applicable to
it with respect to the Merger under the Securities Act and the Exchange Act and
the rules and regulations thereunder and under applicable Blue Sky or similar
securities laws and shall use its best reasonable efforts to obtain required
approvals and clearances with respect thereto.
Section 8.3 Employee Matters. (a) Subject to the provisions of Section
8.3(b), Parent shall take all actions necessary or appropriate to permit the
employees of the Company and its subsidiaries on the Effective Date ("Affected
Employees") to participate after the Effective Date in Parent's employee benefit
programs
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and, except as otherwise provided in Section 8.5(b), to cause the Surviving
Corporation to take all actions necessary or appropriate to adopt Parent's
employee benefit programs effective as of the Effective Date or to make
provision that the Affected Employees are eligible to participate in Parent's
employee benefit programs effective as of the Effective Date. Parent will cause
the Surviving Corporation to give each Affected Employee full credit for service
with the Company for purposes of eligibility to participate in, vesting and
payment of benefits under, amounts of and eligibility for any subsidized benefit
provided under, any Parent employee benefit plan. The foregoing shall not
constitute an obligation on the part of Parent or the Surviving Corporation to
offer employment to any employee of the Company or its subsidiaries.
(b) After the Effective Date, Parent shall have a reasonable period not to
exceed one year (the "Review Period") in which to review all of the employee and
fringe benefit plans (not including plans pursuant to which capital stock or
options to acquire capital stock are issued to employees, which plans shall be
governed by Section 8.3(a)) maintained by the Company or any of its subsidiaries
(the "Company Plans") for compatibility and consistency with Parent's employee
benefit programs. During the Review Period, Parent may determine to have the
Surviving Corporation continue in effect any one or more of the Company Plans,
amend or modify any one or more of the Company Plans, merge one or more of the
Company Plans into a comparable Parent employee benefit plan adopted by the
Surviving Corporation or terminate any one or more of the Company Plans in its
or their entirety. Any such amendment, modification or termination shall not
deprive any Affected Employee of any accrued benefit or benefit payment to which
such Affected Employee has become entitled to prior to the Effective Date. If
the Surviving Corporation is continuing in effect any of the Company Plans
during the Review Period, then (i) neither it nor Parent shall be obligated to
adopt a comparable Parent employee benefit plan for Affected Employees, it being
intended by the parties that there be no duplication of benefits, and (ii) the
obligation to have the Surviving Corporation adopt the comparable Parent
employee benefit plan or program, as set out in Section 8.3(a), shall arise, and
such adoption shall be effective only as of the date the comparable Company Plan
is discontinued and not as of the Effective Date. If Parent does not maintain an
employee benefit plan comparable to one of the Company Plans, there shall be no
obligation to adopt any plan or program upon the discontinuance or termination
of such Company Plan.
Section 8.4 [Intentionally Omitted]
Section 8.5 Indemnification. (a) From and after the Effective Date, Parent
shall indemnify, defend and hold harmless the officers, directors and employees
of the Company (the "Indemnified Parties") against all losses, expenses, claims,
damages or liabilities arising out of the transactions contemplated by this
Agreement to the fullest extent permitted or required under applicable law,
including, without limitation, the advancement of expenses (including, without
limitation, reasonable attorneys' fees). Parent agrees that all rights to
indemnification existing in favor of the directors, officers or employees of the
Company as provided in the Company's Certificate of Incorporation, By-Laws or
existing indemnification agreements, as in effect as of the date hereof, with
respect to matters occurring through the Effective Date, shall survive the
Merger and shall continue in full force and effect for a period of not less than
six years from the Effective Date, and Parent shall guaranty the obligations of
the Company in respect thereof. Parent agrees to cause Surviving Corporation to
maintain in effect for not less than three years after the Effective Date the
current policies of directors' and officers' liability insurance maintained by
the Company with respect to matters occurring prior to the Effective Date;
provided, however, that (i) Surviving Corporation may substitute therefor
policies of at least the same coverage (with carriers comparable to the
Company's existing carriers) containing terms and conditions which are no less
advantageous to the Indemnified Parties and (ii) Surviving Corporation shall not
be required to pay an annual premium for such insurance in excess of one and
one-half times the last annual premium paid prior to the date hereof, but in
such case shall purchase as much coverage as possible for such amount.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the Effective Date, the parties hereto agree
to cooperate and use their respective best reasonable efforts to vigorously
defend against and respond thereto.
Section 8.6 HSR Act. The Company and Parent shall use their best
reasonable efforts to file as soon as practicable notifications under the HSR
Act in connection with the Merger and the transactions contemplated
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hereby, and to respond as promptly as practicable to any inquiries received from
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") for additional information or
documentation and to respond as promptly as practicable to all inquiries and
requests received from any State Attorney General or other governmental
authority in connection with antitrust matters relating to the transactions
contemplated by this Agreement.
Section 8.7 Additional Agreements. (a) Subject to the terms and conditions
herein provided, each of
the parties hereto agrees to cooperate with each other and use its best
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement and the Option, including using its best
reasonable efforts to obtain all necessary waivers, consents and approvals, to
effect all necessary registrations and filings (including, but not limited to,
filings under the HSR Act and applicable state insurance laws and regulations
and with all applicable Governmental Entities) and to lift any injunction or
other legal bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible) or the Option, subject, however, in the case of the
Merger, to the appropriate vote of the shareholders of the Company.
(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Agreement, Parent and
the Surviving Corporation shall take all such necessary action.
(c) The Company hereby waives all of its rights under the Right of First
Refusal Agreement, dated October 31, 1990, between the Company and John Deere
Insurance Company and its affiliates (the "Refusal Rights") relating to the
Option and all transactions effected pursuant to the Option. Upon consummation
of any conveyance pursuant to an exercise of the Option, the Refusal Rights
shall automatically terminate and expire and be of no further force and effect.
Section 8.8 No Solicitation. (a) Except as contemplated by this Agreement
and the Option, the Company shall not, nor shall any of its subsidiaries,
directly or indirectly, take (nor shall the Company authorize or permit its
subsidiaries, officers, directors, employees, representatives, investment
bankers, attorneys, accountants or other agents or affiliates, to take) any
action to (i) encourage, solicit or initiate the submission of any Business
Combination Proposal (as defined below), (ii) enter into any agreement with
respect to any Business Combination Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Business Combination Proposal; provided, however, that (i) the Company
may participate in discussions or negotiations with or furnish information to
any Third Party (as defined in Section 11.3(b)) which makes an unencouraged and
unsolicited proposal of a transaction which the Board of Directors of the
Company reasonably believes will result in a Superior Proposal (as defined
below) (provided that any such information so furnished shall at the same time
be furnished to Parent) and (ii) the Company may recommend to its shareholders a
Business Combination Proposal which it has reasonably determined will result in
a Superior Proposal. Any actions permitted under, and taken in compliance with
this Section 8.8, shall not be deemed a breach of any other covenant or
agreement of the Company contained in this Agreement. For purposes of this
Section, "Business Combination Proposal" shall mean, with respect to the
Company, any tender or exchange offer, proposal for a merger, consolidation or
other business combination involving the Company or any Significant Subsidiary
of the Company or any other proposal or offer to enter into the transactions
described in subdivisions (A) through (D) of the definition of a Third Party
Business Combination (as defined in Section 11.3(b)), and "Superior Proposal"
shall mean, with respect to the Company, any bona fide Business Combination
Proposal which the Board of Directors of the Company reasonably determines will
be more favorable to its shareholders than the Merger.
(b) In addition to the obligations of the Company set forth in Section
8.8(a), the Company shall promptly advise Parent of any request for information
or of any Business Combination Proposal, or any inquiry with respect to or which
appears to be intended to or could reasonably be expected to lead to any
Business Combination Proposal, the material terms and conditions of such
request, Business Combination Proposal or inquiry, and the identity of the
person making any such request, Business Combination Proposal or inquiry.
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The Company shall keep Parent fully informed of the status and details of any
such request, Business Combination Proposal or inquiry.
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the following
conditions, any one or more of which may be waived in a writing executed by
Parent and the Company subject to and in accordance with Section 10.4 hereof:
(a) This Agreement and the transactions contemplated hereby shall have
been approved and adopted by the requisite vote of the holders of the
Company Common Stock.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(c) All approvals necessary for the consummation of the transactions
contemplated by this Agreement shall have been obtained from the Insurance
Commissioners of the respective Departments of Insurance of the States of
New Jersey and Connecticut, and such approvals shall be in full force and
effect.
(d) No preliminary or permanent injunction or other order by any
federal or state court in the United States which prevents the consummation
of the Merger shall have been issued and remain in effect (each party
agreeing to use its best reasonable efforts to have any such injunction
lifted).
Section 9.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived in writing by the Company in accordance with Section
10.4 hereof:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Agreement required to be performed on or prior
to the Effective Date and the representations and warranties of Parent and
Sub contained in this Agreement shall be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date
(except to the extent they relate to the date of this Agreement or any
other particular date), and the Company shall have received a certificate
of the President or Chief Executive Officer or a Vice President of Parent
and Sub to that effect.
(b) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Schedule shall have been obtained, and, to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 4.4 of the Parent Disclosure Schedule shall
have been submitted by Parent.
(c) The Company shall have received an opinion of Willkie Farr &
Gallagher, dated the Closing Date, in form and substance reasonably
satisfactory to the Company.
Section 9.3 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived in writing by Parent in accordance with Section 10.4
hereof:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Effective Date and the representations and warranties of the Company
contained in this Agreement shall be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date
(except to the extent they relate to the date of this Agreement or any
other particular date), except as contemplated or permitted by this
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Agreement, and Parent and Sub shall have received a certificate of the
President or Chief Executive Officer or a Vice President of the Company to
that effect.
(b) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Schedule shall have been obtained and, to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Schedule shall
have been submitted by the Company.
(c) Neither the Board of Directors of the Company nor any committee
thereof shall have amended, modified, rescinded or repealed the
recommendation of the Company's Board of Directors to the shareholders of
the Company to approve the Merger and the adoption of this Agreement, and
neither the Board of Directors of the Company nor any committee thereof
shall have adopted any other resolutions in connection with this Agreement
and the transactions contemplated hereby inconsistent with such
recommendation of the consummation of the transactions contemplated hereby.
(d) Parent shall have received an opinion of Gibson, Dunn & Crutcher,
dated the Closing Date, in form and substance reasonably satisfactory to
Parent.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination. This Agreement may be terminated at any time
prior to the Effective Date, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of the Company:
(a) by mutual consent of the Board of Directors of Parent and the
Board of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before June 30, 1995 (provided the terminating party is
not otherwise in material breach of its representations, warranties,
covenants or agreements under this Agreement);
(c) by the Company if any of the conditions specified in Sections 9.1
or 9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction, including the failure to
obtain any required approval of its shareholders or the shareholders of
Parent at a duly held meeting of shareholders or at an adjournment thereof
(provided the Company is not otherwise in material breach of its
representations, warranties, covenants or agreements under this Agreement);
(d) by Parent if any of the conditions specified in Sections 9.1 or
9.3 have not been met or waived by Parent at such time as such condition is
no longer capable of satisfaction, including the failure to obtain any
required approval of its shareholders or the shareholders of the Company at
a duly held meeting of shareholders or at an adjournment thereof (provided
Parent is not otherwise in material breach of its representations,
warranties, covenants or agreements under this Agreement);
(e) by either Parent or the Company if there has been a material
breach on the part of the other of any representation, warranty, covenant
or agreement set forth in this Agreement, which breach has not been cured
within fifteen business days following receipt by the breaching party of
written notice of such breach;
(f) by either Parent or the Company upon written notice to the other
party if any Governmental Entity of competent jurisdiction shall have
issued a final permanent order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement, and in any
such case the time for appeal or petition for reconsideration of such order
shall have expired without such appeal or petition being granted; or
(g) by the Company if the Board of Directors of the Company reasonably
determines that a Business Combination Proposal will result in a Superior
Proposal; provided, however, that termination of
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this Agreement under this Section 10.1(g) shall not be effective unless and
until (i) simultaneously with such termination the terminating party enters
into a definitive agreement to effect the Business Combination Proposal and
(ii) the terminating party has made payment in full of the fee required in
Section 11.3(b) hereof.
Section 10.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company as provided above, this Agreement
shall forthwith become void and (except for termination of this Agreement
pursuant to Section 10.1(e)) there shall be no liability on the part of either
the Company, Parent or Sub or their respective officers or directors; provided
that Sections 4.4 and 5.14, the last sentence of Section 8.1, Section 8.6(with
respect to the Option and the transactions contemplated thereby), Section 8.7
(with respect to the Option and the transactions contemplated thereby), this
Section 10.2 and Sections 11.3, 11.5, 11.6 and 11.7 shall survive the
termination.
Section 10.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval hereof by the shareholders of the Company,
but, after such approval, no amendment shall be made which in any way materially
adversely affects the rights of such shareholders, without the further approval
of such shareholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
Section 10.4 Waiver. At any time prior to the Effective Date, the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
documents delivered pursuant hereto by any other party and (iii) waive
compliance with any of the agreements or conditions contained herein; provided,
however, that no such waiver shall materially adversely affect the rights of the
shareholders of the Company or Parent, as the case may be. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid if set
forth in an instrument in writing signed on behalf of such party.
ARTICLE XI
GENERAL PROVISIONS
Section 11.1 Non-Survival of Representations, Warranties and
Agreements. All representations and warranties set forth in this Agreement
shall terminate at the earlier of (x) the Effective Date and (y) termination of
this Agreement in accordance with Article X hereof. All covenants and agreements
set forth in this Agreement shall survive in accordance with their terms.
Section 11.2 Notices. All notices or other communications under this
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
If to the Company:
Re Capital Corporation
Two Stamford Plaza
P.O. Box 10148
Stamford, CT 06904
Attention: James E. Roberts
Telecopy No.: (203) 325-8968
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With a copy to:
Gibson, Dunn & Crutcher
200 Park Avenue
New York, NY 10166-0193
Attention: Conor D. Reilly, Esq.
Telecopy No.: (212) 949-7606
If to Parent or Sub:
Zurich Reinsurance Centre Holdings, Inc.
One Chase Manhattan Plaza
43rd Floor
New York, NY 10005
Attention: Steven M. Gluckstern
Telecopy No.: (212) 898-5007
With a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Attention: Peter A. Appel, Esq.
Telecopy No.: (212) 821-8111
or to such other address as any party may have furnished to the other parties in
writing in accordance with this Section 11.2.
Section 11.3 Expenses; Termination Fees. (a) Subject to Section 11.3(b),
if (i) the Merger is consummated or (ii) this Agreement is terminated in
accordance with Section 10.1(a), 10.1(b), 10.1(d) or 10.1(f) hereof, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by Parent, including legal and accounting
expenses and expenses incurred in connection with the preparation, filing,
printing and mailing of the preliminary and definitive Proxy Statement (not
including investment banking fees in the case of clause (ii) above).
(b) Except as otherwise provided in this Section 11.3(b), if this Agreement
is terminated by Parent as provided in Section 10.1(e) hereof, the Company shall
pay to Parent within five business days after receipt of a written request
therefor, in same day funds, an amount equal to (i) all costs and expenses (not
in excess of $1,000,000) reasonably incurred by Parent in connection with this
Agreement and the transactions contemplated hereby, including all reasonable
legal, professional and service fees and expenses, and (ii) $1,000,000.
Notwithstanding the foregoing, if (i) the Merger is not consummated as a result
of a material breach by the Company of Section 8.8 hereof, (ii) the Agreement is
terminated pursuant to Section 10.1(g) hereof, or (iii) a transaction described
in subdivisions (A) through (D) of the definition of a Third Party Business
Combination (as defined below) shall occur either prior to the termination of
this Agreement pursuant to Section 10.1(a), 10.1(b), 10.1(c), 10.1(d), 10.1(f)
or 10.1(g) hereof or within one year of the date this Agreement is terminated by
Parent pursuant to Section 10.1(e) hereof, then the Company shall pay to Parent,
within five business days after receipt of a written request therefor in the
case of clause (i) and immediately after the termination of this Agreement
pursuant to Section 10.1(g) or the occurrence of a transaction described in
subdivisions (A) through (D) of the definition of a Third Party Business
Combination in the case of clauses (ii) and (iii), respectively, an amount in
same day funds equal to (i) all costs and expenses (not in excess of $1,000,000)
reasonably incurred by Parent in connection with this Agreement and the
transactions contemplated hereby, including all reasonable legal, professional
and service fees and expenses, and (ii) $4,500,000 (less, in the case of a
termination of this Agreement by Parent pursuant to Section 10.1(e) hereof, any
amounts paid to Parent pursuant to the preceding sentence). The term "Third
Party Business Combination" of the Company means the occurrence of any of the
following events: (A) the Company or any Significant Subsidiary of the Company
is acquired by merger or otherwise by any person or group, other than the other
party hereto or any affiliate thereof (a "Third Party"); (B) the Company or any
subsidiary of the
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Company enters into an agreement with a Third Party which contemplates the
acquisition of 20% or more of the total assets of the Company and its
subsidiaries taken as a whole; (C) the Company enters into a merger or other
agreement with a Third Party which contemplates the acquisition of more than 20%
of the outstanding shares of the Company's capital stock; (D) a Third Party
acquires more than 30% of the total assets of the Company and its subsidiaries
taken as a whole; (E) a Third Party who owns no shares of the Company's capital
stock acquires more than 30% of the outstanding shares of the Company's capital
stock, or any person or group which beneficially owns (or has the right to
acquire) 15% or more of the outstanding shares of the Company's capital stock
acquires 15% or more shares of the Company's capital stock; (F) the Company
adopts a plan of liquidation relating to more than 30% of the total assets of
the Company and its Subsidiaries taken as a whole; (G) the Company repurchases
more than 30% of the outstanding shares of the Company's capital stock; or (H)
there is a public announcement or written proposal with respect to a plan or
intention by the Company or a Third Party to effect any of the foregoing
transactions, which transaction is effected during the one year period following
such public announcement or written proposal. For purposes of this Agreement,
the term "beneficial ownership" shall have the meaning set forth in Rule 13d-3
of the Exchange Act.
Section 11.4 Publicity. So long as this Agreement is in effect, Parent,
Sub and the Company agree to consult with each other in issuing any press
release or otherwise making any public statement with respect to the
transactions contemplated by this Agreement, and none of them shall issue any
press release or make any public statement prior to such consultation. The
commencement of litigation relating to this Agreement or the transactions
contemplated hereby or any proceedings in connection therewith shall not be
deemed a violation of this Section 11.4.
Section 11.5 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
Section 11.6 Interpretation. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 11.7 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (i) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
(other than as provided in the Confidentiality Agreement), (ii) except as
provided in the last sentence of Sections 8.3 and 8.5, is not intended to confer
upon any other person any rights or remedies hereunder and shall be binding upon
and inure to the benefit solely of each party hereto, and their respective
successors and assigns, (iii) shall not be assigned by operation of law or
otherwise, except that Sub shall have the right to assign to any direct wholly
owned subsidiary of Parent any and all rights and obligations of Sub under this
Agreement, and (iv) shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Delaware (without giving
effect to the provisions thereof relating to conflicts of law). This Agreement
may be executed in any number of counterparts which together shall constitute a
single agreement.
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IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunder duly authorized all as of
the date first written above.
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
By: /s/ PETER R. PORRINO
Name: Peter R. Porrino
Title: Senior Vice President and
Chief Financial Officer
ZRC MERGER-SUB CORP.
By: /s/ PETER R. PORRINO
Name: Peter R. Porrino
Title: Treasurer
RE CAPITAL CORPORATION
By: /s/ CONOR D. REILLY
Name: Conor D. Reilly
Title: Secretary
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ATTACHMENT TO THE AGREEMENT AND PLAN OF MERGER:
AGREEMENT TO FURNISH OMITTED SCHEDULES UPON REQUEST
AND LIST OF OMITTED SCHEDULES
AGREEMENT: The Company hereby agrees to furnish supplementally a copy of
any omitted schedules to the stockholders upon request.
LIST OF OMITTED SCHEDULES:
Schedule 3.6 -- Stock Options
Schedule 3.7 -- Warrants (None)
Schedule 4.2 -- Approvals
Schedule 5.1 -- Certificates of Incorporation and By-Laws of Re Capital
Corporation, Re Capital Reinsurance Corporation and RCI
Systems, Inc.
Schedule 5.3 -- Subsidiaries
Schedule 5.4 -- Default and/or Rights of Termination, Cancellation or
Acceleration
Schedule 5.6 -- Absence of Certain Changes or Events
Schedule 5.7 -- Litigation (None)
Schedule 5.9 -- Employee Benefit Plans
Schedule 5.10 -- ERISA
Schedule 5.15 -- Compliance with Applicable Laws
Schedule 5.16 -- Taxes
Schedule 5.18 -- List of Insurance Licenses/Certificates of Authority of Re
Capital Reinsurance Corporation to Conduct its Reinsurance
Business in the Ordinary Course in the Jurisdiction
Indicated
Schedule 5.19 -- Reinsurance; Retrocession
Schedule 5.20 -- Company Material Adverse Effects (None)
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APPENDIX B
OPTION AND VOTING AGREEMENT
THIS AGREEMENT, dated as of January 11, 1995, between Zurich Reinsurance
Centre Holdings, Inc., a Delaware corporation ("ZRC"), and John Deere Insurance
Group, Inc. (the "Shareholder"), a major shareholder of Re Capital Corporation,
a Delaware corporation ("Re Cap").
W I T N E S S E T H:
WHEREAS, contemporaneously with the execution of this Agreement, Re Cap and
ZRC are entering into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which a wholly-owned subsidiary of ZRC will be merged into Re Cap
(the "Merger") and the holders of Re Cap's common stock, par value $0.10 per
share ("Re Cap Common Stock"), will receive $18.50 per share of Re Cap Common
Stock;
WHEREAS, ZRC may be required to incur substantial expenses in connection
with the performance of the Merger Agreement;
WHEREAS, ZRC, as a condition to its willingness to enter into the Merger
Agreement, has required the Shareholder to enter into this Agreement with
respect to all of the shares of Re Cap Common Stock owned by the Shareholder,
together with any additional shares of Re Cap Common Stock hereafter acquired by
the Shareholder (pursuant to Section 7, by purchase or otherwise) (such
specified number of shares, and any additional shares when and if they are
acquired, being referred to as the "Shares") on the terms and conditions
hereinafter set forth; and
WHEREAS, the Board of Directors of Re Cap has approved ZRC becoming an
"interested stockholder" for purposes of Section 203 of the Delaware General
Corporation Law;
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option. The Shareholder hereby grants to ZRC an option (the
"Option") to purchase all but not less than all of the Shares at a purchase
price of $18.50 per share (the "Purchase Price") in cash (subject to adjustment
pursuant to Section 7 below) for each Share purchased.
2. Exercise of Option. At any time prior to the termination of this
Agreement in accordance with the terms of Section 12, ZRC may exercise the
Option, in whole, but not in part, if:
(a) a Third Party Business Combination (as defined in the Merger
Agreement) occurs; or
(b) the Merger Agreement is terminated and ZRC is entitled to payment
of expenses and a fee pursuant to section 11.3(b) of the Merger Agreement.
At any time ZRC wishes to exercise the Option, ZRC shall give written
notice (the "Notice") to the Shareholder specifying a place and a date not less
than two nor more than fifteen business days from the date of the Notice for the
closing (the "Closing") of such purchase; provided, however, that, subject to
the termination provision set forth in Section 12, the date for such Closing
shall be extended to a date that shall not be later than 35 days after the later
of (a) the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
regulations thereunder (the "HSR Act") and (b) the receipt by ZRC of all
necessary approvals under applicable state insurance laws and regulations.
3. Payment and Delivery of Certificate(s).
At the Closing hereunder:
(a) ZRC will make payment to the Shareholder of the aggregate Purchase
Price for the Shares being purchased upon exercise of the Option in
immediately available funds by wire transfer to a bank
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designated by the Shareholder at least one (1) business day prior to such
Closing in an amount equal to the Purchase Price multiplied by the total
number of Shares being purchased; and
(b) The Shareholder will deliver to ZRC, against payment to the
Shareholder as provided in Section 3(a), a certificate or certificates
representing the number of Shares so purchased by ZRC duly endorsed or with
executed blank stock powers attached, in either event with signature
guaranteed such that registered ownership of the Shares may be registered
for transfer on the books of Re Cap.
4. Agreement to Vote. The Shareholder hereby agrees, during the term of
this Agreement, to vote all of the Shares at any meeting, or in connection with
any written consent, of the Re Cap shareholders (a) in favor of the Merger
Agreement and any other related transactions or matters presented in connection
with the Merger and (b) against any other proposal which provides for any
merger, sale of assets or other Third Party Business Combination (as defined in
the Merger Agreement) between Re Cap (or any subsidiary of Re Cap) and any other
person or entity or which is otherwise inconsistent with the Merger or the
Merger Agreement.
5. Legending of Certificates. The Shareholder agrees to submit to ZRC
contemporaneously with or promptly following execution of this Agreement (or
promptly following receipt of any additional certificates representing any
additional Shares) all certificates representing the Shares so that ZRC may note
thereon a legend referring to the option granted to it by, and voting agreement
contained in, this Agreement.
6. Payment of Additional Purchase Price. If, after purchasing the Shares
pursuant to the Option, ZRC or any of its affiliates receives any cash or
non-cash consideration in respect of the Shares in connection with a Third Party
Business Combination during the period commencing on the date of the Closing
hereunder and ending on the first anniversary thereof, ZRC shall promptly pay
over to the Shareholder, as an addition to the Purchase Price, (a) the excess,
if any, of such consideration over the aggregate Purchase Price paid for the
shares by ZRC less (b) the amount of any federal, state, local or other tax paid
or payable as a result of, or otherwise attributable to, the sale or other
disposition of the Shares by ZRC; provided that, (X) if the consideration
received by ZRC or such affiliates shall be securities listed on a national
securities exchange or traded on the NASDAQ National Market ("NASDAQ"), the per
share value of such consideration shall be equal to the closing price per share
listed on such national securities exchange or NASDAQ on the date such
transaction is consummated and (Y) if the consideration received by ZRC or such
affiliates shall be in a form other than securities, the per share value shall
be determined in good faith as of the date such transaction is consummated by
ZRC and the Shareholder, or, if ZRC and the Shareholder cannot reach agreement,
by a nationally recognized investment banking firm reasonably acceptable to the
parties.
7. Adjustments to Prevent Dilution, Etc. In the event of a stock dividend
or distribution, or any change in Re Cap Common Stock by reason of any stock
dividend, split-up, recapitalization, combination, exchange of shares or the
like, the term "Shares" shall be deemed to refer to and include the Shares as
well as all such stock dividends and distributions and any shares into which or
for which any or all of the Shares may be changed or exchanged. In such event,
the amount to be paid per share by ZRC shall be proportionately adjusted.
8. Representations and Warranties of the Shareholder.
The Shareholder represents and warrants to ZRC that:
(a) The Shareholder is the sole beneficial owner of the Shares; the
Shares are all of the shares of the capital stock of Re Cap owned
beneficially or of record by the Shareholder; and the Shareholder owns the
Shares, free and clear of any agreements, liens, adverse claims or
encumbrances whatsoever with respect to the ownership of or the right to
vote the Shares.
(b) The Shareholder has all requisite corporate power and authority to
enter into and perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement has been duly authorized by all
necessary corporate action on the part of the Shareholder. This Agreement
has been duly executed and delivered by the Shareholder.
(c) The execution, delivery and performance of this Agreement will
not, with or without the giving of notice or the passage of time, (i)
violate any judgment, injunction, order or decree of any court,
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arbitrator or governmental agency applicable to the Shareholder, or (ii)
conflict with, result in the breach of any provision of, constitute a
default under, or require the consent of any third party under, any
agreement or instrument to which the Shareholder is a party or by which the
Shareholder is bound.
9. Additional Covenants of the Shareholder.
The Shareholder hereby covenants and agrees that:
(a) Until the termination of this Agreement, the Shareholder will not
enter into any transaction, take any action or by inaction permit any event
to occur that would result in any of the representations or warranties of
the Shareholder herein contained not being true and correct.
(b) Until the termination of this Agreement, the Shareholder shall
not, directly or indirectly, through any employee, agent or otherwise: (i)
solicit, initiate or encourage submission of proposals or offers from any
person relating to any acquisition or purchase of all or a material part of
the assets of, or any equity interest in, or any merger, consolidation or
business combination with, Re Cap or any of its subsidiaries (an
"acquisition proposal"), or (ii) participate in any discussions or
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way or assist, facilitate or
encourage any acquisition proposal by any other person.
(c) From and after the date hereof until the termination of this
Agreement, the Shares shall not be sold, transferred, pledged,
hypothecated, transferred by gift, or otherwise disposed of in any manner
whatsoever.
(d) The Shareholder shall execute and deliver any additional documents
reasonably necessary or desirable, in the opinion of ZRC's or Re Cap's
counsel, to evidence the Option granted in Section 1 and the agreement to
vote granted in Section 4 with respect to the Shares or otherwise implement
and effect the provisions of this Agreement.
10. Representations and Warranties of ZRC.
ZRC represents and warrants to the Shareholder that:
(a) ZRC has all requisite corporate power and authority to enter into
and perform all of its obligations under this Agreement. The execution,
delivery and performance of this Agreement and all of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of ZRC. This Agreement has been duly executed and
delivered by ZRC.
(b) Neither the execution, delivery or performance of this Agreement
by ZRC nor the consummation of the transactions contemplated herein will
(i) violate the Certificate of Incorporation or Bylaws of ZRC, (ii) violate
any judgment, injunction, order or decree of any court, arbitrator or
governmental agency applicable to ZRC, or (iii) conflict with, result in
the breach of any provision of, or constitute a default under, any
agreement or instrument to which ZRC is a party or by which ZRC is bound.
(c) If the Option is exercised, the Shares will be acquired for
investment for ZRC's own account, not as a nominee or agent and not with a
view to the distribution of any part thereof. ZRC has no present intention
of selling, granting any participation in, or otherwise distributing the
same nor does ZRC have any contract, undertaking, agreement or arrangement
with any person or to any third person, with respect to any of the Shares.
(d) ZRC understands that the Shares may not be sold, transferred, or
otherwise disposed of without registration under the Securities Act of
1933, as amended (the "1933 Act"), or an exemption therefrom, and that in
the absence of an effective registration statement covering the Shares or
an available exemption from registration under the 1933 Act, the Shares
must be held indefinitely. In the absence of an effective registration
statement covering the Shares, ZRC will sell, transfer, or otherwise
dispose of the Shares only in a matter consistent with its representations
and agreements set forth herein.
11. Cooperation as to Regulatory Matters. As promptly as possible after
the execution hereof, ZRC will file any required notifications with the Federal
Trade Commission ("FTC") and the Antitrust Division of the
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Department of Justice ("Justice") pursuant to and in compliance with the HSR Act
and seek all regulatory approvals required in connection with the transactions
contemplated hereby. ZRC will comply fully with all applicable notification,
reporting and other requirements of the HSR Act and will cooperate with Re Cap
in satisfying such requirements. ZRC shall not unreasonably delay submission of
information required by the FTC and Justice under the HSR Act and shall use its
best efforts to supply such information promptly. At all times from the date
hereof until the termination of this Agreement, ZRC will use its reasonable best
efforts promptly to obtain any and all regulatory approvals and to make any
filings under federal and state securities laws necessary in connection with the
acquisition of Shares pursuant to this Agreement. The Shareholder will cooperate
fully and promptly with ZRC.
12. Termination. This Agreement shall terminate on the earlier of (a) the
Effective Date (as defined in the Merger Agreement) and (b) the date of
termination of the Merger Agreement, unless the Merger Agreement is terminated
by ZRC pursuant to Section 10.1(d) or Section 10.1(e) thereto or by Re Cap
pursuant to Section 10.1(g) thereto, in which case this Agreement shall
terminate 15 days after termination of the Merger Agreement; provided, however,
that if, during such 15-day period, ZRC delivers the Notice, this Agreement
shall terminate six months after termination of the Merger Agreement.
13. Binding Effect; Assignment. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective successors and permitted
assigns. ZRC may assign its rights and obligations hereunder to an entity
controlled by or under common control with ZRC. The Shareholder shall not assign
its rights or obligations hereunder without ZRC's consent.
14. Notices. All notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered personally or by
Federal Express or other courier service or sent by express mail, postage
prepaid, return receipt requested, addressed to the respective party at the
applicable address below, on the date of such personal delivery or on the date
received:
If to ZRC:
Zurich Reinsurance Centre Holdings, Inc.
One Chase Manhattan Plaza
43rd Floor
New York, New York 10005
Attention: Steven M. Gluckstern
Telecopy No.: (212) 898-5007
with a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Attention: Peter A. Appel, Esq.
Telecopy No.: (212) 821-8111
If to the Shareholder:
John Deere Insurance Group, Inc.
3400 80th Street
Moline, Illinois 61265
Attention: Dennis E. Hoffmann
Telecopy No.: (309) 765-5892
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Bonnie Greaves, Esq.
Telecopy No.: (212) 848-7179
Any party may change the foregoing address from time to time by giving the other
party notice thereof.
15. Injunctive Relief; Remedies Cumulative.
(a) Each party hereto acknowledges that the other party will be irreparably
harmed and that there will be no adequate remedy at law for a violation of any
of the covenants or agreements of such party that are
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contained in this Agreement. It is accordingly agreed that, in addition to any
other remedies that may be available to the non-breaching party upon the breach
by any other party of such covenants and agreements, the non-breaching party
shall have the right to obtain injunctive relief to restrain any breach or
threatened breach of such covenants or agreements or otherwise to obtain
specific performance of any of such covenants or agreements.
(b) No remedy conferred upon or reserved to any party herein is intended to
be exclusive of any other remedy, and every remedy shall be cumulative and in
addition to every other remedy herein or now or hereafter existing at law, in
equity or by statute.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
17. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute a single agreement.
18. Effect of Partial Invalidity. Whenever possible, each provision of
this Agreement shall be construed in such a manner as to be effective and valid
under applicable law. If any provision of this Agreement or the application
thereof to any party or circumstance shall be prohibited by or invalid under
applicable law, such provisions shall be ineffective to the extent of such
prohibition without invalidating the remainder of such provision or any other
provisions of this Agreement or the application of such provision to the other
party or other circumstances.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first above written.
ZURICH REINSURANCE CENTRE HOLDINGS, INC.
By: /s/ PETER R. PORRINO
Name: Peter R. Porrino
Title: Senior Vice President and
Chief
Financial Officer
JOHN DEERE INSURANCE GROUP, INC.
By: /s/ DENNIS E. HOFFMANN
Name: Dennis E. Hoffmann
Title: President and Chief Executive
Officer
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APPENDIX C
[LETTERHEAD OF SMITH BARNEY INC.]
January 11, 1995
The Board of Directors
Re Capital Corporation
Two Stamford Plaza
Stamford, Connecticut 06904
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the common stock of Re Capital Corporation ("Re
Capital") of the consideration to be received by such stockholders pursuant to
the terms and subject to the conditions set forth in the Agreement and Plan of
Merger, dated as of January 11, 1995 (the "Merger Agreement"), by and among
Zurich Reinsurance Centre Holdings, Inc. ("ZRC"), ZRC Merger-Sub Corp. ("Sub")
and Re Capital. As more fully described in the Merger Agreement, (i) Sub will be
merged with and into Re Capital (the "Merger") and (ii) each outstanding share
of the common stock, par value $0.10 per share, of Re Capital (the "Re Capital
Common Stock") will be converted into the right to receive $18.50 in cash (the
"Merger Consideration").
In arriving at our opinion, we reviewed the Merger Agreement and the
reserve review dated February 1, 1994 of Tillinghast, a Towers Perrin Company
("Tillinghast"), relating to Re Capital (the "Tillinghast Report"), and held
discussions with certain senior officers, directors and other representatives
and advisors of Re Capital concerning the business, operations and prospects of
Re Capital. We examined certain publicly available business and financial
information relating to Re Capital as well as certain financial forecasts and
other data for Re Capital which were provided to us by the management of Re
Capital. We reviewed the financial terms of the Merger as set forth in the
Merger Agreement in relation to, among other things: current and historical
market prices and trading volumes of the Re Capital Common Stock; the historical
and projected earnings of Re Capital; and the capitalization and financial
condition of Re Capital. We also considered, to the extent publicly available,
the financial terms of certain other similar transactions recently effected
which we considered comparable to the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations we considered comparable to those of Re
Capital. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed necessary to arrive at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
provided to or otherwise reviewed by or discussed with us, we have been advised
by the management of Re Capital that such forecasts and other information were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of Re Capital as to the future financial
performance of Re Capital. With respect to the Tillinghast Report, we assumed,
with your consent, that such valuation was prepared on bases reflecting the best
currently available estimates and judgments of Tillinghast. Except for the
Tillinghast Report, we have not made or been provided with an independent
evaluation or appraisal of the assets, liabilities (contingent or otherwise) or
reserves of Re Capital nor have we made any physical inspection of the
properties or assets of Re Capital. In connection with our engagement, we
approached, and held discussions with, certain third parties to solicit
indications of interest in a possible acquisition of Re Capital,
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and assisted in negotiations with those third parties that indicated such
interest. Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Re
Capital in connection with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation of the Merger.
We also will receive a fee upon the delivery of this opinion. In the ordinary
course of our business, we may actively trade the equity and debt securities of
Re Capital and ZRC for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
Our advisory services and the opinion expressed herein are provided solely
for the use of the Board of Directors of Re Capital in its evaluation of the
proposed Merger and are not on behalf of, and are not intended to confer rights
or remedies upon, ZRC, any stockholder of Re Capital or ZRC, or any person other
than Re Capital's Board of Directors. Our opinion may not be published or
otherwise used or referred to, nor shall any public reference to Smith Barney be
made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to the holders of Re Capital Common Stock.
Very truly yours,
/s/ SMITH BARNEY INC.
SMITH BARNEY INC.
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APPENDIX D
DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipt in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
D-1
<PAGE> 81
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation, or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights on the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation which
shall, within 20 days after such service, file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of
D-2
<PAGE> 82
their shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the list at
the addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware, or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payments shall be so made to each such stockholder, in the case of
holders of uncertified stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall
D-3
<PAGE> 83
be dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
262, L. '94, eff. 7-1-94.)
D-4
<PAGE> 84
APPENDIX E
[LETTERHEAD OF ERNST & YOUNG LLP]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Re Capital Corporation
We have audited the accompanying consolidated balance sheets of Re Capital
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects,the consolidated financial position of
Re Capital Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company made certain accounting changes in 1993 and 1992.
ERNST & YOUNG LLP
February 8, 1995
E-1
<PAGE> 85
RE CAPITAL CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR
THE APRIL 25, 1995 SPECIAL MEETING OF THE
STOCKHOLDERS OF RE CAPITAL CORPORATION
The undersigned stockholder of Re Capital Corporation ("Re Cap") hereby
appoints R. Richard Mueller and Conor D. Reilly, and each of them, the lawful
attorneys and proxies of the undersigned, with full powers of substitution and
revocation, to vote on behalf of the undersigned all shares of Re Cap common
stock (the "Common Stock") which the undersigned is entitled to vote at the
Special Meeting (the "Special Meeting") of the stockholders of Re Cap to be held
on April 25, 1995 at 10:00 a.m., Eastern Standard Time, at 200 Park Avenue, 48th
Floor, New York, New York, and at any and all adjournments and postponements
thereof. The undersigned hereby acknowledges receipt of the Notice of Special
Meeting and hereby instructs said attorneys and proxies to vote said shares of
Common Stock as indicated hereon.
Please indicate your vote by an "X" in the appropriate box below, sign and
date this Proxy and return promptly in the enclosed envelope.
1. Approval of the Agreement and Plan of Merger providing for a merger
pursuant to which ZRC Merger-Sub Corp. ("Merger Sub") will be merged with
and into Re Cap with Re Cap continuing as the surviving corporation, and
each share of Re Cap Common Stock (other than specifically excluded
shares of Common Stock) will be converted into the right to receive
$18.50 per share in cash, without interest.
FOR / / AGAINST / / ABSTAIN / /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR.
2. IN THEIR DISCRETION ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING.
<PAGE> 86
This Proxy, if properly executed, will be voted in the manner directed by
the stockholder. IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, EXECUTED PROXIES WILL
BE VOTED FOR APPROVAL OF THE AGREEMENT AND PLAN OF MERGER AND IN THE DISCRETION
OF THE PROXY HOLDERS AS TO ANY OTHER MATTERS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING.
PLEASE MARK, SIGN AND DATE THIS PROXY AND RETURN IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
Date: , 1995.
----------------------------------
--------------------------------
Signature:
--------------------------------
Signature:
--------------------------------
Title:
NOTE: Please sign exactly as
your name appears on the stock
certificate. If joint owners,
both owners should sign this
Proxy. When signing as attorney,
executor, administrator,
trustee, guardian or corporate
officer, please give your full
title as such. If a corporation,
please sign in full corporate
name by the duly authorized
officer. If a partnership,
please sign in partnership name
by an authorized person.
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------------------------------------------------------------------
<S> <C>
No. 99.1 Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(This exhibit is incorporated by reference on sequential page number 46)
</TABLE>
<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
------------------ TO
------------------
------------------------------
COMMISSION FILE NUMBER: 1-5429
------------------------------
RE CAPITAL CORPORATION
<TABLE>
<S> <C>
DELAWARE 13-3351768
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
TWO STAMFORD PLAZA,
STAMFORD, CONNECTICUT 06904-2148
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (203) 977-6100
------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
----------------------------------------------------------- ------------------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
Common Stock, $.10 Par Value
5 1/2% Convertible Debentures Due August 1, 2000
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Company held by
nonaffiliates of the Company was $71,001,880 on February 10, 1995 (based on the
last reported sale price of the Common Stock of the Company on the NASDAQ
National Market System on February 10, 1995).
The number of shares of the Company's Common Stock, $.10 par value (being
the only class of common stock of the Company), outstanding on February 10, 1995
was 7,052,799 shares (including 126,600 restricted shares).
Portions of the definitive proxy statement for the Company's 1995 Annual
Meeting of Shareholders and of the special proxy statement for its Special
Meeting of Stockholders are incorporated by reference in Part III hereof.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER
---- ------
<C> <S> <C>
PART I
1. Business..................................................................... 1
2. Properties................................................................... 17
3. Legal Proceedings............................................................ 17
4. Submission of Matters to a Vote of Security Holders.......................... 17
PART II
5. Market for Company's Common Stock and Related Stockholder Matters............ 18
6. Selected Financial Data...................................................... 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 19
8. Financial Statements and Supplementary Data.................................. 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 26
PART III
10. Directors and Executive Officers............................................. 26
11. Executive Compensation....................................................... 26
12. Security Ownership of Certain Beneficial Owners and Management............... 26
13. Certain Relationships and Related Transactions............................... 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 26
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS.
GENERAL. Re Capital Corporation (the "Company") was incorporated in New
Jersey in 1950. On August 10, 1989, the Company changed its state of
incorporation to Delaware by merging into a wholly-owned Delaware subsidiary
which had been incorporated in 1986. The Company, headquartered in Stamford,
Connecticut, engages principally in underwriting domestic property and casualty
reinsurance through its wholly-owned subsidiary, Re Capital Reinsurance
Corporation ("Re Cap"). Re Cap was incorporated in New Jersey in August 1986 and
commenced underwriting activities in October 1986. Re Cap writes only treaty
reinsurance and emphasizes working layer excess of loss and proportional
treaties. As a working layer reinsurer, Re Cap's loss experience is determined
more by loss frequency than by loss severity. Re Cap functions principally as a
lead reinsurer. As a lead reinsurer, Re Cap generally conducts underwriting and
claims audits of its reinsureds and negotiates the price, terms and conditions
of the reinsurance treaties it underwrites. Re Cap's business is generated
exclusively through reinsurance intermediaries.
MERGER AGREEMENT. On January 11, 1995, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Zurich Reinsurance
Centre Holdings, Inc. ("ZRC") and ZRC Merger-Sub Corp., a wholly-owned
subsidiary of ZRC ("ZRC Merger-Sub").
The Merger Agreement provides that, at the effective time (the "Effective
Time") of the merger (the "Merger"), each share of the Company's common stock,
par value $.10 per share ("Common Stock"), outstanding immediately prior to the
Effective Time (which may include a certain number of restricted shares to be
determined) will, without any action on the part of the holder thereof, be
converted into the right to receive $18.50 in cash, without interest. ZRC will
assume all obligations under the Company's existing 5 1/2% Convertible
Debentures (the "Convertible Debentures") due August 1, 2000 ($69 million
outstanding aggregate principal amount as of January 11, 1995) that are not
converted into Common Stock prior to the closing of the Merger.
As more fully described in the Merger Agreement, upon the occurrence of
certain specified events, including the occurrence of certain Third Party
Business Combinations (as defined in the Merger Agreement), the Company will pay
ZRC a fee of $4,500,000 plus an amount equal to the costs and expenses incurred
by ZRC in connection with the Merger Agreement, not exceeding $1,000,000.
Pursuant to an Option and Voting Agreement, dated as of January 11, 1995
(the "Option and Voting Agreement"), between John Deere Insurance Group, Inc.
("Deere Insurance") and ZRC, Deere Insurance has (i) granted ZRC an option (the
"Option") to acquire under the circumstances described in the Option and Voting
Agreement, at $18.50 per share, its 3,087,598 shares of the Common Stock,
comprising approximately 43.8% of the outstanding shares of the Common Stock as
of February 10, 1995, and all future shares of Common Stock that Deere Insurance
may acquire (the "Deere Insurance Shares"), and (ii) agreed to vote the Deere
Insurance Shares in favor of the approval of the Merger and any other related
transactions or matters presented in connection with the Merger and against any
other proposal which provides for any merger, sale of assets or other Third
Party Business Combination, between the Company (or any subsidiary of the
Company) and any person or entity, or which is otherwise inconsistent with the
Merger or the Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares. See "Relationship with Deere Insurance -- Control of the
Company."
The Merger Agreement contains various agreements on the part of the Company
that restrict its abilities to operate its business prior to the Effective Time.
If the Merger is consummated as planned, the board of
1
<PAGE> 5
directors of the Company will consist of the directors of ZRC Merger-Sub
immediately prior to the Effective Time.
The closing of the Merger is subject to approval by the Company's
stockholders, certain state insurance regulatory approvals and certain other
customary conditions and approvals. The description contained herein of the
Merger and related agreements is qualified in its entirety by reference to the
Merger Agreement, the Option and Voting Agreement and the Company's Form 8-K,
dated as of January 11, 1995 and filed on January 19, 1995.
INDUSTRY OVERVIEW
GENERAL. Reinsurance is a contractual arrangement in which an insurance
company, the reinsurer, agrees to indemnify another insurance company, the
cedant, against all or a portion of the insurance risks underwritten by the
cedant under one or more insurance policies. Reinsurance can provide a cedant
with several major benefits, including a reduction in net liability on
individual risks, catastrophe protection from large or multiple losses and
assistance in maintaining acceptable financial ratios. Reinsurance also provides
a cedant with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without concomitant
increases in capital and surplus. The reinsurance transaction can be negotiated
directly between the cedant and reinsurer or through a reinsurance intermediary.
In general, casualty insurance protects the insured against financial loss
arising out of its obligation to others for loss or damage to persons or
property. Property insurance protects the insured against financial loss arising
out of the loss of property or its use caused by an insured peril. Property and
casualty reinsurance protects the cedant against loss to the extent of the
reinsurance coverage provided. Property reinsurance involves a high degree of
volatility but losses generally are reported within a relatively short time
period after the event. A greater degree of unpredictability is associated with
casualty risks because there tends to be a greater lag in the reporting and
payment of casualty claims, due to the nature of the risks and the greater
potential for litigation.
TYPES OF REINSURANCE
TREATY AND FACULTATIVE REINSURANCE. There are two basic types of
reinsurance agreements: treaty contracts and facultative certificates. A treaty
is an agreement, usually renewable on an annual basis, between a cedant and a
reinsurer under which the cedant is required to cede and the reinsurer is
required to assume a specified portion of a type or category of risks insured by
the cedant under designated types of policies issued during the term of the
treaty contract. Under a facultative certificate, the cedant cedes and the
reinsurer assumes all or part of the risks insured under a single primary
insurance policy. Facultative reinsurance is negotiated separately for each
insurance policy that is reinsured. Facultative reinsurance typically is
purchased by cedants for individual risks not covered by their reinsurance
treaties, for amounts in excess of limits on risks covered by their reinsurance
treaties and for unusual risks. Because of the transactional nature of the
business and the greater risk generally involved, potential margins on
facultative business are often higher than on treaty business. However, the
reinsurer's losses also may be higher for facultative business because the
reinsurer often assumes a higher potential liability and because the risks
reinsured are often more volatile. Underwriting expenses, and in particular
personnel costs, are higher on facultative business because each risk is
individually underwritten and administered.
PRO RATA AND EXCESS OF LOSS REINSURANCE. Both treaty and facultative
reinsurance can be written on either a pro rata (also known as quota share or
proportional) basis or an excess of loss basis. In reinsurance written on a pro
rata basis, the reinsurer, in return for a predetermined portion or share of the
insurance premium charged by the cedant, indemnifies the cedant against a
predetermined portion of the losses and loss adjustment expenses ("LAE") of the
cedant under the covered insurance policy or policies. In the case of
reinsurance written on an excess of loss basis, the reinsurer indemnifies the
cedant against all or a specified portion of losses and LAE on underlying
insurance policies in excess of a specified dollar amount, known as the cedant's
retention or attachment point, subject to a negotiated reinsurance limit.
2
<PAGE> 6
Excess of loss reinsurance often is written in layers. One or a group of
reinsurers accepts the risk just above the cedant's retention up to a specified
amount, at which point another reinsurer or a group of reinsurers accepts the
excess liability or such liability reverts to the cedant. The reinsurer taking
on the risk just above the cedant's retention layer is said to write low layer
or working layer excess of loss reinsurance. A loss that reaches just beyond the
cedant's retention layer will create a loss for the working layer reinsurer, but
not for the reinsurers on the higher layers. Losses incurred in working layer
reinsurance tend to be more predictable than those in higher layers due to their
greater historical frequency. Similarly, premiums for working layer reinsurance
tend to be greater than those for higher excess layers due to this greater loss
frequency.
REINSURANCE UNDERWRITING
GENERAL. Re Cap provides treaty reinsurance principally to insurers of
commercial and personal lines of casualty insurance. In addition, Re Cap
reinsures a limited amount of personal and commercial lines of property
insurance. Re Cap generally does not reinsure the following classes: fidelity,
surety, mortgage guaranty and aggregate loss ratio covers. Re Cap writes
reinsurance through a variety of reinsurance intermediaries representing a
diversity of insurers. Re Cap does not conduct business directly with insurers.
Re Cap also acts as underwriter and claims manager to Deere Insurance. Re
Cap acts on Deere Insurance's behalf and in Deere Insurance's name in
underwriting and servicing various lines of treaty reinsurance business. See
"Relationship with Deere Insurance -- Services Agreements with Deere Insurance."
Re Cap operates primarily as a lead reinsurer of brokered working layer
excess of loss and proportional property and casualty treaty reinsurance. As a
lead reinsurer, Re Cap generally is able to negotiate the pricing, terms and
conditions of the treaties it underwrites. As a working layer reinsurer, Re Cap
writes proportional treaties structured to respond to the "first dollar" of loss
and excess of loss reinsurance treaties with relatively low attachment points
and relatively low limits of liability. In general, the working layer is
"pierced" more frequently than layers which have higher attachment points. This
greater loss frequency is offset by the greater premiums that characterize
working layer reinsurance. In addition, loss severity generally is more
predictable for the working layer than for the higher layers of reinsurance
because of the relatively low level of coverage provided. Re Cap's ability to
derive an underwriting profit from its working layer business depends primarily
on its ability to estimate loss frequency and to a lesser extent on its ability
to estimate loss severity.
Re Cap's casualty treaties are derived largely from insurers concentrating
on small to medium commercial liability accounts and on insurers specializing in
transportation risks. Additionally, Re Cap reinsures professional liability
programs, generally on a claims-made policy form. Reinsurance treaties for such
programs are structured with relatively low limits of liability, and most are
written on a working layer basis. In general, Re Cap seeks to reinsure programs
and lines of casualty insurance in which it believes past experience permits a
reasonably accurate estimation of premium adequacy.
Re Cap's gross written premiums are composed of greater amounts of casualty
business than of property writings. Due to the relatively low per occurrence
limits to which it restricts itself, Re Cap does not now purchase casualty
retrocessions except for the quota share participation of Deere Insurance (see
"Relationship with Deere Insurance -- Services Agreements with Deere
Insurance"). Re Cap does purchase property retrocessions in addition to the
quota share participation of Deere Insurance. Therefore, casualty business
represents a greater percentage of Re Cap's net written premiums than of its
gross written premiums. The composition of Re Cap's book of business reflects
existing market conditions, including the adequacy of reinsurance and insurance
pricing for various classes of business, the availability of retrocessions and
other factors that vary over time.
BUSINESS MIX. Re Cap is, and has been since its formation, exclusively a
treaty reinsurer with no involvement in facultative reinsurance. Re Cap wrote an
aggregate of 133 treaties in 1994 compared with 132 and 125 in 1993 and 1992,
respectively. Re Cap's net premiums written for its principal lines of business
in aggregate dollars and as percentages of the total of all lines are set forth
in the table below for the periods indicated.
3
<PAGE> 7
NET PREMIUMS WRITTEN BY LINE OF BUSINESS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Casualty:
Auto Liability........................ $ 52,265 39.5% $ 39,030 33.7% $ 44,685 36.8%
General Liability..................... 38,533 29.1% 36,280 31.3% 38,262 31.6%
Professional Liability................ 16,780 12.7% 19,293 16.7% 17,836 14.7%
Workers Compensation.................. 1,077 .8% 986 .8% 1,192 1.0%
Medical Malpractice................... 705 .5% 1,516 1.3% 1,363 1.1%
-------- ----- -------- ----- -------- -----
Total Casualty................ 109,360 82.6% 97,105 83.8% 103,338 85.2%
-------- ----- -------- ----- -------- -----
Property:
Auto Physical Damage.................. 13,450 10.2% 8,567 7.4% 3,966 3.3%
Commercial Per Risk................... 4,133 3.1% 2,235 1.9% 7,621 6.2%
Aviation, Marine and Other............ 2,269 1.7% 1,670 1.5% 48 --
Mechanical Breakdown.................. 1,609 1.2% 5,336 4.6% 5,531 4.6%
Catastrophe Covers.................... 1,600 1.2% 901 .8% 812 .7%
-------- ----- -------- ----- -------- -----
Total Property................ 23,061 17.4% 18,709 16.2% 17,978 14.8%
-------- ----- -------- ----- -------- -----
Total All Lines......................... $132,421 100.0% $115,814 100.0% $121,316 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Re Cap writes property and casualty treaties on both a pro rata and working
layer excess of loss basis. The distribution of net premiums written by type of
reinsurance in aggregate dollars and as a percentage of total net premiums
written is set forth in the table below for the periods indicated.
NET PREMIUMS WRITTEN BY TYPE OF REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Casualty:
Pro Rata.............................. $ 84,416 63.8% $ 75,619 65.3% $ 85,265 70.3%
Excess of Loss........................ 24,944 18.8% 21,486 18.5% 18,073 14.9%
-------- ----- -------- ----- -------- -----
109,360 82.6% 97,105 83.8% 103,338 85.2%
Property:
Pro Rata.............................. 20,851 15.7% 17,449 15.1% 16,869 13.9%
Excess of Loss........................ 2,210 1.7% 1,260 1.1% 1,109 .9%
-------- ----- -------- ----- -------- -----
23,061 17.4% 18,709 16.2% 17,978 14.8%
Summary:
Pro Rata.............................. 105,267 79.5% 93,068 80.4% 102,134 84.2%
Excess of Loss........................ 27,154 20.5% 22,746 19.6% 19,182 15.8%
-------- ----- -------- ----- -------- -----
Total................................... $132,421 100.0% $115,814 100.0% $121,316 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Re Cap's three largest clients accounted for approximately 59.9% of 1994
gross written premiums. The Company's largest cedant in 1994 was Deere Insurance
which contributed $33,953,000 of gross written premium. See "Relationship with
Deere Insurance -- Reinsurance of Deere Insurance Member Companies."
4
<PAGE> 8
Gross written premiums from United States Security Insurance Company
("USSIC"), the Company's second largest cedant, totalled $25,586,000. USSIC
writes private passenger auto liability and physical damage business in the
state of Florida.
Re Cap obtained approximately 17.1% of its 1994 gross written premiums from
reinsurance of the Scottsdale Insurance Company and other member companies of
the Nationwide Group ("Scottsdale"). An additional 1.3% of Re Cap's 1994 gross
written premiums represented retrocessions of Deere Insurance with respect to
treaties on which Deere Insurance reinsured Scottsdale. The 18.4% of Re Cap's
1994 gross written premiums derived both directly and indirectly from Scottsdale
was obtained from 22 treaties, the largest of which represented approximately 6%
of Re Cap's 1994 gross written premiums.
Loss of all or a substantial portion of the business provided by Deere
Insurance, USSIC or Scottsdale could have a material adverse effect on Re Cap's
written premiums. If such a loss were to occur, however, the Company believes
that the number of treaties in force and the distribution of annual renewal
dates throughout the fiscal year would reduce the impact of such a loss. In
addition, the Company does not believe that the loss of these treaties would
result in a concurrent material decrease in the Company's earnings because the
invested assets held for these treaties would continue to earn investment income
until paid out over an extended loss payout period.
MARKETING. Re Cap obtains all of its business through intermediaries which
represent the cedant in negotiations for the purchase of reinsurance. The
process of effecting a brokered reinsurance placement typically begins when a
cedant enlists the aid of an intermediary in structuring a reinsurance program.
Often the intermediary will consult with one or more lead reinsurers as to the
pricing and contract terms of the reinsurance protection being sought. Once the
cedant has approved the terms quoted by the lead reinsurer, the intermediary
will offer participation to qualified reinsurers until the program is fully
subscribed to by reinsurers at terms agreed to by all.
By working through intermediaries to originate its business, the Company
need not maintain a substantial sales organization which, during periods of
reduced premium volume, would comprise a significant and non-productive part of
overhead. In addition, management believes that submissions from the
intermediary market are more numerous and diverse, including certain targeted
specialty coverages, than would be available through a salaried sales
organization and that the Company is able to exercise greater selectivity than
would be possible in dealing directly with cedants.
Re Cap pays commissions to intermediaries based on negotiated percentages
of the premium it writes. These commissions constitute part of Re Cap's total
acquisition costs and are included in its underwriting expenses. Direct writers
of reinsurance typically incur higher fixed costs that are included in its
underwriting expenses. Reinsurers using intermediaries can lower these costs
during a downturn by writing less business and incurring lower brokerage costs.
Intermediaries do not have the authority to bind Re Cap with respect to
reinsurance agreements nor does Re Cap commit in advance to accept any portion
of the business that intermediaries submit to it. Reinsurance business from any
cedant, whether new or renewal, is subject to acceptance by Re Cap.
In 1994, Aon Re, Inc. and Alexander Reinsurance Intermediaries, Inc.
accounted for 61% and 23%, respectively, of Re Cap's gross written premiums. Of
the 61% of Re Cap's 1994 gross written premiums accounted for by Aon Re, Inc.,
slightly more than one-third (24%) was derived from reinsurance of
transportation business underwritten by Deere Insurance. These two
intermediaries are among the ten largest intermediaries in the reinsurance
industry. Re Cap's concentration of business through a small number of sources
is consistent with the concentration of the property-casualty broker reinsurance
market, in which a majority of the business is written through the top ten
intermediaries. Loss of all or a substantial portion of the business provided by
either of these intermediaries could have a short-term material adverse effect
on the business and operations of Re Cap. The Company does not believe, however,
that the loss of such business would have a long-term material adverse effect
due to the Company's competitive position within the broker reinsurance market
and the availability of business from other intermediaries.
5
<PAGE> 9
UNDERWRITING. In evaluating treaty opportunities, Re Cap relies heavily on
an underwriting process that emphasizes close coordination of underwriting,
marketing, claims and accounting functions. As a lead reinsurer, Re Cap is able
to derive the majority of its volume from relatively few accounts, permitting
not only close review of each new treaty opportunity, but also ongoing
monitoring of existing accounts. A substantial amount of Re Cap's premium is
derived from reinsurance treaties that are customarily written with an annual
anniversary date that enables the lead reinsurers to engage in periodic review
and to renegotiate price, terms and conditions when necessary.
In its role as a lead reinsurer, Re Cap analyzes various aspects of a
prospective cedant's business, including, but not limited to, historical loss
and exposure data for the program involved, financial statements, rates, rating
plans, underwriting guides and business projections. A positive review of this
material generally is followed by a claims and underwriting audit conducted at
the prospective cedant's office. In addition to evaluating the integrity of the
prospective cedant's reserves and the quality of the program to be reinsured,
the audit assists in the assessment of the prospective cedant's management and
its business plan.
RELATIONSHIP WITH DEERE INSURANCE
Deere Insurance. Deere Insurance, a wholly-owned subsidiary of Deere &
Company, provides a broad range of property-casualty and life insurance products
throughout the United States through two divisions and six subsidiary companies.
The Deere Insurance property-casualty companies are licensed to transact
business in all 50 states, are currently rated "AA" (Excellent) in claims-paying
ability by Standard & Poor's Insurance Rating Services, "A+" (Superior) by A.M.
Best and, in 1994, had aggregate direct written premiums of approximately $362
million and surplus of $274 million.
Control of the Company. Deere Insurance owns approximately 43.8% of the
outstanding shares of Common Stock (27.9% assuming conversion in full of the
Convertible Debentures). Deere Insurance has filed an amendment, dated January
11, 1995, to its Schedule 13D stating that, pursuant to the Option and Voting
Agreement, Deere Insurance has (i) granted to ZRC the Option to acquire from
Deere Insurance under the circumstances described in the Option and Voting
Agreement all, but not less than all, of the Deere Insurance Shares at a
purchase price (the "Purchase Price") of $18.50 per share in cash, and (ii)
agreed to vote the Deere Insurance Shares in favor of the approval of the Merger
and any other related transactions or matters presented in connection with the
Merger and against any other proposal which provides for any merger, sale of
assets or other Third Party Business Combination, between the Company (or any
subsidiary of the Company) and any person or entity, or which is otherwise
inconsistent with the Merger or the Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares.
The Option and Voting Agreement also provides that if, after purchasing the
Deere Insurance Shares pursuant to the Option, ZRC or any of its affiliates
receives any cash or non-cash consideration in respect of the Deere Insurance
Shares in connection with a Third Party Business Combination during the period
commencing on the date of the closing of the purchase under the Option and
ending on the first anniversary thereof, ZRC will promptly pay over to Deere
Insurance, as an addition to the Purchase Price, (A) the excess, if any, of the
value of such consideration over the aggregate Purchase Price paid for the Deere
Insurance Shares by ZRC less (B) the amount of any federal, state, local or
other tax paid or payable as a result of, or otherwise attributable to, the sale
or other disposition of the Deere Insurance Shares by ZRC.
The Option and Voting Agreement will terminate on the earlier of (a) the
Effective Time and (b) the date of termination of the Merger Agreement, unless
the Merger Agreement is terminated (i) by ZRC as a result of its conditions not
being satisfied or a material breach by the Company or (ii) by the Company after
a
6
<PAGE> 10
reasonable determination by the Board of Directors of the Company that a
Business Combination (as defined in the Merger Agreement) will result in a
Superior Proposal (as defined in the Merger Agreement), in which case the Option
and Voting Agreement will terminate 15 days after termination of the Merger
Agreement; provided, however, that if, during such 15-day period, ZRC delivers
notice of its exercise of the Option, the Option and Voting Agreement will
terminate six months after termination of the Merger Agreement.
In connection with receiving the approval of the Company's Board of
Directors to own more than 15% of the outstanding Common Stock, Deere Insurance
entered into an agreement with the Company in which it agreed to give the
Company a right of first refusal with regard to any proposed sale of any shares
of the Company's Common Stock owned by it, unless such sale is to an entity
acquiring more than 50% of the Company's Common Stock. In the Merger Agreement,
the Company waived these provisions as they relate to the possible exercise by
ZRC of its rights under the Option and Voting Agreement.
As the Company's largest shareholder, Deere Insurance may be in a position
to exert a significant influence on the Company through the election of
directors and otherwise and to affect corporate transactions, including the
blocking of business combinations of which it may not approve. Dennis E.
Hoffmann, Chairman of the Board of Directors of the Company since March 1991,
and its Chief Executive Officer from March 1991 to March 1992, is President of
Deere Insurance. Conor D. Reilly, Secretary of the Company since 1986, and a
partner in the law firm of Gibson, Dunn & Crutcher, counsel to the Company,
became a director of Deere Insurance in 1992. George G. D'Amato, Jr., a senior
partner in the law firm of D'Amato & Lynch, is a director of the Company and of
Deere Insurance. Conflicts of interest could arise with respect to transactions
involving Deere Insurance or its affiliates (other than the Company), on the one
hand, and the Company, on the other hand. Approval of any such transactions
would require the affirmative vote of the disinterested members of the Company's
Board of Directors. If ZRC exercises the Option under the circumstances
described in the Option and Voting Agreement, ZRC would similarly be in a
position to exert a significant influence on the Company. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. Neither the Option and Voting Agreement nor the
Merger Agreement provides ZRC with any right to designate or elect directors of
the Company. However, if ZRC exercises the Option under the circumstances
described in the Option and Voting Agreement, ZRC would be in a position to
significantly influence the designation or election of directors of the Company.
Reinsurance of Deere Insurance Member Companies. Approximately 24% of Re
Cap's gross written premiums in 1994 resulted from reinsurance of long-haul
trucking and other transportation business underwritten by John Deere Insurance
Company, an Illinois corporation and a wholly owned subsidiary of Deere
Insurance ("JDIC"). Approximately 16% and 10% of Re Cap's gross written premiums
were derived from this source in 1993 and 1992, respectively, following the
entry of JDIC into the field of transportation insurance in the second half of
1991.
Services Agreements with Deere Insurance. As of May 1, 1987, Re Cap
entered into underwriting and claims management services agreements with JDIC.
Pursuant to such agreements, JDIC appointed Re Cap as its underwriter and claims
manager to act on its behalf and in its name in underwriting and servicing
various lines of treaty reinsurance business. Under the original terms of such
agreements, JDIC agreed to cede to Re Cap 92.5% of the casualty reinsurance
business and 52.725% of the property reinsurance business written by Re Cap in
its capacity as underwriter for JDIC. Effective January 1, 1988, the agreements
were amended to provide for a 92.5% cession to Re Cap of both property and
casualty business written on behalf of JDIC. Re Cap has also agreed to provide
JDIC with a quota share participation of 7.5% in other insurance business
written by Re Cap. The terms of the agreements as currently in place limit the
reinsurance premiums which may be written by Re Cap in its capacity as
underwriter for JDIC to no more than $50 million in gross written premium per
year. JDIC has informed the Company that it does not currently have any
comparable agreements with other reinsurers. These agreements may be terminated
by Re Cap and JDIC if, among other things, there is a material change in control
of either party.
Because Re Cap was not eligible for a rating from A.M. Best until 1992, and
because it is currently rated "A" (Excellent), the agreements with JDIC have
been of substantial value in permitting the Company to respond to opportunities
requiring a reinsurer rated "A+" by A.M. Best. During 1994, 15.9% of Re Cap's
gross
7
<PAGE> 11
written premium, or $22.8 million, represented business originated by the
Company but written by JDIC. This compares with 21% or $26.5 million,
respectively, for the year ended December 31, 1993.
In addition, Deere Insurance and Re Cap are parties to a Right of First
Acceptance Agreement, dated June 9, 1993, pursuant to which Deere Insurance
agreed to cause its subsidiaries involved in the business of writing property
and casualty insurance to offer to Re Cap, subject to certain exceptions, all
reinsurance placed by such subsidiaries relating to property and casualty
insurance. This agreement may be terminated by either party upon ten days'
written notice.
RESERVES. In many cases, significant amounts of time, ranging up to
several years, may elapse between the occurrence of a loss, the reporting of
such loss to the reinsurer and the reinsurer's payment of such loss. To
recognize liabilities for unpaid losses, Re Cap establishes reserves, which are
balance sheet liabilities representing estimates of amounts needed to pay known
claims, LAE and reserves for claims and LAE that are incurred but not reported
("IBNR"). Reserves are subject to the effects of trends in loss severity and
frequency. Thus, these estimates are reviewed on an ongoing basis and as
experience develops and new information becomes known, the liabilities are
adjusted as necessary. Such adjustments, if any, are reflected in operating
results.
Re Cap's actuarial department employs a computer-based model to estimate
IBNR by reinsurance contract. Reserves are estimated on the basis of individual
treaties, rather than classes of business, because loss development patterns
vary widely from treaty to treaty, even for similar lines and classes of
business. The principal inputs to the model are expected loss ratios and loss
reporting patterns. As part of its underwriting of a reinsurance treaty, Re Cap
develops estimates of expected loss ratios and reporting patterns by reference
to (i) the lines of business underlying the reinsurance treaty, (ii) Re Cap's
prior experience with similar lines of business and (iii) industry data. These
assumptions are reviewed on an ongoing basis and updated periodically. During Re
Cap's initial years of writing reinsurance, it relied primarily on industry data
in establishing the expected loss ratios and reporting patterns for its
actuarial model. As its business has matured, Re Cap increasingly has considered
its own experience in conjunction with the modeled results in establishing
reserves. In addition, Re Cap has retained an independent actuarial consulting
firm to perform an analysis of reserves and to provide general actuarial
consulting services to Re Cap.
The results of casualty lines of business recently have become less
predictable because of latent risks such as asbestos and other pollution
liability, whose effects may not be known for many years, and expanded concepts
of civil liability. Insurers and reinsurers have made and will continue to make
upward adjustments to loss reserves for asbestos and other pollution claims
under policies written prior to 1986, when the industry adopted policy changes
designed to exclude such claims. Re Cap did not begin underwriting activities
until November 1986 and as a result has no known material exposure to latent
environmental claims not contemplated or priced for in the underwriting process.
Since its inception, Re Cap has written treaties accounting for less than 0.1%
of its net written premiums reinsuring policies providing coverage for
environmental hazards. Each such treaty reinsures only claims-made coverage for
narrowly defined environmental hazards.
Re Cap establishes loss and LAE reserves for claims when it receives notice
of such claims. Re Cap's policy is to establish reserves for reported losses in
an amount equal to the greater of the reserve recommended by the cedant or by Re
Cap's Claims Department. In the case of excess of loss reinsurance, reserves are
established on a case-by-case basis using several factors, including the type of
risk involved, knowledge of the circumstances surrounding the claim, severity of
injury or damage, estimated ultimate exposure, experience of Re Cap with the
cedant, and underlying policy provisions. Re Cap conducts periodic claim audits
to determine the adequacy of recommended reserves.
8
<PAGE> 12
The following table represents an analysis of Re Cap's claims and claim
expenses liability, reconciling the beginning and ending liability balances, net
of reinsurance recoverable, for the fiscal years ended December 31, 1994, 1993,
and 1992.
RECONCILIATION OF LIABILITY FOR CLAIMS AND CLAIM EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net liability for claims and claim expenses, at the
beginning of year........................................ $191,599 $172,666 $162,985
Provision for claims and claim expenses occurring in the
current year............................................. 94,547 87,165 90,684
Increase (Decrease) in estimated losses for claims
occurring in prior years:
Commutations.......................................... -- -- 2,505
All other business.................................... 248 (3,028) (870)
-------- -------- --------
Total increase (decrease).................................. 248 (3,028) 1,635
-------- -------- --------
Net incurred claims during the current year.............. 94,795 84,137 92,319
Payment for claims and claim expenses occurring during:
The current year...................................... 18,117 13,632 16,715*
Prior years:
Commutations........................................ -- -- 26,378
All other business.................................. 66,739 51,572 39,545
-------- -------- --------
84,856 65,204 82,638
-------- -------- --------
Net liability for claims and claim expenses, at end of
year..................................................... 201,538 191,599 172,666
Reinsurance recoverables on unpaid losses and LAE,
at end of year........................................... 8,859 9,039 12,088
-------- -------- --------
Gross liability for claims and claim expenses, at end of
year..................................................... $210,397 $200,638 $184,754
======== ======== ========
</TABLE>
---------------
* Includes $5.3 million in loss payments related to Hurricanes Andrew and Iniki
and the Los Angeles riots.
9
<PAGE> 13
The following table presents the development of the Company's historical
balance sheet liabilities net of ceded reinsurance for the period December 31,
1986 through December 31, 1994. The top of the table shows the estimated
liabilities net of ceded reinsurance at the balance sheet date for each of the
indicated years. This reflects the estimated amounts of claims and claim
expenses for claims arising in that year and in all prior years that are unpaid
at the balance sheet date, including losses that had been incurred but not yet
reported to the Company. The upper portion of the table shows the cumulative
subsequently paid amounts as of successive years with respect to that reserve
liability. The lower portion of the table shows the reestimated amount of the
previously recorded reserve based on experience as of the end of each succeeding
year. The estimates change as more information becomes known about the frequency
and severity of claims for individual years. A redundancy (deficiency) exists
when the reestimated liability at each December 31 is less (greater) than the
prior liability estimate. The "Cumulative Redundancy (Deficiency)" depicted in
the table for any particular calendar year represents the aggregate change in
the initial estimates over all subsequent calendar years.
ANALYSIS OF NET CLAIMS AND CLAIM EXPENSES DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims
and Claim Expenses............. $201,538 $191,599 $172,666 $162,985 $130,738 $101,958 $61,661 $17,535 $ 244
Cumulative Amount of Liability
Paid:
One Year Later................. 66,739 51,572 65,923 37,054 24,984 11,418 3,966 167
Two Years Later................ 97,916 95,653 64,955 41,770 20,160 6,556 210
Three Years Later.............. 124,444 79,553 51,415 26,506 8,458 421
Four Years Later............... 94,619 58,868 30,789 9,920 456
Five Years Later............... 66,478 33,129 10,740 456
Six Years Later................ 36,322 11,191 456
Seven Years Later.............. 12,006 456
Eight Years Later.............. 456
Net Liability Reestimated as of:
One Year Later................. 191,847 169,638 164,620 114,322 92,457 60,797 17,633 700
Two Years Later................ 171,640 163,027 114,881 79,323 51,209 16,745 574
Three Years Later.............. 164,725 113,678 77,995 40,667 13,881 491
Four Years Later............... 115,460 76,884 39,748 12,672 461
Five Years Later............... 76,869 39,974 12,715 457
Six Years Later................ 40,469 12,754 456
Seven Years Later.............. 12,967 456
Eight Years Later.............. 456
Cumulative Redundancy
(Deficiency)................... (248) 1,026 (1,740) 15,278 25,089 21,192 4,568 (212)
-------- -------- -------- -------- -------- ------- ------- -----
Cumulative Redundancy
(Deficiency) Resulting from
Commutations................... 0 0 (2,505) 16,675 9,058 1,086 0 0
-------- -------- -------- -------- -------- ------- ------- -----
Cumulative Redundancy
(Deficiency) as adjusted....... $ (248) $ 1,026 $ 765 $ (1,397) $ 16,031 $20,106 $ 4,568 $(212)
======== ======== ======== ======== ======== ======= ======= =====
</TABLE>
The following table presents the development of the Company's historical
gross balance sheet liabilities for the period December 31, 1986 through
December 31, 1994.
10
<PAGE> 14
ANALYSIS OF GROSS CLAIMS AND CLAIM EXPENSES DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability -- End
of Year................ $201,538 $191,599 $172,666 $162,985 $130,738 $101,958 $61,661 $17,535 $ 244
Reinsurance
Recoverable............ 8,859 9,039 12,088 10,412 10,398 7,902 3,302 528 --
-------- -------- -------- -------- -------- -------- ------- ------- -----
Gross Liability -- End of
Year................... 210,397 200,638 184,754 173,397 141,136 109,860 64,963 18,063 244
Gross Liability
Reestimated as of:
One Year Later......... 201,252 181,404 174,270 122,346 99,889 63,762 18,258 575
Two Years Later........ 183,702 172,317 122,761 85,009 53,788 17,334 575
Three Years Later...... 174,329 121,262 83,520 42,211 14,362 502
Four Years Later....... 123,332 81,947 41,427 12,824 461
Five Years Later....... 81,789 41,584 13,003 456
Six Years Later........ 42,000 13,079 456
Seven Years Later...... 13,272 456
Eight Years Later...... 456
Cumulative Redundancy
(Deficiency)........... $ (614) $ 1,052 $ (932) $ 17,804 $ 28,071 $22,963 $ 4,791 $(212)
======== ======== ======== ======== ======== ======= ======= =====
</TABLE>
In evaluating the information contained in the "Analysis of Net Claims and
Claim Expenses Development" table ("Net table"), it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
example, if a loss determined in 1990 to be $100,000 was first reserved in 1987
at $125,000, the $25,000 redundancy (original estimate minus actual loss) would
be included in the Cumulative Redundancy (Deficiency) for each of the years
1987-1990 shown above. This table does not present accident or policy year
development data. Conditions and trends that have affected the development of
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies based
on this table.
Additionally, a majority of the Company's business consists of pro rata
treaties with sliding scale commission arrangements under which lower than
anticipated loss ratios may result in higher ceding commissions and higher than
anticipated loss ratios may result in lower ceding commissions. Consequently,
the positive impact of favorable loss development on the Company's results may
be diminished and the negative impact of adverse loss development may be
mitigated, by the existence of such commission arrangements. This fact should be
considered in analyzing the tables above.
The trend depicted in the Net table indicates that reserves held as of
December 31, 1990 have developed redundantly due to favorable developments for
losses occurring from 1987 through 1990. Specifically, the cumulative
redundancies in the Company's Estimates of Liability for Unpaid Claims and Claim
Expenses as of December 31, 1990, 1989 and 1988 were $15,278,000, $25,089,000
and $21,192,000, respectively. These redundancies have resulted principally from
three factors.
First, the Company's commutation of certain of its reinsurance agreements
with the Integral Insurance Company in the fourth quarter of 1991 caused a
decrease in reserves of $10,615,000 from amounts held as of December 31, 1990,
and a decrease in reserves of $3,708,000 from amounts held as of December 31,
1989. The decrease in 1990 reserves of $10,615,000 was more than offset by an
increase in commissions of $10,945,000 (pursuant to the terms of the
commutation).
Second, a total of four smaller commutations with other cedants during 1990
and 1991 caused a decrease in reserves of $6,060,000 from amounts held as of
December 31, 1990, and a decrease in reserves of $5,350,000 and $1,086,000 from
amounts held as of December 31, 1989 and 1988, respectively. The decrease in
1990 reserves of $6,060,000 was partially offset by an increase in commissions
of $1,114,000 and a reduction in premium accruals of $3,050,000.
11
<PAGE> 15
Third, and finally, the remaining redundancies of $16,031,000 and
$20,106,000 for reserves as of December 31, 1989 and 1988, respectively, have
resulted from favorable loss development, principally for treaties written
during 1987 and 1988. The Company's experience for treaties written during these
years has been consistent with the favorable development experienced by a
majority of its surplus lines client base for this period and reflects the
Company's emphasis on pro rata reinsurance.
For net reserves at December 31, 1991, the table shows a cumulative
deficiency of $1,740,000 as of December 31, 1994. As the table indicates, this
deficiency resulted from the commutation of certain reinsurance agreements in
the fourth quarter of 1992. Excluding the effects of this commutation, which
increased reserves by $2,505,000 from December 31, 1991 levels, the Company
would have recorded a redundancy of $765,000 for that period.
Reinsurers may enter into a commutation agreement for a variety of reasons.
Such reasons may include, but are not limited to, a desire to close a given
underwriting year or to terminate and fully settle a reinsurance relationship
because of a change in the reinsurer's evaluation of the cedant. For these and
other reasons, Re Cap anticipates that from time to time it may enter into
additional commutations.
RETROCESSIONS. Re Cap does not generally offer limits greater than
$1,000,000 per occurrence per treaty on property catastrophe business. For
casualty and property per risk business, commitments are generally limited to
$750,000 per occurrence, per treaty, but larger commitments may be made subject
to the approval of Re Cap's Chief Executive Officer. In practice, Re Cap's
commitments for casualty, property per risk, and property catastrophe business
average significantly less than $500,000 per occurrence per treaty.
Due to the relatively low limits afforded by Re Cap on the business it
underwrites, it does not now purchase treaty retrocessions on a per risk or per
treaty basis except for the quota share participation of Deere Insurance and
certain account specific protections. See "Relationship with Deere
Insurance -- Services Agreements with Deere Insurance."
Re Cap maintains a property catastrophe retrocessional agreement to protect
itself against an aggregation of losses resulting from a single event. Factors
that have resulted recently in a contraction of capacity for property
catastrophe reinsurance have also reduced the availability of property
catastrophe retrocessions. Effective April 1, 1994, Re Cap secured
retrocessional protection for one year that management believes is adequate for
the property treaties that Re Cap writes. Re Cap anticipates that it will extend
retrocessional protection through the Merger on acceptable terms.
Although retrocessional protection does not legally discharge the
retroceding reinsurer for its liability for the full amount of coverage provided
by its reinsurance agreements, it does make the retrocessionaire liable to the
retroceding reinsurer for the portion of the reinsurance retroceded to the
retrocessionaire. Regardless of whether a retrocessionaire is able to meet its
assumed obligations, Re Cap is liable for these obligations. All
retrocessionaires must conform to the Company's security standards and must be
specifically approved by the Company's Security Committee which consists of four
members of senior management and the Chief Executive Officer. The Security
Committee reevaluates the financial condition of the Company's retrocessionaires
at least annually. The evaluation process involves financial analysis of current
audited financial data and comparative analysis of such data in accordance with
guidelines established by Re Cap. Business may not be conducted with
retrocessionaires who are not approved by the Security Committee.
Of the property catastrophe retrocessional coverage obtained by the Company
effective April 1, 1994, approximately one-third is provided by domestic
companies rated "A-" (Excellent) or better by A.M. Best. The remaining coverage
is obtained by the Company principally from Underwriters at Lloyd's of London,
LaSalle Re and Zurich Re (UK) Limited. At December 31, 1994, Re Cap had no
material uncollectible amounts due from retrocessionaires. Amounts recoverable
from all retrocessionaires represented 5.8% of Re Cap's surplus at December 31,
1994, of which more than three-quarters (5% of surplus) was from JDIC.
CLAIMS. Claims are managed by Re Cap's professional claims department. Its
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
of proper reserves and payment of claims. In addition, the Claims Department
conducts periodic audits of specific claims and overall claims procedures at the
offices of cedants. Prior to Re
12
<PAGE> 16
Cap's acceptance of most working layer casualty treaties, the Claims Department
conducts claims audits at the offices of prospective cedants. Such companies are
not reinsured unless the audit results are satisfactory to Re Cap. The Claims
Department also conducts annual audits, principally of reserve adequacy, at the
offices of Re Cap's cedants. The Claims Department monitors the progress and
ultimate outcome of claims to ensure that subrogation, salvage and other cost
recovery opportunities are fully explored.
INVESTMENTS. Re Cap's investments must comply with the insurance laws of
the State of New Jersey. These laws prescribe the type, quality and
concentration of investments that may be made. In general, these laws permit
investments in federal, state and municipal obligations, corporate bonds,
preferred stocks and common stocks, real estate mortgages and real estate,
within specified limits and subject to certain qualifications. Moreover, in
order to be considered an acceptable reinsurer by cedants and intermediaries, a
reinsurer must offer financial security. The quality and liquidity of invested
assets are important considerations in determining such security.
The Company is party to an investment advisory agreement with Conning &
Company ("Conning"), an insurance research firm providing specialty research,
trading, consulting and financial advisory services to the insurance industry.
Pursuant to that agreement, Conning advises Re Cap and the Investment Committee
of the Company's Board of Directors (the "Investment Committee") as to
recommended investment strategies and relevant economic trends and executes all
investment transactions on behalf of Re Cap. The investment advisory agreement
may be terminated by either party upon written notice. Maurice W. Slayton, a
member of the Board of Directors of the Company, is Chairman of the Board,
President and Chief Executive Officer of Conning. See Item 12, "Security
Ownership of Certain Beneficial Owners and Management" and Item 13, "Certain
Relationships and Related Transactions."
Re Cap's investment policy is determined by the Investment Committee, which
also periodically reviews the quality and composition of Re Cap's investments.
The Investment Committee sets and regularly revises guidelines to be followed by
Conning in making investments for Re Cap. The guidelines currently in place
provide that (i) Re Cap's portfolio shall consist entirely of corporate and
municipal bonds and a limited amount (less than 10% of the portfolio) of
mortgage backed securities, (ii) securities purchased shall have Moody's and
Standard & Poors ratings of "A" or better, (iii) corporate and municipal bond
issues shall not exceed 5% of any one issue, (iv) funds invested in securities
of any single issuer (other than the U.S. Government) shall not exceed 5% of
invested assets and (v) maturities of fixed income investments shall not exceed
30 years from the date of purchase. There is no assurance that these guidelines
will not be changed in the future by the Investment Committee.
The Company's current investment strategy seeks to maximize after-tax
investment income through a high quality diversified taxable bond and tax-exempt
municipal bond portfolio, while maintaining an adequate level of liquidity.
Diversification is an important factor in providing the balance necessary to
maintain safety of principal, predictability of income, growth of surplus, a
strong liquidity position and appropriate asset/liability matching. Although it
is difficult to estimate precisely the duration of its liabilities (due to the
uncertainty surrounding payout patterns), Re Cap believes that there is a
reasonable matching of its assets and liabilities. Re Cap generally invests in
securities with contractual maturities of less than 10 years. At December 31,
1994, the average duration of the portfolio was 2.8 years. Re Cap believes (i)
it does not face a significant risk of asset/liability mismatching, and (ii) a
substantial movement in interest rates would not have a material adverse impact
on liquidity, capital resources or results of operations. The Company and Re Cap
have no investments in high yield bonds, common or preferred stocks or real
estate, which are more susceptible to market fluctuation.
13
<PAGE> 17
The table below sets forth the distribution of the Company's consolidated
investment portfolio at December 31, 1994, by type, expected maturity and
quality rating.
<TABLE>
<CAPTION>
AVERAGE
INVESTMENTS MATURITY MARKET AMORTIZED
(DOLLARS IN THOUSANDS) IN YEARS VALUE COST
-------- -------- ---------
<S> <C> <C> <C>
TYPE
Tax-exempt bonds(1).......................................... 2.5 $161,252 $159,682
Other taxable bonds.......................................... 3.8 101,194 105,669
Mortgage-backed securities(2)................................ 5.6 29,576 32,226
Asset-backed securities...................................... 3.7 18,589 19,211
U.S. treasury and government agency securities............... 4.0 26,085 27,640
Short-term investments, invested cash and cash............... 0.7 6,198 6,198
-------- -------- --------
Total investments and cash......................... 3.3 $342,894 $350,626
======== ========
EXPECTED MATURITY
Due in one year or less...................................... 0.5 $ 56,571 $ 56,162
Due after one year through five years........................ 2.9 202,107 203,924
Due after five years through ten years....................... 6.1 84,216 90,540
-------- -------- --------
Total investments and cash......................... 3.3 $342,894 $350,626
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARKET AMORTIZED
VALUE COST
--------- --------
<C> <C>
QUALITY (FIXED MATURITY INVESTMENTS)(3)
<S> <C>
Aaa -- Tax-exempt bonds.............................................. $118,492 $117,718
Other taxable bonds........................................... 14,381 15,097
Mortgage-backed securities.................................... 29,576 32,226
Asset-backed securities....................................... 18,589 19,211
U.S. treasury and government agency securities................ 26,085 27,640
-------- --------
207,123 211,892
-------- --------
Aa -- Tax-exempt bonds.............................................. 33,540 32,781
Other taxable bonds........................................... 32,691 35,071
-------- --------
66,231 67,852
-------- --------
A -- Other taxable bonds........................................... 54,122 55,501
Tax-exempt bonds.............................................. 9,220 9,183
-------- --------
63,342 64,684
-------- --------
Total fixed maturity investments.............................. $336,696 $344,428
======== ========
</TABLE>
---------------
(1) Includes, at market value, $8,579,000 escrowed to maturity, $55,547,000
pre-refunded in U.S. Government Securities and $60,941,000 insured by
Municipal Bond Investors Assurance Corporation, Financial Guaranty Insurance
Company, AMBAC Indemnity Corporation and Financial Security Assurance
Corporation.
(2) The mortgage-backed securities held in the Company's consolidated investment
portfolio consist entirely of real estate mortgage conduits ("REMICs"),
which are all in planned amortization class ("PAC") tranches. These
securities, which had a market value of $29,576,000 (amortized cost of
$32,225,000), are backed by U.S. Government agencies and therefore have the
highest credit rating. All mortgage-backed securities held in the portfolio
are actively traded in the public markets. The risk inherent in holding
mortgage-backed securities is a prepayment risk resulting from possible
decreases in interest rates. The Company believes that its exposure to
prepayment risk is largely mitigated because the majority of its REMIC
securities were purchased in 1993 in a low interest rate environment.
Further, the Company's holdings consist entirely of PAC bonds. Such
instruments have reduced prepayment risk because they are structured to
provide a more certain cash flow to the investor and thereby create a more
certain
14
<PAGE> 18
asset/liability match than pass-throughs. Additionally, PAC instruments
significantly reduce the Company's likelihood of material capital gains or
losses from prepayment.
(3) Ratings as assigned by Moody's Investors Service, Inc. Such ratings are
generally assigned upon the issuance of the securities and are subject to
revision on the basis of ongoing evaluations.
COMPETITION. Competitive conditions currently prevail in all sectors of
the reinsurance industry. The Company competes with many domestic and foreign
insurers and reinsurers, many of which have greater financial, marketing and
management resources than the Company. Re Cap competes with both reinsurers that
obtain business directly from cedants and with reinsurers that obtain their
business through intermediaries. Increased competition in recent years has
resulted in a deterioration of reinsurance rates, terms and conditions. The
industry is moving toward greater consolidation and to compete effectively, size
and financial strength are increasingly important. Transactions tend to have
fewer and larger participants, thereby negatively affecting the availability of
underwriting opportunities for smaller reinsurers such as the Company. Ceding
companies have become more specialized, however, which management believes will
favor reinsurers such as the Company with technical underwriting and risk
assessment skills and a focus on specialty business.
Extraordinary catastrophe loss activity since 1989 has caused a contraction
in capacity for property catastrophe reinsurance and retrocessions. The
reduction in supply precipitated moderate rate increases in this market segment
beginning in late 1991. By late 1992, and continuing through 1994, these
increases had become significant. Management cannot predict if and when market
conditions will change for the remainder of the industry.
Re Cap received its initial rating of "A-" (Excellent) from A.M. Best in
June 1992 (Re Cap was not eligible for a rating by A.M. Best until it had at
least five years of operating history). A.M. Best reviews its rating at least
annually and, in May 1994, upgraded its "A-" (Excellent) rating to a rating of
"A" (Excellent) for Re Cap. A.M. Best's ratings are based on an analysis of the
financial condition and operating performance of a reinsurance company as they
relate to the industry in general. These ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations.
Certain insurers use A.M. Best's ratings to assist them in assessing reinsurers.
Prior to receiving its A.M. Best rating, Re Cap entered into a reinsurance
arrangement with Deere Insurance, which has an A.M. Best rating of "A+," that
permits the Company to respond to opportunities requiring a reinsurer rated "A+"
by A.M. Best. See "Relationship with Deere Insurance -- Services Agreements with
Deere Insurance."
In September 1993, Re Cap received an initial claims-paying ability rating
of "A" (Good) from Standard & Poor's Insurance Rating Services. This rating was
affirmed in December 1994. The claims-paying ability rating addresses the
financial capacity of the Company to meet its reinsurance obligations.
REGULATION. Reinsurance agreements generally are not subject to regulation
by any government authority with respect to rates or contract terms. In
contrast, the rates and policy terms of insurance contracts generally are
regulated closely by state insurance departments. As a practical matter, the
rates charged by insurers may limit the rates that can be charged by reinsurers.
Re Cap, as a reinsurer, is subject to regulation and supervision in the
states in which it does business. The regulation and supervision relates
primarily to the standards of solvency that must be met and maintained,
licensing requirements for reinsurers, the nature of and limitations on
investments, restrictions on the size of risks which may be reinsured, deposits
of securities for the benefit of a cedant, methods of accounting, periodic
examinations of the financial condition and affairs of reinsurers, the form and
content of reports of financial condition required to be filed, and reserves for
unearned premiums, losses and other purposes.
In addition, the Company and Re Cap are and will be subject to regulation
under the insurance statutes, including the insurance holding company statutes,
of the states in which Re Cap is licensed. These regulations vary from state to
state but generally require insurance holding companies and insurers and
reinsurers that are subsidiaries of holding companies to register and file
reports concerning their capital structure, ownership, financial condition and
business operations. Such regulations also generally require prior regulatory
agency approval of (i) changes in control of insurers and reinsurers, (ii)
transactions within the holding company
15
<PAGE> 19
structure and (iii) extraordinary dividends. The regulatory agencies of each
state have statutory authorization to enforce their laws and regulations through
administrative orders and enforcement proceedings.
Re Cap is domiciled in New Jersey. New Jersey insurance law provides that
no corporation or other person, except an authorized insurer, may acquire
control of an insurance holding company, and thus indirect control of its New
Jersey insurance and reinsurance subsidiary, unless it has given notice to such
subsidiary and obtained the prior written approval of the Commissioner of
Insurance of the State of New Jersey for such acquisition. Any purchaser of ten
percent of the Common Stock of the Company would be presumed to have acquired
control of the Company, unless such presumption is rebutted. In 1990, Deere
Insurance obtained such approval from the Commissioner of Insurance of the State
of New Jersey for such acquisition of control of the Company. Pursuant to the
Merger Agreement, ZRC has applied for such approval and that application is
pending.
The Company is a holding company and the principal source of its funds will
be cash dividends and tax payments from Re Cap pursuant to a tax sharing
agreement. The payment of cash dividends by Re Cap is restricted by state
insurance regulations. Under New Jersey law, Re Cap will be permitted to pay
dividends only from its statutory surplus, which at December 31, 1994 aggregated
$166,596,000. In general, Re Cap cannot pay within any twelve-month period,
without prior approval of the New Jersey Insurance Commissioner, dividends which
exceed the lesser of 10% of surplus at the end of the previous year or 100% of
net investment income for the previous year. The maximum amount of dividends
which could be paid by Re Cap to the Company during 1995, without prior
regulatory approval, is approximately $16,660,000. To date, Re Cap has never
paid a dividend to the Company.
Re Cap is required to file annual and other reports relating to its
financial condition and other matters with the New Jersey Insurance Department.
The New Jersey Insurance Department conducts triennial examinations of insurance
companies domiciled in New Jersey. Representatives of the New Jersey Insurance
Department completed a regular triennial examination of Re Cap's records and
business affairs during 1991, for the period ended December 31, 1990, and issued
a final report on January 11, 1993, which reported no material deficiencies. Re
Cap has been advised that the New Jersey Insurance Department will be conducting
an examination during 1995. Re Cap may also be subject to periodic examinations
by the insurance departments of other states in which it is currently licensed
or becomes licensed.
Re Cap is licensed in Arizona, California, Delaware, the District of
Columbia, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan,
Minnesota, Nebraska, New Jersey, New Mexico, New York, North Dakota, Oregon,
Pennsylvania, Texas, Utah and Washington as an insurer and a reinsurer; and in
Connecticut, Florida, Georgia, Louisiana, Massachusetts, Montana, Nevada, Ohio,
Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, and
Wisconsin as a reinsurer. Re Cap is an admitted reinsurer in Colorado, Missouri,
North Carolina, Vermont and Virginia. Re Cap has filed applications for a
license in the states of Arkansas, Mississippi and Oklahoma. In addition to the
above listed states, Re Cap believes that insurers domiciled in Hawaii and
Wyoming may presently take credit for reinsurance ceded to Re Cap.
In addition to the regulatory requirements imposed by the jurisdictions in
which they are licensed, reinsurers are subject to indirect regulatory
requirements imposed by jurisdictions in which their cedants are licensed
through the credit for reinsurance mechanism. The effect of reinsurance on
statutory financial statements is a principal reason for a cedant to enter into
a reinsurance agreement. In general, an insurer which obtains reinsurance from a
reinsurer that is licensed or accredited by the state in which the insurer files
financial statements is permitted to take credit on its statutory financial
statements in an aggregate amount equal to the liability for unearned premiums
and for loss and LAE reserves ceded to the reinsurer. The great majority of
states, however, permits the reduction in statutory surplus resulting from
reinsurance obtained from an unlicensed or nonaccredited reinsurer to be offset
to the extent that the reinsurer provides a letter of credit or other qualified
form of funding to the ceding insurer to support its obligation under the
reinsurance agreement.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC"), state legislatures, insurance regulators and the
United States Congress. State legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, state authority to
regulate insurance companies and holding company systems.
16
<PAGE> 20
The NAIC and state insurance regulators have been reexamining existing laws and
regulations, with an emphasis on insurance company investment and solvency
issues. Legislation has been introduced in Congress that could result in the
federal government assuming some role in the regulation of the insurance
industry. It is not possible to predict the future impact of changing state and
federal regulation on the operations of the Company.
In December 1993, the NAIC adopted final minimum capitalization
requirements for property-casualty insurance and reinsurance companies known as
the risk-based capital model. The NAIC's stated objective in developing these
risk-based capital standards is to improve solvency monitoring. Formal
implementation of these new minimum capitalization requirements will occur
concurrent with the filing of 1994 annual statements. Re Cap believes that its
capital and surplus are adequate to meet the risk-based capital requirements
contained in the NAIC's model.
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is intended primarily to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more of the ratios can lead to
inquiries from state insurance commissioners. As of December 31, 1994, Re Cap's
results were within the usual values for eleven of the twelve ratios.
Some states have adopted, or are considering adopting, laws and regulations
that limit the right of offset by reinsurers. Offset permits two contracting
parties with reciprocal obligations to set off those obligations against each
other to arrive at a net balance due and to pay only that balance. The right of
offset is important primarily for reinsurers which both cede business to and
assume business from the same entities, and would then become relevant if and
when any such entity becomes insolvent. There is currently only one entity
(JDIC) which Re Cap both cedes business to and assumes business from. The NAIC
recently amended its Insurers Rehabilitation and Liquidation Model Act to limit
offset under certain circumstances. These provisions have been adopted in only a
few states, and have been rejected by several others. Some states have no laws
governing offset and rely on common law principles; other states have adopted a
wide range of offset provisions. Because liquidation of insurers is generally
governed by the insurance insolvency laws of the state of domicile of the
insolvent insurer or reinsurer, and those laws may vary widely and are subject
to possible change, it is difficult to predict what impact, if any, these
provisions will have on Re Cap.
EMPLOYEES. At January 31, 1995, the Company employed 41 persons. No
employees are represented by a labor union, and the Company's management
believes that its employee relations are good.
ITEM 2. PROPERTIES.
The Company's corporate offices are located at Two Stamford Plaza, 281
Tresser Boulevard, Stamford, Connecticut 06904-2148. The Company's corporate
office is occupied pursuant to a lease covering approximately 26,295 square feet
of office space. This lease expires in 2001. The lease has minimum annual
rentals, not including costs of certain escalation clauses, of $1,067,000
through 1996 and 85% of the fair market value from 1997 to 2001. In addition, Re
Cap maintains a corporate office in Fort Lee, New Jersey.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of the property of the Company or
its subsidiaries is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1994.
17
<PAGE> 21
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Effective June 23, 1993, the Company's Common Stock began trading on the
NASDAQ National Market System under the symbol RCAP. Previously the Company's
stock was listed on the American Stock Exchange under the symbol RCC. The
following table sets forth, for the periods indicated, the high and low closing
sales prices per share of the Company's Common Stock as reported by the NASDAQ
National Market System and dividends declared and subsequently paid.
<TABLE>
<CAPTION>
MARKET PRICE
--------------
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C> <C>
1994 First Quarter................................. 14 3/4 13 $ .08
Second Quarter................................ 14 12 1/4 $ .08
Third Quarter................................. 13 1/4 12 1/2 $ .08
Fourth Quarter................................ 13 1/4 12 $ .08
1993 First Quarter................................. 16 1/2 14 5/8 $ .07
Second Quarter................................ 15 1/2 14 $ .07
Third Quarter................................. 15 1/4 13 1/4 $ .07
Fourth Quarter................................ 15 1/2 13 1/4 $ .07
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for information
regarding statutory restrictions on the payment of dividends by the Company's
subsidiary, Re Cap. As of February 8, 1995, there were approximately 245
shareholders of record.
18
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected consolidated financial information for
the last five fiscal years. This information should be read in conjunction with
the consolidated financial statements of Re Capital Corporation and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Premiums written.................... $132,421 $115,814 $121,316 $140,533 $106,615
======== ======== ======== ======== ========
Premiums earned..................... 129,398 $112,681 $118,443 $134,846 $102,523
Net investment income............... 21,696 18,934 17,270 15,953 12,658
Net realized investment gains
(losses).......................... 39 694 342 118 (19)
-------- -------- -------- -------- --------
Total revenues...................... 151,133 132,309 136,055 150,917 115,162
======== ======== ======== ======== ========
Net income.......................... $ 7,907 $ 8,037 $ 2,309(1) $ 8,929 $ 9,772
======== ======== ======== ======== ========
Per share data:
Primary earnings per share........ $ 1.14 $ 1.18 $ .35(1) $ 1.24 $ 1.44
Fully diluted earnings per
share.......................... .95 1.06 .35(1) 1.24 1.44
Cash dividends declared per
share.......................... .32 .28 .24 .15 --
AT YEAR-END
Total investments and cash.......... $342,894(3) $344,087(3) $256,036 $254,040 $192,955
Total assets(2)..................... 466,232(3) 458,617(3) 366,728 348,692 290,889
Long-term debt...................... 69,000 69,000 10,000 10,000 --
Shareholders' equity................ 121,207(3) 130,773(3) 103,893 109,666 104,126
Equity per share outstanding........ 17.19(3) 18.56(3) 16.42 16.07 15.05
</TABLE>
---------------
(1) Includes a nonrecurring addition of $868,000 or $.13 per share, as the
result of the Company's adoption, effective January 1, 1992, of SFAS No.
109, "Accounting for Income Taxes."
(2) 1992 and all prior balances have been reclassified for comparative purposes
to reflect the provisions of SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
(3) Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company is engaged primarily in property and casualty reinsurance
underwriting through its wholly-owned subsidiary, Re Cap.
MERGER AGREEMENT
On January 11, 1995, the Company entered into the Merger Agreement with ZRC
and ZRC Merger-Sub.
The Merger Agreement provides that, at the Effective Time of the Merger,
each share of the Company's Common Stock, outstanding immediately prior to the
Effective Time (which may include a certain number of restricted shares to be
determined) will, without any action on the part of the holder thereof, be
converted into the right to receive $18.50 in cash, without interest. ZRC will
assume all obligations under the Company's Convertible Debentures due August 1,
2000 ($69 million outstanding aggregate principal amount as of January 11, 1995)
that are not converted into Common Stock prior to the closing of the Merger.
19
<PAGE> 23
As more fully described in the Merger Agreement, upon the occurrence of
certain specified events, including the occurrence of certain Third Party
Business Combinations, the Company will pay ZRC a fee of $4,500,000 plus an
amount equal to the costs and expenses incurred by ZRC in connection with the
Merger Agreement, not exceeding $1,000,000.
Pursuant to the Option and Voting Agreement, between Deere Insurance and
ZRC, Deere Insurance has (i) granted ZRC the Option to acquire under the
circumstances described in the Option and Voting Agreement, at $18.50 per share,
the Deere Insurance Shares, and (ii) agreed to vote the Deere Insurance Shares
in favor of the approval of the Merger and any other related transactions or
matters presented in connection with the Merger and against any other proposal
which provides for any merger, sale of assets or other Third Party Business
Combination, between the Company (or any subsidiary of the Company) and any
person or entity, or which is otherwise inconsistent with the Merger or the
Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares. See "Relationship with Deere Insurance -- Control of the
Company."
The Merger Agreement contains various agreements on the part of the Company
that restrict its abilities to operate its business prior to the Effective Time.
If the Merger is consummated as planned, the board of directors of the Company
will consist of the directors of ZRC Merger-Sub immediately prior to the
Effective Time.
The closing of the Merger is subject to approval by the Company's
stockholders, certain state insurance regulatory approvals and certain other
customary conditions and approvals. The description contained herein of the
Merger and related agreements is qualified in its entirety by reference to the
Merger Agreement, the Option and Voting Agreement and the Company's Form 8-K,
dated as of January 11, 1995 and filed on January 19, 1995.
OVERVIEW
The operating results of the Property and Casualty Industry (the "P&C
Industry"), including the Company, are subject to significant fluctuations due
to numerous factors including premium rate competition, catastrophic and
unpredictable events (including man-made and natural disasters), general
economic and social conditions, interest rates and changes in tax laws and
regulatory developments. The P&C Industry has been characterized by cycles in
which a period of improved profitability has led to increased capacity and more
competition, which has resulted in diminished profitability. This part of the
cycle has been followed by a reduction in capacity and the partial or complete
withdrawal or the insolvency of a number of insurers and reinsurers, leading to
decreased competition and improved rates and profitability.
The industry experienced an extended down cycle from 1979 to the end of
1984. Underwriting losses in that period grew significantly as a result of
severe price competition and an increase in the frequency and severity of
reported losses. The industry was affected by expanding theories of tort and
insurer liability and by growing exposure to long-tail risks, such as asbestos
and other pollution claims, which were not adequately taken into account in the
pricing, terms and conditions of insurance and reinsurance being written. At the
same time, premium rates declined as competition in the industry increased.
These conditions led to a decline in the surplus of insurers and reinsurers and
a number of insurance and reinsurance companies became insolvent or voluntarily
withdrew from the market. From 1985 to 1987, the demand for reinsurance
increased and reinsurance pricing and underwriting results improved. This
attracted increased capacity into the industry as insurers and reinsurers
strengthened their surplus through capital infusions and retained earnings. From
mid-1987 and continuing through 1994, the P&C Industry experienced increased
competition and reduced premium rates. This competition has been much more
pronounced in certain areas than in others.
20
<PAGE> 24
Competition has been most severe in the areas of commercial property insurance
and excess limits of casualty insurance for larger insureds. In addition,
cedants have raised their retentions, resulting in a reduction in demand for
reinsurance and concomitant overcapacity in the reinsurance industry.
The catastrophe losses in the property insurance market in 1992 and again
in 1994 negatively affected the surplus of many property insurers and
reinsurers, most of which also write casualty business. At the same time, cash
flows are under continuing pressure from both large catastrophe loss payments
and continued low rates of premium growth caused by the persistence of
competitive market conditions. Additionally, the historically low interest rates
that prevailed during 1993 have had a negative impact on the P&C Industry's
investment income. Despite these factors, competitive market conditions prevail
in the P&C industry.
UNDERWRITING RESULTS
The underwriting results of a property and casualty insurer or reinsurer
typically are evaluated by reference to its loss ratio, expense ratio and
combined ratio, determined on the basis of statutory accounting practices
("SAP"). Underwriting profit is only one element of overall profitability, which
also includes investment results, interest expense and the effects of income
taxation. Accordingly, the combined ratio alone should not be used to measure
overall profitability.
The historical changes in Re Cap's losses and LAE principally result from
changes in its premiums earned, the mix of business between pro rata and excess
of loss reinsurance and the profitability of the treaties written. During the
period 1992-1994, the casualty lines of business reinsured by Re Cap did not
change significantly, other than an increase in auto liability business. During
the same three year period the composition of the property lines of business
reinsured by the Company changed dramatically. Auto physical damage premiums
increased 239% while premiums for the mechanical breakdown and commercial per
risk lines decreased 71% and 46%, respectively. In the aggregate, however,
property premiums as a percentage of net premiums written, increased only
marginally from 15% to 17%.
Re Cap writes a significant amount of business with sliding scale
commission arrangements. Lower loss ratios (subject to minimums) will thus
result in higher commissions, while higher loss ratios (subject to maximums)
will result in lower commissions. For this reason, the Company focuses on the
combined ratios rather than comparing loss and expense ratios from different
years. Based on this important benchmark, Re Cap equaled or outperformed the
reinsurance industry in each of the eight full years of its existence.
Management attributes these favorable comparisons to the adherence to strict
underwriting standards and overhead cost controls.
The following table sets forth, for the periods indicated, Re Cap's SAP
combined ratios and the components thereof, and the combined ratios for the
reinsurance industry (based on the Company's analysis of Reinsurance Association
of America data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss Ratio..................... 73.3% 74.7% 77.8% 61.1% 61.6% 68.8% 67.4% 64.2%
Underwriting Expense Ratio:
Commission and Brokerage..... 25.1 25.5 28.8 35.6 30.9 24.3 24.3 25.6
Other Operating Expenses..... 6.0 6.7 6.6 5.3 6.5 6.2 6.7 9.0
----- ----- ----- ----- ----- ----- ----- -----
Total Expense Ratio....... 31.1 32.2 35.4 40.9 37.4 30.5 31.0 34.6
----- ----- ----- ----- ----- ----- ----- -----
Combined Ratio................. 104.4% 106.9% 113.2% 102.0% 99.0% 99.3% 98.4% 98.8%
===== ===== ===== ===== ===== ===== ===== =====
Reinsurance Industry Combined
Ratio........................ 107.1%* 106.9% 119.0% 107.1% 106.1% 106.9% 102.7% 102.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
---------------
* As of September 30, 1994.
21
<PAGE> 25
COMPARISON OF FISCAL YEARS 1994-1992
The Company's 1994 net income of $7,907,000 decreased by 1.6% from net
income of $8,037,000 for the year ended December 31, 1993. Operating income,
excluding after-tax realized investment gains and the expenses associated with a
possible merger or other corporate transactions in 1994, increased by 18.9% from
$7,579,000 in 1993 to $9,015,000 for the year ended December 31, 1994. Primary
and fully diluted earnings per share for the year ended December 31, 1994 were
$1.14 and $.95, respectively, versus $1.18 and $1.06, respectively for the year
ended December 31, 1993. The improvement in the Company's 1994 operating results
principally reflects a significant decrease in property losses during the year.
Results for 1993 were adversely impacted by the unfavorable runoff of quota
share commercial property treaties cancelled prior to 1993. Both net income of
$2,309,000 and operating income of $1,215,000, for the year ended December 31,
1992, were substantially reduced by property catastrophe losses and a
commutation charge.
REVENUES
Net premiums written and net premiums earned for the year ended December
31, 1994 of $132,421,000 and $129,398,000 increased 14.3% and 14.8%,
respectively from $115,814,000 and $112,681,000 for the year ended December 31,
1993. The increase in net premiums written in 1994 resulted from a combination
of new business and increased participations on existing treaties. The growth in
premium volume was concentrated in the auto liability and auto physical damage
lines of business. The 33.9% growth in the auto liability premiums was primarily
attributable to an increase in the cessions from Re Cap's two largest cedants.
Similarly, the increase of $4,883,000 or 57% in auto physical damage premiums
relates almost entirely to an increase in Re Cap's share of premiums assumed
from its second largest client. These increases were partially offset by a 71%
decrease in mechanical breakdown premiums as a result of an adjustment to a
retrocessional program.
In 1993, net premiums written of $115,814,000 and net premiums earned of
$112,681,000 declined 4.5% and 4.9%, respectively, when compared to 1992. These
decreases were almost entirely attributable to the cancellation or non-renewal
in 1992 of a majority of the Company's commercial property per risk treaties.
Due to the inadequate pricing which prevailed in this segment of the market, the
Company reduced its pro rata commercial property writings by 71%, from
$7,621,000 in 1992 to $2,235,000 in 1993. Conversely, the Company increased its
writings of auto physical damage business during 1993 by approximately
$4,600,000. This increase was principally attributable to market opportunities
presented in the wake of Hurricane Andrew. Also, during 1993, auto liability
premiums declined 12.6%, primarily as a result of the nonrenewal of two
commercial trucking treaties. The following table summarizes the Company's net
premiums written by line of business for the years 1992-1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Casualty:
Auto Liability....................................... $ 52,265 $ 39,030 $ 44,685
General Liability.................................... 38,533 36,280 38,262
Professional Liability............................... 16,780 19,293 17,836
Workers Compensation................................. 1,077 986 1,192
Medical Malpractice.................................. 705 1,516 1,363
-------- -------- --------
Total Casualty............................... 109,360 97,105 103,338
-------- -------- --------
Property:
Auto Physical Damage................................. 13,450 8,567 3,966
Commercial Per Risk.................................. 4,133 2,235 7,621
Aviation, Marine and Other........................... 2,269 1,670 48
Mechanical Breakdown................................. 1,609 5,336 5,531
Catastrophe Covers................................... 1,600 901 812
-------- -------- --------
Total Property............................... 23,061 18,709 17,978
-------- -------- --------
Total All Lines........................................ $132,421 $115,814 $121,316
======== ======== ========
</TABLE>
22
<PAGE> 26
CLAIMS AND CLAIM EXPENSES
Re Cap's statutory combined ratio improved by 2.5 points to 104.4% in 1994,
reflecting a reduction in property losses between 1993 and 1994. The impact of
property catastrophe losses was comparable in both years. In 1994, the
Northridge earthquake increased the combined ratio by 1.0 point and reduced
fully diluted earnings by $.08 per share. The World Trade Center bombing and
Midwest floods increased the 1993 combined ratio by 0.9 points and also
decreased fully diluted earnings by $.08 per share. In 1992, Hurricanes Andrew
and Iniki and the Los Angeles riots added 5.9 points to the combined ratio and
reduced earnings per share by $.65.
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Combined ratio.............................................. 104.4% 106.9% 113.2%
Property catastrophe losses................................. (1.0) (0.9) (5.9)
----- ----- -----
Catastrophe adjusted combined ratio......................... 103.4% 106.0% 107.3%
===== ===== =====
</TABLE>
Excluding catastrophe losses, the Company's combined ratio in 1994 and 1993
exceeded its average of 102.7% for its first six full years of operation
(1987-1992) by 0.7 and 3.3 points, respectively. In 1994, the strengthening of
certain casualty loss reserves involving the 1993 and 1994 underwriting years
increased the combined ratio by 1.1 points. This strengthening was confined to a
limited number of treaties and reduced net income by $.14 and $.09 per share on
a primary and fully diluted basis, respectively.
The 3.3 point difference in the combined ratio for 1993 was the result of
property claim activity related to the runoff of quota share treaties cancelled
prior to 1993. Results from these treaties, excluding catastrophe losses,
increased the 1993 combined ratio by 4.3 points and reduced primary and fully
diluted earnings per share by $.42 and $.33, respectively.
AMORTIZATION OF DEFERRED ACQUISITION COSTS
The Company's amortization of its deferred acquisition costs increased by
16.9% in 1994 from $28,455,000 to $33,272,000. In 1993, this expense decreased
by 17.8% from $34,624,000 in 1992. This expense represents that portion of the
costs of obtaining reinsurance business, principally ceding and brokerage
commissions, related to the net premiums earned for the year. The 16.9% increase
in 1994 is a direct function of the corresponding 14.8% increase in earned
premiums. Likewise, the 17.8% decrease in 1993 is a result of a reduction in the
Company's net premiums earned as well as a modest shift in the composition of
its business to a greater percentage of excess of loss treaties. Excess of loss
treaties typically do not provide for ceding commission, which are the largest
component of deferred acquisition costs.
INTEREST EXPENSE
Interest expense increased in 1994 to $3,795,000 from $2,348,000 in 1993.
This increase resulted from the inclusion of a full year's interest expense for
the $69,000,000 of Convertible Debentures issued on July 27, 1993. From 1992 to
1993, interest expense increased by $985,000 from $1,363,000 primarily as a
result of the issuance of the aforementioned convertible debentures.
OTHER OPERATING EXPENSES
Other operating expenses which include compensation, employee benefits and
overhead, increased by $1,607,000 or 16.8% for the year ended December 31, 1994.
Included within this increase is $1,134,000 of non-recurring expenses,
principally legal and financial advisory costs, associated with the
aforementioned pending acquisition by ZRC. The balance of the change relates to
normal increases in salaries, pension and travel expenses as well as a full
year's amortization of the costs incurred in 1993 in connection with the
convertible debenture offering. The 2.4% decrease in other operating expenses
from 1992 to 1993 was a result of a reduction in pension expense partially
offset by increases in the Company's state and franchise taxes.
23
<PAGE> 27
INVESTMENT INCOME
Net investment income, excluding net realized gains, increased 14.6% in
1994, from $18,934,000 to $21,696,000. In 1993, net investment income increased
9.6% over the 1992 level of $17,270,000. These increases were the result of
growth in invested assets attributable to cash flow from operations and the
proceeds of the 1993 offering of $69,000,000 in convertible debentures.
Exclusive of investment income allocable to the proceeds of this offering, the
Company's net investment income for the year ended December 31, 1994 increased
by 5.8% over the comparable 1993 amount. The pre-tax yield on investments
declined in 1994 to 6.6% from 6.7% in 1993 and 7.0% in 1992. On an after-tax
basis, the investment yield declined to 5.2% in 1994 from 5.4% in 1993 and 5.7%
in 1992. This downward trend in yields is a direct result of the decline in
interest rates that occurred during 1993 concurrent with the Company's purchase
of more than $105,000,000 in fixed income securities, $52,000,000 of which were
purchased from the proceeds of the Company's convertible debenture offering.
While interest rates increased progressively through 1994, such increases have
not yet offset the impact of the 1993 purchases.
Net realized investment gains for 1994 were $39,000 versus $694,000 and
$342,000 in 1993 and 1992, respectively. The 1993 gains were the result of the
Company selectively selling certain taxable securities and replacing them with
tax-exempt securities in order to increase after-tax yield.
FEDERAL INCOME TAXES
For the year ended December 31, 1994, the Company recorded a Federal income
tax provision of $195,000 versus tax benefits of $230,000 and $3,490,000 in 1993
and 1992, respectively. As a result of Re Cap's underwriting losses in each of
the three years, the Company's pre-tax results include a proportionally higher
component of tax-exempt income, thereby reducing the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had total shareholders' equity of
$121,207,000. During 1994, shareholders' equity decreased by $9,566,000 from
$130,773,000 at December 31, 1993. This decrease resulted principally from
unrealized depreciation on the Company's fixed income portfolio, net of tax, of
$15,564,000 offset by net income less cash dividends declared of $5,651,000.
Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." In
connection therewith, the Company classified its entire portfolio of fixed
income securities as available for sale. In accordance with the new standard,
these securities are being carried at their market value. The unrealized
depreciation on these bonds, net of tax, of $5,103,000 as of December 31, 1994
has been included as a component of shareholders' equity.
On July 27, 1993, the Company successfully completed an offering of
$69,000,000 of the Convertible Debentures. The Convertible Debentures are due on
August 1, 2000, and are convertible into common stock of Re Capital at a
conversion price of $17.1875 per share. The Company contributed $45,250,000 of
the net proceeds of the offering of the Convertible Debentures to the surplus of
Re Cap. In addition, $15,000,000 of the net proceeds was used to repay the
Company's revolving bank loan, which was then terminated. The balance of the
proceeds of approximately $7,000,000 was retained for general corporate
purposes. Management believes that the Company has sufficient liquidity to meet
its anticipated reinsurance obligations and operating expenses, including debt
financing costs and principal repayments.
On June 1, 1993, the Company announced the suspension of its share
repurchase program. This program, which had been ongoing since October 20, 1987,
resulted in the aggregate repurchase of 2,378,888 shares at an average price of
$11.74. At the time the share repurchase program was suspended, there remained
approximately $2,500,000 authorized for future repurchases.
Cash flow from operations totaled $26,824,000 in 1994, compared to
$22,978,000 in 1993. Cash flow in 1994 was increased by approximately
$10,000,000 as the result of the restructuring of a cedant trust agreement in
the second quarter. The Company anticipates that its cash flow from operations
in 1995 will continue to be sufficient to fulfill its operational and financing
needs.
24
<PAGE> 28
At December 31, 1994, the Company had investments and cash of $342,894,000,
a decrease of $1,193,000 or .3% from 1993. This decrease was due principally to
cash flow from operations of $26,824,000 net of unrealized depreciation in the
fixed income portfolio of $23,583,000 and cash dividends paid to shareholders of
$2,184,000.
In 1993, the Company's invested assets and cash increased by $88,051,000 or
34.4% from the 1992 level. This increase was due to cash flow from operations
and the proceeds of the Company's offering of the Convertible Debentures net of
the repayment of its bank loan. Also included in this increase was an adjustment
to reflect the implementation of SFAS No. 115. In 1993, the Company sold
$12,789,000 of fixed income securities. These sales, from the Company's then
held-for-sale portfolio, were made to replace certain taxable securities with
tax-exempt securities.
The Company continues to maintain a disciplined investment policy whereby
the investment portfolio is invested exclusively in fixed income securities
rated "A" or better. This policy is an outgrowth of the Company's investment
strategy, which seeks to maximize after-tax investment income through a
high-quality, diversified taxable bond and tax-exempt municipal bond portfolio,
while maintaining an adequate level of liquidity. Consistent with this policy,
the Company has elected to manage its portfolio to maintain yield rather than to
pursue a strategy of realizing investment gains. The Company seeks to achieve an
appropriate matching of its investments with its reinsurance liabilities. The
average effective maturity of the investment portfolio was 3.3 years at December
31, 1994 versus 3.9 years at December 31, 1993.
As a holding company, the Company's principal sources of cash are cash
dividends and tax payments from Re Cap, borrowings and the issuance of equity or
debt securities. Generally, dividends that can be paid by Re Cap without the
prior approval of the New Jersey Insurance Commissioner are limited for any
twelve month period to the lesser of 10% of surplus or net investment income. At
December 31, 1994, the surplus of Re Cap was $166,596,000 and net investment
income for the year then ended was $21,514,000. Accordingly, dividends for 1994
not requiring prior approval of the New Jersey Insurance Commissioner are
limited to approximately $16,660,000. To date, Re Cap has never paid a dividend
to the Company. The Company and Re Cap are parties to a tax sharing agreement,
which requires Re Cap to compute its hypothetical tax liability on a separate
company basis. The amount of such liability, which has historically exceeded the
amount of the Company's actual tax liability, is then remitted to the Company.
For the years ended December 31, 1994 and 1993, the excess of such payments over
actual payments by the Company was approximately $1,380,000 and $1,440,000,
respectively.
ACCOUNTING STANDARDS AND REGULATION
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Post Employment Benefits." SFAS No. 112, which is effective for fiscal years
beginning after December 15, 1993, establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. The Company's adoption of SFAS No. 112, effective January
1, 1994, did not have a material impact on its financial statements.
In June 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was effective
for fiscal years beginning after December 15, 1993, requires that securities be
classified in one of three categories. Debt securities that the Company has the
intent and ability to hold to maturity are to be classified as held to maturity
and reported at amortized cost. Debt and equity securities that are held for
resale are to be classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity
securities not so classified would be considered available for sale and reported
at fair value with unrealized gains and losses, net of tax, included in
shareholders' equity. As previously noted, the Company elected to adopt this new
standard effective December 31, 1993. In connection therewith, the Company
classified all of its fixed income portfolio as available for sale and recorded
such securities at their market value. The Company's classification of its
portfolio as available for sale provides the Company with the flexibility to
adjust its portfolio as needed in response to operating, tax and regulatory
conditions.
25
<PAGE> 29
In December 1993, the National Association of Insurance Commissioners (the
"NAIC") adopted final minimum capitalization requirements for property-casualty
reinsurance companies known as the Risk-Based Capital model. The NAIC's stated
objective in developing these risk-based capital standards is to improve
solvency monitoring. Formal implementation of these new minimum capitalization
requirements will occur concurrent with the filing of the 1994 annual statement.
Management believes that its capital and surplus are adequate to meet the
risk-based capital requirements contained in the NAIC's model.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto and the
Schedules on pages F-1 through F-18 and S-1 through S-4 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
See the information under captions "Election of Directors" and "Directors
and Executive Officers" in the Registrant's definitive proxy statement (the
"Proxy Statement") for its 1995 Annual Meeting of Shareholders, which is hereby
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the caption "Compensation of Directors and
Executive Officers" in the Proxy Statement, which is hereby incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the caption "Security Ownership of Principal
Stockholders" in the Registrant's special proxy statement (the "Special Proxy
Statement") for its Special Meeting of Stockholders to be held to vote on the
Merger, which is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption "Interests of Certain Persons in the
Merger" in the Special Proxy Statement, and information under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
are hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND SCHEDULES. The Financial Statements and
schedules listed in the accompanying Index to Financial Statements and Schedules
at page F-1 are filed as part of this Annual Report on Form 10-K, and are
included in Item 8.
EXHIBITS. The exhibits listed in the accompanying Index to Exhibits at
page E-1 are filed as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K. A Form 8-K was filed on January 19, 1995,
announcing the Company's execution of the Merger Agreement.
26
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut on the 14th day February, 1995.
RE CAPITAL CORPORATION
(Registrant)
By: /s/ JAMES E. ROBERTS
------------------------------------
James E. Roberts, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
/s/ JAMES E. ROBERTS President, Chief Executive Officer February 14, 1995
----------------------------------- and Director (Principal Executive
James E. Roberts Officer)
/s/ R. RICHARD MUELLER Vice President, Chief Financial February 14, 1995
----------------------------------- Officer and Treasurer (Principal
R. Richard Mueller Accounting and Financial Officer)
/s/ DENNIS E. HOFFMANN Chairman and Director February 14, 1995
-----------------------------------
Dennis E. Hoffmann
/s/ DONALD E. CHISHOLM Vice Chairman and Director February 14, 1995
-----------------------------------
Donald E. Chisholm
/s/ GEORGE G. D'AMATO, JR. Director February 14, 1995
-----------------------------------
George G. D'Amato, Jr.
/s/ HAROLD R. HISER, JR. Director February 14, 1995
-----------------------------------
Harold R. Hiser, Jr.
/s/ JEAN R. PERRETTE Director February 14, 1995
-----------------------------------
Jean R. Perrette
/s/ MAURICE W. SLAYTON Director February 14, 1995
-----------------------------------
Maurice W. Slayton
/s/ RICHARD R. WEST Director February 14, 1995
-----------------------------------
Richard R. West
</TABLE>
27
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut on the 14th day February, 1995.
RE CAPITAL CORPORATION
(Registrant)
By:
-----------------------------------
James E. Roberts, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
President, Chief Executive Officer February 14, 1995
----------------------------------- and Director (Principal Executive
James E. Roberts Officer)
Vice President, Chief Financial February 14, 1995
----------------------------------- Officer and Treasurer (Principal
R. Richard Mueller Accounting and Financial Officer)
----------------------------------- Chairman and Director February 14, 1995
Dennis E. Hoffmann
----------------------------------- Vice Chairman and Director February 14, 1995
Donald E. Chisholm
----------------------------------- Director February 14, 1995
George G. D'Amato, Jr.
----------------------------------- Director February 14, 1995
Harold R. Hiser, Jr.
----------------------------------- Director February 14, 1995
Jean R. Perrette
----------------------------------- Director February 14, 1995
Maurice W. Slayton
Director February 14, 1995
-----------------------------------
Richard R. West
</TABLE>
28
<PAGE> 32
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
The following report and financial statements and schedules of Re Capital
Corporation and subsidiaries are included in response to Item 14(a).
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
REPORT
Report of independent auditors on the consolidated financial statements and
schedules...................................................................... F-2
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 31, 1994 and 1993..................... F-3
Consolidated statements of income for the years ended December 31, 1994, 1993
and 1992....................................................................... F-4
Consolidated statements of shareholders' equity for the years ended December 31,
1994, 1993 and 1992........................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 1994, 1993
and 1992....................................................................... F-6
Notes to consolidated financial statements....................................... F-7 - F-18
SCHEDULES
Schedule II -- Condensed Financial Information of Registrant for the years ended
December 31, 1994, 1993 and 1992............................................... S-1 - S-3
Schedule VI -- Supplemental information covering Property/Casualty Insurance
Operations for the years ended December 31, 1994, 1993 and 1992................ S-4
</TABLE>
------------------------------------------
Schedules other than those listed above have been omitted
because the required information is inapplicable or the
information is presented in the financial statements or related
notes.
F-1
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Re Capital Corporation
We have audited the accompanying consolidated balance sheets of Re Capital
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Re Capital Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company made certain accounting changes in 1993 and 1992.
ERNST & YOUNG LLP
New York, New York
February 8, 1995
F-2
<PAGE> 34
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value
(amortized cost: 1994 -- $344,428 and 1993 -- $318,868)........... $336,696 $334,719
Short-term........................................................... 5,137 8,676
-------- --------
Total Investments............................................ 341,833 343,395
Cash................................................................... 1,061 692
Accrued investment income.............................................. 6,612 6,280
Premiums receivable.................................................... 64,261 57,227
Reinsurance balances recoverable....................................... 14,829 12,557
Deferred acquisition costs............................................. 13,376 13,389
Funds held by ceding companies......................................... 1,602 11,947
Other assets........................................................... 22,658 13,130
-------- --------
Total Assets................................................. $466,232 $458,617
======== ========
LIABILITIES
Claims and claim expenses.............................................. $210,397 $200,638
Unearned premiums...................................................... 52,221 46,487
Convertible debentures................................................. 69,000 69,000
Other liabilities...................................................... 13,407 11,719
-------- --------
Total Liabilities............................................ 345,025 327,844
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized: 1,000,000 shares; none
issued...............................................................
Common stock, $.10 par value; authorized: 50,000,000 shares;
issued 9,540,174 shares (1994) and 9,536,159 shares (1993)........... 954 954
Additional paid-in capital............................................. 93,242 93,194
Unrealized (depreciation) appreciation on fixed maturities
available for sale, net of tax....................................... (5,103) 10,461
Retained earnings...................................................... 61,541 55,890
Unearned compensation -- restricted common stock....................... (1,333) (1,632)
Treasury stock, at cost: 2,490,284 shares.............................. (28,094) (28,094)
-------- --------
Total Shareholders' Equity................................... 121,207 130,773
-------- --------
Total Liabilities and Shareholders' Equity................... $466,232 $458,617
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 35
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Premiums written........................................... $132,421 $115,814 $121,316
Increase in unearned premiums.............................. 3,023 3,133 2,873
-------- -------- --------
Premiums earned............................................ 129,398 112,681 118,443
Net investment income...................................... 21,696 18,934 17,270
Net realized investment gains.............................. 39 694 342
-------- -------- --------
Total Revenues........................................... 151,133 132,309 136,055
EXPENSES
Claims and claim expenses.................................. 94,795 84,137 92,319
Amortization of deferred acquisition costs................. 33,272 28,455 34,624
Other operating expenses................................... 11,169 9,562 9,798
Interest expense........................................... 3,795 2,348 1,363
-------- -------- --------
Total Expenses........................................... 143,031 124,502 138,104
Income (Loss) before Federal income taxes.................. 8,102 7,807 (2,049)
Federal income tax expense (benefit)....................... 195 (230) (3,490)
-------- -------- --------
Income before cumulative effect of accounting change..... 7,907 8,037 1,441
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 868
-------- -------- --------
Net Income............................................... $ 7,907 $ 8,037 $ 2,309
======== ======== ========
PER SHARE DATA
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding........................ 6,959 6,834 6,533
======== ======== ========
Primary earnings per share before cumulative effect of
accounting change........................................ $ 1.14 $ 1.18 $ 0.22
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 0.13
-------- -------- --------
Primary earnings per share................................. $ 1.14 $ 1.18 $ 0.35
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE:
(assuming conversion of convertible debentures)
Weighted average shares outstanding........................ 10,974 8,792 7,074
======== ======== ========
Fully diluted earnings per share before cumulative effect
of accounting change..................................... $ .95 $ 1.06 $ 0.22
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 0.13
-------- -------- --------
Fully diluted earnings per share........................... $ .95 $ 1.06 $ 0.35
======== ======== ========
Cash dividends declared per share.......................... $ .32 $ 0.28 $ 0.24
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 36
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
(DEPRECIATION)
APPRECIATION
ON FIXED UNEARNED
SHARES OF MATURITIES COMPENSATION --
COMMON STOCK ADDITIONAL AVAILABLE RESTRICTED COMMON TOTAL
---------------- COMMON PAID-IN FOR SALE, RETAINED COMMON STOCK IN SHAREHOLDERS'
ISSUED TREASURY STOCK CAPITAL NET OF TAX EARNINGS STOCK TREASURY EQUITY
----- -------- ------ ---------- ----------------- -------- -------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1992.......... 8,817 1,990 $ 882 $ 81,310 $ -- $48,981 $ -- $(21,507) $ 109,666
Exercise of
common stock
options....... 2 2
Treasury shares
acquired...... 499 (6,569) (6,569)
Dividends to
shareholders... (1,515) (1,515)
Net Income...... 2,309 2,309
----- ------- ----- --------- -------- ------- ------- -------- -----------
Balance at
December 31,
1992.......... 8,817 2,489 882 81,312 -- 49,775 -- (28,076) 103,893
Exercise of
common stock
options....... 8 1 93 94
Treasury shares
acquired...... 1 (18) (18)
Dividends to
shareholders... (1,922) (1,922)
Exercise of
convertible
note
payable....... 588 59 9,941 10,000
Issuance of
restricted
common
stock --
employees..... 123 12 1,848 (1,860) --
Restricted stock
compensation
expense --
employees..... 228 228
Net Income...... 8,037 8,037
Cumulative
effect, net of
tax, of a
change in
accounting for
investments in
debt
securities.... 10,461 10,461
----- ------- ----- --------- -------- ------- ------- -------- -----------
Balance at
December 31,
1993.......... 9,536 2,490 954 93,194 10,461 55,890 (1,632) (28,094) 130,773
Exercise of
common stock
options....... 4 4
Dividends to
shareholders... (2,256) (2,256)
Issuance of
restricted
common
stock --
directors..... 4 44 (44) --
Restricted stock
compensation
expense --
directors..... 33 33
Restricted stock
compensation
expense --
employees..... 310 310
Net Income...... 7,907 7,907
Decrease in
unrealized
appreciation
on fixed
maturities
available for
sale, net of
tax........... (15,564) (15,564)
----- ------- ----- --------- -------- ------- ------- -------- ---------
Balance at
December 31,
1994.......... 9,540 2,490 $ 954 $ 93,242 $ (5,103) $61,541 $ (1,333) $(28,094) $ 121,207
===== ======= ===== ========= ========= ======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 37
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 7,907 $ 8,037 $ 2,309
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in claim liabilities.......................... 10,198 19,767 8,592
Increase in unearned premiums.......................... 3,023 3,133 2,873
Decrease (Increase) in deferred acquisition costs...... 13 (1,162) (306)
Increase in reinsurance balances, net.................. (6,591) (8,655) (7,190)
Decrease (Increase) in funds held, net................. 10,311 (462) (1,049)
(Increase) Decrease in accrued investment income....... (332) (963) 1
Amortization of net investment premium................. 2,192 1,806 1,713
Net realized investment gains.......................... (39) (694) (342)
Change in deferred tax asset, net...................... (1,647) (2,243) (4,946)
Change in other assets and liabilities, net............ 1,789 4,414 408
-------- -------- -------
Net Cash Provided by Operating Activities................. 26,824 22,978 2,063
INVESTING ACTIVITIES
Maturities or calls of fixed maturities..................... 22,446 16,622 19,157
Sales of fixed maturities................................... -- 11,380 5,878
Purchases of fixed maturities............................... (50,158) (105,280) (32,901)
Net sales of short-term investments......................... 3,539 2,657 5,297
Net additions to property and equipment..................... (102) (364) (2)
-------- -------- -------
Net Cash Used in Investing Activities..................... (24,275) (74,985) (2,571)
FINANCING ACTIVITIES
Cash dividends to shareholders.............................. (2,184) (1,811) (1,477)
Net proceeds from issuance of convertible debentures........ -- 67,282 --
Acquisition of treasury stock............................... -- (18) (6,569)
Short-term debt (repayments) borrowings, net................ -- (14,850) 9,350
Exercise of common stock options............................ 4 94 2
-------- -------- -------
Net Cash (Used in) Provided by Financing Activities....... (2,180) 50,697 1,306
-------- -------- -------
INCREASE (DECREASE) IN CASH................................. 369 (1,310) 798
Cash at Beginning of Year................................... 692 2,002 1,204
-------- -------- -------
Cash at End of Year....................................... $ 1,061 $ 692 $ 2,002
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 38
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which differ from statutory accounting
practices prescribed by regulatory authorities for the Company's reinsurance
subsidiary, Re Capital Reinsurance Corporation ("Re Cap"). Certain accounts have
been reclassified in the 1993 and 1992 financial statements to conform to the
1994 presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Re Capital
Corporation (the "Company") and its wholly-owned subsidiaries, principally Re
Cap. All material intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS
Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement requires
that securities be classified in one of three categories: held-to-maturity,
available-for-sale and/or trading. The Company has categorized all of its fixed
income portfolio as available-for-sale and recorded such securities at their
market value as determined by quoted market prices. Unrealized appreciation
(depreciation) on these securities is recorded as a separate component of
shareholders' equity, net of tax.
Investment income is recognized when earned. Realized gains and losses on
sales of investments are recognized in net income on the specific identification
basis.
REVENUE RECOGNITION
Premiums are earned over the terms of the reinsurance contracts. Unearned
premiums are computed by pro rata methods based on statistical data or reports
received from ceding companies. Premium and commission adjustments are accrued
on an estimated basis throughout the policy terms.
ACQUISITION COSTS
Acquisition costs, consisting of commission and brokerage expenses, are
deferred and amortized over the period in which related premiums are earned.
Deferred acquisition costs are limited to their estimated realizable value after
consideration of anticipated claims and claim expenses and anticipated
investment income.
LIABILITIES FOR CLAIMS AND CLAIM EXPENSES
The liabilities for claims and claim expenses are based on reports and
individual case estimates received from ceding companies. An estimate is
provided for claims and claim expenses incurred but not reported on the basis of
the experience of Re Cap, the reinsurance industry, and of the ceding companies
on the business reinsured by Re Cap. Although considerable variability is
inherent in such estimates, management believes that the liabilities for unpaid
claims and claim expenses are adequate. These estimates are regularly reviewed
and as experience develops and new information becomes known, the estimated
liabilities are adjusted as necessary. Such adjustments, if any, are reflected
in results of operations in the period in which they become known.
F-7
<PAGE> 39
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Federal income tax provisions are based on income reported for financial
statement purposes. Deferred Federal income taxes are recognized using the
liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Effective January 1, 1992, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes." The cumulative effect of adopting this new
standard as of January 1, 1992, was to increase net income for the year ended
December 31, 1992 by $868,000, or $.13 per share.
EARNINGS PER SHARE OF COMMON STOCK
Primary earnings per share of common stock are based on the weighted
average number of common shares and common stock equivalents outstanding
computed by the "treasury stock" method. Fully diluted earnings per share
assumes conversion of dilutive convertible debentures and the assumed exercise
of all common stock equivalents.
REINSURANCE
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." This statement requires the Company to report its
statement of financial position gross of the effects of its retrocessional
program. Additionally, this standard establishes criteria for determining what
constitutes a reinsurance contract for accounting purposes. SFAS No. 113 did not
have a material impact on the Company's results of operations.
On July 22, 1993, the FASB's Emerging Issues Task Force (EITF) issued
consensus 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Companies," which established new accounting guidelines for
multi-year retrospectively rated reinsurance contracts. These guidelines did not
have an impact on the Company's financial statements.
NOTE 2 INVESTMENTS
Major categories of net investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Fixed maturities...................................... $21,788 $18,757 $17,688
Short-term investments................................ 556 772 781
------- ------- -------
22,344 19,529 18,469
Net investment expenses............................... (648) (595) (1,199)*
------- ------- -------
Net investment income............................... $21,696 $18,934 $17,270
======= ======= =======
</TABLE>
---------------
* Includes $575,000 of interest expense related to a commutation payment made by
Re Cap.
F-8
<PAGE> 40
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
Realized and unrealized investment gains (losses) were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
-------- ------ -----
<S> <C> <C> <C>
Net realized gains on calls/sales of fixed maturities........... $ 39 $ 694 $ 342
Tax expense..................................................... (13) (236) (116)
-------- ------ -----
Net realized investment gains, net of tax..................... $ 26 $ 458 $ 226
======== ====== =====
Change in unrealized appreciation (depreciation)
of fixed maturities........................................ $(23,583) $2,567 $(230)*
======== ====== =====
</TABLE>
---------------
* Includes $617,000 of unrealized appreciation on securities classified as held
for sale and recorded at the lower of amortized cost or market value.
The amortized cost and estimated market value of debt securities at
December 31, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Municipal securities............................ $159,682 $ 2,751 $ (1,181) $161,252
Corporate securities............................ 105,669 325 (4,800) 101,194
Mortgage- and asset-backed securities........... 51,437 8 (3,280) 48,165
U.S. Treasury and government agency
securities.................................... 27,640 -- (1,555) 26,085
-------- ------- -------- --------
December 31, 1994............................. $344,428 $ 3,084 $(10,816) $336,696
======== ======= ======== ========
Municipal securities............................ $161,922 $10,606 $ -- $172,528
Corporate securities............................ 97,164 4,698 (298) 101,564
Mortgage- and asset-backed securities........... 42,079 910 (27) 42,962
U.S. Treasury and government agency
securities.................................... 17,703 177 (215) 17,665
-------- ------- -------- --------
December 31, 1993............................. $318,868 $16,391 $ (540) $334,719
======== ======= ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1994, by contractual maturity dates are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................................................ $ 15,547 $ 15,616
Due after one year through five years.................................. 165,393 164,391
Due after five years through ten years................................. 89,212 85,348
Due after 10 years..................................................... 22,839 23,176
-------- --------
292,991 288,531
Mortgage- and asset-backed securities.................................. 51,437 48,165
-------- --------
Totals............................................................... $344,428 $336,696
======== ========
</TABLE>
F-9
<PAGE> 41
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
There were no gains or losses realized on the sale of investments in 1994.
Gross gains of $582,000 and gross losses of $7,000 were realized on the sale of
investments during 1993, as compared to realized gross gains of $100,000 in
1992.
NOTE 3 CLAIMS AND CLAIM EXPENSES
The following table represents an analysis of Re Cap's claims and claim
expenses liability, reconciling the beginning and ending liability balances, net
of reinsurance recoverable, for the fiscal years ended December 31, 1994, 1993,
and 1992.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net liability for claims and claim expenses, at the
beginning of year........................................ $191,599 $172,666 $162,985
Provision for claims and claim expenses occurring in the
current year............................................. 94,547 87,165 90,684
Increase (Decrease) in estimated losses for claims
occurring in prior years:
Commutations.......................................... -- -- 2,505
All other business.................................... 248 (3,028) (870)
-------- -------- --------
Total increase (decrease).................................. 248 (3,028) 1,635
-------- -------- --------
Net incurred claims during the current year.............. 94,795 84,137 92,319
Payment for claims and claim expenses occurring during:
The current year...................................... 18,117 13,632 16,715*
Prior years:
Commutations........................................ -- -- 26,378
All other business.................................. 66,739 51,572 39,545
-------- -------- --------
84,856 65,204 82,638
-------- -------- --------
Net liability for claims and claim expenses, at end of
year..................................................... 201,538 191,599 172,666
Reinsurance recoverables on unpaid losses and LAE,
at end of year........................................... 8,859 9,039 12,088
-------- -------- --------
Gross liability for claims and claim expenses, at end of
year..................................................... $210,397 $200,638 $184,754
======== ======== ========
</TABLE>
---------------
* Includes $5.3 million in loss payments related to Hurricanes Andrew and Iniki
and the Los Angeles riots.
NOTE 4 CONVERTIBLE DEBENTURES
On July 27, 1993, the Company completed a public offering of $69,000,000 in
convertible debentures (the "Debentures") due August 1, 2000. The Debentures
bear interest at 5 1/2% and are convertible into shares of Re Capital
Corporation common stock at a price of $17.1875 per share, subject to adjustment
in certain circumstances. The Debentures are redeemable at any time on or after
August 3, 1996, in whole or in part, at the option of the Company, at a
redemption price of 103.14%, decreasing to par at maturity (see Note 13). The
expenses incurred in the offering of $1,718,000 were deferred and are being
amortized over the life of the
F-10
<PAGE> 42
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 CONVERTIBLE DEBENTURES (CONTINUED)
Debentures. At December 31, 1994, the fair value of the debentures was
approximately $62,790,000 ($72,450,000 at February 8, 1995), based on quoted
market prices.
In October 1991, the Company sold a $10,000,000 convertible note to John
Deere Insurance Company ("JDIC"). During 1993, the terms of the convertible note
were amended to provide for (i) conversion at $17.00 per share and (ii) a
reduction in the stated interest rate to 5 1/2%. On June 15, 1993, JDIC
converted the note into 588,235 shares of the Company's common stock.
Interest paid in 1994 and 1993 was $3,837,000 and $1,078,000, respectively.
NOTE 5 FEDERAL INCOME TAXES
The provision for Federal income taxes differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for tax purposes.
Federal income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax on income:
Current............................................. $ 1,842 $ 2,013 $ (510)
Deferred............................................ (1,647) (2,243) (2,980)
------- ------- -------
Federal income tax expense (benefit)........... $ 195 $ (230) $(3,490)
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (included in other assets) and liabilities as
of December 31, 1994 and 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting....................................... $14,069 $13,608
Unrealized depreciation on fixed maturities available for
sale........................................................ 2,629 --
Unearned premiums.............................................. 3,202 2,996
Pension expense................................................ 1,970 1,717
AMT credit carryforwards....................................... 2,206 1,550
Other.......................................................... 474 279
------- -------
Total deferred tax assets................................... 24,550 20,150
------- -------
Deferred tax liabilities:
Unrealized appreciation on fixed maturities available for
sale........................................................ -- 5,390
Deferred acquisition costs..................................... 4,548 4,552
Other.......................................................... 662 534
------- -------
Total deferred tax liabilities.............................. 5,210 10,476
------- -------
Net deferred tax assets..................................... $19,340 $ 9,674
======= =======
</TABLE>
Federal income taxes paid during the years ended December 31, 1994, 1993,
and 1992 were $1,720,000, $1,460,000, and $1,923,000, respectively.
F-11
<PAGE> 43
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 FEDERAL INCOME TAXES (CONTINUED)
The Company's effective income tax rate on income varied from the statutory
Federal income tax rate as a result of the following items:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate....... $ 2,755 $ 2,654 $ (696)
(Decrease) Increase in taxes resulting from:
Tax-exempt investment income........................ (2,987) (2,898) (2,815)
Other............................................... 427 14 21
------- ------- -------
Federal income tax expense (benefit)............. $ 195 $ (230) $(3,490)
======= ======= =======
</TABLE>
NOTE 6 EMPLOYEE BENEFITS
RESTRICTED COMMON STOCK
During 1993, the shareholders of the Company approved the adoption of the
Restricted Stock Incentive Compensation Plan (the "Plan"). Under the Plan,
certain key employees have been awarded 123,000 shares of the Company's common
stock at an aggregate market value of $1,860,000. Such shares vest only upon
achievement of certain designated financial performance targets or after ten
years, whichever is sooner. The related expense for the Plan was $310,000 and
$228,000 for 1994 and 1993, respectively.
STOCK OPTIONS
The Company's Long-Term Incentive Plan (the "Incentive Plan"), adopted in
1987 and amended in 1992, provides for awarding stock grants and options to key
employees. There are a maximum of 1,000,000 shares of common stock issuable
under the Incentive Plan, of which 127,678 shares have been granted and 751,935
options have been awarded (net of cumulative forfeitures of 12,088 shares) as of
December 31, 1994, including 11,169 options which have been exercised as of
December 31, 1994. Options granted, at the market value of the common stock on
the date of grant, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year ($9.325 to $17.875 per
share)........................................................ 743 751 620
Granted ($14.00 to $14.125 per share)........................... -- -- 141
Exercised ($9.325 per share).................................... (1) (8) --
Forfeited....................................................... (1) -- (10)
--- --- ---
Outstanding at end of year ($9.325 to $17.875 per share)........ 741 743 751
=== === ===
Options exercisable............................................. 704 656 576
=== === ===
Shares available for future options............................. 120 120 120
=== === ===
</TABLE>
STOCK APPRECIATION RIGHTS
At December 31, 1994, 1993, and 1992, there were 17,687 stock appreciation
rights ("SARs") outstanding at an exercise price of $14.525. The SARs are
payable in cash or common stock at the Company's option.
F-12
<PAGE> 44
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEES' RETIREMENT PLAN
In 1990, the Employees' Retirement Plan of Re Capital Corporation (the
"Retirement Plan") was adopted. The Retirement Plan is a defined benefit,
noncontributory plan covering substantially all full-time employees. Benefits
are based on years of credited service and average compensation. The Company's
funding policy is to contribute amounts that are necessary to maintain the
Retirement Plan on a sound actuarial basis and to meet the minimum funding
standards prescribed by law. Assets of the Retirement Plan are invested in trust
funds composed of equity and fixed income securities. The components of pension
expense applicable to this plan for the years ended December 31, 1994, 1993, and
1992 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the year.................. $248 $247 $197
Interest cost on projected benefit obligation................. 95 87 56
Actual return on plan assets.................................. (99) (65) (46)
Net amortization and deferral................................. 2 16 14
---- ---- ----
Net pension expense......................................... $246 $285 $221
==== ==== ====
</TABLE>
The projected benefit obligation for 1994 and 1993 was determined using
assumed discount rates of 8.25% and 7.25%, and assumed compensation increases of
6.25% and 5.5%, respectively. The assumed long-term rate of return on plan
assets for both years was 8.25%.
<TABLE>
<CAPTION>
RECONCILIATION OF
FUNDED STATUS AS OF
DECEMBER 31,
-------------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$828,000 and $739,000 in 1994 and 1993, respectively....... $ (857) $ (807)
======= =======
Projected benefit obligation..................................... $(1,448) $(1,628)
Plan assets at fair value........................................ 1,294 1,114
------- -------
Funded status.................................................... (154) (514)
Remaining portion of unrecognized net obligation existing at
January 1, 1990................................................ 230 247
Unrecognized prior service cost.................................. (285) --
Unrecognized net loss............................................ 53 183
------- -------
Accrued pension cost included in other liabilities............. $ (156) $ (84)
======= =======
</TABLE>
SUPPLEMENTAL EMPLOYEE BENEFITS
In connection with contractual employment arrangements, certain officers of
the Company have been granted retirement benefits, net of amounts provided by
the Retirement Plan, based on various fixed percentages of final average
compensation, as defined. These retirement benefits are accounted for as
deferred compensation arrangements and are accrued over the expected periods of
employment of the individuals. The liability for these retirement benefits at
December 31, 1994 and 1993 aggregated $5,640,000 and $4,880,000, respectively,
and the related expense for the years ended December 31, 1994, 1993, and 1992
was $715,000, $461,000, and $1,421,000, respectively.
F-13
<PAGE> 45
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 EMPLOYEE BENEFITS (CONTINUED)
SEVERANCE COMPENSATION ARRANGEMENTS
The Company has in place severance compensation agreements for two senior
officers of the Company which could become effective if a change in control of
the Company's outstanding common stock is proposed or occurs. The severance
agreements provide for the payment of additional compensation, accelerated
pension vesting, and other employee welfare benefits if certain specified
"takeover" actions occur without the approval of not less than two-thirds of the
Board of Directors prior to such takeover actions.
EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan (401k) whereby the Company
matches 50% of each employee's contribution up to 6% of the employee's salary.
The Company's contribution for 1994, 1993, and 1992 were $87,000, $83,000, and
$75,000, respectively.
NOTE 7 COMMON STOCK
On May 20, 1992, the Company's shareholders approved an amendment to the
Company's charter increasing the number of authorized shares of common stock
from 15,000,000 to 50,000,000. Previously, on May 5, 1987, the Company's
shareholders had authorized 1,000,000 shares of a new class of Preferred Stock,
par value $.10 per share. The relative rights, preferences and limitations of
any issuance of preferred stock are to be determined by the Company's Board of
Directors.
Since October 20, 1987, the Company has announced fourteen stock repurchase
programs totalling $30,460,000. As of December 31, 1993, the Company had
purchased 2,378,888 shares for approximately $27,916,000, or $11.74 a share, and
had $2,544,000 authorized for future repurchases. On June 1, 1993, the Company
announced the suspension of its share repurchase program.
NOTE 8 DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
The ability of the Company to pay dividends is largely dependent upon the
ability of Re Cap to pay dividends to the Company. Dividends of Re Cap may be
paid only out of its statutory surplus. The maximum amount of dividends that may
be paid in any twelve-month period without prior approval of the New Jersey
Insurance Department is the lesser of net investment income or 10% of statutory
surplus. Accordingly, for 1994, dividends are limited to approximately
$16,660,000. Loans and advances from Re Cap to the Company are subject to
regulatory approval.
Re Cap's statutory surplus was $166,596,000 and $155,530,000 at December
31, 1994 and 1993, respectively. Re Cap's statutory net income for the years
ended December 31, 1994 and 1993 was $11,839,000 and $7,988,000, respectively,
as compared to a statutory net loss of $204,000 for the year ended December 31,
1992.
For Re Cap, the differences between generally accepted accounting
principles (GAAP) and statutory accounting practices are the treatment of
acquisition costs, deferred income taxes and other deferred charges. The
following tables set forth a reconciliation of Re Cap's net income (loss) and
statutory surplus, as filed
F-14
<PAGE> 46
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION (CONTINUED)
with the insurance regulatory authorities, to its net income and shareholders'
equity as determined in accordance with GAAP for the years ended and as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
Statutory net income (loss) of Re Capital
Reinsurance Corporation.................................. $ 11,839 $ 7,988 $ (204)
Change in deferred acquisition costs....................... (13) 1,162 306
Provision for deferred income taxes........................ 957 1,640 3,632
Cumulative effect of change in accounting for income
taxes.................................................... -- -- 462
Other...................................................... -- (78) (209)
-------- -------- --------
GAAP net income of Re Capital Reinsurance Corporation...... $ 12,783 $ 10,712 $ 3,987
======== ======== ========
RECONCILIATION OF SURPLUS
Statutory capital and surplus of Re Capital
Reinsurance Corporation.................................. $166,596 $155,530 $102,088
Deferred acquisition costs................................. 13,376 13,389 12,227
Unrealized (depreciation) appreciation of investments, net
of tax................................................... (5,091) 10,456 --
Deferred income taxes...................................... 15,838 14,882 13,242
Unauthorized reinsurance................................... 862 96 330
Non-admitted assets........................................ 44 37 6
Other...................................................... -- -- 78
-------- -------- --------
GAAP shareholders' equity of Re Capital
Reinsurance Corporation.................................. $191,625 $194,390 $127,971
======== ======== ========
</TABLE>
NOTE 9 COMMITMENTS AND CONTINGENCIES
Rental expense for all leases aggregated $1,021,000 in 1994, $944,000 in
1993, and $1,150,000 in 1992. Future minimum payments under noncancelable
operating leases at December 31, 1994 are; $1,128,000 in 1995, $1,082,000 in
1996, $935,000 in 1997, $939,000 in 1998, $939,000 in 1999, and $2,041,000
thereafter. Several of the leases have renewable options with rental rate
adjustments.
Re Cap is contingently liable under standby letters of credit totalling
$217,000 at December 31, 1994, issued to guarantee its obligations for claim
liabilities and unearned premium reserves owed to ceding companies. Fixed income
securities with an amortized cost of $408,000 are pledged as collateral to the
bank issuing the letters of credit. In addition, fixed income securities with an
amortized cost of $107,322,000 are pledged to secure trust agreements with three
ceding companies.
NOTE 10 REINSURANCE
All of Re Cap's premiums written are assumed from other insurance
companies. Re Cap also cedes reinsurance to other companies. Risks are reinsured
(retroceded) with other companies to permit the recovery of a portion of Re
Cap's losses. Re Cap remains liable regardless of whether the reinsuring
companies meet their obligations under these reinsurance treaties.
F-15
<PAGE> 47
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 REINSURANCE (CONTINUED)
The components of the Company's reinsurance balances recoverable at
December 31, 1994 and 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Ceded claims and claim expenses.................................. $ 8,859 $ 9,039
Prepaid reinsurance premiums..................................... 5,135 2,424
Reinsurance recoverable on paid claims........................... 835 1,094
------- -------
Reinsurance balances recoverable............................... $14,829 $12,557
======= =======
</TABLE>
The effect of the Company's retrocessional program on premiums written,
premiums earned and claims and claim expenses for the years ended December 31,
1994, 1993 and 1992 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Ceded premiums written.................................. $11,329 $7,459 $5,668
Ceded premiums earned................................... 8,618 6,749 5,483
Ceded claims and claim expenses......................... 4,388 3,209 9,865
</TABLE>
NOTE 11 RELATED PARTY TRANSACTIONS
In 1987, Re Cap entered into an underwriting and claims management
agreement with John Deere Insurance Company ("JDIC") under which Re Cap writes
certain reinsurance business on behalf of JDIC and assumes 92.5% of such
business, and cedes approximately 7.5% of most of its other reinsurance business
to JDIC. At December 31, 1994, Deere Insurance's ownership in the Company's
common stock was 43.8% of outstanding shares (see Note 13). Significant balances
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Amounts due Re Cap:
Premium balances......................................... $21,524 $18,785
Ceded claims and claim expenses.......................... 7,611 7,370
Deferred acquisition costs............................... 4,115 2,636
------- -------
Totals........................................... $33,250 $28,791
======= =======
Amounts due JDIC:
Gross claims and claim expenses.......................... $81,620 $69,375
Unearned premiums........................................ 14,216 8,936
Other, net............................................... 1,325 575
------- -------
Totals........................................... $97,161 $78,886
======= =======
</TABLE>
F-16
<PAGE> 48
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Assumed from JDIC:
Premiums earned..................................... $51,454 $42,334 $47,415
Claims and claim expenses........................... 39,562 33,772 38,472
Amortization of deferred acquisition costs.......... 12,538 7,926 11,884
Ceded to JDIC:
Premiums earned..................................... $ 5,731 $ 4,840 $ 4,645
Claims and claim expenses........................... 3,800 3,330 3,606
Amortization of deferred acquisition costs.......... 1,749 1,435 1,555
</TABLE>
In addition, premiums assumed from two unrelated parties represent 17.9%
and 16.5%, respectively, of net written premiums for the year ended December 31,
1994.
NOTE 12 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Premiums earned..................................... $29,207 $35,020 $32,102 $33,069
Net investment income............................... 5,197 5,346 5,506 5,647
Net realized investment gains (losses).............. 41 (3) 1 --
Net income.......................................... 1,537 2,854 2,637 879
Primary earnings per share.......................... .22 .40 .38 .13
Fully diluted earnings per share.................... .20 .31 .30 .13
Cash dividends declared per share................... .08 .08 .08 .08
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Premiums earned..................................... $28,732 $29,624 $27,007 $27,318
Net investment income............................... 4,383 4,510 4,907 5,134
Net realized investment gains....................... -- 388 306 --
Net income.......................................... 2,008 2,851 1,321 1,857
Primary earnings per share.......................... .31 .43 .19 .26
Fully diluted earnings per share.................... .31 .43 .18 .22
Cash dividends declared per share................... .07 .07 .07 .07
</TABLE>
F-17
<PAGE> 49
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 SUBSEQUENT EVENT
On January 11, 1995, the Company entered into an Agreement and Plan of
Merger with Zurich Reinsurance Centre Holdings, Inc. ("ZRC") and ZRC Merger-Sub
Corp., a wholly owned subsidiary of ZRC.
Under the terms of the agreement, shareholders of the Company's common
stock will receive cash consideration of $18.50 per share, and ZRC will assume
all obligations under the Company's existing 5 1/2% Convertible Debentures that
are not converted into common shares prior to the closing. The transaction,
expected to be completed in the first half of 1995, is conditioned upon approval
by the Company's stockholders, certain state insurance regulatory approvals and
certain other customary conditions and approvals. Deere Insurance, owner of
43.8% of the Company's outstanding shares of common stock, has agreed to vote
that stock in favor of the acquisition.
F-18
<PAGE> 50
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RE CAPITAL CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Fixed maturities available for sale, at market value (amortized cost,
1994 -- $2,998 and 1993 -- $3,001)................................ $ 2,980 $ 3,009
Short-term investments............................................... -- 3,954
Investment in subsidiaries........................................... 191,421 194,187
Deferred debt issuance costs......................................... 1,370 1,616
Other assets......................................................... 2,491 1,669
-------- --------
Total Assets................................................. $198,262 $204,435
======== ========
LIABILITIES
Convertible debentures............................................... $ 69,000 $ 69,000
Due to subsidiaries.................................................. 4,321 1,551
Interest payable..................................................... 1,581 1,623
Other liabilities.................................................... 2,153 1,488
-------- --------
Total Liabilities............................................ 77,055 73,662
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized:
1,000,000 shares, none issued.....................................
Common stock, $.10 par value; authorized:
50,000,000 shares, issued: 9,540,174 shares (1994)
and 9,536,159 shares (1993)....................................... 954 954
Additional paid-in capital........................................... 93,242 93,194
Unrealized (depreciation) appreciation on fixed maturities
available for sale, net of tax.................................... (5,103) 10,461
Retained earnings.................................................... 61,541 55,890
Unearned compensation -- restricted common stock..................... (1,333) (1,632)
Treasury stock, at cost: 2,490,284 shares............................ (28,094) (28,094)
-------- --------
Total Shareholders' Equity................................... 121,207 130,773
-------- --------
Total Liabilities and Shareholders' Equity................... $198,262 $204,435
======== ========
</TABLE>
S-1
<PAGE> 51
SCHEDULE II (CONTINUED)
RE CAPITAL CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Interest income................................................ $ 182 $ 129 $ 24
------ ------ ------
Total.................................................. 182 129 24
------ ------ ------
EXPENSES
Interest expense............................................... 3,795 2,348 1,363
Legal and consulting expenses.................................. 1,066 261 313
Other operating expenses....................................... 2,105 1,541 1,483
------ ------ ------
Total.................................................. 6,966 4,150 3,159
------ ------ ------
Loss before Federal income tax benefit......................... (6,784) (4,021) (3,135)
Federal income tax benefit..................................... (1,910) (1,354) (1,057)
------ ------ ------
Loss before equity in net income of consolidated
subsidiaries................................................ (4,874) (2,667) (2,078)
Equity in net income of consolidated subsidiaries.............. 12,781 10,704 3,519
------ ------ ------
Income before cumulative effect of accounting change........... 7,907 8,037 1,441
Cumulative effect of change in method of accounting for
income taxes................................................ -- -- 868
------ ------ ------
Net Income............................................. $7,907 $8,037 $2,309
====== ====== ======
</TABLE>
S-2
<PAGE> 52
SCHEDULE II (CONTINUED)
RE CAPITAL CORPORATION
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash (Used in) Provided by Operating
Activities....................................... $(1,757) $ 1,561 $(1,228)
INVESTING ACTIVITIES
Purchases of fixed maturities.............................. -- (3,002) --
Net sales (purchases) of short-term investments............ 3,954 (3,954) --
Net additions to property and equipment.................... (17) (120) (55)
------- -------- -------
Net Cash Provided by (Used in) Investing
Activities....................................... 3,937 (7,076) (55)
FINANCING ACTIVITIES
Cash dividends to shareholders............................. (2,184) (1,811) (1,477)
Net proceeds from issuance of convertible debentures....... -- 67,282 --
Acquisition of treasury stock.............................. -- (18) (6,569)
Short-term debt (repayments) borrowings, net............... -- (14,850) 9,350
Exercise of common stock options........................... 4 94 2
Surplus contribution to subsidiary......................... -- (45,250) --
------- -------- -------
Net Cash (Used in) Provided by Financing
Activities....................................... (2,180) 5,447 1,306
------- -------- -------
(Decrease) Increase in Cash................................ -- (68) 23
Cash at Beginning of Year.................................. -- 68 45
------- -------- -------
Cash at End of Year................................ $ -- $ -- $ 68
======= ======== =======
</TABLE>
S-3
<PAGE> 53
SCHEDULE VI
RE CAPITAL CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1994
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN H
-----------------
CLAIMS & CLAIM
COLUMN C ADJUSTMENT
COLUMN B ------------- COLUMN D EXPENSES
COLUMN A ----------- RESERVES FOR ----------- COLUMN G INCURRED RELATED
------------------- DEFERRED UNPAID CLAIMS DISCOUNT COLUMN E COLUMN F ---------- TO
AFFILIATION POLICY AND CLAIM IF ANY, ----------- -------- NET (1) (2)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES(*) COLUMN C PREMIUMS(*) PREMIUMS INCOME YEAR YEARS
------------------- ----------- ------------- ----------- ----------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
Consolidated
Property/Casualty
Entities......... $13,376 $ 210,397 $ 0 $52,221 $129,398 $ 21,514 $94,547 $ 248
========== ============= ========== ============ ========= ========= ======== ========
1993
Consolidated
Property/Casualty
Entities......... $13,389 $ 200,638 $ 0 $46,487 $112,681 $ 18,805 $87,165 $(3,028)
========== ============= ========== ============ ========= ========= ======== ========
1992
Consolidated
Property/Casualty
Entities......... $12,227 $ 184,754 $ 0 $42,644 $118,443 $ 17,245 $90,684 $ 1,635
========== ============= ========== ============ ========= ========= ======== ========
<CAPTION>
COLUMN I COLUMN J
------------------- -----------
COLUMN A AMORTIZATION PAID
------------------- OF DEFERRED CLAIMS COLUMN K
AFFILIATION POLICY AND CLAIM ---------
WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
------------------- ------------------- ----------- ---------
<S> <C> <C> <C>
1994
Consolidated
Property/Casualty
Entities......... $33,272 $84,856 $132,421
================= =========== ==========
1993
Consolidated
Property/Casualty
Entities......... $28,455 $65,204 $115,814
================= =========== ==========
1992
Consolidated
Property/Casualty
Entities......... $34,624 $82,638 $121,316
================= =========== ==========
</TABLE>
---------------
(*) 1992 balances have been reclassified for comparative purposes to reflect the
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
S-4
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM EXHIBIT
------------ -----------------------------------------------------------------------
<S> <C> <C>
(3)(a)(1) Restated Certificate of Incorporation of Re Capital Corporation.
(Incorporated by reference to Appendix B of Re Capital Corporation's
Proxy Statement for 1989 Annual Meeting of Shareholders.)
(3)(a)(2) December 29, 1992 amendment to the Restated Certificate of
Incorporation of Re Capital Corporation. (Incorporated by reference to
Exhibit 3(a)(2) of Re Capital Corporation's Form 10-K for the year
ended December 31, 1992.)
(3)(b) By-Laws of Re Capital Corporation. (Incorporated by reference to
Exhibit 3(b) of Re Capital Corporation's Form 10-K for the year ended
December 31, 1991.)
(10)(a) Letter Agreement, dated June 16, 1986, by and between Re Capital
Reinsurance Corporation and Conning & Company relating to financial
advisory and portfolio management services provided by Conning &
Company. (Incorporated by reference to Exhibit 10-17 of Re Capital
Corporation's Registration Statement No. 33-8680 on Form S-2.)
(10)(b) Lease, dated September 16, 1986, between Stamford New-Urban Associates
and Re Capital Corporation. (Incorporated by reference to Exhibit
(10)(v) of Re Capital Corporation's Form 10-K for the year ended
December 31, 1986.)
(10)(c)# Long-Term Incentive Compensation Plan of Re Capital Corporation, as
amended as of May 20, 1992. (Incorporated by reference to Exhibit 10(c)
of Re Capital Corporation's Form 10-K for the year ended December 31,
1992.)
(10)(d)# Restricted Stock Incentive Compensation Plan of Re Capital Corporation.
(Incorporated by reference to Exhibit A of Re Capital Corporation's
Proxy Statement for the 1993 Annual Meeting of Shareholders.)
(10)(e) Multiple Line Quota Share Retrocessional Agreement, No. 80A, between
John Deere Insurance Company and Re Capital Reinsurance Corporation.
(Incorporated by reference to Exhibit 10(z) of Re Capital Corporation's
Form 10-K for the year ended December 31, 1987.)
(10)(f) Multiple Line Quota Share Retrocessional Agreement Policy, No. 050187,
between John Deere Insurance Company and Re Capital Reinsurance
Corporation. (Incorporated by reference to Exhibit 10(aa) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1987.)
(10)(g) Amended and Restated Tax Allocation Agreement, dated as of January 1,
1993, among Re Capital Corporation, Re Capital Reinsurance Corporation
and RCI Systems, Inc. (Incorporated by reference to Exhibit 10(i) of Re
Capital Corporation's Form 10-K for the year ended December 31, 1992.)
(10)(h) Underwriting and Claims Management Services Agreement, made as of May
1, 1987, between John Deere Insurance Company and Re Capital
Reinsurance Corporation, as amended by Endorsements 1 through 6.
(Incorporated by reference to Exhibit 10(s) of Re Capital Corporation's
Form 10-K for the year ended December 31, 1988.)
(10)(i)# Amended and Restated Employment Agreement, dated as of March 6, 1991,
between Re Capital Corporation and Donald E. Chisholm. (Incorporated by
reference to Exhibit 10(o) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1990.)
(10)(j)# Amended and Restated Employment Agreement, dated as of June 1, 1988,
between Re Capital Corporation and James E. Roberts. (Incorporated by
reference to Exhibit 10(u) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1988.) (Agreement with David C. Smith is
identical.)
(10)(k)# Severance Compensation Agreement, dated as of February 15, 1989,
between Re Capital Corporation and James E. Roberts. (Incorporated by
reference to Exhibit 10(y) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1988.) (Agreement with David C. Smith is
identical.)
(10)(l)# Amendment Agreement, dated as of January 15, 1990, amending Exhibit
(10)(j) hereto. (Incorporated by reference to Exhibit 10(y) of Re
Capital Corporation's Form 10-K for the year ended December 31, 1989.)
(Agreement with David C. Smith is identical.)
</TABLE>
E-1
<PAGE> 55
<TABLE>
<CAPTION>
ITEM EXHIBIT
------------ -----------------------------------------------------------------------
<S> <C> <C>
(10)(m) Endorsement 7, amending Exhibit 10(h) hereto, effective January 1,
1990. (Incorporated by reference to Re Capital Corporation's Form 10-K
for the year ended December 31, 1989.)
(10)(n)# Employees' Retirement Plan of Re Capital Corporation. (Incorporated by
reference to Re Capital Corporation's Form 10-Q for the quarter-year
ended September 30, 1990.)
(10)(o)# Employees' Retirement Plan of Re Capital Corporation -- Trust
Agreement, dated as of November 1, 1990, between Re Capital Corporation
and Union Trust Company. (Incorporated by reference to Re Capital
Corporation's Form 10-Q for the quarter-year ended September 30, 1990.)
(10)(p) Right of First Refusal Agreement, dated as of October 31, 1990, among
John Deere Insurance Group, Inc., John Deere Insurance Company, Tahoe
Insurance Company, Rock River Insurance Company and Re Capital
Corporation. (Incorporated by reference to Re Capital Corporation's
Form 10-Q for the quarter-year ended September 30, 1990.)
(10)(q) Amendment Agreement, dated as of December 20, 1990, amending Exhibit
10(f). (Incorporated by reference to Exhibit 10(dd) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1990.)
(10)(r) Amendment Agreement, dated as of December 20, 1990, amending Exhibit
10(e). (Incorporated by reference to Exhibit 10(ee) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1990.)
(10)(s) Endorsement 8, amending Exhibit 10(h) hereto, effective January 1,
1991. (Incorporated by reference to Exhibit 10(v) of the Re Capital
Corporation's Form 10-K for the year ended December 31, 1991.)
(10)(t) Right of First Acceptance Agreement, dated June 9, 1993, between John
Deere Insurance Group, Inc. and Re Capital Reinsurance Corporation.
(Incorporated by reference to Exhibit 10.22 of Re Capital Corporation's
Registration Statement No. 33-63590 on Form S-2).
(10)(u)#* Amendment Agreement, dated as of March 29, 1994, amending Exhibit
10(j). (Agreement with David C. Smith is identical.)
(10)(v) Agreement and Plan of Merger dated as of January 11, 1995 among Zurich
Reinsurance Centre Holdings, Inc., ZRC Merger-Sub Corp. and the
Registrant. (Incorporated by reference to Exhibit 1 of Re Capital
Corporation's Form 8-K dated as of January 11, 1995, filed on January
19, 1995.)
(10)(w) Option and Voting Agreement between Zurich Reinsurance Centre Holdings,
Inc. and John Deere Insurance Group, Inc. (Incorporated by reference to
Exhibit 2 of Re Capital Corporation's Form 8-K dated as of January 11,
1995, filed on January 19, 1995.)
(11)* Statement regarding computation of earnings per share.
(12)* Statement regarding ratio of earnings to fixed charges.
(22) Subsidiaries of Re Capital Corporation: Re Capital Reinsurance
Corporation (N.J.) and RCI Systems, Inc. (Delaware)
(24)* Consent of Independent Auditors relating to Form S-8 filed on December
13, 1990.
(29)* Schedule P filed by Re Capital Reinsurance Corporation with state
regulatory authorities.
(99) Special Proxy Statement for Re Capital Corporation's Special Meeting of
Stockholders to be held to vote on the Agreement and Plan of Merger.
(Incorporated by reference to the Special Proxy Statement.)
</TABLE>
---------------
* Filed herewith.
# A management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of this report.
E-2
<PAGE> 56
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT dated as of the 29th day of March, 1994, between James
E. Roberts (the "Executive") and Re Capital Corporation, a Delaware corporation
(the "Company").
WHEREAS, the Company and the Executive are parties to an amended and
restated employment agreement dated as of June 1, 1988 and amended as of January
15, 1990 (the "Agreement"); and
WHEREAS, the Company and the Executive desire to amend the Agreement as set
forth below, in accordance with the resolutions of the Compensation Committee of
the Board of Directors of the Company approved at a meeting of such committee
held on March 29, 1994 and the mutual considerations received by the Company and
the Executive pursuant thereto.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 3(a) of the Agreement is amended to read as follows: Period of
Employment. The period of the Executive's employment under this Agreement (the
"Period of Employment") shall be deemed to have commenced as of May 26, 1986 and
shall continue through May 31, 1995, subject to extension or termination as
herein provided. If the Company, within three months of May 31, 1995, fails to
attempt in good faith to negotiate a new employment agreement with the
Executive, the Executive shall have the right to extend the Period of Employment
to May 31, 1996. Notwithstanding the foregoing, the Period of Employment shall
cease prior to either May 31, 1995 or May 31, 1996 if it is terminated sooner as
provided in paragraph 6(a) (disability), 7 (death), 8(c) (termination of
employment) or 10 (retirement).
2. Except as amended hereby, all terms of the Agreement shall remain in
full force and effect after the effectiveness hereof. After such effectiveness,
all references in the Agreement to "this Agreement" shall refer to the Agreement
as amended hereby.
3. This Amendment Agreement may be executed in two counterparts, each of
which shall be deemed an original, but both of which together shall constitute
one and the same agreement.
4. This Amendment Agreement (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties, with respect to the subject matter hereof, other than the
terms of the Agreement not affected hereby, (b) is not intended to confer upon
any other persons any rights or remedies hereunder, (c) shall be amended or
waived in whole or in part only by a written instrument, signed by both parties
hereto, (d) in case any provision of this Amendment Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby, and
(e) shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
RE CAPITAL CORPORATION
By /s/ Conor D. Reilly
-------------------------
Name: Conor D. Reilly
Title: Secretary
/s/ James E. Roberts
-------------------------
James E. Roberts
E-3
<PAGE> 57
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT dated as of the 29th day of March, 1994, between James
E. Roberts (the "Executive") and Re Capital Corporation, a Delaware corporation
(the "Company").
WHEREAS, the Company and the Executive are parties to an amended and
restated employment agreement dated as of June 1, 1988 and amended as of January
15, 1990 (the "Agreement"), and
WHEREAS, the Company and the Executive desire to amend the Agreement as set
forth below, in accordance with the resolutions of the Compensation Committee of
the Board of Directors of the Company approved at a meeting of such committee
held on March 29, 1994 and the mutual considerations received by the Company and
the Executive pursuant thereto.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 3(a) of the Agreement is amended to read as follows: Period of
Employment. The period of the Executive's employment under this Agreement (the
"Period of Employment") shall be deemed to have commenced as of May 26, 1986 and
shall continue through May 31, 1995, subject to extension or termination as
herein provided. If the Company, within three months of May 31, 1995, fails to
attempt in good faith to negotiate a new employment agreement with the
Executive, the Executive shall have the right to extend the Period of Employment
to May 31, 1996. Notwithstanding the foregoing, the Period of Employment shall
cease prior to either May 31, 1995 or May 31, 1996 if it is terminated sooner as
provided in paragraph 6(a) (disability), 7 (death), 8(c) (termination of
employment) or 10 (retirement).
2. Except as amended hereby, all terms of the Agreement shall remain in
full force and effect after the effectiveness hereof. After such effectiveness,
all references in the Agreement to "this Agreement" shall refer to the Agreement
as amended hereby.
3. This Amendment Agreement may be executed in two counterparts, each of
which shall be deemed an original, but both of which together shall constitute
one and the same agreement.
4. This Amendment Agreement (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties, with respect to the subject matter hereof, other than the
terms of the Agreement not affected hereby, (b) is not intended to confer upon
any other persons any rights or remedies hereunder, (c) shall be amended or
waived in whole or in part only by a written instrument, signed by both parties
hereto, (d) in case any provision of this Amendment Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby, and
(e) shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
RE CAPITAL CORPORATION
By
-------------------------
Name: Conor D. Reilly
Title: Secretary
-------------------------
James E. Roberts
E-3
<PAGE> 58
RE CAPITAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11.0 -- COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding...................................... 6,923 6,729 6,439
Weighted average shares of common stock
equivalents associated with stock options, net................ 36 105 94
------- ------ ------
Total........................................................... 6,959 6,834 6,533
======= ====== ======
Net Income...................................................... $ 7,907 $8,037 $2,309
======= ====== ======
Per share amount................................................ $ 1.14 $ 1.18 $ .35
======= ====== ======
FULLY DILUTED
Average shares outstanding...................................... 6,923 6,729 6,439
Weighted average shares of common stock
equivalents associated with stock options, net................ 36 105 159
Assumed conversion of convertible debentures and note........... 4,015 1,958 476
------- ------ ------
Total........................................................... 10,974 8,792 7,074
======= ====== ======
Net Income...................................................... $ 7,907 $8,037 $2,309
Add convertible debenture and note interest,
net of Federal income tax effect.............................. 2,505 1,304 528
------- ------ ------
Adjusted Net Income............................................. $10,412 $9,341 $2,837
======= ====== ======
Per share amount................................................ $ .95 $ 1.06 $ .40
======= ====== ======
</TABLE>
E-4
<PAGE> 59
RE CAPITAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12.0 -- COMPUTATION OF RATIOS OF
EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Income (Loss) before Federal income taxes..................... $ 8,102 $ 7,807 $(2,049)
Add: Fixed charges............................................ 4,114 2,663 1,746
-------- ------- -------
Income (Loss) before Federal income taxes and fixed charges... $ 12,234 $10,470 $ (303)
======= ======= =======
Fixed charges:
Interest expense............................................ $ 3,795 $ 2,348 $ 1,363
One-third rental expense*................................... 337 315 383
-------- ------- -------
Total fixed charges................................. $ 4,132 $ 2,663 $ 1,746
======= ======= =======
Ratio of earnings to fixed charges............................ 3.0X 3.9X NM
======= ======= =======
</TABLE>
---------------
*Portion of rental expense representative of a reasonable interest factor.
E-5
<PAGE> 60
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38237) pertaining to the Long-Term Incentive Plan of Re Capital
Corporation of our report dated February 8, 1995, with respect to the
consolidated financial statements and schedules of Re Capital Corporation and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1994.
New York, New York
February 21, 1995
E-6
