<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to _____________________
Commission file number: 0-26456
RISK CAPITAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 06-1424716
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
20 Horseneck Lane
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 862-4300
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 12 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 the number of shares outstanding of each of the issuer's classes of
common stock.
CLASS OUTSTANDING AT JUNE 30, 1997
- ---------------------------- ----------------------------
Common Stock, $.01 par value 17,035,173
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<PAGE>
RISK CAPITAL HOLDINGS, INC.
INDEX
PAGE
NO.
-------
PART I. FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Review Report of Independent Accountants 1
Consolidated Statement of Income 2
For the three and six month periods ended June 30, 1997
and 1996
Consolidated Balance Sheet 3
June 30, 1997 and December 31, 1996
Consolidated Statement of Changes in Stockholders' Equity 4
For the six month periods ended June 30, 1997 and 1996
Consolidated Statement of Cash Flows 5
For the six month periods ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 20
Signatures 21
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Risk Capital Holdings, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Risk
Capital Holdings, Inc. and its subsidiary as of June 30, 1997, and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows for the period from January 1, 1997 to June 30, 1997. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1996, and the related
consolidated statements of income, of retained earnings, and of cash flows for
the year then ended (not presented herein), and in our report dated February 7,
1997 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1996, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
Price Waterhouse LLP
New York, New York
July 30, 1997
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
--------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
PREMIUMS AND OTHER REVENUES
Net premiums written $30,090 $16,468 $63,956 $23,571
Increase in unearned premiums (10,189) (12,630) (22,983) (17,960)
--------------- ------------- ---------------- -------------
Net premiums earned 19,901 3,838 40,973 5,611
Net investment income 3,525 3,136 6,976 6,544
Net investment gains (losses) (420) 448 (445) 254
--------------- ------------- ---------------- -------------
Total revenues 23,006 7,422 47,504 12,409
EXPENSES
Claims and claims expenses 13,411 2,797 27,951 4,046
Commissions and brokerage 5,412 927 11,523 1,489
Other operating expenses 3,700 2,633 7,445 5,124
--------------- ------------- ---------------- -------------
Total expenses 22,523 6,357 46,919 10,659
INCOME BEFORE INCOME TAXES AND EQUITY
IN NET LOSSES OF INVESTEES 483 1,065 585 1,750
Federal income taxes:
Current 387 809 675 877
Deferred (463) (729) (937) (919)
--------------- ------------- ---------------- -------------
Income tax expense (benefit) (76) 80 (262) (42)
--------------- ------------- ---------------- -------------
INCOME BEFORE EQUITY IN NET LOSS OF INVESTEES 559 985 847 1,792
Equity in net loss of investees (215) (305)
--------------- ------------- ---------------- -------------
NET INCOME $344 $985 $542 $1,792
=============== ============= ================ =============
PER SHARE DATA
Primary and fully diluted:
Net income $0.02 $0.06 $0.03 $0.11
=============== ============= ================ =============
Operating income: net income
excluding net investment losses and
equity in net loss of investees $0.05 $0.04 $0.07 $0.10
=============== ============= ================ =============
Average shares outstanding 17,023,430 16,977,790 17,024,232 16,959,540
=============== ============= ================ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
------------------- ------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $120,555 $140,381
(amortized cost: 1997, $120,065; 1996, $140,128)
Publicly traded equity securities 173,534 117,360
(cost: 1997, $129,696; 1996, $108,580)
Privately held securities 53,239 28,847
(cost: 1997, $43,698; 1996, $23,363)
Short-term investments 94,675 104,886
------------------- -----------------
Total investments 442,003 391,474
------------------- -----------------
Cash 4,178 1,466
Accrued investment income 1,904 2,151
Investment accounts receivable 4,617 560
Premiums receivable 39,471 23,669
Reinsurance recoverable on unearned premiums 1,177 576
Reinsurance recoverable 153 522
Deferred policy acquisition costs 12,921 7,018
Other assets 6,488 5,050
------------------- -----------------
$512,912 $432,486
=================== =================
LIABILITIES
Claims and claims expenses $38,587 $20,770
Unearned premiums 60,932 37,348
Reinsurance premiums payable 536
Contingent commissions payable 5,067 2,734
Investment accounts payable 10,061 10,598
Deferred income tax liability 15,698 3,026
Other liabilities 3,358 5,261
------------------- -----------------
Total liabilities 133,703 80,273
------------------- -----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
20,000,000 shares authorized (none issued)
Common stock, $.01 par value:
80,000,000 shares authorized
(1997, 17,045,246; 1996, 17,031,246 shares issued) 170 170
Additional paid-in capital 340,714 340,435
Unrealized appreciation of investments, net of income tax 35,015 9,436
Deferred compensation under stock award plan (2,194) (2,959)
Retained earnings 5,673 5,131
Less treasury stock, at cost (1997, 10,073 shares) (169)
------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 379,209 352,213
------------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $512,912 $432,486
=================== =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
--------------- -------------
<S> <C> <C>
COMMON STOCK
Balance at beginning of year $170 $169
Issuance of common stock 1
--------------- -------------
Balance at end of period 170 170
--------------- -------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 340,435 338,737
Issuance of common stock 279 1,067
--------------- -------------
Balance at end of period 340,714 339,804
--------------- -------------
UNREALIZED APPRECIATION OF INVESTMENTS,
NET OF INCOME TAX
Balance at beginning of year 9,436 3,731
Change in unrealized appreciation (depreciation) 25,579 (1,885)
--------------- -------------
Balance at end of period 35,015 1,846
--------------- -------------
DEFERRED COMPENSATION UNDER STOCK AWARD PLAN
Balance at beginning of year (2,959) (3,441)
Restricted common stock issued (279) (1,065)
Compensation expense recognized 1,044 1,008
--------------- -------------
Balance at end of period (2,194) (3,498)
--------------- -------------
RETAINED EARNINGS
Balance at beginning of year 5,131 1,019
Net income 542 1,792
--------------- -------------
Balance at end of period 5,673 2,811
--------------- -------------
TREASURY STOCK, AT COST
Balance at beginning of year
Purchase of treasury shares (169)
--------------- -------------
Balance at end of period (169)
--------------- -------------
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year 352,213 340,215
Issuance of common stock 279 1,068
Change in unrealized appreciation (depreciation)
of investments, net of income tax 25,579 (1,885)
Change in deferred compensation 765 (57)
Net income 542 1,792
Purchase of treasury stock (169)
--------------- -------------
Balance at end of period $379,209 $341,133
=============== =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $542 $1,792
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses, net 17,817 3,533
Unearned premiums 23,584 17,960
Premiums receivable (15,802) (11,302)
Accrued investment income 247 26
Contingent commissions payable 2,333
Reinsurance balances, net (768) 34
Deferred policy acquisition costs (5,903) (2,221)
Net investment (gains)/losses 445 (254)
Deferred income tax asset (1,101) (919)
Other liabilities (1,903) 99
Other items, net (2,179) (1,676)
---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,312 7,072
---------------- ---------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (86,234) (168,771)
Sales of fixed maturity investments 101,194 156,125
Net sales of short-term investments 12,956 70,830
Purchases of equity securities (54,028) (69,931)
Sales of equity securities 12,018 9,017
Purchases of furniture and equipment (337) (142)
---------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES (14,431) (2,872)
---------------- ---------------
FINANCING ACTIVITIES
Common stock issued 279 1,068
Purchase of treasury stock (169)
Deferred compensation on restricted stock (279) (1,065)
---------------- ---------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (169) 3
---------------- ---------------
Increase in cash 2,712 4,203
Cash beginning of year 1,466 982
---------------- ---------------
Cash end of period $4,178 $5,185
================ ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Risk Capital Holdings, Inc. ("RCHI"), incorporated in March 1995 under the laws
of the State of Delaware, is a holding company whose wholly owned subsidiary,
Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), a Nebraska
corporation, was formed to provide, on a global basis, property and casualty
reinsurance and other forms of capital, either on a stand-alone basis or as part
of integrated capital solutions for insurance companies with capital needs that
cannot be met by reinsurance alone. (RCHI and Risk Capital Reinsurance are
collectively referred to herein as the "Company.") In September 1995, through
its initial public offering, related exercise of the underwriters'
over-allotment option and direct sales of an aggregate of 16,750,625 shares of
RCHI's common stock, par value $.01 per share (the "Common Stock"), at $20 per
share, and the issuance of warrants, RCHI was capitalized with net proceeds of
approximately $335.0 million, of which $328.0 million was contributed to the
statutory capital of Risk Capital Reinsurance.
Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock
and Class B warrants to purchase an aggregate of 1,920,601 shares of Common
Stock were issued in connection with the direct sales. Class A warrants are
immediately exercisable at $20 per share and expire September 19, 2002. Class B
warrants are exercisable at $20 per share during the seven year period
commencing September 19, 1998, provided that the Common Stock has traded at or
above $30 per share for 20 out of 30 consecutive trading days.
2. GENERAL
The accompanying interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and in the opinion of
management, reflect all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of results for such periods. These
consolidated financial statements should be read in conjunction with the 1996
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
3. PER SHARE DATA
Earnings per share are computed based on the weighted average number of shares
of Common Stock and common stock equivalents outstanding during the period using
the modified treasury stock method. Stock options and Class A and B warrants to
purchase Common Stock are considered to be common stock equivalents. The common
stock equivalents were anti-dilutive, and thus not included in the weighted
average shares outstanding.
6
<PAGE>
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." This statement replaces the historical presentation of "primary"
earnings per share with the caption "basic" earnings per share. Basic earnings
per share excludes dilution and is computed by dividing net income by the
weighted average number of shares outstanding for the period. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, with early adoption prohibited. Upon adoption, all prior period earnings
per share amounts will be restated.
The Company's primary and fully diluted earnings per share amounts as previously
reported are not expected to differ materially from the basic and diluted
amounts required by SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
This statement establishes standards for the reporting of comprehensive income
and its components. Comprehensive income is defined as the change in equity
during a period resulting from transactions and other events from nonowner
sources. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will apply the provisions of the
statement beginning in 1998.
Currently, comprehensive income for the Company would consist of net income and
the change in unrealized appreciation or depreciation of investments, net of
income tax, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------------- ------------------------------
1997 1996 1996 1995 (1)
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income $542 $1,792 $4,112 $1019
Change in unrealized appreciation
(depreciation), net of income tax 25,579 (1,885) 5,705 3,731
------------ ----------- ------------ ------------
Comprehensive income (loss) $26,121 ($93) $9,817 $4,750
============ =========== ============= ============
PER SHARE AMOUNTS:
Net income $0.03 $0.11 $0.24 $0.06
Change in unrealized appreciation
(depreciation), net of income tax 1.50 (0.11) 0.34 0.22
------------ ----------- ------------ ------------
Comprehensive income (loss) $1.53 - $0.58 $0.28
============ =========== ============= ============
</TABLE>
(1) For the period from June 23, 1995 (date of inception) to December 31, 1995
7
<PAGE>
4. INVESTMENT INFORMATION
The Company classifies all of its publicly traded fixed maturity and equity
securities as "available for sale" and accordingly, they are carried at
estimated fair value. The fair value of publicly traded fixed maturity
securities and publicly traded equity securities is estimated using quoted
market prices or dealer quotes. Short-term investments, which have a maturity of
one year or less at the date of acquisition, are carried at cost, which
approximates fair value.
All of the Company's publicly traded equity securities and privately held
securities were issued by insurance and reinsurance companies or companies
providing services to the insurance industry. At June 30, 1997, the publicly
traded equity portfolio consisted of 12 investments, with estimated fair values
ranging individually from $1.5 million to $22.6 million.
Investments in privately held securities, issued by privately and publicly held
companies, may include both equity securities and securities convertible into,
or exercisable for, equity securities (some of which may have fixed maturities).
Privately held securities are subject to trading restrictions or are otherwise
illiquid and do not have readily ascertainable market values. The risk of
investing in such securities is generally greater than the risk of investing in
securities of widely held, publicly traded companies. Lack of a secondary market
and resale restrictions may result in the Company's inability to sell a security
at a price that would otherwise be obtainable if such restrictions did not exist
and may substantially delay the sale of a security which the Company seeks to
sell. Such investments are classified as "available for sale" and carried at
estimated fair value, except for investments in which the Company believes it
has the ability to exercise significant influence (generally defined as
investments in which the Company owns 20% or more of the outstanding voting
common stock of the issuer), which are carried under the equity method of
accounting. Under this method, the Company records its proportionate share of
income or loss for such investments in results of operations.
The estimated fair value of investments in privately held securities, other than
those carried under the equity method, is initially equal to the cost of such
investments until the investments are revalued based principally on substantive
events or other factors which could indicate a diminution or appreciation in
value, such as an arm's-length third party transaction justifying an increased
valuation or adverse development of a significant nature requiring a write down.
The Company periodically reviews the valuation of investments in privately held
securities with Marsh & McLennan Risk Capital Corp., its equity investment
advisor.
8
<PAGE>
Privately held securities consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1997 1996
-------------------- -------------------
<S> <C> <C>
EQUITY SECURITIES:
CARRIED UNDER THE EQUITY METHOD:
The ARC Group, LLC $ 9,459
Capital Protection Insurance Services, LLC 361
First American Financial Corporation 6,569
Insurance Investment Group, L.P. 136 $ 180
Island Heritage Insurance Company, Ltd. 4,104 4,269
New Europe Insurance Ventures 248
Providers' Assurance Corporation 3,921
CARRIED AT FAIR VALUE:
Peregrine Russell Miller Insurance Fund
of Asia Limited 7,554 7,465
Terra Nova (Bermuda) Holdings, Ltd. 16,417 15,870
Venton Holdings, Ltd. 4,470 1,063
------------- -------------
Total privately held equities $53,239 $28,847
============= =============
</TABLE>
At June 30, 1997, the Company had investment commitments relating to its
privately held securities totaling approximately $31 million, compared to $22
million at December 31, 1996.
Set forth below is certain information relating to each of the Company's
investments in privately held securities which occurred during the second
quarter of 1997:
THE ARC GROUP, LLC
In July 1997, the Company completed its acquisition, effective as of May 7,
1997, of a minority ownership interest in The ARC Group, LLC ("ARC"). ARC,
founded in 1986, is an independent wholesale insurance broker and managing
general agent specializing in the placement of professional liability insurance,
primarily directors and officers liability coverage. ARC will continue to
operate as an independent wholesaler, obtaining its business from a network of
several hundred agents and brokers in the United States.
9
<PAGE>
CAPITAL PROTECTION INSURANCE SERVICES, LLC
In May 1997, the Company contributed $510,000, representing 51% (49% voting
interest) of the total capitalization of a newly-formed underwriting management
company, Capital Protection Insurance Services, LLC ("CPI"). CPI, as an
underwriting manager for insurance companies, offers specialty risk and
alternative market solutions. As part of its arrangements with CPI, the Company
expects to provide reinsurance capacity for the business CPI develops.
PROVIDERS' ASSURANCE CORPORATION
In April 1997, the Company acquired an approximately 37% ownership interest in
Providers' Assurance Corporation ("Providers"), for $4 million. Providers
develops and markets workers' compensation insurance programs through joint
operating arrangements with community-based healthcare providers, and offers
other workers' compensation-related consulting services to the healthcare
community. Under the agreements with Providers, the Company has the right to
provide certain reinsurance on insurance programs developed by Providers during
specified time periods.
VENTON HOLDINGS, LTD.
During the 1997 second quarter, the Company recorded an increase of
approximately $3.4 million in the carrying value of its investment in Venton
Holdings, Ltd. ("Venton") to partially reflect the purchase price paid by EXEL
Limited for its 20% ownership in Venton. The new carrying value was established
by taking the mid-point between the per share purchase price paid by the Company
and per share purchase price recently paid by EXEL Limited.
5. STATUTORY DATA
The statutory capital and surplus of Risk Capital Reinsurance at June 30, 1997
was $365.0 million, compared to $334.3 million at December 31, 1996. The
statutory net loss for the six month period ended June 30, 1997 was $6.1
million, compared to a net loss of $1.4 million in the prior year period. The
growth in surplus during the first half of 1997 is primarily from unrealized
appreciation of the Company's public equity portfolio.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
THE COMPANY
Risk Capital Holdings, Inc. ("RCHI") is the holding company for Risk Capital
Reinsurance Company ("Risk Capital Reinsurance"), RCHI's wholly owned subsidiary
which is domiciled in Nebraska. (RCHI and Risk Capital Reinsurance are
collectively referred to herein as the "Company".) RCHI was incorporated in
March 1995 and commenced operations during September 1995 upon completion of its
initial public offering and related exercise of the underwriters' over-allotment
option and direct sales of an aggregate of 16,750,625 shares of RCHI's common
stock, par value $.01 per share, at $20 per share, and the issuance of warrants
(collectively, the "Offerings"). RCHI received aggregate net proceeds from the
Offerings of approximately $335.0 million, of which $328.0 million was
contributed to the capital of Risk Capital Reinsurance. On November 6, 1995,
Risk Capital Reinsurance was licensed under the insurance laws of the State of
Nebraska.
RECENT INDUSTRY PERFORMANCE
The property and casualty reinsurance industry has been highly cyclical. This
cyclicality has produced periods characterized by intense price competition due
to excessive underwriting capacity as well as periods when shortage of capacity
permitted favorable premium levels. Demand for reinsurance is influenced
significantly by underwriting results of primary property and casualty insurers
and prevailing general economic and market conditions, all of which affect
liability retention decisions of primary insurers and reinsurance premium rates.
The supply of reinsurance is related directly to prevailing prices and levels of
surplus capacity, which, in turn, may fluctuate in response to changes in rates
of return on investments being realized in the reinsurance industry. The
cyclical trends in the industry and the industry's profitability can also be
affected significantly by volatile and unpredictable developments, including
changes in the propensity of courts to grant larger awards, natural disasters
(such as catastrophic hurricanes, windstorms, earthquakes, floods and fires),
fluctuations in interest rates and other changes in the investment environment
that affect market prices of investments and the income and returns on
investments, and inflationary pressures that may tend to affect the size of
losses experienced by ceding primary insurers.
Reinsurance treaties that are placed by intermediaries are typically for one
year terms with a substantial number that are written or renewed on January 1
each year. Other significant renewal dates include April 1, July 1 and October
1. Thus far, the 1997 renewal periods have been marked by continuing intensified
competitive conditions in terms of premium rates and treaty terms and conditions
in both the property and casualty segments of the marketplace. These conditions
have worsened due to large domestic primary companies retaining more of their
business and ceding less premiums to reinsurers. While the Company is initially
somewhat disadvantaged compared with many of its competitors, which are larger,
have greater resources and longer operating histories than the Company, it
believes it has been able to generate attractive opportunities in the
marketplace due to its substantial unencumbered capital base, experienced
management team and relationship with its equity investment advisor as well as
its strategic focus on generating a small number of large reinsurance treaty
transactions that may also be integrated with an equity investment in client
companies.
11
<PAGE>
As of July 30, 1997, the Company had 64 in-force treaties, with approximately
$150 million of annualized in-force premiums. Such in-force premiums represent
estimated annualized premiums from treaties entered into during 1996 and the
1997 renewal periods that are expected to generate net premiums written during
calendar year 1997. All except one of such treaties are subject to renewal.
Without taking into account the possibility that (x) several of the treaties
entered into during 1996 that are scheduled to expire during the remainder of
1997 may be renewed and (y) additional new treaties may be bound during 1997, it
is estimated that the Company could record approximately $130 million of net
premiums written over the twelve month period ending December 31, 1997 from such
treaties. Such estimates of in-force premiums and net premiums written do not
include certain unearned premium portfolios and other non-recurring transactions
and are based on information provided by ceding company clients. Actual premium
writings for 1997 may differ materially from such estimates.
RESULTS OF OPERATIONS
For the six month periods ended June 30, 1997 and 1996, the Company had
consolidated net income of approximately $542,000, or $0.03 per share, and $1.8
million, or $0.11 per share, respectively. After-tax realized investment losses
of $289,000, or $0.02 per share, for the first half of 1997, compare with a net
investment gain of $165,000, or $0.01 per share, for the same prior year period.
Net income for the first half of 1997 included an after-tax loss of $0.3
million, or $0.02 per share, representing the Company's equity in the net loss
of investee companies, which are accounted for under the equity method of
accounting.
The Company believes that the results of operations for the six months ended
June 30, 1997 are not necessarily indicative of its future financial results due
to a number of factors, including (i) the increase in net premiums written
indicated by the Company's January 1 and subsequent 1997 renewal season
activity, (ii) the Company's emphasis on targeting casualty business that is
longer-tail than its current mix of business and (iii) the Company's investment
strategy. Increased premium writings, particularly longer-tail casualty
business, can generally be expected to generate higher underwriting losses
because of the related requirement to establish claims liabilities that are
adequate to cover the costs of anticipated future claim payments without taking
into account the time value of money.
The amount of investment income earned that may offset underwriting losses from
quarter to quarter could vary and diminish as the Company continues to employ
its strategy of investing a substantial portion of its investment portfolio in
publicly traded and privately held equity securities of insurance companies and
insurance-related entities. Investments in equity securities yield less current
investment income than fixed maturity investments. Variability and declines in
the Company's results of operations could be further exacerbated by private
equity investments in start-up companies which are accounted for under the
equity method. Such start-up companies may be expected to initially generate
operating losses. The Company's results may also be impacted by currency gains
and losses for business transacted in currencies other than
12
<PAGE>
U.S. dollars. Accordingly, the Company's results of operations for the year
ending December 31, 1997 may vary from quarter to quarter and from the financial
results reported by the Company in 1996, and could also produce operating
losses.
At June 30, 1997, primary and fully-diluted book value per share were $22.26 and
$21.91, respectively, which compare with primary and fully-diluted book value
per share of $20.68 at December 31, 1996. For the first half of 1997, unrealized
appreciation increased by $25.6 million, net of tax, or $1.50 per share.
Included in the change in unrealized appreciation for the 1997 six-month period
is an unrealized gain, net of tax, of $2.2 million, or $0.13 per share, relating
to the Company's privately held equity investment in Venton Holdings, Ltd.
Unrealized appreciation or depreciation of investments to the extent that it
occurs for investments carried at fair value is recorded in a separate
components of stockholders' equity, net of related deferred income taxes. Such
gains or losses are recorded in net income to the extent investments are sold.
The timing and recognition of such gains and losses are unpredictable and not
indicative of future operating results.
NET PREMIUMS WRITTEN
Net premiums written for the six month periods ended June 30, 1997 and 1996 were
as follows:
(IN MILLIONS)
SIX MONTHS ENDED
JUNE 30,
-----------------------------------------
1997 1996
------------ -------------
Property $8.0 $6.5
Casualty 31.8 5.5
Multi-line 18.1 1.5
Specialty 6.1 10.1
------------ ------------
Total $64.0 $23.6
============ =============
Approximately 30% of net premiums written in the first half of 1997 was from
non-U.S. clients, compared with 56% in the first half of 1996.
Set forth below is the Company's statutory composite ratios for the six month
periods ended June 30, 1997 and 1996:
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1997 1996
------------ --------------
Claims and claims expense ratio 68.2% 72.1%
Commissions and brokerage ratio 27.2% 15.7%
Operating expense ratio 10.6% 21.3%
------------ ---------------
Statutory composite ratio 106.0% 109.1%
============ ===============
13
<PAGE>
Given the low level of premium volume the Company may initially generate and the
long-term nature of the casualty business which the Company seeks to write, it
is likely that earned premiums will be insufficient to cover claims costs,
acquisition costs and operating expenses, thereby resulting in continued
underwriting losses in 1997.
In pricing its reinsurance treaties, the Company focuses on many factors,
including exposure to claims and commissions and brokerage expenses. Commissions
and brokerage expenses are acquisition costs that generally vary by the type of
treaty and line of business, and are considered by the Company's underwriting
and actuarial staff in evaluating the adequacy of premium writings.
Other operating expenses increased to $7.4 million for the first half of 1997,
compared to $5.1 million for the 1996 prior year period. Assuming the successful
execution of the Company's business strategy, the Company expects other
operating expenses to grow commensurate with growing operations, but expects
other operating expenses to decline moderately as a percentage of net premiums
written because increases in premium writings are generally expected to exceed
the growth in such expenses.
Included in 1997 other operating expenses is a pre-tax foreign exchange loss of
$538,000. Such loss is principally related to assets and premiums receivable of
approximately $5.8 million denominated in European Currency Units ("ECU's"),
which is recorded separately from statutory underwriting results and therefore
excluded from the statutory composite ratio. Unhedged monetary assets and
liabilities are translated at the exchange rate in effect at the balance sheet
date, with the resulting foreign exchange gains or losses recognized in income.
Such future gains or losses are unpredictable, and could be material.
INVESTMENT RESULTS
At June 30, 1997, approximately 49% of the Company's invested assets, short term
investments and cash consisted of fixed maturity and short-term investments
compared to 63% at the end of 1996. Net investment income for the first six
months of 1997 was approximately $7.0 million, compared to $6.5 million for the
prior year period. The amount of investment income from quarter to quarter could
vary and diminish as the Company continues to employ its strategy of investing a
substantial portion of its investment portfolio in publicly traded and privately
held equity securities of insurance companies which generally yield less current
investment income than fixed maturity investments. Unrealized appreciation or
depreciation of such investments to the extent that it occurs is recorded in a
separate component of stockholders' equity, net of related deferred income
taxes. Gains or losses are recorded in net income to the extent investments are
sold, but the recognition of such gains and losses is unpredictable and not
indicative of future operating results.
14
<PAGE>
INCOME TAXES
The Company's effective tax rates for the first half of 1997 and 1996 are less
than the 35% statutory rate on pre-tax operating income due to tax exempt income
and the dividends received deductions. The gross deferred income tax benefits
for the first half of 1997 and 1996 of approximately $1.1 million and $919,000,
respectively, which are assets considered recoverable from future taxable
income, resulted principally from temporary differences between financial and
taxable income. Temporary differences include, among other things, charges for
restricted stock grants which are not deductible for income tax purposes until
vested (vesting of existing restricted stock grants will occur over a five-year
period), as well as charges for a portion of unearned premiums and claims
reserves.
INVESTMENTS
A principal component of the Company's investment strategy is investing a
significant portion of invested assets in publicly traded and privately held
equity securities, primarily issued by insurance and reinsurance companies and
companies providing services to the insurance industry. Cash and fixed maturity
investments and, if necessary, the sale of publicly traded equity securities
will be used to support shorter-term liquidity requirements.
As a significant portion of the Company's investment portfolio will generally be
equity securities issued by insurance and reinsurance companies and companies
providing services to the insurance industry, the equity portfolio lacks
industry diversification and will be particularly subject to the cyclically of
the insurance industry. Unlike fixed income securities, equity securities such
as common stocks, including the equity securities in which the Company may
invest, generally are not and will not be rated by any nationally recognized
rating service. The values of equity securities generally are more dependent on
the financial condition of the issuer and less dependent on fluctuations in
interest rates than are the values of fixed income securities. The market value
of equity securities generally is regarded as more volatile than the market
value of fixed income securities. The effects of such volatility on the
Company's equity portfolio could be exacerbated to the extent that such
portfolio is concentrated in the insurance industry and in relatively few
issuers.
As the Company's investment strategy is to invest a significant portion of its
investment portfolio in equity securities, its investment income in any fiscal
period may be smaller, as a percentage of investments, and less predictable than
that of other insurance companies, and net realized and unrealized gains
(losses) on investments may have a greater effect on the Company's results of
operations or stockholders' equity at the end of any fiscal period than other
insurance and/or reinsurance companies. Because the realization of gains and
losses on equity investments is not generally predictable, such gains and losses
may differ significantly from period to period.
Investments included in the Company's private portfolio include securities
issued by privately held companies and securities issued by public companies
that are generally restricted as to resale or are otherwise illiquid and do not
have readily ascertainable market values. The risk of investing in such
securities is generally greater than the risk of investing in securities of
widely held, publicly traded companies. Lack of a secondary market and resale
restrictions may result in the Company's inability to sell a security at a price
that would otherwise be obtainable if such
15
<PAGE>
restrictions did not exist and may substantially delay the sale of a security
the Company seeks to sell. At June 30, 1997, cash and invested assets totaled
approximately $446.2 million, consisting of $98.9 million of cash and short-term
investments, $120.6 million of publicly traded fixed maturity investments,
$173.5 million of publicly traded equity securities and $53.2 million of
privately held securities.
During the first six months of 1997, the Company allocated approximately $20.5
million from its short term portfolio to publicly traded equity securities, and
an additional $20.6 million to fund investments in privately held securities.
See Note 4 under the caption "Investment Information" of the accompanying Notes
to Consolidated Financial Statements for certain information regarding the
Company's privately held securities and their carrying values. During the
remainder of 1997 and over the long-term, the Company intends to continue to
allocate a substantial portion of its cash and short-term investments into
publicly traded and privately held equity securities, subject to market
conditions and opportunities in the marketplace.
At June 30, 1997, the publicly traded equity portfolio consisted of investments
in 12 publicly traded domestic insurers, reinsurers, or companies providing
services to the insurance industry. The estimated fair values of such
investments ranged individually from $1.5 million to $22.6 million. The fixed
maturity and short-term investments were all rated investment grade by Moody's
Investors Service, Inc. or Standard & Poor's Corporation and have an average
quality rating of AA and an average duration of approximately 2.4 years.
The Company's pre-tax and net of tax investment yields in the first six months
of 1997 were 3.7% and 2.7%, respectively, compared to 3.9% and 2.9%,
respectively, for the same prior year period. Assuming a stable interest rate
environment, the Company anticipates such yields to moderately decline as funds
invested in short-term securities are allocated into equity securities.
The Company has not invested in derivative financial instruments such as
futures, forward contracts, swaps, or options or other financial instruments
with similar characteristics such as interest rate caps or floors and fixed-rate
loan commitments.
LIQUIDITY AND CAPITAL RESOURCES
RCHI is a holding company and has no significant operations or assets other than
its ownership of all of the capital stock of Risk Capital Reinsurance, whose
primary and predominant business activity is providing reinsurance and other
forms of capital to insurance and reinsurance companies and making investments
in insurance-related companies. RCHI will rely on cash dividends and
distributions from Risk Capital Reinsurance to pay any cash dividends to
stockholders of RCHI and to pay any operating expense that RCHI may incur. The
payment of dividends by RCHI will be dependent upon the ability of Risk Capital
Reinsurance to provide funds to RCHI. The ability of Risk Capital Reinsurance to
pay dividends or make distributions to RCHI is dependent upon its ability to
achieve satisfactory underwriting and investment results and to meet certain
regulatory standards of the State of Nebraska. There are presently no
contractual restrictions on the payment of dividends or the making of
distributions by Risk Capital Reinsurance to RCHI.
16
<PAGE>
Nebraska insurance laws provide that, without prior approval of the Nebraska
Director of Insurance (the "Nebraska Director"), Risk Capital Reinsurance cannot
pay a dividend or make a distribution (together with other dividends or
distributions paid during the preceding 12 months) that exceeds the greater of
(i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory
net income from operations from the preceding calendar year not including
realized capital gains. Net income (exclusive of realized capital gains) not
previously distributed or paid as dividends from the preceding two calendar
years may be carried forward for dividends and distribution purposes. Any
proposed dividend or distribution in excess of such amount is called an
"extraordinary" dividend or distribution and may not be paid until either it has
been approved, or a 30-day waiting period has passed during which it has not
been disapproved, by the Nebraska Director. Notwithstanding the foregoing,
Nebraska insurance laws provide that any distribution that is a dividend may be
paid by Risk Capital Reinsurance only out of earned surplus arising from its
business, which is defined as unassigned funds (surplus) as reported in the
statutory financial statement filed by Risk Capital Reinsurance with the
Nebraska Insurance Department for the most recent year. In addition, Nebraska
insurance laws also provide that any distribution that is a dividend and that is
in excess of Risk Capital Reinsurance's unassigned funds, exclusive of any
surplus arising from unrealized capital gains or revaluation of assets, will be
deemed an "extraordinary" dividend subject to the foregoing requirements.
RCHI and Risk Capital Reinsurance file consolidated federal income tax returns
and have entered into a tax sharing agreement (the "Tax Sharing Agreement"),
allocating the consolidated income tax liability on a separate return basis.
Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance makes tax
sharing payments to RCHI based on such allocation.
Net cash flow from operating activities for the six months ended June 30,
1997 was $17.3 million, compared with $7.1 million in the prior year
period.
The primary sources of liquidity for Risk Capital Reinsurance are net cash flow
from operating activities, principally premiums received, the receipt of
dividends and interest on investments and proceeds from the sale or maturity of
investments. The Company's cash flow is also affected by claims payments, some
of which could be large. Therefore, the Company's cash flow could fluctuate
significantly from period to period.
The Company does not currently have any material commitments for any capital
expenditures over the next 12 months other than in connection with the further
development of the Company's infrastructure. The Company expects that its
financing and operational needs for the foreseeable future will be met by the
Company's balance of cash and short-term investments, as well as by funds
generated from operations. However, no assurance can be given that the Company
will be successful in the implementation of its business strategy.
At June 30, 1997, the Company's consolidated stockholders' equity totaled $379.2
million, or $22.26 per share. At such date, statutory surplus of Risk Capital
Reinsurance was approximately $365.0 million. Based on data available as of
March 31, 1997 from the Reinsurance Association of America, Risk Capital
Reinsurance is the thirteenth largest domestic broker market oriented reinsurer
as measured by statutory surplus.
17
<PAGE>
SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this Form 10-Q include forward looking statements that involve risks and
uncertainties, including, but not limited to, quarterly fluctuations in results
and other risks detailed from time to time in the Company's Securities and
Exchange Commission filings. Among the factors that could cause such forward
looking statements not to be realized include, without limitation, acceptance in
the market of the Company's reinsurance products; the availability of
investments on terms that are attractive to the Company; pricing competition;
the amount of underwriting capacity from time to time in the market; general
economic conditions and conditions specific to the reinsurance and investment
markets in which the Company operates; regulatory changes and conditions; rating
agency policies and practices; claims development and loss of key executives.
Actual results may differ materially from management expectations. The Company
assumes no obligation to update any forward looking statement or other
information contained in this report.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1996 Annual Meeting of Shareholders ("Annual Meeting") of Risk
Capital Holdings, Inc. ("RCHI") was held on May 13, 1997.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in RCHI's
Proxy Statement, dated April 14, 1997.
(c) The shareholders of RCHI re-elected the Class II Directors of RCHI to
hold office until the 2000 annual meeting of shareholders and until
their successors are elected and qualified. Set forth below are the
number of votes cast for and withheld for each such Director:
ELECTION OF DIRECTORS
FOR WITHHELD
--- --------
Allan W. Fulkerson 15,323,089 5,225
Lewis L. Glucksman 15,291,989 36,325
Ian R. Heap 15,291,989 36,325
At the Annual Meeting, the shareholders also approved (i) an Amendment
to RCHI's 1995 Long Term Incentive and Share Award Plan and (ii)
ratified the selection of Price Waterhouse LLP as independent
accountants for the fiscal year ending December 31, 1997. Set forth
below are the voting results for such proposals:
APPROVAL OF AMENDMENT TO RCHI'S 1995 LONG TERM INCENTIVE AND SHARE
AWARD PLAN
FOR AGAINST ABSTAIN
--- ------- -------
15,045,854 236,935 28,475
RATIFICATION OF SELECTION OF PRICE WATERHOUSE LLP AS INDEPENDENT
ACCOUNTANTS
FOR AGAINST ABSTAIN
--- ------- -------
15,321,314 1,300 5,700
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
10.1 Stock Option Agreements - Executive Officers
10.2 Stock Option Agreement - Chairman
10.3 Restricted Share Agreements - Executive Officers
15 Accountants' Awareness Letter and Limitation of
Liability (regarding unaudited interim financial
information)
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the three month period
ended June 30, 1997.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
20
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
RISK CAPITAL HOLDINGS, INC.
----------------------------------
(REGISTRANT)
/s/ MARK D. MOSCA
----------------------------------
DATE: AUGUST 13, 1997 MARK D. MOSCA
PRESIDENT
/s/ PAUL J. MALVASIO
----------------------------------
DATE: AUGUST 13, 1997 PAUL J. MALVASIO
CHIEF FINANCIAL OFFICER
21
<PAGE>
EXHIBIT INDEX
Exhibit
NO. DESCRIPTION
10.1 Stock Option Agreements - Executive Officers
10.2 Stock Option Agreement - Chairman
10.3 Restricted Share Agreements - Executive Officers
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
22
<PAGE>
EXHIBIT 10.1
STOCK OPTION AGREEMENTS -- EXECUTIVE OFFICERS
Each of the executive officers of Risk Capital Holdings, Inc. ("RCHI")
listed below has entered into Stock Option Agreements with RCHI that are
substantially identical in all material respects to the agreement, dated as of
September 19, 1995, between RCHI and Mark D. Mosca, a copy of which is being
filed herewith in this Exhibit 10.1, except for the terms indicated below:
EXECUTIVE OFFICER DATE OF GRANT* OPTION SHARES* OPTION PRICE*
- ----------------- ------------- ------------- ------------
Mark D. Mosca September 19, 1995 100,000 $20.00
(see attached
agreement)
November 19, 1996 74,000 $17.625
Peter A. Appel November 13, 1995 25,000 $21.00
November 19, 1996 39,500 $17.625
Bonnie L. Boccitto October 2, 1995 25,000 $21.25
November 19, 1996 39,500 $17.625
Paul J. Malvasio September 20, 1995 25,000 $20.00
November 19, 1996 39,500 $17.625
_____________
* Such terms are defined in the attached agreement.
* * * *
<PAGE>
RISK CAPITAL HOLDINGS, INC.
STOCK OPTION AGREEMENT
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby
acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Mark D. Mosca, an officer of the Company on the
date hereof (the "Option Holder"), the option to purchase common stock, $.01 par
value per share, of the Company ("Shares"), upon the following terms:
WHEREAS, the following terms reflect the Company's 1995 Long Term
Incentive and Share Award Plan, as amended by the First Amendment thereto (the
"Plan");
(a) GRANT. The Option Holder is hereby granted an option (the
"Option") to purchase 100,000 Shares (the "Option Shares") pursuant to the Plan,
the terms of which are incorporated herein by reference. The Option is granted
as of September 19, 1995 (the "Date of Grant") and such grant is subject to the
terms and conditions herein and the terms and conditions of the applicable
provisions of the Plan. Such Option shall not be treated as an incentive stock
option under Section 422 of the Internal Revenue Code of 1986, as amended.
(b) STATUS OF OPTION SHARES. The Option Shares shall upon issue rank
equally in all respects with the other Shares.
(c) OPTION PRICE. The purchase price for the Option Shares shall be,
except as herein provided, $20.00 per Option Share, hereinafter sometimes
referred to as the "Option Price," payable immediately in full upon the exercise
of the Option.
(d) TERM OF OPTION. The Option may be exercised only during the
period (the "Option Period") commencing in accordance with paragraph (f) below
and shall continue for seven years from the date the Option, or portion thereof,
becomes exercisable; thereafter the Option Holder shall cease to have any rights
in respect thereof. The right to exercise the Option may be subject to sooner
termination in the event employment with the Company is terminated, as provided
in paragraph (j) below.
(e) NO RIGHTS OF SHAREHOLDER. The Option Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or in equity.
(f) EXERCISABILITY. One-fifth of the Options shall become
exercisable on each of the first, second, third, fourth and fifth anniversary of
the Date of Grant, subject to paragraph (j) below; provided that all such
options shall immediately become exercisable (1) to the extent provided in
paragraph (j) below and (2) upon a Change in Control. Subject to paragraph (j)
below, the Option may be exercised at any time or from time to time during the
Option Period in regard to all or any portion of the Option which is then
exercisable, as may be adjusted pursuant to paragraph (g) below.
<PAGE>
"Change in Control" means and shall be deemed to have occurred if:
a. any person (within the meaning of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), other than a Permitted Person or Initial
Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting Securities;
or
b. any Initial Investor is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting
Securities representing 50% or more of the total voting power of all the then
outstanding Voting Securities; or
c. the individuals who, as of the Date of Grant, constitute the Board of
Directors of the Company together with those who become directors subsequent to
such date and whose recommendation, election or nomination for election to the
Board was approved by a vote of at least a majority of the directors then still
in office who either were directors as of such date or whose recommendation,
election or nomination for election was previously so approved, cease for any
reason to constitute a majority of the members of the Board; or
d. the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by the Company
of all or substantially all of the Company's assets, or reorganization of the
Company (provided that all material regulatory approvals have been obtained), or
consummation of any such transaction, other than any such transaction which
would (x) result in at least 60% of the total voting power represented by the
voting securities of the surviving entity outstanding immediately after such
transaction being beneficially owned by the former stockholders of the Company
and (y) not otherwise be deemed a Change in Control under subparagraphs a, b, c
or e of this paragraph (f); or
e. the Board adopts a resolution to the effect that, for purposes hereof,
a Change in Control has occurred.
(i) "Initial Investors" means (A) X.L. Insurance Company, Ltd.;
(B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital
Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or
equivalent in the case of a non-corporate entity) of the foregoing.
(ii) "Permitted Persons" means (A) the Company; (B) any Related
Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act)
comprised of any or all of the foregoing.
-2-
<PAGE>
(iii) "Related Party" means (A) a majority-owned subsidiary of the
Company; (B) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any majority-owned subsidiary of
the Company; or (C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of Voting Securities.
(iv) "Voting Security" means any security of the Company which
carries the right to vote generally in the election of directors.
(g) ADJUSTMENTS FOR RECAPITALIZATION AND DIVIDENDS. In the event that,
prior to the expiration of the Option, any dividend in Shares, recapitalization,
Share split, reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other such change affects the
Shares such that they are increased or decreased or changed into or exchanged
for a different number or kind of shares, other securities of the Company or of
another corporation or other consideration, then in order to maintain the
proportionate interest of the Option Holder and preserve the value of the
Option, (i) there shall automatically be substituted for each Share subject to
the unexercised Option the number and kind of shares, other securities or other
consideration into which each outstanding Share shall be changed or for which
each such Share shall be exchanged, and (ii) the exercise price shall be
increased or decreased proportionately so that the aggregate purchase price for
the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.
(h) NONTRANSFERABILITY. The Option may not be assigned or otherwise
transferred, disposed of or encumbered by the Option Holder, other than by will
or by the laws of descent and distribution. During the lifetime of the Option
Holder, the Option shall be exercisable only by the Option Holder or by his or
her guardian or legal representative. Notwithstanding the foregoing, the Option
may be transferred for no consideration by the Option Holder to members of his
or her "immediate family" or to a trust established for the exclusive benefit of
solely one or more members of the Option Holder's "immediate family." Any
Option held by the transferee will continue to be subject to the same terms and
conditions that were applicable to the Option immediately prior to the transfer,
except that the Option will be transferable by the transferee only by will or
the laws of descent and distribution. For purposes hereof, "immediate family"
means the Option Holder's children, stepchildren, grandchildren, parents,
stepparents, grandparents, spouse, siblings (including half brothers and
sisters), in-laws, and relationships arising because of legal adoption.
(i) EXERCISE OF OPTION. In order to exercise the Option, the Option
Holder shall submit to the Company an instrument in writing signed by the Option
Holder, specifying the number of Option Shares in respect of which the Option is
being exercised, accompanied by payment, in a manner acceptable to the Company,
of the Option Price for the Option Shares for which the Option is being
exercised. Payment to the Company in cash or Shares already owned by the Option
Holder (provided that the Option Holder has owned such Shares for a minimum
period of six months) and having a total Fair Market Value (as defined below)
equal to the exercise price, or in a combination of cash and such Shares, shall
be deemed acceptable. Option Shares will be
-3-
<PAGE>
issued accordingly by the Company within 15 business days, and a share
certificate dispatched to the Option Holder within 30 days.
The Company shall not be required to issue fractional Shares upon the
exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional share therefor, shall pay a cash adjustment therefor in an amount
equal to their Fair Market Value (or if any Shares are not publicly traded, an
amount equal to the book value per share at the end of the most recent fiscal
quarter) multiplied by the fraction of the fractional share which would
otherwise have been issued hereunder. Anything to the contrary herein
notwithstanding, the Company shall not be obligated to issue any Option Shares
hereunder if the issuance of such Option Shares would violate the provision of
any applicable law, in which event the Company shall, as soon as practicable,
take whatever action it reasonably can so that such Option Shares may be issued
without resulting in such violations of law. For purposes hereof, Fair Market
Value shall mean the mean between the high and low selling prices per Share on
the immediately preceding date (or, if the Shares were not traded on that day,
the next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.
(j) TERMINATION OF SERVICE. In the event the Option Holder ceases to be
an employee of the Company, (i) due to retirement after attainment of age 65,
(ii) due to death or disability, as determined under the Company's long-term
disability plan, or (iii) due to (A) termination by the Company without cause
(as defined in the Option Holder's employment agreement dated September 19,
1995) or (B) constructive termination (as defined below), the Option, to the
extent not already exercisable in full, shall become immediately and fully
exercisable at the time of such termination of service, and the Option may be
exercised at any time during the Option Period. Subject to paragraph (f) above,
if the Option Holder ceases to be an employee of the Company for any other
reason, the portion of the Option which is not then exercisable shall be
cancelled on the date service terminates, and the portion of the Option which is
then exercisable may be exercised at any time within six months after the date
of such termination, but not later than termination of the Option Period. For
purposes of this Option, service with Risk Capital Reinsurance Company, the
Company's wholly owned subsidiary, shall be considered to be service with the
Company. "Constructive termination" means the occurrence, with respect to the
Option Holder, of any of the following: (i) the assignment of duties
inconsistent with such Option Holder's position or a significant diminution in
his/her responsibilities; (ii) a reduction in such Option Holder's base salary
or bonus opportunity; (iii) the requirement that such Option Holder work at a
location outside of Fairfield County, Connecticut, or Westchester County, New
York; or (iv) the failure to secure the agreement of any successor corporation
or other entity to the Company to fully assume the Company's obligations under
the arrangements described herein.
(k) OBLIGATIONS AS TO CAPITAL. The Company agrees that it will at all
times maintain authorized and unissued share capital sufficient to fulfill all
of its obligations under the Option.
-4-
<PAGE>
(l) TRANSFER OF SHARES. The Option, the Option Shares, or any interest in
either, may be sold, assigned, pledged, hypothecated, encumbered, or transferred
or disposed of in any other manner, in whole or in part, only in compliance with
the terms, conditions and restrictions as set forth in the governing instruments
of the Company, applicable United States federal and state securities laws and
the terms and conditions hereof. Each certificate for Option Shares issued upon
exercise of the Option, unless at the time of exercise such Option Shares are
registered under the Securities Act of 1933, as amended, shall bear the
following legend or such other legend as the Company deems appropriate:
"The securities evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the 'Act'), and may not be offered,
sold or otherwise transferred except (i) in compliance with the provisions
of any applicable state securities or 'Blue Sky' laws and (ii) (A) pursuant
to an effective registration under the Act, (B) in compliance with Rule 144
under the Act, (C) inside the United States to a Qualified Institutional
Buyer in compliance with Rule 144A under the Act, (D) outside the United
States in compliance with Rule 904 of Regulation S under the Act or
(E) inside the United States to an institutional 'accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a transaction
which, in the opinion of counsel reasonably satisfactory to the Company,
qualifies as an exempt transaction under the Act and the rules and
regulations promulgated thereunder."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend or such other legend deemed appropriate by the
Company shall also bear such legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to the
restrictions set forth herein. The provisions of this paragraph (l) shall be
binding upon all subsequent holders of certificates bearing the above legend and
all subsequent holders of the Option, if any.
(m) EXPENSES OF ISSUANCE OF OPTION SHARES. The issuance of stock
certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) or by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.
(n) WITHHOLDING. The Option Holder agrees to make appropriate
arrangements with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of the Option.
(o) REFERENCES. References herein to rights and obligations of the Option
Holder shall apply, where appropriate, to the Option Holder's legal
representative or estate without regard to whether specific reference to such
legal representative or estate is contained in a particular provision of this
Option.
-5-
<PAGE>
(p) SETTLEMENT OF DISPUTES. Any dispute between the parties arising from
or relating to the terms of this Option shall be resolved by arbitration held in
the State of Connecticut in accordance with the rules of the American
Arbitration Association. All costs associated with any arbitration, including
all legal expenses, for both parties shall be borne by the Company.
(q) NO MITIGATION. To the extent that the vesting of any portion of the
Option is accelerated upon a Change in Control or upon a termination of service
as provided herein, neither the Option, nor any Option Shares nor any interest
in either, shall be reduced by any compensation received by the Option Holder in
connection with any other employment.
(r) NOTICES. Any notice required or permitted to be given under this
agreement shall be in writing and shall be deemed to have been given when
delivered personally or by courier, or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the party concerned
at the address indicated below or to such changed address as such party may
subsequently by similar process give notice of:
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
Mark D. Mosca
[address of Option Holder]
(s) GOVERNING LAW. This agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
(t) ENTIRE AGREEMENT. This agreement constitutes the entire
agreement among the parties relating to the subject matter hereof, and any
previous agreement or understanding among the parties with respect thereto is
superseded by this agreement.
(u) COUNTERPARTS. This agreement may be executed in two
counterparts, each of which shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this agreement as of
the Date of Grant.
RISK CAPITAL HOLDINGS, INC.
By:/s/ Peter A. Appel
------------------------
Peter A. Appel
Managing Director, General Counsel and
Secretary
/s/ Mark D. Mosca
------------------------
Mark D. Mosca
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<PAGE>
EXHIBIT 10.2
RISK CAPITAL HOLDINGS, INC.
STOCK OPTION AGREEMENT
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby
acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Robert Clements, a director of the Company on the
date hereof (the "Option Holder"), the option to purchase common stock, $.01 par
value per share, of the Company ("Shares"), upon the following terms:
WHEREAS, the following terms reflect the Company's 1995 Long Term
Incentive and Share Award Plan, as amended by the First Amendment thereto (the
"Plan");
(a) GRANT. Subject to the approval of paragraph 2 of the First
Amendment to the Plan by the affirmative vote of the holders of a majority of
the voting securities of the Company at a meeting duly held during calendar year
1997, the Option Holder is hereby granted an option (the "Option") to purchase
74,000 Shares (the "Option Shares") pursuant to the Plan, the terms of which are
incorporated herein by reference. The Option is granted as of November 19, 1996
(the "Date of Grant") and such grant is subject to the terms and conditions
herein and the terms and conditions of the applicable provisions of the Plan.
Such Option shall not be treated as an incentive stock option under Section 422
of the Internal Revenue Code of 1986, as amended.
(b) STATUS OF OPTION SHARES. The Option Shares shall upon issue rank
equally in all respects with the other Shares.
(c) OPTION PRICE. The purchase price for the Option Shares shall be,
except as herein provided, $17.625 per Option Share, hereinafter sometimes
referred to as the "Option Price," payable immediately in full upon the exercise
of the Option.
(d) TERM OF OPTION. The Option may be exercised only during the
period (the "Option Period") commencing in accordance with paragraph (f) below
and shall continue for seven years from the date the Option, or portion thereof,
becomes exercisable; thereafter the Option Holder shall cease to have any rights
in respect thereof. The right to exercise the Option may be subject to sooner
termination as provided in paragraph (j) below.
(e) NO RIGHTS OF SHAREHOLDER. The Option Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or in equity.
(f) EXERCISABILITY. One-fifth of the Options shall become
exercisable on each of the first, second, third, fourth and fifth anniversary of
the Date of Grant, subject to paragraph (j) below; provided that all such
options shall immediately become exercisable (1) to the extent provided in
paragraph (j) below and (2) upon a Change in Control. Subject to paragraph (j)
below, the Option may be exercised at any time or from time to time during the
Option Period in regard to all or any portion of the Option which is then
exercisable, as may be adjusted pursuant to paragraph (g) below.
<PAGE>
"Change in Control" means and shall be deemed to have occurred if:
a. any person (within the meaning of the Securities Exchange Act of 1934,
as amended, (the "Exchange Act")), other than a Permitted Person or Initial
Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting Securities;
or
b. any Initial Investor is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting
Securities representing 50% or more of the total voting power of all the then
outstanding Voting Securities; or
c. the individuals who, as of the Date of Grant, constitute the Board of
Directors of the Company together with those who become directors subsequent to
such date and whose recommendation, election or nomination for election to the
Board was approved by a vote of at least a majority of the directors then still
in office who either were directors as of such date or whose recommendation,
election or nomination for election was previously so approved, cease for any
reason to constitute a majority of the members of the Board; or
d. the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by the Company
of all or substantially all of the Company's assets, or reorganization of the
Company (provided that all material regulatory approvals have been obtained), or
consummation of any such transaction, other than any such transaction which
would (x) result in at least 60% of the total voting power represented by the
voting securities of the surviving entity outstanding immediately after such
transaction being beneficially owned by the former stockholders of the Company
and (y) not otherwise be deemed a Change in Control under subparagraphs a, b, c
or e of this paragraph (f); or
e. the Board adopts a resolution to the effect that, for purposes hereof,
a Change in Control has occurred.
(i) "Initial Investors" means (A) X.L. Insurance Company, Ltd.;
(B) The Trident Partnership, L.P.; (C) Taracay Investors; (D) Marsh &
McLennan Risk Capital Holdings, Ltd.; or (E) any majority-owned subsidiary
or parent (or equivalent in the case of a non-corporate entity) of the
foregoing.
(ii) "Permitted Persons" means (A) the Company; (B) any Related
Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act)
comprised of any or all of the foregoing.
(iii) "Related Party" means (A) a majority-owned subsidiary of the
Company; (B) a trustee or other fiduciary holding securities under an
employee
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<PAGE>
benefit plan of the Company or any majority-owned subsidiary of the
Company; or (C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of Voting Securities.
(iv) "Voting Security" means any security of the Company which
carries the right to vote generally in the election of directors.
(g) ADJUSTMENTS FOR RECAPITALIZATION AND DIVIDENDS. In the event that,
prior to the expiration of the Option, any dividend in Shares, recapitalization,
Share split, reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other such change affects the
Shares such that they are increased or decreased or changed into or exchanged
for a different number or kind of shares, other securities of the Company or of
another corporation or other consideration, then in order to maintain the
proportionate interest of the Option Holder and preserve the value of the
Option, (i) there shall automatically be substituted for each Share subject to
the unexercised Option the number and kind of shares, other securities or other
consideration into which each outstanding Share shall be changed or for which
each such Share shall be exchanged, and (ii) the exercise price shall be
increased or decreased proportionately so that the aggregate purchase price for
the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.
(h) TRANSFERABILITY. The Option may not be assigned or otherwise
transferred, disposed of or encumbered by the Option Holder, other than by will
or by the laws of descent and distribution. During the lifetime of the Option
Holder, the Option shall be exercisable only by the Option Holder or by his or
her guardian or legal representative. Notwithstanding the foregoing, the Option
may be transferred by the Option Holder to members of his or her "immediate
family" or to a trust established for the exclusive benefit of solely one or
more members of the Option Holder's "immediate family." Any Option held by the
transferee will continue to be subject to the same terms and conditions that
were applicable to the Option immediately prior to the transfer, except that the
Option will be transferable by the transferee only by will or the laws of
descent and distribution. For purposes hereof, "immediate family" means the
Option Holder's children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters), in-laws,
and relationships arising because of legal adoption.
(i) EXERCISE OF OPTION. In order to exercise the Option, the Option
Holder shall submit to the Company an instrument in writing signed by the Option
Holder, specifying the number of Option Shares in respect of which the Option is
being exercised, accompanied by payment, in a manner acceptable to the Company,
of the Option Price for the Option Shares for which the Option is being
exercised. Payment to the Company in cash or Shares already owned by the Option
Holder (provided that the Option Holder has owned such Shares for a minimum
period of six months) and having a total Fair Market Value (as defined below)
equal to the exercise price, or in a combination of cash and such Shares, shall
be deemed acceptable. Option Shares will be issued accordingly by the Company
within 15 business days, and a share certificate dispatched to the Option Holder
within 30 days.
The Company shall not be required to issue fractional Shares upon the
exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional
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<PAGE>
share therefor, shall pay a cash adjustment therefor in an amount equal to their
Fair Market Value (or if any Shares are not publicly traded, an amount equal to
the book value per share at the end of the most recent fiscal quarter)
multiplied by the fraction of the fractional share which would otherwise have
been issued hereunder. Anything to the contrary herein notwithstanding, the
Company shall not be obligated to issue any Option Shares hereunder if the
issuance of such Option Shares would violate the provision of any applicable
law, in which event the Company shall, as soon as practicable, take whatever
action it reasonably can so that such Option Shares may be issued without
resulting in such violations of law. For purposes hereof, Fair Market Value
shall mean the mean between the high and low selling prices per Share on the
immediately preceding date (or, if the Shares were not traded on that day, the
next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.
(j) TERMINATION OF SERVICE. In the event the Option Holder ceases to be a
director of the Company, (i) due to retirement after attainment of age 65 or
(ii) due to death or disability, the Option, to the extent not already
exercisable in full, shall become immediately and fully exercisable at the time
of such termination of service, and the Option may be exercised at any time
during the Option Period. Subject to paragraph (f) above, if the Option Holder
ceases to be a director of the Company for any other reason, the portion of the
Option which is not then exercisable shall be cancelled on the date service
terminates, and the portion of the Option which is then exercisable may be
exercised at any time within six months after the date of such termination, but
not later than termination of the Option Period.
(k) OBLIGATIONS AS TO CAPITAL. The Company agrees that it will at all
times maintain authorized and unissued share capital sufficient to fulfill all
of its obligations under the Option.
(l) TRANSFER OF SHARES. The Option, the Option Shares, or any interest in
either, may be sold, assigned, pledged, hypothecated, encumbered, or transferred
or disposed of in any other manner, in whole or in part, only in compliance with
the terms, conditions and restrictions as set forth in the governing instruments
of the Company, applicable United States federal and state securities laws and
the terms and conditions hereof. Each certificate for Option Shares issued upon
exercise of the Option, unless at the time of exercise such Option Shares are
registered under the Securities Act of 1933, as amended, shall bear the
following legend or such other legend as the Company deems appropriate:
"The securities evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the Act'), and may not be offered,
sold or otherwise transferred except (i) in compliance with the provisions
of any applicable state securities or 'Blue Sky' laws and (ii) (A) pursuant
to an effective registration under the Act, (B) in compliance with Rule 144
under the Act, (C) inside the United States to a Qualified Institutional
Buyer in compliance with Rule 144A under the Act, (D) outside the United
States in compliance with Rule 904 of Regulation S under the Act or
(E) inside the United States to an institutional accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a transaction
which, in the opinion of counsel reasonably satisfactory to the Company,
qualifies as an exempt transaction under the Act and the rules and
regulations promulgated thereunder."
-4-
<PAGE>
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend or such other legend deemed appropriate by the
Company shall also bear such legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to the
restrictions set forth herein. The provisions of this paragraph (l) shall be
binding upon all subsequent holders of certificates bearing the above legend and
all subsequent holders of the Option, if any.
(m) EXPENSES OF ISSUANCE OF OPTION SHARES. The issuance of stock
certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) or by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.
(n) WITHHOLDING. The Option Holder agrees to make appropriate
arrangements with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of the Option.
(o) REFERENCES. References herein to rights and obligations of the Option
Holder shall apply, where appropriate, to the Option Holder's legal
representative or estate without regard to whether specific reference to such
legal representative or estate is contained in a particular provision of this
Option.
(p) SETTLEMENT OF DISPUTES. Any dispute between the parties arising from
or relating to the terms of this Option shall be resolved by arbitration held in
the State of Connecticut in accordance with the rules of the American
Arbitration Association. All costs associated with any arbitration, including
all legal expenses, for both parties shall be borne by the Company.
(q) NO MITIGATION. To the extent that the vesting of any portion of the
Option is accelerated upon a Change in Control or upon a termination of service
as provided herein, neither the Option, nor any Option Shares nor any interest
in either, shall be reduced by any compensation received by the Option Holder in
connection with any other employment.
(r) NOTICES. Any notice required or permitted to be given under this
agreement shall be in writing and shall be deemed to have been given when
delivered personally or by courier, or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the party concerned
at the address indicated below or to such changed address as such party may
subsequently by similar process give notice of:
-5-
<PAGE>
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
[address of Option Holder]
(s) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflict of laws.
(t) ENTIRE AGREEMENT. This agreement constitutes the entire agreement
among the parties relating to the subject matter hereof, and any previous
agreement or understanding among the parties with respect thereto is superseded
by this agreement.
(u) COUNTERPARTS. This agreement may be executed in two counterparts,
each of which shall constitute one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this agreement
to be signed as of the Date of Grant.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
-----------------------
Name: Peter A. Appel
Title: Managing Director, General
Counsel and Secretary
/s/ Robert Clements
--------------------------
Robert Clements
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<PAGE>
EXHIBIT 10.3
RESTRICTED SHARE AGREEMENTS -- EXECUTIVE OFFICERS
Each of the executive officers of Risk Capital Holdings, Inc. ("RCHI")
listed below has entered into Restricted Share Agreements with RCHI that are
substantially identical in all material respects to the agreement, dated as of
September 19, 1995, between RCHI and Mark D. Mosca, a copy of which is being
filed herewith in this Exhibit 10.3, except for the terms indicated below:
EXECUTIVE OFFICER DATE RESTRICTED SHARES*
- ----------------- ---- -----------------
Mark D. Mosca September 19, 1995 100,000
(see attached
agreement)
Peter A. Appel November 13, 1995 25,000
Bonnie L. Boccitto October 2, 1995 25,000
Paul J. Malvasio September 20, 1995 25,000
_____________
* Such term is defined in the attached agreement.
* * * *
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Restricted Share Agreement
THIS AGREEMENT, dated as of September 19, 1995, between Risk Capital
Holdings, Inc. (the "Company"), a Delaware corporation, and Mark D. Mosca (the
"Employee").
WHEREAS, the Employee has been designated to participate in the
Company's 1995 Long Term Incentive and Share Award Plan (as amended, the
"Plan");
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows.
1. AWARD OF SHARES. Pursuant to the provisions of the Plan, the
terms of which are incorporated herein by reference, the Employee is hereby
awarded 100,000 Restricted Shares (the "Award"), subject to the terms and
conditions herein set forth. Capitalized terms used herein and not defined
shall have the meanings set forth in the Plan.
2. TERMS AND CONDITIONS. It is understood and agreed that the Award
of Restricted Shares evidenced hereby is subject to the following terms and
conditions:
(a) VESTING OF AWARD. Subject to the other terms and conditions of
this Agreement, this Award shall become vested in accordance with the following
schedule:
THE FOLLOWING NUMBER
OF RESTRICTED SHARES
SHALL BE VESTED ON
ON THIS DATE EACH RESPECTIVE DATE
9/19/96 20,000
9/19/97 20,000
9/19/98 20,000
9/19/99 20,000
9/19/00 20,000
; provided that all such shares shall immediately become vested (i) to the
extent provided in Section 2(b) hereof and (ii) upon a Change in Control.
"Change in Control" means and shall be deemed to have occurred if:
a. any person (within the meaning of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than a Permitted Person or an
Initial Investor, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting
Securities representing 35% or more of the total voting power of all the
then outstanding Voting Securities; or
<PAGE>
b. any Initial Investor is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
Voting Securities representing 50% percent or more of the total voting
power of all the then outstanding Voting Securities; or
c. the individuals who, as of the date hereof, constitute the Board
of Directors of the Company together with those who become directors
subsequent to such date and whose recommendation, election or nomination
for election to the Board was approved by a vote of at least a majority of
the directors then still in office who either were directors as of such
date or whose recommendation, election or nomination for election was
previously so approved, cease for any reason to constitute a majority of
the members of the Board; or
d. the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by the
Company of all or substantially all of the Company's assets, or
reorganization of the Company (provided that all material regulatory
approvals have been obtained), or consummation of any such transaction,
other than any such transaction which (x) would result in at least 60% of
the total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
beneficially owned by the former stockholders of the Company and (y) not
otherwise be deemed a Change in Control under subparagraphs a, b, c or e of
this Section 2(a); or
e. the Board adopts a resolution to the effect that, for purposes
hereof, a Change in Control has occurred.
(i) "Initial Investors" means (A) X.L. Insurance Company, Ltd.;
(B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital
Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or
equivalent in the case of a non-corporate entity) of the foregoing.
(ii) "Permitted Persons" means (A) the Company; (B) any Related
Party; or (C) any group (as defined in Rule 13d-3 under the Exchange
Act) comprised of any or all of the foregoing.
(iii) "Related Party" means (A) a majority-owned subsidiary of the
Company; (B) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any majority-owned subsidiary
of the Company; or (C) a corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion
as their ownership of Voting Securities.
(iv) "Voting Security" means any security of the Company which
carries the right to vote generally in the election of directors.
-2-
<PAGE>
(b) TERMINATION OF SERVICE; FORFEITURE OF UNVESTED SHARES. In the event
the Employee ceases to be an employee of the Company, (i) due to retirement
after attainment of age 65, (ii) due to death or disability, as determined under
the Company's long-term disability plan, or (iii) due to (A) termination by the
Company without cause (as defined in the Employee's employment agreement dated
September 19, 1995) or (B) constructive termination (as defined below), the
Restricted Shares subject to the Award, to the extent not already vested in
full, shall become immediately and fully vested at the time of such termination
of service. Subject to Section 2(a), if the Employee ceases to be an employee
of the Company for any other reason, the portion of the Award which is not then
vested shall be forfeited by the Employee and become the property of the
Company. For purposes of this Agreement, service with Risk Capital Reinsurance
Company, the Company's wholly owned subsidiary, shall be considered to be
service with the Company. "Constructive termination" means the occurrence, with
respect to the Employee, of any of the following: (i) the assignment of duties
inconsistent with such Employee's position or a significant diminution in
his/her responsibilities; (ii) a reduction in such Employee's base salary or
bonus opportunity; (iii) the requirement that such Employee work at a location
outside of Fairfield County, Connecticut, or Westchester County, New York; or
(iv) the failure to secure the agreement of any successor corporation or other
entity to the Company to fully assume the Company's obligations under the
arrangements described herein.
(c) CERTIFICATES. Each certificate issued in respect of Restricted Shares
awarded hereunder shall be deposited with the Company, or its designee, together
with, if requested by the Company, a stock power executed in blank by the
Employee, and shall bear a legend disclosing the restrictions on transferability
imposed on such Restricted Shares by this Agreement (the "Restrictive Legend").
Upon the vesting of Restricted Shares pursuant to Section 2(a) or 2(b) hereof
and the satisfaction of any withholding tax liability pursuant to Section 5
hereof, the certificates evidencing such vested Shares, not bearing the
Restrictive Legend, shall be delivered to the Employee.
(d) RIGHTS OF A STOCKHOLDER. Prior to the time a Restricted Share is
fully vested hereunder, the Employee shall have no right to transfer, pledge,
hypothecate or otherwise encumber such Restricted Share. During such period,
the Employee shall have all other rights of a stockholder, including, but not
limited to, the right to vote and to receive dividends at the time paid on such
Restricted Shares.
(e) NO RIGHT TO CONTINUED EMPLOYMENT. This Award shall not confer upon
the Employee any right with respect to continuance of employment by the Company
nor shall this Award interfere with the right of the Company to terminate the
Employee's employment at any time.
3. TRANSFER OF SHARES. The Shares delivered hereunder, or any interest
therein, may be sold, assigned, pledged, hypothecated, encumbered, or
transferred or disposed of in any other manner, in whole or in part, only in
compliance with the terms, conditions and restrictions as set
-3-
<PAGE>
forth in the governing instruments of the Company, applicable United States
federal and state securities laws or any other applicable laws or regulations
and the terms and conditions hereof. Each certificate for Shares delivered
hereunder, unless at the time of issuance such Shares are registered under the
Securities Act of 1933, as amended, shall bear the following legend or such
other legend as the Company deems appropriate:
"The securities evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the 'Act'), and may not be offered,
sold or otherwise transferred except (i) in compliance with the provisions
of any applicable state securities or 'Blue Sky' laws and (ii) (A) pursuant
to an effective registration under the Act, (B) in compliance with Rule 144
under the Act, (C) inside the United States to a Qualified Institutional
Buyer in compliance with Rule 144A under the Act, (D) outside the United
States in compliance with Rule 904 of Regulation S under the Act or
(E) inside the United States to an institutional 'accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a transaction
which, in the opinion of counsel reasonably satisfactory to the Company,
qualifies as an exempt transaction under the Act and the rules and
regulations promulgated thereunder."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend or such other legend deemed appropriate by the
Company shall also bear such legend unless, in the opinion of counsel for the
Company, the securities represented thereby need no longer be subject to the
restriction contained herein. The provisions of this Section 3 shall be binding
upon all subsequent holders of certificates bearing the above legend.
4. EXPENSES OF ISSUANCE OF SHARES. The issuance of stock certificates
hereunder shall be without charge to the Employee. The Company shall pay, and
indemnify the Employee from and against any issuance, stamp or documentary taxes
(other than transfer taxes) or charges imposed by any governmental body, agency
or official (other than income taxes) or by reason of the issuance of Shares.
5. WITHHOLDING. The Employee agrees to make appropriate arrangements
with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of this Agreement.
6. REFERENCES. References herein to rights and obligations of the
Employee shall apply, where appropriate, to the Employee's legal representative
or estate without regard to whether specific reference to such legal
representative or estate is contained in a particular provision of this
Agreement.
7. SETTLEMENT OF DISPUTES. Any dispute between the parties arising from
or relating to the terms of this Agreement shall be resolved by arbitration held
in the State of Connecticut in accordance with the rules of the American
Arbitration Association. All costs associated with any arbitration, including
all legal expenses, for both parties shall be borne by the Company.
-4-
<PAGE>
8. NO MITIGATION. To the extent that the vesting of any portion of the
Award is accelerated upon a Change in Control or upon a termination of service
as provided herein, neither the Shares delivered hereunder nor any interest
therein, shall be reduced by any compensation received by the Employee in
connection with any other employment.
9. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or by courier, or sent by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the party concerned
at the address indicated below or to such changed address as such party may
subsequently by similar process give notice of:
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn.: Secretary
If to the Employee:
Mark D. Mosca
[address of Employee]
10. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflict of laws.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties relating to the subject matter hereof, and any previous
agreement or understanding among the parties with respect thereto is superseded
by this Agreement.
12. COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall constitute one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
-----------------------
Peter A. Appel
Managing Director, General Counsel
and Secretary
/s/ Mark D. Mosca
------------------------
Mark D. Mosca
-6-
<PAGE>
EXHIBIT 15
[LETTERHEAD OF PRICE WATERHOUSE]
ACCOUNTANTS' AWARENESS LETTER AND LIMITATION OF LIABILITY
We are aware of the incorporation by reference in the Registration Statement on
Form S-8 (Registration No. 33-99974) of Risk Capital Holdings, Inc. of our
report dated June 30, 1997 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) appearing in this Form 10-Q. We are also aware of our
responsibilities under the Securities Act of 1933.
We are not subject to the liability provisions of section 11 of the Securities
Act of 1933 for our report dated June 30, 1997 (issued pursuant to the
provisions of Statement on Auditing Standards No. 71) on the unaudited interim
consolidated financial information of Risk Capital Holdings, Inc. because our
report is not a "report" or a "part" of the Registration Statement on Form S-8
(Registration No. 33-99974) prepared or certified by us within the meaning of
sections 7 and 11 of the Securities Act of 1933.
/s/ Price Waterhouse LLP
New York, New York
August 13, 1997
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 120,555
<DEBT-CARRYING-VALUE> 0
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<EQUITIES> 226,773
<MORTGAGE> 0
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0
0
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40,973
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