1
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission
only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Rule 14a-12
HCC Insurance Holdings, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
2
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 24, 2001 AT 8:30 A.M.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Meeting")
of HCC Insurance Holdings, Inc. ("HCC" or the "Company") will be held on
Thursday May 24, 2001 at 8:30 a.m. Houston time, at The Houstonian Hotel, 111
North Post Oak Lane, Houston, Texas, 77024 for the following purposes:
1. To approve an amendment to the Company's Amended Restated Certificate of
Incorporation to classify the Board of Directors into three classes to serve
initially as follows: Class I -- to serve until the Annual Meeting of
Shareholders in 2002; Class II -- to serve until the Annual Meeting of
Shareholders in 2003; and Class III -- to serve until the Annual Meeting of
Shareholders in 2004; and to provide that thereafter each class of Directors
shall serve for a three-year term.
2. In the event of the approval of the Amendment to the Company's Amended
Restated Certificate of Incorporation referred to in Proposal 1, to elect
five Class I Directors for a term of one year, four Class II Directors for a
term of two years and four Class III Directors for a term of three years,
each to serve in such capacity and until his successor is duly elected and
qualifies, or, in the event of the disapproval of said Amendment, to elect
thirteen directors for a one-year term, each to serve until the Annual
Meeting of Shareholders in 2002 and until his successor is duly elected and
qualifies.
3. To vote on a proposal to adopt the Company's 2001 Flexible Incentive Plan
(the "2001 Flexible Plan") which will authorize the possible issuance of
3,000,000 shares of Common Stock to the recipients of grants under such plan;
4. To vote on an amendment to the Company's Amended Restated Certificate of
Incorporation to authorize the issuance of 50,000,000 shares of Preferred
Stock (the "Preferred Stock");
5. To ratify the appointment by the Company's Board of Directors of
PricewaterhouseCoopers LLP, independent auditors, to audit the accounts of
the Company and its subsidiaries for 2001; and
6. To transact such other business as may properly come before the meeting or
any postponement or adjournment thereof.
The Board of Directors has fixed the close of business on April 12, 2001, as the
record date for determining those Shareholders who are entitled to notice of,
and to vote at, the Meeting. A list of such Shareholders will be open to
examination by any Shareholder at the Meeting and for a period of ten days prior
to the date of the Meeting during ordinary business hours at 13403 Northwest
Freeway, Houston, Texas. A copy of the Annual Report of the Company for the
fiscal year ended December 31, 2000, is enclosed.
By Order of the Board of Directors,
CHRISTOPHER L. MARTIN,
Secretary
Houston, Texas
April 30, 2001
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE TO ASSURE
THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU
MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE PREVIOUSLY SENT IN
YOUR PROXY.
3
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
------------------
PROXY STATEMENT
------------------
ANNUAL MEETING OF SHAREHOLDERS
MAY 24, 2001
------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is first being mailed on or about April 30, 2001 to
Shareholders of HCC Insurance Holdings, Inc. ("HCC" or the "Company"), in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the Annual Meeting of Shareholders to be held on
Thursday, May 24, 2001, at 8:30 a.m. Houston time, at The Houstonian Hotel, 111
North Post Oak Lane, Houston, Texas 77024, or any postponement or adjournment
thereof (the "Meeting"). A Shareholder giving a proxy has the power to revoke
the proxy at any time before it is exercised. Such right of revocation is not
limited by or subject to compliance with any formal procedure.
The cost of soliciting proxies will be borne by the Company. Copies of
solicitation material may be furnished to brokers, custodians, nominees and
other fiduciaries for forwarding to beneficial owners of shares of the Company's
Common Stock, and normal handling charges may be paid for such forwarding
service. Solicitation of proxies may be made by mail, personal interview,
telephone and facsimile by officers and other management employees of the
Company, who will receive no additional compensation for their services. It is
contemplated that additional solicitation of proxies will be made in the same
manner under the engagement and direction of Corporate Investor Communications,
Inc., 111 Commerce Road, Carlstadt, New Jersey 07072-2586 at an anticipated cost
of $8,500, plus reimbursement of out-of-pocket expenses.
Only Shareholders of record on April 12, 2001 (the "Record Date") will be
entitled to vote at the Meeting, and each share will have one vote. At the close
of business on the Record Date, there were 58,717,404 shares of the Company's
Common Stock outstanding and entitled to vote at the Meeting.
A majority of the outstanding shares of the Company's Common Stock, represented
in person or by proxy will constitute a quorum at the Meeting. The adoption of
the 2001 Flexible Plan, and the ratification of the appointment of independent
auditors must be approved by a majority of the shares present and voting at the
Meeting. A majority of the issued and outstanding shares must approve the
amendments to the Amended Restated Certificate of Incorporation to classify the
Board of Directors and to authorize the Preferred Stock. The election of
Directors will be determined by a plurality of the votes cast if a quorum is
present. The Board of Directors does not anticipate calling for a vote on any
matter other than those described herein.
Abstentions and broker non-votes are each included in the determination of the
number of shares present and voting for purposes of determining the presence of
a quorum. Each is tabulated separately. A proxy submitted by a Shareholder may
indicate that all or a portion of the shares represented by such proxy are not
being voted by such Shareholder with respect to a particular matter. This may
occur, for example, when a broker is not permitted to vote stock held in street
name on certain matters in the absence of instructions from the beneficial owner
of the stock. The shares subject to any such proxy which are not being voted
with respect to a particular matter (the "Non-Voted Shares") will be treated as
shares not present and entitled to vote on such matter, although such shares may
be considered present and entitled to vote for other purposes and will count for
purposes of determining the presence of a quorum. Shares voted to abstain as to
a particular matter will not be considered Non-Voted Shares. The adoption of the
2001 Flexible Plan and the ratification of the appointment of
PricewaterhouseCoopers as independent auditors require a majority of all votes
cast on each issue. Thus, abstentions will have the same effect as a vote
against those matters, but Non-Voted Shares will not affect the determination of
whether such matters are approved. The amendments to the Amended Restated
Certificate of Incorporation to establish a classified board of directors and to
authorize the Preferred Stock requires a vote of a majority of all issued and
outstanding shares. Thus, abstentions and Non-Voted Shares will have the same
effect as a vote against the proposals. The election of Directors requires a
plurality of the shares. Thus, abstentions and Non-Voted Shares will not affect
the outcome of the election of Directors.
4
STOCK OWNERSHIP OF CERTAIN PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (a) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
Common Stock, (b) each Executive Officer of the Company named in the Summary
Compensation Table, (c) each Director and Advisory Director and (d) all
Directors, Advisory Directors and Executive Officers of the Company as a group.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF COMMON
NAME OWNERSHIP(1)(2) STOCK OUTSTANDING
---- ----------------- -----------------
Ariel Capital Management, Inc.............................. 5,716,375(3) 9.7%
307 North Michigan Avenue
Chicago, Illinois 60601
Stephen L. Way............................................. 4,658,527 7.8%
13403 Northwest Freeway
Houston, Texas 77040-6094
Capital Research & Management Company...................... 3,725,000(4) 6.3%
333 South Hope Street
Los Angeles, California 90071
Beck Mack & Oliver, LLC.................................... 2,886,544(5) 4.9%
330 Madison Avenue
New York, New York 10017
Stephen J. Lockwood........................................ 2,212,397 3.8%
Frank J. Bramanti.......................................... 750,912(6) 1.3%
John N. Molbeck, Jr........................................ 180,541 *
Walter J. Lack............................................. 115,250 *
Edward H. Ellis, Jr........................................ 86,000 *
James R. Crane............................................. 82,500 *
Benjamin D. Wilcox......................................... 75,333 *
J. Robert Dickerson........................................ 74,000 *
Allan W. Fulkerson......................................... 70,000 *
Edwin H. Frank, III........................................ 58,450(7) *
Marvin P. Bush............................................. 54,500(8) *
John L. Kavanaugh.......................................... 43,750 *
Patrick B. Collins......................................... 35,000 *
Steven H. Newman........................................... 10,000 *
James C. Flagg, Ph.D....................................... 0 --
All Directors, Advisory Directors and Executive Officers as 8,507,160 14.0%
a........................................................
group (16 persons)
- ---------------
* Less than 1%.
(1) Directors, Advisory Directors and Executive Officers have sole voting and
investment powers of the shares shown unless otherwise indicated.
(2) Includes shares which Directors, Advisory Directors and Executive Officers
have the right to acquire upon the exercise of options within 60 days from
the Record Date, including the following: Stephen L. Way -- 1,092,300
shares; Frank J. Bramanti -- 589,230 shares; John N. Molbeck, Jr. -- 106,666
shares, Edward H. Ellis, Jr. -- 85,000 shares; Benjamin D. Wilcox -- 73,333
shares; Allan W. Fulkerson -- 60,000 shares; Edwin H. Frank, III -- 52,500
shares; J. Robert Dickerson, -- 37,500 shares; James R. Crane and Marvin P.
Bush -- 32,500 shares each; Patrick B. Collins -- 30,000 shares; Stephen J.
Lockwood -- 15,000; Walter J. Lack -- 5,000 shares; and all Directors,
Advisory Directors and Executive Officers as a group -- 2,264,029 shares.
(3) The foregoing information was obtained from a Schedule 13G filed on April
10, 2001 with the Securities and Exchange Commission (the "SEC").
2
5
(4) The foregoing information was obtained from a Schedule 13G filed on February
12, 2001 with the SEC.
(5) The foregoing information was obtained from a Schedule 13G filed on January
18, 2001 with the SEC.
(6) Includes 750 shares owned of record by Mr. Bramanti's wife in trust for
their children and 2,250 shares owned of record by their children. Mr.
Bramanti disclaims beneficial ownership of such shares.
(7) Includes 1,200 shares owned of record by Mr. Frank's children. Mr. Frank
disclaims beneficial ownership of such shares.
(8) Includes 2,500 shares owned of record by Winston Holdings, LLC, a limited
liability company in which Mr. Bush has an ownership interest. Mr. Bush
disclaims beneficial ownership of such shares, except to the extent of his
actual pecuniary interest therein.
3
6
PROPOSAL I -- APPROVAL OF AMENDMENT TO THE COMPANY'S AMENDED RESTATED
CERTIFICATE OF INCORPORATION TO ESTABLISH A CLASSIFIED BOARD OF DIRECTORS
GENERAL
The Company currently has a Board of Directors consisting of thirteen members
elected to one-year terms at each annual meeting of Shareholders. The Company
seeks to establish a classified board of directors by dividing the Board of
Directors into three classes with staggered terms.
A classified board is one in which a certain number, but not all, of the
directors are elected on a rotating basis each year. The Board of Directors
believes that dividing the Board of Directors into three classes is in the best
interests of the Company and its Shareholders because the likelihood of
continuity and stability in the policies formulated by the Board of Directors
will be enhanced by providing that Directors will serve three-year terms rather
than one-year terms. Two annual elections would, in general, be required to
replace a majority of the classified Board of Directors and effect a forced
change in the control of the Company. This method of electing directors makes
changes in the composition of a company's board of directors more difficult, and
thus a potential change in control of that company a more lengthy and difficult
process. Delaware law permits companies to adopt a classified board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office, with only one class of directors
standing for election each year. The Company's Board of Directors recommends
that the Company's Shareholders approve the adoption of a classified board of
directors, dividing the Board of Directors into three classes. After the
classified Board of Directors is fully implemented, the Directors of each class
will serve three-year terms and the term of one class will expire each year.
THE CLASSIFIED BOARD OF DIRECTORS
The proposed amendment to add a new Article XI to the Amended Restated
Certificate of Incorporation (the "Amendment") would divide the Board of
Directors into three classes: Class I, Class II and Class III. If the Amendment
is adopted and if all current nominees are elected as described in the next
Proposal (relating to the election of Directors), each Director will be elected
to the class described below:
CLASS I: James R. Crane
J. Robert Dickerson
James C. Flagg, Ph.D.
Edwin H. Frank, III
Stephen J. Lockwood
CLASS II: Frank J. Bramanti
Patrick B. Collins
Edward H. Ellis, Jr.
John N. Molbeck, Jr.
CLASS III: Stephen L. Way
Marvin P. Bush
Allan W. Fulkerson
Walter J. Lack
Initially, the term of the Class I Directors would expire at the next annual
meeting of Shareholders in 2002, and the terms of Class II and Class III
Directors would expire at the 2003 and 2004 annual meetings of Shareholders,
respectively. Thereafter, successors to the Directors in each class would be
elected for three-year terms. In the event of a vacancy, the remaining Directors
may appoint a replacement Director to serve until the remainder of the original
term that was vacated. The Amendment will thus have the effect of causing only
one class of Directors to be elected each year, with the Directors in the other
two classes remaining in office until the elections held in the following years,
respectively.
In the event that the Shareholders do not approve the Amendment, each Director
elected at the Meeting will continue to serve for a one-year term only and until
his successor is duly elected and qualified at the next annual meeting in 2002
or until his earlier death, resignation or removal.
4
7
Delaware law provides that members of a classified board of directors may only
be removed for cause unless the subject company's Certificate of Incorporation
provides otherwise. The Company's Amended Restated Certificate of Incorporation
does not permit a Director to be removed without cause.
Although the Board of Directors believes that this Proposal is in the best
interests of the Company and its Shareholders, Shareholders should be aware of
the following possible effects of the adoption of a classified board. Because
the creation of a classified Board might increase the amount of time and effort
required for a potential acquiror to obtain control of the Company without the
cooperation of the Board of Directors, even if the potential acquiror were to
acquire a majority of the Company's outstanding Common Stock, the existence of a
classified board might tend to discourage certain tender offers which
Shareholders might feel would be in their best interests. Because tender offers
for control usually involve a purchase price higher than the current market
price, the creation of a classified board could also discourage open market
purchases by a potential acquiror. In addition, the creation of a classified
board could make the Common Stock less attractive to persons who invest in
securities in anticipation of an increase in price if a takeover bid develops.
Finally, because these provisions will make the removal of Directors more
difficult, it will increase the Directors' security in their positions and,
since the Board of Directors has the power to retain and discharge management,
could increase the likelihood that current management will retain their
positions for longer periods of time than might otherwise be the case in the
absence of a classified board.
Takeovers or changes in management of the Company which are proposed and
effected without prior negotiation with the Company's Board of Directors or
management are not necessarily detrimental to the Company and its Shareholders.
However, the Board of Directors believes that the benefits of seeking to protect
its ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to take over or restructure the Company outweigh the disadvantages of
discouraging such proposals.
The Amendment is not being submitted to Shareholders for approval as the result
of, and the Board of Directors is unaware of, any specific effort by any person
to obtain control of the Company or to accumulate significant amounts of its
Common Stock as of the date of this Proxy Statement.
The foregoing discussion of the Amendment is qualified in its entirety by
reference to the full text of the Amendment attached to this Proxy Statement as
Attachment "A".
Because the Directors will be directly affected by the institution of a
classified board, they may be deemed to have an interest in the outcome of this
Proposal. As of the Record Date, the Company's Directors, Advisory Directors and
Executive Officers as a group beneficially owned approximately 10.6% of the
outstanding Common Stock entitled to vote at the Meeting. See "Stock Ownership
of Certain Principal Stockholders and Management" above. The Company expects
that its Directors, Advisory Directors and Executive Officers will vote their
respective shares of Common Stock in favor of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
AMEND THE COMPANY'S AMENDED RESTATED CERTIFICATE OF INCORPORATION TO ESTABLISH A
CLASSIFIED BOARD OF DIRECTORS. YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY
OTHERWISE.
5
8
PROPOSAL II -- ELECTION OF DIRECTORS
Pursuant to the approval of the proposal to create a classified board of
directors, the second proposal on the agenda for the Meeting is the election of
five persons to serve as Class I Directors for initial one-year terms, four
persons to serve as Class II Directors for initial two-year terms and four
persons to serve as Class III Directors for initial three-year terms beginning
at the Meeting and ending at the 2002, 2003 and 2004 annual meeting of
Shareholders, respectively. Specific Directors will be elected to the classes
and for the terms described in the proposal to establish a classified board
(assuming that proposal is approved Shareholders). In the event that the
Shareholders do not approve the board classification proposal, each Director
elected at the Meeting will continue to serve for a one-year term only and until
his successor is duly elected and qualified at the next annual meeting of
Shareholders in 2002 or until his earlier death, resignation or removal.
Each of the nominees is currently a Director of the Company. James M. Berry, an
HCC Director since 1992, died in December, 2000. The vacancy in the Board of
Directors created by Mr. Berry's death was filled by the appointment of James C.
Flagg, Ph.D. in March, 2001. Edward H. Ellis, Jr. was appointed to the Board of
Directors in April, 2001.
The following table presents information concerning persons nominated for
election as Directors of the Company, including current membership on committees
of the Board of Directors, principal occupation or affiliations during the last
five years and certain directorships held.
Although the Board of Directors does not contemplate that any of the nominees
will be unable to serve, if such a situation arises prior to the Meeting, the
persons named in the enclosed form of Proxy will vote in accordance with their
best judgment for a substitute nominee.
INFORMATION REGARDING NOMINEES FOR DIRECTORS
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
CLASS I
James R. Crane....................... Mr. Crane is the Chairman of the Board of 47 1999
Directors and Chief Executive Officer of EGL
Inc. (Nasdaq symbol: EAGL), the company he
founded in 1984. Mr. Crane was first elected
as an HCC Director in 1999 and is a member of
the Compensation Committee.
J. Robert Dickerson.................. Mr. Dickerson is an attorney and has served as 59 1981
an HCC Director since 1981. Mr. Dickerson is
the Chairman of the Audit Committee.
James C. Flagg, Ph.D................. Dr. Flagg is an Associate Professor in the 49 2001
Department of Accounting, Lowery Mays College
and Graduate School of Business at Texas A&M
University, where he has served since 1988.
Dr. Flagg holds a Bachelor of Science and a
Master of Science in Economics and an M.B.A.
and a Ph.D. in Accounting. Dr. Flagg was
appointed to the Board of Directors in March,
2001 to fill a vacancy and is a member of the
Audit Committee.
6
9
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Edwin H. Frank, III.................. Mr. Frank is a co-founder and the Chairman of 50 1993
FileControl, Inc., an international document
management company. Prior to 1999, Mr. Frank
was the President of Underwriters Indemnity
Holdings, Inc., a subsidiary of RLI
Corporation (NYSE symbol: RLI), and its former
controlling shareholder, having served in such
capacity since 1985. Mr. Frank has served as
an HCC Director since 1993.
Stephen J. Lockwood.................. Mr. Lockwood is the Chief Executive Officer of 53 1981
Stephen J. Lockwood & Co., the Vice-Chairman
of the Board of Directors and until his
retirement in December, 1999, was the Chief
Executive Officer of the Company's subsidiary,
LDG Reinsurance Corporation since 1988. Mr.
Lockwood has served as an HCC Director since
1981. Mr. Lockwood is a Director of four
mutual funds managed by The Dreyfus
Corporation, a subsidiary of Mellon Bank
Corporation (NYSE symbol: MEL) and a director
of Affiliated Managers Group, Inc. (NYSE
symbol: AMG).
CLASS II
Frank J. Bramanti.................... Mr. Bramanti is a Director and Executive Vice 44 1980
President of HCC and since 1982, has served in
various capacities, including Director,
Secretary, Chief Financial Officer and from
June, 1997 to November, 1997, interim
President. Mr. Bramanti is a member of HCC's
Executive Management Committee, Strategic
Planning Committee, Senior Management
Committee and Investment Committee. Mr.
Bramanti is also a Director and Officer of
various of the Company's subsidiaries.
Patrick B. Collins................... Mr. Collins is a retired partner of the 72 1993
international accounting firm of
PricewaterhouseCoopers LLP, a position he held
from 1967 through 1991. Mr. Collins has served
as an HCC Director since 1993 and is a member
of the Audit Committee.
7
10
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Edward H. Ellis, Jr.................. Mr. Ellis is a Director, Senior Vice President 58 2001
and the Chief Financial Officer of HCC. Mr.
Ellis is a Certified Public Accountant with
over 34 years of public accounting experience.
Prior to joining HCC in October, 1997, Mr.
Ellis served as a partner specializing in the
insurance industry with the international
accounting firm of PricewaterhouseCoopers from
November, 1988 to September, 1997. Mr. Ellis
was appointed to the Board of Directors in
April, 2001. Mr. Ellis is a member of HCC's
Executive Management Committee, Senior
Management Committee, Strategic Planning
Committee and Investment Committee. Mr. Ellis
is also a Director and Officer of various of
the Company's subsidiaries.
John N. Molbeck, Jr.................. Mr. Molbeck is a Director, and the President 54 1997
and Chief Operating Officer of HCC, having
served in those capacities since November,
1997. Prior to joining HCC, Mr. Molbeck was
the Managing Director of Aon Natural Resources
Group, a subsidiary of Aon Corporation (NYSE
symbol: AOC) which specializes in energy
related insurance and reinsurance. Mr. Molbeck
is a member of HCC's Executive Management
Committee, Strategic Planning Committee,
Investment Committee and is the Chairman of
the Senior Management Committee. Mr. Molbeck
is also a Director and Officer of various of
the Company's subsidiaries.
CLASS III
Stephen L. Way....................... Mr. Way founded HCC in 1974 and has served as 52 1974
a Director, Chairman of the Board of Directors
and Chief Executive Officer of HCC since its
organization. He served as President of HCC
from its founding until May, 1996. Mr. Way is
the Chairman of the Executive Management
Committee, the Strategic Planning Committee
and a member of the Investment Committee and
the Senior Management Committee. Mr. Way is
also a Director and Officer of various of the
Company's subsidiaries. Mr. Way is a Director
of Fresh Del Monte Produce, Inc. (NYSE symbol:
FDP).
8
11
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Marvin P. Bush....................... Mr. Bush is the President of Winston Capital 44 1999
Management, LLC, a registered investment
adviser which specializes in hedge fund
investments, and the founder and a Managing
Director of Winston Partners, L.P. Mr. Bush
was first elected as an HCC Director in 1999
and is a member of the Investment and
Compensation Committees. Mr. Bush is a
Director of Fresh Del Monte Produce, Inc.
(NYSE symbol: FDP). Mr. Bush is also a member
of the Board of Trustees for the George H. W.
Bush Presidential Library.
Allan W. Fulkerson................... Mr. Fulkerson is the President and a Director 67 1997
of Century Capital Management, Inc., a
registered investment advisor which
specializes in the financial services
industry. In addition, since 1976, he has
served as Chairman and Trustee of Century
Shares Trust, a mutual fund established in
1928 which invests primarily in financial
institutions. Mr. Fulkerson has served as an
HCC Director since 1997 and is the Chairman of
the Investment Committee. Mr. Fulkerson is a
Director of Mutual Risk Management, Ltd. (NYSE
symbol: MM) and Wellington Underwriting plc.
(London Stock Exchange symbol: WUN).
Walter J. Lack....................... Mr. Lack is an attorney and a shareholder in 53 1981
the law firm of Engstrom, Lipscomb & Lack, A
Professional Corporation in Los Angeles,
California. Mr. Lack has served as an HCC
Director since 1981 and is also the Chairman
of the Compensation Committee. Mr. Lack is a
director of Microvision, Inc. (Nasdaq symbol:
MVIS) and SuperGen Inc. (Nasdaq symbol: SUPG).
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" EACH OF THE
PROPOSED NOMINEES. YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
9
12
INFORMATION REGARDING EXECUTIVE OFFICERS AND ADVISORY DIRECTORS WHO ARE NOT
NOMINEES FOR DIRECTOR
SERVED
THE
PRINCIPAL OCCUPATION COMPANY
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Benjamin D. Wilcox................... Mr. Wilcox is a Senior Vice President of HCC 57 1998
and the President and Chief Executive Officer
of Houston Casualty Company and its
subsidiaries, U.S. Specialty Insurance Company
and HCC Life Insurance Company. Mr. Wilcox is
also the Chairman of the Board of Directors of
the Company's subsidiary, Avemco Insurance
Company. Prior to joining HCC in December,
1998, Mr. Wilcox served as a Senior Vice
President of Aon Risk Services, Inc., a
subsidiary of Aon Corporation which
specializes in marine and energy insurance and
reinsurance. Mr. Wilcox is a member of HCC's
Executive Management Committee, Senior
Management Committee and Strategic Planning
Committee and is also a Director and Officer
of various of the Company's other
subsidiaries.
John L. Kavanaugh.................... Mr. Kavanaugh is the Chief Executive Officer 57 1983
of Houston Casualty's London branch office,
and an Advisory Director of HCC, a position he
has held since January, 2001. Prior to his
re-engagement by the Company in January, 2001,
Mr. Kavanaugh served as a Director or Advisory
Director of the Company from 1983 to 1998. Mr.
Kavanaugh has served as Chief Executive
Officer of Bain Hogg International Ltd., a
Lloyd's insurance broker and a subsidiary of
Aon Corporation, from 1996 to December, 2000
and as Deputy Chairman and a Director of Aon
UK Holdings, Limited from January, 1999 to
December, 2000.
Steven H. Newman..................... Mr. Newman is a consultant to HCC and an 57 2000
Advisory Director, a position he has held
since November, 2000. From October, 1987 to
October, 2000, Mr. Newman was Chairman of the
Board of Directors and Chief Executive Officer
of Underwriters Re Group, Inc. and from May,
2000 to October, 2000 Chairman of the Board of
Directors of Swiss Re America. Mr. Newman has
also served as Chairman of the Board of
Directors of the Reinsurance Association of
America and President of the Casualty
Actuarial Society and has represented the
United States at United Nations conferences
dealing with international insurance and
reinsurance issues.
10
13
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 2000, the Board of Directors met four times. Each Director attended or
participated via teleconference in 75% or more of the meetings of the Board of
Directors or the meetings of any committee on which he served. The Board of
Directors has standing Audit, Compensation and Investment Committees. It does
not have a standing Nominating Committee.
AUDIT COMMITTEE
The Audit Committee is composed entirely of outside Directors who are not
officers or employees of the Company ("Nonemployee Directors") and with whom the
Company does not have a business relationship. In the opinion of the Board of
Directors, these Directors are independent of management and free of any
relationship that may interfere with the exercise of their independence from the
Company and its management. The current members of the Audit Committee are
Patrick B. Collins, J. Robert Dickerson (Chairman) and James C. Flagg. During
2000, the members of the Audit Committee were James M. Berry, Patrick B. Collins
and J. Robert Dickerson (Chairman). The Audit Committee held five in-person
meetings and two teleconference meetings in 2000. The Audit Committee recommends
to the Board of Directors the selection of the Company's outside auditors and
reviews with the independent auditors the scope and results of the Company's
audits, the Company's internal accounting controls and the professional services
furnished by the independent auditors to the Company. See "Report of the Audit
Committee" below.
COMPENSATION COMMITTEE
The Board of Directors has a Compensation Committee which consists of three
Nonemployee Directors. The current members of the Compensation Committee are
Marvin P. Bush, James R. Crane and Walter J. Lack (Chairman). During 2000, the
members of the Compensation Committee were James R. Crane, Edwin H. Frank, III
and Walter J. Lack (Chairman). Mr. Lack has been the Chairman of the
Compensation Committee since September, 1999. The Compensation Committee met
twice during 2000. The Compensation Committee monitors compensation arrangements
for senior management employees for consistency of corporate objectives with the
interests of the Company's Shareholders; approves salary and non-salary
compensation for senior management; recommends bonus programs to the Board of
Directors; and administers the Company's stock option plans. See "Report of the
Compensation Committee" below.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or has been an officer or employee of
the Company or any of its subsidiaries. No Executive Officer of the Company
served as a member of the Compensation Committee. No Executive Officer of the
Company served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such committee,
the entire board of directors) of another corporation, one of whose executive
officers served on the Compensation Committee or as a Director of the Company.
No Executive Officer of the Company served as a director of another corporation,
one of whose executive officers served on the Compensation Committee. Mr. Lack
is a shareholder in the law firm of Engstrom, Lipscomb & Lack, A Professional
Corporation, with which the Company has an immaterial business relationship.
This business relationship is described below under "Certain Relationships and
Related Transactions."
INVESTMENT COMMITTEE
The Investment Committee is currently composed of two Nonemployee Directors and
four employee Directors of the Company. The current members of the Investment
Committee are Stephen L. Way, Frank J. Bramanti, Marvin P. Bush, Edward H.
Ellis, Jr., Allan W. Fulkerson (Chairman), and John N. Molbeck, Jr. During 2000,
James M. Berry also served on the Investment Committee. The Investment Committee
held two in-person meetings and six teleconference meetings in 2000. The
Investment Committee is charged with establishing investment policies for the
Company and its subsidiaries and directing the investment of the funds of the
Company and its subsidiaries in accordance with those policies. In this regard,
the Investment Committee oversees the investment management activities of New
11
14
England Asset Management, Inc., a subsidiary of Berkshire Hathaway, Inc. (NYSE
symbol: BRK), the Company's third party investment manager.
COMPENSATION OF DIRECTORS
A Director who is an employee of the Company is not compensated for services
rendered as a member of the Board of Directors or any committee of the Board of
Directors. During 2000, the Nonemployee Directors received cash compensation
consisting of a fee of $2,500 for each meeting of the Board of Directors
attended and $500 for each teleconference meeting of the Board of Directors in
which they participated. An additional fee of $1,000 was paid to each
Nonemployee Director committee member and $2,000 was paid to the committee
chairman for each Audit, Compensation or Investment Committee meeting attended.
Nonemployee Directors receive cash compensation of $250 for committee members
and $500 for the committee chairman for each teleconference committee meeting in
which they participate. The Company also reimburses its Directors for travel,
lodging and related expenses incurred in attending Board or committee meetings.
During 2000, each Nonemployee Director received an option to purchase 10,000
shares of the Company's Common Stock at an exercise price of $12.0625 per share
under the 1996 Nonemployee Director Stock Option Plan. Nonemployee Directors
serving during 2000 received additional options to purchase shares of the
Company's Common Stock at an exercise price of $12.0625 per share in the
following amounts: Allan W. Fulkerson -- 20,000; Marvin P. Bush and James R
Crane -- 10,000 each; and Patrick B. Collins, J. Robert Dickerson, Edwin H.
Frank, III and Walter J. Lack -- 5,000 each.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Engstrom, Lipscomb & Lack, A Professional Corporation,
represents the Company and certain of its insureds regarding claim-related
matters. Mr. Lack, a Director of the Company and a member of the Compensation
Committee, is a shareholder of the firm.
During 1997, the Company committed to make a $5.0 million investment as a
limited partner in Century Capital Partners II, Ltd. (the "Partnership"), an
investment partnership which specializes in investing in small and start-up
financial services companies. Mr. Fulkerson, a Director of the Company, is a
managing member of CCP Capital II, LLC, the Partnership's general partner and a
director, shareholder and President of Century Capital Management, Inc., the
investment advisor to the Partnership. At December 31, 2000, $3.4 million had
been invested under this commitment.
Underwriters Indemnity Holdings, Inc. ("Underwriters") is a property and
casualty insurance group in which Houston Casualty owned an interest and whose
former President and controlling shareholder, Mr. Frank, is a Director of the
Company. In January, 1999, Houston Casualty sold its 21% interest in
Underwriters to an unrelated third party, RLI Corporation, in connection with
RLI's acquisition of all of the outstanding shares of Underwriters. In
connection with such transaction, Houston Casualty received a 20% interest in
FRI Holdings, Inc. ("FRI"), an entity in which Mr. Frank is the controlling
shareholder. FRI holds a 17% interest in FileControl, Inc., an entity in which
Mr. Frank owns a 17% interest and of which he is a co-founder and Chairman. In
October, 1999, Houston Casualty also acquired a 13% interest in FileControl,
Inc. for a $750,000 investment.
In June, 1994, the Company entered into an arrangement with an entity owned by
Mr. Way, pursuant to which the Company pays the operating expenses for providing
transportation services to employees, Directors and clients of the Company. The
Company, however, provides its own employees to operate the equipment. During
2000, the Company paid $633,972 to this entity. None of these funds were paid
directly to Mr. Way.
In the opinion of management, the terms of the above four arrangements are fair
and reasonable and as favorable to the Company as could have been obtained from
an unrelated party.
On December 31, 1997, Mr. Bramanti, Executive Vice President and a Director of
the Company, borrowed $100,000 from the Company, evidenced by a Promissory Note.
Such loan bears interest at a rate of 5.75% per annum and is due in full,
together with accrued interest, on December 31, 2001. On March 1, 2001, Mr.
Bramanti repaid $50,000 in principal plus accrued interest under the Promissory
Note. The remaining amount of the loan was outstanding as of the Record Date.
12
15
The Company has entered into employment agreements with each of Messrs. Way,
Molbeck, Bramanti, Ellis and Wilcox. A summary of the principal terms of such
employment agreements is included under the caption "Employment Agreements"
below.
There are no family relationships among the Executive Officers and Directors,
and there are no arrangements or understandings between any Nonemployee Director
or any other person pursuant to which that Nonemployee Director was selected as
a Director. The Company has agreed under the employment agreements with Messrs.
Way, Molbeck and Bramanti to use its best efforts to ensure that each such
Executive Officer is named as a Director.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires the Company's Directors and Executive Officers and persons who own more
than 10% of a registered class of the Company's equity securities to file
initial reports of ownership and changes in ownership with the SEC. Such
officers, Directors and Shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based upon a
review of the copies of such forms furnished to the Company and written
representations from the Company's Directors and Executive Officers, all persons
subject to the reporting requirements of Section 16(a) filed all required
reports on a timely basis, with the exception of Messrs. Dickerson and Lack, who
failed to timely report the exercise of stock options in February and December
2000, respectively. Reports of such transactions were subsequently filed.
13
16
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain information concerning compensation paid or
accrued by the Company to or on behalf of the Company's Chief Executive Officer
and the other four most highly compensated Executive Officers serving at
December 31, 2000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------- ----------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
--------------------------- ---- ---------- --------- ---------------- ---------------------- ----------------
Stephen L. Way(1).................... 2000 800,000 -- 357,084 675,000 52,042
Chairman of the Board of Directors 1999 800,000 -- 240,022 200,000 63,510
and Chief Executive Officer 1998 800,000 50,000 -- 525,000 66,223
John N. Molbeck, Jr.(2).............. 2000 600,000 150,000 -- 200,000 15,763
President and Chief Operating Officer 1999 525,000 -- -- 50,000 15,027
1998 500,000 50,000 -- 200,000 7,864
Frank J. Bramanti(3)................. 2000 350,000 -- -- 100,000 13,625
Executive Vice President 1999 325,000 -- -- -- 13,062
1998 325,000 50,000 -- 275,000 13,473
Benjamin D. Wilcox(4)................ 2000 315,000 50,000 -- 100,000 17,553
President and Chief Executive Officer 1999 300,000 50,000 -- 100,000 5,274
of Houston Casualty 1998 20,577 -- -- -- 222
Edward H. Ellis, Jr.(5).............. 2000 250,000 50,000 -- 75,000 13,722
Senior Vice President 1999 240,000 25,000 -- 25,000 13,748
and Chief Financial Officer 1998 225,000 25,000 -- 10,000 5,476
- ---------------
(1) Other annual compensation includes for 2000 and 1999, respectively, $170,709
and $200,000 for utilization of Company employees. All other compensation
includes for 2000, 1999 and 1998, respectively, $41,842, $53,910 and $56,623
for term life policy premiums and $10,200, $9,600 and $9,600 for
contributions by the Company under the Company's 401(k) Plan. In addition,
in 2000, 1999, 1998, respectively, $137,105, $129,345 and $122,023 of
interest accrued on Mr. Way's deferred compensation.
(2) All other compensation for 2000, 1999 and 1998, respectively, includes life
and disability premiums of $5,563, $5,427 and $3,603 and contributions of
$10,200, $9,600 and $4,261 by the Company under the Company's 401(k) Plan
for 2000, 1999 and 1998, respectively
(3) All other compensation for 2000, 1999 and 1998, respectively, includes life
and disability premiums of $3,425, $3,462 and $3,873, and contributions of
$10,200, $9,600 and $9,600 by the Company under the Company's 401(k) Plan.
(4) All other compensation for 2000, 1999 and 1998, respectively, includes life
and disability premiums of $7,353, $5,274 and $222 and for 2000,
contributions of $10,200 by the Company under the Company's 401(k) plan.
Information for 1998 includes all compensation paid to Mr. Wilcox from
December 7, 1998, the date of his employment as President and Chief
Operating Officer of Houston Casualty and its insurance company
subsidiaries.
(5) All other compensation for 2000, 1999 and 1998, respectively, includes life
and disability premiums of $3,522, $4,148 and $2,071 and contributions of
$10,200, $9,600 and $3,405 by the Company under the Company's 401(k) plan.
14
17
STOCK OPTIONS
The following table provides details regarding stock options granted to the
Named Executive Officers during 2000. In addition, in accordance with SEC rules
there are shown the hypothetical gains or "option spreads" that would exist for
the respective options. The gains are based on assumed rates of annual
compounded growth in stock price of 5% and 10% from the date the options were
granted over the full option term. The actual value, if any, an executive may
realize will depend on the spread between the market price and the exercise
price on the date the option is exercised. The 5% and 10% assumed rates of
growth are for illustrative purposes only. They are not intended to predict
future stock prices, which will depend on market conditions and other factors
such as the Company's performance.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF OF SHARE PRICE APPRECIATION
NUMBER OF TOTAL OPTIONS FOR OPTION TERM (1)
SECURITIES UNDERLYING GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION ---------------------------
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE PER SHARE DATE 5% 10%
---- --------------------- -------------------- ---------------- ---------- ------------ ------------
Stephen L. Way......... 600,000 34.4% $12.0625 12/31/07 $3,456,000 $8,277,000
75,000 4.3% $12.0625 12/31/04 $ 250,000 $ 552,000
John N. Molbeck,
Jr. ................. 200,000 11.5% $12.0625 12/31/04 $ 667,000 $1,473,000
Frank J. Bramanti...... 100,000 5.7% $12.0625 12/31/04 $ 333,000 $ 736,000
Benjamin D. Wilcox..... 100,000 5.7% $12.0625 12/31/04 $ 333,000 $ 736,000
Edward H. Ellis,
Jr. ................. 75,000 4.3% $12.0625 12/31/04 $ 250,000 $ 552,000
- ---------------
(1) Potential gains are net of the exercise price, but before taxes associated
with the exercise. These amounts represent certain assumed rates of
appreciation only, based on SEC rules. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock,
overall market conditions and the option holders' continued employment
through the vesting period. The amount reflected in this table may not
necessarily be achieved. Amounts shown under the "Potential Realizable
Value" columns have been calculated by multiplying the exercise price by the
annual appreciation rate shown (compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options.
STOCK OPTION EXERCISES AND HOLDINGS
The following table shows stock options exercised by the Named Executive
Officers during 2000, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable stock options as of the end of 2000. Also
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock option and the
year-end price of the Company's Common Stock.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS/SARS
SHARES YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
Stephen L. Way......................... -- -- 892,300 600,000 $7,294,684 $8,925,000
John N. Molbeck, Jr. .................. 121,875 $799,926 106,666 213,334 $1,409,157 $2,818,343
Frank J. Bramanti...................... 50,950 $164,128 589,230 -- $7,585,312 --
Benjamin D. Wilcox..................... -- -- 53,333 146,667 $ 707,078 $1,836,672
Edward H. Ellis, Jr. .................. 25,000 $209,600 85,000 50,000 $ 495,125 $ 743,750
- ---------------
(1) The values were determined on the basis of the closing stock price of
$26.9375 at fiscal year-end December 31, 2000, and equal the aggregate
amount by which the market value of the option shares exceeds the exercise
price of such options.
15
18
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the CEO and each of the
Named Executives which set forth the general terms and conditions of each
Executive's employment by the Company for the period commencing January 5, 2000.
Each of the Executives has the right to voluntarily terminate his employment at
any time. The following summarizes the terms of each of these Agreements:
Stephen L. Way
Pursuant to the terms of the Employment Agreement between the Company and Mr.
Stephen L. Way (the "CEO Agreement"), Mr. Way has agreed to serve as Chairman of
the Board and Chief Executive Officer of the Company through December 31, 2002,
and will receive an annual base salary of $800,000. Mr. Way is also entitled to
certain other perquisites, including use of a Company automobile, certain club
memberships, extended medical coverage and reimbursement for estate planning
expenses. The CEO Agreement further provides that upon its termination, Mr. Way
will serve the Company as a consultant for a period of five years and receive
$450,000 per year. In the event Mr. Way's employment is terminated as a result
of his death or disability, he or his legal representative will be entitled to
receive the compensation he would have otherwise been entitled to receive
throughout the remaining term of the CEO Agreement. In addition, any unvested
stock options will immediately vest. Mr. Way will be entitled to receive all of
the sums otherwise due to him under the CEO Agreement in the event Mr. Way's
employment is terminated other than: (i) by the Company for Cause; or (ii) by
Mr. Way unless for Good Reason after a Change of Control. The Company will also
reimburse Mr. Way if there are any payments made to him which are subject to any
excise taxes. If the CEO Agreement is terminated, Mr. Way has agreed to certain
provisions relating to non-competition, confidentiality and non-solicitation of
customers and employees.
John N. Molbeck, Jr.
Pursuant to Mr. Molbeck's Employment Agreement (the "Molbeck Agreement"), Mr.
Molbeck will act as President of the Company through December 31, 2002 and will
receive a salary of $600,000 per year. In addition, Mr. Molbeck will be entitled
to an annual bonus payment of $150,000 if the Company's net earnings per share
increases by at least 10% from the net earnings of the immediately preceding
year. Mr. Molbeck received such a bonus for the year 2000. Mr. Molbeck is also
entitled to certain perquisites, including use of a Company automobile, certain
club memberships, life insurance, extended medical coverage in certain
circumstances and reimbursement for estate planning expenses. The Molbeck
Agreement further provides that, upon its termination, Mr. Molbeck will serve
the Company as a consultant for ten years and receive $200,000 per year. If a
consultant, Mr. Molbeck will be required to perform certain minimum hours of
consulting services. In the event Mr. Molbeck's employment is terminated as a
result of his disability, his options will continue vesting for one year and he
will receive his contracted for compensation. Thereafter, he will receive 50% of
such compensation throughout the remaining term. The Company's obligation to pay
Mr. Molbeck's consulting fee will not terminate upon his death or disability.
Mr. Molbeck will be entitled to receive all sums otherwise due under the Molbeck
Agreement in the event Mr. Molbeck's employment is terminated other than: (i) by
the Company for Cause; or (ii) by Mr. Molbeck unless for Good Reason after a
Change of Control. The Company will also reimburse Mr. Molbeck if there are any
payments made to him which are subject to excise taxes. If the Molbeck Agreement
is terminated, Mr. Molbeck has agreed to certain provisions relating to non-
competition, confidentiality and non-solicitation of customers and employees.
Frank J. Bramanti
Mr. Bramanti has entered into an Employment Agreement effective as of January 5,
2000 (the "Bramanti Agreement"), which expires on December 31, 2002. Mr.
Bramanti will act as an Executive Vice President for the Company and will
receive $350,000 salary for the calendar year beginning January 1, 2000, and
increasing by $25,000 for the annual periods beginning January 1, 2001 and 2002.
Pursuant to Mr. Bramanti's Employment Agreement, on January 1, 2003, his
employment will terminate and thereafter he will serve as a consultant for the
Company at an annual rate of $200,000, decreasing by $50,000 for
16
19
each of the next two years. The terms of Mr. Bramanti's consulting agreement are
substantially similar to those of Mr. Molbeck, including his perquisites and
rights upon termination, death or disability, except Mr. Bramanti is not
entitled to any earnings-related bonuses. If the Bramanti Agreement is
terminated, Mr. Bramanti has agreed to certain provisions relating to
non-competition, confidentiality and non-solicitation of customers and
employees.
Benjamin D. Wilcox
Mr. Wilcox has entered into an Employment Agreement effective as of January 5,
2000, (the "Wilcox Agreement") which expires on December 31, 2002. Mr. Wilcox
will act as Senior Vice President of the Company and President and Chief
Operating Officer of Houston Casualty. Mr. Wilcox will receive a salary of
$315,000 for the calendar year beginning January 1, 2000, and increasing by
$15,000 for each annual period beginning January 1, 2001. He will also receive
an annual bonus of not less than $50,000. The Employment Agreement also provides
that upon its termination, Mr. Wilcox will serve the Company as a consultant for
a period of three years and receive $200,000 per year. With the exception of
earnings-related bonuses, the terms of Mr. Wilcox's consulting agreement are
substantially similar to those of Mr. Molbeck. Mr. Wilcox is also entitled to
certain perquisites, including a car allowance, certain club memberships, and
life insurance. Mr. Wilcox's rights upon termination, death or disability are
similar to those provided to Mr. Molbeck. If the Wilcox Agreement is terminated,
Mr. Wilcox has agreed to certain provisions relating to non-competition,
confidentiality and non-solicitation of customers and employees.
Edward H. Ellis, Jr.
Mr. Ellis has entered into an Employment Agreement effective as of January 5,
2000, (the "Ellis Agreement") which expires on December 31, 2002. Mr. Ellis will
act as Senior Vice President and Chief Financial Officer of the Company and will
receive a salary of $250,000 for the calendar year beginning January 1, 2000,
and increasing by $25,000 for each annual period beginning January 1, 2001. Mr.
Ellis' rights upon termination, death or disability are similar to those
provided to Mr. Molbeck. If the Ellis Agreement is terminated, Mr. Ellis has
agreed to certain provisions relating to non-competition, confidentiality and
non-solicitation of customers and employees.
REPORT OF THE COMPENSATION COMMITTEE
During 2000, the Compensation Committee (the "Committee") consisted of James R.
Crane, Edwin H. Frank, III and Walter J. Lack (Chairman). The current members of
the Compensation Committee are Marvin P. Bush, James R. Crane and Walter J. Lack
(Chairman).
All decisions by the Committee relating to the compensation of the Company's
Executive Officers are reviewed and approved by the full Board of Directors. The
philosophy of the Company's compensation program is to employ, retain and reward
executives capable of leading the Company in achieving its business objectives.
These objectives include creating and then preserving strong financial
performance, increasing the assets of the Company, positioning the Company's
assets and business operations in geographic markets and industry segments
offering long-term growth opportunities, enhancing shareholder value and
ensuring the survival of the Company. The accomplishment of these objectives is
measured against conditions prevalent in the industry within which the Company
operates. In recent years these conditions reflect a highly competitive market
environment and rapidly changing overall industry market conditions.
The available forms of executive compensation include base salary, cash bonus
awards and stock options. Performance of the Company is a key consideration. The
Company's compensation policy recognizes, however, that stock price performance
is only one measure of performance and, given industry business conditions and
the long-term strategic direction and goals of the Company, it may not
necessarily be the best current measure of executive performance. Therefore, the
Company's compensation policy also gives consideration to the Company's
achievement of business objectives when determining Executive Officer
compensation. An additional objective of the Committee has been to reward
Executive Officers with equity compensation in addition to salary in keeping
with the Company's overall compensation philosophy, which
17
20
attempts to place equity in the hands of its employees in an effort to further
instill shareholder considerations and values in the actions of employees and
Executive Officers. The Committee strongly believes that the interests of its
employees and Executive Officers must be closely aligned with those of its
Shareholders.
The Committee has, with the approval of the full Board of Directors, determined
that the interests of the Company and its shareholders are best served by the
Company's entering into multi-year employment agreements with certain Executive
Officers, including the Chief Executive Officer and the Named Executive
Officers. A summary of the principal terms of such employment agreements is
included under the caption "Employment Agreements" above. The Committee believes
that such multi-year employment arrangements benefit the Company and its
shareholders by permitting the Company to attract and retain Executive Officers
with demonstrated leadership abilities and to secure the services of such
Executive Officers at agreed upon terms over an extended period of time. The
compensation payable to the subject Executive Officers pursuant to the
employment agreements is consistent with the compensation policies of the
Company as established by the Committee.
Compensation paid to Executive Officers is based upon a Company wide salary
structure consistent for each position relative to its authority and
responsibility compared to industry peers. Stock option awards have been used to
reward Executive Officers and to retain them through the potential of capital
gains and equity buildup in the Company. In 2000, the number of stock options
granted, whether in conjunction with a written employment agreement or
otherwise, was determined by the subjective evaluation by the Committee of the
executive's ability to influence the Company's long term growth and
profitability. The Board of Directors believes the award of stock options
represents an effective incentive to create value for the shareholders.
The Committee's executive compensation policies are intended to provide
competitive levels of compensation in order to attract and retain qualified
officers. Compensation for each of the Executive Officers, as well as other
officers, consists of three basic elements: base salary, cash bonuses and
long-term incentive compensation. The base salaries are fixed at levels which
the Committee believes are comparable to those of executives of similar status
in the property and casualty insurance industry. Each Executive Officer is also
eligible to receive an annual bonus dependent upon the Company's success as well
as an assessment of the performance and contribution of each Executive Officer
of the Company for the year. The Committee feels that longer-term incentives are
appropriate to motivate and retain key personnel and that stock ownership by
management is beneficial in aligning management and Shareholder interests in the
enhancement of Shareholder value.
In 2000, the Committee reviewed base salary and annual bonus recommendations
made by the Chief Executive Officer based upon his assessment of the performance
of individual Executive Officers and his assessment of each Executive Officer's
past performance and expectation as to future contributions. The Committee then
formulated its own recommendations which were submitted for approval to the
Board of Directors. The Chief Executive Officer and other Executive Officers
also made recommendations to the Committee concerning the grant of stock options
to other officers.
Section 162(m) of the Internal Revenue Code of 1986 (the "Code"), generally
disallows a tax deduction to public companies for compensation over $1.0 million
paid to the corporation's Chief Executive Officer and the four other most highly
compensated Executive Officers
Section 162(m) further provides that qualifying performance-based compensation
will not be subject to the deduction limit if certain requirements are met. The
Company currently intends to structure grants under future stock option plans in
a manner that complies with this statute. The Company does not currently intend
to structure the discretionary annual bonus for Executive Officers to comply
with Section 162(m). Such bonuses do not meet Section 162(m)'s requirement that
they be "payable solely on account of the attainment of one or more performance
goals." Therefore, the Committee believes the annual discretionary bonuses, as
currently structured, better serve the interests of the Company's Shareholders
by allowing broader discretion in recognizing an Executive Officer's
contribution and performance.
18
21
In connection with the compensation of the Company's Executive Officers, the
Committee is aware of Section 162(m) of the Code as it relates to deductibility
of qualifying compensation paid to Executive Officers. The Committee believes
that compensation to be paid in 2001 may exceed the deductibility limitations on
non-excluded compensation to certain of the Company's Executive Officers.
CHIEF EXECUTIVE OFFICER COMPENSATION
As referenced above, the Company has entered into an employment agreement with
Mr. Way upon terms approved by the Committee, pursuant to which Mr. Way would
serve as Chairman of the Board of Directors and Chief Executive Officer of the
Company. A summary of the principal terms of Mr. Way's employment agreement is
included under the caption "Employment Agreements" above. The Committee believes
the Chief Executive Officer's cash compensation for 2000 and as contemplated by
the employment agreement is warranted by the Company's continuing performance in
light of overall adverse market conditions in many of the Company's lines of
business and the substantial growth and diversification of the Company's
operations experienced by the Company under his leadership. The Company's
underwriting experience continues to be exceptional and during the period 1996
through 2000, the Company's average combined ratio was 94.7%, as compared with
the industry's average of 105.2% (1996-1999). During the period, the Company's
gross written premium increased from $337.3 million to $967.5 million, an
increase of 187%, net written premium increased from $183.0 million to $283.8
million, an increase of 55%, and total revenue increased from $270.8 million to
$466.2 million, an increase of 72%. Also during the period, the Company's
shareholders' equity increased from $296.5 million to $529.4 million, a 79%
increase. After giving effect to the March, 2001 public offering of its Common
Stock, the Company's pro forma shareholders' equity as of December 31, 2000
would have been $682.3 million. During the same four-year period, the Company's
assets increased from $965.8 million to $2.7 billion, a 184% increase. In
addition, during 2000, the Company successfully completed the integration of the
publicly traded The Centris Group, Inc., the parent corporation of a group of
insurance companies and underwriting agencies acquired in December, 1999.
Submitted by the Compensation Committee:
Walter J. Lack, Chairman
Marvin P. Bush
James R. Crane
19
22
REPORT OF THE AUDIT COMMITTEE
The Audit Committee is composed of three independent directors and acts under a
written charter adopted by the Board of Directors, which is attached to this
Proxy Statement as Attachment "B". James M. Berry was a member of the Audit
Committee prior to his death. In April, 2001 the members of the Board of
Directors appointed James C. Flagg as a member of the Audit Committee
concurrently with his appointment to the Board of Directors. The Audit Committee
is responsible for overseeing HCC's financial reporting process on behalf of the
Board of Directors. HCC's management is primarily responsible for HCC's
financial statements and the quality and integrity of the reporting process,
including the systems of internal controls. The independent auditors,
PricewaterhouseCoopers are responsible for auditing those financial statements
and for expressing an opinion on the conformity of the financial statements with
generally accepted accounting principles.
In fulfilling its oversight responsibilities, the Audit Committee has reviewed
and discussed the audited financial statements for the year ended December 31,
2000, with HCC's management and representatives of the independent auditors. The
Audit Committee discussed with the independent auditors the matters required to
be discussed by Statement on Auditing Standards No. 61, Communication with Audit
Committees, as amended. In addition, the Audit Committee discussed with the
independent auditors their independence from HCC and its management, including
the matters in written disclosures required by Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees, and has received
from PricewaterhouseCoopers the written disclosure required by Standard No. 1.
The Audit Committee has considered the compatibility of non-audit services,
primarily actuarial, tax consulting and auditing of the statutory financial
statements of the Company's insurance company subsidiaries, with the auditors'
independence.
PricewaterhouseCoopers audited the accounts of the Company and its subsidiaries
for the fiscal year ended December 31, 2000 and has served as the Company's
auditors since 1987. In February, 2000, PricewaterhouseCoopers informed the
Company that they may not have been in compliance with the auditor independence
standards established by the SEC and certain accounting regulatory bodies. Such
potential non-compliance by PricewaterhouseCoopers related to a delay in the
payment of capital and retirement funds to a member of the Company's executive
management and a member of the Board of Directors who were former partners of
PricewaterhouseCoopers. PricewaterhouseCoopers has assured the Audit Committee
that such delayed transfer of funds did not affect the quality or integrity of
its audits of the Company's financial statements and that it presently complies
with all applicable auditor independence requirements.
In reliance on its review of the audited financial statements and the discussion
referred to above, the Audit Committee has recommended to the Board of Directors
that the audited financial statements be included in HCC's Annual Report on Form
10-K for the year ended December 31, 2000, for filing with the SEC.
Submitted by the Audit Committee:
J. Robert Dickerson, Chairman
Patrick B. Collins
James C. Flagg, Ph.D.
20
23
PROPOSAL III -- PROPOSAL TO APPROVE THE ADOPTION OF THE
2001 FLEXIBLE INCENTIVE PLAN
The adoption of the Company's 2001 Flexible Incentive Plan (the "2001 Flexible
Plan") has been unanimously approved by the Company's Board of Directors and
recommended to be submitted to the Company's Shareholders for approval at the
Meeting. The description of the 2001 Flexible Plan contained herein is not
intended to be complete and is qualified in its entirety by reference to
Attachment "C", which contains the complete text of the 2001 Flexible Plan.
Contingent upon the adoption of the 2001 Flexible Plan by the Company's
Shareholders, the Board of Directors has determined that all unissued options
(approximately 512,820 as of the Record Date) under the Company's other stock
option plans will be cancelled and no additional options will be issued under
such plans.
The purposes of the 2001 Flexible Plan are to enable the Company to attract,
motivate and retain highly talented employees, nonemployee directors,
consultants and other service providers by enabling the Company to make awards
that recognize the creation of long-term value for the Company's Shareholders
and promote the continued growth and success of the Company. To accomplish this
purpose, the 2001 Flexible Plan provides for the granting to eligible persons of
stock options, stock appreciation rights, restricted stock, performance awards,
performance stock, dividend equivalent rights and any combination thereof. The
Board of Directors deems the 2001 Flexible Plan to be in the best interests of
the Company. The 2001 Flexible Plan does not permit the repricing of stock
options.
AVAILABLE SHARES
The aggregate number of shares of Common Stock which may be issued under the
2001 Flexible Plan (or with respect to which awards may be granted) shall not
exceed 3,000,000 shares. Shares issued under the 2001 Flexible Plan may be
either authorized and unissued Common Stock or Common Stock held in or acquired
for the treasury of the Company. Any shares of Common Stock subject to a stock
option or stock appreciation right that are not issued prior to the expiration
of such awards, or any restricted stock or performance shares that are
forfeited, will again be available for award under the 2001 Flexible Plan. In
the event that shares of Common Stock are delivered to the Company in payment of
the exercise price with respect to any stock option granted under the 2001
Flexible Plan, the number of shares available for future awards under the 2001
Flexible Plan will be reduced only by the net number of shares issued.
PERSONS ELIGIBLE TO PARTICIPATE
Eligibility for participation in the 2001 Flexible Plan is confined to
employees, nonemployee directors, consultants and other service providers of the
Company and its subsidiaries, as determined by the Board of Directors or its
designated Compensation Committee in its sole discretion.
ADMINISTRATION
The Compensation Committee administers the 2001 Flexible Plan and has broad
powers under the 2001 Flexible Plan to, among other things, administer and
interpret the 2001 Flexible Plan, establish guidelines for the 2001 Flexible
Plan's operation, select persons to whom awards are to be made under the 2001
Flexible Plan, determine the types, sizes and combinations of awards to be
granted under the 2001 Flexible Plan, and determine other terms and conditions
of an award. The Compensation Committee may delegate the authority to perform
specified functions under the 2001 Flexible Plan to officers of the Company. In
addition, except as set forth below under "Amendment and Termination," the
Compensation Committee also has the power to modify or waive restrictions or
limitations on the exercisability of awards and to accelerate and extend
existing awards. The Compensation Committee may also determine whether, and to
what extent and under what conditions to provide loans to eligible participants
to purchase Common Stock under the 2001 Flexible Plan, in addition, the
Compensation Committee has the power to modify the terms of existing awards.
21
24
TYPES OF AWARDS
The 2001 Flexible Plan provides for the grant of any or all of the following
types of awards: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights, either in tandem
with stock options or freestanding; (3) restricted stock awards; (4) performance
shares; (5) performance awards; (6) dividend equivalent rights; and (7) other
stock-based awards. Each of these types of awards is described in greater detail
in the 2001 Flexible Plan. Awards may be granted singly, in combination or in
tandem, as determined by the Compensation Committee. The specific amount of
awards to be received by or allocated to the officers or employees or any other
participant under the 2001 Flexible Plan is in the discretion of the
Compensation Committee and is therefore not determinable for future periods.
PAYMENT FOR AWARDS
The purchase price of any shares of Common Stock purchased pursuant to the
exercise of an award granted under the 2001 Flexible Plan is payable in full on
the exercise date in cash, by check, by surrender to the Company of shares of
Common Stock registered in the name of the participant, by delivery to the
Company of such other lawful consideration as the Compensation Committee may
determine, or by a combination of the foregoing. Any such shares so surrendered
shall be deemed to have a value per share equal to the fair market value of a
share of Common Stock on such date.
AMENDMENT AND TERMINATION
The Compensation Committee may at any time, and from time to time, amend, in
whole or in part, any or all of the provisions of the 2001 Flexible Plan or
suspend or terminate it entirely, retroactively or otherwise; provided, however,
that unless otherwise required by law or specifically provided in the 2001
Flexible Plan, the rights of the plan participant with respect to options or
other awards granted prior to such amendment, suspension or termination may not
be impaired without the consent of such participant; and, provided further, that
without the approval of the Shareholders of the Company, no amendment may be
made which would materially increase the aggregate number of shares of Common
Stock that may be issued under the 2001 Flexible Plan; or modify the
requirements as to eligibility to receive incentive stock options under the 2001
Flexible Plan
No award or grant may be made under the 2001 Flexible Plan on or after May 24,
2011 (the tenth anniversary of the effective date of the 2001 Flexible Plan).
The 2001 Flexible Plan is not subject to any provision of ERISA and is not
qualified under Section 401(a) of the Internal Revenue Code of 1986.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
APPROVE THE ADOPTION OF THE 2001 FLEXIBLE INCENTIVE PLAN. YOUR PROXY WILL BE SO
VOTED UNLESS YOU SPECIFY OTHERWISE.
22
25
PROPOSAL IV -- PROPOSAL TO AMEND
THE COMPANY'S AMENDED RESTATED CERTIFICATE OF INCORPORATION
TO AUTHORIZE THE ISSUANCE OF
PREFERRED STOCK
The proposed amendment (the "Preferred Stock Amendment") to the Amended Restated
Certificate of Incorporation will create 50,000,000 authorized shares of
Preferred Stock. The description of the Preferred Stock Amendment contained
herein is not intended to be complete and is qualified in its entirety by
reference to the proposed Preferred Stock Amendment as set forth in Attachment
"D".
The Preferred Stock contemplated by the proposed Preferred Stock Amendment would
be authorized for issuance in advance by the Shareholders and its terms, rights
and features would be determined by the Board of Directors of the Company upon
issuance. The authorization of such Preferred Stock would permit the Board of
Directors to issue Preferred Stock from time to time in one or more series.
Subject to the provisions of Preferred Stock Amendment and the limitations
prescribed by law, the Board of Directors would be expressly authorized, at its
discretion, to adopt resolutions to issue shares, to fix the number of shares
and to change the number of shares constituting any series and to provide for or
change the voting powers designations, preferences and relative, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation and preferences of the
shares constituting any series of the Preferred Stock, in each case without any
further action or vote by the Shareholders. The Board of Directors would be
required to make any determination to issue shares of Preferred Stock based on
its judgment as to the best interests of the Company and its Shareholders.
Therefore, the terms, rights and features of a Preferred Stock subject to this
proposal cannot be stated or predicted with certainty.
It is not possible to state the effects of the proposed Preferred Stock
Amendment upon the rights of holders of Common Stock until the Board of
Directors determines the respective rights of the holders of one or more series
of Preferred Stock. However, the issuance of shares of Preferred Stock pursuant
to the Board of Directors' authority described above may adversely affect the
rights of the holders of Common Stock. Specifically, the effects of such
issuances of Preferred Stock could include (i) reduction of the amount otherwise
available for payment of dividends on Common Stock, if any, (ii) restrictions on
dividends on Common Stock, (iii) dilution of the voting power of Common Stock,
and (iv) restrictions on the rights of holders of Common Stock to share in the
Company's assets on liquidation until satisfaction of any liquidation preference
granted to the holders of such subsequently designated series of Preferred
Stock. For example, Preferred Stock issued by the Company may rank prior to the
Common Stock as to dividend rights, liquidation preferences or both, may have
full or limited voting rights, and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock could decrease the
amount of earnings and assets allocable to or available for distribution to
holders of Common Stock and adversely affect the rights and powers, including
voting rights of the Common Stock, and may discourage bids for the Common Stock
or may otherwise adversely affect the market price of the Common Stock.
The proposed Preferred Stock Amendment will provide the Company with increased
financial flexibility in meeting future capital requirements by providing
another type of security in addition to its Common Stock, as it will allow
Preferred Stock to be available for issuance from time to time and with such
features as determined by the Board of Directors for any proper corporate
purpose. Such purposes could include, without limitation, issuance for cash as a
means of obtaining capital for use by the Company, or issuance as part or all of
the consideration required to be paid by the Company for acquisitions of other
businesses or properties.
Any issuance of Preferred Stock with voting rights could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company by increasing the number of outstanding shares entitled to vote and
by increasing the number of votes required to approve a change in control of the
Company. Shares of voting or convertible Preferred Stock could be issued, or
rights to purchase such shares could be issued, to render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest, merger or otherwise. The ability of the Board of Directors
to
23
26
issue such additional shares of Preferred Stock, with the rights and preferences
it deems advisable, could discourage an attempt by a party to acquire control of
the Company by tender offer or other means. Such issuances could therefore
deprive Shareholders of benefits that could result from such an attempt, such as
the realization of a premium over the market price that such an attempt could
cause. Moreover, the issuance of such additional shares of Preferred Stock to
persons supporting the Board of Directors could make it more difficult to remove
incumbent managers and directors from office even if such change were to be
favorable to Shareholders generally.
While the Preferred Stock Amendment may have anti-takeover ramifications, the
Board of Directors believes that the financial flexibility offered by the
Preferred Stock Amendment outweighs any disadvantages. To the extent that the
Preferred Stock Amendment may have anti-takeover effects, the Preferred Stock
Amendment may encourage persons seeking to acquire the Company to negotiate
directly with the Board of Directors enabling the Board of Directors to consider
the proposed transaction in a manner that best serves the Shareholders'
interests.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE PROPOSAL
TO AMEND THE COMPANY'S AMENDED RESTATED CERTIFICATE OF INCORPORATION TO
AUTHORIZE THE ISSUANCE OF PREFERRED STOCK. YOUR PROXY WILL BE SO VOTED UNLESS
YOU SPECIFY OTHERWISE.
24
27
PROPOSAL V -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending December 31, 2001 and has
further directed that management submit the selection of independent auditors
for ratification by Shareholders at the Annual Meeting. PricewaterhouseCoopers
(or its predecessor) has audited the Company's financial statements since
January 1, 1987. Representatives of PricewaterhouseCoopers are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
Shareholder ratification of the selection of PricewaterhouseCoopers as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board of Directors is submitting the selection of
PricewaterhouseCoopers to the Shareholders for ratification as a matter of good
corporate practice. If the Shareholders fail to ratify the selection, the Audit
Committee and the Board of Directors will reconsider whether or not to retain
that firm. Even if the selection is ratified, the Audit Committee and the Board
of Directors in their discretion may direct the appointment of different
independent auditors at any time during the year if they determine that such a
change would be in the best interests of the Company and its Shareholders.
AUDIT FEES
During the fiscal year ended December 31, 2000, the aggregate fees billed by
PricewaterhouseCoopers for the audit of the Company's financial statements for
such fiscal year and for the reviews of the Company's interim financial
statements was $458,595.
ALL OTHER FEES
During the fiscal year ended December 31, 2000, the aggregate fees billed by
PricewaterhouseCoopers for professional services other than audit fees was
$698,104. Such professional services consisted primarily of actuarial services,
tax consulting and insurance company statutory accounting services.
The Audit Committee has determined the rendering of the non-audit services by
PricewaterhouseCoopers is compatible with maintaining the auditor's
independence.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY'S INDEPENDENT
AUDITORS. YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
25
28
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total returns for an
investment of $100 made on December 31, 1995 in the Common Stock of the Company,
the NYSE Composite Index and the Nasdaq Insurance Stock Index. The graph assumes
that all dividends were reinvested.
TOTAL RETURN PERFORMANCE
[PERFORMANCE GRAPH]
PERIOD ENDING
--------------------------------------------------------------------
INDEX 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00
----- -------- -------- -------- -------- -------- --------
HCC Insurance Holdings,
Inc. 100.00 162.56 144.64 120.07 91.56 189.18
NYSE Composite Index 100.00 119.06 155.14 180.82 197.35 199.35
Nasdaq Insurance Index 100.00 113.99 167.21 148.98 115.57 145.12
OTHER BUSINESS
The Board of Directors has no knowledge of any other matter to be submitted at
the Meeting. If any other matter shall properly come before the Meeting, the
persons named in the Proxy will have discretionary authority to vote the shares
thereby represented in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Any Shareholder proposal intended to be presented for consideration at the 2002
Annual Meeting of Shareholders and to be included in the Company's Proxy
Statement must be in proper form and received by the Secretary of the Company at
the principal executive offices of the Company by the close of business on
December 30, 2001. It is suggested that a proponent submit any proposal by
Certified Mail -- Return Receipt Requested and all proposals should be sent to
the attention of the Secretary.
26
29
FORM 10-K
The Company will furnish without charge to each person whose proxy is being
solicited, upon request of any such person, a copy of the Annual Report of the
Company on Form 10-K for the fiscal year ended December 31, 2000, as filed with
the SEC, including the financial statements and schedules thereto but not the
exhibits. Requests for copies of such report should be directed to Andra D.
Lahr, Investor Relations, HCC Insurance Holdings, Inc., 13403 Northwest Freeway,
Houston, Texas 77040-6094. Copies of any exhibit to the Form 10-K will be
forwarded upon receipt of a written request therefor addressed to Ms. Lahr.
EACH SHAREHOLDER WHO DOES NOT EXPECT TO ATTEND THE ANNUAL MEETING OF
SHAREHOLDERS IN PERSON IS URGED TO EXECUTE THE PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
CHRISTOPHER L. MARTIN,
Secretary
Dated April 30, 2001
27
30
ATTACHMENT "A"
CERTIFICATE OF AMENDMENT
TO THE
AMENDED RESTATED CERTIFICATE OF INCORPORATION
OF
HCC INSURANCE HOLDINGS, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, HCC Insurance
Holdings, Inc. (the "Corporation"), a corporation organized and existing and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: The Amended Restated Certificate of Incorporation of the Corporation is
hereby amended by adding new Article XI in its entirety to read as follows:
"ARTICLE XI
The number of Directors of the Corporation shall be fixed from time to time by a
bylaw or amendment thereof duly adopted by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized Directors
(whether or not there exists any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board for
adoption). Any Director or the entire Board of Directors may be removed from
office by the shareholders of the Corporation only for cause. The Directors
shall be divided into three classes with the term of office of the first class
to expire at the first annual meeting of the shareholders held following the
adoption of this provision, and the term of office of the second class to expire
at the second annual meeting of shareholders held following the adoption of this
provision, and the term of office of the third class to expire at the third
annual meeting of the shareholders held following the adoption of this
provision. After the Directors are divided into three classes, as set forth in
the preceding sentence, all subsequent elections shall be for a term to expire
at each third succeeding annual meeting of shareholders after such election. All
Directors shall hold office until the expiration of the term for which elected,
and until their respective successors are duly elected and qualified, except in
the case of death, resignation, or removal of any Director. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of any incumbent Director. The newly created directorships resulting from any
increase in the authorized number of Directors or any vacancies on the Board of
Directors resulting form death, resignation or other reason (other than removal
from office for cause by vote of the shareholders) may be filled by a majority
vote of the Directors then in office, though less than a quorom. Any vacancies
created as a result of removal by the shareholders of one or more Directors for
cause, shall be filled by a vote of the shareholders."
SECOND: This amendment to the Amended Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Section 242 of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Christopher L. Martin, its authorized officer, this 24th day of May, 2001.
HCC INSURANCE HOLDINGS, INC.
By:
-------------------------------------------------------
Christopher L. Martin, Vice President and
Secretary
28
31
ATTACHMENT "B"
HCC INSURANCE HOLDINGS, INC.
CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
I. AUDIT COMMITTEE PURPOSE
The Audit Committee is a part of the Board of Directors and is
appointed by the Board to assist the Board in fulfilling its
oversight responsibilities with respect to (i) the annual financial
information to be provided to shareholders and the Securities and
Exchange Commission (SEC); (ii) the system of internal controls that
management has established; and (iii) the internal and external
audit process. In addition, the Committee provides an avenue for
communication between the internal audit function, the independent
accountants, financial management and the Board. The Committee shall
establish a clear understanding with the independent accountants
that the independent accountants must maintain an open and
transparent relationship with the Committee and that the ultimate
accountability of the independent accountants is to the Board and
the Committee. The Committee will make regular reports to the Board
concerning its activities.
While the Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Committee to plan or conduct
audits or to determine that the Company's financial statements are
complete and accurate and are in accordance with generally accepted
accounting principles. This is the responsibility of management and
the independent auditor. Moreover, it is not the duty of the
Committee to conduct investigations, to resolve disagreements, if
any, between management and the independent auditor or to assure
compliance with laws and regulations and the Company's business
conduct guidelines.
Subject to the prior approval of the Board, the Committee has the
authority to investigate any matter or activity involving financial
accounting or financial reporting and should have a direct access to
the independent auditors as well as anyone in the organization in so
doing. Subject to the prior approval of the Board, the Committee
shall have the ability to retain, at the Company's expense, such
special legal, accounting, or other consultants or experts as it
deems necessary in the performance of its duties.
II. AUDIT COMMITTEE COMPOSITION AND MEETINGS
Committee members shall meet the requirements of the New York Stock
Exchange and the SEC. The Committee shall be comprised of three
directors as determined by the Board, each of whom shall be an
independent, non-executive director, free from any relationship that
would interfere with the exercise of his or her independent
judgment. All members of the Committee shall have a basic
understanding of finance and accounting and be able to read and
understand fundamental financial statements, and at least one member
of the Committee shall have accounting or related financial
management expertise.
The Committee shall meet at least four times annually, or more
frequently as circumstances dictate. The Committee shall also meet
privately in executive session at least annually with management,
the director of the internal auditing department, the independent
auditors, and as a committee to discuss any matters that the
Committee or each of these groups believe should be discussed. In
addition, the Committee, or at least its Chair, shall meet with
management and the independent auditors quarterly to review the
Company's financial statements and significant findings based upon
the auditors' limited review procedures.
29
32
III. AUDIT COMMITTEE FUNCTIONS -- The Committee shall perform the following
functions:
Review Procedures
1. Review and reassess the adequacy of this Charter at least
annually. Submit the charter to the Board of Directors for
approval and have the document published at least every three
years in accordance with SEC regulations.
2. Review the Company's annual audited financial statements prior to
filing or distribution. The review shall include discussion with
management and independent auditors of significant issues
regarding accounting principles, practices, and judgments.
3. In consultation with management, the independent auditors, and the
internal auditors, consider the integrity of the Company's
financial reporting processes and control. Discuss significant
risk exposures and the steps management has taken to monitor,
control, and report such exposures. Review significant findings,
including the status of previous recommendations prepared by the
independent auditors and the internal auditing department together
with management's responses.
4. Review with financial management and the independent auditors the
Company's quarterly financial results prior to the release of
earnings and/or the Company's quarterly financial statements prior
to filing or distribution. Discuss any significant changes to the
Company's accounting principles and any items required to be
communicated by the independent auditors in accordance with SAS
61.
Independent Auditors
5. The independent auditors are ultimately accountable to the Board
of Directors. The Committee shall review the independence and
performance of the auditors and annually recommend to the Board of
Directors the appointment of the independent auditors or approve
any discharge of auditors when circumstances warrant.
6. Discuss with management the fees and other significant
compensation to be paid to the independent auditors.
7. On an annual basis, the Committee shall review and discuss with
the independent auditors all significant relationships they have
with the Company that could impair the auditors' independence.
8. Review the independent auditors audit plan and engagement letter.
9. Prior to releasing the year-end earnings, discuss the results of
the audit with the independent auditors.
10. Consider the independent auditors' judgment about the quality and
appropriateness of the Company's accounting principles as applied
in its financial reporting.
Internal Audit Department and Legal Compliance
12. The internal audit department shall be responsible to senior
management, but shall have a direct reporting responsibility to
the Board of Directors through the Committee.
13. Review the qualifications of the internal audit department, as
needed.
14. Review the reasons for any replacement of the senior internal
audit executive.
15. Review significant reports prepared by the internal audit
department together with management's response and follow-up to
these reports.
30
33
Other Audit Committee Responsibilities
16. Annually prepare a report to shareholders as required by the
Securities and Exchange Commission. The report shall be included
in the Company's annual proxy statements and shall, at a minimum,
state whether the Audit Committee has:
- Reviewed and discussed the audited financial statements with
management;
- Discussed with the independent auditors the matters required to
be discussed by SAS 61;
- Received certain written disclosures from the auditors regarding
their independence as required by Independent Standards Board
Statement No. 1; and
- If, based on this review, the audit committee recommended to the
Board to include the audited financial statements in the annual
report filed with the SEC.
17. Perform any other activities consistent with this Charter, the
Company's Bylaws, and governing law, as the Committee or the Board
deems necessary or appropriate.
18. Maintain minutes of meetings and periodically report to the Board
of Directors on significant results of the foregoing activities.
31
34
ATTACHMENT "C"
HCC INSURANCE HOLDINGS, INC.
2001 FLEXIBLE INCENTIVE PLAN
1. PURPOSE
The purposes of the HCC Insurance Holdings, Inc. 2001 Flexible Incentive Plan
(the "2001 Flexible Plan") are to promote the interests of HCC Insurance
Holdings, Inc. (together with any successor thereto, the "Company") and its
subsidiaries and Shareholders by enabling the Company to attract, motivate and
retain employees, directors, consultants, and other service providers by
offering such employees, directors, consultants, and service providers
performance-based stock incentives and other equity interests in the Company and
other incentive awards that recognize the creation of value for the Shareholders
and promote the Company's long-term growth and success. To achieve these
purposes, Participants may receive stock options, Stock Appreciation Rights,
Restricted Stock, Performance Awards, Dividend Equivalent Rights and any other
Awards, or any combination thereof, subject to the terms of the Plan set forth
below.
2. DEFINITIONS
As used in the 2001 Flexible Plan, the following terms shall have the meanings
set forth below unless the content otherwise requires:
2.1 "Award" shall mean the grant of a stock option, a Stock Appreciation Right,
a Restricted Stock, a Performance Award, a Dividend Equivalent Right or any
other Award under the 2001 Flexible Plan.
2.2 "Board" shall mean the Board of Directors of the Company, as the same may
be constituted from time to time.
2.3 "Change in Control" shall mean, after the effective date of the 2001
Flexible Plan, (i) the occurrence of an event of a nature that would be required
to be reported in response to Item 1 of a Form 8-K Current Report of the Company
promulgated pursuant to Sections 13 and 15(d) of the Exchange Act; provided
that, without limitation, such a Change in Control shall be deemed to have
occurred if (a) any "person," as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under any employee benefit plan of the Company, or any
company owned, directly or indirectly, by the Shareholders in substantially the
same proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities
or (b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election by the Board or the nomination
for election by the Shareholders was approved by a vote of at least two-thirds
( 2/3) of the Directors then still in office who either were Directors at the
beginning of the two-year period or whose election or nomination for election
was previously so approved; (ii) the Shareholders approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the surviving entity outstanding immediately after such
merger or consolidation; provided, however, that a merger or consolidation
effected to implement a reorganization or recapitalization of the Company, or a
similar transaction (collectively, a "Reorganization"), in which no "person"
acquires more than twenty percent (20%) of the combined voting power of the
Company's then outstanding securities shall not constitute a Change in Control
of the Company; or (iii) the Shareholders approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
32
35
2.5 "Committee" shall mean the Stock Option or Compensation Committee of the
Company, if such a separate committee is appointed by the Board, or, in the
absence of such a separate committee, it shall mean the Board. If a separate
committee is appointed, then to the extent required by Rule 16b-3 promulgated
under the Exchange Act and any successor thereunder promulgated during the
duration of the 2001 Flexible Plan, the Committee members who approve Awards
which would otherwise not qualify for an exemption from Rule 16b-3 shall consist
of two or more "Nonemployee directors" as defined by Rule 16b-3. To the extent
that Awards are intended to satisfy, and to the extent required to satisfy, the
"performance based compensation" exemption under Section 162(m) of the Code and
such Treasury Regulations as may be promulgated thereunder, the Committee
members who approve Awards shall consist of two or more "outside directors" as
defined by such Section of the Code and such Treasury Regulations.
2.6 "Common Stock" shall mean the Common Stock, $1.00 par value per share, of
the Company.
2.7 "Designated Beneficiary" shall mean the beneficiary designated by an
Optionee in a manner determined by the Committee, to exercise rights of the
Optionee in the event of the Optionee's death. In the absence of an effective
designation by an Optionee the Designated Beneficiary shall be the Optionee's
estate.
2.8 "Disability" shall mean permanent and total inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than twelve (12)
months, as determined in the sole and absolute discretion of the Committee.
2.9 "Dividend Equivalent Right" shall mean the right of the holder thereof to
receive credits based on the cash dividends that would have been paid on the
Shares specified in an Award granting Dividend Equivalent Rights if the Shares
subject to such Award were held by the person to whom the Award is made.
2.10 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
2.11 "Fair Market Value" shall mean with respect to the Shares, as of any date,
(i) the last reported sales price on any stock exchange on which the Common
Stock is traded or, if not reported on such exchange, on the composite tape, or,
in case no such sale takes place on such day, the average of the reported
closing bid and asked quotations on such exchange; (ii) if the Common Stock is
not listed on a stock exchange or no such quotations are available, the closing
price of the Common Stock as reported by the National Market System of the
National Association of Securities Dealers, Inc., or, if no such quotations are
available, the average of the high bid and low asked quotations in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated, or similar organization; or (iii) in the event that there shall be
no public market for the Common Stock, the fair market value of the Common Stock
as determined (which determination shall be conclusive) in good faith by the
Committee, based upon the value of the Company as a going concern, as if such
Common Stock were publicly owned stock, but without any discount with respect to
minority ownership.
2.12 "Incentive Stock Option" shall mean any stock option awarded under the
2001 Flexible Plan which qualifies as an "incentive stock option" under Section
422 of the Code or any successor provision.
2.13 "Non-Tandem Stock Appreciation Right" shall mean any Stock Appreciation
Right granted alone and not in connection with an Award which is a stock option.
2.14 "Non-Qualified Stock Option" shall mean any stock option awarded under the
2001 Flexible Plan that does not qualify as an Incentive Stock Option.
2.15 "Optionee" shall mean any Participant who has been granted a stock option
under the 2001 Flexible Plan and who has executed a written stock option
agreement with the Company reflecting the terms of such grant.
2.16 "Participant" shall mean an individual who is eligible to receive an Award
in accordance with Section 5.
33
36
2.17 "Performance Award" shall mean any Award hereunder of Shares, units or
rights based upon, payable in, or otherwise related to, Shares (including
Restricted Stock), or cash of an equivalent value, as the Committee may
determine, at the end of a specified performance period established by the
Committee.
2.18 "2001 Flexible Plan" shall mean the HCC Insurance Holdings, Inc. 2001
Flexible Incentive Plan, as amended and restated as set forth herein, and as may
be amended from time to time.
2.19 "Restricted Stock" shall mean any Award of Shares under the 2001 Flexible
Plan that are subject to restrictions or risk of forfeiture.
2.20 "Retirement" unless otherwise defined in any other agreement regarding an
Award, shall mean termination of a Participant's employment other than for cause
on or after the attainment of age 65 (or such other age as is permitted for the
Participant by the Committee in its sole discretion), provided the Participant
does not engage in full time employment with any other entity.
2.21 "Shareholders" shall mean the holders of Shares and/or, to the extent the
context requires, other equity securities of the Company.
2.22 "Shares" shall mean shares of the Company's Common Stock and any shares of
capital stock or other securities of the Company hereafter issued or issuable
upon, in respect of or in substitution or exchange for such Shares.
2.23 "Stock Appreciation Right" shall mean the right of the holder thereof to
receive an amount in cash or Shares equal to the excess of the Fair Market Value
of a Share on the date of exercise over the Fair Market Value of a Share on the
date of the grant (or such other value as may be specified in the agreement
granting the Stock Appreciation Right).
2.24 "Subsidiary" shall mean any subsidiary of the Company, and any business
venture designated by the Committee in which the Company has a significant
interest, as determined in the discretion of the Committee, provided that for
all purposes hereunder relating to Incentive Stock Options, "Subsidiary" shall
mean a subsidiary corporation of the Company, as defined in Section 424(f) of
the Code.
2.25 "Tandem Stock Appreciation Right" shall mean a Stock Appreciation Right
granted in connection with an Award which is a stock option.
3. ADMINISTRATION OF THE 2001 FLEXIBLE PLAN
3.1 Committee. The 2001 Flexible Plan shall be administered and interpreted by
the Committee in its discretion.
3.2 Awards. Subject to the provisions of the 2001 Flexible Plan and directions
from the Board, the Committee is authorized to and has the complete power and
discretion to:
(a) determine the persons to whom Awards are to be granted;
(b) determine the types and combinations of Awards to be granted, the
number of Shares to be covered by the Award, the pricing of the Award, the time
or times when the Award shall be granted and may be exercised, the terms,
performance criteria or other conditions, vesting periods or any restrictions
for an Award, any restrictions on Shares acquired pursuant to the exercise of an
Award and any other terms and conditions of an Award;
(c) conclusively interpret the provisions of the 2001 Flexible Plan and any
agreement, instrument, or other document relating to the 2001 Flexible Plan;
(d) prescribe, amend and rescind the rules and regulations relating to the
2001 Flexible Plan or make individual decisions as questions arise, or both;
(e) determine whether, to what extent and under what circumstances to
provide loans from the Company to participants to purchase Shares subject to
Awards under the 2001 Flexible Plan, and the terms and conditions of such loans;
(f) rely upon employees, consultants, and agents of the Company for such
clerical and record keeping duties as may be necessary in connection with the
administration of the 2001 Flexible Plan; and
34
37
(g) make all other determinations and take all other actions necessary or
advisable for the administration of the 2001 Flexible Plan.
3.3 Procedures. A majority of the Committee members shall constitute a quorum.
All determinations of the Committee shall be made by a majority of its members.
All questions of interpretation and application of the 2001 Flexible Plan or
pertaining to any question of fact or Award granted hereunder shall be decided
by the Committee, whose decision shall be final, conclusive and binding upon the
Company and each other affected party.
3.4 Delegation by the Committee. The Committee may delegate to officers of the
Company, pursuant to a written delegation, the authority to perform specified
functions under the 2001 Flexible Plan. Any actions taken by any officers of the
Company pursuant to such written delegation of authority shall be deemed to have
been taken by the Committee. Notwithstanding the foregoing, to the extent
necessary to satisfy the requirements of Section 162(m) of the Code and/or Rule
16b-3 promulgated under the Exchange Act, any function relating to a Reporting
Participant or a covered employee (as defined in Section 162(m) of the Code)
shall be performed solely by the Committee.
4. SHARES SUBJECT TO 2001 FLEXIBLE PLAN
4.1 Limitations. The maximum number of Shares that may be issued with respect
to Awards under the 2001 Flexible Plan shall not exceed 3,000,000 unless such
maximum shall be increased or decreased by reason of changes in capitalization
of the Company as hereinafter provided. The Shares issued pursuant to the 2001
Flexible Plan may be authorized but unissued Shares, or may be issued Shares
which have been reacquired by the Company.
4.2 Changes. To the extent that any Award under the 2001 Flexible Plan, shall
be forfeited, shall expire or shall be canceled, in whole or in part, then the
number of Shares covered by the Award or stock option so forfeited, expired or
canceled may again be awarded pursuant to the provisions of the 2001 Flexible
Plan. Notwithstanding the foregoing, Shares subject to a stock option or Stock
Appreciation Right that is awarded to a Named Executive Officer (as defined by
Section 17.1) and that is cancelled, shall not again be available under the
Plan. In the event that Shares are delivered to the Company in full or partial
payment of the exercise price for the exercise of a stock option granted under
the 2001 Flexible Plan, the number of Shares available for future Awards under
the 2001 Flexible Plan shall be reduced only by the net number of Shares issued
upon the exercise of the option. Awards that may be satisfied either by the
issuance of Shares or by cash or other consideration shall, until the form of
consideration to be paid is finally determined, be counted against the maximum
number of Shares that may be issued under the 2001 Flexible Plan. If the Award
is ultimately satisfied by the payment of consideration other than Shares, as,
for example, a stock option granted in tandem with a Stock Appreciation Right
that is settled by a cash payment of the stock appreciation, such Shares may
again be made the subject of an Award under the 2001 Flexible Plan. Awards will
not reduce the number of Shares that may be issued pursuant to the 2001 Flexible
Plan if the settlement of the Award will not require the issuance of Shares, as,
for example, a Stock Appreciation Right that can be satisfied only by the
payment of cash.
5. ELIGIBILITY
An individual shall be eligible to participate in the Plan and receive Awards
hereunder if the individual is an employee of the Company or a Subsidiary or if
the individual otherwise provides services to the Company or a Subsidiary as an
officer, consultant or Nonemployee director or in any other capacity; provided
that Incentive Stock Options may only be awarded to individuals who are
employees of the Company or a Subsidiary. In making any determination as to
persons to whom Awards shall be granted, the type of Award, and/or the number of
Shares to be covered by the Award, the Committee shall consider the position and
responsibilities of the Participant; his or her importance to the Company and
its Subsidiaries; the duties of such person; his or her past, present and
potential contributions to the growth and success of the Company and its
Subsidiaries; and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the 2001 Flexible Plan.
35
38
6. STOCK OPTIONS
6.1 Grants. The Committee may grant stock options alone or in addition to
other Awards granted under the 2001 Flexible Plan to any Participant. Each
person so selected shall be offered an option to purchase the number of Shares
determined by the Committee. The Committee shall specify whether such option is
an Incentive Stock Option or Non-Qualified Stock Option and any other terms and
conditions relating to such Award. To the extent that any stock option does not
qualify as an Incentive Stock Option (whether because of its provisions or the
time or manner of its exercise or otherwise), such stock option or the portion
thereof which does not qualify shall constitute a separate Non-Qualified Stock
Option. Each such person so selected shall have a reasonable period of time
within which to accept or reject the offered option. Failure to accept within
the period so fixed by the Committee may be treated as a rejection. Each person
who accepts an option shall enter into a written agreement with the Company, in
such form as the Committee may prescribe, setting forth the terms and conditions
of the option, consistent with the provisions of the 2001 Flexible Plan. The
Optionee and the Company shall enter into option agreements for Incentive Stock
Options and Non-Qualified Stock Options. At any time and from time to time, the
Optionee and the Company may agree to modify an option agreement so that an
Incentive Stock Option may be converted to a Non-Qualified Stock Option. The
Committee may require that an Optionee meet certain conditions before the option
or a portion thereof may vest or be exercised, as, for example, that the
Optionee remain in the employ or active service of the Company for a stated
period or periods of time before the option, or stated portions thereof, may
vest or be exercised.
6.2 Option Price. The option exercise price of the Shares covered by each
stock option shall be determined by the Committee; provided, however, that the
option exercise price of an Incentive Stock Option shall not be less than one
hundred percent (100%) of the Fair Market Value of Shares on the date of the
grant of such Incentive Stock Option. Subject to the provisions of Section 13,
the exercise price of a stock option issued in accordance with this 2001
Flexible Plan shall not be adjusted or amended following the issuance of such
stock option.
6.3 Incentive Stock Options Limitations.
(a) To the extent required by Section 422 of the Code, in no event shall
any person be granted Incentive Stock Options to the extent that the Shares
covered by any Incentive Stock Options (and any Incentive Stock Options granted
under any other plans of the Company and its Subsidiaries) that may be exercised
for the first time by such person in any calendar year have an aggregate Fair
Market Value in excess of $100,000. For this purpose, the Fair Market Value of
the Shares shall be determined as of the dates on which the Incentive Stock
Options are granted. It is intended that the limitation on Incentive Stock
Options provided in this Subsection 6.3(a) be the maximum limitation on options
which may be considered Incentive Stock Options under the Code.
(b) Notwithstanding anything herein to the contrary, in no event shall any
Participant owning more than ten percent (10%) of the total combined voting
power of the Company or any Subsidiary be granted an Incentive Stock Option
hereunder unless the option exercise price shall be at least one hundred ten
percent (110%) of the Fair Market Value of the Shares subject to such Incentive
Stock Option at the time that the Incentive Stock Option is granted and the term
of such Incentive Stock Option shall not exceed five (5) years.
6.4 Option Term. Subject to Subsection 6.3(b) hereof, the term of a stock
option shall be for such period of months or years from the date of its grant as
may be determined by the Committee; provided, however, that no stock option
shall be exercisable later than ten (10) years from the date of its grant.
Subject to the foregoing, a stock option granted to a Participant who is not an
employee of the Company or any Subsidiary shall be exercisable at such time and
to such extent (including after termination of such Participant's service for
the Company) as is expressly provided in the option agreement. No stock option
that is granted to a Participant who is an employee of the Company or any
Subsidiary may be exercised
36
39
unless, at the time of such exercise, the Optionee is, and has been continuously
since the date of grant of his or her stock option, employed by the Company,
except that:
(a) A stock option may, to the extent vested, be exercised within the
period of ninety (90) days after the date the Optionee ceases to be an employee
of the Company and the Subsidiaries for any reason other than as set forth below
(or within such lesser period as may be specified in the applicable option
agreement), provided that the option agreement may designate a longer exercise
period and that the exercise after such ninety (90)-day period shall be treated
as the exercise of a Non-Qualified Stock Option under the 2001 Flexible Plan.
(b) In the event of the death of the Optionee while in the employ of the
Company or the Subsidiaries or within ninety (90) days after the date the
Optionee ceases to be an employee of the Company or the Subsidiaries (or within
such lesser period as may be specified in the applicable option agreement,
whichever is shorter), the stock option may, to the extent vested and previously
unexercised, be exercised by the Optionee's Designated Beneficiary within the
one-year period immediately following such date of death (or within such lesser
period as may be specified in the applicable option agreement, whichever is
shorter);
(c) If the Optionee voluntarily terminates employment with the Company
without good reason (which determination shall be made in the sole and absolute
discretion of the Committee), the stock option may, to the extent vested and
previously unexercised by the Optionee within the period of ten (10) days
immediately following the termination of employment of the Optionee (or within
such lesser period as may be specified in the applicable option agreement,
whichever is shorter);
(d) If the Optionee ceases to be an employee of the Company by reason of
the Optionee's Disability, the stock option may be exercised by the Optionee for
the full number of shares or any portion thereof except as to the issuance of
fractional shares, to the full extent of this option less any previously
exercised shares at any time within the period of one year after the date of
Disability of the Optionee (or within such lesser period as may be specified in
the applicable option agreement, whichever is shorter);
(e) If the employment of the Optionee is terminated for cause (which
determination shall be made in the sole and absolute discretion of the
Committee) the stock option may, to the extent vested and previously
unexercised, be exercised by the Optionee within the period of ten (10) days
after the termination of employment of the Optionee (or within such lesser
period as may be specified in the applicable option agreement, whichever is
shorter);
(f) In the event of the Optionee's Retirement, the stock option may, to the
extent vested and previously unexercised, be exercised by the Optionee within
the period of one (1) year after the termination of employment by the Optionee
(or within such lesser period as may be specified in the applicable option
agreement, whichever is shorter), provided that the exercise of the option more
than ninety (90) days after the Optionee's termination of employment shall be
treated as the exercise of a Non-Qualified Option under the 2001 Flexible Plan.
6.5 Vesting of Stock Options.
(a) Each stock option granted hereunder may only be exercised to the extent
that the Optionee is vested in such option. Each stock option shall vest
separately in accordance with the option vesting schedule, if any, determined by
the Committee in its sole discretion, which will be incorporated in the stock
option agreement entered into between the Company and each Optionee and only to
the extent that the Optionee remains in the continuous employ or service of the
Company or a Subsidiary. The option vesting schedule will be accelerated if, in
the sole discretion of the Committee, the Committee determines that acceleration
of the option vesting schedule would be desirable for the Company.
(b) In the event of the dissolution or liquidation of the Company, each
stock option granted under the 2001 Flexible Plan shall terminate as of a date
to be fixed by the Board; provided, however, that not less than thirty (30)
days' written notice of the date so fixed shall be given to each Optionee and
each such Optionee shall be fully vested in and shall have the right during such
period to exercise the option,
37
40
even though such option would not otherwise be exercisable under the option
vesting schedule. At the end of such period, any unexercised option shall
terminate and be of no other effect.
(c) In the event of a Reorganization (as defined in Section 2.3 hereof):
(1) If there is no plan or agreement respecting the Reorganization, or
if such plan or agreement does not specifically provide for the change,
conversion or exchange of the Shares under outstanding and unexercised
stock options for other securities then the provisions of Subsection 6.5(b)
shall apply as if the Company had dissolved or been liquidated on the
effective date of the Reorganization; or
(2) If there is a plan or agreement respecting the Reorganization, and
if such plan or agreement specifically provides for the change, conversion
or exchange of the Shares under outstanding and unexercised stock options
for securities of another corporation, then the Board shall adjust the
Shares under such outstanding and unexercised stock options (and shall
adjust the Shares remaining under the 2001 Flexible Plan which are then
available to be awarded under the 2001 Flexible Plan, if such plan or
agreement makes no specific provision therefor) in a manner not
inconsistent with the provisions of such plan or agreement for the
adjustment, change, conversion or exchange of such Shares and such options.
(3) The Committee may provide in an option agreement and/or Stock
Appreciation Rights agreement that in the event of a Change in Control of
the Company, (i) all or a portion of the stock options and any associated
Stock Appreciation Rights awarded under such agreement shall become fully
vested and immediately exercisable and/or (ii) the vesting of all
performance-based stock options shall be determined as if the performance
period or cycle applicable to such stock options had ended immediately upon
such Change in Control; provided, however, that if in the opinion of
counsel to the Company the immediate exercisability of options when taken
into consideration with all other "parachute payments" as defined in
Section 280G of the Code, as amended, would result in an "excess parachute
payment" as defined in such section as well as an excise tax imposed by
Section 4999 of the Code, such options and any associated Stock
Appreciation Rights shall become fully vested and immediately exercisable,
except as and to the extent the Committee in its sole discretion, shall
otherwise determine, which determination by the Committee shall be based
solely upon maximizing the after-tax benefits to be received by any such
Optionee. If the Committee does not provide for accelerated vesting in an
option or Stock Appreciation Rights agreement pursuant to this Subsection
6.5(c)(3), such option and/or Stock Appreciation Right shall vest, if at
all, solely in accordance with the terms of the agreement and the other
terms of this Plan.
6.6 Exercise of Stock Options.
(a) Stock options may be exercised as to Shares only in amounts and at
intervals of time specified in the written option agreement between the Company
and the Optionee. Each exercise of a stock option, or any part thereof, shall be
evidenced by a notice in writing to the Company. The purchase price of the
Shares as to which an option shall be exercised shall be paid in full at the
time of exercise, and may be paid to the Company either:
(1) in cash (including check, bank draft or money order); or
(2) by the delivery of Shares having a Fair Market Value equal to the
aggregate option rate;
(3) by a combination of cash and Shares; or
(4) by other consideration deemed acceptable by the Committee in its
sole discretion.
(b) An Optionee shall not have any of the rights of a Shareholder with
respect to the Shares covered by a stock option except to the extent that one or
more certificates representing such Shares shall have been delivered to the
Optionee, or the Optionee has been determined to be a Shareholder of record by
the Company's transfer agent, upon due exercise of the option.
6.7 Date of a Stock Option Grant. The granting of a stock option shall take
place only upon the execution and delivery by the Company and an Optionee of an
option agreement. Neither any action taken by the Board nor anything contained
in the 2001 Flexible Plan or in any resolution adopted or to be
38
41
adopted by the Board or the Shareholders shall constitute the granting of a
stock option under the 2001 Flexible Plan.
7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Committee may grant to any Participant either Non-Tandem Stock
Appreciation Rights or Tandem Stock Appreciation Rights. Stock Appreciation
Rights shall be subject to such terms and conditions as the Committee shall
impose. The grant of the Stock Appreciation Right may provide that the holder
may be paid for the value of the Stock Appreciation Right either in cash or in
Shares, or a combination thereof, at the discretion of the Committee. In the
event of the exercise of a Stock Appreciation Right payable in Shares, the
holder of the Stock Appreciation Right shall receive that number of whole Shares
of stock of the Company having an aggregate Fair Market Value on the date of
exercise equal to the value obtained by multiplying (i) either (a) in the case
of a Tandem Stock Appreciation Right, the difference between the Fair Market
Value of a Share on the date of exercise over the per share exercise price of
the related option, or (b) in the case of a Non-Tandem Stock Appreciation Right
the difference between the Fair Market Value of a Share on the date of exercise
over the Fair Market Value on the date of the grant by (ii) the number of Shares
as to which the Stock Appreciation Right is exercised. However, notwithstanding
the foregoing, the Committee, in its sole discretion, may place a ceiling on the
amount payable upon exercise of a Stock Appreciation Right but any such
limitation shall be specified at the time that the Stock Appreciation Right is
granted.
7.2 Exercisability. A Tandem Stock Appreciation Right may be granted at the
time of the grant of the related stock option or, if the related stock option is
a Non-Qualified Stock Option, at any time thereafter during the term of the
stock option. A Tandem Stock Appreciation Right granted in connection with an
Incentive Stock Option (i) may be exercised at, and only at, the times and to
the extent the related Incentive Stock Option is exercisable, (ii) expires upon
the termination of the related Incentive Stock Option, (iii) may not exceed 100%
of the difference between the exercise price of the related Incentive Stock
Option and the market price of the Shares subject to the related Incentive Stock
Option at the time the Tandem Stock Appreciation Right is exercised and (iv) may
be exercised at, and only at, such times as the market price of the Shares
subject to the related Incentive Stock Option exceeds the exercise price of the
related Incentive Stock Option. The Tandem Stock Appreciation Right may be
transferred at, and only at, the times and to the extent the related stock
option is transferable. If a Tandem Stock Appreciation Right is granted, there
shall be surrendered and canceled from the related option at the time of
exercise of the Tandem Stock Appreciation Right, in lieu of exercise under the
related option, that number of Shares as shall equal the number of Shares as to
which the Tandem Stock Appreciation Right shall have been exercised.
7.3 Certain Limitations on Non-Tandem Stock, Appreciation Rights. A Non-Tandem
Stock Appreciation Right will be exercisable as provided by the Committee and
will have such other terms and conditions as the Committee may determine. A
Non-Tandem Stock Appreciation Right is subject to acceleration of vesting or
immediate termination in certain circumstances in the same manner as stock
options pursuant to Sections 6.4 and 6.5 of the 2001 Flexible Plan.
7.4 Limited Stock Appreciation Rights. The Committee is also authorized to
grant "Limited Stock Appreciation Rights," either as Tandem Stock Appreciation
Rights or Non-Tandem Stock Appreciation Rights. Limited Stock Appreciation
Rights would become exercisable only upon the occurrence of a Change in Control
or such other event as the Committee may designate at the time of grant or
thereafter.
8. RESTRICTED STOCK
8.1 Grants. The Committee may grant Awards of Restricted Stock for no cash
consideration, for such minimum consideration as may be required by applicable
law, or for such other consideration as may be specified by the grant. The terms
and conditions of the Restricted Stock shall be specified by the grant
agreement. The Committee, in its sole discretion, may specify any particular
rights which the person to whom an Award of Restricted Stock is made shall have
in the Restricted Stock during the restriction period and the restrictions
applicable to the particular Award, the vesting schedule (which may be based on
service, performance or other factors) and rights to acceleration of vesting
(including, without
39
42
limitation, whether non-vested Shares are forfeited or vested upon termination
of employment or service). Further, the Committee may award performance-based
Restricted Stock by conditioning the grant, or vesting or such other factors,
such as the release, expiration or lapse of restrictions upon any such Award
(including the acceleration of any such conditions or terms) of such Restricted
Stock upon the attainment of specified performance goals or such other factors
as the Committee may determine. The Committee shall also determine when the
restrictions shall lapse or expire and the conditions, if any, under which the
Restricted Stock will be forfeited or sold back to the Company. Each Award of
Restricted Stock may have different restrictions and conditions. The Committee,
in its discretion, may prospectively change the restriction period and the
restrictions applicable to any particular Award of Restricted Stock. Unless
otherwise set forth in the 2001 Flexible Plan, Restricted Stock may not be
disposed of by the recipient until the restrictions specified in the Award
expire.
8.2 Awards and Certificates. Any Restricted Stock issued hereunder may be
evidenced in such manner as the Committee, in its sole discretion, shall deem
appropriate including, without limitation, book-entry registration or issuance
of a stock certificate or certificates. In the event any stock certificate is
issued in respect of Shares of Restricted Stock awarded hereunder, such
certificate shall bear an appropriate legend with respect to the restrictions
applicable to such Award. The Company may retain, at its option, the physical
custody of any stock certificate representing any awards of Restricted Stock
during the restriction period or require that the Restricted Stock be placed in
escrow or trust, along with a stock power endorsed in blank, until all
restrictions are removed or expire.
9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or both, as the
Committee may determine, of (i) "Performance Shares" or the right to receive
Shares, Restricted Stock or cash of an equivalent value, or any combination
thereof as the Committee may determine, or (ii) "Performance Units," or the
right to receive a fixed dollar amount payable in cash, Common Stock, Restricted
Stock or any combination thereof, as the Committee may determine. The Committee
may grant Performance Awards to any Participant for no cash consideration, for
such minimum consideration as may be required by applicable law or for such
other consideration as may be specified at the time of the grant. The terms and
conditions of Performance Awards shall be specified at the time of the grant and
may include provisions establishing the performance period, the performance
criteria to be achieved during a performance period, the criteria used to
determine vesting (including the acceleration thereof), whether Performance
Awards are forfeited or vest upon termination of employment or service during a
performance period and the maximum or minimum settlement values. Each
Performance Award shall have its own terms and conditions, which shall be
determined at the discretion of the Committee. If the Committee determines, in
its sole discretion, that the established performance measures or objectives are
no longer suitable because of a change in the Company's business, operations,
corporate structure or for other reasons that the Committee deems satisfactory,
the Committee may modify the performance measures or objectives and/or the
performance period.
9.2 Terms and Conditions. Performance Awards may be valued by reference to the
Fair Market Value of a Share or according to any formula or method deemed
appropriate by the Committee, in its sole discretion, including, but not limited
to, achievement of specific financial, production, sales, cost or earnings
performance objectives that the Committee believes to be relevant to the
Company's business and for remaining in the employ or active service of the
Company for a specified period of time, or the Company's performance or the
performance of its Common Stock measured against the performance of the market,
the Company's industry segment or its direct competitors. Performance Awards may
be paid in cash, Shares (including Restricted Stock) or other consideration, or
any combination thereof. If payable in Shares, the consideration for the
issuance of the Shares may be the achievement of the performance objective
established at the time of the grant of the Performance Award. Performance
Awards may be payable in a single payment or in installments and may be payable
at a specified date or dates or upon attaining the performance objective, all at
the Committee's discretion. The extent to which any applicable performance
objective has been achieved shall be conclusively determined by the Committee.
40
43
10. DIVIDEND EQUIVALENT RIGHTS
The Committee may grant a Dividend Equivalent Right either as a component of
another Award or as a separate Award, and, in general, each such holder of a
Dividend Equivalent Right that is outstanding on a dividend record date for the
Company's Common Stock shall be credited with an amount equal to the cash or
stock dividends or other distributions that would have been received had the
Shares covered by the Award been issued and outstanding on the dividend record
date. The terms and conditions of the Dividend Equivalent Right shall be
specified by the grant. Dividend equivalents credited to the holder of a
Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional Shares (which may thereafter accrue additional Dividend
Equivalent Rights). Any such reinvestment shall be at the Fair Market Value at
the time thereof. Dividend Equivalent Rights may be settled in cash or Shares,
or a combination thereof, in a single payment or in installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement or payment
for or lapse of restrictions on such other Award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms a conditions different from
such other Award.
11. OTHER AWARDS
The Committee may grant to any Participant other forms of Awards based upon,
payable in or otherwise related to, in whole or in part, Shares, if the
Committee, in its sole discretion, determines that such other form of Award is
consistent with the purposes and restrictions of the 2001 Flexible Plan. The
terms and conditions of such other form of Award shall be specified by the grant
including, but not limited to, the price, if any, and the vesting schedule, if
any. Such Awards may be granted for no cash consideration, for such minimum
consideration as may be required by applicable law or for such other
consideration as may be specified by the grant.
12. COMPLIANCE WITH SECURITIES AND OTHER LAWS
In no event shall the Company be required to sell or issue Shares under any
Award if the sale or issuance thereof would constitute a violation of applicable
Federal or state securities laws or regulations or a violation of any other law
or regulation of any governmental or regulatory agency or authority or any
national securities exchange. As a condition to any sale or issuance of Shares,
the Company may place legends on Shares, issue stop transfer orders and require
such agreements or undertakings as the Company may deem necessary or advisable
to assure compliance with any such laws or regulations, including, if the
Company or its counsel deems it appropriate, representations from the person to
whom an Award is granted that he or she is acquiring the Shares solely for
investment and not with a view to distribution and that no distribution of the
Shares will be made unless registered pursuant to applicable Federal and state
securities laws, or in the opinion of counsel of the Company, such registration
is unnecessary.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION
The value of an Award in Shares and the number of Shares available for issuance
hereunder shall be adjusted from time to time as follows:
(a) Subject to any required action by Shareholders, the number of Shares
covered by each outstanding Award, and the exercise price, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares of the Company resulting from a subdivision or consolidation of Shares or
the payment of a stock dividend (but only in Shares) or any other increase or
decrease in the number of Shares affected without receipt of consideration by
the Company.
(b) Subject to any required action by Shareholders, if the Company shall be
the surviving corporation in any Reorganization, merger or consolidation (or if
the Company is not the surviving corporation in such a transaction, but the
transaction does not constitute a Change in Control), each outstanding Award
shall pertain to and apply to the securities to which a holder of the number of
Shares subject to the Award would have been entitled, and if a plan or agreement
reflecting any such event is in effect that specifically provides for the
change, conversion or exchange of Shares, then any adjustment to
41
44
Shares relating to an Award hereunder shall not be inconsistent with the terms
of any such plan or agreement.
(c) In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of par value into the same number of
Shares with a different par value or without par value, the Shares resulting
from any such change shall be deemed to be the Shares within the meaning of the
2001 Flexible Plan.
To the extent that the foregoing adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Board, whose determination
shall be final, binding and conclusive.
Except as hereinbefore expressly provided in the 2001 Flexible Plan, any person
to whom an Award is granted shall have no rights by reason of any subdivision or
consolidation of stock of any class or the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class or by
reason of any dissolution, liquidation, reorganization, merger or consolidation
or spin-off of assets or stock of another corporation, and any issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall not affect and no adjustment by reason thereof
shall be made with respect to, the number or exercise price of Shares subject to
an Award. The grant of an Award pursuant to the 2001 Flexible Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, Reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell or
transfer all or any part of its business or assets.
14. AMENDMENT OR TERMINATION OF THE 2001 FLEXIBLE PLAN
14.1 Amendment of the 2001 Flexible Plan. Notwithstanding anything contained
in the 2001 Flexible Plan to the contrary, all provisions of the 2001 Flexible
Plan may at any time or from time to time be modified or amended by the Board;
provided, however, that no Award at any time outstanding under the 2001 Flexible
Plan may be modified, impaired or canceled adversely to the holder of the Award
without the consent of such holder; and provided, further, that the 2001
Flexible Plan may not be amended (a) to increase the maximum number of Shares
subject to the 2001 Flexible Plan or (b) to modify the requirements as to
eligibility to receive Incentive Stock Options without approval by the holders
of a majority of the Shares of the Company represented and voted at a meeting of
the Shareholders.
14.2 Termination of the 2001 Flexible Plan. The Board may suspend or terminate
the 2001 Flexible Plan at any time, and such suspension or termination may be
retroactive or prospective. However, no Award may be granted on or after the
tenth anniversary of the adoption of the 2001 Flexible Plan or of the adoption
of any amendment to or restatement of the Plan if the Plan as so amended or
restated is approved by the Shareholders in accordance with Section 14.1.
Termination of the 2001 Flexible Plan shall not impair or affect any Award
previously granted hereunder and the rights of the holder of the Award shall
remain in effect until the Award has been exercised in its entirety or has
expired or otherwise has been terminated by the terms of such Award.
15. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with the
Participant's consent at any time prior to payment or exercise in any manner not
inconsistent with the terms of the 2001 Flexible Plan, including, without
limitation to change the date or dates as of which (a) an option becomes
exercisable or (b) a performance-based Award is deemed earned. The Committee is
also authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards in recognition of unusual or non-recurring events
(including, without limitation, the events described in Section 13 hereof)
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the 2001 Flexible Plan.
Any provision of the 2001 Flexible Plan or any agreement regarding an Award to
the contrary notwithstanding, the Committee may cause any Award granted to be
canceled in consideration of a cash payment or alternative Award made to the
holder
42
45
of such canceled Award equal in value to the Fair Market Value of such canceled
Award. The determinations of value under this Section 15 shall be made by the
Committee in its sole discretion.
16. GENERAL PROVISIONS
16.1 No Limit on Other Compensation Arrangements. Nothing contained in the
2001 Flexible Plan shall prevent the Company from adopting or continuing in
effect other compensation arrangements, and such arrangements may be either
generally applicable or applicable only in specific cases.
16.2 No Right to Employment. Nothing in the 2001 Flexible Plan or in any
Award, nor the grant of any Award, shall confer upon or be construed as giving
any recipient of an Award any right to remain in the employ or service of the
Company. Further, the Company may at any time dismiss an Optionee in the 2001
Flexible Plan from employment or service, free from any liability or any claim
under the 2001 Flexible Plan, unless otherwise expressly provided in the 2001
Flexible Plan or in any Award agreement. No Participant, employee, Optionee or
other person shall have any claim to be granted any Award, and there is no
obligation for uniformity or treatment of employees, Participants or holders or
beneficiaries of Awards.
16.3 Governing Law. The validity, construction and effect of the 2001 Flexible
Plan and any rules and regulations relating to the 2001 Flexible Plan shall be
determined in accordance with the laws of the State of Texas, without giving
effect to the conflicts of laws principles thereof.
16.4 Severability. If any provision of the 2001 Flexible Plan or any Award is
or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or Award, or would disqualify the 2001 Flexible
Plan or any Award under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable laws, or
if it cannot be construed or deemed amended without, in the sole determination
of the Committee, materially altering the intent of the 2001 Flexible Plan or
the Award, such provision shall be stricken as to such jurisdiction, person or
Award and the remainder of the 2001 Flexible Plan and any such Award shall
remain in full force and effect.
16.5 No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the 2001 Flexible Plan or any Award, and the Committee shall
determine whether cash, other securities or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional Shares
or any rights thereto shall be canceled, terminated or otherwise eliminated.
16.6 Headings. Headings are given to the Sections and Subsections of the 2001
Flexible Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way material or relevant to the construction or
interpretation of the 2001 Flexible Plan or any provision thereof.
16.7 Effective Date. The 2001 Flexible Plan shall be effective as of May 24,
2001 after its approval by the holders of a majority of the Shares of the
Company represented and voting at the Annual Meeting of Shareholders to be held
May 24, 2001. If the 2001 Flexible Plan is not approved by the Shareholders at
the 2001 Annual Meeting, the 2001 Flexible Plan shall be null and void.
16.8 Non-Transferability of Awards. Awards shall be nontransferable other than
by will or the laws of descent and distribution, and Awards may be exercised,
during the lifetime of the holder, only by the holder (or the holder's duly
appointed guardian or personal representative); provided, however, that Awards
other than Incentive Stock Options may be transferred (i) by the holder to a
family member, trust, charity, or similar organization for estate planning
purposes or (ii) with the approval of the Committee, as directed under a
qualified domestic relations order.
16.9 Withholding. The Company shall have the right to withhold or require
separate payment of all Federal, state, local or other taxes or payments
required by law to be withheld or paid with respect to any Award or payment made
under the Plan. Such amounts shall be withheld or paid prior to the delivery of
any certificate representing shares of Common Stock or any other Award subject
to such withholding. Such a payment may be made by the delivery of cash (or
other consideration acceptable to the Company) to the Company in an amount that
equals or exceeds the required withholding obligation of the Company. In the
event of a transfer of an Award, the Participant who assigns the Award shall
remain subject to withholding taxes or similar obligations upon exercise of the
Award by the transferee to the extent required
43
46
by the Code or other applicable laws. All determinations of withholding
liability under this Section shall be made by the Company in its sole discretion
and shall be binding upon the Participant.
17. NAMED EXECUTIVE OFFICERS
17.1 Applicability of Section 17. The provisions of this Section 17 shall
apply only to those Executive Officers (i) whose compensation is required to be
reported in the Company's proxy statement pursuant to Item 402(a)(3)(i) and (ii)
of Regulation S-K under the general rules and regulations under the Exchange
Act, as amended, and (ii) whose total compensation, including estimated Awards,
is determined by the Committee to possibly be subject to the limitations on
deductions imposed by Section 162(m) of the Code ("Named Executive Officers").
In the event of any inconsistencies between this Section 17 and the other 2001
Flexible Plan provisions as they pertain to Named Executive Officers, the
provisions of this Section 17 shall control.
17.2 Establishment of Performance Goals. Awards for Named Executive Officers,
other than stock options and Stock Appreciation Rights, shall be based on the
attainment of certain performance goals. No later than the earlier of (i) ninety
(90) days after the commencement of the applicable fiscal year or such other
award period as may be established by the Committee ("Award Period") and (ii)
the completion of twenty-five percent (25%) of such Award Period, the Committee
shall establish, in writing, the performance goals applicable to each such Award
for Named Executive Officers. At the time the performance goals are established
by the Committee, their outcome must be substantially uncertain. In addition,
the performance goal must state, in terms of an objective formula or standard,
the method for computing the amount of compensation payable to the Named
Executive Officer if the goal is obtained. Such formula or standard shall be
sufficiently objective so that a third party with knowledge of the relevant
performance results could calculate the amount to be paid to the subject Named
Executive Officer. The material terms of the performance goals for Named
Executive Officers and the compensation payable thereunder shall be submitted to
the Shareholders for their review and approval if and to the extent required for
such compensation to be deductible pursuant to Section 162(m) (or any successor
thereto) of the Code, and the Treasury Regulations thereunder. Shareholder
approval, if necessary, shall be obtained for such performance goals prior to
any Award being paid to such Named Executive Officer. If Shareholder approval is
required and the Shareholders do not approve such performance goals, no amount
shall be paid to such Named Executive Officer for such applicable Award Period
under the 2001 Flexible Plan. The disclosure of the "material terms" of a
performance goal and the compensation payable thereunder shall be determined
under the guidelines set forth under Section 162(m) of the Code, and the
Treasury Regulations thereunder.
17.3 Components of Awards. Each Award to a Named Executive Officer, other than
stock options and Stock Appreciation Rights, shall be based on performance goals
which are sufficiently objective so that a third party having knowledge of the
relevant facts could determine whether the goal was met. Except as provided in
Section 17.8 herein, performance measures which may serve as determinants of
Named Executive Officers Awards shall be limited to the following measures:
earnings per share; return on assets; return on equity; return on capital; net
profit after taxes; net profit before taxes; economic value added; operating
profits; stock price; market share; and sales or expenses. Within ninety (90)
days following the end of each Award Period, the Committee shall certify in
writing that the performance goals, and any other material terms were satisfied.
Thereafter, Awards shall be made for each Named Executive Officer as determined
by the Committee. The Awards may not vary from the pre-established amount based
on the level of achievement.
17.4 No Mid-Year Change in Awards. Except as provided in Sections 17.8 and
17.9 herein, each Named Executive Officers Awards shall be based exclusively on
the performance measures established by the Committee pursuant to Sections 17.2
and 17.3.
17.5 No Partial Award Period Participation. A Named Executive Officer who
becomes eligible to participate in the 2001 Flexible Plan after performance
goals have been established in an Award Period pursuant to Sections 17.2 and
17.3 may not participation in the 2001 Flexible Plan prior to the next
44
47
succeeding Award Period, except with respect to Awards which are stock options
or Stock Appreciation Rights.
17.6 Performance Goals. Except as provided in Section 17.8 herein, performance
goals shall not be changed following their establishment, and Named Executive
Officers shall not receive any payout, except with respect to Awards which are
stock options or Stock Appreciation Rights, when the minimum performance goals
are not met or exceeded.
17.7 Individual Performance and Discretionary Adjustments. Except as provided
in Section 17.8 herein, subjective evaluations of individual performance of
Named Executive Officers shall not be reflected in their Awards, other than
Awards which are stock options or Stock Appreciation Rights. The payment of such
Awards shall be entirely dependent upon the attainment of the pre-established
performance goals.
17.8 Amendments. No amendment of the 2001 Flexible Plan with respect to any
Named Executive Officer may be made which would (i) increase the maximum amount
that can be paid to any one Optionee under the 2001 Flexible Plan, (ii) change
the specified performance goal for payment of Awards, or (iii) modify the
requirements as to eligibility for participation in the 2001 Flexible Plan,
unless the Shareholders have first approved such amendment in a manner which
would permit the deduction under Section 162(m) of the Code of such payment in
the fiscal year it is paid. The Committee shall amend this Section 17 and such
other provisions as it deems appropriate, to cause amounts payable to Named
Executive Officers to satisfy the requirements of Section 162(m) and the
Treasury Regulations promulgated thereunder.
17.9 Stock Options and Stock Appreciation Rights; Maximum Amount of
Compensation. Notwithstanding any provision of this 2001 Flexible Plan
(including the provisions of this Section 17) to the contrary, the amount of
compensation which a Named Executive Officer may receive with respect to stock
options and Stock Appreciation Rights which are granted hereunder shall be based
solely on an increase in the value of the applicable Shares after the date of
grant of such Award. Thus, no stock option may be granted hereunder to a Named
Executive Officer with an exercise price less than the Fair Market Value of
Shares on the date of grant. The maximum number of Shares (or cash equivalent
value) with respect to which stock options or Stock Appreciation Rights may be
granted hereunder to any Named Executive Officer during any calendar year may
not exceed 500,000 Shares, subject to adjustment as provided in Section 13
hereunder. The maximum amount of compensation payable as an Award (other than an
Award which is a stock option or Stock Appreciation Right) to any Named
Executive Officer during any calendar year may not exceed $1,000,000.
45
48
ATTACHMENT "D"
CERTIFICATE OF AMENDMENT
TO THE
AMENDED RESTATED CERTIFICATE OF INCORPORATION
OF
HCC INSURANCE HOLDINGS, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, HCC Insurance
Holdings, Inc., (the "Corporation"), a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: The Amended Restated Certificate of Incorporation of the Corporation is
hereby amended by deleting and replacing the first paragraph of Article Four of
the Certificate of Incorporation. Article Four shall read as follows:
"ARTICLE IV
A. Capital Stock. The aggregate number of shares of Capital Stock which the
Corporation is authorized to issue is Three Hundred Million (300,000,000)
shares, consisting of:
(1) Two Hundred Fifty Million (250,000,000) shares of Common Stock
with a par value of $1.00 per share (the "Common Stock"); and
(2) Fifty Million (50,000,000) shares of Preferred Stock with a par
value of $.01 per share (the "Preferred Stock").
B. Common Stock.
(1) Voting Rights. Except as set forth herein or as otherwise required
by law, each outstanding share of Common Stock shall be entitled to vote on
each matter on which the Shareholders of the Corporation shall be entitled
to vote, and each holder of Common Stock shall be entitled to one vote for
each share of such stock held by such holder.
(2) Dividends. The Board of Directors of the Corporation may cause
dividends to be paid to holders of shares of Common Stock out of funds
legally available for the payment of dividends.
(3) Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, all
distributions on the Common Stock of the Corporation shall be payable to
the holders of shares of Common Stock.
C. Preferred Stock. The preferences and relative, participating or other
rights of Preferred Stock, and the qualifications, limitations or restrictions
thereof are as follows:
(1) Preferred Stock may be issued from time to time in one or more
classes or series, the shares of each class or series to have such
designations and powers, preferences and rights, qualifications,
limitations and restrictions thereof as are stated and expressed herein and
in the resolution or resolutions providing for the issue of such class or
series adopted by the Board of Directors as hereinafter prescribed.
(2) Authority is hereby expressly granted to and vested in the Board
of Directors to authorize the issuance of Preferred Stock from time to time
in one or more classes or series, to determine and take necessary
proceedings fully to effect the issuance and redemption of any such
Preferred Stock, and, with respect to each class or series of Preferred
Stock, to fix and state by resolution or resolutions from time to time
adopted providing for the issuance thereof the following:
(a) whether or not the class or series is to have voting rights,
full or limited, or is to be without voting rights;
(b) the preferences and relative, participating, optional or other
special rights, if any, with respect to any class or series
46
49
(c) whether or not the share of any class or series shall be
redeemable and if redeemable the redemption price or prices, and the
time or times at which and the terms and conditions upon which, such
shares shall be redeemable and the manner of redemption;
(d) whether or not the shares of a class or series shall be subject
to the operation of retirement or sinking funds to be applied to the
purchase or redemption of such shares for retirement, and if such
retirement or sinking fund or funds be established, the annual amount
thereof and the terms and provisions relative to the operation thereof;
(e) the dividend rate, whether dividends are payable in cash, stock
of the Corporation, or other property, the conditions upon which and the
times when such dividends are payable, the preference to or the relation
to the payment of the dividends payable on any other class or classes or
series of stock, whether or not such dividend shall be cumulative or
noncumulative, and if cumulative, the date or dates from which such
dividends shall accumulate;
(f) whether or not the shares of any class or series shall be
convertible into, or exchangeable for, the shares of any other class of
classes or of any other series of the same of any other class or classes
of stock of the Corporation and the conversion price or prices or ratio
or ratios or the rate or rates at which such conversion or exchange may
be made, with such adjustments, if any, as shall be stated and expressed
or provided for in such resolution or resolutions; and
(g) such other special rights and protective provisions with
respect to any class or series as the Board of Directors may deem
advisable.
The shares of each class or series of Preferred Stock may vary from the shares
of any other series thereof in any or all of the foregoing respects. The Board
of Directors may increase the number of shares of Preferred Stock designated for
any existing class or series by a resolution adding to such class or series
authorized and unissued shares of Preferred Stock not designated for any other
class or series. The Board of Directors may decrease the number of shares of
Preferred Stock not designated for any other class or series. The Board of
Directors may decrease the number of shares of Preferred Stock designated for
such class or series, and the shares so subtracted shall become authorized,
unissued and undesignated shares of Preferred Stock."
SECOND: This amendment to the Amended Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of Section 242 of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Christopher L. Martin, its authorized officer, this 24th day of May, 2001.
HCC INSURANCE HOLDINGS, INC.
By:
-------------------------------------------------------
Christopher L. Martin, Vice President and
Secretary
47
50
-- FOLD AND DETACH HERE --
- --------------------------------------------------------------------------------
HCC INSURANCE HOLDINGS, INC.
ANNUAL MEETING OF SHAREHOLDERS - TO BE HELD MAY 24, 2001
THE BOARD OF DIRECTORS SOLICITS THIS PROXY
The undersigned hereby constitutes and appoints Frank J. Bramanti and
Christopher L. Martin, and each of them, acting in the absence of others, as
proxies of the undersigned, with full power of substitution in the premises to
each of them, to appear and vote, as designated herein, all shares of stock of
the Common Stock of HCC Insurance Holdings, Inc. (the "Company") held of record
by the undersigned on April 12, 2001 at the annual Meeting of Shareholders of
the Company to be held at The Houstonian Hotel, 111 North Post Oak Lane,
Houston, Texas 77024 on May 24, 2001, at 8:30 a.m., Central time, and at any
and all postponements or adjournments thereof (the "Meeting").
WHEN PROPERTY EXECUTED, THIS PROXY WILL BE VOTED AS DESIGNATED BELOW BY THE
UNDERSIGNED. IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" THE
ELECTION OF ALL NOMINEES FOR DIRECTOR LISTED BELOW, AND, ACCORDING TO THE
DISCRETION OF THE PROXY HOLDERS, ON ANY OTHER MATTERS THAT MAY PROPERLY COME
BEFORE THE MEETING OR ANY AND ALL POSTPONEMENTS OR ADJOURNMENTS THEREOF.
1. Approval of the Amendment to the Amended Restated Certificate of
Incorporation of the Company to create a classified board of directors by
dividing the Board of Directors into three (3) classes with staggered terms
of office.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Election of Directors
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY TO VOTE
as marked to the contrary below). for all nominees below.
To elect the following Directors to serve for one-year (Class I), two-year
(Class II) or three-year (Class III) terms of office ending at the Annual
Meeting of Shareholders in the year 2002, 2003 and 2004, respectively, or
until their successors are duly elected and qualified or, if Proposal 1 is
not adopted, to elect each of the nominees listed below for a period ending
at the Annual Meeting of Shareholders in the year 2002 or until their
successors are duly elected and qualified.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME ON THE LIST BELOW.)
Class I: James R. Crane, J. Robert Dickerson, James C. Flagg, Ph. D.,
Edwin H. Frank, III and Stephen J. Lockwood.
Class II: Frank J. Bramanti, Patrick B. Collins, Edward H. Ellis, Jr.
and John N. Molbeck, Jr.
Class III: Marvin P. Bush, Allan W. Fulkerson, Walter J. Lack and
Stephen L. Way.
3. Approval of the 2001 Flexible Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Approval of the Amendment to the Amended Restated Certificate of
Incorporation of the Company to Authorize the issuance of Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE MARK, SIGN, AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
(continued and to be signed on the reverse)
51
- FOLD AND DETACH HERE -
- -------------------------------------------------------------------------------
(continued from other side)
5. Ratification on the appointment of PricewaterhouseCoopers LLP as independent
auditors of the Company for the year 2001.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. In their discretion, the proxies are authorized to vote upon such business as
may properly come before the Meeting or any postponement or adjournment
thereof.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders, the Proxy Statement for such meeting, and the Annual Report of HCC
Insurance Holdings, Inc. for the fiscal year ended December 31, 2000.
____________________________________________
SIGNATURE OF SHAREHOLDER
____________________________________________
SIGNATURE OF SHAREHOLDER (if jointly held)
Dated: _______________________________, 2001
Note: Please sign exactly as your name
appears on this card. On joint accounts each
joint holder should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give your full title as
such. If a corporation, please sign in full
corporate name by President or other
authorized person. If a partnership, please
sign in partnership name by authorized
person.