UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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HCC Insurance Holdings, Inc.
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HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 23, 2002 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 23, 2002 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 elect eleven directors for a one-year term, each to serve until the Annual
Meeting of Shareholders in 2003 and until his successor is duly elected and
qualifies;
2. To vote on a proposal to amend the Company's 2001 Flexible Incentive Plan
(the "2001 Flexible Plan") to increase the number of shares of Common Stock
for which options and other awards may be granted thereunder from 3,000,000
to 5,500,000 and to make certain other technical amendments; and
3. 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 11, 2002, 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, 2001, is enclosed.
By Order of the Board of Directors,
CHRISTOPHER L. MARTIN,
Secretary
Houston, Texas
April 26, 2002
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.
HCC INSURANCE HOLDINGS, INC.
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
------------------
PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
MAY 23, 2002
------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is first being mailed on or about April 26, 2002 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 23, 2002, 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 Georgeson Shareholder
Communications, Inc., 111 Commerce Road, Carlstadt, New Jersey 07072-2586 at an
anticipated cost of $7,000, plus reimbursement of out-of-pocket expenses.
Only Shareholders of record on April 11, 2002 (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 62,045,500 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 amendments to the 2001 Flexible Plan must be approved by a majority of the
shares present and voting at the Meeting. 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
amendments to the 2001 Flexible Plan requires a majority of all votes cast.
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 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.
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. ............................ 5,286,567(3) 8.5%
307 North Michigan Avenue
Chicago, Illinois 60601
Stephen L. Way............................................. 3,558,917 5.7%
13403 Northwest Freeway
Houston, Texas 77040-6094
Frank J. Bramanti.......................................... 155,882(4) *
Edward H. Ellis, Jr. ...................................... 86,000 *
J. Robert Dickerson........................................ 84,000 *
Allan W. Fulkerson......................................... 82,500 *
Walter J. Lack............................................. 72,250 *
John L. Kavanaugh.......................................... 68,750 *
John N. Molbeck, Jr. ...................................... 57,875 *
Edwin H. Frank, III........................................ 55,950(5) *
Benjamin D. Wilcox......................................... 55,333 *
Marvin P. Bush............................................. 45,000(6) *
Steven H. Newman........................................... 43,333 *
James R. Crane............................................. 42,500 *
Christopher L. Martin...................................... 35,167 *
Patrick B. Collins......................................... 35,000 *
James C. Flagg, Ph.D....................................... 6,666 *
All Directors, Advisory Directors and Executive Officers as 4,485,123 7.2%
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 -- 200,000 shares;
Edward H. Ellis, Jr. -- 85,000 shares; Allan W. Fulkerson -- 75,500 shares;
Benjamin D. Wilcox -- 53,333 shares; Edwin H. Frank, III -- 50,000 shares;
Marvin P. Bush -- 42,500 shares; J. Robert Dickerson -- 37,500 shares;
Christopher L. Martin -- 35,167 shares; Steven H. Newman -- 33,333 shares;
Patrick B. Collins -- 30,000 shares; John L. Kavanaugh -- 25,000 shares;
James R. Crane -- 22,500 shares; Walter J. Lack -- 15,000 shares; James C.
Flagg, Ph.D. -- 6,666 shares; and all Directors, Advisory Directors and
Executive Officers as a group -- 711,499 shares.
(3) The foregoing information was obtained from a Schedule 13G filed on January
22, 2002 with the Securities and Exchange Commission (the "SEC").
(4) 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.
(5) Includes 1,200 shares owned of record by Mr. Frank's children. Mr. Frank
disclaims beneficial ownership of such shares.
(6) 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.
2
PROPOSAL I -- ELECTION OF DIRECTORS
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 2003 or until his earlier death, resignation or
removal. Each of the nominees is currently a Director of the Company. Stephen J.
Lockwood, a director since 1981, retired from the Board of Directors, on March
31, 2002. John N. Molbeck, Jr., a Director, President and Chief Operating
Officer of the Company is not standing for re-election and is retiring from the
Company on December 31, 2002.
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. The Board of Directors believes that
the Company and its Shareholders benefit from the wide variety of industry and
professional experience which characterize the Nonemployee Director members of
its Board of Directors.
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
---- -------------------------- --- --------
Stephen L. Way....................... Mr. Way founded HCC in 1974 and has served as 53 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
a member of the Investment and Finance
Committee and 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).
Frank J. Bramanti.................... Mr. Bramanti is a Director and until his 45 1980
retirement in December, 2001, was an Executive
Vice 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
Investment and Finance Committee and a
Certified Public Accountant.
Marvin P. Bush....................... Mr. Bush is the President of Winston Capital 45 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 Finance
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.
3
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
James R. Crane....................... Mr. Crane is the Chairman of the Board of 48 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.
Patrick B. Collins................... Mr. Collins is a Certified Public Accountant a 73 1993
retired partner of the 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.
J. Robert Dickerson.................. Mr. Dickerson is an attorney and has served as 60 1981
an HCC Director since 1981. Mr. Dickerson is
the Chairman of the Audit Committee.
Edward H. Ellis, Jr. ................ Mr. Ellis is a Director, Executive Vice 59 2001
President 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 the Investment and
Finance Committee and is also a Director and
Officer of various of the Company's
subsidiaries.
James C. Flagg, Ph.D. ............... Dr. Flagg is a Certified Public Accountant and 50 2001
an Associate Professor in the 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.
Edwin H. Frank, III.................. Mr. Frank is a co-founder and the Chairman of 52 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.
4
SERVED
AS
PRINCIPAL OCCUPATION DIRECTOR
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
Allan W. Fulkerson................... Mr. Fulkerson is the President and a Director 68 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 and Finance Committee. Mr.
Fulkerson is a Director of Wellington
Underwriting plc. (London Stock Exchange
symbol: WUN).
Walter J. Lack....................... Mr. Lack is an attorney and a shareholder in 54 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.
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
---- -------------------------- --- --------
John L. Kavanaugh.................... Mr. Kavanaugh is the Chief Executive Officer 58 1983
of Houston Casualty Company'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.
Christopher L. Martin................ Mr. Martin is an Executive Vice President and 35 1997
the General Counsel and Secretary of HCC.
Prior to joining HCC in June, 1997, Mr. Martin
was an attorney with the law firm of Winstead
Sechrest & Minick, P.C. in Houston, Texas. Mr.
Martin is a Director and Officer of various of
the Company's subsidiaries.
5
SERVED
THE
PRINCIPAL OCCUPATION COMPANY
NAME DURING THE PAST FIVE YEARS AGE SINCE
---- -------------------------- --- --------
John N. Molbeck, Jr. ................ Mr. Molbeck is a Director, and the President 55 1997
and Chief Operating Officer of HCC, having
served in those capacities since November,
1997. Mr. Molbeck is not standing for
re-election as a Director. Mr. Molbeck is a
Certified Public Accountant and has been in
the insurance industry for 33 years. Prior to
joining HCC, Mr. Molbeck was the Managing
Director of Aon Natural Resources Group, a
subsidiary of Aon Corporation (NYSE symbol:
AOC). Mr. Molbeck is a member of HCC's
Investment and Finance Committee and is also a
Director and Officer of various of the
Company's subsidiaries.
Steven H. Newman..................... Mr. Newman is a consultant to HCC and an 58 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.
Benjamin D. Wilcox................... Mr. Wilcox is an Executive Vice President of 58 1998
HCC and the President and Chief Executive
Officer of Houston Casualty Company, U.S.
Specialty Insurance Company, HCC Life
Insurance Company and 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. Mr. Wilcox is a
Director and Officer of various of the
Company's other subsidiaries.
6
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 2001, the Board of Directors met four times and acted by written consent
on various other occasions. 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 and Finance Committees. It does not
have a standing Nominating Committee.
AUDIT COMMITTEE
The Audit Committee is composed entirely of independent Directors (as defined
under the New York Stock Exchange's listing standards) 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 members of the Audit Committee during 2001 and currently are
Patrick B. Collins, J. Robert Dickerson (Chairman) and James C. Flagg. The Audit
Committee held five meetings in 2001. The Audit Committee recommends to the
Board of Directors the selection of the Company's outside auditors and reviews
with the independent and internal 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 members of the Compensation Committee during 2001 and
currently are Marvin P. Bush, James R. Crane and Walter J. Lack (Chairman). Mr.
Lack has been the Chairman of the Compensation Committee since September, 1999.
The Compensation Committee met twice during 2001. 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 (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.
INVESTMENT AND FINANCE COMMITTEE
The Investment and Finance Committee is currently composed of Stephen L. Way,
Frank J. Bramanti, Marvin P. Bush, Edward H. Ellis, Jr., Allan W. Fulkerson
(Chairman), and John N. Molbeck, Jr. The Investment and Finance Committee held
four meetings in 2001. The Investment and Finance 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 and Finance
Committee oversees the investment management activities of General Re-New
England Asset Management, Inc., a subsidiary of Berkshire Hathaway, Inc. (NYSE
symbol: BRK), the Company's third party investment manager.
7
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 2001, the Nonemployee Directors received cash compensation
consisting of a fee of $3,500 for each meeting of the Board of Directors
attended and $1,000 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 and Finance Committee
meeting attended. Nonemployee Directors receive cash compensation of $500 for
committee members and $1,000 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 January 2001, each Nonemployee Director serving at
that time received an option to purchase 10,000 shares of the Company's Common
Stock at an exercise price of $20.50 per share under the 1996 Nonemployee
Director Stock Option Plan. In March, 2001, James C. Flagg received an option to
purchase 20,000 shares of the Company's Common Stock at an exercise price of
$24.00 per share in connection with his election to Board of Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 2001, $4.4 million had
been invested under this commitment. In addition, in January 2002, the Company
invested $5.0 million as a preferred shareholder in CenCo Investment LLC an
entity in which the Partnership holds the common shares and for which Mr.
Fulkerson serves as a Director.
Underwriters Indemnity Holdings, Inc. ("Underwriters") is a property and
casualty insurance group in which the Company owned an interest and whose former
President and controlling shareholder, Mr. Frank, is a Director of the Company.
In January, 1999, the Company 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, the Company 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, the Company also
made a $750,000 investment in FileControl, Inc. In October, 2001, the Company
made an additional investment of $285,000 in FileControl, Inc. and presently
holds a 10.6% interest.
In June, 1994, the Company entered into an arrangement with an entity owned by
the Chairman, Mr. Way, pursuant to which the Company leases equipment for
providing transportation services to employees, Directors and clients of the
Company. The Company, however, provides its own employees to operate the
equipment and pays all related operating expenses. During 2001, the Company paid
$1.0 million in lease payments to this entity.
In the opinion of management, the terms of the above arrangements are fair and
reasonable and as favorable to the Company as could have been obtained from an
unrelated party.
On December 31, 1997, during his employment with the Company, Mr. Bramanti, a
Director of the Company, borrowed $100,000 from the Company, evidenced by a
Promissory Note. Such loan bore interest at a rate of 5.75% per annum and has
been repaid in full.
The Company has entered into employment agreements with each of Messrs. Way,
Molbeck, Bramanti, Wilcox, Ellis and Martin. A summary of the principal terms of
such employment agreements is included under the caption "Employment Agreements"
below.
8
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.
Ellis, Molbeck and Way 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 Mr. Kavanaugh, an Advisory
Director, who did not report an option grant within the prescribed time period.
Such option grant has since been reported.
9
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,
the other four most highly compensated Executive Officers serving at December
31, 2001 and Mr. Bramanti, who would have otherwise been included in such table
had he been serving at year-end (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).................... 2001 800,000 -- 334,879 -- 82,900
Chairman of the Board of Directors 2000 800,000 -- 357,084 675,000 52,042
and Chief Executive Officer 1999 800,000 -- 240,022 200,000 63,510
John N. Molbeck, Jr.(2).............. 2001 600,000 -- -- -- 18,295
President and Chief Operating Officer 2000 600,000 150,000 -- 200,000 15,763
1999 525,000 -- -- 50,000 15,027
Frank J. Bramanti(3)................. 2001 375,000 68,668 -- -- 14,011
Executive Vice President (Retired) 2000 350,000 -- -- 100,000 13,625
1999 325,000 -- -- 13,062
Benjamin D. Wilcox(4)................ 2001 330,625 50,000 -- -- 17,701
Executive Vice President of the 2000 315,000 50,000 -- 100,000 17,553
Company and Chief Executive 1999 300,000 50,000 -- 100,000 5,274
Officer of Houston Casualty
Edward H. Ellis, Jr.(5).............. 2001 275,025 50,000 -- 13,787
Executive Vice President and 2000 250,000 50,000 -- 75,000 13,722
Chief Financial Officer 1999 240,000 25,000 -- 25,000 13,748
Christopher L. Martin(6)............. 2001 170,000 15,000 -- -- 11,315
Executive Vice President, General 2000 147,500 15,000 -- -- 10,393
Counsel and Secretary 1999 130,000 10,000 -- 45,000 8,694
---------------
(1) Other annual compensation includes for 2001, 2000 and 1999, respectively,
$200,000, $170,709 and $200,000 for utilization of Company employees. All
other compensation for 2001, 2000 and 1999, respectively, includes $72,700,
$41,842 and $53,910 for term life policy premiums and $10,200, $10,200 and
$9,600 for contributions by the Company under the Company's 401(k) Plan. In
addition, in 2001, 2000 and 1999, respectively, $160,518, $137,105 and
$129,345 of interest accrued on Mr. Way's deferred compensation.
(2) All other compensation for 2001, 2000 and 1999, respectively, includes life
and disability premiums of $8,095, $5,563 and $5,427 and contributions of
$10,200, $10,200 and $9,600 by the Company under the Company's 401(k) Plan
for 2001, 2000 and 1999, respectively.
(3) Mr. Bramanti retired as Executive Vice President in December, 2001. All
other compensation for 2001, 2000 and 1999, respectively, includes life and
disability premiums of $3,811, $3,425 and $3,462 and contributions of
$10,200, $10,200 and $9,600 by the Company under the Company's 401(k) Plan.
(4) All other compensation for 2001, 2000 and 1999, respectively, includes life
and disability premiums of $7,501, $7,353 and $5,274 and for 2001,
contributions of $10,200 by the Company under the Company's 401(k) plan.
(5) All other compensation for 2001, 2000 and 1999, respectively, includes life
and disability premiums of $3,587, $3,522 and $4,148 and contributions of
$10,200, $10,200 and $9,600 by the Company under the Company's 401(k) plan.
(6) All other compensation for 2001, 2000, 1999, respectively, includes life and
disability premiums of $1,128, $943 and $594, and contributions of $10,187,
$9,450 and $8,100 by the Company under the Company's 401(k) Plan.
10
STOCK OPTION EXERCISES AND HOLDINGS
There were no stock options granted to the Named Executive Officers during 2001.
The following table shows stock options exercised by the Named Executive
Officers during 2001, 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 2001. 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......................... 1,092,300 $10,597,306 -- 400,000 $ -- $6,195,000
John N. Molbeck, Jr. .................. 106,666 $ 1,233,912 106,666 106,668 $1,474,490 $1,474,521
Frank J. Bramanti...................... 589,230 $ 7,741,532 -- -- $ -- $ --
Benjamin D. Wilcox..................... 73,333 $ 790,194 33,333 93,334 $ 516,245 $1,186,760
Edward H. Ellis, Jr. .................. 25,000 $ 391,910 85,000 25,000 $ 547,187 $ 387,187
Christopher L. Martin.................. 5,000 $ 55,230 33,167 25,166 $ 278,039 $ 279,872
---------------
(1) The values were determined on the basis of the closing stock price of $27.55
at fiscal year-end December 31, 2001, and equal the aggregate amount by
which the market value of the option shares exceeds the exercise price of
such options.
11
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. 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 effective as of January 5,
2000 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 effective as of January 5, 2000
(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 did not receive such a
bonus for the year 2001. 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. In the event Mr. Molbeck's employment is terminated as a
result of his death or disability, his options will vest and remain exercisable
for one year and he or his estate will receive his contracted for compensation
through the date of his death or, if disabled, for a one year period;
thereafter, he will receive 50% of such compensation throughout the remaining
term. 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. 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
During 2001, Mr. Bramanti was subject to an Employment Agreement effective as of
January 5, 2000 (the "Bramanti Agreement"). Under the Bramanti Agreement, Mr.
Bramanti acted as an Executive Vice President for the Company and received a
$375,000 salary for 2001. Upon Mr. Bramanti's retirement as Executive Vice
President in December, 2001, Mr. Bramanti has agreed to continue to serve as an
12
employee consultant at a rate of $200,000 for 2002, $150,000 for 2003, $100,000
each of 2004 through 2006, and $50,000 for each of 2007 through 2012. The other
terms of Mr. Bramanti's consulting arrangement are similar to those of Mr.
Molbeck, including his perquisites and rights upon termination, death or
disability. Mr. Bramanti has also 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
acts as Executive Vice President of the Company and President and Chief
Operating Officer of Houston Casualty and other insurance company subsidiaries.
Under the Wilcox Agreement, Mr. Wilcox received a salary of $330,625 for 2001
and will receive $345,000 for 2002. He also receives an annual bonus of not less
than $50,000. The Wilcox 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. 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 1,
2002, (the "Ellis Agreement") which replaced a prior employment agreement. The
Ellis Agreement expires on December 31, 2006. Mr. Ellis acts as Executive Vice
President and Chief Financial Officer of the Company. Mr. Ellis received a
salary of $275,025 for 2001 and will receive a salary of $325,000 for 2002, and
increasing by $25,000 for each year thereafter during the term of the agreement.
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.
Christopher L. Martin
Mr. Martin has entered into an Employment Agreement effective as of October 1,
2000, and amended January 1, 2002 (the "Martin Agreement") which expires on
December 31, 2003. Mr. Martin acts as Executive Vice President, General Counsel
and Secretary of the Company. Mr. Martin received a salary of $170,000 for 2001
and will receive a salary of $195,000 for 2002 and $220,000 for 2003. Mr. Martin
is also entitled to certain perquisites, including a car allowance and a club
membership. Mr. Martin's rights upon termination, death or disability are
similar to those provided to Mr. Molbeck. If the Martin Agreement is terminated,
Mr. Martin has agreed to certain provisions relating to non-competition,
confidentiality and non-solicitation of customers and employees.
13
REPORT OF THE COMPENSATION COMMITTEE
During 2001, the Compensation Committee (the "Committee") consisted of 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 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 Committee's executive compensation policies are intended to provide
competitive levels of compensation in order to attract and retain qualified
officers. 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 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 2001, 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.
In 2001, 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 Chief Executive
Officer and other Executive Officers also made recommendations to the Committee
concerning the grant of stock options to other officers.
14
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.
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 2001 and as contemplated by
the employment agreement is warranted by the Company's continuing performance
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 1997 through 2001,
the Company's average combined ratio was 98.3%, as compared with the industry's
average of 106.3% (1997-2000). During the period, the Company's gross written
premium increased from $346.4 million to $1.0 billion, an increase of 192%, net
written premium increased from $142.9 million to $373.0 million, an increase of
161%, and total revenue increased from $281.5 million to $505.5 million, an
increase of 80%. Also during the period, the Company's shareholders' equity
increased from $365.8 million to $763.5 million, a 109% increase. During the
same four-year period, the Company's assets increased from $1.2 billion to $3.2
billion, a 169% increase. In addition, during 2001 the Company completed the
acquisition of three underwriting agency operations which were intended to
provide a further diversification of the Company's business and to present
opportunities for future growth.
Submitted by the Compensation Committee:
Walter J. Lack, Chairman
Marvin P. Bush
James R. Crane
15
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 was attached to the
Company's Proxy Statement for the May 24, 2001 Annual Meeting of Shareholders.
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. The Audit
Committee meets periodically with management, the internal auditors and the
independent auditors regarding accounting policies and procedures, audit results
and internal accounting controls. The internal auditors and the independent
auditors have free access to the Audit Committee, without management's presence
to discuss the scope and results of their audit work. 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 LLP, are responsible for
auditing those financial statements and for expressing an opinion on the
conformity of the financial statements with accounting principles generally
accepted in the United States.
In fulfilling its oversight responsibilities, the Audit Committee has reviewed
and discussed the audited financial statements for the year ended December 31,
2001, 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 the 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, 2001 and has served as the Company's
auditors since 1987. Representatives of PricewaterhouseCoopers are expected to
be present at the Annual Meeting, will have opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
AUDIT FEES
During the year ended December 31, 2001, the aggregate fees billed by
PricewaterhouseCoopers for the audit of the Company's financial statements for
such year and for the reviews of the Company's interim financial statements was
$474,992.
ALL OTHER FEES
During the year ended December 31, 2001, the aggregate fees billed by
PricewaterhouseCoopers for professional services other than audit fees was
$909,435. Such aggregate amount represented fees of $483,902 for required
regulatory statutory audits and loss reserve certifications; and $141,017 for
tax consulting; $134,790 for professional services rendered in connection with
the Company's registration statements; and $149,727 for other professional
services.
The Audit Committee has determined the rendering of the above-mentioned
non-audit services by PricewaterhouseCoopers was compatible with maintaining the
auditor's independence.
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, 2001, for filing with the SEC.
Submitted by the Audit Committee:
J. Robert Dickerson, Chairman
Patrick B. Collins
James C. Flagg, Ph.D.
16
PROPOSAL II -- PROPOSAL TO APPROVE THE AMENDMENT TO THE
2001 FLEXIBLE INCENTIVE PLAN
The Company's 2001 Flexible Incentive Plan (the "Plan") was approved by the
Company's Shareholders at a meeting held on May 24, 2001. The Board has
unanimously approved an amendment to the Plan. The description of the Plan
contained herein is not intended to be complete and is qualified in its entirety
by reference to Attachment "A", which contains the complete text of the amended
2001 Flexible Plan.
PURPOSES OF THE PLAN
The purposes of the 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
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 Plan does not permit
the repricing of stock options. Although the maximum term under the Plan is ten
years, most stock options are granted with a six-year term. Stock options issued
under the Plan are granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. The Board of Directors deems the Plan
to be in the best interests of the Company.
THE AMENDMENT TO THE PLAN
The amendment increases the number of shares of Common Stock for which options
may be granted from 3,000,000 to 5,500,000. The amendment clarifies the
limitation on the number of shares of Common Stock with respect to which options
may be granted during any calendar year to any participants under the Plan. The
amendment eliminates certain provisions of the Plan which specified the terms of
exercisability of stock options granted under the Plan following certain events
applicable only to individual participants, such as termination of employment,
retirement, death and disability. The amended Plan provides that such terms will
be included in the applicable stock option agreement. The amendment also
contains a number of technical revisions to the terms of the Plan in order to,
among other things, ensure the viability of awards made to foreign participants,
clarify that the Plan shall be considered an "unfunded" plan unless specified
otherwise, and clarify the Plan provisions related to the applicability of
Section 162(m) limitations
AVAILABLE SHARES
As amended, the aggregate number of shares of Common Stock which may be issued
under the Plan (or with respect to which awards may be granted) is 5,500,000
shares. Without giving effect to the amendment, the maximum number is 3,000,000.
Shares issued under the Plan may be either authorized and unissued Common Stock
or Common Stock held in or acquired for the treasury of the Company. Generally,
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 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 Plan, the number of shares available for future awards under
the Plan will be reduced only by the net number of shares issued.
PERSONS ELIGIBLE TO PARTICIPATE
Eligibility for participation in the 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.
17
ADMINISTRATION
The Compensation Committee administers the Plan and has broad powers under the
Plan to, among other things, administer and interpret the Plan and related award
agreements, establish guidelines for the Plan's operation, select persons to
whom awards are to be made under the Plan, determine the types, sizes and
combinations of awards to be granted under the Plan, and determine other terms
and conditions of an award. The Compensation Committee may delegate the
authority to perform specified functions under the 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 Plan. In addition, the
Compensation Committee has the power to modify the terms of existing awards.
TYPES OF AWARDS
The 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 awards (including
performance shares and performance units); (5) dividend equivalent rights; and
(6) other stock-based awards. Each of these types of awards is described in
greater detail in the 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 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 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 Board of Directors may at any time, and from time to time, amend, in whole
or in part, any or all of the provisions of the Plan or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that unless otherwise
required by law or specifically provided in the 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 Plan; or modify the requirements as to eligibility to receive incentive
stock options under the Plan
No award or grant may be made under the Plan on or after May 23, 2012 (the tenth
anniversary of the effective date of the amended Plan).
The 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 AMENDMENTS TO THE 2001 FLEXIBLE INCENTIVE PLAN. YOUR PROXY WILL BE
SO VOTED UNLESS YOU SPECIFY OTHERWISE.
18
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total returns for an
investment of $100 made on December 31, 1996 in the Common Stock of the Company,
the Standard & Poor's 400 Midcap Index and the Standard & Poor's 400 Midcap
Insurance Index. During 2001 and prior years, the Company utilized the NYSE
Composite Index and the Nasdaq Insurance Stock Index in the preparation of its
Performance Graph and such indices are included on the graph below for
reference. The Company has replaced such indices for purposes of its Performance
Graph for 2002 and has selected the Standard & Poor's 400 Midcap Index and the
Standard & Poor's 400 Midcap Insurance Index as indices which are more
reflective of companies of comparable market capitalization to the Company and
which include companies traded on the New York Stock Exchange with the Company.
The graph assumes that all dividends were reinvested.
TOTAL RETURN PERFORMANCE
[PERFORMANCE GRAPH]
PERIOD ENDING
--------------------------------------------------------------------
INDEX 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
----- -------- -------- -------- -------- -------- --------
HCC Insurance Holdings,
Inc. 100.00 88.97 73.86 56.32 116.38 120.18
NYSE Composite Index 100.00 132.60 156.96 173.98 178.45 163.03
Nasdaq Insurance Index 100.00 146.73 130.73 101.41 127.35 136.23
S&P 400 Midcap Index 100.00 132.00 156.96 179.78 211.13 209.79
S&P 400 Midcap Insurance
Index 100.00 137.71 181.41 169.12 256.49 241.65
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 2003
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
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business on December 27, 2002. 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.
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, 2001, 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 L. Byron Way,
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 therefore addressed to Mr. Way.
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
April 26, 2002
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ATTACHMENT "A"
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,
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.
21
2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
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 "non-employee directors" as defined by Rule 16b-3. To the extent
that Awards are intended to satisfy, and to the extent required to satisfy, the
"qualified 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.
22
2.16 "Participant" shall mean an individual who is eligible to receive an Award
in accordance with Section 5.
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;
23
(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
(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. Subject to the last two sentences of Section
2.5, 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.
3.5 Foreign Participation. To ensure the viability of awards granted to
Participants employed in foreign countries, the Committee may provide for such
special terms as it may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. Moreover, to the extent
permitted by applicable law and to the extent such authority would not adversely
affect the 2001 Flexible Plan, Participants, or Awards, the Committee may
approve such supplements to, or amendments, restatements or alternative versions
of the 2001 Flexible Plan as it may consider necessary or appropriate for such
purposes without thereby affecting the terms of the 2001 Flexible Plan as in
effect for any other purposes; provided that, no such supplements, amendments,
restatements or alternative versions shall increase the Share limitations
contained in Section 4 of the Plan or change the eligibility provisions of
Section 5 of the Plan.
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 5,500,000 unless such
maximum shall be increased or decreased by reason of changes in capitalization
of the Company as hereinafter provided. 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 Participant during any calendar year may
not exceed 500,000 Shares, subject to adjustment as provided in Section 13
hereunder. 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 unexercised or shall be canceled, in whole or in
part, then the number of Shares covered by the Award to the extent forfeited,
expired or canceled may again be awarded pursuant to the provisions of the 2001
Flexible Plan. Notwithstanding the foregoing, to the extent required for Awards
intended to constitute -- "qualified performance-based compensation" under Code
Section 162(m) to satisfy such requirements of Code Section 162(m), Shares
subject to a stock option or Stock Appreciation Right that is cancelled shall
not again be available under the Plan for purposes of the second sentence of
Section 4.1 and such other purposes, if any, as are required to satisfy such
requirements under Code Section 162(m). 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
24
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.
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
25
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. The extent to
which a stock option that is granted to a Participant who is an employee of the
Company or any Subsidiary may be exercised by the Participant or the
Participant's Designated Beneficiary after the Participant's termination of
employment with the Company and all Subsidiaries (including by reason of
Disability) shall be determined by the Committee and incorporated into the terms
of the applicable option agreement.
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, 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.
26
(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, 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);
(2) by the delivery of Shares having a Fair Market Value equal to the
aggregate purchase price;
(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 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
27
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 Fair Market Value 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 Fair Market Value 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 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
28
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, (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, Shares, 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 Shares 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.
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 of
the Shares 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
29
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
and 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 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.
30
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 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.
31
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, as amended, shall be effective as
of May 23, 2002 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 23, 2002. If the 2001 Flexible Plan, as amended, is not approved by the
Shareholders at the 2002 Annual Meeting, the amendments to 2001 Flexible Plan
(but not the 2001 Flexible Plan as approved by the Shareholders at the 2001
Annual Meeting) 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 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.
16.10 Unfunded Plan. Unless otherwise determined by the Committee, the 2001
Flexible Plan shall be unfunded and shall not create (or be construed to create)
a trust or a separate fund or funds. The 2001 Flexible Plan shall not establish
any fiduciary relationship between the Company and any Participant or
32
other person. To the extent any person holds any rights by virtue of an award
granted under the 2001 Flexible Plan, such rights shall be no greater than the
rights of an unsecured general creditor of the Company.
17. CODE SECTION 162(M) LIMITATIONS
17.1 Applicability. In the event of any inconsistencies between this Section
17 and the other 2001 Flexible Plan provisions, the provisions of this Section
17 shall control.
17.2 Establishment of Performance Goals. Awards, 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. 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 Participant 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 Participant. The material terms of the performance goals for
Participants 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 Participant. If Shareholder approval is required
and the Shareholders do not approve such performance goals, no amount shall be
paid to such Participant 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 Participant, 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
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 Participant 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 Award, other than stock options and Stock Appreciation Rights,
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 Participant 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 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 Participants 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 the
Participants shall not be reflected in their Awards,
33
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
Participant 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 Participants 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 Participant 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 Participant with
an exercise price less than the Fair Market Value of Shares on the date of
grant. The maximum amount of compensation payable as an Award (other than an
Award which is a stock option or Stock Appreciation Right) to any Participant
during any calendar year may not exceed $1,000,000. Section 4.1 sets forth the
maximum number of Shares (or cash equivalent value) with respect to which stock
options or Stock Appreciation Rights may be granted to any Participant during
any calendar year.
34
FOLD AND DETACH HERE
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HCC INSURANCE HOLDINGS, INC.
ANNUAL MEETING OF SHAREHOLDERS - TO BE HELD MAY 23, 2002
THE BOARD OF DIRECTORS SOLICITS THIS PROXY
The undersigned hereby constitutes and appoints Stephen L. Way 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 11, 2002 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 23, 2002, at 8:30 a.m., Houston time, and at any and all postponements or
adjournments thereof (the "Meeting").
WHEN PROPERLY 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. Election of Directors
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY TO VOTE
as marked to the contrary below). for all nominees listed below.
To elect the following Directors to serve for one-year terms of office
ending at the Annual Meeting of Shareholders in the year 2003, 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.)
Frank J. Bramanti Marvin P. Bush
Patrick B. Collins James R. Crane
J. Robert Dickerson Edward H. Ellis, Jr.
James C. Flagg, Ph.D. Edwin H. Frank, III
Allan W. Fulkerson Walter J. Lack
Stephen L. Way
2. Approval of the amendments to the 2001 Flexible Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE MARK, SIGN, DATE, AND RETURN YOUR PROXY
PROMPTLY IN THE ENCLOSED ENVELOPE.
(continued and to be signed on the reverse)
FOLD AND DETACH HERE
--------------------------------------------------------------------------------
(continued from other side)
3. In their discretion, the proxies are authorized to vote upon such business
as may properly come before the Meeting or postponement or any 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, 2001.
------------------------------------------
SIGNATURE OF SHAREHOLDER
------------------------------------------
SIGNATURE OF SHAREHOLDER (if jointly held)
Dated: , 2002
------------------------------
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.