<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended March 31, 2000
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from _______ to __________
Commission file number 0-20766
--------------------------------------------------------
HCC Insurance Holdings, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 76-0336636
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13403 Northwest Freeway, Houston, Texas 77040-6094
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(713) 690-7300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On May 5, 2000, there were 49,213,773 shares of Common Stock, $1.00 par value
issued and outstanding.
<PAGE>
HCC INSURANCE HOLDINGS, INC.
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999...........................3
Condensed Consolidated Statements of Earnings
Three Months Ended March 31, 2000 and
Three Months Ended March 31, 1999..............................4
Condensed Consolidated Statements of Changes in
Shareholders' Equity Three Months Ended March 31,
2000 and Year Ended December 31, 1999..........................5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and
Three Months Ended March 31, 1999..............................7
Notes to Condensed Consolidated Financial Statements.............8
Item 2. Management's Discussion and Analysis............................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk......21
Part II. OTHER INFORMATION....................................................22
2
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
---------
Condensed Consolidated Balance Sheets
(Unaudited)
--------
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Investments:
Fixed income securities, at market
(cost: 2000 $334,468,000; cost: 1999 $ 343,534,000) $ 335,320,000 $ 342,641,000
Marketable equity securities, at market
(cost: 2000 $15,732,000; cost: 1999 $22,493,000) 11,385,000 19,970,000
Short-term investments, at cost, which approximates market 317,799,000 215,694,000
Other investments, at cost, which approximates fair value 5,995,000 3,017,000
--------------- ---------------
Total investments 670,499,000 581,322,000
Cash 7,319,000 26,533,000
Restricted cash and cash investments 92,767,000 84,112,000
Premium, claims and other receivables 534,492,000 607,986,000
Reinsurance recoverables 690,339,000 736,485,000
Ceded unearned premium 129,825,000 133,657,000
Ceded life and annuity benefits 93,804,000 95,760,000
Deferred policy acquisition costs 36,872,000 40,450,000
Property and equipment, net 38,024,000 37,804,000
Goodwill 272,225,000 263,687,000
Other assets 26,316,000 42,827,000
--------------- ---------------
Total assets $ 2,592,482,000 $ 2,650,623,000
=============== ===============
LIABILITIES
Loss and loss adjustment expense payable $ 853,321,000 $ 871,104,000
Life and annuity policy benefits 93,804,000 95,760,000
Reinsurance balances payable 114,433,000 113,373,000
Unearned premium 182,046,000 188,524,000
Deferred ceding commissions 34,758,000 39,792,000
Premium and claims payable 548,684,000 584,537,000
Notes payable 260,566,000 242,546,000
Accounts payable and accrued liabilities 36,106,000 57,559,000
--------------- ---------------
Total liabilities 2,123,718,000 2,193,195,000
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; 250,000,000 shares authorized;
(issued and outstanding: 2000 49,112,439 shares;
1999 48,839,027 shares) 49,112,000 48,839,000
Additional paid-in capital 177,347,000 176,359,000
Retained earnings 245,096,000 234,922,000
Accumulated other comprehensive income (loss) (2,791,000) (2,692,000)
--------------- ---------------
Total shareholders' equity 468,764,000 457,428,000
--------------- ---------------
Total liabilities and shareholders' equity $ 2,592,482,000 $ 2,650,623,000
=============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Condensed Consolidated Statements of Earnings
(Unaudited)
--------
For the three months ended March 31,
2000 1999
---------------- ----------------
REVENUE
Net earned premium $ 63,356,000 $ 33,979,000
Management fees 29,261,000 23,435,000
Commission income 12,985,000 17,755,000
Net investment income 8,239,000 7,264,000
Net realized investment gain (loss) (403,000) 170,000
Other operating income 6,651,000 9,384,000
------------- -------------
Total revenue 120,089,000 91,987,000
EXPENSE
Loss and loss adjustment expense 48,809,000 23,764,000
Operating expense:
Policy acquisition costs, net 9,321,000 2,070,000
Compensation expense 21,385,000 18,922,000
Other operating expense 13,918,000 12,283,000
------------- -------------
Net operating expense 44,624,000 33,275,000
Interest expense 5,021,000 3,309,000
------------- -------------
Total expense 98,454,000 60,348,000
------------- -------------
Earnings before income tax provision 21,635,000 31,639,000
Income tax provision 9,000,000 10,930,000
------------- -------------
Net earnings $ 12,635,000 $ 20,709,000
============= =============
Basic earnings per share data:
Earnings per share $ 0.26 $ 0.42
============= =============
Weighted average shares outstanding 49,403,000 48,764,000
============= =============
Diluted earnings per share data:
Earnings per share $ 0.25 $ 0.42
============= =============
Weighted average shares outstanding 49,709,000 49,544,000
============= =============
Cash dividends declared, per share $ 0.05 $ 0.05
============= =============
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2000 and
for the year ended December 31, 1999
(Unaudited)
----------
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
Stock capital earnings income (loss) equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1998 $ 48,252,000 $ 162,102,000 $ 219,804,000 $ 9,705,000 $ 439,863,000
Net earnings -- -- 25,123,000 -- 25,123,000
Other comprehensive income (loss) -- -- -- (12,397,000) (12,397,000)
505,555 shares of Common Stock issued
for exercise of options, including tax
benefit of $1,156,000 506,000 4,277,000 -- -- 4,783,000
101,330 shares of Common Stock issued for
purchased companies 101,000 1,899,000 -- -- 2,000,000
414,207 shares of Common Stock contractually
issuable in the future -- 8,271,000 -- -- 8,271,000
Cash dividends declared, $0.20 per share -- -- (9,733,000) -- (9,733,000)
Other (20,000) (190,000) (272,000) -- (482,000)
------------- ------------- ------------- ------------- -------------
Balance as of December 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000
============= ============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2000 and
for the year ended December 31, 1999
(Unaudited)
(continued)
--------
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
Stock capital earnings income (loss) equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000
Net earnings -- -- 12,635,000 -- 12,635,000
Other comprehensive income (loss) -- -- -- (99,000) (99,000)
128,439 shares of Common Stock issued for
exercise of options, including tax benefit of
$142,000 128,000 1,133,000 -- -- 1,261,000
Issuance of 144,973 shares of
contractually issuable Common Stock 145,000 (145,000) -- -- --
Cash dividends declared, $0.05 per share -- -- (2,461,000) -- (2,461,000)
------------- ------------- ------------- ------------- -------------
Balance as of March 31, 2000 $ 49,112,000 $ 177,347,000 $ 245,096,000 $ (2,791,000) $ 468,764,000
============= ============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Condensed Consolidated Statements of Cash Flows
(Unaudited)
--------
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,635,000 $ 20,709,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in premium, claims and other receivables 71,428,000 39,769,000
Change in reinsurance recoverables 46,146,000 (65,925,000)
Change in ceded unearned premium 3,832,000 477,000
Change in loss and loss adjustment expense payable (17,783,000) 34,331,000
Change in reinsurance balances payable 1,060,000 29,444,000
Change in unearned premium (6,478,000) (2,940,000)
Change in premium and claims payable, net of restricted cash (44,508,000) (61,919,000)
Net realized investment (gain) loss 403,000 (170,000)
Gains on sales of strategic investments and inactive subsidiary (1,144,000) (5,319,000)
Depreciation and amortization expense 4,439,000 3,080,000
Other, net (9,313,000) 15,355,000
------------- -------------
Cash provided by operating activities 60,717,000 6,892,000
Cash flows from investing activities:
Sales of fixed income securities 11,302,000 --
Maturity or call of fixed income securities 16,364,000 2,245,000
Sales of equity securities 6,547,000 1,520,000
Sales of strategic investments and inactive subsidiary 16,145,000 14,943,000
Change in short-term investments (120,823,000) (6,939,000)
Cash paid for companies acquired, net of cash received (9,901,000) (57,863,000)
Cost of securities acquired (14,815,000) (24,291,000)
Purchases of property and equipment and other, net (1,569,000) (2,829,000)
------------- -------------
Cash used by investing activities (96,750,000) (73,214,000)
Cash flows from financing activities:
Proceeds from notes payable 24,000,000 202,000,000
Sale of Common Stock 1,261,000 606,000
Payments on notes payable (6,000,000) (145,600,000)
Dividends paid (2,442,000) (1,930,000)
------------- -------------
Cash provided by financing activities 16,819,000 55,076,000
------------- -------------
Net change in cash (19,214,000) (11,246,000)
Cash at beginning of period 26,533,000 16,018,000
------------- -------------
Cash at end of period $ 7,319,000 $ 4,772,000
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statement
7
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) GENERAL INFORMATION
HCC Insurance Holdings, Inc. ("the Company" or "HCC") and its subsidiaries
include domestic and foreign property and casualty and life insurance
companies, underwriting agencies, intermediaries and service companies.
HCC, through its subsidiaries, provides specialized property and casualty
and life and health insurance to commercial customers in the areas of
accident and health reinsurance, aviation, marine, medical stop-loss,
property, offshore energy and workers' compensation insurance.
Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
include all adjustments which are, in the opinion of management, necessary
for fair presentation of the results of the interim periods. All
adjustments made to the interim periods are of a normal recurring nature.
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The condensed
consolidated financial statements for periods reported should be read in
conjunction with the annual consolidated financial statements and related
notes thereto. The condensed consolidated balance sheet as of December 31,
1999, and the condensed consolidated statement of changes in shareholders'
equity for the year then ended were derived from audited financial
statements, but do not include all disclosures required by generally
accepted accounting principles.
During December, 1999, the Company acquired all of the outstanding shares
of The Centris Group, Inc. ("Centris") in a transaction accounted for
using the purchase method of accounting. Therefore, the results of
operations of the Centris companies are included in the 2000 condensed
consolidated statement of earnings but are not included in the 1999
condensed consolidated statement of earnings.
Income Tax
For the three months ended March 31, 2000 and 1999, the income tax
provision has been calculated based on an estimated effective tax rate for
each of the fiscal years. The difference between the Company's effective
tax rate and the Federal statutory rate is primarily the result of
nontaxable municipal bond interest included in pretax income, offset by
the effects of the amortization of goodwill and state income taxes.
Effects of Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" was issued
in June, 1998 and is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, with early adoption permitted. The Company
has utilized derivative or hedging strategies only infrequently in the
past and in immaterial amounts, although it is currently using derivatives
and hedging strategies to a greater extent as it expands its foreign
operations. The effects of SFAS No. 133, as well as the timing of its
adoption, are currently being reviewed by management.
8
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(1) GENERAL INFORMATION, continued
During December, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in
Financial Statements" which becomes effective for the Company during the
second quarter of 2000. The Company does not expect the adoption of SAB
No. 101 to have a material effect on the Company's financial position,
results of operations or cash flows.
Reclassifications
Certain amounts in the 1999 condensed consolidated financial statements
have been reclassified to conform to the 2000 presentation. Such
reclassifications had no effect on the Company's net earnings,
shareholders' equity or cash flows.
(2) REINSURANCE
In the normal course of business the Company's insurance company
subsidiaries cede a substantial portion of their premium to non-affiliated
domestic and foreign reinsurers through quota share, surplus, excess of
loss and facultative reinsurance agreements. Although the ceding of
reinsurance does not discharge the primary insurer from liability to its
policyholder, the subsidiaries participate in such agreements for the
purposes of limiting their loss exposure, protecting against catastrophic
loss and diversifying their business. The majority of assumed reinsurance
was written by underwriting agency subsidiaries of the Company utilizing
unaffiliated insurance companies as the primary writer. The following
tables represent the effect of such reinsurance transactions on net
premium and loss and loss adjustment expense:
<TABLE>
<CAPTION>
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------- ------------- -------------
<S> <C> <C> <C>
For the three months ended March 31, 2000:
Direct business $ 144,625,000 $ 138,417,000 $ 95,227,000
Reinsurance assumed 62,513,000 78,118,000 60,141,000
Reinsurance ceded (146,478,000) (153,179,000) (106,559,000)
------------- ------------- -------------
Net amounts $ 60,660,000 $ 63,356,000 $ 48,809,000
============= ============= =============
</TABLE>
9
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, continued
<TABLE>
<CAPTION>
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------- ------------- -------------
<S> <C> <C> <C>
For the three months ended March 31, 1999:
Direct business $ 50,038,000 $ 60,270,000 $ 46,961,000
Reinsurance assumed 91,605,000 85,347,000 90,512,000
Reinsurance ceded (111,224,000) (111,638,000) (113,709,000)
------------- ------------- -------------
Net amounts $ 30,419,000 $ 33,979,000 $ 23,764,000
============= ============= =============
</TABLE>
The table below represents the approximate composition of reinsurance
recoverables in the accompanying condensed consolidated balance sheets:
March 31, 2000 December 31, 1999
-------------- -----------------
Reinsurance recoverable on paid losses $ 110,020,000 $ 91,318,000
Commuted receivable -- 53,210,000
Reinsurance recoverable on outstanding losses 358,233,000 382,565,000
Reinsurance recoverable on IBNR 228,375,000 214,933,000
Reserve for uncollectible reinsurance (6,289,000) (5,541,000)
------------- -------------
Total reinsurance recoverables $ 690,339,000 $ 736,485,000
============= =============
The insurance company subsidiaries require reinsurers not authorized by the
subsidiaries' respective states of domicile to collateralize their reinsurance
obligations to the Company. The table below shows amounts held by the Company as
collateral plus other credits available for potential offset.
March 31, 2000 December 31, 1999
-------------- -----------------
Payables to reinsurers $ 222,169,000 $212,962,000
Letters of credit 134,521,000 154,111,000
Cash deposits 23,302,000 19,882,000
-------------- ------------
Total credits $ 379,992,000 $386,955,000
============== ============
10
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, continued
The Company has established a reserve of $6.3 million as of March 31, 2000
for potential collectibility issues related to reinsurance recoverables.
The adverse economic environment in the worldwide insurance industry has
placed great pressure on reinsurers and the results of their operations.
Ultimately, these conditions could affect reinsurers' solvency.
Historically, there have been insolvencies following a period of
competitive pricing in the industry, such as the marketplace has
experienced for the last several years. Therefore, while management
believes that the reserve is adequate based on current available
information, conditions may change or additional information might be
obtained that would affect management's estimate of the adequacy of the
level of the reserve and which may result in a future increase or decrease
in the reserve. Management continually reviews the Company's financial
exposure to the reinsurance market and will continue to take actions to
protect shareholders' equity.
11
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION
The performance of each segment is evaluated by management based upon net
earnings. Net earnings is calculated after tax and after all corporate
expense allocations, purchase price allocations and intercompany
eliminations have been charged or credited to the individual segments. The
following tables show information by business segment and geographic
location. Geographic location is determined by physical location of the
Company's offices and does not represent the location of insureds or
reinsureds from whom the business was generated.
<TABLE>
<CAPTION>
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
===================================================================================
<S> <C> <C> <C> <C> <C> <C>
For the three months ended March 31, 2000:
Revenue:
Domestic $67,640,000 $29,893,000 $ 7,431,000 $6,179,000 $ 254,000 $111,397,000
Foreign 1,447,000 938,000 6,307,000 -- -- 8,692,000
Inter-segment -- 2,184,000 38,000 351,000 -- 2,573,000
-----------------------------------------------------------------------------------
Total segment revenue $69,087,000 $33,015,000 $13,776,000 $6,530,000 $ 254,000 122,662,000
===================================================================
Inter-segment revenue (2,573,000)
------------
Consolidated total revenue $120,089,000
============
Net earnings (loss):
Domestic $ 3,704,000 $ 6,882,000 $ 3,318,000 $ 966,000 $(1,653,000) $ 13,217,000
Foreign (1,269,000) 187,000 767,000 -- -- (315,000)
-----------------------------------------------------------------------------------
Total segment net earnings (loss) $ 2,435,000 $ 7,069,000 $ 4,085,000 $ 966,000 $(1,653,000) 12,902,000
===================================================================
Inter-segment eliminations (267,000)
------------
Consolidated net earnings $ 12,635,000
============
Other items:
Net investment income $ 5,828,000 $ 1,440,000 $ 757,000 $ 113,000 $ 101,000 $ 8,239,000
Depreciation and amortization 789,000 2,829,000 609,000 107,000 105,000 4,439,000
Interest expense 5,000 2,282,000 1,285,000 -- 1,449,000 5,021,000
Capital expenditures 710,000 1,144,000 157,000 117,000 56,000 2,184,000
Income tax provision 274,000 5,677,000 2,733,000 470,000 20,000 9,174,000
Inter-segment eliminations (174,000)
------------
Consolidated income tax provision $ 9,000,000
============
</TABLE>
12
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, continued
<TABLE>
<CAPTION>
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
For the three months ended March 31, 1999:
Revenue:
Domestic $37,288,000 $ 23,440,000 $10,519,000 $9,216,000 $ (33,000) $ 80,430,000
Foreign 3,024,000 872,000 7,661,000 -- -- 11,557,000
Inter-segment -- 279,000 241,000 344,000 -- 864,000
------------------------------------------------------------------------------------
Total segment revenue $40,312,000 $ 24,591,000 $18,421,000 $9,560,000 $ (33,000) 92,851,000
====================================================================
Inter-segment revenue (864,000)
------------
Consolidated total revenue $ 91,987,000
============
Net earnings (loss):
Domestic $ 6,202,000 $ 4,459,000 $ 4,065,000 $4,261,000 $ (394,000) $ 18,593,000
Foreign 68,000 (110,000) 2,158,000 -- -- 2,116,000
------------------------------------------------------------------------------------
Net earnings (loss) $ 6,270,000 $ 4,349,000 $ 6,223,000 $4,261,000 $ (394,000) $ 20,709,000
====================================================================================
Other items:
Net investment income $ 5,766,000 $ 909,000 $ 425,000 $ 81,000 $ 83,000 $ 7,264,000
Depreciation and amortization 625,000 1,363,000 880,000 63,000 149,000 3,080,000
Interest expense 9,000 1,149,000 919,000 -- 1,232,000 3,309,000
Capital expenditures 782,000 1,342,000 399,000 31,000 275,000 2,829,000
Income tax provision 1,309,000 3,367,000 3,928,000 2,306,000 20,000 10,930,000
</TABLE>
13
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(4) EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period divided into net earnings. Diluted
earnings per share is based on the weighted average number of common
shares outstanding plus the potential common shares outstanding during the
period divided into net earnings. Outstanding common stock options, when
dilutive, are considered to be potential common stock for the purpose of
the diluted calculation. The treasury stock method is used to calculate
potential common stock due to options. Contingent shares to be issued are
included in the earnings per share computation only when the underlying
conditions for issuance have been met.
The following table provides a reconciliation of the denominators used in
the earnings per share calculations:
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Net earnings $ 12,635,000 $ 20,709,000
============ ============
Reconciliation of number of shares outstanding:
Shares of Common Stock outstanding at period end 49,112,000 48,410,000
Effect of Common Stock issued during the period (73,000) (60,000)
Contingent shares to be issued 95,000 --
Common Stock contractually issuable in the future 269,000 414,000
------------ ------------
Weighted average Common Stock outstanding 49,403,000 48,764,000
Additional dilutive effect of outstanding options
(as determined by the application of the treasury
stock method) 306,000 780,000
------------ ------------
Weighted average Common Stock and potential common
stock outstanding 49,709,000 49,544,000
============ ============
</TABLE>
As of March 31, 2000, there were approximately 3.5 million options that
were not included in the computation of diluted earnings per share because
to do so would have been antidilutive. There are 283,500 shares of the
Company's Common Stock to be issued if certain conditions are met as of
December 31, 2000, or in subsequent years. These shares were not included
in the earnings per share computation because the conditions for issuance
have not yet been met.
14
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(5) OTHER INFORMATION
Supplemental Information
Supplemental information for the three months ended March 31, 2000 and
1999, is summarized below:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Interest paid $ 2,660,000 $ 2,997,000
Income tax paid (received) (6,896,000) 1,054,000
Comprehensive income 12,536,000 20,078,000
Ceding commissions netted with policy acquisition costs 46,700,000 23,138,000
</TABLE>
Restructuring
As of December 31, 1999, the Company had accrued two separate
restructuring liabilities, relating to HCC's ongoing operations ("HCC
internal") and to HCC's acquisition of Centris. Changes in the accruals
between December 31, 1999 and March 31, 2000 are shown in the tables
below:
HCC Internal Restructuring
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 3/31/00
----------- ---------- ----------- ----------
Severance $3,115,000 $3,115,000 $ -- $ --
Other 911,000 70,000 (514,000) 327,000
---------- ---------- --------- --------
Total $4,026,000 $3,185,000 $(514,000) $327,000
========== ========== ========= ========
During the first quarter of 2000, the Company determined that one of the
leased offices scheduled to be closed would be retained. Therefore, the
Company reversed $789,000 (included as a credit in other operating
expenses) of the restructuring expense recorded during the fourth quarter
of 1999, of which $514,000 was the reversal of the accrual for the future
lease payments and $275,000 was the reversal of the write down of certain
assets.
15
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(5) OTHER INFORMATION, continued
Centris Restructuring
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 3/31/00
----------- ---------- ----------- ----------
Contractual executive severance
accruals $5,866,000 $4,024,000 $ -- $1,842,000
Other severance accruals 397,000 186,000 171,000 382,000
Lease obligation accruals 848,000 345,000 239,000 742,000
---------- ---------- -------- ----------
Total $7,111,000 $4,555,000 $410,000 $2,966,000
========== ========== ======== ==========
It is expected that most of the remaining severance accrual will be paid
during the second quarter of 2000. The adjustments in 2000 were recorded
as management decided to take additional steps to integrate parts of the
Centris operations. Management continues to evaluate what additional
actions, if any, are necessary to finalize the integration of the Centris
operations. In addition, there are unresolved contingencies remaining from
the acquisition. Any additional accruals for either the unresolved
contingencies or the integration of operations will be recorded as an
adjustment to the purchase price allocation.
16
<PAGE>
Management's Discussion and Analysis
Three months ended March 31, 2000 versus three months ended March 31, 1999
During December, 1999, the Company acquired all of the outstanding shares of The
Centris Group, Inc. ("Centris") in a transaction accounted for using the
purchase method of accounting. Therefore, the results of operations of the
Centris companies are included in the 2000 condensed consolidated statement of
earnings, but are not included in the 1999 condensed consolidated statement of
earnings.
Results of Operations
Total revenue increased 31% to $120.1 million for the first quarter of 2000
from $92.0 million for the same period in 1999. The revenue increase was in
the insurance company and underwriting agency segments and resulted from the
effects of internal growth, increased rates, increased retentions of premium
underwritten by the Company's insurance company subsidiaries and the Centris
acquisition.
Net investment income increased 13% to $8.2 million for the first quarter of
2000 from $7.3 million for the same period in 1999. This reflects the higher
level of invested assets resulting from higher retentions of premium
underwritten by the insurance company subsidiaries and a commuted reinsurance
agreement.
Compensation expense increased $2.5 million during the first quarter of 2000
from the same period in 1999. This increase reflects a normal progressional
increase due to business growth plus the increase due to the Centris
acquisition offset by the savings resulting from the 1999 restructuring.
Other operating expenses increased $1.6 million during the same period for
similar reasons. Other operating expenses for the first quarter of 2000 also
included a credit of $789,000 reflecting the reversal of certain
restructuring charges previously recorded.
Interest expense was $5.0 million for the first quarter of 2000, an increase of
$1.7 million from $3.3 million for the same period in 1999. The increase is a
result of increased debt outstanding, principally as a result of funding for the
acquisition of Centris, and higher interest rates.
Income tax expense was $9.0 million for the first quarter of 2000 compared to
$10.9 million for the same period in 1999. The Company's effective tax rate was
42% in the 2000 quarter compared to 35% in 1999. Most of this increase was due
to increased amortization of goodwill, which is not deductible for income tax
purposes, as a result of the Centris acquisition and increased income subject to
state income taxes.
Net earnings for the first quarter of 2000 decreased to $12.6 million, or
$0.25 per share, from $20.7 million, or $0.42 per share, for the same period
in 1999. The decreases result from a strong performance by the underwriting
agency segment offset by a reduction in commission income earned by the
intermediary segment. The insurance company segment result was lower in this
period due to the run-off of the 1999 account.
The Company's book value per share was $9.49 as of March 31, 2000, up from $9.29
as of December 31, 1999.
SEGMENTS
Insurance Companies
Gross written premium increased 46% to $207.1 million for the first quarter
of 2000 from $141.6 million for the same period in 1999 due to the
substantial increase in medical stop-loss premium following the acquisition
of Centris, new business, rate increases and the increase in participation by
the Company's insurance company subsidiaries in this business. This increase
was somewhat offset by a reduction in aviation premium, although there was a
timing difference on two large items that will now be recorded in the second
quarter 2000. The increase was the result of internal growth as the Company's
insurance company subsidiaries increased their participation in the business
underwritten by the Company's underwriting agency subsidiaries and the effect
of the medical stop-loss business acquired in conjunction with the
acquisition of Centris. Net written premium for the first quarter of 2000
increased 99% to $60.7 million from $30.4 million
17
<PAGE>
for the same period in 1999, as the insurance company subsidiaries have
increased retentions on many of their lines of business as underwriting
results begin to improve. Net earned premium increased 86% to $63.4 million
for the same reasons. The increase in earned premium is expected to continue
throughout 2000 and 2001.
Loss and loss adjustment expense increased to $48.8 million for the first
quarter of 2000 from $23.8 million for the same period in 1999. The GAAP net
loss ratio increased to 77% for the first quarter of 2000 from 70% for the
same period in 1999. The increase in net loss and loss adjustment expense is
due to the increase in net retained premium and higher loss ratio. The net
loss ratio was negatively affected by unfavorable underwriting results as a
result of the run-off of certain lines of business written in prior years.
Improved underwriting results were experienced in the domestic aviation and
medical stop-loss lines of business. The GAAP gross loss ratio was 72% in the
first quarter of 2000 compared to 94% for the same period in 1999. The
decrease in the gross loss ratio represents the effects of steps taken in the
first quarter of 2000 to increase premium rates on certain lines of business,
reduced writings on other unprofitable lines of business and an improvement
in the underwriting results for the domestic aviation and medical stop-loss
lines of business. The statutory combined ratio was 100.9% in the first
quarter of 2000 compared to 93.7% for the same period in 1999.
Policy acquisition costs, which are net of ceding commissions on reinsurance
ceded, increased to $9.3 million during the first quarter of 2000, compared
to the same period in 1999, due to increased retained premium as the Company
purchased less reinsurance.
Net earnings of the insurance companies decreased to $2.4 million in the
first quarter of 2000 from $6.3 million for the same period in 1999, as a
result of the higher combined ratio which is expected to improve later in
2000.
Underwriting Agencies
Management fees increased 25% to $29.3 million for the first quarter of 2000,
compared to $23.4 million for the same period in 1999. Premiums underwritten
increased 28% to $268.9 million for the first quarter of 2000 from $210.9
million for the same period in 1999. These increases resulted from the
acquisition of Centris. Net earnings of the underwriting agencies increased
63% to $7.1 million in the first quarter of 2000 from $4.3 million in 1999
due to the increased revenue and higher pretax margins. Growth in
underwriting agency volume is also expected to have a positive impact on the
insurance company segment.
Intermediaries
Commission income decreased to $13.0 million in the first quarter of 2000
from $17.8 million for the same period in 1999. Net earnings of the
intermediaries decreased to $4.1 million in the first quarter of 2000 from
$6.2 million for the same period in 1999. The decreases were primarily due to
a reduction in the amount of ceded reinsurance by the Company's insurance
company subsidiaries.
Other Operations
The decrease in other operating revenue to $6.7 million during the first
quarter of 2000 from $9.4 million for the same period in 1999 results
principally from the recognition of gains from the disposition of strategic
operational investments. A gain of $4.9 million was recorded during the first
quarter of 1999 compared to a $1.1 million gain in the first quarter of 2000.
Net earnings of other operations decreased to $1.0 million in 2000 from $4.3
million in 1999 for the same reasons. Quarter to quarter comparisons will
vary substantially depending on strategic investments or dispositions in any
given period.
18
<PAGE>
Restructuring
As of December 31, 1999, the Company had accrued two separate restructuring
liabilities, relating to HCC's ongoing operations ("HCC internal") and to HCC's
acquisition of Centris. Changes in the accruals between December 31, 1999 and
March 31, 2000 are shown in the tables below:
HCC Internal Restructuring
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 3/31/00
----------- ---------- ----------- ----------
Severance $3,115,000 $3,115,000 $ -- $ --
Other 911,000 70,000 (514,000) 327,000
---------- ---------- --------- --------
Total $4,026,000 $3,185,000 $(514,000) $327,000
========== ========== ========= ========
During the first quarter of 2000, the Company determined that one of the leased
offices scheduled to be closed would be retained. Therefore, the Company
reversed $789,000 (included as a credit in other operating expenses) of the
restructuring expense recorded during the fourth quarter of 1999, of which
$514,000 was the reversal of the accrual for future lease payments and $275,000
was the reversal of the write down of certain assets.
<TABLE>
<CAPTION>
Centris Restructuring
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 3/31/00
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Contractual executive severance
accruals $5,866,000 $4,024,000 $ -- $1,842,000
Other severance accruals 397,000 186,000 171,000 382,000
Lease obligation accruals 848,000 345,000 239,000 742,000
---------- ---------- -------- ----------
Total $7,111,000 $4,555,000 $410,000 $2,966,000
========== ========== ======== ==========
</TABLE>
It is expected that most of the remaining severance accrual will be paid during
the second quarter of 2000. The adjustments in 2000 were recorded as management
decided to take additional steps to integrate parts of the Centris operations.
Management continues to evaluate what additional actions, if any, are necessary
to finalize the integration of the Centris operations. In addition, there are
unresolved contingencies remaining from the acquisition. Any additional accruals
for either the unresolved contingencies or the integration of operations will be
recorded as an adjustment to the purchase price allocation.
Liquidity and Capital Resources
The Company receives substantial cash from premiums, reinsurance recoverables,
management fees and commission income and, to a lesser extent, investment income
and proceeds from sales and redemptions of investment and other assets. The
principal cash outflows are for the payment of claims and loss adjustment
expenses ("LAE"), payment of premiums to reinsurers, purchase of investments,
debt service, policy acquisition costs, operating expenses, income and other
taxes and dividends. The Company continues to collect its receivables and
recoverables generally in the ordinary course and has not incurred and does not
expect to incur any significant liquidity difficulties. The Company limits its
liquidity exposure by holding funds, letters of credit and other security such
that net balances due to it are less than the gross balances shown in the
condensed consolidated balance sheet.
19
<PAGE>
The Company's consolidated cash and investment portfolio increased $70.0
million, or 12%, since December 31, 1999, and totaled $677.8 million as of
March 31, 2000, of which $325.1 million was cash and short-term investments.
The increase in short-term investments resulted from the collection of the
commutation receivable recorded during December 1999, the proceeds from the
sale of a strategic operational investment during 2000, as well as the
proceeds from the sale of Centris' portfolio of common equity securities.
Total assets were unchanged at $2.6 billion as of March 31, 2000.
On December 17, 1999, the Company entered into a $300.0 million Revolving
Loan Facility (the "Facility") with a group of banks. Borrowings under the
Facility may be made from time to time by the Company for general corporate
purposes until the Facility's expiration on December 18, 2004. Outstanding
advances under the Facility bear interest at agreed upon rates. The Facility
is collateralized in part by the pledge of the stock the Company's principal
insurance company subsidiaries and by the pledge of stock of and guarantees
entered into by the Company's principal underwriting agency and intermediary
subsidiaries. The Facility agreement contains certain restrictive covenants,
including, without limitation, minimum net worth requirements for the Company
and certain subsidiaries, restrictions on certain extraordinary corporate
actions, notice requirements for certain material occurrences, and required
maintenance of specified financial ratios. Management believes that the
restrictive covenants and other obligations of the Company which are
contained in the Facility agreement are typical for comparable financing
arrangements. The initial funding available under the Facility was used,
among other things, to refinance existing indebtedness and to partially fund
the Centris acquisition. As of March 31, 2000, total debt outstanding under
the Facility was $253.0 million and the weighted average interest rate was
7.59%.
The Company believes that its operating cash flows, short-term investments and
the Facility will provide sufficient sources of liquidity to meet its operating
needs for the foreseeable future.
Effects of Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June, 1998 and is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, with early adoption permitted. The Company has utilized
derivative or hedging strategies only infrequently in the past and in immaterial
amounts, although it is currently using derivatives and hedging strategies to a
greater extent as it expands its foreign operations. The effects of SFAS No.
133, as well as the timing of its adoption, are currently being reviewed by
management.
During December, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in Financial
Statements" which becomes effective for the Company during the second quarter of
2000. The Company does not expect the adoption of SAB No. 101 to have a material
effect on the Company's financial position, results of operations or cash flows.
Year 2000
The Year 2000 issue is the result of date coding within computer programs that
were written using just two digits rather than four digits to define the
applicable year. If not corrected, these date codes could cause computers to
fail to calculate dates beyond 1999 and, as a result, computer applications
could fail or create erroneous information as a result of the Year 2000 date
change. Although the Company experienced no material system failures attributed
to the year 2000 change-over, the Company may have exposure in the property and
casualty operations of its insurance company subsidiaries to claims asserted
under certain insurance policies for damages caused by an insured's failure to
address its own Year 2000 computer problems. As with other companies in the
insurance industry, the Company has evaluated and continues to evaluate the
potential Year 2000 insurance exposures. The Company's insurance company
subsidiaries did not generally offer policies of insurance marketed as Year 2000
liability coverage. However, due to the nature of certain of the policies, such
as policies of property insurance, an insured may submit purported claims for
coverage under such policies, which may result from Year 2000 related causes. In
this regard, the Company continues to assess appropriate responses to such
attempted claims in light of Year 2000 coverage issues under the insurance
coverages offered by the
20
<PAGE>
insurance company subsidiaries. The nature of the Company's response to such
attempted claims is generally dependent on the particular facts and
circumstances of the underlying claims and coverage. Management does not believe
that Year 2000 coverage issues associated with the insurance coverages offered
by the Company's insurance company subsidiaries will have a material adverse
effect on the Company's results of operations or cash flows.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information
provided in Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk" of the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
This report on Form 10-Q (the "Report") contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors created
thereby. Investors are cautioned that all forward-looking statements
necessarily involve risks and uncertainty, including, without limitation, the
risk of a significant natural disaster, the inability of the Company to
reinsure certain risks, the adequacy of its loss reserves, the financial
viability of reinsurers, the expansion or contraction in its various lines of
business, the impact of inflation, changing licensing requirements and
regulations in the United States and in foreign countries, the ability of the
Company to integrate its recently acquired businesses, the effect of pending
or future acquisitions as well as acquisitions which have recently been
consummated, general market conditions, competition, licensing and pricing.
All statements, other than statements of historical facts, included or
incorporated by reference in this Report that address activities, events or
developments that the Company expects or anticipates will or may occur in the
future, including, without limitation, such things as future capital
expenditures (including the amount and nature thereof), business strategy and
measures to implement such strategy, competitive strengths, goals, expansion
and growth of the Company's businesses and operations, plans, references to
future success, as well as other statements which includes words such as
"anticipate", "believe", "estimate", "expect", "intend", "plan", "probably"
and other similar expressions, constitute forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could over time prove to be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this Report
will themselves prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
21
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10.1 Employment Agreement effective as of January 5, 2000,
between HCC Insurance Holdings, Inc. and John N.
Molbeck.
10.2 Employment Agreement effective as of January 5, 2000,
between HCC Insurance Holdings, Inc. and Edward H.
Ellis, Jr.
27 EDGAR Financial Data Schedule - March 31, 2000
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCC Insurance Holdings, Inc.
----------------------------------------
(Registrant)
May 15, 2000 /s/ Stephen L. Way
- ------------ ----------------------------------------
(Date) Stephen L. Way, Chairman of the Board
and Chief Executive Officer
May 15, 2000 /s/ Edward H. Ellis, Jr.
- ------------ ----------------------------------------
(Date) Edward H. Ellis, Jr., Senior Vice
President and Chief Financial Officer
22
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 5th day
of January, 2000 (the "Effective Date"), between HCC INSURANCE HOLDINGS, INC.
("HCC" or "Company"), and JOHN N. MOLBECK, JR. ("Executive"), sometimes
collectively referred to herein as the "Parties."
R E C I T A L S:
WHEREAS, Executive is to be employed as President of HCC, and, as an
integral part of its management who participates in the decision-making process
relative to short and long-term planning and policy for the Company, will serve
on the Company's Executive Management Committee;
WHEREAS, it is the desire of the Board of Directors of HCC (the "Board")
to (i) directly engage Executive as an officer of HCC and its subsidiaries; and
(ii) directly engage, if elected, the services of Executive as a director of HCC
and its subsidiaries;
WHEREAS, Executive is desirous of committing himself to serve HCC on the
terms herein provided; and
WHEREAS, Executive and HCC have previously entered into an Employment
Agreement effective as of January 1, 1998 (the "1998 Contract") which is to be
cancelled, terminated and of no further force or effect.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the Parties agree as follows:
1. Termination of 1998 Contract and Term. Effective as of the Effective
Date, the 1998 Contract shall be cancelled, terminated and of no further force
or effect. The Company hereby agrees to employ Executive as its President, and
Executive hereby agrees to accept such employment, on the terms and conditions
set forth herein, for the period commencing on the Effective Date and expiring
as of 11:59 p.m. on December 31, 2002 (the "Basic Term") (unless sooner
terminated as hereinafter set forth). Until the Company retains the services of
a Chief Operating Officer ("COO"), Executive shall also serve as the COO.
2. Duties.
(a) Duties as Employee of the Company. Executive shall, subject to
the supervision of the Chief Executive Officer and Board, have general
management and control of HCC in the ordinary course of its business with all
such powers with respect to such management and control as may be reasonably
incident to such responsibilities. During normal business hours, Executive shall
devote his full time and attention to diligently attending to the business of
the Company during the Basic Term. During the Basic Term, Executive shall not
directly or indirectly render any services of a business, commercial, or
professional nature to any other person, firm,
<PAGE>
corporation, or organization, whether for compensation or otherwise, without the
prior written consent of the Chairman of the Board. However, Executive shall
have the right to engage in such activities as may be appropriate in order to
manage his personal investments so long as such activities do not materially
interfere or conflict with the performance of his duties to the Company
hereunder. The conduct of such activity shall not be deemed to materially
interfere or conflict with Executive's performance of his duties until Executive
has been notified in writing thereof and given a reasonable period in which to
cure the same. Executive may perform his duties from time-to-time at his
residences in Colorado or Arizona during reasonable times when his absence from
the HCC Houston office would not effect the successful performance of his
duties.
(b) Other Duties. At all times during the Basic Term, the Company
shall use its best efforts to cause Executive to be elected a director and to
serve on the Executive Committee and Senior Management Committee of HCC. Any
such failure to use its best efforts prior to a Change of Control shall be a
material breach of this Agreement for purposes of Paragraph 4(a)(iv). If
elected, Executive agrees to serve as a director and on the Executive Committee
and Senior Management Committee of HCC and of any of its subsidiaries and in one
or more executive offices of any of HCC's subsidiaries, provided Executive is
indemnified for serving in any and all such capacities in a manner acceptable to
the Company and Executive. If elected, Executive agrees that he shall not be
entitled to receive any compensation for serving as a director of HCC or in any
capacities of HCC's subsidiaries other than the compensation to be paid to
Executive by the Company pursuant to this Agreement.
3. Compensation and Related Matters.
(a) Base Salary. Executive shall receive a base salary (the "Base
Salary") paid by the Company at the annual rate of $600,000, payable not less
frequently than in substantially equal monthly installments.
(b) Bonus Payments. Each year Executive shall be entitled to
receive, in addition to the Base Salary, an annual bonus payment of $150,000 if
HCC's annual net earnings per share increases by at least 10% from the net
earnings per share of the immediately proceeding year. For purposes of this
Agreement, net earnings per share is defined as HCC's consolidated net earnings
per share as reported in HCC's Annual Report on Form 10-K.
(c) Expenses. During the Basic Term, Executive shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by him in
accordance with the policies and procedures established by the Compensation
Committee for the Company's senior executive officers in performing services
hereunder, provided that Executive properly accounts therefor in accordance with
Company policy.
(d) Other Benefits. Executive shall be entitled to participate in or
receive benefits under any compensatory employee benefit plan or other
arrangement made available by the Company now or in the future to its senior
executive officers and key management employees, subject to and on a basis
consistent with the terms, conditions, and overall administration of such
2
<PAGE>
plan or arrangement. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the Base Salary payable to Executive pursuant to Paragraph (a) of this
Section. The Company shall not make any changes in any employee benefit plans or
other arrangements in effect on the date hereof or subsequently in effect in
which Executive currently or in the future participates (including, without
limitation, each pension and retirement plan, supplemental pension and
retirement plan, savings and profit sharing plan, stock or unit ownership plan,
stock or unit purchase plan, stock or unit option plan, life insurance plan,
medical insurance plan, disability plan, dental plan, health and accident plan,
or any other similar plan or arrangement) that would adversely affect
Executive's rights or benefits thereunder, unless such change occurs pursuant to
a program applicable to substantially all executives of the Company and does not
result in a proportionately greater reduction in the rights of or benefits to
Executive as compared with any other executive of the Company.
(e) Vacations. Executive shall be entitled to twenty-five (25) paid
vacation days per year during the Basic Term. There shall be no carryover of
unused vacation from year to year. For purposes of this Paragraph, weekends
shall not count as vacation days, and Executive shall also be entitled to all
paid holidays and personal days given by the Company to its senior executive
officers.
(f) Perquisites. Executive shall be entitled to receive the
perquisites and fringe benefits appertaining to an executive officer of HCC in
accordance with any practice established by the Compensation Committee.
Notwithstanding, and in addition to, any perquisites to which Executive is
entitled pursuant to the preceding sentence, Executive shall: (i) have use of a
new Mercedes 500 SEL automobile, and the Company shall pay all expenses related
to Executive's use of such car, including gasoline, insurance, and maintenance;
(ii) be allowed to travel on business utilizing first class passage (whether
domestic or international); (iii) receive the membership fee and annual dues to
Shadow Hawk Country Club in addition to the golf and other clubs which Executive
is a member and for which Executive's fees and expenses are to be reimbursed,;
(iv) receive a total of $1,000,000 term life insurance (which shall be in
addition to the standard benefits provided to Executive under the Company's
group life insurance program that covers officers); (v) in addition to the other
benefits provided in this Agreement, Executive shall be entitled to receive
medical insurance as currently provided under the Company's group program, as
such group program may be changed from time-to-time in the future, and Executive
shall be entitled to continue to be covered by such group program or, if not
permitted under the terms of the group program, then the Company shall provide
Executive with a medical insurance policy providing substantially similar
benefits as to the group program, for the period ending on the date of the later
to die of Executive or, if Executive is married on the date of his death,
Executive's spouse or the date all of Executive's children complete college (as
defined in the Company's group program). Executive shall be entitled to receive
the medical benefits defined herein at no cost to the Executive. However,
Executive's rights pursuant to this subparagraph (v) shall be void if Executive
is terminated for Cause or if Executive voluntarily terminates his employment;
and (vi) HCC shall pay for Executive's preparation of estate planning and wealth
preservation documents during the course of Executive's employment with the
Company. Such estate planning and wealth preservation documents may be changed
from time-to-time at the Company's cost and expense, pursuant to Executive's
change in circumstances.
3
<PAGE>
(g) Proration. Any payments or benefits payable to Executive
hereunder in respect of any calendar year during which Executive is employed by
the Company for less than the entire year, unless otherwise provided in the
applicable plan or arrangement, shall be prorated in accordance with the number
of days in such calendar year during which he is so employed. Notwithstanding
the foregoing, any payments pursuant to Paragraphs 4(c) or 4(d) of this
Agreement shall not be subject to proration.
4. Termination.
(a) Definitions.
(1) "Cause" shall mean:
(i) Material dishonesty which is not the result of an
inadvertent or innocent mistake of Executive with respect to the Company
or any of its subsidiaries;
(ii) Willful misfeasance or nonfeasance of duty by
Executive intended to injure or having the effect of injuring in some
material fashion the reputation, business, or business relationships of
the Company or any of its subsidiaries or any of their respective
officers, directors, or employees;
(iii) Material violation by Executive of any material
term of this Agreement; or
(iv) Conviction of Executive of any felony, any crime
involving moral turpitude or any crime other than a vehicular offense
which could reflect in some material fashion unfavorably upon the Company
or any of its subsidiaries.
Executive may not be terminated for Cause unless and until there has been
delivered to Executive written notice from the Board supplying the particulars
of Executive's acts or omissions that the Board believes constitute Cause, a
reasonable period of time (not less than 30 days) has been given to Executive
after such notice to either cure the same or to meet with the Board, with his
attorney if so desired by Executive, and following which the Board by action of
not less than two-thirds of its members furnishes to Executive a written
resolution specifying in detail its findings that Executive has been terminated
for Cause as of the date set forth in the notice to Executive.
(2) A "Change of Control" shall be deemed to have occurred
if:
(i) Any "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other
than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of 50% or more of the Company's then outstanding voting common
stock; or
4
<PAGE>
(ii) At any time during the period of three (3)
consecutive years (not including any period prior to the date hereof),
individuals who at the beginning of such period constituted the Board (and
any new director whose election by the Board or whose nomination for
election by the Company's shareholders were approved by a vote of at least
two-thirds of the directors then still in office who either were directors
at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority thereof; or
(iii) The shareholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than a
merger or consolidation (a) in which a majority of the directors of the
surviving entity were directors of the Company prior to such consolidation
or merger, and (b) which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being changed into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the surviving entity outstanding
immediately after such merger or consolidation; or
(iv) 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.
(3) A "Disability" shall mean the absence of Executive from
Executive's duties with the Company on a full-time basis for 180 consecutive
days, or 180 days in a 365-day period, as a result of incapacity due to mental
or physical illness which results in the Executive being unable to perform the
essential functions of his position, with or without reasonable accommodation.
(4) A "Good Reason" shall mean any of the following (without
Executive's express written consent):
(i) Following a Change of Control, a material alteration
in the nature or status of Executive's title, duties or responsibilities,
or the assignment of duties or responsibilities inconsistent with
Executive's status, title, duties and responsibilities;
(ii) A failure by the Company to continue in effect any
employee benefit plan in which Executive was participating, or the taking
of any action by the Company that would adversely affect Executive's
participation in, or materially reduce Executive's benefits under, any
such employee benefit plan, unless such failure or such taking of any
action adversely affects the senior members of corporate management of the
Company generally to the same extent;
(iii) A relocation of the Company's principal executive
offices, or Executive's relocation to any place other than the principal
executive offices, exceeding a distance of fifty (50) miles from the
Company's current executive office located in Houston, Texas, except for
reasonably required travel by Executive on the Company's business;
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(iv) Any material breach by the Company of any provision
of this Agreement; or
(v) Any failure by the Company to obtain the assumption
and performance of this Agreement by any successor (by merger,
consolidation, or otherwise) or assign of the Company.
However, Good Reason shall exist with respect to an above specified matter
only if such matter is not corrected by the Company within thirty (30)
days of its receipt of written notice of such matter from Executive, and
in no event shall a termination by Executive occurring more than ninety
(90) days following the date of the event described above be a termination
for Good Reason due to such event.
(5) "Termination Date" shall mean the date Executive is
terminated for any reason pursuant to this Agreement.
(b) Termination Without Cause or Termination For Good Reason:
Benefits. In the event there is a termination by the Company without Cause, or
if Executive terminates for Good Reason within ninety (90) days after a Change
of Control (a "Termination Event"), this Agreement shall terminate, except as
provided in Paragraph 6, and Executive shall be entitled to the following
severance benefits:
(1) For a period of twelve (12) months after the Termination
Date (unless the remainder of the Basic Term is less than twelve (12)
months in which case, for an amount of time equal to the remainder of the
Basic Term), Base Salary (as defined in Paragraph 3(a)), at the rate, and
payable quarterly unless such termination is by the Company without Cause,
in which event such amount of Base Salary shall be paid in a lump sum
within ten (10) days of the Termination Event.
(2) If there is a Change of Control or if there is a
Termination Event, any stock options ("Stock Awards") which Executive has
received under this Agreement shall vest immediately and, if there is a
Termination Event, all such Stock Awards shall be exercisable for ten (10)
days from the date of such Termination Event or the remainder of their
term, whichever is less.
(3) To the extent not theretofore paid or provided, the
Company shall timely pay or provide to Executive any other amounts or
benefits required to be paid or provided or which Executive is eligible to
receive under any plan, program, policy or practice, or contract or
agreement of the Company and its affiliated companies for the period of
time equal to the remainder of the Basic Term (such other amounts and
benefits shall be hereinafter referred to as the "Other Benefits").
Without limiting the preceding sentence and without limiting any other
provision of this Agreement, through December 31, 2002 the Company, at its
sole expense, shall continue to provide (through its own plan and/or
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individual policies) Executive (and Executive's dependents) with health
benefits no less favorable than the group health plan benefits provided
during such period to any senior executive officer of the Company or any
affiliated company (to the extent any such coverage or benefits are
taxable to Executive by reason of being provided under a self-insured
health plan of the Company or an affiliate, the Company shall make
Executive "whole" for the same on an after-tax basis). In any event, the
Other Benefits provided for pursuant to this Paragraph shall be secondary
to any benefits and coverage Executive (or his dependents) receive from
another employer.
(4) If Executive receives any payments whether or not pursuant
to this Agreement which are subject to an excise tax imposed under Section
4999 of the Internal Revenue Code of 1986, as amended, or any similar tax
imposed under federal, state, or local law (collectively, "Excise Taxes"),
the Company shall pay to Executive (on or before the date on which the
Company is required to withhold such Excise Taxes), 1) an additional
amount equal to all Excise Taxes then due and payable, and 2) the amount
necessary to defray Executive's increased (federal, state, and local) tax
liability arising due to payment of the amount specified in this
Subsection (4) which shall include any costs and expenses, including
penalties and interest incurred by Executive in connection with any audit,
proceedings, etc. related to the payment of such Excise Taxes or this
payment. For purposes of calculating the amount payable to Executive under
this Paragraph, the federal and state income tax rates used shall be the
highest marginal federal and state rates applicable to ordinary income in
Executive's state of residence, taking into account any federal income tax
deductions or credits available to Executive for state income taxes. The
Company shall cause its independent auditors to calculate such amount and
provide Executive a copy of such calculation at least ten (10) days prior
to the date specified above for payment of such amount. It is the intent
of the Parties that this Subsection (4) shall place Executive in the same
net after-tax position Executive would have been in had no payment been
subject to an Excise Tax and, notwithstanding anything herein to the
contrary, it shall be construed to effectuate said result.
(5) All accrued compensation and unreimbursed expenses through
the Termination Date. Such amounts shall be paid to Executive in a lump
sum in cash within thirty (30) days after the Termination Date; and
(6) Executive shall be free to accept other employment during
such period, and there shall be no offset of any employment compensation
earned by Executive in such other employment during such period against
payments due Executive under this Paragraph (4), and there shall be not
offset in any compensation received from such other employment against the
Base Salary set forth above.
(c) Termination In Event of Death: Benefits. If Executive's
employment is terminated by reason of Executive's death during the Basic Term,
this Agreement shall terminate, except as provided in Paragraph 6, without
further obligation to Executive's legal representatives under this Agreement,
other than for payment of all accrued compensation, unreimbursed expenses,
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the timely payment or provision of Other Benefits through the date of death,
and, if such death occurs on or after October 1 of any year, such cash or stock
bonus as Executive would otherwise have been awarded in such year if Executive's
death had not occurred. Such amounts shall be paid to Executive's estate or
beneficiary, as applicable, in a lump sum in cash within ninety (90) days after
the date of death. With respect to the provision of Other Benefits, the term
Other Benefits as used in this Paragraph 4(c) shall include, without limitation,
and Executive's estate and/or beneficiaries shall be entitled to receive,
benefits at least equal to the most favorable benefits provided by the Company
to the estates and beneficiaries of other executive level employees of the
Company under such plans, programs, practices, and policies relating to death
benefits, if any, as in effect with respect to other executives and their
beneficiaries at any time during the 120-day period immediately preceding the
date of death. Additionally, all Stock Awards shall be vested immediately and
shall be exercisable for the greater of one year after the date of such vesting
or the remaining term of such option.
(d) Termination In Event of Disability: Benefits. If Executive's
employment is terminated by reason of Executive's Disability during the Basic
Term, this Agreement shall continue in full force for a period of one (1) year
following such Disability and if such Disability occurs on or after October 1 of
any year Executive shall be entitled to the same cash or stock bonus in such
year that Executive would have been awarded if such Disability had not occurred.
Following such one (1) year period, this Agreement shall continue in full force
except that (a) the Base Salary shall be reduced by 50% and (b) Executive shall
not be entitled to any subsequent cash or stock bonuses. In addition, all
outstanding Stock Awards shall vest immediately upon such termination due to
Disability. If Executive's Disability occurs prior to the commencement of the
Consulting Period, defined below, in addition to the amounts provided for
herein, Executive shall receive the Consulting Fee, defined below, at such time
as it would have otherwise been earned, whether or not Executive can perform
Consulting Services, defined below. Additionally, all Stock Awards shall be
vested immediately and shall be exercisable for the greater of one year after
the date of such vesting or the remaining term of such option.
(e) Voluntary Termination by Employee and Termination for Cause:
Benefits. Executive may terminate his employment with the Company without Good
Reason by giving written notice of his intent and stating an effective
Termination Date at least ninety (90) days after the date of such notice;
provided, however, that the Company may accelerate such effective date by paying
Executive through the proposed Termination Date and also vesting awards that
would have vested but for this acceleration of the proposed Termination Date.
Upon such a termination by Executive except as provided in Paragraph 6 or upon
termination for Cause by the Company, this Agreement shall terminate and the
Company shall pay to Executive all accrued compensation, unreimbursed expenses
and the Other Benefits through the Termination Date. Such amounts shall be paid
to Executive in a lump sum in cash within thirty (30) days after the date of
termination. In addition, all unvested stock options shall terminate and all
vested options will terminate ten (10) days after the Termination Date.
(f) Director Positions. Executive agrees that upon termination of
employment, for any reason, at the request of the Chairman of the Board, he will
immediately tender his
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resignation from any and all Board positions held with the Company and/or any of
its subsidiaries and affiliates. If Executive remains as a director, after such
termination, Executive shall be compensated as an outside director.
5. Non-Competition, Non-Solicitation, and Confidentiality. Executive
recognizes and agrees that the benefit of not being employed at-will, is
provided in consideration for, among other things, the agreements contained in
this Section, as well as the Stock Awards granted to Executive pursuant to this
Agreement. The Company agrees that while employed pursuant to this Agreement,
Executive will be provided with confidential information of Company; specialized
training on how to perform his duties; and contact with the Company's customers
and potential customers. Furthermore, in the event Executive is terminated
without Cause, or terminates for Good Reason, and more than one (1) year remains
on the existing Basic Term, then Executive shall receive additional
consideration in an amount equal to the quotient of the Base Salary divided by
12, which shall thereupon be multiplied by the number of months remaining in the
Basic Term minus 12 months and which shall be paid in one lump sum within ten
(10) days of such termination.
In consideration of all of the foregoing, Executive agrees as follows:
(a) Non-Competition During Employment. Executive agrees during the
Basic Term and the Consulting Period he will not compete with the Company by
engaging in the conception, design, development, production, marketing, or
servicing of any product or service that is substantially similar to the
products or services which the Company provides, and that he will not work for,
in any capacity, assist, or become affiliated with as an owner, partner, etc.,
either directly or indirectly, any individual or business which offers or
performs services, or offers or provides products substantially similar to the
services and products provided by Company.
(b) Conflicts of Interest. Executive agrees that during the Basic
Term and the Consulting Period, he will not engage, either directly or
indirectly, in any activity (a "Conflict of Interest") which might adversely
affect the Company or its affiliates, including ownership of a material interest
in any supplier, contractor, distributor, subcontractor, customer or other
entity with which the Company does business or accepting any material payment,
service, loan, gift, trip, entertainment, or other favor from a supplier,
contractor, distributor, subcontractor, customer or other entity with which the
Company does business, and that Executive will promptly inform the Chairman of
the Company as to each offer received by Executive to engage in any such
activity. Executive further agrees to disclose to the Company any other facts of
which Executive becomes aware which might in Executive's good faith judgment
reasonably be expected to involve or give rise to a Conflict of Interest or
potential Conflict of Interest.
(c) Non-Competition After Termination. Executive agrees that
Executive shall not, at any time during the period of two (2) years after the
termination of the later of the Basic Term or the Consulting Period, for any
reason, within any of the markets in which the Company has sold products or
services or formulated a plan to sell products or services into a market during
the last twelve (12) months of Executive's employ or which the Company enters
into within three (3) months thereafter, engage in or contribute Executive's
knowledge to any work which is competitive with or
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similar to a product, process, apparatus, service, or development on which
Executive worked or with respect to which Executive had access to Confidential
Information while employed by the Company; provided, however, this Paragraph (c)
shall not operate to prevent Executive from engaging in retail insurance or
re-insurance activities during such two-year period to the extent such
activities do not compete or permit any other person or entity to compete with
any business the Company or any of its subsidiaries or affiliated companies were
engaged in at the time of such termination or which the Company enters into
within three (3) months thereafter. Following the expiration of said two (2)
year period, Executive shall continue to be obligated under the Confidential
Information Paragraph of this Agreement not to use or to disclose Confidential
Information of the Company so long as it shall not be publicly available. It is
understood that the geographical area set forth in this covenant is divisible so
that if this clause is invalid or unenforceable in an included geographic area,
that area is severable and the clause remains in effect for the remaining
included geographic areas in which the clause is valid.
(d) Non-Solicitation of Customers. Executive further agrees that for
a period of two (2) years after the termination of the Basic Term and the
Consulting Period, he will not solicit or accept any business from any customer
or client or prospective customer or client with whom Executive dealt or
solicited while employed by Company during the last twelve (12) months of his
employment.
(e) Non-Solicitation of Employees. Executive agrees that for the
duration of the Basic Term, and for a period of two (2) years after the
termination of the Basic Term and the Consulting Period, he will not either
directly or indirectly, on his own behalf or on behalf of others, solicit,
attempt to hire, or hire any person employed by Company to work for Executive or
for another entity, firm, corporation, or individual.
(f) Confidential Information. Executive further agrees that he will
not, except as the Company may otherwise consent or direct in writing, reveal or
disclose, sell, use, lecture upon, publish or otherwise disclose to any third
party any Confidential Information or proprietary information of the Company, or
authorize anyone else to do these things at any time either during or subsequent
to his employment with the Company. This Section shall continue in full force
and effect after termination of Executive's employment and after the termination
of this Agreement. Executive's obligations under this Paragraph with respect to
any specific Confidential Information and proprietary information shall cease
when that specific portion of the Confidential Information and proprietary
information becomes publicly known, in its entirety and without combining
portions of such information obtained separately. It is understood that such
Confidential Information and proprietary information of the Company include
matters that Executive conceives or develops, as well as matters Executive
learns from other employees of Company. Confidential Information is defined to
include information: (1) disclosed to or known by the Executive as a consequence
of or through his employment with the Company; (2) not generally known outside
the Company; and (3) which relates to any aspect of the Company or its business,
finances, operation plans, budgets, research, or strategic development.
"Confidential Information" includes, but is not limited to the Company's trade
secrets, proprietary information, financial documents, long range plans,
customer lists, employer compensation, marketing strategy, data bases, costing
data, computer software
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developed by the Company, investments made by the Company, and any information
provided to the Company by a third party under restrictions against disclosure
or use by the Company or others.
(g) Return of Documents, Equipment, Etc. All writings, records, and
other documents and things comprising, containing, describing, discussing,
explaining, or evidencing any Confidential Information, and all equipment,
components, parts, tools, and the like in Executive's custody or possession that
have been obtained or prepared in the course of Executive's employment with the
Company shall be the exclusive property of the Company, shall not be copied
and/or removed from the premises of the Company, except in pursuit of the
business of the Company, and shall be delivered to the Company, without
Executive retaining any copies, upon notification of the termination of
Executive's employment or at any other time requested by the Company. The
Company shall have the right to retain, access, and inspect all property of
Executive of any kind in the office, work area, and on the premises of the
Company upon termination of Executive's employment and at any time during
employment by the Company to ensure compliance with the terms of this Agreement.
(h) Reaffirm Obligations. Upon termination of his employment with
the Company, Executive, if requested by Company, shall reaffirm in writing
Executive's recognition of the importance of maintaining the confidentiality of
the Company's Confidential Information and proprietary information, and reaffirm
any other obligations set forth in this Agreement.
(i) Prior Disclosure. Executive represents and warrants that he has
not used or disclosed any Confidential Information he may have obtained from
Company prior to signing this Agreement, in any way inconsistent with the
provisions of this Agreement.
(j) Confidential Information of Prior Companies. Executive will not
disclose or use during the period of his employment with the Company any
proprietary or Confidential Information or Copyright Works which Executive may
have acquired because of employment with an employer other than the Company or
acquired from any other third party, whether such information is in Executive's
memory or embodied in a writing or other physical form.
(k) Breach. Executive agrees that any breach of Paragraphs 5(a),
(c), (d), (e) or (f) above cannot be remedied solely by money damages, and that
in addition to any other remedies Company may have, Company is entitled to
obtain injunctive relief against Executive. Nothing herein, however, shall be
construed as limiting Company's right to pursue any other available remedy at
law or in equity, including recovery of damages and termination of this
Agreement and/or any payments that may be due pursuant to this Agreement.
(l) Right to Enter Agreement. Executive represents and covenants to
Company that he has full power and authority to enter into this Agreement and
that the execution of this Agreement will not breach or constitute a default of
any other agreement or contract to which he is a party or by which he is bound.
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(m) Extension of Post-Employment Restrictions. In the event
Executive breaches Paragraphs 5(b), (d), or (e) above, the restrictive time
periods contained in those provisions will be extended by the period of time
Executive was in violation of such provisions.
(n) Enforceability. The agreements contained in Section 5 are
independent of the other agreements contained herein. Accordingly, failure of
the Company to comply with any of its obligations outside of this Paragraph do
not excuse Executive from complying with the agreements contained herein.
(o) Survivability. The agreements contained in Paragraphs 5(c)-(g)
shall survive the termination of this Agreement for any reason.
6. Consulting Agreement. Effective upon Executive's termination of
employment for any reason other than Executive's termination by the Company for
Cause prior to the end of the Basic Term, HCC hereby retains Executive as a
consultant (an independent contractor and not as an employee) for a period of
ten (10) years (the "Consulting Period"). Termination of the Basic Term shall
not effect the Parties' rights and obligations under this Paragraph 6. Subject
to the following, Executive agrees to provide, if requested, a minimum of 200
hours of service per year, or, as requested by the Company, up to a total of 600
hours during any one year of the Consulting Period; provided, however, that the
total number of hours to be worked over the duration of the Consulting Period
shall not exceed 2,000 (the "Consulting Services"). The Consulting Services to
be provided shall be commensurate with Executive's training, background,
experience and prior duties with the Company. Executive agrees to make himself
reasonably available to provide such Consulting Services during the Consulting
Period; provided, however, the Company agrees that it shall provide reasonable
advance notice to Executive of its expected consulting needs and any request for
Consulting Services hereunder shall not unreasonably interfere with Executive's
other business activities and personal affairs as determined in good faith by
Executive. In addition, Executive shall not be required to perform any requested
Consulting Services which, in Executive's good faith opinion, would cause
Executive to breach any fiduciary duty or contractual obligation Executive may
have to another employer. Further, during the Consulting Period, Executive shall
not be subject to any non-competition provisions except for the two-year period
provided for in Paragraph 5(c). Unless waived by Executive, Executive shall not
be required to perform Consulting Services for more than four (4) days during
any week or for more than eight (8) hours during any day. Executive's travel
time shall constitute hours of Consulting Services for purposes of this
Paragraph 6. The Parties contemplate that, when appropriate, the Consulting
Services shall be performed at Executive's office, residence or at the Company's
executive offices in Houston, Texas and may be performed at such other locations
only as they may mutually agree upon. Executive shall be properly reimbursed for
all travel and other expenses reasonably incurred by Executive in rendering the
Consulting Services. HCC shall pay Executive $200,000 per year (the "Consulting
Fee") during the Consulting Period, payable monthly in arrears. In addition,
Executive shall receive, on an "as-is" basis, the automobile Executive was
utilizing at the commencement of the Consulting Period. Executive may elect to
delay payment for services but not the services themselves. Except as set forth
below and in Paragraphs 4(c) or 4(d) hereof, if Executive fails to provide the
hours requested by the Company in any 24-month period, Executive's rights to
receive any further Consulting Fee
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shall immediately terminate. During the Consulting Period, except as otherwise
provided for herein, Executive shall receive no employment benefits from HCC. If
Executive dies or becomes Disabled during the Basic Term (or as an employee of
the Company following the Basic Term) or during the Consulting Period he (or, on
his death, his beneficiary or estate) shall receive or continue to receive as
the case may be the Consulting Fee during the remainder of the Consulting Period
as if such death or Disability had not occurred.
7. Assignment. This Agreement cannot be assigned by Executive. The Company
may assign this Agreement only to a successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and assets of the Company provided such successor expressly agrees in
writing reasonably satisfactory to Executive to assume and perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession and assignment had taken place.
Failure of the Company to obtain such written agreement prior to the
effectiveness of any such succession shall be a material breach of this
Agreement.
8. Binding Agreement. Executive understands that his obligations under
this Agreement are binding upon Executive's heirs, successors, personal
representatives, and legal representatives.
9. Notices. All notices pursuant to this Agreement shall be in writing and
sent certified mail, return receipt requested, addressed as set forth below, or
by delivering the same in person to such party, or by transmission by facsimile
to the number set forth below. Notice deposited in the United States Mail,
mailed in the manner described hereinabove, shall be effective upon deposit.
Notice given in any other manner shall be effective only if and when received:
If to Executive: John N. Molbeck, Jr.
3424 Ella Lee Lane
Houston, Texas 77027
If to Company: HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040
Fax: (713) 462-2401
with a copy (which shall Arthur S. Berner, Esq.
not constitute notice) to: Haynes and Boone
1000 Louisiana Street,
Suite 4300
Houston, Texas 77002-5012
Fax: (713) 236-5652
10. Waiver. No waiver by either party to this Agreement of any right to
enforce any term or condition of this Agreement, or of any breach hereof, shall
be deemed a waiver of such right in the future or of any other right or remedy
available under this Agreement.
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11. Severability. If any provision of this Agreement is determined to be
void, invalid, unenforceable, or against public policy, such provisions shall be
deemed severable from the Agreement, and the remaining provisions of the
Agreement will remain unaffected and in full force and effect.
12. Arbitration. In the event any dispute arises out of Executive's
employment with or by the Company, or separation/termination therefrom, whether
as an employee or as a consultant, which cannot be resolved by the Parties to
this Agreement, such dispute shall be submitted to final and binding
arbitration. The arbitration shall be conducted in accordance with the National
Rules for the Resolution of Employment Disputes of the American Arbitration
Association ("AAA"). If the Parties cannot agree on an arbitrator, a list of
seven (7) arbitrators will be requested from AAA, and the arbitrator will be
selected using alternate strikes with Executive striking first. The cost of the
arbitration will be shared equally by Executive and Company ; provided, however,
the Company shall promptly reimburse Executive for all costs and expenses
incurred in connection with any dispute in an amount up to, but not exceeding 20
percent of Executive's Base Salary (or, if the dispute arises during the
Consulting Period, Executive's Base Salary as in effect immediately prior to the
beginning of the Consulting Period) unless such termination was for Cause in
which event Executive shall not be entitled to reimbursement unless and until it
is determined he was terminated other than for Cause. Arbitration of such
disputes is mandatory and in lieu of any and all civil causes of action and
lawsuits either party may have against the other arising out of Executive's
employment with Company, or separation therefrom. Such arbitration shall be held
in Houston, Texas.
13. Entire Agreement. The terms and provisions contained herein shall
constitute the entire agreement between the parties with respect to Executive's
employment with Company during the time period covered by this Agreement. This
Agreement replaces and supersedes any and all existing Agreements entered into
between Executive and the Company relating generally to the same subject matter,
if any, and shall be binding upon Executive's heirs, executors, administrators,
or other legal representatives or assigns.
14. Modification of Agreement. This Agreement may not be changed or
modified or released or discharged or abandoned or otherwise terminated, in
whole or in part, except by an instrument in writing signed by the Executive and
an officer or other authorized executive of Company.
15. Understand Agreement. Executive represents and warrants that he has
read and understood each and every provision of this Agreement, and Executive
understands that he has the right to obtain advice from legal counsel of choice,
if necessary and desired, in order to interpret any and all provisions of this
Agreement, and that Executive has freely and voluntarily entered into this
Agreement.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
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17. Jurisdiction and Venue. With respect to any litigation regarding this
Agreement, Executive agrees to venue in the state or federal courts in Harris
County, Texas, and agrees to waive and does hereby waive any defenses and/or
arguments based upon improper venue and/or lack of personal jurisdiction. By
entering into this Agreement, Executive agrees to personal jurisdiction in the
state and federal courts in Harris County, Texas.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple
copies, effective as of the date first written above.
EXECUTIVE COMPANY
HCC INSURANCE HOLDINGS, INC.
/s/ John N. Molbeck, Jr. /s/ Stephen L. Way
- ------------------------------------ By: ------------------------------------
JOHN N. MOLBECK, JR. STEPHEN L. WAY,
Chief Executive Officer and
Chairman of the Board
Dated: April 20, 2000 Dated: 5/1/00
------------------------------ ----------------------------------
[SIGNATURE PAGE TO MOLBECK EMPLOYMENT AGREEMENT]
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EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of
the 5th day of January, 2000 (the "Effective Date"), between HCC INSURANCE
HOLDINGS, INC. ("HCC" or "Company"), and EDWARD H. ELLIS, JR. ("Executive"),
sometimes collectively referred to herein as the "Parties."
R E C I T A L S:
WHEREAS, Executive is to be employed as Senior Vice President and Chief
Financial Officer ("CFO") and, as an integral part of its management who
participates in the decision-making process relative to short and long-term
planning and policy for the Company, will serve on the Company's Executive
Management Committee;
WHEREAS, it is the desire of the Board of Directors of HCC (the "Board")
to (i) directly engage Executive as an officer of HCC and its subsidiaries;
WHEREAS, Executive is desirous of committing himself to serve HCC on the
terms herein provided; and
WHEREAS, Executive and HCC have previously entered into an Employment
Agreement effective as of January 1, 1998 (the "1998 Contract") which is to be
cancelled and of no further force and effect.
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the Parties agree as follows:
1. Termination of 1998 Contract and Term. Effective as of the Effective
Date, the 1998 Contract shall be cancelled, terminated and of no further force
or effect. The Company hereby agrees to employ Executive as a Senior Vice
President and CFO, and Executive hereby agrees to accept such employment, on the
terms and conditions set forth herein, for the period commencing on the
Effective Date and expiring as of 11:59 p.m. on December 31, 2002 (the "Basic
Term") (unless sooner terminated as hereinafter set forth).
At Executive's option, Executive shall have the right to retire on or
after December 31, 2001. In such event, Executive shall be retained as a
consultant to the Company for the period beginning on the date of such
retirement and ending one year thereafter (the "Consulting Period"). Executive
shall receive a fee during such Consulting Period of $100,000 (the "Consulting
Fee"). During the Consulting Period, any options or grants pursuant to this
Agreement shall continue to vest and be exercisable. In addition to the
Consulting Fee, the Company shall on behalf of the Executive provide for medical
insurance in accordance with the Company's policy and COBRA and, subject to the
terms of any plan, all other benefits Executive would have received if he were
an employee.
2. Duties.
<PAGE>
(a) Duties as Employee of the Company. Executive shall, subject to
the supervision of the Board of Directors, act as Chief Financial Officer of HCC
in the ordinary course of its business with all such powers with respect to such
management and control as may be reasonably incident to such responsibilities.
During normal business hours, Executive shall devote his full time and attention
to diligently attending to the business of the Company during the Basic Term.
During the Basic Term, Executive shall not directly or indirectly render any
services of a business, commercial, or professional nature to any other person,
firm, corporation, or organization, whether for compensation or otherwise,
without the prior written consent of the Board of Directors of HCC. However,
Executive shall have the right to engage in such activities as may be
appropriate in order to manage his personal investments so long as such
activities do not materially interfere or conflict with the performance of his
duties to the Company hereunder. The conduct of such activity shall not be
deemed to materially interfere or conflict with Executive's performance of his
duties until Executive has been notified in writing thereof and given a
reasonable period in which to cure the same.
(b) Other Duties. If elected, Executive agrees to serve as a member
of the Senior Management Committee of HCC and of any of its subsidiaries and in
one or more executive offices of any of HCC's subsidiaries, provided Executive
is indemnified for serving in any and all such capacities in a manner acceptable
to the Company and Executive. If elected, Executive agrees that he shall not be
entitled to receive any compensation for serving as a director of HCC, or in any
capacities of HCC's subsidiaries other than the compensation to be paid to
Executive by the Company pursuant to this Agreement.
3. Compensation and Related Matters.
(a) Base Salary. Executive shall receive a base salary paid by the
Company as follows: $250,000 for the year ending December 31, 2000; $275,000 for
the year ending December 31, 2001; and $300,000 for the year ending December 31,
2002, payable in each calendar year in substantially equal monthly installments.
For purposes of this Agreement, "Base Salary" shall mean the Executive's initial
base salary or, if increased, then the increased base salary.
(b) Bonus Payments. Executive shall be eligible to receive, in
addition to the Base Salary, an annual cash and/or stock bonus payment in
amount, which may be zero, to be determined at the sole discretion of the
Compensation Committee.
(c) Expenses. During the Basic Term, Executive shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by him (in
accordance with the policies and procedures established by the Board for the
Company's senior executive officers) in performing services hereunder, provided
that Executive properly accounts therefor in accordance with Company policy.
(d) Other Benefits. Executive shall be entitled to participate in or
receive benefits under any compensation employee benefit plan or other
arrangement made available by the
2
<PAGE>
Company now or in the future to its senior executive officers, subject to and on
a basis consistent with the terms, conditions, and overall administration of
such plan or arrangement. Nothing paid to Executive under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the Base Salary payable to Executive pursuant to Paragraph (a)
of this Section. The Company shall not make any changes in any employee benefit
plans or other arrangements in effect on the date hereof or subsequently in
effect in which Executive currently or in the future participates (including,
without limitation, each pension and retirement plan, supplemental pension and
retirement plan, savings and profit sharing plan, stock or unit ownership plan,
stock or unit purchase plan, stock or unit option plan, life insurance plan,
medical insurance plan, disability plan, dental plan, health and accident plan,
or any other similar plan or arrangement) that would adversely affect
Executive's rights or benefits thereunder, unless such change occurs pursuant to
a program applicable to substantially all executives of the Company and does not
result in a proportionately greater reduction in the rights of or benefits to
Executive as compared with any other executive of the Company.
(e) Vacations. Executive shall be entitled to twenty (20) paid
vacation days per year during the Basic Term. There shall be no carryover of
unused vacation from year to year. For purposes of this Paragraph, weekends
shall not count as vacation days, and Executive shall also be entitled to all
paid holidays given by the Company to its senior executive officers.
(f) Perquisites. Executive shall be entitled to receive the
perquisites and fringe benefits appertaining to an executive officer of HCC in
accordance with any practice established by the Board.
(g) Proration. Any payments or benefits payable to Executive
hereunder in respect of any calendar year during which Executive is employed by
the Company for less than the entire year, unless otherwise provided in the
applicable plan or arrangement, shall be prorated in accordance with the number
of days in such calendar year during which he is so employed. Notwithstanding
the foregoing, any payments pursuant to Paragraph 4(c) or 4(d) this Agreement
shall not be subject to proration.
4. Termination.
(a) Definitions.
(1) "Cause" shall mean:
(i) Material dishonesty which is not the result of an
inadvertent or innocent mistake of Executive with respect to the Company
or any of its subsidiaries;
(ii) Willful misfeasance or nonfeasance of duty by
Executive intended to injure or having the effect of injuring in some
material fashion the reputation, business, or business relationships of
the Company or any of its subsidiaries or any of their respective
officers, directors, or employees;
3
<PAGE>
(iii) Material violation by Executive of any material
term of this Agreement;
(iv) Conviction of Executive of any felony, any crime
involving moral turpitude or any crime other than a vehicular offense
which could reflect in some material fashion unfavorably upon the Company
or any of its subsidiaries.
Executive may not be terminated for Cause unless and until there has been
delivered to Executive written notice from the Board supplying the
particulars of his acts or omissions that the Board believes constitute
Cause, a reasonable period of time (not less than 30 days) has been given
to Executive after such notice to either cure the same or to meet with the
Board with his attorney if so desired by Executive, and following which
the Board by action of not less than two-thirds of its members furnishes
to Executive a written resolution specifying in detail its findings that
Executive has been terminated for Cause as of the date set forth in the
notice to Executive.
(2) A "Change of Control" shall be deemed to have occurred if:
(i) Any "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other
than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of 50% or more of the Company's then outstanding voting common
stock; or
(ii) At any time during the period of three (3)
consecutive years (not including any period prior to the date hereof),
individuals who at the beginning of such period constituted the Board (and
any new director whose election by the Board or whose nomination for
election by the Company's shareholders were approved by a vote of at least
two-thirds of the directors then still in office who either were directors
at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority thereof; or
(iii) The shareholders of the Company approve a merger
or consolidation of the Company with any other corporation, other than a
merger or consolidation (a) in which a majority of the directors of the
surviving entity were directors of the Company prior to such consolidation
or merger, and (b) which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being changed into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the surviving entity outstanding
immediately after such merger or consolidation; or
4
<PAGE>
(iv) 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.
Executive may not be terminated for Cause unless and until there has been
delivered to Executive written notice from the Board supplying the
particulars of his acts or omissions that the Board believes constitute
Cause, a reasonable period of time (not less than 30 days) has been given
to Executive after such notice to either cure the same or to meet with the
Board with his attorney if so desired by Executive, and following which
the Board by action of not less than two-thirds of its members furnishes
to Executive a written resolution specifying in detail its findings that
Executive has been terminated for Cause as of the date set forth in the
notice to Executive.
(3) A "Disability" shall mean the absence of Executive from
Executive's duties with the Company on a full-time basis for 180 consecutive
days, or 180 days in a 365-day period, as a result of incapacity due to mental
or physical illness which results in the Executive being unable to perform the
essential functions of his position, with or without reasonable accommodation.
(4) A "Good Reason" shall mean any of the following (without
Executive's express written consent):
(i) Following a change of control, a material alteration
in the nature or status of Executive's title, duties or responsibilities,
or the assignment of duties or responsibilities inconsistent with,
Executive's status title, duties and responsibilities;
(ii) A failure by the Company to continue in effect any
employee benefit plan in which Executive was participating, or the taking
of any action by the Company that would adversely affect Executive's
participation in, or materially reduce Executive's benefits under, any
such employee benefit plan, unless such failure or such taking of any
action adversely affects the senior members of corporate management of the
Company generally;
(iii) A relocation of the Company's executive offices,
or Executive's relocation to any place other than the executive offices,
exceeding a distance of fifty (50) miles from the Company's current
executive office located in Houston, Texas, except for reasonably required
travel by Executive on the Company's business;
(iv) Any material breach by the Company of any provision
of this Agreement; or
(v) Any failure by the Company to obtain the assumption
and performance of this Agreement by any successor (by merger,
consolidation, or otherwise) or assign of the Company.
5
<PAGE>
However, Good Reason shall exist with respect to an above specified matter only
if such matter is not corrected by the Company within thirty (30) days of its
receipt of written notice of such matter from Executive and in no event shall a
termination by Executive occurring more than ninety (90) days following the date
of the event described above be a termination for Good Reason due to such event.
(5) "Termination Date" shall mean the date Executive is
terminated for any reason pursuant to this Agreement.
(6) "Termination Following a Change of Control" shall mean
failure of any successor/surviving company to adopt this Agreement.
(b) Termination Without Cause or For Good Reason: Benefits. In the
event there is a termination by the Company without Cause, or if Executive
terminates for Good Reason within ninety (90) days after a Change of Control (a
"Termination Event"), this Agreement shall terminate and Executive shall be
entitled to the following severance benefits:
(1) For the remainder of the Basic Term after the Termination
Date, Base Salary (as defined in Paragraph 3(a)), at the rate in effect
immediately prior to the Termination Event, payable in a lump sum;
(2) If there is a Change of Control or if there is a
Termination Event, any stock options ("Stock Awards") which Executive has
received under this Agreement shall vest immediately and, if there is a
Termination Event, all such Stock Awards shall be exercisable for ten (10)
days from the date of such Termination Event or the remainder of their
term, whichever is less;
(3) To the extent not theretofore paid or provided, the
Company shall timely pay or provide to Executive any other amounts or
benefits required to be paid or provided or which Executive is eligible to
receive under any plan, program, policy or practice, or contract or
agreement of the Company and its affiliated companies for the period of
time equal to the remainder of the Basic Term and through December 31,
2002 the Company, at its sole expense, shall continue to provide (through
its own plan and/or individual policies) Executive (and Executive's
dependents) with health benefits no less favorable than the group health
plan benefits provided during such period to any senior executive officer
of the Company or any affiliated company (to the extent any such coverage
or benefits are taxable to Executive by reason of being provided under a
self-insured health plan of the Company or an affiliate, the Company shall
make Executive "whole" for the same on an after-tax basis), provided,
however, such coverage shall be secondary to any group health plan
coverage Executive (or his dependents) receive from another employer,
(such other amounts and benefits shall be hereinafter referred to as the
"Other Benefits");
(4) If Executive receives any payments whether or not pursuant
to this Agreement which are subject to an excise tax imposed under Section
4999 of the Internal
6
<PAGE>
Revenue Code of 1986, as amended, or any similar tax imposed under
federal, state, or local law (collectively, "Excise Taxes"), the Company
shall pay to Executive (on or before the date on which the Company is
required to withhold such Excise Taxes), 1) an additional amount equal to
all Excise Taxes then due and payable, and 2) the amount necessary to
defray Executive's increased (federal, state, and local) tax liability
arising due to payment of the amounts specified in this Subsections (4) of
this Paragraph 4, which shall include any costs and expenses, including
penalties and interest incurred by Executive in connection with any audit,
proceedings, etc. related to the payment of such Excise Taxes or this
payment. For purposes of calculating the amount payable to Executive under
this Paragraph, the federal and state income tax rates used shall be the
highest marginal federal and state rates applicable to ordinary income in
Executive's state of residence, taking into account any federal income tax
deductions or credits available to Executive for state income taxes. The
Company shall cause its independent auditors to calculate such amount and
provide Executive a copy of such calculation at least ten (10) days prior
to the date specified above for payment of such amount. It is the intent
of the Parties that this Subsection (4) shall place Executive in the same
net after-tax position Executive would have been in had no payment been
subject to an Excise Tax and, notwithstanding anything herein to the
contrary, it shall be construed to effectuate said result;
(5) All accrued compensation and unreimbursed expenses through
the Termination Date. Such amounts shall be paid to Executive in a lump
sum in cash within thirty (30) days after the Termination Date; and
(6) Executive shall be free to accept other employment during
such period, and there shall be no offset of any employment compensation
earned by Executive in such other employment during such period against
payments due Executive under this Paragraph (4), and there shall be no
offset in any compensation received from such other employment against the
Base Salary set forth above.
(c) Termination In Event of Death: Benefits. If Executive's
employment is terminated by reason of Executive's death during the Basic Term,
this Agreement shall terminate without further obligation to Executive's legal
representatives under this Agreement, other than for payment of all accrued
compensation, unreimbursed expenses, the timely payment or provision of Other
Benefits through the date of death. Such amounts shall be paid to Executive's
estate or beneficiary, as applicable, in a lump sum in cash within ninety (90)
days after the date of death. With respect to the provision of Other Benefits,
the term Other Benefits as used in this Paragraph 4(c) shall include, without
limitation, and Executive's estate and/or beneficiaries shall be entitled to
receive, benefits at least equal to the most favorable benefits provided by the
Company to the estates and beneficiaries of other executive level employees of
the Company under such plans, programs, practices, and policies relating to
death benefits, if any, as in effect with respect to other executives and their
beneficiaries at any time during the 120-day period immediately preceding the
date of death. Additionally, all Stock Awards shall be vested immediately and
shall be exercisable for the greater of one year after the date of such vesting
or the remaining term of such option.
7
<PAGE>
(d) Termination In Event of Disability: Benefits. If Executive's
employment is terminated by reason of Executive's Disability during the Basic
Term, this Agreement shall continue in full force for a period of one (1) year
following such Disability. Following such one (1) year period, this Agreement
shall continue in full force except that (a) the Base Salary shall be reduced by
50% and (b) Executive shall, not be entitled to any subsequent cash or stock
bonuses. In addition, all outstanding Stock Awards shall vest immediately upon
such termination due to Disability and shall be exercisable for the greater of
one year after the date of such vesting or the remaining term of the option.
(e) Voluntary Termination by Employee and Termination for Cause:
Benefits. Executive may terminate his employment with the Company without Good
Reason by giving written notice of his intent and stating an effective
Termination Date at least ninety (90) days after the date of such notice;
provided, however, that the Company may accelerate such effective date by paying
Executive through the proposed Termination Date and also vesting awards that
would have vested but for this acceleration of the proposed Termination Date.
Upon such a termination by Executive or upon termination for Cause by the
Company, this Agreement shall terminate and the Company shall pay to Executive
all accrued compensation, unreimbursed expenses and the Other Benefits through
the Termination Date. Such amounts shall be paid to Executive in a lump sum in
cash within thirty (30) days after the date of termination. In addition, all
unvested stock options shall terminate and all vested options will terminate ten
(10) days after the Termination Date.
(f) Director Positions. Executive agrees that upon termination of
employment, for any reason, at the request of the Chairman of the Board,
Executive will immediately tender his resignation from any and all Board
positions held with the Company and/or any of its subsidiaries and affiliates.
5. Non-Competition, Non-Solicitation, and Confidentiality. Executive
recognizes and agrees that the benefit of not being employed at-will, is
provided in consideration for, among other things, the agreements contained in
this Section, as well as the Stock Awards granted to Executive pursuant to this
Agreement. The Company agrees that while employed pursuant to this Agreement,
Executive will be provided with confidential information of Company; specialized
training on how to perform his duties; and contact with the Company's customers
and potential customers.
(a) Non-Competition During Employment. Executive agrees that during
the Basic Term and the Consulting Period, he will not compete with the Company
by engaging in the conception, design, development, production, marketing, or
servicing of any product or service that is substantially similar to the
products or services which the Company provides, and that he will not work for,
in any capacity, assist, or become affiliated with as an owner, partner, etc.,
either directly or indirectly, any individual or business which offers or
performs services, or offers or provides products substantially similar to the
services and products provided by Company, provided, Executive shall not be
prevented from owning no more than 2% of any Company whose stock is publicly
traded.
8
<PAGE>
(b) Conflicts of Interest. Executive agrees that during the Basic
Term and the Consulting Period, he will not engage, either directly or
indirectly, in any activity (a "Conflict of Interest") which might adversely
affect the Company or its affiliates, including ownership of a material interest
in any supplier, contractor, distributor, subcontractor, customer or other
entity with which the Company does business or accepting any material payment,
service, loan, gift, trip, entertainment, or other favor from a supplier,
contractor, distributor, subcontractor, customer or other entity with which the
Company does business, and that Executive will promptly inform the President of
the Company as to each offer received by Executive to engage in any such
activity. Executive further agrees to disclose to the Company any other facts of
which Executive becomes aware which in Executive's good faith judgment could
reasonably be expected to involve or give rise to a Conflict of Interest or
potential Conflict of Interest.
(c) Non-Competition After Termination. Executive agrees that
Executive shall not, at any time during the period of two (2) years after the
later of termination of the Basic Term or the Consulting Period for any reason,
within any of the markets in which the Company has sold products or services or
formulated a plan to sell products or services into a market during the last
twelve (12) months of Executive's employ or which the Company enters into within
three (3) months thereafter, engage in or contribute Executive's knowledge to
any work which is competitive with or similar to a product, process, apparatus,
service, or development on which Executive worked or with respect to which
Executive had access to Confidential Information while employed by the Company.
Following the expiration of said two (2) year period, Executive shall continue
to be obligated under the Confidential Information Paragraph of this Agreement
not to use or to disclose Confidential Information of the Company so long as it
shall not be publicly available. It is understood that the geographical area set
forth in this covenant is divisible so that if this clause is invalid or
unenforceable in an included geographic area, that area is severable and the
clause remains in effect for the remaining included geographic areas in which
the clause is valid.
(d) Confidential Information. Executive further agrees that he will
not, except as the Company may otherwise consent or direct in writing, reveal or
disclose, sell, use, lecture upon, publish or otherwise disclose to any third
party any Confidential Information or proprietary information of the Company, or
authorize anyone else to do these things at any time either during or subsequent
to his employment with the Company. This Section shall continue in full force
and effect after termination of Executive's employment and after the termination
of this Agreement. Executive's obligations under this Paragraph with respect to
any specific Confidential Information and proprietary information shall cease
when that specific portion of the Confidential Information and proprietary
information becomes publicly known, in its entirety and without combining
portions of such information obtained separately. It is understood that such
Confidential Information and proprietary information of the Company include
matters that Executive conceives or develops, as well as matters Executive
learns from other employees of Company. Confidential Information is defined to
include information: (1) disclosed to or known by the Executive as a consequence
of or through his employment with the Company; (2) not generally known outside
the Company; and (3) which relates to any aspect of the Company or its business,
finances, operation plans, budgets, research, or strategic development.
"Confidential Information" includes, but is not limited to the Company's trade
secrets, proprietary information, financial documents, long range plans,
customer
9
<PAGE>
lists, employer compensation, marketing strategy, data bases, costing data,
computer software developed by the Company, investments made by the Company, and
any information provided to the Company by a third party under restrictions
against disclosure or use by the Company or others.
(e) Return of Documents, Equipment, Etc. All writings, records, and
other documents and things comprising, containing, describing, discussing,
explaining, or evidencing any Confidential Information, and all equipment,
components, parts, tools, and the like in Executive's custody or possession that
have been obtained or prepared in the course of Executive's employment with the
Company shall be the exclusive property of the Company, shall not be copied
and/or removed from the premises of the Company, except in pursuit of the
business of the Company, and shall be delivered to the Company, without
Executive retaining any copies, upon notification of the termination of
Executive's employment or at any other time requested by the Company. The
Company shall have the right to retain, access, and inspect all property of
Executive of any kind in the office, work area, and on the premises of the
Company upon termination of Executive's employment and at any time during
employment by the Company to ensure compliance with the terms of this Agreement.
(f) Reaffirm Obligations. Upon termination of his employment with
the Company, Executive, if requested by Company, shall reaffirm in writing
Executive's recognition of the importance of maintaining the confidentiality of
the Company's Confidential Information and proprietary information, and reaffirm
any other obligations set forth in this Agreement.
(g) Prior Disclosure. Executive represents and warrants that he has
not used or disclosed any Confidential Information he may have obtained from
Company prior to signing this Agreement, in any way inconsistent with the
provisions of this Agreement.
(h) Confidential Information of Prior Companies. Executive will not
disclose or use during the period of his employment with the Company any
proprietary or Confidential Information or Copyright Works which Executive may
have acquired because of employment with an employer other than the Company or
acquired from any other third party, whether such information is in Executive's
memory or embodied in a writing or other physical form.
(i) Breach. Executive agrees that any breach of Paragraphs .A.5(a)
or (c) above cannot be remedied solely by money damages, and that in addition to
any other remedies Company may have, Company is entitled to obtain injunctive
relief against Executive. Nothing herein, however, shall be construed as
limiting Company's right to pursue any other available remedy at law or in
equity, including recovery of damages and termination of this Agreement and/or
any payments that may be due pursuant to this Agreement.
(j) Right to Enter Agreement. Executive represents and covenants to
Company that he has full power and authority to enter into this Agreement and
that the execution of this Agreement will not breach or constitute a default of
any other agreement or contract to which he is a party or by which he is bound.
10
<PAGE>
(k) Enforceability. The agreements contained in Section .A.5 are
independent of the other agreements contained herein. Accordingly, failure of
the Company to comply with any of its obligations outside of this Paragraph do
not excuse Executive from complying with the agreements contained herein.
(l) Survivability. The agreements contained in Paragraphs
.A.5(c)-(d) shall survive the termination of this Agreement for any reason.
6. Assignment. This Agreement cannot be assigned by Executive. The Company
may assign this Agreement only to a successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and assets of the Company provided such successor expressly agrees in
writing reasonably satisfactory to Executive to assume and perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession and assignment had taken place.
Failure of the Company to obtain such written agreement prior to the
effectiveness of any such succession shall be a material breach of this
Agreement.
7. Binding Agreement. Executive understands that his obligations under
this Agreement are binding upon Executive's heirs, successors, personal
representatives, and legal representatives.
8. Notices. All notices pursuant to this Agreement shall be in writing and
sent certified mail, return receipt requested, addressed as set forth below, or
by delivering the same in person to such party, or by transmission by facsimile
to the number set forth below (which shall not constitute notice). Notice
deposited in the United States Mail, mailed in the manner described hereinabove,
shall be effective upon deposit. Notice given in any other manner shall be
effective only if and when received:
If to Executive: Edward H. Ellis, Jr.
1826 Castlerock
Houston, Texas 77090
Fax: (281) 397-6440
If to Company: HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, Texas 77040
Fax: (713) 462-2401
with a copy (which shall Arthur S. Berner, Esq.
not constitute notice) to: Haynes and Boone, LLP
1000 Louisiana Street,
Suite 4300
Houston, Texas 77002-5012
Fax: (713) 236-5652
11
<PAGE>
9. Waiver. No waiver by either party to this Agreement of any right to
enforce any term or condition of this Agreement, or of any breach hereof, shall
be deemed a waiver of such right in the future or of any other right or remedy
available under this Agreement.
10. Severability. If any provision of this Agreement is determined to be
void, invalid, unenforceable, or against public policy, such provisions shall be
deemed severable from the Agreement, and the remaining provisions of the
Agreement will remain unaffected and in full force and effect.
11. Arbitration. In the event any dispute arises out of Executive's
employment with or by the Company, or separation/termination therefrom, which
cannot be resolved by the Parties to this Agreement, such dispute shall be
submitted to final and binding arbitration. The arbitration shall be conducted
in accordance with the National Rules for the Resolution of Employment Disputes
of the American Arbitration Association ("AAA"). If the Parties cannot agree on
an arbitrator, a list of seven (7) arbitrators will be requested from AAA, and
the arbitrator will be selected using alternate strikes with Executive striking
first. The cost of the arbitration will be shared equally by Executive and
Company ; provided, however, the Company shall promptly reimburse Executive for
all costs and expenses incurred in connection with any dispute in an amount up
to, but not exceeding 20 percent of Executive's base salary unless such
termination was for Cause in which event Executive shall not be entitled to
reimbursement unless and until it is determined he was terminated other than for
Cause. Arbitration of such disputes is mandatory and in lieu of any and all
civil causes of action and lawsuits either party may have against the other
arising out of Executive's employment with Company, or separation therefrom.
Such arbitration shall be held in Houston, Texas.
12. Entire Agreement. The terms and provisions contained herein shall
constitute the entire agreement between the parties with respect to Executive's
employment with Company during the time period covered by this Agreement. This
Agreement replaces and supersedes any and all existing Agreements entered into
between Executive and the Company relating generally to the same subject matter,
if any, and shall be binding upon Executive's heirs, executors, administrators,
or other legal representatives or assigns.
13. Modification of Agreement. This Agreement may not be changed or
modified or released or discharged or abandoned or otherwise terminated, in
whole or in part, except by an instrument in writing signed by the Executive and
an officer or other authorized executive of Company.
14. Understand Agreement. Executive represents and warrants that he has
read and understood each and every provision of this Agreement, and Executive
understands that he has the right to obtain advice from legal counsel of choice,
if necessary and desired, in order to interpret any and all provisions of this
Agreement, and that Executive has freely and voluntarily entered into this
Agreement.
12
<PAGE>
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
16. Jurisdiction and Venue. With respect to any litigation regarding this
Agreement, Executive agrees to venue in the state or federal courts in Harris
County, Texas, and agrees to waive and does hereby waive any defenses and/or
arguments based upon improper venue and/or lack of personal jurisdiction. By
entering into this Agreement, Executive agrees to personal jurisdiction in the
state and federal courts in Harris County, Texas.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
13
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple
copies, effective as of the date first written above.
EXECUTIVE COMPANY
HCC INSURANCE HOLDINGS, INC.
/s/ Edward H. Ellis, Jr. /s/ Stephen L. Way
- ------------------------------------ By: ------------------------------------
EDWARD H. ELLIS, JR. STEPHEN L. WAY,
Chief Executive Officer and
Chairman of the Board
Dated: 4/24/00 Dated: 5/1/00
------------------------------ ----------------------------------
[SIGNATURE PAGE TO ELLIS EMPLOYMENT AGREEMENT]
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 335,320,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,385,000
<MORTGAGE> 0
<REAL-ESTATE> 0
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0
0
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63,356,000
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</TABLE>
