Filed pursuant to Rule 424(b)(5)
Registration No. 333-76122
Registration No. 333-58350
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 22, 2002)
[HCC LOGO]
$125,000,000
HCC INSURANCE HOLDINGS, INC.
1.30% CONVERTIBLE NOTES DUE 2023
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We will pay interest at the rate of 1.30% per year on the notes each April 1
and October 1. The first interest payment will be made on October 1, 2003. The
notes will be unsecured obligations and will rank equally with our existing and
future unsecured senior indebtedness. The notes will mature on April 1, 2023.
Holders may surrender the notes for conversion into shares of our common
stock under the following circumstances:
- if as of the last day of the preceding calendar quarter, the closing sale
price of our common stock for at least 20 consecutive trading days during
the period of 30 consecutive trading days ending on the last trading day
of that quarter is more than 130% of the conversion price per share of
common stock,
- if the notes have been called for redemption,
- if we are party to certain consolidations, mergers or binding share
exchanges, or
- if at any time after December 1, 2003, the notes are rated below "BBB-,"
or are not rated at all, by Standard & Poor's Rating Services.
Upon conversion, we may choose to deliver, in lieu of shares of our common
stock, cash or a combination of cash and shares of our common stock.
Each $1,000 principal amount of notes is convertible into 29.4377 shares of
our common stock, which represents an initial conversion price of $33.97 per
share. The conversion price, and, therefore, the conversion rate, may be
adjusted for certain reasons. The shares of our common stock trade on the New
York Stock Exchange under the symbol "HCC." The last reported sale price of the
shares on March 24, 2003 was $26.13 per share.
Holders may require us to purchase all or a portion of their notes on April
1, 2009, April 1, 2014 and April 1, 2019. We may choose to pay the purchase
price in cash or in shares of our common stock or a combination of cash and
shares of our common stock. In addition, if we have a change in control
occurring on or before April 1, 2009, holders may require us to repurchase all
or a portion of their notes. We may redeem all or a portion of the notes for
cash at any time on or after April 4, 2009 at a cash redemption price equal to
the principal amount of the notes plus accrued and unpaid interest.
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INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
PER NOTE TOTAL
-------- ------------
Public Offering Price 100.00% $125,000,000
Underwriting Discount 2.25% $ 2,812,500
Proceeds to HCC Insurance Holdings, Inc. (before expenses) 97.75% $122,187,500
Interest on the notes will accrue from March 28, 2003, to the day of
delivery.
The underwriters may also purchase up to an additional $18,750,000 aggregate
principal amount of notes within 30 days from the date of this prospectus
supplement to cover over-allotments, if any.
The notes will be ready for delivery in book-entry form only through The
Depository Trust Company on or about March 28, 2003.
------------------
Sole Book-Running Manager
SALOMON SMITH BARNEY
RAYMOND JAMES
WELLS FARGO SECURITIES, LLC
WILLIAM BLAIR & COMPANY
ADVEST, INC.
March 25, 2003
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement............................ S-3
About Forward-Looking Statements............................ S-3
Prospectus Supplement Summary............................... S-4
Summary Financial Data...................................... S-7
Risk Factors................................................ S-10
Use of Proceeds............................................. S-12
Capitalization.............................................. S-12
Market Information.......................................... S-13
Ratio of Earnings to Fixed Charges.......................... S-13
Description of Notes........................................ S-14
Certain U.S. Federal Income Tax Consequences................ S-28
Underwriting................................................ S-33
Certain Legal Matters....................................... S-34
PROSPECTUS
About This Prospectus....................................... 2
The Company................................................. 3
Risk Factors................................................ 6
Use of Proceeds............................................. 11
Ratio of Earnings to Fixed Charges.......................... 11
Description of Our Common Stock............................. 11
Description of Senior Debt Securities and Subordinated Debt
Securities................................................ 13
Description of Warrants..................................... 18
Plan of Distribution........................................ 21
Certain Legal Matters....................................... 21
Experts..................................................... 22
About Forward-Looking Statements............................ 22
Where You Can Find More Information......................... 22
S-2
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of the notes being offered. The second
part, the accompanying prospectus, gives more general information, some of which
may not apply to the notes being offered. A description of our capital stock is
contained in the accompanying prospectus. This prospectus supplement, together
with the documents incorporated by reference in the accompanying prospectus, may
add, update or change information in the accompanying prospectus. If information
in this prospectus supplement or the documents incorporated by reference in the
accompanying prospectus is inconsistent with the accompanying prospectus, this
prospectus supplement or the documents incorporated by reference in the
accompanying prospectus will apply and will supersede the information in the
accompanying prospectus.
Please read and consider all information contained in this prospectus
supplement, the accompanying prospectus and the documents incorporated by
reference in the accompanying prospectus together with the additional
information described under the section entitled "Where You Can Find More
Information" in the accompanying prospectus and the section entitled "Risk
Factors" in each of this prospectus supplement and the accompanying prospectus
before you make an investment decision.
This prospectus supplement and the accompanying prospectus do not
constitute an offer or solicitation by anyone in any jurisdiction in which an
offer or solicitation is not authorized or in which the person making an offer
or solicitation is not qualified to do so, or to anyone to whom it is unlawful
to make an offer or solicitation.
ABOUT FORWARD-LOOKING STATEMENTS
This prospectus supplement contains certain "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created by those laws. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or incorporated
by reference in this prospectus supplement that address activities, events or
developments that we expect or anticipate may occur in the future, including
such things as future capital expenditures, business strategy, competitive
strengths, goals, growth of our business and operations, plans, and references
to future success may be considered forward-looking statements. Also, when we
use words such as "anticipate," "believe," "estimate," "expect," "intend,"
"plan," "probably" or similar expressions, we are making forward-looking
statements.
Many risks and uncertainties may impact the matters addressed in these
forward-looking statements. Many possible events or factors could affect our
future financial results and performance. These could cause our results or
performance to differ materially from those we express in our forward-looking
statements. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, any of these assumptions, and
therefore also the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this prospectus
supplement, our inclusion of this information is not a representation by us or
any other person that our objectives and plans will be achieved. You should
consider these risks and those we set out in the "Risk Factors" section of this
prospectus supplement and the accompanying prospectus before you purchase our
securities.
S-3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement, the accompanying prospectus and the documents incorporated into each
by reference. Because it is a summary, it does not contain all of the
information that you should consider before investing in our securities. You
should read the entire prospectus supplement, the accompanying prospectus and
the documents incorporated by reference carefully, including the section
entitled "Risk Factors" and the financial statements and related notes to those
financial statements included in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference.
THE OFFERING
ISSUER........................ HCC Insurance Holdings, Inc.
NOTES......................... $125,000,000 aggregate principal amount of
1.30% convertible notes due April 1, 2023. We
have also granted the underwriters an option to
purchase up to $18,750,000 aggregate principal
amount of additional notes to cover
over-allotments, if any.
OFFERING PRICE................ 100% of the principal amount of the notes, plus
accrued interest, if any, on the notes.
MATURITY OF NOTES............. April 1, 2023.
INTEREST PAYMENT DATES........ April 1 and October 1 of each year, commencing
on October 1, 2003.
CONVERSION RIGHTS............. For each $1,000 principal amount of notes
surrendered for conversion, a holder will
receive 29.4377 shares of our common stock,
which represents an initial conversion price of
$33.97 per share. The conversion price may be
adjusted for certain reasons. See "Description
of Notes -- Conversion Rights."
Holders may surrender notes for conversion into
shares of our common stock:
- in any calendar quarter, if, as of the last
day of the preceding calendar quarter, the
closing sale price of our common stock for
at least 20 consecutive trading days during
the period of 30 consecutive trading days
ending on the last trading day of that
quarter was more than 130% of the
conversion price per share of our common
stock;
- if the notes have been called for
redemption, the notes may be surrendered
for conversion at any time prior to the
close of business on the second business
day prior to the redemption date,
- if we are party to certain consolidations,
mergers or binding share exchanges as
provided in "Description of Notes --
Conversion Rights," or
- if at any time after December 1, 2003, the
notes are rated below "BBB-," or are not
rated at all, by Standard & Poor's Rating
Services.
The ability to surrender notes for conversion
will expire at the close of business on April
1, 2023, unless they have previously been
redeemed or purchased.
S-4
In all cases upon conversion, we may choose to
deliver, in lieu of shares of our common stock,
cash or a combination of cash and shares of our
common stock.
RANKING....................... The notes will be unsecured and unsubordinated
indebtedness of HCC and will rank on a parity
with HCC's other unsecured and unsubordinated
indebtedness. The notes will not be guaranteed
by any of our subsidiaries, and, accordingly,
the notes will be effectively subordinated to
the liabilities of our subsidiaries, including
trade creditors. The notes do not limit the
ability of our subsidiaries to incur
indebtedness. As of December 31, 2002, our
subsidiaries had liabilities of approximately
$2.6 billion, including guarantees of our
indebtedness.
SINKING FUND.................. None.
REDEMPTION OF NOTES AT OUR
OPTION........................ We may redeem all or a portion of the notes for
cash at any time on or after April 4, 2009, at
a redemption price equal to the principal
amount of the notes plus accrued and unpaid
interest to, but excluding, the redemption
date. See "Description of Notes -- Redemption
of Notes at Our Option."
REPURCHASE OF THE NOTES AT THE
OPTION OF THE HOLDER.......... Holders may require us to repurchase all or a
portion of their notes on April 1, 2009, April
1, 2014 and April 1, 2019, at a repurchase
price equal to the principal amount of the
notes plus accrued and unpaid interest to, but
excluding, the repurchase date. We may choose
to pay the purchase price in cash or in shares
of our common stock or a combination of cash
and common stock. See "Description of
Notes -- Repurchase of Notes at the Option of
Holders."
CHANGE IN CONTROL............. Upon a change in control of HCC occurring on or
before April 1, 2009, each holder may require
us to repurchase all or a portion of the
holder's notes at a price equal to the
principal amount of the notes plus accrued and
unpaid interest to, but excluding, the date of
repurchase. Such repurchase price may be paid
by us in cash or in shares of our common stock
or a combination of cash and common stock. See
"Description of Notes -- Change in Control
Requires Repurchase of Notes by Us at the
Option of the Holder."
EVENTS OF DEFAULT............. If there is an event of default on the notes,
the aggregate principal amount of the notes
plus the accrued and unpaid interest on those
notes may be declared immediately due and
payable. These amounts automatically become due
and payable in certain circumstances. See
"Description of Notes -- Events of Default."
USE OF PROCEEDS............... We intend to use the net proceeds from this
offering to repay indebtedness under our
revolving loan facility, to assist in the
financing of pending and future acquisitions
and strategic investments, and for general
corporate purposes.
DTC ELIGIBILITY............... The notes will be issued in book-entry form and
will be represented by permanent global
certificates deposited with a custodian for and
registered in the name of a nominee of The
S-5
Depository Trust Company in New York, New York.
Beneficial interests in any such securities
will be shown on, and transfers will be
effected only through, records maintained by
DTC and its direct and indirect participants
and any such interest may not be exchanged for
certificated securities, except in limited
circumstances. See "Description of
Notes -- Book-Entry System for Notes."
NEW YORK STOCK EXCHANGE SYMBOL
FOR COMMON STOCK.............. HCC
TRADING....................... We have not applied and do not intend to apply
for the listing of the notes on any securities
exchange.
RECENT DEVELOPMENTS
HCC has entered into a definitive agreement to acquire 2,564,164 shares of
Series A Mandatory Convertible Preferred Stock of Argonaut Group, Inc., a NASDAQ
publicly traded company, for a purchase price of approximately $34.6 million.
The acquisition of the convertible preferred stock is subject to certain
conditions, which may be waived by HCC, including the requirement that Argonaut
sell an aggregate amount of $58 million of such convertible preferred stock. If
all the conditions to closing are either satisfied or waived, the transaction is
expected to close on or about March 31, 2003. The convertible preferred stock is
convertible into common stock of Argonaut at a conversion price, subject to
adjustment in certain circumstances, of $13.50 per share.
S-6
SUMMARY FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
The summary consolidated financial data as of and for the years ended
December 31, 2001, 2000, 1999 and 1998 set forth below have been derived from
our audited consolidated financial statements. The summary consolidated
financial data as of and for the year ended December 31, 2002 are unaudited, but
in the opinion of management include all normal recurring adjustments necessary
for a fair presentation of our financial position and results of operations for
such period. All information contained in this summary should be read in
conjunction with the consolidated financial statements, the related notes and
the section entitled Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in the documents incorporated by
reference.
FOR THE YEARS ENDED DECEMBER 31,(1)
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
STATEMENT OF EARNINGS DATA:
REVENUE
Net earned premium............. $ 505,521 $ 342,787 $ 267,647 $ 141,362 $ 143,100
Management fees................ 77,082 61,795 96,058 90,713 74,045
Commission income.............. 41,572 43,412 49,886 58,233 40,804
Net investment income.......... 37,769 39,638 39,836 30,946 29,342
Net realized investment gain
(loss)...................... 453 393 (5,321) (4,164) 845
Other operating income......... 6,985 17,436 25,497 28,475 22,268
---------- ---------- ---------- ---------- ----------
Total revenue.......... 669,382 505,461 473,603 345,565 310,404
EXPENSE
Loss and loss adjustment
expenses.................... 306,491 267,390 198,470 109,650 91,302
Operating expense:
Policy acquisition costs.... 63,274 27,923 23,743 8,177 10,978
Compensation expense........ 80,495 69,762 83,086 79,196 57,227
Provision for
reinsurance(2)............ -- -- -- 43,462 --
Other operating expense..... 47,642 71,119 53,274 53,273 36,558
---------- ---------- ---------- ---------- ----------
Total operating
expense.............. 191,411 168,804 160,103 184,108 104,763
Interest expense............... 8,301 8,884 20,347 12,964 6,021
---------- ---------- ---------- ---------- ----------
Total expense.......... 506,203 445,078 378,920 306,722 202,086
---------- ---------- ---------- ---------- ----------
Earnings before income tax
provision................... 163,179 60,383 94,683 38,843 108,318
Income tax provision........... 57,351 30,186 37,202 12,271 35,208
---------- ---------- ---------- ---------- ----------
Net earnings before
accounting change...... 105,828 30,197 57,481 26,572 73,110
Cumulative effect of accounting
change(3)...................... -- -- (2,013) -- --
---------- ---------- ---------- ---------- ----------
Net earnings.............. $ 105,828 $ 30,197 $ 55,468 $ 26,572 $ 73,110
========== ========== ========== ========== ==========
S-7
FOR THE YEARS ENDED DECEMBER 31,(1)
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
BASIC EARNINGS PER SHARE DATA:
Earnings before accounting
change...................... $ 1.70 $ 0.52 $ 1.13 $ 0.53 $ 1.49
Cumulative effect of accounting
change(3)................... -- -- (0.04) -- --
---------- ---------- ---------- ---------- ----------
Net earnings................... $ 1.70 $ 0.52 $ 1.09 $ 0.53 $ 1.49
========== ========== ========== ========== ==========
Weighted average shares
outstanding................. 62,225 58,321 50,742 50,058 48,917
========== ========== ========== ========== ==========
DILUTED EARNINGS PER SHARE DATA:
Earnings before accounting
change...................... $ 1.68 $ 0.51 $ 1.11 $ 0.52 $ 1.46
Cumulative effect of accounting
change(3)................... -- -- (0.04) -- --
---------- ---------- ---------- ---------- ----------
Net earnings................... $ 1.68 $ 0.51 $ 1.07 $ 0.52 $ 1.46
========== ========== ========== ========== ==========
Weighted average shares
outstanding................. 62,936 59,619 51,619 50,646 49,933
========== ========== ========== ========== ==========
Cash dividend declared, per
share.......................... $ 0.255 $ 0.245 $ 0.22 $ 0.20 $ 0.16
========== ========== ========== ========== ==========
AMOUNTS ADJUSTED FOR NON-
AMORTIZATION OF GOODWILL(4):
Adjusted net earnings............ $ 105,828 $ 41,584 $ 67,302 $ 31,980 $ 74,856
========== ========== ========== ========== ==========
Adjusted basic earnings per
share.......................... $ 1.70 $ 0.71 $ 1.33 $ 0.64 $ 1.53
========== ========== ========== ========== ==========
Adjusted diluted earnings per
share.......................... $ 1.68 $ 0.70 $ 1.30 $ 0.63 $ 1.50
========== ========== ========== ========== ==========
STATUTORY OPERATING DATA AND
RATIOS(5)
Gross written premium.......... $1,163,397 $1,014,833 $ 972,154 $ 576,184 $ 500,962
Net written premium............ 545,475 371,409 283,947 150,261 123,315
Policyholders' surplus......... 523,807 401,393 326,249 315,474 369,401
Gross written premium to
policyholders' surplus...... 222.1% 252.8% 298.0% 182.6% 135.6%
Net written premium to
policyholders' surplus...... 104.1% 92.5% 87.0% 47.6% 33.4%
Loss ratio..................... 62.0% 78.0% 71.1% 107.1% 67.2%
Expense ratio.................. 23.9% 23.8% 27.0% 22.8% 15.7%
---------- ---------- ---------- ---------- ----------
Combined ratio................. 85.9% 101.8% 98.1% 129.9% 82.9%
========== ========== ========== ========== ==========
Combined ratio excluding
effects of the provision for
reinsurance in 1999......... 104.1%
========== ========== ========== ========== ==========
Industry average combined
ratio....................... * 115.9% 110.1% 107.8% 105.6%
S-8
AS OF DECEMBER 31,(1)
---------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- ---------- ----------
(Unaudited)
BALANCE SHEET DATA:
Total investments.............. $1,167,636 $ 885,659 $ 711,113 $ 581,322 $ 525,646
Premium, claims and other
receivables................. 753,527 665,965 609,716 636,671 382,885
Reinsurance recoverables....... 798,934 899,128 789,412 736,485 372,672
Ceded unearned premium......... 164,224 71,140 114,469 133,657 149,568
Goodwill and other
intangibles................. 350,086 328,815 266,015 263,687 88,043
Total assets................... 3,704,151 3,219,120 2,790,755 2,679,737 1,709,643
Loss and LAE payable........... 1,155,290 1,130,748 944,117 871,104 460,511
Unearned premium............... 331,050 179,530 190,550 188,524 201,050
Notes payable.................. 230,027 181,928 212,133 242,546 121,600
Shareholders' equity........... 882,907 763,453 530,930 458,439 440,430
Net tangible book value per
share(6).................... 8.54 7.06 5.13 3.88 7.16
Book value per share(6)........ $ 14.15 $ 12.40 $ 10.29 $ 9.12 $ 8.94
---------------
* not available.
(1) Certain amounts in the 2001, 2000, 1999 and 1998 selected consolidated
financial data have been reclassified to conform to the 2002 presentation.
Such reclassifications had no effect on our net earnings, shareholders'
equity or cash flows.
(2) During 1999, we recorded a provision for reinsurance recoverables in the
amount of $29.5 million relating to one of our reinsurers that was
subsequently placed into liquidation and a $14.0 million loss related to the
commutation of all liabilities with another reinsurer.
(3) During 2000, we changed certain of our revenue recognition methods for our
agencies and intermediaries to agree to guidance contained in Securities and
Exchange Commissions' Staff Accounting Bulletin Number 101 entitled "Revenue
Recognition in Financial Statements". See Note (1) in the Notes to
Consolidated Financial Statements.
(4) During 2002, we adopted Statement of Financial Accounting Standards ("SFAS")
No. 142 entitled "Goodwill and Other Intangible Assets", which required that
goodwill and indefinite-lived intangible assets no longer be amortized. The
adjusted amounts presented are amounts that we would have reported had we
adopted SFAS No. 142 on January 1, 1998.
(5) Ratios based on statutory accounting principles, or SAP, data are not
intended to be a substitute for results of operations on the basis of
generally accepted accounting principles, or GAAP. The differences between
SAP and GAAP are described in Note (14) of our consolidated financial
statements. Including this information on a SAP basis is meaningful and
useful to allow a comparison of our operating results with those of other
companies in the insurance industry. The source of the industry average is
A.M. Best Company. A.M. Best reports on insurer performance on a SAP basis
to provide for more standardized comparisons among individual companies, as
well as to track overall industry performance.
(6) Book value per share is calculated by dividing shares outstanding plus
contractually issuable shares into total shareholders' equity. Net tangible
book value per share uses total shareholders' equity less the sum of
goodwill and other intangible assets as the numerator.
S-9
RISK FACTORS
You should carefully consider the specific risk factors set forth below, as
well as the specific risk factors relating to our business and our industry
contained in the accompanying prospectus, before deciding to invest in the
notes. You should also consider the other information contained or incorporated
by reference in this prospectus supplement and the accompanying prospectus
before deciding to invest in the notes. This prospectus supplement and the
accompanying prospectus contain or incorporate statements that constitute
forward-looking statements regarding, among other matters, our intent, belief or
current expectations about our business. These forward-looking statements are
subject to risks, uncertainties and assumptions.
OUR COMMON STOCK PRICE CONSTANTLY CHANGES, WHICH MAY CAUSE THE TRADING PRICE OF
THE NOTES TO BE HIGHLY VOLATILE.
We expect that the market price of the notes will be significantly affected
by the market price of our common stock. This may result in greater volatility
in the market price of the notes than would be expected of non-convertible debt
securities. The price of our common stock on the New York Stock Exchange
constantly changes. Since January 1, 2000, our stock has traded from a low of
$10.94 to a high of $29.65 per share. Because the notes are convertible into our
common stock, volatility or depressed prices for our common stock could have a
similar effect on the trading price of the notes. Holders who have received
common stock upon conversion will also be subject to the risk of volatility and
depressed prices. Fluctuation in our common stock price may be caused by a
number of factors, some of which are beyond our control, including:
- additions or departures of our key personnel;
- announcements by us of significant contracts, acquisitions or capital
commitments;
- changes in estimates by securities analysts of our financial results;
- changes in market valuations of property and casualty insurance companies
generally;
- quarterly variations in our operating results;
- significant sales of our common stock; and
- acquisitions or losses of our major customers.
In addition, the stock market in recent years has experienced broad price
and volume fluctuations that have often been unrelated to the operating
performance of companies, particularly property and casualty insurance
companies. These broad market fluctuations have also adversely affected, and may
continue to adversely affect, the market price of our common stock.
FUTURE SALES OF OUR COMMON STOCK MAY ADVERSELY AFFECT OUR COMMON STOCK PRICE AND
THEREFORE THE TRADING PRICE OF THE NOTES.
We believe that substantially all of the shares of common stock that will
be outstanding after this offering and shares of common stock issued in the
future upon the exercise of outstanding options and the conversion of other
outstanding convertible notes will be freely tradable under the federal
securities laws following this offering, subject to certain limitations. These
limitations include vesting provisions in option agreements, restrictions in
lock-up agreements with certain shareholders, and volume and manner-of-sale
restrictions under Rule 144. The future sale of a substantial number of shares
of our common stock into the public market following this offering, or the
perception that such sales could occur, could adversely affect the prevailing
market price of our common stock, which would, in turn, adversely affect the
trading price of the notes.
S-10
IF AN ACTIVE MARKET FOR THE NOTES FAILS TO DEVELOP OR IS NOT SUSTAINED, THE
TRADING PRICE AND LIQUIDITY OF THE NOTES COULD BE MATERIALLY ADVERSELY AFFECTED.
The notes are new securities for which there is currently no market. We do
not intend to apply for listing of the notes on any securities exchange or
automated quotation system. Although the underwriters have advised us that they
currently intend to make a market in the notes after the completion of the
offering, the underwriters are not obligated to do so, and any such market
making activities may be discontinued at any time without notice. We do not know
if any market for the notes will develop, or that any such market will provide
liquidity for holders of the notes. If a market for the notes were to develop,
the notes could trade at prices that may be higher or lower than their initial
offering price depending upon many factors, including prevailing interest rates,
our operating results and the market for similar securities. If an active market
for the notes fails to develop or be sustained, the trading price and liquidity
of the notes could be materially adversely affected.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
IN CONTROL REPURCHASE OPTION OR THE REPURCHASE AT THE OPTION OF THE HOLDER
PROVISION IN THE NOTES.
Upon the occurrence of specific kinds of change in control events occurring
on or before April 1, 2009 and on the April 1, 2009, April 1, 2014 and April 1,
2019 repurchase dates, we may be required to offer to repurchase all of the
outstanding notes. However, it is possible that we will not have sufficient
funds at such time to make the required repurchase of notes in cash or that
restrictions in our credit facilities or other indebtedness will not allow such
repurchases. Under the notes, we may pay the repurchase price described above in
shares of our common stock in cash or a combination of cash and stock. In
addition, important corporate events, such as leveraged recapitalizations that
would increase the level of our indebtedness, would not constitute a "Change in
Control" under the indenture governing the notes. See "Description of
Notes -- Repurchase of Notes at the Option of Holders" and "-- Change in Control
Requires Repurchase of Notes by Us at the Option of the Holder."
AS A HOLDING COMPANY, WE WILL DEPEND ON DISTRIBUTIONS FROM OUR SUBSIDIARIES IN
ORDER TO FULFILL OUR PAYMENT OBLIGATIONS ON THE NOTES.
Substantially all of our operations are conducted through our subsidiaries
and substantially all of our earnings and cash flows are generated by our
subsidiaries. As a result, we will depend on the earnings of our subsidiaries in
order to pay the interest and repay the principal which we owe and to pay cash
dividends to our common shareholders in the future. In addition, we are
dependent on the distribution of our subsidiaries' earnings, loans and other
payments by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. They have no
obligation to pay any amounts due on the notes or to provide us with funds for
our payment obligations, whether by dividends, distributions, loans or other
payments. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries to us is subject to statutory or contractual
restrictions and restrictions contained in our current credit facilities.
Payments to us by our subsidiaries will also be contingent upon our
subsidiaries' earnings and business considerations. Therefore, we may not have
sufficient cash flow to meet our obligations under the notes.
In addition, except to the extent we may be a creditor with recognized
claims against our subsidiaries, the claims of creditors of our subsidiaries
will have priority with respect to the assets and earnings of our subsidiaries
over claims of our direct creditors including holders of the notes.
S-11
USE OF PROCEEDS
The net proceeds to us from the sale of the notes in this offering are
estimated to be approximately $121,687,500 (approximately $140,015,625 if the
underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and estimated offering expenses payable by us.
We intend to use approximately $66.0 million of the net proceeds to repay
outstanding indebtedness under our revolving loan facility. The revolving loan
facility to be repaid bears interest at agreed upon rates and matures on
December 17, 2004. As of December 31, 2002, the total amount of debt outstanding
under our revolving loan facility was approximately $53.0 million and the
weighted average interest rate was 3.2%. This revolving loan facility is
collateralized in part by the pledge of our insurance companies' stock and
guaranties entered into by our underwriting agencies and intermediaries.
We intend to use the remainder of the net proceeds to assist in the
financing of pending and future acquisitions and strategic investments and for
general corporate purposes.
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 2002:
- on an actual basis; and
- on an as-adjusted basis to give effect to:
- our sale of $125.0 million aggregate principal amount of notes in this
offering; and
- the repayment of our remaining indebtedness under our bank facility with
a portion of the net proceeds from the sale of notes in this offering.
AS OF DECEMBER 31, 2002
------------------------
AS
ACTUAL ADJUSTED(1)
---------- -----------
(IN THOUSANDS)
2% Convertible notes........................................ $ 172,451 $ 172,451
Bank facility............................................... 53,000 --
Notes offered hereby........................................ -- 125,000
Other debt.................................................. 4,576 4,576
---------- ----------
Total debt........................................... 230,027 302,027
---------- ----------
Shareholders' equity
Common Stock, $1.00 par value 250,000 shares authorized;
62,358 shares issued and outstanding(2)................ 62,358 62,358
Additional paid-in capital................................ 416,406 416,406
Retained earnings......................................... 383,378 383,378
Accumulated other comprehensive income.................... 20,765 20,765
---------- ----------
Total shareholders' equity........................... 882,907 882,907
---------- ----------
Total capitalization................................. $1,112,934 $1,184,934
========== ==========
---------------
(1) Assumes no exercise of the over-allotment option. If the over-allotment
option is exercised, notes offered hereby would be $143.8 million and total
debt would be $320.8 million.
(2) Excluding 7.3 million shares of our common stock reserved for issuance upon
the exercise of options to purchase shares of our common stock, of which
options to purchase 6.4 million shares have been granted and 0.9 million
shares are available for future grant and excluding 5.4 million shares
reserved for possible conversion of the 2.00% convertible notes.
S-12
MARKET INFORMATION
PRICE RANGE OF COMMON STOCK
Our common stock trades on the New York Stock Exchange under the ticker
symbol "HCC."
The intra-day high and low sale prices for quarterly periods during the
period January 1, 2001 through March 24, 2003, as reported by the New York Stock
Exchange and the dividends declared were as follows:
HIGH LOW DIVIDENDS
------ ------ ---------
2003:
First Quarter (through March 24, 2003).................... $26.46 $22.30 $0.065
2002
Fourth Quarter............................................ 25.70 22.37 0.065
Third Quarter............................................. 26.60 19.11 0.065
Second Quarter............................................ 28.50 24.70 0.0625
First Quarter............................................. 28.95 24.90 0.0625
2001:
Fourth Quarter............................................ 29.20 25.15 0.0625
Third Quarter............................................. 26.67 21.21 0.0625
Second Quarter............................................ 29.65 23.26 0.06
First Quarter............................................. 26.88 20.50 0.06
On March 24, 2003, the last reported sale price of our common stock as
reported by the New York Stock Exchange was $26.13 per share.
SHAREHOLDERS
We have one class of authorized capital stock, consisting of 250,000,000
shares of common stock, par value $1.00 per share. As of March 14, 2003, there
were approximately 62.7 million shares of issued and outstanding common stock
held by approximately 975 shareholders of record. We believe there are in excess
of 15,000 beneficial owners.
DIVIDEND POLICY
Beginning in June 1996, we announced a planned quarterly program of paying
cash dividends to shareholders. We paid a cash dividend of $0.02 per share in
July 1996 and in each succeeding quarter through the first quarter of 1997. We
have increased the quarterly cash dividend in each year. Beginning in October
2002, our quarterly dividend was $0.065 per share. Our Board of Directors may
review our dividend policy from time to time, and any determination with respect
to future dividends will be made in light of regulatory and other conditions at
that time, including our earnings, financial condition, capital requirements,
loan covenants and other related factors. Under the terms of our revolving loan
facility, we are prohibited from paying dividends in excess of an agreed upon
maximum amount in any fiscal year. That limitation should not affect our ability
to pay dividends in a manner consistent with our past practice and current
expectations.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of our earnings to fixed charges for the periods indicated are as
follows:
2002 2001 2000 1999 1998
----- ---- ---- ---- -----
Ratio of earnings to fixed charges................ 15.69 6.36 5.13 3.58 15.42
S-13
For these ratios, earnings consist of income before interest expense,
including amortization of capitalized expenses related to indebtedness, an
estimated interest factor (33.3%) of rental expense and income taxes. Fixed
charges consist of interest expense, including amounts capitalized and
amortization of capitalized expenses related to indebtedness, and an estimated
interest factor (33.3%) of rental expense.
DESCRIPTION OF NOTES
We will issue the notes under an indenture dated August 23, 2001, as
supplemented by a supplemental indenture, between us and Wachovia Bank, National
Association (as successor to First Union National Bank), as trustee, referred to
in this prospectus supplement and in the accompanying prospectus as the "senior
indenture." The following description of the particular terms of the notes
offered in this prospectus supplement, referred to in the accompanying
prospectus as "senior debt securities," supplements and, to the extent they are
inconsistent with each other, replaces the description of the general terms and
provisions of the senior debt securities set forth in the accompanying
prospectus. In this section of the prospectus supplement when we use the terms
"HCC," "we," "our," or "us," we are referring only to HCC Insurance Holdings,
Inc. and not any of our subsidiaries.
GENERAL
The notes will be limited to $125,000,000 aggregate principal amount
($143,750,000 aggregate principal amount if the underwriters exercise their
over-allotment option in full). The notes will mature on April 1, 2023.
Interest on the notes accrues at a rate of 1.30% per annum from the date of
original issuance, payable semiannually on April 1 and October 1 of each year
or, if such day is not a business day, on the next succeeding business day,
commencing on October 1, 2003. We will make each interest payment in cash to the
holders of record of the notes on each March 15 and September 15 immediately
preceding the interest payment date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The notes will be payable both as to principal and interest on
presentation, if in certificated form, at the offices or agencies we maintain
for such purpose within the city and state of New York or, at our option,
payment of interest may be made by check mailed or delivered to the holders of
the notes at their respective addresses set forth in the register of holders of
notes or by wire transfer of immediately available funds to an account
previously specified in writing by the holder to us and the trustee.
However, we will pay interest by wire transfer of immediately available
funds at the election of any holder with an aggregate principal amount of notes
in excess of $2.0 million. Payments to The Depository Trust Company, New York,
New York, which we refer to as DTC, will be made by wire transfer of immediately
available funds to the account of DTC or its nominee.
We may not reissue a note that has matured or been converted, repurchased
by us at the option of a holder, redeemed or otherwise cancelled.
Holders may present notes for conversion at the office of the conversion
agent, which agent will initially be the trustee. Holders may present notes for
registration of transfer at the office of the trustee.
The notes are not subject to defeasance or covenant defeasance.
S-14
RANKING OF NOTES
The notes will be unsecured and unsubordinated indebtedness of ours and
will rank on a parity with our other unsecured and unsubordinated indebtedness.
The notes will not be guaranteed by any of our subsidiaries, and, accordingly,
the notes will be effectively subordinated to the claims of our subsidiaries'
creditors, including trade creditors. The notes do not limit the ability of our
subsidiaries to incur indebtedness. As of December 31, 2002, our subsidiaries
had liabilities of approximately $2.6 billion, including guarantees of our
indebtedness.
The notes will not be secured by any of our assets. The notes do not
restrict us and our subsidiaries from incurring additional secured and unsecured
debt. As of December 31, 2002, we and our subsidiaries had outstanding secured
debt of $67.3 million, including letters of credit, which does not include
capital leases. Holders of secured debt would have claims on the assets securing
such indebtedness prior to the holders of the notes.
CONVERSION RIGHTS
The initial conversion price is $33.97 per share of our common stock, which
is equivalent to a conversion rate of 29.4377 shares for each $1,000 principal
amount of notes. The number of shares of common stock issuable upon conversion
of a note will equal the principal amount of a note or portion thereof
surrendered for conversion divided by the conversion price on the date of
conversion. The conversion price and, therefore the conversion rate, is subject
to adjustment upon the occurrence of certain events described below. Upon
conversion, a holder of a note otherwise entitled to a fractional share will
receive cash equal to the same fraction of the then current market price of our
shares of common stock on the trading day immediately preceding the date of
conversion. Holders may convert their notes in part so long as that part is
$1,000 principal amount or an integral multiple of $1,000.
If we choose to satisfy all or any portion of our obligation (the
"conversion obligation") at any time other than upon notice of redemption or at
maturity in cash, we will notify you through the trustee of the dollar amount to
be satisfied in cash (which must be expressed either as 100% of the conversion
obligation or as a fixed dollar amount) at any time on or before the date that
is two business days following receipt of your notice of conversion ("cash
settlement notice period"). If we timely elect to pay cash for any portion of
the shares of common stock otherwise issuable to you, you may retract the
conversion notice at any time during the two business day period beginning on
the day after the final day of the cash settlement notice period ("conversion
retraction period"); no such retraction can be made (and a conversion notice
shall be irrevocable) if we do not elect to deliver cash in lieu of shares of
common stock (other than cash in lieu of fractional shares). Unless the
conversion notice has been retracted, settlement (in cash and/or shares) will
occur on the business day following the final day of the 10 trading day period
beginning on the day after the final day of the conversion retraction period
(the "cash settlement averaging period"). Settlement amounts will be computed as
follows:
- If we elect to satisfy the entire conversion obligation in shares of our
common stock, we will deliver to you a number of shares of our common
stock equal to (i) the aggregate principal amount of notes to be
converted divided by 1,000 multiplied by (ii) the conversion rate.
- If we elect to satisfy the entire conversion obligation in cash, we will
deliver to you cash in an amount equal to the product of:
- a number equal to (i) the aggregate principal amount of notes to be
converted divided by 1,000 multiplied by (ii) the conversion rate, and
- the average closing price of shares of our common stock during the cash
settlement averaging period on the New York Stock Exchange.
- If we elect to satisfy a fixed portion (other than 100%) of the
conversion obligation in cash, we will deliver to you such cash amount
("cash amount") and a number of shares equal to the excess, if any, of
the number of shares of common stock calculated as set forth in the first
bullet of this
S-15
paragraph over the number of shares equal to the sum, for each day of the
cash settlement averaging period, of (x) the pro rated portion of the
cash amount for such day divided by (y) the closing price of shares of
our common stock on such day on the New York Stock Exchange.
Holders may surrender notes for conversion into at our option shares of
common stock, cash or a combination thereof in any calendar quarter, if, as of
the last day of the preceding calendar quarter, the closing sale price of our
common stock for at least 20 consecutive trading days during the period of 30
consecutive trading days ending on the last trading day of that preceding
quarter was more than 130% of the conversion price per share of common stock on
the last trading day of that quarter. The conversion agent will, on our behalf,
determine at the end of each quarter if the notes are convertible and notify us
and the trustee. If the notes are convertible as of the end of a quarter, we
will issue a press release indicating that the notes are convertible during the
subsequent quarter and will publish such information on our website.
Even if the condition in the preceding paragraph has not been satisfied,
holders may surrender notes or a portion thereof for conversion in the following
circumstances:
- if the notes or a portion thereof have been called for redemption, the
notes may be surrendered for conversion at any time prior to the close of
business on the second business day prior to the redemption date unless
we default on payment of the redemption price, in which case the
conversion right shall terminate at the close of business on the date
such default is cured and such payment is made;
- if we are party to a consolidation, merger or binding share exchange
pursuant to which the shares of our common stock would be converted into
cash, securities or other property, the notes may be surrendered for
conversion at any time from and after the date which is 15 days prior to
the anticipated effective date of the transaction until 15 days after the
actual date of such transaction. At the effective time of such
transaction, the right to convert a note into shares of common stock will
be changed into a right to convert it into the kind and amount of cash,
securities or other property of HCC or another person which the holder
would have received if the holder had converted the holder's note
immediately prior to the effective time of the transaction. If the
transaction also constitutes a change in control occurring prior to April
1, 2009, the holder will be able to require us to purchase all or a
portion of such holder's notes as described under "-- Change in Control
Requires repurchase of Notes by Us at the Option of the Holder"; or
- if, at any time after December 1, 2003, the notes are rated below "BBB-,"
or the assigned rating is suspended or withdrawn by Standard & Poor's
Rating Services or such rating agency is not then rating the notes.
A note for which a holder has delivered a repurchase notice or a change in
control repurchase notice, as described below, requiring us to repurchase the
note, may be surrendered for conversion only if the notice is withdrawn in
accordance with the senior indenture, unless we default in payment of the
applicable repurchase price or change of control repurchase price.
Except as noted below, we will not make any cash payment or other
adjustment on account of any dividends on common stock issued on the conversion
or on account of any interest that accrues from the interest payment date
immediately preceding the date of conversion up to the date of conversion on
notes surrendered for conversion. Rather, our obligation to pay such interest
will be deemed satisfied in full through the issuance of common stock upon
conversion. If any notes are converted during the period after any record date
for the payment of an installment of interest but before the next interest
payment date, interest on those notes will be paid on the next interest payment
date, notwithstanding such conversion, to the holder of record of those notes on
the record date. However, any notes that are delivered to us for conversion
after any record date but before the next interest payment date must be
accompanied by a payment equal to the interest payable on such interest payment
date on the principal amount of notes being converted, except in the following
circumstances:
- if, during that period between a record date and the next interest
payment date, a conversion occurs on or after the date that we have
issued a redemption notice and prior to the date of redemption, or
S-16
- if a repurchase notice or change of control repurchase notice delivered
by the holder has not been withdrawn and the conversion rights of the
holder would terminate between the period between such record date and
the interest payment date, or
- if, at the time of conversion, we are in default on the payment of
interest on the notes.
A certificate for the number of full shares of common stock into which any
note is converted, or, at our election, the equivalent cash amount, together
with any cash payment for fractional shares and for accrued interest on the
notes, will be delivered through the conversion agent as soon as practicable
following the conversion date. For a discussion of the tax treatment of a holder
receiving shares of common stock upon surrendering notes for conversion, see
"Certain U.S. Federal Income Tax Consequences -- U.S. Holders."
The conversion price will be adjusted for:
(1) the issuance of our common stock as a dividend or distribution to
all holders of shares of our common stock;
(2) subdivisions and combinations of our common stock;
(3) the issuance to all holders of shares of our common stock of
certain rights or warrants to purchase our common stock (or securities
convertible into our common stock) at less than (or having a conversion
price per share less than) the market price of our common stock on the
business day immediately preceding the date of announcement of the
issuance;
(4) distributions to all holders of shares of our common stock of
cash, shares of our capital stock, evidences of our indebtedness or other
assets, including securities but excluding:
- common stock referred to in item (1) above,
- rights or warrants referred to in item (3) above,
- any dividends or distributions of stock, securities or other property
or assets in connection with a reclassification, change, merger,
consolidation, statutory share exchange, combination, sale or
conveyance resulting in a change in the conversion consideration
pursuant to the third succeeding paragraph, and
- any dividends or distributions paid exclusively in cash;
(5) distributions consisting exclusively of cash to all holders of
shares of our common stock to the extent that those distributions, combined
together with:
- all other all-cash distributions made within the preceding 12 months
for which no adjustment has been made, plus
- any cash and the fair market value of other consideration paid for in
any tender offers by us or any of our subsidiaries for our common
stock expiring within the preceding 12 months for which no adjustment
has been made,
exceeds 10% of our market capitalization on the record date for that
distribution. Our "market capitalization," as of any date, is the product
of the sale price of our common stock on such date times the number of
shares of our common stock then outstanding; and
(6) purchases of our common stock pursuant to a tender offer made by
us or any of our subsidiaries to the extent that the same involves an
aggregate consideration that, together with:
- any cash and the fair market value of any other consideration paid in
any other tender offer by us or any of our subsidiaries for our common
stock expiring within the 12 months preceding the tender offer for
which no adjustment has been made, plus
- the aggregate amount of any all-cash distributions referred to in the
immediately preceding bullet point to all holders of our common stock
within 12 months preceding the expiration of the tender offer for
which no adjustments have been made,
exceeds 10% of our market capitalization on the expiration of the tender
offer.
S-17
We will not make any adjustment if holders of notes may participate in the
transactions described above or in certain other cases. In cases:
- where the fair market value of assets, debt securities or certain rights,
warrants or options to purchase our securities that are applicable to one
share of common stock and are distributed to shareholders equals or
exceeds the average sale price of our common stock over a specified
period, or
- in which the average sale price of our common stock over a specified
period exceeds the fair market value of the assets, debt securities or
rights, warrants or options so distributed by less than $1.00,
rather than being entitled to an adjustment in the conversion price, the holder
of a note will be entitled to receive upon conversion, in addition to the shares
of common stock, the kind and amount of assets, debt securities or rights,
warrants or options comprising the distribution that the holder would have
received if the holder had converted its notes immediately prior to the record
date for determining the shareholders entitled to receive the distribution.
We will not make an adjustment in the conversion price unless the
adjustment would require a change of at least 1% in the conversion price in
effect at that time. We will carry forward and take into account in any
subsequent adjustment any adjustment that would otherwise be required to be
made.
If we:
- reclassify or change our common stock (other than changes resulting from
a subdivision or combination), or
- consolidate or combine with or merge into or are a party to a binding
share exchange with any person or sell or convey to another person all or
substantially all of our property and assets,
and the holders of our common stock receive (or the common stock is converted
into) stock, other securities or other property or assets (including cash or any
combination thereof) with respect to or in exchange for their common stock,
then, at the effective time of the transaction the holders of the notes may
convert the notes into the consideration they would have received if they had
converted their notes immediately prior to the reclassification, change,
consolidation, combination, merger sale or conveyance. We may not become a party
to any such transaction unless its terms are consistent with the foregoing.
In the event that we distribute shares of capital stock of a subsidiary of
ours, the conversion price will be adjusted, if at all, based on the market
value of the subsidiary stock so distributed relative to the market value of our
common stock, in each case over a measurement period following the distribution.
In the event we elect to make a distribution described in paragraphs
numbered (3) or (4) above which, in the case of paragraph (4), has a per share
value equal to more than 10% of the closing sale price of our shares of common
stock on the day preceding the declaration date for the distribution, or in the
event of a voluntary or involuntary dissolution, liquidation or winding up,
then, if the notes are otherwise convertible, we will be required to give notice
to the holders of notes at least 20 days' prior to the ex-dividend date for the
distribution and, upon the giving of notice, the notes may be surrendered for
conversion at any time until the close of business on the business day prior to
the ex-dividend date or until we announce that the distribution will not take
place. No adjustment to the conversion price or the ability of a holder of a
note to convert will be made if the holder will otherwise participate in the
distribution without conversion or in certain other cases.
If a taxable distribution to holders of our common stock or other
transaction occurs which results in any adjustment of the conversion price, you
may in certain circumstances be deemed to have received a distribution subject
to United States federal income tax as a dividend. In certain other
circumstances, the absence of an adjustment may result in a taxable dividend to
the holders of our common stock. See "Certain U.S. Federal Income Tax
Consequences -- U.S. Holders."
S-18
To the extent permitted by law, from time to time we may reduce the
conversion price of the notes by any amount for any period. In that case, we
will give at least 20 business days' notice to holders of the reduction. We may
also reduce the conversion price, as our board of directors deems advisable to
avoid or diminish any income tax to holders of our common stock resulting from
any dividend or distribution of stock (or rights to acquire stock) or from any
event treated as such for income tax purposes. Any such reduction, however, will
not be taken into account for purposes of determining whether the closing price
of our common stock exceeds the conversion price by 105% in connection with an
event which would otherwise be a change in control.
REDEMPTION OF NOTES AT OUR OPTION
At any time on or after April 4, 2009, we may redeem the notes, in whole or
in part, on at least 30 but no more than 60 days' notice, at a cash redemption
price equal to the principal amount of the notes plus accrued and unpaid
interest on the notes to (but excluding) the redemption date.
If we redeem less than all of the outstanding notes, the trustee will
select the notes to be redeemed not more than 60 days prior to the redemption
date in integral multiples of $1,000 by any method the trustee shall deem fair
and appropriate. If a portion of your notes is selected for partial redemption
and you convert a portion of the notes, the portion selected for redemption will
be converted. We may not give notice of any redemption if we have defaulted in
payment of interest and the default is continuing.
MANDATORY REDEMPTION
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
REPURCHASE OF NOTES AT THE OPTION OF HOLDERS
You have the right to require us to repurchase the notes on April 1, 2009,
April 1, 2014 and April 1, 2019. We will be required to repurchase any
outstanding note for which you deliver a written repurchase notice to the paying
agent and deliver the note prior to, on or after the repurchase date. This
notice must be delivered during the period beginning at any time from the
opening of business on the date that is 20 business days prior to the repurchase
date until the close of business on the repurchase date. If a repurchase notice
is given and withdrawn during that period, we will not be obligated to
repurchase the notes listed in the notice. Our repurchase obligation will be
subject to certain additional conditions.
We are required to repurchase any such notes at a repurchase price equal to
the principal amount of the notes plus accrued and unpaid interest to (but
excluding) the purchase date. We may, at our option, elect to pay the repurchase
price in cash or shares of our common stock or any combination thereof. For a
discussion of the tax treatment of a note holder receiving cash, shares of our
common stock or any combination thereof, see "Certain U.S. Federal Income Tax
Consequences -- U.S. Holders."
We will be required to give notice on a date not less than 20 business days
prior to each repurchase date to all holders at their addresses shown in the
register of the registrar (and to beneficial owners as required by applicable
law) stating among other things:
- whether we will pay the repurchase price of notes in cash or common stock
or any combination thereof, specifying the percentages of each;
- if we elect to pay in common stock, the method of calculating the market
price of the common stock; and
- the procedures that holders must follow to require us to repurchase their
notes.
Your right to require us to repurchase notes is exercisable by delivering a
written repurchase notice to the paying agent within 20 business days of the
repurchase date. The paying agent will initially be the trustee.
S-19
The repurchase notice must state:
(1) the certificate numbers of the holder's notes to be delivered for
repurchase (or, if your notes are not certificated, your repurchase notice
must comply with appropriate DTC procedures);
(2) the portion of the principal amount of notes to be repurchased,
which must be $1,000 or an integral multiple of $1,000;
(3) that the notes are to be repurchased by us pursuant to the
applicable provisions of the notes and the senior indenture; and
(4) your election, in the event we elect to pay all or a portion of
the repurchase price in shares of our common stock but prove unable to
satisfy the conditions for common stock payment and ultimately have to pay
cash, to:
- withdraw your repurchase notice as to all or a portion of the notes to
which it relates, or
- receive cash in respect of the entire repurchase price for all the
notes or portions of notes described in your repurchase notice.
If you fail to indicate your choice with respect to the election described
in paragraph (4) above, you will be deemed to have elected to receive cash for
the entire repurchase price for all the notes or portions of notes described in
your repurchase notice.
You may withdraw any written repurchase notice by delivering a written
notice of withdrawal to the paying agent prior to the close of business on the
repurchase date. The notice of withdrawal shall state:
- the principal amount of the notes being withdrawn;
- the certificate numbers of the notes being withdrawn (or, if your notes
are not certificated, your withdrawal notice must comply with appropriate
DTC procedures); and
- the principal amount of the notes that remains subject to the repurchase
notice, if any, which must be $1,000 or an integral multiple of $1,000.
If we elect to pay the repurchase price, in whole or in part, in shares of
our common stock, the number of shares of common stock to be delivered by us
shall be equal to the portion of the repurchase price to be paid in common stock
divided by the market price of a share of common stock. We will pay cash based
on the market price for all fractional shares of common stock in the event we
elect to deliver common stock in payment, in whole or in part, of the repurchase
price.
The "market price" of our common stock means the average of the sale prices
of our common stock for the five trading day period ending on the third business
day (if the third business day prior to the applicable repurchase date is a
trading day or, if not, then on the last trading day prior to such third
business day) prior to the applicable purchase date, appropriately adjusted to
take into account the occurrence, during the period commencing on the first of
such trading days during such five trading day period and ending on such
repurchase date, of certain events with respect to the common stock that would
result in an adjustment of the conversion price.
The "sale price" of our common stock on any date means the closing sale
price per share (or if no closing sale price is reported, the average of the bid
and ask prices or, if more than one in either case, the average of the average
bid and the average ask prices) on such date as reported in composite
transactions for the principal United States securities exchange on which our
common stock is traded or, if our common stock is not listed on a United States
national or regional securities exchange, as reported by the Nasdaq System.
Because the market price of the common stock is determined prior to the
applicable purchase date, holders of notes bear the market risk with respect to
the value of the common stock from the date such market price is determined to
the repurchase date. We may pay the repurchase price or any portion of the
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repurchase price in common stock only if the information necessary to calculate
the market price is published in a daily newspaper of national circulation.
Upon determination of the actual number of shares of common stock issuable
in accordance with the foregoing provisions, we will publish such information on
our website at www.hcch.com or in such other public medium as we may determine.
In addition to the above conditions, our right to repurchase notes, in
whole or in part, with shares of common stock is subject to our satisfying
various conditions, including:
- the listing of such shares of common stock on the principal United States
securities exchange on which the common stock is then listed or the
inclusion of such shares in The Nasdaq National Market if the common
stock is then so included;
- the registration of the common stock under the Securities Act of 1933 and
the Securities Exchange Act of 1934, if required;
- qualification or registration of such shares under applicable state
securities law, if necessary, or the availability of an exemption
therefrom; and
- delivery to the trustee of an officer's certificate and an opinion of
counsel, each stating, among other things, that the terms of the issuance
of the common stock are in accordance with the senior indenture and that
the common stock to be issued in payment of the repurchase price has been
duly authorized and, when issued and delivered pursuant to the terms of
the senior indenture, will be validly issued, fully paid and
non-assessable and, to the best of such counsel's knowledge, free from
preemptive rights.
If such conditions are not satisfied with respect to a holder prior to the
close of business on a repurchase date, we will pay the repurchase price of the
notes of such holder entirely in cash. We may not change the form or components
or percentages of components of consideration to be paid for the notes once we
have given the notice that we are required to give to holders of notes, except
as described in the preceding sentence.
Our obligation to pay the repurchase price for a note for which a
repurchase notice has been delivered and not validly withdrawn is conditioned
upon book-entry transfer or physical delivery of the note, together with
necessary endorsements, to the paying agent at any time after delivery of the
repurchase notice. We will cause the purchase price for the note to be made
promptly following the later of the repurchase date or the time of book-entry
transfer or physical delivery of the note.
If the paying agent holds money or securities sufficient to pay the
repurchase price of a note on the business day following the repurchase date in
accordance with the senior indenture, then, immediately after the repurchase
date, the note will cease to be outstanding and interest will cease to accrue,
whether or not book-entry transfer is made or the note is delivered to the
paying agent. Thereafter, all other rights of the holder shall terminate, other
than the right to receive the repurchase price upon delivery of the note.
Our ability to repurchase notes with cash may be limited by the terms of
our then existing indebtedness, financial agreements or financial resources.
We may not repurchase any notes at the option of holders if an event of
default with respect to the notes has occurred and is continuing, other than a
default in the payment of the repurchase price with respect to such notes.
In connection with any repurchase offer, we will comply with the provisions
of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Securities
Exchange Act of 1934 which may then be applicable. We will file a Schedule TO or
any other required schedule under the Securities Exchange Act of 1934.
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CHANGE IN CONTROL REQUIRES REPURCHASE OF NOTES BY US AT THE OPTION OF THE
HOLDER
In the event of a change in control occurring on or prior to April 1, 2009,
you will have the right, at your option and subject to the terms and conditions
of the senior indenture, to require us to repurchase all or any portion of the
principal amount of your notes not previously called for redemption, in integral
multiples of $1,000, at a price equal to the aggregate principal amount of the
notes to be repurchased, together with interest accrued to, but excluding, the
repurchase date. We have the option to pay you in cash or in shares of our
common stock, valued at the then market price, or a combination of cash and
common stock. We will be required to repurchase the notes no later than 40
business days after the occurrence of such change in control. We refer to this
date in this prospectus supplement as the "change in control purchase date."
Within 15 business days after the occurrence of a change in control, we
must mail to the trustee, the paying agent and to all holders of notes at their
addresses shown in the register of the registrar (and to beneficial owners as
required by applicable law) a notice regarding the change in control, which
notice must state, among other things:
- the events causing a change in control;
- the date of such change in control;
- the last date on which a holder may exercise the repurchase right;
- the change in control repurchase price;
- the change in control repurchase date;
- the name and address of the paying agent and the conversion agent;
- the conversion price and any adjustments to the conversion price;
- that notes with respect to which a change in control repurchase notice is
given by the holder may be converted, if otherwise convertible, only if
the change in control repurchase notice has not been withdrawn in
accordance with the terms of the senior indenture;
- the procedures that holders must follow to exercise these rights;
- whether we will pay the repurchase price of notes in cash or common stock
or any combination thereof, specifying the percentages of each; and
- if we elect to pay in common stock, the method of calculating the market
price of the common stock.
To exercise this right, you must deliver a written notice so as to be
received by the paying agent no later than the close of business on the change
in control repurchase date. The required repurchase notice upon a change in
control must state:
- the certificate numbers of the notes to be delivered by the holder (or,
if the notes are not certificated, your repurchase notice must comply
with appropriate DTC procedures);
- the portion of the principal amount of notes to be repurchased, which
portion must be $1,000 or an integral multiple of $1,000; and
- that we are to repurchase such notes pursuant to the applicable
provisions of the senior indenture.
You may withdraw any change in control repurchase notice by delivering to
the paying agent a written notice of withdrawal prior to the close of business
on the change in control purchase date.
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The notice of withdrawal must state:
- the principal amount of the notes being withdrawn;
- the certificate numbers of the notes being withdrawn (or, if the notes
are not certificated, your withdrawal notice must comply with appropriate
DTC procedures); and
- the principal amount of the notes that remain subject to a change in
control repurchase notice.
Our obligation to pay the change in control repurchase price for a note for
which a change in control repurchase notice has been delivered and not validly
withdrawn is conditioned upon delivery of the note, together with necessary
endorsements, to the paying agent at any time after the delivery of such change
in control repurchase notice. We will cause the change in control repurchase
price for such note to be paid promptly following the later of the change in
control repurchase date or the time of delivery of such note.
If the paying agent holds money sufficient to pay the change in control
repurchase price of the note on the change in control repurchase date in
accordance with the terms of the senior indenture, then, immediately after the
change in control repurchase date, interest on such note will cease to accrue,
whether or not the note is delivered to the paying agent. Thereafter, all other
rights of the holder shall terminate, other than the right to receive the change
in control repurchase price upon delivery of the note.
Under the senior indenture, a "change in control" is deemed to have
occurred at such time as:
- any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934), other than HCC or our
subsidiaries, is or becomes the direct or indirect beneficial owner (as
defined in Rule 13d-3 of the Securities Exchange Act of 1934) of 50% or
more of the total voting power of all shares of our common stock entitled
to vote generally in elections of directors; or
- the Company consolidates with or merges with or into another person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any person, or any person
consolidates with or merges with or into the Company, pursuant to a
transaction in which the Company's voting shares are converted into or
exchanged for cash, securities or other property, except a transaction
where the Company's voting shares are converted into or exchanged for
voting shares of the surviving or transferee corporation (other than
voting shares that mature or are redeemable for cash or debt securities
prior to the maturity date of the notes) constituting a majority of the
outstanding voting shares of the surviving or transferee corporation
immediately after giving effect to their issuance; or
- at any time during any consecutive two-year period, the following persons
cease for any reason to constitute a majority of the board of directors
of the Company:
- individuals who at the beginning of such period constituted the board of
directors of HCC; or
- any new directors whose election by the board of directors of HCC or
whose nomination for election by our shareholders was approved by a vote
of at least a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved; or
- we are liquidated or dissolved or adopt a plan of liquidation.
However, a change of control will not be deemed to have occurred if either:
- the closing price per share of our common stock for any five trading days
within the period of ten consecutive trading days ending immediately
after the later of the change of control or the public announcement of
the change of control, in the case of a change of control under the first
bullet point in the preceding paragraph, or the period of ten consecutive
trading days ending immediately before the change of control, in the case
of a change of control under the second and third bullet points in the
preceding paragraph, equals or exceeds 105% of the conversion price of
the notes in effect on each of those trading days; or
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- all of the consideration, excluding cash payments for fractional shares
and cash payments made pursuant to dissenters' appraisal rights, in a
merger or consolidation otherwise constituting a change in control under
the first and second bullet points in the preceding paragraph above
consists of shares of common stock traded on a national securities
exchange or quoted on The Nasdaq National Market, or will be so traded or
quoted immediately following such merger or consolidation, and as a
result of such merger or consolidation the notes become convertible
solely into such common stock.
The senior indenture does not permit our board of directors to waive our
obligation to repurchase notes at the option of holders in the event of a change
in control.
In connection with any repurchase offer in the event of a change in
control, we will:
- comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender
offer rules under the Securities Exchange Act of 1934 which may then be
applicable; and
- file Schedule TO or any other required schedule under the Securities
Exchange Act of 1934.
The change in control repurchase feature of the notes may in certain
circumstances make more difficult or discourage a takeover of HCC. The change in
control repurchase feature, however, is not the result of our knowledge of any
specific effort:
- to accumulate shares of our common stock;
- to obtain control of us by means of a merger, tender offer, solicitation
or otherwise; or
- by management to adopt a series of anti-takeover provisions.
Instead, the change in control repurchase feature is a standard term
contained in other notes offerings that have been marketed by the underwriters.
The terms of the change in control repurchase feature resulted from negotiations
between the underwriters and us.
We could, in the future, enter into certain transactions, including certain
recapitalizations, that would not constitute a change in control with respect to
the change in control repurchase feature of the notes but which would increase
the amount of our (or our subsidiaries') outstanding indebtedness.
We may not repurchase notes at the option of holders upon a change in
control if there has occurred and is continuing an event of default with respect
to the notes, other than a default in the payment of the change in control
repurchase price with respect to the notes.
EVENTS OF DEFAULT
In addition to the events of default set forth in the prospectus and any
other events of default set forth in the senior indenture, with respect to the
notes, each of the following events is defined as an "event of default":
- default by us in the performance, or breach, of any other covenant or
warranty in the notes or the senior indenture (other than a default in
the performance or breach of a covenant or warranty that is otherwise
specifically addressed) with respect to the notes for 60 days after
written notice to us by the trustee or to us and the trustee by the
holders of not less than 25% in aggregate principal amount of the notes;
- any event of default under any mortgage, senior indenture or other
instrument of HCC under which any indebtedness for borrowed money in an
aggregate principal amount exceeding $35,000,000 shall become due and
payable prior to the date upon which it is otherwise due and payable, if
such acceleration is not rescinded or annulled within 30 days after
written notice provided in accordance with the senior indenture;
- default in payment of the principal amount, redemption price, repurchase
price, or change in control repurchase price with respect to any note
when it becomes due and payable;
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- default in payment of any accrued and unpaid interest which default
continues for 30 days; and
- failure by us to convert any portion of the principal amount of a note in
accordance with its terms following exercise by the holder of the note of
the right to convert the note.
If there is an event of default on the notes, the aggregate principal
amount of the notes then outstanding may be declared immediately due and
payable.
If an event of default shall have happened and be continuing, either the
trustee or the holders of not less than 25% in aggregate principal amount of the
notes then outstanding may declare the principal amount of the notes plus the
accrued but unpaid interest on the notes through the date of such declaration,
to be immediately due and payable. In the case of certain events of bankruptcy
or our insolvency, the aggregate principal amount of the notes then outstanding
plus the accrued but unpaid interest thereon through the occurrence of such
event shall automatically become and be immediately due and payable.
MODIFICATION
We and the trustee may enter into supplemental indentures that add, change
or eliminate provisions of the senior indenture or modify the rights of the
holders of the notes with the consent of the holders of at least a majority in
principal amount of the notes then outstanding. However, the senior indenture
may not be modified or amended to:
- change the stated maturity of the principal of, or any installment of
principal of or any interest on, any debt security;
- reduce the principal amount of any debt security;
- reduce the rate of interest on any debt security;
- reduce any additional amounts payable on any debt security;
- reduce any premium payable upon the redemption of any debt security;
- reduce the amount of the principal of an original issue discount security
that would be due and payable upon a declaration of acceleration of its
maturity under the terms of the senior indenture;
- change any place of payment where, or the currency in which any debt
security or any premium or interest on, that debt security is payable;
- impair the right to institute suit for the enforcement of any payment of
principal of or premium or any interest on any debt security on or after
its stated maturity, or, in the case of redemption, on or after the
redemption date;
- reduce the percentage in principal amount of the outstanding debt
securities of any series, the consent of whose holders is required for
the supplemental indenture;
- reduce the percentage in principal amount of the outstanding debt
securities of any series, the consent of whose holders is required for
any waiver of compliance with certain provisions of the senior indenture
or certain defaults under the senior indenture and their consequences;
- modify any of the provisions relating to supplemental indentures, waiver
of past defaults or waiver of certain covenants, except to increase the
percentage in principal amount of the outstanding debt securities of a
series required for the consent of holders to approve a supplemental
indenture or a waiver of a past default or compliance with certain
covenants or to provide that certain other provisions of the senior
indenture cannot be modified or waived without the consent of the holder
of each outstanding debt security that would be affected by such a
modification or waiver;
- impair the right of any holder to convert any note, or impair or
adversely affect the right to bring a suit to enforce the right to
convert any note;
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- make any change that adversely affects the right of a holder to receive
shares of our common stock upon surrendering a note for conversion;
- make any change that adversely affects the right of a holder to require
us to repurchase a note; or
- reduce or adversely affect the right to receive the redemption price or
repurchase price for the notes;
without the consent of the holders of each of the debt securities affected by
that modification or amendment.
GOVERNING LAW
The senior indenture and the notes will be governed by, and construed in
accordance with, the laws of the State of New York, without regard to conflicts
of laws principles.
BOOK-ENTRY SYSTEM FOR NOTES
Upon issuance, the notes will be represented by a global security or
securities (each a "Global Security"). Each Global Security will be deposited
with, or on behalf of, DTC, which will act as the depositary (the "Depositary").
Upon the issuance of any such Global Security, the Depositary or its nominee
will credit the accounts of persons holding it with the principal or face
amounts of the notes represented by any such Global Security. Ownership of
beneficial interests in any such Global Security will be limited to participants
that have accounts with the Depositary or persons that may hold interests
through participants. Ownership of beneficial interests by participants in any
such Global Security will be shown on, and the transfer of that ownership will
be effected only through, records maintained by the Depositary. Ownership of
beneficial interests in any such Global Security by persons that hold through
participants will be shown on, and the transfer of that ownership interest
within such participant will be effected only through, records maintained by
such participant. The laws of some jurisdictions require that certain purchasers
of securities take physical delivery of the securities in definitive form. Such
limits and such laws may impair the ability to acquire or transfer beneficial
interests in a Global Security.
Payment of principal or premium, if any, and/or interest, if any, on, or
shares of common stock in exchange for, the notes, will be made to the
Depositary or its nominee, as the sole registered owner and holder of the Global
Security for such series for all purposes under the senior indenture. Neither
we, the trustee nor any of our agents or the trustee's agent will have any
responsibility or liability for any aspect of the Depositary's records relating
to or payments made on account of beneficial ownership interests in any such
Global Security or for maintaining, supervising or reviewing any of the
Depositary's records relating to such beneficial ownership interests.
We have been advised by the Depositary that upon receipt of any payment of
principal of, or interest on, any Global Security, the Depositary will
immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Security as shown on the records of the Depositary. Payments by participants to
owners of beneficial interests in such Global Security held through such
participants will be governed by standing instructions and customary practices
as is now the case with securities held for customer accounts registered in
"street name" and will be the sole responsibility of such participants.
No Global Security may be transferred except as a whole by the Depositary
to a nominee of the Depositary. Each Global Security is exchangeable for
certificated notes only if:
- the Depositary notifies us that it is unwilling or unable to continue as
Depositary for such Global Security or if at any time the Depositary
ceases to be a clearing agency registered under the Securities Exchange
Act of 1934 and we fail within 90 days thereafter to appoint a successor,
- we in our sole discretion determine that such Global Security shall be
exchangeable, or
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- there shall have occurred and be continuing an event of default (as
defined in the senior indenture) or an event which with the giving of
notice or lapse of time or both, would constitute an event of default
with respect to the notes represented by such Global Security. In such
event, we will issue notes in certificated form in exchange for such
Global Security. In any such instance, an owner of a beneficial interest
in a Global Security will be entitled to physical delivery in
certificated form of notes equal in principal amount to such beneficial
interest and to have such notes registered in its name. Notes issued in
certificated form will be issued in denominations of $1,000 or any larger
amount that is an integral multiple of $1,000, and will be issued in
registered form only, without coupons. Subject to the foregoing, no
Global Security is exchangeable, except for a Global Security for the
same series of notes of like denomination to be registered in the name of
the Depositary or its nominee.
So long as the Depositary, or its nominee, is the registered owner of a
Global Security, such Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the notes represented by such Global
Security for the purposes of receiving payment on such notes, receiving notices
and for all other purposes under the senior indenture and such notes. Beneficial
interests in the notes will be evidenced only by, and transfer thereof will be
effected only through, records maintained by the Depositary and its
participants. Except as provided herein, owners of beneficial interests in any
Global Security will not be entitled to such Global Security and will not be
considered the holders of such Global Security for any purposes under the senior
indenture. Accordingly, each person owning a beneficial interest in such Global
Security must rely on the procedures of the Depositary, and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder under the senior
indenture. The Depositary will not consent or vote with respect to the Global
Security representing the notes. Under its usual procedures, the Depositary
mails an Omnibus Proxy to us as soon as possible after the applicable record
date. The Omnibus Proxy assigns Cede & Co.'s (the Depositary's partnership
nominee) consenting or voting rights to those participants to whose accounts the
notes are credited on the applicable record date (identified in a listing
attached to the Omnibus Proxy).
The Depositary has advised us that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered under the Securities Exchange Act of
1934. The Depositary was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among its
participants through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depositary's participants include securities brokers and
dealers, banks, trust companies, clearing corporations, and certain other
organizations some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
rules applicable to the Depositary and its participants are on file with the
Securities and Exchange Commission.
SAME-DAY SETTLEMENT AND PAYMENT FOR NOTES
Settlement for the notes will be made by the underwriters, in immediately
available funds. All cash payments of principal and interest will be made by us
in immediately available funds.
The notes will trade in the Depositary's same-day funds settlement system
until maturity or until such notes are issued in definitive form, and secondary
market trading activity in such notes will therefore be required by the
Depositary to settle in immediately available funds. No assurance can be given
as to the effect, if any, of settlement in immediately available funds on
trading activity in such notes.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
This section summarizes certain U.S. federal income tax considerations
relating to the purchase, ownership and disposition of the notes and the common
stock into which the notes may be converted. The following discussion assumes
that the notes will be treated as indebtedness for U.S. federal income tax
purposes. This summary is based on existing legal authorities, including the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations and judicial decisions and administrative interpretations,
as of the date hereof, all of which are subject to change, possibly with
retroactive effect. There can be no assurance that the U.S. Internal Revenue
Service ("IRS") will not challenge one or more of the tax results described
herein, and we have not obtained, nor do we intend to obtain, a ruling from the
IRS with respect to the U.S. federal income tax consequences described below.
This summary generally applies only to "U.S. Holders" that purchase notes in the
initial offering at their issue price and hold the notes or common stock as
"capital assets" (generally, property held for investment). For this purpose,
U.S. Holders include citizens or residents of the United States, corporations
organized under the laws of the United States or any state and estates, the
income of which is subject to U.S. federal income taxation regardless of its
source. A trust is generally a U.S. Holder if its administration is subject to
the primary supervision of a U.S. court and one or more U.S. persons have the
authority to control all substantial decisions of the trust. Special rules apply
to "Non-U.S. Holders," including nonresident alien individuals and foreign
corporations, estates or trusts. This summary describes some, but not all, of
these special rules. Income earned through a foreign or domestic partnership is
subject to special rules that are generally not discussed here. This discussion
does not purport to address all tax considerations that may be important to a
particular holder in light of the holder's circumstances, such as the
alternative minimum tax provisions of the Code, or to certain categories of
investors that may be subject to special rules, such as certain financial
institutions, tax-exempt organizations, dealers in securities, persons who hold
notes or common stock as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction or persons who have
ceased to be U.S. citizens or taxed as resident aliens. Finally, this summary
does not describe any tax considerations arising under the laws of any
applicable foreign, state or local jurisdiction.
We assume that a substantial amount of the notes will be sold to the
public, excluding sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers, at a price equal to 100% of the aggregate principal amount of such
notes (or within 1/4 of 1% of such amount multiplied by the number of complete
years to maturity). As a consequence, the following discussion assumes that the
special rules which require debt instrument holders to accrue "original issue
discount" as ordinary interest income, regardless of their regular method of
accounting for U.S. federal income tax purposes, do not apply.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATION AND THE CONSEQUENCES OF FEDERAL ESTATE OR GIFT TAX LAWS,
FOREIGN, STATE OR LOCAL LAWS AND TAX TREATIES.
U.S. HOLDERS
Interest on Notes. U.S. Holders will be required to recognize as ordinary
income any interest paid or accrued on the notes, in accordance with their
regular method of accounting for U.S. federal income tax purposes.
Sale, Exchange or Redemption of Notes. A U.S. Holder will generally
recognize capital gain or loss if the holder disposes of a note in a sale,
redemption or exchange (other than a conversion of the note into common stock or
a redemption of the note for common stock as discussed below). The holder's gain
or loss will equal the difference between the proceeds received by the holder,
excluding any proceeds that are attributable to accrued interest which will be
recognized as ordinary interest income to the extent that the holder has not
previously included the accrued interest in income, and the holder's adjusted
tax basis in the note. The proceeds received by the holder will include the
amount of any cash and the fair market value of any other property received for
the note. The holder's tax basis in the note will generally equal the
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amount the holder paid for the note. The gain or loss will be long-term capital
gain or loss if the holder held the note for more than one year. Long-term
capital gains of individuals, estates and trusts are generally taxed at a
maximum rate of 20%. The deductibility of capital losses may be subject to
limitation.
Adjustment of Conversion Rate. The terms of the notes allow for changes in
the conversion rate of the notes in certain circumstances. A change in
conversion rate may result in a taxable dividend to holders, although such
holders would not actually receive any cash or other property. A taxable
dividend would result, for example, if the conversion rate is adjusted to
compensate holders for distributions of cash or other property to our
shareholders. However, not all changes in the conversion rate will result in a
taxable dividend to holders. For instance, a change in the conversion rate may
occur in order to prevent the dilution of the holders' interests upon a stock
split or other change in capital structure. Changes of this type, if made by a
bona fide, reasonable adjustment formula, are not treated as taxable dividends.
Conversion of Notes. A U.S. Holder generally will not recognize any income,
gain or loss on converting a note into common stock, except to the extent the
common stock is considered attributable to accrued interest not previously
included in income (which is taxable as ordinary income). If a holder receives
cash in lieu of a fractional share of stock, the holder will be treated as if
the holder received the fractional share and then had the fractional share
redeemed for the cash. The holder would recognize gain or loss equal to the
difference between the cash received and that portion of the holder's tax basis
in the stock attributable to the fractional share. The holder's aggregate tax
basis in the common stock will equal the holder's adjusted tax basis in the
corresponding note, less any portion allocable to any fractional share. The
holder's holding period for the stock will include the holding period for the
corresponding note. However, the holder's holding period for any stock
attributable to accrued interest will begin on the day following the exchange
date.
If we decide to satisfy the conversion obligation in part cash and part
common stock, the holder will recognize gain realized in the exchange to the
extent of cash received, but no loss will be recognized on such conversion. The
holder's tax basis in the common stock permitted to be received tax-free will
equal the holder's tax basis in the corresponding note less the amount of cash
received plus the amount of gain recognized on the conversion. The holder's
holding period for the common stock will include the holding period for the
corresponding note. Alternatively, in the event that we decide to satisfy the
conversion obligation entirely in cash, the holder will recognize gain or loss
equal to the difference between the proceeds received by such holder (excluding
amounts allocated to interest) and the holder's adjusted tax basis in the note.
See "-- Sale, Exchange or Redemption of Notes" above.
Repurchase of Notes Using Common Stock in Lieu of Cash. If a holder
exercises its right to require us to repurchase a note, we may, in lieu of
paying the repurchase price in cash, use our common stock to repurchase the
note. In this event, the exchange of a note for common stock should constitute a
tax-free recapitalization to holders because the notes should constitute
"securities" within the meaning of the Code provisions regarding tax-free
reorganizations. However, no assurances can be provided in this regard because
the test as to whether a debt instrument is a "security" is based on a number of
facts and circumstances that involves an overall evaluation of the nature of the
debt instrument, with the term of the debt instrument usually regarded as one of
the most significant factors. Debt instruments with a term of five years or less
generally have not qualified as "securities," whereas debt instruments with a
term of ten years or more generally have qualified as "securities."
If the exchange of notes for common stock constitutes a tax-free
recapitalization, exchanging holders will not recognize any gain or loss, except
to the extent the common stock is attributable to accrued interest on the notes
which will be recognized as ordinary interest income to the extent the holder
has not previously included the accrued interest in income. A holder's tax basis
in shares of common stock attributable to accrued interest generally will equal
the amount of such accrued interest included in income and the holding period of
such common stock will begin on the day following the exchange date. For a
discussion of the rules relating to the tax treatment of fractional common
shares and the determination of the tax basis and the holding period of the
common stock received in exchange for the notes, see "--Conversion of Notes"
above.
S-29
If the notes were determined not to constitute "securities" for U.S.
federal income tax purposes, then an exchanging holder would recognize gain or
loss in accordance with the rules described above under "--Sale, Exchange or
Redemption of Notes." In this event, a holder's initial tax basis in the common
stock received would be equal to its fair market value on the exchange date, and
the holding period for the common stock would begin on the day immediately after
the exchange date.
Dividends on Common Stock. If, after a U.S. Holder converts a note into
common stock, we make a distribution of cash or other property in respect of
that stock, the distribution will be treated as a dividend, taxable to the U.S.
Holder as ordinary income, to the extent it is paid from our current or
accumulated earnings and profits. If the distribution exceeds our current and
accumulated profits, the excess will be treated first as a tax-free return of
the holder's investment, up to the holder's tax basis in its common stock. Any
remaining excess will be treated as capital gain. If the U.S. Holder is a
corporation, it may be able to claim a deduction for a portion of any
distribution received that is considered a dividend.
Legislation has been introduced in Congress that, if enacted into law,
would generally provide that dividends paid by U.S. corporations would be
tax-exempt to the recipient to the extent that the dividends were paid out of
previously-taxed corporate income. The proposed legislation would eliminate the
dividends received deduction in respect of dividends (including constructive
dividends) paid by us with respect to any common stock issued by us upon
conversion of the notes. It is impossible to predict whether this proposed
legislation will be enacted or what changes may be made to this proposed
legislation prior to enactment, including with respect to its effective date.
Accordingly, investors are advised to consult their tax advisors regarding the
proposed legislation.
Sale or Exchange of Common Stock. A U.S. Holder will generally recognize
capital gain or loss on a sale or exchange of common stock. The holder's gain or
loss will equal the difference between the proceeds received by the holder and
the holder's adjusted tax basis in the common stock. The proceeds received by
the holder will include the amount of any cash and the fair market value of any
other property received for the stock. The gain or loss will be long-term
capital gain or loss if the holder's holding period for the stock is more than
one year. Long-term capital gains of individuals, estates and trusts are
generally taxed at a maximum rate of 20%. The deductibility of capital losses
may be subject to limitation.
Information Reporting and Backup Withholding. Information reporting and
backup withholding at the rate specified in the Code may apply to payments of
principal and interest on a note, dividends on common stock or the proceeds from
the sale or other disposition of a note or common stock with respect to certain
noncorporate U.S. Holders. Such U.S. Holders generally will be subject to backup
withholding unless the U.S. Holder provides to the payor a correct taxpayer
identification number and certain other information, certified under penalties
of perjury, or otherwise establishes an exemption. Any amount withheld under the
backup withholding rules may be credited against the U.S. Holder's federal
income tax liability and any excess may be refundable provided the proper
information is provided to the IRS.
NON-U.S. HOLDERS
Interest on Notes. Payments of interest on the notes to Non-U.S. Holders
will generally qualify as "portfolio interest" and thus will be exempt from the
withholding of U.S. federal income tax if the Non-U.S. Holder properly certifies
as to its foreign status as described below. The portfolio interest exception
will not apply to payments of interest to a Non-U.S. Holder that:
- owns, directly or indirectly, at least 10% of our voting stock; or
- is a "controlled foreign corporation" that is, directly or indirectly,
related to us.
If the portfolio interest exception does not apply, then payments of
interest to a Non-U.S. Holder will generally be subject to U.S. federal income
tax withholding at a rate of 30%, unless reduced by an applicable tax treaty.
The portfolio interest exception and several of the special rules for
Non-U.S. Holders described below generally apply only if the Non-U.S. Holder
appropriately certifies as to its foreign status. A Non-U.S.
S-30
Holder can generally meet this certification requirement by providing a properly
executed Form W-8BEN or appropriate substitute form to us or our paying agent.
If the holder holds the note through a financial institution or other agent
acting on the holder's behalf, the holder may be required to provide appropriate
documentation to the agent. The holder's agent will then generally be required
to provide appropriate certifications to us or our paying agent, either directly
or through other intermediaries. Special rules apply to foreign partnerships,
estates and trusts, and in certain circumstances certifications as to foreign
status of partners, trust owners or beneficiaries may have to be provided to us
or our paying agent.
Sale, Exchange or Redemption of Notes. Non-U.S. Holders generally will not
be subject to U.S. federal income tax on any gain realized on the sale, exchange
or redemption of the notes. This general rule, however, is subject to several
exceptions. For example, the gain will be subject to U.S. federal income tax if:
- the gain is effectively connected with the conduct by the Non-U.S. Holder
of a U.S. trade or business and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder;
- the Non-U.S. Holder is an individual that has been present in the United
States for 183 days or more in the taxable year of disposition and
certain other requirements are met; or
- the Non-U.S. Holder was a citizen or resident of the United States and is
subject to special rules that apply to certain expatriates.
Conversion of Notes. A Non-U.S. Holder generally will not recognize any
income, gain or loss on converting a note into common stock. Any gain recognized
as a result of the holder's receipt of cash (including cash in lieu of a
fractional share of stock) will generally not be subject to U.S. federal income
tax. See "-- Sale or Exchange of Common Stock" below. However, amounts received
that are allocable to accrued but unpaid interest will be treated as set for in
"Interest on Notes" above.
Dividends on Common Stock. Dividends paid to a Non-U.S. Holder will
generally be subject to U.S. federal income tax withholding at a 30% rate. The
withholding tax might not apply, however, or might apply at a reduced rate,
under the terms of a tax treaty between the United States and the Non-U.S.
Holder's country of residence. A Non-U.S. Holder must demonstrate its
entitlement to treaty benefits by satisfying applicable certification and other
requirements.
Sale or Exchange of Common Stock. Non-U.S. Holders will generally not be
subject to U.S. federal income tax on any gain realized on the sale, exchange or
other disposition of common stock. This general rule, however, is subject to
exceptions, as described under "-- Sale, Exchange or Redemption of Notes" above.
Income or Gain Effectively Connected With a U.S. Trade or Business. The
preceding discussion of the tax consequences of the purchase, ownership and
disposition of notes or common stock by a Non-U.S. Holder assumes that the
holder is not engaged in a U.S. trade or business. If any interest on the notes,
dividends on common stock or gain from the sale, exchange or other disposition
of the notes or common stock is effectively connected with a U.S. trade or
business conducted by the Non-U.S. Holder, then the income or gain will be
subject to U.S. federal income tax at regular graduated income tax rates, but
will not be subject to withholding tax if certain certification requirements are
satisfied. If the Non-U.S. Holder is eligible for the benefits of a tax treaty
between the United States and the holder's country of residence, any
"effectively connected" income or gain will generally be subject to U.S. federal
income tax only if it is also attributable to a permanent establishment
maintained by the holder in the United States. If the Non-U.S. Holder is a
corporation, that portion of its earnings and profits that is effectively
connected with its U.S. trade or business will generally be subject to a "branch
profits tax" at a 30% rate, although an applicable tax treaty might provide for
a lower rate.
U.S. Federal Estate Tax. The estates of nonresident alien individuals are
subject to U.S. federal estate tax on property with a U.S. situs. The notes will
not be U.S. situs property as long as interest on the notes paid immediately
before the death of the Non-U.S. Holder will have qualified as portfolio
interest under
S-31
the rules described above. Because we are a U.S. corporation, our common stock
will be U.S. situs property, and therefore will be included in the taxable
estate of a nonresident alien individual, unless an applicable estate tax or
other treaty provides otherwise.
Information Reporting and Backup Withholding. In general, information
reporting will apply to payments of interest and principal on the notes or
dividends on the common stock, and backup withholding at the rate specified in
the Code will apply with respect to such payments unless the Non-U.S. Holder
appropriately certifies as to its foreign status or otherwise establishes an
exemption.
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of a note or common stock
effected outside the United States by a foreign office of a foreign "broker" (as
defined in applicable Treasury regulations), provided that such broker:
- derives less than 50% of its gross income for certain periods from the
conduct of a trade or business in the United States;
- is not a controlled foreign corporation for U.S. federal income tax
purposes; and
- is not a foreign partnership that, at any time during its taxable year,
has 50% or more of its income or capital interests owned by U.S. persons
or is engaged in the conduct of a U.S. trade or business.
Payment of the proceeds of a sale of a note or common stock effected
outside the United States by a foreign office of any other broker will not be
subject to backup withholding tax or information reporting if such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption. Payment of the proceeds of a sale of a note or common
stock effected by the U.S. office of a broker will be subject to information
reporting requirements and backup withholding tax unless the Non-U.S. Holder
properly certifies under penalties of perjury as to its foreign status and
certain other conditions are met or it otherwise establishes an exemption.
Any amount withheld under the backup withholding rules may be credited
against the Non-U.S. Holder's U.S. federal income tax liability and any excess
may be refundable if the proper information is provided to the IRS.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR
SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR
NOTES OR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN
APPLICABLE LAWS.
S-32
UNDERWRITING
Salomon Smith Barney Inc. is acting as sole book-running manager of the
offering, and, together with Raymond James & Associates, Inc., Wells Fargo
Securities, LLC, William Blair & Company, L.L.C. and Advest, Inc., are acting as
representatives of the underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed to purchase, and we have agreed to sell to that underwriter, the
principal amount of notes set forth opposite the underwriter's name.
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
Salomon Smith Barney Inc. .................................. $ 81,250,000
Raymond James & Associates, Inc. ........................... 13,750,000
Wells Fargo Securities, LLC................................. 11,250,000
William Blair & Company, L.L.C. ............................ 10,000,000
Advest, Inc. ............................................... 8,750,000
------------
Total..................................................... $125,000,000
============
The underwriting agreement provides that the obligations of the
underwriters to purchase the notes included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the notes if they purchase any of the notes (other
than those covered by the over-allotment option described below).
The underwriters propose to offer some of the notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the notes to dealers at the public offering price less a
concession not to exceed 2.25% of the principal amount of the notes. After the
initial offering of the notes to the public, the representatives may change the
public offering price and concessions.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an additional
$18,750,000 principal amount of notes at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent such option is exercised, each of the underwriters will be
obligated, subject to certain conditions, to purchase an additional principal
amount of notes in approximately the same proportion as set forth in the table
above.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering (expressed as
a percentage of the principal amount of the notes).
PAID BY HCC
-----------
Per note.................................................... 2.25%
In connection with the offering, Salomon Smith Barney, on behalf of the
underwriters, may purchase and sell notes in the open market. These transactions
may include over-allotment, syndicate covering transactions and stabilizing
transactions. Over-allotment involves syndicate sales of notes in excess of the
principal amount of notes to be purchased by the underwriters in the offering,
which creates a syndicate short position. Syndicate covering transactions
involve purchases of the notes in the open market after the distribution has
been completed in order to cover syndicate short positions. Stabilizing
transactions consist of certain bids or purchases of notes made for the purpose
of preventing or retarding a decline in the market price of the notes while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney, in covering syndicate short positions or making
stabilizing purchases, repurchases notes originally sold by that syndicate
member.
S-33
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the notes. They may also cause the price of the
notes to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time.
We estimate that our total expenses for this offering, excluding
underwriting discounts, will be approximately $500,000.
The underwriters and certain of their affiliates have performed investment
banking or commercial banking and other financial services for us and certain of
our affiliates from time to time for which they have received customary fees and
expenses. The underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of their business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
We will use a portion of the net proceeds of the sale of the notes to repay
indebtedness under the revolving credit facility that we owe to certain of the
underwriters or their affiliates. Since more than 10% of the net proceeds of the
offering will be used to repay indebtedness that we owe to the underwriters or
their affiliates, our offering will be made in compliance with the requirements
of Rule 2710(c)(8) of the National Association of Securities Dealers, Inc.
Conduct Rules.
We, our directors and our executive officers have agreed with Salomon Smith
Barney not to offer for sale, sell, contract to sell or otherwise dispose of,
directly or indirectly, any shares of common stock (or any option, warrant or
other security convertible into or exchangeable or exercisable for shares of
common stock), subject to certain exceptions, during the period from the date of
this prospectus supplement continuing through the date 45 days after the date of
this prospectus supplement, except with the prior written consent of Salomon
Smith Barney.
CERTAIN LEGAL MATTERS
Haynes and Boone, LLP will pass upon the validity of the notes and certain
legal matters regarding our common stock. Cleary, Gottlieb, Steen & Hamilton
will pass upon certain legal matters for the underwriters.
Our forward-looking statements speak only as of the date made and we will
not update these forward-looking statements unless the securities laws require
us to do so. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus supplement may not occur.
S-34
PROSPECTUS
[HCC LOGO]
HCC INSURANCE HOLDINGS, INC.
COMMON STOCK
SENIOR DEBT SECURITIES
SUBORDINATED DEBT SECURITIES
WARRANTS
---------------------
We may offer from time to time up to $750,000,000 of any combination of the
securities described in this prospectus. We will not offer or sell any
securities under this prospectus unless accompanied by a prospectus supplement.
We may offer and sell, from time to time:
- debt securities;
- shares of our common stock; and
- warrants to purchase our debt securities or our common stock.
We will provide the specific terms of these securities in one or more
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest in these securities.
We may sell the securities directly, or through agents designated from time
to time, or to or through underwriters or dealers. If any underwriters are
involved in the sale of any securities, their names and any applicable
commissions or discounts will be set forth in a prospectus supplement. For
additional information on the methods of sale, you should refer to the section
entitled "Plan of Distribution."
Our common stock is listed on the NYSE under the Symbol "HCC." The last
reported sale price on January 18, 2002 was $25.86 per share.
---------------------
INVESTMENT IN THESE SECURITIES INVOLVES RISK. SEE THE RISK FACTORS
SECTION BEGINNING ON PAGE 6.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OF THIS PROSPECTUS OR WHETHER IT IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this prospectus is January 22, 2002.
TABLE OF CONTENTS
PAGE
----
About This Prospectus....................................... 2
The Company................................................. 3
Risk Factors................................................ 6
Use of Proceeds............................................. 11
Ratio of Earnings to Fixed Charges.......................... 11
Description of Our Common Stock............................. 11
Description of Senior Debt Securities and Subordinated Debt
Securities................................................ 13
Description of Warrants..................................... 18
Plan of Distribution........................................ 21
Certain Legal Matters....................................... 21
Experts..................................................... 22
About Forward-Looking Statements............................ 22
Where You Can Find More Information......................... 22
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under the shelf registration process, we may offer any combination of the
securities described in this prospectus in one or more offerings with a total
offering price of up to $750,000,000. This prospectus provides you with a
general description of securities we may offer. Each time we use this prospectus
to offer securities, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. Please
carefully read this prospectus, any prospectus supplement and the documents
incorporated by reference in the prospectus together with the additional
information described under "Where You Can Find More Information" and "Risk
Factors" before you make an investment decision.
You should rely only on the information contained in this prospectus and
the applicable prospectus supplement. We have not authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell the securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus,
together with the information we previously filed with the SEC and incorporated
by reference, is accurate only as of the date on the front cover of this
prospectus. The information included in any prospectus supplement is accurate
only as of the date of that prospectus supplement. Our business, financial
condition, results of operations and prospects may change after the date on the
front cover of this prospectus.
2
THE COMPANY
As used in this prospectus, unless otherwise required by the context, the
terms "we," "us," "our" and the "Company" refer to HCC Insurance Holdings, Inc.
and its consolidated subsidiaries, and the term "HCC" refers only to HCC
Insurance Holdings, Inc.
OVERVIEW
We provide property and casualty insurance and accident and health
insurance coverages, underwriting agency and intermediary services, and other
insurance related services both to commercial customers and individuals. We
concentrate our activities in selected narrowly defined lines of business. We
operate primarily in the United States and the United Kingdom, although some of
our operations have a broader international scope. We underwrite insurance both
on a direct basis, where we insure a risk in exchange for a premium, and on a
reinsurance basis, where we insure all or a portion of another insurance
company's risk in exchange for all or a portion of the premium. We market our
insurance products both directly to customers and through a network of
independent or affiliated agents and brokers.
Our insurance companies are risk-bearing and focus their underwriting
activities on providing insurance and/or reinsurance in the following lines of
business:
- contingency;
- disability;
- energy;
- errors and omissions;
- general aviation;
- kidnap and ransom;
- life, accident and health;
- marine;
- medical stop-loss;
- professional liability; and
- property.
In the United States, Avemco Insurance Company, U.S. Specialty Insurance
Company and HCC Life Insurance Company operate on an admitted, or licensed,
basis. Houston Casualty Company operates on a surplus lines basis as a
non-admitted, or unlicensed, insurer offering insurance coverage not otherwise
available from an admitted insurer in the relevant state.
Our underwriting agencies underwrite on behalf of our insurance companies
and other insurance companies. They receive fees for these services and do not
bear any of the insurance risk of the companies for which they underwrite. Our
underwriting agencies generate revenues based entirely on management fees and
profit commissions and specialize in contingency, disability, kidnap and ransom,
medical stop-loss, and professional liability insurance and a variety of
accident and health related insurance and reinsurance products. Our medical
stop-loss insurance provides coverages to companies, associations and public
entities that elect to self-insure their employee's medical coverage for losses
within specified levels, allowing them to manage the risk of excessive health
insurance exposure by limiting aggregate and specific losses to a predetermined
amount.
We have recently consolidated the operations of certain of our agencies
with certain of our insurance companies to improve operational efficiencies. The
operations of HCC Aviation Insurance Group, Inc., and our occupational accident
and workers' compensation underwriting agency, HCC Employer Services, Inc., were
consolidated into those of our licensed property and casualty insurance company,
U.S. Specialty
3
Insurance Company, and the operations of our London-based accident and health
underwriting agency, LDG Re (London), Ltd., were consolidated with those of the
London branch of our largest property and casualty insurance company, Houston
Casualty Company. We expect to continue consolidating certain agency operations
in the future.
Our intermediaries provide insurance and reinsurance brokerage services for
our insurance companies and our clients, and receive fees for their services.
Our intermediaries do not bear any of the insurance risks of the companies on
behalf of which they act. They earn commission income and to a lesser extent
fees for certain services, generally paid by the insurance and reinsurance
companies with whom the business is placed. These operations consist of:
- consulting on risks by providing information to clients about insurance
coverage;
- marketing risks by providing information and assistance on pricing a
particular insurance risk;
- placing risks by negotiating with insurers and reinsurers to accept an
insurance risk; and
- servicing risks by facilitating the collection of premiums and resolution
of claims on behalf of our insurance clients.
Our intermediaries specialize in developing and marketing employee benefit
plans on a retail basis and in placing reinsurance for both accident and health,
and property and casualty lines of business.
We are a Delaware corporation. Our principal executive offices are located
at 13403 Northwest Freeway, Houston, Texas 77040 and our telephone number is
(713) 690-7300. We maintain a World Wide Web-site at www.hcch.com. The reference
to our World Wide Web address does not constitute the incorporation by reference
of the information contained at this site in this prospectus supplement or the
accompanying prospectus.
OUR STRATEGY
Our business philosophy as an insurer is to maximize underwriting profits
while limiting risk in order to preserve shareholders' equity and maximize
earnings. We concentrate our insurance writings in selected, narrowly defined
lines of business where we believe we can achieve an underwriting profit. We
focus on lines of business that have relatively short lead times between the
occurrence of an insured event and the reporting of claims. We market our
insurance products both directly to customers and through independent or
affiliated agents and brokers.
The property and casualty insurance industry and individual lines of
business within the industry are cyclical in that there are times when a large
number of companies offer insurance on certain lines of business, and the
premiums tend to go down, and other times where insurance companies decide to
limit their writings in certain lines of business or suffer from excessive
losses, which tends to increase the premiums for those companies that continue
to write insurance in those lines of business. In our insurance company
operations, we believe our operational flexibility, which permits us to shift
the focus of our insurance underwriting activity among our various lines of
business and also to shift the emphasis from our insurance risk-bearing business
to our non-insurance fee-based business, as well as our experienced underwriting
personnel and access to, and expertise in, the reinsurance marketplace allow us
to implement a strategy of emphasizing more profitable lines of business during
periods of increased premium rates and de-emphasizing less profitable lines of
business during periods of severe competition. In addition, we believe that our
underwriting agencies and intermediary subsidiaries complement our insurance
underwriting activities. Our ability to utilize affiliated insurers,
underwriting agencies and intermediaries permits us to retain a greater portion
of the gross revenue derived from written premium.
We purchase reinsurance by transferring part of the risk we have assumed
through the process of ceding this risk to a reinsurance company in exchange for
part of the premium we receive in connection with the risk. We purchase
reinsurance to limit the net loss from both individual and catastrophic risks to
our insurance companies. The amount of reinsurance we purchase varies by, among
other things, the particular risks
4
inherent in the policies underwritten, the pricing of reinsurance and the
competitive conditions within the relevant line of business.
In 2000 and 2001, due to a hardening of the respective markets, premium
rates in the accident and health, energy, general aviation and medical stop-loss
lines of business increased. We anticipate continued improvements in these
markets and in all of our lines of business during 2002 as a result of the
effects from the September 11, 2001 terrorist attacks in the United States on
the insurance industry and other market conditions and market forces. In
response to these changing market conditions, we plan to continue to expand the
underwriting activities in our insurance company operations.
We also acquire or make strategic investments in companies that present an
opportunity for future profits or for enhancement of our business. We expect to
continue to seek to acquire complementary businesses with established management
and established reputations in the insurance industry. We believe that we can
enhance acquired businesses through the synergies created by our underwriting
capabilities and our other operations. However, our business plan is shaped by
our underlying business philosophy, which is to maximize underwriting profit,
while preserving shareholders' equity. As a result, our primary objective is to
increase net earnings rather than market share or gross written premium.
In our ongoing operations, we will continue to:
- emphasize the underwriting of lines of business in which premium rates,
the availability and cost of reinsurance, and market conditions warrant;
- limit our net loss exposure to our insurance company subsidiaries from a
catastrophe loss through the use of reinsurance; and
- review the potential acquisition of specialty insurance operations and
other strategic investments.
5
RISK FACTORS
Investing in our securities will provide you with an interest in, or
obligation of, our Company. As an investor, you will be subject to risks
inherent in our businesses. The performance of your investment in our Company
will reflect the performance of our business relative to, among other things,
general economic and industry conditions, market conditions and competition. The
value of your investment may increase or it may decline and could result in a
loss. You should carefully consider the following factors as well as other
information contained in this prospectus or information incorporated by
reference before deciding to make any investment in our Company.
IF WE CANNOT OBTAIN ADEQUATE REINSURANCE PROTECTION FOR THE RISKS WE HAVE
UNDERWRITTEN, WE WILL EITHER BE EXPOSED TO GREATER LOSSES FROM THESE RISKS OR WE
WILL REDUCE THE LEVEL OF BUSINESS WE UNDERWRITE, WHICH WILL REDUCE OUR REVENUES.
We purchase reinsurance for significant amounts of risk underwritten by our
insurance company subsidiaries, especially catastrophe risks. We also purchase
reinsurance on risks underwritten by others which we reinsure through a
retrocession agreement. Market conditions beyond our control determine the
availability and cost of the reinsurance protection we purchase, which may
affect the level of our business and profitability. For instance, the natural
attrition of reinsurers who exit lines of business, or who curtail their
writings, for economic or other reasons, reduces the capacity of the reinsurance
market, causing rates to rise. In addition, the historical results of
reinsurance programs and the availability of capital also affect the
availability of reinsurance. Our reinsurance facilities are generally subject to
annual renewal. We cannot assure you that we can maintain our current
reinsurance facilities or that we can obtain other reinsurance facilities in
adequate amounts and at favorable rates. Further, we cannot determine at this
time what the present and longer term effects of the September 11, 2001 attacks
will have on the reinsurance market in general and on our ability to obtain
reinsurance in adequate amounts and at favorable rates in particular. If we are
unable to renew our expiring facilities or to obtain new reinsurance facilities,
either our net exposures would increase or, if we are unwilling to bear an
increase in net exposures, we would have to reduce the level of our underwriting
commitments, especially catastrophe exposed risks. Either of these potential
developments could have a material adverse effect on our business. The lack of
available reinsurance may also adversely affect our ability to generate fee and
commission income in our underwriting agency and reinsurance intermediary
operations. A reinsurance intermediary structures and arranges reinsurance
between insurers seeking to cede insurance risks and reinsurers willing to
assume such risks.
IF THE COMPANIES THAT PROVIDE OUR REINSURANCE DO NOT PAY ALL OF OUR CLAIMS, WE
COULD INCUR SEVERE LOSSES.
We purchase reinsurance by transferring, or ceding, part of the risk we
have assumed to a reinsurance company in exchange for part of the premium we
receive in connection with the risk. Although reinsurance makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve us, the reinsured, of our liability to our policyholders.
Accordingly, we bear credit risk with respect to our reinsurers. We cannot
assure you that our reinsurers will pay all of our reinsurance claims, or that
they will pay our claims on a timely basis.
It is presently unclear what effect the attacks of September 11, 2001 will
ultimately have on the financial position of our reinsureres. At present, we can
neither determine the extent to which we will be liable, as a result of the
terrorist attacks of September 11, for risks we have ceded to reinsurers, nor
can we determine the extent to which our credit risk with respect to our
reinsurers may have increased because the reinsurers are in a weakened financial
position as a result of the September 11 attacks. If we become liable for risks
we have ceded with respect to the September 11 attacks or if our reinsurers
cease to meet their obligations to us, whether because they are in a weakened
position as a result of the September 11 attacks or otherwise, our results of
operations and financial position could be materially adversely affected.
6
IF WE ARE UNSUCCESSFUL IN COMPETING AGAINST LARGER OR MORE WELL-ESTABLISHED
BUSINESS RIVALS, OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL BE
ADVERSELY AFFECTED.
In our specialty insurance operations, we compete in narrowly-defined niche
classes of business such as the insurance of private aircraft (general
aviation), and employer sponsored, self-insured medical plans (medical
stop-loss), as distinguished from such general lines of business as automobile
or homeowners insurance. We compete with a large number of other companies in
our selected lines of business, including: American International Group and U.S.
Aviation Insurance Group (a subsidiary of Berkshire Hathaway, Inc.) in our
aviation line of business; SAFECO Corporation and Hartford Life, Inc. in our
medical stop-loss line of business; and Underwriters at Lloyd's, ACE Limited and
XL Capital Ltd. in our accident and health line of business. We face competition
both from specialty insurance companies, underwriting agencies and
intermediaries as well as from diversified financial services companies that are
significantly larger than we are and that have significantly greater financial,
marketing and other resources than we do. Some of these competitors also have
longer experience and more market recognition than we do. In addition to
competition in the operation of our business, we face competition from a variety
of sources in attracting and retaining qualified employees.
We cannot assure you that we will maintain our current competitive position
in the markets in which we operate, or that we will be able to expand our
operations into new markets. If we fail to do so, our business could be
materially adversely affected.
BECAUSE WE ARE A PROPERTY AND CASUALTY INSURER, UNFORESEEN CATASTROPHIC LOSSES
MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, LIQUIDITY AND FINANCIAL
CONDITION.
Property and casualty insurers are subject to claims arising out of
catastrophes that may have a significant effect on their results of operations,
liquidity and financial condition. Catastrophe losses have had a significant
impact on our results. Catastrophes can be caused by various events, including
hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires and may include man-made events, such as the September 11,
2001 terrorist attacks on the World Trade Center. The incidence and severity of
catastrophes are inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured exposure in the
area affected by the event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, hurricanes, earthquakes and
terrorist attacks may produce significant damage in large, heavily populated
areas. Catastrophes can cause losses in a variety of our property and casualty
lines, and most of our past catastrophe-related claims have resulted from
hurricanes and earthquakes; however, as a result of the September 11, 2001
terrorist attacks, we experienced the largest single loss to our insurance
company operations in our history. Insurance companies are not permitted to
reserve for a catastrophe until it has occurred. In 2002, we expect that
approximately 10% of our current business may be affected by catastrophes. It is
therefore possible that a catastrophic event or multiple catastrophic events
could have material adverse effect upon our results of operations, liquidity and
financial condition.
BECAUSE WE OPERATE INTERNATIONALLY, FLUCTUATIONS IN CURRENCY EXCHANGE RATES MAY
AFFECT OUR RECEIVABLE AND PAYABLE BALANCES AND OUR RESERVES, WHICH MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We underwrite insurance coverages which are denominated in a number of
foreign currencies, and we establish and maintain our loss reserves with respect
to these policies in their respective currencies. Our net earnings could be
adversely affected by exchange rate fluctuations, which would adversely affect
receivable and payable balances and reserves. Our principal area of exposure
relates to fluctuations in exchange rates between the major European currencies
(particularly the British pound sterling) and the U.S. dollar. Consequently, a
change in the exchange rate between the U.S. dollar and the British pound
sterling could have an adverse effect on our net earnings.
On a limited basis, we enter into foreign currency forward contracts as a
hedge against foreign currency fluctuations. The foreign currency forward
contracts are used to convert currency at a known rate in an amount
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that approximates average monthly expenses. Thus, the effect of these
transactions is to limit the foreign currency exchange risk of the recurring
monthly expenses. We use these foreign currency forward contracts strictly as a
hedge against existing exposure to foreign currency fluctuations rather than as
a form of speculative or trading investment.
IF WE FAIL TO COMPLY WITH EXTENSIVE STATE, FEDERAL AND FOREIGN REGULATIONS, WE
WILL BE SUBJECT TO PENALTIES, WHICH MAY INCLUDE FINES AND SUSPENSION AND WHICH
MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We are subject to extensive governmental regulation and supervision. Most
insurance regulations are designed to protect the interests of policyholders
rather than shareholders and other investors. This regulation, generally
administered by a department of insurance in each state in which we do business,
relates to, among other things:
- approval of policy forms and premium rates;
- standards of solvency, including risk-based capital measurements (which
is a measure developed by the National Association of Insurance
Commissioners and used by state insurance regulators to identify
insurance companies that potentially are inadequately capitalized);
- licensing of insurers and their agents;
- restrictions on the nature, quality and concentration of investments;
- restrictions on the ability of our insurance company subsidiaries to pay
dividends to us;
- restrictions on transactions between insurance company subsidiaries and
their affiliates;
- restrictions on the size of risks insurable under a single policy;
- requiring deposits for the benefit of policyholders;
- requiring certain methods of accounting;
- periodic examinations of our operations and finances;
- prescribing the form and content of records of financial condition
required to be filed; and
- requiring reserves for unearned premium, losses and other purposes.
State insurance departments also conduct periodic examinations of the
affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies, holding
company issues and other matters.
Recently adopted federal financial services modernization legislation is
expected to lead to additional federal regulation of the insurance industry in
the coming years. Also, foreign governments regulate our international
operations. Our business depends on compliance with applicable laws and
regulations and our ability to maintain valid licenses and approvals for our
operations.
Some regulatory authorities have relatively broad discretion to grant,
renew, or revoke licenses and approvals. Regulatory authorities may deny or
revoke licenses for various reasons, including the violation of regulations. In
some instances, we follow practices based on our interpretations of regulations,
or those that we believe may be generally followed by the industry, which may be
different from the requirements or interpretations of regulatory authorities. If
we do not have the requisite licenses and approvals and do not comply with
applicable regulatory requirements, the insurance regulatory authorities could
preclude or temporarily suspend us from carrying on some or all of our
activities or otherwise penalize us. That type of action could have a material
adverse effect on our business. Also, changes in the level of regulation of the
insurance industry (whether federal, state or foreign), or changes in laws or
regulations themselves or interpretations by regulatory authorities, could have
a material adverse effect on our business.
8
IF THE RATING AGENCIES DOWNGRADE OUR COMPANY OR OUR INSURANCE COMPANIES, OUR
RESULTS OF OPERATIONS AND COMPETITIVE POSITION IN THE INDUSTRY MAY SUFFER.
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Our insurance companies are rated
by A.M. Best Company and Standard & Poor's Corporation. A.M. Best and Standard &
Poor's ratings reflect their opinions of an insurance company's and insurance
holding company's financial strength, operating performance, strategic position,
and ability to meet its obligations to policyholders, and are not evaluations
directed to investors. Our ratings are subject to periodic review by A.M. Best
and Standard & Poor's and the continued retention of those ratings cannot be
assured. If our ratings are reduced from their current levels by A.M. Best
and/or Standard & Poor's, our results of operations could be adversely affected.
OUR LOSS RESERVES ARE BASED ON AN ESTIMATE OF OUR FUTURE LIABILITY. IF ACTUAL
CLAIMS PROVE TO BE GREATER THAN OUR RESERVES, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We maintain loss reserves to cover our estimated liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of our general expenses, for reported and unreported claims incurred as
of the end of each accounting period. Reserves do not represent an exact
calculation of liability. Rather, reserves represent an estimate of what we
expect the ultimate settlement and administration of claims will cost. These
estimates, which generally involve actuarial projections, are based on our
assessment of facts and circumstances then known, as well as estimates of future
trends in claims severity, frequency, judicial theories of liability and other
factors. These variables are affected by both internal and external events, such
as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable in
advance. Additionally, there may be a significant reporting lag between the
occurrence of the insured event and the time it is reported to us. The inherent
uncertainties of estimating reserves are greater for certain types of
liabilities, particularly those in which the various considerations affecting
the type of claim are subject to change and in which long periods of time may
elapse before a definitive determination of liability is made. Reserve estimates
are continually refined in a regular and ongoing process as experience develops
and further claims are reported and settled. Adjustments to reserves are
reflected in the results of the periods in which such estimates are changed.
Because setting reserves is inherently uncertain, there can be no assurance that
current reserves will prove adequate in light of subsequent events.
We have recently announced that we estimate our pre-tax gross loss related
to the terrorist attacks of September 11, 2001 to be $141.0 million and our
pre-tax net loss to be $35.0 million. We believe our estimates of gross and net
losses to be reasonable, but they may be subject to adjustment as we receive
additional information from our clients and producers. It is difficult to fully
estimate our losses from the September 11, 2001 attacks given the uncertain
nature of the damage theories related to insurance claims made in connection
with the attacks.
WE INVEST A SIGNIFICANT AMOUNT OF OUR ASSETS IN FIXED INCOME SECURITIES THAT
HAVE EXPERIENCED MARKET FLUCTUATIONS. FLUCTUATIONS IN THE FAIR MARKET VALUE OF
FIXED INCOME SECURITIES MAY GREATLY REDUCE THE VALUE OF OUR INVESTMENT
PORTFOLIO, AND AS A RESULT, OUR FINANCIAL CONDITION MAY SUFFER.
As of September 30, 2001, $489.7 million of our $911.8 million investment
portfolio was invested in fixed income securities. The fair market value of
these fixed income securities and the investment income from these fixed income
securities fluctuate depending on general economic and market conditions. With
respect to our investments in fixed income securities, the fair market value of
these investments generally increases or decreases in an inverse relationship
with fluctuations in interest rates, while net investment income realized by us
from future investments in fixed income securities will generally increase or
decrease with interest rates. In addition, actual net investment income and/or
cash flows from investments that carry prepayment risk (such as mortgage-backed
and other asset-backed securities) may differ from those anticipated at the time
of investment as a result of interest rate fluctuations. An investment has
prepayment risk when there is a risk that the timing of cash flows that result
from the repayment of principal might occur earlier than anticipated because of
declining interest rates or later than anticipated because of rising interest
rates. Historically, the
9
impact of market fluctuations has affected our financial statements. Because all
of our fixed income securities are classified as available for sale, changes in
the fair market value of our securities are reflected in our balance sheet.
Similar treatment is not available for liabilities. Therefore, interest rate
fluctuations could adversely affect our generally accepted accounting
principles, or GAAP, shareholders' equity, total comprehensive income and/or our
cash flows. Historically, the impact of market fluctuations has affected our
financial statements. Unrealized pre-tax net investment gains (losses) on
investments in fixed-income securities were $11.9 million, ($19.0 million) and
$3.6 million for the years ended 2000, 1999 and 1998, respectively.
IF STATES DRASTICALLY INCREASE THE ASSESSMENT OUR INSURANCE COMPANIES ARE
REQUIRED TO PAY, OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION WILL SUFFER.
Our insurance company subsidiaries are subject to assessments in most
states where we are licensed for the provision of funds necessary for the
settlement of covered claims under certain policies provided by impaired,
insolvent or failed insurance companies. Maximum contributions required by law
in any one year vary by state and have historically been between 1% and 2% of
annual premiums written. We cannot predict with certainty the amount of future
assessments. Significant assessments could have a material adverse effect on our
financial condition or results of operations.
IF WE ARE UNABLE TO OBTAIN DIVIDENDS IN NEEDED AMOUNTS FROM OUR INSURANCE
COMPANY SUBSIDIARIES AS A RESULT OF REGULATORY RESTRICTIONS, WE MAY NOT BE ABLE
TO MEET OUR DEBT, DIVIDEND, AND EXPENSE OBLIGATIONS.
Our principal assets are the shares of capital stock of our insurance
company subsidiaries. We may rely on dividends from our insurance company
subsidiaries to meet our obligations for paying principal and interest on
outstanding debt obligations, dividends to shareholders and corporate expenses.
The payment of dividends by our insurance company subsidiaries is subject to
regulatory restrictions and will depend on the surplus and future earnings of
these subsidiaries, as well as the regulatory restrictions. As a result, should
our other sources of funds prove to be inadequate, we may not be able to receive
dividends from our insurance company subsidiaries at times and in amounts
necessary to meet our obligations.
10
USE OF PROCEEDS
Except as otherwise described in the applicable prospectus supplement, we
intend to use the net proceeds from the sale of our securities for general
corporate purposes, including, but not limited to, the following purposes:
- contribute capital to insurance company subsidiaries;
- make acquisitions;
- make capital expenditures;
- provide working capital;
- purchase equity or fixed income investments;
- repay or refinance debt or other corporate obligations; or
- repurchase and redeem securities.
Pending any specific application, we may initially invest funds in
short-term marketable securities or apply them to the reduction of short-term
indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of our earnings to our fixed charges for the periods indicated
are as follows:
FOR THE NINE MONTHS FOR THE YEARS ENDED DECEMBER 31,
ENDED SEPTEMBER 30, ----------------------------------
2001 2000 1999 1998 1997 1996
------------------- ---- ---- ----- ----- ----
Ratio of earnings to fixed charges...... 3.69 5.13 3.58 15.42 11.10 9.31
For these ratios, earnings consist of income before interest expense,
including amortization of capitalized expenses related to indebtedness estimated
interest factor (33.3%) of rental expense, accounting changes and income taxes.
Fixed charges consist of interest expense, including amounts capitalized,
amortization of capitalized expenses related to indebtedness, and estimated
interest factor (33.3%) of rent expense.
DESCRIPTION OF OUR COMMON STOCK
Set forth below is a summary of all of the material provisions of our
organizational documents. You should read the organizational documents, which
are filed as exhibits to this registration statement, for other provisions that
may be important to you. In addition, you should be aware that the summary below
does not give full effect to the terms of the provisions of statutory or common
law which may affect your rights as a shareholder.
Pursuant to our Certificate of Incorporation, we have the authority to
issue an aggregate of 250,000,000 shares of common stock, par value $1.00 per
share. As of December 31, 2001, 61,437,555 shares of common stock were
outstanding, and 5,789,323 shares of our common stock were reserved for issuance
under our various stock option plans.
Voting rights. Each share of common stock is entitled to one vote in the
election of directors and on all other matters submitted to a vote of our
shareholders. Our shareholders do not have the right to cumulate their votes in
the election of directors.
Dividends, distributions and stock splits. Holders of our common stock are
entitled to receive dividends if, as and when such dividends are declared by our
Board of Directors out of assets legally available therefor.
Liquidation. In the event of any dissolution, liquidation, or winding up
of our affairs, whether voluntary or involuntary, after payment of our debts and
other liabilities, our remaining assets will be distributed ratably among the
holders of common stock.
11
Fully Paid. All shares of common stock outstanding are fully paid and
nonassessable, and all the shares of common stock to be outstanding upon
completion of this offering will be fully paid and nonassessable.
Other Rights. Holders of our common stock have no redemption or conversion
rights and no preemptive or other rights to subscribe for our securities.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
We are a Delaware corporation. The Delaware General Corporation Law
contains certain provisions that could discourage potential takeover attempts
and make it more difficult for our shareholders to change management or receive
a premium for their shares.
Delaware Law. We are subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a business combination with
an "interested shareholder" for a period of three years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner that includes approval
by at least 66.7% of the outstanding stock not owned by the interested
shareholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the shareholder. For purposes of
Section 203, an "interested shareholder" is defined to include any person that
is:
- the owner of 15% or more of the outstanding voting stock of the
corporation;
- an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and
- an affiliate or associate of the persons described in the foregoing
bullet points.
Shareholders may, by adopting an amendment to the corporation's Certificate
of Incorporation or Bylaws, elect for the corporation not to be governed by
Section 203, effective 12 months after adoption. Neither our Certificate of
Incorporation nor our Bylaws exempt us from the restrictions imposed under
Section 203. It is anticipated that the provisions of Section 203 may encourage
companies interested in acquiring us to negotiate in advance with our Board of
Directors because shareholder approval of the transaction, as discussed above,
would be unnecessary.
Charter and Bylaw Provisions. Our Certificate of Incorporation and Bylaws
provide that any action required or permitted to be taken by our shareholders
may be effected either at a duly called annual or special meeting of the
shareholders or by written consent of the shareholders. Special meetings of
shareholders may be called by the President, the Board of Directors or by a
majority of the shareholders entitled to vote at the special meeting.
Our Certificate of Incorporation does not provide for the division of our
Board of Directors into classes. Each year at the annual meeting of
shareholders, all directors are elected to hold office until the next succeeding
annual meeting of shareholders. The number of directors is fixed by resolution
of the Board, but is required under the Bylaws to be at least seven and not more
than fifteen. The size of the board is currently fixed at thirteen members.
Directors may be removed with the approval of the holders of a majority of
the shares entitled to vote at a meeting of shareholders. Directors may be
removed by shareholders with or without cause. Vacancies and newly-created
directorships resulting from any increase in the number of directors may be
filled by a majority of the directors then in office, a sole remaining director,
or the holders of a majority of the shares entitled to vote at a meeting of
shareholders.
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LIMITATION OF LIABILITY; INDEMNIFICATION
Our Certificate of Incorporation contains certain provisions permitted
under the Delaware General Corporation Law relating to the liability of
directors. These provisions eliminate a director's personal liability for
monetary damages resulting from a breach of fiduciary duty, except that a
director will be personally liable:
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law relating to
unlawful stock repurchases or dividends; or
- for any transaction from which the director derives an improper personal
benefit.
These provisions do not limit or eliminate our rights or those of any
shareholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.
Our Bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We have
entered into separate indemnification agreements with our directors and officers
that may, in some cases, be broader than the specific indemnification provisions
contained in our Certificate of Incorporation, Bylaws or the Delaware General
Corporation Law. The indemnification agreements may require us, among other
things, to indemnify the officers and directors against certain liabilities,
other than liabilities arising from willful misconduct, that may arise by reason
of their status or service as directors or officers. These agreements also may
require us to advance the expenses incurred by the officers and directors as a
result of any proceeding against them as to which they could be indemnified. We
believe that these indemnification arrangements are necessary to attract and
retain qualified individuals to serve as directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is First Union
National Bank.
DESCRIPTION OF SENIOR DEBT SECURITIES AND
SUBORDINATED DEBT SECURITIES
GENERAL
The debt securities will be our general unsecured obligation and will be
issued as either senior notes and debentures, which are referred to throughout
as the senior debt securities, or subordinated notes and debentures, which are
referred to throughout as the subordinated debt securities, or both. We would
issue our debt securities under one or more separate indentures, in each case
between us, our subsidiary guarantors and the trustee, and in substantially the
form that has been filed as an exhibit to the registration statement of which
this prospectus is a part, but subject to any future amendments or supplements.
We will issue senior debt securities under a senior indenture and subordinated
debt securities under a subordinated indenture. We refer to the senior indenture
and the subordinated indenture below singularly as the indenture or together as
the indentures. We refer to the senior trustee and the subordinated trustee
below individually as a trustee and together as the trustees.
Set forth below is a summary of all of the material terms of the
indentures. The particular terms of the debt securities we might offer and the
extent to which these general provisions apply will be described in a prospectus
supplement relating to the offered debt securities. We have included the forms
of the indentures under which the offered debt securities will be issued as
exhibits to the registration statement, and you should read the indentures for
provisions that may be important to you.
13
Our payment obligations under any debt securities may, if specified in any
prospectus supplement, be fully and unconditionally guaranteed by one or more of
our subsidiaries as subsidiary guarantors. If any series of debt securities is
guaranteed by one of our subsidiaries, the applicable prospectus supplement will
identify each subsidiary guarantor and describe such subsidiary guarantee,
including the circumstances in which it may be released. Unless specified
otherwise in any prospectus supplement, any guarantee of debt securities by one
or more of our subsidiaries will be on a full and unconditional basis.
Unless we provide otherwise in any prospectus supplement, the indentures do
not limit the aggregate principal amount of debt securities that we can issue.
We may issue debt securities in one or more series and in differing aggregate
principal amounts. We may issue debt securities in any currency or currency unit
that we may designate. We may issue debt securities in registered or global
form. The rights of holders of debt securities will be limited to our assets and
the assets of any subsidiary guarantors.
Except in the case of any debt securities that are guaranteed by a
subsidiary guarantor, the debt securities will not be obligations of any of our
subsidiaries. Except as may be described in any prospectus supplement, the
indentures do not limit the ability of our subsidiaries to incur debt in the
future. Our right to participate in the assets of any subsidiary (and thus the
ability of holders of the debt securities to benefit indirectly from such
assets) is generally subject to the prior claims of creditors, including trade
creditors, of that subsidiary, except to the extent that we are recognized as a
creditor of such subsidiary, in which case our claims would still be subject to
any security interest of other creditors of such subsidiary. Unless the debt
securities are guaranteed by our subsidiaries, the debt securities will be
structurally subordinated to creditors, including trade creditors, of our
subsidiaries with respect to the assets of the subsidiaries against which such
creditors have a more direct claim.
The senior debt securities will rank equally with all of our other senior
debt, if any. As of September 30, 2001, our debt to equity ratio was 19.8:100.
If we offer subordinated debt, the subordinated debt securities will have a
junior position to all of our senior debt, if any. We currently have outstanding
$172,500,000 in 2.00% Convertible Notes Due 2021, which are unsecured
obligations that will rank equally with our existing and future unsecured senior
indebtedness. As of December 31, 2001, we have no outstanding indebtedness under
our $200,000,000 bank loan facility. Any amounts borrowed under that facility
would be senior to the subordinated debt securities. We will disclose any
material changes to such amounts in a prospectus supplement prepared in
accordance with this prospectus. Other than as may be described in a prospectus
supplement, neither indenture will contain any covenant or provision that
affords debt holders protection in the event that we enter into a highly
leveraged transaction in which we borrow a substantial amount of the monetary
requirements for such transaction. These same holders would not have any right
to require us to repurchase the debt securities, in the event that the credit
rating of any debt securities declined as a result of our involvement in a
takeover, recapitalization, similar restructuring or otherwise.
A prospectus supplement including the indentures, filed as an exhibit,
relating to any series of debt securities that we may offer will include
specific terms relating to the offering. These terms will include some or all of
the following:
- the title and type of debt securities being offered, which may include
medium term notes;
- the total principal amount of debt securities being offered;
- whether the debt securities will be issued in one or more forms of global
securities and whether such global securities are to be issuable in
temporary global form or permanent global form;
- whether the debt securities will be guaranteed by any of the subsidiaries
of the Company;
- the dates on which the principal of, and premium, if any, on the offered
debt securities is payable;
- the interest rate or the method of determining the interest rate;
- the date from which interest will accrue;
- the interest payment dates;
14
- the place where the principal, premium and interest is payable;
- any optional redemption periods;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- whether the debt securities will be convertible into shares of common
stock or exchangeable for other of our securities (which would be
required to be registered under the Securities Act of 1933) and if so,
the terms of conversion or exchange;
- the currency or currencies, if other than U.S. dollars, in which
principal payments or other payments will be payable;
- events causing acceleration of maturity;
- any provisions granting special rights to holders when a specified event
occurs;
- any changes to or additional events of default or covenants;
- any material United States federal income tax consequences and any
special tax implications of ownership and disposition of the debt
securities; and
- any other terms of the debt securities.
The debt securities will be issued in registered form. There will be no
service charge for any registration, transfer or exchange of debt securities. We
may, however, require payment of an amount that would be sufficient to cover any
tax or other governmental charge we may incur. We may sell debt securities at a
discount or premium (which may be substantial) below or above their stated
principal amount, either bearing no interest or bearing interest at a rate that
may be below the market rate at the time we issue the debt securities.
We will describe any material United States federal income tax consequences
and other special considerations applicable to discounted debt securities in the
prospectus supplement. If we sell any of the offered debt securities for any
foreign currency or currency unit, or if any of the principal, premium or
interest, if any, is payable on any of the offered debt securities, the
restrictions, elections, tax consequences, specific terms and other information
pertaining to the offered debt securities and such foreign currency or foreign
currency unit will be set forth in the prospectus supplement describing such
offered debt securities.
DENOMINATIONS
We will issue the debt securities in registered form of $1,000 each or
integral multiples thereof.
SUBORDINATION
Under the subordinated indenture, payment of the principal, interest and
any premium on the subordinated debt securities generally will be subordinated
and junior in right of payment to the prior payment in full of all senior
indebtedness. The subordinated indenture defines senior indebtedness to include
all notes or other unsecured evidences of indebtedness, including our guarantees
for money borrowed by us, not expressed to be subordinate or junior in right of
payment to any other of our indebtedness and all extensions of such
indebtedness. The subordinated indenture provides that no payment of principal,
interest and any premium on the subordinated debt securities may be made in the
event:
- of any insolvency, bankruptcy or similar proceeding involving us or our
property;
- we fail to pay the principal, interest, any premium or any other amounts
on any senior indebtedness when due;
- of a default (other than a payment default with respect to the senior
indebtedness) that imposes a payment blockage on the subordinated debt
securities for a maximum of 179 days at any one time, unless the event of
default has been cured or waived or shall no longer exist; or
15
- the principal and any accrued interest on any series of subordinated debt
securities has been declared due and payable upon an event of default
described in the subordinated debt indenture and such declaration has not
been rescinded.
In the event of any voluntary or involuntary bankruptcy, insolvency,
reorganization or other similar proceeding relating to us, all of our
obligations to holders of senior indebtedness will be entitled to be paid in
full before any payment shall be made on account of the principal of, or
premium, if any, or interest, if any, on the subordinated debt securities of any
series. In the event of any such bankruptcy, insolvency, reorganization or other
similar proceeding, holders of the subordinated debt securities of any series,
together with holders of indebtedness ranking equally with the subordinated debt
securities, shall be entitled, ratably, to be paid amounts that are due to them,
but only from assets remaining after we pay in full the amounts that we owe on
our senior indebtedness. We will make these payments before we make any payment
or other distribution on account of any indebtedness that ranks junior to the
subordinated debt securities. However, if we have paid in full all of the sums
that we owe with respect to our senior indebtedness and creditors in respect of
our obligations associated with such derivative products have not received
payment in full of amounts due to them, then the available remaining assets
shall be applied to payment in full of those obligations before any payment is
made on the subordinated debt securities. If we are in default on any of our
senior indebtedness or if any such default would occur as a result of certain
payments, then we may not make any payments on the subordinated debt securities
or effect any exchange or retirement of any of the subordinated debt securities
unless and until such default has been cured or waived or otherwise ceases to
exist.
No provision contained in the subordinated indenture or the subordinated
debt securities affects our absolute and unconditional obligation to pay when
due, principal of, premium, if any, and interest on the subordinated debt
securities and neither the subordinated indenture nor the subordinated debt
securities prevent the occurrence of any default or event of default under the
subordinated indenture or limit the rights of the subordinated trustee or any
holder of subordinated debt securities, subject to the three preceding
paragraphs, to pursue any other rights or remedies with respect to the
subordinated debt securities. As a result of these subordination provisions, in
the event of the liquidation, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or an assignment for the benefit of our
creditors or any of our subsidiaries or a marshaling of our assets or
liabilities and our subsidiaries, holders of subordinated debt securities may
receive ratably less than other creditors.
If this prospectus is being delivered in connection with a series of
subordinated debt securities, the accompanying prospectus supplement or the
information incorporated herein by reference will set forth the approximate
amount of senior indebtedness outstanding as of the end of the most recent
fiscal quarter.
EVENTS OF DEFAULT; REMEDIES
The following are defined as events of default under each indenture:
- our failure to pay principal or any premium on any debt security when
due;
- our failure to pay any interest on any debt security when due, continued
for 30 days;
- our failure to deposit any mandatory sinking fund payment when due,
continued for 30 days;
- our failure to perform any other covenant or warranty in the Indenture
that continues for 90 days after written notice;
- our certain events of bankruptcy, insolvency or reorganization; and
- any other event of default as may be specified with respect to debt
securities of such series.
An event of default for a particular series of debt securities does not
necessarily constitute an event of default for any other series of debt
securities. The trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal or interest) if the trustee
considers withholding of notice to be in the best interest of the holders. If an
event of default occurs, either the trustee or the holders of at least 25% of
the principal amount of the outstanding debt securities may declare the
principal amount of the debt
16
securities of the applicable series to be due and payable immediately. If this
happens, subject to certain conditions, the holders of a majority of the
principal amount of the outstanding debt securities of such series can void the
declaration. These conditions include the requirement that we have paid or
deposited with the trustee a sum sufficient to pay all overdue principal and
interest payments on the series of debt securities subject to the default. If an
event of default occurs due to certain events of bankruptcy, insolvency or
reorganization, the principal amount of the outstanding debt securities of all
series will become immediately due and payable without any declaration or other
act on the part of either trustee or any holder.
Depending on the terms of our indebtedness, an event of default under an
indenture may cause a cross default on our other indebtedness. Other than its
duties in the case of default, a trustee is not obligated to exercise any of its
rights or powers under any indenture at the request, order or direction of any
holder or group of holders unless the holders offer the trustee reasonable
indemnity. If the holders provide reasonable indemnification, the holders of a
majority of the principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee, or exercising any power conferred upon the trustee for any series
of debt securities. The holders of a majority of the principal amount
outstanding of any series of debt securities may, on behalf of all holders of
such series, waive any past default under the indenture, except in the case of a
payment of principal or interest default. We are required to provide to each
trustee an annual statement reflecting the performance of our obligations under
the indenture and any statement of default, if applicable.
COVENANTS
Under the indentures, we will:
- pay the principal, interest and any premium on the debt securities when
due;
- maintain a place of payment;
- deliver a report to the trustee at the end of each fiscal year reviewing
our obligations under the indentures; and
- deposit sufficient funds with any payment agent on or before the due date
for any principal, interest or any premium.
MODIFICATION OR AMENDMENT OF INDENTURES
Under each indenture, all rights and obligations and the rights of the
holders may be modified or amended with the consent of the holders of a majority
in aggregate principal amount of the outstanding debt securities of each series
affected by the modification or amendment. No modification or amendment may,
however, be made without the consent of the holders of any debt securities if
the following provisions are affected:
- change in the stated maturity date of the principal payment or
installment of any principal payment;
- reduction in the principal amount or premium on, or interest on any of
the debt securities;
- reduction in the percentage required for modifications or amendment to be
effective against any holder of any debt securities.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Each indenture generally permits a consolidation or merger between us and
another corporation. Each indenture also permits us to sell all or substantially
all of our property and assets. If this happens, the surviving or acquiring
company will assume all of our responsibilities and liabilities under the
indentures, including the payment of all amounts due on the debt securities and
the performance of the covenants in the indentures. We will only consolidate or
merge with or into any other company or sell all, or substantially all, of our
assets according to the terms and conditions of the indentures. The surviving or
acquiring company will be substituted for us in the Indentures with the same
effect as if it had been an original party to the indenture.
17
Thereafter, the successor company may exercise our rights and powers under any
indenture, in our name or in its own name. Any act or proceeding our board of
directors or any of our officers are required or permitted to do may be done by
the board of directors or officers of the successor company. If we sell all or
substantially all of our assets, we shall be released from all our liabilities
and obligations under any Indenture and under the debt securities.
DISCHARGE AND DEFEASANCE
We will be discharged from our obligations under the debt securities of any
series at any time if we irrevocably deposit with the trustee enough cash or
U.S. government securities to pay the principal, interest, any premium and any
other sums due through the stated maturity date or redemption date of the debt
securities of the series. In this event, we will be deemed to have paid and
discharged the entire indebtedness on all outstanding debt securities of the
series. Accordingly, our obligations under the applicable indenture and the debt
securities of such series to pay any principal, premium, or interest, if any,
shall cease, terminate and be completely discharged. The holders of any debt
securities shall then only be entitled to payment out of the money or U.S.
government securities deposited with the trustee and such holders of debt
securities of such series will not be entitled to the benefits of the indenture
except as relate to the registration, transfer and exchange of debt securities
and the replacement of lost, stolen or mutilated debt securities.
PAYMENT AND PAYING AGENTS
We will pay the principal, interest and premium on fully registered
securities at designated places. We will pay by check mailed to the person in
whose name the debt securities are registered on the day specified in the
indentures or any prospectus supplement. We will make debt securities payments
in other forms at a place we designate and specify in a prospectus supplement.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Fully registered debt securities may be transferred or exchanged at the
corporate trust office of the trustee or at any other office or agency we
maintain for such purposes without the payment of any service charge except for
any tax or governmental charge. The registered securities must be duly endorsed
or accompanied by a written instrument of transfer, if required by us or the
security registrar. We will describe any procedures for the exchange of debt
securities for other debt securities of the same series in the prospectus
supplement for that offering.
GLOBAL SECURITIES
We may issue the debt securities of a series in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
we identify in a prospectus supplement. We may issue global securities in
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or part for the individual debt securities it represents,
the depositary or its nominee may not transfer a global security except as a
whole. The depositary for a global security and its nominee may only transfer
the global security between themselves or their successors. We will make
principal, premium and interest payments on global securities to the depositary
or the nominee it designates as the registered owner for such global securities.
The depositary or its nominee will be responsible for making payments to you and
other holders of interests in the global securities. We and the paying agents
will treat the persons in whose names the global securities are registered as
the owners of such global securities for all purposes. Neither we nor the paying
agents have any direct responsibility or liability for the payment of principal,
premium or interest to owners of beneficial interests in the global securities,
and such liability is that of the depositary or its variance. As a result the
beneficial interest holder may have to rely on the depositary to recover in the
event of default.
DESCRIPTION OF WARRANTS
We may issue warrants, including warrants to purchase common stock, debt
securities or other securities registered pursuant to this registration
statement and described in this prospectus. We may issue warrants
18
independently or together with other securities that may be attached to or
separate from the warrants. We will issue each series of warrants under a
separate warrant agreement that will be entered into between us and a bank or
trust company, as warrant agent, and will be described in the prospectus
supplement relating to the particular issue of warrants. The warrant agent will
act solely as our agent in connection with the warrant of such series and will
not assume any obligation or relationship of agency for or with holders or
beneficial owners of warrants. The following describes certain general terms and
provisions of the warrants we may offer. We will set forth further terms of the
warrants and the applicable warrant agreement in the applicable prospectus
supplement.
DEBT WARRANTS
The applicable prospectus supplement will describe the terms of any debt
warrants, including the following:
- the title of such debt warrants;
- the offering price for such debt warrants;
- the aggregate number of such debt warrants;
- the designation and terms of the debt securities purchasable upon
exercise of such debt warrants;
- if applicable, the designation and terms of the securities with which
such debt warrants are issued and the number of such debt warrants issued
with each security;
- if applicable, the date from and after which such debt warrants and any
securities issued therewith will be separately transferable;
- the principal amount of debt securities purchasable upon exercise of a
debt warrant and the price at which such principal amount of debt
securities may be purchased upon exercise;
- the date on which the right to exercise such debt warrants shall commence
and the date on which such right shall expire;
- if applicable, the minimum or maximum amount of such debt warrants which
may be exercised at any one time;
- whether the debt warrants represented by the debt warrant certificates or
debt securities that may be issued upon exercise of the debt warrants
will be issued in registered form;
- information with respect to book-entry procedures, if any;
- the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;
- if applicable, a discussion of certain United States federal income tax
considerations;
- the antidilution provisions of such debt warrants, if any;
- the redemption or call provisions, if any, applicable to such debt
warrant; and
- any additional terms of the debt warrants, including terms, procedures
and limitations relating to the exchange and exercise of such debt
warrants.
COMMON STOCK WARRANTS
The applicable prospectus supplement will describe the terms of any
warrants exchangeable for common stock, including:
- the title of such warrants;
- the offering price of such warrants;
19
- the aggregate number of such warrants;
- the designation and terms of the common stock issued by us purchasable
upon exercise of such warrants;
- if applicable, the designation and terms of the securities with which
such warrants are issued and the number of such warrants issued with each
such security;
- if applicable, the date from and after which such warrants and any
securities issued therewith will be separately transferable;
- the number of shares of common stock issued by us purchasable upon
exercise of the warrants and the price at which such shares may be
purchased upon exercise;
- the date on which the right to exercise such warrants shall commence and
the date on which such right shall expire;
- if applicable, the minimum or maximum amount of such warrants which may
be exercised at any one time;
- the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;
- if applicable, a discussion of certain United States federal income tax
considerations; and
- the antidilution provisions of the warrants, if any.
20
PLAN OF DISTRIBUTION
We may distribute the securities described in this prospectus or any
prospectus supplement from time to time in one or more transactions at a fixed
price or prices (which may be changed from time to time), at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Each prospectus supplement will describe the
method of distribution of the securities offered under that prospectus
supplement.
We may sell securities directly, through agents designated from time to
time, through underwriting syndicates led by one or more managing underwriters
or through one or more underwriters acting alone. Each prospectus supplement
will describe the terms of the securities to which the prospectus supplement
relates, the name or names of any underwriters or agents with whom we have
entered into arrangements with respect to the sale of such securities, the
public offering or purchase price of such securities and the net proceeds we
will receive from such sale.
In addition, each prospectus supplement will describe any underwriting
discounts and other items constituting underwriters' compensation, any discounts
and commissions allowed or paid to dealers, if any, any commissions allowed or
paid to agents, and the securities exchange or exchanges, if any, on which the
subject securities will be listed.
Any underwriter or agent participating in the distribution of the
securities may be deemed to be an underwriter, as that term is defined in the
Securities Act, of the offered securities and sold and any discounts or
commissions received by them, and any profit realized by them on the same or
resale of the securities may be deemed to be underwriting discounts and
commissions under the Securities Act. Certain of any such underwriters and
agents, including their associates, may be customers of, engage in transactions
with and perform services for us and our subsidiaries in the ordinary course of
business.
Securities may also be offered and sold, if so indicated in the prospectus
supplement, in connection with a remarketing upon their purchase, in accordance
with a redemption or repayment pursuant to their terms, by one or more firms
("remarketing firms") acting as principals for their own accounts or as agents
for either of us. Any remarketing firm will be identified and the terms of its
agreement, if any, with us and its compensation will be described in the
prospectus supplement. Remarketing firms may be deemed to be underwriters in
connection with the securities remarketed thereby.
If any underwriter or any selling group member intends to engage in
stabilizing, syndicate short covering transactions, penalty bids or any other
transaction in connection with the offering of securities that may stabilize,
maintain, or otherwise affect the price of those securities, such intention and
a description of such transactions will be described in the prospectus
supplement.
Agents and underwriters may be entitled under agreements entered into with
us to indemnification by us against certain civil liabilities, including
liabilities under the Securities Act of 1933, or to contribution with respect to
payments which the agents or underwriters may be required to make in respect
thereof. Certain of any such agents and underwriters, including their
associates, may be customers of, engage in transactions with, or perform
services for, us and our subsidiaries in the ordinary course of business.
Except as indicated in the applicable prospectus supplement, the securities
are not expected to be listed on a securities exchange, except for the common
stock, which is listed on the NYSE, and any underwriters or dealers will not be
obligated to make a market in securities. We cannot predict the activity or
liquidity of any trading in the securities.
CERTAIN LEGAL MATTERS
Unless otherwise indicated in the applicable prospectus supplements, the
validity of the securities offered by this prospectus will be passed upon for us
by Haynes and Boone, LLP, our legal counsel.
21
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K of HCC Insurance Holdings, Inc. for the year
ended December 31, 2000 and to the Current Report on Form 8-K dated June 14,
2001 of HCC Insurance Holdings, Inc. have been so incorporated in reliance on
the reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created by those laws. These forward-looking statements include
information about possible or assumed future results of our operations. All
statements, other than statements of historical facts, included or incorporated
by reference in this prospectus that address activities, events or developments
that we expect or anticipate may occur in the future, including, such things as
future capital expenditures, business strategy, competitive strengths, goals,
growth of our business and operations, plans, and references to future success
may be considered forward-looking statements. Also, when we use words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "probably" or
similar expressions, we are making forward-looking statements.
Many risks and uncertainties may impact the matters addressed in these
forward-looking statements. Many possible events or factors could affect our
future financial results and performance. These could cause our results or
performance to differ materially from those we express in our forward-looking
statements. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, any of these assumptions, and
therefore also the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties
inherent in the forward-looking statements included in this prospectus,
particularly in light of the terrorist attacks on September 11, 2001 and the
global war on terrorism, our inclusion of this information is not a
representation by us or any other person that our objectives and plans will be
achieved. You should consider these risks and those we set out in the Risk
Factors section of this prospectus before you purchase our securities.
Our forward-looking statements speak only as of the date made and we will
not update these forward-looking statements unless the securities laws require
us to do so. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus may not occur.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC maintains an internet site http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers (including us) that file documents with the SEC
electronically. Our SEC filings may be obtained from that web site. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference
facilities. You may also read and copy any document we file with the SEC at the
following SEC public reference facilities:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 233 Broadway Citicorp Center
Room 1024 New York, New York 10279 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Room of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated
22
by reference is considered to be part of this prospectus, and later information
that we file with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until we terminate the offering:
- Our Annual Report on Form 10-K for the year ended December 31, 2000;
- Our Current Report on Form 8-K dated February 23, 2001;
- Our Current Report on Form 8-K dated March 2, 2001;
- Our Current Report on Form 8-K dated May 11, 2001 (to the extent these
items were "filed" with the SEC and not "furnished" to the SEC pursuant
to Regulation FD);
- Our Current Report on Form 8-K dated June 14, 2001;
- Our Current Report on Form 8-K dated July 27, 2001;
- Our Current Report on Form 8-K dated August 10, 2001 (to the extent these
items were "filed" with the SEC and not "furnished" to the SEC pursuant
to Regulation FD);
- Our Current Report on Form 8-K dated August 24, 2001;
- Our Current Report on Form 8-K dated September 14, 2001;
- Our Current Report on Form 8-K dated October 10, 2001;
- Our Current Report on Form 8-K dated November 8, 2001 (to the extent
these items were "filed" with the SEC and not "furnished" to the SEC
pursuant to Regulation FD);
- Our Current Report on Form 8-K dated November 13, 2001 (to the extent
these items were "filed" with the SEC and not "furnished" to the SEC
pursuant to Regulation FD);
- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
and
- Our Quarterly Report on Form 10-Q for the quarter ended September 30,
2001.
Any person, including any beneficial owner, may request a copy of these
filings, at no cost, by writing or telephoning us at the following address:
Investor Relations
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, TX 77040
713-690-7300
23
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$125,000,000
HCC INSURANCE HOLDINGS, INC.
1.30% CONVERTIBLE NOTES DUE 2003
(HCC LOGO)
------------
PROSPECTUS SUPPLEMENT
MARCH 25, 2003
------------
SALOMON SMITH BARNEY
RAYMOND JAMES
WELLS FARGO SECURITIES, LLC
WILLIAM BLAIR & COMPANY
ADVEST, INC.
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