Houston, Texas-based HCC Insurance Holdings Inc., announcing the results of its independent investigation of stock option granting practices, said company founder Stephen L. Way resigned as chief executive officer effective Nov. 17, 2006. Way will remain a director and serve as the non-executive chairman of the Board of Directors.
In addition, Chris L. Martin has resigned as executive vice president and general counsel.
HCC investigated stock option granting practices during the period of 1995 through the present and concluded that the company used incorrect measurement dates for certain stock option grants covering a significant number of employees during the period from 1995 through 2006.
The investigation was conducted by members of the Audit Committee, acting as an independent special committee of the Board of Directors (the “Special Committee”), with the assistance of Skadden, Arps, Slate, Meagher & Flom LLP as independent legal counsel to the Special Committee and LECG as forensic accountants. The company and the Special Committee are working with their advisors to determine the appropriate measurement dates and assess the related financial effects.
LECG currently estimates the cumulative pre-tax financial impact of recording additional non-cash charges associated with stock option grants is not likely to exceed $37 million spread over the vesting periods of the options in question. The company said it expects that the errors will require some increased tax provision.
HCC said it intends to continue cooperating with the SEC in connection with its informal inquiry into this matter.
Way founded the company in 1974 and served as a director, chairman of the Board of Directors and chief executive officer of the company since its organization. Way was also president of the company during most of the period.
Since becoming a public company in 1992 under Way’s leadership, the company’s assets have increased from $162 million to more than $7 billion. During the same time period, the HCC’s gross written premium has risen from $74.9 million to $2 billion in 2005, and annual revenue has increased from $29.1 million to $1.6 billion in 2005. It has also completed over 30 acquisitions.
Effective with Way’s resignation, the Frank J. Bramanti was elected as CEO. Bramanti has over twenty-five years of experience in the property and casualty business, almost all of which were with HCC where he was instrumental in shaping the company’s operational and financial plans as well as its acquisition philosophy. Bramanti has served on HCC’s Board since 1980 and also served from 1980-2001 in various capacities, including as executive vice president, chief financial officer and interim president.
Way is expected to provide assistance to Bramanti and guidance to the company with respect to strategic planning. Way agreed to terminate his employment agreement with the loss of any further compensation including any 2006 bonus and to pay the company the difference between the initial strike price and the closing price on the new measurement date for options he has exercised that were incorrectly priced. In addition, with respect to unexercised vested options, Way also agreed that each new strike price would be based on the new measurement date as determined by the company. Unvested options are being terminated.
Under the terms of his separation agreement, Martin agreed to terminate his employment agreement and to pay the company the difference between the initial strike price and the closing price on the new measurement date for options he has exercised that were incorrectly priced. In addition, with respect to unexercised vested options, Martin also agreed that each new strike price would be based on the new measurement date as determined by the company.
J. Robert Dickerson has been elected to serve as lead director. Dickerson has served on the Board of Directors since 1981.
The company has amended its option granting practices to provide for fixed grant dates, and the Board of Directors will continue to consider the report of the Special Committee and appropriate remedial measures to enhance the process for equity based compensation awards in the future.
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