-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QA7lg6krFCsPPUYjaqW9T2tZ4sLCiI8Fxf9I3HaNKCETo9xXLHIbf/sLaBCgBhJ/ Nx0N/xtZ3C2XAt9LniAGpg== 0000950129-02-002550.txt : 20020515 0000950129-02-002550.hdr.sgml : 20020515 20020515123529 ACCESSION NUMBER: 0000950129-02-002550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13790 FILM NUMBER: 02649818 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 h96894e10-q.txt HCC INSURANCE HOLDINGS, INC. - DATED 3/31/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended March 31, 2002. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from _______ to __________ Commission file number 0-20766 -------------------------------------------------------- HCC Insurance Holdings, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 76-0336636 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13403 Northwest Freeway, Houston, Texas 77040-6094 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (713) 690-7300 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On May 7, 2002, there were 62.2 million shares of common stock, $1.00 par value issued and outstanding. HCC INSURANCE HOLDINGS, INC. INDEX
PAGE NO. -------- Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets March 31, 2002 and December 31, 2001 ......................... 3 Condensed Consolidated Statements of Earnings For the three months ended March 31, 2002 and 2001 ........... 4 Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2002 and for the year ended December 31, 2001 ............................. 5 Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2002 and 2001 ........... 7 Notes to Condensed Consolidated Financial Statements .............. 8 Item 2. Management's Discussion and Analysis .............................. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 23 Part II. OTHER INFORMATION .......................................................... 24
This report on Form 10-Q 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. We have based these forward-looking statements on our current expectations and projections about future events. 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 report 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 successes 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 which are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. 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, any forward-looking events discussed in this report may not occur. 2 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Balance Sheets (unaudited, in thousands) ----------
March 31, 2002 December 31, 2001 -------------- ----------------- ASSETS Investments: Fixed income securities, at market (cost: 2002 - $533,546; 2001 - $513,674) $ 540,787 $ 525,428 Marketable equity securities, at market (cost: 2002 - $15,297; 2001 - $16,431) 15,241 16,569 Short-term investments, at cost, which approximates market 340,097 338,904 Other investments, at estimated fair value (cost: 2002 - $13,023; 2001 - $8,007) 12,492 7,565 -------------- ----------------- Total investments 908,617 888,466 Cash 12,812 16,891 Restricted cash 154,234 138,545 Premium, claims and other receivables 656,679 665,965 Reinsurance recoverables 898,511 899,128 Ceded unearned premium 73,628 71,140 Ceded life and annuity benefits 82,654 83,013 Deferred policy acquisition costs 36,986 32,071 Property and equipment, net 51,899 52,486 Goodwill 315,206 315,318 Other assets 44,334 56,097 -------------- ----------------- TOTAL ASSETS $ 3,235,560 $ 3,219,120 ============== ================= LIABILITIES Loss and loss adjustment expense payable $ 1,147,848 $ 1,130,748 Life and annuity policy benefits 82,654 83,013 Reinsurance balances payable 91,784 88,637 Unearned premium 191,668 179,530 Deferred ceding commissions 18,557 16,681 Premium and claims payable 678,029 717,159 Notes payable 179,523 181,928 Accounts payable and accrued liabilities 57,668 57,971 -------------- ----------------- Total liabilities 2,447,731 2,455,667 SHAREHOLDERS' EQUITY Common stock, $1.00 par value; 250.0 million shares authorized; (shares issued and outstanding: 2002 - 62,023; 2001 - 61,438) 62,023 61,438 Additional paid-in capital 409,636 402,089 Retained earnings 312,831 293,426 Accumulated other comprehensive income 3,339 6,500 -------------- ----------------- Total shareholders' equity 787,829 763,453 -------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,235,560 $ 3,219,120 ============== =================
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Earnings (unaudited, in thousands, except per share data) ----------
For the three months ended March 31, 2002 2001 ------------ ------------ REVENUE Net earned premium $ 111,478 $ 71,921 Management fees 19,412 15,750 Commission income 10,160 14,641 Net investment income 8,694 10,632 Net realized investment gain (loss) 502 (824) Other operating income 1,463 2,972 ------------ ------------ Total revenue 151,709 115,092 EXPENSE Loss and loss adjustment expense 68,331 48,542 Operating expense: Policy acquisition costs, net 13,054 4,274 Compensation expense 19,626 18,619 Other operating expense 12,600 14,415 ------------ ------------ Net operating expense 45,280 37,308 Interest expense 2,378 3,347 ------------ ------------ Total expense 115,989 89,197 ------------ ------------ Earnings before income tax provision 35,720 25,895 Income tax provision 12,438 10,717 ------------ ------------ Net earnings $ 23,282 $ 15,178 ============ ============ BASIC EARNINGS PER SHARE DATA: Earnings per share $ 0.38 $ 0.28 ============ ============ Weighted average shares outstanding 61,936 53,720 ============ ============ DILUTED EARNINGS PER SHARE DATA: Earnings per share $ 0.37 $ 0.28 ============ ============ Weighted average shares outstanding 62,713 55,070 ============ ============ Cash dividends declared, per share $ 0.0625 $ 0.06 ============ ============
See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2002 and for the year ended December 31, 2001 (unaudited, in thousands, except per share data) ----------
Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' stock capital earnings income equity --------- ---------- ---------- ------------- ------------- BALANCE AS OF DECEMBER 31, 2000 $ 51,342 $ 196,999 $ 277,876 $ 4,713 $ 530,930 Net earnings -- -- 30,197 -- 30,197 Other comprehensive income -- -- -- 1,787 1,787 ------------- Comprehensive income 31,984 6,900 shares of common stock issued in public offering, net of costs 6,900 145,505 -- -- 152,405 2,715 shares of common stock issued for exercise of options, including tax benefit of $12,312 2,715 50,023 -- -- 52,738 300 shares of common stock issued for purchased companies 300 8,031 -- -- 8,331 Issuance of 114 shares of contractually issuable common stock 114 (114) -- -- -- Issuance of 67 shares of contingently issuable common stock 67 1,645 -- -- 1,712 Cash dividends declared, $0.245 per share -- -- (14,647) -- (14,647) --------- ---------- --------- ------------- ------------- BALANCE AS OF DECEMBER 31, 2001 $ 61,438 $ 402,089 $ 293,426 $ 6,500 $ 763,453 ========= ========== ========= ============= =============
See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2002 and for the year ended December 31, 2001 (unaudited, in thousands, except per share data) (continued) ----------
Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' stock capital earnings income (loss) equity ---------- ---------- --------- ------------- ------------- BALANCE AS OF DECEMBER 31, 2001 $ 61,438 $ 402,089 $ 293,426 $ 6,500 $ 763,453 Net earnings -- -- 23,282 -- 23,282 Other comprehensive income (loss) -- -- -- (3,161) (3,161) ------------- Comprehensive income 20,121 482 shares of common stock issued for exercise of options, including tax benefit of $1,562 482 7,650 -- -- 8,132 Issuance of 103 shares of contractually issuable common stock 103 (103) -- -- -- Cash dividends declared, $0.0625 per share -- -- (3,877) -- (3,877) ---------- ---------- --------- ------------- ------------- BALANCE AS OF MARCH 31, 2002 $ 62,023 $ 409,636 $ 312,831 $ 3,339 $ 787,829 ========== ========== ========= ============= =============
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries -------- Condensed Consolidated Statements of Cash Flows (unaudited, in thousands) --------
For the three months ended March 31, 2002 2001 --------- --------- Cash flows from operating activities: Net earnings $ 23,282 $ 15,178 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in premium, claims and other receivables 9,286 11,586 Change in reinsurance recoverables 617 (44,544) Change in ceded unearned premium (2,488) 19,280 Change in loss and loss adjustment expense payable 17,100 46,605 Change in reinsurance balances payable 3,147 (28,057) Change in unearned premium 12,138 (20,009) Change in premium and claims payable, net of restricted cash (54,819) 20,049 Depreciation and amortization expense 2,747 4,521 Other, net 2,092 (5,502) --------- --------- Cash provided by operating activities 13,102 19,107 Cash flows from investing activities: Sales of fixed income securities 68,311 43,806 Maturity or call of fixed income securities 9,812 6,670 Sales of equity securities 1,189 -- Change in short-term investments (1,193) (14,027) Cost of securities acquired (92,951) (60,598) Purchases of property and equipment (1,325) (1,299) --------- --------- Cash used by investing activities (16,157) (25,448) Cash flows from financing activities: Sale of common stock, net of costs 6,570 156,524 Payments on notes payable (2,527) (154,500) Dividends paid and other, net (5,067) (3,023) --------- --------- Cash used by financing activities (1,024) (999) --------- --------- Net change in cash (4,079) (7,340) Cash at beginning of period 16,891 13,991 --------- --------- CASH AT END OF PERIOD $ 12,812 $ 6,651 ========= =========
See Notes to Condensed Consolidated Financial Statement 7 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. and its subsidiaries ("we," "us" and "our") provide specialized property and casualty and accident and health insurance coverages, underwriting agency and intermediary services to commercial customers and individuals. Our lines of business include group life, accident and health; aviation; property, marine and offshore energy; and other specialty insurance and reinsurance. We operate primarily in the United States and in the United Kingdom, although some of our operations have a broader international scope. We underwrite insurance on both a direct basis, where we insure a risk in exchange for a premium, and a reinsurance basis, where we insure all or a portion of another insurance company's risk in exchange for all or portion of the premium. We market our products both directly to customers and through a network of independent and affiliated agents and brokers. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include all adjustments which are, in our opinion, necessary for a fair presentation of the results of the interim periods. All adjustments made to the interim periods are of a normal recurring nature. The condensed consolidated financial statements include the accounts of HCC Insurance Holdings, Inc. and those of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements for periods reported should be read in conjunction with the annual audited consolidated financial statements and related notes. The condensed consolidated balance sheet as of December 31, 2001, and the condensed consolidated statement of changes in shareholders' equity for the year then ended were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. Income Tax For the three months ended March 31, 2002 and 2001, the income tax provision has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between our effective tax rate and the Federal statutory rate is primarily the result of state income taxes, tax exempt municipal bond interest and, in 2001, differences in goodwill amortization. Subsequent Event During April 2002, we drew down $40.0 million on our bank line of credit and made a $50.0 million capital contribution to our largest insurance company, Houston Casualty Company, to support its growth and increased business opportunities. 8 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (1) GENERAL INFORMATION, CONTINUED Effects of Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 142 entitled "Goodwill and Other Intangible Assets" was issued in June, 2001, and became effective for us on January 1, 2002. SFAS No. 142 requires goodwill to be tested for impairment at a level referred to as a reporting unit. SFAS No. 142 requires us to perform the first goodwill impairment test on all reporting units no later than June 30, 2002. The first step is to compare the fair value with the book value of a reporting unit. If the fair value of a reporting unit is less than its book value, the second step will be to calculate the impairment loss, if any, to be reported no later than December 31, 2002. We will recognize any impairment loss from the initial adoption of SFAS No. 142 as a change in accounting principle. After the initial adoption, goodwill of a reporting unit will be tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. SFAS No. 142 also requires the discontinuance of the amortization of goodwill effective January 1, 2002 and that goodwill recognized for acquisitions which were consummated after July 1, 2001 will not be amortized. SFAS No. 142 is not expected to have a material effect on our financial position or cash flows, but it does impact our results of operations. Based upon our preliminary review of the impact of SFAS No. 142 to determine the effect, if any, of the initial goodwill impairment testing, we believe it is unlikely that we will have to record an impairment charge. However, we are still in the process of completing the valuations. During the first quarter of 2002, we performed a preliminary review of our reporting units in accordance with SFAS No. 142. A reporting unit is defined by SFAS No. 142 (paragraph 30) as "...an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component." We review internal financial information on a subsidiary-by-subsidiary basis within each operating segment. SFAS No. 142 requires aggregation of two or more components into a reporting unit if the components have similar economic characteristics. For the insurance companies we believe we will aggregate the subsidiaries into two reporting units: 1) insurance companies licensed in the United States, and 2) United States surplus lines and all other insurance companies. With respect to the underwriting agencies and intermediaries, we believe the individual subsidiaries will be separate reporting units. However, we are still in the process of completing our analysis. 9 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) (continued) (1) GENERAL INFORMATION, CONTINUED The tables below reconcile net earnings and earnings per share we reported to adjusted amounts that we would have reported had we adopted SFAS No. 142 on January 1, 2001 instead of January 1, 2002:
For the three months ended March 31, 2002 2001 ------------ ------------ Net earnings: Reported net earnings $ 23,282 $ 15,178 Add back goodwill amortization -- 2,823 Add back license amortization -- 217 Less tax benefit from goodwill amortization -- (273) ------------ ------------ ADJUSTED NET INCOME $ 23,282 $ 17,945 ============ ============ Basic earnings per share: Reported basic earnings per share $ 0.38 $ 0.28 Add back amortization, net of tax effect -- 0.05 ------------ ------------ ADJUSTED BASIC EARNINGS PER SHARE $ 0.38 $ 0.33 ============ ============ Diluted earnings per share: Reported diluted earnings per share $ 0.37 $ 0.28 Add back amortization, net of tax effect -- 0.05 ------------ ------------ ADJUSTED DILUTED EARNINGS PER SHARE $ 0.37 $ 0.33 ============ ============
The following tables show the balances of our intangible assets, which are included in other assets on our condensed consolidated balance sheets, after our adoption of SFAS No. 142 effective January 1, 2002: Intangible assets not subject to amortization-- insurance company and other licenses $ 6,792 ======== Intangible assets subject to amortization: Gross amounts recorded $ 10,231 Less accumulated amortization (722) -------- NET INTANGIBLE ASSETS SUBJECT TO AMORTIZATION $ 9,509 ========
10 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (1) GENERAL INFORMATION, CONTINUED Amortization of intangible assets which are subject to amortization under SFAS No. 142 amounted to $0.9 million during the first quarter of 2002. There was an insignificant amount of amortization for the first quarter of 2001, as substantially all of our intangible assets subject to amortization were acquired in our October 2001 acquisitions. Estimated amortization expense for 2002 and future years as of January 1, 2002 are as follows: 2002 $ 3,267 2003 2,294 2004 1,477 2005 972 2006 367 Thereafter 1,132 --------------- TOTAL $ 9,509 ===============
Reclassifications Certain amounts in our 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 presentation. Such reclassifications had no effect on our net earnings, shareholders' equity or cash flows. (2) REINSURANCE In the normal course of business our insurance companies cede a portion of their premium to non-affiliated domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, our insurance companies participate in such agreements for the purpose of limiting their loss exposure, protecting them against catastrophic loss and diversifying their business. The following table represents the effect of such reinsurance transactions on premium and loss and loss adjustment expense:
Loss and Loss Written Earned Adjustment Premium Premium Expense --------- --------- ------------- For the three months ended March 31, 2002: Direct business $ 192,090 $ 184,559 $ 143,216 Reinsurance assumed 55,678 49,528 19,100 Reinsurance ceded (125,496) (122,609) (93,985) --------- --------- ------------- NET AMOUNTS $ 122,272 $ 111,478 $ 68,331 ========= ========= =============
11 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (2) REINSURANCE, CONTINUED
Loss and Loss Written Earned Adjustment Premium Premium Expense --------- --------- ------------- For the three months ended March 31, 2001: Direct business $ 181,952 $ 196,410 $ 130,066 Reinsurance assumed 47,262 51,479 100,204 Reinsurance ceded (156,709) (175,968) (181,728) --------- --------- ------------- NET AMOUNTS $ 72,505 $ 71,921 $ 48,542 ========= ========= =============
The table below represents the composition of reinsurance recoverables in our condensed consolidated balance sheets:
March 31, 2002 December 31, 2001 -------------- ----------------- Reinsurance recoverable on paid losses $ 80,216 $ 86,653 Reinsurance recoverable on outstanding losses 406,432 414,428 Reinsurance recoverable on incurred but not reported losses 418,937 403,223 Reserve for uncollectible reinsurance (7,074) (5,176) -------------- ----------------- TOTAL REINSURANCE RECOVERABLES $ 898,511 $ 899,128 ============== =================
Our insurance companies require their reinsurers not authorized by the respective states of domicile of our insurance companies to collateralize the reinsurance obligations due to us. The table below shows amounts held by us as collateral plus other credits available for potential offset.
March 31, 2002 December 31, 2001 -------------- ----------------- Payables to reinsurers $ 197,354 $ 199,581 Letters of credit 144,896 145,796 Cash deposits 15,957 14,851 -------------- ----------------- TOTAL CREDITS $ 358,207 $ 360,228 ============== =================
12 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (2) REINSURANCE, CONTINUED We have a reserve of $7.1 million as of March 31, 2002 for potential collectibility issues related to reinsurance recoverables and associated expenses. During the first three months of 2002, we increased the reserve for uncollectible reinsurance by $1.9 million. The adverse economic environment in the worldwide insurance industry and the terrorist attacks on September 11, 2001 have placed great pressure on reinsurers and the results of their operations. Ultimately, these conditions could affect reinsurers' solvency. Historically, there have been insolvencies following a period of competitive pricing in the industry, such as the marketplace has experienced for the last several years. While we believe that our overall reserve is adequate based on currently available information, conditions may change or additional information might be obtained which may result in a future change in the reserve. We periodically review our financial exposure to the reinsurance market and the level of our reserve and continue to take actions in an attempt to mitigate our risk. A number of reinsurers have delayed or suspended the payment of amounts recoverable under certain reinsurance contracts to which we are a party. Such delays have affected, although not materially to date, the investment income of our insurance companies, but not to any extent their liquidity. We limit our liquidity exposure by holding funds, letters of credit or other security such that net balances due to us are significantly less than the gross balances shown in our consolidated balance sheets. The final resolution of claims, litigation and arbitrations with respect to reinsurance matters to which we are a party may extend over several years. They are more fully discussed in our Form 10-K for the year ended December 31, 2001 and there has been no material change during 2002. (3) SEGMENT AND GEOGRAPHIC INFORMATION The performance of each segment is evaluated based upon net earnings and is calculated after tax and after all corporate expense allocations, purchase price allocations and intercompany eliminations have been charged or credited to the individual segments. The following tables show information by business segment and geographic location. Geographic location is determined by physical location of our offices and does not represent the location of insureds or reinsureds from whom the business was generated. Effective January 1, 2001 and 2002, we consolidated the operations of three and one of our underwriting agencies, respectively, into the operations of our insurance companies. Policies incepting on or after the effective dates, along with associated expenses, will be reported in the insurance company segment. The administration of all policies incepting before the effective dates, which are now in run off, along with associated expenses, will continue to be reported in the underwriting agency segment. This consolidation will affect the comparability of segment information between periods. SFAS No. 142, which we adopted effective January 1, 2002, required the discontinuance of the amortization of goodwill and indefinite lived intangible assets on a prospective basis. This will affect the comparability of certain segment information between periods. Adjusted segment information for the three months ended March 31, 2001, as if we had adopted SFAS No. 142 as of January 1, 2001, is shown in the 2001 table. 13 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total ----------------------------------------------------------------------------------- For the three months ended March 31, 2002: Revenue: Domestic $ 103,413 $ 19,706 $ 5,139 $ 293 $ 613 $ 129,164 Foreign 16,795 507 5,243 -- -- 22,545 Inter-segment -- 6,135 256 -- -- 6,391 ----------------------------------------------------------------------------------- TOTAL SEGMENT REVENUE $ 120,208 $ 26,348 $ 10,638 $ 293 $ 613 158,100 ===================================================================== Inter-segment revenue (6,391) --------- CONSOLIDATED TOTAL REVENUE $ 151,709 ========= Net earnings: Domestic $ 14,364 $ 5,235 $ 565 $ 65 $ 1,348 $ 21,577 Foreign 536 258 1,144 -- -- 1,938 ----------------------------------------------------------------------------------- TOTAL SEGMENT NET EARNINGS $ 14,900 $ 5,493 $ 1,709 $ 65 $ 1,348 23,515 ===================================================================== Inter-segment eliminations (233) --------- CONSOLIDATED NET EARNINGS $ 23,282 ========= Other items: Net investment income $ 7,692 $ 715 $ 222 $ 20 $ 45 $ 8,694 Depreciation and amortization 758 1,607 86 50 246 2,747 Interest expense (benefit) 73 1,986 644 -- (325) 2,378 Capital expenditures 502 424 290 -- 109 1,325 Income tax provision (benefit) 7,319 3,137 1,701 (9) 449 12,597 Inter-segment eliminations (159) --------- CONSOLIDATED INCOME TAX PROVISION $ 12,438 =========
14 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total -------------------------------------------------------------------------------- For the three months ended March 31, 2001: Revenue: Domestic $ 72,128 $ 17,030 $ 7,075 $ 2,432 $ 112 $ 98,777 Foreign 7,110 623 8,582 -- -- 16,315 Inter-segment -- 4,521 75 559 -- 5,155 -------------------------------------------------------------------------------- TOTAL SEGMENT REVENUE $ 79,238 $ 22,174 $ 15,732 $ 2,991 $ 112 120,247 =================================================================== Inter-segment revenue (5,155) --------- CONSOLIDATED TOTAL REVENUE $ 115,092 ========= Net earnings (loss): Domestic $ 7,102 $ 4,018 $ 1,975 $ 516 $ (55) $ 13,556 Foreign (654) 248 1,624 -- -- 1,218 -------------------------------------------------------------------------------- TOTAL SEGMENT NET EARNINGS (LOSS) $ 6,448 $ 4,266 $ 3,599 $ 516 $ (55) 14,774 =================================================================== Inter-segment eliminations 404 --------- CONSOLIDATED NET EARNINGS $ 15,178 ========= Net effect of goodwill and intangible asset amortization $ 569 $ 1,408 $ 790 $ -- $ -- $ 2,767 -------------------------------------------------------------------------------- ADJUSTED SEGMENT NET EARNINGS (LOSS) $ 7,017 $ 5,674 $ 4,389 $ 516 $ (55) 17,541 =================================================================== Inter-segment eliminations 404 --------- ADJUSTED CONSOLIDATED NET EARNINGS $ 17,945 ========= Other items: Net investment income $ 7,694 $ 1,815 $ 1,015 $ 38 $ 70 $ 10,632 Depreciation and amortization 1,400 2,055 886 36 144 4,521 Interest expense 3 1,348 1,093 -- 903 3,347 Capital expenditures 685 311 141 48 114 1,299 Income tax provision 2,395 3,239 3,382 310 1,150 10,476 Inter-segment eliminations 241 --------- CONSOLIDATED INCOME TAX PROVISION $ 10,717 =========
15 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED The following tables present revenue by line of business within each operating segment for the periods indicated:
For the three months ended March 31, 2002 2001 ------------- ------------- Insurance company: Group life, accident and health $ 64,884 $ 40,261 Aviation 25,183 20,342 Property, marine and offshore energy 8,182 3,979 Other specialty lines of business 6,338 2,475 ------------- ------------- SUBTOTAL 104,587 67,057 Discontinued lines of business 6,891 4,864 ------------- ------------- TOTAL NET EARNED PREMIUM $ 111,478 $ 71,921 ============= ============= Underwriting agency: Group life, accident and health $ 11,733 $ 13,377 Property and casualty 7,679 2,373 ------------- ------------- TOTAL MANAGEMENT FEES $ 19,412 $ 15,750 ============= ============= Intermediary: Group life, accident and health $ 8,022 $ 11,291 Property and casualty 2,138 3,350 ------------- ------------- TOTAL COMMISSION INCOME $ 10,160 $ 14,641 ============= =============
16 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (4) EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of common shares outstanding during the period divided into net earnings. Diluted earnings per share is based on the weighted average number of common shares outstanding plus the potential common shares outstanding during the period divided into net earnings. Outstanding common stock options, when dilutive, are considered to be potential common shares for the purpose of the diluted calculation. The treasury stock method is used to calculate potential common shares due to options. Contingent shares to be issued are included in the earnings per share computation only when the underlying conditions for issuance have been met. The following table provides a reconciliation of the denominators used in the earnings per share calculations:
For the three months ended March 31, 2002 2001 -------------- -------------- Net earnings $ 23,282 $ 15,178 ============== ============== Reconciliation of number of shares outstanding: Shares of common stock outstanding at period end 62,023 58,679 Effect of common shares issued during the period (139) (5,114) Common shares contractually issuable in the future 52 155 -------------- -------------- Weighted average common shares outstanding 61,936 53,720 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 777 1,350 -------------- -------------- Weighted average common shares and potential common shares outstanding 62,713 55,070 ============== ==============
As of March 31, 2002, there were approximately 0.4 million options that were not included in the computation of diluted earnings per share because to do so would have been antidilutive. 17 HCC Insurance Holdings, Inc. and Subsidiaries -------- Notes to Condensed Consolidated Financial Statements (unaudited, in thousands) (continued) (5) SUPPLEMENTAL INFORMATION Supplemental information for the three months ended March 31, 2002 and 2001, is summarized below:
2002 2001 --------- --------- Interest paid $ 2,070 $ 6,001 Income tax paid 1,565 3,481 Comprehensive income 20,121 18,932 Ceding commissions netted with policy acquisition costs 33,211 52,762
(6) COMMITMENTS AND CONTINGENCIES In addition to the matters discussed in Note (2), Reinsurance, we are party to numerous lawsuits and other proceedings that arise in the normal course of our business. Many of these lawsuits and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which we believe have been adequately included in our loss reserves. Also, from time to time, we are party to lawsuits and other proceedings which relate to disputes over contractual relationships with third parties, or which involve alleged errors and omissions on the part of our subsidiaries. We believe the resolution of any such lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS Statement of Financial Accounting Standards ("SFAS") No. 142 entitled "Goodwill and Other Intangible Assets" became effective for us on January 1, 2002 and required the discontinuance of the amortization of goodwill and indefinite lived intangible assets on a prospective basis. This will affect the comparability of financial results between periods. See "Effects of Recent Accounting Pronouncements" for additional information. Three months ended March 31, 2002 versus three months ended March 31, 2001 Results of Operations Total revenue increased 32% to $151.7 million for the first quarter of 2002 from $115.1 million for the same period in 2001. The revenue increase resulted principally from increased business and greater retention levels in the insurance company segment, which was partially offset by reductions in the intermediary and other operations segments as a result of lower commission income due to market conditions and less other operating income as a result of the sale of operations in 2001. Net investment income decreased to $8.7 million for the first quarter of 2002 from $10.6 million for the same period in 2001. This decrease was due to the decrease in interest rates partially offset by the higher level of invested assets which resulted from cash flow provided by operating activities. Cash flow provided by operating activities continued to be positive for the first quarter of 2002, but was somewhat lower than the same period in 2001. This difference is due to relative timing of premium receipts and payments for the related payable amounts and our increased retention of business. We expect cash flow provided by operating activities to improve thereby increasing net investment income, but the increase could be substantially offset by the effect of lower interest rates. Compensation expense increased to $19.6 million during the first quarter of 2002 from $18.6 million for the same period in 2001. An increase of $3.2 million is due to agency subsidiaries acquired in October, 2001. This is somewhat offset by a decrease of $1.4 million from subsidiaries sold during the third quarter of 2001. Other operating expense decreased to $12.6 million during the first quarter of 2002 compared to the $14.4 million in 2001. The decrease in other operating expenses results principally from the decrease in the amortization of goodwill and intangible assets and expense savings partially offset by the effect of operations bought and sold subsequent to March 31, 2001. Interest expense was $2.4 million for the first quarter of 2002 compared to $3.3 million for the same period in 2001. The decrease is due to lower interest rates on our outstanding debt. Included in the 2002 amount is $1.1 million representing the amortization of underwriting discounts and expenses of our August 2001 issuance of 2% convertible notes. Such amortization will be completed September 1, 2002. Income tax expense was $12.4 million for the first quarter of 2002 compared to $10.7 million for the same period in 2001. Our effective tax rate was 35% in the 2002 quarter compared to 41% in 2001. Part of the reduction in the effective tax rate is due to the fact that goodwill is not being amortized during 2002 and most of the 2001 amortization of goodwill was not deductible for income tax purposes. Also, a greater percentage of our income in 2002 is from the insurance company segment, which has a lower effective tax rate. Net earnings increased 53% to $23.3 million, or $0.37 per diluted share, for the first quarter of 2002 from $15.2 million, or $0.28 per diluted share, for the same period in 2001. The increase in net earnings resulted from a much improved underwriting performance by the insurance company segment, which more than offset the reductions in the intermediary and other operations segments, and from the non-amortization of goodwill in accordance with SFAS No. 142. Had we adopted SFAS No. 142 effective January 1, 2001 our net income for the first quarter of 2001 would have increased $2.8 million, or $0.05 per diluted share. The percentage increase in net earnings was greater than the increase in earnings per share as our shares outstanding increased due to our March 2001 public offering and the shares issued during the past year in connection with the exercise of options. 19 Our book value per share was $12.69 as of March 31, 2002, up from $12.40 as of December 31, 2001. SEGMENTS Insurance Companies Gross written premium increased 8% to $247.8 million for the first quarter of 2002 from $229.2 million for the same period in 2001 due to the following: o Increases in the property, marine and offshore energy line of business written by the London branch of Houston Casually Company as rates are improving; o Utilizing our insurance companies as the issuing carriers on directors and officers liability and professional liability business written by Professional Indemnity Agency, Inc., an underwriting agency we acquired in October, 2001; and o An increase in rates on non-U.S. aviation business. These increases were partially offset by decreases in lines of businesses we are no longer underwriting. Net written premium for the first quarter of 2002 increased 69% to $122.3 million from $72.5 million for the same period in 2001, as our insurance companies have increased retention on the medical stop-loss business written in 2002, and to a lesser extent property, marine and offshore energy, in addition to the effect of the increases in gross premium described above. Net earned premium increased 55% to $111.5 million for the same reasons. The increase in net written premium and net earned premium is expected to continue. Loss and loss adjustment expense was $68.3 million for the first quarter of 2002 compared to $48.5 million for the same period in 2001. The net loss ratio decreased to 61.3% for the first quarter of 2002 from 67.5% for the same period in 2001. Improved underwriting results were experienced in all of our lines of business with the medical stop-loss part of the group life, accident and health line of business being the largest contributor to the improvement. The gross loss ratio was 69.3% in the first quarter of 2002 compared to 92.9% for the same period in 2001. During the first quarter of 2001, we recorded a gross loss of approximately $55.7 million due to the Petrobras 36 Brazilian offshore energy production platform sinking. Excluding this one claim, our gross loss ratio would have been 70.4% for the first quarter of 2001. The Petrobras claim was substantially reinsured and did not have a material effect on our net earnings. The following tables provide information by line of business (in thousands):
Gross Net Net Net written written earned loss premium premium premium ratio -------- -------- -------- -------- For the three months ended March 31, 2002: Group life, accident and health $145,883 $ 64,927 $ 64,884 64.2% Aviation 44,114 22,633 25,183 58.5 Property, marine and offshore energy 33,828 20,465 8,182 31.6 Other specialty lines of business 20,015 10,923 6,338 69.1 -------- -------- -------- -------- Subtotal 243,840 118,948 104,587 60.6 Discontinued lines of business 3,928 3,324 6,891 72.0 -------- -------- -------- -------- TOTALS $247,768 $122,272 $111,478 61.3% ======== ======== ======== Expense ratio 26.0 -------- Combined ratio 87.3% ========
20
Gross Net Net Net written written earned loss premium premium premium ratio -------- -------- -------- -------- For the three months ended March 31, 2001: Group life, accident and health $150,638 $ 40,442 $ 40,261 70.1% Aviation 34,938 18,265 20,342 58.9 Property, marine and offshore energy 14,279 6,308 3,979 60.7 Other specialty lines of business 3,449 2,475 2,475 82.7 -------- -------- -------- -------- Subtotal 203,304 67,490 67,057 66.6 Discontinued lines of business 25,910 5,015 4,864 79.4 -------- -------- -------- -------- TOTALS $229,214 $ 72,505 $ 71,921 67.5% ======== ======== ======== Expense ratio 28.3 -------- Combined ratio 95.8% ========
Policy acquisition costs, which are net of ceding commissions on reinsurance ceded, increased to $13.1 million during the first quarter of 2002, from $4.3 million in the same period in 2001. This increase is due to the higher net earned premium and the loss of ceding commissions on business now retained. The expense ratio improved to 26.0% for the first quarter of 2002 compared to 28.3% for the same period in 2001, as we were able to increase net earned premium (the denominator) while incurring only a small increase in personnel and infrastructure costs. Net earnings of our insurance companies increased to $14.9 million in the first quarter of 2002 from $6.4 million for the same period in 2001, due to improved underwriting results. Only $0.6 million of the increase was due to the adoption of SFAS No. 142. Underwriting Agencies Management fees increased 23% to $19.4 million for the first quarter of 2002, compared to $15.8 million for the same period in 2001. Subsidiaries acquired in October 2001 accounted for $8.3 million in management fees in the first quarter of 2002. This was offset by a decrease in management fees from our other underwriting agencies as we continue the consolidation of four of our pre-existing underwriting agency operations into our insurance company operations. Net earnings of our underwriting agencies increased to $5.5 million in the first quarter of 2002 from $4.3 million in 2001 primarily as a result of the adoption of SFAS No. 142. There was $1.4 million (net of income tax) of goodwill amortization recorded in 2001 that was not recorded in 2002. The two subsidiaries acquired in October 2001 contributed $1.5 million to net income during the first quarter of 2002 after absorbing interest on acquisition debt and corporate expense allocations. We are cautiously optimistic that we will see increases in revenue and net earnings in future periods as some of our underwriting agency lines of business are showing signs of increasing growth. Intermediaries Commission income decreased to $10.2 million for the first quarter of 2002, compared to $14.6 million for the same period in 2001 due to general market conditions and less ceded reinsurance being placed on behalf of our insurance companies as they increased their retentions. Net earnings of our intermediaries decreased to $1.7 million for the first quarter of 2002 compared to $3.6 million for the same period of 2001 for the same reasons, plus a change in the mix of business, which had a lower gross margin during the current year. We expect only a slow improvement, if any, in this segment until market conditions change. 21 Other Operations The decrease in other operating revenue to $0.3 million during the first quarter of 2002 from $3.0 million for the same period in 2001 resulted principally from the sale or closure of certain operations during 2001. Net earnings of other operations decreased to $0.1 million in 2002 from $0.5 million in 2001 for the same reasons. Quarter to quarter comparisons may vary substantially depending on other operating investments or dispositions thereof in any given period. As of December 31, 2001 all operating entities included in this segment had been sold or closed, so future activity in this segment is expected to remain at a low level. Corporate The net income of the corporate segment was $1.3 million for the first quarter of 2002 compared to a net loss of $0.1 million for the same period in 2001. This improvement resulted from the reduction of interest expense as a result of lower interest rates on our outstanding debt and the repayment of our debt under our bank facility by using the proceeds from the March 2001 public offering of common stock and part of the proceeds from the August, 2001 offering of 2% convertible notes. Liquidity and Capital Resources We receive substantial cash from premiums, collection of reinsurance recoverables, management fees and commission income and, to a lesser extent, investment income and proceeds from sales and redemptions of investments and other assets. Our principal cash outflows are for the payment of claims and loss adjustment expenses, payment of premiums to reinsurers, purchase of investments, debt service, policy acquisition costs, operating expenses, income and other taxes and dividends. Variations in operating cash flows can occur due to timing differences in either the payment of claims and the collection of related recoverables or the collection of receivables and the payment of related payable amounts. We limit our liquidity exposure by holding funds, letters of credit and other security such that net balances due to us are generally less than the gross balances shown in our condensed consolidated balance sheets. We maintain a substantial level of cash and liquid short-term investments which are used to meet anticipated payment obligations. Our consolidated cash and investment portfolio increased $16.1 million, or 2% , during 2002 and totaled $921.4 million as of March 31, 2002 of which $352.9 million was cash and short-term investments. The increase in investments resulted from the positive operating cash flows. During April 2002, we drew down $40.0 million on our bank line of credit and made a $50.0 million capital contribution to our largest insurance company, Houston Casualty Company, to support its growth and increased business opportunities. We have a reserve of $7.1 million as of March 31, 2002 for potential collectibility issues related to reinsurance recoverables and associated expenses. During the first three months of 2002, we increased the reserve for uncollectible reinsurance by $1.9 million. The adverse economic environment in the worldwide insurance industry and the terrorist attacks on September 11, 2001 have placed great pressure on reinsurers and the results of their operations. Ultimately, these conditions could affect reinsurers' solvency. Historically, there have been insolvencies following a period of competitive pricing in the industry, such as the marketplace has experienced for the last several years. While we believe that our overall reserve is adequate based on currently available information, conditions may change or additional information might be obtained which may result in a future change in the reserve. We periodically review our financial exposure to the reinsurance market and the level of our reserve and continue to take actions in an attempt to mitigate our risk. A number of reinsurers have delayed or suspended the payment of amounts recoverable under certain reinsurance contracts to which we are a party. Such delays have affected, although not materially to date, the investment income of our insurance companies, but not to any extent their liquidity. We limit our liquidity exposure by holding funds, letters of credit or other security such that net balances due to us are significantly less than the gross balances shown in our consolidated balance sheets. The final resolution of claims, litigation and arbitrations with respect to 22 reinsurance matters to which we are a party may extend over several years. They are more fully discussed in our Form 10-K for the year ended December 31, 2001 and there has been no material change during 2002. We believe that our operating cash flows, short-term investments and bank facility will provide sufficient sources of liquidity to meet our operating needs for the foreseeable future. Effects of Recent Accounting Pronouncements SFAS No. 142 entitled "Goodwill and Other Intangible Assets" was issued in June, 2001, and became effective for us on January 1, 2002. SFAS No. 142 requires goodwill to be tested for impairment at a level referred to as a reporting unit. SFAS No. 142 requires us to perform the first goodwill impairment test on all reporting units no later than June 30, 2002. The first step is to compare the fair value with the book value of a reporting unit. If the fair value of a reporting unit is less than its book value, the second step will be to calculate the impairment loss, if any, to be reported no later than December 31, 2002. We will recognize any impairment loss from the initial adoption of SFAS No. 142 as a change in accounting principle. After the initial adoption, goodwill of a reporting unit will be tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. SFAS No. 142 also requires the discontinuance of the amortization of goodwill effective January 1, 2002 and that goodwill recognized for acquisitions which were consummated after July 1, 2001 will not be amortized. SFAS No. 142 is not expected to have a material effect on our financial position or cash flows, but it does impact our results of operations. Based upon our preliminary review of the impact of SFAS No. 142 to determine the effect, if any, of the initial goodwill impairment testing, we believe it is unlikely that we will have to record an impairment charge. However, we are still in the process of completing the valuations. During the first quarter of 2002, we performed a preliminary review of our reporting units in accordance with SFAS No. 142. A reporting unit is defined by SFAS No. 142 (paragraph 30) as "...an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component." We review internal financial information on a subsidiary-by-subsidiary basis within each operating segment. SFAS No. 142 requires aggregation of two or more components into a reporting unit if the components have similar economic characteristics. For the insurance companies we believe we will aggregate the subsidiaries into two reporting units: 1) insurance companies licensed in the United States, and 2) United States surplus lines and all other insurance companies. With respect to the underwriting agencies and intermediaries, we believe the individual subsidiaries will be separate reporting units. However, we are still in the process of completing our analysis. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" of our Annual Report on Form 10-K for the year ended December 31, 2001. 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings In addition to the matters discussed in Note (2), Reinsurance, we are party to numerous lawsuits and other proceedings that arise in the normal course of our business. Many of these lawsuits and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which we believe have been adequately included in our loss reserves. Also, from time to time, we are party to lawsuits and other proceedings which relate to disputes over contractual relationships with third parties, or which involve alleged errors and omissions on the part of our subsidiaries. We believe the resolution of any such lawsuit will not have a material adverse effect on our financial position, results of operations or cash flows. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K On February 5, 2002, we reported on Form 8-K that we had signed a letter of intent to acquire all of the outstanding interests in MAG Global Financial Products, LLC. On February 7, 2002, we reported on Form 8-K the text materials used for presentations at various investor conferences. On February 22, 2002, we reported on Form 8-K our announcement of financial results for the fourth quarter and full year of 2001. On March 6, 2002, we reported on Form 8-K the text materials used for presentations at various investor conferences. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCC Insurance Holdings, Inc. ------------------------------------------------- (Registrant) May 15, 2002 /s/ Stephen L. Way - ------------------ ------------------------------------------------- (Date) Stephen L. Way, Chairman of the Board and Chief Executive Officer May 15, 2002 /s/ Edward H. Ellis, Jr. - ------------------ ------------------------------------------------- (Date) Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer 24 -----END PRIVACY-ENHANCED MESSAGE-----