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EXHIBIT (c)(2)
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of March 18, 1997, to indicate
beneficial ownership of shares of the Company's common stock by each director,
nominee and officer named in the Summary Compensation Table, individually, and
all officers and directors of the Company, as a group, and each person known by
the Company to own beneficially more than 5% of the outstanding shares of the
Company's common stock. Except as otherwise indicated, each of the persons
named below has sole voting and investment power with respect to the shares of
common stock beneficially owned by that person.
BENEFICIAL OWNERSHIP
--------------------
PERCENT OF
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER (1) SHARES OUTSTANDING
-------------------- ------ -----------
Anthem Insurance Companies, Inc.(2)................................ 8,693,056 66.8
Great American Insurance Company(8)................................ 2,300,000 15.9
John C. Aplin(5)(7)................................................ 8,549 *
Birch E. Bayh(7)................................................... 9,480 *
John C. Crane(5)(7)................................................ 5,943 *
Mitchell E. Daniels(5)(7).......................................... 7,945 *
Catherine E. Dolan(7).............................................. 789 *
Ernie Green(5)(7).................................................. 3,136 *
Michael B. Henning(6).............................................. 40,996 *
Dwane R. Houser(3)................................................. 8,449 *
L. Ben Lytle(3)(6)................................................. 136,500 1.0
Keith A. Maib...................................................... 2,458 *
Robert C. Nevins(6)................................................ 243 *
Thomas C. Roberts(7)............................................... 4,612 *
William W. Rosenblatt(4)(5)(7)..................................... 9,686 *
Robert S. Schneider(6)............................................. 22,855 *
Patrick M. Sheridan(6)............................................. 78,000 *
Michael L. Smith(5)(7)............................................. 4,827 *
James B. Stradtner(5)(7)........................................... 12,216 *
Frank C. Witthun(6)................................................ 49,421 *
(All directors and officers as a group = 22 persons)(6)............ 431,597 3.3
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* Percentage of ownership is less than 1% of the total outstanding shares
on March 18, 1997.
(1) Unless otherwise noted below, the address of all of the stockholders
listed above is c/o the Company, 120 Monument Circle, Indianapolis,
Indiana 46204.
(2) Amount includes 104,402 shares which have been reserved for issuance
under Anthem's Acordia Stock Plan for key executive hires of Anthem.
(3) Messrs. Lytle and Houser are officers and directors of Anthem and
disclaim beneficial ownership of shares of the Company owned by Anthem.
(4) Amount includes 932 shares which are held by Mr. Rosenblatt's children
as to which he disclaims beneficial ownership.
(5) Amount includes 2,018 shares which are held by Mr. Aplin, 2,767 shares
which are held by Mr. Crane, 2,382 shares which are held by Mr. Smith,
809 shares which are held by Mr. Rosenblatt, 382 shares which are held
by Mr. Stradtner, 103 shares which are held by Mr. Green, and 485
shares which are held by Mr. Daniels under the Company's Deferred
Compensation Plan as to which they each disclaim beneficial ownership.
(6) Amount includes 31,500 exercisable options held by Mr. Lytle, 43,334
exercisable options held by Mr. Witthun, 18,000 exercisable options
held by Mr. Sheridan, 30,734 exercisable options held by Mr. Henning,
21,667 exercisable options held by Mr. Schneider, 89 exercisable
options held by Mr. Nevins, and 189,640 exercisable options held by all
directors and officers as a group. These amounts represent that portion
of
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the named officers and directors' 1993, 1994, 1995 and 1996 option
grants which are exercisable as of March 18, 1997.
(7) Amount includes 5,787 exercisable options which are held by Mr. Rosenblatt,
5,478 exercisable options which are held by each of Messrs. Aplin and Bayh,
4,332 exercisable options which are held by Mr. Stradtner, 4,612
exercisable options which are held by Mr. Roberts, 3,176 exercisable
options which are held by each of Messrs. Crane and Daniels, 3,033
exercisable options which are held by Mr. Green, 2,445 exercisable options
which are held by Mr. Smith and 789 exercisable options which are held by
Ms. Dolan under the Company's Directors Plan.
(8) On October 6, 1993, the Company purchased (the "Acquisition") all of the
outstanding capital stock of American Business Insurance, Inc. from Great
American Insurance Company ("Great American"). In connection with the
Acquisition, the Company issued to Great American 800,000 shares of common
stock of the Company, and warrants to purchase an additional 1,500,000
shares of common stock. The warrants are exercisable at any time until
October 6, 2003, at an exercise price of $25 per share. The 1,500,000
shares of common stock issuable upon exercise of the warrants are included
in the "number of shares" above, and are included as part of the number of
shares outstanding for purposes of calculating "percent of shares
outstanding" above. The Company granted to Great American certain
registration rights in connection with the Acquisition. The terms of the
Acquisition, including the terms of the warrants and the registration
rights granted to Great American, are more fully described in the Current
Report on Form 8-K filed by the Company with the Securities and Exchange
Commission on October 21, 1993, with respect to the Acquisition. On October
14, 1993, an affiliate of Great American filed a Statement on Schedule 13D
with the Securities and Exchange Commission concerning Great American's
ownership of common stock of the Company. Great American's address is 580
Walnut St., Cincinnati, Ohio 55202.
EXECUTIVE COMPENSATION
The Company believes that stockholders should be provided information about
executive compensation that is easy to understand and relevant. The following
disclosure was prepared in accordance with the proxy rules of the Securities and
Exchange Commission.
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SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
RESTRICTED STOCK
FISCAL OTHER ANNUAL STOCK OPTIONS ALL OTHER
EXECUTIVE YEAR SALARY BONUS(5)(6) COMPENSATION(7) AWARDS(3) SHARES COMPENSATION(4)
--------- ---- ------ ----------- -------------- ---------- ------ ---------------
L. Ben Lytle(1)(2)................... 1996 $ 127,232 $ $ $ 0 0 $ 0
Chairman 1995 240,000 0 0 0 0 0
1994 240,000 200,000 0 0 0 0
Frank C. Witthun(3).................. 1996 327,971 297,016 0 160,625 25,000 15,260
President & CEO 1995 230,002 0 0 0 18,000 11,923
1994 209,447 136,179 0 0 0 11,142
Keith A. Maib(3)..................... 1996 90,419 160,844 87,930 75,000 4,583 3,345
Executive Vice President 1995 N/A N/A N/A N/A N/A N/A
& CFO 1994 N/A N/A N/A N/A N/A N/A
Michael B. Henning................... 1996 200,522 156,947 0 0 13,000 12,718
Executive Vice President 1995 190,008 0 0 0 9,600 9,646
1994 181,238 111,725 0 0 0 8,997
Robert S. Schneider.................. 1996 171,577 126,572 0 0 11,000 5,463
Senior Vice President 1995 163,097 0 0 0 7,500 7,402
& Controller 1994 155,012 83,551 0 0 0 8,137
Robert C. Nevins..................... 1996 207,513 109,521 0 0 8,517 4,976
Executive Vice President 1995 N/A N/A 0 0 N/A N/A
1994 N/A N/A 0 0 N/A N/A
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(1) Mr. Lytle is an employee of Anthem who provided services to the Company
in 1996 pursuant to a management agreement between Anthem and the
Company. See "Certain Transactions--Management Agreement." Anthem pays
Mr. Lytle for his services to Anthem as well as to the Company. The
amounts disclosed above represent the portion of Mr. Lytle's
compensation paid by the Company to Anthem for Mr. Lytle's services.
The amount paid by the Company has varied from year to year depending
upon Mr. Lytle's contribution as evaluated by the Compensation
Committee of the Company. The Compensation Committee has reviewed the
performance and compensation of Mr. Lytle only with respect to the
services performed for and compensation paid by the Company.
(2) For the year 1996, the Compensation Committee of the Company authorized
the Company to pay Anthem $127,232 in total for Mr. Lytle's services.
(3) The amounts reported represent the market value of the common stock
underlying the restricted stock at the date of grant, without taking
into account any diminution in value attributable to the restrictions
on such stock. Mr. Witthun's award was made on May 20, 1996; the
closing price of the common stock on that date was $32.125 per share.
Mr. Maib's award was made on August 1, 1996; the closing price of the
common stock on that date was $31.00 per share. As of December 31,
1996, Mr. Witthun held 5,000 shares of restricted stock with a value on
that date of $145,000 based on a closing market price on that date of
$29.00. As of December 31, 1996, Mr. Maib held 2,419 shares of
restricted stock with a value on that date of $70,151 based on a
closing market price on that date of $29.00. Dividends are paid
quarterly on these shares at the same rate as dividends paid on common
stock held by public stockholders. The restricted stock for Mr. Witthun
vests at the rate of 25% per year for a 4-year period. The restricted
stock for Mr. Maib vests at a rate of 50% per year for a 2-year period.
(4) Amounts for 1996 include the Company's matching contribution under the
401(k) Long Term Investment Saving Plan in the amount of $3,620 for Mr.
Witthun, $1,931 for Mr. Maib, $2,983 for Mr. Henning, $3,321 for Mr.
Schneider and $3,138 for Mr. Nevins. Amounts for 1996 also include the
Company's matching contribution under the Acordia Deferred Compensation
Plan in the amount of $3,971 for Mr. Witthun, $1,399 for Mr. Maib,
$1,433 for Mr. Henning, $1,583 for Mr. Schneider and $1,813 for Mr.
Nevins. The 1995 amount for Mr. Witthun has been restated from the
prior year to exclude $24,619 in moving expenses. Amounts for 1996 also
include the vested portion of interest earned on certain deferred
compensation in excess of what would be earned at 100% of the
applicable federal interest rate as published by the Internal Revenue
Service in the amount of $7,669 for Mr. Witthun, $15.00 for Mr. Maib,
$8,301 for Mr. Henning, $579.00 for Mr. Schneider and $25.00 for Mr.
Nevins.
(5) The amounts reported are classified by reference to the performance
year in which the incentive awards were earned.
(6) Amount for Mr. Maib includes $100,000 which was paid as an employment
contract signing bonus in August, 1996. Mr. Maib joined the Company in
August of 1996 and Mr. Nevins joined the Company in March 1996. Mr.
Maib's 1996 performance year incentive award was pro-rated 5/12. Mr.
Nevin's 1996 performance year incentive award was pro-rated 9/12.
(7) Amount represents a tax gross-up payment on Mr. Maib's employment
contract signing bonus of $100,000.
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OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REAALIZABLE
VALUE AT
% OF ASSUMED ANNUAL RATE OF
TOTAL STOCK
OPTIONS EXERCISE PRICE APPRECIATION
STOCK GRANTED OR FOR OPTION TERM(4)
DATE OF OPTIONS IN FISCAL BASE PRICE EXPIRATION --------------------
EXECUTIVE GRANT GRANTED (#)(1)(2) YEAR(3) PER SHARE DATE 5% 10%
--------- ----- ----------------- ------- --------- ---- -- ---
L. Ben Lytle.................... N/A 0 0 0 0 0 0
Frank C. Witthun................ 2/23/96 25,000 5.8% $28.375 2/23/06 $446,122 $1,130,561
Keith A. Maib................... 10/18/96 4,583 1.1% 30.125 10/18/06 86,827 220,036
Michael B. Henning.............. 2/23/96 13,000 3.0% 28.375 2/23/06 231,984 587,892
Robert S. Schneider............. 2/23/96 11,000 2.6% 28.375 2/23/06 196,294 497,447
Robert C. Nevins................ 5/20/96 8,250 1.9% 32.125 5/20/06 166,677 422,392
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(1) All options granted in 1996 are exercisable in cumulative 33-1/3%
installments commencing one year after date of grant, with full vesting
occurring on the third anniversary date. All awards vest immediately upon
change of control of the Company as defined in the plan document.
(2) Under the terms of the Company's executive stock plan, the Compensation
Committee retains discretion subject to plan limits to modify the term of
outstanding options and to re-price the options.
(3) A total of 430,134 options were granted in 1996.
(4) These amounts represent calculations at 5% and 10% assumed rates of
appreciation set by the Securities and Exchange Commission and therefore
are not intended to forecast possible future appreciation, if any, of the
Company's common stock price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
VALUE OF (IN THE MONEY)
NUMBER OF OPTIONS HELD AT OPTIONS AT FISCAL YEAR
FISCAL YEAR END END(1)
--------------- ------
EXECUTIVE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- ----------- -------------- ----------- -------------
L. Ben Lytle.................................................... 31,500 0 $ 348,250 0
Frank C. Witthun................................................ 29,000 37,000 217,250 $ 15,625
Keith A. Maib................................................... 0 4,583 0 0
Michael B. Henning.............................................. 23,200 19,400 197,000 8,125
Robert S. Schneider............................................. 15,500 16,000 126,500 6,875
Robert C. Nevins................................................ 0 8,517 0 167
(1) Values were calculated using the closing stock price on December 31, 1996
on the New York Stock Exchange of $29.00.
There were no options exercised in 1996 by any of the officers named in the
Summary Compensation Table.
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PENSION PLAN TABLE
The following table shows estimated annual benefits payable upon retirement
(age 65) under the Acordia Pension Plan computed as a straight-line annuity,
including amounts payable under the Supplemental Executive Retirement Plan.
YEARS OF SERVICE
-------------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ --------- --------- --------- --------- ---------
$125,000 $ 27,108 $ 36,144 $ 45,180 $ 54,216 $ 63,252
150,000 32,733 43,644 54,555 65,466 76,377
175,000 38,358 51,144 63,930 76,716 89,502
200,000 43,983 58,644 73,305 87,966 102,627
225,000 49,608 66,144 82,680 99,216 115,752
250,000 55,233 73,644 92,055 110,466 128,877
300,000 66,483 88,644 110,805 132,966 155,127
400,000 88,983 118,644 148,305 177,966 207,627
450,000 100,233 133,644 167,055 200,466 233,877
500,000 111,483 148,644 185,805 222,966 260,127
$750,000 $167,733 $223,644 $279,555 $335,466 $391,377
Benefits are paid as a life annuity and are not offset by Social Security
or other amounts.
The annual benefit at retirement on or after age 65 is equal to the sum of
1.2% of final average pay up to a breakpoint, plus 1.5% of final average pay in
excess of the breakpoint multiplied by years of service up to a maximum of 35
years. Benefits from the Acordia Pension Plan are limited pursuant to Internal
Revenue Code Section 415(b). The general rule currently limits the annual
benefit to $125,000. Final average pay is the highest average compensation for a
consecutive 5-year period in the ten years preceding retirement or other
termination of employment. Compensation includes base salary, commissions,
overtime, premium pay and annual cash bonuses (i.e., the salary and bonus amount
shown on the Summary Compensation Table), however, under Internal Revenue Code
Section 401(a)(17), the maximum amount of annual compensation that can be taken
into account under the Acordia Pension Plan for any individual in 1997 is
$160,000. Amounts that cannot be paid from the Acordia Pension Plan because of
Internal Revenue code limits are paid from the Supplemental Executive Retirement
Plan.
The Pension Plan also provides grandfathered benefits for employees who
were participants in the predecessor Pension Plan on or before July 1, 1989,
which are intended to be reasonably comparable to the benefits which would have
accrued had the predecessor Pension Plan remained in effect. As a result, the
defined benefits at retirement age 65 for Michael B. Henning may be larger than
shown on the Pension Plan Table. Estimated annual benefits payable to Michael B.
Henning at age 65 are $150,000.
The years of credited service as of December 31, 1996 under the Pension
Plan for individuals named in the Summary Compensation Table are as follows: Mr.
Henning, 25.3 years; Mr. Witthun, 5.8 years and Mr. Schneider, 4.4 years. Mr.
Nevins and Mr. Maib are not yet participants in the Pension Plan.
EXECUTIVE EMPLOYMENT AGREEMENTS/
SEVERANCE AND CHANGE OF CONTROL AGREEMENT
Effective January 1, 1997, the Company entered into a revised employment
agreement with Mr. Witthun. The employment agreement provides for the employment
of Mr. Witthun as an executive officer of the Company. Mr. Witthun's agreement
is for a period of two years ending on December 31, 1998.
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Effective January 1, 1996, the Company extended the term of its employment
agreement with Mr. Henning for an additional year term expiring on December 31,
1998.
The Company entered into an employment agreement with Mr. Maib effective
August 1, 1996 for a term ending December 31, 1998, and an employment agreement
with Mr. Nevins, effective April 1, 1996, for a term ending December 31, 1998.
Each of the agreements with Messrs. Witthun, Henning, Maib and Nevins
provides for a base annual salary; currently, $330,018 for Mr. Witthun, $235,014
for Mr. Maib, $235,014 for Mr. Nevins and $190,008 for Mr.
Henning.
Each agreement further provides that if the executive is terminated (i) for
Cause by the Company, (ii) voluntarily, or (iii) by reason of death, the Company
will pay the executive his salary through the date of termination. The
employment agreements of Messrs. Henning, Maib and Nevins further provide that
if the executive is terminated without Cause, the Company will pay the executive
the greater of twelve months' salary or the remaining salary through the end of
the employment agreement term. Mr. Witthun's employment agreement with the
Company provides that if Mr. Witthun is terminated without Cause by the Company,
the Company will pay Mr. Witthun his salary, any accrued annual and long-term
incentive award, and benefits through the date of termination. The employment
agreement further states that if Mr. Witthun executes the Company's standard
Release and Waiver Agreement, for the greater of one year or the unexpired term
of the agreement, the Company will pay Mr. Witthun (i) his then current salary,
(ii) an amount equal to 50% of any target annual incentive and long-term
incentive opportunity which Mr. Witthun would otherwise have been eligible to
receive as of the effective date of Mr. Witthun's termination of employment,
including, if equity-based incentives are held by the Executive or otherwise
accrue to him but such stock is not publicly traded, cash in an amount equal to
fifty percent (50%) of the value that was intended to be earned by executive at
target performance under the stock plan; and (iii) medical benefits which
executive would otherwise have been eligible to receive as of the effective date
of executive's termination of employment.
The employment agreements of Messrs. Witthun, Henning, Maib and Nevins
provide that they will remain in effect in the event of a Change of Control of
the Company. For Mr. Witthun, if, following a Change of Control of the Company,
(i) Mr. Witthun is assigned to any duties substantially inconsistent with his
position with the Company immediately prior to a Change of Control or his duties
are substantially reduced, (ii) Mr. Witthun's salary or incentive opportunities
are materially reduced, (iii) Mr. Witthun is assigned to duties or
responsibilities involving a residence relocation or substantially greater
travel obligations, (iv) the Company's Strategic Plan is materially changed or
abandoned, or (v) the Company fails to obtain assumption of the obligations of
the agreement by a successor, Mr. Witthun shall be entitled to receive the same
severance package that would be payable if the Company terminated the employment
agreement without Cause. For Messrs. Maib, Nevins and Henning, if, following a
Change of Control of the Company, (i) the executive's duties, responsibilities,
or compensation are substantially reduced or executive is assigned to any duties
substantially inconsistent with his position, duties or responsibilities with
the Company immediately prior to the Change in Control, (ii) the executive's
salary is materially reduced as compared to his salary immediately prior to the
Change in Control, (iii) the Company fails to obtain the assumption of its
obligations to perform the agreement by any successor, or (iv) the Company's
long-term strategic plan is materially changed or abandoned such that the
maximum potential payout of incentive compensation to the executive is
substantially reduced, the executive shall be entitled to receive the same
severance package as is payable upon termination without Cause. The employment
agreements also provide that each executive is eligible to participate in all
employee benefit, stock options, bonus and executive perquisite programs
provided by the Company to employees in similar positions. Messrs. Witthun,
Henning, Nevins and Maib are also subject to certain restrictions under their
agreements, prohibiting them from engaging in competition with the Company or
any of its subsidiaries and from divulging any confidential or proprietary
information obtained by them while in the employ of the Company. A breach of any
such restriction will entitle the Company to seek injunctive relief.
Effective February 1997 in the case of Mr. Maib, and March 1997 in the case
of Messrs. Witthun, Henning and Nevins, the Company entered into Transaction
Agreements with each of the four executives which provide for
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additional compensation in the event of a Termination as a result of a Change in
Control, including any potential business combination with Anthem or a third
party concerning the Company's independent brokerage operations (the
"Independent Brokerage Operations") and/or its health business. The Transaction
Agreements do not replace the Employment Agreements discussed above. The
Transaction Agreements expire on the earlier of December 31, 1997 or the date
the Company and Anthem announce that they are no longer soliciting interest from
prospective purchasers in the Independent Brokerage Operations. However, if on
or before December 31, 1997, the Board has approved a transaction which would be
a Change in Control, the Transaction Agreements will be extended to December 31,
1998. Under the Transaction Agreements, a Termination as a result of a Change in
Control occurs if on or following a Change in Control, Anthem, one of its
affiliates, or a successor to the Company does not both offer the executive a
comparable position and assume the executive's Employment Agreement and
Transaction Agreement, or if upon, following or in anticipation of a Change in
Control (and within 12 months prior to the event), the executive's position at
the Company is not comparable to his position at the time of execution of the
Transaction Agreement. The Transaction Agreement with Mr. Witthun requires as a
further condition that Anthem, one of its affiliates, or a successor to the
Company extend the term of Mr. Witthun's Employment Agreement for a period of 36
months from the date of Change in Control. The Transaction Agreements between
the Company and Messrs. Witthun, Henning and Maib provide that in the event of a
Change in Control, each executive will be paid annual and long-term incentive
opportunities at target levels for 1997.
The Transaction Agreement between the Company and Mr. Henning also provides
that in the event of a Termination as a result of a Change in Control, Mr.
Henning will receive consulting and non-compete payments equaling $673,000 (in
lieu of severance under the Employment Agreement), all payable over the period
beginning on the date of Termination and ending on January 31, 2001. In
addition, Mr. Henning will receive continued pension accruals and medical
coverage until February 1, 2000, and shall be eligible for the Company's
post-retirement medical program. The Transaction Agreement between the Company
and Mr. Maib provides that in the event of a Termination as a result of a Change
in Control, Mr. Maib will receive severance payments equal to 24 months' salary
(in lieu of severance under the Employment Agreement), and at 50% of target
levels annual and long-term incentive opportunities for 1998 and 1999, all
payable over a two year period beginning at the date of termination. In
addition, Mr. Maib will receive medical coverage during the severance period.
Under Mr. Nevin's Transaction Agreement, in the event of a Termination as a
result of a Change in Control, Mr. Nevins will receive continued medical
benefits during any period for which severance is paid under the Employment
Agreement. He will also be paid a Retention Bonus of $130,000 if he remains in
employment of the Company, or its successor, on the date of the Change in
Control (or is earlier terminated other than for Cause), and an additional
Retention Bonus of $170,000 if he remains in such employment on the second
anniversary of the Change in Control (or is earlier terminated other than for
Cause, dies, or becomes disabled). The Transaction Agreement between the Company
and Mr. Witthun provides that in the event of a Termination as a result of a
Change in Control, Mr. Witthun will receive consulting and non-compete payments
equaling $1,886,000 (in lieu of severance and incentives under the Employment
Agreement), all payable over the period beginning on the date of Termination and
ending on the third anniversary of the Change in Control. In addition, Mr.
Witthun will receive continued pension accruals until October 31, 1998 and
medical coverage during the consulting and severance periods, and shall be
eligible for the Company's post-retirement medical program. Under each
Transaction Agreement, awards previously made under the Company 1992 Stock
Compensation plan will vest upon a Change in Control.
Effective January 1, 1997, Mr. Schneider is no longer employed by the
Company.
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COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS
The Company's Compensation Committee has determined that a strong link
should exist between executive compensation and value created for stockholders.
This philosophy is put into practice through incentive compensation programs
which tie total compensation directly to the Company's performance and the value
received by stockholders.
COMPENSATION PHILOSOPHY
The Compensation Committee's decisions are based on its belief that
compensation is an integral part of the Company's strategic direction which
should reflect the value created for stockholders. The Company's compensation
programs are structured to reflect the following core principles:
- Compensation should be meaningfully related to the value created for
stockholders and provide executives an opportunity to acquire ownership
in the Company;
- Compensation programs should support the short-term and long-term
strategic goals and objectives of the Company;
- Compensation programs should reflect and promote the Company's values,
and reward individuals for outstanding contributions to the Company's
success;
- Compensation plays a critical role in attracting and retaining highly
qualified executives;
- There should be significant "pay at risk" for executive performance
within the Company, and,
- While compensation opportunities should be based in part on individual
contribution, total compensation earned by executives should be
determined by how the Company performs as a whole.
COMPENSATION MIX AND MEASUREMENT
The Company's executive compensation program consists of three (3) major
components, base salary, annual incentive and long-term incentive, each of which
is intended to support the overall compensation philosophy. For purposes of
competitive comparisons, the Compensation Committee used data from compensation
surveys for companies determined by the Compensation Committee to be of
comparable size and market capitalization (the "Comparable Companies"). These
are not the same as the Peer Group used for purposes of the stock price
performance graph below, but there is overlap. The Comparable Companies include
companies with which the Company competes for executives.
BASE SALARY. Base salary is targeted to be between 80% and 100% of the
median of Comparable Companies. The Company does not adjust base salaries every
year. Rather, salaries for executives are reviewed by the Compensation Committee
periodically and may be adjusted based on:
(1) the Compensation Committee's assessment that the individual's
responsibilities and/or contributions to the Company have increased; and
(2) significant movement in market competitive pay levels.
For 1996, the salary of Mr. Witthun was increased based on an increase in
responsibilities and an assessment of market competitive salary levels.
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ANNUAL INCENTIVE PLAN. Annual incentives are intended to reflect the
Compensation Committee's belief that executive contribution to stockholder
returns comes from maximizing earnings and increasing the quality of those
earnings. These incentives (at target levels) coupled with base salary, position
cash compensation between the 50th and 75th percentiles of the market of
Comparable Companies. Awards may range from 0% to 180% of target.
The Compensation Committee believes that the Company's Annual Incentive
Plan (the "Annual Incentive Plan") provides an excellent link between the value
created for stockholders and the incentives paid to executives. Under the Annual
Incentive Plan, executives do not receive incentive awards unless a specified
level of growth in operating profits (threshold) is achieved. Target awards are
based on the attainment of financial and strategic objectives, such as growth in
revenues and increasing the quality of earnings by diversifying revenue sources
among product and geographic parameters, profitability of business placed with
affiliated insurers and retention of existing customers.
LONG-TERM INCENTIVE PLAN. The long-term incentive component is intended to
attract, retain and motivate executives to improve long-term stock performance.
Executives are encouraged to acquire and hold Company common stock. Executives
have the opportunity to earn annual stock option awards based on their
performance. Stock options are awarded at fair market value and will only create
compensation if the Company's common stock market price per share appreciates in
value. Generally, awards vest in equal amounts over three (3) years and options
are exercisable for ten (10) years from the date of the award.
The target level of options for each executive is based on demonstrated
past and expected future performance of the executive. To earn a full award for
the performance year, each participant must achieve specific long-term financial
and strategic goals. The Compensation Committee determines the number of options
to be awarded based on individual executive and overall Company performance in
the prior year. The Compensation Committee also takes into consideration prior
option awards and the overall equity position of the individual executive.
Effective January 1, 1995, the Compensation Committee adopted stock
ownership guidelines for executives including the executives named in the
Summary Compensation Table. Executives are expected to achieve a level of stock
ownership equal to a multiple of salary, with the multiple varying depending
upon the position (the multiple ranges from 1-4 times salary in the case of the
named executives). Shares owned directly or beneficially, restricted shares,
shares held in 401(k) accounts and in the money unexercised stock options
(limited to 50% of the guidelines) are counted for the purposes of the
guidelines. Executives are expected to achieve their guideline level over a five
year period beginning January 1, 1995 or their hire date, whichever is later.
TOTAL COMPENSATION
Total compensation potential (for the highest performing employee officers
of the Company) is targeted at the 75th percentile of the market of Comparable
Companies. Actual payment of this level of total compensation is based on
performance. Aggressive long-term incentives are emphasized to deliver
significant compensation for performance above competitive levels when the
Company's stockholders also benefit from the executive's performance.
REVIEW OF 1996 PERFORMANCE AND COMPENSATION FOR THE COMPANY'S NAMED OFFICERS
In carrying out its responsibilities, the Compensation Committee of the
Company met on February 20, 1997 and reviewed the following:
1. The performance and compensation of the Company's officers;
2. The Annual Incentive Plan 1996 award recommendations; and
3. Target total compensation and the mix among elements for the Company's
executives.
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DEDUCTIBILITY CAP ON EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code ("Section 162(m)") disallows,
subject to limited exceptions, a corporate tax deduction for certain
compensation paid in excess of $1 million to the chief executive officer and the
four other most highly paid executive officers of publicly-held companies. The
Company believes that the stock options and SARs granted at an exercise price
not less than the fair market value of the Company's common stock on the date of
grant in 1996 and prior years satisfied the requirements of Section 162(m) and
thus compensation recognized in connection with such awards should be fully
deductible. For 1996, the Company will not be denied a deduction with respect to
any amount of compensation paid to any executive officer.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Lytle served as the Chief Executive Officer of the Company through
November 1996. Effective December 1, 1996, the Company's Board of Directors
elected Mr. Witthun as its President and Chief Executive Officer. Prior to Mr.
Witthun's election, Mr. Lytle provided services to the Company through a
management agreement with Anthem. Anthem pays Mr. Lytle for his services to
Anthem as well as to the Company. The Company reimbursed a portion of the
compensation paid to Mr. Lytle, plus other related costs. The amount paid by the
Company has varied from year to year depending on Mr. Lytle's contribution as
evaluated by the subjective judgment of the Compensation Committee. For the year
1996, the Compensation Committee of the Company authorized the Company to pay
Anthem an amount equal to $127,232.
Mr. Witthun receives all of his pay directly from the Company. The
Compensation Committee approved a base salary adjustment and 1996 Annual
Incentive Plan award as noted in the Summary Compensation Table, relating to his
contributions to Company performance. These decisions were based on the
subjective judgment of the Compensation Committee, with particular reference to:
(1) the Company's significant earnings and revenue growth over 1995, (2)
improved organizational efficiency, through regionalizing operations, (3)
continued growth through financially and strategically sound acquisitions, and
(4) disposition (at a gain) of operations that were not core to the Company's
strategic plan.
The above Compensation Committee Report and the Company's Stock Price
Performance Graph which follows shall not be deemed incorporated by reference by
any general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
COMPENSATION COMMITTEE
John C. Aplin (Chair)
John C. Crane
Mitchell E. Daniels, Jr.
Catherine E. Dolan
Thomas C. Roberts
James B. Stradtner
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