DONEGAL GROUP INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 19, 2001
To the Stockholders of
DONEGAL GROUP INC.:
The annual meeting of stockholders of Donegal Group Inc. will be held at
10:00 a.m., local time, on April 19, 2001, at the Company's offices, 1195 River
Road, Marietta, Pennsylvania 17547. At the annual meeting, the stockholders will
act on the following matters:
1. Election of three Class C directors, to serve until the expiration of
their three-year terms and until their successors are elected;
2. Approval of a proposal to (a) amend Article 4 of the Company's
Certificate of Incorporation (the "Amendment") to (i) authorize
30,000,000 shares of a new class of common stock with one-tenth of a
vote per share designated as Class A common stock, (ii) reclassify the
Company's existing common stock as Class B common stock, effect a
one-for-three reverse split of the Class B common stock and reduce the
number of authorized shares thereof from 20,000,000 shares to
10,000,000 shares, (iii) eliminate the Company's existing Class A
common stock, (iv) establish the rights, powers and terms of the Class
A common stock and Class B common stock and (v) retain the authority
to issue 2,000,000 shares of series preferred stock, and (b) restate
Article 4 of the Certificate of Incorporation as so amended;
3. Approval of the Company's 2001 Equity Incentive Plan for Employees;
4. Approval of the Company's 2001 Equity Incentive Plan for Directors;
5. Approval of the Company's 2001 Employee Stock Purchase Plan;
6. Election of KPMG LLP as independent public accountants for the Company
for 2001; and
7. Any other matters that properly come before the meeting.
All stockholders of record as of the close of business on February 21, 2001
are entitled to vote at the annual meeting.
The Company's 2000 Annual Report, which is not part of the proxy soliciting
material, is enclosed.
It is important that your shares be represented and voted at the annual
meeting. Please complete, sign and return the enclosed proxy card in the
envelope provided whether or not you expect to attend the annual meeting in
person.
By Order of the Board of Directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 23, 2001
Marietta, Pennsylvania
TABLE OF CONTENTS
Page
----
ABOUT THE ANNUAL MEETING...................................................1
What is the purpose of the annual meeting?.................................1
Who is entitled to vote at the meeting?....................................1
What are the voting rights of the stockholders?............................2
Who can attend the annual meeting?.........................................3
What constitutes a quorum?.................................................3
How do I vote?.............................................................3
Can I change my vote after I return my proxy card?.........................3
How do I vote my 401(k) plan shares?.......................................4
What are the Board's recommendations?......................................4
What vote is required to approve each item?................................4
Who will pay the costs of soliciting proxies on behalf of the
Board of Directors?.....................................................5
STOCK OWNERSHIP............................................................5
Who are the largest owners of the Company's stock?.........................5
How much stock do the Company's directors and executive officers own?......6
Section 16(a) beneficial ownership reporting compliance....................8
Relationship with the Mutual Company.......................................8
ITEM 1 - ELECTION OF DIRECTORS............................................12
Directors Standing for Election...........................................12
Directors Continuing in Office............................................12
The Board of Directors and Its Committees.................................14
Compensation of Directors.................................................14
Executive Compensation....................................................15
Summary Compensation Table................................................15
Options Exercised and Values for Fiscal Year 2000.........................16
Report of the Compensation Committee......................................16
Comparison of Total Return on the Company's Common Stock
with Certain Averages..................................................19
Report of the Audit Committee.............................................20
Certain Transactions......................................................21
ITEM 2 - PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION...............21
Description of the Amendment and the Stock Dividend.......................21
Background of the Amendment and the Stock Dividend........................23
Reasons for the Amendment and the Stock Dividend; Recommendation of the
Board of Directors.....................................................24
Certain Potential Disadvantages of the Amendment and the Stock Dividend...26
Federal Income Tax Consequences...........................................27
Description of the Class A Common Stock and the Class B Common Stock......28
Stockholder Information...................................................32
Certain Effects of the Amendment and the Stock Dividend...................32
i
ITEM 3 - APPROVAL OF THE 2001 EQUITY INCENTIVE PLAN FOR EMPLOYEES.........35
Description of the 2001 Equity Incentive Plan.............................35
Incentive Options and Non-Qualified Options...............................36
Amendment and Termination.................................................37
Federal Income Tax Consequences...........................................38
ITEM 4 - APPROVAL OF THE 2001 EQUITY INCENTIVE PLAN FOR DIRECTORS.........40
Description of the 2001 Director Plan.....................................40
Restricted Stock Awards...................................................42
Non-Qualified Stock Options...............................................42
Amendment and Termination.................................................43
Federal Income Tax Consequences...........................................43
ITEM 5 - APPROVAL OF THE 2001 EMPLOYEE STOCK PURCHASE PLAN................44
Description of the 2001 Employee Stock Purchase Plan......................44
Amendment and Termination.................................................47
Federal Income Tax Consequences...........................................47
ITEM 6 - ELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS.......................48
STOCKHOLDER PROPOSALS.....................................................49
OTHER MATTERS.............................................................50
ii
DONEGAL GROUP, INC.
PROXY STATEMENT
This proxy statement contains information relating to the annual meeting of
stockholders of Donegal Group Inc. to be held on Thursday, April 19, 2001,
beginning at 10:00 a.m., at the offices of the Company, 1195 River Road,
Marietta, Pennsylvania 17547, and at any postponement, adjournment or
continuation of the meeting. This proxy statement and accompanying proxy are
first being mailed to stockholders on March 23, 2001.
ABOUT THE ANNUAL MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Company's annual meeting, stockholders will act upon the matters
outlined in the notice of meeting on the cover page of this proxy statement,
including
o the election of directors,
o the approval of an amendment of the Company's Certificate of
Incorporation,
o the approval of the 2001 Equity Incentive Plan for Employees,
o the approval of the 2001 Equity Incentive Plan for Directors,
o the approval of the 2001 Employee Stock Purchase Plan, and
o the election of the Company's independent public accountants.
In addition, the Company's management will report on the performance of the
Company during 2000 and respond to questions from stockholders.
WHO IS ENTITLED TO VOTE AT THE MEETING?
Only stockholders of record at the close of business on the record date,
February 21, 2001, are entitled to receive notice of the annual meeting and to
vote the shares of common stock that they held on that date at the meeting, or
any postponement, adjournment or continuation of the meeting.
1
WHAT ARE THE VOTING RIGHTS OF THE STOCKHOLDERS?
Each outstanding share of common stock will be entitled to one vote on each
matter to be voted upon at the meeting.
2
As of the record date, Donegal Mutual Insurance Company (the "Mutual
Company") owned 5,511,127 shares of the Company's outstanding common stock, or
approximately 62.2% of the Company's outstanding common stock. The Mutual
Company has advised the Company that the Mutual Company will vote its shares for
the election of Thomas J. Finley, Jr., R. Richard Sherbahn and John J. Lyons as
Class C directors, for all of the proposals set forth in the notice of annual
meeting and for the election of KPMG LLP as the Company's independent public
accountants for 2001. Therefore, Messrs. Finley, Sherbahn and Lyons will be
elected as Class C directors, the proposals set forth in the notice of annual
meeting will be approved and KPMG LLP will be elected as the Company's
independent public accountants for 2001, irrespective of the votes cast by the
stockholders of the Company other than the Mutual Company.
WHO CAN ATTEND THE ANNUAL MEETING?
All stockholders as of the record date, or their duly appointed proxies,
may attend the annual meeting. Even if you currently plan to attend the meeting,
we recommend that you also submit your proxy as described below so that your
vote will be counted if you later decide not to attend the meeting.
If you hold your shares in "street name" (that is, through a broker or
other nominee), you will need to bring a copy of a brokerage statement
reflecting your stock ownership as of the record date and check in at the
registration desk at the meeting.
WHAT CONSTITUTES A QUORUM?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the shares of common stock outstanding on the record date will
constitute a quorum, permitting the meeting to conduct its business. As of the
record date, 8,875,127 shares of common stock of the Company were outstanding.
Proxies received but marked as abstentions and broker non-votes will be included
in the calculation of the number of shares considered to be present at the
meeting.
HOW DO I VOTE?
If you complete and properly sign the accompanying proxy card and return it
to the Company, it will be voted as you direct. If you are a registered
stockholder and attend the meeting, you may deliver your completed proxy card in
person. "Street name" stockholders who wish to vote at the meeting will need to
obtain a signed proxy from the institution that holds their shares.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with the Secretary of the
Company either a notice of revocation or a duly executed proxy bearing a later
3
date. The powers of the proxy holders will be revoked if you attend the meeting
in person and request that your proxy be revoked, although attendance at the
meeting will not by itself revoke a previously granted proxy.
HOW DO I VOTE MY 401(K) PLAN SHARES?
If you participate in the Donegal Mutual Insurance Company 401(k) Plan, you
may vote the number of shares of common stock equivalent to the interest in
common stock credited to your account as of the record date. You may vote by
instructing Reliance Trust, the trustee of the plan, pursuant to the instruction
card being mailed with this proxy statement to plan participants. The trustee
will vote your shares in accordance with your duly executed instructions
received by April 9, 2001.
If you do not send instructions, the share equivalents credited to your
account will be voted by the trustee in the same proportion that it votes share
equivalents for which it did receive timely instructions.
You may also revoke previously given voting instructions by April 9, 2001
by filing with the trustee either a written notice or revocation or a properly
completed and signed voting instruction card bearing a later date.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons named as
proxy holders on the proxy card will vote in accordance with the recommendations
of the Board of Directors. The Board of Directors recommends a vote:
o for election of the nominated Class C directors (see pages 12 through
14),
o for the amendment of the Certificate of Incorporation (see pages 21
through 34),
o for the 2001 Equity Incentive Plan for Employees (see pages 35
through 39),
o for the 2001 Equity Incentive Plan for Directors (see pages 40
through 44),
o for the 2001 Employee Stock Purchase Plan (see pages 44 through 48),
and
o for election of KPMG LLP as the Company's independent public
accountants for 2001 (see page 48).
WHAT VOTE IS REQUIRED TO APPROVE EACH ITEM?
Election of Directors. The affirmative vote of a plurality of the votes
cast at the meeting is required for the election of directors. A properly
executed proxy marked "WITHHOLD AUTHORITY" with respect to the election of one
4
or more directors will not be voted with respect to the director or directors
indicated, although it will be counted for purposes of determining whether there
is a quorum. Cumulative voting is not permitted in the election of directors.
Other Items. The affirmative vote of the holders of a majority of the
shares entitled to vote will be required for approval of the amendment of the
Company's Certificate of Incorporation. The affirmative vote of the holders of a
majority of the shares represented in person or by proxy and entitled to vote
will be required for approval of the 2001 Equity Incentive Plan for Employees,
the 2001 Equity Incentive Plan for Directors, the 2001 Employee Stock Purchase
Plan and the election of independent public accountants. Abstentions and shares
held by brokers or nominees as to which voting instructions have not been
received from the beneficial owner of or person otherwise entitled to vote the
shares and as to which the broker or nominee does not have discretionary voting
power, i.e., broker non-votes, are considered shares of stock outstanding and
entitled to vote and are counted in determining the number of votes necessary
for a majority. An abstention or broker non-vote will therefore have the
practical effect of voting against approval of a proposal because each
abstention and broker non-vote will represent one fewer vote for approval of the
proposal.
If you sign your proxy card or broker voting instruction card with no
further instructions, your shares will be voted in accordance with the
recommendation of the Board, i.e., for the election of the Company's nominees
for Class C director, for the proposals set forth in the notice of annual
meeting and for the election of KPMG LLP as the Company's independent public
accountants.
WHO WILL PAY THE COSTS OF SOLICITING PROXIES ON BEHALF OF THE BOARD OF
DIRECTORS?
The Company is making this solicitation and will pay the cost of soliciting
proxies on behalf of the Board of Directors, including expenses of preparing and
mailing this proxy statement. In addition to mailing these proxy materials, the
solicitation of proxies or votes may be made in person or by telephone or
telegram by the Company's regular officers and employees, none of whom will
receive special compensation for such services. Upon request, the Company will
also reimburse brokers, nominees, fiduciaries and custodians and persons holding
shares in their names or in the names of nominees for their reasonable expenses
in sending proxies and proxy material to beneficial owners.
STOCK OWNERSHIP
WHO ARE THE LARGEST OWNERS OF THE COMPANY'S STOCK?
The following table identifies each person who is known by the Company to
beneficially own more than 5% of the Company's outstanding common stock. All
information is as of February 21, 2001 unless otherwise noted.
5
SHARES PERCENT OF
NAME OF INDIVIDUAL BENEFICIALLY OUTSTANDING
OR IDENTITY OF GROUP OWNED COMMON STOCK
-------------------- ----- ------------
Donegal Mutual Insurance Company 5,511,127 62.2%
1195 River Road
Marietta, PA 17547
Wellington Management Company, LLP 498,400(1) 5.6%
75 State Street
Boston, MA 02109
- ------------------
(1) As reported by Wellington Management Company, LLP as of December 31, 2000
in a filing made with the Securities and Exchange Commission (the "SEC").
HOW MUCH STOCK DO THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICERS OWN?
The following table shows the amount and percentage of the Company's
outstanding common stock beneficially owned by each director and nominee for
director, each executive officer named in the Summary Compensation Table and all
executive officers and directors of the Company as a group as of February 21,
2001.
SHARES PERCENT OF
NAME OF INDIVIDUAL BENEFICIALLY OUTSTANDING
OR IDENTITY OF GROUP OWNED(1) COMMON STOCK(2)
-------------------- -------- --------------
DIRECTORS AND NOMINEES:
C. Edwin Ireland 20,440(3) --
Donald H. Nikolaus 486,892(4) 5.3%
Patricia A. Gilmartin 11,905(3) --
Philip H. Glatfelter, II 14,379(3) --
R. Richard Sherbahn 10,026(3) --
Robert S. Bolinger 11,481(3) --
Thomas J. Finley, Jr. 10,574(3) --
John J. Lyons -0- --
6
EXECUTIVE OFFICERS (5):
Ralph G. Spontak 173,760(6) 1.9%
William H. Shupert 67,944(7) --
Robert G. Shenk 70,071(8) --
James B. Price 61,748(9) --
All directors and executive officers
as a group (12 persons) 983,947(10) 10.3%
- --------------
(1) Information furnished by each individual named. This table includes shares
that are owned jointly, in whole or in part, with the person's spouse, or
individually by his or her spouse.
(2) Less than 1% unless otherwise indicated.
(3) Includes 8,889 shares of common stock the director has the option to
purchase under the Company's Amended and Restated 1996 Equity Incentive
Plan for Directors (the "1996 Director Plan") that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(4) Includes 300,000 shares of common stock Mr. Nikolaus has the option to
purchase under the Company's 1996 Amended and Restated Equity Incentive
Plan (the "1996 Equity Incentive Plan") that are currently exercisable or
that become exercisable within 60 days after the date of this Proxy
Statement.
(5) Excludes executive officers listed under "Directors."
(6) Includes 139,999 shares of common stock Mr. Spontak has the option to
purchase under the 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(7) Includes 60,666 shares of common stock Mr. Shupert has the option to
purchase under the 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement.
(8) Includes 61,667 shares of common stock Mr. Shenk has the option to purchase
under the 1996 Equity Incentive Plan that are currently exercisable or that
become exercisable within 60 days after the date of this Proxy Statement.
(9) Includes 53,333 shares of common stock Mr. Price has the option to purchase
under the 1996 Equity Incentive Plan that are currently exercisable or that
become exercisable within 60 days after the date of this Proxy Statement.
7
(10) Includes 650,108 shares of common stock purchasable upon the exercise of
options granted under the 1996 Equity Incentive Plan that are currently
exercisable or that become exercisable within 60 days after the date of
this Proxy Statement, and 53,334 shares of common stock purchasable upon
the exercise of options granted under the 1996 Director Plan that are
currently exercisable or that become exercisable within 60 days after the
date of this Proxy Statement.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act")
requires that the officers and directors of the Company, as well as persons who
own more than 10% of a class of equity securities of the Company, file reports
of their ownership of the Company's securities, as well as monthly statements of
changes in such ownership, with the Company, the SEC and the Nasdaq Stock
Market. Based upon written representations received by the Company from its
officers, directors and more than 10% stockholders, and the Company's review of
the monthly statements of ownership changes filed with the Company by its
officers, directors and more than 10% stockholders during 2000, the Company
believes that all such filings required during 2000 were made on a timely basis.
RELATIONSHIP WITH THE MUTUAL COMPANY
The Company was formed by the Mutual Company in August 1986 and was a
wholly owned subsidiary of the Mutual Company until November 1986, when the
Company sold 600,000 shares of common stock in a public offering, thereby
reducing the Mutual Company's ownership of the Company's outstanding common
stock from 100% to approximately 79.5%, which subsequently increased to
approximately 84%. In September 1993, the Company sold 1,150,000 shares of
common stock in a public offering. At the same time, the Mutual Company sold
200,000 shares of the Company's common stock, reducing the Mutual Company's
ownership of the Company's outstanding common stock to approximately 57%. From
that date through February 21, 2001, the Mutual Company has at various times
purchased an aggregate of 591,100 shares of the Company's common stock in the
open market in exempt transactions under SEC Rule 10b-18 and in private
transactions. In addition, since the adoption of the Company's Dividend
Reinvestment Plan in July 1997, the Mutual Company has purchased 555,905 shares
of the Company's common stock through the reinvestment of dividends. The Mutual
Company owned 5,511,127 shares, or approximately 62.2% of the Company's common
stock, as of February 21, 2001.
The Company's operations are interrelated with the operations of the Mutual
Company, and various reinsurance arrangements exist between the Company and the
Mutual Company. The Company believes that its various transactions with the
Mutual Company have been on terms no less favorable to the Company than the
terms that could have been negotiated with an independent third party.
8
The Mutual Company provides all personnel for the Company and certain of
its insurance subsidiaries, including Atlantic States Insurance Company
("Atlantic States"), Delaware Atlantic Insurance Company ("Delaware Atlantic"),
Southern Insurance Company of Virginia ("Southern") and Pioneer Insurance
Company, an Ohio corporation, ("Pioneer Ohio"). Expenses are allocated to the
Company, Delaware Atlantic, Southern and Pioneer Ohio according to a time
allocation and estimated usage agreement, and to Atlantic States in relation to
the relative participation of the Mutual Company and Atlantic States in the
pooling agreement described herein. Expenses allocated to the Company under such
agreement were $26,677,399 in 2000.
The Mutual Company leases office equipment and automobiles from the
Company, under a lease dated January 1, 1990. The Mutual Company made lease
payments to the Company of $836,997 in 2000.
The Mutual Company is currently a party to retrocessional reinsurance
contracts with each of the Company's insurance company subsidiaries, Southern,
Delaware Atlantic, Pioneer Ohio, Pioneer Insurance Company, a New York
corporation, ("Pioneer New York") and Southern Heritage Insurance Company
("Southern Heritage"), whereby the Mutual Company reinsures each such company in
respect of 100% of the net liability that may accrue to such company from its
insurance operations and retrocedes 100% of the net liability back to such
company, which such company assumes.
The Mutual Company and Atlantic States participate in an underwriting pool,
whereby Atlantic States cedes premiums, losses and loss adjustment expenses on
all of its business to the Mutual Company and assumes from the Mutual Company a
specified portion of the premiums, losses and loss adjustment expenses of the
Mutual Company and Atlantic States. Substantially all of the Mutual Company's
property and casualty insurance business written or in force on or after October
1, 1986 is included in the pooled business. Pursuant to amendments to the
pooling agreement subsequent to October 1, 1986, the Mutual Company, which is
solely responsible for any losses in the pooled business with dates of loss on
or before the close of business on September 30, 1986, has increased the
percentage of retrocessions of the pooled business to Atlantic States. As most
recently amended, effective as of July 1, 2000, 70% of the pooled business has
been retroceded to Atlantic States. All premiums, losses, loss adjustment
expenses and other underwriting expenses are prorated among the parties on the
basis of their participation in the pool. The pooling agreement may be amended
or terminated at the end of any calendar year by agreement of the parties. The
allocations of pool participation percentages between the Mutual Company and
Atlantic States are based on the pool participants' relative amounts of capital
and surplus, expectations of future relative amounts of capital and surplus and
the ability of the Company to raise capital for Atlantic States. The Company
does not currently anticipate a further increase in Atlantic States' percentage
of participation in the pool, nor does the Company intend to terminate the
participation of Atlantic States in the pooling agreement. Additional
information describing the pooling agreement is contained in the Company's 2000
Annual Report to Stockholders, a copy of which is enclosed with this Proxy
Statement.
9
Atlantic States and the Mutual Company are also currently parties to a
property catastrophe excess of loss reinsurance agreement whereby the Mutual
Company reinsures Atlantic States for catastrophe losses in excess of $400,000
per event.
The Mutual Company and Southern are parties to a reinsurance agreement,
whereby the Mutual Company has reinsured 50% of Southern's business. Because the
Mutual Company places substantially all of the business assumed from Southern in
the pool, from which the Company has an allocation of 70%, the Company's
operations include approximately 85% of the business written by Southern.
Southern and the Mutual Company settle balances resulting from this reinsurance
arrangement on a monthly basis. The Mutual Company and Southern are also parties
to a property catastrophe excess of loss reinsurance agreement, whereby the
Mutual Company reinsures Southern for catastrophe losses in excess of $300,000
and an excess of loss reinsurance agreement whereby the Mutual Company reinsures
Southern for individual losses in excess of $100,000, up to a limit of $25,000.
The Mutual Company and Delaware Atlantic are parties to an excess of loss
reinsurance agreement, whereby the Mutual Company reinsures Delaware Atlantic
for individual losses in excess of $50,000 up to a limit of $200,000. The Mutual
Company and Delaware Atlantic are also parties to a property catastrophe excess
of loss reinsurance agreement, whereby the Mutual Company reinsures Delaware
Atlantic for catastrophe losses in excess of $300,000.
The Mutual Company and Pioneer Ohio are parties to an underlying excess of
loss reinsurance agreement, whereby the Mutual Company reinsures Pioneer Ohio
for losses in excess of $50,000 up to a limit of $200,000. The Mutual Company
and Pioneer Ohio are also parties to a property catastrophe excess of loss
agreement whereby the Mutual Company reinsures Pioneer for catastrophe losses in
excess of $200,000.
Effective January 1, 2000, the Mutual Company and Southern Heritage entered
into a catastrophe agreement whereby the Mutual Company reinsures Southern
Heritage for catastrophe claims in excess of $400,000 per event. The Mutual
Company and Southern Heritage are also parties to an underlying excess of loss
reinsurance agreement, whereby the Mutual Company reinsures Southern Heritage
for losses in excess of $150,000, up to a limit of $100,000.
Effective January 1, 2001, the Mutual Company and Pioneer New York entered
into an aggregate excess of loss reinsurance agreement whereby the Company
reinsures Pioneer New York against any loss, adjusted on a quarterly basis
recalculated at the end of each calendar quarter, from: (a) any adverse
development in Pioneer New York's loss reserve and loss adjustment expense
reserve at December 31, 2002 compared to the amount of such reserves at December
31, 2000 in respect of all policy years ending on or before December 31, 2000
and (b) all losses and loss adjustment expenses incurred by Pioneer New York
during the years ending December 31, 2001 and December 31, 2002 by reason of the
fact that Pioneer New York's loss and loss adjustment expense ratios for those
periods exceed 60%.
10
The Company and the Mutual Company jointly own Donegal Financial Services
Corporation, the holding company for Province Bank FSB ("Province Bank"), a
federal savings bank headquartered in Marietta, Pennsylvania, the deposits of
which are insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation. In connection with the initial capitalization of
Province Bank, which opened for business in September 2000, the Mutual Company
purchased 55%, for $3,575,000, and the Company purchased 45%, for $2,923,000, of
the capital stock of Donegal Financial Services Corporation.
The Mutual Company and Province Bank are parties to a lease dated September
1, 2000 whereby Province Bank leases 3,600 square feet of the Mutual Company's
building located at 1205 River Road, Marietta, Pennsylvania from the Mutual
Company for an annual rent based on an independent appraisal obtained by the
Mutual Company. The Mutual Company and Province Bank are also parties to an
Administrative Services Agreement dated September 1, 2000 whereby the Mutual
Company is obligated to provide various human resource services, principally
payroll and employee benefits administration, administrative support, facility
and equipment maintenance services and purchasing, to Province Bank, subject to
the overall limitation that the costs to be charged by the Mutual Company may
not exceed the costs of independent vendors for similar services and further
subject to annual maximum cost limitations specified in the Administrative
Services Agreement.
All of the Company's officers are officers of the Mutual Company, five of
the Company's seven current directors are directors of the Mutual Company and
three of the Company's executive officers are directors of the Mutual Company.
The Company and the Mutual Company maintain a Coordinating Committee, which
consists of two outside directors from each of the Company and the Mutual
Company, none of whom holds seats on both Boards, to review and evaluate the
pooling agreement between the Company and the Mutual Company and to be
responsible for matters involving actual or potential conflicts of interest
between the Company and the Mutual Company. The decisions of the Coordinating
Committee are binding on the Company and the Mutual Company. The Company's
Coordinating Committee members must conclude that intercompany transactions are
fair and equitable to the Company. The purpose of this provision is to protect
the interests of the stockholders of the Company other than the Mutual Company.
The Coordinating Committee meets on an as-needed basis. The Company's members on
the Coordinating Committee are Messrs. Bolinger and Finley. See "Election of
Directors." The Mutual Company's members on the Coordinating Committee are John
E. Hiestand and Frederick W. Dreher.
Mr. Hiestand, age 62, has been a director of the Mutual Company since 1983
and has been President of Hiestand Memorials, Inc., a manufacturer of cemetery
monuments, since 1977.
Mr. Dreher, age 60, has been a director of the Mutual Company since 1996.
He is a partner in the law firm of Duane Morris, where he has practiced since
1965. See "Item 1 -- Election of Directors -- Certain Transactions."
11
ITEM 1 - ELECTION OF DIRECTORS
The Company's Board of Directors currently consists of seven members, but
is being expanded to eight members effective as of the date of the annual
meeting. Each director is elected for a three-year term and until his successor
has been duly elected. The current three-year terms of the Company's directors
expire in the years 2001, 2002 and 2003, respectively.
Three Class C directors are to be elected at the annual meeting. Unless
otherwise instructed, the proxies solicited by the Board of Directors will be
voted for the election of the nominees named below. Two of the nominees, Thomas
J. Finley, Jr. and R. Richard Sherbahn, are currently directors of the Company.
If a nominee becomes unavailable for any reason, the proxies intend to vote
for a substitute nominee designated by the Board of Directors. The Board of
Directors has no reason to believe the nominees named will be unable to serve if
elected. Any vacancy occurring on the Board of Directors for any reason may be
filled by a majority of the directors then in office until the expiration of the
term of the class of directors in which the vacancy exists.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES
NAMED BELOW.
The names of the nominees for Class C director and the Class A directors
and Class B directors who will continue in office after the annual meeting until
the expiration of their respective terms, together with certain information
regarding them, are as follows:
DIRECTORS STANDING FOR ELECTION
CLASS C DIRECTORS
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE*
- ---- --- ----- ------------
Thomas J. Finley, Jr.............. 80 1986 2004
R. Richard Sherbahn............... 72 1986 2004
John J. Lyons..................... 61 -- 2004
- ------------
*If elected at the annual meeting
DIRECTORS CONTINUING IN OFFICE
CLASS A DIRECTORS
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- ----- -----------
Robert S. Bolinger................ 64 1986 2002
Patricia A. Gilmartin............. 61 1986 2002
Philip H. Glatfelter, II ......... 71 1986 2002
12
CLASS B DIRECTORS
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ---- --- ----- -----------
C. Edwin Ireland.................. 91 1986 2003
Donald H. Nikolaus................ 58 1986 2003
Mr. Bolinger has been Chairman and Chief Executive Officer of Susquehanna
Bancshares, Inc. since 1982 and of Farmers First Bank since 1976. Mr. Bolinger
is also a director of Susquehanna Bancshares, Inc.
Mr. Finley retired in 1985 as President and Chief Executive Officer of the
Insurance Federation of Pennsylvania, a position he held for 18 years prior to
his retirement.
Mrs. Gilmartin has been an employee since 1969 of Donegal Insurance Agency,
which has no affiliation with the Company, except that Donegal Insurance Agency
receives insurance commissions in the ordinary course of business from the
Company's subsidiaries and affiliates in accordance with such subsidiaries' and
affiliates' standard commission schedules and agency contracts. Mrs. Gilmartin
has been a director of the Mutual Company since 1979.
Mr. Glatfelter retired in 1989 as a Vice President of Meridian Bank, a
position he held for more than five years prior to his retirement. Mr.
Glatfelter has been a director of the Mutual Company since 1981 and has been
Vice Chairman of the Mutual Company since 1991.
Mr. Ireland is former Chairman of the Lancaster Industrial Development
Authority. He retired from Hamilton Watch Company in 1970. Prior thereto, he was
Vice President, Secretary and Treasurer of Hamilton Watch Company. Mr. Ireland
has been a director of the Mutual Company since 1972 and Chairman of its Board
of Directors since 1985. He has been Chairman of the Company's Board of
Directors since 1986.
Mr. Lyons has been President and Chief Operating Officer of Keefe Managers,
Inc., a manager of private investment funds, since February 1999. In his
capacity as a professional bank consultant, Mr. Lyons served (a) from September
1997 to February 1999 as President and Chief Executive Officer of Gateway
American Bank of Florida, Fort Lauderdale Florida, (b) from August 1996 to April
1997, as President and Chief Executive Officer of Regent National Bank,
Philadelphia, Pennsylvania, (c) from April 1995 to August 1996, as President and
Chief Executive Officer and a director of Monarch Savings Bank, FSB, Clark, New
Jersey and (d) from December 1993 until April 1995, as President and Chief
Executive Officer of Jupiter Tequesta National Bank, Tequesta, Florida. Mr.
Lyons was Vice Chairman of Advest, Inc. during 1993 and from 1989 through 1993
was a member of its Board of Directors. He is a director of Gateway American
Bank of Florida and Bisys Group Inc.
13
Mr. Nikolaus has been President of the Mutual Company since 1981 and a
director of the Mutual Company since 1972. He has been President of the Company
since 1986. Mr. Nikolaus has been a partner in the law firm of Nikolaus &
Hohenadel since 1972.
Mr. Sherbahn has owned and operated Sherbahn Associates, Inc., a life
insurance and financial planning firm, since 1974. Mr. Sherbahn has been a
director of the Mutual Company since 1967.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met seven times in 2000. The Board of Directors has
an Executive Committee, an Audit Committee, a Nominating Committee, a
Compensation Committee and, together with the Mutual Company, a four-member
Coordinating Committee.
The Company's Executive Committee met 15 times in 2000. Messrs. Nikolaus,
Ireland and Glatfelter are the members of the Executive Committee. The Executive
Committee has the authority to take all action that can be taken by the full
Board of Directors, consistent with Delaware law, between meetings of the Board
of Directors.
The Audit Committee of the Company consists of Messrs. Bolinger, Glatfelter
and Ireland. The Audit Committee, which met one time in 2000, reviews audit
reports and management recommendations made by the Company's independent public
accountants.
The Nominating Committee of the Company consists of Messrs. Finley, Ireland
and Glatfelter. The Nominating Committee, which met one time in 2000, is
responsible for the nomination of candidates to stand for election to the Board
of Directors at the annual meeting and the nomination of candidates to fill
vacancies on the Board of Directors between meetings of stockholders. The
Nominating Committee will consider written nominations for directors from
stockholders to the extent such nominations are made in accordance with the
Company's By-laws. See "Stockholder Proposals."
The Compensation Committee of the Company consists of Messrs. Ireland,
Sherbahn and Glatfelter. The Compensation Committee met two times in 2000 to
review and recommend compensation plans, approve certain compensation changes
and grant options under and determine participants in the 1996 Equity Incentive
Plan.
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $17,000 in 2000
and were paid $500 for each meeting attended in excess of five per year.
Directors who are members of committees of the Board of Directors received $250
for each committee meeting attended. If a director serves on the Board of
Directors of both the Mutual Company and the Company, the director receives only
one annual retainer. If the Boards of Directors of both companies meet on the
same day, directors receive only one meeting fee. In such event, the retainer
and meeting fees are allocated 30% to the Mutual Company and 70% to the Company.
14
Pursuant to the 1996 Director Plan, each director of the Company and the
Mutual Company receives an annual restricted stock award ("Restricted Stock
Award") of 177 shares of the Company's common stock, provided that the director
served as a member of the Board of Directors of the Company or the Mutual
Company during any portion of the preceding calendar year. Pursuant to the 1996
Director Plan, each outside director of the Company and the Mutual Company is
also eligible to receive non-qualified options to purchase shares of common
stock in an amount determined by the Company's Board of Directors from time to
time. The Company anticipates that the 2001 Equity Incentive Plan for Directors
will replace the 1996 Director Plan upon the approval of the Amendment and the
distribution of the Stock Dividend described under "Item 2 -- Proposal to Amend
the Certificate of Incorporation" and will provide equivalent benefits to the
directors.
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company and the
Mutual Company during each of the three fiscal years ended December 31, 2000 for
services rendered in all capacities to the chief executive officer of the
Company and the four other most highly compensated executive officers of the
Company whose compensation exceeded $100,000 in the fiscal year ended December
31, 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
--------------------------------------------- ----------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) COMPENSATION($)
------------------ ---- -------- -------- -------------- --------- ---------- ---------------
Donald H. Nikolaus, 2000 340,000 85,821 -- 1,480 -- 71,593(2)
President and Chief 1999 377,931 1,972 10,356 2,766 100,000 103,173
Executive Officer 1998 368,000 108,100 14,594 2,943 133,333 112,958
Ralph G. Spontak, 2000 234,385 42,911 -- 1,480 -- 29,510(2)
Senior Vice President, 1999 249,123 1,478 4,235 2,766 40,000 53,979
Chief Financial Officer 1998 242,000 5,594 5,558 2,943 60,000 57,747
and Secretary
William H. Shupert, 2000 95,000 15,809 -- 1,480 -- 31,269(2)
Senior Vice President, 1999 98,827 1,478 -- 2,766 10,000 33,831
Underwriting 1998 100,000 27,797 -- -- 20,000 46,144
Robert G. Shenk 2000 165,385 22,585 -- -- -- 11,013(2)
Senior Vice President, 1999 154,738 4,642 -- -- 25,000 17,866
Claims 1998 138,000 7,797 -- -- 26,667 17,799
James B. Price 2000 117,000 15,357 -- -- -- 12,084(2)
Senior Vice President, 1999 112,358 3,371 -- -- 16,000 14,975
Claims 1998 105,000 17,425 -- -- 21,333 15,271
- ----------------
15
(1) All compensation of officers of the Company is paid by the Mutual Company.
Pursuant to the terms of an intercompany allocation agreement between the
Company and the Mutual Company, the Company is charged for its
proportionate share of all such compensation.
(2) In the case of Mr. Nikolaus, the total shown for 2000 also includes
premiums of $34,243 paid under split-dollar life insurance policies,
premiums of $2,193, paid under a term life insurance policy and directors
and committee meeting fees of $25,349. In the case of Mr. Spontak, the
total shown for 2000 includes premiums of $6,024 paid under a split-dollar
life insurance policy, premiums of $765 paid under a term life insurance
policy and directors and committee meeting fees of $19,200. In the case of
Messrs. Shupert, Shenk and Price, the totals shown for 2000 also include
term life insurance premiums of $3,770, $513 and $1,584, respectively.
No stock options were granted to any of the persons named in the Summary
Compensation Table during 2000.
The following table shows information with respect to options exercised
during the year ended December 31, 2000 and held on December 31, 2000 by the
persons named in the Summary Compensation Table.
OPTIONS EXERCISED AND VALUES FOR FISCAL YEAR 2000
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Donald H. Nikolaus --- --- 300,000 66,667 $50,000 $100,000
Ralph G. Spontak --- --- 139,999 26,667 20,000 40,000
William H. Shupert --- --- 60,666 6,667 5,000 10,000
Robert G. Shenk --- --- 61,667 16,667 12,500 25,000
James B. Price --- --- 53,333 10,667 8,000 16,000
REPORT OF THE COMPENSATION COMMITTEE
THE FOLLOWING REPORT OF THE COMPANY'S COMPENSATION COMMITTEE AND THE
PERFORMANCE GRAPH THAT IMMEDIATELY FOLLOWS SUCH REPORT SHALL NOT BE DEEMED PROXY
SOLICITATION MATERIAL, SHALL NOT BE DEEMED FILED WITH THE SEC UNDER THE EXCHANGE
ACT OR INCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED AND SHALL NOT
OTHERWISE BE SUBJECT TO THE LIABILITIES OF SECTION 18 OF THE EXCHANGE ACT.
Under the rules established by the SEC, the Company is required to provide
certain information about the compensation and benefits provided to the
Company's President and Chief Executive Officer and the other executive officers
listed in the Summary Compensation Table. The disclosure requirements as to
these officers include the use of specified tables and a report of the Company's
Compensation Committee reviewing the factors that resulted in compensation
16
decisions affecting these officers and the Company's other executive officers.
The Compensation Committee of the Board of Directors has furnished the following
report in fulfillment of the SEC's requirements.
The Compensation Committee reviews the general compensation policies of the
Company, including the compensation plans and compensation levels for executive
officers, and administers the 1996 Equity Incentive Plan and the cash incentive
compensation program in which the Company's executive officers participate. No
members of the Compensation Committee are former or current officers of the
Company, or have other interlocking relationships as defined by the SEC.
Compensation of the Company's executive officers has two principal
elements: (i) an annual portion, consisting of a base salary that is reviewed
annually and cash bonuses based on the Company's underwriting results, and (ii)
a long-term portion, consisting of stock options. In general, the executive
compensation program of the Company has been designed to:
(i) Attract and retain executive officers who contribute to the long-term
success of the Company;
(ii) Motivate key senior executive officers to achieve strategic business
objectives and reward them for the achievement of these objectives;
and
(iii) Support a compensation policy that differentiates in compensation
amounts based on corporate and individual performance and
responsibilities.
A major component of the Company's compensation policy, which has been
approved by the Compensation Committee, is that a significant portion of the
aggregate annual compensation of the Company's executive officers should be
based upon the Company's underwriting results as well as the contribution of the
individual officer. For a number of years, the Company has maintained a cash
incentive compensation program for the Company's executive officers. This
program provides a formula pursuant to which a fixed percentage of the Company's
underwriting results for the year is computed, as specified in the program, and
then allocated among the executive officers selected to participate in the
program for the particular year. The identity of the executive officers selected
to participate in the program for the particular year as well as their
participation in the amount determined by application of the fixed formula is
based upon recommendations submitted by the Company's senior executive officers
to the Compensation Committee. The Compensation Committee reviews those
recommendations and fixes the percentage participation of the Company's
executive officers in the program. The portion of the total compensation of the
executive officers named in the Summary Compensation Table arising from the cash
incentive compensation program formula was $182,483 in 2000 compared to $12,941
in 1999. In September 1999, the Company implemented a restructuring program
designed to reduce the Company's expense ratio and to enable the Company to be
more competitive in the difficult environment that has characterized the
property and casualty insurance industry for the past several years. As part of
the restructuring program, the Company recognized a one-time restructuring
charge of $2,044,430, which substantially affected the
17
Company's underwriting income for 1999 as did losses incurred in connection with
hurricanes in the fall of 1999. The success of the restructuring program
resulted in a significant increase in the Company's underwriting income for
2000, which in turn accounted for the increase in the cash incentive
compensation amount for 2000. The Compensation Committee therefore believes that
the amount of the incentive payments are tied directly to the Company's
performance.
The principal factors considered by the Company when it established the
cash incentive compensation program were:
(i) achievement of the Company's long-term underwriting objectives; and
(ii) the Company's long-term underwriting results compared to the long-term
underwriting results of other property and casualty insurance
companies.
Such factors as the Company's continued better-than-industry underwriting
results, continued expense control and the successful implementation and
maintenance of the restructuring program, which resulted in an expense ratio of
31.7% in 2000 compared to 36.6% in 1999, enhancement of the skills of the
Company's workforce, expansion of the Company's insurance products offered, the
development of opportunities to expand the geographic reach of the Company's
service area on a profitable basis, the successful reunderwriting of Southern
Heritage's book of business and the Company's opening of its federal savings
bank affiliate, Province Bank, in September 2000 to offer a broader range of
financial services to the Company's policyholders and agents, as well as a
subjective analysis of Mr. Nikolaus' leadership and performance, were considered
by the Compensation Committee in approving Mr. Nikolaus' participation
percentage under the Company's cash incentive program for 2000.
The Company's executive officers participate in the 1996 Equity Incentive
Plan, under which stock options are granted from time to time at not less than
the fair market value of the Company's common stock on the date of grant. The
options typically vest over three years. The primary purpose of the 1996 Equity
Incentive Plan is to provide an incentive for the Company's long-term
performance. Such stock options provide an incentive for the creation of
stockholder value over the long term because the full benefit of the options can
be realized only if the price of the Company's common stock appreciates over
time. No stock options were granted to the Company's executive officers during
2000.
Based upon all of the foregoing factors, the Compensation Committee
believes the compensation of Mr. Nikolaus and the other executive officers of
the Company is reasonable in view of the Company's performance and the
contribution of those officers to that performance in 2000, as well as the
performance of the Company in 2000 compared to the performance of other property
and casualty insurance companies in 2000.
Section 162(m) of the Code generally disallows a tax deduction to publicly
held companies for compensation of more than $1 million paid to a company's
chief executive officer or any executive officer named in its Summary
Compensation Table. Qualifying performance-based compensation is not subject to
18
the deduction limit if certain requirements are met. The policy of the
Compensation Committee is to structure the compensation of the Company's
executive officers, including Mr. Nikolaus, to avoid the loss of the
deductibility of any compensation, although Section 162(m) will not preclude the
Compensation Committee from awarding compensation in excess of $1 million, if it
should be warranted in the future. The Company believes that Section 162(m) will
not have any effect on the deductibility of the compensation of Mr. Nikolaus and
the other executive officers named in the Summary Compensation Table for 2000.
Submitted by:
January 31, 2001 Compensation Committee
C. Edwin Ireland
R. Richard Sherbahn
Philip H. Glatfelter, II
COMPARISON OF TOTAL RETURN ON THE COMPANY'S
COMMON STOCK WITH CERTAIN AVERAGES
The following graph provides an indicator of cumulative total stockholder
returns on the Company's common stock compared to the Russell 2000 Index and a
peer group of property and casualty insurance companies selected by Value Line,
Inc. The members of the peer group are as follows: 21st Century Industries,
Acceptance Insurance Cos. Inc., ACE Limited, ACMAT Corp., Allcity Insurance Co.,
Allmerica Financial Corp., Allstate Corp., American Financial Group Inc.,
American Medical Security Group Inc., Argonaut Group Inc., Baldwin & Lyons Inc.,
W.R. Berkley Corporation, Capitol Transamerica Corp., The Chubb Corporation,
Cincinnati Financial Corporation, CNA Financial Corp., EMC Insurance Group Inc.,
Erie Indemnity Company, Everest Re Group Ltd., Fairfax Financial Holding,
Fremont General Corporation, Gainsco Inc., Harleysville Group Inc., HCC
Insurance Holdings, Inc., Highlands Insurance Group Inc., Kaye Group Inc.,
Markel Corporation, Meadowbrook Insurance Group Inc., MEEMIC Holdings Inc.,
Merchants Group Inc., Mercury General Corporation, Meridian Insurance Group
Inc., Midland Company, Ohio Casualty Corporation, Old Republic International
Corp., Partnerre Ltd., Philadelphia Consolidated Holding Corp., PICO Holdings
Inc., PMI Mortgage Group, Progressive Corp. Ohio, PXRE Group Ltd., Renaissancere
Holdings Ltd., RLI Corporation, SAFECO Corporation, Seibels Bruce Group Inc.,
Selective Insurance Group, Inc., The St. Paul Companies, Inc., State Auto
Financial Corp., Transatlantic Holdings, Inc., Trenwick Group Ltd., United Fire
and Casualty Company, XL Capital Limited and Zenith National Insurance Company.
[GRAPHIC]
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
DONEGAL GROUP INC., RUSSELL 2000 INDEX AND VALUE LINE INSURANCE
(PROP/CASUALTY) INDEX
(Performance Results Through 12/31/00)
1995 1996 1997 1998 1999 2000
Donegal Group Inc. $100.00 $111.95 $164.44 $157.77 $ 66.62 $104.17
Russell 2000 Index $100.00 $116.44 $142.29 $138.40 $163.08 $156.73
Insurance (Prop/Casualty) $100.00 $127.85 $197.19 $200.19 $176.05 $243.85
Assumes $100 invested at the close of trading on December 31, 1995 in Donegal
Group Inc. common stock, Russell 2000 Index and Value Line Insurance
(Prop/Casualty).
*Cumulative total return assumes reinvestment of dividends.
19
REPORT OF THE AUDIT COMMITTEE
THE FOLLOWING REPORT OF THE COMPANY'S AUDIT COMMITTEE SHALL NOT BE DEEMED
PROXY SOLICITATION MATERIAL, SHALL NOT BE DEEMED FILED WITH THE SEC UNDER THE
EXCHANGE ACT OR INCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED AND SHALL NOT
OTHERWISE BE SUBJECT TO THE LIABILITIES OF SECTION 18 OF THE EXCHANGE ACT.
The Audit Committee of the Board of Directors reviews the financial
reporting process, including the overview of the financial reports and other
financial information provided by the Company to governmental or regulatory
bodies, the public and others who rely thereon, the Company's systems of
internal accounting and financial controls, the selection, evaluation and
retention of independent public accountants and the annual independent audit of
the Company's financial statements. Each of the Audit Committee members
satisfies the definition of independent director as established in the Audit
Committee Policy of the Nasdaq Stock Market and complies with the financial
literacy requirements thereof. The Board of Directors adopted a written charter
for the Audit Committee on June 13, 2000, which is attached to this proxy
statement as Appendix A.
The Audit Committee has reviewed the Company's audited consolidated
financial statements and discussed those statements with management. The Audit
Committee has also discussed with KPMG LLP, the Company's independent public
accountants during 2000, the matters required to be discussed by Statement of
Auditing Standards No. 61 (Communication with Audit Committees, as amended).
The Audit Committee received from KPMG LLP the written disclosures required
by Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees) and discussed with KPMG LLP matters relating to its
independence. The Audit Committee also considered the compatibility of the
provision of non-audit services by KPMG LLP with the maintenance of KPMG LLP's
independence.
On the basis of these reviews and discussions, the Audit Committee
recommended to the Board of Directors that the Company's audited consolidated
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000, and be filed with the SEC.
Submitted by:
January 31, 2001 Audit Committee
Robert S. Bolinger
Philip H. Glatfelter, II
C. Edwin Ireland
20
CERTAIN TRANSACTIONS
Donald H. Nikolaus, President and a director of the Company and the Mutual
Company, is also a partner in the law firm of Nikolaus & Hohenadel. Such firm
has served as general counsel to the Mutual Company since 1970 and to the
Company since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York counties. Such firm is paid
its customary fees for such services.
Patricia A. Gilmartin, a director of the Company and the Mutual Company, is
an employee of Donegal Insurance Agency, which has no affiliation with the
Company except that Donegal Insurance Agency receives insurance commissions in
the ordinary course of business from the Company's subsidiaries and affiliates
in accordance with such subsidiaries' and affiliates' standard commission
schedules and agency contracts.
Frederick W. Dreher, a director of the Mutual Company and one of the Mutual
Company's representatives on the Coordinating Committee, is a partner in the law
firm of Duane Morris, which represents the Company and the Mutual Company in
certain legal matters. Such firm is paid its customary fees for such services.
ITEM 2 - PROPOSAL TO AMEND THE CERTIFICATE OF INCORPORATION
DESCRIPTION OF THE AMENDMENT AND THE STOCK DIVIDEND
At the annual meeting, the stockholders will be asked to consider and vote
upon the amendment of Article 4 of the Company's Certificate of Incorporation,
in the form included as Appendix B to this proxy statement (the "Amendment"),
to: (i) authorize 30,000,000 shares of a new class of common stock with
one-tenth of a vote per share designated as Class A common stock, $.01 par value
per share (the "Class A common stock"), (ii) (a) reclassify the Company's
existing $1.00 par value per share common stock (the "existing common stock") as
Class B common stock, $.01 par value per share (the "Class B common stock"), (b)
effect a one-for-three reverse split of the Class B common stock (the "Reverse
Split") and (c) reduce the number of authorized shares of Class B common stock
from 20,000,000 shares to 10,000,000 shares; (iii) eliminate the Company's
existing Class A common stock, (iv) establish the rights, powers and terms of
the Class A common stock and Class B common stock, (v) retain the existing
authorization to issue 2,000,000 shares of series preferred stock, $1.00 per
value per share, and (vi) restate Article 4 of the Company's Certificate of
Incorporation as so amended.
If the Amendment is approved by the stockholders of the Company, the Board
of Directors intends to prepare and file a Certificate of Amendment to the
Company's Certificate of Incorporation in accordance with the Amendment, which
will become effective (the "Effective Date") immediately upon acceptance of the
filing by the Secretary of State of the State of Delaware. The Board of
Directors would then have the power, without soliciting further stockholder
approval, to issue the additional authorized shares, except to the extent that
such approval may be required by law or by the rules applicable to a class of
securities listed on the Nasdaq National Market System, and such shares may be
21
issued for such consideration, cash or otherwise, at such times and in such
amounts as the Board of Directors may determine in its discretion. The future
issuance by the Company of shares of series preferred stock, Class A common
stock or Class B common stock may dilute the equity ownership of the Company's
current stockholders. Although the Board of Directors currently intends to file
the Certificate of Amendment if the Amendment is approved by the stockholders at
the annual meeting, the resolution of stockholders will reserve to the Board of
Directors the right to defer or abandon the Amendment and not file such
Certificate of Amendment even if the Amendment has been approved by the
stockholders.
If the Board of Directors elects to file the Certificate of Amendment,
promptly after the Effective Date, the Board of Directors has approved a
distribution as a dividend of two shares of Class A common stock (the "Stock
Dividend") for each share of Class B common stock received pursuant to the
Reverse Split. The effect of the Stock Dividend, coupled with the Reverse Split
of the existing common stock, is that each stockholder will continue to own the
same number of shares of capital stock of the Company with one-third of such
stockholding constituting shares of Class B common stock and two-thirds of such
stockholding constituting shares of Class A common stock. The record date for
the Stock Dividend (the "Stock Dividend Record Date") is the close of business
on April 20, 2001, and the date of distribution of the Class A common stock
pursuant to the Stock Dividend is expected promptly after the Amendment is
approved by the stockholders. Stockholder approval of the Stock Dividend is not
required by Delaware law and is not being solicited by this proxy statement.
Following the Reverse Split and the distribution of the Stock Dividend,
each outstanding certificate representing existing common stock will be void,
and the Company will mail to each holder of existing common stock certificates
representing the number of whole shares of Class A common stock and Class B
common stock held by such holder following the Reverse Split and the
distribution of the Stock Dividend. No certificates representing fractional
interests in existing common stock will be issued and cash will be paid in lieu
thereof.
An example of the effect of the Amendment, including the Reverse Split and
the Stock Dividend, on a holder of 100 and 300 shares, respectively of the
existing common stock is as follows:
A holder of 100 shares of existing common stock before the effective date
of the Amendment, the Reverse Split and the Stock Dividend will, on the
effective date of those transactions, hold 33 shares of Class B common stock as
a result of the Reverse Split and 66 shares of Class A common stock as a result
of the Stock Dividend. In addition, the holder would receive cash in lieu of
receiving the remaining one-third of a share of Class B common stock that
resulted from the Reverse Split in amount equal to the one-third fractional
interest times the closing price of the existing common stock on the record date
for the Stock Dividend. Similarly, a holder of 300 shares of existing common
stock will, on the effective date of the Amendment, the Reverse Split and the
Stock Dividend, hold 100 shares of Class B common stock as a result of the
Reverse Split and 200 shares of Class A common stock as a result of the Stock
Dividend.
22
As more fully explained later, after the Stock Dividend and the Reverse
Split, there will be no change in the relative voting power or equity of any
stockholder of the Company, including the Mutual Company, because the Reverse
Split will apply equally to all stockholders and because the Stock Dividend will
be distributed to each stockholder in proportion to the number of shares of
Class B common stock owned following the Reverse Split.
The Amendment has been unanimously approved by the Company's Board of
Directors, including the directors who are not also directors of the Mutual
Company. The Board of Directors believes that the Amendment and the Stock
Dividend are in the best interests of the Company and its stockholders and
recommends a vote FOR the approval and adoption of the Amendment.
BACKGROUND OF THE AMENDMENT AND THE STOCK DIVIDEND
In recent years, a number of publicly held companies with majority or
controlling ownership by a single family or entity have adopted dual class
capitalization structures, whereby one class of common stock either has
exclusive voting rights or substantially greater voting power per share than the
other class of common stock. The rules of the New York Stock Exchange, the
American Stock Exchange and Nasdaq permit dual class voting structures, that do
not reduce the relative voting rights of the holders of an outstanding class of
voting securities by the issuance of a class of voting securities having greater
voting rights.
The Mutual Company has owned not less than a majority of the Company's
existing common stock since the formation of the Company in 1986, and owned
approximately 62% of the Company's existing common stock as of the date of this
proxy statement. See "Stock Ownership." The Board of Directors believes that the
Mutual Company's voting control of the Company has substantially facilitated the
consistent management, stable underwriting operations, external growth and
surplus adequacy of the Company's insurance subsidiaries in recent years. The
Board of Directors further believes that the authorization of the Class A common
stock with voting rights that are limited to one-tenth of a vote per share will
allow additional flexibility to pursue corporate opportunities while at the same
time enhancing the maintenance of the relative voting power of the Mutual
Company and that the maintenance of the relative voting power of the Mutual
Company will continue to contribute significantly to the growth, financial
stability and success of the Company and its insurance subsidiaries.
Approval of the Amendment will also permit the Company to issue Class A
common stock to raise additional equity capital and will enable the Company to
issue Class A common stock in order to effect acquisitions of other companies.
The issuance of additional shares of Class A common stock for these and other
purposes after the Stock Dividend will also increase the liquidity of the Class
A common stock. At the same time, the limited voting rights applicable to the
Class A common stock will enable the Company to issue a substantial amount of
Class A common stock without materially adversely affecting the Mutual Company's
voting control of the Company.
23
REASONS FOR THE AMENDMENT AND THE STOCK DIVIDEND; RECOMMENDATION OF THE BOARD OF
DIRECTORS
The Board of Directors believes that a capital structure that has more than
one class of publicly traded common stock offers a number of potential benefits
to the Company. The Amendment will enable the Company to issue Class A common
stock or securities convertible into or exchangeable for Class A common stock
for financing, acquisition and compensation purposes without materially
adversely affecting the voting percentage of any stockholder, including the
Mutual Company.
The Company's Board of Directors has given due consideration to the
Amendment and has determined that the Amendment is in the best interests of the
Company and its stockholders. Some stockholders, however, may believe that the
Amendment is disadvantageous to the extent that it may favor long-term investors
and tend to discourage takeovers of the Company. The Company's Board of
Directors, five of whom are currently directors of the Mutual Company and one of
whom is the Chief Executive Officer of the Company, considered this factor in
reaching their recommendation. The Company's Board of Directors believes that
the Amendment is advantageous to the Company's long-term growth strategy to the
extent that it may favor long-term investors and may discourage attempts to take
over the Company, which the Board of Directors believes is a remote possibility
because of the Mutual Company's existing voting control of the Company.
The Company's Board of Directors suggests that each stockholder read and
review carefully the description of the Amendment, including the Reverse Split,
and the Stock Dividend and certain potential effects thereof as described in
this proxy statement.
Financing Flexibility
The Company has followed, and intends to continue to follow, a long-term
strategy for growth. The Company's Board of Directors believes that this
strategy will serve to maximize the value of the Company and further believes
that the voting control held by the Mutual Company has provided the stability
and absence of disruption necessary to pursue a long-term strategy.
Implementation of the Amendment will provide the Company with increased
flexibility in the future to issue common equity in connection with acquisitions
and to raise equity capital or to issue convertible debt as a means to finance
future growth without materially diluting the voting power of the Company's
existing stockholders, including the Mutual Company. Class A common stock will
also be used in the future for the Company's stock-based incentive plans for
employees and directors as indicated in Proposals 3, 4 and 5. The Company has no
plans to issue Class B common stock in the future except upon the exercise of
currently outstanding options to purchase Class B common stock, and the Company
currently has no plans to issue any shares of series preferred stock.
The Company intends to make a public offering of Class A common stock at an
appropriate but as yet undetermined time in the future. The Company anticipates
that such an offering would be effected through certain underwriters, and that
24
the proceeds to be received by the Company would be used to repay certain
indebtedness incurred in connection with the Company's external growth and for
working capital and other general corporate purposes. There can be no assurance,
however, that the Company will proceed with a public offering. Any such public
offering is contingent on approval of the Amendment, approval of the public
offering by the Company's Board of Directors, market conditions, the market
price of the Class A common stock, a determination as to the appropriate timing
for such an offering and such other factors as the Company's Board of Directors
then considers relevant. Any such public offering would be made only by means of
a prospectus complying with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"). This proxy statement does not constitute an
offer to sell, or a solicitation of an offer to buy, any shares of Class A
common stock. If a public offering occurs in the future, then holders of Class A
common stock and Class B common stock would experience a dilution of their
percentage ownership interest in the Company.
Stockholder Flexibility
The Amendment and the Stock Dividend will permit a stockholder to dispose
of a portion of his equity interest in the Company without significantly
affecting his voting power by selling his Class A common stock and retaining
ownership of his Class B common stock. Therefore, stockholders who are
interested in maintaining their relative voting power in the Company may be more
willing to sell or otherwise dispose of part of their holdings of Class A common
stock, which may result in an increased trading volume and increased liquidity
of the Class A common stock. Upon the adoption of the Amendment and the
distribution of the Stock Dividend, stockholders may also exchange Class B
common stock for Class A common stock on a share-for-share basis. See
"Description of the Class A Common Stock and the Class B Common Stock -- Right
to Exchange Class B Common Stock for Class A Common Stock."
Continuity
The adoption of the Amendment and the distribution of the Stock Dividend
should reduce the risk of disruption in the Company's long-term plans and
objectives that could otherwise result if the Company determined, for insurance
regulatory, diversification or other reasons that it would be advisable to issue
a significant amount of equity securities, and would also provide the Mutual
Company with additional flexibility. Therefore, the Amendment and the Stock
Dividend should provide a basis for continuity pursuant to such plans and
objectives if and when such circumstances arise.
Key Employees
Implementation of the Amendment and the Stock Dividend should allow all
employees to continue to concentrate on their primary responsibilities without
undue concern about the Mutual Company's ability to maintain its voting control
of the Company and become susceptible to an unwanted takeover. By enhancing the
ability of the Mutual Company to maintain voting control of the Company, the
Amendment and the Stock Dividend may, therefore, enhance the ability of the
Company to attract and retain highly qualified key employees.
25
Business Relationships
Implementation of the Amendment and the Stock Dividend may enhance the
existing and potential business relationships of the Company with reinsurers,
insurance regulatory authorities, customers and others who could become
concerned about changes in the control of the Company if the Mutual Company were
unable to maintain its voting control of the Company.
CERTAIN POTENTIAL DISADVANTAGES OF THE AMENDMENT AND THE STOCK DIVIDEND
While the Company's Board of Directors has determined that implementation
of the Amendment and the Stock Dividend is in the best interests of the Company
and its stockholders, the Company's Board of Directors recognizes that
implementation of the Amendment and the Stock Dividend may result in certain
disadvantages, including the following:
Maintenance of Mutual Company Control
The Mutual Company currently owns approximately 62% of the existing common
stock and has effective voting control over the Company. Regardless of whether
the Amendment is adopted and the Stock Dividend is implemented, the Mutual
Company will maintain its ability in its sole discretion to maintain or dispose
of its voting control of the Company. Implementation of the Amendment and the
Stock Dividend is likely to limit to a greater degree than currently the already
unlikely future circumstances in which a sale or transfer by the Mutual Company
of its equity interest in the Company could lead to a merger proposal or tender
offer that is not acceptable to the Mutual Company or a proxy contest for the
removal of the Company's incumbent directors. Consequently, implementation of
the Amendment and the Stock Dividend might reduce the possibility that
stockholders of the Company will have an opportunity to sell their shares at a
premium over prevailing market prices by reason of an acquisition of the Company
and make it more difficult to replace the current Board of Directors and
management of the Company.
Although the Company's Board of Directors currently intends to utilize the
shares of Class A common stock to be authorized if the Amendment is approved
solely for the purposes previously described in this Proxy Statement, such
shares could also be used by the Company's Board of Directors to dilute the
equity ownership of persons seeking to obtain control of the Company, thereby
possibly discouraging or deterring a non-negotiated attempt to obtain control of
the Company and making removal of incumbent management more difficult. Proposal
of the Amendment and the Stock Dividend, however, is not a result of, nor does
the Company's Board of Directors have knowledge of, any effort to accumulate the
Company's capital stock or to obtain control of the Company by means of a
merger, tender offer, solicitation in opposition to the Company's Board of
Directors or otherwise. Because the Mutual Company owns approximately 62% of the
Company's outstanding existing common stock and, after approval of the Amendment
and distribution of the Stock Dividend, will continue to own approximately 62%
of the Company's Class B common stock, the likelihood of a non-negotiated
attempt to obtain control of the Company is remote.
26
State Statutes
Some state securities laws contain provisions that, due to the issuance of
the Class A common stock in the Stock Dividend, may restrict an offering of
securities by the Company or the secondary trading of its equity securities in
those states. However, because of exemptions or for other reasons, the Company
does not believe that such provisions will have a material adverse effect on the
amount of equity securities that the Company would be able to offer or on the
price obtainable for such equity securities in such an offering or in the
secondary trading market for the Company's equity securities.
Security for Credit
The Company does not anticipate that adoption of the Amendment and the
distribution of the Stock Dividend will affect the ability of holders to use the
Class A common stock or the Class B common stock as security for the extension
of credit by financial institutions, securities brokers or dealers.
Investment by Institutions
Implementation of the Amendment and the Stock Dividend may affect the
decision of some institutional investors that would otherwise consider investing
in the existing common stock. The holding of common stock with less than one
vote per share may not be permitted by the investment policies of some
institutional investors.
Reduction in Holdings
To the extent that a stockholder's holding is reduced by reason of the
Reverse Split to less than 100 shares of Class B common stock, the brokerage
fees for sale of his shares will in all likelihood be higher than the brokerage
fees applicable to the sale of only round lots of shares.
Since it is not anticipated that the Reverse Split will cause any material
decrease in the number of round lot holders below the current level of
approximately 1,000 and because few, if any, stockholders currently hold less
than three shares, there will be no impact on the Company's reporting
obligations pursuant to the Exchange Act, and, even if the Company were eligible
to deregister its Class B common stock under the Exchange Act, the Company's
current intention is not to deregister the Class B common stock.
FEDERAL INCOME TAX CONSEQUENCES
The Company believes that, in general, for federal income tax purposes (i)
neither the reclassification of the existing common stock as Class B common
stock nor the distribution of shares of Class A common stock pursuant to the
Stock Dividend will be taxable to a stockholder of the Company, (ii) neither the
Class A common stock nor the Class B common stock will constitute "Section 306
stock" within the meaning of Section 306(c) of the Code, (iii) the cost or other
basis of each share of existing common stock will be apportioned among the
27
shares of Class A common stock and Class B common stock in proportion to the
number of shares of Class A common stock and Class B common stock held as of the
date of the Stock Dividend and (iv) the holding period for each new share of
Class A common stock and Class B common stock will include such stockholder's
holding period for the existing common stock with respect to which the Class A
common stock and the Class B common stock is distributed. Stockholders are urged
to seek the advice of their own tax advisors on this matter and on state income
tax matters.
DESCRIPTION OF THE CLASS A COMMON STOCK AND THE CLASS B COMMON STOCK
As previously indicated in this Proxy Statement, the Amendment will
authorize the issuance of a class of common stock designated as Class A common
stock and reclassify the existing common stock as Class B common stock. The
rights, powers and limitations of the Class A common stock and the Class B
common stock are set forth in full in the proposed Amendment, the full text of
which is included as Appendix B to this proxy statement and incorporated herein
by reference. The following summary is a materially complete statement of the
rights, preferences and limitations of the Class A common stock and the Class B
common stock as proposed under the Amendment; however, such summary should be
read in conjunction with, and is qualified in its entirety by reference to,
Appendix B.
Voting
The holders of shares of Class A common stock are entitled to one-tenth of
one vote per share held on any matter to be voted on by the stockholders of the
Company, and the holders of shares of Class B common stock are entitled to one
vote per share held on any matter to be voted on by the stockholders of the
Company. Except as required under the Delaware General Corporation Law (the
"DGCL") or the Company's Certificate of Incorporation, the holders of Class A
common stock and the holders of Class B common stock would vote together as a
single class on all matters to be voted upon by the stockholders of the Company.
Under the Certificate of Incorporation of the Company, as proposed to be
amended and restated, and the DGCL, at any election of directors, those nominees
receiving the highest number of votes cast for the number of directors to be
elected will be elected as directors. Because there is no provision in the
Company's Certificate of Incorporation permitting cumulative voting in the
election of directors, the Mutual Company, as the holder of approximately 62% of
the Company's Class A common stock and Class B common stock, will for the
indefinite future have the right to control the election of all of the members
of the Company's Board of Directors, and the holders of the remainder of the
outstanding shares of Class A common stock and Class B common stock will not be
able to cause the election of any directors of the Company.
Furthermore, under the Certificate of Incorporation of the Company, as
proposed to be amended and restated, and the DGCL, only the affirmative vote of
the holders of a majority in voting power represented by the Class A common
stock and the Class B common stock, voting as a single class, will be required
to amend the Certificate of Incorporation, to authorize additional shares of
capital stock of any class, to approve any merger or consolidation of the
28
Company with or into any other corporation or the sale of all or substantially
all of the Company's assets or to approve the dissolution of the Company. In
addition, as permitted under the DGCL, the Company's Certificate of
Incorporation, as proposed to be amended and restated, will provide that the
number of authorized shares of Class A common stock or Class B common stock may
be increased or decreased, but not below the number of shares then outstanding,
by the affirmative vote of the holders of a majority in voting power represented
by the Class A common stock and the Class B common stock voting as a single
class.
Under the DGCL, the holders of any Class A common stock or Class B common
stock would be entitled to vote as a separate class on any proposal to change
the par value of such class or to alter or change the rights, preferences and
limitations of such class in a way that would affect adversely such rights of
such class.
Dividends and Distributions
Each share of Class A common stock and each share of Class B common stock
is equal in respect to the right to receive such dividends as are declared by
the Company's Board of Directors in its discretion from time to time from funds
legally available therefor and other distributions in cash, stock and property,
including distributions in connection with any recapitalization and upon
liquidation, dissolution or winding up of the Company, except that (i) a
dividend or distribution in cash or property on a share of Class A common stock
may be greater than any distribution in cash or property on a share of Class B
common stock and (ii) dividends or other distributions payable on the Class A
common stock and the Class B common stock in shares of capital stock shall be
made to all holders of Class A common stock and Class B common stock and may be
made (a) in shares of Class A common stock to the holders of Class A common
stock and in shares of Class B common stock to the holders of Class B common
stock, (b) in shares of Class A common stock to the holders of Class A common
stock and to the holders of Class B common stock or (c) in any other authorized
class or series of capital stock to the holders of Class A common stock and to
the holders of Class B common stock.
The Company's Board of Directors has the authority under the Company's
Certificate of Incorporation, as proposed to be amended and restated, to pay
dividends on the Class A common stock at a greater rate than on the Class B
common stock. It is the current intention of the Company's Board of Directors to
declare and pay cash dividends on the Class A common stock at the quarterly rate
of $.10 per share and to declare and pay cash dividends on the Class B common
stock at the quarterly rate of $.09 per share.
The current policy of the Company's Board of Directors is to consider the
declaration of dividends on a quarterly basis. The payment of future dividends,
if any, will be at the discretion of the Company's Board of Directors and will
depend on many factors, including the Company's earnings, financial position,
the capital requirements of the Company and its insurance subsidiaries and other
factors. As an insurance holding company, the Company's principal source of cash
for the payment of dividends is dividends from the Company's insurance
subsidiaries. The Company's insurance subsidiaries are subject to state
29
insurance laws that regulate their ability to pay dividends. Therefore, there
can be no assurance as to future dividends.
It is the intention of the Company's Board of Directors to amend the
Company's Dividend Reinvestment and Stock Purchase Plan (the "Dividend
Reinvestment Plan") so as to permit the reinvestment of dividends on the Class A
common stock and the Class B common stock in shares of Class A common stock and
the voluntary purchase of Class A common stock, in each case subject to the
terms of the Dividend Reinvestment Plan. The Dividend Reinvestment Plan, as
proposed to be amended, will not permit the reinvestment of dividends in, or
voluntary purchases of, Class B common stock. Any offering of Class A common
stock pursuant to the Dividend Reinvestment Plan would be made only by means of
a prospectus complying with the requirements of the Securities Act. This proxy
statement does not constitute an offer to sell, or a solicitation of an offer to
buy, any shares of Class A common stock.
There are no redemption or sinking fund provisions applicable to the Class
A common stock or to the Class B common stock. Holders of Class A common stock
and holders of Class B common stock are not subject to further calls or
assessments by the Company.
Except as otherwise required by the DGCL or as otherwise provided in the
Company's Certificate of Incorporation, the Company's Board of Directors
currently intends that each share of Class A common stock and each share of
Class B common stock would have identical powers, preferences and limitations in
all respects other than as stated in this proxy statement.
Mergers and Consolidations
Each holder of Class A common stock and each holder of Class B common stock
will be entitled to receive the same per share consideration in a merger or
consolidation of the Company.
Right to Exchange Class B Common Stock for Class A Common Stock
Under the Company's Certificate of Incorporation, as proposed to be amended
and restated, each holder of Class B common stock will have the right at any
time to exchange Class B common stock for Class A common stock on a
share-for-share basis. Holders of Class B common stock who wish to exchange
their shares of Class B common stock for shares of Class A common stock may do
so by forwarding their certificates representing shares of Class B common stock
to the Company's transfer agent with a request that such certificates be
exchanged, to the extent requested, for certificates representing an equivalent
number of shares of Class A common stock.
30
Transferability; Trading Market
Like the existing common stock, the Class A common stock and the Class B
common stock will be freely transferable. The Company intends to file listing
applications with the Nasdaq Stock Market with respect to the Class A common
stock and the Class B common stock and, like the existing common stock, it is
expected that both of the classes will be quoted for trading on the Nasdaq
National Market.
Change in Authorized Capital and Par Value
The Company's Certificate of Incorporation currently authorizes 2,000,000
shares of series preferred stock, 20,000,000 shares of common stock and
15,000,000 shares of Class A common stock. The Amendment would reclassify the
authorized shares of capital stock by authorizing the issuance of up to
2,000,000 shares of series preferred stock, up to 30,000,000 shares of Class A
common stock and up to 10,000,000 shares of Class B common stock. After
implementation of the Amendment and the Stock Dividend, 5,916,751 shares of
Class A common stock and approximately 2,958,375 shares of Class B common stock
would be issued and outstanding. Therefore, assuming approval of the Amendment,
2,000,000 shares of series preferred stock, 24,333,334 shares of Class A common
stock and approximately 7,167,286 shares of Class B common stock would be
available for issuance from time to time for any proper corporate purpose,
including stock splits, stock dividends, acquisitions, stock option plans,
funding of employee benefit plans and public and private equity offerings. No
further action or authorization by stockholders would be necessary prior to the
issuance of the authorized but unissued shares of series preferred stock, Class
A common stock or Class B common stock after the Amendment is approved unless
applicable laws and regulations would require such approval in a given instance.
The Amendment would reclassify the total number of shares of capital stock
that could be issued. The reclassification results from: (i) the
reclassification of the existing common stock as Class B common stock, the
change of its par value from $1.00 per share to $.01 per share and the reduction
of the authorized number of shares thereof from 20,000,000 shares to 10,000,000
shares (ii) the authorization of 30,000,000 shares of Class A common stock and
(iii) the elimination of the existing Class A common stock. The Company's Board
of Directors believes the authorized shares of capital stock contemplated by the
Amendment available for possible future financing and acquisition transactions
and other general corporate purposes is desirable. Having such authorized shares
of capital stock available for issuance in the future will provide the Company
with greater flexibility and may allow such shares to be issued without the
expense or delay of a special meeting of stockholders. The Company does not
presently have any agreement, understanding, arrangement or plans that would
result in the issuance of any of the additional shares of capital stock to be
authorized except as set forth in the Amendment, pursuant to the Stock Dividend,
pursuant to the 2001 Employee Stock Purchase Plan, the 2001 Equity Incentive
Plan, the 2001 Directors Plan, the Company's Agency Stock Purchase Plan, the
Dividend Reinvestment Plan and as described herein under "Reasons for the
Amendment and the Stock Dividend; Recommendation of the Board of Directors --
Financing Flexibility." Unissued shares of capital stock could be issued in
31
circumstances that would serve to preserve the control of the Company by the
Mutual Company and the Company's current management. The Amendment will permit
the holders of a majority of the Company's Class B common stock to have a
controlling influence over the amendment of the Company's Certificate of
Incorporation in the future to increase the number of authorized shares of
series preferred stock, Class A common stock and Class B common stock.
STOCKHOLDER INFORMATION
The Company intends to deliver to the holders of Class A common stock and
Class B common stock the same proxy statements, annual reports and other
information as it currently delivers to the holders of the existing common
stock.
CERTAIN EFFECTS OF THE AMENDMENT AND THE STOCK DIVIDEND
Effects on Relative Ownership and Voting Powers
Because the Amendment provides that each share of existing common stock
will be reclassified and reverse split into one-third of a share of Class B
common stock and because the shares of Class A common stock to be distributed
pursuant to the Stock Dividend is to be made to all stockholders in proportion
to the number of shares of Class B common stock held on the Stock Dividend
Record Date by each stockholder, the relative ownership interest and voting
power of each holder of three or more shares of existing common stock will be
the same immediately after effectiveness of the Amendment and the Stock Dividend
as it was immediately prior thereto. Consequently, assuming the Mutual Company
retains its shares of Class B common stock, the Amendment will not alter the
Mutual Company's present voting power in the Company.
Stockholders who sell their shares of Class B common stock after the Stock
Dividend will lose a greater amount of voting power in proportion to equity than
they would have prior to the Stock Dividend. At the same time, stockholders
desiring to maintain a long-term investment in the Company will be free to
continue to hold the Class B common stock and retain the benefits of the voting
power attached to such Class B common stock.
The Mutual Company has an interest in the approval of the Amendment and the
distribution of the Stock Dividend because, as previously discussed, the
implementation of the Amendment and the Stock Dividend may enhance the ability
of the Mutual Company to retain voting control of the Company. See "Reasons for
the Amendment and the Stock Dividend; Recommendation of the Board of Directors."
As of the date of this proxy statement, the Mutual Company owned approximately
62% of the outstanding existing common stock of the Company. Accordingly, the
Mutual Company will receive 62% of the Class A common stock and approximately
62% of the Class B common stock in connection with the Amendment and the Stock
Dividend.
If the Mutual Company, following the Stock Dividend, were to sell or
otherwise distribute all of the shares of Class A common stock received pursuant
32
to the Stock Dividend, the Mutual Company would still have approximately 62% of
the voting power in the Company assuming no other change. The foregoing is for
illustrative and disclosure purposes only, and is in no way intended to suggest
that the Mutual Company has any intention of selling or otherwise distributing
any of its shares of Class A common stock or Class B common stock following the
Amendment and the Stock Dividend. It is the present intention of the Mutual
Company to retain all of its shares of Class B common stock and to sell or
otherwise distribute shares of Class A common stock if it sells or otherwise
distributes any shares of capital stock of the Company.
Effect on Market Price
The market price of shares of the Company's Class A common stock and Class
B common stock after implementation of the Amendment, including the Reverse
Split, and distribution of the Stock Dividend will depend on many factors,
including, among others, the future performance of the Company, general market
conditions and conditions relevant to companies engaged in the property and
casualty insurance business. Accordingly, the Company cannot predict the market
price at which the Class A common stock and the Class B common stock will trade
following the adoption of the Amendment, including the Reverse Split, and the
distribution of the Stock Dividend or whether one class will trade at a premium
over the other class.
Trading Market
Upon effectiveness of the Amendment, including the Reverse Split,
approximately 2,958,375 shares of Class B common stock will be issued and
outstanding. After the distribution of the Stock Dividend, 5,916,751 shares of
Class A common stock will be issued and outstanding. To minimize dilution of the
voting power of the Company's existing stockholders, including the Mutual
Company, the Company is more likely to issue additional shares of Class A common
stock than Class B common stock in the future to raise equity, finance
acquisitions or fund employee benefits. Furthermore, if the Mutual Company were
ever to sell or otherwise distribute any of its shares of the Company's capital
stock, the Mutual Company is more likely to sell or otherwise distribute shares
of Class A common stock. Any such issuance of additional Class A common stock by
the Company or dispositions of Class A common stock by the Mutual Company may
serve to enhance market activity in the Class A common stock relative to the
Class B common stock. Furthermore, exchanges of Class B common stock for Class A
common stock could have a similar effect on market activity, and it is possible
that if exchanges of Class B common stock for Class A common stock were
substantial, the Class B common stock might no longer satisfy the criteria for
maintenance of its listing on the Nasdaq National Market or Nasdaq SmallCap
Market. In such event, holders of Class B common stock would be able to exercise
their right of exchange for Class A common stock so as to preserve the liquidity
of their investment.
Effect on Book Value and Earnings Per Share
Because the Company will have the same number of shares of capital stock
outstanding after the Amendment, including the Reverse Split, and the Stock
33
Dividend, the implementation of the Amendment, including the Reverse Split, and
the Stock Dividend will have no effect on the book value or earnings per share
of the Company.
Registration Provisions of the Securities Act
Because the existing common stock will be as classified as Class B common
stock with essentially the same rights, powers and limitations, the
reclassification is not an "offer," "offer to sell," "offer for sale" or "sale"
of a security within the meaning of Section 2(3) of the Securities Act, and will
not involve the substitution of one security for another under Rule 145
thereunder. In addition, the Stock Dividend of Class A common stock will not
involve a "sale" of a security under the Securities Act or Rule 145.
Consequently, the Company is not required to register and has not registered the
Class A common stock or the Class B common stock under the Securities Act.
The existing common stock is registered under Section 12 of the Exchange
Act, and, upon the reclassification of the existing common stock as Class B
common stock, the Class B common stock will remain registered under the Exchange
Act. The Company intends to file a registration statement relating to the Class
A common stock under the Exchange Act and anticipates such registration
statement will become effective not later than the Stock Dividend Record Date.
Because the Amendment and the Stock Dividend do not constitute a "sale" of
either the Class A common stock or the Class B common stock under the Securities
Act, stockholders will not be deemed to have purchased such shares separately
from the existing common stock under the Securities Act and Rule 144 thereunder.
Class B common stock held immediately upon the effectiveness of the Amendment
and shares of Class A common stock received pursuant to the Stock Dividend,
other than any such shares held by affiliates of the Company within the meaning
of the Securities Act, may be offered for sale and sold in the same manner as
the existing common stock without registration under the Securities Act.
Affiliates of the Company, including the Mutual Company, will continue to be
subject to the restrictions specified in Rule 144 under the Securities Act.
NASDAQ Stock Market Criteria
The existing common stock is currently quoted for trading on the Nasdaq
National Market, and the Company intends to apply for inclusion of both the
Class A common stock and the Class B common stock on the Nasdaq National Market.
The Amendment is intended to comply with the rules of the Nasdaq Stock Market
that prohibit the disparate reduction or restriction of the voting rights of
existing stockholders through any corporate action or issuance. The purpose of
the rule is to prohibit stock issuances and other corporate actions that have a
"disenfranchising effect" on existing stockholders. The Company presently
anticipates that both the Class A common stock and the Class B common stock will
be quoted for trading on the Nasdaq National Market. Future issuances of either
Class A common stock or Class B common stock may be subject to further Nasdaq
Stock Market approval.
34
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT.
ITEM 3 - APPROVAL OF THE 2001 EQUITY INCENTIVE PLAN FOR EMPLOYEES
DESCRIPTION OF THE 2001 EQUITY INCENTIVE PLAN
The Board of Directors of the Company adopted the 2001 Equity Incentive
Plan, subject to stockholder approval of the 2001 Equity Incentive Plan and the
Amendment, the distribution of the Stock Dividend and the listing of the Class A
common stock on the Nasdaq National Market. See "Item 2 - Proposal to Amend the
Certificate of Incorporation." The purpose of the 2001 Equity Incentive Plan is
to further the growth, development and financial success of the Company, the
Mutual Company and the subsidiaries of the Company and the Mutual Company by
providing additional incentives to those officers and key employees who are
responsible for the management and affairs of the Company, the Mutual Company
and the subsidiaries of the Company and the Mutual Company which will enable
them to participate in the growth of the capital stock of the Company.
The 2001 Equity Incentive Plan will permit the granting of options to
purchase Class A common stock of the Company ("Options"), including Options
intended to qualify as incentive stock options ("Incentive Stock Options") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
Options not intended to so qualify ("Non-Qualified Stock Options") to those
officers and key employees of the Company, the Mutual Company and the
subsidiaries of the Company and the Mutual Company (as defined in Section 425 of
the Code) who are in positions in which their decisions, actions and counsel
significantly impact upon the profitability and success of the Company, the
Mutual Company and the subsidiaries of the Company and the Mutual Company.
Directors of the Company who are not also officers or employees of the Company,
the Mutual Company or the subsidiaries of the Company and the Mutual Company are
not eligible to participate in the 2001 Equity Incentive Plan. Nothing contained
in the 2001 Equity Incentive Plan affects the right of the Company, the Mutual
Company or any subsidiary of the Company or the Mutual Company to terminate the
employment of an employee.
Upon the implementation of the 2001 Equity Incentive Plan, no additional
options will be granted under the Company's 1996 Equity Incentive Plan, which
relates to the Company's existing common stock.
The total number of shares of Class A common stock that may be the subject
of Options granted under the 2001 Equity Incentive Plan may not exceed 1,500,000
shares in the aggregate. If an Option expires or is terminated for any reason
without having been fully vested or exercised, the number of shares subject to
such Option that have not been purchased or become vested may again be made
subject to an Option under the 2001 Equity Incentive Plan. Appropriate
adjustments to outstanding Options and to the number or kind of shares subject
to the 2001 Equity Incentive Plan are provided for in the event of a stock
split, reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate transactions involving the
35
Company, including a merger or a sale of all or substantially all of the assets
of the Company. The Class A common stock is not currently authorized for
issuance or listed for trading. The Company will seek to have the Class A common
stock listed for trading on the Nasdaq National Market. Approximately 50 persons
will initially be eligible to participate in the 2001 Equity Incentive Plan,
including executive officers of the Company, the Mutual Company and the
subsidiaries of the Company and the Mutual Company. No Options have yet been
granted to any person and no determination has been made as to the allocation of
grants of Options to specific employees under the 2001 Equity Incentive Plan. It
is not anticipated that any Options will be granted until the Class A common
stock has been authorized for issuance and the shares listed for trading on the
Nasdaq National Market.
The 2001 Equity Incentive Plan will be administered by the Board of
Directors of the Company or a committee of two or more members, each of whom
must be a "non-employee director" within the meaning of Rule 16b-3 under the
Exchange Act (the "Equity Plan Committee"). The Equity Plan Committee is
authorized to (i) interpret the provisions of the 2001 Equity Incentive Plan and
decide all questions of fact arising in its application; (ii) select the
employees to whom Options are granted and determine the timing, type, amount,
size and terms of each such grant and (iii) make all other determinations
necessary or advisable for the administration of the 2001 Equity Incentive Plan.
INCENTIVE OPTIONS AND NON-QUALIFIED OPTIONS
The exercise price of the shares of Class A common stock subject to Options
will be set by the Equity Plan Committee but may not be less than 100% of the
fair market value of such shares on the date the Option is granted as determined
by the Equity Plan Committee.
Options will be evidenced by written agreements in such form not
inconsistent with the 2001 Equity Incentive Plan as the Equity Plan Committee
shall approve from time to time. Each agreement will state the period or periods
of time within which the Option may be exercised, provided, however, that no
Option may be exercised in whole or in part during the first six months after
such Option is granted unless expressly permitted by the Committee. The Equity
Plan Committee may accelerate the exercisability of any installments upon such
circumstances and subject to such terms and conditions as the Equity Plan
Committee deems appropriate. Unless the Equity Plan Committee accelerates
exercisability, no Option that is unexercisable at the time of the optionee's
termination of employment may thereafter become exercisable. No Option may be
exercised after ten years from the date of its grant.
An outstanding Non-Qualified Option that has become exercisable generally
terminates up to three years after the termination of employment due to death,
retirement or total disability and three months after employment termination for
any reason other than retirement, total disability or death. Incentive Stock
Options that have become exercisable generally will terminate one year after
termination of employment due to total disability or death and three months
after an employment termination for any other reason. No Option may be assigned
or transferred, except by will or by the applicable laws of descent and
distribution. During the lifetime of the optionee, the Option may be exercised
only by the optionee.
36
The Equity Plan Committee will determine whether Options granted are to be
Incentive Stock Options meeting the requirements of Section 422 of the Code.
Incentive Stock Options may be granted only to eligible employees. Any such
optionee must own less than 10% of the total combined voting power of the
Company or of any of its subsidiaries unless at the time such Incentive Stock
Option is granted the price of the Option is at least 110% of the fair market
value of the Class A common stock subject to the Option and, by its terms, the
Incentive Stock Option is not exercisable after the expiration of five years
from the date of grant. An optionee may not receive Incentive Stock Options that
first become exercisable in any calendar year for shares with an aggregate fair
market value determined at the date of grant in excess of $100,000.
The option price must be paid in full at the time of exercise unless
otherwise determined by the Equity Plan Committee. Payment must be made in cash,
in shares of Class A common stock or in shares of Class B common stock valued at
their then fair market value, or a combination thereof, as determined in the
discretion of the Equity Plan Committee. It is the policy of the Equity Plan
Committee that any taxes required to be withheld must also be paid at the time
of exercise. The Equity Plan Committee may, in its discretion, allow an optionee
to enter into an agreement with the Company's transfer agent or a brokerage firm
of national standing whereby the optionee will simultaneously exercise the
Option and sell the shares acquired thereby and either the Company's transfer
agent or the brokerage firm executing the sale will remit to the Company from
the proceeds of sale the exercise price of the shares as to which the Option has
been exercised.
AMENDMENT AND TERMINATION
The 2001 Equity Incentive Plan will remain in effect until all Options
granted under the 2001 Equity Incentive Plan have been satisfied by the issuance
of shares, except that no Option may be granted under the 2001 Equity Incentive
Plan after April 18, 2011. Without stockholder approval, no amendments may be
made to the 2001 Equity Incentive Plan to: (i) materially increase the maximum
number of shares that may be issued under the 2001 Equity Incentive Plan, except
to reflect adjustments in capitalization as described in the 2001 Equity
Incentive Plan; (ii) materially increase the benefits accruing to participants
under the 2001 Equity Incentive Plan or (iii) materially modify requirements for
eligibility for participation under the 2001 Equity Incentive Plan. In all other
respects, the 2001 Equity Incentive Plan can be amended, modified, suspended or
terminated by the Board of Directors of the Company or the Equity Plan
Committee, except that no modification, amendment or termination may be made to
the 2001 Equity Incentive Plan, without the consent of an optionee, if such
modification, amendment or termination will negatively affect the rights of the
optionee under an Option previously granted.
37
FEDERAL INCOME TAX CONSEQUENCES
Based on the advice of counsel, the Company believes that the normal
operation of the 2001 Equity Incentive Plan should generally have, under the
Code and the regulations thereunder, all as in effect on the date of this proxy
statement, the principal federal income tax consequences described below. The
tax treatment described below does not take into account any changes in the Code
or the regulations thereunder that may occur after the date of this proxy
statement. The following discussion is only a summary; it is not intended to be
all-inclusive or to constitute tax advice, and, among other things, does not
cover possible state or local tax consequences. This description may differ from
the actual tax consequences of participation in the 2001 Equity Incentive Plan.
An employee receiving an Option (an "Optionee") will not recognize taxable
income upon the grant of the Option, nor will the Company be entitled to any
deduction on account of such grant.
In the case of Non-Qualified Stock Options, the Optionee will recognize
ordinary income upon the exercise of the Non-Qualified Stock Option in an amount
equal to the difference between the option price and the fair market value of
the shares on the date of exercise. An Optionee exercising a Non-Qualified Stock
Option is subject to federal income tax withholding on the income recognized as
a result of the exercise of the Non-Qualified Stock Option. Such income will
include any income attributable to any shares issuable upon exercise that are
surrendered, if permitted under the applicable stock option agreement, in order
to satisfy the federal income tax withholding requirements.
Subject to the exceptions described herein, the basis of the shares
received by the Optionee upon the exercise of a Non-Qualified Stock Option will
be the fair market value of the shares on the date of exercise. The Optionee's
holding period will begin on the day after the date on which the Optionee
recognizes income with respect to the transfer of such shares, i.e., generally
the day after the exercise date. When the Optionee disposes of the shares
acquired upon exercise of a Non-Qualified Stock Option, the Optionee will
generally recognize capital gain or loss under the Code rules that govern stock
dispositions, assuming the shares are held as capital assets, equal to the
difference between (i) the selling price of the shares and (ii) the sum of the
option price and the amount included in his income when the Non-Qualified Stock
Option was exercised. Any net capital gain (i.e., the excess of the net
long-term capital gains for the taxable year over net short-term capital losses
for such taxable year) will be taxed at a capital gains rate that depends on how
long the shares were held and the Optionee's tax bracket. Any net capital loss
may be used only to offset up to $3,000 per year of ordinary income (reduced to
$1,500 in the case of a married individual filing separately) or carried forward
to a subsequent year. The use of shares to pay the exercise price of a
Non-Qualified Stock Option, if permitted under the applicable stock option
agreement, will be treated as a like-kind exchange under Section 1036 of the
Code to the extent that the number of shares received on the exercise does not
exceed the number of shares surrendered. The Optionee will therefore recognize
no gain or loss with respect to the surrendered shares and will have the same
basis and holding period with respect to the newly acquired shares (up to the
number of shares surrendered) as with respect to the surrendered shares. To the
38
extent the number of shares received exceeds the number surrendered, the fair
market value of such excess shares on the date of exercise, reduced by any cash
paid by the Optionee upon such exercise, will be includible in the gross income
of the Optionee. The Optionee's basis in such excess shares will equal the fair
market value of such shares on the date of exercise, and the Optionee's holding
period with respect to such excess shares will begin on the day following the
date of exercise.
Incentive Stock Options granted under the 2001 Equity Incentive Plan are
intended to qualify as incentive stock options under Section 422 of the Code. A
purchase of shares upon exercise of an Incentive Stock Option will not result in
recognition of income at that time, provided the Optionee was an employee of the
Company or certain related corporations described in Section 422(a)(2) of the
Code during the entire period from the date of grant of the Incentive Stock
Option until three months before the date of exercise (increased to 12 months if
employment ceased due to total and permanent disability). The employment
requirement is waived in the event of the Optionee's death. Of course, in all of
these situations, the Incentive Stock Option itself may provide a shorter
exercise period after employment ceases than the allowable period under the
Code. However, the excess of the fair market value of the shares purchased over
the exercise price will constitute an item of tax preference. This tax
preference will be included in the Optionee's computation of the Optionee's
alternative minimum tax. The basis of the shares received by the Optionee upon
exercise of an Incentive Stock Option is the exercise price. The Optionee's
holding period for such shares begins on the date of exercise.
If the Optionee does not dispose of the shares issued to the Optionee upon
the exercise of an Incentive Stock Option within one year after such issuance or
within two years after the date of the grant of such Incentive Stock Option,
whichever is later, then any gain or loss realized by the Optionee on a later
sale or exchange of such shares generally will be a long-term capital gain or a
long-term capital loss equal to the difference between the amount realized upon
the disposition and the exercise price, if such shares are otherwise a capital
asset in the hands of the Optionee. Any net capital gain (i.e., the excess of
the net long-term capital gains for the taxable year over net short-term capital
losses for such taxable year) will be taxed at a capital gains rate that depends
on how long the shares were held and the Optionee's tax bracket. Any net capital
loss may be used only to offset up to $3,000 per year of ordinary income
(reduced to $1,500 in the case of a married individual filing separately) or
carried forward to a subsequent year. If the Optionee sells the shares during
such period (i.e., within two years after the date of grant of the Incentive
Stock Option or within one year after the transfer of the shares to the
Optionee), the sale will be deemed a "disqualifying disposition." In that event,
the Optionee will recognize ordinary income for the year in which the
disqualifying disposition occurs equal to the amount, if any, by which the
lesser of the fair market value of such shares on the date of exercise of such
Incentive Stock Option or the amount realized from the sale exceeded the amount
the Optionee paid for such shares. In the case of disqualifying dispositions
resulting from certain transactions, such as gift or related party transactions,
the Optionee will realize ordinary income equal to the fair market value of the
shares on the date of exercise minus the exercise price. The basis of the shares
with respect to which a disqualifying disposition occurs will be increased by
the amount included in the Optionee's ordinary income. Disqualifying
dispositions of shares may also, depending upon the sales price, result in
capital gain or loss under the Code rules that govern other stock dispositions,
39
assuming that the shares are held as a capital asset. The tax treatment of such
capital gain or loss is summarized herein.
Subject to the exceptions described herein, the use of shares of Class A
common stock or Class B common stock already owned by the Optionee to pay the
purchase price of an Incentive Stock Option will be treated as a like-kind
exchange under Section 1036 of the Code to the extent that the number of shares
received on the exercise does not exceed the number of shares surrendered. The
Optionee will therefore recognize no gain or loss with respect to the
surrendered shares and will have the same basis and holding period with respect
to the newly acquired shares (up to the number of shares surrendered) as with
respect to the surrendered shares. To the extent that the number of shares
received exceeds the number surrendered, the Optionee's basis in such excess
shares will equal the amount of cash paid by the Optionee upon the exercise of
the Incentive Stock Option, if any, and the Optionee's holding period with
respect to such excess shares will begin on the date such shares are transferred
to the Optionee. However, if payment of the purchase price upon exercise of an
Incentive Stock Option is made with shares acquired upon exercise of an
Incentive Stock Option before the shares used for payment have been held for the
two-year or one-year period described herein, use of such shares as payment will
be deemed a "disqualifying disposition" of the shares used for payment subject
to the rules described above.
Under current law, any gain realized by an Optionee, other than long-term
capital gain, is taxable at a maximum federal income tax rate of 39.6%. Under
current law, long-term capital gain is taxable at a maximum federal income tax
rate of 20%.
The Company will be entitled to a tax deduction in connection with an
Option under the 2001 Equity Incentive Plan in an amount equal to the ordinary
income realized by the Optionee at the time such Optionee recognizes such income
including any ordinary income realized by the Optionee upon a "disqualifying
disposition" of an Incentive Stock Option as described herein.
The foregoing discussion is only a summary of certain of the federal income
tax consequences relating to the 2001 Equity Incentive Plan as in effect on the
date of this proxy statement. No consideration has been given to the effects of
federal estate, state, local and other tax laws upon the 2001 Equity Incentive
Plan or upon the Optionee or the Company, which laws will vary depending upon
the particular jurisdiction or jurisdictions involved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 2001 EQUITY
INCENTIVE PLAN.
ITEM 4 - APPROVAL OF THE 2001 EQUITY INCENTIVE PLAN FOR DIRECTORS
DESCRIPTION OF THE 2001 DIRECTOR PLAN
The Board of Directors of the Company adopted the 2001 Director Plan,
subject to stockholder approval of the 2001 Director Plan and the Amendment, the
distribution of the Stock Dividend and the listing of the Class A common stock
40
on the Nasdaq National Market. See "Item 2 - Proposal to Amend the Certificate
of Incorporation." The purpose of the Director Plan is to enhance the ability of
the Company and the Mutual Company to attract and retain highly qualified
directors, to compensate them for their services to the Company and the Mutual
Company and the subsidiaries of the Company and the Mutual Company, as the case
may be, and, in so doing, to strengthen the alignment of the interests of the
directors with the interests of the stockholders by ensuring ongoing ownership
of the Company's Class A common stock.
The 2001 Director Plan provides for: (i) the grant of non-qualified stock
options ("Director Options") to outside directors (an "Outside Director") of the
Company and the Mutual Company and (ii) an annual grant to each director of the
Company and the Mutual Company (a "Director") of a restricted stock award (a
"Restricted Stock Award") of 177 shares of Class A common stock to be issued on
the first business day of January in each year, commencing January 2, 2002,
provided that the Director served as a member of the Board of Directors of the
Company or the Mutual Company during any portion of the prior year. Director
Options and Restricted Stock Awards collectively are hereinafter referred to as
"Stock Rights." Restricted Stock Awards are made automatically, and no action by
the Board of Directors of the Company or the Board of Directors of the Mutual
Company will be required. The total number of shares of Class A common stock
that may be the subject of grants under the 2001 Director Plan may not exceed
200,000 shares in the aggregate.
Upon the implementation of the 2001 Director Plan, no additional grants
of Stock Rights will be made under the 1996 Director Plan relating to the
Company's existing common stock. The Class A common stock is not currently
authorized or listed for trading on the Nasdaq National Market. The Company will
seek to have the Class A common stock listed for trading on the Nasdaq National
Market.
The number of persons who are eligible to participate in the 2001 Director
Plan is currently 12, consisting of directors of the Company and the Mutual
Company. No Options or Restricted Stock Awards have been granted under the 2001
Director Plan, and no determination has been made as to the allocation of grants
of Options or Restricted Stock Awards under the 2001 Director Plan, except as
described above. The issuance of Stock Rights is subject to approval of the
Amendment and the 2001 Director Plan by the stockholders of the Company, the
distribution of the Stock Dividend and the listing of the Class A common stock
on the Nasdaq National Market.
Appropriate adjustments to outstanding Options and to the number or kind of
shares subject to the 2001 Director Plan are provided for in the event of a
stock split, reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate transactions involving the
Company, including a merger or a sale of all or substantially all of the assets
of the Company.
The 2001 Director Plan is administered by the Board of Directors. The Board
of Directors has the power to interpret the 2001 Director Plan, the Director
Options and the Restricted Stock Awards, and, subject to the terms of the 2001
Director Plan, to determine who will be granted Director Options, the number of
41
Director Options to be granted to any Outside Director, the timing of such grant
and the terms of exercise. The Board of Directors also has the power to adopt
rules for the administration, interpretation and application of the 2001
Director Plan. The Board of Directors does not have any discretion to determine
who will be granted Restricted Stock Awards under the 2001 Director Plan, to
determine the number of Restricted Stock Awards to be granted to each Director
or to determine the timing of such grants.
RESTRICTED STOCK AWARDS
Restricted Stock Awards consist of shares of Class A common stock that are
issued in the name of the Director but that may not be sold or otherwise
transferred by the grantee until one year after the date of grant. Upon the
issuance of shares under a Restricted Stock Award, the Director will have all
rights of a stockholder with respect to the shares, except that such shares may
not be sold, transferred or otherwise disposed of until one year after the date
of grant.
Restricted Stock Awards will be evidenced by written agreements in such
form not inconsistent with the 2001 Director Plan as the Board of Directors
shall approve from time to time. Each agreement shall contain such restrictions,
terms and conditions as are required by the 2001 Director Plan. Although the
Class A common stock comprising each Restricted Stock Award will be registered
in the name of the grantee, a restrictive legend shall be placed on the stock
certificate.
NON-QUALIFIED STOCK OPTIONS
The exercise price of Director Options granted under the 2001 Director Plan
will be set by the Board of Directors and may not be less than 100% of the fair
market value per share of the Class A common stock on the date that the Director
Option is granted.
Director Options will be evidenced by written agreements in such form not
inconsistent with the 2001 Director Plan as the Board of Directors shall approve
from time to time. Each agreement will state the period or periods of time
within which the Director Option may be exercised. The Board of Directors may
accelerate the exercisability of any Director Options upon such circumstances
and subject to such terms and conditions as the Board of Directors deems
appropriate. Unless the Board of Directors accelerates exercisability, no
Director Option that is unexercisable at the time of the optionee's termination
of service as a Director may thereafter become exercisable. No Director Option
may be exercised after ten years from the date of grant. If a Director Option
expires or is canceled for any reason without having been fully exercised or
vested, the number of shares subject to such Director Option that had not been
purchased or become vested may again be made subject to a Director Option under
the 2001 Director Plan.
The option price must be paid in full at the time of exercise unless
otherwise determined by the Board of Directors. Payment must be made in cash, in
shares of Class A common stock or Class B common stock valued at their then fair
market value, or a combination thereof, as determined in the discretion of the
Board of Directors. It is the policy of the Board of Directors that any taxes
required to be withheld must also be paid at the time of exercise. The Board of
Directors may, in its discretion, allow an optionee to enter into an agreement
42
with the Company's transfer agent or a brokerage firm of national standing
whereby the Director will simultaneously exercise the Director Option and sell
the shares acquired thereby and either the Company's transfer agent or the
brokerage firm executing the sale will remit to the Company from the proceeds of
sale the exercise price of the shares as to which the Director Option has been
exercised and the required amount of withholding.
An outstanding Director Option that has become exercisable generally
terminates one year after termination of a Director's service as a Director due
to death and three months after termination of a Director's service as a
Director for any reason other than death. A Director Option granted under the
2001 Director Plan may be exercised during the lifetime of the optionee only by
the optionee.
AMENDMENT AND TERMINATION
The 2001 Director Plan will remain in effect until all Director Options
granted under the 2001 Director Plan have been satisfied by the issuance of
shares, except that no Stock Rights may be granted under the Director Plan after
April 18, 2011. The Board of Directors may terminate, modify, suspend or amend
the 2001 Director Plan at any time, subject to any required stockholder approval
or any stockholder approval that the Board of Directors may deem to be advisable
for any reason, such as for the purpose of obtaining or retaining any statutory
or regulatory benefits under tax, securities or other laws or satisfying any
applicable stock exchange listing requirements. No modification, amendment or
termination to the 2001 Director Plan will alter or impair any rights or
obligations under any outstanding Stock Right without the consent of the
optionee or grantee, as the case may be. No Stock Right may be granted during
any period of suspension nor after termination of the 2001 Director Plan.
FEDERAL INCOME TAX CONSEQUENCES
The 2001 Director Plan is not a qualified plan under Section 401(a) of the
Code. Based on the advice of counsel, the Company believes that the normal
operation of the 2001 Director Plan should generally have, under the Code and
the regulations thereunder, all as in effect on the date of this Proxy
Statement, the principal federal income tax consequences described below. The
tax treatment described below does not take into account any changes in the Code
or the regulations thereunder that may occur after the date of this Proxy
Statement. The following discussion is only a summary; it is not intended to be
all-inclusive or to constitute tax advice, and, among other things, does not
cover possible state or local tax consequences. This description may differ from
the actual tax consequences of participation in the 2001 Director Plan.
An optionee will not recognize income for federal income tax purposes upon
the receipt of a Director Option, nor will the Company be entitled to any
deduction on account of such grant. Such optionee will recognize ordinary
taxable income for federal income tax purposes at the time of exercise in the
amount by which the fair market value of such shares then exceeds the option
price. When the optionee disposes of the shares acquired upon exercise of the
Director Option, the optionee will generally recognize capital gain or loss
43
equal to the difference between (i) the amount received upon disposition of the
shares and (ii) the sum of the option price and the amount included in the
optionee's income when the Director Option was exercised. Such gain will be
long-term or short-term depending upon whether the shares were held for at least
one year after the date of exercise.
A grantee of shares of restricted stock pursuant to a Restricted Stock
Award will recognize ordinary income for federal income tax purposes in the year
of receipt, measured by the value of the shares received determined without
regard to the transfer restriction or other restrictions relating to such issue.
Any gain or loss recognized upon the sale of the shares will generally be
treated as capital gain or loss and will be long-term or short-term depending
upon the holding period of the shares.
Under current law, any gain realized by an optionee or a grantee, as the
case may be, other than long-term capital gain is taxable at a maximum federal
income tax rate of 39.6%. Long-term capital gain is taxable at a maximum federal
income tax rate of 20%.
The Company will be entitled to a tax deduction in connection with Stock
Rights under the 2001 Director Plan in an amount equal to the ordinary income
realized by the optionee or grantee, as the case may be, and at the time he
recognizes such income.
The foregoing discussion is only a summary of certain of the federal income
tax consequences relating to the 2001 Director Plan as in effect on the date of
this proxy statement. No consideration has been given to the effects of federal
estate, state, local and other laws (tax or other) upon the 2001 Director Plan
or upon the optionee or grantee, so the case may be, or the Company, which laws
will vary depending upon the particular jurisdiction or jurisdictions involved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 2001 EQUITY
INCENTIVE PLAN FOR DIRECTORS.
ITEM 5 - APPROVAL OF THE 2001 EMPLOYEE STOCK PURCHASE PLAN
DESCRIPTION OF THE 2001 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of the Company adopted the 2001 Employee Stock
Purchase Plan (the "2001 Stock Purchase Plan"), subject to stockholder approval
of the 2001 Stock Purchase Plan and the Amendment, distribution of the Stock
Dividend and the listing of the Class A common stock on the Nasdaq National
Market. See "Item 2 - Proposal to Amend the Certificate of Incorporation." The
purpose of the 2001 Stock Purchase Plan is to provide eligible employees with an
opportunity to acquire or increase their proprietary interest in the Company
through the purchase of the Company's Class A common stock at a discount from
current market prices. The 2001 Stock Purchase Plan is intended to meet the
requirements of Section 423 of the Code.
The total number of shares of the Company's Class A common stock that
are available for issuance under the 2001 Stock Purchase Plan is 300,000 shares.
44
Appropriate adjustments in the number or kind of shares reserved for sale under
the 2001 Stock Purchase Plan are provided for in the event of a stock split,
stock dividend, share combination or spin-off and certain other types of
corporate transactions involving the Company, including mergers, consolidations,
reorganizations and reclassifications. The Class A common stock is not currently
authorized for issuance or listed for trading. The Company will seek to have the
Class A common stock listed for trading on the Nasdaq National Market.
Upon the implementation of the 2001 Stock Purchase Plan, the Company's 1996
Employee Stock Purchase Plan (the "Prior Plan") will be discontinued and no
additional shares of the Company's existing common stock will be issued under
that plan.
The 2001 Stock Purchase Plan is administered by a committee of three
employees of the Company (the "Purchase Plan Committee") appointed by the Board
of Directors. The Purchase Plan Committee is authorized to adopt rules and
regulations from time to time for carrying out the provisions of the 2001 Stock
Purchase Plan. Any interpretation or construction of any provision of the 2001
Stock Purchase Plan by the Purchase Plan Committee is final and conclusive as to
all persons absent contrary action by the Board of Directors. Any interpretation
or construction of any provision of the 2001 Stock Purchase Plan by the Board of
Directors is final and conclusive as to all persons.
Full-time employees of the Company, the Mutual Company and each subsidiary
of the Company or the Mutual Company who have completed one month of employment
prior to the beginning of an enrollment period are eligible to participate in
the 2001 Stock Purchase Plan. An otherwise eligible employee may not purchase
shares under the 2001 Stock Purchase Plan if exercising the right to purchase
shares of the Company's common stock: (i) would cause the employee to own shares
of Class A common stock and Class B common stock that possess 5% or more of the
total combined voting power or value of all classes of the Company's stock or
any subsidiary of the Company or the Mutual Company or (ii) would cause the
employee to have purchase rights under all stock purchase plans of the Company
or any subsidiary of the Company or the Mutual Company that meet the
requirements of Section 423 of the Code that accrue at a rate that exceeds
$25,000 of fair market value of the common stock of the Company or any
subsidiary of the Company or the Mutual Company for each calendar year in which
such right is outstanding. Separation from employment for any reason constitutes
an automatic withdrawal from the 2001 Stock Purchase Plan.
The 2001 Stock Purchase Plan provides for semi-annual subscription periods,
extending from January 1 through June 30 or from July 1 through December 31,
respectively, beginning on July 1, 2001 and ending on June 30, 2011.
Employees enrolled in the Prior Plan as of June 30, 2001 will be deemed to
be automatically enrolled for participation in the 2001 Stock Purchase Plan.
Thereafter, enrollment for participation in the 2001 Stock Purchase Plan will
take place during the month preceding each subscription period, which is either
the period from December 1 through December 31 or the period from June 1 through
June 30 of each year.
45
Payroll deduction is the only payment method available for the purchase of
Class A common stock under the 2001 Stock Purchase Plan. Employees may invest a
maximum of 10% of their base pay towards the purchase of Class A common stock in
any subscription period. At a minimum, an employee must authorize a payroll
deduction sufficient to enable such employee to purchase at least ten shares of
Class A common stock in any subscription period.
Subscriptions received under the 2001 Stock Purchase Plan during each
subscription period will be held by the Company in a plan account maintained for
each employee. At the end of each subscription period, the amount contained in
the employee's plan account will be divided by the subscription price for the
applicable subscription period, and the employee's plan account will be credited
with the resulting number of whole shares. The subscription price for any
subscription period will be equal to the lesser of 85% of the closing price of
the Class A common stock as reported on the Nasdaq National Market on the last
trading day before the first day of the enrollment period with respect to such
subscription period or 85% of the closing price of the Class A common stock as
reported on the Nasdaq National Market on the last trading day of such
subscription period.
No employee may assign his rights under the 2001 Stock Purchase Plan.
An employee may transfer rights under the 2001 Stock Purchase Plan only by will
or by the laws of descent and distribution, and, during an employee's lifetime,
such subscription rights shall be exercisable only by the employee.
Upon the termination of an employee's employment with the Company, the
Mutual Company or a subsidiary of the Company or the Mutual Company or an
employee's withdrawal from the 2001 Stock Purchase Plan, the amount of any cash
credited to the employee's 2001 Stock Purchase Plan account for the current
subscription period will be refunded by the Company to the employee without
interest. Withdrawal by an officer subject to Section 16 of the Exchange Act,
except for withdrawal because of the termination of an officer's employment with
the Company, the Mutual Company or a subsidiary of the Company or the Mutual
Company, will become effective only at the end of a subscription period. No
further payroll deductions will be made with respect to employees that have
withdrawn from the 2001 Stock Purchase Plan. An employee's withdrawal from the
2001 Stock Purchase Plan does not affect such employee's eligibility to
participate in the 2001 Stock Purchase Plan during succeeding subscription
periods. A retiring employee or a beneficiary of a participating employee upon
the death of such employee may elect to purchase the appropriate number of whole
shares of Class A common stock using the date of retirement or death as though
it were the last day of a subscription period.
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AMENDMENT AND TERMINATION
The 2001 Stock Purchase Plan will remain in effect until June 30, 2011 or
until all shares available for purchase are purchased under the 2001 Stock
Purchase Plan. The Board of Directors of the Company has the right to terminate
the 2001 Stock Purchase Plan at any time without notice, as long as no
participant's existing rights are adversely affected thereby. Without
stockholder approval, no amendments may be made to the 2001 Stock Purchase Plan
to: (i) increase materially the benefits accruing to participants under the 2001
Stock Purchase Plan; (ii) increase the total number of shares of Class A common
stock subject to the 2001 Stock Purchase Plan; (iii) change the formula by which
the price at which the shares of Class A common stock shall be sold is
determined or (iv) change the class of employees eligible to participate in the
2001 Stock Purchase Plan.
FEDERAL INCOME TAX CONSEQUENCES
The 2001 Stock Purchase Plan is intended to qualify under the provisions of
Section 423 of the Code. Based on the advice of counsel, the Company believes
that the normal operation of the 2001 Stock Purchase Plan should generally have,
under the Code and the regulations thereunder, all as in effect on the date of
this proxy statement, the principal federal income tax consequences described
below. The tax treatment described below does not take into account any changes
in the Code or the regulations thereunder that may occur after the date of this
proxy statement. The following discussion is only a summary; it is not intended
to be all-inclusive or to constitute tax advice, and, among other things, does
not cover possible state or local tax consequences. This description may differ
from the actual tax consequences of participation in the 2001 Stock Purchase
Plan.
No income will be realized for federal income tax purposes by a participant
upon the purchase of shares under the 2001 Stock Purchase Plan. For participants
who do not dispose of their shares within two years after the date on which the
right to purchase was granted nor within one year after their shares were
purchased, the gain on sale of the shares following the end of the required
holding period (or their increase in value in the event of death prior to sale)
will, under the present provisions of the Code, be taxed as ordinary income to
the extent of the lesser of (i) an amount equal to the difference between the
fair market value of the shares on the date of grant and 85% of such value on
such date or (ii) an amount equal to the difference between the fair market
value of the shares at the time of disposition and the amount paid for such
shares under the 2001 Stock Purchase Plan. Any additional gain will be treated
as long-term capital gain assuming the shares are capital assets in the
participant's hands. If a participant is entitled to long-term capital gain
treatment upon a sale of the stock, the Company will not be entitled to any
deduction for federal income tax purposes with respect thereto. For participants
who dispose of their shares within two years after the date of grant or within
one year after their shares were purchased, the gain on the sale of the shares
will, under the present provisions of the Code, be taxed as ordinary income to
the extent of the difference between the purchase price of the shares and the
fair market value of the shares on the purchase date and such difference will be
deductible by the Company for federal income tax purposes. Any additional gain
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will be treated as long-term or short-term capital gain, depending on whether
the shares have been held for more or less than one year from the date they were
purchased.
Under current law, any gain realized by a participant, other than long-term
capital gain is taxable at a maximum federal income tax rate of 39.6%. Long-term
capital gain is taxable at a maximum federal income tax rate of 20%.
The foregoing discussion is only a summary of certain of the federal income
tax consequences relating to the 2001 Stock Purchase Plan as in effect on the
date of this Proxy Statement. No consideration has been given to the effect of
federal estate, state, local and other laws (tax or other) upon the 2001 Stock
Purchase Plan or upon the participant or the Company, which laws will vary
depending upon the particular jurisdiction or jurisdictions involved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 2001 EMPLOYEE
STOCK PURCHASE PLAN.
ITEM 6 - ELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Unless instructed to the contrary, it is intended that votes will be cast
pursuant to the proxies for the election of KPMG LLP as the Company's
independent public accountants for 2001. The Company has been advised by KPMG
LLP that none of its members has any financial interest in the Company. Election
of KPMG LLP will require the affirmative vote of the holders of a majority of
the shares of the Company's existing common stock present in person or
represented by proxy at the annual meeting.
A representative of KPMG LLP will attend the annual meeting, will have the
opportunity to make a statement, if he desires to do so, and will be available
to respond to any appropriate questions presented by stockholders at the annual
meeting.
Audit Fees. The aggregate fees billed to the Company by KPMG LLP, the
independent public accountants for the Company, in connection with (i) the audit
of Company's annual consolidated financial statements for the fiscal year ended
December 31, 2000 and (ii) the reviews of the consolidated financial statements
included in the Company's Form 10-Q quarterly reports for the fiscal year ended
December 31, 2000 was $118,000.
Financial Design and Implementation Fees. No fees were billed by KPMG LLP
for information technology services rendered by KPMG LLP during the fiscal year
ended December 31, 2000.
All Other Fees. The aggregate fees billed by KPMG LLP for non-audit
services other than information technology services during the fiscal year ended
December 31, 2000 was $65,000 for statutory auditing and actuarial reviews.
The Audit Committee has determined that the provision of the non-audit
services described above is compatible with maintaining KPMG LLP's independence.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF KPMG LLP AS
THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR 2001.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions of
Rule 14a-8 of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in the Company's proxy statement for its 2002 annual meeting of
stockholders must deliver such proposal in writing to the Company's Secretary at
the Company's principal executive offices at 1195 River Road, Marietta,
Pennsylvania 17547, not later than November 23, 2001.
Pursuant to Section 2.3 of the Company's By-laws, if a stockholder wishes
to present at the Company's 2002 annual meeting of stockholders (i) a proposal
relating to nominations for and election of directors for consideration by the
Nominating Committee of the Company's Board of Directors or (ii) a proposal
relating to a matter other than nominations for and election of directors,
otherwise than pursuant to Rule 14a-8 of the proxy rules of the SEC, the
stockholder must comply with the provisions relating to stockholder proposals
set forth in the Company's By-laws, which are summarized below. Written notice
of any such proposal containing the information required under the Company's
By-laws, as described herein, must be delivered in person, by first class United
States mail postage prepaid or by reputable overnight delivery service to the
Company's Secretary at the Company's principal executive offices at 1195 River
Road, Marietta, Pennsylvania 17547 during the period commencing on November 23,
2001 and ending on December 23, 2001.
A written proposal of nomination for a director must set forth (A) the name
and address of the stockholder who intends to make the nomination (the
"Nominating Stockholder"), (B) the name, age, business address and, if known,
residence address of each person so proposed, (C) the principal occupation or
employment of each person so proposed for the past five years, (D) the number of
shares of capital stock of the Company beneficially owned within the meaning of
SEC Rule 13d-3 by each person so proposed and the earliest date of acquisition
of any such capital stock, (E) a description of any arrangement or understanding
between each person so proposed and the Nominating Stockholder with respect to
such person's proposal for nomination and election as a director and actions to
be proposed or taken by such person as a director, (F) the written consent of
each person so proposed to serve as a director if nominated and elected as a
director and (G) such other information regarding each such person as would be
required under the proxy solicitation rules of the SEC if proxies were to be
solicited for the election as a director of each person so proposed. Only
candidates nominated by stockholders for election as a member of the Company's
Board of Directors in accordance with the By-law provisions summarized herein
will be eligible to be considered by the Nominating Committee for nomination for
election as a member of the Company's Board of Directors at the 2002 annual
meeting of stockholders, and any candidate not nominated in accordance with such
provisions will not be considered or acted upon for election as a director at
the 2002 annual meeting of stockholders.
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A written proposal relating to a matter other than a nomination for
election as a director must set forth information regarding the matter
equivalent to the information that would be required under the proxy
solicitation rules of the SEC if proxies were solicited for stockholder
consideration of the matter at a meeting of stockholders. Only stockholder
proposals submitted in accordance with the By-law provisions summarized above
will be eligible for presentation at the 2002 annual meeting of stockholders,
and any matter not submitted to the Company's Board of Directors in accordance
with such provisions will not be considered or acted upon at the 2002 annual
meeting of stockholders.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented for
consideration at the annual meeting other than the matters described in the
notice of annual meeting, but if any matters are properly presented, proxies in
the enclosed form returned to the Company will be voted in accordance with the
recommendation of the Board of Directors or, in the absence of such a
recommendation, in accordance with the judgment of the proxy holder.
By Order of the Board of Directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 23, 2001
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