COMPENSATION OF DIRECTORS
Each non-employee director receives an annual director's fee of $15,000
(except for the Chairman who receives an annual fee of $25,000) and a fee of
either $500 per day for attending, in person, meetings of the Board of Directors
or committees of the Board of Directors, or $250 per day for participating in
such meetings by telephone; and are reimbursed for their reasonable expenses
incurred in connection with attendance at or participation in such meetings. In
addition, under the 1996 Plan, each non-employee director who was a director of
the Company on December 4, 1995 was granted an option to purchase 25,000 shares
of Common Stock. Messrs. Glenn and Carroll were each granted an option to
purchase 25,000 shares of Common Stock on February 8, 1996 and June 27, 1996,
respectively, at the time of their respective appointments to the Board of
Directors. Such grants were approved by the stockholders of the Company in
connection with stockholder approval of the 1996 Plan at the 1996 Annual Meeting
of Stockholders in December 1996. Additionally, under the terms of the 1996
Plan, each director, other than a director first elected within twelve months
prior to this Annual Meeting, will be granted an option to purchase 1,000 shares
of Common Stock immediately following each Annual Stockholder Meeting,
commencing with this Annual Meeting.
Directors who are employees of the Company receive no additional
compensation for their services as directors. However, such directors are
reimbursed for their reasonable expenses incurred in connection with attendance
at or participation in meetings of the Board of Directors or committees of the
Board of Directors.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership, as of April 18, 1997, of the Common Stock by (i) any person known by
the Company to beneficially own more than 5% of the outstanding Common Stock;
(ii) each director of the Company; (iii) the Company's Chief Executive Officer
and each of the four most highly compensated executive officers (collectively,
the "Named Officers") whose total salaries and bonuses exceeded $100,000 for
services rendered to the Company during the last fiscal year; and (iv) all
directors and executive officers of the Company as a group, including the Named
Officers. All share and warrant amounts and related exercise prices have been
adjusted to give effect to the one-for-fourteen reverse stock split of the
Common Stock completed on March 27, 1995. On April 18, 1997, there were
5,872,537 shares of Common Stock issued and outstanding.
NUMBER OF SHARES
OF COMMON STOCK PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNERSHIP(1)
- ------------------------ --------------------- ------------
HP Partners L.P.(2)........................ 2,201,600 32.5%
c/o HP Management, Inc.
444 Madison Avenue, 38th Floor
New York, New York 10022
John Hancock Mutual Life................... 639,500 10.8%
Insurance Company(2)
John Hancock Place
P.O. Box 111
Boston, Massachusetts 02117
The Mutual Life Insurance Company........... 399,845 6.8%
of New York(2)
1740 Broadway
New York, New York 10019
TJS Partners, L.P.(2)........................ 399,000 6.8%
52 Vanderbilt Avenue
5th Floor
New York, New York 10017
Stephen Feinberg............................. 389,000 6.6%
950 Third Avenue, 20th Floor
New York, New York 10022
Pierre Besuchet(3)(6)(7)..................... 44,048 *
James L. Boehme(6)(7)........................ 78,000 1.3%
Daniel T. Carroll(6)(7)...................... 27,000 *
George V. Flagg(6)(7)........................ 110,000 1.8%
Lawrence R. Glenn(6)(7)(8)................... 25,000 *
Mark S. Hauser(4)(6)(7)...................... 2,241,600 34.0%
Laurence R. Irving(6)(7)..................... 10,000 *
William P. Lyons(4)(6)(7).................... 2,305,600 34.7%
David Jan Mitchell(4)(6)(7).................. 2,259,600 34.2%
Edward L. Palmer(6)(7)(8).................... 26,464 *
Glenn C. Riker(5)............................ 6,427 *
All directors and executive officers as a
group (12 persons)(3)(4)(5)(6)............. 2,735,539 38.9%
___________________
* Represents less than 1% of outstanding Common Stock.
(1) Each director and executive officer has sole voting and investment power
with respect to the shares beneficially owned, except as otherwise noted in
the footnotes to this table. For purposes of this table, a person or group
of persons is deemed to have "beneficial ownership" of any shares of Common
Stock which such person has the right to acquire on or within 60 days of
April 18,
2
1997. For purposes of computing the percentage of outstanding Common Stock
held by each person or group of persons named above, any shares which such
person has the right to acquire on or within 60 days after April 18, 1997
are deemed to be outstanding, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
(2) With respect to warrants held by the Institutions, including John Hancock
Mutual Life Insurance Company and The Mutual Life Insurance Company, such
warrants have been adjusted (subject to notification of the Institutions)
in accordance with the anti-dilution provisions contained therein to
increase the number of shares purchasable and to reduce the exercise
thereof. Includes shares issuable upon the exercise of warrants having a
current exercise price of $10.17 per share, as follows: John Hancock Mutual
Life Insurance Company and affiliates - 71,799; and The Mutual Life
Insurance Company of New York and affiliates - 44,893. With respect to HP
Partners L.P., includes 685,714 shares of Common Stock issuable upon the
exercise of warrants having a current exercise price of $4.58 per share.
The information in the foregoing table and in this note is based on the
Company's records and on either a Schedule 13D or a Schedule 13G filed with
the Securities and Exchange Commission by each of the following
stockholders and dated as indicated: HP Partners L.P., dated January 20,
1995; John Hancock Mutual Life Insurance Company, dated January 16, 1996;
The Mutual Life Insurance Company of New York, dated March 2, 1995; TJS
Partners, L.P., dated June 17, 1996; and Stephen Feinberg, dated October
11, 1996. The Schedule 13D filed by TJS Partners, L.P. states that TJS
Management, L.P., TJS Corporation and Thomas J. Salvatore may be deemed to
own beneficially the shares owned beneficially by TJS Partners, L.P.
(3) Excludes vested options to purchase 17,884 shares of Common Stock granted
to Mr. Besuchet under the Company's 1992 Directors' Option Plan (the
"Directors Plan"). Grants of stock options are no longer permitted under
the Directors Plan. Such options have a current exercise price of $13.97
per share; however, they become exercisable only if the price per share of
the Common Stock on the Nasdaq National Market is not less than $24.45 for
30 consecutive trading days. Such condition had not been met as of April
18, 1997.
(4) Includes 1,515,886 shares of Common Stock and warrants to purchase 685,714
shares of Common Stock owned by HP Partners. Messrs. Hauser, Mitchell and
Spier (a former director of the Company) are stockholders and directors of
the general partner of HP Partners, and Messrs. Mitchell and Spier are also
limited partners of HP Partners. Messrs. Hauser, Mitchell and Spier are
also the sole stockholders of the special limited partner of HP Partners
which is entitled to various rights relating to 285,714 of the
partnership's warrants. Pursuant to HP Partners' partnership agreement,
Mr. Lyons has an arrangement to participate in any economic benefit which
Mr. Spier obtains as a result of Mr. Spier's shareholding interest in such
general partner. See "Certain Transactions".
(5) Includes vested options granted under the Company's Amended and Restated
Senior Executives' Option Plan (the "Executive Plan") to Mr. Riker to
purchase 4,427 shares of Common Stock, at an exercise price of $7.28 per
share. These options become exercisable only if the price per share of the
Common Stock on the Nasdaq National Market is not less than $13.30 for 30
consecutive trading days. Such condition had been met as of April 18,
1997. Also includes vested options granted under the 1996 Plan to Mr.
Riker to purchase 2,000 shares of Common Stock. Excludes options granted
to Mr. Riker under the 1994 Plan and the 1996 Plan which have not yet
vested to purchase 4,427 and 8,000 shares of Common Stock, respectively.
3
(6) Includes vested options granted under the 1996 Plan to each of Messrs.
Besuchet, Carroll, Glenn, Hauser, Lyons, Mitchell, Palmer, Flagg, Boehme,
Irving and Stern to purchase 25,000, 25,000, 25,000, 40,000 85,000, 55,000,
25,000, 104,000, 78,000, 10,000 and 5,000 shares of Common Stock,
respectively. Excludes options granted under the 1996 Plan which have not
yet vested to each of Messrs. Flagg, Boehme, Irving and Stern to purchase
156,000, 117,000, 15,000, and 20,000 shares of Common Stock, respectively.
(7) The address of such stockholder is: c/o Holmes Protection Group, Inc., 440
Ninth Avenue, New York, New York 10001-1695.
4
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth a summary of annual and long-term
compensation earned by or paid to the Named Officers for services rendered to
the Company during each of the last three fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
ANNUAL AWARDS
----------------------- -----------------------------
Securities
Other Annual UNDERLYING OPTIONS/ All Other
SALARY BONUS COMPENSATION SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)(1)
---- ----- ------- --- --- ------
George V. Flagg............ 1994 $ -- -- $ -- -- $ --
President and 1995 -- -- -- -- --
Chief Executive Officer 1996 196,154 -- 12,750 260,000(2) 4,763
James L. Boehme............ 1994 $ -- -- -- -- --
Executive Vice President - 1995 -- -- -- -- --
Sales and Marketing 1996 147,115 -- 12,750 195,000(2) 4,748
Glenn C. Riker............. 1994 88,150 12,782 13,000 8,854(3) 3,209
Senior Vice President- 1995 91,260 20,716 13,000 -- 3,476
Human Resources 1996 93,445 9,125 13,000 10,000(3) 3,691
Lawrence R. Irving......... 1994 -- -- -- -- --
Vice President - Finance 1995 -- -- -- -- --
1996 68,654 20,000 31,800 25,000(5) --
(1) Represents matching contributions by the Company under the Company's 401(k)
Plan. 20% of accrued matching contributions become vested on each of the
second through sixth anniversaries of employment and are fully vested
thereafter.
(2) Represents a grant of stock options made in January 1996 under the 1996
Plan, subject to approval, which was granted, of the 1996 Plan by
stockholders of the Company at the 1996 Annual Meeting of Stockholders in
December 1996.
(3) 1994 option grants replaced a like number of options previously granted
under the Executive Plan to Mr. Riker in 1992.
5
(4) Represents a grant of stock options made in December 1995 under the 1996
Plan, subject to approval, which was granted, of the 1996 Plan by
stockholders of the Company at the 1996 Annual Meeting of Stockholders in
December 1996.
(5) Represents a grant of stock options made in May 1996 under the 1996 Plan,
subject to approval, which was granted, of the 1996 Plan by stockholders of
the Company at the 1996 Annual Meeting of Stockholders in December 1996.
All information under "Executive Compensation" herein relating to stock
options (except for those granted under the 1996 Plan) and related exercise and
hurdle prices have been adjusted to give effect to the one-for-fourteen reverse
stock split of the Common Stock effected on March 27, 1995.
The following table contains information concerning the grant of stock
options made to the Named Officers during the fiscal year ended December 31,
1996 under the Executive Plan or the 1996 Plan:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Percent of Market
Number of Total Price
Securities Option/SARs on
NAME Underlying Granted to Exercise or Base Grant
Optionals/SARs Employees in Price Date
GRANTED (#) FISCAL YEAR ($/SH) (1) ($/SH)
George V. Flagg....... 260,000 25.9% $6.00-$10.00(3) $6.00
James L. Boehme....... 195,000 19.5% $6.00-$10.00(3) $6.00
Glen C. Riker......... 10,000 1.0% $12.00 $12.00
Lawrence R. Irving.... 25,000 2.5% $8.50 $8.50
Potential
Realizable Value
at Assumed
Annual
Rates of
Stock Price
Appreciation for
Option Term(1)
NAME Expiration DATE 5% 10%
George V. Flagg....... 1/7/2006 $962,893 $2,312,485
James L. Boehme....... 1/7/2006 $722,170 $1,734,364
Glenn C. Riker........ 11/4/2006 $75,467 $191,249
Lawrence R. Irving.... 5/5/2006 $133,640 $338,670
(1) Once vested, all options which have been granted under the Executive Plan
become exercisable only if the price per share of the Common Stock on the
Nasdaq National Market is not less than $13.30 for 30 consecutive trading
days. Such condition had been met as of April 18,
6
1997. The 1996 Plan was approved by the Company's stockholders at the 1996
Annual Meeting of Stockholders in December 1996.
(2) Amounts indicated under the "Potential Realizable Value" columns above have
been calculated by multiplying the market price on the date of grant by the
annual appreciation rate shown (compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options.
(3) Upon shareholder approval of the 1996 Plan at the 1996 Annual Meeting of
Stockholders, one-fifth of the total number of options granted vested
immediately at an exercise price of $6.00 per share. With respect to the
remaining options, one-fifth of the total number of options granted will
vest on each January 2nd of the years 1997 through 2000 at an exercise
price at each of said dates which is $1.00 greater than the prior year's
exercise price (i.e., $7.00 on January 2, 1997, $8.00 on January 2, 1998,
$9.00 on January 2, 1999 and $10.00 on
January 2, 2000).
Except as disclosed above, no other grants of stock options were made in
the fiscal year ended December 31, 1996 to any of the Named Officers. No stock
options were exercised by any of the Named Officers during the fiscal year ended
December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Value of
Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs
Options/SARs at Fiscal
at Fiscal Year-End (#) Year-End ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
George V. Flagg......... 52,000/208,000 (2) $442,000/$1,248,000
James L. Boehme......... 39,000/156,000 (2) $331,500/$936,000
Glenn C. Riker.......... 6,427/12,427 (1)(2) $5,000/$20,000
Lawrence R. Irving...... 5,000/20,000 (2) $30,000/$120,000
(1) Options were granted pursuant to the Executive Plan.
(2) Options were granted pursuant to the 1996 Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994, Mr. William Spier, a former director of the Company who resigned
on September 30, 1996, entered into an agreement with PremiTech Corporation
("PremiTech"), which is a limited partner of HP Partners, to acquire PremiTech's
limited partnership interest for approximately $2,000,000, at the option of
PremiTech, in the event that PremiTech did not enter into an agreement for the
provision of information technology services to the Company. Such information
technology
7
agreement was subsequently executed on April 4, 1995, thereby terminating
PremiTech's option to sell its interest in HP Partners to Mr. Spier.
Pursuant to HP Partners' partnership agreement, Mr. Lyons has an
arrangement to participate in any economic benefit which Mr. Spier obtains as a
result of Mr. Spier's shareholding interest in such general partner.
On December 5, 1995, each of Messrs. Hauser, Lyons, Mitchell and Spier were
granted options under the 1996 Plan, subject to stockholder approval of the 1996
Plan, to purchase 15,000, 60,000, 30,000 and 15,000 shares of Common Stock,
respectively, at an exercise price of $5.56 per share. Such grants were made in
recognition of the extraordinary services that each of these individuals
provided to the Company in connection with the management transition and
reorganization that occurred during 1995. The 1996 Plan was approved by
stockholders in December 1996 at the Company's 1996 Annual Meeting of
Stockholders.
EMPLOYMENT AGREEMENTS
Mr. Flagg is employed by the Company pursuant to an employment agreement
dated January 8, 1996, which expires on December 31, 1996, but continues
year-to-year thereafter unless terminated in accordance with its terms. Mr.
Flagg's employment agreement provides for an annual base salary of no less than
$200,000. Mr. Boehme is employed by the Company pursuant to an employment
agreement dated January 8, 1996, which expires on December 31, 1996, but
continues year-to-year thereafter unless terminated in accordance with its
terms. Mr. Boehme's employment agreement provides for an annual base salary of
no less than $150,000. Mr. Irving is employed by the Company pursuant to an
employment agreement dated May 13, 1996, which expires on December 31, 1998, but
continues year-to-year thereafter unless terminated in accordance with its
terms. Mr. Irving's employment agreement provides for an annual base salary of
no less than $105,000. Mr. Stern is employed by the Company pursuant to an
employment agreement dated as of December 2, 1996, which expires on December 31,
1998, but continues year-to-year thereafter unless terminated in accordance with
its terms. Mr. Stern's employment agreement provides for an annual base salary
of no less than $140,000. The salaries provided under all of these employment
agreements may be increased at the discretion of the Board of Directors or the
Compensation Committee thereof. Under the terms of Messrs. Flagg's, Boehme's,
Irving's and Stern's respective employment agreements, options were granted to
purchase shares of Common Stock under the 1996 Plan (260,000 shares in the case
of Mr. Flagg, 195,000 shares in the case of Mr. Boehme and 25,000 shares each in
the case of Messrs. Irving and Stern). Messrs. Flagg, Boehme, Irving and Stern
are also provided with certain other benefits and perquisites pursuant to their
respective employment agreements. Upon termination of employment with the
Company, Messrs. Flagg, Boehme, Irving and Stern are each subject to a
non-compete period of six months.
In accordance with Messrs. Flagg's, Boehme's, Irving's and Stern's
respective employment agreements, upon a termination of employment by the
Company for reasons other than (i) "Cause," (ii) "Disability" (each as defined
in such employment agreements), or (iii) death, or adjudicated incompetency, the
Company will be obligated to pay to each of Messrs. Flagg, Boehme, Irving and
Stern the greater of 12 months' base salary or base salary for the balance of
the remaining term of the respective employment agreement, and to maintain
certain benefits. Upon termination of employment by the Company within 12
months of a "Change-of-Control Event" (as defined below), Messrs. Flagg, Boehme,
Irving and Stern shall each be entitled to receive their respective base
salaries and certain
8
other benefits for an additional period of 12 months. As defined in Messrs.
Flagg's, Boehme's, Irving's and Stern's respective employment agreements, a
"Change-of-Control Event" means the consummation of (i) a proxy contest for
control of the Board of Directors resulting in the person or entity or group of
affiliated persons or entities (collectively, a "Control Group") initiating
such proxy contest electing a majority of the members of the Board of Directors;
(ii) the purchase by a Control Group of the Common Stock or other securities of
the Company which, when aggregated with any other securities of the Company then
held by such Control Group, gives such Control Group "beneficial ownership" (as
defined in Rule 13d-3 promulgated under the Exchange Act) of securities
representing more than 50% of the combined voting power of the Company; or (iii)
any such transaction that the Board of Directors shall have favorably
recommended to stockholders of the Company at any time prior to its
consummation, and such recommendation shall not have been withdrawn.
Mr. Riker was employed by the Company pursuant to an employment agreement
dated October 12, 1994, which expired on December 31, 1996, and which provided
for an annual base salary of $91,260. The Company and Mr. Riker have agreed to
enter into a new employment agreement on terms substantially similar to those
set forth in the employment agreements of Messrs. Flagg, Boehme, Irving and
Stern. It is anticipated that Mr. Riker's employment agreement will provide for
an annual base salary of no less than $100,000.
Upon the occurrence of a "Change-of-Control Event," the Company's maximum
aggregate salary payment obligation would be $1,435,000. Such amount is
calculated by combining the 1997 base salaries of each of Messrs. Flagg, Boehme,
Irving, Stern and Mr. Riker (assuming a new employment agreement is entered
into) for a period of 24 months.
COMPENSATION COMMITTEE REPORT TO STOCKHOLDERS
The Compensation Committee establishes compensation policies and practices
for the Company, outlines objectives for the Company's executive officers and
sets the compensation of the executive officers, certain highly compensated
employees and the Board of Directors. Additionally, the Compensation Committee
is charged with the administration of the Company's employee benefit plans,
including stock option plans.
General Policies Regarding Compensation of Executive Officers
The Company's executive compensation policies are designed to attract and
retain superior management and professional talent, to motivate those
individuals to maximize shareholder value, and to reward those individuals with
increases in base salary, bonuses when performance objectives are achieved, and
appropriate stock options. Together these components link each executive's
compensation directly to individual and Company performance. The initial base
salary and terms of bonuses for certain executive officers are contained in the
employment agreements described under the caption "Employment Agreements".
Salary. Individual base salaries reflect the level of responsibility, the
experience and training required, and the executive's ability to contribute to
the Company's success. Salaries are reviewed at least annually and are
increased on the recommendation of the Chief Executive Officer to the
Compensation Committee, which is empowered to take final action. The base
salaries specified in each executive's employment agreement may from time to
time be adjusted, subject to the minimum salary levels specified therein.
9
Bonuses. In 1996, the Company established the 1996 Incentive Compensation
Plan (the "Incentive Plan") which is designed to reward executive officers and
certain other employees for exceptional performance. The actual awards under
the Incentive Plan are recommended by a senior management committee, including
the Chief Executive Officer, and approved by the Compensation Committee. The
bonus opportunity for eligible participants is based on their level of
responsibility, their performance and the performance by the Company. Bonus
awards for eligible participants range from 15% to 50% of their base salaries.
In fiscal year ended December 31, 1996, actual awards granted to the Named
Officers under the Incentive Plan ranged from 0% to 19% of the base salary.
In addition to bonus payments under the Incentive Plan, the Chief Executive
Officer may from time to time recommend, subject to the Compensation Committee's
approval, additional discretionary bonus payments to certain executive officers
based on exceptional individual performance and unique contributions to the
Company.
Stock Options. The Compensation Committee believes that continued use of
stock options is an effective mechanism for long-term incentive compensation of
executive officers and certain other employees. Such compensation, the
Compensation Committee believes, effectively links the actions of these officers
and employees to the interests of stockholders and is critical to the Company's
remaining competitive in its compensation practices. Accordingly, the Company
adopted the 1996 Plan described herein. As a result of stockholder approval of
the 1996 Plan in December 1996, no further grants will be made under the
Executive Plan.
Compensation Limitations. In 1993, the Internal Revenue Code was amended
to limit the deductibility of compensation paid to certain executives in excess
of $1 million. Compensation not subject to the limitation includes certain
compensation payable solely because an executive attains performance goals. The
Company's compensation deduction for a particular executive's total
compensation, including compensation realized from the exercise of stock
options, will be limited to $1 million. The Compensation Committee believes
that the compensation paid by the Company in the fiscal year ended December 31,
1996 will not result in any material loss of tax deductions for the Company.
Compensation of the Chief Executive Officer
Mr. Flagg's annual base salary of $200,000 for the fiscal year ended
December 31, 1996 was determined by the terms of his employment agreement, dated
January 8, 1996. The Compensation Committee believes that the compensation
earned by Mr. Flagg in 1996 pursuant to his employment agreement was appropriate
in light of Mr. Flagg's substantial contribution to improving the efficiency of
the Company's operations and his efforts toward positioning the Company's
business for future growth. Among other things, Mr. Flagg's contribution and
efforts were instrumental in effecting an over 10% reduction in selling, general
and administration expenses of the Company in 1996 as compared to 1995, securing
a new, two-year, $25 million credit facility for the Company, initiating and
implementing a strategic acquisition strategy, enhancing and expanding the
Company's national accounts program and promoting and executing the Company's
public offering of Common Stock in September 1996.
Members of the Compensation Committee
Pierre Besuchet
Daniel T. Carroll (Chairman)
David J. Mitchell
10
Edward L. Palmer
11