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SCHEDULE 14A
(RULE 14A-101)14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULEConfidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[x][X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c)Section 240.14a-11c or Rule 14a-12.Section 240.14a-12
Ceres Group, Inc.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set(set forth the amount on which the
filing fee is calculated and state how it was determined):
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[CERES GROUP, INC. LOGO]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 12, 2001MAY 15, 2002
Notice is hereby given that the 20012002 Annual Meeting of Stockholders of
Ceres Group, Inc. will be held at 17800 Royalton Road, Cleveland, Ohio on Tuesday, June 12, 2001,May
15, 2002 at 2:10:00 p.m.a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to amend Ceres' Bylaws to
set the number of directors at nine and to provide for a
staggered Board of Directors which would divide our Board into
three classes, each with three directors, serving staggered
terms of office of three years (Proposal 1).
2. To elect nine directors to hold office for staggered terms
ranging from one to three years if the first proposal is
adopted or, in the alternative, to elect nine directors to
hold office until the next annual election of directors, andor
until their successors are elected and qualified (Proposal 1);
2. To consider and vote upon a proposal to amend our 1998 Key
Employee Share Incentive Plan to authorize an additional one
million shares, to include non-employee directors, consultants
and advisors as eligible recipients of options under the plan,
and to include a provision limiting the maximum number of
options or stock appreciation rights granted under the plan to
any one employee (Proposal 2);.
3. To consider and vote upon a proposal to approve the
QQLink.com, Inc. 2000 Key Employee Share Incentive Plan for
our subsidiary, QQLink.com, Inc. (Proposal 3);
4. To consider and vote upon a proposal to approve
performance-based compensation for Peter W. Nauert, our
Chairman of the Board, President and Chief Executive Officer
(Proposal 4);
5. To ratify the appointment of Ernst & Young LLP as our
independent accountants for the fiscal year ending December
31, 2001 (Proposal 5);
6. To consider and transact any other business that may properly
come before the meeting or any adjournment thereof.
Stockholders of record at the close of business on April 20, 2001March 25, 2002 will
be entitled to notice of, and to vote at, the 20012002 Annual Meeting or any
adjournment thereof.
By order of the Board of Directors,
/s/ Linda S. Standish
Linda S. Standish
May 1, 2001Kathleen L. Mesel
Kathleen L. Mesel
Corporate Secretary
April 15, 2002
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CERES GROUP, INC.
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PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of our Board of Directors for use at the 20012002 Annual
Meeting of Stockholders of Ceres Group, Inc., a Delaware corporation, to be held
on Tuesday, June 12, 2001May 15, 2002 at 2:10:00 p.m.a.m., local time.
This Proxy Statement and the accompanying notice and proxy card,
together with our annual report to stockholders on Form 10-K/A10-K for the year ended
December 31, 20002001 and our 20002001 summary annual report, will first be sent to
stockholders on or about May 1, 2001.April 15, 2002.
QUESTIONS ANDand ANSWERS
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Q: WHEN AND WHERE IS THE ANNUAL MEETING?
A: Our 20012002 Annual Meeting of Stockholders will be held on Tuesday, June
12, 2001May 15, 2002 at
2:10:00 p.m.a.m. local time at the company's office at 17800 Royalton Road,
Cleveland, Ohio 44136.
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Q: WHAT ARE STOCKHOLDERS VOTING ON?
A: - Amendments to our Bylaws to set the number of directors at
nine and to provide for a staggered Board of Directors which
would divide our Board into three classes, each with three
directors, serving staggered terms of office of three years.
- Election of three directors to hold office until the 2003
Annual Meeting of Stockholders, three directors to hold office
until the 2004 Annual Meeting of Stockholders and three
directors to hold office until the 2005 Annual Meeting of
Stockholders or, if the amendments to our Bylaws in Proposal 1
are not approved, the election of nine directors (Andrew A. Boemi, Michael A. Cavataio,
Bradley E. Cooper, Susan S. Fleming, Rodney L. Hale, Robert J.
Lunn, Peter W. Nauert, William J. Ruhuntil the
next Annual Meeting of Stockholders, and Robert A. Spass).
- Approval of amendments to our 1998 Key Employee Share Incentive
Plan to authorize an additional one million shares, to include
non-employee directors, consultantsuntil their
successors have been duly elected and advisors as eligible
recipients of options under the plan and to include a provision
limiting the number of options or stock appreciation rights
granted under the plan to any one employee.
- Approval of the QQLink.com, Inc. 2000 Key Employee Share Incentive
Plan.
- Approval of performance-based compensation for Peter W. Nauert,
our Chairman of the Board, President and Chief Executive Officer.
- Ratification of the appointment of Ernst & Young LLP as our
independent accountants.qualified.
If a proposal other than the fivetwo listed above is presented at the
annual meeting, your signed proxy card gives authority to Charles E.
Miller, Jr. and Kathleen L. Mesel to vote on any additional proposals.
Our Board of Directors believes that the election of its nominees and
the approval of Proposal 1 are in the best interests of Ceres Group and
its stockholders and recommends that the stockholders vote FOR
each of the nominees and FOR Proposal 1.
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Q: WHO IS ENTITLED TO VOTE?
A: Stockholders as of the close of business on April 20, 2001,March 25, 2002, the record
date, are entitled to vote at the annual meeting. Each share of our
common stock, par value $0.001 per share, 2
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is entitled to one vote.
In addition, United Insurance Company of
America, as the holder of our convertible voting preferred stock, will
be entitled to vote its shares of convertible voting preferred as if
the shares had been converted into common stock on the record date
(1,310,454 shares of our common stock). The holder of our convertible
voting preferred stock and the holders of our common stock will vote
together as one class.- --------------------------------------------------------------------------------
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Q: HOW DO STOCKHOLDERS VOTE?
A: Sign and date each proxy card you receive and return it in the prepaid
envelope. If you do not mark any selections, your proxy card will be
voted in favorFOR the election of the five proposals.director nominees set forth in Proposal 2
and FOR Proposal 1. You have the right to revoke your proxy any time
before the meeting by:
- notifying our corporate secretary,
- voting in person, or
- returning a later-datedlater-day proxy card.
If you return your signed proxy card, but do not indicate your voting
preferences, Charles E. Miller, Jr. and Kathleen L. Mesel will vote FOR
the five proposals on your behalf.
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Q: WHO WILL COUNT THE VOTE?
A: Representatives of National City Bank, our transfer agent, will
tabulate the votes. Marlayna J. Jeanclerc and Linda S. Standish will
act as inspectors of election.
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Q: WHAT SHARES ARE INCLUDED ON YOUR PROXY CARD?
A: The number of shares printed on your proxy card represents all your
shares, including any shares you may own in Ceres' 401(k) savings plan,
employee stock purchase plan and agent stock purchase plan. If you are
an employee of Ceres and our insurance subsidiaries, the shares in your
401(k) savings account and stock purchase plan account will be voted in
accordance with your instructions, if indicated. If your proxy card is
signed, but does not indicate your voting preferences, we have been
advised by the 401(k) plan administrator and the plan trustee that your
shares will be voted in favor of each of the nominated directors and
each of the other four proposals.proposal.
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Q: WHAT DOES IT MEAN IF A STOCKHOLDER GETS MORE THAN ONE PROXY CARD?
A: Receipt of more than one proxy card means that your shares are
registered differently and are in more than one account. Sign and
return all proxy cards to ensure that all your shares are voted. To
provide better stockholder services, we encourage you to have all
accounts registered in the same name and address. You may do this by
contacting our transfer agent, National City Bank, at 800-622-6757.
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Q: WHAT CONSTITUTES A QUORUM?
A: As of the record date, 18,762,33833,901,112 shares of our common stock, including
1,310,454 shares of common stock that United Insurance is entitled to
cast as the holder of our convertible voting preferred stock are
entitled to vote at the annual meeting. A majority of the voting stock,
present or represented by proxy, constitutes a quorum for the
transaction of business at the annual meeting. If you submit a properly
executed proxy card, then you will be considered part of the quorum. If
you are present or represented by a proxy at the annual meeting and you
abstain, your abstention will have the same effect as a vote against
that proposal.
"Broker non-votes" will not be part of the voting power present, but
will be counted to determine whether or not a quorum is present. A
"broker non-vote" occurs when a broker holding stock in "street name"
indicates on the proxy that it does not have discretionary authority to
vote on a particular matter.matter and has not received instructions from the
beneficial owner.
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Q: WHAT ARE THE VOTING REQUIREMENTS?
A: The nine nominees for director who receive a plurality of the votes
cast by the holders of our common stock, in person or by proxy, at the
Annual Meeting will be elected. All other matters require the approval
of a majority of the votes cast by the holders of our common stock, in
person or by proxy, at the Annual Meeting. If you are present or
represented by a proxy at the annual meeting and you abstain, your
abstention will have the same effect as a vote against that proposal.
"Broker non-votes" will not be counted in the total number of votes and
will have no effect on the outcome of voting.
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Q: WHO CAN ATTEND THE ANNUAL MEETING?
A: All stockholders as of the record date, April 20, 2001,March 25, 2002, can attend.
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Q: WHAT PERCENTAGE OF STOCK DO THE DIRECTORS AND EXECUTIVE OFFICERS OWN?
A: Together, as of April 20, 2001, they beneficially own approximately
17.7 % of our common stock. (See page 42 for more details.)
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Q: WHO ARE THE LARGEST PRINCIPAL STOCKHOLDERS?
A: - International Managed Care, LLC and International Managed Care
(Bermuda), L.P. beneficially own 7,783,033 shares of our common
stock, or 39.6%, as of the record date.
- Peter W. Nauert, our Chairman of the Board, President and Chief
Executive Officer, beneficially owns 2,880,157 shares of our
common stock, or 15.3%, as of the record date.
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Q: WHEN IS A STOCKHOLDER PROPOSAL DUE FOR THE NEXT YEAR'S ANNUAL MEETING?
A: In order to be considered for inclusion in next year's proxy statement,
stockholder proposals must be submitted in writing by January 1,December 26,
2002, to Corporate Secretary, Ceres Group, Inc., 17800 Royalton Road,
Cleveland, Ohio 44136, and must be in accordance with the provisions of
our Bylaws and Rule 14a-8 promulgated under the Securities Exchange Act of 1934. See
page 4930 for more details.
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Q: HOW DOES A STOCKHOLDER NOMINATE SOMEONE TO BE A DIRECTOR OF CERES?
A: Any stockholder may recommend any person as a nominee for director by
writing to the Chairman of the Executive Committee, c/o Ceres Group,
Inc., 17800 Royalton Road, Cleveland, Ohio 44136. Recommendations must
be received by January 16, 2002. See page 49 for more details.
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Q: WHO PAYS FOR THE SOLICITATION EXPENSES?
A: The expense of soliciting proxies, including the cost of preparing,
printing and mailing the proxy materials, will be paid by us. In
addition to the solicitation of proxies by mail, solicitation may be
made personally, by telephone and by facsimile, and we may pay persons
holding shares for others their expenses for sending proxy materials to
their principals. NoIn addition to solicitation willby use of the mails,
proxies may be made other thansolicited by our directors, officers and employees.employees in
person or by telephone, telegram or other means of communication. We
have retained D.F. King & Co., Inc. for their customary fees, plus
reimbursement of expenses, to assist in our solicitation of proxies
from brokers, nominees, institutions and individuals. D.F. King & Co.'s
fees are estimated to be $12,500.
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PROPOSAL ONE
TO APPROVE AMENDMENTS TO CERES' BYLAWS
TO SET THE NUMBER OF DIRECTORS AT NINE AND TO
CREATE A STAGGERED BOARD OF DIRECTORS
THE PROPOSED AMENDMENTS ARE SUMMARIZED BELOW. YOU SHOULD READ THE
ENTIRE PROXY STATEMENT AND THE REVISED TEXT OF THE BYLAWS ATTACHED AS ANNEX A IN
THEIR ENTIRETY BEFORE YOU DECIDE HOW TO VOTE.
The Board of Directors has unanimously approved, and recommends that
you approve, amendments to our Bylaws setting the number of directors at nine
and providing for the classification of our Board of Directors into three
classes with staggered three-year terms of office.
Our Certificate of Incorporation does not currently contain any
provisions regarding the number or term of service of our directors. The number
of members of our Board is currently set at nine, pursuant to the voting
agreement described below. Our Bylaws currently provide that the Board will have
no less than six and no more than fifteen members. In addition, the election of
directors is currently governed by our Bylaws, which provide that all directors
are to be elected annually for a term of one year. Our directors are presently
elected annually to hold office until the next annual meeting of stockholders or
until their successors are duly elected and qualified.
If these proposed amendments to our Bylaws are approved:
- the number of directors will be set at nine, and
- our nine directors will be divided equally into three separate
classes, designated Class I, Class II and Class III. Initially,
Class I directors shall be elected for a term of one year, Class
II directors for a two-year term and Class III directors for a
three-year term. When directors are elected at the next and
following annual meetings of stockholders, they will be elected to
three-year terms. See "Election of Directors" (Proposal 2) as to
the composition of each class of directors if this amendment is
approved.
In addition, the proposed amendments state that the provisions in our
Bylaws regarding the number of directors and a staggered board may only be
amended or repealed by an affirmative vote of the holders of at least two-thirds
of the outstanding shares of our common stock.
Termination of Voting Agreement.
A group of our stockholders are currently bound by a voting agreement,
dated July 1, 1998, which was amended and restated July 25, 2000 and amended on
November 30, 2001. These stockholders collectively own 15,345,890 shares of our
common stock or 39.9% of our outstanding shares. Pursuant to the provisions of
the voting agreement, these stockholders are effectively
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able to elect all of our directors and to determine the outcome of all corporate
actions requiring stockholder approval, including approving or preventing a
change of control of the company, a business combination involving the company,
the incurrence of indebtedness, the issuance of equity securities and the
payment of dividends on our common stock. The voting agreement provides that
these stockholders will cause our Board of Directors to consist of nine
directors, some or all of whom are designated by a few of these stockholders.
However, more than two-thirds of these holders under the voting agreement, each
of whom are also directors, have agreed that they would be in favor of
terminating the agreement if our stockholders vote in favor of a staggered
board. These holders also indicated that they would vote for such a staggered
board. For more information on this voting agreement, see "Voting Agreement" on
page 28.
Possible Benefits of a Staggered Board.
The Board of Directors believes that a staggered system of electing
directors would provide important benefits to Ceres, including:
- A staggered board will help to assure the continuity and stability
of our business strategies and policies and management of our
business because a majority of the Board of Directors at any given
time will have prior experience as directors of our company. This
is particularly important to a growth-oriented organization, such
as Ceres.
- In addition, in the event of an unfriendly or unsolicited proposal
to purchase a significant or controlling interest in Ceres, a
staggered board would give us the time necessary:
- to effectively evaluate and negotiate the proposal,
- to study alternative proposals,
- to assure that stockholder value is maximized, and
- to assure that the interests of the stockholders are
protected to the maximum extent possible.
- A staggered board is designed to reduce the vulnerability of a
company to an unsolicited takeover proposal, particularly a
proposal that does not contemplate the acquisition of all of the
outstanding shares, or an unsolicited proposal for the
restructuring or sale of all or part of the company.
Possible Anti-Takeover Effect of a Staggered Board.
Establishing a staggered board has anti-takeover implications by making
it more difficult for an unsolicited takeover attempt to succeed, as obtaining
control of a company through changing the composition of its board is more
difficult. The proposed staggered board amendment will significantly extend the
time required to effect a change in control of our Board of Directors and may
discourage hostile takeover bids for Ceres. Currently, a change in control can
be made by stockholders holding a plurality of the votes cast at a single annual
meeting. If we implement a staggered Board of Directors, a possible acquirer
would be unable to obtain
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7majority control of our Board of Directors for a period of at least two years,
because a majority of directors cannot be elected at a single meeting. No more
than one-third of the sitting Board of Directors would be up for election at any
one annual meeting. These effects are somewhat mitigated by the ability of
stockholders to remove any and all directors, with cause, at a meeting or by
written consent.
Delaware law provides that unless our Certificate of Incorporation
provides otherwise (which it does not), directors serving on a staggered or
classified board of directors may be removed by stockholders only for cause.
Currently, under our Bylaws, all of our directors are elected annually and any
and all directors may be removed with or without cause by stockholders.
Because of the additional time required to change control of the Board
of Directors, the staggered board amendment will tend to perpetuate present
management. Without the ability to obtain immediate control of our Board of
Directors, a takeover bidder will not be able to take action to remove other
impediments to its acquisition of Ceres. Because the staggered board amendment
will increase the amount of time required for a takeover bidder to obtain
control of Ceres without cooperation of the Board of Directors, even if the
takeover bidder were to acquire a majority of our outstanding stock, it will
tend to discourage some tender offers, perhaps including some tender offers that
stockholders may feel would be in their best interests. The staggered board
amendment will also make it more difficult for our stockholders to change the
composition of our Board of Directors even if the stockholders believe such a
change would be desirable.
In addition, the proposed staggered board amendment states that the
provision regarding a staggered board in our Bylaws may only be amended or
repealed by an affirmative vote of the holders of at least two-thirds of the
outstanding shares of our common stock.
Vote Required
Approval of the amendments to our Bylaws requires the affirmative vote
of the holders of a majority of the votes cast by the holders of our common
stock, in person or represented by proxy, at the annual meeting. Broker
non-votes will not count in favor of or against this Proposal. The enclosed
proxy card will be voted FOR this proposal unless the proxy holders are
otherwise instructed.
If these amendments to our Bylaws are not approved, the number and term
of office of our directors will not change and the current provisions of our
Bylaws and the Delaware General Corporation Law will continue to govern.
THE BOARD OF DIRECTORS RECOMMENDS AND ENCOURAGES THAT YOU VOTE "FOR"
THE APPROVAL OF THE AMENDMENTS TO OUR BYLAWS TO SET THE NUMBER OF DIRECTORS AT
NINE AND TO CREATE A STAGGERED BOARD OF DIRECTORS.
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PROPOSAL ONETWO
ELECTION OF DIRECTORS
The number of directors has been fixed at nine, and nine directors are
currently in office. AtIf the annual meeting, shares represented by proxies,
unless otherwise specified,proposed amendments to our Bylaws setting the number
of directors at nine and providing for a staggered Board of Directors divided
into three classes, as described in Proposal 1 above, are adopted, three
directors will each be elected for a term expiring at the Annual Meeting of
Stockholders to be held during 2003 (Class I), 2004 (Class II) and 2005 (Class
III).
If Proposal 1 is adopted, the amendments to our Bylaws will be voted FORpromptly
filed in the electionrecords of the Company, the number of directors will be set at nine
and a staggered Board of Directors will thereby be created. In that event, Susan
S. Fleming, Rodney L. Hale and Robert J. Lunn will be the nominees to hold officefor election
as the Class I Directors for a one-year term expiring in 2003; Andrew A. Boemi,
Michael A. Cavataio and Bradley E. Cooper will be the nominees as the Class II
Directors for a two-year term expiring in 2004; and Peter W. Nauert(1), William
J. Ruh and Robert A. Spass will be the nominees for election as the Class III
Directors for a three-year term expiring in 2005.
If the amendments are not adopted, a staggered Board of Directors will
not be created, the voting agreement will continue in effect and the nominees
elected as directors will serve until the next annual election of directors and, in each case,Annual Meeting or until their
respective successors are dulyhave been elected and qualified.
If, by reason of death or other unexpected occurrence, any nominee
should not be available for election, the proxies will be voted for such
substitute nominee as the Board of Directors may propose. In the election of
directors, the nine nominees receiving the greatest number of votes will be
elected. Broker non-votes will not count in favor of or against election of any
nominee.
Pursuant to the provisions of a voting agreement, dated July 1, 1998,
which wasthe amended and restated on July 25, 2000, between Ceres and some of its
stockholders, including International Managed Care, LLC (formerly Insurance
Partners, L.P.), International Managed Care (Bermuda), L.P. (formerly Insurance
Partners Offshore (Bermuda), L.P.), Strategic Acquisition Partners, LLC, Turkey
Vulture Fund XIII, Ltd. and their assignees,voting
agreement, the nine directors currently in office have been nominated for
re-election by the Board of Directors at the annual meeting. SeeFor more
information regarding this voting agreement, see "Voting Agreement" on page 41.28.
For more information regarding the nominees for directorship, see
"Board of Directors" on page 8.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ANDREW BOEMI,
MICHAEL CAVATAIO, BRADLEY COOPER, SUSAN FLEMING, RODNEY HALE, ROBERT LUNN, PETER
NAUERT, WILLIAM RUH AND ROBERT SPASS.
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1 See page 8 PROPOSAL TWO
AMENDMENTS TO 1998 KEY EMPLOYEE SHARE INCENTIVE PLAN
TO AUTHORIZE AN ADDITIONAL ONE MILLION SHARES,
TO INCLUDE NON-EMPLOYEE DIRECTORS, CONSULTANTS
AND ADVISORS AS ELIGIBLE RECIPIENTS UNDER THE PLAN
AND TO LIMIT THE MAXIMUM NUMBER OF OPTIONS AND STOCK
APPRECIATION RIGHTS THAT CAN BE GRANTED TO ANY ONE EMPLOYEE
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. BECAUSE THIS IS
A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROXY STATEMENT AND THE REVISED TEXT OF THE 1998 KEY
EMPLOYEE SHARE INCENTIVE PLAN ATTACHED AS ANNEX A IN THEIR ENTIRETY BEFORE YOU
DECIDE HOW TO VOTE.
The plan, adopted by stockholders at the 1999 annual meetingfor information regarding Peter Nauert's position as our Chief
Executive Officer and amended at the 2000 annual meeting, provides incentives to our key employees by
encouraging these employees to acquire a larger share ownership in Ceres,
thereby increasing their proprietary interest in our business and enhancing
their personal financial interest in its success. The plan permits the grant to
employees, including officers and directors who are employees, of
non-transferable non-qualified stock options or incentive stock options to
purchase shares of our common stock and the grant of non-transferable options to
receive payments based on the appreciation of our common stock, or stock
appreciation rights. The plan currently authorizes 1,000,000 shares of our
common stock available for issuance under the plan.
Our Board of Directors believes that an additional share reserve will
allow us to provide the necessary incentives to eligible recipients.
Accordingly, on March 13, 2001, the Board adopted an amendment to the plan,
subject to your approval, to increase the total number of shares of our common
stock available for issuance under the plan by an additional 1,000,000 shares to
a total of 2,000,000 shares of our common stock. As of April 20, 2001, a total
of 1,508,337 shares were subject to granted options, leaving, after approval of
this amendment, 491,663 shares available for future options or awards.
Our Board of Directors also believes that this incentive plan should be
made available to non-employee directors, consultants and advisors and should
limit the number of options or stock appreciation rights granted to any one
employee annually. Accordingly, on March 13, 2001, the Board also adopted
amendments to the plan, subject to your approval, to include non-employee
directors, consultants and advisors and to limit the number of options or stock
appreciation rights granted to any one employee annually.
The language of the proposed amendments is attached to this proxy
statement as ANNEX A. The principal features of the plan, assuming approval of
the amendments, are described below.
DESCRIPTION OF THE PLAN
The plan provides for the grant to employees, including officers and
directors who are employees, of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986 or the grant of non-qualified
stock options to eligible employees, non-employeePresident.
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directors, consultants and advisors, and for the grant of stock appreciation
rights. Incentive stock options may be exercisable for up to ten years at an
option price of not less than the fair market value of our common stock on the
date that the option is granted, or for up to five years at an option price of
not less than 110% of the fair market value of our common stock in the case of
an officer or other key employee who owns, at the time the option is granted,
more than ten percent of our common stock. Holders of incentive stock options
qualify for favorable tax treatment. See "Summary of Federal Income Tax
Consequences." Non-qualified stock options may be exercisable for up to ten
years at such exercise price and upon such terms and conditions as the
Compensation Committee of our Board of Directors may determine.
The plan is administered by the Compensation Committee of our Board of
Directors, which is charged with designating those persons to whom options or
stock appreciation rights are to be granted and determining the terms of such
awards, including the exercise price of options, the number of shares subject to
an option, the time when an option or stock appreciation right may be exercised
and whether stock appreciation rights will be made part of any options.
Options granted under the plan are subject to the following
restrictions, among others:
- the per share exercise price for incentive stock options must be
equal to or greater than 100% of the fair market value of a share
of our common stock on the date of grant of the option;
- no option may be exercisable after the expiration of ten years
from the date of its grant; and
- options granted under the plan are subject to transfer
restrictions as follows:
- no option or stock appreciation right shall be transferable
by the optionee other than by will or the laws of descent
and distribution; and
- no option granted can be pledged or hypothecated, nor can it
be subject to execution, attachment or similar process.
The plan limits the maximum number of options or stock appreciation
rights granted to any one employee under the plan to 500,000 shares annually.
The Compensation Committee may condition the exercise of any option
upon the continued employment of the optionee with us, and may make such option
immediately exercisable. However, the Committee will require that from the date
of grant of any incentive stock option until three months prior to the date such
option is exercised, such optionee must be an employee of Ceres or a subsidiary.
If an optionee's employment with us is terminated by reason of a
permanent and total disability or death, then his or her incentive options or
stock appreciation rights will expire one year after the date of termination. If
an optionee's employment is terminated for any other reason, then his or her
options or stock appreciation rights will terminate on the effective date of
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such termination. Options and stock appreciation rights become immediately
exercisable in the event of a change in control (as defined in the plan) of
Ceres.
Options exercised by the optionee may be paid in cash or by check or,
with the consent of the Compensation Committee, in whole or in part with a
surrender of our common stock having a fair market value on the date of exercise
equal to that portion of the purchase price for which payment in cash or check
is not made. The Committee, in its sole discretion, may approve other methods of
exercise for an option or payment of an option price, provided that no such
method may cause any incentive stock option granted under the plan to not
qualify under Section 422 of the Code or cause any shares of our common stock
issued in connection with the exercise of an option not to be fully paid and
non-assessable shares of common stock.
Stock appreciation rights may be granted by the Compensation Committee
to key employees, non-employee directors, consultants and advisors as a right in
tandem with the number of shares of common stock underlying options granted to
such eligible recipient under the plan or on a stand-alone basis with respect to
a number of shares of common stock for which an option has not been granted. No
optionee is entitled to a grant of a stock appreciation right solely as a result
of the grant of an option to such optionee. Stock appreciation rights are the
right to receive payment per share of the stock appreciation rights exercised in
shares of our common stock, in cash, or check, or a combination of cash, or
check, and shares of common stock equal to the excess of the common stock's fair
market value on the date of exercise over its fair market value on the date the
stock appreciation right was granted. Exercise of a stock appreciation right
issued in tandem with an option will result in the reduction of the number of
shares of our common stock underlying the related option to the extent of the
stock appreciation right exercise. After the grant of a stock appreciation
right, an optionee intending to rely on an exemption from Section 16(b) of the
Exchange Act is required to hold such stock appreciation right for six months
from the date the price for such stock appreciation right is fixed to the date
of cash settlement. Additionally, in order to remain exempt from Section 16(b)
of the Exchange Act, a stock appreciation right must be exercised by an optionee
subject to Section 16(b) only during the period beginning on the third business
day following the release of a summary statement of our quarterly or annual
sales and earnings and ending on the twelfth business day following said date.
Our Compensation Committee, subject to the approval of the Board of
Directors, has the authority to amend, modify, suspend or terminate the plan,
provided that no such action impairs the rights of the holder of any outstanding
option or stock appreciation right without the written consent of such holder,
and provided further that certain amendments of the plan are subject to
stockholder approval. Unless terminated sooner, the plan will terminate on
September 30, 2008.
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SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
Non-Qualified Stock Options
Generally. An optionee generally will not recognize income upon the
grant of a non-qualified stock option. If an optionee receives unrestricted
shares of our common stock upon the exercise of a non-qualified stock option,
the optionee will normally recognize ordinary income at the time of exercise
equal to the excess of the fair market value, at the time of exercise, of the
optioned shares of common stock over the exercise price. When the optionee
disposes of the shares, capital gain will be recognized, either long or
short-term depending on the holding period beginning on the date the shares are
acquired.
Tax Consequences to Ceres. To the extent that an optionee recognizes
ordinary income, we will generally be entitled to a corresponding deduction
assuming that the deduction is not disallowed by Section 162(m) of the Code. The
deduction is allowed in the tax year in which the optionee is required to
include the amount in income.
Incentive Stock Options
Generally. An optionee will not recognize income upon the grant of an
incentive stock option. In addition, an optionee will not recognize income upon
the exercise of an incentive stock option if he or she satisfies certain
employment and holding period requirements. To satisfy the employment
requirement, an optionee generally must exercise the option not later than three
months after he or she ceases to be an employee of Ceres or a subsidiary or one
year if he or she ceases to be an employee due to disability. To satisfy the
holding period requirement, an optionee must not sell or dispose of the optioned
shares of our common stock before two years from the grant of the option and
must hold the optioned shares of our common stock more than one year after the
common stock are transferred to the optionee. If these requirements are
satisfied, upon the sale of the shares of our common stock, the optionee will be
taxed at long-term capital gains rates on any gain, measured by the difference
between the optionee's basis in our common stock and the net proceeds of the
sale.
Disqualifying Disposition. If shares of our common stock acquired upon
the timely exercise of an incentive stock option are sold, exchanged or
otherwise disposed of without satisfying the holding period requirement, a
disqualifying disposition, the optionee will usually recognize ordinary income
at the time of disposition equal to the amount of the excess of the fair market
value of the optioned shares of our common stock on the date of the exercise of
the incentive stock option over the exercise price.
Alternative Minimum Tax. An optionee generally must include in
alternative minimum taxable income the amount by which the amount paid for the
option is exceeded by the option's
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fair market value at the time of exercise of the option, or, if later, at the
time at which the stock is freely transferable or not subject to a substantial
risk of forfeiture.
Tax Consequences to Ceres. The granting of an incentive stock option,
or the exercise thereof, will generally not result in a deduction for us.
However, to the extent that an optionee recognizes ordinary income as the result
of a disqualifying disposition, we will generally be entitled to a corresponding
deduction, assuming that the deduction is not disallowed by Section 162(m) of
the Code.
Stock Appreciation Rights
Generally. The recipient of stock appreciation right awards generally
will not recognize income at the time a stock appreciation right is granted, but
will recognize ordinary income upon the exercise of a stock appreciation right
equal to the sum of:
- the gross cash proceeds payable, and
- the fair market value on the exercise date of any shares received.
Tax Consequences to Ceres. We will be entitled to a tax deduction with
respect to a stock appreciation right at the same time in the same amount as the
recipient recognizes ordinary income, assuming that the deduction is not
disallowed by Section 162(m) of the Code.
The following table sets forth options under the plan that were
granted, subject to approval of the amendments to the plan, to executive
officers as a group and non-executive officer employees as a group. Generally,
each of the options set forth below vests in three years.
NUMBER OF SHARES UNDERLYING
OPTIONS TO BE GRANTED
DATE OF GRANT NAME UNDER THE PLAN EXERCISE PRICE
------------- ---- -------------- --------------
January 19, 2001 Executive Officers as a Group 150,000 $6.625 - 8.00
Non-Executive Officer Employees as a
Group 223,333 $5.875 - 9.357
March 15, 2001 Executive Officers as a Group - -
Non-Executive Officer Employees as a
Group 25,000 $6.50
April 10, 2001 Executive Officers as a Group* 250,000 $5.12
- ----------
*Granted pursuant to Mr. Nauert's new employment agreement and vesting on
April 10, 2003.
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Approval of the amendments to the plan requires the affirmative vote of
the holders of a majority of our voting stock present in person or represented
by proxy and entitled to vote at the annual meeting. The enclosed proxy card
will be voted FOR this proposal unless the proxy holders are otherwise
instructed.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
AMENDMENTS TO OUR 1998 KEY EMPLOYEE SHARE INCENTIVE PLAN.
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PROPOSAL THREE
APPROVAL OF QQLINK.COM, INC.
2000 KEY EMPLOYEE SHARE INCENTIVE PLAN
CERTAIN ASPECTS OF THIS PROPOSAL ARE SUMMARIZED BELOW. BECAUSE THIS IS
A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROXY STATEMENT AND THE COMPLETE TEXT OF THE
QQLINK.COM, INC. 2000 KEY EMPLOYEE SHARE INCENTIVE PLAN ATTACHED AS ANNEX B IN
THEIR ENTIRETY BEFORE YOU DECIDE HOW TO VOTE.
On March 13, 2001, Ceres' Board of Directors approved the adoption of
the QQLink.com, Inc. 2000 Key Employee Share Incentive Plan. QQLink.com, Inc. is
a subsidiary of Ceres. QQLink is an agent-linked e-commerce exchange dedicated
to empowering participating agents with Internet technology by combining a
traditional agent distribution system with direct online sales of insurance and
other financial service products. Ceres owns 94% of QQLink with the remaining 6%
primarily owned by 15 of Ceres' agents. These QQLink investors own 2,550,000
shares of Class A common stock of QQLink. Ceres owns all of the authorized,
issued and outstanding shares of Class B common stock of QQLink. The QQLink 2000
Key Employee Share Incentive Plan is effective upon QQLink and Ceres stockholder
approval of the plan. The Board recommends approval of this incentive plan to
provide a necessary reward to the key employees of QQLink, Ceres or their
subsidiaries by increasing their proprietary interest in QQLink and enhancing
their personal financial interest in its success. The plan authorizes 4,000,000
shares of Class A common stock of QQLink available for issuance under the plan.
The principal features of the QQLink 2000 Key Employee Share Incentive
Plan are described below.
DESCRIPTION OF THE PLAN
This plan provides key employees of QQLink, Ceres or their subsidiary
corporations with the opportunity to acquire equity interest in QQLink by making
available for award or purchase shares of QQLink Class A common stock, par value
$0.001 per share, through the grant of nontransferable options to purchase
shares of QQLink Class A common stock and the grant of nontransferable options
to receive payments based on the appreciation of QQLink Class A common stock.
The plan provides for the grant of options that qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986 for the grant of
non-qualified stock options and for the grant of stock appreciation rights.
Incentive stock options may be exercisable for up to ten years at an option
price of not less than the fair market value of QQLink Class A common stock on
the date that the option is granted, or for up to five years at an option price
of not less than 110% of the fair market value of QQLink Class A common stock in
the case of an officer or other key employee who owns, at the time the option is
granted, more than ten percent of QQLink Class A common stock. Holders of
incentive stock options qualify for favorable tax
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treatment. See "Summary of Federal Income Tax Consequences." Non-qualified stock
options may be exercisable for up to ten years at such exercise price and upon
such terms and conditions as the Compensation Committee of the QQLink Board of
Directors may determine.
The plan will be administered by the Compensation Committee of the
QQLink Board of Directors, which is charged with designating those persons to
whom options or stock appreciation rights are to be granted and determining the
terms of such awards, including the exercise price of options, the number of
shares subject to an option, the time when an option or stock appreciation right
may be exercised and whether stock appreciation rights will be made part of any
options.
Options granted under the plan are subject to the following
restrictions, among others:
- the per share exercise price for incentive stock options must be
equal to or greater than 100% of the fair market value of a share
of QQLink Class A common stock on the date of the option grant;
- no option may be exercisable after the expiration of ten years
from the date of its grant; and
- options granted under the plan are subject to transfer
restrictions as follows:
- no option or stock appreciation right shall be transferable
by the optionee other than by will or the laws of descent
and distribution; and
- no option granted can be pledged or hypothecated, nor can it
be subject to execution, attachment or similar process.
The plan limits the maximum number of options or stock appreciation
rights granted to any one employee under the plan to 200,000 shares annually.
The QQLink Compensation Committee may condition the exercise of any
option upon the continued employment of the optionee with QQLink, Ceres or one
of their subsidiaries, and may make such option immediately exercisable.
However, the Committee will require that from the date of grant of any incentive
stock option until three months prior to the date such option is exercised, such
optionee must be an employee of QQLink, Ceres or a subsidiary.
If an optionee's employment with QQLink, Ceres or one of their
subsidiaries is terminated by reason of a permanent and total disability or
death, then his or her incentive options or stock appreciation rights will
expire one year after the date of termination. If an optionee's employment is
terminated for any other reason, then his or her options or stock appreciation
rights will terminate on the effective date of such termination. Options and
stock appreciation rights become immediately exercisable in the event of a
change in control (as defined in the plan) of QQLink.
Options exercised by the optionee may be paid in cash or by check or,
with the consent of the QQLink Compensation Committee, in whole or in part with
a surrender of shares of QQLink
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Class A common stock having a fair market value on the date of exercise equal to
that portion of the purchase price for which payment in cash or check is not
made. The Committee, in its sole discretion, may approve other methods of
exercise for an option or payment of an option price, provided that no such
method may cause any incentive stock option granted under the plan to not
qualify under Section 422 of the Code or cause any shares of QQLink Class A
common stock issued in connection with the exercise of an option not to be fully
paid and non-assessable shares of QQLink Class A common stock.
Stock appreciation rights may be granted by the Compensation Committee
to key employees as a right in tandem with the number of shares of QQLink Class
A common stock underlying options granted to such employees under the plan or on
a stand-alone basis with respect to a number of shares of Class A common stock
for which an option has not been granted. No optionee is entitled to a grant of
a stock appreciation right solely as a result of the grant of an option to such
optionee. Stock appreciation rights are the right to receive payment per share
of the stock appreciation rights exercised in shares of QQLink Class A common
stock, in cash, or check, or a combination of cash, or check, and shares of
Class A common stock equal to the excess of the Class A common stock's fair
market value on the date of exercise over its fair market value on the date the
stock appreciation right was granted. Exercise of a stock appreciation right
issued in tandem with an option will result in the reduction of the number of
shares of QQLink Class A common stock underlying the related option to the
extent of the stock appreciation right exercise. After the grant of a stock
appreciation right, an optionee intending to rely on an exemption from Section
16(b) of the Exchange Act is required to hold such stock appreciation right for
six months from the date the price for such stock appreciation right is fixed to
the date of cash settlement. Additionally, in order to remain exempt from
Section 16(b) of the Exchange Act, a stock appreciation right must be exercised
by an optionee subject to Section 16(b) only during the period beginning on the
third business day following the release of a summary statement of our quarterly
or annual sales and earnings and ending on the twelfth business day following
said date.
The QQLink Compensation Committee, subject to the approval of the
QQLink Board of Directors, has the authority to amend, modify, suspend or
terminate the plan, provided that no such action impairs the rights of the
holder of any outstanding option or stock appreciation right without the written
consent of such holder, and provided further that certain amendments of the plan
are subject to Ceres' stockholder approval. Unless terminated sooner, the plan
will terminate on January 1, 2011.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
Non-Qualified Stock Options
Generally. An optionee generally will not recognize income upon the
grant of a non-qualified stock option. If an optionee receives unrestricted
shares of QQLink Class A common stock upon the exercise of a non-qualified stock
option, the optionee will normally recognize
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ordinary income at the time of exercise equal to the excess of the fair market
value, at the time of exercise, of the optioned shares of QQLink Class A common
stock over the exercise price. When the optionee disposes of the shares, capital
gain will be recognized, either long or short term depending on the holding
period beginning on the date the shares are acquired.
Tax Consequences to QQLink. To the extent that an optionee recognizes
ordinary income, QQLink will generally be entitled to a corresponding deduction
assuming that the deduction is not disallowed by Section 162(m) of the Code. The
deduction is allowed in the tax year in which the optionee is required to
include the amount in income.
Incentive Stock Options
Generally. An optionee will not recognize income upon the grant of an
incentive stock option. In addition, an optionee will not recognize income upon
the exercise of an incentive stock option if he or she satisfies certain
employment and holding period requirements. To satisfy the employment
requirement, an optionee generally must exercise the option not later than three
months after he or she ceases to be an employee of QQLink, Ceres or a subsidiary
or one year if he or she ceases to be an employee due to death or disability. To
satisfy the holding period requirement, an optionee must not sell or dispose of
the optioned shares of QQLink Class A common stock before two years from the
grant of the option and must hold the optioned shares of QQLink Class A common
stock more than one year after the QQLink Class A common stock are transferred
to the optionee. If these requirements are satisfied, upon the sale of the
shares of QQLink Class A common stock, the optionee will be taxed at long-term
capital gains rates on any gain, measured by the difference between the
optionee's basis in QQLink Class A common stock and the net proceeds of the
sale.
Disqualifying Disposition. If shares of QQLink Class A common stock
acquired upon the timely exercise of an incentive stock option are sold,
exchanged or otherwise disposed of without satisfying the holding period
requirement, a disqualifying disposition, the optionee will usually recognize
ordinary income at the time of disposition equal to the amount of the excess of
the fair market value of the optioned shares of QQLink Class A common stock on
the date of the exercise of the incentive stock option over the exercise price.
Alternative Minimum Tax. An optionee generally must include in
alternative minimum taxable income the amount by which the amount paid for the
option is exceeded by the option's fair market value at the time of exercise of
the option, or, if later, at the time at which the stock is freely transferable
or not subject to a substantial risk of forfeiture.
Tax Consequences to QQLink. The granting of an incentive stock option,
or the exercise thereof, will generally not result in a deduction for QQLink.
However, to the extent that an optionee recognizes ordinary income as the result
of a disqualifying disposition, QQLink will generally be entitled to a
corresponding deduction, assuming that the deduction is not disallowed by
Section 162(m) of the Code.
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Stock Appreciation Rights
Generally. The recipient of stock appreciation right awards generally
will not recognize income at the time a stock appreciation right is granted, but
will recognize ordinary income upon the exercise of a stock appreciation right
equal to the sum of:
- the gross cash proceeds payable, and
- the fair market value on the exercise date of any shares received.
Tax Consequences to QQLink. QQLink will be entitled to a tax deduction
with respect to a stock appreciation right at the same time in the same amount
as the recipient recognizes ordinary income, assuming that the deduction is not
disallowed by Section 162(m) of the Code.
The following table sets forth options that were granted under the
plan, subject to approval of the plan, on March 13, 2001 and April 10, 2001, to
executive officers as a group and non-executive officer employees as a group.
Each of the options vest on the third anniversary of the date of grant.
NAME NUMBER OF SHARES EXERCISE PRICE
Executive Officers as a Group 2,000,000 $2.25
400,000 $1.50
Non-Executive Officer Employees as a Group 350,000 $1.25
Approval of the QQLink.com 2000 Key Employee Share Incentive Plan
requires the affirmative vote of the holders of a majority of our voting stock
present in person or represented by proxy and entitled to vote at the annual
meeting. The enclosed proxy card will be voted FOR this proposal unless the
proxy holders are otherwise instructed.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
QQLINK.COM, INC. 2000 KEY EMPLOYEE SHARE INCENTIVE PLAN.
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PROPOSAL FOUR
ADOPTION OF PERFORMANCE-BASED COMPENSATION FOR
PETER W. NAUERT, OUR CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
On April 10, 2001, we entered into an employment agreement with Peter
W. Nauert effective July 1, 2001, which includes certain performance-based
compensation for Mr. Nauert. Our Compensation Committee and the Board of
Directors recommended that all of the performance-based compensation payable to
Mr. Nauert be submitted to stockholders for approval at this annual meeting.
The performance-based compensation in Mr. Nauert's new employment
agreement is intended to address certain limitations on the deductibility of
executive compensation under Section 162(m) of the Internal Revenue Code, which
limits the deductibility of certain compensation in excess of $1 million per
year paid by a publicly-traded corporation to certain employees, including Mr.
Nauert. Certain types of compensation may be excluded from the limitations on
deductibility, including compensation that qualifies as "performance-based
compensation."
The Internal Revenue Service, in the regulations promulgated under
Section 162(m) of the Code, has indicated that four conditions must be satisfied
in order for compensation to qualify as performance-based. Compensation will not
be subject to the deduction limit if the following four conditions are met:
- it is payable on account of the attainment of one or more
pre-established, objective performance goals;
- the performance goals are established by a compensation committee
of the board of directors that is comprised solely of two or more
outside directors;
- the material terms of the compensation and the performance goals
are disclosed to and approved by stockholders before payment; and
- the compensation committee certifies that the performance goals
have been satisfied before payment.
To comply with the provisions of the Code and to qualify the compensation
payable to Mr. Nauert as performance-based compensation eligible for exclusion
from the deduction limit, the performance-based compensation payable to Mr.
Nauert is being submitted to stockholders for approval and adoption at this
annual meeting.
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Pursuant to his new employment agreement effective July 1, 2001, Mr.
Nauert will receive $750,000 per year in base salary. This agreement also
establishes certain performance criteria based upon overall company performance
for determining the maximum amount of performance-based compensation to Mr.
Nauert, who has wide ranging responsibilities for the company's overall
performance. The business criteria on which the performance goals are based may
include our revenues, earnings per share, common stock price or a combination
of each.
The performance-based compensation payable to Mr. Nauert pursuant to
his new employment agreement includes the following features:
- Stock awards with a value at the time of issuance of up to
$500,000 per year if certain performance-based targets are
achieved;
- A cash award in an amount equal to Mr. Nauert's federal, state and
local taxes resulting from the payment of the stock awards. In no
event will the tax payment for any year exceed 50% of the fair
market value of the stock award to which it relates. For this
purpose, the fair market value of a stock award shall be equal to
the product of (i) the number of shares of our common stock,
including fractional shares, paid to Mr. Nauert multiplied by (ii)
the closing price of one (1) share of our common stock on the date
of payment.
- Stock options were granted to Mr. Nauert pursuant to his new
employment agreement to purchase 250,000 shares of our common
stock. The stock options were granted to Mr. Nauert on April 10,
2001 with an exercise price of $5.12 per share. These options will
vest on April 10, 2003 if Mr. Nauert is still employed by Ceres.
- Mr. Nauert will participate in our officer bonus plan. If Ceres
reaches certain set earnings per share target levels, Mr. Nauert
will receive a percentage of his base salary as incentive pay. The
maximum amount Mr. Nauert is entitled to receive in any one year
under this plan is 100% of his base salary, or $750,000.
In addition, Mr. Nauert was granted options to purchase 2,000,000
shares of Class A common stock of QQLink with an exercise price of $2.25 per
share. These options vest three years from the date of grant.
For more information regarding Mr. Nauert's new employment agreement,
see "Employment Agreements--Peter W. Nauert."
Approval of this Proposal requires the affirmative vote of the majority
of our voting stock present in person or represented by proxy and entitled to
vote at the annual meeting. The enclosed Proxy will be voted FOR this proposal
unless the proxy holders are otherwise instructed.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF
PERFORMANCE-BASED COMPENSATION FOR PETER W. NAUERT, OUR CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER.
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PROPOSAL FIVE
RATIFICATION OF INDEPENDENT ACCOUNTANTS
Ernst & Young LLP has been our independent public accountants since
August 1998. Representatives of Ernst & Young have direct access to members of
our Audit Committee and regularly attend their meetings. Representatives of
Ernst & Young are expected to attend the annual meeting to answer appropriate
questions and make a statement if they desire.
In 2000, the Audit Committee reviewed all services provided by Ernst &
Young to ensure that they were within the scope previously approved by the
committee.
Although our Bylaws do not require the selection of independent
accountants to be submitted to stockholders for approval, this selection is
being presented to you for ratification or rejection at the annual meeting. We
need the affirmative vote of the majority of our voting stock present in person
or by proxy and entitled to vote at the meeting in order to ratify Ernst & Young
as independent accountants for the fiscal year ending December 31, 2001. If the
resolution is rejected, or if Ernst & Young declines to act or becomes incapable
of action, or if its engagement is discontinued by action of our Board of
Directors, the Board will appoint other independent accountants whose continued
engagement after the next annual meeting of stockholders will be subject to
ratification by you.
THE AUDIT COMMITTEE AND THE BOARD OF DIRECTORS RECOMMEND THAT YOU VOTE
FOR THE RATIFICATION OF ERNST & YOUNG LLP AS OUR INDEPENDENT ACCOUNTANTS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2001.
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BOARD OF DIRECTORS
Based on information as of April 20, 2001,March 25, 2002, the following describes the
age, position with Ceres, principal occupation and business experience during
the past five years, and other directorships of each person nominated for
election as a director. Pursuant to the provisionprovisions of the voting agreement, all
of the nominees are currently directors and have been nominated for re-election
by the Board of Directors for election at the annual meeting. See "Voting
Agreement" on page 41.28.
NAME AGE POSITION DIRECTOR SINCE
-Name Age Position Director Since
---- --- ------------------------------------------------------------ --------------
Peter W. Nauert 5758 Chairman of the Board, President and Chief Executive 1998
Executive OfficerOfficer(1)
Andrew A. Boemi 5657 Director 1997
Michael A. Cavataio 5758 Director 1997
Bradley E. Cooper 3435 Director 1998
Susan S. Fleming 31 Director 2000
Rodney L. Hale 6061 Director 2000
Robert J. Lunn 51 Director 2001
William J. Ruh 4041 Director 2000
Robert A. Spass 45 Director 1998
Mr. Nauert has been the President, Chief Executive Officer and a
director of Ceres since July 3, 1998 and Chairman of the Board since June 10,
1999. Mr. Nauert joined Ceres in July 1998 after the expiration of his
non-compete with Conseco, Inc., which in 1997 purchased Pioneer Financial
Services, Inc., a company that underwritesan underwriter and marketsmarketer of health insurance, life insurance
and annuities throughout the United States. Mr. Nauert served as Chief Executive
Officer of Pioneer Financial Services Inc. from 1982 to 1997, and as Chairman from
1988 to 1997. Mr. Nauert had been employed in an executive capacity by one or
more of the insurance subsidiaries of Pioneer Financial Services from 1968 to
1997.
Mr. Boemi has been managing director of Turnaround Capital Partners,
L.P., a company engaged in investing in small to mid-sized public and private
companies in the early turnaround stages, since 1997. In 1997, Mr. Boemi served
as the managing director of Marietta Capital Partners, a company engaged in
private investment banking and corporate restructuring.
From 1990 to 1996, Mr.
Boemi was a partner of S-K Partners, Ltd., where he specialized in financial and
operational turnarounds of small to mid-sized companies and crisis management.
Mr. Cavataio is a real estate developer in northern Illinois and
southern Wisconsin. He served as a director of Pioneer Financial Services from
1986 to 1997 and served as Vice Chairman from 1995 to 1997. Mr. Cavataio has
served as a director of FirstarU.S. Bank of Northern Illinois since 1988 and as a
director of AON Funds, Inc., a subsidiary of AON Corp., a multi-line
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and brokerage company, since 1994.
Mr. Cooper has been a partner and co-founder of Capital Z Partners
since 1998. He currently serves on the Board of Directors of Superior NationalSNTL Group, Inc.,
Highlands Insurance Group,
Highland Insurance Group, American Capital Access Holdings,8
- ------------------
(1) Mr. Nauert has advised our Board of Directors of his intention to retire as
our President and Chief Executive Officer. On April 15, 2002, Mr. Nauert and
the company executed an agreement pursuant to which Mr. Nauert's services as
our President and CEO will terminate on the earlier of (i) the hiring of a new
CEO, (ii) his retirement, (iii) the Board's removal of Mr. Nauert as interim
CEO, or (iv) June 1, 2002. In addition, the agreement calls for the termination
of Mr. Nauert's existing employment agreement, his rendering of certain
transitional services and for certain payments by the company to Mr. Nauert.
Mr. Nauert will continue to serve as Chairman of the Board until the 2003
annual meeting of stockholders.
Universal American FinanceFinancial Corp., eStellarnet, Inc., and Inlumen, Inc.PXRE Group, Ltd. From 1994 to 1998, Mr.
Cooper served as a partner of Insurance Partners, L.P. that executed investments
in property and casualty insurers, life and health insurers, healthcare services
firms, and related insurance businesses. Prior to the formation of Insurance
Partners, L.P., he was a Vice Presidentvice president of International Insurance Advisors,
Inc., the management company of International Insurance Investors, L.P. Prior to
joining International Insurance Advisors, Inc., Mr. Cooper was an investment
banker in the Financial Institutions Group at Salomon Brothers, Inc.
Ms. Fleming has been a partner of Capital Z Partners since January
2002. From 1998 to 2002, she was a principal of Capital Z since 1998.Z. She serves on the
Board of Directors of Universal American Financial Corp. and Access Coverage
Corp.PXRE Group, Ltd.
From 1994 to 1998, Ms. Fleming served as a Vice Presidentvice president of Insurance Partners
I, L.P., where she assisted in the successful completion of numerous
investments. Ms. Fleming also was an investment banking analyst with Morgan
Stanley & Co., working in the financial institutions M&A group and in firm
management from 1992 to 1994.
Mr. Hale has been the president of International Insurance Investment
Strategies, a consulting firm specializing in strategic alternatives for the
life insurance industry, since 1993. Since 1995, he has owned Sterling Investors
Life Insurance Company, a life and accident and health insurance company.
Mr. Lunn is the founder of Lunn Partners, L.L.C.,LLC, a private investment
banking firm established in 1994. He is the firm's managing partner and chief
investment officer, overseeing all investment activities. Prior to establishing
Lunn Partners, Mr. Lunn was a managing director at Lehman Brothers and a member
of Lehman Brokers' Operating Committee. He was head of the Financial Services
Division, which included Private Client Services, Global Management, Performance
Based Funds Management, and Securities Lending. Mr. Lunn was with Morgan Stanley
& Co. from 1977-1994.1977 to 1994. Mr. Lunn serves on the board of Shaw Industries.
Mr. Ruh has been a principalan Executive Vice President and co-founder of Castle
Creek Capital, an investment management company, since 1995. He is also a
co-founder and has been a principal of Belle PlaineCastle Creek Financial, a registered
broker/dealer that conducts financial advisory services and places private equity
investments, since 1995. Mr. Ruh worked for Bank One Corporation and MabounMabon
Securities prior to founding Castle Creek and Belle Plaine.Creek. Mr. Ruh presently serves as a
director of Veristar Corporation and First Community Bank of the Desert.Indivos Corporation.
Mr. Spass has been a Partnerpartner and co-founder of Capital Z Partners, an
investment management company, since 1998. Prior to co-founding Capital Z, Mr.
Spass was the managing partnerManaging Partner and co-founder of Insurance Partners I, L.P. Mr.
Spass served as president and chief executive officer of International Insurance
Advisors, Inc., an investment management company, 22
24
from 1990 to 1994. Mr. Spass
is a director of USI Insurance Services, Universal American Financial
Corporation, Superior National InsuranceSNTL Group, Highlands Insurance Group and Aames Financial Corp.
9
COMPOSITION OF THE BOARD OF DIRECTORS
Our Board of Directors has nine members. The directors are elected by
our stockholders at the annual meeting and each director holds office until the
next annual meeting and until his successor is properly elected. Someelected and qualified.
Certain of our stockholders have entered into a voting agreement that governs
who they will vote for as directors.directors of Ceres. However, more than two-thirds
of the holders under the voting agreement, who are also directors, have agreed
that they would be in favor of terminating the agreement if our stockholders
vote at this Annual Meeting to divide our Board of Directors into three
classes, each with three directors, serving staggered terms of office of three
years as outlined in Proposal 1. For more information on this voting agreement,
see "Voting Agreement" on page 41.28.
DIRECTOR COMPENSATION
In 2000,2001, our directors, with the exception of Messrs. Cooper,Mr. Nauert,
and Spass and Ms. Fleming, received a
$2,500 quarterly retainer and eachnon-qualified stock options to purchase 5,000
shares of common stock. Each chairman of a committee received a $5,000
annual fee for serving as a chairman of a committee.
In 2001, each director, except for Mr. Nauert, will receive a
$2,500 quarterly retainer, non-qualified stock options to purchase 5,000 shares
of our common stock and each chairman of a committee will receive a $5,000
annual fee for serving as a chairman of a committee.
SECTION 16(a)16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers, directors and persons who beneficially own more than 10% of
our common stock, to file initial reports of ownership and changes in ownership
with the Securities and Exchange Commission. Based on a review of the copies of
such forms furnished to us and written representations from our executive
officers and directors, we believe that all forms were filed in a timely manner
during 2000.2001.
BOARD COMMITTEES
Our Board of Directors met fourfive times in 20002001 and took action by
written consent ninefive times. During 2000,2001, all members of the Board, with the
exception of Mr. Lunn and Mr. Hale, participated in at least 75% of all Board
and applicable committee meetings.
Our Board of Directors has standing executive, compensation,
investment, audit and auditQQLink conflicts committees.
Executive Committee. Our Executive Committee has all powers of ourthe
Board of Directors in the management of our business and affairs between Board
meetings except the power to fill vacancies on the Board or its committees. The
Executive Committee also functions as a nominating committee. As a nominating
committee, the Executive Committee seeks 23
25
qualified persons to serve as directors
and makes recommendations to the Board of Directors. Currently the members of
the Executive Committee are Mr. Nauert (Chairman)(chairman), Mr. Cavataio, Mr. Ruh and Mr.
Spass. The Executive Committee met four times and took action by written consent
sevenfour times during 2000.in 2001.
10
Investment Committee. Our Investment Committee establishes policies for
our investments and monitors their management. Currently the members of the
Investment Committee are Mr. Cavataio (Chairman)(chairman), Mr. Boemi and Mr. Hale. The
Investment Committee met three times and took action by written consent twice
during 2000.once in 2001.
Compensation Committee. Our Compensation Committee is responsible for
determining the compensation of our executive officers and administering our
various stock plans. Currently the members of the Compensation Committee are Mr.
Ruh (Chairman)(chairman), Mr. Cooper and Mr. Hale. The Compensation Committee met oncethree
times and took action by written consent six times during 2000.twice in 2001.
Audit Committee. Our Audit Committee recommends to ourthe Board of
Directors the firm of independent accountants to serve us and reviews the scope,
performance and results of the annual audit. In accordance with its written
charter that was approved and adopted by our Board of Directors in 2000, our
Audit Committee assists our Board of Directors in monitoring:
- the integrity of our financial statements;statements,
- our compliance with legal and regulatory requirements;requirements, and
- the independence and performance of our internal and external
auditors.
The Audit Committee's current composition satisfies the regulations of the
Nasdaq Stock Market, Inc. governing audit committee composition. A copy of our
Audit Committee Charter is attached to this Proxy Statement as ANNEX C.charter was filed with our proxy statement for the 2001 Annual
Meeting.
Currently the members of the Audit Committee are Mr. Boemi (Chairman)(chairman),
Mr. Cavataio and Ms. Fleming. The Audit Committee met sevenfive times during 2001.
QQLink Conflicts Committee. Our QQLink Conflicts Committee is
responsible for determining and took
action by written consent onceresolving issues relating to:
- the sale of stock to investors,
- the issuance of options to management,
- the use of Ceres personnel to manage and operate QQLink,
- the use of any other Ceres resources, and
- any other perceived or potential conflict between Ceres and its
insurance subsidiaries, on the one hand, and QQLink, on the
other.
Currently, the members of the QQLink Conflicts Committee are Mr. Ruh
(chairman), Mr. Cavataio and Mr. Hale. The QQLink Conflicts Committee did not
meet during 2000.2001.
AUDIT COMMITTEE REPORT
In fulfilling its oversight responsibilities, the Audit Committee
reviewed our audited financial statements with management. The Audit Committee
also discussed with our independent auditors the matters required by Statement
on Auditing Standards No. 61,
11
"Communication with Audit Committees." The Audit Committee reviewed with Ernst &
Young LLP, our independent auditors who are responsible for expressing an
opinion on the conformity of our audited financial statements with generally
accepted accounting principles, their judgment as to the quality, not just the
acceptability, of our accounting principles, the reasonableness of significant
judgments and the clarity of disclosures in our financial statements. Also, the
Committee discussed the results of the annual audit and such other matters
required to be 24
26
communicated with the Audit Committee under generally accepted
auditing standards.
In discharging its oversight responsibility as to the audit process,
the Audit Committee obtained from our independent auditors a formal written
statement describing all relationships between theour independent auditorauditors and us
that might bear on the auditors'our independent auditors independence consistent with
Independence Standards Board Standard No. 1 "Independence Discussions with Audit
Committees," and discussed with the auditors any relationships that may impact
their objectivity and independence. In considering the auditors' independence,
the Audit Committee also considered whether the non-audit services performed by
the auditors on our behalf were compatible with maintaining the independence of
the auditors.
In reliance upon the Audit Committee's reviews and discussions with
management and our independent auditors, the Audit Committee recommended to our
Board that our audited financial statements be included in our Annual Report on
Form 10-K for the year ended December 31, 2000,2001, for filing with the Securities
and Exchange Commission. The Audit Committee also recommended the reappointment
of the independent auditors to audit our financial statements for the current
fiscal year, 2002, and the Board concurred in such recommendation,
subject to the ratification of the appointment by the stockholders at the annual
meeting.recommendation.
Principal Accounting Firm Fees.
The following table sets forth the aggregate fees billed to us for the
fiscal year ended December 31, 2000,2001, by our principal accounting firm, Ernst & Young LLP:
Audit Fees $623,272Young:
Audit Fees $ 740,000
Financial Information Systems Design and Implementation 0
All Other Fees* 44,000
----------
TOTAL $1,284,000
==========
* Includes fees related to tax services and Implementation
Fees --
All Other Fees, including$448,000 of fees for tax consulting, Department
of Insurance examination, acquisitions and other non-audit
services 182,650
--------
TOTAL $805,922
========related to our
2001 public offering
AUDIT COMMITTEE
ANDREW A. BOEMI
MICHAEL A. CAVATAIO
SUSAN S. FLEMING
2512
27
EXECUTIVE OFFICERS
EXECUTIVE
NAME AGE POSITION OFFICER SINCE
- ---- --- ---------------------------------------------------- -------------
Peter W. Nauert(1) 57Nauert 58 Chairman of the Board, President and Chief Executive 1998
OfficerOfficer(1)
George A. Gehringer 46 Senior Vice President - Individual Health Division 2002
Bruce M. Henry 4243 Chief Marketing Officer and President of CeresHealthMark 2000
Sales, 2000 LLC
Charles E. Miller, Jr. 5051 Executive Vice President and Chief Financial Officer 1998
Mark A. Nielsen 4849 Executive Vice President of- Senior Health Division 2001
Anthony J. Pino 5354 Executive Vice President - Group Health Division 1999
- ----------------------------
(1) Biographical information on Mr. Nauert can be found under "Board of
Directors." Mr. Nauert has advised our Board of Directors of his intention
to retire as our President and Chief Executive Officer. On April 15, 2002,
Mr. Nauert and the company executed an agreement pursuant to which Mr.
Nauert's services as our President and CEO will terminate on the earlier of
(i) the hiring of a new CEO, (ii) his retirement, (iii) the Board's removal
of Mr. Nauert as interim CEO, or (iv) June 1, 2002. In addition, the
agreement calls for the termination of Mr. Nauert's existing employment
agreement, his rendering of certain transitional services and for certain
payments by the company to Mr. Nauert. Mr. Nauert will continue to serve as
Chairman of the Board until the 2003 annual meeting of stockholders.
Mr. Gehringer has served as the Senior Vice President of our Individual
Health Division since January 1, 2002. He has been Senior Vice President,
Acquisitions of Ceres since March 1999. Prior to joining Ceres, Mr. Gehringer
was Vice President of Special Projects for World Insurance Company from 1988
through 1999.
Mr. Henry has been our Chief Marketing Officer since June 2000 and
President of CeresHealthMark Sales, LLC since March 2001. He was our Chief Sales
Officer since joining us in July 1998. From 1996 to 1998, Mr. Henry was National
Sales Director for Design Benefit Plans, a marketing subsidiary of Pioneer
Financial Services. Prior to 1996, Mr. Henry was regional sales manager for a
subsidiary of Pioneer Financial Services.
Mr. Miller has been our Executive Vice President and Chief Financial
Officer since October 1998. From 1996 to 1998, he was a principal and president
of Wellington Partners, Inc., an insurance acquisition company. Mr. Miller was
also a consultant to the Insurance Partners' funds. Before 1996, Mr. Miller was
executive vice president, chief financial officer and a director of Harcourt
General Insurance Companies.Company.
Mr. Nielsen has served as Executive Vice President of our Senior Health
Division since MarchJune 2001. Since July 2000, he has served as President of
Continental General Insurance Company, a subsidiary of Ceres. He has served as
President of The Pyramid Life Insurance Company, a subsidiary of Ceres, since
1996 and in various vice president capacities for Pyramid Life since 1978.
Mr. Pino has served as Executive Vice President of Ceres since February
2000 and was Senior Vice President of Ceres from August 1999 to February 2000.
From June to August 1999,
13
he was a consultant to Ceres. From 1996 to 1999, Mr. Pino was president of
National Health Services, Inc., a managed care subsidiary of United Payors &and
United Providers, an intermediary between health care payors and health care
providers. From 1991 to 1996, Mr. Pino was executive vice president of Pioneer
Financial Services and president of National Group Life Insurance Company, a
subsidiary of Pioneer.
26
28
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the annual compensation paid with
respect to the calendar years ended December 31, 2001, 2000 1999 and 1998,1999, to our
Chief Executive Officer and our five most highly-compensatedhighly compensated executive officers
during 2000.2001.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------- ------------ ALL OTHER
OTHER SECURITIES
COMPENSATION(3)NAME AND ANNUAL UNDERLYING ---------------
NAME ANDALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS - ---------------------------COMPENSATION (3)
------------------ ---- ------ -------- --------------- ------- ----------------
PETER W. NAUERT.............. 20002001 $364,318 -0- -0- $1,236,777(4) - -$1,509,971 (4) 250,000 $2,322
Chairman of the Board, 19992000 -0- -0- 993,242(4)1,236,777 (4) - -
President and Chief 19981999 -0- -0- 500,000993, 242 (4) - -
Executive Officer
BRUCE M. HENRY............... 2000 $258,000 $25,476 24,115 34,262 $33,873(5)2001 369,500 $39,386 35,708 40,000 33,873 (5)
Chief Marketing Officer and 2000 226,500 25,476 24,115 34,262 33,873 (5)
President of HealthMark Sales, LLC 1999 176,900 - - 15,000 -
President of Ceres Sales, LLC 1998 103,800 - - 25,000 -
BILLY B. HILL, JR.(6)............... 2001 -0- 47,264 151,418 (7) 45,000 300,000
Former General Counsel 2000 -0- 30,570 166,353(7)166,352 (7) 29,114 305,000
General Counsel
1999 -0- - 200,000(7)200,004 (7) - 240,000
1998 -0- - - 125,000 230,580
GLEN A. LAFFOON.............. 2000 100,300 7,165 6,784 6,824 163,564(8)
Former Executive Vice 1999 215,200 - - 15,000 4,562
President and Assistant 1998 180,000 - - 25,000 1,000
Secretary of Ceres
CHARLES E. MILLER, JR........ 2001 250,000 39,386 35,708 45,000 49,242 (8)
Executive Vice President 2000 248,300 28,660 27,123 27,294 1,242
Executive Vice President49,242 (8)
and Chief Financial Officer 1999 211,900 - - 25,000 145,810(10)
and Chief Financial Officer 1998 93,000(9) - - 100,000 12,000(10)145,810 (8)
ANTHONY J. PINO.............. 2001 257,143 39,386 35,708 40,000 1,242
Executive Vice President 2000 234,400 19,106 18,086 43,196 1,242
1999 98,200 - - 25,000 414
MARK A. NIELSEN.............. 2001 220,700 17,727 16,070 80,000 720
Executive Vice President 1999 98,2002000 79,680 (9) - - 25,000 414- 257 (9)
- ----------
(1) Unless otherwise indicated, the amounts in this column represent the
bonus paid to each officer under the 1999 and 2000 officer bonus plan.
These amounts were earned in 1999 and 2000 but paid in 2000.2000 and 2001,
respectively.
14
(2) Unless otherwise indicated, the amounts in this column represent the
fair market value on the date of grant of the stock award paid to each
officer under the 1999 and 2000 officer bonus plan. These amounts were
earned in 1999 and 2000 but paid in 2000.2000 and 2001, respectively.
(3) For the year 2000, $1,000 represents the contribution payable by us in
stock to each of Messrs. Laffoon,
27
29
Henry, Miller and Pino under our 401(k) plan,
and for the year 1999, to each of Messrs. Laffoon andMr. Miller under our 401(k) plan. For the year
1998, $1,000 represents the contribution payable by us to Mr. Laffoon under our 401(k) plan.
(4) In 2000 1999 and 1998,1999, Mr. Nauert received no cash salary. Under his current
employment agreement, Mr. Nauert is entitled to a stock award payable
in shares of our common stock and a cash payment equal to the amount of
taxes payable on the stock award. In 2001, pursuant to his employment
agreement, Mr. Nauert received 203,607 shares of our common stock
valued at $1,078,551. In 2000, pursuant to his employment agreement,
Mr. Nauert received 130,040 shares of our common stock valued at
$883,412, and in 1999, Mr. Nauert received 108,108 shares of our common
stock valued at $709,459. He is also entitled to an amount equal to the
taxes payable on such awards which amounted to $431,420 in 2001,
$353,365 in 2000 and $283,784 in 1999. For information regarding Mr.
Nauert's current employment agreement and his new employment agreement, see "Employment Agreements" on page 29.24.
Mr. Nauert received no payment in 2000 under the 1999 officer bonus
plan.
(5) Includes $33,333 in connection with the forgiveness of 1/3 of a
$100,000 loan from Ceres to Mr. Henry.Henry in each of 2000 and 2001. An
additional 1/3 of the loan will be forgiven in each of 2001 and 2002.
(6) Mr. Hill servesserved as our General Counsel until September 30, 2001 and as
a consultant until December 31, 2001 pursuant to a retainer agreement
under which he iswas paid an annual retainer. See "Employment
Agreements."
(7) In 2001, Mr. Hill received 72,798 shares, valued at $108,156, and
$43,262 in cash equal to the taxes payable on the stock award. In 2000,
pursuant to his retainer agreement and the 1999 officer bonus plan, Mr.
Hill received 18,816 shares of our common stock, valued at $127,089,
and $39,263 in cash equal to the taxes payable on the stock award, and inaward. In
1999, pursuant to his retainer agreement, Mr. Hill received 16,667
shares of our common stock, valued at $133,336, and $66,668 in cash
equal to the taxes payable on the stock award.
(8) Includes $160,000 paid to Mr. Laffoon in connection with his
retirement. Mr. Laffoon retired on May 31, 2000.
(9) Includes a one-time payment of $50,000 to induce Mr. Miller to enter
into his employment agreement.
(10) Represents (i) payment of $4,000 per month for expenses relating to his
residence in Cleveland, Ohio, and (ii) in 1999, $96,000 related to
non-recurring expenses related to Mr. Miller's relocation from Florida
to Ohio. See "Employment Agreements."
28
30(9) Represents compensation paid by Ceres to Mr. Nielsen following the
acquisition of Pyramid Life Insurance Company on July 26, 2000.
OPTION GRANTS IN 20002001
The following table summarizes information concerning options granted
during the fiscal year ended December 31, 20002001 to each of our executive officers
listed in the compensation table.
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE APPRECIATION FOR
SHARES GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM*
UNDERLYING EMPLOYEES IN PRICE PER ------------TERM*
NAME OPTIONS 20002001 SHARE EXPIRATION DATE 5% 10%
---- ------- ---- ----- --------------- -- ---
Peter W. Nauert............ 0 -- -- -- -- --Nauert......... 250,000 27.5% $5.12 April 10, 2011 $809,973 $2,039,974
Bruce M. Henry............. 10,000 1.7% $6.81 February 3, 2010 $42,815 $108,518
24,262 4.1% 7.00 September 13, 2010 106,795 270,556Henry.......... 20,000 2.2% $8.00 August 10, 2011 $100,611 $254,983
20,000 2.2% $6.00 May 1, 2011 $75,455 $191,233
15
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SHARES GRANTED TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN PRICE PER TERM*
NAME OPTIONS 2001 SHARE EXPIRATION DATE 5% 10%
---- ------- ---- ----- --------------- -- ---
Billy B. Hill, Jr.......... 29,114 5.0% 7.00 September 13, 2010 128,155 324,786
Glen A. Laffoon............ 6,824 1.2% 7.00 September 13, 2001 30,028 76,114Jr....... 25,000 2.8% $8.00 August 10, 2011 $125,766 $318,733
20,000 2.2% $6.00 May 1, 2011 $75,455 $191,233
Charles E. Miller, Jr. 27,294 4.7% 7.00 September 13, 2001 120,143 304,481Jr... 25,000 2.8% $8.00 August 10, 2011 $125,766 $318,733
20,000 2.2% $6.00 May 1, 2011 $75,455 $191,233
Anthony J. Pino ........... 25,000 4.3% 6.81 February 3, 2010 107,057 271,319
18,196 3.1% 7.00 September 13, 2001 80,091 202,982Pino......... 20,000 2.2% $8.00 August 10, 2011 $100,611 $254,983
20,000 2.2% $6.00 May 1, 2011 $75,455 $191,233
Mark A. Nielsen......... 50,000 5.5% $6.625 July 26, 2011 $208,309 $527,911
10,000 1.1% $8.00 August 10, 2011 $50,299 $127,483
20,000 2.2% $6.00 May 1, 2011 $75,455 $191,233
- -----------------------------------------------
* Assumes a ten-year term of the options. These amounts are based on
hypothetical appreciation rates of 5% and 10% and are not intended to forecast
the actual appreciation of our common stock. No gain to optionees is possible
without an actual increase in the price of our stock, which would benefit all
of our stockholders.
Note: Each of the above options was granted under the 1998 Key Employee Share
Incentive Plan and each vest on the third anniversary of the date of
grant of such option.option with the exception of Mr. Laffoon's options were forfeited upon his
retirement.Nauert's, which vest on
April 10, 2003 and Mr. Hill's which have already vested.
OPTION VALUES AT YEAR-END 20002001
The following table summarizes information with respect to the number
of unexercised options held by the executive officers listed in the compensation
table as of December 31, 2000.2001. None of these executive officers exercised any
options in 2000.2001.
NUMBER OF SECURITIES UNDERLYING VALUE OF IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBERNumber of Securities Underlying Value of In-the-Money Options at
Options at December 31, 2000 DECEMBER2001 December 31, 2000*2001*
---------------------------- ------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLEName Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
Peter W. Nauert 350,000/150,000 -/-500,000/250,000 --/--
Bruce M. Henry 0/74,262 -/-25,000/89,262 --/--
Billy B. Hill, Jr. 25,000/129,114 $12,500/-
Glen A. Laffoon 0/46,824 -/-199,114/0 --/--
Charles E. Miller, Jr. 70,000/82,294 -/-125,000/72,294 --/--
Anthony J. Pino 25,000/83,196 --/--
Mark A. Nielsen 0/68,196 -/-80,000 --/--
- ----------
29
31
* Valued at $6.00$3.69 per share, the closing price per share of our common stock on December
31, 2000.
STOCK OPTION PLANS
1998 KEY EMPLOYEE SHARE INCENTIVE PLAN
Our 1998 Key Employee Share Incentive Plan was adopted by our
stockholders in 1999 and provides for the grant of non-qualified stock options
or incentive stock options to purchase our stock and the grant of options to
receive payments based on the appreciation of our common stock. As of April 20,
2001, there were options granted under the plan to purchase 1,508,337 shares.
For more information about the plan, see "Proposal Two."
302001.
16
32
1998 EMPLOYEE STOCK OPTION PLAN
We adopted the 1998 Employee Stock Option Plan effective December 31,
1998. The plan was amended in February 1999. The plan provided for the grant of
options to purchase 1,000 shares of our common stock to each full-time employee
of Central Reserve on December 31, 1998 who had not received any of our options
under any other option plan. In addition, eligible employees who had not
previously received options under the plan would receive an option to purchase
1,000 shares on December 31 of each year beginning in December 1999. The plan
provided for the grant of options to purchase up to a maximum of 500,000 shares.
The options are subject to certain restrictions and vest three years after
grant. The options terminate if the employee ceases to be employed by Central
Reserve before the option is vested and ten years after the grant date. The
purpose of the plan was to attract, retain and reward the full time employees of
Central Reserve and strengthen the mutuality of interest between these employees
and our stockholders. As of April 20, 2001, there were outstanding under the
plan options to purchase 338,000 shares. The plan was terminated by the Board of
Directors as of December 31, 2000 and no future grants will be made.
2000 EMPLOYEE STOCK PURCHASE PLAN AND AGENT STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our stockholders
on June 27, 2000. The stock purchase plan is administered by our Compensation
Committee. The Compensation Committee has all of the powers of our Board of
Directors with respect to the plan. The Compensation Committee may adopt rules
and regulations for purposes of the plan. We will make six-month offerings
beginning on May 1 and November 1 of each year.
All of our employees, including officers, who work more than 20 hours a
week are eligible to participate in the employee stock purchase plan. Temporary
employees are not eligible. As of December 31, 2000, we had approximately 1,100
employees eligible to participate in the employee stock purchase plan. However,
no employee is eligible to participate in the plan, if immediately after the
purchase, the employee would own shares possessing at least 5% of the total
combined voting power of Ceres or any of its subsidiaries. In addition, no
employee may purchase more than $25,000 worth of our common stock, determined at
the fair market value of the shares at the time the right to purchase is
granted, under all our employee stock purchase plans in any calendar year.
31
33
The employee stock purchase plan permits us to offer our common stock
for purchase by eligible employees at a price equal to 85% of the lesser of the
market value of the stock on the first day of the offering period, or the market
value of the stock on the last day of the offering period.
Eligible employees may accumulate savings through payroll deductions
over an offering period in order to purchase common stock at the end of the
period. Purchases of common stock under the employee stock purchase plan may
only be made with accumulated savings from payroll deductions, and an employee
cannot complete the purchases using other resources. The accumulated payroll
deductions for an offering are automatically applied at the end of the offering
period to purchase as many shares of common stock as feasible, and the unused
balance will be carried over to the next offering.
The rate, ranging from 1% to 15%, of an employee's payroll deduction
must be established before the offering. An employee's payroll deduction
authorization for one offering will apply to successive offerings unless the
employee changes the authorization. An employee may reduce, but not increase,
his or her rate of payroll deductions during an offering or withdraw from an
offering at any time. Upon withdrawal from any offering, the employee's
accumulated savings for the offering will be returned to the employee without
interest.
While each participant in the employee stock purchase plan is required
to sign an agreement authorizing payroll deductions, the participant may
withdraw from an offering by terminating his or her payroll deductions and by
delivering to us a notice of withdrawal from the plan. A participant may
withdraw at any time at least ten days prior to the end of the applicable
offering period.
Upon any withdrawal from an offering by the employee, we will
distribute to the employee his or her accumulated payroll deductions without
interest and no further payroll deductions will be made from his or her pay. The
employee's interest in the offering will be automatically terminated. The
employee would be eligible to participate in the next offering by re-enrolling
in the plan.
Any individual whose employment with us is terminated for any reason,
other than disability, death or retirement, before the end of an offering will
become ineligible to purchase common stock under the employee stock purchase
plan.
Rights granted under the employee stock purchase plan are not
transferable and may be exercised only by the person to whom the rights are
granted.
The employee stock purchase plan is intended to comply with Section 423
of the Code. Our Board of Directors may amend or terminate the stock purchase
plan at any time. However, any increase in the number of shares of common stock
reserved for issuance under the employee stock purchase plan or material
modification of the eligibility requirements would require stockholder approval.
In addition, the employee stock purchase plan will terminate when all the
32
34
shares reserved for issuance under the plan have been purchased.
There are 1,000,000 shares of our common stock reserved for
issuance in the aggregate under the Employee Stock Purchase Plan and the 2000
Agent Stock Purchase Plan.
Our 2000 Agent Stock Purchase Plan, which is similar to the Employee
Stock Purchase Plan, allows some of our agents to purchase shares of our common
stock at the same discount from fair value. The Agent Stock Purchase Plan does
not qualify as an employee stock purchase plan within the meaning of Section 423
of the Code.
In the event of a dissolution, liquidation or specified type of merger
of Ceres, the employee and agent stock purchase plans will terminate and the
Compensation Committee may accelerate the exercise date of the offering so that
the outstanding options may be exercised immediately prior to any such event.
BENEFIT PLANS
Effective January 1, 1998, our noncontributory pension plan was
converted into a defined contribution 401(k) savings plan. Employees become
eligible to participate in the 401(k) plan after six months of service. Based on
the provisions of the plan, participants may contribute up to 10% of their
pretax annual compensation. The plan provides for a 100% employer matching
contribution only for that portion of participant contributions made to a fund
that holds principally our shares of common stock, up to $1,000 annually. Our
total matching contributions were approximately $376,000 for 2000, $133,000 for
1999 and $52,000 for 1998.
EMPLOYMENT AGREEMENTS
PETER W. NAUERT.
JULY 1, 1998 AGREEMENT. Mr. Nauert serves as our Chairman of the Board,
President and Chief Executive Officer.
JULY 1, 1998 EMPLOYMENT AGREEMENT. Effective July 1, 1998, we entered into
an employment agreement, as amended, with Mr. Nauert under which he servesserved as
Chief Executive Officer until June 30, 2001. Mr. Nauert received no annual
salary under the agreement. Rather, his compensation iswas composed of three
components:
- awards of our common stock or "stock awards";,
- stock options;options, and
- incentive pay,
all designed to induce Mr. Nauert to enter into the agreement and to remain with
us for the three yearthree-year term of the agreement. These three components are
explained below:
33
35
Stock Award. Mr. Nauert received stock awards equal to 108,108 shares
of our common stock on July 1, 1999, 26,722 shares of our common stock on
January 1, 2000, 32,421 shares of our common stock on April 1, 2000, 33,988
shares of our common stock on July 1, 2000, 36,909 shares of our common stock on
October 2, 2000, 34,626 shares of our common stock on January 2, 2001, and 37,166
shares of our common stock on April 2, 2001. Mr. Nauert is entitled to quarterly stock awards on the first
day of each calendar quarter in2001 and 103,412 shares of our common
stock equal to
$250,000 divided by the average closing price of our common stock for
the calendar quarter ending three months before the payment untilon July 1, 2001 when the final quarterly stock award will be paid.2001. The July 1, 2001 stock award will includeincluded the stock awards
for the quarters ending March 31, 2001 and June 30, 2001 and an additional
payment of 25,225 shares. Mr. Nauert will also receivereceived a cash payment equal to the
amount of taxes payable on the stock award before the time these taxes becomebecame
due. Mr. Nauert will forfeit any unpaid stock award or cash payment for
taxes if we terminate his employment for any reason other than a
"Severanceable Event" as defined by the agreement.
Stock Options. Mr. Nauert was granted options to purchase an aggregate
of 500,000 shares of our common stock. The exercise prices of the options are as
follows:
NUMBER OF OPTIONS EXERCISE PRICE17
Number of Options Exercise Price
----------------- --------------
100,000 $ 6.50$6.50
100,000 $ 7.50$7.50
100,000 $ 8.50$8.50
100,000 $ 9.50$9.50
100,000 $10.50
Thirty percent (30%) of the options vested immediately upon issuance on July 3,
1998, 20% vested on July 1, 1999, and 20% vested on July 1, 2000. The2000 and the remaining
30% of the options will vestvested on July 1, 2001. The vesting of all options shall occuroccurred pro rata among
the various exercise price levels. However, all options shall become exercisable (vest) upon
a "Severanceable Event" as defined by the agreement. A "Severanceable
Event" means any of the following:
- termination by the company for any reason other than for
"Cause," as defined by the agreement;
- termination upon a "Change of Control" as defined by the
agreement;
- termination by Mr. Nauert for "Good Reason" as defined
by the agreement; or
- termination due to death or total or partial disability
of Mr. Nauert.
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36
Mr. Nauert will forfeit any unvested options if his employment
is terminated for any reason other than a "Severeanceable Event" as set
forth above.
Incentive Pay. For each year of employment, Mr. Nauert would receive an
amount equal to 5% of the amount by which our pre-tax income for such year
exceedsexceeded the following targets: $14,544,000 in 1998; $30,597,000 in 1999; and
$30,093,000 in 2000. For 2000, 1999 and 1998, Mr. Nauert did not qualify for any
compensation under this component of his agreement.
Under the agreement, Mr. Nauert iswas obligated to retain ownership of at
least 900,000 shares of our common stock unless we release him from this
obligation. Additionally, Mr. Nauert may receivecould have received cash bonuses or other
incentive compensation as our Board of Directors approves.approved.
JULY 1, 2001 EMPLOYMENT AGREEMENT. On April 10, 2001, we entered into a
newan
employment agreement with Mr. Nauert, effective July 1, 2001, for a term of two
years. The new agreement is automatically renewable at the end of the initial two
year term for successive one year terms unless either party gives written notice
of termination. The terms of the new agreement are as follows:
Salary and Stock Award. Under this agreement, Mr. Nauert will receive
an annual base salary of $750,000 in cash. In addition, as part of the new agreement,
we are involved in ongoing discussions with Mr. Nauert regardingis entitled
to quarterly stock awards on the performance-based targets that, if achieved, would entitlefirst day of each calendar quarter in shares of
our common stock equal to $125,000 divided by the average closing price of our
common stock for the calendar quarter immediately preceding the payment. On
October 1, 2001, Mr. Nauert received a stock award equal to 28,403 shares of our
common stock. On January 1, 2002, Mr. Nauert received a stock award equal to
38,226 shares of our common stock. Mr. Nauert will also receive stock awards up to $500,000 per year and tax paymentsa cash payment
equal to the federal, state and local taxes payable by Mr. Nauert on the stock
awards.
Stock Options. As an inducement to signing his new employment
agreement, Mr. Nauert was granted options to purchase 250,000
shares of our common stock at an exercise price of $5.12 per share. All 250,000
options vest on April 10, 2003. However, all of the options vest upon the
occurrence of a "Severenceable Event." A "Severanceable Event,Event" means any of the
following:
- termination by the company for any reason other than for
"Cause," as defined inby the agreement.agreement,
- termination upon a "Change of Control" as defined by the
agreement,
- termination by Mr. Nauert for "Good Reason" as defined by the
agreement, or
- termination due to the death or total or partial disability of
Mr. Nauert.
18
Mr. Nauert will forfeit any unvested options if his employment is
terminated for any reason other than a "Severenceable Event" as set forth above.
Incentive Pay. Mr. Nauert will participate in our officer bonus plan
based on specified target performance levels of the company. Mr. Nauert's
incentive pay could range from 0% of his cash salary to 100% of his cash salary
in any given year.
In the event that we terminate Mr. Nauert without "cause" or there
occurs a "qualifying termination" following a "change of control," Mr. Nauert is
entitled to two years' severance equal to his base salary and stock awards,
including the tax payments, and any incentive pay to which he would have been
entitled assuming the target level performance was met; provided that after July
1, 2003, the incentive pay would be reduced to a one year payment.
35
37
BRUCE M. HENRY. Mr. Henry serves as Chief Marketing Officer of Ceres
and President of Ceres Sales, LLC. On April 10, 2001, we entered into an
employment agreement with Mr. Henry under which he will serve as Chief Marketing
Officer until June 30, 2003. The agreement is automatically renewable at the end
of the initial term for successive one year terms unless we give prior written
notice of termination. If we terminate Mr. Henry's employment other than for
cause, Mr. Henry will be entitled to severance pay equal to 18 months' salary.
In addition, he will be entitled to severance pay equal to two years' salary in
the event of a "change of control"control," as defined in his employment agreement. The
agreement also provides for reimbursement of business expenses and certain other
fringe benefits. Under the agreement, Mr. Henry will receive bonuses under the
officer bonus plan.
BILLY B. HILL, JR. Mr. Hill servesserved as our General Counsel pursuant to a
retainer agreement dated as of June 30, 1998 for a term of three years under
which Mr. Hill received a retainer of $240,000 per year. Effective January 1,
2000, Mr. Hill's retainer was increased to $300,000. Under the agreement, Mr.
Hill received stock options to purchase 125,000 shares of our common stock.
Twenty-five thousand of the options vested immediately at an exercise price of
$5.50 per share. The remainder will vestvested on July 1, 2001. The exercise price of
the remainingother options is as follows: $6.50 - 25,000 options; $7.50 - 25,000 options;
$8.50 - 25,000 options;options and $9.50 - 25,000 options. Mr. Hill maycould have also
receivereceived cash bonuses or other cash incentive compensation as our Board of
Directors may approve.approved. The agreement providesprovided for the reimbursement of reasonable
business expenses. Under the agreement, Mr. Hill iswas not required to devote all
of his time to Ceres. If Mr. Hill is terminated for reasons other
than cause or his agreement is not renewed at the end of its term, Mr. Hill will
receive two years of his retainer as severance pay. On April 10, 2001, we amended Mr. Hill's retainer
agreement to extend the term of the agreement until
June 30, 2003. The agreement is automatically renewable at the end of the term
for successive one year terms unless we givegave prior
written notice of termination. GLEN A. LAFFOON.On September 30, 2001, Mr. Laffoon served as Executive Vice PresidentHill resigned his
position and Assistant Secretary of Ceres and as President and Chief Executive Officer of
Central Reserve until his retirement on May 31, 2000. Pursuant to his retirementretainer agreement Mr. Laffoon was paid $160,000 on or before July 1, 2000 and an
additional $160,000 on January 31, 2001.terminated.
CHARLES E. MILLER, JR. Mr. Miller joined Ceres on October 1, 1998 as
Executive Vice President and Chief Financial Officer. On December 7, 1998, Mr.
Miller was also elected Executive Vice President and Chief Financial Officer of
Central Reserve. He became Treasurer of Central Reserve in January 1999. On
October 1, 1998, we entered into a three-year employment agreement with Mr.
Miller that provides for a base salary of $175,000 and a one-time payment of
$50,000 to induce Mr. Miller to enter into the agreement. On April 1, 1999, Mr.
Miller's salary was increased to $225,000 per year. Effective January 1, 2000,
19
Mr. Miller's salary was increased to $250,000 for the remainder of the term. If
we terminate Mr. Miller's employment other than for cause, Mr. Miller will be
entitled to severance pay equivalent to one year's salary. Additionally, Mr.
Miller was granted options to purchase 100,000 shares of our common stock at an
exercise price of $6.50. Of these, 40,000 vested immediately;immediately, 30,000 vested
October 1, 2000;2000, and the remaining 30,000 will vestvested on October 1, 2001. Unvested
options
36
38
become vested if Mr. Miller's employment is terminated because of a change of
control of Ceres, as defined in the agreement. The
agreement also provides for the reimbursement of reasonable expenses of
relocation. Under the agreement, Mr. Miller may receive cash bonuses or other
cash-incentive compensation as the Board of Directors may approve. On April 10,
2001, we amended Mr. Miller's employment agreement to extend the term of his
employment until June 30, 2003. Mr. Miller's employment agreement is
automatically renewable at the end of the term for successive one year terms
unless we give prior written notice of termination. Pursuant to the amendment,
Mr. Miller will be entitled to severance pay equal to 18 months' salary if we
terminate him without cause. In addition, he will be entitled to severance pay
equal to two years' salary in the event of a "change inof control" as defined in
the amendment. Mr. Miller will receive bonuses under the officer bonus plan.
MARK A. NIELSEN. Mr. Nielsen serves as Executive Vice President of our
Senior Health Division and as President of Continental General and Pyramid Life.
On July 26, 2000, we entered into an employment agreement with Mr. Nielsen for a
term of two years. Under this agreement, Mr. Nielsen would receive a salary of
$200,000 per year and each renewal year thereafter. Mr. Nielsen's employment
agreement provides that for each day of service under this agreement, the term
extends for an additional day until the end of the calendar year in which Mr.
Nielsen reaches age 65. Under this agreement, Mr. Nielsen is also eligible to
participate in the officer bonus plan. If we terminate Mr. Nielsen's employment
for any reason other than for cause, or if Mr. Nielsen terminates the agreement
for "good reason" as defined in the agreement, Mr. Nielsen will receive a
severance payment in an amount equal to his salary through the remaining term of
his agreement, but not less than two years and the amount of his most recent
annual bonus. Mr. Nielsen would also be entitled to outplacement services.
ANTHONY J. PINO. Mr. Pino serves as Executive Vice President of Ceres.
He served as Senior Vice President of Claims from August 1999 until his
promotion to Executive Vice President in February 2000. Mr. Pino and Central
Reserve entered into an employment agreement effective October 1, 1999 under
which Mr. Pino willwould receive a salary of $150,000 for the period of October 1, 1999
through October 1, 2000 and each renewal year.year thereafter. Effective January 1,
2000, his salary was increased to $200,000 for the remainder of the term. His
salary was increased again to $250,000. The agreement automatically renews for
succeeding one-yearone year terms, unless we provide 60-days60 days' advance notice. The current term runs through October 1, 2001. If we
terminate Mr. Pino's employment other than for cause, Mr. Pino will be entitled
to severance pay, equivalent to one year's salary. His agreement also provides
for reimbursement of business expenses and certain other fringe benefits. On
April 10, 2001, we amended Mr. Pino's employment agreement to extend the term of
thishis employment until June 30, 2003. Mr. Pino's employment agreement is
automatically renewable at the end of the term for successive one year terms
unless we give prior written notice of termination. Pursuant to the amendment,
Mr. Pino will be entitled to severance pay equal to 18 months' salary if we
terminate him without cause. In addition, he will be entitled to severance pay
equal to two years' salary in the event of a "change of control" as defined in
the amendment. Mr. Pino will receive bonuses under the officer bonus plan.
20
COMPENSATION COMMITTEE REPORT ON
EXECUTIVE COMPENSATION
OVERVIEW
The base compensation of most of our executive officers is governed by
individual employment agreements. An important goal is to attract and retain
corporate officers and senior staff and to motivate them to superior
performance. In determining the level and composition of compensation for our
executive officers, the Committee considers, among other things, the
responsibilities of the office, the experience and background of the individual,
an evaluation of the individual's contribution to Ceres and available
information as to the practices of other insurance companies. In addition, in
2000,2002, the Committee engaged an outside consultant to review officerofficers' salaries
and annual incentive plans and make recommendations to the Committee.
37
39
The Ceres Group, Inc. 1998 Key Employee Share Incentive Plan is
designed to provide incentives to executive officers and other key employees by
encouraging them to acquire a larger share of ownership in Ceres, thereby
increasing their proprietary interest in our business and enhancing their
personal financial interest in our success. This plan permits the grant of
non-transferable options to purchase our common stock, which grants may or may
not qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986.Code. The plan
also permits the grant of non-transferable options to receive payments based on
the appreciation of our stock. In making any
grants under the plan, the Committee does so based upon merit and keeping with
our overall objective of enhancing our profitability and stockholder value.
BASE SALARY
Even though the salaries of most of our executive officers' salariesofficers are
determined by their individual employment agreements, the Compensation Committee
reviews the salaries of our executive officers each year and adjusts salaries,
in its discretion, based on a subjective evaluation of individual performance
and comparisons to peers inside and outside Ceres.
ANNUAL INCENTIVE AWARDS
Annual incentive awards are designed to focus management attention on
our performance. In March 2001, the Board of Directors, based on the
recommendation ofThe 2002 bonus plan has not been finalized by the Compensation
Committee, adopted theCommittee.
The 2001 Officer Bonus
Plan. Under thisbonus plan bonuses will bewas based on both corporate and individual
performance goals. If we reach a setAn earnings per share target forwas set, and if reached, the
year, the
bonus will be paid at a percentage of the officer's annual salary. The salary percentage
bonus, ranging from 50% to 15% of annual salary, will bewould have been determined by
the officer's level within Ceres. The bonus if earned, will bewould have been paid 75% in cash and
25% in restricted stock with two yeartwo-year cliff vesting. If an officer electselected to
take up to 50% of the entire bonus payout in restricted stock, that
officerhe would receivehave
received a 20% premium on the additional stock received. No bonuses were paid
under the plan.
21
The 2000 bonus plan provided for two equal bonus poolsplans for selected
senior officers and for our executive officers. Bonuses were distributed out of
each pool pro rata based on the base salary of the individual officer. Both
pools were based on minimum achievement of pre-tax earnings targets. Bonuses
were paid 50% by a formula and 50% by discretion. The formula bonuses were paid
50% in cash and 50% in shares of our common stock. The bonus was earned in 2000,
but was paid in April 2001.
The 1999 bonus program for our executive officers and other key
employees became effective with the achievement of a minimum pre-tax profit of
$16 million. Eligibility for the 1999 bonus program was based on 1999 salary and
level of corporate responsibility. The bonus pool for eligible officers was 10%
of the 1999 net after-tax income. The bonus was paid 50% by formula and 50% by
discretion. The discretionary payment was based on the officer's
38
40
performance, length of tenure and corporate expectations for 1999. The bonus was
paid 25% in our stock, 25% in cash and 50% in options. The bonus was earned in
1999 but was paid in the second and third quarters of 2000.
COMPENSATION OF OUR CHIEF EXECUTIVE OFFICER
Mr. Nauert's compensation is governed by his employment agreement.
Effective July 1, 2001, we entered into a new employment agreement with Mr.
Nauert. Under this agreement, Mr. Nauert doeswill receive $750,000 per year in base
salary. In addition, Mr. Nauert is entitled to quarterly stock awards on the
first day of each calendar quarter in shares of our common stock equal to
$125,000 divided by the average closing price of our common stock for the
calendar quarter immediately preceding the payment. On October 1, 2001, Mr.
Nauert received a stock award equal to 28,403 shares of our common stock. On
January 1, 2002, Mr. Nauert received a stock award equal to 38,226 shares of our
common stock. Mr. Nauert will also receive a cash payment equal to the federal,
state and local taxes payable by Mr. Nauert on the stock awards. Further, on
April 10, 2001, Mr. Nauert was granted stock options to purchase 250,000 shares
of our common stock. These options will vest April 10, 2003. Mr. Nauert was
eligible to participate in our officer bonus plan, with a potential to earn 100%
of his base salary if we had reached certain set target levels.
Under his previous employment agreement, Mr. Nauert did not receive an
annual salary under his current agreement. Rather,
his current employmentsalary. That agreement iswas composed of (1) stock awards equal to $1
million of our common stock per year, plus an amount equal to the taxes payable
on such awards, (2) non-qualified stock options to purchase 500,000 shares of
our common stock, which were granted in 1998, and (3) incentive pay equal to 5%
of the amount by which our pre-tax income for such year exceeds specified
targets. Under thethat agreement, Mr. Nauert iswas obligated to retain ownership of
at least 900,000 shares of our common stock unless we release himreleased from this
obligation. In addition, Mr. Nauert maywas eligible to receive cash bonuses or
other incentive compensation as the Board approves.
Effective July 1, 2001, we entered into a new employment agreement with
Mr. Nauert. Under this agreement, Mr. Nauert will receive $750,000 per year in
base salary. In addition, as part of the new agreement, we are involved in
ongoing discussions with Mr. Nauert regarding the performance-based targets that
if achieved could entitle Mr. Nauert to receive stock awards with a value at the
time of issuance of up to $500,000 per year and tax payments equal to the
federal, state and local taxes payable by Mr. Nauert on the stock awards.
Further, on April 10, 2001 Mr. Nauert was granted stock options to purchase
250,000 shares of our common stock. These options will vest April 10, 2003. Mr.
Nauert will participate in our officer bonus plan, with a potential to earn 100%
of his base salary if we reach certain set target levels.may have approved.
For a more detailed description of Mr. Nauert's current and newformer
employment agreement, see "Employment Agreements - Peter W. Nauert."
COMPENSATION COMMITTEE
WILLIAM J. RUH
BRADLEY E. COOPER
RODNEY L. HALE
WILLIAM J. RUH
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During part of the year ended December 31, 2000,2001, the members of the Compensation Committee included Messrs.
Cavataio,Ruh, Cooper and Ruh. For a
discussionHale, none of transactions with these directors, see "Certain Related
Transactions."
39whom were officers or employees of the Company.
22
41
PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return to
the cumulative total return of the University of Chicago Center for Research in
Security Prices ("CRSP") Nasdaq Stock Market Index and the CRSP Nasdaq Insurance
Stocks Index. (Assumes $100 invested on December 31, 1995,1996, in each of three
indices and dividends reinvested.)
[GRAPH]
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
CERES GROUP, INC.Ceres Group, Inc. $100.0 $66.1 $133.9 $90.3 $77.4 $47.6
Nasdaq Stock Market 100.0 86.0 56.8 115.1 77.6 66.5
NASDAQ STOCK MARKET122.5 172.7 320.8 193.0 153.1
Nasdaq Insurance Stocks 100.0 123.0 150.7 212.5 394.8 237.4
NASDAQ INSURANCE STOCKS 100.0 114.0 167.3 149.0 115.6 145.2146.7 130.7 101.4 127.3 136.5
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 20, 2001,March 25, 2002, information
regarding the beneficial ownership of our common stock based on 33,901,112
shares outstanding by:
- each stockholder known to us to be the beneficial owner of more
than 5% of our common stock,
- each director,
- each executive officer included in our 20002001 executive
compensation table, and
- our directors and executive officers as a group.
40
42
The information contained in this table does not include:group, and
- 295,000 shares of our common stock issuable under
non-qualified stock options that are outstanding but not
presently exercisable,
- 1,508,337 shares of our common stock issuable under stock
options that are outstanding but not presently exercisable
pursuanteach person or entity party to the 1998 Key Employee Share Incentive Plan,
- 338,000 shares of our common stock issuable under stock
options that are outstanding but not presently exercisable
pursuant to the 1998 Employee Stock Option Plan,
- 78,706 shares of our common stock issuable under stock options
that are outstanding and presently exercisable pursuant to the
1999 Special Agents' Stock Option Plan; and
- shares issuable upon the exercise of a put option granted to
the QQLink Class A common stockholders to convert their shares
of QQLink Class A common stock into shares of our common stock
beginning November 3, 2003.voting agreement.
23
BENEFICIAL OWNERSHIP(1)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
EQUITY GUARANTEE
NAME AND ADDRESS(2)ADDRESS (2) SHARES WARRANTS(3) WARRANTS(4) OPTIONS(5) TOTAL PERCENT
-------------------- ------ ----------- ----------- ---------- ----- -------
International Managed Care, LLC(6)LLC (6) 3,749,285 1,422,184 -- -- 5,171,469 27.4%14.6%
54 Thompson Street
New York, New York 10012
International Managed Care (Bermuda), 1,826,171 785,393 -- -- 2,611,564 14.3%
(Bermuda),7.5%
L.P.(6)
54 Thompson Street
New York, New York 10012
Peter W. Nauert(6)Nauert (6) (7) 1,461,1211,661,162 569,036 500,000 350,000 2,880,157 15.3%500,000 3,230,198 9.1%
Lunn-Ceres II, LLC(6)LLC (6) 1,434,000 -- -- -- 1,434,000 8.2%4.2%
One North Franklin, Suite 750
Chicago, Illinois 60606
Lunn-Ceres, LLC(6)LLC (6)(8) 400,000 -- -- -- 400,000 2.3%1.2%
One North Franklin, Suite 750
Chicago, Illinois 60606
41
43
BENEFICIAL OWNERSHIP(1)
-------------------------------------------------------------------------------
EQUITY GUARANTEE
NAME AND ADDRESS(2) SHARES WARRANTS(3) WARRANTS(4) OPTIONS(5) TOTAL PERCENT
-------------------- ------ ----------- ----------- ---------- ----- -------
Lunn-Partners Small Cap Value Equity 25,000 -- -- -- 25,000 *
Fund, L.P.(6)
One North Franklin, Suite 750
Chicago, Illinois 60606
Lunn-Partners Micro Cap Value Equity 16,666 -- -- -- 16,666 *
Fund, L.P.(6)
One North Franklin, Suite 750
Chicago, Illinois 60606
Richard M. Osborne(6)(9) 778,210 366,236 300,000 -- 1,444,446 8.0%
8500 Station Street, Suite 113
Mentor, Ohio 44060
United Insurance Company of America(10) 1,310,454 -- -- -- 1,310,454 7.0%
One East Wacker Drive
Chicago, Illinois 60601
Castle Creek Capital Partners 1,171,725 -- -- -- 1,171,725 6.7%3.5%
Fund IIa, LP(6)LP (6)
6051 El Tordo
Rancho Santa Fe, CA 92067
Castle Creek Capital Partners Fund 494,942 -- -- -- 494,942 2.8%1.5%
IIb, LP(6)LP (6)
6051 El Tordo
Rancho Santa Fe, CA 92067
Medical Mutual of Ohio(6)Ohio (6) 480,009 184,735 -- -- 664,744 3.8%
1200 Huron Road, 10th Floor2.0%
1220 E. Ninth Street
Cleveland, Ohio 4411544114
LEG Partners SBIC, L.P.(6) 240,003 92,367 -- -- 332,370 1.9%1.0%
230 Park Avenue, 19th Floor
New York, New York 10169
Michael A. Cavataio(6)(11) 231,818Cavataio (6) (9) 240,318 92,367 -- -- 324,185 1.8%332,685 1.0%
3125 Ramsgate Road
Rockford, Illinois 61114
Billy B. Hill, Jr.(6)(12) 102,999 23,841 100,000 25,000 251,840 1.4%
Joseph Cusimano IRA(6)IRA (6) 131,912 46,183 -- -- 178,095 1.0%*
c/o Lunn Partners
One North Franklin, Suite 750
Chicago, Illinois 60606
4224
44
BENEFICIAL OWNERSHIP(1)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
EQUITY GUARANTEE
NAME AND ADDRESS(2)ADDRESS (2) SHARES WARRANTS(3) WARRANTS(4) OPTIONS(5) TOTAL PERCENT
-------------------- ------ ----------- ----------- ---------- ----- -------
Howard R. Conant(6)Conant (6) 90,909 46,184 -- -- 137,093 *
c/o Lunn Partners
One North Franklin, Suite 750
Chicago, Illinois 60606
Charles E. Miller, Jr.(6)(13) 18,470 (10) 29,606 3,016 -- 70,000 91,486125,000 157,622 *
Glen A. Laffoon(6)(14)Laffoon (6) (11) 80,978 -- -- -- 80,978 *
Val Rajic(6)Rajic (6) -- -- -- 75,000 75,00025,000 25,000 *
Carramore Limited(6)Limited (6) 66,666 -- -- -- 66,666 *
C/c/o Lunn Partners
One North Franklin, Suite 750
Chicago, Illinois 60606
Bruce Henry (6) 37,581 7,239 -- 40,000 84,820 *
Andrew A. Boemi (6) (14) 31,000 -- -- 15,000 46,000 *
Ralph Alexander (6) (13) 8,947 8,177 -- 25,000 42,124 *
Alfa Laval, Inc.(6) 41,666 -- -- -- 41,666 *
c/o The Northern Trust Co.
40 Broad Street, 8th Floor
New York, New York 10004
Michael A. Crowe(6)Crowe (6) 41,666 -- -- -- 41,666 *
c/o Lunn Partners
One North Franklin, Suite 750
Chicago, Illinois 60606
Bruce Henry(6) 33,169 7,239 -- -- 40,408 *
Anthony Pino(6) 24,288Pino (6) 24,897 2,681 -- -- 26,96927,578 *
Sally J. Krogh(6)Krogh (6) 25,000 -- -- -- 25,000 *
c/o Stifel, Nicolaus and Co., Inc.
4343 E. State Street
Rockford, Illinois 61108
Kenneth A. Mannino(6)(15)Mannino (6) (12) 25,000 -- -- -- 25,000 *
c/o Stifel, Nicolaus and Co., Inc.
4343 E. State Street
Rockford, Illinois 61108
Ralph Alexander(6)(16) 8,947 8,177John Kertis (6) 3,101 1,340 -- 20,000 24,441 *
Richard Kusnic (6) 5,502 1,340 -- 17,12415,000 21,842 *
Marc C. Krantz(6) 6,967 2,310Ronald Kotowski (6) 4,928 134 -- -- 9,27715,000 20,062 *
1375 E. Ninth Street, 20th Fl.
Cleveland, Ohio 44114
4325
45
BENEFICIAL OWNERSHIP(1)
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
EQUITY GUARANTEE
NAME AND ADDRESS(2)ADDRESS (2) SHARES WARRANTS(3) WARRANTS(4) OPTIONS(5) TOTAL PERCENT
-------------------- ------ ----------- ----------- ---------- ----- -------
Marc C. Krantz (6) 6,967 2,310 -- -- 9,277 *
1375 E. Ninth Street, 20th Fl.
Cleveland, Ohio 44114
Krantz Family Limited Partnership(6)Partnership (6) 5,965 2,309 -- -- 8,274 *
1375 E. Ninth Street, 20th Fl.
Cleveland, Ohio 44114
John Cochrane(6) 6,000 -- -- -- 6,000 *
c/o Lunn Partners
209 S. LaSalle, Suite 810
Chicago, Illinois 60604
Richard Kusnic(6) 5,152 1,340 -- -- 6,492 *
George Gehringer(6) 4,941Gehringer (6) 6,316 671 -- -- 5,61210,000 16,987 *
Mark A. Nielsen 4,4665,696 -- -- -- 4,4665,696 *
Ronald Kotowski(6) 4,195 134 -- -- 4,329 *
John Kertis(6) 2,682 1,340 -- -- 4,022 *
Andrew A. Boemi(6)(17) 4,000Robert Lunn (15) -- -- -- 4,000 *
Robert Lunn(18) 0 -- -- --
0 0%
Bradley E. Cooper 0(16) -- -- -- 0 0%-- -- --
Susan S. Fleming 0 -- -- -- 0 0%-- -- --
Rodney L. Hale 0 -- -- -- 0 0%-- -- --
William J. Ruh (19) 0(17) 50,000 -- -- -- 0 0%50,000 *
Robert A. Spass (20) 0(16) 50,000 -- -- -- 0 0%50,000 *
All directors and executive officers 1,777,3322,130,260 674,339 500,000 420,000 3,371,671 17.7%680,000 3,984,599 11.1%
as a group (13 individuals)
Voting and stockholders agreements 13,040,522 3,657,743 900,000 520,000 18,118,265 80.4%12,413,888 3,267,666 500,000 790,000 16,971,554 44.1%
group(6)
- -------------
* Less than 1%
(1) Unless otherwise indicated, we believe that all persons named in the
table have sole investment and voting power over the warrants, options
and/or shares of stock owned.
44
46
(2) Unless otherwise indicated, the address of each of the beneficial
owners identified is c/o Ceres Group, Inc., 17800 Royalton Road,
Cleveland, Ohio 441136.44136.
(3) Warrants to purchase shares at $5.41 per share exercisable any time
until July 2, 2005. These warrants are known as the equity warrants.
The number of shares issuable upon the exercise of the equity warrants
and the original exercise price of $5.50 per share was adjusted on July
25 and July 26, 2000 in connection with the acquisition of The Pyramid
Life Insurance Company.
26
(4) Warrants to purchase shares at $6.00 per share exercisable any time
until five years from the date of issuance (December 16, 1997 and July
3, 1998). These warrants are known as the guarantee warrants.
(5) Options to purchase shares that are presently or will become
exercisable within 60 days.
(6) All of these shares, equity warrants, guarantee warrants and options,
totaling 18,118,26516,971,554 or 80.4%44.1%, are subject to a voting agreement and/or
stockholders agreement. Shares, equity warrants, guarantee warrants
and stockholdersoptions, totaling 15,345,890 or 39.9%, are subject to the voting
agreement and asshares, equity warrants, guarantee warrants and options,
totaling 15,304,889 or 39.8% are subject to the stockholders
agreement. As a result, each of these persons may be deemed to
beneficially own, as a part of the group, all of these shares. Each of
these persons disclaims beneficial ownership of the shares
beneficially owned by the other persons who are parties to the voting
and stockholders agreements, except that the Castle Creek funds are
not subject to the stockholders agreement and each of the
Lunn-Ceres
II, Alfa Laval, Mr. Crowe, Lunn Partners Micro Cap, Lunn Partners
Small Cap and Carramore Limited are not subject to the voting
agreement.
(7) Includes 1,259,2891,325,920 shares, 569,036 equity warrants and 500,000
guarantee warrants held by the Peter W. Nauert Revocable Trust, of
which Mr. Nauert is the trustee.
(8) On December 14, 2000, Lunn-Ceres, LLC distributed its shares to its
members on a prorata basis as follows: Peter H. Huizenga - 66,668;
Kevin F. Flynn June, 1992 Non-exempt Trust - 40,000; KMK & Associates -
33,334; Howard Conant, Jr. - 33,333; Howard R. Conant - 33, 333; Joseph
Cusimano IRA - 33,333; Peer Pedersen - 33,333; Richard A. Forsythe
Revocable Trust - 33,333; Arthur A. Watson III Trust - 20,000; Michael
L. Keiser - 13,334; Cedar Stone, LLC - 13, 333; J. Douglas Gray - 13,
333; Colleen Megan Watson Trust - 13, 333; Eva Losacco & Michael
Losacco - 13,333; and Mark Molloy - 6,667. (9) Includes 778,210 sharesThe members were joined as
parties to the Voting Agreement and 366,236 equity warrants held by Turkey
Vulture Fund XIII, Ltd., an Ohio limited liability company, of which
Mr. Osborne is the sole Manager.
(10) Represents $7.5 million of our convertible voting preferred stockStockholders Agreement at the initial conversion price of $6.145 per share, plus accrued but
unpaid dividends at April 20, 2001. The convertible voting preferred
stock is convertible at any time. Dividends are payable annually in
sharestime
of the convertible voting preferred stock.
(11)distribution.
(9) Includes 54,682 shares and 26,164 equity warrants held by the
Mercantile Bank of Northern Illinois, Trustee of the Conseco Deferred
Compensation Plan F/B/O Michael Cavataio and 5,385 shares held by
Stifel, Nicolaus and Co., Custodian for Michael A. Cavataio IRA.
(12) Includes 50,455 shares and 23,841 equity warrants held by Karon Hill,
Mr. Hill's wife.
(13)(10) Includes 7,100 shares and 3,016 equity warrants held by First Union
National Bank C/F Charles E. Miller, Jr. R/O IRA.
(14)(11) Includes 41,150 shares held by Mr. Laffoon's wife and 3,000 shares held
jointly with his wife.
(15)(12) Shares held by Stifel, Nicolaus and Co., Custodian for Kenneth A.
Mannino IRA.
45
47
(16)(13) Includes 8,177 equity warrants held by First Clearing Corp. Custodian
Ralph Alexander IRA.
(17)(14) Includes 3,000 shares held in trust for Mr. Boemi's children.
(18)(15) Mr. Lunn is the beneficial owner of 227 shares held through his limited
partnership interests in limited partnerships that invested in
Lunn-Ceres II, LLC.
(19)(16) Messrs. Cooper and Spass are managing partners of an indirect general
partner of each of the International Managed Care funds. Both Mr.
Cooper and Mr. Spass disclaim a beneficial ownership of all shares and
equity warrants owned by the International Managed Care funds.
(17) Mr. Ruh is a managing partner of Castle Creek Capital, general partner
of Castle Creek Capital Partners Fund IIa, LP and Castle Creek Capital
Partners Fund IIb, LP. Mr. Ruh disclaims beneficial ownership of all
shares owned by the Castle Creek funds.
(20) Mr. Spass is a managing partner of an indirect general partner of each
of the International Managed Care funds. Mr. Spass disclaims a
beneficial ownership of all shares and equity warrants owned by the
International Managed Care funds.27
VOTING AGREEMENT
We are a party to an Amended and Restated Voting Agreement, originally
dated as of July 1, 1998 and amended on July 1, 2000.2000 and November 30, 2001. The
voting agreement was amended and restated in connection with the acquisition of
Pyramid Life to provide the Castle Creek funds a boardBoard seat designation. The
voting agreement will remain in effect until July 2, 2003, unless earlier
terminated. The voting agreement, as amended, provides that the parties to the
agreement will cause our Board of Directors to consist of nine directors, some
or all, as applicable, of whom will be the following individuals:
- fourFour individuals designated by the International Managed Care
funds, so long as the International Managed Care funds and their
officers, directors, employees and affiliates own shares equal to
at least 3,259,092 shares of our common stock,stock; three individuals
designated by the International Managed Care funds, so long as the
International Managed Care funds own at least 2,172,728 shares of
our common stock, but less than 3,259,092 shares,shares; two individuals
designated by the International Managed Care funds, so long as the
International Managed Care funds own at least 1,086,364 shares of
our common stock, but less than 2,172,728 shares,shares; and one
individual designated by the International Managed Care funds, so
long as the International Managed Care funds own at least 434,545
shares of our common stock, but less than 1,086,364 shares;1,086,364.
- twoTwo individuals designated by Strategic Acquisition Partners, LLC,
so long as Strategic Partners and its affiliates own at least
631,976 shares of our common stock,stock; and one individual designated
by Strategic Partners, so long as Strategic Partners
and its affiliates own at least
126,395 shares of our common stock, but less than 631,976 shares;shares.
and
- one individual designated by Turkey Vulture Fund XIII, Ltd.,
so long as Turkey Vulture Fund and its affiliates own at least
180,228 shares of our common stock; and
46
48
- oneOne individual designated by the Castle Creek funds so long as the
Castle Creek funds and their affiliates own at least 416,667
shares of our common stock.
Currently the International Managed Care funds have the right to designate four
directors, Strategic Partners has the right to designate two, and the Castle
Creek funds have the right to designate one director. The director(s) designated
by:
- the International Managed Care funds are Messrs. Cooper, Spass
and Lunn and Ms. Fleming;Fleming,
- Strategic Partners are Messrs. Cavataio and Nauert;Nauert, and
- Castle Creek is Mr. Ruh.
In connection, with the December 2001 public offering, the voting
agreement was amended to release Richard Osborne, Turkey Vulture Fund has not opted to designate a director at this time
but retainsXIII,
Ltd., Billy Hill and Karon Hill from the right to do so at any time.agreement.
In addition, the voting agreement prohibits the transfer of any shares
of our common stock owned by the parties to the agreement except for transfers:
- pursuant to an effective registration statement;statement,
28
- pursuant to Rule 144 under the Securities Act;Act, or
- where the purchaser agrees to be bound by the provisions of the
agreement.
However, the voting agreement does not prohibit the transfer of the equity
warrants or the guarantee warrants or the shares issuable upon their exercise.
This agreement may render more difficult or tend to discourage mergers,
acquisitions, tender offers or proxy contests. More than two-thirds of the
holders under the voting agreement, who are also directors, have agreed that
they would be in favor of terminating the agreement if our stockholders vote at
this Annual Meeting to divide our Board of Directors into three classes, each
with three directors, serving staggered terms of office of three years as
outlined in Proposal 1. These holders also have indicated that they would vote
for such a staggered board.
STOCKHOLDERS AGREEMENT
We and some of our stockholders have entered into a stockholders
agreement, dated as of July 1, 1998, as amended on February 17, 1999 and July
25, 2000, that provides that each of these stockholders will have certain rights
in connection with certain sales of shares by the other parties to the
stockholders agreement. Specifically, if the International Managed Care funds
sell shares representing more than 20% of our outstanding common stock, the
International Managed Care funds have the right to require each of the other
parties to sell a portion of his, her or its shares, which represents the same
percentage of the fully diluted shares held by that stockholder as the shares
being sold by the International Managed Care funds represent of the fully
diluted shares it holds. For example, if the International Managed Care funds
were selling 75% of its fully diluted stock, it could require each of the other
parties to also sell 75% of their fully diluted stock. All shares transferred
pursuant to this provision of the stockholders agreement will be sold at the
same price and time as, and otherwise be treated identically with, the shares
being sold by the International Managed Care funds.
The stockholders agreement also provides that if any party desires to
sell shares, other than a sale in an underwritten public offering pursuant to an
effective registration statement under the Securities Act, representing more
than 20% of our outstanding common stock, then the selling stockholder must make
an offer to each of the other parties to the stockholders agreement to include
in the proposed sale a portion of that stockholder's shares which represents the
same percentage of that stockholder's fully diluted shares as the shares being
sold by the selling stockholder represents of its fully diluted shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2000,2001, we reimbursed Geneva Capital, Inc., a company owned by Peter
W. Nauert, approximately $253,000$281,900 in connection with our proportionate share
of the use of a plane leased by Geneva Capital.
In 1999, we reimbursed Geneva Capital
approximately $104,000 in connection with the use of the plane.
Effective July 26, 2000, we acquired The Pyramid Life Insurance Company
from Unitrin Insurance Company of America, a subsidiary of Unitrin, Inc. Of the
$67.5 million purchase price, $20 million was obtained from the proceeds of the
sale of 3,333,334 shares of our common stock in a private placement offering to
Castle Creek Capital Fund IIa, LP, Castle Creek Capital Partners Fund IIb, LP,
and Lunn-Ceres II, LLC or its designees for $6.00 per share. Mr. Ruh, one of our
directors, has been an executive vice president and founder of Castle Creek
Capital, an investment management company, since 1995. Mr. Lunn, one of our
directors, has been the
4729
49
managing partner of Lunn Partners, LLC since its formation in 1994. Lunn
Partners is the managing member of Lunn-Ceres II, LLC. In addition, we paid Lunn
Partners a $500,000 placement fee in connection with the Pyramid offering.
In order to comply with certain state insurance regulatory requirements
that prohibit providing group life insurance unless at least ten lives are
insured, we formed CRL Preferred Group, Inc., International Professional Group,
Inc., North America Preferred Employers, Inc., and Keystone Employers Group,
Inc. to serve as trustees of trusts established to provide group life insurance
to employers with less than ten employees. In compliance with state regulations
that require that the stockholders of these "trustee corporations" be natural
persons, certain individuals hold, for our benefit, all of the outstanding
shares of these trustee corporations and are directors of the corporations. None
of the officers or directors of these corporations receives any compensation for
serving in that capacity.
For a discussion of the employment agreements we have with Messrs.
Nauert, Miller, Laffoon and Hill, see "Employment Agreements."
STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
A stockholder intending to present a proposal to be included in the
proxy statement for our 20022003 Annual Meeting of Stockholders or to nominate a
director for election at the 2002 Annual Meeting, must deliver the
proposal or notice to our Secretary at our principal executive offices no later
than January
1,December 26, 2002. Any stockholder proposal or nomination must also comply with the
requirements of our Bylaws and, in the case of a stockholder proposal, Rule 14a-8 of the Exchange Act. No stockholder proposals were
received for inclusion in this Proxy Statement.
A stockholder may also present a proposal directly to our stockholders
at the 20022003 Annual Meeting. However, if we do not receive notice of the
stockholder proposal prior to the close of business on March 17, 2002,1, 2003, Securities
and Exchange Commission rules permit management to vote proxies in their
discretion on the proposed matter. If we receive notice of the stockholder
proposal on or before the close of business on March 17, 2002,1, 2003, management can
only vote proxies in their discretion if they advise stockholders in our 20022003
Proxy Statement about the nature of the proposed matter and how management
intends to vote on the matter.
OTHER MATTERS
If the enclosed proxy card is validly executed, returned, and not
revoked, the shares represented thereby will be voted in accordance with any
specification made by the stockholder. In the absence of any such specification,
proxies will be voted FOR the Staggered Board Amendment in Proposal 1 and the
election of the nine named nominees FORin Proposal No. 2, FOR Proposal No. 3, FOR Proposal No. 4 and FOR Proposal No. 5.
48
502.
If any other matters shall properly come before the meeting, the
persons named in thethat proxy, or their substitutes, will vote thereon in
accordance with their judgment. The Board of Directors does not know of any
other matters whichthat will be presented for action at the meeting. Representatives
of Ernst & Young are expected to attend the Annual Meeting to answer appropriate
questions and make a statement if they desire.
You are urged to sign and return your proxy card promptly to make
certain your shares will be voted at the annual meeting. For your convenience, a
return envelope is enclosed requiring no additional postage if mailed in the
United States.
By order of the Board of Directors,
/s/ Peter W. Nauert
Peter W. Nauert
Chairman of the Board
Date: May 1, 2001
49April 15, 2002
30
51
ANNEXES
52
ANNEX A
1998 KEY EMPLOYEE SHARE INCENTIVE PLANCERTIFICATE OF AMENDMENT TO CERES' BYLAWS
-----------------------------------------
(New material underlined. Material to be deleted shown as stricken)
5. [Employees] Persons Eligible for Grants.
(A) GENERAL. GrantsSection 2.2. Number.
The Board will consist of [no less than six and no more than
fifteen] *[nine]* members[, or such other number of directors
as may be madedetermined from time to time by resolution of the
directors of the Corporation].
*[Notwithstanding anything contained in these Bylaws to those key
employees, NON-EMPLOYEE DIRECTORS, CONSULTANTS AND ADVISORS of
Ceres or of a subsidiary corporation who are designated by the
Committee in its sole and exclusive discretion. Key employees
may include, butcontrary, this Section 2.2 shall not necessarily be limited, employees
who are also membersaltered, amended or
repealed except by an affirmative vote of at least two-thirds
of the outstanding shares of all capital stock entitled to
vote at a stockholders' meeting duly called for such
purpose.]*
Section 2.3. Election; Resignation; Removal; Vacancies.
*[(a) The Corporation has elected, and the stockholders
have approved at the 2002 Annual Meeting of
Stockholders, to divide the Board of Directors (excluding
members of the
Committee), officers of Ceres, and officers of
any subsidiary corporation. STOCK OPTIONS MAY BE GRANTED TO
NON-EMPLOYEE DIRECTORS WHILE ACTUALLY SERVING ON THE BOARD OF
CERES OR A SUBSIDIARY CORPORATION, AND CONSULTANTS AND
ADVISORS RETAINED BY CERES OR A SUBSIDIARY CORPORATION AT THE
TIME OF GRANT. However, Stock Options intended to qualify as
Incentive Stock Options shall only be granted to employees
while actually employed by Ceres or a subsidiary corporation.
The Committee may grantCorporation into no more than three designated
classes. Each class shall have one-third of the total
directors, but in no event more than a combined total
of nine directors in accordance with Section 2.2
above. Beginning at the 2002 Annual Meeting, the
Class I directors shall be elected to hold office for
a term expiring at the next succeeding annual
meeting, Class II directors shall be elected to hold
office for a term expiring at the second succeeding
annual meeting and Class III directors shall be
elected to hold office for a term expiring at the
third succeeding annual meeting. Thereafter, only one
Option, with or without
SARS, to the same key employee, DIRECTOR, CONSULTANT OR
ADVISOR. No Optionclass of directors will be granted toup for re-election at any
key employee,
DIRECTOR, CONSULTANT OR ADVISOR during any periodannual meeting of time when
such key employee, DIRECTOR, CONSULTANT OR ADVISOR is onstockholders and each class of
directors will be elected for a leavethree-year term.]*
[At the first annual meeting of absence.
(B) MAXIMUM GRANT TO ANY EMPLOYEE. THE MAXIMUM NUMBER OF COMMON
SHARES WITH RESPECT TO WHICH OPTIONS OR SARS MAY BE GRANTED TO
ANY EMPLOYEE UNDER THIS PLAN SHALL NOT EXCEED 500,000
ANNUALLY; PROVIDED, HOWEVER, THIS LIMITATION MAY BE INCREASED
OR ADJUSTED WITH RESPECT TO ANY EMPLOYEE BY ONE OR MORE OF THE
FOLLOWING EVENTS: (I) THE DEEMED EXERCISE OF AN OPTION WHEN A
TANDEM SAR IS EXERCISED BY THE EMPLOYEE, PURSUANT TO
SECTION 6, (II) THE INCREASE, DECREASE OR EXCHANGE OF COMMON
SHARES, PURSUANT TO SECTION 6, AND (III) THE SURRENDER OF AN
OPTION AND THE GRANT OF A NEW OPTION BY THE EMPLOYEE, PURSUANT
TO SECTION 7(H). ALL ADJUSTMENTS TO THE LIMITATION ON GRANTS
OF OPTIONS OR SARS PROVIDED FOR IN THIS SECTION SHALL BE
DETERMINED BY THE COMMITTEE, PURSUANT TO SECTION 4.
6. SHARES SUBJECT TO THE PLAN; ADJUSTMENTS TO OPTIONS; GRANTS. Upon the
approval of the Plan bystockholders and at
each subsequent annual meeting, the stockholders
[One Million (1,000,000)will elect directors, each of whom will hold office
for a term of one year or until his or her successor
is elected and qualified.]
TWO MILLION
(2,000,000) presently authorized but unissued Common Shares of Ceres shall be
reserved, allotted and set aside for issuance under the Plan, subject to the
next sentence and Section 7(h). If a SAR is granted in tandem with an Option
pursuant to Section 8 and such SAR is thereafter exercised in whole or in part,
then such Option or the portion thereof to which the duly exercised SAR relates
shall be deemed to have been exercised for purposes of such Option, but the
Common Shares which were issuable to such Option or the portion thereof to which
the duly exercised SAR relates*[(b)]* Any director may be made available for reoffering under the
Plan to any eligible key employee.
A-1
53
If,resign at any time subsequentupon written
notice to the date of adoption ofCorporation.
*[(c)]* Any director [or the Planentire Board] may be removed
with [or without] cause by the Boardvote of Directors, the number of Common Shares are increased or
decreased, or changed into or exchanged for a different number or kind of shares
of stock or other securities of Ceres or of another corporation (whether as a
result of a stock split, stock dividend, combination or exchange of shares,
exchange for other securities, reclassification, reorganization, redesignation,
merger, consolidation, recapitalization or otherwise): (i) there shall
automatically be substituted for each Common Share subject to an unexercised
Stock Option or SAR (in whole or in part) granted under the Plan, the number and
kind of shares of stock or other securities into which each outstanding Common
Share shall be changed or for which each such Common Share shall be exchanged;
and (ii) the option price per Common Share or unit of securities shall be
increased or decreased proportionately so that the aggregate purchase price for
the securities subject to a Stock Option or SAR shall remain the same as
immediately prior to such event. In addition to the foregoing, the Committee
shall be entitled in the event of any such increase, decrease or exchange of
Common Shares to make other adjustments to the securities subject to a Stock
Option or SAR, the provisions of the Plan, and to any related Stock Option or
SAR agreements (including adjustments which may provide for the elimination of
fractional shares), where necessary to preserve the terms and conditions of any
Grants hereunder.
A-2
54
ANNEX B
QQLINK.COM, INC.
2000 KEY EMPLOYEE SHARE INCENTIVE PLAN
1. GENERAL. This 2000 Key Employee Share Incentive Plan ("Plan")
provides key employees of QQLink.com, Inc. ("QQLink"), its parent corporation or
subsidiary corporations of QQLink with the opportunity to acquire or expand
their equity interest in QQLink by making available for award or purchase shares
of Class A common stock, par value $0.001 per share, of QQLink ("Common
Shares"), through the granting of nontransferable options to purchase Common
Shares ("Options") and the granting of nontransferable options to receive
payments based on the appreciation of Common Shares ("SARs"). Options and SARs
are collectively referred to herein as "Grants;" an individual grant of Options
is individually referred to herein as a "Grant QQLink intends that key employees
may be granted, simultaneously or from time to time, Options that qualify as
incentive stock options ("Incentive Stock Options") under Section 422 of the
Internal Revenue Code of 1986, as amended ("Code"), or Options that do not so
qualify ("Non-qualified Stock Options"). No provision of the Plan is intended or
shall be construed to grant employees alternative rights in any Incentive Stock
Option granted under the Plan so as to prevent such Option from qualifying under
Section 422 of the Code.
2 PURPOSE OF THE PLAN. The purpose of the Plan is to provide incentives
to key employees of QQLink, its parent corporation or subsidiary corporations of
QQLink, by encouraging such employees to acquire a larger share ownership in
QQLink, thereby increasing their proprietary interest in QQLink's business and
enhancing their personal financial interest in its success. For purposes of the
Plan, a "subsidiary corporation" consists of any corporation fifty percent (50%)
of the shares of which are directly or indirectly owned or controlled by QQLink.
For purposes of the Plan, a "parent corporation" consists of any corporation
that owns or controls fifty percent (50%) of the voting shares of QQLink.
3. EFFECTIVE DATE OF THE PLAN. The Plan shall have a stated effective
date of January 1, 2001. However, the Plan is and shall be effective upon its
adoption by the Board of Directors, subject to approval by holders
of a majority of the totalshares of stock then entitled
to vote in the election of directors.
*[(d)]* Any newly created directorship or any vacancy
occurring in the Board for any cause may be filled by
a majority of the remaining members of the Board,
although such majority is less than a quorum, or by a
plurality of the votes cast on a proposal to approve the Plan at a meeting of
the
stockholders, at which a quorum is present, of QQLink and Ceres Group, Inc.
("Ceres"). If the Plan is not so approved within twelve (12) months after the
date the Plan is adopted by the Board of Directors, the Plan and any Grants made
hereunder shall be null and void. However, if the Plan is approved, no further
stockholder approval shall be required with respect to the making of Grants
pursuant to the Plan, except as provided in Section 11 hereof.
4. ADMINISTRATION OF THE PLAN. The Plan will be administered by the
Compensation Committee of the Board of Directors of QQLink ("Committee") which
shall consist of not less than three members. None of the Committee members
shall be employees of QQLink, its parent corporation or its subsidiary
corporations nor be eligible to receive an Option while serving as a member of
the Committee. Each of the Committee members shall be a "Non-Employee Director"
within the meaning of Rule 16b-3 promulgated by the Securities and Exchange
Commission under
B-1
55
the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor
definition adopted by the Securities and Exchange Commission, and each shall be
an "outside director" within the meaning of Section 162(m) of the Code. The
Board may also select one or more qualified Directors to serve as alternate
members of the Committee, who may take the place of any absent member or members
at any meeting of the Committee. The Committee shall be authorized to administer
the Plan in accordance with its terms and may adopt, amend or repeal such rules
and regulations as the Committee may desire concerning the conduct of its
affairs. The interpretation and construction by the Committee of any provision
of the Plan or of any Grant under it and the administration of the Plan by the
Committee shall be final.
A majority of the Committee shall constitute a quorum. The acts of a
majority of the members present at any meeting at which a quorum is present (or
acts unanimously approved in writing by the members of the Committee) shall
constitute binding acts of the Committee. No member of the Board of Directors or
the Committee shall be liable for any action taken or omitted, or any
determination made, in good faith in connection with the Plan.
Subject to the terms and conditions of the Plan, the Committee is
authorized and empowered:
(a) To select the key employees to whom Grants may be
made;
(b) To determine the number of Common Shares to be
covered by any Grant;
(c) To prescribe the terms and conditions of any Grants
made under the Plan, and the form and agreement used
in connection with the grant of Options and SARs;
(d) To determine the time or times when Options and SARsdirector so elected will be granted and when they will terminate in whole
or in part;
(e) To determine the time or times when Options and SARs
that are granted may be exercised;
(f) To determine, at the time an Option is granted under
the Plan, whether such Option is an Incentive Stock
Option entitled to the benefits of Section 422 of the
Code;
(g) To establish any other Option agreement provisions
not inconsistent with the terms and conditions of the
Plan or, where the Option is an Incentive Stock
Option, with the terms and conditions of Section 422
of the Code; and
(h) To determine whether SARs will be made part of any
Grants consisting of Options, and to approve any SARs
made part of any such Grants pursuant to Section 8
hereof.
B-2
56
6. EMPLOYEES ELIGIBLE FOR GRANTS.
(a) Grants may be made from time to time to those key employees of
QQLink, its parent corporation or a subsidiary corporation who
are designated by the Committee in its sole and exclusive
discretion. Key employees may include, but shall not
necessarily be limited to, employees who are also members of
the Board of Directors (excluding members of the Committee),
officers of QQLink, officers of its parent corporation and
officers of any subsidiary corporation. However, Options
intended to qualify as Incentive Stock Options shall only be
granted to employees while actually employed by QQLink, its
parent corporation or a subsidiary corporation. The Committee
may grant more than one Option, with or without SARs, to the
same key employee. No Option will be granted to any key
employee during any period of time when such key employee is
on a leave of absence.
(b) MAXIMUM GRANT TO ANY EMPLOYEE. The maximum number of Common
Shares with respect to which Options or SARs may be granted to
any employee under this Plan shall not exceed 2,000,000
annually; provided, however, this limitation may be increased
or adjusted with respect to any employee by one or more of the
following events: (i) the deemed exercise of an Option when a
tandem SAR is exercised by the employee, pursuant to Section
6, (ii) the increase, decrease or exchange of Common Shares,
pursuant to Section 6, and (iii) the surrender of an Option
and the grant of a new Option by the employee, pursuant to
Section 7(h). All adjustments to the limitation on grants of
Options or SARs provided for in this section shall be
determined by the Committee, pursuant to Section 4.
6. SHARES SUBJECT TO THE PLAN; ADJUSTMENTS TO OPTIONS; GRANTS. Upon
the approval of the Plan by the stockholders, 4,000,000 presently authorized but
unissued Common Shares shall be reserved, allotted and set aside for issuance
under the Plan, subject to the next sentence and Section 7(h). If a SAR is
granted in tandem with an Option pursuant to Section 8 and such SAR is
thereafter exercised in whole or in part, then such Option or the portion
thereof to which the duly exercised SAR relates shall be deemed to have been
exercised for purposes of such Option, but the Common Shares which were issuable
to such Option or the portion thereof to which the duly exercised SAR relates
may be made available for reoffering under the Plan to any eligible key
employee.
If, at any time subsequent to the date of adoption of the Plan
by the Board of Directors, the number of Common Shares are increased or
decreased, or changed into or exchanged for a different number or kind of shares
of stock or other securities of QQLink or of another corporation (whether as a
result of a stock split, stock dividend, combination or exchange of shares,
exchange for other securities, reclassification, reorganization, redesignation,
merger, consolidation, recapitalization or otherwise): (i) there shall
automatically be substituted for each Common Share subject to an unexercised
Option or SAR (in whole or in part) granted under the Plan, the number and kind
of shares of stock or other securities into which each outstanding Common Share
shall be changed or for which each such Common Share shall be and (ii) the
option price per Common Share
B-3
57
or unit of securities shall be increased or decreased proportionately so that
the aggregate purchase price for the securities subject to an Option or SAR
shall remain the same as immediately prior to such event. In addition to the
foregoing, the Committee shall be entitled in the event of any such increase,
decrease or exchange of Common Share to make other adjustments to the securities
subject to an Option or SAR, the provisions of the Plan, and to any related
Option or SAR agreements (including adjustments which may provide for the
elimination of fractional shares), where necessary to preserve the terms and
conditions of any Grants hereunder.
7. OPTION PROVISIONS.
(a) GENERAL. The Committee may grant to key employees (also referred
to as "optionees") either nontransferable Incentive Stock Options or
Non-qualified Stock Options. However, an Incentive Stock Option shall only be
granted within ten (10) years from the earlier of (i) the date this Plan is
adopted by the Board of Directors of QQLink; or (ii) the date this Plan is
approved by the stockholders of QQLink and Ceres.
(b) OPTION PRICE. The option price per Common Share which may be
purchased under the Plan shall be determined by the Committee at the time of
Grant, but shall not be less than one hundred percent (100%) of the fair market
value of a Common Share, determined as of the date such Option is granted;
however, if a key employee to whom an Incentive Stock Option is granted is, at
the time of the grant of such Option, an "owner," as defined in Section
422(b)(6) of the Code (modified as provided in Section 424 (d) of the Code), of
more than ten percent (10%) of the total combined voting power of all classes of
stock of QQLink, its parent corporation or any subsidiary corporation (a
"Substantial Stockholder"), the price per Common Share of such Option, as
determined by the Committee, shall not be less than one hundred ten percent
(110%) of the fair market value of a Common Share on the date such Option is
granted. The Option price per Common Share under each Option granted pursuant to
the Plan that is a Non-qualified Stock Option shall be determined by the
Committee at the time of Grant. The fair market value of a Common Share shall be
determined by the Committee in accordance with procedures to be established by
it. The day on which the Committee approves the granting of an Option shall be
considered the date on which such Option is granted.
(c) PERIOD OF OPTION. The Committee shall determine when each Option
is to expire. However, no Option (including without limitation, an Incentive
Stock Option) may be exercisable for a period of more than ten (10) years from
the date it is granted. Further, no Incentive Stock Option granted to an
employee who is a Substantial Stockholder at the time of the grant of such
Option shall be exercisable after the expiration of five (5) years from the date
of grant of such Option.
(d) LIMITATION ON EXERCISE AND TRANSFER OF OPTIONS. Only the key
employee to whom an Option is granted may exercise such Option, except in those
cases where a guardian or other legal representative has been duly appointed for
such key employee, and except as otherwise provided in the case of such key
employee's death. No Option granted hereunder shall be transferable by an
optionee other than by will or the laws of descent and distribution; provided,
however, that if so provided in the instrument evidencing the Option, the
Committee may permit an
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58
optionee to transfer the Option during his/her lifetime to one or more members
of his family or to one or more trusts for the benefit of one or more members of
his/her family so long as no consideration is paid for such transfer and such
transfer would not result in the loss of any exemption under Rule 16b-3 for any
Option that the Committee does not permit to be so transferred. The transferee
of an Option shall be subject to all restrictions, terms, and conditions
applicable to the Option prior to its transfer, except that the Option shall not
be further transferable inter vivos by the transferee. The Committee may impose
on any transferable Option and on the Common Shares to be issued upon the
exercise of the Option such limitations and conditions as the Committee deems
appropriate. No Option granted hereunder can be pledged or hypothecated, nor
shall any such Option be subject to execution, attachment or similar process.
(e) EMPLOYMENT; HOLDING PERIOD REQUIREMENTS FOR CERTAIN OPTIONS. The
Committee may condition the exercise of any Option granted hereunder upon the
continued employment of the optionee by QQLink, its parent corporation or a
subsidiary or parent corporation, and may make any such Option immediately
exercisable. However, the Committee will require that, from and after the date
of grant of any Incentive Stock Optionhold
office until the date three (3) months prior to
the date such Option is exercised, such optionee must be an employee of QQLink,
its parent corporation or a subsidiary corporation, but always subject to the
right of QQLink, its parent corporation or any subsidiary corporation to
terminate such optionee's employment during such period. Each Option shall be
subject to such additional restrictions as to the time and method of exercise as
shall be prescribed by the Committee. Upon satisfaction of such requirements, if
any, an Option or the appropriate portion thereof may be exercised in whole or
in part from time to time during the Option period; however, such exercise
right(s) shall be limited to blocks of at least one hundred (100) Common Shares.
(f) PAYMENT OF OPTION PRICE. An Option shall be exercised by an
optionee giving written notice to QQLink of his/her intention to exercise the
same, accompanied by full payment of the purchase price in cash or by check, or,
with the consent of the Committee, in whole or in part with a surrender of
Common Shares having a fair market value on the date of exercise equal to that
portion of the purchase price for which payment in cash or check is not made.
The Committee may, in its sole discretion, approve other methods of exercise for
an Option or payment of the option price, provided that no such method shall
cause any option granted under the Plan as an Incentive Stock Option to not
qualify under Section 422 of the Code or cause any Common Share issued in
connection with the exercise of an Option not to be a fully paid and
non-assessable Common Share.
(g) CERTAIN REISSUANCES OF OPTIONS. To the extent Common Shares are
surrendered by an optionee in connection with the exercise of an Option in
accordance with Section 7(f), the Committee may in its sole discretion grant new
Options to such optionee (to the extent Common Shares remain available for
Grants), subject to the following terms and conditions:
(i) The number of Common Shares issuable pursuant to the new
Options shall be equal to the number of Common Shares
being surrendered by the optionee;
B-5
59
(ii) The option price per Common Share shall be equal to the
fair market value of a Common Share, on the date of
exercise of those Options whose exercise caused such
Grant; and
(iii) The terms and conditions of such Options shall in all
other respects replicate the terms and conditions of
those Options whose exercise caused such Grant, except
to the extent such terms and conditions are determined
to not be wholly consistent with the general provisions
of this Section 7 or in conflict with the remaining
provisions of the Plan.
(h) CANCELLATION AND REPLACEMENT OF OPTIONS; REALLOCATION OF UNUSED
COMMON SHARES. The Committee may at any time or from time to time permit the
voluntary surrender by an optionee who is the holder of any outstanding Options
under the Plan, where such surrender is conditioned upon the granting to such
optionee of new Options for such number of shares as the Committee shall
determine, or may require such a voluntary surrender as a condition precedent to
the grant of Options. The Committee shall determine the terms and conditions of
new Options, including the prices at and periods during which they may be
exercised, in accordance with the provisions of this Plan, all or any of differ
from which may differ from the terms and conditions of the Options surrendered.
Any such new Options shall be subject to all the relevant provisions of this
Plan. The Common Shares subject to any Option so surrendered, and/or any, Common
Shares subject to any Option that has lapsed, been forfeited, or been cancelled
and extinguished in connection with the exercise of an SAR, shall no longer be
charged against the limitation provided in Section 6 of this Plan and may again
become shares subject to the Plan. The granting of new Options in connection
with the surrender of outstanding Options under this Plan shall be considered
for the purposes of the Plan as the granting of new Options and not an
alteration, amendment or modification of the Plan or of the Options being
surrendered. Common Shares that are not purchased through the exercise of
Options that terminate or lapse may be used for further Grants under the Plan.
(i) LIMITATION ON EXERCISABLE INCENTIVE STOCK OPTIONS. The aggregate
fair market value of the Common Shares first becoming subject to exercise as
Incentive Stock Options by a key employee during any given calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). Such aggregate
fair market value shall be determined as of the date such Option is granted,
taking into account, in the order in which granted, any other Incentive Stock
Options granted by QQLink or by its parent corporation or subsidiary
corporation.
8. SHARE APPRECIATION RIGHTS. A key employee may be granted the right to receive
a payment based on the increase in the value of Common Shares occurring after
the date of such Grant. Such rights shall be known as SARs. SARs may (but need
not) be granted to a key employee in tandem with, and exercisable in lieu of
exercising, a Grant of Options. SARs will be granted upon terms and conditions
specified by the Committee receiving such Grant, or by its parent corporation or
a subsidiary corporation if such parent corporation or subsidiary corporation,
as the case may be, is the employer of the key employee receiving such Grant. No
optionee is entitled to a Grant of SARs solely as a result of the grant of an
Option to him. Any SAR if granted in tandem with a Grant of Options, may only be
exercised by the holder thereof with respect to all, or a portion, of the
Options to which such tandem SAR applies. When granted in tandem with an Option,
a SAR shall
B-6
60
provide that the holder of an Option shall have the right to receive an amount
equal to one hundred percent (100%) of the excess, if any, of the fair market
value of the Common Shares covered by such Option, determined as of the date of
exercise of such SAR by the Committee (in the same manner as such value is
determined for purposes of the granting of Options), over the price to be paid
for such Common Shares under such Option. Such amount will be payable by either
QQLink, its parent corporation, or the subsidiary corporation, whichever such
corporation is the employer of the employee, in one or more of the following
manners, as determined by the Committee:
(a) cash (or check);
(b) Common Shares having a fair market value equal to such amount;
or
(c) a combination of cash (or check) and Common Shares.
In the case of SARs granted in tandem with Options, in no event may any person
exercise any such SARs unless (i) such person is then permitted to exercise the
Options with respect to which such SARs relate, and (ii) the fair market value
of the Common Shares covered by the tandem Options, determined as provided
above, exceeds the option price of such Common Shares. Upon the exercise of any
SARs, the Option, or that portion thereof to which such SARs relate, shall be
canceled and automatically extinguished. A SAR granted in tandem with a Option
hereunder shall be made a part of the Option agreement to which such SAR
relates, in a form approved by the Committee and not inconsistent with this
Plan. The granting of an Option or SAR shall impose no obligation upon the
optionee to exercise such Option or SAR. The obligation of QQLink, its parent
corporation, or a subsidiary corporation to satisfy SARs shall not be funded or
secured in any manner. No SAR granted hereunder shall be transferable by the key
employee granted such SAR, other than by will or the laws of descent and
distribution.
After the Grant of a SAR, an optionee intending to rely on an exemption
from Section 16(b) of Exchange Act may be required, if determined necessary by
the Committee, to hold such SAR for six (6) months from the date the price for
such SAR is fixed to the date of cash settlement.
9. TERMINATION OF EMPLOYMENT. If a key employee ceases to be an
employee of QQLink, its parent corporation and every subsidiary corporation, for
a reason other than death, retirement, or permanent and total disability,
his/her Grants shall, unless extended by the Committee on or before his/her date
of termination of employment, terminate on the effective date of such
termination of employment. Neither the key employee nor any other person shall
have any right after such date to exercise all or any part of his/her Options or
SARs.
If termination of employment is due to death or permanent and total disability,
then outstanding Options and SARs may be exercised within the one (1) year
period ending on the first anniversary of such death or permanent and total
disability. In the case of death, such outstanding Options and SARs shall be
exercised by such key employee's estate, or the person designated by such key
employee by will, or as otherwise designated by the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Option or SAR
be exercisable after the
B-7
61
expiration of the Option period, and in the case of exercises made after a key
employee's death, not to any greater extent than the key employee would have
been entitled to exercise such Option or SAR at the time of his death.
Subject to the discretion of the Committee, if a key employee
terminates employment with QQLink, its parent corporation and all subsidiary
corporations because of normal or early retirement under the Retirement Plan for
Employees of Ceres (or any successor retirement plan), any then-outstanding
Options or SARs held by such key employee shall lapse at the earlier of the end of the term of such Optionoffice of
the director whom he or SAR,she has replaced or ninety (90) days after such retirementuntil his
or permanenther successor is elected and total disability.
If a key employee of QQLink, its parent corporation or one of its
subsidiary corporationsqualified.
A-1
Language indicted as being shown by strike out in the typeset document is
granted a leave of absence because of sickness orenclosed in brackets "[" and "]" in the needelectronic format.
Language indicated as being shown as inserted text in the typeset document is
enclosed in asterisks and brackets "*[" and "]*" in the electronic format.
*[Notwithstanding anything contained in these Bylaws to enter military service, his/her employment with QQLink, its parent
corporation or such subsidiary corporationthe
contrary, this Section 2.3 shall not be considered terminated,
and he/she shall be deemedaltered, amended or
repealed except by an employeeaffirmative vote of QQLink, its parent corporation or such
subsidiary corporation during such leave of absence or any extension thereof
granted by QQLink, its parent corporation or such subsidiary corporation.
10. CHANGE IN CONTROL. Upon the occurrence of a Change in Control (as
defined below), notwithstanding any other provisions hereof or of any agreement
to the contrary, all Options and SARs granted under this Plan shall immediately
vest and become exercisable in full. For purposes of this Plan, a Change in
Control shall be deemed to have occurred if:
(i) if there occurs any transaction (which shall include a
series of transactions occurring within sixty (60) days or
occurring pursuant to a plan), that has the result that
stockholders of QQLink immediately before such transaction
cease to own at least fifty-one percent (51%)two-thirds
of the voting
stock of QQLink or of any entity that results from the
participation of QQLink in a reorganization, consolidation,
merger, liquidation or any other form of corporate
transaction;
(ii) if the stockholders of QQLink approve a plan of merger,
consolidation, reorganization, liquidation or dissolution in
which QQLink does not survive (unless the approved merger,
consolidation, reorganization, liquidation or dissolution is
subsequently abandoned); or
(iii) if the stockholders of QQLink approve a plan for the sale,
lease, exchange, transfer, assignment or other dispositionoutstanding shares of all or substantially all the property and assets of
QQLink (unlesscapital stock entitled to
vote at a stockholders' meeting duly called for such
plan is subsequently abandoned).
In determining whether a Change in Control has occurred, gratuitous
transfers made by a person to an affiliate of such person (as
determined by the Board of Directors of QQLink), whether by gift,
devise or otherwise, shall not be taken into account. For purposes
of this Plan, ownership of voting securities shall take into
account and
B-8
62
shall include ownershippurpose.]*
A-2
Language indicated as determined by applying the provisions of
Rule l3d-3(d)(l)(i)being shown as in effect on the date hereof pursuant to the
Exchange Act.
11. AMENDMENT, SUSPENSION AND TERMINATION. The Committee is authorized
to interpret this Plan and from time to time adopt any rules and regulations for
carrying out this Plan that it may deem advisable. Subject to the approval of
the Board of Directors of QQLink, the Committee may at any time amend, modify,
suspend or terminate this Plan. In no event, however, without the approval of
stockholders, shall any action of the Committee or the Board of Directors result
in:
(a) Materially amending, modifying or altering the eligibility
requirements provided in Section 5 hereof;
(b) Materially increasing, except as provided in Section 6
hereof, the maximum number of shares subject to Grants; or
(c) Materially increasing the benefits accruing to participants
under this Plan, except to conform this Plan and any
agreements made hereunder to changesinserted text in the Code or governing
law.
12. INVESTMENT REPRESENTATION, APPROVALS AND LISTING. The Committee may
condition any Grant hereunder upon receipt of the following investment
representation from the optionee:
"I agree that any Common Shares of QQLink.com, Inc. that I may acquire
by virtue of this Option or SAR shall be acquired for investment
purposes onlytypeset document is
enclosed in asterisks and not with a view to distribution or resale,brackets "*[" and may
not be transferred, sold, assigned, pledged, hypothecated or otherwise
disposed of by me unless (i) a registration statement or posteffective
amendment to a registration statement under the Securities Act of 1933,
as amended, with respect to said Common Shares has become effective so
as to permit the sale or other disposition of said shares by me; or
(ii) there is presented to QQLink.com, Inc., an opinion of counsel
satisfactory to QQLink.com, Inc. to the effect that the sale or other
proposed disposition of said Common Shares by me may lawfully be made
otherwise than pursuant to an effective registration statement or
post-effective amendment to a registration statement relating to the
said shares under the Securities Act of 1933, as amended."]*"
QQLink shall not be required to issue any certificate or certificates
for Common Shares upon the exercise of any Option or SAR granted under this Plan
prior to (i) the obtaining of any approval from any governmental agency which
the Committee shall, in its sole discretion, determine to be necessary or
advisable; (ii) the completion of any registration or other qualifications of
the Common Shares under any state or federal law or ruling or regulations of any
governmental body which the Committee shall, in its sole discretion, determine
to be necessary or advisable or the determination by the Committee, in its sole
discretion, that any registration or other qualification of the Common Shares is
not necessary or advisable; and (iii) the obtaining of an investment
representation from the optionee in the form stated above or in such other form
as the Committee, in its sole discretion, shall determine to be adequate.
B-9electronic format.
63
13. GENERAL PROVISIONS. The form and substance of Option agreements and
SAR agreements made hereunder, whether granted at the same or different times,
need not be identical. Nothing in this Plan or in any agreement shall confer
upon any key employee any right to continue in the employ of QQLink, its parent
corporation or any of its subsidiary corporations, to be entitled to any
remuneration or benefits not set forth in this Plan or such Grant, or to
interfere with or limit the right of QQLink, its parent corporation or any
subsidiary corporation to terminate his/her employment at any time, with or
without cause. Nothing contained in this Plan or in any Option agreement or SAR
shall be construed as entitling any optionee to any rights of a stockholder as a
result of the grant of an Option or an SAR, until such time as Common Shares are
actually issued to such optionee pursuant to the exercise of such Option or SAR.
The successors and assigns of QQLink may assume this Plan. The liability of
QQLink under this Plan and any sale made hereunder is limited to the obligations
set forth herein with respect to such sale and no term or provision of this Plan
shall be construed to impose any liability on QQLink in favor of any employee
with respect to any loss, cost or expense which the employee may incur in
connection with or arising out of any transaction in connection with this Plan.
The expense of administering the Plan shall be borne by QQLink. The Plan and all
Options and actions taken thereunder and any agreements relating thereto shall
be governed by, and controlled in accordance with the laws of QQLink's state of
incorporation, without regard to its conflicts of law principles or statute. The
captions and section numbers appearing in this Plan are inserted only as a
matter of convenience; they do not define, limit, construe or describe the scope
or intent of the provisions of this Plan.
14. TERMINATION OF THE PLAN. This Plan shall terminate on the tenth
(10th) anniversary of its effective date, as determined in accordance with
Section 3 of this Plan, but no later than January 1, 2011. This Plan may be
terminated earlier in accordance with Section 11 of this Plan. After the Plan
terminates, no Options or SARs shall be granted hereunder. All Options and SARs
outstanding at the time of termination of the Plan shall continue in full force
and effect according to their terms and the terms and conditions of the Plan.
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64
ANNEX C
CERES GROUP, INC.
AUDIT COMMITTEE CHARTER
YEAR 2000
Statement of Policy
The audit committee shall assist the board of directors in monitoring (1) the
integrity of the financial statements of the company; (2) the compliance by the
company with legal and regulatory requirements and (3) the independence and
performance of the company's internal and external auditors. In doing so, the
audit committee is responsible for maintaining free and open communication
between the directors, the independent auditors, the internal auditors, and the
financial management of the company.
Organization
The board of directors shall appoint the audit committee. The composition of the
audit committee shall satisfy the requirements of Nasdaq Stock Market, Inc.,
concerning the number, independence, financial literacy and experience of
members.
Responsibilities and Processes
The audit committee shall report regularly to the board of directors. The
committee shall review and reassess the adequacy of this Charter annually and
recommend any proposed changes to the board of directors for approval.
C-1
65
The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable to
the board and the audit committee. The committee shall review and recommend to
the directors, after consultation with the financial management of the company,
the independent auditors to be selected to audit the financial statements of the
company and its divisions and subsidiaries. The committee shall discuss with the
auditors their independence from management and the company and the matters
included in the written disclosures required by the Independence Standards
Board.
The committee shall discuss with the internal auditors and the independent
auditors the overall scope and plans for their respective audits including the
adequacy of staffing and compensation. Also, the committee shall discuss with
management, the internal auditors, and the independent auditors the adequacy and
effectiveness of the accounting and financial controls, including the company's
system to monitor and manage business risk, and legal and ethical compliance
programs. Further, the committee shall meet separately with the internal
auditors and the independent auditors, with and without management present, to
discuss the results of their examinations.
The committee shall review the interim financial statements with management and
the independent auditors prior to the filing of the company's Quarterly Report
on Form 10-Q. Also, the committee shall discuss the results of the quarterly
review and any other matters required to be communicated to the committee by the
independent auditors under generally accepted auditing standards. The chair of
the committee may represent the entire committee for the purposes of this
review.
C-2
66
The committee shall review with management and the independent auditors the
financial statements to be included in the company's Form 10-K, including their
judgment about the quality, not just acceptability, of accounting principles,
the reasonableness of significant judgments, and the clarity of the disclosures
in the financial statements. Also, the committee shall discuss the results of
the annual audit and any other matters required to be communicated to the
committee by the independent auditors under generally accepted auditing
standards.
The audit committee shall approve any revisions to the company's Code of Conduct
and shall confirm with management that all employees, officers and directors
have signed the company's Code of Conduct.
The audit committee shall prepare the report of the audit committee required by
the rules of the Securities and Exchange Commission (SEC) to be included in the
company's annual proxy statement.
Limit of Responsibility
While the audit committee has the responsibilities and powers set forth in this
Charter, the duties of the audit committee do not include planning or conducting
audits or determining whether the company's financial statements are complete
and accurate and are in accordance with generally accepted accounting
principles; rather, those duties are the responsibility of management and the
independent auditor. The audit committee is also not responsible for conducting
investigations, resolving disagreements, if any, between management and the
independent auditor nor assuring compliance with laws and regulations and the
company's Code of Conduct.
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67
DETACH CARD
- --------------------------------------------------------------------------------
CERES GROUP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE 20012002 ANNUAL MEETING OF STOCKHOLDERS ON JUNE 12, 2001MAY 15, 2002
AT 2:10:00 P.M.A.M. LOCAL TIME
The undersigned hereby constitutes and appoints Charles E. Miller, Jr. and
Kathleen L. Mesel, and each of them, his true and lawful agents and proxies with
full power of substitution in each, to represent the undersigned at the 20012002
Annual Meeting of Stockholders of Ceres Group, Inc. to be held at 17800 Royalton
Road, Cleveland, Ohio 44136 on Tuesday, June 12, 2001Wednesday, May 15, 2002 at 2:10:00 p.m.a.m., local
time, and at any adjournments thereof, on all matters coming before said
meeting.
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSAL 1
AND "FOR" ALL NOMINEES IN PROPOSAL 1
AND "FOR" EACH OF PROPOSALS 2, 3, 4 AND 5.2.
1. Approval of amendments to our Bylaws to set the number of directors at nine
and to create a staggered Board of Directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. Directors: Andrew A. Boemi; Michael A. Cavataio; Bradley E. Cooper; Susan S.
Fleming; Rodney L. Hale; Robert J. Lunn; Peter W. Nauert; William J. Ruh and
Robert A. Spass.
FOR [ ] WITHHELD [ ]
FOR, EXCEPT VOTE WITHHELD FROM THE FOLLOWING NOMINEE(S): [ ]
- --------------------------------------------------------------------------------
2. Approval of amendments to our 1998 Key Employee Share Incentive Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Approval of the QQLink.com, Inc. 2000 Key Employee Share Incentive Plan for
our subsidiary, QQLink.com, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Approval of performance-based compensation for Peter W. Nauert, our President
and Chief Executive Officer.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
SEE REVERSE SIDE
68
DETACH CARD
- --------------------------------------------------------------------------------
5. Ratification of Ernst & Young, LLP as our independent accountants for the
fiscal year ending December 31, 2001.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE
REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE
WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR
SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
DatedDated: -------------------- , 2001
----------------------2002
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Signature
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Signature
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Title
NOTE: PLEASE SIGN AS NAME APPEARS
HEREON. JOINT OWNERS SHOULD EACH
SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE GIVE FULL
TITLE AS SUCH.