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SCHEDULE 14A
(RULE 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]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
PICO HOLDINGS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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PICO HOLDINGS, INC.
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of PICO Holdings, Inc., a California
corporation (the "Company"), will be held at the Museum of Contemporary Art, in
the Coast Room, 700 Prospect Street, La Jolla, California 92037 on Monday, JulyThursday,
October 19, 19992000 at 9:00 a.m. (PDT)(PT) for the following purposes:
1. To elect threetwo directors, for which positions the Board of Directors has
nominated John R. Hart, Ronald Langley,Richard D. Ruppert, M.D. and John D. Weil,S. Walter Foulkrod, III, Esq.,
to serve for three years until the annual meeting of shareholders in
the year 20022003 and until their respective successors have been duly
elected and qualified;
andqualified.
2. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors.
3. To amend Article III of the Company's Articles of Incorporation to
eliminate the authorization of Preferred Stock.
4. To approve the Company's 2000 Nonstatutory Stock Option Plan.
5. To transact such other business as may be properly brought before the
meeting and any adjournment thereof.
Shareholders of record at the close of business on June 4, 1999September 7, 2000 will be
entitled to notice of and to vote at the Annual Meeting and any adjournment
thereof.
By Order of the Board of Directors
/s/ Ronald Langley
Ronald Langley
Chairman of the Board
Dated: June 11, 1999September 8, 2000
TO ASSURE YOUR REPRESENTATION AT THE MEETING, WHETHER OR NOT YOU PLAN TO ATTEND,
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE.ENVELOPE AS PROMPTLY AS POSSIBLE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR
RIGHT TO REVOKE SUCH PROXY BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN PERSON
AT THE MEETING. PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER,
BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE
MEETING A LETTER FROM THE BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR
BENEFICIAL OWNERSHIP OF THE SHARES AND YOU MUST OBTAIN FROM THE RECORD HOLDER A
PROXY ISSUED IN YOUR NAME.
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PICO HOLDINGS, INC.
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULYOCTOBER 19, 19992000
The proxy accompanying this Proxy Statement is solicited by the Board of
Directors of PICO Holdings, Inc., a California corporation (the "Company"), to
be voted at the Annual Meeting of Shareholders of the Company (the "Annual
Meeting") to be held at the Museum of Contemporary Art, Coast Room, 700 Prospect
Street, La Jolla, California 92037, at 9:00 a.m. (PDT)(PT) on Monday, JulyThursday, October 19,
19992000 and at any postponement or adjournment thereof. The date of this Proxy Statement
is June 11, 1999, the approximate date upon which it was first mailed to
shareholders. The proxy may be revoked by
appropriate written notice at any time before it is exercised or by voting in
person at the meeting.
GENERAL INFORMATION
A copy of the Company's Annual Report to Shareholders for 19981999 accompanies this
Proxy Statement. The Annual Report and these proxy solicitation materials wereare
being mailed on or about June 11, 1999September 8, 2000 to all shareholders entitled to vote
at the meeting.
As of June 4, 1999,September 7, 2000, the record date for the determination of shareholders
entitled to vote at the Annual Meeting, 13,328,77012,390,096 shares of Common Stock of the
Company were issued and outstanding.outstanding, excluding 4,394,127 treasury shares. Each
share of Common Stock entitles the holder to one vote on all matters brought
before the Annual Meeting, except for 4,380,779the 4,394,127 shares held by the Company
and subsidiaries of the Company which may not be voted.
In voting for the election of directors, shareholders have cumulative voting
rights. Accordingly, each shareholder may cumulate such voting power as such
shareholder possesses and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of shares held by the
shareholder, or distribute such shareholder's votes on the same principle among
two or more candidates, as such shareholder sees fit. However, no shareholder is
entitled to cumulate votes (in other words, cast for any candidate a number of
votes greater than the number of shares of stock held by such shareholder)
unless at least one shareholder has given notice, at the Annual Meeting prior to
the voting, of the shareholder's intention to cumulate votes. If any shareholder
has given such notice, all shareholders may cumulate their votes for candidates
in nomination.nominated
candidates.
The proxy, if returned properly executed and not subsequently revoked by written
notice delivered to the Secretary of the Company or by the shareholder voting in
person at the Annual Meeting, will be voted in accordance with the choice made
by the shareholder thereon. If a choice is not made with respect to the election
of directors and authority to vote for directors is not withheld,any issue,
the proxy will be voted for the election of directors asitems described under "Election of
Directors."in this Proxy Statement. If
cumulative voting is permitted in the election of directors at the Annual
Meeting, the proxy holders shall have discretion as to the manner in which votes
represented by the proxy are to be cumulated, unless the proxy indicates the
manner in which such votes shall be cumulated.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by the
inspectors of election inspectors appointed for the meeting andwho will also determine whether
or not a quorum is present. The inspectors of election inspectors will treat abstentions,
and any shares as to which a broker or nominee has indicated that it does not
have discretionary authority to vote on a particular matter, as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum.quorum at the meeting, but will not be considered as present with respect to
that matter.
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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of December 31, 1998,September 7, 2000, with
respect to the beneficial ownership of the Company's Common Stock entitled to
vote by each person known by the Company to be the beneficial owner of more than
5% of Common Stock, and by each director, each Named Officer (as defined below)
and all executive officers former chief executive officers, and directors as a group. Except as otherwise
indicated, each person has sole investment and voting power, subject to
community property laws. Unless otherwise indicated, the business address for
each person is 875 Prospect Street, Suite 301, La Jolla, CA 92037.
NUMBER OF SHARES AND NATURE PERCENTAGE OWNERSHIP OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) VOTING SHARES
- ------------------------------------ --------------------------- -------------
Ronald Langley(2)(4) 621,725 6.0%3,974,754 30.7%
John R. Hart(3)(4) 616,170 5.9%3,972,143 30.5%
Robert R. Broadbent 11,94910,949 *
Carlos C. Campbell -0- *
S. Walter Foulkrod, III, Esq. 2,904Esq 1,652 *
Richard D. Ruppert, MD (5) 6,9747,298 *
John D. Weil (6) 529,518 5.1%4,048,892 32.7%
David A. Williams 78,693105,000 *
Richard H. Sharpe (7) 67,52768,075 *
Gary W. Burchfield (8) 47,04347,272 *
James F. Mosier (9) 47,303 *
A. Judson HillPICO Equity Investors, L.P. (10) 100,000 *
Sheila C. Ferguson (11) 3,986 *
Maxim C. W. Webb (12) 29,409 *3,333,333 26.9%
Executive Officers and Directors 5,656,983 41.2%
as a Group (14 2,163,201 20.8%(13 persons)
*Less than one percent (1%)
- -----------------------------------
(1) Sole voting and investment power unless otherwise indicated.
(2) Of these shares, 555,863 represent beneficial ownership of currentlyoptions
exercisable options. 551within the next 60 days. 2,375 shares are held in the
Company's 401(k) Plan. Mr. Langley owns a membership interest in PICO
Equity Investors Management, LLC which has been Chairman and a Directorvoting control of GEC since September 5,
1995. He has been Chairman, and a Director3,333,333
shares of the Company since November
20, 1996.Company.
(3) Of these shares, 613,170 represent beneficial ownership of currentlyoptions
exercisable options.within the next 60 days. Mr. Hart owns a membership
interest in PICO Equity Investors Management, LLC which has been President and CEO and a Directorvoting
control of GEC since September 5, 1995. He has been President and CEO and a
Director3,333,333 shares of the Company. The number of shares shown
above does not include 19,940 shares of the Company since November 20, 1996.
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compensation plan Rabbi Trust for Mr. Hart.
(4) Mr. Langley and Mr. Hart formerly had stock options, granted in 1995,
to purchase shares of GEC;Global Equity Corporation; these shares were
converted on December 17, 1998 into economically equivalent stock
options to purchase shares of the Company. Mr. Langley and Mr. Hart
each had 1993 call option agreements with GPG;Guinness Peat Group plc in
August 1998, the Company assumed GPG'sGuinness Peat Group's obligations with
respect to these 412,846 options. Mr. Langley exercised 57,307 of his
call options in December 1998 and has 149,116 call options remaining.
Mr. Hart has not exercised any call options and has 206,423 call
options remaining.
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(5) Dr. Ruppert shares voting and investment power with his wife.
(6) Of these shares, 495,558660,558 are owned by a partnership which Mr. Weil
controls. Mr. Weil owns a membership interest in PICO Equity Investors
Management, LLC which has voting control of 3,333,333 shares of the
Company.
(7) Of these shares, 60,119 represent beneficial ownership of currentlyoptions
exercisable options.within the next 60 days. In addition, 2,8973,447 shares are held
in the Company's 401(k) Plan.
(8) Of these shares, 42,083 represent beneficial ownership of currentlyoptions
exercisable options.within the next 60 days. In addition, 805994 shares are held
in the Company's 401(k) Plan.
(9) Of these shares, 42,083 represent beneficial ownership of currentlyoptions
exercisable options.within the next 60 days. In addition, 2,371 shares are held
in the Company's 401(k) Plan.
(10) Mr. Hill has beneficial ownership of 100,000 optionsPursuant to buya rights offering conducted by the Company in March 2000,
an investment partnership named PICO Equity Investors, L.P. acquired on
March 28, 2000, 3,333,333 newly issued shares of the
Company. Mr. Hill's options vest monthly over three years in equal
increments beginning November 3, 1998.
(11) Of these shares, 3,702 represent beneficial ownership of currently
exercisable options. In addition, 284 shares are heldwhich were not subscribed
for in the Company's
401(k) Plan.
(12) Ofrights offering. PICO Equity Investors, L.P. is managed by
PICO Equity Investors Management, LLC. PICO Equity Investors
Management, LLC is owned by Mr. Langley, Mr. Hart and Mr. Weil. PICO
Equity Investors Management, LLC will exercise all voting and
investment decisions with respect to these 3,333,333 shares 29,177 represent beneficial ownershipfor up to
ten years. The interest of currently
exercisable options. In addition, 232 sharesPICO Investors Management, LLC in any
profits and losses earned on this investment will be proportional to
the capital contributions made to PICO Equity Investors, L.P. by the
partners, i.e., 1,000/50,001,000. There are held in the Company's
401(k) Plan.no other fees or other
management compensation of any kind payable to Mr. Langley, Mr. Hart,
and Mr. Weil.
1. ELECTION OF DIRECTORS
NOMINEES AND CONTINUING DIRECTORS
The Board of Directors is divided into three classes, with the terms of office
of each class ending in successive years. ThreeTwo directors of the Company are to be
elected for terms ending at the Annual Meeting of Shareholders in the year 20022003
or until their respective successors have been duly elected and qualified.
Unless otherwise instructed, the proxy holders named on the enclosed form of
proxy intend to distribute the votes represented by proxies in such proportions
as they deem desirable to elect a maximum of the threetwo nominees named below or their
substitutes. Although it is not contemplated that any nominee will decline or be
unable to serve, if either occurs prior to the Annual Meeting, a substitute
nominee will be selected by the Board of Directors. See "Stock Ownership of
Certain Beneficial Owners and Management" for the number of shares of Common
Stock beneficially owned by these nominees.
As a result of the resignation in April 1998 of a director whose term would have
expired at the Annual Meeting of Shareholders in 2000, there currently exists
one vacancy on the Company's Board of Directors. The Board of Directors has not
nominated an individual for election at the 1999 Annual Meeting of Shareholders
to fill this vacancy. A majority of the directors may nevertheless elect to fill
this vacancy at any time in the future without shareholder approval.
Notwithstanding the vacancy, proxies may not be voted for a greater number of
persons than the number of nominees named.
The following table sets forth information regarding the nominees for election
as directors and the other directors whose terms of office as directors will
continue after the Annual Meeting, including their ages, a brief description of
their business experience, certain directorships held by each of them and the
year in which each became a director of the Company.
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6The nominees for election as directors receiving the highest numbers of votes
shall be elected. THE COMPANY'S BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE NOMINEES FOR ELECTION LISTED BELOW.
DIRECTOR NAME BUSINESS EXPERIENCE AGE SINCE
------------- ------------------- --- -----
DIRECTORS WITH
NOMINEES STANDING FOR ELECTION FOR TERMS ENDING IN 2000:
2003:
S. Walter Foulkrod, III, Esq. Attorney; owner of S. Walter Foulkrod, III & 57 1996
Associates, Attorneys at 58 1996
Law, Harrisburg, PA, since 1994; President and Chairman of Foulkrod,
Reynolds & Havas, PC, from 1984 to 1994; Director of Physicians
Insurance Company of Ohio ("Physicians") since 1988.
Richard D. Ruppert, MD Physician; President of Medical College of Ohio 68 1996
from 1978 to 1993; 69 1996
President of American Society of Internal Medicine from 1992 to 1993;
Director of Physicians since 1988.
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DIRECTORS WITH TERMS ENDING IN 2001:
Robert R. Broadbent Retail consultant since 1989; Chairman of 77 1996
Higbee Company from 1984 to 78 1996
1989; President, CEO, Director and Vice Chairman of the Higbee Company
from 1979 to 1984; President and Chief Executive Officer of Liberty
House - Mainland from 1976 to 1978; Chairman and CEO of Gimbel's from
1973 to 1976; Director of Physicians from 1993 to 1995.
Carlos C. Campbell President of C.C. Campbell & Company, Reston, 61 1998
Virginia, since 1985; 62 1998
Director of Resource America, Inc., Fidelity Mortgage Funding, Inc., and
Passport Health.
David A. Williams CEO of Beutel Goodman & Co. Ltd. From 1991 to 56 1998
1995; President, 57 1998
Roxborough Holdings Limited, Toronto, Ontario since 1995; Director of
Global Equity Corporation, Enhanced Marketing Services, Equisure
Financial Network, FRI Corporation, Krystal Bond Corporation, Octagon
Industries Ltd., Phoenix Duff and Phelps Corp., Pinetree Capital
Corporation, Micropulse Inc., Radiant Energy Corporation, and Signature
Brands Ltd.
NOMINEES STANDING FOR ELECTION FORDIRECTORS WITH TERMS ENDING IN 2002:
John R. Hart President and CEO and Director of the Company since 1996; President of 40 1996
Quaker Holdings Limited, an 39 1996 investment company, since 1991; Principal
with Detwiler, Ryan & Company, Inc., an investment bank, from 1982 to
1991; Director of Physicians since 1993; President and CEO of Physicians
since 1995; President and CEO and Director of Global Equity Corporation
since 1995; Director of PC Quote, Inc; President and CEOInc.
Ronald Langley Chairman and Director of the Company since 1996.
Ronald Langley1996; Director and executive 55 1996
officer of Pacific Southwest 54 1996 Corporation, a strategic investment
company, from 1989 to 1992; Director of Physicians since 1993; Chairman
of Physicians since 1995: Chairman and Director of Global Equity
Corporation since 1995; Chairman of Summit
Global Management, Inc. since 1994; Director of PC Quote, Inc; Chairman and Director of the
Company since 1996.Inc.
John D. Weil President, Clayton Management Company, a 58 1996
strategic investment company; 59 1996
Director of Todd Shipyards Corporation, Oglebay Norton Company, Southern
Investors Service Company, Inc., Allied Health Products, Inc., and
Baldwin & Lyons, Inc.
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Company's Board of Directors is seeking shareholder ratification of its
selection of Deloitte & Touche LLP to serve as the Company's auditors for the
fiscal years ending December 31, 1999 and December 31, 2000. Deloitte & Touche
LLP has previously served as the auditors of the Company since July 1997. It is
anticipated that representatives of Deloitte & Touche LLP will attend the Annual
Meeting, will have the opportunity to make any statements they may desire, and
will be available to respond to appropriate questions from PICO shareholders.
Approval of this proposal requires the affirmative vote of the holders of a
majority of the shares represented and voting at the Annual Meeting. THE
COMPANY'S BOARD RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
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3. AMENDMENT OF ARTICLE III OF THE COMPANY'S ARTICLES OF
INCORPORATION TO ELIMINATE THE PREFERRED STOCK
Article III of the Company's Articles of Incorporation presently authorizes two
classes of stock: one hundred million shares of Common Stock and two million
shares of Preferred Stock.
No Preferred shares are issued or outstanding and management and the Board of
Directors have no plans to issue any Preferred shares. The Board of Directors is
of the opinion that the existence of the Preferred shares, although none have
been issued, may possibly constitute an impediment to realizing the Company's
value. Therefore, the Board of Directors has recommended that ARTICLE III of the
Company's Articles of Incorporation be amended to eliminate the Preferred
shares. If the shareholders approve the amendment of ARTICLE III to eliminate
the Preferred shares, ARTICLE III would read as follows:
ARTICLE III
This corporation is authorized to issue one (1) class of shares,
designated as "Common Stock." The number of shares of Common Stock
authorized to be issued is one hundred million (100,000,000). The par
value of each share is one tenth of one cent (0.001).
The proposed amendment of ARTICLE III requires the affirmative vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
at the meeting. THE COMPANY'S BOARD RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
4. APPROVAL OF THE COMPANY'S 2000 NONSTATUTORY STOCK OPTION PLAN
At the Annual Meeting, the shareholders will be asked to approve the
PICO Holdings, Inc. 2000 Nonstatutury Stock Option Plan (the "2000 Plan"). On
April 7, 2000 (the "Effective Date"), the Company's Board of Directors adopted
the 2000 Plan, subject to its approval by the shareholders, in order to augment
the Physicians Insurance Company of Ohio 1995 Nonstatutory Stock Option Plan
(the "Physicians Plan").
The Board of Directors believes that in order to successfully attract
and retain the best possible candidates for positions of responsibility the
Company must continue to offer a competitive equity incentive program. As of
June 30, 2000, only 5,000 shares remained available for future stock option
grants under the Physicians Plan. The proposed 2000 Plan is intended to ensure
that the Company will continue to have available a reasonable number of shares
for its stock option program. It authorizes an additional 1,200,000 shares of
the Company's common stock to be made available for stock option grants. The
2000 Plan also provides for the periodic grant of stock options to the
nonemployee members of the Board of Directors in amounts determined by a formula
described below.
The 2000 Plan also provides for the periodic grant of stock options to
the nonemployee members of the Board of Directors in amounts determined by a
formula as described below. The Compensation Committee reviewed director
compensation, and recommended to the Board of Directors, in line with a recent
study performed by William M. Mercer, Incorporated, that the Company's
compensation for nonemployee directors was below that of director's compensation
for peer companies. To bring the Company's nonemployee director compensation up
to a level competitive with that of companies of comparable size and to enable
the Company to continue to attract and retain qualified directors, William M.
Mercer, Incorporated recommended that the Company's compensation for nonemployee
directors include an element consisting of stock options to bring total
nonemployee director's compensation up to competitive levels and to align
nonemployee director's compensation with the long term interests of the
Company's shareholders.
SUMMARY OF THE 2000 PLAN
The following summary of the 2000 Plan is qualified in its entirety by
the specific language of the 2000 Plan, a copy of which is available to any
shareholder upon request.
GENERAL. The purpose of the 2000 Plan is to advance the interests of
the Company and its shareholders by providing an incentive to attract, retain
and reward the Company's employees, directors and consultants and by motivating
them to contribute to the Company's goals. The 2000 Plan provides for the grant
of nonstatutory stock options, that is, options not intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code.
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SHARES SUBJECT TO 2000 PLAN. A maximum of 1,200,000 of the authorized
but unissued or reacquired shares of the Company's common stock may be issued
under the 2000 Plan. Appropriate adjustments will be made to the shares subject
to the 2000 Plan and the "Grant Limit" described below and to outstanding
options upon any merger, consolidation, reorganization, reincorporation,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, split-up, split-off, spin-off, combination of shares, exchange of shares
or similar change in the capital structure of the Company. If any outstanding
option expires, terminates or is canceled, or if shares acquired pursuant to an
option are repurchased by the Company at their original exercise price, the
expired or repurchased shares are returned to the 2000 Plan and again become
available for grant.
To enable the Company to deduct in full for federal income tax purposes
the compensation recognized by certain executive officers in connection with
options that may be granted under the 2000 Plan, the plan is designed to qualify
such compensation as "performance-based compensation" under Section 162(m) of
the Internal Revenue Code. To comply with Section 162(m), the 2000 Plan limits
the number of shares for which options may be granted to any employee. Under
this limitation, no employee (or prospective employee) may be granted options
for more than 500,000 shares in any fiscal year (the "Grant Limit"). The Grant
Limit is subject to appropriate adjustment in the event of certain changes in
the Company's capital structure, as previously described. No option granted
under the 2000 Plan may become exercisable unless and until the Plan is approved
by the Company's shareholders.
ADMINISTRATION. The 2000 Plan will be administered by the Board of
Directors or a duly appointed committee of the board, which, in the case of
options intended to qualify for the performance-based compensation exemption
under Section 162(m) of the Internal Revenue Code, must be comprised solely of
two or more "outside directors" within the meaning of Section 162(m). (For the
purposes of this discussion, the term "board" refers to either the Board of
Directors or a committee of the board.) Subject to the provisions of the 2000
Plan and with the exception of options granted automatically to nonemployee
directors as described below, the board determines the persons to whom options
are to be granted, the number of shares to be covered by each option, the timing
and terms of exercisability and vesting of each option, the purchase price and
the type of consideration to be paid to the Company upon the exercise of each
option, the time of expiration of each option, and all other terms and
conditions of the options. The board may amend, modify, extend, cancel or renew
any option, waive any restrictions or conditions applicable to any option, and
accelerate, continue, extend or defer the exercisability or vesting of any
option. The 2000 Plan provides, subject to certain limitations, for
indemnification by the Company of any director, officer or employee against all
reasonable expenses, including attorneys' fees, incurred in connection with any
legal action arising from the person's action or failure to act in administering
the 2000 Plan. The board will interpret the 2000 Plan and options granted under
it, and all determinations of the board will be final and binding on all persons
having an interest in the 2000 Plan or any option.
ELIGIBILITY. Options may be granted under the 2000 Plan to employees ,
directors and consultants of the Company or of any present or future parent or
subsidiary corporations of the Company. In addition, options may be granted to
prospective service providers in connection with written offers of employment or
other service relationship, provided that no shares may be purchased prior to
such person's commencement of service. As of June 30, 2000, the Company and its
subsidiaries had approximately 148 employees, including 15 executive officers
and 6 directors and consultants who would be eligible under the 2000 Plan.
TERMS AND CONDITIONS OF OPTIONS. Each option granted under the 2000
Plan will be evidenced by a written agreement between the Company and the
optionee specifying the number of shares subject to the option and the other
terms and conditions of the option, consistent with the requirements of the 2000
Plan. All options must have an exercise price equal to at least 85% of the fair
market value of a share of the Company's common stock on the date of grant,
except for any options granted in substitution for options in certain corporate
reorganizations in a manner that would qualify under Section 424(a) of the
Internal Revenue Code. As of June 16, 2000, the closing price of the Company's
common stock, as reported on the Nasdaq National Market, was $13.0625 per share.
The 2000 Plan provides that the option exercise price may be paid in
cash, by check or cash equivalent; by the assignment of the proceeds of a sale
or loan with respect to some or all of the shares being acquired upon the
exercise of the option; to the extent legally permitted, by surrender to the
Company of shares of its common stock owned by the optionee having a fair market
value not less than the exercise price or by means of a promissory note if the
optionee is an employee; by such other lawful consideration as approved by the
board; or by any combination of these. Nevertheless, the board may restrict the
forms of payment permitted in connection with any option grant. No option may be
exercised unless the optionee has made adequate provision for federal, state,
local and foreign taxes, if any, relating to the exercise of the option.
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Options will become vested and exercisable at such times or upon such
events and subject to such terms, conditions, performance criteria or
restrictions as specified by the board. The maximum term of any option granted
under the 2000 Plan is 20 years, provided that an option granted to a
nonemployee member of the board will have a term of ten years. An option
generally will remain exercisable for six months following the optionee's
termination of service. However, if such termination results from the optionee's
death or disability, the option generally will remain exercisable for 12 months.
In any event, the option must be exercised no later than its expiration date.
Options granted under the 2000 Plan are generally nontransferable by
the optionee other than by will or by the laws of descent and distribution, and
are exercisable during the optionee's lifetime only by the optionee except to
the extent permitted by the board and set forth in the option agreement.
AUTOMATIC GRANT OF NONEMPLOYEE DIRECTOR OPTIONS. In addition to
authorizing the board to grant options to employees, directors and consultants
on a discretionary basis, the 2000 Plan provides for the nondiscretionary,
automatic grant of options to nonemployee directors, that is, members of the
board who, at the time of grant, are not employees of the Company or of any
parent or subsidiary of the Company. On the Effective Date, each nonemployee
director then in office was granted an option (an "Effective Date Option") to
purchase 1,500 shares of the Company's common stock provided that the option
will not be exercisable prior to approval of the 2000 Plan by the Company's
shareholders and will terminate if such approval is not received at an exercise
price of $15.00 per share. In addition, on the dates of the 2001 annual meeting
of the shareholders and each subsequent Annual Meeting during the term of the
2000 Plan, each nonemployee director remaining in office after the Annual
Meeting will be granted automatically an option (an "Annual Option") to purchase
a number of shares of common stock determined by dividing $15,000 by the
Black-Scholes value per share subject to the option, as determined by the
Company's independent auditors on the same basis as would apply to such options
for the purposes of disclosure in the Company's financial statements. The
exercise price per share under each Effective Date Option is $15.00. The closing
price of the Company's common stock on the Effective Date as reported on the
Nasdaq National Market was $11.1875. The exercise price per share under each
Annual Option will equal the fair market value of a share of the Company's
common stock on the date of grant, generally the closing price reported on the
Nasdaq National Market. Unless earlier terminated under the terms of the 2000
Plan, each nonemployee director option will expire ten years after grant. With
the exception of the Effective Date Options, nonemployee director options will
be exercisable in full on and after their date of grant. Nonemployee director
options will remain exercisable for six months following the director's
termination of service unless such termination results from the director's
death, disability or a Change in Control as described below, in which case the
option will remain exercisable for 12 months, provided that in no event may the
option be exercised after its expiration date.
CHANGE IN CONTROL. The 2000 Plan defines a "Change in Control" of the
Company as any of the following events upon which the shareholders of the
Company immediately before the event do not retain immediately after the event,
in substantially the same proportions as their ownership of shares of the
Company's voting stock immediately before the event, direct or indirect
beneficial ownership of more than 50% of the total combined voting power of the
stock of the Company, its successor or the corporation to which the assets of
the Company were transferred, as the case may be: (i) a sale or exchange by the
shareholders in a single or series of related transactions of more than 50% of
the Company's voting stock; (ii) a merger or consolidation in which the Company
is a party; (iii) the sale, exchange or transfer of all or substantially all of
the assets of the Company; or (iv) a liquidation or dissolution of the Company.
If a Change in Control occurs, the surviving, continuing, successor or
purchasing corporation or other business entity or parent thereof may either
assume the Company's rights and obligations under the outstanding options or
substitute substantially equivalent options for the acquirer's stock. The 2000
Plan permits the board, in granting any option, to provide in the option
agreement that if the outstanding option is not assumed or replaced upon a
Change in Control then its vesting and exercisability will be accelerated
effective ten days prior to the Change in Control to such extent, if any, as
specified by the board in the option agreement. Options that are not assumed,
replaced or exercised prior to a Change in Control will terminate. In addition,
the 2000 Plan permits the board to provide in any option agreement that if,
within 12 months following a Change in Control, the optionee's service is
involuntarily terminated without cause (as defined in the plan) or the optionee
resigns for good reason (as defined in the plan), then the vesting and
exercisability of the option will be accelerated to such extent, if any, as
specified by the board in the option agreement, and the option will remain
exercisable for up to 12 months after the date of the optionee's termination of
service (but not beyond the option's expiration date).
TERMINATION OR AMENDMENT. The 2000 Plan will continue in effect until
the earlier of its termination by the board or the date on which all shares
available for issuance under the plan have been issued and all restrictions on
such shares under the terms of the plan and the agreements evidencing options
granted under the plan have lapsed. The board may terminate or amend the 2000
Plan at any time. However, without shareholder approval, the board may not amend
the 2000 Plan to increase the total
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number of shares of common stock issuable thereunder or effect any other change
that would require shareholder approval under applicable law. No termination or
amendment may affect an outstanding option unless expressly provided by the
board, and, in any event, may not adversely affect an outstanding option without
the consent of the optionee, unless the amendment is necessary to comply with
applicable law.
SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary is intended only as a general guide as to the
U.S. federal income tax consequences under current law of participation in the
2000 Plan and does not attempt to describe all possible federal or other tax
consequences of such participation or tax consequences based on particular
circumstances.
Options granted under the 2000 Plan are not intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code and,
therefore, will be nonstatutory stock options having no special tax status. An
optionee generally recognizes no taxable income as the result of the grant of a
nonstatutory stock option. Upon exercise of a nonstatutory stock option, the
optionee normally recognizes ordinary income in the amount of the difference
between the option exercise price and the fair market value of the shares on the
determination date (as defined below). If the optionee is an employee, such
ordinary income generally is subject to withholding of income and employment
taxes. The "determination date" is the date on which the option is exercised
unless the shares are subject to a substantial risk of forfeiture (as in the
case where an optionee is permitted to exercise an unvested option and receive
unvested shares which, until they vest, are subject to the Company's right to
repurchase them at the original exercise price upon the optionee's termination
of service) and are not transferable, in which case the determination date is
the earlier of (i) the date on which the shares become transferable or (ii) the
date on which the shares are no longer subject to a substantial risk of
forfeiture. If the determination date is after the exercise date, the optionee
may elect, pursuant to Section 83(b) of the Internal Revenue Code, to have the
exercise date be the determination date by filing an election with the Internal
Revenue Service no later than 30 days after the date the option is exercised.
Upon the sale of stock acquired by the exercise of a nonstatutory stock option,
any gain or loss, based on the difference between the sale price and the fair
market value on the determination date, will be taxed as capital gain or loss.
No tax deduction is available to the Company with respect to the grant of a
nonstatutory stock option or the sale of the stock acquired pursuant to such
grant. The Company generally should be entitled to a deduction equal to the
amount of ordinary income recognized by the optionee as a result of the exercise
of a nonstatutory stock option, except to the extent such deduction is limited
by applicable provisions of the Internal Revenue Code.
NEW PLAN BENEFITS
On April 7, 2000, the date on which it adopted the 2000 Plan, the Board
of Directors approved the grant of options to selected employees, and Effective
Date Options were granted under the terms of the 2000 Plan to the nonemployee
directors. However, the 2000 Plan provides that such options may not be
exercised and will terminate if the shareholders do not approve the 2000 Plan.
The Board of Directors established an exercise price of $15.00 per share under
these options. On April 7, 2000, the closing price per share of the Company's
common stock as reported on the Nasdaq National Market was $11.1875.
With the exception of the future automatic grant of options to
nonemployee directors, all options will be granted under the 2000 Plan at the
discretion of the Board of Directors, and, accordingly, are not yet
determinable. In addition, benefits under the 2000 Plan will depend on a number
of factors, including the fair market value of the Company's common stock on
future dates and the exercise decisions made by the optionees. Consequently it
is not possible to determine the benefits that might be received by optionees
receiving discretionary grants under the 2000 Plan. Furthermore, with respect to
options to be granted automatically to nonemployee directors on the dates of
subsequent annual meetings, the number of shares subject to each option will
depend on the values of the factors taken into account in applying the
Black-Scholes option pricing model. These include the fair market value of the
Company's common stock on the grant date, the option exercise price, the
expected life of the option, the expected stock price volatility, the expected
dividends on common stock, and the risk-free interest rate for the expected term
of the option.
The following table sets forth (i) the numbers of shares subject to
options granted to certain persons and groups of persons subject to the approval
of the 2000 Plan by the shareholders, and (ii) the numbers of shares that would
have been granted on July 19, 1999 the date of last year's annual meeting of
shareholders, to those nonemployee directors remaining in office immediately
following that annual meeting had the 2000 Plan been in effect and had the
number of shares subject to such options been determined by the Black-Scholes
formula method provided under the 2000 Plan for nonemployee director options to
be granted on the dates of the annual meetings in 2001 and subsequent years
during the term of the 2000 Plan.
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- ---------------------------------------- -------------------------------------- --------------------------------------
(i) (ii)
Options that Would Have Been Granted
to Nonemployee Directors under
Options Granted on April 7, 2000 Black-Scholes Formula Had 2000 Plan
Subject to Shareholder Approval of Been in Effect on Date of 1999
the 2000 Plan Annual Meeting
Name and Position No. of Shares No. of Shares
- ---------------------------------------- -------------------------------------- --------------------------------------
John R. Hart, President and Chief 456,586 0
Executive Officer
- ---------------------------------------- -------------------------------------- --------------------------------------
Ronald Langley, Chairman of the Board 427,932 0
of Directors
- ---------------------------------------- -------------------------------------- --------------------------------------
Richard H. Sharpe, Chief Operating 75,149 0
Officer
- ---------------------------------------- -------------------------------------- --------------------------------------
Gary W. Burchfield, Chief Financial 21,042 0
Officer and Treasurer
- ---------------------------------------- -------------------------------------- --------------------------------------
James F. Mosier, General Counsel and 21,042 0
Secretary
- ---------------------------------------- -------------------------------------- --------------------------------------
All current executive officers, as a 1,057,223 0
group (7 persons)
- ---------------------------------------- -------------------------------------- --------------------------------------
All current directors who are not 9,000 5,346
executive officers, as a group (6
persons)
- ---------------------------------------- -------------------------------------- --------------------------------------
All employees, including all current 1,082,223 0
officers who are not executive
officers, as a group (9 persons)
- ---------------------------------------- -------------------------------------- --------------------------------------
VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION
Approval of this proposal requires a number of votes "For" the proposal
that represents a majority of the shares present or represented by proxy and
voting at the Annual Meeting. Abstentions and broker non-votes will each be
counted as present for purposes of determining the presence of a quorum but will
have no effect on the outcome of the vote.
As described above, the 2000 Plan is intended to preserve the treatment
of option-related compensation as "performance-based compensation" for purposes
of Section 162(m) of the Code. By approving this proposal, the shareholders will
be approving, among other things, the eligibility requirements for participation
in the 2000 Plan and the Grant Limit.
The Board of Directors believes that adoption of the proposed 2000 Plan
is in the best interests of the Company and its shareholders for the reasons
stated above. THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
PROPOSAL TO APPROVE THE 2000 PLAN.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has an Executive Committee, an Audit
Committee, a Compensation Committee, and a Nominating Committee.
The Executive Committee currently consists of Messrs. Langley (Chairman), Hart,
and Weil. The Executive Committee may exercise substantially all the powers
vested in the Board of Directors except for certain actions as prescribed by
California law.
The Audit Committee consists of Messrs. Ruppert (Chairman), Foulkrod, and
Williams, none of whom has been or is an officer or employee of the Company. In
1998,1999, this Committee met sixseven times. The functions of the Audit Committee
include reviewing the accounting principles and practices employed by the
Company and its subsidiaries; meeting with the Company'sCompany"s independent auditors to
review their reports on their audits of the Company'sCompany"s financial statements,
their comments on the internal
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accounting controls of the Company and the action taken by management with
regard to such comments; reviewing auditor independence; issuing an Audit
Committee report to shareholders; and recommending annually to the Board of
Directors the appointment of the Company'sCompany"s independent auditors. The Audit
Committee has the authority, in its discretion, to order interim and unscheduled
audits and to perform such other duties as may be assigned to it from time to
time by the Board of Directors.
The Compensation Committee (the "Compensation Committee") consists of Messrs. Weil (Chairman), Foulkrod, and
Ruppert, none of whom was or is an officer or employee of the Company. The
Compensation Committee met three timesone time in 1998.1999. The functions of the Compensation
Committee include reviewing and approving the overall executive compensation
program for officers of the Company and its subsidiaries, considering and
reviewing compensation levels for services as a member of the Board of
Directors, approving individual executive officer compensation packages and
recommending to the Board of Directors modifications of the compensation package
for the Chief Executive Officer. The Compensation Committee'sCommittee"s goals are to
attract and retain qualified directors and key executives critical to the
long-term success of the Company, to reward executives for the long-term success
of the Company and the enhancement of shareholder value, and to integrate
executive compensation with both annual and long-term financial results of the
Company.
The Nominating Committee met one time in 1998.1999. Its members consist of Messrs.
Langley (Chairman), Ruppert, and Hart. The Committee will consider nominees
recommended by shareholders; such recommendations must be submitted in writing
to the Committee.
DIRECTORS' ATTENDANCE
In 1998,1999, there were sixfive meetings of the Board of Directors of the Company. All
of the directors attended 75% or more of the aggregate of their respective Board
of Directors and Committee meetings.
DIRECTORS' COMPENSATION
Directors who are not officers or employees of the Company or its subsidiaries
receive a retainer of $15,000 per year, $1,000 for each Board and Committee
meeting attended in person and $500.00 for each telephonic Board and Committee
meeting attended. There is a limit of $4,000 per day in Board and Committee fees
to any one director. In line with the recent study by William M. Mercer,
Incorporated, the annual retainer for each nonemployee member of the Board of
Directors was increased to $20,000 effective July 1, 2000; see Report of the
Compensation Committee.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the compensation for
fiscal year 19981999 of the (i) Chief Executive Officer of the Company (ii) the four
other highly compensated executive officers of the Company as of December 31,
19981999 whose salary and bonus exceeded $100,000. (Messrs. Langley, Hart, Sharpe,
Burchfield, and Mosier are sometimes hereinafter referred to as "Named
Officers"). Amounts under the caption "Bonus" are amounts earned for performance
during the year including amounts paid after the end of the year.
510
813
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation CompensationAwards
------------------- Awards
-----------------
Securities
Underlying
Options All Other
NAME AND PRINCIPAL POSITION Options All Other Year Salary Bonus (Shares) Compensation
---- ------ ----- -------- ------------
Chief Executive Officer:
- -----------------------
Chief Executive Officer:
- ------------------------
John R. Hart(1) (2) 1999 $800,000 -0- -0- $29,840(7)
President and Chief 1998 $800,000 -0- -0- $22,000(7)
President and ChiefExecutive Officer 1997 $800,000(3)$800,000(2) -0- -0- -0-
Executive Officer 1996 $300,000 $450,000 175,347(4)Officers
- ------------------
Ronald Langley(2) (3) 1999 $800,000 -0- Executive Officers(2):
- ----------------------
Ronald Langley(5)-0- $29,840(7)
Chairman of the 1998 $800,000 -0- -0- $22,000(7)
ChairmanBoard of theDirectors 1997 $800,000(3)$800,000(2) -0- -0- -0-
Board of Directors 1996 $300,000 $450,000 175,347(4) -0-
Richard H. Sharpe(6)Sharpe(4) 1999 $192,570 -0- -0- $29,840(7)
Chief Operating Officer 1998 $199,029 -0- -0- $22,000(7)
Chief Operating Officer 1997 $165,317 $ 18,340$18,340 -0- $18,734(7)
1996 $139,376 $ 28,000 60,119(4) $14,362(7)-0-
Gary W. Burchfield(8)Burchfield(5) 1999 $141,750 -0- -0- $26,121(7)
Chief Financial Officer 1998 $164,640 -0- -0- $20,930(7)
Chief Financial OfficerAnd Treasurer 1997 $135,000 $ 13,500$13,500 -0- $15,618(7)
And Treasurer 1996 $102,170 $ 35,000 42,083(4) $10,506(7)
James F. Mosier(9)Mosier(6) 1999 $131,985 -0- -0- $24,323(7)
General Counsel 1998 $126,910 -0- -0- $18,512(7)
General Counseland Secretary 1997 $113,017 $ 12,570$12,570 -0- $12,796(7)
and Secretary 1996 $ 82,835 $ 27,000 42,083(4) $ 8,497(7)
- --------------------------------
(1) Mr. Hart became President and CEO of the Company on November 20, 1996.
Prior to that time he was President and CEO of Physicians Insurance
Company of Ohio since July 15, 1995.
(2) Includes compensation received from Physicians prior to the Merger, as
well as compensation received from the Company.
(3) Mr. Langley and Mr. Hart were each compensated $533,328 by the Company
for consulting services in 1997 in the areas of investment banking,
investment portfolio analysis, and analysis of operations. In addition,
Mr. Langley and Mr. Hart entered into consulting agreements with a
subsidiary of Global Equity Corporation for annual compensation of
$266,672 each for consulting services in the areas of investment
banking, investment portfolio analysis, and analysis of operations. On
December 31, 1997, Mr. Langley and Mr. Hart each signed employment
agreements with the Company on terms substantially similar to the
consulting agreements.
(4) Options issued by Physicians prior to the November 1996 Merger under
the Physicians Insurance Company of Ohio 1995 Non-Qualified Stock
Option Plan and assumed by the Company upon the Merger. All options are
fully vested.
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9
(5)(3) Mr. Langley became Chairman of the Board of Directors of Physicians
Insurance Company of Ohio on July 15, 1995. He became Chairman of the
Board of Directors of the Company on November 20, 1996.
(6)(4) Mr. Sharpe became Chief Operating Officer of Physicians Insurance
Company of Ohio on June 3, 1994. He became Chief Operating Officer of
the Company on November 20, 1996.
(5) Mr. Burchfield became Chief Financial Officer and Treasurer of
Physicians Insurance Company of Ohio on November 3, 1995. He became
Chief Financial Officer and Treasurer of the Company on November 20,
1996.
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14
(6) Mr. Mosier became General Counsel and Secretary of Physicians Insurance
Company of Ohio in 1984. He became General Counsel and Secretary of the
Company on November 20, 1996.
(7) Represents amounts contributed by the Company to the PICO Holdings,
Inc. Employees 401(k) Retirement Plan and Trust. This retirement plan
conforms to the requirements of the Employee Retirement Income Security
Act.
(8) Mr. Burchfield became Chief Financial Officer and Treasurer of
Physicians on November 3, 1995. He became Chief Financial Officer and
Treasurer of the Company on November 20, 1996.
(9) Mr. Mosier became General Counsel and Secretary of Physicians in 1984.
He became General Counsel and Secretary of the Company on November 20,
1996.
OPTION GRANTS IN LAST FISCAL YEAR
Options to purchase 100,000 sharesNone of the Company's Common Stock were grantedNamed Officers received options during the year ended December 31,
1998 to A. Judson Hill, Executive Vice
President, as shown in Stock Ownership of Certain Beneficial Owners in
Management, footnote 10.1999.
OPTION EXERCISES AND FISCAL 19981999 YEAR-END VALUE
The following table provides information concerning options held as of December
31, 19981999 by the persons named in the Summary Compensation Table.Named Officers. No options were exercised in 19981999 by such
individuals.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised In-the-Money-Options
Options at 12/31/9899 At 12/31/9899 (1)
------------------- ---------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Ronald Langley(2) 406,747555,863 -0- -0- -0-
John R. Hart(2) 406,747613,170 -0- -0- -0-
Richard H. Sharpe 60,119 -0- -0- -0-
Gary W. Burchfield 42,083 -0- -0- -0-
James F. Mosier 42,083 -0- -0- -0-
- --------------------------------
(1) Based on the closing price of the Company's Common Stock on December
31, 19981999 on the Nasdaq National Market of $13.25$12.3125 per share.
(2) In addition to theseThe number of options shown above for Mr. Langley and Mr. Hart have aincludes
the right to purchase shares of the Company under Call Option
Agreements assumed by the Company in August 1998; see Stock Ownership
of Certain Beneficial Owners and Management, footnote 4.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the Compensation
Committee. Mr. Langley and Mr. Hart have been directors and executive officers
of GEC since September 5, 1995.
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10
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Langley and Mr. Hart each entered into employment agreements effective
December 31, 1997 with the Company. Total compensation to Mr. Langley and Mr.
Hart under these employment agreements is $800,000 each on an annual basis.
These employment agreements include a change in control clause providing that if
there is a change of control before December 31, 1999, the Company shall
immediately pay each employee a total lump sum of $2.4 million and an amount
equal to three times the highest annual bonus paid to the employee in the last
three years.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a rights offering conducted by the Company in March 2000, an
investment partnership named PICO Equity Investors, L.P. acquired on March 28,
2000, 3,333,333 newly issued shares which were not subscribed for in the rights
offering. PICO Equity Investors, L.P. is managed by PICO Equity Investors
Management, LLC. PICO Equity Investors Management, LLC is owned by Mr. Langley,
Mr. Hart and Mr. Hart entered into employment agreementsWeil. PICO Equity Investors Management, LLC will exercise all
voting and investment decisions with respect to these 3,333,333 shares for up to
ten years. The interest of PICO Equity Investors Management, LLC in any profits
and losses earned on this investment will be proportional to the Company,
effective December 31, 1997, see Summary Compensation Table, footnote 3. In
addition,capital
contributions made to PICO Equity Investors, L.P. by the partners; i.e.,
1,000/50,001,000. There are no other fees or other management compensation of
any kind payable to Mr. Langley, Mr. Hart, and Mr. Hart are entitled to receive 50% of the first $1
million of the profits of Summit Global Management, Inc. No compensation has
been paid under this arrangement.Weil.
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REPORT OF THE COMPENSATION COMMITTEE
This report of the Compensation Committee, (the "Compensation Committee"), and the Stock Price Performance Graph
set forth below, shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act of 1933, as amended (the "Securities Act") or under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") except to the
extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.
COMMITTEE MEMBERS
The three-member Compensation Committee of the Board of Directors is a standing
committee composed entirely of outside Directors. Mr. Weil is the chairman and
Mr. Foulkrod and Dr. Ruppert are the other members.
COMMITTEE FUNCTIONS
The Compensation Committee is responsible for assuring that all of the executive
compensation programs of the Company are developed, implemented, and
administered in a way that supports the Company's fundamental philosophy that a
significant proportionportion of executive compensation should be effectively linked to
companyCompany performance.
The Compensation Committee meets on a regularly scheduled basis. It reviews and
approves the overall executive compensation program which includes both base pay
and incentive compensation. It considers and approves individual executive
officer compensation packages based on recommendations of the Company's Chief
Executive Officer. It recommends, for the approval of the full Board, any
modification to the compensation package of the Company's Chief Executive
Officer.
The Compensation Committee also reviews the level of compensation paid to
nonemployee members of the Company's Board of Directors and makes
recommendations to the Board of Directors to modify the level of nonemployee
directors compensation when appropriate.
EXECUTIVE COMPENSATION PHILOSOPHY
The Board of Directors of Physiciansthe Company's predecessor retained an independent
compensation expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer
conducted an analysis of marketplace executive compensation levels. The scope of
Mercer's study covered the Company's Chairman and President and Chief Executive
Officer. The objectives of Mercer's study were as follows:
- -o Analyze the scope, responsibilities and skill requirements of the jobs
performed by Messrs. Langley and Hart and compare and contrast to
comparable benchmark executive positions found in the marketplace.
- -o Develop an appropriate methodology for selecting comparable benchmark
jobs, industry categories and a peer group of companies comparable to
the Company in terms of business focus, industry classification and
size; and competingcompetition for senior executives with the skills, expertise
and talent demonstrated by the Company's top two executives.
8
11
- -o For the appropriate benchmark jobs, industry category and peer company
group, collect information on marketplace compensation levels and
practices from compensation surveys and peer company proxy statements.
The companies included in the peer company group are not necessarily
those included in the Nasdaq Insurance Stock Index. DetermineIndex used to determine
the most relevant marketplace compensation levels and to compare actual
Company compensation levels.
- -o Develop alternate approaches for structuring the total compensation
package for the Company's top two executives, in terms of compensation
elements to be used, the mix of total pay and how short and long term
incentive compensation might be structured to accurately reflect
performance.
13
16
Mercer's study recommended to the Compensation Committee a compensation strategy
with the following objectives:
- -o To provide a total compensation package that:
- is competitive with market rates for executives with similar
skill, talent and job requirements.
- is closely linked to the Company's strategy and the role of
covered executives in building shareholder value through
growing the book value and, ultimately, the market value of
the Company.
- -o To retain critical executive talent by:
- providing a reasonable and competitive level of current income
(cash flow).
- providing for loss of future incentive opportunity if an
executive terminates employment before unrealized investment
gains are realized.
- -o To link executive rewards to shareholder interests by:
- tying incentive awards to growth in book value which
ultimately translates into increased market price per share
(as investments are liquidated for gains, and the Company
grows earnings).
- granting additional stock options in the future once current options are
exercised or expire.future.
The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. The Company obtains
industry and peer group surveys, and consults with independent experts, to
evaluate the Company's executive compensation programs in comparison with those
offered by its comparable competitors.
In March 2000, the Compensation Committee asked Mercer to examine the present
level of stock options granted to the Company's management, to recommend an
appropriate level of stock options to be granted in the future to the Company's
management, and to review the level of compensation paid to the Company's
nonemployee directors. The Compensation Committee believed such a review by
Mercer was necessary in order to assist the Company in retaining and attracting
qualified directors and executives, and to link executive and director rewards
to the long term interests of the Company's shareholders. Mercer's study
recommended that additional stock options be granted to management to enhance
the Company's ability to retain and attract key executives. Mercer's study also
recommended that, to enable the Company to remain competitive and to continue to
be able to retain and attract qualified members of the Board of Directors and to
align directors long term interests with those of shareholders, nonemployee
directors compensation should be increased and should contain an element of
stock options granted annually. The nonemployee directors options granted
annually will vest immediately as a further incentive to nonemployee directors
and to further link nonemployee director's compensation with the Company's
performance. In line with the recent study by Mercer, with respect to annual
cash remuneration paid to nonemployee directors, the board approved the
Compensation Committees recommendation that the Company's annual retainer fee be
increased to $20,000 per nonemployee director.
The Compensation Committee has considered amendments to the Internal Revenue
Code denying deductions for annual compensation to certain executives in excess
of $1 million, subject to certain exceptions. The Company's compensation
structure has been such that it does not believe that it is likely that the $1
million cap will affect the Company in the near future. The Internal Revenue
Service has issued proposed regulations which, among other things, provide for a
transition period of three years for plans previously approved by shareholders.
The Company is studying the proposed regulations, but has not yet determined
what steps may be required or desirable with respect to its existing plans.
EXECUTIVE COMPENSATION PROGRAM
The features of the executive compensation program as recommended by Mercer and
approved by the Compensation Committee are:
BASE COMPENSATION. A fixed rate, to be reviewed annually. Future adjustments
will take into account movement in executive compensation levels, changes in job
responsibilities, and the size of the Company.
914
1217
INCENTIVE AWARDS. Based on growth of book value per share in a fiscal year.
Awards are earned when a pre-determined threshold is surpassed. If book value
per share of the Company exceeds this threshold, the incentive award is equal to
5% of the increase in book value per share multiplied by the number of shares
outstanding at the beginning of the fiscal year. The threshold for 1998 is 19%1999 was 23%.
In addition, the Board of Directors of Physicians granted options under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan. The
options granted under said option plan were designed to reinforce the
relationship between the Company's future performance and the executive's
potential future financial rewards. These options were assumed by PICO Holdings,
Inc. on November 20, 1996. In line with this philosophy of providing incentives
to Executive Officers, the Company agreed to convert the GEC options of said
officers on an economically equivalent basis, to options to purchase shares of
the Company effective with the close of the PICO/GEC Combination.
GOALS OF COMPENSATION COMMITTEE
The Compensation Committee attempts to align executive compensation with the
value achieved by the executives for the Company's shareholders. The Company's
compensation program for executives emphasizes a combination of base salary,
discretionary bonuses, and stock options designed to attract, retain, and
motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and Company performance, as well as compensation
paid by comparable companies.
Executives also participate in other employee benefit programs, including health
insurance, group life insurance, and the Company's 401(k) Plan.
DISCUSSION OF 19981999 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
No bonus was paid with respect to the Company's performance in 1998.1999. In 1997,
the Compensation Committee recommended to the Board of Directors, and the Board
of Directors accepted the recommendation, that it was appropriate for the CEO
and the Chairman to be compensated as employees, rather than as consultants.
Accordingly, effective December 31, 1997, the CEO and Chairman entered into
employment agreements with the Company. The terms of these employment agreements
are substantially similar to the terms of the consulting agreements.
As stated above, the Compensation Committee believes the interest of Company
shareholders is best served by aligning the CEO's short-term compensation, over
and above competitive fixed annual rate of pay, with an increase in the
Company's book value per share which will ultimately be reflected in higher
market values per share. Specifically, a threshold was set at 80% of the S&P
500's annualized total return for the five previous calendar years. For 1998,1999,
this threshold was approximately 19%23%. Since the increase in the Company's book value per share
decreased in 1998 was approximately 4.5%,1999, and did not exceed the threshold, no bonus i.e. short-term incentive, was payable for
1998.
The1999.
In light of the Global Equity Corporation options converted to options to buy
the Company's stock in 1998 and the Company's assumption of the Guinness Peat
Group, plc call option agreements in 1998, the Compensation Committee awarded long term incentives in 1995 in the form of
175,347 non-qualified stockdid not
grant any options at the then current market value. In
addition, the Committee recommended that the CEO's options with GEC, initially
granted in 1995, be converted on an economically equivalent basis to purchase
shares of the Company upon consummation of the GEC/PICO transaction, December
16, 1998. Finally, the Committee recommended and the Board agreed that the
Company assume in August 1998 GPG's obligations to the CEO and Chairman under
November 1993 Call Option Agreements.in 1999.
The Committee believes that the compensation provided by this combination of
fixed annual compensation, and short-term and long term incentives provides a
mechanism to fairly compensate the CEO while providing the CEO with a strong
incentive to maximize shareholder value.
August 3, 1998June 28, 2000 Compensation Committee
John D. Weil, Chairman
S. Walter Foulkrod, III, Esq.
Richard D. Ruppert, MD
10COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the Compensation
Committee. None of these individuals had any of the interlock relationships
requiring disclosure.
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STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the Nasdaq
Insurance Stocks Index, and the Nasdaq Stock Market (U.S. Companies) for the
period January 1, 19941995 through December 31, 1998.1999.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG PICO HOLDINGS, INC., NASDAQ MARKET INDEX (U.S. COS.)
AND NASDAQ INSURANCE STOCK INDEX AND RUSSELL 2000 INDEX
[PERFORMANCE GRAPH]
FISCAL YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1993 1994 1995 1996 1997 1998Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99
PICO Holdings $100.00 28.95 36.84 43.42 67.76 27.59
NASDAQ Market Index (Excluding ADRs) $100.00 97.56 137.12 168.90 206.73 289.90100.00 127.27 150.00 234.09 96.36 89.55
NASDAQ Insurance Stock Index $100.00 100.57 140.41 159.18 195.00 195.18100.00 139.61 158.28 194.19 194.07 204.81
Russell 2000 Index 100.00 126.21 144.84 174.56 168.54 201.61
Assumes $100 invested on Jan. 1, 1995
Fiscal Year Ending Dec. 31, 1999
The graph assumes $100 was invested on January 1, 19941995 in the Company's Common
Stock, the Nasdaq Stock Market (U.S. Companies) Index, and the Nasdaq Insurance
Stocks Index, and that all dividends were reinvested. The performance of PICO
Holdings, Inc. stock on this graph represents the historical performance of
shares of Citation Insurance Group, which was renamed PICO Holdings, Inc. on
November 20, 1996. It does not represent the historical stock performance of
Physicians Insurance Company of Ohio.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based on a review of the copies of these reports received by the Company and
written representations from certain reporting persons that they have complied
with the relevant filing requirements, the Company believes that all filing
requirements have been complied with on a timely basis for the fiscal year ended
December 31, 1998.1999.
INDEPENDENT AUDITORS OF PICO
Deloitte & Touche LLP was the Company's independent auditing firm for fiscal
year 19981999 and has been appointed by the Board of Directors as the Company's
independent auditing firm for fiscal year 1999.2000. Representatives of Deloitte &
Touche LLP are expected to be present at the meeting, will have the opportunity
to make any statements they desire, and will be available to respond to
appropriate questions from shareholders.
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SOLICITATION OF PROXIES
The Board of Directors is not aware of any matters other than those specifically
stated in the Notice of Annual Meeting which are to be presented for action at
the meeting. However, should any further matter requiring a vote of the
shareholders arise, it is the intention of the persons named in the proxy to
vote the proxy in accordance with their judgment.
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The cost of this solicitation of proxies is being borne by the Company. In
addition to the solicitation of proxies by use of the mails, the Company may use
the services of one or more directors, officers or other regular employees of
the Company (who will receive no additional compensation for their services in
such solicitation) to solicit proxies personally and by telephone. Arrangements
will be made with brokerage firms and other custodians, nominees and fiduciaries
to forward solicitation material to the beneficial owners of the stock held of
record by such persons, and the Company will reimburse such firms or persons for
reasonable expenses actually incurred by them in so doing.
SHAREHOLDER NOMINATION OF DIRECTORS
Nominations other than those made by the directors of the Company must be in
writing and be delivered or mailed to the Secretary of the Company not less than
3560 days prior to the Annual Meeting. Such nominations must include the
information regarding each nominee required by the Bylaws of the Company.
Nominations not made according to these procedures will be disregarded.
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next annual meeting of
the stockholders of the Company must be received by the Company at its offices
no later than January 7, 2000,March 9, 2001, and satisfy the conditions established by the
Securities and Exchange Commission for stockholder proposals to be included in
the Company's proxy statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business that the Board of
Directors intends to present or knows that others will present at the meeting is
as set forth above. If any other matter or matters are properly brought before
the meeting, or any adjournment thereof, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters in
accordance with their best judgment.
By OrderSeptember 8, 2000
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APPENDIX 1
PICO HOLDINGS, INC.
2000 NONSTATUTORY STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The PICO Holdings, Inc. 2000 Nonstatutory Stock
Option Plan (the "PLAN") is hereby established effective as of April 7, 2000,
the date of its adoption by the Board (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Participating Company Group and its shareholders by providing an incentive to
attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "BOARD" means the Board of Directors /s/ Ronald Langley
Ronald Langley
Chairmanof the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board Juneduly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means PICO Holdings, Inc., a California
corporation, or any successor corporation thereto.
(e) "CONSULTANT" means a person engaged to provide consulting
or advisory services (other than as an Employee or a Director) to a
Participating Company, provided that the identity of such person, the nature of
such services or the entity to which such services are provided would not
preclude the Company from offering or selling securities to such person pursuant
to the Plan in reliance on registration on a Form S-8 Registration Statement
under the Securities Act.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
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(h) "EMPLOYEE" means any person treated as an employee
(including, an Officer or a Director who is treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan. The Company shall determine in good faith
and in the exercise of its discretion whether an individual has become or has
ceased to be an Employee and the effective date of such individual's employment
or termination of employment, as the case may be. For purposes of an
individual's rights, if any, under the Plan as of the time of the Company's
determination, all such determinations by the Company shall be final, binding
and conclusive, notwithstanding that the Company or any court of law or
governmental agency subsequently makes a contrary determination.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its discretion,
or by the Company, in its discretion, if such determination is expressly
allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be the closing price of a share of Stock (or the mean
of the closing bid and asked prices of a share of Stock if the Stock is so
quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap
Market or such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in The Wall Street
Journal or such other source as the Company deems reliable. If the relevant date
does not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in its
discretion.
(ii) If, on such date, the Stock is not listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be as determined by the Board in good faith without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
(k) "INSIDER" means an Officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended
to be an incentive stock option within the meaning of Section 422(b) of the
Code.
(m) "NONEMPLOYEE DIRECTOR" means a Director of the Company who
is not an Employee.
(n) "NONEMPLOYEE DIRECTOR OPTION" means an Option granted to a
Nonemployee Director pursuant to Section 7 of the Plan.
(o) "OFFICER" means any person designated by the Board as an
officer of the Company.
(p) "OPTION" means a right to purchase Stock pursuant to the
terms and conditions of the Plan. All Options shall be Nonstatutory Stock
Options.
(q) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock
Option" and a form of "Stock Option Agreement" incorporated therein by
reference, or such other form or forms as the Board may approve from time to
time.
(r) "OPTIONEE" means a person who has been granted one or more
Options.
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(s) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(t) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(u) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(v) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(w) "SECTION 162(M)" means Section 162(m) of the Code, as
amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(x) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(y) "SERVICE" means an Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee,
Director or a Consultant. An Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
an Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company. Notwithstanding the
foregoing, unless otherwise designated by the Company or required by law, a
leave of absence shall not be treated as Service for purposes of determining
vesting under the Optionee's Option Agreement. The Optionee's Service shall be
deemed to have terminated either upon an actual termination of Service or upon
the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its discretion,
shall determine whether the Optionee's Service has terminated and the effective
date of such termination.
(z) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(aa) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Option.
3.2 AUTHORITY OF OFFICERS. Any Officer shall have the authority to act
on behalf of the Company with respect to any matter, right, obligation,
determination or election which is the responsibility of or which is allocated
to the Company herein, provided the Officer has apparent authority with respect
to such matter, right, obligation, determination or election.
3.3 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its discretion:
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(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to determine the Fair Market Value of shares of Stock or
other property;
(c) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(d) to approve one or more forms of Option Agreement;
(e) to amend, modify, extend, cancel or renew any Option or to
waive any restrictions or conditions applicable to any Option or any shares
acquired upon the exercise thereof;
(f) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of Service with the Participating Company Group;
(g) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(h) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent not inconsistent with the
provisions of the Plan or applicable law.
3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.5 COMMITTEE COMPLYING WITH SECTION 162(M). If the Company is a
"publicly held corporation" within the meaning of Section 162(m), the Board may
establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Option which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).
3.6 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action,
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suit or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be one million two hundred thousand
(1,200,000) and shall consist of authorized but unissued or reacquired shares of
Stock or any combination thereof. If an outstanding Option for any reason
expires or is terminated or canceled or if shares of Stock are acquired upon the
exercise of an Option subject to a Company repurchase option and are repurchased
by the Company at the Optionee's exercise price, the shares of Stock allocable
to the unexercised portion of such Option or such repurchased shares of Stock
shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
change in the Stock through merger, consolidation, reorganization,
reincorporation, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, split-up, split-off, spin-off, combination of
shares, exchange of shares or similar change in the capital structure of the
Company, or in the event of payment of a dividend or distribution to the
shareholders of the Company in a form other than Stock (excepting normal cash
dividends) that has a material effect on the Fair Market Value of shares of
Stock, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options, in the Section 162(m) Grant
Limit set forth in Section 5.3 and in the exercise price per share of any
outstanding Options in order to prevent dilution or enlargement of Optionees'
rights under the Plan. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4.2 shall be rounded down
to the nearest whole number, and in no event may the exercise price of any
Option be decreased to an amount less than the par value, if any, of the stock
subject to the Option. The adjustments determined by the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Directors and Consultants, subject to the limitations and
restrictions set forth in Section 5.2. For purposes of the foregoing sentence,
"Employees," "Directors" and "Consultants" shall include prospective Employees,
prospective Directors and prospective Consultants to whom Options are granted in
connection with written offers of an employment or other service relationship
with the Participating Company Group. Eligible persons may be granted more than
one (1) Option. However, eligibility in accordance with this Section shall not
entitle any person to be granted an Option, or, having been granted an Option,
to be granted an additional Option.
5.2 OPTION GRANT RESTRICTIONS. A Nonemployee Director Option may be
granted only to a person who, at the time of grant, is a Nonemployee Director.
All Options shall be Nonstatutory Stock Options.
5.3 SECTION 162(M) GRANT LIMIT. Subject to adjustment as provided in
Section 4.2, at any such time as the Company is a "publicly held corporation"
within the meaning of Section 162(m), no Employee or prospective Employee shall
be granted one or more Options within any fiscal year of the Company which in
the aggregate are for the purchase of more than five hundred thousand (500,000)
shares. An Option which is canceled in the same fiscal year of the Company in
which it was granted shall continue to be counted against the Section 162(m)
Grant Limit for such period.
6. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option Agreement.
Option Agreements may incorporate all or any of the terms of the Plan by
reference and, except as otherwise set forth in Section 7 with respect to
Nonemployee Director Options, shall comply with and be subject to the following
terms and conditions:
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6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that the exercise
price per share shall be not less than eighty-five percent (85%) of the Fair
Market Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option may be granted with an exercise price
lower than the minimum exercise price set forth above if such Option is granted
pursuant to an assumption or substitution for another option in a manner
qualifying under the provisions of Section 424(a) of the Code.
6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be exercisable at
such time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that (a) no Option shall be exercisable after the expiration of twenty
(20) years after the effective date of grant of such Option and (b) no Option
granted to a prospective Employee, prospective Consultant or prospective
Director may become exercisable prior to the date on which such person commences
Service with a Participating Company. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an Option (other than a Nonemployee
Director Option), any Option granted hereunder shall terminate twenty (20) years
after the effective date of grant of the Option, unless earlier terminated in
accordance with its provisions.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check or
cash equivalent; (ii) by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Optionee having a Fair Market Value not less
than the exercise price; (iii) by delivery of a properly executed notice
together with irrevocable instructions to a broker providing for the assignment
to the Company of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"); (iv) provided that the Optionee is an Employee
(unless otherwise not prohibited by law, including, without limitation, any
regulation promulgated by the Board of Governors of the Federal Reserve System)
and in the Company's sole discretion at the time the Option is exercised, by
delivery of the Optionee's promissory note in a form approved by the Company for
the aggregate exercise price; provided that, if the Company is incorporated in
the State of Delaware, the Optionee shall pay in cash that portion of the
aggregate exercise price not less than the par value of the shares being
acquired; (v) by such other consideration as may be approved by the Board from
time to time to the extent permitted by applicable law; or (vi) by any
combination thereof. The Board may at any time or from time to time, by approval
of or by amendment to the standard forms of Option Agreement described in
Section 8, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the foregoing,
an Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided by
the Board, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either have
been owned by the Optionee for more than six (6) months (and not used for
another Option exercise by attestation during such period) or were not acquired,
directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company reserves, at any
and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(iii) PAYMENT BY PROMISSORY NOTE. No promissory note
shall be permitted if the exercise of an Option using a promissory note would be
a violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine. The Board shall have the authority to permit or
require the
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Optionee to secure any promissory note used to exercise an Option with the
shares of Stock acquired upon the exercise of the Option or with other
collateral acceptable to the Company. Unless otherwise provided by the Board, if
the Company at any time is subject to the regulations promulgated by the Board
of Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's securities,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its discretion, the Company shall have the right to require the
Optionee, through payroll withholding, cash payment or otherwise, including by
means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Fair
Market Value of any shares of Stock withheld or tendered to satisfy any such tax
withholding obligations shall not exceed the amount determined by the applicable
minimum statutory withholding rates. The Company shall have no obligation to
deliver shares of Stock or to release shares of Stock from an escrow established
pursuant to the Option Agreement until the Participating Company Group's tax
withholding obligations have been satisfied by the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to a
right of first refusal, one or more repurchase options, or other conditions and
restrictions as determined by the Board in its discretion at the time the Option
is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
6.6 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination of
the Option as otherwise provided herein and unless otherwise provided by the
Board in the grant of an Option and set forth in the Option Agreement, an Option
shall be exercisable after an Optionee's termination of Service only during the
applicable time period determined in accordance with this Section 6.6 and
thereafter shall terminate:
(i) DISABILITY. If the Optionee's Service terminates
because of the Disability of the Optionee, the Option, to the extent unexercised
and exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee (or the Optionee's guardian or legal representative)
at any time prior to the expiration of twelve (12) months (or such longer period
of time as determined by the Board, in its discretion) after the date on which
the Optionee's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Optionee's Service terminates
because of the death of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee's legal representative or other person who acquired
the right to exercise the Option by reason of the Optionee's death at any time
prior to the expiration of twelve (12) months (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within three (3) months (or such longer
period of time as determined by the Board, in its discretion) after the
Optionee's termination of Service.
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(iii) TERMINATION AFTER CHANGE IN CONTROL. The Board
may, in its discretion, provide in any Option Agreement that if the Optionee's
Service ceases as a result of "Termination After Change in Control" (as defined
in such Option Agreement), then (1) the Option, to the extent unexercised and
exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee (or the Optionee's guardian or legal representative)
at any time prior to the expiration of twelve (12) months after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date, and (2) the exercisability and vesting of the Option and
any shares acquired upon the exercise thereof shall be accelerated effective as
of the date on which the Optionee's Service terminated to such extent, if any,
as shall have been determined by the Board, in its discretion, and set forth in
the Option Agreement. Notwithstanding the foregoing, if the Company and the
other party to the transaction constituting a Change in Control agree to treat
such transaction as a "pooling-of-interests" for accounting purposes and it is
determined that the provisions or operation of this Section 6.6(a)(iii) would
preclude treatment of such transaction as a "pooling-of-interests" and provided
further that in the absence of the preceding sentence such transaction would be
treated as a "pooling-of-interests," then this Section 6.6(a)(iii) shall be
without force or effect, and the vesting and exercisability of the Option shall
be determined under any other applicable provision of the Plan or the Option
Agreement evidencing such Option.
(iv) OTHER TERMINATION OF SERVICE. If the Optionee's
Service terminates for any reason, except Disability, death or Termination After
Change in Control, the Option, to the extent unexercised and exercisable by the
Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee at any time prior to the expiration of six (6) months
(or such longer period of time as determined by the Board, in its discretion)
after the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time periods
set forth in Section 6.6(a) is prevented by the provisions of Section 11 1999below,
the Option shall remain exercisable until six (6) months (or such longer period
of time as determined by the Board, in its discretion) after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
6.7 TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by the Board, in its
discretion, and set forth in the Option Agreement evidencing such Option, an
Option shall be assignable or transferable subject to the applicable
limitations, if any, described in the General Instructions to Form S-8
Registration Statement under the Securities Act.
7. TERMS AND CONDITIONS OF NONEMPLOYEE DIRECTOR OPTIONS.
----------------------------------------------------
Nonemployee Director Options shall be evidenced by Option Agreements
specifying the number of shares of Stock covered thereby, in such form as the
Board shall from time to time establish. Such Award Agreements may incorporate
all or any of the terms of the Plan by reference and shall comply with and be
subject to the terms and conditions of Section 6 to the extent not inconsistent
with this Section and the following terms and conditions:
7.1 AUTOMATIC GRANT. Subject to the execution by a Nonemployee Director
of an appropriate Option Agreement, Nonemployee Director Options shall be
granted automatically and without further action of the Board, as follows:
8
28
(a) EFFECTIVE DATE OPTIONS. Each person who is a Nonemployee
Director on the Effective Date shall be granted on such date an Option
("Effective Date Option") to purchase one thousand five hundred (1,500) shares
of Stock.
(b) ANNUAL OPTIONS. On the date of each annual meeting of the
shareholders of the Company, commencing with the annual meeting held in 2001,
each Nonemployee Director (including any Director who previously did not qualify
as a Nonemployee Director but who subsequently becomes a Nonemployee Director)
who remains a Nonemployee Director immediately following such annual meeting
shall be granted an Option (an "Annual Option") to purchase that number of whole
shares of Stock determined by dividing (i) fifteen thousand dollars ($15,000) by
(ii) an amount equal to the estimated fair value of an option for one (1) share
of Stock (the "FAIR VALUE PER SHARE") determined as of the date of such annual
meeting using the Black-Scholes option pricing model in accordance with the
following: The Company shall, at its expense, arrange with its independent
accountants to make a determination of the applicable Fair Value Per Share as of
the date of grant of the Nonemployee Director Options. The Black-Scholes option
pricing model shall be applied to determine the applicable Fair Value Per Share
in the same manner in which it is applied for the purposes of the Company's
financial statement disclosures made in accordance with Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), taking into account those factors
which the Company's independent accountants determine would be appropriate in
applying the Black-Scholes option pricing model for purposes of SFAS 123 to an
option having the same terms as the terms of the Nonemployee Director Options
granted pursuant to this subsection (b).
(c) RIGHT TO DECLINE NONEMPLOYEE DIRECTOR OPTION.
Notwithstanding the foregoing, any person may elect not to receive a Nonemployee
Director Option by delivering written notice of such election to the Board no
later than the day prior to the date such Nonemployee Director Option would
otherwise be granted. A person so declining a Nonemployee Director Option shall
receive no payment or other consideration in lieu of such declined Nonemployee
Director Option. A person who has declined a Nonemployee Director Option may
revoke such election by delivering written notice of such revocation to the
Board no later than the day prior to the date such Nonemployee Director Option
would be granted pursuant to Section 7.1(a) or (b), as the case may be.
7.2 EXERCISE PRICE. The exercise price per share of Stock subject to
each Effective Date Option shall be fifteen dollars ($15.00), an amount in
excess of the Fair Market Value of a share of Stock on the Effective Date. The
exercise price per share of stock subject to each Annual Option shall be the
Fair Market Value of a share of stock on the date of grant of the Annual Option.
7.3 EXERCISABILITY AND TERM OF NONEMPLOYEE DIRECTOR OPTIONS. Each
Nonemployee Director Option shall be fully vested and exercisable on the date of
grant of the Option and thereafter until its termination; provided, however,
that no Effective Date Option shall be exercisable prior to the date on which
the shareholders of the Company initially approve the Plan. Each Nonemployee
Director Option shall terminate and cease to be exercisable on the tenth (10th)
anniversary of the date of grant of the Option, unless earlier terminated in
accordance with the terms of the Plan or the Option Agreement evidencing such
Option.
7.4 EFFECT OF TERMINATION OF SERVICE. Subject to earlier termination of
the Nonemployee Director Option as otherwise provided herein, each Nonemployee
Director Option shall be exercisable after the Optionee's termination of Service
only during the applicable time period determined in accordance with Section 6.6
and thereafter shall terminate; provided, however, that if an Optionee's Service
terminates by reason of the Optionee ceasing to be a Director as a result of a
Change in Control (as defined in Section 9, below), the Nonemployee Director
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee at any time
prior to the expiration of twelve (12) months after the date on which the
Optionee's Service was so terminated, but in any event no later than the Option
Expiration Date.
7.5 TRANSFERABILITY OF NONEMPLOYEE DIRECTOR OPTIONS. During the
lifetime of the Optionee, a Nonemployee Director Option shall be exercisable
only by the Optionee or the Optionee's guardian or legal representative. No
Nonemployee Director Option shall be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution. Notwithstanding the
foregoing, to the extent permitted by the Board, in its discretion, and set
forth in the Option Agreement evidencing such Option, a Nonemployee Director
Option shall be assignable or transferable subject to the applicable
limitations, if any, described in the General Instructions to Form S-8
Registration Statement under the Securities Act.
9
29
8. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
8.1 OPTION AGREEMENT. Unless otherwise provided by the Board at the
time the Option is granted, an Option shall comply with and be subject to the
terms and conditions set forth in the appropriate form of Option Agreement
approved by the Board concurrently with its adoption of the Plan and as amended
from time to time.
8.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any standard form of Option Agreement
described in this Section 8 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.
9. CHANGE IN CONTROL.
-----------------
9.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the shareholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, a "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting securities of the Company or, in the case of a Transaction
described in Section 9.1(a)(iii), the corporation or other business entity to
which the assets of the Company were transferred (the "TRANSFEREE"), as the case
may be. For purposes of the preceding sentence, indirect beneficial ownership
shall include, without limitation, an interest resulting from ownership of the
voting securities of one or more corporations or other business entities which
own the Company or the Transferee, as the case may be, either directly or
through one or more subsidiary corporations or other business entities. The
Board shall have the right to determine whether multiple sales or exchanges of
the voting securities of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
9.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change in
Control, the surviving, continuing, successor, or purchasing corporation or
other business entity or parent thereof, as the case may be (the "ACQUIRING
CORPORATION"), may, without the consent of any Optionee, either assume the
Company's rights and obligations under outstanding Options or substitute for
outstanding Options substantially equivalent options for the Acquiring
Corporation's stock. In the event the Acquiring Corporation elects not to assume
or substitute for outstanding Options in connection with a Change in Control,
the exercisability and vesting of each such outstanding Option and any shares
acquired upon the exercise thereof held by Optionees whose Service has not
terminated prior to such date shall be accelerated, effective as of the date ten
(10) days prior to the date of the Change in Control, to such extent, if any, as
shall have been determined by the Board, in its discretion, and set forth in the
Option Agreement evidencing such Option. The exercise or vesting of any Option
and any shares acquired upon the exercise thereof that was permissible solely by
reason of this Section 9.2 and the provisions of such Option Agreement shall be
conditioned upon the consummation of the Change in Control. Any Options which
are neither assumed or substituted for by the Acquiring Corporation in
connection with the Change in Control nor exercised as of the date of the Change
in Control shall terminate and cease to be outstanding effective as of the date
of the Change in Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Change in Control and any consideration
received pursuant to the Change in Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in
10
30
Section 9.1(a)(i) constituting a Change in Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding Options
shall not terminate unless the Board otherwise provides in its discretion.
9.3 FEDERAL EXCISE TAX UNDER SECTION 4999 OF THE CODE.
(a) EXCESS PARACHUTE PAYMENT. In the event that any
acceleration of vesting pursuant to an Option and any other payment or benefit
received or to be received by the Optionee would subject the Optionee to any
excise tax pursuant to Section 4999 of the Code due to the characterization of
such acceleration of vesting, payment or benefit as an "excess parachute
payment" under Section 280G of the Code, the Optionee may elect, in his or her
sole discretion, to reduce the amount of any acceleration of vesting called for
under the Option in order to avoid such characterization. Notwithstanding the
foregoing, if the Company and the other party to the transaction constituting a
Change in Control agree to treat such transaction as a "pooling-of-interests"
for accounting purposes and it is determined that the provisions or operation of
this Section 9.3(a) would preclude treatment of such transaction as a
"pooling-of-interests" and provided further that in the absence of the preceding
sentence such transaction would be treated as a "pooling-of-interests," then
this Section 9.3(a) shall be without force or effect.
(b) DETERMINATION BY INDEPENDENT ACCOUNTANTS. To aid the
Optionee in making any election called for under Section 9.3(a), no later than
the date of the occurrence of any event that might reasonably be anticipated to
result in an "excess parachute payment" to the Optionee as described in Section
9.3(a), the Company shall request a determination in writing by independent
public accountants selected by the Company (the "ACCOUNTANTS"). As soon as
practicable thereafter, the Accountants shall determine and report to the
Company and the Optionee the amount of such acceleration of vesting, payments
and benefits which would produce the greatest after-tax benefit to the Optionee.
For the purposes of such determination, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Sections 280G and 4999
of the Code. The Company and the Optionee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make their required determination. The Company shall bear all fees and expenses
the Accountants may reasonably charge in connection with their services
contemplated by this Section 9.3(b).
10. PROVISION OF INFORMATION.
------------------------
Each Optionee shall be given access to information concerning the
Company equivalent to that information generally made available to the Company's
common shareholders.
11. COMPLIANCE WITH SECURITIES LAW.
------------------------------
The grant of Options and the issuance of shares of Stock upon exercise
of Options shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities. Options may not
be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, no Option may be exercised
unless (a) a registration statement under the Securities Act shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (b) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal counsel
to be necessary to the lawful issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the failure to issue or sell
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of any Option, the Company may require the
Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
11
31
12. TERMINATION OR AMENDMENT OF PLAN.
--------------------------------
The Board may terminate or amend the Plan at any time. However, subject
to changes in applicable law, regulations or rules that would permit otherwise,
without the approval of the Company's shareholders, there shall be (a) no
increase in the maximum aggregate number of shares of Stock that may be issued
under the Plan (except by operation of the provisions of Section 4.2) and (b) no
other amendment of the Plan that would require approval of the Company's
shareholders under any applicable law, regulation or rule. No termination or
amendment of the Plan shall affect any then outstanding Option unless expressly
provided by the Board. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option without the consent of the
Optionee, unless such termination or amendment is necessary to comply with any
applicable law, regulation or rule.
13. SHAREHOLDER APPROVAL.
--------------------
The Plan has been adopted by the Board subject to its approval by the
Company's shareholders at the 2000 Annual Meeting of the shareholders, including
any adjournment thereof (the "2000 Annual Meeting"). Any Option granted prior to
the approval of the Plan by the Company's shareholders shall become exercisable
no earlier than the date of shareholder approval of the Plan. In the event that
such shareholder approval is not obtained at the 2000 Annual Meeting, each such
Option shall terminate effective on the date of the 2000 Annual Meeting.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing sets forth the PICO Holdings, Inc. 2000 Nonstatutory Stock
Option Plan as duly adopted by the Board on April 7, 2000.
James F. Mosier
Secretary
12
1532
PROXY PROXY
PICO HOLDINGS, INC.
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints John R. Hart and James F. Mosier, or either
of them acting alone, as proxies, each with the power to appoint his substitute,
and hereby authorizes them to represent, and to vote as designated below, all
the shares of Common Stock of PICO Holdings, Inc. (the "Company") held of record
by the undersigned on June 4, 1999September 7, 2000 at the Annual Meeting of Shareholders to
be held at the Museum of Contemporary Art, Coast Room, 700 Prospect Street, La
Jolla, California 92037 on Monday, JulyOctober 19, 19992000 at 9:00 a.m. (PDT)(PT), and at any
adjournment thereof.
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPEENVELOPE.
(Continued and to be signed on reverse side)side.)
- -------------------------------------------------------------------------------
13--------------------------------------------------------------------------------
1633
PICO HOLDINGS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY [X]
FOR WITHHOLD FOR ALL
1. Election of Three Directors, to Serve for Three-Year ALL ALL EXCEPT 2. In their discretion, the above named
Terms until the Annual Meeting of Shareholders in 2002. Proxies are authorized to vote upon
NOMINEES: John R. Hart, Ronald Langley, John D. Weil [ ] [ ] [ ] each other item of business as may
properly come before the meeting or
any adjournment thereof.
- ------------------------------------------------------------- THIS PROXY, WHEN PROPERLY EXECUTED, WILL
(To withhold authority to vote for an individual nominee, BE VOTED IN THE MANNER DIRECTED HEREIN,
strike a line through the nominee's name in the list above.) IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL LISTED ABOVE.
-------------------------------
(Signature)
-------------------------------
(Signature if held jointly)
Dated:
-------------------------
Please sign exactly as your name(s) appears on your
stock certificate. If such stock is held by joint
tenants, both persons should sign. When signing as
attorney, executor, administrator, trustee or guardian,
please note your title as such. If the stock is
registered in the name of a corporation, please sign in
the corporation's name by the president or any other
authorized officer. If the stock is registered in the
name of a partnership, please sign in the partnership's
name by an authorized person.
- ------------------------------------------------------------------------------------------------------------------------------------ONLY.
For Withhold For All
1. Election of Two Directors, to Serve for All All Except
Three-Year Terms until the Annual Meeting [ ] [ ] [ ]
of Shareholders in 2003.
NOMINEES: Richard D. Ruppert, MD,
S. Walter Foulkrod, III, Esq.
------------------------------------------------
(To withhold authority to vote for an individual
nominee, strike a line through the nominee's name
in the list above.)
2. To ratify the appointment of Deloitte & Touche, LLP
as the Company's independent auditors for fiscal years
1999 and 2000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To amend Article III of the Company's Articles of
Incorporation to eliminate the Preferred Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve the Company's 2000 Nonstatutory Stock
Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion, the above named Proxies are
authorized to vote upon each other item of business
as may properly come before the meeting or any
adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN
THE MANNER DIRECTED HEREIN. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE PROPOSALS LISTED ABOVE.
- ------------------------------------------------
(Signature)
- ------------------------------------------------
(Signature if held jointly)
Dated:
------------------------------------------
Please sign exactly as your name(s) appears on
your stock certificate. If such stock is held
by joint tenants, both persons should sign.
When signing as attorney, executor,
administrator, trustee or guardian, please note
your title as such. If the stock is registered
in the name of a corporation, please sign in
the corporation's name by the president or any
other authorized officer. If the stock is
registered in the name of a partnership, please
sign in the partnership's name by an authorized
person.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
EVEN IF YOU ARE PLANNING TO ATTEND THE MEETING IN PERSON,
YOU ARE URGED TO SIGN AND MAIL THIS PROXY IN THE RETURN ENVELOPE
SO THAT YOUR STOCK MAY BE REPRESENTED AT THE MEETING.
14