[LOGO OMITTED]
PENN-AMERICA GROUP, INC.
420 S. York Road
Hatboro, Pennsylvania 19040
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 14, 2003
____________________
The Annual Meeting of Shareholders (the "Meeting") of Penn-America
Group, Inc., a Pennsylvania corporation (the "Company"), will be held on May 14,
2003 at 10:00 a.m., local time, at the Company's offices at 420 S. York Road,
Hatboro, Pennsylvania, for the following purposes:
1. To elect directors to hold office until the Annual Meeting of Shareholders
in 2004 and until their respective successors are duly elected and
qualified;
2. To ratify amendments to the 2002 Stock Incentive Plan, formerly known as
the Amended and Restated 1993 Stock Incentive Plan; and,
3. To transact such other business as may properly come before the Meeting and
any and all adjournments and postponements thereof.
The Board of Directors has fixed the close of business on March 31,
2003 as the record date for the Meeting. Only shareholders of record at that
time are entitled to notice of and to vote at the Meeting and any adjournment or
postponement thereof.
The enclosed proxy is solicited by the Board of Directors of the
Company. The cost of soliciting proxies will be borne by the Company. Reference
is made to the accompanying Proxy Statement for further information with respect
to the business to be transacted at the Meeting.
All shareholders are cordially invited to attend the Meeting in person.
However, to assure your representation at the Meeting, you are urged to date,
sign and return the enclosed proxy promptly. Any shareholder attending the
Meeting may vote in person even if he or she has returned a proxy.
By Order of the Board of Directors,
Garland P. Pezzuolo
Secretary
April 11, 2003
Annual Reports to Shareholders, including financial statements, are
being mailed to shareholders together with these proxy materials, commencing on
or about April 11, 2003.
1
[LOGO OMITTED]
PENN-AMERICA GROUP, INC.
420 S. York Road
Hatboro, Pennsylvania 19040
___________________
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
MAY 14, 2003
___________________
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Penn-America Group, Inc., a Pennsylvania
corporation (the "Company"), for use at the Company's Annual Meeting of
Shareholders (the "Meeting"), which is scheduled to be held at 10:00 a.m., local
time, on May 14, 2003, at 420 S. York Road, Hatboro, Pennsylvania for the
purposes set forth in the foregoing notice of the Meeting. This Proxy Statement,
the foregoing notice and the enclosed proxy are being sent to shareholders on or
about April 11, 2003.
The Board of Directors knows of no matters that are likely to be
brought before the Meeting, other than the matters specifically referred to in
the notice of the Meeting. If any other matters properly come before the
Meeting, however, the persons named in the enclosed proxy, or their duly
constituted substitutes acting at the Meeting, will be authorized to vote or
otherwise act thereon in accordance with their judgment on such matters. If the
enclosed proxy is properly executed and returned prior to voting at the Meeting,
the shares represented thereby will be voted in accordance with the instructions
marked thereon. In the absence of instructions, executed proxies will be voted
"FOR" the nominees to the Board of Directors in the election of directors and
for ratification of amendments to the Company's 2002 Stock Incentive Plan.
Any proxy may be revoked at any time prior to its exercise by notifying
the Secretary of the Company in writing, by delivering a duly executed proxy
bearing a later date, or by attending the Meeting and voting in person.
VOTING SECURITIES AND SECURITY OWNERSHIP
Voting Securities
Each shareholder of record at the close of business on March 31, 2003
is entitled to one vote for each share held. At the close of business on March
31, 2003, there were outstanding 14,610,577 shares of the Company's Common
Stock, $.01 par value ("Common Stock"). The presence at the Meeting, in person
or by proxy, of shareholders entitled to cast at least a majority of the votes
which all shareholders are entitled to cast will constitute a quorum for the
Meeting. In the event that the Meeting is adjourned for one or more periods
aggregating at least 15 days due to the absence of a quorum, those shareholders
entitled to vote who attend the adjourned Meeting, although less than a quorum
as described in the preceding sentence, shall constitute a quorum for the
purpose of acting upon any matter set forth in the foregoing notice.
In the election of directors, the nominees receiving a plurality of the
votes cast at the Meeting shall be elected. In the ratification of Amendments to
the 2002 Stock Incentive Plan, formerly known as the Amended and Restated 1993
Stock Incentive Plan (hereinafter referred to as the "2002 Stock Incentive Plan"
or the "Plan"), and approval of all other matters to be submitted to the
shareholders, an affirmative vote of a majority of the votes cast at the Meeting
is required. For purposes of determining the number of votes cast with respect
to any voting matter,
2
only those cast "FOR" or "AGAINST" are included. Abstentions and broker
non-votes are counted only for purposes of determining whether a quorum is
present at the Meeting.
Security Ownership of Management and Principal Shareholders
The table below sets forth certain information as of March 31, 2003
regarding the beneficial ownership, as defined in regulations of the Securities
and Exchange Commission, of Common Stock of (i) each person who is known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Company's Common Stock, (ii) each director and nominee for director of the
Company, (iii) the Company's Chief Executive Officer and the executive officers
listed in the Compensation Table on page 12 and (iv) all directors and executive
officers as a group. On March 31, 2003, there were 14,610,577 shares of the
Company's Common Stock outstanding. Unless otherwise specified, the named
beneficial owner has sole voting and investment power. The information in the
table below was furnished by the persons listed.
Amount Beneficially Percent
Name of Beneficial Owner Owned(1)(2)(3) of Class
------------------------ -------------- --------
Penn Independent Corporation............................. 4,631,250 31.7%
420 S. York Road
Hatboro, PA 19040
Irvin Saltzman........................................... 4,743,750 (4) 32.5%
420 S. York Road
Hatboro, PA 19040
Jon S. Saltzman.......................................... 4,833,263 (5) 33.1%
Jami Saltzman-Levy....................................... 4,632,635 (6) (7) 31.7%
E. Anthony Saltzman...................................... 4,631,250 (8) 31.7%
Richard L. Duszak........................................ 2,500 *
Charles Ellman........................................... 138,050 (9) *
Robert A. Lear........................................... 76,500 *
M. Moshe Porat, Ph.D., CPCU.............................. 87,000 (10) *
Paul Simon............................................... 40,500 *
Thomas P. Bowie.......................................... -0-(11) *
Joseph F. Morris......................................... 44,898 *
J. Ransley Lennon........................................ 39,144 *
Garland P. Pezzuolo...................................... 10,142 (12) *
John D. Curry............................................ 15,510 *
Avenir Corporation....................................... 972,010 8.4%
Dimensional Fund Advisors, Inc........................... 900,100 6.35%
FMR Corporation.......................................... 1,077,875 7.6%
Wellington Management Company, LLP....................... 1,076,000 7.6%
All executive officers and directors
as a group (14 persons)............................ 5,408,892 37%
------------
* Less than 1%
(1) Includes shares of restricted stock awarded to certain officers of the
Company under the Company's 2002 Stock Incentive Plan, which have not yet
vested but which vest immediately in the event of a "change in control" (as
that term is defined in the relevant agreements), and over which such
persons maintain voting power, as follows: 9,000 shares for Mr. Morris and
15,000 shares for Mr. Curry.
3
(2) Includes shares subject to exercisable options, as follows: 112,500 for Mr.
Irvin Saltzman; 81,262 for Mr. Jon Saltzman; 58,500 for Mr. Lear; 69,750
for Dr. Moshe Porat; 33,750 for Mr. Ellman; 36,000 for Mr. Simon; 22,516
for Mr. Lennon; 20,898 shares for Mr. Morris; and, 3,391 shares for Ms.
Pezzuolo.
(3) Includes shares acquired by certain executives under a Company-sponsored
executive loan program approved by the Board of Directors between 2000 and
2001 (see "Certain Transactions"), as follows: Jon S. Saltzman, 71,250
shares; Joseph F. Morris, 9,000 shares; J.Ransley Lennon, 16,500 shares;
and, Garland P. Pezzuolo, 6,000 shares.
(4) Of these shares, 4,631,250 are owned of record by Penn Independent
Corporation. Mr. Irvin Saltzman, Chairman of the Board of Directors, owns
45.94% of the outstanding voting securities of Penn Independent.
(5) Of these shares, 4,631,250 are owned of record by Penn Independent. Mr. Jon
S. Saltzman, collectively with Ms. Jami Saltzman-Levy and Mr. E. Anthony
Saltzman, serves as a trustee of five trusts that own a total of 48.17% of
the outstanding voting securities of Penn Independent. Additionally, Mr.
Jon Saltzman serves individually as trustee of two trusts that collectively
own 1.02% of the outstanding voting securities of Penn Independent. Mr. Jon
Saltzman also owns .11% of the outstanding voting securities of Penn
Independent in his own name. The total number of shares of Company common
stock owned by Mr. Jon Saltzman includes 71,250 shares that are owned
jointly with his spouse, and excludes 12,225 shares held by Mr. Jon
Saltzman's spouse to which he disclaims beneficial ownership.
(6) Of these shares, 4,631,250 are owned of record by Penn Independent. Ms.
Jami Saltzman-Levy, collectively with Mr. Jon S. Saltzman and Mr. E.
Anthony Saltzman, serves as trustee of five trusts that own a total of
48.17% of the outstanding voting securities of Penn Independent.
Additionally, Ms. Jami Saltzman-Levy serves individually as trustee of nine
trusts that collectively own 4.59% of the outstanding voting securities of
Penn Independent. Ms. Jami Saltzman-Levy also owns .11% of the outstanding
voting securities of Penn Independent in her own name.
(7) 1,385 of such shares are owned jointly with her spouse.
(8) These shares are owned of record by Penn Independent. Mr. E. Anthony
Saltzman, collectively with Ms. Jami Saltzman-Levy and Mr. Jon S. Saltzman,
serves as trustee of five trusts that own a total of 48.17% of the
outstanding voting securities of Penn Independent. Mr. E. Anthony Saltzman
also owns .11% of the outstanding voting securities of Penn Independent in
his own name.
(9) Excludes 45,000 shares held by Mr. Ellman's wife to which Mr. Ellman
disclaims beneficial ownership.
(10) 17,250 of such shares are owned jointly with his spouse.
(11) On October 30, 2002, Mr. Bowie's employment with the Company was
terminated.
(12) 750 of such shares are owned jointly with her spouse.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Nominees for Election
At the Meeting, the shareholders will elect 9 directors to hold office
until the Annual Meeting of Shareholders in 2004 and until their respective
successors are duly elected and qualified. Unless contrary instructions are
given, the shares represented by a properly executed proxy will be voted "FOR"
the election of the following nominees: Irvin Saltzman, Jon S. Saltzman, Richard
L. Duszak, Charles Ellman, Robert A. Lear, Jami Saltzman-Levy, M. Moshe Porat,
E. Anthony Saltzman and Paul Simon. All of the nominees are presently members of
the Board of Directors of the Company.
The Board of Directors believes that the nominees will be able to serve
as directors. If any nominee is unable to serve, the persons named in the
enclosed proxy will vote the shares they represent for the election of such
other persons as the Board of Directors may recommend, unless the Board of
Directors reduces the number of directors.
4
Set forth below is certain information concerning the nominees for election
as directors:
Director
Name Age Since Position with the Company
---- --- ----- -------------------------
Irvin Saltzman............. 80 1993 Chairman, Director
Jon S. Saltzman............ 45 1993 President and Chief Executive Officer, Director
Richard L. Duszak.......... 62 2003 Director
Charles Ellman............. 74 1994 Director
Robert A. Lear............. 57 1993 Director
Jami Saltzman-Levy......... 46 1994 Director
Dr. M. Moshe Porat......... 56 1994 Director
E. Anthony Saltzman........ 43 2001 Director
Paul Simon................. 74 1997 Director
Mr. Irvin Saltzman is the founder of Penn-America Insurance Company
("Penn-America"), the wholly-owned subsidiary of the Company, and of Penn
Independent Corporation ("Penn Independent"), an insurance enterprise which owns
32% of the outstanding shares of the Company. Mr. Saltzman has been Chairman of
the Board of Directors of the Company since its formation in July 1993. He has
been active in the insurance industry since 1947. Mr. Saltzman is the father of
Mr. Jon S. Saltzman, Ms. Jami Saltzman-Levy and Mr. E. Anthony Saltzman. See
"Certain Transactions".
Mr. Jon S. Saltzman has been President and Chief Executive Officer of
the Company since its formation in July 1993, and an officer and director of
Penn Independent since 1985 and 1987, respectively. He has been President, Chief
Executive Officer and Director of Penn-America since June 1993. Mr. Saltzman was
President and Chief Operating Officer of Penn-America from June 1989 until June
1993, and was Vice President, Marketing of Penn-America from January 1986 until
June 1988. Prior to that time, he was an underwriter and a broker with Delaware
Valley Underwriting Agency, Inc. ("DVUA"), a wholly owned subsidiary of Penn
Independent. Mr. Saltzman is Mr. Irvin Saltzman's son and Ms. Jami
Saltzman-Levy's and Mr. E. Anthony Saltzman's brother.
Richard L. Duszak, CPA retired from full-time employment as an audit
partner in January of 2000 after more than 36 years with the public accounting
firm of KPMG LLP. He currently chairs The MMA Group, an organization of chief
executive officers that functions as an advisory board. From March 2001 to March
2002, he served as Chief Financial Officer for Micro EDS, a privately-owned
marketing company in the pharmaceutical industry.
Mr. Ellman has been a Director of the Company since 1994 and was a
Director of Penn-America from May 1976 until May 1995. Prior to 1994, Mr. Ellman
was Vice Chairman and a Director of Penn Independent.
Mr. Lear has been President and Chief Executive Officer of Penn
Independent since September 1996 and previously served as Executive Vice
President-Finance from 1994 to August 1996. He was Vice President-Finance and
Chief Financial Officer of the Company from its formation in July 1993 until
March 1995. Mr. Lear has been a Director of Dynasil Corporation of America since
February 1998, and in 2001 became a Director of Mountainview Indemnity, a
Bermuda-based, privately held captive affiliated with the Chubb Group. Prior to
joining Penn Independent, Mr. Lear had over 15 years of public accounting
experience, specializing in the insurance industry. Mr. Lear is a certified
public accountant.
Ms. Saltzman-Levy was Vice President-Human Resources of Penn
Independent from 1985 to June 2000, has been a Director of Penn-America and Penn
Independent since 1991 and 1992, respectively, and is currently a Vice President
of Penn Independent since June 2000. Ms. Saltzman-Levy is Mr. Irvin Saltzman's
daughter and Mr. Jon Saltzman's and Mr. E. Anthony Saltzman's sister.
5
Dr. Porat has been Dean of the Fox School of Business and Management at
Temple University since August 1996; and previously was the Joseph E. Boettner
Professor and Chairman of the Risk Management, Insurance and Actuarial Science
Department at the Temple University School of Business and Management for eight
years. Prior to joining Temple University, Dr. Porat was the Deputy General
Manager of IHUD Insurance Agencies Ltd., an international insurance brokerage
firm.
Mr. E. Anthony Saltzman currently holds the positions of Vice
President, Penn Independent and Sr. Vice President, DVUA, a wholly-owned
subsidiary of Penn Independent, engaged as excess and surplus lines brokers,
managing general agents, brokers and intermediaries in the property and casualty
insurance industry. Mr. Saltzman was previously an underwriter from 1975 through
1989 with DVUA. From 1989 through 1992, he was Vice President of Penn
Independent Financial Services, another wholly owned subsidiary of Penn
Independent engaged in the business of financing insurance premiums. Mr.
Saltzman is Mr. Irvin Saltzman's son, and Mr. Jon Saltzman's and Ms. Jami
Saltzman-Levy's brother.
Mr. Simon is Professor and Director of the Public Policy Institute at
Southern Illinois University. Mr. Simon founded the Institute in 1997, shortly
after retiring from the United States Senate after twelve years of service as a
senator from Illinois. His distinguished political career includes 14 years in
the Illinois House and Senate and a term as Lieutenant Governor of the State,
the first Lieutenant Governor in the state's history to be elected with a
governor from another party. He built a chain of 13 newspapers in the southern
and central parts of Illinois, which he sold in 1966 to devote full-time to
public service and writing. Mr. Simon is the recipient of 44 honorary degrees
and has written 16 books. He is currently a director of a number of foundations.
Meetings and Committees of the Board of Directors
The Board of Directors ("Board") held 7 meetings in 2002. The Board has
established a Compensation and Stock Option Committee, an Audit Committee and a
Nominating and Corporate Governance Committee. 1 A special committee consisting
of Messrs. Porat, Simon and Martin Sheffield (our former director) was appointed
by the Board of Directors to represent non-Penn Independent shareholders'
interests relating to capital raising opportunities for the Company. This
special committee was disbanded at the end of 2002.
The Compensation and Stock Option Committee met 3 times in 2002. Dr.
Porat and Messrs. Ellman and Simon are members of this Committee with Dr. Porat
serving as Chairman. See "Report of Compensation and Stock Option Committee".
The Audit Committee is composed of Messrs. Ellman and Duszak and Dr.
Porat, with Mr. Ellman serving as Chairman. These directors are all
"independent" based on New York Stock Exchange listing standards. The Board of
Directors has determined that no one has a relationship to the Company that may
interfere with their independence from the Company and its management. The Board
of Directors has also designated Audit Committee member Richard L. Duszak as an
"audit committee financial expert", as that term is defined by the Securities
and Exchange Commission. Each Audit Committee member's compensation is solely
based on that of an outside director serving on the Board and one committee of
the Board. Information regarding the functions performed by the Audit Committee
and the number of meetings held during the fiscal year is provided in the
"Report of the Audit Committee", set forth in more detail below. The Audit
Committee is governed by a written charter approved by the Board of Directors
and attached to this proxy statement.
The Nominating and Corporate Governance Committee met 1 time in 2002.
In February 2003, the Committee met and recommended the nominees for election to
the Board of Directors. Current members of the Committee include Messrs. Simon
and Duszak and Dr. Porat, with Mr. Simon serving as Chairman. Currently, the
Committee reviews the size and composition of the Board of Directors and is
responsible for recommending nominees to serve on the Board of Directors. In
carrying out its responsibilities for nomination of directors, the Committee
considers
______________________
(1)In August of 2002, the Nominating Committee was re-named the "Nominating and
Corporate Governance Committee" and granted additional general responsibilities
as a result of the corporate governance initiatives set forth in the
Sarbanes-Oxley Act of 2002, final rules of the Securities and Exchange
Commission and proposed listing standards of the New York Stock Exchange. The
Committee is currently drafting a written charter and Code of Ethics to apply to
all directors and officers of the Company, which it anticipates will be in place
prior to the dates prescribed by the Securities and Exchange Commission and the
New York Stock Exchange.
6
candidates recommended by other directors, employees and shareholders. Written
suggestions for candidates to serve as directors, if nominated and elected,
should be sent to the President of the Company at 420 S. York Road, Hatboro, PA
19040.
The Company's bylaws require that written notice of the intent to make
a nomination at a meeting of shareholders must be received by the President of
the Company (a) with respect to an election to be held at an annual meeting, not
less than 60 days nor more than 90 days prior to the anniversary date of the
immediately preceding Annual Meeting of Shareholders, and (b) with respect to an
election to be held at a special meeting or, in the case of an annual meeting
that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, not later than the
close of business on the tenth day following the day on which notice of the date
of the meeting is given to shareholders. The notice must contain (1) the name
and address of the shareholder who intends to make the nomination(s) and of the
person or persons to be nominated; (2) a representation that the shareholder is
a holder of record of shares of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (3) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (4) such other information
regarding each nominee proposed by such shareholder as would have been required
to be included in the proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the Board of Directors; and (5) the consent of each nominee
to serve as a director of the Company, if so elected.
PROPOSAL NO. 2
RATIFICATION OF AMENDMENTS TO 2002 STOCK INCENTIVE PLAN
At the Meeting, the shareholders will vote on the ratification of two
amendments to the 2002 Stock Incentive Plan, formerly known as the "Amended and
Restated 1993 Stock Incentive Plan". The amendments concern an increase in the
number of shares of common stock available for issuance under the Plan [which
have been registered with the Securities and Exchange Commission ("SEC"), but
which are subject to ratification at the Meeting], and modifications to the
definition of "change in control" in the Plan. Unless contrary instructions are
given, the shares represented by a majority of shareholders entitled to vote
shall be voted "FOR" ratification of the proposed amendments to the 2002 Stock
Incentive Plan. The amendments are being submitted for ratification by the
shareholders as one proposal. Shareholders will not be able to approve one
modification and reject the other. A copy of the Plan, as proposed to be
amended, is attached at Appendix A.
I. Increase of Shares of Common Stock Available for Issuance
Under the Company's 2002 Stock Incentive Plan, non-qualified stock
options and restricted shares of common stock may be granted to one or more
executive officers, employees, consultants, advisors and/or independent, outside
directors. The size of any stock option grant or restricted stock award can be
based on Company and/or individual performance and the individual's
responsibilities and position with the Company. Options are generally granted
with exercise prices equal to the fair market value of the Company's common
stock on the date of grant and become exercisable in equal installments over a
period of up to five years, unless there is a "change in control" in which event
the vesting and exercise periods accelerate. The Compensation and Stock Option
Committee of the Board of Directors administers distribution of non-qualified
stock options and restricted stock awards under the Plan; except that with
respect to the grant of non-qualified stock options to independent, outside
directors, pre-determined, annual grants of non-qualified stock options have
been established.
In 1993, at the time of the Company's initial public offering, the
Company registered 787,500 shares of the Company's common stock under the 1993
Stock Incentive Plan with the SEC.2 On June 5, 2002, the Company filed a
Registration Statement on Form S-8 with the SEC registering, subject to
shareholder ratification at this Meeting, an additional 1,050,000 shares of the
Company's common stock, for a total of 1,837,500 shares registered under the
Plan. As of December 31, 2002, 447,858 shares were issued through restricted
common stock awards, 763,707
__________________
(2) All sums are adjusted to reflect a three-for-two stock split affected March
7, 1997 and a three-for-two stock split affected on May 9, 2002.
7
shares are reserved for the exercise of outstanding non-qualified stock options,
67,500 shares have expired and 558,435 shares are reserved for future use. The
Company requests that the shareholders ratify this amendment to the 2002 Stock
Incentive Plan, to allow for the issuance of additional shares under the Plan.
Set forth below is a table summarizing non-qualified stock options
granted and restricted common stock awarded, subject to ratification of Proposal
No. 2 by the shareholders.
NEW PLAN BENEFITS
As of December 31, 2002
Name/Position Dollar Value($)(1) Number of Units(#)
------------- ------------------ ------------------
Jon S. Saltzman
President and Chief Executive Officer 120,423 68,813
Joseph F. Morris
Sr. Vice President, Chief
Financial Officer and Treasurer 280,283 81,990
J. Ransley Lennon
Vice President,
Information Technology 29,677 16,958
Garland P. Pezzuolo
Vice President, Secretary
and General Counsel 29,677 16,958
John D. Curry
Vice President,
Underwriting and Marketing 155,000 15,000
Thomas P. Bowie
Formerly Sr. Vice President, Claims 54,750(2) 9,000
Executive Group 615,060 199,719
Non-Executive Directors 179,820 111,750
Non-Executive Employees 484,694 171,096
------------------------
(1) For non-qualified stock options, the total value is based upon the
difference between the last sales price of the Company's Common Stock on
the New York Stock Exchange as of December 31, 2002 and the exercise price
of the options, multiplied by the number of option shares.
(2) All non-qualified stock options granted to Mr. Bowie were forfeited as a
result of Mr. Bowie's termination on October 30, 2002.
8
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2002
Weighted-Average Number of
Number of Securities Exercise Price of Securities
To be Issued Upon Outstanding Options, Remaining
Exercise of Warrants and Rights Available for
Outstanding Options, Compensation Future Issuance
Warrants and Rights Plans Under Equity Plans
------------------- ----- ------------------
Plans Previously Approved
By Shareholders
---------------
Equity compensation plans
approved by security holders 763,707 $6.06 558,435(1)
________________________
Plans Not Approved
By Shareholders
---------------
Equity compensation plans
not approved by
security holders (2) 33,313(3) $10.22 254,201
____________________________
(1) These securities may be in the form of grants of non-qualified stock
options or awards of restricted common stock of the Company.
(2) The Agent's Contingent Profit Commission Plan was adopted without
shareholder approval on May 7, 2002, and provides for the issuance of up to
300,000 shares of restricted common stock to the Company's general agents
based on the achievement of predetermined underwriting performance
objectives.
(3) 33,313 shares of restricted common stock were issued in March of 2003. The
restrictions expire in August of 2003.
II. Definition of "Change in Control"
In 2002, as an incentive to certain executive officers to remain in the
employ of the Company in the event of a "change in control", the Committee
authorized the issuance of executive change in control/employment continuation
agreements (hereinafter referred to as "employment continuation agreements").
See "Report of Compensation and Stock Option Committee", Section II (d), set
forth below. As defined in these agreements, "change of control" means:
"... a transaction or series of transactions (including any
cash tender or securities exchange offer, merger or other business
combination, or contested election of directors, or any combination
thereof) as the result of which:
(i) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such employee benefit
plan or Employee or any Affiliate or Associate of Employee or any group
of which Employee is a member and in which he participates in his
capacity as a shareholder of the Corporation) together with all
Affiliates and Associates of such Person, shall become the Beneficial
Owner of a percentage ownership in the aggregate combined voting power
of all Voting Securities of the Corporation then outstanding that is
greater than the then current percentage ownership of Penn Independent
in the aggregate combined voting powers of all Voting Securities of the
Corporation then outstanding; or
(ii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such
9
employee benefit plan or Employee or any Affiliate or Associate of
Employee or any group of which Employee is a member and in which he
participates in his capacity as a shareholder of the Corporation)
together with all Affiliates and Associates of such Person, shall
become the Beneficial Owner of 30% or more of the aggregate combined
voting power of all Voting Securities of the Corporation then
outstanding, irrespective of Penn Independent's then current percentage
ownership in such Voting Securities; provided that during any period of
two consecutive calendar years there is a change of 25% or more in the
composition of the Board in office at the beginning of such period,
except for changes approved by at least two-thirds of the directors
then in office who were directors at the beginning of the period; or
(iii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such employee benefit
plan or Employee or any Affiliate or Associate of Employee or any group
of which Employee is a member and in which he participates in his
capacity as a shareholder of the Corporation) together with all
Affiliates and Associates of such Person, shall become the Beneficial
Owner of greater than 50% of the aggregate combined voting power of all
Voting Securities of Penn Independent; or
(iv) during any period of two consecutive calendar years there
is a change of 25% or more in the composition of the Board in office at
the beginning of such period except for changes approved by at least
two-thirds of the directors then in office who were directors at the
beginning of the period; or
(v) 80% or more of the assets of the Corporation and its
Subsidiaries shall be sold or transferred to any Person (other than an
Affiliate of the Corporation); or
(vi) the Board makes a determination that such transaction or
transactions constitute a Change of Control for purposes of this
individual Agreement; provided, however, that the Board shall make such
determination in its sole and absolute discretion and need not make its
determination in a uniform manner with respect to the Employee as may
be accorded to other employees with similar agreements.
For purposes of this Agreement, a Change of Control shall be
deemed to have occurred on the date upon which any of the foregoing is
consummated or becomes effective."
The Amended and Restated 1993 Stock Incentive Plan defined "change in control"
as follows:
"A 'Change in Control' shall be deemed to have occurred upon
the earliest to occur of the following events: (i) the date the
shareholders of the Company (or the Board of Directors, if shareholder
action is not required) approve a plan or other arrangement pursuant to
which the Company will be dissolved or liquidated, or (ii) the date the
shareholders of the Company (or the Board of Directors, if shareholder
action is not required) approve a definitive agreement to sell or
otherwise dispose of substantially all of the assets of the Company, or
(iii) the date the shareholders of the Company (or the Board of
Directors, if shareholder action is not required) and the shareholders
of the other constituent corporation (or its board of directors, if
shareholder action is not required) have approved a definitive
agreement to merge or consolidate the Company with or into such other
corporation, other than, in either case, a merger or consolidation of
the Company in which holders of shares of the Company's Common Stock
immediately prior to the merger or consolidation will have at least a
majority of the ownership of common stock of the surviving corporation
(and, if one class of common stock is not the only class of voting
securities entitled to vote on the election of directors of the
surviving corporation, a majority of the voting power of the surviving
corporation's voting securities) immediately after the merger or
consolidation, which common stock (and, if applicable, voting
securities) is to be held in the same proportion as such holders'
ownership of Common Stock of the Company immediately before the merger
or consolidation, or (iv) the date any entity, person or group, within
the meaning of Section 13(d) (3)
10
or Section 14(d) (2) of the Securities Exchange Act of 1934, as
amended, other than the Company, any of its subsidiaries or any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries, Penn Independent Corporation or
those individuals and trusts who comprise the shareholders of Penn
Independent Corporation on the effective date of this Plan shall have
become the beneficial owner of, or shall have obtained voting control
over, more than thirty percent (30%) of the outstanding Shares of the
Company's Common Stock, or (v) the first day after the date this Plan
is effective when directors are elected such that a majority of the
Board of Directors shall have been members of the Board of Directors
for less than two (2) years, unless the nomination for election of each
new director who was not a director at the beginning of such two (2)
year period was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
such period."
The Company believes that the new proposed definition, as set forth in the
employment continuation agreements, more accurately represents circumstances
under which a change in control could occur. Thus, the Company proposes that the
shareholders ratify an amendment to the Plan to make consistent with the
employment continuation agreements the definition of "change in control" in the
2002 Stock Incentive Plan
11
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation earned
during each of the last three fiscal years by the Company's Chief Executive
Officer, by the four next most highly compensated executive officers as of
December 31, 2002, and by one additional executive officer who was not an
executive officer as of December 31, 2002, and who would have been among the
four next mostly highest compensated executive officers but for the fact that he
was not an executive officer as of December 31, 2002 (hereinafter collectively
referred to as the "named executive officers").
Long-Term Compensation
Annual Compensation Awards
--------------------------------------- ------------------------------
Name and Other Annual Restricted Securities All Other
Principal Bonus Compensation Stock Underlying Compensation
Position Year Salary($) ($)(1) (1)(2)(3) Award(s)($)(4) Options(#)(5) ($)(6)
-------- ---- --------- ------- ----------------- -------------- ------------- ------------
Jon S. Saltzman 2002 361,262 174,800 17,461 0 0 5,500
President and Chief 2001 310,969 100,000 14,944 0 68,813 0
Executive Officer 2000 300,000 0 11,197 0 0 6,955
Joseph F. Morris 2002 206,250 100,000 12,924 0 0 6,700
Sr. Vice President, 2001 192,923 75,000 11,931 0 29,490 7,064
Chief Financial 2000 60,154 15,000 0 73,750 37,500 (7) 0
Officer and Treasurer
J. Ransley Lennon 2002 136,385 50,000 0 0 0 4,994
Vice President, 2001 117,346 34,500 0 0 16,958 4,539
Information 2000 114,500 0 0 0 0 4,015
Technology
Garland P. Pezzuolo 2002 121,000 50,000 0 0 0 6,040
Vice President, 2001 109,039 34,500 0 0 16,958 3,121
Secretary and 2000 100,000 0 0 0 0 3,000
General Counsel
John D. Curry(8) 2002 108,573 41,400 0 155,000 0 3,002
Vice President,
Underwriting and
Marketing
Thomas P. Bowie(9) 2002 133,654 0 0 0 0 7,195
Formerly Sr. Vice 2001 145,616 45,000 12,960 0 22,118 (10) 13,068
President, Claims 2000 135,000 0 9,255 0 0 2,100
------------
(1) Other than a signing bonus for Mr. Morris, no bonuses were awarded in 2000.
For calendar years 2001 and 2002, any bonus awarded represents a bonus for
that calendar year, granted in January of the following year.
(2) Excludes certain perquisites and other amounts that, for any executive
officer, did not exceed in the aggregate 10% of the total annual salary and
bonus for such executive officer.
(3) Includes amounts paid as taxes on vesting restricted common stock.
(4) Represents restricted common stock awarded to Mr. Curry (15,000 shares) on
April 4, 2002, and Mr. Morris (15,000 shares) on September 5, 2000, which
vest ratably over 5 years (unless there is a "change in control" in which
event the shares vest immediately), and on which dividends are paid.
(5) Represents the number of shares underlying non-qualified stock options
earned in 2000, 2001 and 2002, respectively.
12
(6) "All Other Compensation" for 2002 represents: (a) employer contributions to
the Company's 401(k) Savings Plan, as follows: $5,500 for Mr. Saltzman,
$5,500 for Mr. Morris, $4,279 for Mr. Lennon, $4,125 for Ms. Pezzuolo,
$1,832 for Mr. Curry and $4,125 for Mr. Bowie; and (b) the Company's
payment of premiums towards life insurance for the benefit of a personal,
named beneficiary of the executive officer, as follows: $1,200 for Mr.
Morris, $715 for Mr. Lennon, $1,915 for Ms. Pezzuolo, $1,170 for Mr. Curry
and $3,070 for Mr. Bowie.
(7) Represent part of Mr. Morris' signing bonus.
(8) Mr. Curry joined the Company on April 4, 2002.
(9) Mr. Bowie was terminated from the Company on October 30, 2002.
(10) Mr. Bowie forfeited these securities upon his termination from the Company
on October 30, 2002.
Option/SAR Grants
As part of 2001 bonuses, non-qualified stock options were granted in
January of 2002, as follows: (1) Jon S. Saltzman, 68,813; (2) Joseph F. Morris,
29,490; (3) J. Ransley Lennon, 16,958; (4) Garland P. Pezzuolo, 16,958; and, (5)
Thomas P. Bowie, 22,118. These options vest ratably over 5 years and are
exercisable for 10 years. See "Report of Compensation and Stock Option
Committee". The Company does not currently have (and has not previously had) any
plan pursuant to which any stock appreciation rights ("SARs") may be granted.
OPTIONS EARNED IN 2001 (GRANTED ON JANUARY 2, 2002)
Number of
Securities
Underlying % of Present Value
Options Total Options Exercise Expiration on Date of
Name Granted Granted Price Date Grant(1)
---- ------- ------- ----- ---- --------
Jon S. Saltzman 68,813 20% $7.30 1/2/2012 $135,169
Joseph F. Morris 29,490 9 7.30 1/2/2012 57,927
J.Ransley Lennon 16,958 5 7.30 1/2/2012 33,311
Garland P. Pezzuolo 16,958 5 7.30 1/2/2012 33,311
John D. Curry 0 0 0 N/A 0
Thomas P. Bowie (2) 22,118 6 7.30 10/30/02 43,446
------------
(1) The present value of each stock option grant was estimated using the
Black-Scholes option pricing model. The model assumes the following:
expected annual dividend rate of 2.0%, expected life of options of 10
years, risk-free interest rate of 3.6%, and expected stock price
volatility of 22%.
(2) Mr. Bowie's options were forfeited upon his termination from the
Company on October 30, 2002.
13
Aggregated Option/SAR Exercises and Fiscal Year-End Options/SAR Value Table
The following table sets forth information relating to options
exercised during 2002 by the Company's Chief Executive Officer and those named
executive officers in possession of options, as well as the number and value of
such options held on December 31, 2002. The Company does not currently have (and
has not previously had) any plan pursuant to which any stock appreciation rights
("SARs") may be granted.
AGGREGATED OPTION EXERCISES IN 2002
AND OPTION VALUES AT DECEMBER 31, 2002
Number of Securities
Underlying
Shares Unexercised Value of Unexercised
Acquired Options at In-the-Money Options at
on Value Dec. 31, 2002(#) Dec. 31, 2002($)(1)
---------------------------- -----------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Jon S. Saltzman 0 0 67,500 68,813 $340,875 $120,423
Joseph F. Morris 0 0 15,000 51,990 61,950 144,533
J. Ransley Lennon 0 0 19,125 16,958 96,581 29,677
Garland P. Pezzuolo 0 0 0 16,958 0 29,677
------------
(1) Total value of unexercised options is based upon the difference between
the last sales price of the Company's Common Stock on the New York Stock
Exchange as of December 31, 2002 and the exercise price of the options,
multiplied by the number of option shares.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
I. Introduction
------------
The Compensation and Stock Option Committee (the "Compensation
Committee") consists of Dr. Porat (Chairman) and Messrs. Ellman and Simon, all
of whom are non-employee directors of the Company. The Compensation Committee is
charged generally with the review and development of compensation practices
regarding the Company's key employees (relative to salary, bonus and longer-term
compensation) and all other employees (relative to bonuses and/or longer-term
compensation). The Compensation Committee bases its compensation recommendations
upon information derived from multiple sources including company personnel,
recommendations of management, outside compensation consultants and industry
surveys. The Compensation Committee believes that consideration of these diverse
sources of information helps to create a balanced and appropriate compensation
program.
The Compensation Committee has established an overall compensation
program to attract, retain and motivate executive officers and employees and to
enhance their incentive to perform at the highest levels and contribute
significantly to the Company's success. In establishing executive compensation,
the Compensation Committee considers various factors including the personal
performance of the executive officer, the attainment of certain financial goals
and the need to attract, retain and motivate key employees. In 2002, the Company
retained an outside compensation consultant to review the Company's compensation
program and evaluate current base salaries, cash bonus levels and longer-term
stock incentive compensation.
II. Base Salaries
-------------
The Compensation Committee does not actively participate in setting
employee salaries. In determining appropriate compensation levels for its
executive officers, however, the Compensation Committee conducted a review of
compensation data provided by an outside compensation consultant of companies in
a peer group deemed appropriate by the Compensation Committee. Peer group
companies for purposes of establishing compensation levels were not necessarily
the same companies as those included in the performance graph utilized to
evaluate the performance of the Company's stock.
14
Consistent with advice received from outside compensation consultants,
the Compensation Committee generally sets its competitive salaries for executive
officer positions in the range between the median level and the 75th percentile
of those companies it surveys. The base salaries of executive officers were
initially determined by evaluating the responsibilities of the position held and
the experience and performance of the individual, with reference to the
competitive marketplace for executive talent.
Mr. Jon Saltzman's compensation was determined by the Compensation
Committee in light of the factors set forth above. His total compensation was
compared with compensation packages within the industry. In determining Mr.
Saltzman's base salary in 2002, the Compensation Committee evaluated his
personal performance, and that of the Company, on both a qualitative and
quantitative level. Based on the financial results of the Company in 2002, as
well as the Committee's position to maintain salaries between the median level
and the 75th percentile, Mr. Saltzman's base salary was increased to $380,000
effective January 1, 2003.
III. Bonuses and Longer-Term Incentives
-----------------------------------
In order to attract, retain and motivate executive officers and key
employees, the Compensation Committee has established a combination of
short-term and long-term compensation. Generally, short-term compensation, in
the form of annual cash bonuses, and longer-term compensation, in the form of
awards of restricted stock and grants of non-qualified stock options, are given
to key and other employees and are determined pursuant to two compensation
plans. While not part of compensation for 2002, the Company's 2002 Stock
Incentive Plan is available to the Company's employees.
A. Key Employee Incentive Plan
---------------------------
The Company's Key Employee Incentive Compensation Plan currently
applies to approximately twenty-five executive officers and key employees and is
designed as an incentive to encourage these individuals to excel in their
performance individually and collectively to the benefit of stockholders and the
Company. The Plan is simple and predictable, yet provides significant overall
monetary incentives. Under this Plan, short-term cash compensation may be
awarded if the Company achieves a pre-determined level of GAAP underwriting
income, before taxes.
In January of 2003, executive officers and key employees received
annual cash bonuses ranging from 17.3% to 46.0% of their annualized salary as of
December 31, 2002, based upon the achievement of the predetermined GAAP
underwriting income for the year ended December 31, 2002. For 2003, the
Compensation Committee has approved continuance of the Key Employee Incentive
Plan (payable in January 2004) to each eligible key employee, assuming the
established Company GAAP underwriting income before taxes is achieved.
B. Employee Bonus Plan
-------------------
While the Compensation Committee is not charged with establishing
salaries and cash bonuses awarded to employees, the Compensation Committee is
responsible for establishing employee bonuses to the extent that any such bonus
includes non-qualified stock options or restricted stock awards. While previous
annual employee bonus plans provided for the award of both cash and
non-qualified stock options as a bonus to employees, effective January 1, 2002
the Compensation Committee removed from consideration the award of any
non-qualified stock options as part of any bonus to employees. Thus, cash
bonuses for Company performance in 2002 were awarded and paid in January of
2003, and the Company plans on providing for cash bonuses in 2003 (payable
2004).
C. 2002 Stock Incentive Plan
-------------------------
Under the Company's 2002 Stock Incentive Plan, non-qualified stock
options and restricted shares of common stock may be granted to executive
officers, employees (including employees who are members of the Board of
Directors), consultants, advisors and/or independent, outside directors.3 The
size of any stock option or restricted stock award can be based on Company
and/or individual performance and the individual's responsibilities and position
with the Company. Options are generally to be granted with exercise prices equal
to the fair market value of
__________________________
(3) In June of 2002, the Company filed with the Securities and Exchange
Commission its 2002 Stock Incentive Plan, which amends the Company's 1993 Stock
Incentive Plan. Subject to shareholder ratification, the 2002 Stock Incentive
Plan increases the number of shares available for distribution under the Plan.
See "Proposal No.2" at p.7.
15
the Company's common stock on the date of grant and become exercisable in equal
installments over a period of five years; unless there is a "change in control"
in which event the vesting and exercise periods accelerate. See Section IV,
below.
Set forth below is a general overview of the Compensation Committee's
awards of restricted common stock and grants of non-qualified stock options over
the past 12 months.
Executive and Key Employees: Prior to 2002, non-qualified stock options
were awarded as both short-term (bonus) compensation and as long-term
incentive compensation to executives and key employees. In 2002, the
Compensation Committee removed the grant of non-qualified stock options as
either short-term (bonus) or longer-term competition, and requested that
management further explore, through an outside compensation consultant,
appropriate short-term and long-term compensation in this regard.
Other Employees: In January of 2002, under the Company's then current
Employee Bonus Plan, employees were granted non-qualified stock options as
2001 bonuses for Company and individual performance. The grant of
non-qualified stock options was subsequently removed from employee bonuses
going forward.
Independent, Outside Directors: As set forth in "Compensation of Directors"
below, the Company's independent, outside directors receive as annual
compensation cash and an award of non-qualified stock options. In May of
2002, the Board authorized the issuance of 7,500 non-qualified stock
options and in 2003 and thereafter, the independent, outside directors will
receive 5,000 non-qualified stock options.
Special Committee Members: A special committee consisting of Messrs. Porat,
Simon and Martin Sheffield (our former director) was appointed by the Board
of Directors to represent non-Penn Independent shareholders' interests
relating to capital raising opportunities for the Company. In 2002, prior
to its disbandment, the special committee members were awarded 18,000
non-qualified stock options each as compensation for their services on this
committee.
Other than the above, the only restricted common stock awarded under
the 2002 Stock Incentive Plan was 15,000 shares of restricted stock awarded to
John D. Curry, Vice President, Underwriting and Marketing, and 2,500 shares of
restricted stock awarded to Craig Levitz, Actuary, as incentives for them to
join the Company.
The Plan also permits the Committee to extend the exercise date of
expiring, vested non-qualified stock options. In 2002, the Committee voted to
extend, and the Board ratified the extension of, certain vested non-qualified
stock options, as follows:
Name Options Granted (#) Value ($) Date of Grant Expiration Date Date of Extension
---- ------------------- --------- ------------- --------------- -----------------
Irvin Saltzman 112,500 $4.00 10/28/93 10/28/03 12/31/04
Jon S. Saltzman 67,500 $4.00 10/28/93 10/28/03 12/31/04
Robert A. Lear 58,500 $4.00 10/28/93 10/28/03 12/31/04
James Heerin 24,750 $4.00 10/28/93 10/28/03 12/31/04
J. Ransley Lennon 19,125 $4.00 10/28/93 10/28/03 12/31/04
Charles Ellman 11,250 $5.89 05/08/96 05/08/02 05/08/03
M. Moshe Porat 11,250 $5.89 05/08/96 05/08/02 05/08/03
IV. Executive Change-In-Control/Employment Continuation Agreements
--------------------------------------------------------------
In 2002, as an incentive to certain executive officers to remain in the
employ of the Company in the event of a change in control, the Compensation
Committee authorized the issuance of executive change in control/employment
continuation agreements (hereinafter referred to as "employment continuation
agreements"). Effective January 1, 2003, the Company maintains employment
continuation agreements with Messrs. Jon S. Saltzman, Joseph F. Morris, J.
Ransley Lennon, John D. Curry and Brian J. Riley, and Ms. Garland P. Pezzuolo.
Under the agreements, the Company agrees to provide a multiple of between one to
two times the employee's then current annualized base salary as "stay" pay, to
be distributed in full at the time of the change in control or proposed change
in control (as defined below); and the executives agree to remain in the employ
of the Company following the date of the announcement of such change of control
or proposed change in control.
16
The employment continuation agreements further provide that if the key
executive's employment is terminated for reasons other than death, disability,
voluntary termination (except for voluntary termination for good reason as
defined in the agreements), or other than for cause (as defined in the
Agreements), upon or within the twelve (12) month period immediately following a
change in control, or after a potential change in control and prior to the
occurrence of a change in control if a change in control occurs within twelve
(12) months of such termination of employment, then the Company will pay the key
executives (i) a severance amount equal to a multiple of between one and two
times the key executive's then current annualized base salary, to be paid eighty
(80%) percent upon the occurrence of the change in control or proposed change in
control and twenty (20%) percent upon the one-year anniversary of the date of
the change in control, and (ii) medical and dental benefits for 12 months
following the date of termination.
As defined in the employment continuation agreements, "change of
control" means:
"... a transaction or series of transactions (including any
cash tender or securities exchange offer, merger or other business
combination, or contested election of directors, or any combination
thereof) as the result of which:
(i) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such employee benefit
plan or Employee or any Affiliate or Associate of Employee or any group
of which Employee is a member and in which he participates in his
capacity as a shareholder of the Corporation) together with all
Affiliates and Associates of such Person, shall become the Beneficial
Owner of a percentage ownership in the aggregate combined voting power
of all Voting Securities of the Corporation then outstanding that is
greater than the then current percentage ownership of Penn Independent
in the aggregate combined voting powers of all Voting Securities of the
Corporation then outstanding; or
(ii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such employee benefit
plan or Employee or any Affiliate or Associate of Employee or any group
of which Employee is a member and in which he participates in his
capacity as a shareholder of the Corporation) together with all
Affiliates and Associates of such Person, shall become the Beneficial
Owner of 30% or more of the aggregate combined voting power of all
Voting Securities of the Corporation then outstanding, irrespective of
Penn Independent's then current percentage ownership in such Voting
Securities; provided that during any period of two consecutive calendar
years there is a change of 25% or more in the composition of the Board
in office at the beginning of such period, except for changes approved
by at least two-thirds of the directors then in office who were
directors at the beginning of the period; or
(iii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Corporation, any
Subsidiary of the Corporation, any employee benefit plan of Penn
Independent, the Corporation or of any Subsidiary of the Corporation,
any Person or entity organized, appointed or established by the
Corporation for or pursuant to the terms of any such employee benefit
plan or Employee or any Affiliate or Associate of Employee or any group
of which Employee is a member and in which he participates in his
capacity as a shareholder of the Corporation) together with all
Affiliates and Associates of such Person, shall become the Beneficial
Owner of greater than 50% of the aggregate combined voting power of all
Voting Securities of Penn Independent; or
(iv) during any period of two consecutive calendar years there
is a change of 25% or more in the composition of the Board in office at
the beginning of such period except for changes approved by at least
two-thirds of the directors then in office who were directors at the
beginning of the period; or
17
(v) 80% or more of the assets of the Corporation and its
Subsidiaries shall be sold or transferred to any Person (other than an
Affiliate of the Corporation); or
(vi) the Board makes a determination that such transaction or
transactions constitute a Change of Control for purposes of this
individual Agreement; provided, however, that the Board shall make such
determination in its sole and absolute discretion and need not make its
determination in a uniform manner with respect to the Employee as may
be accorded to other employees with similar agreements.
For purposes of this Agreement, a Change of Control shall be
deemed to have occurred on the date upon which any of the foregoing is
consummated or becomes effective."
Under Section 280G of the Internal Revenue Code, if total compensation
to any individual as a result of a change in control exceeds three times the
average taxable wages over the last five years, the employee is subject to an
additional 20% excise tax for the amount of compensation that exceeds the
average taxable wages over the last five years. The employment continuation
agreements include a provision to "gross up" the excise tax for each qualified
individual in the event payments trigger a 280G penalty. The Company does not
believe that a 280G will be incurred by any qualified individual.
V. Conclusion
----------
The Internal Revenue Code provides that publicly held corporations may
not deduct, for federal income tax purposes, non-performance based compensation
for its chief executive officer and certain other executive officers to the
extent that such compensation exceeds $1 million for the executive. The
Compensation Committee intends to take such actions as are appropriate to
qualify compensation paid to executives for deductibility under the Internal
Revenue Code. In this regard, base salary and bonus levels are expected to
remain below the $1 million limitation in the foreseeable future. Non-qualified
stock options granted under the Company's 2002 Stock Incentive Plan are designed
to constitute performance-based compensation, which would not be included in
calculating compensation for purposes of the $1 million limitation.
Compensation and Stock Option Committee
M. Moshe Porat (Chairman)
Charles Ellman
Paul Simon
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are Dr. Porat and Messrs.
Ellman and Simon, all non-employee directors of the Company. No member of the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.
Compensation of Directors
The Company pays to each of its non-employee directors an annual
retainer of $25,000 for serving on the Board of Directors and at least one
committee. The Company pays all out-of-pocket expenses incurred by the Directors
for attending meetings.
Pursuant to the Company's 2002 Stock Incentive Plan, an option grant of
5,000 shares of the Company's common stock is made to each non-employee director
on the date of the first annual meeting of shareholders at which such person is
elected to the Board of Directors, and thereafter on the date of each annual
meeting of shareholders at which such person is reelected to the Board of
Directors. Such options are issued at fair market value on the date of grant,
become exercisable on the first anniversary of the date of grant, and are
exercisable for five years from the first anniversary of the date of grant.
In 2001, the Board established a special committee, comprised of
independent, outside directors, M. Moshe Porat, Martin Sheffield and Paul Simon,
to represent non-Penn Independent shareholders' interests relating to capital
18
raising opportunities for the Company. Prior to its disbandment in 2002, the
special committee members were awarded 18,000 non-qualified stock options each
as compensation for their services on this committee
REPORT OF THE AUDIT COMMITTEE
The Board of Directors of the Company has adopted a written charter
setting out the specific responsibilities of the Audit Committee. A copy of the
current mission statement is attached to this proxy statement at Appendix B.
Generally, the Audit Committee assists the Board in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing and reporting practices of the Company. The Committee's role includes
focus on the qualitative aspects of financial reporting to shareholders, the
Company's processes to manage business and financial risk, and compliance with
significant applicable legal, ethical and regulatory requirements. The Committee
is also responsible for appointing and overseeing the independent auditors,
approving all audit and non-audit related services, and for establishing
compensation for the auditors.
The Directors who serve on the Committee are all "independent" as
prescribed by New York Stock Exchange listing standards. In addition, the Board
of Directors has determined that no member of the Audit Committee has a
relationship to the Company that may interfere with their independence from the
Company and its management. The Board of Directors has designated Audit
Committee member Richard L. Duszak as an "audit committee financial expert", as
that term is defined by the Securities and Exchange Commission. Each Committee
member's compensation is solely based on that of an outside director serving on
the Board and one committee of the Board.
In 2002, the Committee appointed Ernst & Young LLP as the Company's
independent auditors. The Committee discussed with the independent auditors the
overall scope and plans for their audit. The Committee periodically met with the
independent auditors, at least quarterly, with and without management present,
to discuss the results of their examination, the critical accounting policies of
the Company, and the overall quality of the Company's accounting principles,
accounting estimates and financial reporting. The Committee held nine (9)
meetings during fiscal year 2002.
In fulfilling its oversight responsibilities relative to the Company's
financial reporting process, the Committee reviewed the audited financial
statements with management, including a discussion of the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgments, and the clarity of disclosures in the financial statements. The
Committee reviewed with the independent auditors all critical accounting
policies used by the Company, as well as their judgments as to the quality, not
just the acceptability, of the Company's accounting principles and such other
matters as are required to be discussed with the Committee under the Statement
on Auditing Standards No. 61 (Communication with Audit Committee). The Committee
also received from and discussed with the independent auditors the written
disclosure required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) relating to that firm's independence from the
Company and evaluated and concluded that no officer, director or employee of the
Company in 2002 was at any time employed with the independent auditors prior to
working for the Company. Finally, the Committee discussed with the independent
auditors any matters required to be discussed and considered the compatibility
of non-audit services with the auditors' independence.
Management is responsible for the Company's financial reporting process
including its system of internal controls, and for the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States. The Company's independent auditors are
responsible for auditing those financial statements. The Committee's
responsibility is to oversee these processes. It is not the Committee's duty or
responsibility to conduct auditing or accounting reviews or procedures.
Therefore, the Committee has relied, without independent verification, on
management's representation that the financial statements have been prepared
with integrity and objectivity and in conformity with accounting principles
generally accepted in the United States and on the representations of the
independent auditors included in their report on the Company's financial
statements. Furthermore, the Committee's considerations and discussions with
management and the independent auditors do not assure that the Company's
financial statements are presented in accordance with accounting principles
generally accepted in the United States or that the audit of the Company's
financial statements has been carried out in accordance with generally accepted
auditing standards.
19
In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board approved) that
the audited financial statements be included in the Annual Report on Form 10-K
for the year ended December 31, 2002, for filing with the Securities and
Exchange Commission.
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return of the New York Stock
Exchange and the Standard and Poor's Insurance Composite for the period December
31, 1997 through December 31, 2002, assuming an initial investment of $100 and
that dividends are reinvested annually.
S&P
Insurance
PNG Stock NYSE Composite
---------- ----------- -----------
12/31/97 100.00 100.00 100.00
12/31/98 87.66 123.55 114.92
12/31/99 76.89 137.39 124.36
12/31/00 77.61 141.35 169.02
12/31/01 109.33 129.22 149.25
12/31/02 142.83 105.45 119.15
[GRAPH OMITTED]
20
CERTAIN TRANSACTIONS
Headquarters Lease
The Company's headquarters in Hatboro, Pennsylvania are occupied
pursuant to a lease, effective July 1, 2000, between Mr. Irvin Saltzman,
Chairman of the Board of Directors, as landlord, and the Company. The lease is
for a term of five years and the Company has one five-year renewal option
thereafter. The current rent is $357,000 per year, based on a price of $15.25
per square foot. Included in the square footage charge is the Company's share of
costs for insurance, real estate taxes, housekeeping, HVAC, energy management,
snow removal/landscaping, utilities, pest control, transformer maintenance,
bathroom maintenance, plant maintenance, phone/voice mail system maintenance and
smoke/fire monitoring. The Company is required to pay its pro rata share of all
increases in the base year of taxes, fees, assessments and expenses on the
entire office facility. As of March 31, 2003, $38,774 was charged, representing
a pro rata share increase in operational expenses for the 2000 and 2001 annual
lease terms. Management believes that the amount being paid by the Company under
the lease represents a fair market value annual rental charge.
Affiliated Insurance Entities
One of Penn Independent's wholly-owned subsidiaries, Delaware Valley
Underwriting Agency, Inc, ("DVUA") is an insurance agency that writes business
with Penn-America. During the year ended December 31, 2002, the business written
by DVUA for Penn-America represented 3.94% ($6,201,000) of the business of
Penn-America. As of December 31, 2002, total commissions paid to DVUA were
$1,314,000 and balances receivable were $353,000. Mr. E. Anthony Saltzman, Sr.
Vice President and Manager of DVUA, is currently a Director of the Company.
Penn-America believes that its arrangements with DVUA are on terms no more
favorable than they would otherwise be if DVUA were an unaffiliated third party.
Executive Loans
In 2000 and 2001, the Board of Directors of Penn-America and the
Company authorized Penn-America to issue to certain executives loans towards the
purchase of the Company's common stock. Under the terms of the loans, the
executives are required to repay principal, brokerage commissions, transaction
costs and interest, calculated semi-annually, within five (5) years from the
date of the loan. On default, the Company has recourse against the defaulting
executive. These loans are forgiven in the event of a change in control, as
defined in the loan agreements. This program was formally terminated by order of
the Board on August 21, 2002. No executive officer entered into any loan(s) with
Penn-America in 2002.
To date, the Company has entered into loans with the Company's Chief
Executive Officer and those named officers listed on page 12, as follows:
Weighted Average
Name Total Loan Amount Interest Rate Number of Shares Acquired
---- ----------------- ------------- -------------------------
Jon S. Saltzman $359,072 6.16% 71,250
Thomas P. Bowie 46,139 (1) 5.07 7,500
Joseph F. Morris 55,845 5.07 9,000
J. Ransley Lennon 97,943 6.20 16,500
Garland P. Pezzuolo 35,511 5.61 6,000
------ ---- -----
Total: $594,510 5.95% 110,250
-------- ----- -------
(1) Mr. Bowie repaid all principal interest, commissions and transaction costs
in April 2003.
Agreements with Penn Independent Corporation
Penn-America receives services from executives, staff and
administrative personnel of Penn Independent, including services in connection
with Penn-America's investment portfolio and human resource administration and
related services. As discussed previously, Penn-America has historically been
charged a portion of the amounts paid by Penn Independent for services such as
insurance, telecommunications, postage and office supplies. In 2002,
Penn-America was charged $230,000 for such services, the majority of which
represented payments for the services of Penn Independent personnel for
executive, human resource administration, investment advisory and other related
support services.
21
The Company believes that the terms of those certain transactions described
above are at least as favorable as those that might have been obtained from
unaffiliated third parties.
INFORMATION CONCERNING INDEPENDENT AUDITORS
The Board of Directors has selected representatives from Ernst and
Young LLP as its auditors for calendar year 2002. The Board of Directors is
evaluating the retention of Ernst and Young LLP as its auditors for calendar
year 2003. Representatives of Ernst and Young LLP, as auditors for December 31,
2002, are expected to be present at the Meeting and will have the opportunity to
make a statement if they so desire and will be available to respond to
appropriate questions.
Independent Auditor Fee Information
-----------------------------------
The Audit Committee approved and authorized for payment, in advance,
all services provided by our independent auditors. Fees for professional
services provided by our independent auditors in each of the last two fiscal
years were as follows:
Year ended December 31,
-----------------------
2002 2001
---- ----
Audit fees $100,000 $85,600
Audit related fees 144,000 -0-
Tax fees -0- -0-
All other fees 53,000 73,500
------ ------
$297,500 $159,000
Fees for audit services include fees associated with the annual audit of the
Company's consolidated financial statements, the quarterly reviews of the
Company's reports on Form 10-Q and the annual statutory audits of the Company's
insurance subsidiaries.
Audit related fees in 2002 represent required audit services provided in
relation to the Company's S-2 and S-8 registrations statements filed with the
Securities and Exchange Commission.
All other fees in 2002 and 2001 represent consulting actuarial services.
OTHER MATTERS
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of the
Company's Common Stock (collectively, the "Reporting Persons"), to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of these reports. In April of
2002, Director Jami Saltzman-Levy filed with the SEC an Amended Form 5 in order
to disclose her acquisition, between May 2001 and March 2002, of 23.35 shares of
Company common stock through a dividend reinvestment program with which she was
involved, and for which she failed to file a timely report of change in
ownership with the SEC. Based on the reports received by it, and written
representations received from the Reporting Persons, the Company believes that
all other filings required to be made by the Reporting Persons for the period
January 1, 2002 through December 31, 2002 were made on a timely basis.
22
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Annual
Meeting of Shareholders in 2004 must be received by the Company at its principal
office in Hatboro, Pennsylvania, no later than December 31, 2003, in order to be
considered for inclusion in the Company's proxy statement and form of proxy
relating to the Meeting.
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON SOLICITED BY
THIS PROXY STATEMENT, ON THE WRITTEN REQUEST OF SUCH PERSON, A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND
SCHEDULES THERETO, AS FILED WITH THE SEC FOR ITS MOST RECENT FISCAL YEAR. SUCH
WRITTEN REQUEST SHOULD BE DIRECTED TO INVESTOR RELATIONS, AT THE ADDRESS OF THE
COMPANY APPEARING ON THE FIRST PAGE OF THIS PROXY STATEMENT. THIS REPORT IS ALSO
AVAILABLE ON THE COMPANY'S WEBSITE AT WWW.PENN-AMERICA.COM.
--------------------
23
Appendix A
----------
PENN-AMERICA GROUP, INC.
AMENDED 2002 STOCK INCENTIVE PLAN
(f/k/a Amended and Restated 1993 Stock Incentive Plan)
1. Purpose. PENN-AMERICA GROUP, INC. (the "Company") hereby adopts,
subject to shareholder approval, the Penn-America Group, Inc. 2002 Stock
Incentive Plan (the "Plan"). The Plan is intended to recognize the contributions
made to the Company by employees of the Company (including employees who are
members of the Board of Directors) or by employees of any Affiliated Company (as
defined below) and certain consultants or advisors to the Company or an
Affiliated Company, to provide such persons with additional incentive to devote
themselves to the future success of the Company or an Affiliated Company, and to
improve the ability of the Company or an Affiliated Company to attract, retain,
and motivate individuals upon whom the Company's sustained growth and financial
success depend, by providing such persons with an opportunity to acquire or
increase their proprietary interest in the Company through receipt of rights to
acquire the Company's Common Stock, par value $.01 per Share (the "Common
Stock"), and through the transfer or issuance of Common Stock subject to
conditions of forfeiture. In addition, the Plan is intended as an additional
incentive to certain directors of the Company who are not employees of the
Company or an Affiliated Company to serve on the Board of Directors and to
devote themselves to the future success of the Company by providing them with an
opportunity to acquire or increase their proprietary interest in the Company
through the receipt of rights to acquire Common Stock.
2. Definitions. Unless the context clearly indicates otherwise, the
following terms shall have the following meanings:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) "Affiliated Company" means a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company within the
meaning of Section 424(e) or (f) of the Code, and in any event, Penn
Independent.
24
(c) "Award" shall mean a grant of Common Stock subject to
conditions of forfeiture made pursuant to the terms of the Plan.
(d) "Award Agreement" shall mean the agreement between the Company
and a Grantee with respect to an Award made pursuant to the Plan.
(e) "Awardee" shall mean a person to whom an Award has been
granted pursuant to the Plan.
(f) A Person shall be deemed the "Beneficial Owner" of any
securities:
(i) that such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the
right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial
Owner" of securities tendered pursuant to a tender or exchange
offer made by such Person or any of such Person's Affiliates
or Associates until such tendered securities are accepted for
payment, purchase or exchange;
(ii) that such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the
right to vote or dispose of or has "beneficial ownership" of
(as determined pursuant to Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), including without
limitation pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of
any security under this subsection (ii) as a result of an oral
or written agreement, arrangement or understanding to vote
such security if such agreement, arrangement or understanding
(A) arises solely from a revocable proxy given in response to
a public proxy or consent solicitation made pursuant to, and
in accordance with, the applicable provisions of the General
Rules and Regulations under the Exchange Act, and (B) is not
then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
25
(iii) that are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing) for the purpose of
acquiring, holding, voting (except pursuant to a revocable
proxy as described in the proviso to subsection (ii) above) or
disposing of any voting securities of the Company; provided,
however, that nothing in this Section 1(c) shall cause a
Person engaged in business as an underwriter of securities to
be the "Beneficial Owner" of any securities acquired through
such Person's participation in good faith in a firm commitment
underwriting until the expiration of forty days after the date
of such acquisition.
(g) "Board of Directors" means the Board of Directors of the
Company.
(h) "Change in Control" shall have the meaning as set forth in
Section 10 of the Plan.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
(j) "Committee" shall have the meaning set forth in Section 3 of
the Plan.
(k) "Company" means Penn-America Group, Inc., a Pennsylvania
corporation.
(l) "Disability" shall have the meaning set forth in Section 22(e)
(3) of the Code.
(m) "Disinterested Director" shall mean a member of the Board of
Directors of the Company who is "disinterested" within the meaning of Rule
16b-3.
(n) "Fair Market Value" shall have the meaning set forth in
Subsection 8(b) of the Plan.
(o) "Formula Grant Date" with respect to a non-employee member of
the Board of Directors shall mean the date of each annual meeting of
shareholders during the term of the Plan at which such person is elected or
reelected as a member of the Board of Directors.
26
(p) "Grantee" shall mean a person to whom an Option or an Award
has been granted pursuant to the Plan.
(q) "Immediate Family" shall mean an Optionee's spouse, children,
grandchildren and/or any trust all the beneficiaries of which include such
Optionee and/or such persons, and any partnership all the partners of which
include such Optionee and/or such persons.
(r) "ISO" means an Option granted under the Plan, which is
intended to qualify as an "incentive stock option" within the meaning of Section
422(b) of the Code.
(s) "Non-employee members of the Board of Directors" shall mean
members of the Board of Directors of the Company who are not employees of the
Company or any Affiliated Company.
(t) "Non-qualified Stock Option" means an Option granted under the
Plan which is not intended to qualify, or otherwise does not qualify, as an
"incentive stock option" within the meaning of Section 422(b) of the Code.
(u) "Option" means either an ISO or a Non-qualified Stock Option
granted under the Plan.
(v) "Optionee" means a person to whom an Option has been granted
under the Plan, which Option has not been exercised and has not expired or
terminated.
(w) "Option Document" means the document described in Section 8 or
Section 9 of the Plan, as applicable, which sets forth the terms and conditions
of each grant of Options.
(x) "Option Price" means the price at which Shares may be
purchased upon exercise of an Option, as calculated pursuant to Subsection 8(b)
or Subsection 9(a) of the Plan.
(y) "Penn Independent" shall mean Penn Independent Corporation or
any affiliate or subsidiary of Penn Independent that at the time of a Change in
Control is the Beneficial Owner of a majority of the combined voting power of
the Company's Voting Securities.
27
(z) "Person" shall mean any individual, entity or group within the
meaning of Section 13(d) (3) or 14(d) (2) of the Exchange Act, or any successor
rule thereto.
(aa) "Restricted Stock" means Common Stock subject to conditions
of forfeiture and transfer granted to any person pursuant to an Award under the
Plan.
(bb) "Rule 16b-3" means Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended.
(cc) "Section 16 Officer" means any person who is an "officer"
within the meaning of Rule 16a-1(f) promulgated under the Securities Exchange
Act of 1934, as amended, or any successor rule.
(dd) "Shares" means the shares of Common Stock of the Company,
which are the subject of Options or granted as Awards under the Plan.
(ee) "Voting Securities" shall mean Common Stock and any other
securities of the corporation entitled to vote generally for the election of
directors or any security convertible into or exchangeable for or exercisable
for the purchase of Common Stock (other than employee stock options or other
employee stock purchase rights) or other securities of the corporation entitled
to vote generally for the election of directors; and "Voting Power" means with
respect to any Voting Security, the maximum number of votes that such security
is or would be entitled to cast generally for the election of directors, and in
the case of a convertible, exercisable or exchangeable Voting Security,
considering such security both on an unconverted, unexercised or unexchanged
basis and a converted, exercised or exchanged basis, as the case may be.
3. Administration of the Plan. The Plan shall be administered by the
Board of Directors of the Company if all members of the Board of Directors are
Disinterested Directors; provided, however, that if all members of the Board of
Directors are Disinterested Directors, the Board of Directors may designate a
committee or committee(s) of the Board of Directors composed of two or more
directors to administer the Plan with respect to the Section 16 Officers,
directors, and/or employees. If any of the members of the Board of Directors are
not Disinterested Directors, the Board of Directors shall (i) designate a
committee composed of two or more directors,
28
each of whom is a Disinterested Director (the "Disinterested Director
Committee"), to operate and administer the Plan in its stead, or (ii) designate
two committees to operate and administer the Plan in its stead, a Disinterested
Director Committee to operate and administer the Plan with respect to the
Company's Section 16 Officers and the directors who are not members of the
Disinterested Director Committee, and another committee composed of two or more
directors (which may include directors who are not Disinterested Directors) to
operate and administer the Plan with respect to persons other than Section 16
Officers or directors or (iii) designate a Disinterested Director Committee to
operate and administer the Plan with respect to the Company's Section 16
Officers and directors (other than those directors serving on the Disinterested
Director Committee) and itself operate and administer the Plan with respect to
persons other than Section 16 Officers or directors. Any of such committees
designated by the Board of Directors, and the Board of Directors itself in its
administrative capacity with respect to the Plan, is referred to as the
"Committee." With the exception of the timing of grants of Options, the price at
which Shares may be purchased, and the number of Shares covered by Options
granted to each member of the Disinterested Director Committee, all of which
shall be as specifically set forth in Section 9, the other provisions set forth
herein, as they pertain to members of the Disinterested Director Committee,
shall be administered by the Board of Directors.
(a) Meetings. The Committee shall hold meetings at such times
and places as it may determine. Acts approved at a meeting by a majority of the
members of the Committee or acts approved in writing by the unanimous consent of
the members of the Committee shall be the valid acts of the Committee.
(b) Grants and Awards. Except with respect to Options granted
to non-employee members of the Board of Directors pursuant to Section 9, the
Committee shall from time to time at its discretion direct the Company to grant
Options and/or Awards pursuant to the terms of the Plan. The Committee shall
have plenary authority to (i) determine the persons to whom, and the times at
which, Options and Awards are to be granted as well as the terms applicable to
Options and Awards, (ii) determine the type of Option to be granted and the
number of Shares subject thereto, (iii) determine the Awardees to whom, and the
times at which, Restricted Stock is granted, the number of Shares awarded, and
the purchase price per Share, if any, and (iv) approve the form and terms and
conditions of the Option Documents and Award Agreements; all subject, however,
to the express provisions of the Plan. In making such determinations, the
Committee may take into account the nature of the Grantee's services and
responsibilities, the Grantee's present and potential contribution to the
Company's success and such other factors as
29
it may deem relevant. Notwithstanding the foregoing, grants of Options to all
non-employee members of the Board of Directors shall be made exclusively in
accordance with Section 9. The interpretation and construction by the Committee
of any provisions of the Plan or of any Option or Award granted under it shall
be final, binding and conclusive.
(c) Exculpation. No member of the Committee shall be
personally liable for monetary damages as such for any action taken or any
failure to take any action in connection with the administration of the Plan or
the granting of Options or Awards there under unless (i) the member of the
Committee has breached or failed to perform the duties of his or her office
under Subchapter B of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended, and (ii) the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness; provided, however, that the
provisions of this Subsection 3(c) shall not apply to the responsibility or
liability of a member of the Committee pursuant to any criminal statute or to
the liability of a member of the Committee for the payment of taxes pursuant to
local, state or federal law.
(d) Indemnification. Service on the Committee shall constitute
service as a member of the Board of Directors of the Company. Each member of the
Committee shall be entitled without further act on his or her part to indemnity
from the Company to the fullest extent provided by applicable law and the
Company's Articles of Incorporation and/or By-laws in connection with or arising
out of any action, suit or proceeding with respect to the administration of the
Plan or the granting of Options and Awards there under in which he or she may be
involved by reason of his or her being or having been a member of the Committee,
whether or not he or she continues to be such member of the Committee at the
time of the action, suit or proceeding.
(e) Limitations on Grants of Options to Consultants and
Advisors. With respect to the grant of Options to consultants or advisors, bona
fide services shall be rendered by consultants or advisors and such services
must not be in connection with the offer or sale of securities in a
capital-raising transaction.
4. Grants and Awards under the Plan. Options under the Plan may be in
the form of a Non-qualified Stock Option, and/or an ISO at the discretion of the
Committee, and Awards under the Plan shall be in the form of Restricted Stock.
30
5. Eligibility. All employees of the Company or an Affiliated Company,
and members of the Board of Directors, and consultants or advisors to the
Company or an Affiliated Company who satisfy the requirements set forth in
Subsection 3(e), shall be eligible to receive Options hereunder, provided,
however, that only employees may receive ISOs. However, non-employee members of
the Board of Directors may receive Options only pursuant to Section 9 of the
Plan and are not eligible to receive Awards. Only an employee of the Company or
an Affiliated Company shall be eligible to receive an Award. No Optionee may
receive Options pursuant to the Plan for more than 100,000 Shares in any one
year. The Committee, in its sole discretion, shall determine whether an
individual qualifies as an employee.
6. Shares Subject to Plan. The aggregate maximum number of Shares for
which Options and Awards may be granted pursuant to the Plan is 1,837,500,
subject to adjustment as provided in Section 11 of the Plan. The Shares shall be
issued from authorized and unissued Common Stock or Common Stock held in or
hereafter acquired for the treasury of the Company. If an Option terminates or
expires without having been fully exercised for any reason, or if Shares granted
pursuant to an Award are forfeited for any reason, such Shares may again be the
subject of one or more Options or Awards granted pursuant to the Plan.
7. Term of the Plan. The Plan is effective as of May 15, 2002, the date
on which it was adopted by the Board of Directors, subject to the approval of
the Plan on or before May 14, 2003 by the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote at a duly called meeting of
shareholders held in accordance with the laws of the Commonwealth of
Pennsylvania. No Option or Award may be granted under the Plan after May 15,
2012.
8. Option Documents and Terms. Each Option granted under the Plan shall
be a Non-qualified Stock Option unless the Option shall be specifically
designated at the time of grant to be an ISO for federal income tax purposes. If
any Option designated an ISO is determined for any reason not to qualify as an
incentive stock option within the meaning of Section 422 of the Code, such
Option shall be treated as a Non-qualified Stock Option for all purposes under
the provisions of the Plan. Options granted pursuant to the Plan shall be
evidenced by the Option Documents in such form as the Committee shall from time
to time approve, which Option Documents shall comply with and be subject to the
following terms and conditions and such other terms and conditions as the
Committee shall from time to time require which are not inconsistent with the
terms of the Plan. However, the provisions of this
31
Section 8 shall not be applicable to Options granted to the non-employee members
of the Board of Directors, except as otherwise provided in Subsection 9(c).
(a) Number of Option Shares. Each Option Document shall state
the number of Shares to which it pertains. An Optionee may receive more than one
Option, which may include Options which are intended to be ISO's and Options
which are not intended to be ISO's, but only on the terms and subject to the
conditions and restrictions of the Plan.
(b) Option Price. Each Option Document shall state the Option
Price which, for a Non-qualified Stock Option, may be less than, equal to, or
greater than the Fair Market Value of the Shares on the date the Option is
granted and, for an ISO, shall be at least 100% of the Fair Market Value of the
Shares on the date the Option is granted as determined by the Committee in
accordance with this Subsection 8(b); provided, however, that if an ISO is
granted to an Optionee who then owns, directly or by attribution under Section
424(d) of the Code, shares possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or an Affiliated
Company, then the Option Price shall be at least 110% of the Fair Market Value
of the Shares on the date the Option is granted. If the Common Stock is traded
in a public market, then the Fair Market Value per Share shall be, if the Common
Stock is listed on a national securities exchange or included in the New York
Stock Exchange System, the last reported sale price thereof on the relevant
date, or, if the Common Stock is not so listed or included, the mean between the
last reported "bid" and "asked" prices thereof on the relevant date, as reported
on the NYSE or, if not so reported, as reported by the National Daily Quotation
Bureau, Inc. or as reported in a customary financial reporting service, as
applicable and as the Committee determines. The Option Price, with respect to
Options granted effective the date of determination of the offering price for
the Common Stock in the Company's initial public offering, shall be such
offering price, which shall be deemed to constitute the Fair Market Value per
share of the Common Stock.
(c) Exercise. No Option shall be deemed to have been exercised
prior to the receipt by the Company of written notice of such exercise and of
payment in full of the Option Price for the Shares to be purchased. Each such
notice shall specify the number of Shares to be purchased and shall (unless the
Shares are covered by a then current registration statement or a Notification
under Regulation A under the Securities Act of 1933, as amended (the "Act")),
contain the Optionee's acknowledgment in form and substance satisfactory to the
32
Company that (a) such Shares are being purchased for investment and not for
distribution or resale (other than a distribution or resale which, in the
opinion of counsel satisfactory to the Company, may be made without violating
the registration provisions of the Act), (b) the Optionee has been advised and
understands that (1) the Shares have not been registered under the Act and are
"restricted securities" within the meaning of Rule 144 under the Act and are
subject to restrictions on transfer and (ii) the Company is under no obligation
to register the Shares under the Act or to take any action which would make
available to the Optionee any exemption from such registration, (c) such Shares
may not be transferred without compliance with all applicable federal and state
securities laws, and (d) an appropriate legend referring to the foregoing
restrictions on transfer and any other restrictions imposed under the Option
Documents may be endorsed on the certificates. Notwithstanding the foregoing, if
the Company determines that issuance of Shares should be delayed pending (A)
registration under federal or state securities laws, (B) the receipt of an
opinion of counsel satisfactory to the Company that an appropriate exemption
from such registration is available, (C) the listing or inclusion of the Shares
on any securities exchange or an automated quotation system or (D) the consent
or approval of any governmental regulatory body whose consent or approval is
necessary in connection with the issuance of such Shares, the Company may defer
exercise of any Option granted hereunder until any of the events described in
this sentence has occurred.
(d) Medium of Payment. An Optionee shall pay for Shares (i) in
cash, (ii) by certified or cashier's check payable to the order of the Company,
or (iii) by such other mode of payment as the Committee may approve, including
payment through a broker in accordance with procedures permitted by Regulation T
of the Federal Reserve Board. Furthermore, the Committee may provide in an
Option Document that payment may be made in whole or in part in shares of the
Company's Common Stock held by the Optionee. If payment is made in whole or in
part in shares of Common Stock, then the Optionee shall deliver to the Company
certificates registered in the name of such Optionee representing the shares of
Common Stock owned by such Optionee, free of all liens, claims and encumbrances
of every kind and having an aggregate Fair Market Value on the date of delivery
that is at least as great as the Option Price of the shares (or relevant portion
thereof) with respect to which such Option is to be exercised by the payment in
shares of Common Stock, endorsed in blank or accompanied by stock powers duly
endorsed in blank by the Optionee. In the event that certificates for shares of
Common Stock delivered to the Company represent a number of shares of Common
Stock in excess of the number of shares of Common Stock required to make payment
for the Option Price of the Shares (or relevant portion thereof) with respect to
which such
33
Option is to be exercised by payment in shares of Common Stock, the stock
certificate issued to the Optionee shall represent (i) the Shares in respect of
which payment is made, and (ii) such excess number of shares of Common Stock.
Notwithstanding the foregoing, the Committee may impose from time to time such
limitations and prohibitions on the use of shares of Common Stock to exercise an
Option as it deems appropriate.
(e) Termination of Options.
-----------------------
(i) No Option shall be exercisable after the first to
occur of the following:
(A) Expiration of the Option term specified in the
Option Document, which, in the case of an ISO, shall not occur after ten (10)
years from the date of grant, or (2) five years from the date of grant of an ISO
if the Optionee on the date of grant owns, directly or by attribution under
Section 424(d) of the Code, shares possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of an
Affiliated Company;
(B) In the case of a Non-qualified Stock Option unless
otherwise provided in the Option Document, and in the case of an ISO, expiration
of three months from the date the Optionee's employment or service with the
Company or its Affiliated Companies terminates for any reason other than
Disability or death or as otherwise specified in Subsection 8(e)(i)(D) or
8(e)(i)(E) below;
(C) In the case of a Non-qualified Stock Option unless
otherwise provided in the Option Document, and in the case of an ISO, expiration
of one year from the date such employment or service with the Company or its
Affiliated Companies terminates due to the Optionee's disability or death;
(D) A finding by the Committee, after full
consideration of the facts presented on behalf of both the Company and the
Optionee, that the Optionee has breached his or her employment or service
contract with the Company or an Affiliated Company, or has been engaged in
disloyalty to the Company or an Affiliated Company, including, without
limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his or her employment or service, or has disclosed
trade secrets or confidential information of the Company or an Affiliated
Company. In such event, in addition to immediate termination of the
34
Option, the Optionee shall automatically forfeit all Shares for which the
Company has not yet delivered the share certificates upon refund by the Company
of the Option Price. Notwithstanding anything herein to the contrary, the
Company may withhold delivery of share certificates pending the resolution of
any inquiry that could lead to a finding resulting in a forfeiture; or
(E) The date, if any, set by the Board of Directors as
an accelerated expiration date in the event of a Change in Control.
(ii) Notwithstanding the foregoing, the Committee
may extend the period during which all or any portion of an Option may be
exercised to a date no later than the Option term specified in the Option
Document pursuant to Subsection 8(e)(i)(A), provided that any change pursuant to
this Subsection 8(e)(ii) which would cause an ISO to become a Non-qualified
Stock Option may be made only with the consent of the Optionee. The terms of an
executive severance agreement or other agreement between the Company and an
Optionee, approved by the Committee, whether entered into prior or subsequent to
the grant of an Option, which provide for Option exercise dates later than those
set forth in Subsection 8(e)(i) but permitted by this Subsection 8(e)(ii) shall
be deemed to be Option terms approved by the Committee and consented to by the
Optionee.
(f) Transfers. An ISO granted under the Plan may not be
transferred, except by will or by the laws of descent and distribution. A
Non-qualified Stock Option granted under the Plan may not be transferred, except
by will or by the laws of descent and distribution, except as follows: If the
terms of the Non-qualified Stock Option specifically so permit, a Non-qualified
Stock Option may be transferred by the Optionee by bona fide gift, with no
consideration for the transfer, to a member of such person's Immediate Family.
If the Optionee receiving such an Option, or having an outstanding Option
amended to provide for such transferability, is a Section 16 Officer, such
Option or Option amendment must be approved by the committee of disinterested
persons (as defined in Rule 16b-3) which administers the Plan with respect to
Section 16 Officers. Notwithstanding the foregoing, a Non-qualified Stock Option
may be transferred pursuant to the terms of a "qualified domestic relations
order," within the meaning of Sections 401(a)(13) and 414(p) of the Code or
within the meaning of Title I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). During the lifetime of the person to whom an Option
is granted (or the member of the Immediate Family if such Option has been
transferred in accordance with the above provisions), such Option may be
exercised only by such person.
35
(g) Limitation on ISO Grants. In no event shall the aggregate
Fair Market Value of the Shares of Common Stock (determined at the time the ISO
is granted) with respect to which ISOs under all incentive stock option plans of
the Company or its Affiliated Companies are exercisable for the first time by
the Optionee during any calendar year exceed $100,000.
(h) Other Provisions. Subject to the provisions of the Plan,
the Option Documents shall contain such other provisions including, without
limitation, provisions authorizing the Committee to accelerate the
exercisability of all or any portion of an Option granted pursuant to the Plan,
additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the Committee shall deem advisable.
(i) Amendment. Subject to the provisions of the Plan, the
Committee shall have the right to amend Option Documents issued to an Optionee,
subject to the Optionee's consent if such amendment is not favorable to the
Optionee, except that the consent of the Optionee shall not be required for any
amendment made pursuant to Subsection 8(e) (i) (E) or Section 10 of the Plan, as
applicable.
9. Special Provisions Relating to Grants of Options to Non-Employee
Members of the Board of Directors. Options granted pursuant to the Plan to
non-employee members of the Board of Directors shall be granted, without any
further action by the Committee, in accordance with the terms and conditions set
forth in this Section 9. Options granted pursuant to this Section 9 shall be
evidenced by Option Documents in such form as the Committee shall from
time-to-time approve, which Option Documents shall comply with and be subject to
the following terms and conditions and such other terms and conditions as the
Committee shall from time-to-time require which are not inconsistent with the
terms of the Plan.
(a) Timing of Grants; Number of Shares Subject of Options;
Exercisability of Options; Option Price. Each non-employee member of the Board
of Directors shall be granted on his or her Formula Grant Date an Option to
purchase Five Thousand (5,000) Shares. Each such Option shall be a Non-qualified
Stock Option becoming exercisable on the first anniversary of the date of grant.
The Option Price shall be equal to the Fair Market Value of the Shares on the
date the Option is granted.
36
(b) Termination of Options Granted Pursuant to Section 9. All
Options granted pursuant to this Section 9 shall be exercisable until the first
to occur of the following:
(i) Expiration of six (6) years from the date of grant;
(ii) Expiration of three (3) months from the date the
Optionee's service as a member of the Board of Directors terminates for any
reason other than Disability or death;
(iii) Expiration of one (1) year from the date the
Optionee's service as a member of the Board of Directors terminates due to the
Optionee's Disability or death; or
(iv) Expiration of three (3) months after the date of a
Change in Control.
(c) Applicability of Provisions of Section 8 to Options
Granted Pursuant to Section 9. The following provisions of Section 8 shall be
applicable to Options granted pursuant to this Section 9: Subsection 8(a)
(provided that all Options granted pursuant to this Section 9 shall be
Non-qualified Stock Options); the definition of Fair Market Value contained in
Subsection 8(b); Subsection 8(c); Subsection 8(d) (provided that Option
Documents relating to Options granted pursuant to this Section 9 shall provide
that payment may be made in whole or in part in shares of Company Common Stock);
Subsection 8(f); and Subsection 8(i) (but only to the extent that the
application of such subsection to Options granted under this Section 9 would not
cause a Disinterested Director no longer to qualify as a Disinterested Director)
10. Change in Control. In the event of a Change in Control, the
Committee may take whatever action it deems necessary or desirable with respect
to the Options and Awards outstanding (other than Options granted pursuant to
Section 9), including, without limitation, accelerating the expiration or
termination date in the respective Option Documents to a date no earlier than
thirty (30) days after notice of such acceleration is given to the Optionees. In
addition to the foregoing, in the event of a Change in Control, Options granted
pursuant to Section 9 of the Plan and Options granted pursuant to the Plan which
are held by Optionees who are employees of the Company or an Affiliated Company
at the time of a Change in Control shall, and in the case of consultants and
advisors to the Company or an Affiliated Company shall (unless the
exercisability of the Options held by such
37
persons is subject to some condition other than the lapse of time (including
within the term "lapse of time" the provisions of Sections 8(e) and 9(b) of the
Plan)), automatically accelerate to the date of the Change in Control and become
immediately exercisable in full, and the restrictions applicable to Restricted
Stock awarded to Awardees who are employees at the time of a Change in Control
shall immediately lapse and the Restricted Stock held by the Company shall be
delivered to the Grantees. An Option granted to a consultant or advisor who is
also a member of the Board of Directors shall be deemed for purposes of the
preceding sentence to be an Option granted to a consultant or advisor and not to
a member of the Board of Directors if such Option is granted for services as a
consultant or advisor.
A "Change in Control" shall mean a transaction or series of
transactions (including any cash tender or securities exchange offer, merger or
other business combination, or contested election of directors, or any
combination thereof) as the result of which:
(i) any Person (other than Penn Independent or any of its
shareholders as of the effective date of this Plan, the Company, any
Affiliated Company, any employee benefit plan of Penn Independent, the
Company or of any Affiliated Company, any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of
any such employee benefit plan or eligible Plan participants or any
Affiliate or Associate of eligible Plan participants or any group of
which eligible Plan participants are members and in which they
participate in their capacity as shareholders of the Company) together
with all Affiliates and Associates of such Person, shall become the
Beneficial Owner of a percentage ownership in the aggregate combined
voting power of all Voting Securities of the Company then outstanding
that is greater than the then current percentage ownership of Penn
Independent in the aggregate combined voting powers of all Voting
Securities of the Company then outstanding; or
(ii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Company, any
Affiliated Company, any employee benefit plan of Penn Independent, the
Company or of any Affiliated Company, any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of
any such employee benefit plan or eligible Plan participants or any
Affiliate or Associate of eligible Plan participants or any group of
which eligible Plan participants are members and in which they
participate in their capacity as shareholders of the Company) together
with all
38
Affiliates and Associates of such Person, shall become the Beneficial
Owner of 30% or more of the aggregate combined voting power of all
Voting Securities of the Company then outstanding, irrespective of Penn
Independent's then current percentage ownership in such Voting
Securities; provided that during any period of two consecutive calendar
years there is a change of 25% or more in the composition of the Board
in office at the beginning of such period, except for changes approved
by at least two-thirds of the directors then in office who were
directors at the beginning of the period; or
(iii) any Person (other than Penn Independent or any of its
shareholders as of the date of this Agreement, the Company, any
Affiliated Company, any employee benefit plan of Penn Independent, the
Company or of any Affiliated Company, any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of
any such employee benefit plan or eligible Plan participants or any
Affiliate or Associate of eligible Plan participants or any group of
which eligible Plan participants are members and in which they
participate in their capacity as shareholders of the Company) together
with all Affiliates and Associates of such Person, shall become the
Beneficial Owner of greater than 50% of the aggregate combined voting
power of all Voting Securities of Penn Independent; or
(iv) during any period of two consecutive calendar years there
is a change of 25% or more in the composition of the Board in office at
the beginning of such period except for changes approved by at least
two-thirds of the directors then in office who were directors at the
beginning of the period; or
(v) 80% or more of the assets of the Company and its
Affiliated Companies shall be sold or transferred to any Person (other
than an Affiliated Company of the Company); or
(vi) the Board makes a determination that such transaction or
transactions constitute a Change in Control for purposes of this Plan.
For purposes of this Plan, a Change in Control shall be deemed to have
occurred on the date upon which any of the foregoing is consummated or becomes
effective.
39
11. Adjustments on Changes in Capitalization. The aggregate number of
Shares and class of shares as to which Options and Awards may be granted
hereunder, the number and class or classes of shares covered by each outstanding
Option and the Option Price thereof shall be appropriately adjusted in the event
of a stock dividend, stock split, recapitalization or other change in the number
or class of issued and outstanding equity securities of the Company resulting
from a subdivision or consolidation of the Common Stock and/or, if appropriate,
other outstanding equity securities, or a recapitalization or other capital
adjustment (not including the issuance of Common Stock on the conversion of
other securities of the Company which are convertible into Common Stock)
affecting the Common Stock which is effected without receipt of consideration by
the Company. The Committee shall have authority to determine the adjustments to
be made under this Section, and any such determination by the Committee shall be
final, binding and conclusive.
12. Terms and Conditions of Awards. Awards granted pursuant to the Plan
shall be evidenced by written Award Agreements in such form as the Committee
shall from time-to-time approve, which Award Agreements shall comply with and be
subject to the following terms and conditions and such other terms and
conditions as the Committee shall from time to time require which are not
inconsistent with the terms of the Plan. The Committee may, in its sole
discretion, shorten or waive any term or condition with respect to all or any
portion of any Award. Notwithstanding the foregoing, all restrictions shall
lapse or terminate with respect to Restricted Stock upon the death or Disability
of the Awardee.
(a) Number of Shares. Each Award Agreement shall state the
number of Shares of Common Stock to which it pertains.
(b) Purchase Price. Each Award Agreement shall specify the
purchase price, if any, which applies to the Award. If the Board specifies a
purchase price, the Awardee shall be required to make payment on or before the
date specified in the Award Agreement. An Awardee shall pay for such Shares (i)
in cash, (ii) by certified check payable to the order of the Company, or (iii)
by such other mode of payment as the Committee may approve.
(c) Restrictions on Transfer and Forfeitures. A stock
certificate representing the Restricted Stock granted to an Awardee shall be
registered in the Awardee's name but shall be held in escrow by the Company's
General Counsel, together with an undated stock power executed by the Awardee
with respect to each
40
stock certificate representing Restricted Stock Registered in such Awardee's
name. The Awardee shall generally have the rights and privileges of a
shareholder as to such Restricted Stock including the right to vote such
Restricted Stock and to receive and retain all cash dividends with respect to
them, except that the following restrictions shall apply: (i) the employee shall
not be entitled to delivery of the certificate until the expiration or
termination of any period designated by the Committee ("Restricted Period") and
the satisfaction of any other conditions prescribed by the Committee; and (ii)
all distributions with respect to the Restricted Stock other than cash
dividends, such as stock dividends, stock splits or distributions of property,
and any distributions (other than cash dividends) subsequently made with respect
to other distributions, shall be delivered to the General Counsel of the
Company, together with appropriate stock powers or other instruments of transfer
signed and delivered to the General Counsel by the Grantee, to be held by the
General Counsel and released to either the Grantee or the Company, as the case
may be, together with the Shares to which they relate; (iii) the Grantee will
have no right to sell, exchange, transfer, pledge, hypothecate or otherwise
dispose of any of the Restricted Stock or distributions (other than cash
dividends) with respect thereto; and (iv) all of the Restricted Stock shall be
forfeited and all rights of the Awardee with respect to such Restricted Stock
shall terminate without further obligation on the part of the Company unless the
Awardee has remained an employee of the Company, any of its Affiliated Companies
or any combination thereof until the expiration or termination of the Restricted
Period and the satisfaction of any other conditions prescribed by the Committee
applicable to such Restricted Stock. Upon the forfeiture of any Restricted
Stock, such forfeited shares shall be transferred to the Company without further
action by the Awardee.
(d) Lapse of Restrictions. Upon the expiration or termination
of the Restricted Period and the satisfaction of any other conditions prescribed
by the Committee time as provided for in the Plan, the restrictions applicable
to the Restricted Stock shall lapse and a stock certificate for the number of
shares of Common Stock with respect to which the restrictions have lapsed shall
be delivered, free of all such restrictions, except any that may be imposed by
law, to the Awardee or the beneficiary or estate, as the case may be. The
Company shall not be required to deliver any fractional share of Common Stock
but will pay, in lieu thereof, the fair market value (determined as of the date
the restrictions lapse) of such fractional share to the Awardee or the Awardee's
beneficiary or estate, as the case may be. The Award may provide for the lapse
of restrictions on transfer and forfeiture conditions in installments.
41
(e) Section 83(b) Elections. An Awardee who files an election
with the Internal Revenue Service to include the fair market value of any
Restricted Stock in gross income while they are still subject to restrictions
shall promptly furnish the Company with a copy of such election together with
the amount of any federal, state, local or other taxes required to be withheld
to enable the Company to claim an income tax deduction with respect to such
election.
(f) Upon a finding by the Committee, after full consideration
of the facts presented on behalf of both the Company and the Awardee, that the
Awardee has breached his or her employment or service contract with the Company
or an Affiliated Company, or has been engaged in disloyalty to the Company or an
Affiliated Company, including, without limitation, fraud, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his or her
employment or service, or has disclosed trade secrets or confidential
information of the Company or an Affiliated Company, Awardee shall automatically
forfeit all Restricted Stock for which (i) the Company has not yet delivered the
Share certificates to the Awardee; (ii) the Restricted Period has not expired or
(iii) any restrictions applicable to the Restricted Stock have not lapsed.
Notwithstanding anything herein to the contrary, the Company may withhold
delivery of Restricted Stock certificates pending the resolution of any inquiry
that could lead to a finding resulting in forfeiture.
(g) Amendment. Subject to the provisions of the Plan, the
Committee shall have the right to amend Awards issued to an Awardee, subject to
the Awardee's consent if such amendment is not favorable to the Awardee, except
that the consent of the Awardee shall not be required for any amendment made
pursuant to Section 10 of the Plan.
13. Amendment of the Plan. The Board of Directors of the Company may
amend the Plan from time-to-time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not change the class of
individuals eligible to receive an ISO or increase the maximum number of Shares
as to which Options may be granted without obtaining the approval of such
change(s), within twelve months before or after such action, by the affirmative
vote of a majority of the votes cast by all shareholders entitled to vote at a
duly called meeting of the shareholders held in accordance with the laws of the
Commonwealth of Pennsylvania (provided, however, that if Rule 16b-3 requires a
greater vote of shareholders, then the Board may not take such action without
obtaining the minimum vote required by Rule 16b-3). No amendment to the Plan
shall adversely affect any
42
outstanding Option or Award, however, without the consent of the Grantee.
Notwithstanding anything to the contrary contained herein, the provisions of the
Plan contained in Section 9 relating to the granting of Options to non-employee
members of the Board of Directors that determine (i) who is to be granted
Options under such Section, (ii) the number of Shares subject to such Options,
(iii) the Option Price of such Options, and (iv) the timing of grants of such
Options shall not be amended more than once in any six month period, other than
to comply with changes in the Code or ERISA.
14. No Commitment to Retain. The grant of an Option or Award pursuant
to the Plan shall not be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company or any Affiliated
Company to retain the Grantee in the employ of the Company or an Affiliated
Company and/or as a member of the Company's Board of Directors or in any other
capacity.
15. Withholding of Taxes. Whenever the Company proposes or is required
to deliver or transfer Shares in connection with the exercise of an Option or
Award, the Company shall have the right to (a) require the recipient to remit or
otherwise make available to the Company an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the delivery
or transfer of any certificate or certificates for such Shares or (b) take
whatever other action it deems necessary to protect its interests with respect
to tax liabilities. The Company's obligation to make any delivery or transfer of
Shares shall be conditioned on the Optionee's compliance, to the Company's
satisfaction, with any withholding requirement.
16. Interpretation. The Plan is intended to enable transactions under
the Plan with respect to directors and officers (within the meaning of Section
16(a) under the Securities Exchange Act of 1934, as amended) to satisfy the
conditions of Rule 16b-3; to the extent that any provision of the Plan would
cause a conflict with such conditions or would cause the administration of the
Plan as provided in Section 3 to fail to satisfy the conditions of Rule 16b-3,
such provision shall be deemed null and void to the extent permitted by
applicable law. This Section shall not be applicable if no class of the
Company's equity securities is then registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
43
Appendix B
----------
MISSION STATEMENT OF THE AUDIT COMMITTEE
OF PENN-AMERICA GROUP, INC.
Effective May 19, 1999, as most recently amended February 28, 2003, the Audit
Committee of the Board of Directors of Penn-America Group, Inc., formally adopts
the following statement:
I. Structure:
----------
It is hereby agreed that the Audit Committee of the Board of Directors of
Penn-America Group, Inc., shall consist of at least three independent outside
directors:
1. Whose independence shall be determined by the Board of Directors in
accordance with the rules of the Securities and Exchange Commission
and the New York Stock Exchange;
2. Who are financially literate, as interpreted by the Company's Board of
Directors in its business judgment in accordance with applicable rules
and regulations of the Securities and Exchange Commission and New York
Stock Exchange; and,
3. At least one such independent, outside director shall have accounting
or related financial management expertise, as interpreted by the
Company's Board of Directors in its business judgment in accordance
with applicable rules and regulations of the Securities and Exchange
Commission and New York Stock Exchange.
II. Purpose:
--------
The purpose of the Audit Committee is to:
A. Assist the Board with oversight of: (i) the integrity of the Company's
financial statements, (ii) the Company's compliance and legal and
regulatory requirements, (iii) the independent auditor's
qualifications and independence, and, (iv) the performance of the
Company's internal audit function and independent auditors; and,
B. Prepare the report, as required by the Securities and Exchange
Commission, to be included in the Company's Annual Proxy Statement.
III. General Responsibilities:
--------------------------
The Audit Committee hereby agrees to:
A. Periodically:
(1) Instruct the independent auditor that the Audit Committee,
as the Board of Directors' representative, is the auditor's
client;
(2) Provide an open avenue of communication between the
independent auditor and the Board of Directors;
(3) Advise financial management and the independent auditor that
they are expected to provide a timely analysis of
significant current financial reporting issues and
practices;
(4) Review periodically with general counsel legal and
regulatory matters that may have a material impact on the
Company's and related entities' financial statements,
compliance policies and programs;
(5) Promptly notify the Board of Directors in the event of a
change in circumstance that would change a member of the
Audit Committee's status as "independent;" and
(6) Conduct or authorize investigations into any matters within
the Committee's scope of responsibilities. The Committee
shall be empowered to retain independent counsel and other
professionals to assist in the conduct of any such
investigation. B.
44
B. Quarterly:
(1) Meet quarterly, at least. The Committee may ask members of
management or others to attend meetings and provide pertinent
information as necessary;
(2) Meet separately with management and with the independent
auditors;
(3) Report to the Board of Directors.
C. Annually:
(1) Retain, terminate and establish compensation for independent
auditors;
(2) Assure the independence of the independent auditor by, among
other things, having the independent auditor submit on a periodic
basis to the Audit Committee a formal written statement
addressing the auditor's independence. The Audit Committee shall
engage in dialogue with the outside auditor with respect to any
matter that might impact the objectivity or independence of the
outside auditor;
(3) Review with the independent auditor the coordination of audit
efforts to assure completeness of coverage, reduction of
redundant efforts and the effective use of audit resources;
(4) Consider, in consultation with the independent auditor, the audit
scope and plan of the independent auditor; (5) Review and update
this Committee Charter.
IV. Specific Duties:
----------------
The Audit Committee further agrees to:
A. Periodically:
(1) Coordinate with the Company's human resource department the
hiring policies with respect to employees and former employees of
independent outside auditors to ensure independence of the
outside auditors and to otherwise comply with Company employment
policies and practices;
B. Quarterly:
(1) Consider and review with the independent auditor their quarterly
and annual report describing:
(a) The adequacy of the Company's and related entities'
internal controls, including computerized information
system controls and security;
(b) Related findings and recommendations of the independent
auditor together with management's responses;
(c) Material issues raised as a result of inquiry by any
government or regulatory body, within the preceding
five (5) years, relative to audits;
(d) All relationships between the independent auditor and
the Company;
(2) Consider and review with management and the independent auditor:
(a) Significant findings, including the Status of Previous
Audit Recommendations;
(b) Any difficulties encountered in the course of audit
work, including any restrictions on the scope of
activities or access to required information. Meet
periodically with the independent auditor and
management in separate sessions to discuss any matters
that the Committee or these groups believe should be
discussed privately with the Committee;
(c) Annual and quarterly audited financials, including
MD&A;
(d) Earnings releases and financial information and
earnings guidance to analysts;
(e) Policies with respect to risk assessment and
management;
(3) Report to the Board on significant results of the foregoing
analyses;
(4) Inquire of management and the independent auditor about
significant risks or exposures and assess the steps management
has taken to minimize such risk to the Company and related
entities;
(5) Provide that financial management and the independent auditor
discuss with the Audit Committee their qualitative judgments
about the appropriateness, not just the acceptability, of
accounting principles and financial disclosure practices used or
proposed to be adopted by the Company;
(6) Inquire as to the auditor's independent qualitative judgments
about the clarity of the financial disclosure practices used or
proposed to be adopted by the Company;
(7) Discuss on a timely basis with the auditor their review of the
Company's quarterly financial information and results thereof;
45
(8) Inquire as to the auditor's views about whether management's
choices of accounting principles are common practices or in the
minority;
(9) Determine as regards to new transactions or events, management's
reasoning for the appropriateness of the accounting principles
and disclosure practices, and seek the advice of the auditors, if
appropriate;
(10) Assure that the auditor's reasoning is described in determining
the appropriateness of changes in accounting principles and
disclosure practices;
(11) Assure that the auditor's reasoning is described in accepting or
questioning significant estimates by management.
C. Annually:
(1) Review with management and the independent auditor the results of
annual audits and related comments in consultation with
committees as deemed appropriate including:
(a) The independent auditor's audit of Penn-America Group,
Inc.'s and subsidiaries' annual financial statements,
accompanying footnotes and its report thereon.
(b) Any significant changes required in the independent
auditor's audit plans. (c) Any difficulties or disputes
with management encountered during the course of the
audit.
(d) Other matters related to the conduct of the audit,
which are to be communicated to the Audit Committee
under Generally Accepted Auditing Standards.
The Audit Committee is responsible for the duties set forth above, but is not
responsible for either the preparation of the financial statements or the
auditing of the financial statements. Management has the responsibility for
preparing the financial statements and implementing internal controls and the
independent accountants have the responsibility for auditing the financial
statements and monitoring the effectiveness of the internal controls. The review
of the financial statements by the Audit Committee is not of the same quality as
the audit performed by the independent accountants. In carrying out its
responsibilities, the Audit Committee believes its policies and procedures
should remain flexible in order to best react to a changing environment.
46
o FOLD AND DETACH HERE o
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF PENN-AMERICA GROUP, INC.
The undersigned, a holder of Common Stock of PENN-AMERICA GROUP, INC., hereby
constitutes and appoints JON S. SALTZMAN and GARLAND P. PEZZUOLO, and each of
them acting individually, as the proxy of the undersigned, with full power of
substitution, for and in the name and stead of the undersigned, to attend the
Annual Meeting of Shareholders of the Company to be held on Wednesday, May 14,
2003 at 10:00 a.m. at 420 S. York Road, Hatboro, Pennsylvania, and any
adjournment or postponement thereof, and thereat to vote all shares of Common
Stock which the undersigned would be entitled to vote if personally present.
This Proxy also delegates discretionary authority to vote with respect to any
other business which may properly come before the meeting and any adjournment or
postponement thereof. THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE
OF ANNUAL MEETING, PROXY STATEMENT AND ANNUAL REPORT OF PENN-AMERICA GROUP, INC.
SEE REVERSE SIDE. PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
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SEE REVERSE SIDE
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o FOLD AND DETACH HERE o
Unless otherwise specified, the shares will be voted "FOR"
the election of all nine nominees for director and "FOR" the
other proposal set forth below.
[ x ] Please mark your vote FOR WITHHELD
as in this example. [ ] [ ]
1. Election of Directors (nominees as listed) Nominees:
Irvin Saltzman, Jon S. Saltzman, Richard L. Duszak,
Charles Ellman, Robert A. Lear, Jami Saltzman-Levy,
M. Moshe Porat, E. Anthony Saltzman and Paul Simon
For, except vote withheld from the following
nominee(s): ___________________________________________
2. To ratify amendments to the 2002 Stock Incentive Plan,
formerly known as the Amended and Restated 1993 Stock
Incentive Plan; and,
FOR WITHHELD
[ ] [ ]
3. To vote on such other business which may properly come
before the meeting.
Dated _____________________________________ , 2003
Signature _______________________________________
Signature _______________________________________
NOTE: Please sign this Proxy as name(s)
appear(s) in address. When signing as
attorney-in-fact, executor, administrator,
trustee or guardian, please add your title as
such, and if signer is a corporation please
sign with full corporate name by duly
authorized officer or officers and affix the
corporate seal. When stock is issued in the
name of two or more persons, all such persons
should sign.