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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. ___ )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FIRST COMMONWEALTH, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: N/A
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): N/A
4) Proposed maximum aggregate value of transaction: N/A
5) Total fee paid: N/A
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: N/A
2) Form, Schedule or Registration Statement No.: N/A
3) Filing Party: N/A
4) Date Filed: N/A
<PAGE>
LOGO
FIRST COMMONWEALTH, INC.
444 NORTH WELLS STREET
SUITE 600
CHICAGO, ILLINOIS 60610
March 30, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of Stockholders
of First Commonwealth, Inc., a Delaware corporation, to be held at 10:00 a.m.
(local time) on Tuesday, May 5, 1998 at Chicago Marriott-Downtown, 540 North
Michigan Avenue, Chicago, Illinois 60611.
The formal notice of the meeting, Proxy Statement and 1997 Annual Report are
enclosed. The matters to be considered at the meeting are described in the
accompanying Proxy Statement. Regardless of your plans for attending in person,
it is important that your shares be represented at the meeting. Therefore,
please complete, sign, date and return the enclosed proxy card in the enclosed,
post-paid envelope. This will enable you to vote on the business to be
transacted whether or not you attend the meeting.
Sincerely,
/s/ Christopher C. Multhauf
Christopher C. Multhauf
Chairman of the Board and Chief
Executive Officer
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FIRST COMMONWEALTH, INC.
444 NORTH WELLS STREET
SUITE 600
CHICAGO, ILLINOIS 60610
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1998
To the Stockholders of
FIRST COMMONWEALTH, INC.
The 1998 Annual Meeting of Stockholders of First Commonwealth, Inc. a
Delaware corporation (the "Company"), will be held at Chicago Marriott-
Downtown, 540 N. Michigan Avenue, Chicago, Illinois 60611, on Tuesday, May 5,
1998, at 10:00 a.m., local time, for the following purposes:
1. to elect two Class III directors;
2. to approve an amendment to the Company's 1995 Long-Term Incentive Plan;
and
3. to transact such other business as may properly come before the Annual
Meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 20, 1998 as
the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting.
Your attention is directed to the accompanying Proxy Statement. Whether or
not you plan to attend the meeting in person, you are urged to complete, sign,
date and return the enclosed proxy card in the enclosed, post-paid envelope. If
you attend the meeting and wish to vote in person, you may withdraw your proxy
and vote your shares personally.
This Notice of Annual Meeting of Stockholders is first being sent to
stockholders on or about March 30, 1998.
By Order of the Board of Directors,
/s/ David W. Mulligan
David W. Mulligan
President, Secretary and Chief
Operating Officer
March 30, 1998
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FIRST COMMONWEALTH, INC.
444 NORTH WELLS STREET
SUITE 600
CHICAGO, ILLINOIS 60610
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 5, 1998
GENERAL INFORMATION
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors of First Commonwealth, Inc., a Delaware
corporation (the "Company"), for use at the 1998 Annual Meeting of
Stockholders (the "Annual Meeting") to be held at 10:00 a.m. (local time) on
May 5, 1998, at Chicago Marriott-Downtown, 540 N. Michigan Avenue, Chicago,
Illinois 60611.
The Board of Directors has fixed the close of business on March 20, 1998 as
the record date for the determination of stockholders entitled to notice of,
and to vote at, the Annual Meeting. On February 28, 1998 the Company had
outstanding 3,639,500 shares of common stock, par value $.001 per share
("Common Stock"). A list of stockholders of record entitled to vote at the
Annual Meeting will be available for inspection by any stockholder, for any
purpose germane to the meeting, during normal business hours, for a period of
10 days prior to the meeting, at the office of the Company located at 444
North Wells Street, Suite 600, Chicago, Illinois.
Whether or not you plan to attend the Annual Meeting, please sign, date and
mail your proxy in the enclosed postage prepaid envelope to First
Commonwealth, Inc., c/o First Chicago Trust Company of New York, P.O. Box
8068, Edison, New Jersey 08818-8068. The proxies will vote your shares
according to your instructions. If you return a properly signed and dated
proxy card but do not mark a choice on one or more items, your shares will be
voted in accordance with the recommendation of the Board of Directors as set
forth in this Proxy Statement. The proxy card gives authority to the proxies
to vote your shares in their discretion on any other matter presented at the
Annual Meeting.
You may revoke your proxy at any time prior to voting at the Annual Meeting
by delivering written notice to the Secretary of the Company, by submitting a
subsequently dated proxy or by attending the Annual Meeting and voting in
person at the Annual Meeting.
This Proxy Statement is first being sent or given to stockholders on or
about March 30, 1998.
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VOTING INFORMATION
Each holder of outstanding shares of Common Stock is entitled to one vote
for each such share held in such holder's name with respect to all matters on
which holders of Common Stock are entitled to vote at the Annual Meeting. A
holder of Common Stock may, with respect to the election of the Class III
directors, vote FOR the election of the director nominees or WITHHOLD
authority to vote for such director nominees. If no direction is made on a
proxy, such proxy will be voted FOR the election of the named director
nominees to serve as a Class III directors and FOR the proposal to approve the
1995 Long-Term Incentive Plan. If a proxy indicates that all or a portion of
the votes represented by such proxy are not being voted with respect to a
particular matter, such non-votes will not be considered present and entitled
to vote on such matter, although such votes may be considered present and
entitled to vote on other matters and will count for purposes of determining
the presence of a quorum. A quorum will be present if a majority of the shares
of Common Stock are represented in person or by proxy at the Annual Meeting.
The election of the Class III directors requires the affirmative vote of a
plurality of votes cast by holders of Common Stock present in person or
represented by proxy and entitled to vote on such matter at the Annual
Meeting. Accordingly, if a quorum is present at the Annual Meeting, the
persons receiving the greatest number of votes by the holders of Common Stock
will be elected to serve as the Class III directors. Since the election of
directors requires only the affirmative vote of a plurality of the votes cast
by holders of Common Stock present in person or represented by proxy and
entitled to vote with respect to such matter, withholding authority to vote
for a nominee and non-votes with respect to the election of directors will not
affect the outcome of the election of directors.
Assuming a quorum is present at the Annual Meeting, the approval of the
amendment to the Company's 1995 Long-Term Incentive Plan requires the
affirmative vote of a majority of the votes cast by the holders of Common
Stock present in person or represented by proxy and entitle to vote on such
matter at the Annual Meeting. A vote to abstain from voting on such proposal
will be treated as a vote against such proposal. Non-votes with respect to
such proposal will not effect the determination of whether such proposal is
approved.
PROPOSAL 1
ELECTION OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of five
directors, divided into three classes. At the 1998 Annual Meeting, two Class
III directors will be elected to serve until the Annual Meeting in the year
2001, or until their successors are elected and qualified. The nominees for
election as Class III directors are identified below. In the event any nominee
who has expressed an intention to serve if elected, fails to stand for
election, the persons named in the proxy presently intend to vote for a
substitute nominee designated by the Board of Directors.
NOMINEES
The following persons, if elected at the 1998 Annual Meeting, will serve as
Class III directors until the 2001 Annual Meeting of Stockholders, or until
their successors are elected and qualified.
CLASS III DIRECTORS--TERM TO EXPIRE IN 2001
Christopher C. Multhauf, age 43, is one of the Company's founders and has
been the Company's Chairman of the Board of Directors and Chief Executive
Officer since 1986. He was also the President between 1986 and 1995. He is a
member of the Executive Committee of the Board of Directors of the Company.
Mr. Multhauf is a former member of the board of directors of the National
Association of Dental Plans. He holds a Master of Business Administration
degree from Samuel Johnson Graduate School of Business, Cornell University.
Pursuant
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to an employment agreement between the Company and Christopher C. Multhauf,
the Company has agreed to employ Mr. Multhauf as its Chairman of the Board of
Directors and Chief Executive Officer. See "Executive Compensation and Other
Information--Employment Agreements."
Richard M. Burdge, Sr., age 71, is one of the founders of the Company and
has been a Director of the Company since 1987. He is a member of the
Compensation Committee, and is the Chairman of the Stock Option Compensation
Committee of the Board of Directors of the Company. Mr. Burdge has been self-
employed as a financial consultant for more than five years. Mr. Burdge was
formerly the Executive Vice President of CIGNA Corporation. Mr. Burdge is a
director of Pacificare Health Systerms, a provider of managed health care and
insurance products.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" THE NOMINEES
FOR CLASS III DIRECTOR.
OTHER DIRECTORS
The following persons are currently directors of the Company whose terms
will continue after the 1998 Annual Meeting.
CLASS I DIRECTOR--TERM SCHEDULED TO EXPIRE IN 1999
William J. McBride, age 53, is Chairman of Novaeon, Inc., a health care
consulting firm. Between August 1986 and December 1995, Mr. McBride was
President of Value Health, Inc., a company which provides managed health care
services primarily in pharmacy and mental health. He was first appointed a
Director of the Company in 1996 to fill the vacancy created by the resignation
of Mr. David C. Seidman. He is also Chairman of the Audit Committee and a
member of the Stock Option Compensation Committee of the Board of Directors of
the Company.
CLASS II DIRECTORS--TERMS SCHEDULED TO EXPIRE IN 2000
David W. Mulligan, age 40, is President, Chief Operating Officer and
Secretary of the Company. Mr. Mulligan is one of the founders of the Company
and has been a Director, Chief Operating Officer and Secretary of the Company
since 1986. He has been the Company's President since 1995. Between 1986 and
1995, he was the Executive Vice President of the Company. Mr. Mulligan is a
member of the Executive Committee of the Board of Directors of the Company.
Mr. Mulligan is also past President of the Virginia HMO Association and the
former Chairman of the National Association of Dental Plans. He holds a Master
of Business Administration degree from Samuel Johnson Graduate School of
Business, Cornell University. Pursuant to an employment agreement between the
Company and David W. Mulligan, the Company is required to take all reasonable
efforts to cause Mr. Mulligan to continue to be elected to the Board of
Directors of the Company. See "Executive Compensation and Other Information--
Employment Agreements."
Jackson W. Smart, Jr., age 67, has been a Director of the Company since
1988. He is Chairman of the Executive Committee and the Compensation Committee
of the Board of Directors of the Company, and is a member of the Audit
Committee of the Board of Directors of the Company. Between March 1991 and
December 1997, Mr. Smart was the Chairman and Chief Executive Officer of MSP
Communications, Inc., a radio broadcasting company. Mr. Smart is a Director of
Federal Express Corporation and Evanston Northwestern Healthcare Corporation,
and a Trustee of the Goldman Sachs Trust, Goldman Sachs Equity Portfolios
Inc., and Goldman Sachs Money Market Trust.
MEETINGS AND COMMITTEES
The Board of Directors of the Company held four meetings during 1997, all of
which were attended by all members of the Board.
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The Board of Directors does not presently have a formal nominating
committee.
The Audit Committee of the Board of Directors recommends the firm to be
appointed as independent accountants to audit financial statements and to
perform services related to the audit, reviews the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's year-end operating results and considers
the adequacy of the internal accounting procedures. The Audit Committee
consists of Messrs. William J. McBride (Chairman) and Jackson W. Smart, Jr.
The Audit Committee held one meeting in 1997, which was attended by both
members of the committee.
The Compensation Committee, which consists of Messrs. Jackson W. Smart, Jr.
(Chairman) and Richard M. Burdge, Sr., reviews and recommends the compensation
arrangements for all officers, approves such arrangements for other senior
level employees, and currently administers and takes such other action as may
be required in connection with certain compensation plans of the Company and
its subsidiaries, other than plans which are administered by the Stock Option
Compensation Committee. The Compensation Committee held two meetings in 1997,
which were attended by both members of the committee.
The Stock Option Compensation Committee of the Board of Directors consists
of Richard M. Burdge, Sr. (Chairman) and William J. McBride , each of whom are
"outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended, and "Non-Employee Directors" within the
meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended.
The Stock Option Compensation Committee administers and takes such other
action as may be required in connection with certain stock option and long-
term incentive plans of the Company. The Stock Option Compensation Committee
held two meetings in 1997, both of which were attended by all members of the
committee.
The Executive Committee of the Board of Directors consists of Jackson W.
Smart, Jr. (Chairman), Christopher C. Multhauf and David W. Mulligan. The
Executive Committee may exercise during intervals between the meetings of the
Board of Directors all the powers vested in the Board of Directors, except as
expressly limited by the Delaware General Corporation Law or otherwise
delegated to the other committees described above. The Executive Committee
held two meetings in 1997, both of which were attended by all members of the
committee.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual fee of $10,000 for service as
directors of the Company. In addition, non-employee directors who serve as
chairmen of the Executive, Audit and Compensation Committees, respectively,
receive an additional annual fee of $5,000 for service in such capacity.
Directors who are officers or employees of the Company or its subsidiaries
receive no compensation for serving as directors. All directors are reimbursed
for out-of-pocket expenses incurred in connection with attendance at meetings
of the Board of Directors and meetings of committees of the Board of
Directors.
Under the Company's 1995 Long-Term Incentive Plan, on the date of each
annual meeting of stockholders of the Company, each person who is a non-
employee director immediately after such annual meeting of stockholders will
be granted a nonqualified option to purchase 1,000 shares of Common Stock and,
on the date on which a person is first elected or begins to serve as a non-
employee director, each such new employee director will be granted a
nonqualified option to purchase 10,000 shares of Common Stock. The per share
exercise price of such options will be equal to the fair market value of the
Common Stock on the date of grant of such option. See "Executive Compensation
and Other Information--1995 Long-Term Incentive Plan."
At the April 30, 1997 Board of Directors meeting, the Board considered the
cancellation and reissuance of options with respect to 10,000 shares of Common
Stock that were awarded to Mr. McBride on August 28, 1996 at a price of
$23.875 per share. Although the market price of the Company's stock was $12.25
on April 30, 1997, the Board determined that the new options should be awarded
at $15.00 per share, equivalent to the initial public offering price of the
Company's shares in November 1995. The Board, with Mr. McBride abstaining from
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the vote, unanimously approved the grant to Mr. McBride of options with
respect to 10,000 shares at the exercise price of $15.00 per share, subject to
the cancellation of options with respect to 10,000 shares at the exercise
price of $23.875 per share.
PROPOSAL 2
AMENDMENT OF 1995 LONG-TERM INCENTIVE PLAN
The First Commonwealth, Inc. 1995 Long-Term Incentive Plan became effective
upon the commencement of the Company's initial public offering. The
stockholders of the Company approved such plan at the 1996 annual meeting and
an amendment to the plan at the 1997 annual meeting. The Board of Directors
have approved a second amendment of such plan as of February 18, 1998 to
increase the number of shares which may be issued under such plan from 200,000
shares to 350,000 shares (the "Amendment") (the Company's 1995 Long-Term
Incentive Plan, as amended, is hereinafter referred to as the "1995 Plan").
Accordingly, the Amendment to the 1995 Plan to increase the number of shares
authorized for issuance from 200,000 to 350,000 is being submitted for
approval by stockholders at the 1998 Annual Meeting. The following is a
description of the 1995 Plan.
DESCRIPTION OF THE 1995 PLAN
General. Under the 1995 Plan, the Company may grant incentive stock options
or nonqualified options, stock appreciation rights ("SARs"), bonus stock
awards which are vested upon grant, stock awards which may be subject to a
restriction period or specified performance measures or both, and performance
shares, as described below. A total of 350,000 shares of Common Stock have
been reserved for issuance under the 1995 Plan, of which 50,000 shares are
available for stock awards, subject to adjustment in the event of a stock
split, stock dividend or other changes in capital structure. No grants may be
made under the 1995 Plan after ten years after its effective date. All non-
employee directors and approximately 100 employees are eligible to participate
in the 1995 Plan. The maximum number of shares of Common Stock with respect to
which options and SARs may be granted during any calendar year to any
participant in the 1995 Plan is 62,500.
Purposes. The purposes of the 1995 Plan are to align the interests of the
Company's stockholders and the recipients of grants under the 1995 Plan by
increasing the proprietary interest of such recipients in the Company's growth
and success and to advance the interests of the Company by attracting and
retaining officers and other key employees, independent contractors and well-
qualified non-employee directors, and to motivate such employees, independent
contractors and non-employee directors to act in the long-term best interests
of the Company's stockholders.
Administration. The 1995 Plan is administered by the Stock Option
Compensation Committee. Subject to the terms of the 1995 Plan, the Stock
Option Compensation Committee is authorized to select eligible persons
participation in the 1995 Plan and to determine the number of shares of Common
Stock subject to the awards granted thereunder, the exercise price, if any,
the time and conditions of exercise, and all other terms and conditions of
such award, provided that any grants of awards to non-employee directors must
be approved by the Board of Directors.
The Stock Option Compensation Committee may delegate some or all of its
power and authority under the 1995 Plan to the Chairman of the Board and Chief
Executive Officer or other executive officer of the Company as it deems
appropriate; provided, however, that such committee may not delegate its power
and authority with regard to the selection for participation in the 1995 Plan
of an officer or other person subject to Section 16 of the Exchange Act or
decisions concerning the timing, pricing or amount of an option grant to such
an officer or other person, and no delegation may be made with respect to the
grant of an award to a "covered employee" within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code").
Effective Date, Termination and Amendment. The 1995 Plan became effective
upon the commencement of the Company's initial public offering in 1995 and
will terminate ten years thereafter, unless terminated earlier by
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the Board of Directors. The Board of Directors generally may amend the 1995
Plan at any time except that, without the approval of the stockholders of the
Company, no amendment may, among other things, (i) increase the number of
shares of Common Stock available under the 1995 Plan, (ii) reduce the minimum
purchase price of a share of Common Stock subject to an option or base price
of an SAR or (iii) extend the term of the 1995 Plan.
Employee Stock Options. In the case of options granted under the 1995 Plan,
the purchase price of shares of Common Stock will be determined by the Stock
Option Compensation Committee at the time of grant, but may not be less than
100% of the fair market value of such shares of Common Stock on the date of
grant. The aggregate fair market value (determined as of the date the option
is granted) of the stock with respect to which incentive stock options are
exercisable for the first time by the optionee in any calendar year (under the
1995 Plan and any other incentive stock option plan of the Company) may not
exceed $100,000. Options granted under the 1995 Plan may not be exercised
after ten years from the date of grant. In the case of any eligible employee
who owns or is deemed to own stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, the exercise
price of any incentive stock options granted under the 1995 Plan may not be
less than 110% of the fair market value of the Common Stock on the date of
grant, and the exercise period may not exceed five years from the date of
grant. Options granted under the 1995 Plan are not transferable by the
optionee other than by will or under the laws of descent and distribution
except that, if the optionee dies prior to exercising his option, the estate
of the deceased optionee may exercise all options in full until the expiration
of one year from the date of death or until the earlier termination of the
option. All stock options will become immediately exercisable upon certain
changes of control of the Company.
Non-Employee Director Options. The 1995 Plan provides for discretionary and
automatic grants of stock options to non-employee directors. Under the
Company's 1995 Long-Term Incentive Plan, on the date of the Company's initial
public offering in 1995, each non-employee director that did not resign
shortly following such offering was granted a nonqualified option to purchase
1,000 shares of Common Stock at the public offering price of $15.00 per share.
In addition, on the date of each annual meeting of stockholders of the
Company, each person who is a non-employee director immediately after such
annual meeting of stockholders will be granted a nonqualified option to
purchase 1,000 shares of Common Stock and, on the date on which a person is
first elected or begins to serve as a non-employee director, each such new
employee director will be granted a nonqualified option to purchase 10,000
shares of Common Stock. The per share exercise price of such options will be
equal to the fair market value of the Common Stock on the date of grant of
such option.
Stock Appreciation Rights. The period for the exercise of an SAR and the
base price of an SAR will be determined by the Stock Option Compensation
Committee. The exercise of an SAR entitles the holder thereof to receive
(subject to withholding taxes) shares of Common Stock (which may be restricted
stock), cash or a combination thereof with a value equal to the difference
between the fair market value of the Common Stock on the exercise date and the
base price of the SAR.
Bonus Stock and Restricted Stock Awards. The 1995 Plan provides for the
grant of bonus stock awards, which are vested upon grant. The 1995 Plan also
provides for stock awards which may be subject to a restriction period
("restricted stock"). An award of restricted stock may be subject to specified
performance measures for the applicable restriction period. The terms of
restricted stock and performance goals will be determined by the committee
which administers the 1995 Plan. Shares of restricted stock will be non-
transferable and subject to forfeiture if the holder does not remain
continuously in the employment of the Company during the restriction period
or, if the restricted stock is subject to performance measures, if such
performance measures are not attained during the restriction period. Subject
to the change in control provisions of the 1995 Plan and unless otherwise
specified in the agreement with respect to a particular restricted stock
award, in the event of a termination of employment for any reason, the portion
of a restricted stock award which is then subject to a restriction period will
be forfeited and canceled. At the present time, no restricted stock awards
have been granted.
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Performance Share Awards. The 1995 Plan also provides for the grant of
performance shares. Each performance share is a right, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of Common Stock, which may be a restricted stock, or the
fair market value of such performance share in cash. The terms of performance
share awards and performance goals will be determined by the committee which
administers the 1995 Plan. Performance shares will be non-transferable and
subject to forfeiture if the specified performance measures are not attained
during the applicable performance period. Subject to the change in control
provisions of the 1995 Plan and unless otherwise specified in the agreement
with respect to a particular performance share award, in the event of
termination of employment for any reason, the portion of a performance share
award which is then subject to a performance period will generally be
forfeited and cancelled. At the present time, no performance shares have been
awarded.
Change in Control. In the event of certain acquisitions of 50% or more of
the Common Stock, a change in the majority of the Board of Directors (subject
to certain exceptions), the approval by stockholders of a reorganization,
merger or consolidation (unless the Company's stockholders receive 50% or more
of the stock and combined voting power of the surviving company) or the
approval by stockholders of a complete liquidation or dissolution, all options
will become immediately exercisable and all awards will be "cashed-out" by the
Company, except, in the case of a merger or similar transaction in which the
stockholders receive publicly traded common stock, outstanding awards will be
substituted for similar rights to acquire a proportionate number of shares of
common stock received in the merger or similar transaction.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the U.S. federal income tax consequences
of awards made under the 1995 Plan.
Stock Options. A participant will not recognize any income upon the grant of
a stock option. A participant will recognize compensation taxable as ordinary
income (and subject to income tax withholding) upon exercise of a nonqualified
stock option equal to the excess of the fair market value of the shares
purchased over their exercise price, and the Company will be entitled to a
corresponding deduction. A participant will not recognize income (except for
purposes of the alternative minimum tax) upon exercise of an incentive stock
option. If the shares acquired by exercise of an incentive stock option are
held for the longer of two years from the date the option was granted or one
year from the date the shares were transferred, any gain or loss arising from
a subsequent disposition of such shares will be taxed as long-term capital
gain or loss, and the Company will not be entitled to any deduction. If,
however, such shares are disposed of within the above-described period, then
in the year of such disposition the participant generally will recognize
compensation taxable as ordinary income equal to the excess of the lesser of
(i) the amount realized upon such disposition and (ii) the fair market value
of such shares on the date of exercise over the exercise price, and the
Company will be entitled to a corresponding deduction.
SARs. A participant will not recognize any taxable income upon the grant of
the SARs. A participant will recognize compensation taxable as ordinary income
(and subject to income tax withholding) upon exercise of an SAR equal to the
fair market value of any shares delivered and the amount of cash paid by the
Company upon such exercise, and the Company will be entitled to a
corresponding deduction.
Bonus Stock. A participant will recognize compensation taxable as ordinary
income (and subject to income tax withholding) in respect of awards of shares
of bonus stock at the time such shares are transferred in an amount equal to
the then fair market value of such shares and the Company will be entitled to
a corresponding deduction, except to the extent the limit of Section 162(m) of
the Code applies.
Restricted Stock. A participant will not recognize taxable income at the
time of the grant of shares of restricted stock, and the Company will not be
entitled to a tax deduction at such time, unless the participant makes an
election to be taxed at the time restricted stock is granted. If such election
is not made, the participant will recognize taxable income at the time the
restrictions lapse in an amount equal to the excess of the fair market
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value of the shares at such time over the amount, if any, paid for such
shares. The amount of ordinary income recognized by a participant by making
the above-described election or upon the lapse of the restrictions is
deductible by the Company as compensation expense, except to the extent the
limit of Section 162(m) of the Code applies. In addition, a participant
receiving dividends with respect to restricted stock for which the above-
described election has not been made and prior to the time the restrictions
lapse will recognize taxable compensation (subject to income tax withholding),
rather than dividend income, in an amount equal to the dividends paid, and the
Company will be entitled to a corresponding deduction, except to the extent
the limit of Section 162(m) of the Code applies.
Performance Shares. A participant will not recognize taxable income upon the
grant of performance shares and the Company will not be entitled to a tax
deduction at such time. Upon the settlement of performance shares, the
participant will recognize compensation taxable as ordinary income (and
subject to income tax withholding) in an amount equal to the fair market value
of any shares delivered and any cash paid by the Company, and the Company will
be entitled to a corresponding deduction, except to the extent the limit of
Section 162(m) of the Code applies. See "Executive Officer Compensation Report
by the Compensation Committee" for a description of Section 162(m) of the
Code.
The following table specifies the number of shares of Common Stock which are
subject to options and shares of bonus stock granted under the 1995 Plan to
named executive, director, employee or group as of February 28, 1998:
AWARDS GRANTED UNDER
1995 LONG-TERM INCENTIVE PLAN
<TABLE>
<CAPTION>
DOLLAR NUMBER OF
NAME AND PRINCIPAL POSITION VALUE COMMON SHARES
--------------------------- ------- -------------
<S> <C> <C>
OPTIONS
Executive Group
Christopher C. Multhauf (Chairman and CEO)............. -- --
David W. Mulligan (President and COO).................. -- --
Gregory D. Stobbe (Vice President, Operations)......... -- 10,500
Mark R. Lundberg (Vice President, Sales)............... -- 5,500
Scott B. Sanders (Chief Financial Officer and
Treasurer)............................................ -- 30,500
-------
Executive Group...................................... -- 46,500
-------
Non-Executive Director Group
Richard M. Burdge, Sr. (Director)...................... -- 3,000
William J. McBride (Director).......................... -- 11,000
Jackson W. Smart, Jr. (Director)....................... -- 3,000
-------
Non-Executive Director Group......................... -- 17,000
-------
Non-Executive Employee Group............................. -- 120,512
-------
TOTAL................................................ -- 183,512
=======
BONUS STOCK
Non-Executive Employee Group............................. $35,565 2,664
======= =======
</TABLE>
Since the option exercise price of all options was greater than or equal to
the fair market value of the shares of Common Stock as of the date of grant,
no dollar value was assigned to the options for purposes of the above table.
Of the 2,664 shares of Common Stock issued as bonus stock, 1,865 shares were
awarded in connection with the Company's initial public offering, such stock
has been valued using the initial public offering price of $15.00 per share,
and 799 shares were issued in 1998, such stock has been valued on the award
date at a price of
8
<PAGE>
$9.50 per share. Based on the closing price of the Common Stock as reported
for Nasdaq National Market Issues by The Wall Street Journal, the market value
of the Common Stock on March 20, 1998 was $14.25 per share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO
THE COMPANY'S 1995 LONG-TERM INCENTIVE PLAN.
EXECUTIVE OFFICERS
The following sets forth certain information with respect to executive
officers of the Company who are not identified above under "Election of
Directors."
Gregory D. Stobbe, age 43, is Senior Vice President, Operations, of the
Company. He joined the Company in 1989 and is responsible for the Company's
key provider relations, member services and operations and processing
departments. Mr. Stobbe was appointed Senior Vice President, Operations in
1993. Mr. Stobbe is a graduate of the DePaul University College of Law.
Mark R. Lundberg, age 45, is Vice President, Sales, of the Company. Mr.
Lundberg joined the Company in July 1994. Prior to joining the Company, Mr.
Lundberg was National Accounts Director for HealthCare COMPARE between 1992
and July 1994. Prior to that time, he was Director of Business Development of
MEDSTAT Systems between 1990 and 1992. Mr. Lundberg holds a Masters in Health
Services Administration degree from the University of Michigan.
Scott B. Sanders, age 37, is Chief Financial Officer and Treasurer of the
Company. He is also Assistant Secretary of the Company. Mr. Sanders joined the
Company in May 1995. Mr. Sanders previously served as the Chief Financial
Officer for Dental Care Plus Management Corp., a managed dental care company,
between 1992 and 1995. Prior to that, Mr. Sanders was a Senior Associate at
ICF/The Smock Quinn Group, a consulting firm, between 1990 and 1992 and a
Senior Associate at Technology Solutions Company, a computer consulting firm,
during 1992. Mr. Sanders holds a Master of Management degree from the J.L.
Kellogg School of Management at Northwestern University.
9
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets forth
certain information concerning compensation for services rendered in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the other named executive officers during the years ended December
31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------- ------------
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
- --------- ---- -------- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Christopher C.
Multhauf
Chairman and
Chief 1997 $135,000 $ -- $ 4,800 -- $ 8,563
Executive Of- 1996 135,000 35,000 4,800 -- 1,188
ficer 1995 118,843 59,421 10,800 -- 793
David W. Mul-
ligan
President,
Secretary and 1997 $130,000 $ -- $ 4,800 -- $ 3,300
Chief Operat- 1996 130,000 35,000 4,800 -- 3,813
ing Officer 1995 115,206 59,421 10,800 -- 3,456
Gregory D.
Stobbe
Senior Vice 1997 $ 90,000 $ -- $ 3,600 2,500 $ 2,240
President, 1996 90,000 22,000 3,600 -- 2,374
Operations 1995 84,133 27,740 3,600 5,000 2,213
Mark R. Lund-
berg 1997 $107,112 $ -- $ 3,600 2,500 $ 2,417
Vice Presi- 1996 107,112 13,986 3,600 -- 2,392
dent, Sales 1995 104,500 15,675 3,600 -- 1,045
Scott B. Sand-
ers(2) 1997 $ 98,000 $ -- $ -- 12,500(3) $ 2,300
Chief Finan-
cial Officer 1996 95,615 17,000 -- 12,500(3) 2,209
and Treasurer 1995 55,436 14,832 -- 15,000 10,110
</TABLE>
- --------
(1) Represents the Company contribution with respect to the named executive
officer under the Company's 401(k) salary deferral plan, except for Mr.
Sanders in 1995. The amount for Mr. Sanders in 1995 represents
compensation paid as a consultant before joining the Company in 1995. See
"Executive Compensation and Other Information--Retirement Plan" below.
Does not include the value of any perquisites and other personal benefits,
securities or property, since the aggregate amount of such compensation is
the less than the lesser of either $50,000 or 10% of the total of annual
salary and bonus reported for the named executive officers above.
(2) Mr. Sanders joined the Company in May 1995.
(3) Options with respect to 12,500 shares granted in 1996 were cancelled in
exchange for options with respect to 12,500 shares in 1997. See "10-Year
Option Repricings" below.
10
<PAGE>
General Information Regarding Options. The following tables show information
regarding stock options held by the executive officers named in the Summary
Compensation Table.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATE OF STOCK
PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS OPTION TERMS(3)
UNDERLYING GRANTED TO EXERCISE EXPIRATION -----------------
NAME OPTIONS GRANTED EMPLOYEES PRICE DATE 5% 10%
- ---- --------------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gregory D. Stobbe (1)... 2,500 3% $11.750 4/22/07 $ 18,475 $ 46,815
Mark Lundberg (1)....... 2,500 3% $11.750 4/22/07 $ 18,475 $ 46,815
Scott B. Sanders (2).... 10,000 14% $11.750 4/22/07 $ 73,900 $187,260
2,500 3% $11.750 4/22/07 18,475 46,815
------ --- -------- --------
12,500 17% $ 92,375 $234,075
------ --- -------- --------
Total............... 17,500 24% $129,325 $327,705
====== === ======== ========
</TABLE>
- --------
(1) The exercise price of the options is equal to the fair market value of a
share of Common Stock on the date of grant. The stock options vest with
respect to 25% of the options on the first, second, third and fourth
anniversaries of the date of grant, and are exercisable until the tenth
anniversary of the date of grant. See "Executive Compensation and Other
Information--1995 Long-Term Incentive Plan" below.
(2) These options were granted in exchange for the cancellation of previous
options issued in 1996. See "10-Year Option Repricings" below. The
exercise price of the options is equal to the fair market value of a share
of Common Stock on the date of grant. The stock options vest with respect
to 25% of the options on the first, second, third and fourth anniversaries
of the assigned anniversary dates, and are exercisable until the tenth
anniversary of the date of grant. See "Executive Compensation and Other
Information--1995 Long-Term Incentive Plan" below.
(3) According to the requirements of the Securities and Exchange Commission,
represents the hypothetical realizable value of each grant of stock
options, assuming that the market price of the shares underlying the
options appreciates in value from the award date to the end of the option
term at the indicated annualized rates.
11
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR END 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AS OF VALUE OF OPTIONS AS OF
1997 DECEMBER 31, 1997 DECEMBER 31, 1997(1)
-------------------- ------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Christopher C. Multhauf
ISO-1987 Plan (2)...... -- -- 35,000 $361,200 --
David W. Mulligan
ISO-1987 Plan (2)...... -- -- 35,000 -- $361,200 --
Gregory D. Stobbe
NSO-1987 Plan (2) 1,200 $21,360 13,750 3,250 $224,263 $32,662
NSO-1995 Plan (3)...... -- 2,500 5,000 -- --
Mark R. Lundberg
NSO-1987 Plan (2)...... -- -- 6,500 2,500 $ 65,325 $25,125
NSO-1995 Plan (3)...... -- -- -- 2,500 -- --
Scott B. Sanders
NSO-1995 Plan (3)...... -- -- 12,125 18,375 -- --
</TABLE>
- --------
(1) Represents the aggregate dollar value of in-the-money, unexercised options
held at the end of the year, based on the difference between the exercise
price and $11.75, the closing price for the Common Stock as of December
31, 1997, as reported for Nasdaq National Market Issues in The Wall Street
Journal.
(2) The exercise price of the above incentive stock options ("ISOs") granted
under the 1987 Plan is equal to 110% of the fair market value of the
Common Stock on the date of grant, and the exercise period is five years
from the date of grant. The exercise price of the above non-qualified
options ("NSOs") granted under the 1987 Plan is equal to the fair market
value of such shares of Common Stock on the date of grant. The above NSOs
become exercisable in cumulative increments of one-fourth of the number of
shares granted annually commencing on the date of grant and are
exercisable until the tenth anniversary of the date of grant. All stock
options granted under the 1987 Plan will become immediately exercisable
upon certain changes of control of the Company. See discussion under "1987
Statutory-Nonstatutory Stock Option Plan" below for a description of the
1987 Plan.
(3) The exercise price of the NSOs granted under the 1995 Plan is equal to the
fair market value of a share of Common Stock on the date of grant. Such
stock options vest with respect to 25% of the options on the first,
second, third and fourth anniversaries of the date of grant or the
assigned anniversary dates, and are exercisable until the tenth
anniversary of the date of grant. All stock options granted under the 1995
Plan will become immediately exercisable upon certain changes of control
of the Company. See discussion under "1995 Long-Term Incentive Plan" below
for a description of the 1995 Plan.
General Information Regarding Repricing of Options. The following table
shows information regarding repricing of stock options held by the executive
officers named in the Summary Compensation Table.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE EXERCISE LENGTH OF
SECURITIES OF STOCK AT PRICE AT NEW ORIGINAL TERM
UNDERLYING TIME OF TIME OF EXERCISE REMAINING AT
NAME DATE OPTIONS REPRICED REPRICING REPRICING PRICE DATE OF REPRICING
- ---- ------- ---------------- ------------ --------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott B. Sanders ....... 4/22/97 10,000 $11.750 $24.125 $11.750 9 Years
Chief Financial Officer
Scott B. Sanders........ 4/22/97 2,500 $11.750 $18.750 $11.750 9 Years
Chief Financial Officer
</TABLE>
12
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Christopher
C. Multhauf, Chairman of the Board of Directors and Chief Executive Officer,
David W. Mulligan, President, Secretary and Chief Operating Officer, Gregory
D. Stobbe, Vice President, Operations, Mark R. Lundberg, Vice President,
Sales, and Scott B. Sanders, Chief Financial Officer and Treasurer, as
described below.
Employment Agreement with Christopher C. Multhauf. This agreement, dated
September 21, 1995, provides that Mr. Multhauf will be employed as the
Company's Chairman of the Board and Chief Executive Officer at an annual
salary of $135,000, which will be reviewed annually, plus a performance bonus
under the Company's Management Bonus Plan and a car allowance. The employment
agreement provides for continuation of base salary, bonus and benefits for one
year (i) following termination of employment without cause, (ii) in the event
of a breach by the Company, (iii) death, (iv) long-term disability or (v) upon
termination of employment for any reason at the end of the six-month period
following a change in control of the Company, or earlier with good cause such
as diminution of responsibility or reduction of benefits. The Company may
terminate the employment of Mr. Multhauf for cause at any time. The employment
agreement also includes certain non-competition and confidentiality
provisions.
Employment Agreement with David W. Mulligan. This agreement, dated September
21, 1995, provides that Mr. Mulligan will be employed as the Company's
President and Chief Operating Officer at an annual salary of $130,000, which
will be reviewed annually, plus a performance bonus under the Company's
Management Bonus Plan and a car allowance. The employment agreement provides
for continuation of base salary, bonus and benefits for one year (i) following
termination of employment without cause, (ii) in the event of a breach by the
Company, (iii) death, (iv) long-term disability or (v) upon termination of
employment for any reason at the end of the six-month period following a
change in control of the Company, or earlier with good cause such as
diminution of responsibility or reduction of benefits. The Company may
terminate the employment of Mr. Mulligan for cause at any time. The employment
agreement also includes certain non-competition and confidentiality
provisions.
Employment Agreement with Gregory D. Stobbe. This agreement dated March 1,
1991, as amended, may be terminated upon the death or total disability of Mr.
Stobbe, for good cause by the Company, without cause by the Company upon six
months' notice and without cause by Mr. Stobbe upon two months' notice. During
the term of this agreement, as amended, Mr. Stobbe is entitled to an annual
gross base salary of $84,000, subject to annual reviews, and is eligible for
an annual bonus based on the achievement of objectives as approved by the
Board of Directors.
Employment Agreement with Mark R. Lundberg. This agreement dated July 25,
1994, may be terminated upon the death or total disability of Mr. Lundberg,
for good cause by the Company, without cause by the Company upon 180 days'
notice and without cause by Mr. Lundberg upon 180 days' notice. During the
term of the agreement, Mr. Lundberg is entitled to an annual gross base salary
of $104,500, subject to annual reviews, and is eligible for an annual bonus
based on the achievement of objectives as approved by the Board of Directors.
Employment Agreement with Scott B. Sanders. This agreement, dated May 25,
1995, may be terminated upon the death or total disability of Mr. Sanders, for
good cause by the Company, without cause by the Company upon 180 days' notice
and without cause by Mr. Sanders upon 60 days' notice. During the term of the
agreement, Mr. Sanders is entitled to an annual gross base salary of $92,000,
subject to annual reviews, and is eligible for an annual bonus based on the
achievement of objectives as approved by the Board of Directors.
MANAGEMENT BONUS PLAN
The Chief Executive Officer and each of the other executive officers named
in the Summary Compensation Table above are eligible to participate in the
Company's Management Bonus Plan. Under this bonus program each executive
officer is entitled to receive a bonus based on three components (1) Company
performance
13
<PAGE>
compared to budget, (2) personal performance and (3) a discretionary award.
Awards are determined by the Compensation Committee.
RETIREMENT PLAN
The Company has a 401(k) salary deferral plan in which all employees of the
Company who have completed at least ninety days of service are eligible to
participate. Under the plan, the Company provides a matching contribution of
$.50 for every dollar an employee invests in the plan up to an annual maximum
of 2% of the employee's compensation for the year. The Company may make
additional discretionary contributions to the plan.
1995 LONG-TERM INCENTIVE PLAN
Under Company's 1995 Long-Term Incentive Plan, as amended (the "1995 Plan"),
the Company may grant incentive stock options or nonqualified options, stock
appreciation rights, bonus stock awards which are vested upon grant, stock
awards which may be subject to a restriction period or specified performance
measures or both, and performance shares. Subject to the terms of the 1995
Plan, the Stock Option Compensation Committee is authorized to select eligible
officers and other key employees and independent contractors for participation
in the 1995 Plan and to determine the number of shares of Common Stock subject
to the awards granted thereunder, the exercise price, if any, the time and
conditions of exercise, and all other terms and conditions of such award.
Subject to shareholder approval at the 1998 Annual Meeting, a total of 350,000
shares of Common Stock have been reserved for issuance under the 1995 Plan, of
which 50,000 shares are available for stock awards, subject to adjustment in
the event of a stock split, stock dividend or other changes in capital
structure. No grants may be made under the 1995 Plan after November 16, 2005.
1987 STATUTORY-NONSTATUTORY STOCK OPTION PLAN
Under the Company's 1987 Statutory-Nonstatutory Stock Option Plan, as
amended (the "1987 Plan"), up to 250,000 shares of Common Stock (as adjusted
for the ten-for-one stock split in 1991) were originally authorized for
issuance upon the exercise of stock options granted under the 1987 Plan. These
stock options may be either incentive stock options or nonqualified options.
Under the terms of the 1987 Plan, no stock options which are incentive stock
options may be granted under the 1987 Plan after October 1, 1996. Subject to
the terms of the 1987 Plan, the committee which administers the 1987 Plan is
authorized to select eligible officers and other key employees for
participation in the 1987 Plan and to determine the number of shares of Common
Stock subject to each option granted thereunder, the exercise price of such
option, the time and conditions of exercise of such option and all other terms
and conditions of such option. The Stock Option Compensation Committee of the
Board of Directors currently administers the 1987 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
All compensation decisions for the Chief Executive Officer and each of the
other executive officers named in the Summary Compensation Table are currently
made by the Compensation Committee of the Board of Directors and by the Stock
Option Compensation Committee of the Board of Directors. The Compensation
Committee consists of Messrs. Jackson W. Smart, Jr. (Chairman) and Richard M.
Burdge, Sr. Each member of the Compensation Committee is a non-employee
director who has not previously been an officer or employee of the Company.
The Stock Option Compensation Committee of the Board of Directors consists of
Messrs. Richard M. Burdge, Sr. (Chairman) and William J. McBride, each of whom
are "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended, and "Non-Employee Directors" within the
meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended.
EXECUTIVE OFFICER COMPENSATION REPORT
This report is submitted by the Compensation Committee and the Stock Option
Compensation Committee of the Board of Directors.
14
<PAGE>
All compensation decisions for the Chief Executive Officer and each of the
other executive officers named in the Summary Compensation Table are made by
the Compensation Committee of the Board of Directors except that the Stock
Option Compensation Committee administers and takes such other action as may
be required in connection with certain stock option and long-term incentive
plans of the Company. The Compensation Committee consists of Messrs. Jackson
W. Smart, Jr. (Chairman) and Richard W. Burdge, Sr. Each member of the
Compensation Committee is a non-employee director who has not previously been
an officer or employee of the Company. The Stock Option Compensation Committee
of the Board of Directors consists of Messrs. Richard M. Burdge, Sr.
(Chairman) and William J. McBride, each of whom are "outside directors" within
the meaning of Section 162(m) of the Code and "Non-Employee Directors" within
the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended.
Executive compensation consists of both annual and long-term compensation.
Annual compensation consists of a base salary and bonus. Long-term
compensation is generally provided through the 1987 Plan and the 1995 Plan.
See "Executive Compensation and Other Information--1987 Statutory and
Nonstatutory Stock Option Plan" and "--1995 Long-Term Incentive Plan."
The Compensation Committee's approach to annual base salary is to offer
competitive salaries in comparison with market practices. The base salary of
each officer is set at a level considered to be appropriate in the judgment of
the Compensation Committee based on an assessment of the particular
responsibilities and performance of such officer taking into account the
performance of the Company, other comparable companies, the dental care
industry, the economy in general and such other factors as the Compensation
Committee may deem relevant. The comparable companies considered by the
Compensation Committee may include companies included in the peer group index
discussed below and/or other companies in the sole discretion of the
Compensation Committee. No specific measures of Company performance or other
factors are considered determinative in the base salary decisions of the
Compensation Committee. Instead, substantial judgment is used and all of the
facts and circumstances are taken into consideration by the Compensation
Committee in its executive compensation decisions.
The current base salary of the Chairman of the Board and Chief Executive
Officer was determined pursuant to an employment agreement entered into as of
September 21, 1995. This agreement provides that Mr. Multhauf will be employed
as the Company's Chairman of the Board and Chief Executive Officer at an
annual salary of $135,000, which will be reviewed annually, plus a performance
bonus under the Company's Management Bonus Plan and a car allowance. See
"Executive Compensation and Other Information--Employment Agreements."
Pursuant to such employment agreement, the Compensation Committee may increase
(but not decrease) the base salary of the Chairman of the Board and Chief
Executive Officer. The Compensation Committee reviewed the base salary of the
Chairman of the Board and Chief Executive Officer on January 23, 1998 and
determined to increase his base salary from $135,000 to $139,728 retroactive
to January 1, 1998.
The Company has also entered into employment contracts with each of the
other named executives officers. See "Executive Compensation and Other
Information--Employment Agreements."
In addition to base salary, the Chief Executive Officer and each of the
other executive officers named in the Summary Compensation Table above are
eligible to participate in the Company's Management Bonus Plan. Under this
bonus program each executive officer is entitled to receive a bonus based on
three components (1) Company performance compared to budget, (2) personal
performance and (3) a discretionary award. Bonuses are determined in the sole
discretion of the Compensation Committee. The Compensation Committee did not
award any management bonuses for 1997 but all prior bonuses to the Chairman of
the Board and the other named executive officers are reported above under
"Summary Compensation Table."
The executive officers are eligible to participate in the Company's 1987
Plan and 1995 Plan. Such plans are administered by the Stock Option
Compensation Committee. Subject to the terms of such plans, the Stock Option
Compensation Committee is authorized to select eligible officers and other key
employees for participation in the 1995 Plan and to determine the number of
shares of Common Stock subject to the awards granted thereunder,
15
<PAGE>
the exercise price, if any, the time and conditions of exercise, and all other
terms and conditions of such award. The purposes of such plans are to align
the interests of the Company's stockholders and the recipients of grants under
such plans by increasing the proprietary interest of such recipients in the
Company's growth and success and to advance the interests of the Company by
attracting and retaining officers and other key employees. The terms and the
size of the option grant to each executive officer will vary from individual
to individual in the Stock Option Compensation Committee's sole discretion. No
specific factors are considered determinative in the grants of options to
executive officers by the Stock Option Compensation Committee. Instead, all of
the facts and circumstances are taken into consideration by the Stock Option
Compensation Committee in its executive compensation decisions. Grants of
options are based on the judgment of the members of the Stock Option
Compensation Committee considering the total mix of information.
In 1997, the Stock Option Compensation Committee granted options to purchase
shares of Common Stock to three executive officers named in the Summary
Compensation Table as set forth above. See "Option Grants in 1997." Each of
the options has an exercise price equal to the fair market value on the date
of grant, has a ten-year term and will become exercisable with respect to 25%
of the Common Shares subject to the option on each of the established first
four anniversaries of the option's date of grant. In the case of one executive
officer, the options were granted subject to the cancellation of options which
had been granted in 1996. See "10-Year Option Repricings." This was done as a
result of the downturn in industry valuations and the Board of Directors
desire to provide the proper incentives for the executive officer.
Section 162(m) of the Code. Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"), generally limits to $1 million the amount that
a publicly held corporation is allowed each year to deduct for the
compensation paid to each of the corporation's chief executive officer and the
corporation's four most highly compensated officers other than the chief
executive officer, subject to certain exceptions. The Company does not believe
that the $1 million deduction limitation should have any material effect on
the Company in the near future. If the $1 million deduction limitation is
expected to have any material effect on the Company in the future, the Company
will consider ways to maximize the deductibility of executive compensation,
while retaining the discretion the Company deems necessary to compensate
executive officers in a manner commensurate with performance and the
competitive environment for executive talent.
This Executive Officer Compensation Report is submitted by the Compensation
Committee of the Board of Directors, Jackson W. Smart, Jr. (Chairman) and
Richard M. Burdge, Sr.; and by the Stock Option Compensation Committee of the
Board of Directors, Richard M. Burdge, Sr. (Chairman) and William J. McBride.
16
<PAGE>
PERFORMANCE GRAPH
The rules of the Securities and Exchange Commission ("SEC") require each
public company to include a performance graph comparing the cumulative total
stockholder return on such company's common stock for the five preceding
fiscal years, or such shorter period as the registrant's class of securities
has been registered with the SEC, with the cumulative total returns of a broad
equity market index and a peer group or similar index. The Common Shares began
trading on the Nasdaq Stock Market under the symbol "FCWI" on November 17,
1995. Accordingly, the performance graph included in this Proxy Statement
shows the period from November 17, 1995 through December 31, 1997.
The following chart graphs the performance of the cumulative total return to
stockholders (stock price appreciation plus dividends) between November 17,
1995 and December 31, 1997 in comparison to The Nasdaq Stock Market-U.S. Index
and The Nasdaq Health Services Stock Index.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG FIRST COMMONWEALTH, INC., THE NASDAQ STOCK MARKET-U.S. INDEX AND
THE NASDAQ HEALTH SERVICES STOCK INDEX
Graph of Data Points
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
First Commonwealth, Inc.... $100.00 $173.33 $131.67 $ 78.33
The Nasdaq Stock Market-
U.S. Index................ $100.00 $100.93 $124.14 $152.34
The Nasdaq Health Service
Stock Index............... $100.00 $113.10 $113.16 $115.34
</TABLE>
Assumes $100 invested on November 17, 1995 in First Commonwealth, Inc.
Common Stock, The Nasdaq Stock Market-U.S. Index and The Nasdaq Health Service
Stock Index. Cumulative total return assumes reinvestment of dividends.
17
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1998, by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers named in the Summary Compensation Table and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT
BENEFICIAL OF
NAME OF BENEFICIAL OWNER(1) OWNERSHIP CLASS(2)
--------------------------- ---------- --------
<S> <C> <C>
SAFECO Corporation (3)................................ 434,400 11.3%
David W. Mulligan (4)................................. 367,287 9.5
Christopher C. Multhauf (5)........................... 340,788 8.9
Marathon Capital Partners (6)......................... 287,300 7.5
AMVESCAP PLC (7)...................................... 224,500 5.8
Investment Advisors, Inc. (8)......................... 206,200 5.4
Richard M. Burdge, Sr. (9)............................ 86,040 2.2
Jackson W. Smart, Jr. (10)............................ 34,000 *
Gregory D. Stobbe (11)................................ 25,875 *
William J. McBride (12)............................... 12,000 *
Scott B. Sanders (13)................................. 12,225 *
Mark R. Lundberg (14)................................. 8,625 *
All executive officers and directors as
a group (8 persons) (15)............................. 886,840 23.1%
</TABLE>
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*Less than 1%.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property laws, the persons named in the table above
have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Applicable percentage of ownership is based on 3,846,235 shares of Common
Stock outstanding on February 28, 1998, including 207,300 shares of
Common Stock subject to options exercisable within 60 days of February
28, 1998.
(3) Based on a Schedule 13G dated January 9, 1998. This Schedule 13G was
filed by SAFECO Corporation on behalf of itself, SAFECO Common Stock
Trust and SAFECO Asset Management Company (collectively, "SAFECO"). Such
Schedule 13G reports shared voting power and shared dispositive power
with respect to 434,400 shares. The business address of SAFECO is SAFECO
Plaza, Seattle, Washington 98185.
(4) Mr. Mulligan is a director and President, Secretary and Chief Operating
Officer of the Company. The business address of Mr. Mulligan is 444 North
Wells Street, Suite 600, Chicago, Illinois 60610. Includes 35,000 shares
of Common Stock, issuable upon exercise of outstanding stock options
which are currently exercisable or exercisable within 60 days.
(5) Mr. Multhauf is Chairman of the Board of Directors and Chief Executive
Officer of the Company. The business address of Mr. Multhauf is 444 North
Wells Street, Suite 600, Chicago, Illinois 60610. Includes 35,000 shares
of Common Stock, issuable upon exercise of outstanding stock options
which are currently exercisable or exercisable within 60 days.
(6) Based on a Schedule 13D dated January 26, 1998. This Schedule 13D was
filed on behalf of Marathon Capital Partners, L.P., Marathon Capital
Management Group, LLC and Peter Gardiner (collectively, "Marathon"). Such
Schedule 13D reports shared voting power and shared dispositive power
with respect to 287,300 shares. The business address of Marathon is 9595
Wilshire Boulevard, Suite 700, Beverly Hills, California 90212.
18
<PAGE>
(7) Based on a Schedule 13G (Amendment No. 1) dated February 9, 1998. This
Schedule 13G amendment was filed by AMVESCAP PLC on behalf of itself and
its wholly-owned subsidiaries, AVZ, Inc., AIM Management Group, Inc.,
AMVESCAP Group Services, Inc., INVESCO, Inc. and INVESCO North American
Holdings, Inc. (collectively, "AMVESCAP"). Such Schedule 13G amendment
reports shared voting power and shared dispositive power with respect to
224,500 shares. The business address of AMVESCAP is 11 Devonshire Square,
London EC2M 4YR, England.
(8) Based on a Schedule 13G dated January 30, 1998. This Schedule 13G was
filed by Investment Advisers, Inc. on behalf of itself ("IAI"). Such
Schedule 13G reports shared voting power and shared dispositive power
with respect to 9,600 shares and sole voting power and sole dispositive
power with respect to 196,600 shares. The business address of IAI is 3700
First Bank Place, Minneapolis, Minnesota 55440.
(9) Mr. Burdge is a director of the Company. Includes 2,000 shares of Common
Stock, issuable upon exercise of outstanding stock options which are
currently exercisable or exercisable within 60 days and 5,000 shares held
by his spouse.
(10) Mr. Smart is a director of the Company. Includes 7,000 shares of Common
Stock, issuable upon exercise of outstanding stock options which are
currently exercisable or exercisable within 60 days.
(11) Mr. Stobbe is Senior Vice President, Operations, of the Company. Includes
25,875 shares of Common Stock, issuable upon exercise of outstanding
stock options which are currently exercisable or exercisable within 60
days.
(12) Mr. McBride is a director of the Company. Includes 10,000 shares of
Common Stock, issuable upon exercise of outstanding stock options which
are currently exercisable or exercisable within 60 days and 2,000 shares
held by his children.
(13) Mr. Sanders is Chief Financial Officer and Treasurer of the Company.
Includes 12,125 shares of Common Stock, issuable upon exercise of
outstanding stock options which are currently exercisable or exercisable
within 60 days.
(14) Mr. Lundberg is Vice President, Sales, of the Company. Includes 8,625
shares of Common Stock, issuable upon exercise of outstanding stock
options which are currently exercisable or exercisable within 60 days.
(15) Includes 135,625 shares of Common Stock issuable upon exercise of
outstanding stock options which are currently exercisable or exercisable
within 60 days.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder require the
Company's directors and officers and persons who are deemed to own more than
ten percent of the Common Shares (collectively, the "Reporting Persons"), to
file certain reports ("Section 16 Reports") with the SEC with respect to their
beneficial ownership of Common Shares. The Reporting Persons are also required
to furnish the Company with copies of all Section 16 Reports they file. Based
on a review of copies of Section 16 Reports and representations to the
Company, the Company believes that all Section 16 filing requirements
applicable to the Reporting Persons during and with respect to 1997 were
complied with on a timely basis, except as disclosed below.
During or with respect to 1997, certain officers and directors were not
timely in reporting the appropriate Form 4 regarding a transaction involving
the Company's stock. The following filings for the following individuals were
late during or with respect to 1997. Christopher C. Multhauf filed Form 5 on
February 13, 1998 reporting the following Form 4 transactions: the sale of
10,000 shares of Common Stock which should have been reported by September 10,
1997; and the sale of 2,000 shares of Common Stock which should have reported
by December 10, 1997. David W. Mulligan filed Form 5 on February 13, 1998
reporting the following Form 4 transactions: the sale of 3,000 shares of
Common Stock which should have been reported by May 10, 1997; the sale of
4,000 shares of Common Stock which should have been reported by June 10, 1997;
the sale of 3,000 shares of Common Stock which should have been reported by
July 10, 1997; the sale of 2,500 shares of Common Stock which should have been
reported by October 10, 1997; and the sale of 3,000 shares of Common Stock
which should have been reported by November 10, 1997. Gregory D. Stobbe filed
Form 5 on February 13, 1998
19
<PAGE>
reporting the following Form 4 transaction: the sale of 1,200 shares of Common
Stock which should have been reported by July 10, 1997. Richard M. Burdge filed
Form 5 on February 13, 1998 reporting the following Form 4 transaction: the
purchase of 20,000 shares of Common Stock which should have been reported by
October 10, 1997; and the purchase of 5,000 shares of Common Stock by his
spouse which should have been reported by October 10, 1997.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of Arthur Andersen LLP, who served as the Company's
independent public accountants for the last fiscal year, are expected to be
present at the Annual Meeting of Stockholders and will have an opportunity to
make a statement and to respond to appropriate questions raised by stockholders
at the Annual Meeting or submitted in writing prior thereto.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
In order to be considered for inclusion in the Company's proxy materials for
the 1999 Annual Meeting of Stockholders, any stockholder proposal must be
addressed to First Commonwealth, Inc., 444 North Wells Street, Suite 600,
Chicago, Illinois 60610, Attention: Secretary, and must be received no later
than November 30, 1998.
EXPENSES OF SOLICITATION
Your proxy is solicited by the Board of Directors and its agents and the cost
of solicitation will be paid by the Company. Officers, directors and regular
employees of the Company, acting on its behalf, may also solicit proxies by
telephone, facsimile transmission or personal interview. The Company will, at
its expense, request brokers and other custodians, nominees and fiduciaries to
forward proxy soliciting material to the beneficial owners of shares of record
by such persons. The Company has retained Corporate Investor Communications,
Inc. to aid in solicitation of proxies for a fee of $1,300 plus out-of-pocket
expenses.
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL FURNISH WITHOUT CHARGE A COPY OF ITS REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997, INCLUDING THE FINANCIAL STATEMENTS AND
THE SCHEDULES THERETO, UPON THE WRITTEN REQUEST OF ANY STOCKHOLDER AS OF THE
RECORD DATE, AND WILL PROVIDE COPIES OF THE EXHIBITS TO THE REPORT UPON PAYMENT
OF A REASONABLE FEE THAT WILL NOT EXCEED THE COMPANY'S REASONABLE EXPENSES
INCURRED IN CONNECTION THEREWITH. REQUESTS FOR SUCH MATERIALS SHOULD BE
DIRECTED TO FIRST COMMONWEALTH, INC., 444 NORTH WELLS STREET, SUITE 600,
CHICAGO, ILLINOIS 60610, TELEPHONE (312) 644-1800, ATTENTION: SCOTT B. SANDERS.
OTHER BUSINESS
It is not anticipated that any matter will be considered by the stockholders
other than those set forth above, but if other matters are properly brought
before the Annual Meeting, the persons named in the proxy will vote in
accordance with their best judgment.
By order of the Board of Directors,
/s/ David W. Mulligan
David W. Mulligan
President, Secretary and Chief
Operating Officer
ALL STOCKHOLDERS ARE URGED TO SIGN, DATE
AND MAIL THEIR PROXIES PROMPTLY.
20
<PAGE>
ANNEX I
P
R FIRST COMMONWEALTH, INC.
0 444 NORTH WELLS, SUITE 600
X CHICAGO, ILLINOIS 60610
Y
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Christopher C. Multhauf and David W.
Mulligan, or either of them acting in the absence of the other, with power of
substitution, attorneys and proxies for and in the name and place of the
undersigned, to vote the number of shares of Common Stock that the undersigned
would be entitled to vote if then personally present at the 1998 Annual Meeting
of the Stockholders of First Commonwealth, Inc., or at any adjournment thereof,
upon the matters as set forth in the Notice of Annual Meeting and Proxy
Statement, as designated on the reverse side hereof.
(change of address/comments)
-----------------------------------------
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(If you have written in the above space,
please mark the corresponding box on the
reverse side of this card)
SEE REVERSE
SIDE
<PAGE>
Please mark your
[X] votes as in this
example
This proxy, when properly executed, will be voted in the manner directed herein.
If no direction is made, this proxy will be voted FOR the nominees in proposal 1
and FOR proposal 2.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the nominees in proposal 1 and
FOR proposal 2.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of Directors [_] [_] Richard M. Burdge, Sr.
Christopher C. Multhauf
2. Amendment to 1995 Long-Term Incentive Plan
FOR AGAINST ABSTAIN
[_] [_] [_]
For, except vote withheld from the following nominee:
- -----------------------------------------------------
3. In accordance with their discretion, upon all other matters that may
properly come before said Annual Meeting and any adjournment thereof.
Change of Address/Comments on
Reverse Side
[_]
- --------------------------------------------------------------------------------
The signer hereby revokes all proxies
heretofore given by the signer to vote at
said meeting or any adjournments thereof.
Please sign exactly as name appears
hereon. Joint owners should each sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
-----------------------------------------
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SIGNATURE(S) DATE
