<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC. LOGO
May 14, 1997
To Our Shareholders:
You are invited to attend the 1997 Annual Meeting of Shareholders which
will take place at the Holiday Inn Crowne Plaza, 8000 Merriman Road, Romulus,
Michigan on Tuesday, June 17, 1997. The meeting will start promptly at 10:30
a.m., local time.
The attached notice of the meeting and Proxy Statement describe the items
of business to be transacted: (i) the election of three directors, (ii)
approving an amendment to the Company's Articles of Incorporation to change the
name of the Company to Universal Care, Inc., (iii) approving and adopting an
amendment to the Company's 1992 Stock Option Plan to increase the number of
shares available for option grants thereunder by 500,000 shares, and (iv) such
other business as may properly come before the meeting or any adjournment
thereof. After the formal business session, there will be a report to the
shareholders on the progress of the Company along with a discussion period.
I look forward to seeing you at the Annual Meeting and hope you will make
plans to attend. Whether or not you plan to attend the meeting, I urge you to
sign, date and return your proxy in the addressed envelope enclosed for your
convenience so that as many shares as possible may be represented at the
meeting. No postage is required if the envelope is mailed in the United States.
Returning the proxy will not affect your right to attend the meeting or your
right to vote in person.
Sincerely,
EUGENE E. JENNINGS
EUGENE E. JENNINGS
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 3
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC. LOGO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 17, 1997
Southfield, Michigan
May 14, 1997
To the Shareholders of Universal Standard Medical Laboratories, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of Universal
Standard Medical Laboratories, Inc. will be held at the Holiday Inn Crowne
Plaza, 8000 Merriman Road, Romulus, Michigan on Tuesday, June 17, 1997, at 10:30
a.m., local time, for the following purposes:
1. To elect three directors of the Company to hold office until the 2000
Annual Meeting of Shareholders or until their successors are elected and
qualified;
2. To approve an amendment to the Company's Articles of Incorporation to
change the Company's name to Universal Care, Inc.;
3. To approve and adopt an amendment to the Company's 1992 Stock Option
Plan to increase the number of shares available for option grants
thereunder by 500,000 shares; and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Shareholders of record on April 21, 1997, will be eligible to vote at this
meeting. The stock transfer books of the Company will not be closed, but only
shareholders of record at the close of business on such date will be entitled to
notice of and to vote at the meeting.
By order of the Board of Directors,
THOMAS S. VAUGHN
THOMAS S. VAUGHN
Secretary
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT. PLEASE DATE, SIGN AND MAIL THE ENCLOSED FORM OF PROXY IN
THE ACCOMPANYING ADDRESSED ENVELOPE AT YOUR EARLIEST OPPORTUNITY.
- --------------------------------------------------------------------------------
<PAGE> 4
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC. LOGO
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Universal Standard Medical Laboratories,
Inc. (the "Company") to be used at the Annual Meeting of Shareholders, and at
any adjournment thereof, to be held on Tuesday, June 17, 1997, at the Holiday
Inn Crowne Plaza, 8000 Merriman Road, Romulus, Michigan beginning at 10:30 a.m.,
local time. The address of the principal executive offices of the Company is
26500 Northwestern Highway, Southfield, Michigan 48076. This Proxy Statement and
the accompanying form of proxy, which is being solicited by the Board of
Directors, will be first sent or given to shareholders on or about May 20, 1997.
Only holders of record of the Company's Common Stock at the close of
business on April 21, 1997 (the "Record Date") will be entitled to notice of and
to vote at the Annual Meeting or any adjournment thereof. Shareholders of record
on the Record Date are entitled to one vote per share on any matter that may
properly come before the Annual Meeting. As of the Record Date, a total of
6,552,768 shares of Common Stock were issued and outstanding and entitled to
vote at the Annual Meeting. The presence, either in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of Common
Stock is necessary to constitute a quorum at the Annual Meeting.
A proxy may be revoked at any time before it is exercised by delivering
written notice to the Secretary of the Company, executing and delivering a later
dated proxy or voting in person at the Annual Meeting. Unless revoked, the
shares represented by each duly executed, timely delivered proxy will be voted
in accordance with the specifications made. IF NO SPECIFICATIONS ARE MADE, SUCH
SHARES WILL BE VOTED FOR THE ELECTION OF DIRECTORS AS PROPOSED IN THIS PROXY
STATEMENT, IN FAVOR OF THE PROPOSAL TO CHANGE THE NAME OF THE COMPANY AND IN
FAVOR OF THE PROPOSAL TO AMEND THE COMPANY'S 1992 STOCK OPTION PLAN (THE "OPTION
PLAN"). The Board of Directors does not intend to present any other matters at
the Annual Meeting. However, should any other matters properly come before the
Annual Meeting, it is the intention of the persons named in the accompanying
form of proxy to vote the proxy in accordance with their best judgment. For
purposes of determining the number of votes cast with respect to the election of
directors, only those cast "for" are included. Abstentions and withheld votes
are counted only for purposes of determining whether a quorum is present at the
Annual Meeting and broker non-votes are not counted for any purpose. Abstentions
and broker non-votes will have the effect of a vote against the proposal to
change the Company's name and will have no effect on the proposal to amend the
Option Plan.
All costs of solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, the officers and employees of the Company, who
will receive no extra compensation therefor, may solicit proxies personally or
by telephone. The Company will reimburse brokerage houses, custodians, nominees
and fiduciaries for their expense in mailing proxy material to principals.
<PAGE> 5
INFORMATION ON SECURITIES
The following table set forth information as of April 1, 1997, unless
otherwise indicated, with respect to the beneficial ownership of Common Stock by
each director and nominee, each executive officer named in the Summary
Compensation Table under "Proposal 1 -- Nominees for Election as Directors --
Executive Compensation," all current directors and executive officers as a group
and all other persons known by the Company to beneficially own more than 5% of
the outstanding shares of Common Stock (each, a "5% Owner").
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME(a) OF SHARES(b) OF CLASS(c)
------- ------------ -----------
<S> <C> <C>
Eduardo Bohorquez.................................. 2,480,517(d) 37.4
Anthony A. Bonelli................................. 27,747(e) *
Robert P. DeCresce................................. 35,747(f) *
Thomas R. Donahue.................................. 0 --
Lou Gorga.......................................... 15,000(g) *
Thomas W. Gorman................................... 584,899(h) 8.9
P. Thomas Hirsch................................... 15,000(i) *
Eugene E. Jennings................................. 80,000(j) 1.2
Joseph J. Vadapalas................................ 2,480,517(d) 37.4
John T. Watkins.................................... 217,150(k) 3.3
Perry C. McClung................................... 132,363(l) 2.0
Alan S. Ker........................................ 47,578(m) *
Thomas Marquard.................................... 22,383(n) *
Portfolio Investment Company Limited............... 2,178,223(o) 33.2
WestSphere Capital, Inc............................ 2,480,517(d) 37.4
WestSphere Capital Associates, L.P. ............... 2,480,517(d) 37.4
Anixter Corporation................................ 774,899(p) 11.8
The Kaufmann Fund, Inc............................. 1,842,857(q) 24.0
All current directors and executive officers as a
group (12 persons)............................... 3,635,999(r) 47.3
</TABLE>
- -------------------------
* Less than one percent
(a) The address of each of WestSphere Capital Associates, L.P. ("WCA"), 55 E.
59th Street, 13th Floor, New York, New York 10017, WestSphere Capital, Inc.
("WCI") and Messrs. Bohorquez, Vadapalas and Donahue is c/o WCA, 55 E. 59th
Street, 13th Floor, New York, New York 10017. The address of Portfolio
Investment Company Limited ("PICL") is P.O. Box 309, 63 SMB, Grand Cayman,
Cayman Islands, B.W.I. The address of Mr. Gorman and Signal Capital
Corporation is 55 Ferncroft Road, Danvers, Massachusetts 01923. The address
of Anixter Corporation is Two North Riverside Plaza, Chicago, Illinois
60606. The address of The Kaufmann Fund Inc. is 140 E. 45th Street, 43rd
Floor, New York, New York 10017.
(b) The column sets forth shares of Common Stock which are deemed to be
"beneficially owned" by the persons named in the table under Rule 13d-3 of
the Securities and Exchange Commission ("SEC"), including shares issuable
under options or warrants exercisable currently or within 60 days of April
1, 1997 or upon conversion of the Company's 8.25% Convertible Subordinated
Debentures Due 2006 ("Debentures"). Each of the persons named in the table
has sole voting and investment power with respect to all shares
beneficially owned by them, except as described in the following footnotes.
(c) For purposes of calculating the percentage of Common Stock beneficially
owned, the shares issuable to such person under stock options or warrants
exercisable currently or within 60 days of April 1, 1997 or upon conversion
of Debentures owned by such person are considered outstanding and added to
the shares of Common Stock actually outstanding.
(d) Information is based on a Schedule 13D filed by PICL and certain related
entities on September 30, 1996. Amount includes 2,178,223 shares owned by
PICL, as well as 219,175 shares and a currently
2
<PAGE> 6
exercisable warrant for 83,117 shares which shares and warrants are owned
by certain other affiliates of WCA and WCI. Pursuant to certain management
agreements, WCA has the authority to direct the voting power of the shares
of the Company owned by these entities. WCI is the general partner of WCA
and therefore may also be deemed to be the beneficial owner of such shares.
WCA, and WCI disclaim this beneficial ownership. Messrs. Bohorquez and
Vadapalas are principals of WCA and directors of WCI and therefore may be
deemed to be beneficial owners of such shares. Messrs. Bohorquez, Donahue
and Vadapalas disclaim beneficial ownership of these shares.
(e) Includes 27,747 shares which may be acquired pursuant to stock options.
(f) Includes 32,747 shares which may be acquired pursuant to stock options and
3,000 shares owned by Dr. DeCresce's minor sons as to which shares Dr.
DeCresce disclaims beneficial ownership.
(g) Includes 15,000 shares which may be acquired pursuant to stock options.
(h) Includes 584,899 shares owned by Signal Capital Corporation for which Mr.
Gorman is a senior investment manager. Excludes 190,000 shares owned by
Anixter International Inc., the parent corporation of Signal Capital
Corporation. Mr. Gorman disclaims beneficial ownership of all such shares.
See note (p).
(i) Includes 15,000 shares which may be acquired pursuant to stock options.
(j) Includes 75,000 shares which may be acquired pursuant to stock options.
(k) Includes 44,332 shares which may be acquired pursuant to stock options.
(l) Includes 30,000 shares which may be acquired pursuant to stock options.
(m) Includes 40,213 shares which may be acquired pursuant to stock options and
7,365 shares as to which Mr. Ker shares beneficial ownership with his
spouse.
(n) Includes 20,213 shares which may be acquired pursuant to stock options and
100 shares as to which Mr. Marquard shares beneficial ownership with his
spouse.
(o) Such shares are subject to a management agreement with WCA. See note (d).
Such shares are also pledged to secure certain obligations of PICL.
(p) Information regarding Anixter Corporation is based on the Schedule 13D
filed by Anixter Corporation on or about January 31, 1995. Amount includes
190,000 shares owned directly and 584,899 shares owned by its subsidiary,
Signal Capital Corporation.
(q) Information regarding The Kaufmann Fund is based on the Schedule 13G filed
by the Fund as of December 31, 1995 and information obtained verbally from
The Kaufman Fund. Includes 1,142,857 shares which may be acquired upon
conversion of Debentures.
(r) Includes a total of 363,156 shares which may be acquired pursuant to
options and warrants. See also footnotes (d) through (m) above. None of the
directors or executive officers beneficially own any Debentures.
3
<PAGE> 7
PROPOSAL 1
NOMINEES FOR ELECTION AS DIRECTORS
The Company's Articles of Incorporation divide the Company's directors into
three classes, the terms of which expire as set forth below. At each annual
meeting, the shareholders of the Company will elect to three-year terms
directors to replace those directors whose terms expire at that annual meeting.
The term of office of directors elected at this year's Annual Meeting will
continue until the 2000 Annual Meeting.
The following sets forth information as to each nominee for election at the
Annual Meeting and each director continuing in office, including his age,
present principal occupation, other business experience during the last five
years, directorships in other publicly held companies, membership on committees
of the Board of Directors and period of service as a director of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES FOR ELECTION.
The election of directors requires a plurality of the votes cast.
If any nominee at the time of election is unable to serve, or otherwise is
unavailable for election, and if other nominees are designated, the persons
named in the accompanying form of proxy will have discretionary authority to
vote or refrain from voting in accordance with their judgment on such other
nominees. If any nominees are substituted by the Board of Directors, the persons
named in the accompanying form of proxy intend to vote for such nominees.
Management is not aware of the existence of any circumstance which would render
any nominee named hereunder unavailable for election. All nominees are currently
directors of the Company.
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS FOR A TERM EXPIRING IN 2000
THOMAS R. DONAHUE, 35, Mr. Donahue has been a director of the Company since
its organization. He has been a principal of WCA since November 1992 and was a
director of WCA from the time of its organization in 1989 until November 1992.
From July 1988 to May 1989, he was employed by Ehrlich Bober & Co. Inc., an
investment banking firm, as a Senior Associate. From September 1986 through June
1988, Mr. Donahue was enrolled in the M.B.A. Program at the Wharton School of
the University of Pennsylvania from which he graduated in June 1988. From July
1984 to August 1986, Mr. Donahue was employed by The Chase Investment Bank, the
investment banking subsidiary of The Chase Manhattan Bank, N.A., as an
Associate.
P. THOMAS HIRSCH, 46, Mr. Hirsch has been a director of the Company since
October 1994. Mr. Hirsch has served as President and Chief Executive Officer of
Path Lab, Inc., a New England hospital-based clinical laboratory company, since
June 1984. From October 1985 until June 1994, Mr. Hirsch was also the President
and Chief Executive Officer of Diagnostic Laboratory Services, Inc., a clinical
laboratory company based in Hawaii. Mr. Hirsch has over 17 years of managerial
experience in the health care industry.
EUGENE E. JENNINGS, 43, Mr. Jennings has been Chairman of the Board,
President and Chief Executive Officer since April 1996. From November 1991 to
March 1996, Mr. Jennings served in various managerial capacities for AMSCO
International, Inc., a manufacturer of medical and industrial infection control
and surgical care equipment and provider of bio-medical services, and most
recently as Corporate Vice President -- International and Bio-Technology and
Pharmaceutical Businesses. Mr. Jennings served as Vice President and General
Manager of Stryker Corporation, a manufacturer of endoscopic medical devices,
during 1990 and 1991 and has more than 15 years of senior executive managerial
experience in the health care industry.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
EDUARDO BOHORQUEZ, PH.D, 50, Dr. Bohorquez has been a director of the
Company since its organization. He has been the President and Chief Executive
Officer of WCI and the Chief Executive Officer of WCA, each an investment firm,
since their organization in 1989. From August 1986 to May 1989, he was employed
by Ehrlich Bober and Co., Inc., an investment banking company, as a Managing
Director, and from January 1980 to July 1986 he was employed by The Chase
Investment Bank, the investment banking subsidiary of The Chase Manhattan Bank,
N.A., as a Managing Director of the Corporate Finance Group. Dr. Bohorquez holds
a Ph.D in Finance from the University of Wisconsin. From 1983 to 1987, he served
as Adjunct Professor of International Finance at Columbia University School of
International Affairs.
4
<PAGE> 8
JOSEPH J. VADAPALAS, 42, Mr. Vadapalas has been a director of the Company
since its organization. He has been an Executive Vice President of WCI and a
Managing Director of WCA since their organization in 1989. From August 1986 to
May 1989, he was employed by Ehrlich Bober & Co., Inc. as a director. From
September 1982 to August 1986, he was employed by The Chase Investment Bank, the
investment banking subsidiary of The Chase Manhattan Bank, N.A., as a director.
DIRECTORS WHOSE TERMS EXPIRE IN 1999
ANTHONY A. BONELLI, 46, Mr. Bonelli has been a director of the Company
since June 1992. Mr. Bonelli has been President and Chief Operating Officer of
Neuman Distributors, Inc., a wholesale distributor of pharmaceutical products,
since August 1995. Previously, he served as President and Chief Operating
Officer for Copley Pharmaceutical, Inc., a worldwide developer and manufacturer
of off-patent generic prescription and over the counter pharmaceuticals, from
June 1993 until November 1994. From September 1989 until June 1993, Mr. Bonelli
was Vice President, Institutional Health Care Strategic Business Unit, for
Parke-Davis, a division of the Warner-Lambert Company, a worldwide
pharmaceutical and consumer products corporation, and prior to that served as
Director of Marketing of Parke-Davis from August 1987 until September 1989. From
February 1986 to August 1987, Mr. Bonelli held various positions with Schering-
Plough Corporation, a pharmaceutical manufacturer, including Director, Trade
Development. Mr. Bonelli holds a law degree from the University of San Francisco
and an M.B.A. from Rutgers University.
ROBERT P. DECRESCE, M.D., 47, Dr. DeCresce has been a director of the
Company since June 1992. He has been the Director of Clinical Laboratories for
Rush-Presbyterian/St. Luke's Medical Center in Chicago, Illinois since July
1991. From 1987 to 1991, he was the Chief of Pathology of Humana
Hospital-Michael Reese in Chicago, Illinois. From 1983 to 1987, he was Vice
President for MetPath Incorporated, a division of Corning, Inc. Dr. DeCresce
received an M.D. from Columbia University College of Physicians and Surgeons in
1975 and an M.B.A. from Columbia University in 1977.
THOMAS W. GORMAN, 37, Mr. Gorman has been a director of the Company since
November 1992. He has been a senior investment manager at Signal Capital
Corporation, a Massachusetts-based investment firm ("Signal") since April 1991.
Mr. Gorman also served as an investment manager at Signal from January 1990 to
April 1991 and as Assistant Treasurer at Signal from May 1988 to January 1990.
From June 1987 to May 1988, Mr. Gorman served as Manager, Corporate Finance, at
General Motors Corporation.
WCI and its affiliates beneficially own approximately 37.4% of the
Company's outstanding Common Stock. Certain of the Company's shareholders, who
control a majority of the outstanding shares of Common Stock, have agreed to
vote their shares for the election of Mr. Gorman at the request of Signal
pursuant to a certain Stockholders Agreement dated June 28, 1991. Such right of
Signal expires upon the earlier to occur of June 27, 2001 and the date on which
Signal no longer holds at least 5% of the Common Stock.
DIRECTOR COMPENSATION
During 1996, the non-employee directors were not paid any cash compensation
for their services as members of the Company's Board of Directors and were only
reimbursed for travel and related expenses. In 1997, the Company may elect to
reinstate payment of director and committee fees.
The Directors Stock Option Plan (the "Directors Plan") provides for the
making of stock option grants to directors who are not employees of the Company
or its subsidiaries and who are not 5% Owners or employees, officers or
affiliates of a 5% Owner. Eligible directors who are first elected to the Board
after March 1995 will receive an initial grant of an option to purchase 15,000
shares in addition to annual grants during the term of the Directors Plan at an
exercise price equal to the fair market value per share of the Common Stock on
the grant date (as calculated under the Directors Plan). In addition, on the
date of each annual meeting during the term of the Directors Plan, each eligible
director will receive an option to purchase 10,000 shares at a price equal to
the fair market value per share of the Common Stock on the grant date (as
calculated under the Directors Plan). Messrs. Bonelli and Hirsch and Dr.
DeCresce each received an option to purchase 10,000 shares at $5.47 per share
during 1996 under the Directors Plan. All options granted under the Directors
Plan become exercisable in equal annual installments on each of the first four
anniversaries of the grant date or
5
<PAGE> 9
immediately upon a "change of control" or "involuntary removal" from the Board
of Directors (as such terms are defined in Directors Plan).
BOARD COMMITTEES AND ATTENDANCE
The Company's Board of Directors has an Audit Committee, a Compensation
Committee and a Stock Option Committee. The Audit Committee, which met three
times during 1996, oversees actions taken by the Company relating to its
financial matters and its independent auditors, recommends the engagement of
auditors and reviews the Company's financial statements. The members of the
Audit Committee are Messrs. Donahue and Bonelli and Dr. DeCresce. The
Compensation Committee, which met seven times during 1996, approves the
compensation of executives of the Company and makes recommendations to the Board
of Directors with respect to standards for setting compensation levels. The
members of the Compensation Committee are Messrs. Vadapalas and Hirsch and Drs.
Bohorquez and DeCresce. The Stock Option Committee, which met two times during
1996, administers the 1992 Stock Option Plan, Employee Stock Purchase Plan and
the Directors Stock Option Plan. The members of the Stock Option Committee are
Dr. DeCresce and Mr. Hirsch. See "Proposal 1 -- Nominees for Election as
Directors -- Executive Compensation" for the reports of the Compensation
Committee and the Stock Option Committee on executive compensation practices and
policies and certain option repricings which occurred in 1996. In addition to
formal meetings, from time to time the Compensation Committee and the Stock
Option Committee informally discuss issues or matters under consideration and
take formal action by unanimous written consent. The Company's Board of
Directors met seven times during 1996. Except for Messrs. Bohorquez and Gorman,
each director attended 75% or more of the total number of meetings of the Board
and committees of which he was a member in 1996.
EXECUTIVE OFFICERS
The executive officers of the Company as of the date of this Proxy
Statement are listed and described below. Executive officers serve at the
discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Eugene E. Jennings................... 43 Chairman of the Board, President, Chief Executive
Officer and Director
Lou Gorga............................ 44 Vice President and Chief Operating Officer
Perry C. McClung..................... 60 Executive Vice President and President of Universal
Standard Managed Care, Inc.
Alan S. Ker.......................... 45 Vice President, Finance, Chief Financial Officer,
Treasurer and Assistant Secretary
</TABLE>
Mr. Jennings' business experience is described under "Proposal 1 --
Nominees for Election as Directors -- Nominees For Election to the Board of
Directors For a Term Expiring in 2000."
Mr. Gorga has been Vice President and Chief Operating Officer of the
Company since September 1995. Prior to joining the Company, Mr. Gorga was a
clinical laboratory consultant. He was Vice President -- General Manager of
Meditrend Consultants, Inc., a clinical laboratory, from 1992 to 1994, was Vice
President, Operations, for the Institute for Laboratory Medicine, a clinical
laboratory, from 1991 to 1992 and served in the same capacity for EnzoLabs,
Inc., a clinical laboratory, from 1989 to 1991. He has also served in a
managerial capacity at MDS Health Group, Inc., Damon Corporation and MetPath,
Inc. Mr. Gorga was involved in a personal bankruptcy which was discharged in
September 1995.
Mr. McClung has been Executive Vice President of the Company and President
of the Company's principal managed care subsidiary since June 1991. Prior to
joining the Company, Mr. McClung served as Vice President of Marketing of MML,
Inc., the Company's Predecessor, from 1984 to May 1991. From 1968 to 1983, Mr.
McClung served in various positions, including Vice President of Auto National
Marketing, with Michigan Blue Cross/Blue Shield.
6
<PAGE> 10
Mr. Ker has served as Vice President, Finance, and Chief Financial Officer
of the Company since July 1991 and was appointed Assistant Secretary in March
1995. Mr. Ker was appointed Treasurer of the Company in June 1992. Prior to
joining the Company, Mr. Ker had been the Western Regional Controller of Damon
Corporation, a nationally-based clinical laboratory, since January 1985. From
1980 through December 1984, Mr. Ker was the Controller for the United States
operations of MDS Health Group, Inc., a worldwide clinical laboratory.
COMMITTEE INTERLOCKS AND CERTAIN TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Joseph Vadapalas, Eduardo Bohorquez, Robert DeCresce and Thomas Hirsch
served on the Compensation Committee of the Board of Directors of the Company
during 1996. None of these individuals was an employee of the Company during
1996.
Pursuant to the terms of a management advisory and consulting agreement
between WCA and the Company which terminated in December 1992. The Company has
an outstanding obligation to WCA in the amount of approximately $395,000. WCA is
a 5% Owner and is controlled by WCI. Dr. Bohorquez is the chief executive
officer of WCA and Mr. Vadapalas is a managing director of WCA.
CERTAIN OTHER TRANSACTIONS AND RELATIONSHIPS
The Company's former laboratory and headquarters in Southfield, Michigan
was leased from Brace Place Associates, of which Mr. Watkins, a director and
former executive officer, is a general partner. This lease expired in September
1996. The aggregate rental payment under this lease was approximately $362,000
in 1996.
7
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY
The following table provides summary information concerning compensation
paid or accrued by the Company and its subsidiaries to the Company's Chief
Executive Officer, its three other executive officers serving as such as of
December 31, 1996, the former Chief Executive Officer and one other former
executive officer (such current and former officers are referred to as the
"Named Officers") for the periods indicated.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND SALARY BONUS OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#) ($)(A)
------------------ ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Eugene Jennings......................... 1996(b) $174,452 $93,750 300,000 $ 290
Chairman of the Board, President and
Chief Executive Officer
Lou Gorga............................... 1996 123,273 -- 80,000(c) 321
Vice President and 1995(d) 46,406 -- 60,000 13,000
Chief Operating Officer
Perry McClung........................... 1996 145,455 -- 85,000(c) 842
Executive Vice President 1995 133,890 -- 10,000 540
1994 113,783 62,500(e) 50,000 540
Alan Ker................................ 1996 133,600 -- 120,000(c) 548
Vice President, Finance, 1995 130,703 -- 10,000 122
Treasurer and Chief 1994 128,006 -- 50,000 122
Financial Officer
John Watkins............................ 1996 107,955 -- -- 72,000
Vice Chairman (Former Chief 1995 149,921 -- 10,000 209
Executive Officer, Chairman 1994 188,441 62,500(e) 50,000 209
and President)(f)
Thomas Marquard......................... 1996 124,502 -- 6,000 --
Vice President, Sales 1995 120,238 -- -- 209
and Marketing of Universal 1994 120,619 -- -- 209
Standard Managed Care, Inc.(g)
</TABLE>
- -------------------------
(a) Amounts in 1996 represent premiums paid by the Company for term life
insurance policies purchased for such officers and, with respect to Mr.
Watkins, payments in consideration for a covenant not to compete.
(b) Mr. Jennings joined the Company as Chairman of the Board, President and
Chief Executive Officer in April 1996.
(c) Amounts include 40,000, 85,000 and 80,000 options held by Messrs. Gorga,
McClung and Ker, respectively, granted prior to 1996 and repriced during
1996.
(d) Mr. Gorga joined the Company as Vice President and Chief Operating Officer
in September 1995.
(e) Represents a discounted advanced payment made to the executive in connection
with the renegotiation of an employment agreement entered into in 1991 as
part of the acquisition of a business in which the executive had an
ownership interest. The executive's employment agreement was renegotiated as
part of the Company's restructuring program in an effort to reduce the
Company's operating costs. This payment represented a 22% discount on
payments that would otherwise have been due to the executive through June
1996.
(f) No longer an executive officer of the Company effective April 4, 1996.
(g) No longer an executive officer of the Company effective March 27, 1996.
8
<PAGE> 12
OPTIONS
The following table sets forth information concerning stock option grants
and repricings during 1996 to the Named Officers. Options granted prior to 1996
but repriced during 1996 are indicated with an asterisk.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(A)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5% 10%
---- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Jennings...... 181,832(b) 23.10% $3.63 3/12/06 $1,075,152 $1,712,000
118,168(b) 14.95 3.39 4/3/06 652,518 1,039,026
Lou Gorga............ 12,500(c)* 1.58 4.75 9/11/05 89,182 142,007
2,500(c)* 0.32 4.75 12/5/05 17,836 28,401
22,500(d)* 2.85 4.75 9/11/05 160,528 255,613
2,500(e)* 0.32 4.75 12/5/05 17,836 28,401
40,000(f) 5.06 3.93 9/22/06 256,062 407,736
Perry McClung........ 15,000(c)* 1.90 4.75 11/5/02 107,018 170,409
7,500(c)* 0.95 4.75 8/2/03 53,509 85,204
5,000(c)* 0.63 4.75 12/6/04 35,673 56,803
2,500(c)* 0.32 4.75 12/5/05 17,836 28,401
2,500(g)* 0.32 4.75 8/2/03 17,836 28,401
5,000(h)* 0.63 4.75 12/6/04 35,673 56,803
7,500(i)* 0.95 4.75 12/5/05 53,509 85,204
10,000(j)(k)* 1.27 4.75 (k) 71,346 113,606
10,000(j)(l)* 1.27 4.75 (l) 71,346 113,606
10,000(j)(m)* 1.27 4.75 (m) 71,346 113,606
10,000(j)(n)* 1.27 4.75 (n) 71,346 113,606
Alan Ker............. 10,000(c)* 1.27 4.75 11/5/02 71,346 113,606
7,500(c)* 0.95 4.75 8/2/03 53,509 85,204
5,000(c)* 0.63 4.75 12/6/04 35,673 56,803
2,500(c)* 0.32 4.75 12/5/05 17,836 28,401
2,500(g)* 0.32 4.75 8/2/03 17,836 28,401
5,000(h)* 0.63 4.75 12/6/04 35,673 56,803
7,500(i)* 0.95 4.75 12/5/05 53,509 85,204
10,000(j)(k)* 1.27 4.75 (k) 71,346 113,606
10,000(j)(l)* 1.27 4.75 (l) 71,346 113,606
10,000(j)(m)* 1.27 4.75 (m) 71,346 113,606
10,000(j)(n)* 1.27 4.75 (n) 71,346 113,606
40,000(f) 5.06 3.93 9/27/06 256,062 407,736
Thomas Marquard...... 6,000(f) 0.76 3.93 9/27/06 38,409 61,160
John Watkins......... -- -- -- -- -- --
</TABLE>
- -------------------------
(a) Represents the value of such option at the end of its 10 year term (without
discounting to present value), assuming the market price of the Common Stock
appreciates from the exercise price beginning on the grant date at an
annually compounded rate of 5% or 10%. These amounts represent assumed rates
of appreciation only. Actual gains, if any, will be dependent on overall
market conditions and on the future performance of the Common Stock. There
can be no assurance that the amount reflected in this table will be
achieved. On April 1, 1997, the closing market price of the Common Stock was
$3.50, which was below the respective prices of all the options indicated in
the table, except for certain of Mr. Jennings'
9
<PAGE> 13
options. Hence, if exercised as of April 1, 1997, none of such options, with
the exception of certain of Mr. Jennings' options, would have any value.
(b) These options were granted under the 1992 Stock Option Plan and become
exercisable in cumulative annual installments of 25% on each of the first
four anniversaries of the grant date or immediately upon death, disability,
change of control or termination of employment without cause.
(c) These options were repriced on May 6, 1996 and their exercisability was
postponed until May 6, 1997. These options will also become exercisable
immediately upon Employee's death or permanent disability, or upon a change
of control of the Company.
(d) These options were repriced on May 6, 1996. On September 11, 1997, 12,500 of
these options become exercisable, and the remainder become exercisable on
September 11, 1998. These options will also become exercisable immediately
upon Employee's death or permanent disability, or upon a change of control
of the Company.
(e) These options were repriced on May 6, 1996 and become exercisable on
December 5, 1997. These options will also become exercisable immediately
upon Employee's death or permanent disability, or upon a change of control
of the Company.
(f) One-half of the options will vest on June 30, 1997 (the "Turn-around
Incentive Options") as follows: one-third of the Turn-around Incentive
Options will vest based upon the achievement of corporate goals, one-third
upon achievement of divisional goals and one-third upon achievement of
individual goals, provided that none of the Turn-around Incentive Options
will vest if the optionee does not achieve his individual goals, unless the
Stock Option Committee otherwise approves of such vesting. If the Company
achieves the 1997 operating plan approved by the Board of Directors, the
other half of the options (the "High Growth Incentive Options") will vest on
December 31, 1997 as follows: a number of High Growth Incentive Options
equal to the number of Turn-around Incentive Options which vested on June
30, 1997 will vest or, if no Turn-around Incentive Options vested because
the optionee failed to achieve his individual goals by June 30, 1977, then
one-half of the High Growth Incentive Options will vest if the optionee has
met his individual goals by December 31, 1997. Vested options become
exercisable in four equal annual installments beginning one year from their
vesting date.
(g) These options were repriced on May 6, 1996 and become exercisable on August
2, 1997. These options will also become exercisable immediately upon
Employee's death or permanent disability, or upon a change of control of the
Company.
(h) These options were repriced on May 6, 1996. On December 6, 1997, 2,500 of
these options become exercisable and the remainder become exercisable on
December 6, 1998. These options will also become exercisable immediately
upon Employee's death or permanent disability, or upon a change of control
of the Company.
(i) These options were repriced on May 6, 1996. On December 5, 1997, 2,500 of
these options become exercisable, on December 5, 1998 an additional 2,500 of
these options become exercisable and on December 5, 1999, the remainder
become exercisable. These options will also become exercisable upon
Employee's death, permanent disability or change of control of the Company.
(j) These options become exercisable in full if the optionee dies or becomes
permanently disabled, or upon certain changes of control of the Company.
(k) These options also become exercisable in full if, prior to December 6, 1997,
the closing price of the Common Stock exceeds $7.00 per share (previously,
$12.00 per share) for at least 20 of 30 consecutive trading days; otherwise,
the options will generally expire on such date. If the options become
exercisable as a result of an event described in note (j) or in the
preceding sentence, the options expire on December 5, 2004 or three months
following termination of employment, whichever is earlier. A portion of the
options become exercisable if the optionee's employment is terminated due to
death, disability or a change of control prior to December 6, 1997, based
upon the time elapsed from the grant date to the termination date as a
percentage of the time from the grant date to December 6, 1997. In such
event, the options expire three months after termination. Upon termination
of employment by the Company for any
10
<PAGE> 14
other reason, the unvested portion of the options will expire and the vested
portion of the options will remain exercisable for a period of three months
following the effective date of termination.
(l) These options also become exercisable in full if, prior to August 6, 1998,
the closing price of the Common Stock exceeds $10.00 per share (previously,
$14.00 per share) for at least 20 of 30 consecutive trading days; otherwise,
the options will generally expire on such date. If the options become
exercisable as a result of an event described in note (j) or in the
preceding sentence, the options expire on December 5, 2004 or three months
following termination of employment, whichever is earlier. A portion of the
options become exercisable if the optionee's employment is terminated due to
death, disability or a change of control prior to August 6, 1998, based upon
the time elapsed from the grant date to the termination date as a percentage
of the time from the grant date to August 6, 1998. In such event, the
options expire three months after termination. Upon termination of
employment by the Company for any other reason, the unvested portion of the
options will expire and the vested portion of the options will remain
exercisable for a period of three months following the effective date of
termination.
(m) These options also become exercisable in full if, prior to April 6, 1999,
the closing price of the Common Stock exceeds $12.00 per share (previously,
$16.00 per share) for at least 20 of 30 consecutive trading days; otherwise,
the options will generally expire on such date. If the options become
exercisable as a result of an event described in note (j) or in the
preceding sentence, the options expire on December 5, 2004 or three months
following the termination of employment, whichever is earlier. A portion of
the options become exercisable if the optionee's employment is terminated
due to death, disability or a change of control prior to April 6, 1999,
based upon the time elapsed from the grant date to the termination date as a
percentage of the time from the grant date to April 6, 1999. In such event,
the options expire three months after termination. Upon termination of
employment by the Company for any other reason, the unvested portion of the
options will expire and the vested portion of the options will remain
exercisable for a period of three months following the effective date of
termination.
(n) These options also become exercisable in full if, prior to December 6, 1999,
the closing price of the Common Stock exceeds $14.00 per share (previously
$18.00 per share) for at least 20 of 30 consecutive trading days; otherwise,
the options will generally expire on such date. If the options become
exercisable as a result of an event described in note (j) or in the
preceding sentence, the options expire on December 5, 2004 or three months
following termination of employment, whichever is earlier. A portion of the
options become exercisable if the optionee's employment is terminated due to
death, disability or a change of control prior to December 6, 1999, based
upon the time elapsed from the grant date to the termination date as a
percentage of the time from the grant date to December 6, 1999. In such
event, the options expire three months after termination. Upon termination
of employment by the Company for any other reason, the unvested portion of
the options will expire and the vested portion of the options will remain
exercisable for a period of three months following the effective date of
termination.
The following table provides information with respect to unexercised
options held as of the end of 1996 by the Named Officers. There were no options
exercised by the Named Officers during 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(A)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Eugene Jennings................................ 0 300,000 0 0
Lou Gorga...................................... 0 100,000 0 0
Perry McClung.................................. 0 85,000 0 0
Alan Ker....................................... 15,213 80,000 0 0
Thomas Marquard................................ 20,213 6,000 0 0
John Watkins................................... 44,332 70,668 0 0
</TABLE>
- -------------------------
(a) Represents the total gain which would have been realized if all options were
exercised at December 31, 1996. The closing market price at December 31,
1996 was $2.87.
11
<PAGE> 15
The following table provides information concerning all repricings of
options to purchase Common Stock held by any executive officer of the Company
since September 25, 1992, the date of the Company's initial public offering.
TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
NUMBER OF MARKET PRICE EXERCISE OPTION TERM
SECURITIES OF STOCK AT PRICE AT REMAINING AT
UNDERLYING TIME OF TIME OF DATE OF
OPTIONS/SARS REPRICING OR REPRICING OR NEW REPRICING OR
REPRICED OR AMENDMENT AMENDMENT EXERCISE AMENDMENT
NAME DATE AMENDED(#) ($) ($) PRICE($) (# OF MONTHS)
---- ---- ------------ ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lou Gorga................. 5/6/96 12,500 $4.38 $ 5.99 $4.75 112
Vice President and Chief 5/6/96 2,500 $4.38 $ 6.00 $4.75 115
Operating Officer 5/6/96 22,500 $4.38 $ 5.99 $4.75 112
5/6/96 2,500 $4.38 $ 6.00 $4.75 115
Perry McClung............. 5/6/96 15,000 $4.38 $10.00 $4.75 78
Executive Vice President 5/6/96 7,500 $4.38 $12.15 $4.75 87
5/6/96 5,000 $4.38 $ 6.20 $4.75 103
5/6/96 2,500 $4.38 $ 6.00 $4.75 115
5/6/96 2,500 $4.38 $12.15 $4.75 87
5/6/96 5,000 $4.38 $ 6.20 $4.75 103
5/6/96 7,500 $4.38 $ 6.00 $4.75 115
5/6/96 10,000 $4.38 $ 6.20 $4.75 7
5/6/96 10,000 $4.38 $ 6.20 $4.75 15
5/6/96 10,000 $4.38 $ 6.20 $4.75 23
5/6/96 10,000 $4.38 $ 6.20 $4.75 31
Alan Ker.................. 5/6/96 10,000 $4.38 $10.00 $4.75 78
Vice President, Finance, 5/6/96 7,500 $4.38 $12.15 $4.75 87
Chief Financial Officer 5/6/96 5,000 $4.38 $ 6.20 $4.75 103
Treasurer and Assistant 5/6/96 2,500 $4.38 $ 6.00 $4.75 115
Secretary 5/6/96 2,500 $4.38 $12.15 $4.75 87
5/6/96 5,000 $4.38 $ 6.20 $4.75 103
5/6/96 7,500 $4.38 $ 6.00 $4.75 115
5/6/96 10,000 $4.38 $ 6.20 $4.75 7
5/6/96 10,000 $4.38 $ 6.20 $4.75 15
5/6/96 10,000 $4.38 $ 6.20 $4.75 23
5/6/96 10,000 $4.38 $ 6.20 $4.75 31
</TABLE>
COMPENSATION COMMITTEE REPORT ON STOCK OPTION REPRICINGS
The Compensation Committee, in reviewing executive officer compensation
levels following the engagement of Eugene Jennings as Chairman of the Board,
President and Chief Executive Officer, observed that stock options held by the
Company's executive officers were exercisable at prices significantly in excess
of then-current trading prices for the Common Stock. These options no longer
served the purpose for which they were intended and provided no real long-term
incentive to the executive officers of the Company. As a result, the Committee
determined it appropriate to reprice all (or, in the case of Mr. Gorga, who was
hired in September 1996, two-thirds) of the options held by the executive
officers, so that these options would once again provide realistic incentive to
the Company's executive officers at a time when the Company urgently needed to
improve its performance. In addition, by repricing options, the Company provided
the executive officers with an opportunity to increase their stock holdings in
order to further align their interests with those of the Company's shareholders.
12
<PAGE> 16
Accordingly, in May 1996, the Company offered to amend existing options to
purchase an aggregate of 205,000 shares of Common Stock under the 1992 Stock
Option Plan held by the executive officers (including the Performance Options,
as defined below) by lowering the exercise price of such options to $4.75 per
share, which exceeded both the then current fair market value of the Common
Stock, as defined in the 1992 Stock Option Plan, and the conversion price of the
Company's outstanding 8.25% Convertible Subordinated Debentures Due 2006.
Previously, such repriced options had exercise prices ranging from $5.99 to
$12.15.
Messrs. McClung and Ker each also held options to purchase 40,000 shares of
Common Stock which vested in four equal installments if the market price of a
share of the Common Stock reached $12.00 by December 6, 1996, $14.00 by August
6, 1997, $16.00 by April 6, 1998 and $18.00 by December 6, 1998, respectively
(the "Performance Options"). With the Common Stock then trading at less than
$4.40 per share, and the first expiration date for the Performance Options less
than eight months away, the Committee determined that the current vesting
provisions in the Performance Options should be revised in order for the
Performance Options to provide real long-term incentive to these executive
officers of the Company. The Committee reset the performance targets for the
vesting of the Performance Options held by these two executive officers so that
such options vested in four equal installments if the market price of a share of
the Common Stock reached $7.00 by December 6, 1997, $10.00 by August 6, 1998,
$12.00 by April 6, 1999 and $14.00 by December 6, 1999, respectively. As a
result of these changes, the Performance Options now provide these executive
officers with strong, added incentive to achieve the Company's long-term
performance objectives. In addition, by tying the exercisability of these
options to significant increases in the market price of the Common Stock, the
Committee has provided that these executives will receive significant financial
reward only if the Company's shareholders receive concurrent significant
financial reward.
In exchange for the repricing of existing stock options and the resetting
of the performance targets under the Performance Options, the executive officers
agreed that all their options that were then exercisable or would become
exercisable during the following year would not be exercisable by the optionee
unless the optionee was employed by the Company for a period of one year
following the repricing. In addition, the executive officers agreed to eliminate
the provisions in their existing stock option agreements which would have
resulted in such options becoming exercisable upon termination of their
employment by the Company without cause, except as to options to purchase 51,250
shares of Common Stock that were then exercisable or which would otherwise have
become exercisable during the subsequent six months. Through these additional
amendments, the Committee provided the Company's executive officers with added
incentive to remain with the Company during the management transition which was
then under way and reduced the Company's stock option obligations to these
executive officers if they did not remain with the Company following the
transition in management.
COMPENSATION COMMITTEE:
EDUARDO BOHORQUEZ, PH.D. P. THOMAS HIRSCH
ROBERT P. DECRESCE, M.D. JOSEPH J. VADAPALAS
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of the Named Officers.
These agreements are described below.
The employment agreement of Mr. Jennings expires on March 12, 1999 and
provides for an annual salary (subject to adjustment for inflation) of $250,000.
In connection with the commencement of his employment, the Company also agreed
to reimburse Mr. Jennings for certain costs and expenses relating to his
relocation to the State of Michigan, including temporary housing, travel, moving
expenses, real estate commission and real estate closing costs, and for taxes
imposed on such reimbursements. Mr. Jennings' employment agreement also provides
for a performance bonus plan for the years 1996 through 1998. For a description
of Mr. Jennings' 1996 performance bonus plan, see "Compensation Committee and
Stock Option Committee Report -- Annual Cash Incentive Opportunities." Under the
1997 and 1998 performance bonus plans, Mr. Jennings will be eligible to earn up
to 100% of his base salary for each such year as a bonus upon the achievement of
certain performance objectives for 1997 and 1998. The potential bonus earned
under the bonus plan for 1997 and 1998
13
<PAGE> 17
is a direct function of the percentage of the Company's operating plan achieved
during the plan year. The operating plan for each of 1997 and 1998 is the
Company's operating plan for each such year as mutually agreed upon by the Board
of Directors and Mr. Jennings. The term of the Employment Agreement will extend
automatically for successive terms of one year unless, at least six months prior
to the then current expiration date, the Company gives notice of its intent not
to extend the term. Upon termination of employment by the Company without cause,
Mr. Jennings generally will be entitled to receive his salary and benefits for a
period of eighteen months if such termination occurs prior to March 12, 1998 or
for twelve months if such termination occurs on or after March 12, 1998. Upon
termination of employment by the Company for cause or as a result of Mr.
Jennings' death, incapacity or violation of the terms of the agreement, the
Company's obligation to pay Mr. Jennings' salary will cease.
The employment agreement of Mr. Gorga expires on December 31, 1998 and
provides for an annual salary (subject to adjustment for inflation) of $125,000.
Upon commencement of his employment, Mr. Gorga also received a payment of
$13,000 in connection with his relocation to the State of Michigan. The contract
term will extend automatically for successive terms of one year unless, at least
six months prior to the then current expiration date, the Company gives notice
of its intent not to extend the term. Upon termination of employment by the
Company without cause, Mr. Gorga generally will be entitled to receive his
salary and benefits for a period of the lesser of six months following the date
of his termination or the remaining term of the employment agreement at the rate
in effect as of the date of termination. Upon termination of employment by the
Company for cause or as a result of Mr. Gorga's death, incapacity or violation
of the terms of the agreement, the Company's obligation to pay Mr. Gorga's
salary will cease. The agreement also provides that Mr. Gorga was entitled to
participate in the 1994-1996 Executive Compensation Plan.
The employment agreement of Mr. McClung expires on June 28, 1999 and
provides for an annual salary based on the level of earnings before interest,
taxes, depreciation and amortization ("EBITDA") for the Company's managed care
operation ("USMC") for each year during the term. The agreement provides that
Mr. McClung will receive a minimum salary of $150,000 during the first year,
which began June 28, 1996, $125,000 (and no more than $400,000) during the
second year and $75,000 (and no more than $300,000) during the third year of the
term. Mr. McClung is entitled to a bonus of $100,000 if USMC's EBITDA from
certain accounts exceeds $4.8 million during each of the years 1996 through
1999. Upon termination of employment without cause by the Company during the
first year of the term, Mr. McClung will receive his salary (reduced by earnings
from subsequent employment) for the remainder of the first year of the term and
for an additional nine months thereafter. Mr. McClung is also entitled to
$125,000, of which $75,000 was payable on or before January 1, 1997 and $50,000
is payable on or before January 1, 1998, in connection with a covenant not to
compete with the Company and its subsidiaries. Upon termination of employment
without cause by the Company after the first year of the term, Mr. McClung, is
entitled to receive his salary (reduced by earnings from subsequent employment)
until nine months after termination of employment or until June 28, 1999,
whichever occurs first. Except for the bonus and the covenant not to compete
payments, the Company has no obligation to make further payments if employment
is terminated for cause or due to death, disability or resignation. The
agreement also provides that Mr. McClung is entitled to participate in the
Company's other executive compensation plans.
The employment agreement of Mr. Ker expires on June 30, 1998 and provides
for an annual salary (subject to adjustment for inflation) of $145,000. The
agreement provides that the contract term will extend automatically for
successive terms of one year unless, at least nine months prior to the then
current expiration date, the Company gives notice of its intent not to extend
the term. Upon termination of employment by the Company without cause, Mr. Ker
generally will be entitled to receive his salary and benefits for a period of
nine months. Upon termination of employment by the Company for cause or as a
result of Mr. Ker's death, incapacity or violation of the terms of the
agreement, the Company's obligation to pay Mr. Ker's salary will cease. The
agreement also provides that Mr. Ker was entitled to participate in the
1994-1996 Executive Compensation Plan.
The employment agreement of Mr. Marquard provides for a minimum annual
salary of $125,947, subject to increase by the Company's chief executive officer
(and adjustment for inflation), until the agreement expires on January, 1, 1999.
Upon termination of Mr. Marquard's employment by the Company for cause or
14
<PAGE> 18
as a result of his death, disability or violation of the terms of the agreement,
the Company's obligation to pay Mr. Marquard's salary will cease. If Mr.
Marquard's employment is terminated without cause, Mr. Marquard generally is
entitled to be paid his salary for nine months and certain outplacement
expenses. The agreement also provides for an annual bonus of up to $50,000 based
upon the level of net revenues generated by the Company from certain new or
expanded managed care contracts.
The employment agreement with Mr. Watkins provides for an annual salary of
$75,000 and expires on June 30, 1997. Upon termination of Mr. Watkins'
employment by the Company for cause or as a result of his death, disability or
violation of the terms of the agreement, the Company's obligation to pay Mr.
Watkins' salary will cease. If Mr. Watkins' employment is otherwise terminated
by the Company, the Company is obligated to pay his salary for the remainder of
the term. Mr. Watkins will also receive payments totaling $120,000, payable in
15 equal monthly installments, which payments began in April 1996, in connection
with his covenant not to compete with the Company during the term of his
employment and for five years thereafter.
In addition, the stock option agreements with Messrs. Jennings, Gorga,
McClung, Ker, Watkins and Marquard provide that such options become immediately
exercisable in full upon a change of control of the Company and, in certain
cases, upon termination without cause. The Company's unwillingness to extend the
term of Mr. Watkins' employment agreement for additional one-year periods
(except where his employment has been terminated as a result of his death,
disability, violation of the terms of the agreement or termination of his
employment for cause) will constitute a termination of Mr. Watkins' employment
without cause for purposes of his stock option agreements, other than the
performance-based options granted in 1994, which will remain outstanding and
continue to become exercisable in accordance with the terms of such options.
Under the 1994-1996 Executive Compensation Plan, a quarterly bonus pool is
established in an amount equal to 7% of the Company's EBITDA (earnings before
interest, taxes, depreciation and amortization) for such quarter, less base
salary payments to the senior executive officers for such quarter. The bonus
pool, if any, is distributed quarterly to senior executive officers. The plan
provides for a cap on annual bonus payments made under the plan and requires any
negative quarterly bonus amount to be accumulated and offset by positive
quarterly bonus amounts before bonuses for future periods may be paid.
COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE REPORT
The Compensation Committee of the Board of Directors is responsible for
oversight and administration of the Company's executive compensation program.
The Stock Option Committee of the Board of Directors is responsible for the
administration of the Company's stock option programs.
The Company believes that its long-term success depends on its ability to
attract, retain and motivate top quality executives. The Compensation Committee
and the Stock Option Committee recognize that the Company's executive
compensation program is an essential element in that process. The Company's
executive compensation program reflects the Company's philosophy that executive
compensation should be directly linked to the Company's performance. The program
has been designed to link executive compensation to Company performance through
at-risk compensation opportunities, both short-term and long-term, in order to
adequately reward executives who contribute to the Company's success.
The Company's executive compensation program consists of base salary,
annual cash incentive opportunities and long-term incentives represented by
stock options. The salary, bonus and other compensation terms for new executive
officers are established by the Compensation Committee based upon each
executive's qualifications, position and level of responsibility.
Base Salary
The Compensation Committee reviews base salary levels of the Company's
executive officers at least annually and, if appropriate, adjusts base salary
levels consistent with the terms of employment agreements with the Company's
senior executive officers. Similarly, the President and Chief Executive Officer
reviews base salary levels of the Company's other senior management annually
and, if appropriate, adjusts such levels.
15
<PAGE> 19
Effective April 3, 1996, the Company engaged Eugene Jennings as Chairman of
the Board, President and Chief Executive Officer of the Company at an annual
base salary of $250,000, subject to annual cost of living increases. The
Compensation Committee established Mr. Jennings' base salary and the other terms
and conditions of employment based upon its assessment of Mr. Jennings'
qualifications, position and level of responsibility at the Company and its
assessment of the terms of employment required to attract Mr. Jennings to the
Company. For a more detailed description of the terms and conditions of Mr.
Jennings' employment with the Company, see "Proposal 1 -- Nominees for Election
as Directors -- Executive Compensation -- Employment Agreements."
During 1996, the base salary levels of certain of the Company's other
executive officers were generally increased, effective March, 1, 1996, to
reflect a 2% cost of living increase as required by the terms of employment
agreements entered into with these executives prior to 1996. In connection with
the engagement of Mr. Jennings, effective April 3, 1996, John T. Watkins, who
had previously served as President and Chief Executive of the Company, became
Vice-Chairman of the Board of the Company, a non-executive officer position. His
base salary level was reduced at that time to $75,000 per annum, reflecting his
reduced responsibilities at the Company. No other changes were made in the base
salary levels of the Company's executive officers during 1996.
The terms of the employment agreements with the Named Officers are
described under "Proposal 1 -- Nominees for Election as Directors -- Executive
Compensation -- Employment Agreements."
Annual Cash Incentive Opportunities
The Compensation Committee endeavors to institute cash incentive
opportunities which will provide significant reward to the Company's senior
executive officers for performance which enhances shareholder value, but which
will result in little or no reward for performance that does not enhance
shareholder value.
Annual cash incentive opportunities have in the past consisted of two
separate components: (i) bonus arrangements based upon the achievement of
individual performance goals, and (ii) bonus arrangements based upon the
achievement of Company performance goals.
The Compensation Committee established a performance bonus plan for Mr.
Jennings for 1996. Under this plan, Mr. Jennings was eligible to earn up to 100%
of his 1996 annual base salary ("1996 Potential Bonus") upon the achievement of
certain performance objectives. Mr. Jennings earned 50% of his 1996 Potential
Bonus based upon his development of a three-year strategic business plan for the
Company's managed care operations, a three-year turnaround plan for the
Company's laboratory operations and human resource and public relations plans.
The additional performance objectives required to be achieved for Mr. Jennings
to earn the remainder of his 1996 Potential Bonus were not achieved during 1996.
These objectives included (i) an increase in the fair market value of the
Company's Common Stock by more than 120% and the Company reporting a positive
net income for 1996, in order for Mr. Jennings to earn 75% of his 1996 Potential
Bonus, and (ii) the achievement of the Company's 1996 operating plan approved by
the Board of Directors, in order for him to earn the remainder of his 1996
Potential Bonus.
Under the performance bonus program established by the Compensation
Committee for the executive officers, other than Mr. Jennings, for 1996, a
quarterly bonus pool was to be established in an amount equal to 7% of the
Company's EBITDA (earnings before interest, taxes, depreciation and
amortization) for each quarter, less base salary payments to the executive
officers for such quarter. The plan provided for a cap on annual bonus payments
under the plan and required any negative quarterly bonus amount to be
accumulated and offset by positive quarterly bonus amounts before bonuses for
future periods could be paid. During 1996, base salary payments to the senior
executive officers for each quarter exceeded 7% of the Company's EBITDA for such
quarter and so no quarterly bonuses were earned by the executive officers in
1996 under this performance bonus program.
Based upon the Company's 1996 financial performance, the Compensation
Committee did not authorize the payment of any other bonuses to Mr. Jennings or
the other senior executive officers relating to 1996 Company performance or
individual performance.
16
<PAGE> 20
Stock Incentive Opportunities
The Company's stock incentive opportunities consist of grants of stock
options under the Company's 1992 Stock Option Plan. The Company's stock option
program permits the executive officers to buy a specific number of shares of
Common Stock, in the future, at or above the fair market value of such shares on
the date an option is granted. Stock options gain value only to the extent the
stock price exceeds the option exercise price. As a result, options have no
value to the Company's executive officers unless the executive officers are able
to significantly improve the Company's operating performance in a fashion which
results in stock price appreciation.
The Stock Option Committee believes that an essential element of the
Company's long-term success is a highly motivated executive team with a
significant financial interest in improving both the Company's short-term and
long-term operating performance. As a result, in the Stock Option Committee's
view, significant stock-based incentive opportunities are a necessary element of
the Company's executive compensation program in order to encourage the
achievement of the Company's long-term operating goals.
In connection with the engagement of Mr. Jennings as Chairman of the Board,
President and Chief Executive Officer, the Compensation Committee, which
administered the Company's 1992 Stock Option Plan at the time, granted Mr.
Jennings options to purchase 300,000 shares of the Common Stock under the 1992
Stock Option Plan. These options become exercisable in four equal annual
installments, beginning one year from their date of grant, at an exercise price
equal to the fair market value of the Common Stock, as defined under the 1992
Stock Option Plan, on the dates of grant. These options were intended to attract
Mr. Jennings to the Company, encourage his continued employment with the Company
and provide incentive to improve Company performance.
In May 1996, options for a total of 205,000 shares of Common Stock held by
executive officers of the Company were repriced. For a description of such
repricings and the basis therefor, see "Proposal 1 -- Nominees for Election as
Directors -- Executive Compensation -- Ten-Year Option/SAR Repricings" and "--
Compensation Committee Report on Stock Option Repricings."
In September 1996, the Stock Option Committee adopted an Incentive Stock
Option Award Program ("ISOAP"). The objective of the ISOAP is to direct and
reward behavior consistent with shareholder value creation. The ISOAP is
intended to provide incentives that encourage higher levels of individual
participation, achievement and commitment to both the Company's short-term and
long-term objectives. Under the ISOAP, participants are given the opportunity to
earn options to purchase Common Stock, and so obtain an equity position in the
Company, if they achieve short-term strategic objectives of the Company.
Further, the ISOAP encourages participants to remain with the Company for
extended periods by providing that options, once vested, become exercisable over
a four year period.
Under the ISOAP during 1996, certain executive officers (other than Mr.
Jennings), officers and managers of the Company were granted options to purchase
shares of Common Stock pursuant to the 1992 Stock Option Plan. Options to
purchase a total of 80,000 shares of Common Stock were granted to executive
officers of the Company under the ISOAP, at an exercise price equal to the fair
market value of the Common Stock, (as defined under the 1992 Stock Option Plan)
on the date of grant. One-half of the ISOAP options will vest on June 30, 1997
(the "Turn-around Incentive Options") as follows: one-third of the Turn-around
Incentive Options will vest based upon the achievement of corporate goals,
one-third upon achievement of divisional goals and one-third upon achievement of
individual goals, provided that none of an optionee's Turn-around Incentive
Options will vest if the optionee does not achieve his or her individual goals,
unless the Stock Option Committee otherwise approves of such vesting. Corporate
and divisional goals are based upon the 1997 operating plan approved by the
Board of Directors. If the Company achieves the 1997 operating plan approved by
the Board of Directors, the other half of the ISOAP options held by an optionee
(the "High Growth Incentive Options") will vest on December 31, 1997 as follows:
a number of High Growth Incentive Options equal to the number of Turn-around
Incentive Options which vested on June 30, 1997 will vest or, if no Turn-around
Incentive Options vested because the optionee failed to achieve their individual
goals by June 30, 1997, then one-half of the High Growth Incentive Options will
vest if the optionee has met his or her individual
17
<PAGE> 21
goals by December 31, 1997. Vested options become exercisable in four equal
annual installments beginning one year from their vesting date.
Deductibility of Executive Compensation
The Compensation Committee and the Stock Option Committee annually review
the provisions of the Internal Revenue Code and related regulations of the
Internal Revenue Service which restrict deductibility of executive compensation
paid to any of the five most highly compensated executive officers at the end of
any fiscal year to the extent such compensation exceeds $1,000,000 in any year.
The Company's 1992 Stock Option Plan contains a restriction on the granting
of options so that compensation realized in connection with the exercise of
options would be exempt from the restriction on deductibility described above.
The 1992 Stock Option Plan restricts to 375,000 the number of shares of Common
Stock that may be subject to options granted to any salaried employee in any two
consecutive fiscal years. It is important to note that while this restriction
allows the Stock Option Committee continuing discretion in establishing
executive officer compensation, it does limit such discretion by restricting the
size of option awards which the Stock Option Committee may grant to any single
individual. The permitted size of the option awards to a single individual is
based on the Board of Directors' determination of the maximum number of option
shares which were required to be granted in a two-year period to attract a new
chief executive officer to the Company.
The Compensation Committee and the Stock Option Committee do not believe
that other components of the Company's compensation program are likely to result
in payments to any executive officer in any year which would be subject to the
restriction on deductibility, and therefore concluded that no further action
with respect to qualifying such compensation for deductibility was necessary at
this time. The Compensation Committee and the Stock Option Committee will
continue to evaluate the advisability of qualifying future executive
compensation programs for deductibility under the Internal Revenue Code.
COMPENSATION COMMITTEE: STOCK OPTION COMMITTEE:
EDUARDO BOHORQUEZ, PH.D. ROBERT P. DECRESCE, M.D.
ROBERT P. DECRESCE, M.D. P. THOMAS HIRSCH
P. THOMAS HIRSCH
JOSEPH J. VADAPALAS
18
<PAGE> 22
SHAREHOLDER RETURN
Set forth below is a graph comparing the cumulative total return on the
Common Stock from September 25, 1992, the date on which the Company's Common
Stock began trading publicly on the Nasdaq Stock Market's National Market
(symbol: USML), through December 31, 1996 with the Standard and Poor's 500 Stock
Index (the "S&P 500"), an index constructed by the Company based on the
cumulative total returns of a group of companies in the clinical laboratory
industry (the "Peer Group") and a published industry index comprised of over 30
companies having an SIC code of 8071 (medical laboratories). The Peer Group
includes DIANON Systems Inc., LabOne, Inc. (f/k/a Home Office Reference
Laboratory Inc.), and Unilab Corp. Meris Laboratories, Inc., which was formerly
in the Peer Group, has been excluded from the Peer Group as it no longer has
publicly traded securities. The Company intends to discontinue the comparison
with the Peer Group as it believes the comparison with the broader published
index will be more informative than the comparison with the Peer Group, which
now includes only three companies. The graph assumes that the value of the
investment in the Common Stock, the S&P 500, the Peer Group and the published
industry index was $100 on September 25, 1992 and that all dividends were
reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
PERIOD SINCE PUBLIC OFFERING ON SEPTEMBER 25, 1992
<TABLE>
<CAPTION>
MEASUREMENT PERIOD USML S&P 500 PEER GROUP INDUSTRY
(FISCAL YEAR COVERED) INDEX
<S> <C> <C> <C> <C>
9/25/92 100 100 100 100
12/31/92 167.5 105.05 107.43 99.42
12/31/93 100 115.64 112.65 87.82
12/31/94 42.5 117.17 87.15 80.67
12/31/95 42.5 161.20 76.47 76.12
12/31/96 28.75 198.21 77.51 58.96
</TABLE>
19
<PAGE> 23
PROPOSAL 2
APPROVAL OF PROPOSAL TO CHANGE THE COMPANY'S NAME
The Board of Directors proposes and recommends to the shareholders for
their approval an amendment to the Articles of Incorporation to change the name
of the Company by amending Article One to read: "The name of the corporation is
Universal Care, Inc." The affirmative vote of the holders of a majority of the
shares of Common Stock issued and outstanding on the Record Date is required to
approve the amendment effectuating the name change.
Over the past few years, the Company has expanded its business beyond the
medical laboratory business which was its principal business focus in its early
years of operations. Today, the Company's business operations include both its
medical laboratories business, as well as managed care operations offering an
array of medical services, including medical laboratory services. The Company's
business strategy is to become a national leader in the development and delivery
of innovative health care management programs. In that regard, it has placed an
increased emphasis on the expansion of its managed care operations and plans to
continue to expand the types of medical services it offers under these programs.
The Company believes that its current name, which includes the words
"Medical Laboratories", does not properly reflect the Company's current business
strategy and business operations. As a result, the Board of Directors has
selected "Universal Care, Inc." as the new name for the Company. The Board of
Directors believes that this new name is more reflective of the Company's
current business strategy of offering broad-based health care management
programs.
If approved by the shareholders at the Annual Meeting, the new name will
become effective upon the filing of an amendment to the Company's Articles of
Incorporation with the Michigan Department of Consumer and Industry Services.
The change in corporate name will not affect the validity or transferability of
stock certificates currently outstanding and shareholders will not be required
to exchange any certificates they currently hold.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE PROPOSAL TO
CHANGE THE NAME OF THE COMPANY TO UNIVERSAL CARE, INC.
20
<PAGE> 24
PROPOSAL 3
APPROVAL OF AMENDMENT TO THE 1992 STOCK OPTION PLAN
PROPOSED AMENDMENT
The Company proposes to amend the Option Plan to increase the number of
shares of Common Stock subject to the Option Plan by 500,000 to 1,800,000
shares. Approval of the proposal to amend the Option Plan requires the
affirmative vote of the holders of a majority of the shares of Common Stock
voted on the proposal at the Annual Meeting.
The Company's executive officer and management compensation program is
based upon the philosophy that executive compensation should be linked to
performance. The purpose of the Option Plan is to attract and retain qualified
personnel and to provide additional incentive to employees, officers, directors
and consultants which is linked to Company performance. Since stock options only
gain value if the price of the Common Stock increases above the option exercise
price, grants of options to executives under the Option Plan reflect the
Company's philosophy and objective of linking executive compensation to Company
performance.
In accordance with this compensation philosophy, during the last year the
Stock Option Committee granted options to purchase 230,000 shares of Common
Stock under the Option Plan pursuant to the Incentive Stock Option Award Program
("ISOAP"), which is described in more detail under "Proposal 1 -- Nominees for
Election as Directors -- Executive Compensation -- Compensation Committee and
Stock Option Committee Report." The participants in the ISOAP were the executive
officers of the Company (other than the Chairman of the Board, President and
Chief Executive Officer of the Company) and certain key officers and managers of
the Company. The ISOAP is designed to encourage achievement of both the
Company's short-term and long-term strategic objectives. Under the ISOAP,
participants are given the opportunity to earn options to purchase Common Stock
upon achievement of the Company's short-term strategic objectives. Further, the
ISOAP encourages achievement of the Company's long-term strategic objectives by
providing that options, once earned, become exercisable over a four year period.
In addition, options under the ISOAP gain value only if management of the
Company is able to achieve and sustain improved operating performance at levels
which cause the price of the Common Stock to increase above the exercise price
of such options.
As part of the Company's reengineering and cost reduction programs
initiated during 1996, the Company strengthened its management team through the
addition of a number of key officers and managers. These new officers and
managers brought new skills, ideas and energy to the Company during the past
year and are responsible for the success of the Company's reengineering and cost
reduction efforts to date. In order to attract these new key officers and
managers to the Company and to provide them with the incentive to achieve the
Company's strategic objectives, the Company granted these officers and managers
options to purchase an aggregate of 126,500 shares of Common Stock under the
Option Plan.
As of May 14, 1997, 1,103,300 shares of Common Stock have been granted
under the Option Plan and are outstanding, and approximately 90,000 shares of
Common Stock under the Option Plan are reserved for future grants which the
Company is committed to make, leaving only 96,700 shares of Common Stock
available at that time for future grants under the Option Plan. The Company
believes that it requires a greater number of option shares than are currently
available under the Option Plan if it is to continue to use stock options to
attract and motivate its management team. Option shares available under the
Option Plan are expected to be used to honor commitments to officers hired in
the last year for future option grants, to attract a number of additional key
officers and managers required to complete the Company's management team and for
annual performance option grants to the Company's executive officers, officers
and key managers. Without the proposed amendment to the Option Plan, the Company
will not have sufficient option shares available for all of these purposes and
the Company will be required to limit its use of grants of stock options as part
of its executive and management compensation program.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
TO THE OPTION PLAN.
21
<PAGE> 25
DESCRIPTION OF OPTION PLAN
The Option Plan was first adopted by the Board of Directors on June 23,
1992 and the Option Plan and subsequent amendments have been approved by the
Company's shareholders. The Option Plan provides for the granting to employees
(including executive officers) of incentive stock options ("ISOs") within the
meaning of Section 422 of the Code and for the granting of nonqualified stock
options to employees (including executive officers), directors and consultants.
Currently, there are approximately 25 employees (including executive officers
and employee-directors), and seven non-employee directors eligible to
participate in the Option Plan.
The Option Plan is currently administered by the Stock Option Committee.
The Stock Option Committee determines who will receive options and the terms of
the options granted under the Option Plan, including the exercise price, number
of shares subject to the option, term and exercisability. The Stock Option
Committee currently is not permitted to grant options to purchase more than
375,000 shares to any salaried employee in any two consecutive fiscal years. In
addition, the Stock Option Committee cannot grant an ISO if, as a result of the
grant, the optionee would have the right in any calendar year to exercise for
the first time one or more ISOs for shares having an aggregate fair market value
(under all plans of the Company and determined for each share as of the date the
option to purchase the share was granted) in excess of $100,000. Generally, no
option may be transferred by the optionee other than by will or the laws of
descent and distribution. Each option may be exercised, during the lifetime of
the optionee, only by the optionee. The exercise price of all ISOs and
nonqualified stock options under the Option Plan must equal at least the fair
market value of the Common Stock of the Company on the date of grant as
calculated under the Option Plan. The exercise price of any ISO granted to an
optionee who owns stock possessing more than 10% of the voting power of the
Company's outstanding capital stock must equal at least 110% of the fair market
value of the Common Stock on the date of grant. Payment of the exercise price
may be made in cash, Common Stock or the retention of option shares which would
otherwise be transferred to the option holder upon exercise of any exercisable
stock option under the Option Plan. As of the close of business on May 1, 1997,
the price per share of Common Stock as quoted on the Nasdaq National Market was
$3.00.
The Option Plan may be amended from time to time by the Board of Directors
but shareholder approval will generally be required for any amendment which
would cause any ISO no longer to qualify as such or which would materially
increase the benefits to any option holder who is subject to Section 16 of the
Securities Exchange Act of 1934 with respect to options granted prior to October
24, 1996.
STOCK OPTIONS GRANTED UNDER THE OPTION PLAN
The following table sets forth the number of shares of Common Stock subject
to options granted under the Option Plan to the Named Officers, all persons who
received more than 5% of the option shares included in the Option Plan (other
than persons whose relationship with the Company has terminated without their
options becoming exercisable), each director-nominee, all non-employee directors
as a group, all current executive officers as a group and all other current
employees as a group. No options have been granted under the Option Plan to any
associate of any current director, executive officer or director-nominee. The
exercise prices of all options granted under the Option Plan, ranging from $3.15
to $12.28, were at or above the fair market value of the Common Stock as of the
respective grant dates. Options granted under the Option Plan generally become
exercisable in cumulative annual installments of 25% on each of the first four
anniversaries of the grant date. Options granted under the Option Plan generally
also become exercisable immediately upon the death or disability of the grantee
or a change in control of the Company, and the options granted to Messrs.
Jennings, Watkins, Miller and certain options granted to Messrs. Gorga, McClung
and Ker, which
22
<PAGE> 26
became exercisable by their terms on May 6, 1997, also become exercisable
immediately upon termination of employment without "cause".
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
SUBJECT TO
OPTIONS PREVIOUSLY
GRANTED UNDER
NAME OF PERSON OR GROUP OPTION PLAN
----------------------- -------------------
<S> <C>
Eugene Jennings, Chairman, President and Chief Executive
Officer and Director -- Nominee........................... 450,000(1)
Lou Gorga, Vice President and Chief Operating Officer....... 100,000(2)
Perry McClung, Executive Vice President and President of
USMC...................................................... 125,000(3)
Alan Ker, Vice President, Finance, Treasurer and Chief
Financial Officer......................................... 120,000(3)
Thomas Marquard, Vice President, Sales and Marketing of
USMC...................................................... 11,000
John Watkins, Vice Chairman and former Chairman, President
and Chief Executive Officer............................... 125,000(4)
Michael Miller, former Vice President, Sales and
Marketing................................................. 90,000(5)
Thomas R. Donahue, Director -- Nominee...................... 0
P. Thomas Hirsch, Director -- Nominee....................... 0
All Non-Employee Directors as a Group....................... 15,000
All Current Executive Officers as a Group................... 795,000(1)(2)(3)
All Other Current Employees (other than Executive Officers)
as a Group................................................ 293,300(6)
</TABLE>
- -------------------------
(1) Includes options to purchase a total of 75,000 shares which the Company
intends to grant during the next year under the Option Plan. For a
description of Mr. Jennings stock options under the Stock Option Plan, see
"Proposal 1 -- Nominees for Election as Directors -- Executive Compensation
-- Options."
(2) For a description of Mr. Gorga's stock options, granted or repriced in 1996
under the Option Plan, see "Proposal 1 -- Nominees for Election as Directors
-- Executive Compensation -- Options." Also includes options to purchase
20,000 shares of Common Stock, 2,500 of which become exercisable on each of
December 5, 1998 and 1999, and September 11, 1998 and 12,500 of which become
exercisable on September 11, 1999.
(3) For a description of Messrs. McClung's and Ker's stock options granted under
the Option Plan, see "Proposal 1 -- Nominees for Election as Directors --
Executive Compensation -- Options." Includes stock options to purchase
40,000 shares of Common Stock granted in 1997 to Mr. McClung under the
ISOAP.
(4) Includes an option for 50,000 shares of Common Stock which becomes
exercisable in cumulative annual installments of 5,458 shares beginning
December 31, 1993 through 1996, 8,733 shares beginning December 31, 1997
through 1999 and the remainder on January 1, 2000. Includes an option for
40,000 shares of Common Stock (the "Performance Option") which become
exercisable if (i) the closing price of the Common Stock exceeds certain
target prices, ranging from $12.00 to $18.00 per share, prior to certain
dates between December 6, 1996 and December 6, 1998, (ii) the optionee dies
or becomes permanently disabled, or (iii) a change in control of the Company
occurs in which shareholders receive consideration in excess of $10.00 per
share. Options to purchase 10,000 of such Performance Option shares have
expired.
(5) Mr. Miller's options expired in 1995 and 1996 in connection with the
termination of his employment with the Company.
(6) Includes options to purchase 110,000 shares of Common Stock granted under
the ISOAP. See "Proposal 1 -- Nominees For Election As Directors --
Compensation Committee and Stock Option Committee Report."
23
<PAGE> 27
FEDERAL INCOME TAX CONSEQUENCES
Under the Code as now in effect, at the time an ISO is granted or
exercised, the optionee will not be deemed to receive any income and the Company
will not be entitled to any deduction. However, the difference between the
exercise price and the fair market value of the shares of Common Stock on the
date of exercise is a tax preference item, which may subject the optionee to the
alternative minimum tax in the year of exercise. The holder of an ISO generally
will be accorded capital gain or loss treatment on the disposition of Common
Stock acquired by exercise of an ISO, provided the disposition occurs more than
two years after the date of grant and more than one year after exercise. An
optionee who disposes of shares acquired upon exercise of an ISO prior to the
expiration of the foregoing holding periods realizes ordinary income upon the
disposition equal to the difference between the exercise price and the lesser of
the fair market value of the shares on the date of exercise or the disposition
price. To the extent ordinary income is recognized by the optionee, the Company
may deduct a corresponding amount as compensation expense. Payment of the
exercise price by surrendering shares of Common Stock generally will not result
in the recognition of a capital gain or loss on the shares surrendered.
Upon the exercise of a nonqualifed stock option, an optionee will recognize
ordinary income equal to the difference between the exercise price and the fair
market value of the Common Stock acquired at the time of exercise and the
Company will receive a corresponding deduction. Payment of the exercise price by
surrendering shares of Common Stock generally will not result in the recognition
of a capital gain or loss on the shares surrendered. When the optionee disposes
of the shares acquired by the exercise of the option, any difference from the
fair market value of the shares on the date of exercise will be treated as
capital gain or loss.
The Company may withhold from an optionee's salary or other compensation
(or to secure payment from the optionee in lieu of withholding) all or any
portion of any withholding or other tax due with respect to any shares of Common
Stock deliverable under such optionee's option or the Committee may (but need
not) permit payment of such withholding by the Company's retention of shares of
Common Stock which would otherwise be transferred to the optionee upon exercise
of the option. In the event any Common Stock is retained by the Company to
satisfy all or any part of the withholding, the part of the withholding deemed
to have been satisfied by such Common Stock will be equal to the fair market
value of the shares of Common Stock retained by the Company.
SECURITIES REPORTING
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of the copies of such forms received by it
since January 1, 1996, or written representations from certain reporting persons
that no Form 5 reports were required for those persons, the Company believes
that all filing requirements applicable to its officers, directors and greater
than 10% beneficial owners were complied with during 1996, except that Alan Ker,
the Treasurer, Vice President Finance and Chief Financial Officer, filed one
late Form 4 report with respect to four options that were repriced during 1996
and one late Form 5 report with respect to one option grant; Lou Gorga, the Vice
President and Chief Operating Officer, filed one late Form 4 report with respect
to two options that were repriced during 1996 and one late Form 5 report with
respect to one option grant; and Perry McClung, the Executive Vice President,
filed one late Form 4 report with respect to four options that were repriced
during 1996.
24
<PAGE> 28
INDEPENDENT ACCOUNTANTS
The accounting firm of BDO Seidman LLP acted as independent accountants to
audit the financial statements of the Company and its consolidated subsidiaries
for 1996. The Audit Committee has not yet completed its evaluation of the 1996
audit process. As a result, the selection of the independent accountants to
audit the financial statements of the Company for the fiscal year ended December
31, 1997, will be made by the Board of Directors at a later date.
Representatives of BDO Seidman LLP are expected to be at the Annual Meeting and
to be available to respond to appropriate questions. Such representatives will
have the opportunity to make a statement if they desire to do so.
On December 31, 1996, the Audit Committee of the Board of Directors of the
Company determined not to retain the firm of Coopers & Lybrand LLP to audit the
Company's financial statements for the year ended December 31, 1996. Coopers &
Lybrand LLP had been the Company's principal accountants for the purpose of
auditing its financial statements since the organization of the Company.
The reports of Coopers & Lybrand LLP on the financial statements for the
years ended December 31, 1995 and 1994 contained no adverse opinion or
disclaimer of opinion, nor were they modified as to uncertainty, audit scope or
accounting principles, except as set forth below. An accountant's report of
Coopers & Lybrand LLP contained in a Form S-2 Registration Statement filed by
the Company with the Securities and Exchange Commission on December 8, 1995
contained a paragraph regarding uncertainty relating to the Company's tax
indemnification obligations to MML, Inc., the business of which was acquired by
the Company in 1991. Coopers & Lybrand LLP reissued this accountant's report on
January 16, 1996, in connection with Amendment No. 1 to such Registration
Statement without inclusion of the foregoing tax indemnification paragraph due
to a change in accounting standards, effective January 1, 1996, which permitted
the removal of this paragraph in Coopers & Lybrand LLP's accountant's report as
long as adequate disclosure regarding the same was contained in the financial
statements to which the accountant's report related. Since the Company's
financial statements relating to such accountant's report contained such
disclosure, Coopers & Lybrand LLP was no longer required to include the
foregoing tax indemnification paragraph in its accountant's report relating to
such financial statements.
The Company has had no disagreements with Coopers & Lybrand LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which disagreements, if not resolved to the
satisfaction of Coopers & Lybrand LLP, would have caused it to make reference to
the subject matter of the disagreements in connection with its reports relating
to the auditing of the Company's financial statements for the years ended
December 31, 1995 and 1994 or during the period January 1, 1996 to December 31,
1996.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1998 Annual
Meeting of Shareholders must be received by the Secretary of the Company at the
Company's principal executive offices on or before January 14, 1998.
Shareholders who wish to submit proposals for action or nominees for election at
a meeting of shareholders must comply with certain notice and informational
requirements set forth in the Company's bylaws.
25
<PAGE> 29
SHAREHOLDERS WHO ARE PHYSICIANS
Pursuant to Federal and State law, physicians are prohibited from
referring, recommending or arranging for a referral of clinical laboratory
services for which payment may be made under Medicare to the Company if such
persons or any member of their immediate family has an investment, compensation
or other financial relationship with the Company, including the ownership of
Common Stock. All owners of Common Stock who are physicians or have physicians
in their immediate family must report the physician's name and I.D. number to
the Company.
By order of the Board of Directors,
Thomas S. Vaughn, Secretary
May 14, 1997
26
<PAGE> 30
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
1992 STOCK OPTION PLAN, AS
AMENDED AND RESTATED MAY 14, 1997
ARTICLE 1
Identification of the Plan
1.1 Title. The plan described herein (the "Plan") shall be known as
the "Universal Standard Medical Laboratories, Inc. 1992 Stock Option Plan."
1.2 Purpose. The purpose of this Plan is (i) to reward Participants in
the Plan for services to Universal Standard Medical Laboratories, Inc. (the
"Company") and its Subsidiaries rendered by such persons after the date of
adoption of this Plan by the Company's stockholders, (ii) to provide
Participants in the Plan with significant additional incentive to promote the
financial success of the Company, and (iii) to provide an incentive which may
be used to induce able persons to enter into or remain in the employment of, or
to provide services to, the Company or any Subsidiary.
1.3 Defined Terms. Certain capitalized terms used in this Plan shall
have the meanings assigned for such terms in Section 10.1 of this Plan.
ARTICLE 2
Administration of this Plan
2.1 Committee's Powers. This Plan shall be administered by a committee
(the "Committee") composed of persons appointed by the Board of Directors of
the Company in accordance with the provisions of Section 2.2. The Committee
shall have full power and authority to prescribe, amend and rescind rules and
procedures governing administration of this Plan. The Committee shall have
full power and authority to interpret the terms of this Plan and the Options
granted hereunder, and the rules and procedures established by the Committee.
Each action of the Committee which is within the scope of the authority
delegated to the Committee by this Plan or by the Board shall be binding on all
persons.
2.2 Committee Membership. The Committee shall be composed of
non-employee members of the Board. The Board shall have the power to determine
the number of members which the Committee shall have and to change the number
of membership positions on the Committee from time to time but in no event
shall the Committee consist of less than two members of the Board. The Board
shall appoint all members to the Committee. The Board may from time to time
appoint members to the Committee in substitution for, or in addition to,
members previously appointed and may fill vacancies, however caused, on the
Committee. Any member of the Committee may be removed from the Committee by
the Board at any time
<PAGE> 31
without cause. If at any time no special committee has been constituted by the
Board especially for the purposes of this Plan, then the entire Board shall
have all powers and rights delegated to the "Committee" under this Plan.
ARTICLE 3
Persons Eligible to Receive Options
A person shall be eligible to be granted an Option only if, on the
proposed Granting Date for such Option, such person is an officer or director
of the Company or meets the following standards: (i) such person is employed by
the Company or a Subsidiary and such person has managerial, supervisory or
similar responsibilities or (ii) such person is an independent contractor who
provides key services to the Company or a Subsidiary. A person selected to be
granted an Option is herein called a "Participant."
ARTICLE 4
Options Grant
4.1 Power to Grant Options. The Committee shall have the right and the
power to grant at any time to any Participant an option entitling such person
to purchase Common Stock from the Company in such quantity, at such price, on
such terms and subject to such conditions consistent with the provisions of
this Plan as may be established by the Committee on or prior to the Granting
Date for such option; provided that, effective on and after May 2, 1996, no
Participant who is a salaried employee shall be eligible to receive aggregate
option grants under this Plan, in any two consecutive fiscal years of the
Company, to purchase more than 375,000 shares of the Common Stock.
4.2 Granting Date. An Option shall be deemed to have been granted under
this Plan on the date (the "Granting Date") on which the Committee designates
as the Granting Date at the time it approves such Option, provided that the
Committee may not designate a Granting Date with respect to any Option which is
earlier than the date on which the granting of such Option is approved by the
Committee.
4.3 Option Terms Which the Committee May Determine. The Committee shall
have the power to determine the Participants to whom Options are granted, the
number of Shares subject to each Option, the number of Options awarded to each
Participant and the time at which each Option is granted. Except as otherwise
expressly provided in this Plan, the Committee shall also have the power to
determine, at the time of the grant of each Option, all terms and conditions
governing the rights and obligations of the holder with respect to such Option,
including but not limited to: (a) the purchase price per Share or the method by
which the purchase price per Share will be determined; (b) the length of the
period during which the Option may be exercised and any limitations on the
number of Shares purchasable with the Option at any given time during such
period; (c) the times at which the Option may be exercised; (d) any conditions
precedent to be satisfied before the Option may be exercised; (e) any
restrictions on
<PAGE> 32
resale of any Shares purchased upon exercise of the Option; and (f) whether the
Option will constitute an Incentive Stock Option.
4.4 Option Agreement. No person shall have any rights under any Option
unless and until the Company and the person to whom such Option is granted have
executed and delivered an agreement expressly granting the Option to such
person and containing provisions setting forth the terms of the Option (an
"Option Agreement").
ARTICLE 5
Option Terms
5.1 Plan Provisions Control Option Terms. The terms of this Plan shall
govern all the Options. In the event any provision of any Option Agreement
conflicts with any term in this Plan as constituted on the Granting Date of
such Option, the term in this Plan as constituted on the Granting Date of the
Option shall control. Except as provided in Article 8, the terms of any Option
may not be changed after the Granting Date of such Option without the express
approval of the Option Holder.
5.2 Price Limitation. Subject to Article 8, the price at which each
Share may be purchased upon the exercise of any Option may not be less than the
Fair Market Value on the Granting Date for such Option, provided that if an
Incentive Stock Option is granted to a person who owns, on the Granting Date of
such Incentive Stock Option, stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company (or of any
parent or Subsidiary of the Company in existence on the Granting Date of such
Option), the price at which each Share may be purchased upon exercise of such
Incentive Stock Option may not be less than 110% of the Fair Market Value on
the Granting Date for such Option.
5.3 Term Limitation. No Incentive Stock Option may be granted under this
Plan which is exercisable more than ten years after its Granting Date. This
Section 5.3 shall not be deemed to limit the term which the Committee may
specify for any Options granted under the Plan which are not intended to be
Incentive Stock Options.
5.4 Transfer Limitations. No Incentive Stock Option or other Option
granted to any Section 16 Holder shall be transferable other than by will or
the laws of descent and distribution or exercisable during the lifetime of the
person to whom the Option is initially granted by anyone other than the initial
grantee. Notwithstanding the terms of the Option Agreement, if any Option
(other than an Incentive Stock Option) is issued to a Holder who is not a
Section 16 Holder on the Granting Date and such Holder becomes a Section 16
Holder before such Holder has fully exercised such Option, then such Option
shall not be transferable other than by will or the laws of descent and
distribution or exercisable during the lifetime of the initial grantee by
anyone other than the initial grantee. Subject to the preceding sentence,
Options (other than Incentive Stock Options) which are granted to anyone other
than a Section 16 Holder may be transferred (i) to any member of the initial
grantee's immediate family or (ii) to any inter vivos trust solely for the
benefit of any members of the initial grantee's immediate family or (iii) as a
result of the
<PAGE> 33
death of the initial grantee, testate or intestate. Nothing contained herein
shall be construed as making an Option transferable if the Option Agreement
provides otherwise. It shall be a condition precedent to any transfer of any
Option that the transferee executes and delivers an agreement acknowledging
that such Option has been acquired for investment and not for distribution and
is and shall remain subject to this Plan and the Option Agreement. The
"Holder" of any Option shall mean (i) the initial grantee or (ii) the person or
trust, if any, to whom the Option is transferred.
5.5 No Right to Employment Conferred. Nothing in this Plan or (in the
absence of an express provision to the contrary) in any Option Agreement (i)
confers any right or obligation on any person to continue in the employ of the
Company or any Subsidiary or to continue to provide services to the Company or
any Subsidiary as an independent contractor or (ii) affects or shall affect in
any way any person's right or the right of the Company or any Subsidiary to
terminate such person's employment or services to the Company or any Subsidiary
at any time, for any reason, with or without cause.
ARTICLE 6
Option Exercise
6.1 Normal Option Term. Except as otherwise provided in Section 6.3, 6.5
or in a Participant's Option Agreement, the right to exercise any Option shall
terminate at the earlier of the following dates: (i) the Termination Date of
the initial grantee of the Option and (ii) the Expiration Date of the Option.
6.2 Exercise Time. Except as provided in Section 6.5, each Option shall
become exercisable at the time provided in the Option Agreement, provided that
the Committee in its sole discretion shall have the right (but shall not in any
case be obligated) to permit the exercise of such Option prior to such time.
6.3 Extension of Exercise Time. The Committee in its sole discretion
shall have the right (but shall not in any case be obligated) to permit any
Option to be exercised after the Termination Date of the Holder of such Option.
Subject to Section 6.8, the Committee shall not have the right to permit the
exercise of any Option after its Expiration Date.
6.4 Exercise Procedures. Each Option shall be exercised by written
notice to the Company. Any Holder of any Option shall be required, as a
condition to such Holder's right to purchase securities with such Option, to
supply the Committee at such person's expense with such evidence,
representations, agreements or assurances (including but not limited to
opinions of counsel satisfactory to the Committee) as the Committee may deem
necessary or desirable in order to establish to the satisfaction of the
Committee the right of such person to exercise such Option, and of the
propriety of the sale of securities by reason of such exercise under the
Securities Act and any other laws or requirements of any governmental authority
specified by the Committee. The Company shall not be obligated to sell any
Shares subject to such Option until all evidence, representations, agreements
and assurances required by the Committee have been
<PAGE> 34
supplied. An Option Holder shall not have any rights as a stockholder with
respect to Shares issuable under any Option until and unless such Shares are
sold and delivered to such Option Holder. The purchase price of Shares
purchased upon the exercise of an Option shall be paid in full in cash or by
check by the Option Holder at the time of the delivery of such Shares, provided
that the Committee may (but need not) permit payment to be made by (i) delivery
to the Company of outstanding Shares, (ii) retention by the Company of Shares
which would otherwise be transferred to the Option Holder upon exercise of the
Option or (iii) any combination of cash, check, the Holder's delivery of
outstanding Shares and retention by the Company of Shares which would otherwise
be transferred to the Option Holder upon exercise of the Option. In the event
any Common Stock is delivered to or retained by the Company to satisfy all or
any part of the purchase price, the part of the purchase price deemed to have
been satisfied by such Common Stock shall be equal to the product derived by
multiplying the Fair Market Value as of the date of exercise times the number
of Shares delivered to or retained by the Company. The number of Shares
delivered to or retained by the Company in satisfaction of the purchase price
shall not be a number which when multiplied by the Fair Market Value as of the
date of exercise would result in a product greater than the purchase price. No
fractional Shares shall be delivered to or retained by the Company in
satisfaction of the purchase price. Any part of the purchase price paid in
cash or by check upon the exercise of any Option shall be added to the general
funds of the Company and may be used for any proper corporate purpose.
6.5 Death or Disability of Participant. Except as otherwise provided in
the Option Agreement, if the Holder of an Option dies or becomes permanently
disabled while such Option Holder is still employed by, or is providing
services as an independent contractor to, the Company or any Subsidiary, then
the right to exercise all unexpired installments of such Option shall be
accelerated and shall accrue as of the date of death. Except as otherwise
provided in the Option Agreement and subject to Section 6.8, if the Holder of
an Option dies and such Option is exercisable at the date of death (for any
reason including acceleration pursuant to the preceding sentence), then the
Holder's estate or the person or persons to whom the Holder's rights under the
Option shall pass by reason of the Holder's death shall have the right to
exercise the Option for one year after the date of death and the Option shall
expire at the end of such one year period.
6.6 [RESERVED]
6.7 Taxes. The Company or any Subsidiary shall be entitled, if the
Committee deems it necessary or desirable, to withhold from an Option Holder's
salary or other compensation (or to secure payment from the Option Holder in
lieu of withholding) all or any portion of any withholding or other tax due
from the Company or any Subsidiary with respect to any Shares deliverable under
such Holder's Option or the Committee may (but need not) permit payment of such
withholding by the Company's retention of Shares which would otherwise be
transferred to the Option Holder upon exercise of the Option. In the event any
Common Stock is retained by the Company to satisfy all or any part of the
withholding, the part of the withholding deemed to have been satisfied by such
Common Stock shall be equal to the product derived by multiplying the Fair
Market Value as of the date of exercise by the number of Shares retained by the
Company. The number of Shares retained by the Company in satisfaction of
withholding shall not be a number which when multiplied by the Fair Market
Value as of the date of exercise
<PAGE> 35
would result in a product greater than the withholding amount. No fractional
Shares shall be retained by the Company in satisfaction of withholding. The
Company may defer delivery under a Holder's Option until indemnified to its
satisfaction.
6.8 Securities Law Compliance. Each Option shall be subject to the
condition that such Option may not be exercised if and to the extent the
Committee determines that the sale of securities upon exercise of the Option
may violate the Securities Act or any other law or requirement of any
governmental authority. The Company shall not be deemed by any reason of the
granting of any Option to have any obligation to register the Shares subject to
such Option under the Securities Act or to maintain in effect any registration
of such Shares which may be made at any time under the Securities Act. An
Option shall not be exercisable if the Committee or the Board determines there
is non-public information material to the decision of the Holder to exercise
such Option which the Company cannot for any reason communicate to such Holder.
Notwithstanding Sections 6.1 and 6.3 and the terms of the Option Agreement, if
(i) any Holder makes a bona fide request to exercise any Option which complies
with Section 6.4, (ii) the Committee or the Board determines such Option cannot
be exercised for a period of time pursuant to this Section 6.8 and (iii) such
Option expires during such period, then the term of such Option shall be
extended until the end of such period.
ARTICLE 7
Shares Subject to This Plan
An aggregate of 1,800,000 shares of Common Stock (after giving effect to
the merger of Elan Holdings Corp. with and into Universal Standard Medical
Laboratories, Inc. and the 10.33 for 1 split of the outstanding Common Stock,
effective October 2, 1992) shall be subject to this Plan. The Options shall be
limited so that the sum of the following shall not as of any given time exceed
1,800,000 Shares: (i) all Shares subject to Options outstanding under this
Plan at the given time and (ii) all Shares which shall have been sold by the
Company by reason of the exercise at or prior to the given time of any of the
Options; provided, that unless the Board shall otherwise determine, for each
Share delivered to or retained by the Company as payment of all or part of the
purchase price upon the exercise of any Option under Section 6.4 or in
satisfaction of all or any part of the withholding amount under Section 6.7,
the aggregate number of Shares subject to this Plan shall be increased by one
Share. In the event any Option shall expire or be terminated or cancelled
before it is fully exercised, then all Shares formerly subject to such Option
as to which such Option was not exercised shall be available for any Option
subsequently granted in accordance with the provisions of this Plan.
ARTICLE 8
Adjustments to Reflect Organic Changes
The Board shall appropriately and proportionately adjust the number and
kind of Shares subject to outstanding Options, the price for which Shares may
be purchased upon the exercise of outstanding Options, and the number and kind
of Shares available for Options subsequently
<PAGE> 36
granted under this Plan to reflect any stock dividend, stock split, combination
or exchange of shares, merger, consolidation or other change in the
capitalization of the Company which the Board determines to be similar, in its
substantive effect upon this Plan or the Options, to any of the changes
expressly indicated in this sentence. The Board may (but shall not be required
to) make any appropriate adjustment to the number and kind of Shares subject to
outstanding Options, the price for which Shares may be purchased upon the
exercise of outstanding Options, and the number and kind of Shares available
for Options subsequently granted under this Plan to reflect any spin-off,
spin-out or other distribution of assets to stockholders or any acquisition of
the Company's stock or assets or other change which the Board determines to be
similar, in its substantive effect upon this Plan or the Options, to any of the
changes expressly indicated in this sentence. The Committee shall have the
power to determine the amount of the adjustment to be made in each case
described in the preceding two sentences, but no adjustment approved by the
Committee shall be effective until and unless it is approved by the Board. In
the event of any reorganization, reclassification, consolidation, merger or
sale of all or substantially all of the Company's assets which is effected in
such a way that holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock, the Board may (but shall not be
required to) substitute the per share amount of such stock, securities or
assets for Shares upon any subsequent exercise of any Option. If any
fractional Share becomes subject to any Option as a result of any change made
under this Article 8, then (i) such Option may not be exercised with respect to
such fractional Share until and unless such Option is exercised as to all other
Shares subject to such Option and (ii) if such Option is exercised with respect
to such fractional Share, the Company shall have the right to deliver to the
Holder in lieu of such fractional Share cash in an amount equal to the product
derived by multiplying the fraction representing the portion of a full Share
represented by such fractional Share times the Fair Market Value on the
exercise date of the Option with respect to such fractional Share established
as prescribed in this Plan.
ARTICLE 9
Amendment and Termination of This Plan
9.1 Amendment. Except as provided in the following two sentences, the
Board shall have complete power and authority to amend this Plan at any time
and no approval by the Company's stockholders or by any other person, committee
or other entity of any kind shall be required to make any amendment approved by
the Board effective. The Board shall not, without the affirmative approval of
the Company's stockholders, amend the Plan in any manner which would cause any
outstanding Incentive Stock Options to no longer qualify as Incentive Stock
Options. If any Section 16 Holder holds any Option granted prior to October
24, 1996, the Board shall not, without the affirmative approval of the
Company's stockholders, make any amendment to this Plan which materially
increases the benefits to such Holder under this Plan with respect to Options
granted prior to October 24, 1996. No termination or amendment of this Plan
may, without the consent of the Holder of any Option prior to termination or
the adoption of such amendment, adversely affect the rights of such Holder
under such Option.
<PAGE> 37
9.2 Termination. The Board shall have the right and the power to
terminate this Plan at any time, provided that no Incentive Stock Options may
be granted after the tenth anniversary of the adoption of this Plan. No Option
shall be granted under this Plan after the termination of this Plan, but the
termination of this Plan shall not have any other effect. Any Option
outstanding at the time of the termination of this Plan may be exercised after
termination of this Plan at any time prior to the Expiration Date of such
Option to the same extent such Option would have been exercisable had this Plan
not terminated.
ARTICLE 10
Interpretation of This Plan
10.1 Definitions. Each term defined in 10.1 has the meaning indicated in
this 10.1 whenever such term is used in this Plan:
"Board of Directors" or "Board" mean the Board of Directors of the Company
as it may be constituted from time to time.
"Cause" shall have the meaning set forth in any employment agreement
between the Company and a Participant or, in the absence of such agreement,
shall mean (i) a Participant's willful and repeated failure to comply with the
lawful directives of the Board or of such Participant's supervisory personnel,
(ii) gross negligence or willful misconduct by a Participant in the performance
of his duties to the Company or its Subsidiaries or any act of dishonesty or
fraud with respect to the Company and/or its Subsidiaries, or (iii) the
commission by a Participant of an act (including but not limited to a felony or
a crime involving moral turpitude) causing material harm to the standing and
reputation of the Company and/or its Subsidiaries, in each case as determined
in good faith by the Board.
"Code" means the Internal Revenue Code of 1986, as amended or any
successor statute.
"Committee" has the meaning assigned such term in Section 2.1.
"Common Stock" means the Company's Common Stock, no par value.
"Company" means Universal Standard Medical Laboratories, Inc., except that
if at any time any corporation or other entity has acquired all or a
substantial part of the assets of the "Company" (as herein defined) and has
agreed to assume the obligations of the "Company" under this Plan, or is the
survivor in a merger or consolidation to which the "Company" was a party, such
corporation or other entity shall be deemed to be the "Company" at the given
time.
"Disability" shall mean a Participant's inability to substantially perform
normal duties for a continuous period of six months or more.
"Expiration Date" means the date specified in the Option Agreement between
the Company and the Holder as the expiration date of such Option. If no
expiration date is specified
<PAGE> 38
in the Option Agreement relating to any Option, then the Expiration Date of
such Option shall be the day prior to the tenth anniversary of the Granting
Date of such Option. Notwithstanding the preceding sentence, if the person to
whom any Incentive Stock Option is granted owns, on the Granting Date of such
Option, stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company (or of any parent of Subsidiary of
the Company in existence on the Granting Date of such Option), and if no
earlier expiration date is specified in the Option Agreement relating to such
Option, than the Expiration Date of such Option shall be the day prior to the
fifth anniversary of the Granting Date of such Option.
"Fair Market Value" means:
(i) for a share of Common Stock, the average of the closing prices
of the sales of the Common Stock on all securities exchanges on which the
Common Stock may at the time be listed or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day or, if on any day the
Common Stock is not so listed, the sales prices of the Common Stock as of 4:00
p.m., New York time, on such day as reported on the Nasdaq Stock Market's
National Market or SmallCap Market or, if the Common Stock is not reported on
the Nasdaq Stock Market's National Market or SmallCap Market on such day, the
average of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which Fair Market Value
is being determined and the 20 consecutive trading days prior to such day or,
if the Common Stock is not so listed or quoted, as determined in good faith by
the Committee; and
(ii) for a Vested Option, the excess (if any) of the Fair Market
Value of a share of Common Stock (as determined in accordance with clause (i))
over the Exercise Price.
"Granting Date" has the meaning assigned such term in Section 4.2.
"Holder" has the meaning assigned such term in Section 5.4.
"Incentive Stock Option" means an incentive stock option, as defined in
Section 422 of the Code, which is granted pursuant to this Plan.
"Option" shall mean each option to purchase Common Stock which shall be
granted by the Committee pursuant to the Provisions of this Plan.
"Option Agreement" has the meaning such term is given in Section 4.4.
"Original Cost" shall mean the original purchase and/or exercise price of
the Shares acquired pursuant to the exercise of Options, adjusted as
appropriate pursuant to Article 8.
"Participant" has the meaning assigned such term in Article 3.
<PAGE> 39
"Plan" has the meaning assigned such term in Section 1.1.
"Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of 1934,
or any successor provision.
"Section 16 Holder" means any person who, with respect to the Company, is
subject to Section 16 of the Securities Exchange Act of 1934 as amended at any
time or any law or statute which succeeds Section 16.
"Securities Act" means the Securities Act of 1933, as amended and the
rules and regulations promulgated thereunder.
"Share" means a share of Common Stock.
"Subsidiary" means any corporation of which the securities having a
majority of the ordinary voting power in electing the board of directors are,
at the time as of which any determination is being made, owned by the Company
either directly or through one or more Subsidiaries.
"Termination Date" means the first date on which the initial grantee of an
Option is not employed by, nor providing services as an independent contractor
to, either the Company or any Subsidiary for any reason (including but not
limited to voluntary or involuntary termination of employment, death or
Disability or voluntary or involuntary termination of the relationship with the
Company or any Subsidiary as an independent contractor).
"Unvested Options" shall mean, as to any Participant as of a particular
date, those Options which are not Vested Options.
"Vested Options" shall mean, as to any Participant as of a particular
date, those Options that are presently exercisable by such Participant as of
such date.
10.2 Captions. The captions (i.e., all underlined words) used in this
Plan are for convenience only, do not constitute a part of this Plan, and shall
not be deemed to limit, characterize or affect in any way any provision of this
Plan. All provisions in this Plan shall be construed as if no captions had
been used in this Plan.
10.3 Severability.
(a) General. Whenever possible, each provision in this Plan and in
every Option at any time granted under this Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Plan or any Option at any time granted under this Plan is held to be
prohibited by or invalid under applicable law, then (i) such provision shall be
deemed amended to accomplish the objectives of the provision as originally
written to the fullest extent permitted by law and (ii) all other provisions of
this Plan and every Option at any time granted under this Plan shall remain in
full force and effect.
<PAGE> 40
(b) Incentive Stock Options. Whenever possible, each provision in
this Plan and in every Option at any time granted under this Plan which is
evidenced by an Option Agreement which expressly states such Option is intended
to constitute an Incentive Stock Option under Section 422 of the Code (an
"intended ISO") shall be interpreted in such manner as to entitle such intended
ISO to the tax treatment afforded by the Code to Incentive Stock Options under
Section 422 of the Code, but if any provision of this Plan or any intended ISO
at any time granted under this Plan is held to be contrary to the requirements
necessary to entitle such intended ISO to the tax treatment afforded by the
Code to Incentive Stock Options under Section 422 of the Code, then (i) such
provision shall be deemed to have contained from the outset such language as
shall be necessary to entitle such intended ISO to the tax treatment afforded
by the Code to Incentive Stock Options under Section 422 of the Code, and (ii)
all other provisions of this Plan and such intended ISO shall remain in full
force and effect. If any Option Agreement covering an intended ISO granted
under this Plan does not explicitly include any terms required to entitle such
intended ISO to the tax treatment afforded by the Code to Incentive Stock
Options under Section 422 of the Code, then all such terms shall be deemed
implicit in the intention to afford such treatment to such Option and such
Option shall be deemed to have been granted subject to all such terms.
10.4 No Strict Construction. No rule of strict construction shall be
applied against the Company, the Committee, or any other person in the
interpretation of any of the terms of this Plan, any Option or any rule or
procedure established by the Committee.
10.5 Choice of Law. This Plan and all documents contemplated hereby, and
all remedies in connection therewith and all questions or transactions relating
thereto, shall be construed in accordance with and governed by the laws of the
State of Michigan.
* * * *
<PAGE> 41
================================================================================
PROXY PROXY
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF UNIVERSAL STANDARD MEDICAL LABORATORIES,
INC.
The undersigned hereby constitutes and appoints Eugene E.
Jennings, Alan S. Ker and Thomas S. Vaughn, and each of them,
attorneys, agents and proxies with power of substitution, to vote all
the shares of Common Stock of Universal Standard Medical Laboratories,
Inc. (the "Company") that the undersigned is entitled to vote at the
Annual Meeting of Shareholders of the Company to be held at the
Holiday Inn Crowne Plaza, 8000 Merriman Road, Romulus, Michigan on
Tuesday, June 17, 1997 at 10:30 a.m., local time, and at any
adjournments thereof, upon the following matters, all of which are
proposed by the Company:
<TABLE>
<S> <C>
1. FOR the election as directors [ ] WITHHOLD AUTHORITY [ ]
of all nominees listed below for all nominees listed below.
(except as marked to the contrary below).
</TABLE>
NOMINEES: Thomas R. Donahue, P. Thomas Hirsch and Eugene E. Jennings.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THAT NOMINEE'S NAME ON THE SPACE PROVIDED
BELOW.)
----------------------------------------------------------------------
UNLESS AUTHORITY IS WITHHELD, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF ALL OF THE NOMINEES NAMED ABOVE.
2. Proposal to change the name of the Company. [ ] FOR [
] AGAINST [ ] ABSTAIN
3. Proposal to approve and adopt the amendment to the Company's 1992
Stock Option Plan. [ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed and dated on reverse side)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED; IF NO DIRECTION IS MADE WITH RESPECT TO A PROPOSAL, THIS
PROXY WILL BE VOTED FOR SUCH PROPOSAL. In their discretion the proxies
are also authorized to vote upon such other matters as may properly
come before the meeting, including the election of any person to the
Board of Directors where a nominee named in the Proxy Statement dated
May 14, 1997, is unable to serve or, for good cause, will not serve.
The undersigned acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the Proxy Statement dated May 14, 1997,
and the 1996 Annual Report to Shareholders and ratifies all that the
proxies or either of them or their substitutes may lawfully do or
cause to be done by virtue hereof and revokes all former proxies.
<TABLE>
<S> <C>
NOTE: Please sign exactly as name(s) appear(s) on stock Signature.................................................
records. When signing as attorney, administrator, trustee,
guardian or corporate officer, please so indicate.
Signature.................................................
Date....................
Date....................
</TABLE>
