OLD REPUBLIC
INTERNATIONAL CORPORATION
Notice of the Annual Meeting of Shareholders
To be held May 26, 2006
To the Shareholders of
OLD REPUBLIC INTERNATIONAL CORPORATION
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of OLD
REPUBLIC INTERNATIONAL CORPORATION will be held in Room 2200 at the offices of
the Company, 307 North Michigan Avenue, Chicago, Illinois 60601, on Friday, May
26, 2006 at 3:00 P.M. Central Daylight Savings Time, for the purpose of
considering and acting upon the following matters:
1. The election of four Class 1 directors;
2. To consider and act upon a proposal to approve the Old Republic
International Corporation 2006 Incentive Compensation Plan; and
3. To transact such other business as may properly come before the meeting.
Shareholders of record at the close of business on March 21, 2006 will be
entitled to vote, either in person or by proxy. Shareholders who do not expect
to attend in person are urged to execute and return the accompanying proxy in
the envelope enclosed.
The annual report of the Company for the year 2005 is being mailed to all
shareholders of record with this Notice and the Proxy Statement.
By order of the Board of Directors.
SPENCER LEROY III
Secretary
Chicago, Illinois
March 31, 2006
Proxy Statement
OLD REPUBLIC INTERNATIONAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
May 26, 2006
GENERAL INFORMATION
This proxy statement is being furnished to the shareholders of Old Republic
International Corporation, a Delaware corporation (the "Company"), 307 North
Michigan Avenue, Chicago, Illinois 60601, in connection with the solicitation of
proxies by its Board of Directors for use at the annual meeting of shareholders
to be held on May 26, 2006 and any adjournments thereof. The approximate date on
which this proxy statement and the accompanying proxy are first being sent to
the shareholders is March 31, 2006.
The proxy is revocable at any time before it is voted by written
notification to the persons named therein as proxies, which may be mailed or
delivered to the Company at the above address. All shares represented by
effective proxies will be voted at the meeting and at any adjournments thereof.
If the enclosed proxy is properly executed and returned in time for voting
with a choice specified thereon, the shares represented thereby will be voted as
indicated thereon. If no specification is made, the proxy will be voted by the
proxy committee for the election as directors of the nominees named below (or
substitutes therefor if any nominees are unable or refuse to serve); for the
approval of the Company's 2006 Incentive Compensation Plan; and in its
discretion upon such matters not presently known or determined which may
properly come before the meeting.
The Company has one class of stock outstanding, Common Stock, $1.00 par
value per share ("Common Stock"). On February 2, 2006, 229,597,096 shares of
Common Stock were outstanding and entitled to one vote each on all matters
considered at the meeting. Shareholders of record as of the close of business on
March 21, 2006 are entitled to notice of and to vote at the meeting. There are
no cumulative voting rights with respect to the election of directors.
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation shows with respect to (i) each person who is known
to be the beneficial owner of more than 5% of the Common Stock of the Company;
(ii) each director and executive officer of the Company; and (iii) all directors
and executive officers, as a group: (a) the total number of shares of Common
Stock beneficially owned as of March 1, 2006 and (b) the percent of the class of
stock so owned as of the same date:
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Amount and
Nature of Percent
Name of Beneficial of
Title of Class Beneficial Owner Ownership Class(*)
------------------------------------ ------------------------------------------ -------------- ----------
Common Stock
Shareholders' beneficial ownership Franklin Mutual Advisors, LLC. 17,211,645 (1) 7.5
of more than 5% of the Common Stock 51 John F Kennedy Parkway
(excluding directors) Short Hills, NJ 07078
Franklin Resources, Inc. 12,207,540 (1) 5.3
One Franklin Parkway
San Mateo, California 94403-1906
Inter Capital Company of Chicago as the
trustee of the
Old Republic International Corporation 11,657,768 (2) 5.1
Employees Savings and Stock
Ownership Plan
Messrs. Bischof, Legg, Popp, Steiner and
Zucaro as members of The
Executive Committee
307 North Michigan Avenue
Chicago, Illinois 60601
Other Shares Percent
Name of Shares Subject to Shares Held by Beneficially of
Common Stock Beneficial Owner Stock Options(*) Employee Plans (*) Owned (*) Total Class(*)
----------------- ------------------- ----------------- ------------------- ----------------- ----------- --------
Directors' and Harrington Bischof - - 20,239(4) 20,239 **
executive Jimmy A. Dew 657,188 153,164 (3) 545,538(5) 1,355,890 0.6
officers' John M. Dixon - - 7,684 7,684 **
beneficial James A. Kellogg 44,445 34.125 (3) 375,562 454,132 0.2
ownership Peter Lardner - 7,379 84,378(6) 91,757 **
Wilbur S. Legg - - 87,780(7) 87,780 **
Spencer LeRoy III 322,578 11,853 (3) 57,722(8) 392,153 0.2
Karl W. Mueller 10,625 - 1,250 11,875 **
Christopher S. Nard 321,307 7,842 1,000 330,149 0.1
John W. Popp - - 19,500 19,500 **
William A. Simpson 797,343 77,967 (3) 318,984(9) 1,194,294 0.5
Arnold L. Steiner - - 820,869(10) 820,869 0.4
Fredricka Taubitz - - 5,000 5,000 **
Charles F. Titterton - - 8,561 8,561 **
Dennis Van Mieghem - - 5,500(11) 5,500 **
Steven R. Walker - - 4,840(12) 4,840 **
William G. White, Jr. - - 87,210 87,210 **
Rande K. Yeager 27,720 15,909 (3) 1,250 44,879 **
Aldo C. Zucaro 1,253,438 260,964 (3) 764,142 2,278,544 0.9
All executive officers
and directors,
as a group (20) 3,498,894 593,090 3,226,134 7,318,118 3.1
============================================================================================================================
* Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. Common shares used for
calculation purposes include the equivalent common shares that may be
issued upon conversion by the beneficial owner of Preferred Stock
convertible within 60 days.
** Less than one-tenth of one percent.
(1) Reflects the number of shares shown in the most recent Schedule 13G filings
with the Securities and Exchange Commission through February 15, 2006.
Franklin Mutual Advisers, LLC., a subsidiary of Franklin Resources, Inc.,
reports that it has advisory contracts pursuant to which Franklin Mutual
Advisors, LLC is granted investment and voting powers over these securities
and for Rule 13d-3 purposes may be considered the beneficial owner of these
shares. Both entities state that the voting and investments of each are
exercised independently.
(2) Under the terms of the Old Republic International Corporation Employees
Savings and Stock Ownership Plan ("ESSOP"), a participant is entitled to
vote the Company stock held by the ESSOP, the shares of which have been
allocated to the participant's account. The Executive Committee of the
Company, pursuant to the ESSOP, is authorized to vote the Company stock
held by the ESSOP until such time as the shares of such stock has been
allocated to a participant's account or where a participant fails to
exercise his or her voting rights. Additionally, the Executive Committee
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may be deemed to have investment power with respect to stock held by the
ESSOP. The Executive Committee is composed of Messrs. Bischof, Legg, Popp,
Steiner and Zucaro. Under the rules of the Securities and Exchange
Commission, each of them may be deemed to be the beneficial owner of such
shares of Common Stock by virtue of such shared voting and investment
power.
(3) Includes only the shares that have been allocated to the employer matching
and employee savings accounts of the director or executive officer as a
participant in the ESSOP. Excludes those shares for which the director or
executive officer may be deemed to have investment and voting power as a
result of being a member of the Executive Committee. Includes shares of the
Company's stock held in the Bituminous Casualty Corporation 401K Plan for
Mr. Lardner and shares of the Company's stock held by the RMIC Profit
Sharing Plan for Messrs. Dew and Simpson.
(4) Includes 8,437 shares held in trust for Mr. Bischof's benefit.
(5) Includes 209,471 shares owned by Mr. Dew's wife.
(6) Includes 56,258 shares held in a living trust of which Mr. Lardner's wife
is the trustee and for which Mr. Lardner disclaims beneficial ownership.
Excludes 8,085 shares held in trust for Mr. Larder's wife as an income
beneficiary for which Mr. Lardner disclaims beneficial ownership.
(7) Includes 80,415 shares held in trust for Mr. Legg's benefit and 7,365
shares held in trust for Mrs. Legg's benefit for which Mr. Legg disclaims
beneficial ownership.
(8) Includes 16,617 shares held in trust for Mr. LeRoy's benefit.
(9) Includes 134,648 shares owned by Mr. Simpson's wife.
(10) Includes 270,237 shares owned by Mr. Steiner directly, 22,350 shares owned
by Mr. Steiner's wife directly, 528,281 shares held in trust for Mr.
Steiner's children. Excludes 91,201 shares held by the Steiner Foundation
for which Mr. Steiner disclaims beneficial ownership.
(11) Includes 1,250 shares owned by Mr. Van Mieghem's wife and 125 shares held
in trust for Mr. Van Mieghem's benefit.
(12) Includes 3,715 shares held in trust for Mr. Walker's benefit.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than ten percent of
the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Based solely on
reports and other information submitted by executive officers, directors and
such other persons required to file, the Company believes that during the year
ended December 31, 2005 all reports required by Section 16(a) have been properly
filed except that through an oversight by his agents, Mr. Steiner made two late
filings concerning shares sold by a limited liability corporation of which he
was both an equity owner and a manager. Neither filing was made more than two
days late.
THE BOARD OF DIRECTORS AND ITS STANDING COMMITTEES
The Company's Board of Directors has the responsibility to review the
overall operations of the Company. The Board members are kept informed of the
Company's results of operations and proposed plans and business objectives
through periodic reports sent to them by the Company's management or presented
at Board and Committee meetings. The Board met four times last year, once each
quarter. Each incumbent director attended at least 75% of the aggregate of the
meetings of the Board of Directors and Committees on which each served during
2005.
Nine of the Company's thirteen current directors have no material
relationships with the Company, apart from their directorships, and are
independent, as that term is used in Section 303A.02 of the Listing Standards of
the New York Stock Exchange ("NYSE"). The independent directors as determined by
the Board of Directors, are Messrs. Bischof, Dixon, Legg, Popp, Steiner,
Titterton, Van Mieghem, White and Ms. Taubitz. The independent directors have
selected from among themselves a Lead Director and met on a regular basis during
2005 in executive sessions apart from the non-independent directors and
management. The Lead Director position rotates among the independent directors
for terms not exceeding two years each. His or her successor will be nominated
by the Nominating Committee and elected by the independent directors. The Lead
Director for 2005 was Wilbur Legg. Succeeding him as the Lead Director in 2006
will be Arnold L. Steiner. Any interested party wishing to express concerns to
the Lead Director or the independent directors may do so by writing to:
Old Republic International Corporation
307 North Michigan Avenue
Chicago, Illinois 60601
The Company's Secretary will promptly forward all such correspondence to
the Lead Director.
Directors' Compensation
Directors of the Company receive an annual retainer of $28,800 plus $2,400
for each Board or Committee meeting they attend. Directors of the Company or any
of its subsidiaries who are full time employees do not receive an annual
retainer but receive $2,400 for each meeting they attend, as members, of the
Board or a Committee of the Company, other than meetings of the Executive
Committee. Mr. Popp as Chairman of the Audit Committee is paid an additional
annual retainer of $15,000. Several independent directors also serve as
directors for subsidiary companies. The fees for their serving on the boards and
committees of these companies ranged from $1,500 to $18,000 for 2005. The total
compensation paid to the Company's independent directors varied depending upon
the number of boards and committees on which each director served. However, the
total annual compensation paid, whether by the Company or a subsidiary, to each
independent director ranged from $73,500 to $146,000 for 2005. The Company and
its subsidiaries, also, either directly pay, or reimburse directors for travel,
lodging and related expenses incurred in attending meetings.
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Board Committees
The Board of Directors has four principal standing committees.
The Executive Committee is empowered to exercise the authority of the Board
of Directors in the management of the business and affairs of the Company
between the meetings of the Board, except as provided in the By-laws or limited
by the provisions of the General Corporation Law of the State of Delaware. The
Committee operates pursuant to a written charter. It is authorized to evaluate
the performance of senior executives, to review and approve the Company's
investment policy, to review and approve the Company's dividend and
capitalization policies, and to evaluate and make recommendations with regard to
executive succession. The Committee also supervises the Company's pension and
Employees Savings and Stock Ownership plans. The Committee, which is currently
composed of Messrs. Bischof, Legg, Popp, Steiner, and Zucaro, met four times
during 2005 and took action by unanimous written consent three times. Mr. Zucaro
is Chairman of the Committee.
The Audit Committee is empowered to oversee the integrity of the Company's
financial statements, the Company's compliance with legal and regulatory
requirements, the independent qualifications and performance of the Company's
internal and external auditors and the selection of the Company's independent
external auditors. The Committee also is required to annually produce a report
which is printed below. The Committee operates pursuant to a written charter,
approved by the Board of Directors, a copy of which is attached as Exhibit A,
and is subject to an annual performance evaluation. While information appearing
on the Company's website is not incorporated by reference in this Proxy
statement, the Committee's charter may be viewed on the Company's website at
www.oldrepublic.com. Printed copies are available to shareholders of the Company
upon request. The Committee is composed of eight independent directors who are
considered by the Board of Directors to be financially literate. The Committee
members currently are: Messrs. Bischof, Legg, Popp, Steiner, Titterton, Van
Mieghem, White and Ms. Taubitz. The Audit Committee had four regularly scheduled
meetings during 2005, three meetings with the Company's independent auditors
prior to the Company's filing of quarterly reports, and it held four special
meetings which included meetings with the Company's Chief Financial Officer and
independent auditors. Mr. Popp is the Committee Chairman. Each member was
considered in the judgment of the Company's Board of Directors to be
independent, as that term is used in paragraph (b)(1)(ii) of the SEC's Rule
10A-3 and Section 303A.02 of the NYSE's Listing Standards. No member served on
the audit committees of three or more unrelated publicly held companies. Four
members of the Committee, Messrs. Popp, Titterton, Van Mieghem and Ms. Taubitz,
each qualify in the judgment of the Board of Directors as an audit committee
financial expert, as that term is used in Item 401(h) of the SEC's Regulation
S-K. A member of the Audit Committee during 2005 and for many years before that,
Mr. William G. White, Jr. has indicated that he will not stand for re-election
when his term expires with the shareholders' meeting on May 26, 2006.
For the year ended December 31, 2005, the Committee selected the accounting
firm of PricewaterhouseCoopers LLP ("PwC") as its independent registered public
accounting firm ("independent auditors") to examine the Company's consolidated
financial statements. A member of PwC is expected to attend the Company's Annual
Meeting of Shareholders. The firm's members will be provided with an opportunity
to make an appropriate statement, if so desired, and will be available to
respond to questions. PwC's aggregate fees incurred by the Company for
professional services for the past five years are shown below. The Company has
been advised that PwC's much greater fees for 2004 and 2005 are primarily
reflective of the firm's added work to comply with its interpretation of
requirements imposed by the Sarbanes Oxley Act and the Public Companies
Accounting Oversight Board.
Type of Fees 2005 2004 2003 2002 2001
------------ ------------- ------------- ------------- ------------- -------------
Audit Fees (a)................. $ 3,992,418 $ 6,664,745 $ 1,808,879 $ 1,430,778 $ 1,392,405
Audit Related Fees (b)......... 581,709 467,184 351,163 281,025 252,200
Tax Fees....................... 8,772 8,199 - - -
All Other Fees................. 3,000 8,411 8,145 - -
------------- ------------- ------------- ------------- -------------
Total................... $ 4,585,898 $ 7,148,539 $ 2,168,187 $ 1,711,803 $ 1,644,605
============= ============= ============= ============= =============
(a) The total 2004 fees of $7,148,539 shown above are $573,738 higher than
previously reported, and reflect final billings by PwC subsequent to
the preparation of the 2005 Proxy Statement.
(b) Includes fees relating to audits of the company's various benefit
plans and actuarial opinions of the Company's loss and loss adjustment
expense reserves required by insurance regulations.
The term "Audit Fees" refers to fees for professional services rendered by
PwC for the audit of the Company's annual financial statements included in the
Company's Form 10-K and review of financial statements included in the Company's
Forms 10-Q and services that are normally provided by PwC in connection with
audits of statutory financial statements and regulatory filings. "Audit Related
Fees" refers to fees for assurance and related services by PwC that are
reasonably related to the performance of the audit or review of the Company's
financial statements and are not reported under "Audit Fees". They consisted
primarily of fees for actuarial opinions required for regulatory purposes on
insurance subsidiaries' claim reserves, audits of employee benefit plans and
assistance in certain state insurance department examinations. "Tax Fees" refers
4
to fees for professional services rendered by PwC for tax compliance. The term
"All Other Fees" refers to fees for products and services provided by PwC, other
than those reported under the preceding categories, and consisted of a charge
for utilizing certain software for the Company's Canadian operations.
The Charter of the Audit Committee requires that the Audit Committee
pre-approve all non-audit work to be performed by the Company's independent
auditors. In determining whether to approve non-audit services to be performed
by the audit firm, the Audit Committee will consider whether the services in
question facilitate the performance of the audit, improve the Company's
financial reporting process or are otherwise in the Company's or the public's
interest. All (100%) of the Audit-Related Fees, Tax Fees and All Other Fees
billed to the Company in 2005 and 2004 were approved by the Audit Committee
pursuant to the pre-approval waiver requirements of Rule 2-01(c)(7)(i)(C) of the
SEC's Regulation S-X. The Audit Committee has determined that these other
services and products rendered by PwC were not incompatible with PwC's
independence as the Company's auditors.
PwC has advised the Committee that all persons engaged in the Company's
independent audit were full-time permanent employees of PwC. No decision has as
of yet been made with respect to the selection of an independent auditor for
fiscal 2006 and, accordingly, the Company is unable to submit the retention of
independent auditors to a vote of the shareholders.
AUDIT COMMITTEE REPORT FOR 2005
The following Report of the Audit Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent the Company specifically incorporates this
Report by reference therein.
In accordance with its written Charter, the Audit Committee of the Board
("Committee") assists the Board in fulfilling its responsibility for oversight
of the quality and integrity of the accounting, auditing and financial reporting
practices of the Company.
As part of its function, it recommended to the Board of Directors the
appointment of PricewaterhouseCoopers LLP ("PwC") as the Company's independent
auditors for 2005.
During 2005, the committee discussed the interim financial and other
information contained in each quarterly report to the Securities and Exchange
Commission with the Chief Executive Officer, Chief Financial Officer, Controller
and the independent auditors prior to its release. The Committee regularly met
with the Company's legal counsel to review litigation involving the Company or
its subsidiaries and ascertain that the Company complied with applicable laws
and regulations.
The Committee meets with the internal and independent auditors, with and
without management present, to discuss the results of their examinations, their
evaluations of the Company's internal controls and the overall quality of the
Company's financial reporting.
In fulfilling its oversight responsibilities, the Committee reviewed and
discussed with management and the independent registered public accounting firm
the Company's audited financial statements contained in the Annual Report on
Form 10-K for the year 2005. In addition, the Committee discussed with the
independent auditors matters to be discussed by Statement on Auditing Standards
No. 61 (Communication with Audit Committees).
The Committee has received from the independent auditors the written
disclosures and the letter required by Independence Standards Board No. 1
(Independence Discussions with Audit Committees) and the Committee has discussed
with PwC the independence of the registered public accounting firm.
Following these discussions and reviews, the Committee recommended to the
Board of Directors and the Board approved the inclusion of the audited financial
statements in the Company's Annual Report on Form 10-K for the year 2005 filed
with the Securities and Exchange Commission.
Audit Committee
John W. Popp, Chairman Fredricka Taubitz
Harrington Bischof Charles F. Titterton
Wilbur S. Legg Dennis P. Van Mieghem
Arnold L. Steiner William G. White, Jr.
The Nominating Committee is empowered to develop and oversee the Company's
policy on the size, composition and qualifications of the Board of Directors.
The Committee is authorized to establish procedures to identify and recommend
5
qualified candidates for election to the Board. The Committee is also
responsible for establishing and overseeing compliance with corporate governance
principles and procedures for the nomination process. The Committee operates
pursuant to a written charter approved by the Board of Directors and is subject
to an annual performance evaluation. While information appearing on the
Company's website is not incorporated by reference in this Proxy statement, the
Committee's charter may be viewed on the Company's website at
www.oldrepublic.com. Printed copies are available to shareholders upon request.
The Committee is composed of five independent directors Messrs. Bischof, Dixon,
Legg, Steiner, and Titterton, of which Mr. Bischof is the Chairman. Each member
of the Committee is considered independent in the judgment of the Company's
Board of Directors and according to the Listing Standards of the NYSE. The
Committee met four times during 2005.
OLD REPUBLIC INTERNATIONAL CORPORATION CORPORATE GOVERNANCE OVERVIEW
For several years the Company has been guided by many of the principles of
director independence and qualifications now required by the rules of the SEC
and NYSE. Subsequent to the promulgation of these regulations, the Company
codified a number of its existing governance practices and adopted all
additional practices required by these rules. Sixty-nine percent of the
Company's current Board membership is considered to meet the appropriate
criteria for independence.
The Audit, Compensation and Nominating Committees of the Board are each
standing committees comprised entirely of independent directors who possess the
professional qualities set forth by these regulations. The Company's Board of
Directors has a Lead Director who chairs meetings of the independent directors.
While information appearing on the Company's website is not incorporated by
reference in this Proxy statement, the Company's Corporate Governance
Guidelines, Code of Ethics for the Principal Executive Officer and Senior
Financial Officers and its Code of Business Conduct and Ethics, may be viewed on
line on the Company's website at www.oldrepublic.com. Printed copies are
available to shareholders upon request to the Investors Relations Department at
the Company's Chicago Home Office.
Shareholders of the Company may communicate with the Board of Directors as
a whole or with any individual director. The communications must be in writing
and sent in care of the Company's Secretary at the Company's office. The
Secretary will forward the communications to the intended recipient as soon as
they are received.
CONSIDERATION AND EVALUATION OF DIRECTOR CANDIDATES
The Company's Board of Directors views its primary mission as (a) rewarding
its shareholders by establishing policies whose objectives are to grow corporate
earnings and shareholders equity over the long term, while increasing the
Company's regular dividend payout; and (b) overseeing the Company's businesses
in a sound, conservative manner to assure their profitable growth and the
capacity to honor their just obligations to assureds and beneficiaries of the
Company's insurance contracts.
Currently the Board is composed of thirteen persons of whom nine are
independent. While it is the Company's longer term objective to reduce the size
of its Board of Directors from thirteen to between nine and eleven and to
increase the representation of independent directors, two director candidates
presented themselves this year who were judged by the Nominating Committee and
the full Board of Directors to be exceptional candidates. Recently retired from
careers spanning over 30 years in the title insurance and mortgage banking
industries, respectively, Messrs. Steven R. Walker and Leo E. Knight, Jr. would
bring valuable expertise to the Board of Directors and the Company. The
Company's subsidiaries have known and dealt with both individuals for many
years, and both would qualify as independent directors in the future.
When the Board of Directors considers new director candidates, it seeks
strong candidates who, ideally, meet appropriate standards of director
independence, are, or have been, senior executives of businesses or professional
organizations, and have significant business, financial, accounting and/or legal
backgrounds related to the Company's operations, markets and/or clients. The
Board will consider any such strong candidate provided he or she possesses the
following personal characteristics: (i) business and professional community
respect for his or her integrity, ethics, principles, insights and analytic
ability; and (ii) ability and initiative to frame insightful questions, to speak
out when appropriate, to challenge questionable assumptions, and to disagree in
a constructive fashion.
The Company's insurance business is managed through three principal
segments, each of which is broadly dispersed geographically. Each of the
segments and their insurance subsidiaries are highly regulated by state and
federal governmental agencies as to their business, accounting and financial
reporting practices. In part, as the result of the specialized nature of its
businesses and their regulations, it is the Company's view that at least two to
four years are normally required for a new director to develop sufficient
knowledge of the business to become a fully productive and effective contributor
to the Company's governance. Reflecting this, each director must agree to serve
one or more three-year terms on both the Company's Board and the board of one or
6
more of its subsidiaries and a number of their corresponding committees. The
commitment of a substantial expenditure of time for meeting preparation,
meetings and travel is essential to the performance of a director's
responsibilities.
Owing to the inherently long-term nature of much of the Company's business,
a demonstrated long-term orientation in a candidate's business dealings is
considered very important. A nominee must commit to acquiring, and retaining
during his or her tenure on the Board, a significant ownership in the Company's
common stock. Similarly, no director may have any significant conflict of
interest with the Company or any of its subsidiaries which would affect the
director's judgment in dealing with their affairs.
In addition to the above minimum criteria, the Nominating Committee seeks
additional background qualities or experience such as a certified public
accountancy with responsibilities in audit practice, experience as a senior
financial officer in an insurance or financial institution with revenues in
excess of $100 million, relevant background in insurance or corporate securities
and/or tax law or other pertinent qualities resulting from an individual's
business management experience.
The Nominating Committee evaluates and proposes candidates to the Board at
large for approval and slating. It is the policy of the Nominating Committee to
consider director candidates nominated by shareholders. Any name presented for
consideration must be submitted to the Lead Director with a copy to the
Secretary of the Corporation for its records no later than 120 days before the
anniversary of the date of the Company's last previous proxy statement. It
should be accompanied by a brief description of the person's qualifications plus
additional sources of relevant information which will assist the Committee in
its investigation of the person's background and qualifications. All candidates
nominated by the shareholders will be evaluated on the basis of the same minimum
criteria and additional background qualifications and experience enumerated
above. A candidate who does not satisfy the minimum criteria enumerated above
will not be nominated by the Nominating Committee to the Board. Given the
long-term nature of the Company's business, nominees should not be presented if
they are regarded simply as representatives of a particular shareholder or group
of shareholders with a short-term orientation.
The Company does not require its Board of Directors to attend annual
meetings of its shareholders. The meetings are conducted by the Chairman of the
Board who represents the entire Board for purposes of such meetings.
The Compensation Committee, is empowered to develop, review and supervise
the employee benefit plans of the Company, to fix the compensation of senior
executive officers, and to evaluate their performance. The Committee also is
required to annually produce a report on executive compensation which is printed
below and is subject to an annual performance evaluation. The Committee operates
pursuant to a written charter approved by the Board of Directors. While
information appearing on the Company's website is not incorporated by reference
in this Proxy statement, the Committee's charter may be viewed on the Company's
website at www.oldrepublic.com. Printed copies are available to shareholders
upon request. The Committee is composed of seven directors, Messrs. Bischof,
Dixon, Legg, Popp, Steiner, Van Mieghem and White. Mr. Dixon is the Committee's
Chairman. Each member of the Committee is considered independent in the judgment
of the Company's Board of Directors and according to the listing standards of
the NYSE. The Committee met five times during 2005.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee has ever served as an
officer or employee of the Company or any of its subsidiaries, nor has any
executive officer of the Company served as a director or member of a
compensation committee for any company that employs any Director of the Company
or member of the Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE MANAGEMENT COMPENSATION
The following Report of the Compensation Committee and the performance
graphs included elsewhere in this proxy statement do not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent the Company specifically incorporates this
Report or the performance graphs by reference therein.
The Compensation Committee of the Board of Directors (the "Committee") of
Old Republic International Corporation (the "Company") evaluated and approved
the overall compensation, policies and practices for the Company's management,
including its Chief Executive Officer ("CEO") and other executive officers, and
the management's range of compensation for other employees of the Company and
its subsidiaries. It, also, reviewed the Company's Key Employees Performance
Recognition Plan ("KEPRP"), the Stock Option Plan (the "Plan"), and the
Employees Savings and Stock Ownership Plan ("ESSOP").
In making its evaluations, the Committee retained an independent
compensation consultant who reviewed the Company's compensation program and its
KEPRP and Plan and compared them to the compensation and benefit programs of
7
other companies including the Company's Peer Group of companies listed on page
17. The consultant also reviewed the Committee's procedures. Further, the
Committee considered a large number of factors including those set forth under
"Compensation Policies" herein, together with other matters such as the
inflation rate and the Company's past performance, generally over consecutive
five-year time frames. The Committee did not consider such factors based upon
any scientific or other formula nor on any quantitative analysis of the
relationship among such factors. Rather, the Committee's evaluation was
subjective since each Committee member exercised his common sense and reasonable
business judgment in attaching varying degrees of importance to each such
factor.
Compensation Policies
The Company's compensation policies and practices, particularly as they
apply to its executive officers, including the CEO, are intended to achieve the
following major objectives:
1. To set annual salaries (base income) for key executive officers at amounts
which: a) are reasonably competitive in the context of prevailing salary
scales; and (b) in the Committee's judgment provide a fixed, reasonable
source of current income during the period of employment. Other sources of
executive compensation discussed in separate sections hereunder are not
taken into account when setting base annual salaries. Among the factors
considered in varying degrees, as previously noted, are business size,
level of responsibility, complexity of operations, long term performance,
term of service, commitment to Old Republic's long term objectives, and
future prospects. Additionally, the Committee takes into account prevailing
salary scales in the insurance industry, trends in salary levels published
in compilations and reports, and data contained in the proxy statements of
publicly held insurance organizations whose assets, revenues, and net
income are larger, smaller, or approximately the same as the Company's.
These insurance organizations include but are not limited to those that are
a part of the Peer Group comparisons on page 17 of this Proxy Statement.
2. To afford personnel an opportunity and incentive to increase their base
income over time through participation in incentive compensation and
related stock option and savings programs. With respect to all such
programs the Committee has approved various criteria, the objectives of
which are to: (a) establish tangible means of evaluating the overall
financial performance of the Company or individual operating centers; (b)
align performance criteria with shareholders' interests by establishing
minimum requirements relative to such performance indicators as return on
equity, return or profit margin on revenues, and increases in earnings; and
(c) encourage a long-term commitment to the Company.
In addition, the Committee considers a variety of intangible and other
subjective factors such as each person's likely future contribution to the
Company's successful growth, his or her level and years of experience, the
current state and prospects of the industry or segment(s) thereof, and the
Company's long-term goals and strategies which may from time to time require
temporary investment in personnel resources in the absence of immediate positive
results. Further, the Committee considers the compensation and benefits
previously paid to its executive officers.
In making its performance evaluations, the Committee takes the
shareholders' interests into account from the standpoints of both total market
return for the Common Stock as well as the Company's intrinsic performance as
such and relative to the Company's Peer Group. However, the Committee places
greater emphasis on the latter two factors since total market return is
influenced materially by the vagaries of the securities markets, over which the
Company, its Board, and management have little control.
Based on a review and evaluation of all the above factors and data, the
Committee believes that the total cash compensation (base salary and cash
incentive compensation) of the CEO and key executives are within a range that
encompasses the median cash compensation of the above mentioned insurance
organizations.
Compensation of the Chief Executive Officer
With specific reference to the CEO's compensation, the Committee has taken
into account all of the factors and objectives discussed above. In addition,
special emphasis is placed on such other considerations as the CEO's vision and
planning for the Company's future and the strategies implemented for their
realization, his leadership qualities and judgment, and his commitment to and
abilities in setting and promoting the character of the organization in the best
interests of its insurance subsidiaries, insurance beneficiaries, employees, and
shareholders. The Committee's evaluation of the CEO's performance takes place
without his presence.
Mr. Zucaro joined the Company in 1976 as Executive Vice President and Chief
Financial Officer. He was promoted to President in 1981, to Chief Executive
Officer in 1990, and to Chairman in 1993 while retaining his offices as
President and Chief Executive Officer. Until 1989, Mr. Zucaro's cash
compensation consisted solely of a base annual salary and a small amount of fees
earned in his capacity as a director of a number of the Company's subsidiaries.
His other compensation was fully deferred pursuant to his participation in the
Company's KEPRP, ESSOP, and stock option plans. Since 1990, his cash
compensation has included 50% of the awards granted to him under the Company's
KEPRP.
8
The following table reflects certain key data pertaining to the Company's
performance during the past five years together with the CEO's compensation
during that period. The Company's performance was a significant factor in the
Committee's evaluation of the CEO's and other executives' cash and deferred
compensation and stock option awards. It, however, was only one of the many
factors cited under "Compensation Policies" above, the relative significance of
which was left to the subjective business judgment of the Committee.
Summary of Company Performance and CEO Compensation
----------------------------------------------------------------------------------------------------------------------------
Company Performance Indicators (a)
(Amounts in millions, except per share and percentage values)
----------------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
vs. vs. vs. vs. vs.
2005 2004 2003 2002 2001 2004 2003 2002 2001 2000
----------------------------------------------------- --------------------------------------
Consolidated Totals:
-------------------
Assets $11,543.2 $10,570.8 $9,712.3 $8,715.4 $7,920.2 9.2% 8.8% 11.4% 10.0% 8.8%
Shareholders' equity 4,024.0 3,865.6 3,553.6 3,155.8 2,783.7 4.1 8.8 12.6 13.4 14.1
Net revenues 3,805.9 3,491.6 3,285.8 2,756.4 2,373.4 9.0 6.3 19.2 16.1 14.6
Net operating income 509.1 404.1 447.2 383.8 330.7 26.0 -9.6 16.5 16.1 20.0
Net income $ 551.4 $ 435.0 $ 459.8 $ 392.9 $ 346.9 26.8 -5.4 17.0 13.3 16.6
Percent return on equity 14.3% 12.2% 14.6% 14.1% 14.2% 17.2 -16.4 3.5 -0.7 5.2
Per Share Data:
--------------
Book value at end of year $ 17.53 $ 16.94 $ 15.65 $ 13.96 $ 12.48 3.5 8.2 12.1 11.8 13.5
Net operating income (diluted) 2.19 1.75 1.95 1.68 1.46 25.1 -10.2 15.6 14.9 20.1
Net income (diluted) $ 2.37 $ 1.89 $ 2.01 $ 1.73 $ 1.54 25.4% -6.0% 16.2% 12.2% 16.6%
Total Return (e):
---------------
Book return 11.2% 10.8% 18.6% 14.5% 16.4%
Market return 10.3% 1.8% 41.8% 2.2% -10.7%
============================================================================================================================
CEO Compensation: A.C. Zucaro
(Amounts in thousands, except per share and percentage values)
----------------------------------------------------------------------------------------------------------------------------
Cash Compensation:
-----------------
Base salary $ 663.3 $ 643.3 $ 620.0 $ 590.0 $ 563.0 3.1% 3.8% 5.1% 4.8% 2.4%
Incentive award 540.3 325.0 584.2 510.1 327.0 66.2 -44.4 14.5 56.0 47.4
Directors fees 47.9 49.9 57.7 48.9 44.8 -4.0 -13.5 18.0 9.2 0.0
Other (c) 10.6 9.9 7.6 5.7 5.6 7.1 30.3 33.3 1.8 0.0
----------------------------------------------------- ---------------------------------------
Total 1,262.1 1,028.1 1,269.5 1,154.7 940.4 22.8% -19.0% 9.9% 22.8% 14.3%
----------------------------------------------------- ---------------------------------------
Deferred Compensation (b):
-------------------------
Incentive award 556.6 337.4 594.5 524.2 327.1 65.0% -43.2% 13.4% 60.3% 46.4%
Stock options 1,475.6 487.0 1,878.7 1,319.9 1,763.8 203.0 -74.1 42.3 -25.2 36.1
Other (d) 14.7 14.7 10.0 10.0 7.8 0.0 47.0 0.0 29.9 -25.0
----------------------------------------------------- ---------------------------------------
Total 2,046.9 839.1 2.483.2 1,854.1 2,098.7 143.9 -66.2 33.9 -11.7 37.2
----------------------------------------------------- ---------------------------------------
Cash & Deferred Compensation $ 3,309.0 $ 1,867.2 $3,752.7 $3,008.8 $3,039.1 77.2% -50.2% 24.7% -1.0% 29.2%
---------------------------- ===================================================== =======================================
Number of Options Awarded 280.0 112.5 346.8 346.8 318.7 148.9% -67.6% 0.0% 8.8% 6.2%
Per Share Strike Price $ 22.35 $ 18.41 $ 19.32 $ 14.37 $ 16.86 21.4% -4.7% 34.4% -14.8% 17.4%
===================================================== =======================================
Estimated annual pension
benefit at retirement $ 262.7
==========
============================================================================================================================
(a) This data was taken from the Company's audited financial statements and
stock market tables as applicable. Return on equity is calculated by
dividing each year's net income by the common shareholders' equity balance
at the beginning of the year. Net operating income is defined as net income
before extraordinary items, realized investment gains or losses and
accounting changes; both net operating income and net income per share are
shown after deduction of preferred stock dividends, as applicable.
(b) In this table, Deferred Incentive Compensation includes the deferred
portion of awards granted under the Company's KEPRP, which prior to 2005
has not been interest bearing, and the employer matching contribution to
the ESSOP. The KEPRP was amended in 2005 to allow an interest factor to be
applied to awards granted in 2005 and subsequent years. Under the proposed
2006 Incentive Compensation Plan it is anticipated that an interest factor
will also be applied to the deferred portion of 2005 and subsequent years'
9
deferred award balances. Both the cash and deferred portion of the KEPRP
and the stock options values shown are attributed to the results of the
year upon which the award was largely based, even though the award was
granted in the following year.
Stock Options have been valued using the Black-Scholes option valuation
model which is also utilized by the Company in expensing stock option
awards in its financial statements. The assumptions used for the most
recent year can be found as a footnote to the Option Grant Table shown on
page 15. The actual future value of such options may, of course, be higher
or lower than these arbitrary formulaic estimates.
On March 17, 2006 conditional awards of stock options were made to the CEO
and a number of other senior executives. These awards are contingent upon
the approval of the 2006 Incentive Compensation Plan by the Company's
Shareholders. The value of such awards, as are shown in the CEO's and other
executives' compensation tables for 2005, have been calculated on a
proforma basis using the Black-Scholes option valuation model and Old
Republic's closing stock price as of March 16, 2006. Accordingly both the
strike price and the value of the options will be recalculated as of May
26, 2006 in the event the 2006 Incentive Compensation Plan is approved by
the Company's Shareholders.
(c) Cash Other includes: health insurance and other minor items.
(d) Deferred Other includes: group term life insurance, ESSOP contributions,
and other minor items.
(e) Total book return represents the sum of each year's dividend yield as a
percentage of book value per share at the beginning of the year plus the
year's percentage change in such book value. Total market return represents
the sum of the annual percentage change in the closing price per share, and
each year's cash dividend as a percentage of the closing price at the
preceding year-end.
Employee Benefit Plans
The Committee also administers the Company's employee benefit plans. Such
plans are an important part of the Company's compensation structure and provide
eligible employees, including the CEO and other executive officers, with an
opportunity and incentive to increase their base salaries.
Key Employee Performance Recognition Plans: Effective January 1, 2005, the
Company adopted a new Key Employee Performance Recognition Plan (the "KEPRP").
At the same time, the Company, while leaving its former plan in place, declared
that no further awards would be made under that plan. Under the Company's KEPRP,
which is similar to the Company's former plan, a performance recognition pool is
established each year for allocation among eligible key employees of the Company
and its participating subsidiaries, including the CEO and other executive
officers. Employees eligible to share in this pool are selected by the Committee
in consultation with the CEO. The Committee makes the sole determination with
regard to the CEO's performance, eligibility and award. After continuing plan
participants are credited with a certain portion of the year's pool for an
earnings multiplier, the CEO recommends the allocation of the balance of the
pool to participants in the plan, other than to himself. Up to 50% of any one
year's pool amount may be carried forward for up to three years for later
allocation. In designating eligible employees and determining amounts to be
allocated, the Committee consults with the CEO and considers the positions and
responsibilities of the employees, the perceived value of their accomplishments
to the Company, their expected future contributions to Old Republic and other
relevant factors. The Committee's evaluation of all such factors is subjective.
Each year's pool amount takes into account pre-established objectives
approved by the Compensation Committee for return on equity and year over year
growth in earnings. Calculation of the pool is made in accordance with a
detailed formula which takes into account (a) the eligible participating
employees' annual salaries, (b) the current year's earnings in excess of the
prior year's earnings (excluding income from realized investment gains or
losses), multiplied by a factor determined by the increase in the Company's
earnings per share, and (c) the latest year's return on equity in excess of a
minimum target return on equity equal to two times the mean of the five-year
average post-tax yield on 10-year and 20-year U.S. Treasury Securities. The pool
is, in turn, limited to a percentage of plan participants' aggregate annual base
salaries, ranging from 10% to 150%, depending upon the amount by which the
current year's actual return on equity exceeds the minimum target return on
equity for the year. There is no prescribed limit as to how much of the year's
available pool may be awarded to each participant.
There is an immediate payment in cash of 50% of any award made, as well as
50% of the multiplier factor applied to the deferred balances of prior years'
participants; the balance of the award vests at the rate of 10% per year of
participation. The deferred balance(s) have not previously accrued interest
although there will be an interest factor applied to them beginning with 2005
deferred awards. An interest factor is similarly included in the Proposed 2006
Incentive Compensation Plan. Pursuant to the plan, participants become vested in
their account balances upon total and permanent disability, death, upon the
earlier of attaining age 55 or being employed for 10 years after first becoming
eligible or upon a change of control of the Company. Benefits are payable in a
set number of equal installments, beginning no earlier than age 55 following
termination of employment, death, disability, retirement or a change of control
of the Company. Distributions for Executive Officers can begin no earlier than
six months following their termination from service.
In addition to the KEPRP, the Company also maintains a number of separate
10
plans for several individual subsidiaries or separate operating centers. Such
plans provide for the achievement of certain financial results and objectives as
to each such subsidiary or operating center. Messrs. Nard and Yeager do not
participate in the Company's KEPRP. Rather, they participate in KEPRP plans
applicable to the subsidiaries and operating centers with which they are
principally associated. Each of these plans operates in the same basic fashion
as the Company's KEPRP. The pools for each plan, including the Company's KEPRP,
are established according to detailed formulas that take into account the annual
increase in earnings, the return on equity in excess of a minimum target
percentage, and other factors pertinent to each operating center. Each separate
subsidiary's or operating center's plan has a cash and deferred element, except
for a few separate plans used for transaction - driven businesses, such as title
insurance, which have historically been cash basis plans. Mr. Kellogg
participates in both the Company's KEPRP and to a smaller extent in a similar
plan maintained for a separate subsidiary.
Stock Option Plan: The Company believes that key employees, including the
CEO and other executive officers, who are in a position to make a substantial
contribution to the long-term performance and direction of the Company should
have a stake in its on-going success. To encourage growth in shareholder value
and a long-term commitment to the success of the Company's business, the Company
maintains a non-qualified stock option plan for key employees of the Company and
its participating subsidiaries. As a result of the Company's wish to encourage
employees, stock option grants have not been limited to executive officers but
have been widely made to its employees. The Corporation's Stock Option Plan (the
"Plan") was approved by the Company's shareholders in 2002 and replaced a
similar non-qualified stock option plan that had been adopted 10 years earlier.
The decision to award stock options pursuant to the Plan and the factors that
contribute to the amount of such awards are the same basic factors as those set
forth under "Compensation Policies" herein.
The performance factors the Committee considers include the achievements of
the individual key employee, the overall performance of the Company and the
likelihood of future contributions to the Company's successful growth by the
individual key employee. The relative significance of these and all other
factors with respect to awards granted to the CEO and other executive officers
is determined subjectively by the Committee. The Plan has provided for the
issuance of options for up to an aggregate of 6% of the Company's Common Stock
issued and outstanding at the end of the month preceding the grant. The sum of
option awards issued in any one year, when added to then outstanding options,
may not therefore be greater than 6% of shares issued and outstanding.
Under the Proposed 2006 Incentive Compensation Plan (the "Proposed Plan")
the aggregate number of shares subject to outstanding options under all Company
sponsored plans and grants shall not exceed 9% of the Company's outstanding
Common Stock at the end of the month immediately preceding an option grant.
Accordingly, following the approval of the Proposed Plan, the total of each
year's option grants and the number of previously granted unexercised options
for all other plans of the Company on the date of grant, may not exceed 9% of
Common Stock then outstanding.
The purchase price per share of Common Stock subject to an option under the
Plan is fixed by the Committee. However, such purchase price may not be less
than 100% of the fair market value per share of Common Stock on the date the
option is granted. Optionees may exercise their options for shares of either
Common Stock or, for options which were vested and exercisable as of December
31, 2004, into Series G Preferred Stock. Elections to exercise into Series G
Preferred Stock may be made only on March 1, June 1, September 1, and December 1
of each year. Each share of Series G Preferred is convertible, at any time,
after six months from the date of issuance, at the holders' option and five
years from the date of issuance, at the Company's option, into 0.95 share of
Common Stock. Series G's dividend is determined by multiplying the prime rate as
of the preceding January 1 and July 1 by the stated value of the stock. The
stated value as adjusted, for Series G is $10.45 per share.
The term of each option may not be for more than 10 years from the date of
grant. Options may be exercised in accordance with the following vesting
schedule: ten percent at the end of the year of the grant, and thereafter,
annually at the rates of 15%, 20%, 25% and 30% so that at the end of the 5th
fiscal year after the grant they are 100% vested. If the optionee dies, retires
in good standing, after age 57, or becomes disabled, vesting acceleration occurs
as is described below. Under the Company's former plan, except for the grant
made in 2002, which used an amended vesting schedule similar to the Plan,
vesting occurs at an annual rate of 10% per year. With respect to options
granted prior to 2004, an employee's right to exercise an option is accelerated
if the Company's Common Stock closes on the NYSE above the vesting acceleration
price established by the Committee for the option. The vesting acceleration
price was established by the Committee at the time of grant at the higher of
150% of the market value of the Common Stock at the date of the grant or 100% of
the book value per Common Share as of the most recent year end. For options
granted prior to January 1, 2000, the vesting acceleration price established by
the Committee was the higher of 150% of the market value of the Common Stock at
the date of the grant or 150% of the book value per Common Share as of the most
recent year end. The vesting acceleration price provision has been eliminated
for options granted in 2004 and subsequent years. If a vesting acceleration
occurs, an optionee may exercise his or her option for the greater of either:
10% of the number of shares covered by the option for each year that the
optionee has been employed by the Company or its participating subsidiaries or
the sum of the optionee's already vested shares plus 50% of the remaining
unvested shares. Vesting accelerations for grants made prior to 2002 accelerate
11
at 10% per year for each year the optionee has been employed by the Company or
its subsidiaries. Vesting acceleration under the Proposed Plan will only apply
in the event of a change in control of the Company or in the event of the death,
disability or retirement, in good standing, after age 57, of an optionee.
Employees Savings and Stock Ownership Plan: The Company's ESSOP qualified as a
401(k) plan effective January 1, 2005. Otherwise the provisions of the plan have
remained unchanged since its beginning in 1978, except that employee
contributions are now treated as pre-tax contributions. Employees' savings, up
to a maximum of 6%, are matched by employer contributions ranging from 20% to
140% of such savings in accordance with a formula based upon the percentages
saved and the increase in the Company's average net operating earnings per share
for the five years ending with the calendar year immediately prior to the year
for which the contribution is made. The Company's matching contribution applies
to annual compensation up to a maximum of $150,000 under the terms of the ESSOP.
Employer contributions are invested exclusively in the Stock of the Company
except that employees over age 55 and with 10 years of service credited under
the Plan may diversify a portion of the employer's contributions out of the
Company's Stock and into alternative investments based on their age and years of
service with the Company. This diversification ranges from 25% at age 55 to 100%
at age 67. The alternative investment choices are the same ones in which
employee savings may be invested. Employee savings may be invested, at the
employee's direction, in publicly traded mutual funds that focus on long term
capital appreciation, long term capital growth, long term growth of capital and
income, long term growth through investments in common stocks of U.S. and
non-U.S. companies, a stock index fund portfolio, and in short or intermediate
term bonds or other fixed income securities. A participant becomes vested in the
account balance allocated from employer contributions upon being totally and
permanently disabled, dying, or upon the earlier of attaining age 65 or being
employed for 6 years. Vesting also occurs in increments of 20% a year, beginning
after one year of service. Benefits are payable upon termination of service,
death or disability, or following retirement and subject to minimum distribution
requirements set out in Treasury regulations under the Internal Revenue Code. At
the election of the participant, benefits derived from employer contributions
are payable either in cash or the Company's Common Stock.
RMIC Profit-Sharing Plan ("Profit Sharing Plan"): Mr. Nard participates in the
Company's ESSOP as well as in the RMIC Profit Sharing Plan, a 401(k) qualified
plan. The RMIC Profit Sharing Plan covers substantially all employees of RMIC
and its affiliates. Contributions to the plan are determined annually by RMIC's
Board of Directors, and voluntary contributions of up to 10% of annual income
are permitted. Employees' contributions are invested, at the employees'
direction, in a number of publicly traded mutual funds and employees may elect
to purchase the Company's Common Stock as an investment option. RMIC Profit
Sharing Plan participants' interests vest in increments of 10% of contributed
amounts beginning with 40% after one year and extending to 100% after seven
years. Account balances are payable upon death or permanent disability. Normal
retirement is at age 65 and the Profit Sharing Plan provides for early
retirement at age 50 with ten years of service. Benefits upon retirement may be
received as a monthly annuity, periodic cash payments, or in a lump-sum
distribution, at the participant's election.
Compensation Committee
John M. Dixon, Chairman
Harrington Bischof
Wilbur S. Legg
John W. Popp
Arnold L. Steiner
Dennis P. Van Mieghem
William G. White, Jr.
12
Executive Compensation
The following table sets forth certain information regarding the
compensation paid or accrued by the Company to or for the account of the Chief
Executive Officer, each of the four other most highly compensated executive
officers and the Chief Financial Officer of the Company for services rendered in
all capacities during each of the Company's fiscal years ended December 31,
2005, 2004 and 2003:
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
------------------------------- -------------
(a) (b) (c) (d) (e) (f)
Securities
Underlying
Name and Option All Other
Principal Positions Year Salary (1) Bonus (2) Awards (3) Compensation (4)
--------------------------- --------- ------------- ------------ ------------ -----------------
A.C. Zucaro 2005 $ 711,279 $1,096,929 280,000 (5) $ 25,313
President & Chief 2004 693,203 662,400 112,500 24,598
Executive Officer 2003 677,700 1,178,700 346,875 17,640
James A. Kellogg 2005 357,400 421,948 60,000 (5) 19,135
Senior Vice President 2004 344,067 375,260 37,500 25,083
General Insurance 2003 330,367 275,000 25,000 14,701
Spencer LeRoy III 2005 378,364 372,513 64,000 (5) 18,430
Senior Vice President, 2004 366,257 302,533 62,500 16,536
Secretary & General 2003 352,866 309,951 62,500 16,496
Counsel
Karl W. Mueller (6) 2005 325,000 253,275 35,000 (5) 19,522
Senior Vice President & 2004 81,250 220,000 12,500 245
Chief Financial Officer 37,500
Christopher S. Nard (7) 2005 305,167 757,856 75,000 (5) 44,482 (8)
Senior Vice President
Mortgage Guaranty
Rande K. Yeager (9) 2005 275,483 620,000 15,000 (5) 10,710
Senior Vice President 2004 265,483 618,500 13,750 15,890
Title Insurance 2003 252,950 900,000 18,750 17,081
=============================================================================================================================
(1) Includes base salary and fees paid for services as a director of the
Company or its subsidiaries.
(2) Includes combined cash and deferred incentive compensation awards granted
under the Company's KEPRP and similar plans maintained for different
subsidiaries of the Company. In this table, both the cash and deferred
portion of the KEPRP as well as stock option awards are attributed to the
year on which the award was largely based, even though the award was
granted in the following year. KEPRP awards are made 50% in cash and 50%
deferred except for the plan under which Mr. Yeager participates which does
not defer any part of the award granted. The deferred amounts included in
this column are usually not payable before the person retires at 55 years
of age or later; prior to 2005, the deferred portions do not accrue
interest and are included in this column without a present value discount.
(3) As adjusted for the stock dividend paid December 30, 2005.
(4) Includes the employer matching contribution to the Company's ESSOP, the
amount of premium for the Company's group term life insurance plan
attributed to the compensation of executive officers of the Company, the
value of the personal use of vehicles provided, the amount of premium paid
for by the Company for health insurance, and the value of meals or club
dues paid for by the Company. For 2005, the Company's matching ESSOP
contribution for each executive officer was $4,950. For 2005, $9,753,
$1,242, $2,322, $810, $204 and $1,290 were attributed to the compensation
of Messrs. Zucaro, Kellogg, LeRoy, Mueller, Nard and Yeager, respectively,
for group term life insurance premiums paid by the Company under a program
available to all of its eligible employees.
(5) A conditional stock option award based largely on 2005 performance was made
by the Compensation Committee on March 17, 2006 contingent upon the
approval of the 2006 Incentive Compensation Plan (the Proposed Plan) by the
Company's Shareholders. This award shall be null and void if shareholder
approval of the Proposed Plan is not obtained within twelve months of the
date of the award.
(6) Mr. Mueller became an executive officer of the Company on October 1, 2004.
(7) Mr. Nard became an executive officer of the Company effective June 1, 2005.
(8) Includes $21,000 as the vested amount accrued for Mr. Nard in the RMIC
Profit Sharing Plan for 2005.
(9) Mr. Yeager became an executive officer of the Company effective March 21,
2003.
13
Retirement Plans
The Company maintains the Old Republic International Corporation Salaried
Employees Restated Retirement Plan (the "Company Plan") for its employees and
those of participating subsidiaries who have continuously been employed prior to
December 31, 2004. Persons whose employment commenced on or after January 1,
2005 are not eligible for the Company Plan but may participate in the Company's
ESSOP. The Company Plan, which is noncontributory, provides for benefits based
upon 1.5% of the participant's "Final Average Monthly Earnings" (1/60th of the
aggregate earnings of the employee during the period of the five consecutive
years of service out of the last ten consecutive years of service which results
in the highest "Final Average Monthly Earnings") multiplied by the participant's
years of service. Earnings equal base salary and commissions, but excludes cash
and deferred incentive compensation awards granted under the Company's KEPRP.
The following table sets forth the estimated annual benefits payable under
the Company Plan to an employee, upon retirement at December 31, 2005, at age 65
after specified years of service:
Highest Average Estimated Annual Retirement Income for
Annual Earnings of Representative Years Credited Service*
the 5 Consecutive -----------------------------------------------------------------------------------------------
Plan Years Out of the
Last 10 Plan Years 5 10 15 20 25 30
----------------------- ------------ ------------ ------------ ------------- ------------ -------------
$ 200,000 $ 15,000 $ 30,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000
300,000 22,500 45,000 67,500 90,000 112,500 135,000
400,000 30,000 60,000 90,000 120,000 150,000 180,000
500,000 37,500 75,000 112,500 150,000 187,500 225,000
600,000 45,000 90,000 135,000 180,000 225,000 270,000
$ 700,000 $ 52,500 $105,000 $157,500 $210,000 $262,500 $315,000
============================================================================================================================
*Amounts shown in the table above which exceed $220,000 - - the maximum
allowed by law for a qualified plan in 2006 - - would only be payable to a
qualified participant under the Old Republic International Corporation
Executive's Excess Benefit Plan described below.
The amounts shown in the chart are computed on the basis of straight life
annuity amounts and are not subject to offsets for any Social Security payments.
At December 31, 2005, Mr. Zucaro was credited with 28 years of service, Mr.
Kellogg was credited with 27 years of service, and Mr. LeRoy was credited with
12 years of service, for purposes of the Plan. Mr. Mueller is eligible for
participation but is not yet credited with a full year of service for the Plan.
Mr. Yeager does not participate in the Plan as employees of the Old Republic
National Title Group participate in the Old Republic National Title Group
(ORNTG) Plan instead of the Company Plan. The ORNTG Plan operates in the same
basic fashion as the Company's Plan except that benefits are calculated
differently. The monthly benefit is 1.20% of the participants Final Average
Monthly Earnings up to the Social Security Integration Level times the
participant's years of credited service limited to a maximum of 30 years. At
December 31, 2005, Mr. Yeager was credited with 17 years of service and his
highest average annual earnings for the purpose of this plan was approximately
$239,273. Mr. Nard did not participate in the plan because employees of Republic
Mortgage Insurance Company (RMIC) participate in the RMIC Profit-Sharing Plan
instead of the Company Plan.
At December 31, 2005, the highest average annual earnings for purposes of
the above computations under the Company Plan were approximately $616,000 for
Mr. Zucaro, $294,033 for Mr. Kellogg and $346,999 for Mr. LeRoy. The differences
between such amounts and the Annual Compensation amounts shown for Messrs.
Zucaro, Kellogg, LeRoy and Yeager in the Summary Compensation Table on page 13
are threefold: the above figures are averages of annual base salaries over the
past 5 years, do not include directors' fees, nor include any form of incentive
compensation awards.
The Company also maintains the Old Republic International Corporation
Executive's Excess Benefit Plan (the "Excess Benefit Plan") to provide certain
key executives with pension benefits in excess of the benefits provided by the
Company Plan. The Excess Benefit Plan is administered by the Executive Committee
of the Board of Directors, which selects the employees to participate in the
Excess Benefit Plan from those who are participants in the Company Plan. As of
December 31, 2005, Messrs. Zucaro and LeRoy are the only approved executive
officers who qualified for participation under this Excess Benefit Plan as this
plan was terminated relative to any additional participants as of December 31,
2004.
14
Option Grants in 2005
The following table sets forth certain information regarding options to
purchase shares of Common Stock granted to the executive officers of the Company
listed in the Executive Compensation Table during the Company's 2005 fiscal
year:
Option Grants in 2005 (1)
----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f)
-------------------------------------------
Individual Grants
-------------------------------------------
Number of % of Total -----------------
Securities Options Grant Date
Underlying Granted to Present
Options Employees Exercise Expiration Value Per
Name Granted (2) in 2005 Price Date Black-Scholes(3)
--------------------------- ------------ ------------ ----------- ----------- -----------------
A. C. Zucaro 112,500 5.56 $ 18.41 12/31/14 $ 486,990
James A. Kellogg 37,500 1.85 18.41 12/31/14 162,330
Spencer LeRoy III 62,500 3.09 18.41 12/31/14 270,550
Karl W. Mueller 12,500 .62 18.41 12/31/14 54,110
Christopher S. Nard 53,125 2.63 18.41 12/31/14 229,967
Rande K. Yeager 13,750 .68 $ 18.41 12/31/14 $ 59,521
================================================================================================================
(1) Options awarded in 2005 were largely based upon the Company's aggregate
performance for the three years ended December 31, 2004.
(2) See the Report of the Compensation Committee on Executive Management
Compensation "Stock Option Plan" regarding the vesting of stock options.
(3) The value of options is calculated pursuant to the Black-Scholes model
which is also utilized in expensing stock option awards in the Company's
financial statements. The option values represent the estimated present
value as of the date options were granted. The significant assumptions
incorporated in the Black-Scholes model in estimating the value of the
options include the following:
a) Options are issued with an exercise price equal to the fair market value
of stock on the date of issuance.
b) The term of each option is 10 years (unless otherwise shortened or
forfeited due to termination of employment).
c) The model assumes an interest rate of 4.626% which is the interest rate
on U.S. Treasury securities on the date of grant with maturity dates
corresponding to that of the expected option lives.
d) An expected volatility of 25.975% is calculated using daily stock prices
for the period prior to the grant date corresponding with the expected
option life.
e) An expected annual dividend yield of 3.8244% is assumed.
The ultimate value of the options will depend on the future market price of
the Company's Common Stock which cannot be forecasted with reasonable
accuracy. The actual value, if any, that an optionee will realize upon
exercise of an option will depend on the excess of the market value over
the exercise price on the date the option is exercised. The number of
options granted and their exercise price have been adjusted to reflect the
Company's Stock Dividend of December 30, 2005.
The following table shows certain data relative to stock option awards
granted and applicable to the five compensation years ended December 31, 2005.
(Amounts in Thousands, Except Percentages)
-------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Options Granted Value of Options
Total Shares Pretax for the Year Granted
Outstanding Operating ------------------------------ -----------------------------
Issuance at End of Income for # of % of Shares $ % of Pretax
Year Prior Year Prior Year Shares Outstanding Value Income
------------ -------------- ------------- ----------- --------------- ----------- -------------
2001 221,725 $ 392,800 2,152.5 .97% $ 9,320 2.37%
2002 223,082 476,900 2,133.0 .96 11,795 2.47
2003 226,122 546,800 2,313.7 1.02 8,815 1.61
2004 227,007 660,400 2,525.6 1.11 13,689 2.07
2005 228,204 $ 603,000 2,057.5 .90% $ 8,930 1.48%
===================================================================================================================
-------------------------------------------------------------------------------------------------------------------
(e) Column (d) / Column (b).
(f) Column (d) x Options valued @ $4.33 (2001), $5.53 (2002), $3.81 (2003),
$5.42 (2004), and $4.33 (2005). Assuming that 2,505,000 options are
ultimately granted in 2006 the approximate Black-Scholes value
calculated as of March 16, 2006 in column (f) would be $12,515 or 2.07%
of 2005's Pretax Income.
(g) Column (f) / Column (c).
15
Aggregate Options Exercised in 2005 and Option Values at December 31, 2005
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's 2005 fiscal
year and the number and value of exercisable and unexercisable options to
purchase shares of Common Stock held at the end of the Company's 2005
fiscal year by the executive officers of the Company named in the Executive
Compensation Table:
Aggregated Option Exercises in 2005
and Option Values at December 31, 2005
----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options at 12/31/05 Options at 12/31/05
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
----------------------- -------------- --------------- ----------------------------- --------------------------------
A. C. Zucaro - - 1,136,718 / 499,219 $6,331,526 / $1,332,633
James A. Kellogg - - 41,857 / 55,425 264,325 / 132,501
Spencer LeRoy III - - 305,000 / 124,219 2,471,224 / 322,640
Karl W. Mueller - - 10,625 / 39,375 12,531 / 57,094
Christopher S. Nard - - 301,563 / 128,813 2,175,697 / 378,242
Rande K. Yeager 32,250 $ 274,500 22,657 / 32,344 $89,612 / $82,765
=============================================================================================================================
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Common Stock at
December 31, 2005 and the option exercise price per share multiplied by the
number of shares subject to options.
Equity Compensation Plan Information at December 31, 2005
The following table sets forth certain information regarding securities
authorized for issuance under equity compensation plans as of year end 2005. The
Company only has equity compensation plans that were approved by the Company's
shareholders.
Number of Number of securities
securities to be remaining available for
issued upon exercise Weighted-average future issuance under
of outstanding exercise price of equity compensation plans
options, warrants outstanding options, (excluding securities
Plan Category and rights warrants and rights reflected in column (1))
------------------------------------------ ---------------------- --------------------- ---------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders................... 12,226,170 $ 15.76 1,508,354
Equity compensation plans not
approved by security holders.......... - - -
---------------------- --------------------- ---------------------------
Total............................ 12,266,170 $ 15.76 1,508,354
===========================================================================================================================
(1) At year end 2005, the aggregate number of shares subject to outstanding
options under all Company sponsored plans and grants could not exceed, at
any time, 6% of the Company's outstanding Common Stock. Under the Proposed
2006 Incentive Compensation Plan, the aggregate number of shares subject to
outstanding options under all company sponsored Plans and grants shall not
exceed 9% of the Company's outstanding Common Stock at the end of the month
immediately preceeding an option grant.
Comparative Five-Year Total Market Returns
The following table, prepared on the basis of market and related data
furnished by Standard & Poor's Total Return Service, reflects total market
return data for the most recent five calendar years ended December 31, 2005. For
purposes of the presentation, the information is shown in terms of $100 invested
at the close of trading on the last trading day preceding the first day of the
fifth preceding year. The $100 investment is deemed to have been made either in
Old Republic Common Stock, in the S&P 500 Index of common stocks, or in an
aggregate of the common shares of the Peer Group of publicly held insurance
businesses selected by Old Republic. In each instance the cumulative total
return assumes reinvestment of cash dividends on a pretax basis.
16
The information utilized to prepare this table has been obtained from
sources believed to be reliable, but no representation is made that it is
accurate or complete in all respects.
Comparison of Five Year Total Market Return
OLD REPUBLIC INTERNATIONAL CORPORATION vs. S&P 500 vs. Peer Group
(For the five years ended December 31, 2005)
--------------------------------------------------------------------------------
{GRAPHIC OMITTED]
Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05
------- ------- ------- ------- ------- -------
ORI $100.00 $89.40 $91.27 $129.88 $132.24 $146.14
S&P 500 100.00 88.11 68.64 88.33 97.94 102.75
Peer Group 100.00 91.97 79.04 98.98 110.63 129.29
--------------------------------------------------------------------------------
The Peer Group consists of the following publicly held corporations
selected by the Company for its 2000 to 2005 comparison: Ace Limited, American
Financial Group, Inc., The Chubb Corporation, Cincinnati Financial Corporation,
Fidelity National Financial, Inc., First American Corporation, MGIC Investment
Corporation, Ohio Casualty Corporation, Radian Group Inc., SAFECO Corporation,
St. Paul Travelers Companies, Inc. and XL Capital Ltd. The composition of the
Peer Group has been approved by the Compensation Committee and consists of the
same companies as last year's Peer Group.
PROPOSAL 1
ELECTION OF DIRECTORS
The following tables list all nominees and continuing directors of the
Company. Four Class 1 Directors are to be elected to hold office for a term of
three years and until their successors are elected and qualified. It is intended
that, in the absence of contrary specifications, votes will be cast pursuant to
the enclosed proxies for the election of such nominees. Should any of the
nominees become unable or unwilling to accept nomination or election, it is
intended, in the absence of contrary specifications, that the proxies will be
voted for the balance of those named and for a substitute nominee or nominees.
However, the Company now knows of no reason to anticipate such an occurrence.
All of the nominees have consented to be named as nominees and to serve as
directors if elected.
On February 23, 2006, Mr. White advised the Company that he was retiring
from the Board and would not stand for reelection in 2006. At this meeting, the
Board recommended Mr. Steven R. Walker as a Class 1 Director to replace Mr.
White. The Board also voted to add a fourteenth directorship and elected Mr. Leo
E. Knight, Jr. to the newly-created position, effective as of its regularly
scheduled meeting on August 24, 2006. Mr. Knight will serve as a Class 3
director, as the Company's By-Laws require that the directors be assigned as
equally as possible among each of the three Classes. The Class 3 directors'
current terms expire in 2008.
Both Messers. Walker and Knight were recommended as directors by the
Company's Nominating Committee which is composed of five independent directors,
at the suggestion of one of the Company's independent directors. No fee was paid
to any third party to identify, evaluate or assist in identifying or evaluating
these directors or any other potential directors.
17
Positions with Company, Business Experience and
Name Age Other Directorships
-------------------------------------- ----------------- -------------------------------------------------------------
Nominees for Election
---------------------
CLASS 1 (Term expires in 2006)
Harrington Bischof 71 Director since 1997; President of Pandora Capital
Corporation since 1996; formerly Senior Advisor
Prudential Securities, Inc.
Peter Lardner 73 Director since 1985; retired; prior to 2002, Chairman of
the Board of Bituminous Casualty Corporation, a
subsidiary of the Company.
Charles F. Titterton 64 Director since August 2004; retired; Formerly Director
Insurance Group with Standard & Poor's Corp. until 2003.
Steven R. Walker 60 Director nominee; retired; formerly Senior Counsel and
Partner with Leland, Parachini, Steinberg, Matzger &
Melnick, LLP, attorneys, San Francisco, California, which
has been retained as counsel for Old Republic Title
Company, a subsidiary of the Company, during more than
the last five years.
------------------------------------------------------------------------------------------------------------------------------
Continuing Members
------------------
CLASS 2 (Term expires in 2007)
Jimmy A. Dew 65 Director since 1980; Sales Group Manager and Vice
Chairman of Republic Mortgage Insurance Company, a
subsidiary of the Company, for more than the past five
years.
John M. Dixon 66 Director since 2003; retired; Director of Amsted
Industries Incorporated, Chicago, Illinois; formerly
Chief Executive Partner with the law firm of Chapman and
Cutler, Chicago, Illinois until his retirement in 2002.
Wilbur S. Legg 83 Director since 1969; retired; formerly Partner of Lord
Bissell & Brook, attorneys, Chicago, Illinois. Mr. Legg's
former firm has been retained by the Company as counsel
during more than the last two fiscal years.
John W. Popp 83 Director since 1993; retired; formerly Partner with the
accounting firm of KPMG LLP until 1982.
Dennis P. Van Mieghem 65 Director since August 2004; retired; formerly Partner
with the accounting firm of KPMG LLP until 1998.
------------------------------------------------------------------------------------------------------------------------------
18
Continuing Members (Cont'd)
---------------------------
CLASS 3 (Term expires in 2008)
Leo E. Knight, Jr. 60 Director, effective August 24, 2006; retired; formerly
Chairman and Chief Executive Officer of National City
Mortgage Company, Dayton, Ohio, an insured of the Company's
subsidiary, Republic Mortgage Insurance Company, for more
than the past five years. Mr. Knight is also a director of
Merscorp, Inc.
William A. Simpson 64 Director since 1980; Chairman of Republic Mortgage
Insurance Company ("RMIC"), a subsidiary of the Company,
for more than the past five years. Prior to June 1, 2005
he was also Senior Vice President of the Company and
President and Chief Executive Officer of RMIC.
Arnold L. Steiner 68 Director since 1974; retired for more than the past five
years; formerly President of Steiner Bank, Birmingham,
Alabama.
Fredricka Taubitz 62 Director since 2003; Director of WFS Financial Inc. since
January 2003; until 2000, Executive Vice President and Chief
Financial Officer of Zenith National Insurance Corp. Until
1985, Partner with the accounting firm of Coopers & Lybrand,
now PricewaterhouseCoopers LLP.
A. C. Zucaro 66 Director since 1976; Chairman of the Board, Chief Executive
Officer and President of the Company and various
subsidiaries for more than the past five years.
-----------------------------------------------------------------------------------------------------------------------------
Board of Directors Recommendation
The Board of Directors recommends a vote FOR the Class 1 Directors that are
listed as nominees. Proxies solicited by the Board of Directors will be voted
for the election of these nominees unless shareholders specify to the contrary
in their proxies.
Proposal 2
Approval of the Old Republic International Corporation
2006 Incentive Compensation Plan
This proposal is to approve the Old Republic International Corporation 2006
Incentive Compensation Plan (herein called "the Proposed Plan")
Background
On February 23, 2006, the Board of Directors approved the Proposed Plan and
recommended that it be submitted to the Company's shareholders for their
approval and adoption within twelve (12) months. If approved by the
shareholders, the Proposed Plan will be effective as of February 23, 2006. The
following summary of the Proposed Plan is qualified in all respects by reference
to the provisions of the Proposed Plan, a copy of which is attached hereto as
Exhibit B.
The Company presently maintains the 2002 Old Republic International
Corporation Non-Qualified Stock Option Plan ("the Stock Option Plan") and the
Key Employee Performance Recognition Plan (the "KEPRP") for key employees of the
Company and its wholly owned subsidiaries. Both the Stock Option Plan and KEPRP
are described in their respective sections on pages 10 and 11. If the Proposed
Plan is approved by the Shareholders of the Company, no additional stock options
under the Stock Option Plan or awards under the KEPRP will be made and these
19
plans will terminate. However, options granted and awards made under them will
continue to remain outstanding until they expire, are exercised, are paid out or
are forfeited. No options under the Stock Option Plan will be re-priced or
surrendered in exchange for options under the Proposed Plan, nor will any awards
or balances under the KEPRP be changed or surrendered in exchange for the awards
under the Proposed Plan.
Purpose of the Proposed Plan
The purpose of the Proposed Plan is to promote the interests of the Company
and its shareholders by providing key individuals on whom rests major
responsibilities for the present and future success of the Company and its
subsidiaries with an opportunity to acquire a proprietary interest in the
Company and cash or deferred compensation as an incentive that will encourage
them to put forth their maximum effort for the continued success and growth of
the Company and its subsidiaries. In addition, it is believed that the Proposed
Plan will aid the Company in attracting and retaining key individuals of
outstanding ability.
Summary of the Proposed Plan
The Proposed Plan is similar to the Company's current Stock Option Plan and
would also permit cash and deferred performance awards similar to those under
KEPRP. Under the Proposed Plan, an award to a participant may be in the form of
a stock option, other stock-based awards, cash or a combination of these. Any
individual selected by the Compensation Committee as being in a position to
affect materially the profitability and growth of the Company, is eligible to
receive an award under the Proposed Plan. On December 31, 2005 approximately 545
officers and key employees were participants in the Company's Stock Option and
KEPRP Plans and it is anticipated that a similar number will be eligible under
the Proposed Plan. Shown below is information concerning conditional awards
under the Proposed Plan which were largely based on performance in 2005.
2006 Incentive Compensation Plan Awards
-------------------------------------------------------------------------------------------------------------
Performance Number Value of
Name Principal Positions Award of Options (1) of Options (2)
--------------------------------------------------------------------------------------------------------------
A.C. Zucaro President & Chief
Executive Officer - 280,000 $ 1,475,600
James Kellogg Senior Vice President
General Insurance - 60,000 316,200
Spencer LeRoy III Senior Vice President,
Secretary & General - 64,000 337,280
Counsel
Karl W. Mueller Senior Vice President &
Chief Financial Officer - 35,000 184,450
Chris Nard Senior Vice President
Mortgage Guaranty - 75,000 392,250
Rande K. Yeager Senior Vice President
Title Insurance - 15,000 79,050
All Executive Officers as a Group. - 542,500 2,855,975
All Non-Executive Directors as a Group. - 105,000 553,350
All Employees as a Group. - 980,500 $ 5,167,235
===============================================================================================================
(1) On March 17, 2006, options for 1,524,500 shares were awarded to employees
under the 2002 Stock Option Plan. The number of shares remaining available
for option awards was too few for any awards to Executive Officers and
certain other senior executive officers, and they received none. Instead,
conditional awards in the aggregate amount of 980,500 shares were
recommended by the Company's Compensation Committee and approved by its
directors, under the Proposed Plan. These awards shall be null and void if
shareholder approval of the Proposed Plan is not obtained within twelve
months of the date of the awards.
(2) The option grant price of the shares awarded and the dollar value of these
options were not determinable when granted. The exercise price, per share,
of these options will be the closing price of the Company's Common Stock on
the New York Stock Exchange ("NYSE") on the date of the approval of the
Proposed Plan. The Company has assigned values to these conditionally
awarded options using the Black-Scholes model. These values were arrived at
by using the closing price on the NYSE of the Company's Common Stock on
March 16, 2006 and applying assumptions similar to those outlined in
footnote (b) on page 10. These valuations are solely intended to be used
for illustration purposes in connection with this table.
The Compensation Committee of the Board of Directors, which currently consists
20
of Messrs. Bischof, Dixon, Legg, Popp, Steiner, Van Mieghem and White, shall
administer the Proposed Plan. None of the members of the Compensation Committee
has within the last year participated in any stock option, KEPRP or other
employee benefit plan of the Company. The Compensation Committee shall: (i)
select the participants to whom awards may be granted; (ii) determine the type
or types of awards, to be granted to each participant; (iii) determine the
number of Stock Option Shares to be covered by each award granted hereunder;
(iv) determine the terms and conditions of any Performance Award granted
hereunder; (v) determine whether, to what extent, and under what circumstances
cash Performance Awards made under the Proposed Plan shall be deferred; (vi)
determine whether, or to what extent and under what circumstances any award
shall be canceled or suspended; (vii) interpret and administer the Proposed Plan
and any Award Agreement; (viii) correct any defect, supply any omission or
reconcile any inconsistency in the Proposed Plan or any award; (ix) establish
such rules and regulations and appoint such agents as it shall deem appropriate
for the proper administration of the Proposed Plan; (x) make any other
determination and take any other action that the Committee deems necessary or
desirable for administration of the Proposed Plan.
Under the Proposed Plan, the aggregate number of shares subject to Stock
Options and other equity-based awards and issued pursuant to the Proposed Plan
is limited to no more than 9% of the Common Stock of the Company issued and
outstanding at the end of the month immediately preceding the grant ("Maximum
Number"). Also, the aggregate number of option shares issued under the Proposed
Plan, the Company's Current Stock Option Plan and all other Company stock
options plans shall not exceed the Maximum Number.
The purchase price per share of Common Stock subject to a Stock Option will
be fixed by the Compensation Committee but shall not be less than 100% of the
fair market value per share of Common Stock on the date the Stock Option is
granted. The Committee shall not, without the approval of the Company's
stockholders: (a) lower the option price per Share of a Stock Option after it is
granted, (b) cancel a Stock Option when the option price per share exceeds the
Fair Market Value of the underlying shares in exchange for another award, or (c)
take any other action with respect to a Stock Option that may be treated as a
re-pricing under the rules and regulations of the NYSE. The closing price per
share of the Company's Common Stock on March 16, 2006 on the NYSE was $22.35.
The term of each Stock Option shall not exceed ten years from the date
granted. Under ordinary circumstances, Stock Options may be exercised only while
a participant is an employee of the Company or its subsidiaries in accordance
the following vesting schedule ("Normal Vesting Schedule"):
10% in the fiscal year of the grant
15% in the second fiscal year following the grant and 25% cumulatively
20% in the third fiscal year following the grant and 45% cumulatively
25% in the fourth fiscal year following the grant and 70% cumulatively
30% in the fifth fiscal year following the grant and 100% cumulatively
If any change in control of the Company occurs, or if the participant dies,
retires in good standing due to age, or becomes disabled, Stock Options may be
exercised to the extent of the greater 10% of the number of shares covered
thereby for each of the years that the participant has been employed by the
Company or any subsidiary, or the Normal Vesting Schedule plus 50% of the
unvested remaining shares. Whatever shares remain unvested thereafter, shall
vest in accordance with the Normal Vesting Schedule. Retired participants and
estates of deceased participants shall have until the earlier of the expiration
of the Stock Options granted or four (4) years from the date of retirement or
death to exercise all exercisable Stock Options. In the event of the termination
of the participant's employment, other than by reason of retirement or death,
all unexercised Stock Options held by the participant shall terminate and be
forfeited.
Performance Awards in the form of cash and/or deferred cash compensation
may be granted hereunder to participants, either alone or in addition to Stock
Options granted under the Proposed Plan. The performance goals to be achieved
for each Performance Period shall be determined by the Committee. The terms of
any Performance Award granted under the Proposed Plan shall be set forth in a
written Award Agreement and the terms of Performance Awards need not be the same
with respect to each participant. The performance criteria to be achieved during
any Performance Period and the length of the Performance Period shall be
determined by the Committee upon the grant of each Performance Award. A
Performance Period shall not be shorter than twelve (12) months. The amount of
the Performance Award to be distributed shall be determined by the Committee.
Except as may otherwise be provided in an Award Agreement, Performance
Awards will be distributed only after the end of the relevant Performance
Period. Performance Awards shall be paid in cash and may be paid in lump sum or
in installments following the close of the Performance Period or, in accordance
with procedures established by the Committee, on a deferred basis subject to the
requirements of Sections 409A of the Internal Revenue Code.
Approval of the Proposed Plan requires an affirmative vote of the holders
of a majority of the Company's Common Stock present and entitled to vote. The
Board of Directors of the Company may at any time amend, suspend or terminate
the Proposed Plan. No termination or amendment of the Plan may, without the
consent of the individual to whom any Stock Option or Performance Award shall
have been theretofore granted, adversely affect the rights of such individual.
21
Awards under the Proposed Plan may be granted from time to time by the
Compensation Committee prior to February 23, 2016 as of which date the Proposed
Plan shall terminate.
Federal Income Tax Treatment
Awards granted under the Proposed Plan will not qualify for the special tax
treatment accorded to certain statutory stock options under the Internal Revenue
Code (the "Code), nor is the Proposed Plan a qualified pension, profit-sharing
or stock bonus plan under the Code. A participant will not recognize ordinary
income for federal income tax purposes at the time of the grant of a Stock
Option or a Performance Award. However, upon the payment of cash under a
Performance Award or the exercise of a Stock Option, the participant will
realize ordinary income in an amount measured by the value of the cash
Performance Award or the value of the Option share on the date of exercise over
the option price for the Stock Option, if any, and the Company shall be entitled
to a corresponding deduction, subject to the requirements of Section 162(m) of
the Internal Revenue Code. To comply with the requirements of Section 162(m),
the Proposed Plan sets a limit of 2,000,000 option shares or other stock unit
awards representing no more than 400,000 shares for any participant during a
36-month period and $3,000,000 to any participant in cash and deferred
performance awards during any 12-month period. The Company is required for
federal income tax purposes to withhold tax on such income realized through the
exercise of a Stock Option or the payment of a cash Performance Award. Upon a
subsequent disposition of shares, acquired by a Stock Option the participant
will realize short-term or long-term capital gain or loss, depending on the term
the stock is held after the date of exercise, with the basis for computing such
gain or loss equal to the option price plus the amount of ordinary income
realized upon exercise.
Vote Required
The Proposed Plan will not become effective unless approved by the
Company's Shareholders. The affirmative vote of the holders of a majority of the
Company's securities present at the meeting who are entitled to vote on the
proposal is required to approve the Proposed Plan.
Board of Directors Recommendation
The Board of Directors recommends a vote FOR the approval of the 2006
Incentive Compensation Plan. Proxies solicited by the Board of Directors will be
voted in favor of this proposal unless shareholders' specify to the contrary in
their proxies.
VOTING PROCEDURES
The General Corporation Law of the State of Delaware specifies that in the
absence of contrary requirements in a corporation's Certificate of Incorporation
or By-laws, the votes on matters at Shareholders' Meetings are decided as
follows: (1) Directors are elected by a plurality of the shares present in
person or by proxy at the meeting and who are entitled to vote in the election,
(2) amendments to the Company's Certificate of Incorporation are determined by
the affirmative vote of the majority of shares of the Company's capital stock
that are outstanding and entitled to vote, and (3) all other matters are
determined by the affirmative vote of the majority of the shares present in
person or by proxy at the meeting and who are entitled to vote on the subject
matter.
The Company's Certificate of Incorporation and By-laws do not require any
different treatment for matters to be considered at the Company's Annual
Shareholders' Meeting.
The Company's Certificate of Incorporation and its By-laws are silent on
the mechanics of voting. As a result, the General Corporation Law of the State
of Delaware is controlling. Under Delaware law the votes at the Company's Annual
Shareholders' Meeting will be counted by the inspectors of election required to
be appointed at the meeting. The inspectors are charged with ascertaining the
number of shares outstanding, the number of shares present, whether in person or
by proxy, and the validity of all proxies. The inspectors are entitled to rule
on any voting challenges and are responsible for the tabulation of the voting
results.
Under Delaware law, abstentions are counted in determining the quorum of
the meeting and as having voted on any proposal on which an abstention is voted.
Therefore, on those proposals which require a plurality vote of the shares at
the meeting that are entitled to vote, the vote of an abstention has no effect.
However, on those proposals which require an affirmative vote of the majority of
shares present in person or by proxy at the meeting, the vote of an abstention
has the effect of a vote against the proposal.
In the event of a broker non-vote arising from the absence of authorization
by the beneficial owner to vote on a proposal, the shares reported are counted
for the determination of a quorum for the meeting but they are not counted as
having voted on the proposal where there is a non-vote. Therefore, on those
proposals which require a plurality or a majority vote of the shares at the
meeting that are entitled to vote, a non-vote will have no effect. However, on
22
those proposals which require an affirmative vote of the majority of the shares
outstanding who are entitled to vote, a non-vote has the effect of a vote
against the proposal.
SHAREHOLDER PROPOSALS FOR 2007 ANNUAL MEETING
In order for a proposal by a shareholder of the Company to be included in
the Company's proxy statement and form of proxy for the 2007 Annual Meeting of
Shareholders, the proposal must be received by the Company no later than
December 2, 2006.
OTHER MATTERS
The Company knows of no matters, other than those referred to herein, which
will be presented at the meeting. If, however, any other appropriate business
should properly be presented at the meeting, the proxies named in the enclosed
form of proxy will vote the proxies in accordance with their best judgment.
ELECTRONIC DELIVERY
If you are a registered shareholder and have access to a computer and the
Internet, you may receive future Annual Reports and Proxy Statements
electronically. To sign up for electronic delivery, go to www.computershare.com.
Once you sign up, you will no longer receive a printed copy of the Annual Report
or the Proxy Statement, unless you request one. Each year you will receive an
e-mail explaining how to access the Annual Report and the Proxy Statement at any
time by contacting Computershare.
EXPENSES OF SOLICITATION
All expenses incident to the solicitation of proxies by the Company will be
paid by the Company. In addition to solicitation by mail, the Company has
retained D. F. King & Company of New York City, to assist in the solicitation of
proxies, including delivery of proxy materials. Fees for this solicitation are
expected to be approximately $6,500. The Company intends to reimburse brokerage
houses and other custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred in forwarding copies of solicitation material to
beneficial owners of Common Stock held of record by such persons. In a limited
number of instances, regular employees of the Company may solicit proxies in
person or by telephone.
By order of the Board of Directors.
SPENCER LEROY III
Secretary
Chicago, Illinois
March 31, 2006
23
Exhibit A
---------
AUDIT COMMITTEE CHARTER
COMMITTEE'S PURPOSE
The Audit Committee (the "Committee") is appointed by the Board of
Directors of Old Republic International Corporation (the "Corporation"): (A) to
assist the Board in monitoring (1) the integrity of the financial statements of
the Corporation and the effectiveness of the Corporation's internal controls
over financial reporting, (2) the Corporation's compliance with legal and
regulatory requirements, (3) the independent auditor's qualifications and
independence, and (4) the performance of the Corporation's internal audit
function and independent auditors; and (B) to prepare the report required by the
rules of the Securities and Exchange Commission (the "Commission") to be
included in the Corporation's annual proxy statement.
COMMITTEE MEMBERSHIP
The Committee shall consist of not less than three members of the Board,
one of whom shall be designated as the chairperson, appointed by the Board upon
the recommendation of the Board's Nominating Committee. Each appointed member
must meet the independence and experience requirements under the rules of the
New York Stock Exchange and the Sarbanes-Oxley Act of 2002 (the "Act)", and the
rules promulgated by the Commission under the Securities Exchange Act of 1934
(the "Exchange Act"). At least one member must be an "audit committee financial
expert" as defined by the Commission. No Director shall be eligible for
appointment to the Committee if he or she serves on the audit committees of more
than two other publicly held companies.
COMMITTEE MEETINGS
The Committee shall meet as often as it determines, but not less frequently
than once every fiscal quarter. The Committee shall meet periodically with
management, the internal auditors and the independent auditor in separate
executive sessions. The Committee may request any officer or employee of the
Corporation or the Corporation's outside counsel or independent auditor to
attend a meeting of the Committee or to meet with any members of, or consultants
to, the Committee. A majority of the Committee members, present in person or by
conference telephone or other conferencing equipment, shall constitute a quorum.
The Committee may form subcommittees consisting of one or more members for any
purpose it deems appropriate and may delegate to such subcommittee(s) such power
and authority as the Committee deems appropriate, other than power or authority
which the Committee is required by law or regulation or listing standard to
exercise as a whole.
DUTIES AND RESPONSIBILITIES
The Committee shall have the sole authority to appoint, retain, compensate,
evaluate and terminate the Corporation's independent auditors. The Committee
shall approve all audit engagement fees and terms, shall discuss with the
independent auditor the planning and staffing of the annual audit, and shall
approve all non-audit engagements that may be performed by the independent
auditors. The independent auditors shall report directly to the Committee, and
the Committee shall be directly responsible for the oversight of the independent
auditors, including resolution of disagreements between management and the
independent auditors.
The Committee shall have the authority, to the extent it deems necessary or
appropriate, to retain independent legal, accounting or other advisors. The
Corporation shall provide for appropriate funding, as determined by the
Committee, for payment of compensation to the independent auditors and to any
advisors employed by the Committee.
The Committee shall make regular reports to the Board. The Committee shall
review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval. The Committee shall annually review
the Committee's own performance.
The Committee, to the extent it deems necessary or appropriate, shall:
As to Financial Statement and Disclosure Matters:
------------------------------------------------
1. Review and discuss with management and the independent auditor
the Corporation's annual audited financial statements, including
footnotes and disclosures made in management's discussion and
analysis, and recommend to the Board whether the audited
financial statements should be included in the Corporation's Form
10-K.
A-1
2. Review and discuss with management and the independent auditor
the Corporation's quarterly financial statements prior to the
filing of its Form 10-Q.
3. Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with
the preparation of the Corporation's financial statements,
including any changes in the Corporation's selection or
application of accounting principles, any major issues as to the
effectiveness of the Corporation's internal controls over
financial reporting and any steps being adopted in light of
significant deficiencies or material weaknesses.
4. Review and discuss with the independent auditors:
(a) All critical accounting policies and practices that
are used.
(b) Any major recommended alternative treatments of
financial information within generally accepted
accounting principles that have been discussed with
management, ramifications of the possible use of such
alternative disclosures and treatments, and the
treatment preferred by the independent auditor.
(c) Other material written communications between the
independent auditor and management such as any
management letter or schedule of unadjusted
differences.
5. The Chief Executive Officer and/or the Chief Financial Officer
shall discuss with the Committee or its Chairman any change in
accounting policies, material charges or credits, and departures
in disclosures or presentation in the Corporation's quarterly
earnings release prior to the issuance of any release so
affected.
6. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives and any off-balance sheet
structures on the Corporation's financial statements.
7. Discuss periodically with management the Corporation's major
financial risk exposures and the steps management has taken to
monitor and control such exposures, including the Corporation's
risk assessment and risk management policies.
8. Discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to
the conduct of the audit, including any difficulties encountered
in the course of the audit work, any restrictions on the scope of
activities or access to requested information, and any
significant disagreements with management.
9. Review disclosures made to the Committee by the Corporation's CEO
and CFO during their certification process for the Form 10-K and
Form 10-Q about any significant deficiencies or material
weaknesses in the design or operation of internal controls and
any fraud involving management or other employees who have a
significant role in the Corporation's internal controls.
As to Oversight of the Corporation's Relationship with the Independent Auditor:
------------------------------------------------------------------------------
10. Review and evaluate the lead partner of the independent auditor
team.
11. At least annually, evaluate the independent auditor's
qualifications, performance and independence. In making its
evaluation, the Committee shall take into account the opinions of
management of the Corporation and the Corporation's internal
auditors. The Committee shall further ensure the rotation of the
lead audit partner at least every five years. The Committee shall
decide as to whether the Corporation is obtaining high quality
audits and whether rotation of the independent auditing firm
would be appropriate.
12. Recommend to the Board policies for the Corporation's hiring of
employees or former employees of the independent auditor who
participated in any capacity in the audit of the Corporation.
As to Oversight of the Corporation's Internal Audit Function:
------------------------------------------------------------
13. Review the appointment and replacement of the senior internal
auditing executive.
A-2
14. Review the significant reports to management prepared by the
internal auditing department and management's responses.
15. Discuss with the independent auditor and management the internal
audit department responsibilities, budget and staffing and any
recommended changes in the planned scope of the internal audit,
taking costs and benefits into account.
As to Compliance Oversight Responsibilities:
-------------------------------------------
16. Obtain reports from management, the Corporation's senior internal
auditing executive and the independent auditor that the
Corporation and its subsidiaries are in compliance with
applicable legal and regulatory requirements. Review reports and
disclosures of insider and affiliated party transactions. Advise
the Board with respect to the Corporation's policies and
procedures regarding compliance.
17. Establish procedures for the receipt, retention and treatment of
complaints received by the Corporation regarding accounting and
financial reporting matters, internal accounting controls or
auditing matters, and for the confidential, anonymous submission
by employees of concerns regarding material accounting or
auditing matters.
18. Discuss with management and the independent auditor any
correspondence with regulators or governmental agencies and any
published reports which raise material issues regarding the
Corporation's accounting policies, internal controls over
financial reporting and financial statements and disclosures.
19. Discuss with the Corporation's General Counsel legal matters that
may have a material impact on the financial statements or the
Company's compliance policies.
LIMITATION OF COMMITTEE'S ROLE
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Committee to plan or conduct audits or to
determine that the Corporation's financial statements and disclosures are
complete and accurate and are in accordance with generally accepted accounting
principles and applicable rules and regulations.
A-3
Exhibit B
---------
2006 INCENTIVE COMPENSATION PLAN
1. PURPOSE OF THE PLAN
The purpose of the Plan is to assist the Company and its Subsidiaries
in attracting and retaining selected individuals to serve the Company
who are expected to contribute to the Company's success and to achieve
long-term objectives which will inure to the benefit of all
stockholders of the Company through the additional incentives inherent
in the Awards hereunder.
2. DEFINITIONS
2.1. "Award" shall mean any Option, Other Stock Unit Award or any other
right, interest or option relating to Shares, or other property
(including cash) granted pursuant to the provisions of the Plan.
2.2. "Award Agreement" shall mean any written agreement, contract or
other instrument or document evidencing any Award granted by the
Committee hereunder, including through an electronic medium.
2.3. "Board" shall mean the Board of Directors of the Company.
2.4. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
2.5. "Committee" shall mean the Compensation Committee of the Board,
consisting of no fewer than three Directors, each of whom is (i) a
"non-employee director" within the meaning of Rule 16b-3 of the
Exchange Act, (ii) an "outside director" within the meaning of Section
162(m) of the Code, and (iii) an "independent director" for purpose of
the rules and regulations of the New York Stock Exchange (or such other
principal securities market on which the Shares are traded).
2.6. "Covered Employee" shall mean a "covered employee" within the
meaning of Section 162(m) of the Code.
2.7. "Director" shall mean a non-employee member of the Board.
2.8. "Employee" shall mean any employee of the Company or any
Subsidiary and any prospective employee conditioned upon, and effective
not earlier than, such person's becoming an employee of the Company or
any Subsidiary.
2.9. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.10. "Fair Market Value" of Shares as of any date shall mean the
composite transactions closing price for the Shares on the immediately
preceding trading date of the New York Stock Exchange, as published in
The Wall Street Journal (or if there were no reported prices on such
date, on the last preceding date on which the prices were reported) or,
if the Company is not then listed on the New York Stock Exchange, on
such other principal securities exchange on which the Shares are
traded, and if the Company is not listed on the New York Stock Exchange
or any other securities exchange, the Fair Market Value of Shares shall
be an amount, not less than book value, determined by the Committee in
its sole discretion.
2.11. "Option" shall mean any right granted to a Participant under the
Plan allowing such Participant to purchase Shares at such price or
prices and during such period or periods as the Committee shall
determine.
2.12. "Option Proceeds" shall mean the cash actually received by the
Company for the option price in connection with the exercise of Options
or options granted under the Prior Plans that are exercised after the
effective date of the Plan, plus the maximum tax benefit that could be
realized by the Company as a result of the exercise of such Options or
options granted under the Prior Plans, which tax benefit shall be
determined by multiplying (a) the amount that is deductible for federal
income tax purposes as a result of any such option exercise (currently
equal to the amount upon which the Participant's withholding tax
obligation is calculated), times (b) the maximum federal corporate
income tax rate for the year of exercise.
B-1
2.13. "Other Stock Unit Award" shall have the meaning set forth in
Section 5.1.
2.14. "Participant" shall mean an individual who is selected by the
Committee to receive an Award under the Plan.
2.15. "Payee" shall have the meaning set forth in Section 9.1 hereof.
2.16. "Performance Award" shall mean any Award granted pursuant to
Article 6 hereof.
2.17. "Performance Period" shall mean that period established by the
Committee at the time any Performance Award is granted or at any time
thereafter during which any performance goals specified by the
Committee with respect to such Award are to be measured.
2.18. "Permitted Assignee" shall have the meaning set forth in Section
8.3 hereof.
2.19. "Prior Plan" shall mean the Amended and Restated 2002 Old
Republic International Corporation Non-Qualified Stock Option Plan.
2.20. "Shares" shall mean the shares of Common Stock of the Company,
par value $1.00 per share.
2.21. "Securities Act" shall mean the Securities Act of 1933, as
amended.
2.22. "Subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Award, each of the corporations other
than the last corporation in the unbroken chain owns stock possessing
50% or more of the total combined voting power of all classes of stock
in one of the other corporations in the chain.
3. ELIGIBILITY AND ADMINISTRATION
3.1. Eligibility. Any individuals who, in the discretion of the
Committee, are in positions to affect the profitability and growth of
the Company shall be eligible to be selected as Participants.
3.2. Administration.
(a) The Plan shall be administered by the Committee. The Committee
shall have full power and authority, subject to the provisions of
the Plan and subject to such orders or resolutions not
inconsistent with the provisions of the Plan as may from time to
time be adopted by the Board, to: (i) select the Participants to
whom Awards may from time to time be granted hereunder; (ii)
determine the type or types of Awards, not inconsistent with the
provisions of the Plan, to be granted to each Participant
hereunder; (iii) determine the number of Shares to be covered by
each Award granted hereunder; (iv) determine the terms and
conditions, not inconsistent with the provisions of the Plan, of
any Award granted hereunder; (v) determine whether, to what
extent, and under what circumstances cash Awards made under the
Plan shall be deferred; (vi) determine whether, to what extent and
under what circumstances any Award shall be canceled or suspended;
(vii) interpret and administer the Plan and any instrument or
agreement entered into under or in connection with the Plan,
including any Award Agreement; (viii) correct any defect, supply
any omission or reconcile any inconsistency in the Plan or any
Award in the manner and to the extent that the Committee shall
deem desirable to carry it into effect; (ix) establish such rules
and regulations and appoint such agents as it shall deem
appropriate for the proper administration of the Plan; and (x)
make any other determination and take any other action that the
Committee deems necessary or desirable for administration of the
Plan.
(b) Decisions of the Committee shall be final, conclusive and
binding on all persons or entities, including the Company, any
Participant, and any Subsidiary. A majority of the members of the
Committee may determine its actions and fix the time and place of
its meetings.
(c) To the extent not inconsistent with applicable law, including
Section 162(m) of the Code, or the rules and regulations of the
New York Stock Exchange (or such other principal securities market
on which the Shares are traded), the Committee may delegate to a
committee of one or more Directors of the Company or, to the
extent permitted by law, to one or more executive officers or a
committee of executive officers of the Company or its Subsidiaries
the right to grant Awards to Employees who are not executive
officers of the Company and the authority to take action on behalf
of the Committee pursuant to the Plan to cancel or suspend Awards
to Employees who are not executive officers of the Company.
B-2
4. OPTIONS
4.1. Number of Shares Subject to the Plan.
a) Subject to adjustment as provided in Section 8.2 hereof, the
aggregate number of Shares subject to Awards and issued pursuant
to this Plan shall not exceed nine percent (9%) of the Shares
issued and outstanding (excluding Shares held by the Company and
any of its Subsidiaries) as of the end of the month immediately
preceding the granting of an Award hereunder, less the aggregate
number of Shares subject to options then outstanding under the
Company's Prior Plan.
b) If any Shares subject to an Award or to an award under the
Prior Plan are forfeited, expire or terminate without issuance of
all or a portion of the Shares subject to such Award, the Shares
shall, to the extent of such forfeiture, expiration, termination
or non-issuance, again be available for Awards under the Plan.
c) In the event that (i) any Option granted hereunder is
exercisable through the tendering of Shares (either actually or by
attestation) or by the withholding of Shares by the Company, or
(ii) withholding tax liabilities arising from such Option or Prior
Plan award are satisfied by the tendering of Shares (either
actually or by attestation) or by the withholding of Shares by the
Company, then only the number of Shares issued net of the Shares
tendered or withheld shall be counted for purposes of determining
the maximum number of Shares available for grant under the Plan,
and the Shares so tendered or withheld shall again be available
for Awards under the Plan.
d) Shares reacquired by the Company on the open market using
Option Proceeds shall be available for Awards under the Plan.
e) In the event that a company acquired by the Company or any
Subsidiary or with which the Company or any Subsidiary combines
has shares available under a pre-existing plan approved by
shareholders and not adopted in contemplation of such acquisition
or combination, the shares available for grant pursuant to the
terms of such pre-existing plan (as adjusted, to the extent
appropriate, using the exchange ratio or other adjustment or
valuation ratio or formula used in such acquisition or combination
to determine the consideration payable to the holders of common
stock of the entities party to such acquisition or combination)
may be used for Awards under the Plan and shall not reduce the
Shares authorized for grant under the Plan; provided that Awards
using such available shares shall not be made after the date
awards or grants could have been made under the terms of the
pre-existing plan, absent the acquisition or combination, and
shall only be made to individuals who were not Employees prior to
such acquisition or combination.
4.2. Character of Shares. Any Shares issued hereunder may consist, in
whole or in part, of authorized and unissued shares, Treasury shares or
shares purchased in the open market or otherwise.
4.3. Grant of Options. Options may be granted hereunder to Participants
either alone or in addition to other Awards granted under the Plan. Any
Option shall be subject to the terms and conditions of this Article 4
and to such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall deem desirable.
4.4. Award Agreements. The Options granted pursuant to this Article 4
shall be evidenced by a written Award Agreement in such form and
containing such terms and conditions as the Committee shall determine
which are not inconsistent with the provisions of the Plan. The terms
of Options need not be the same with respect to each Participant.
Granting of an Option pursuant to the Plan shall impose no obligation
on the recipient to exercise such Option. Any individual who is granted
an Option pursuant to this Article 4 may hold more than one Option
granted pursuant to the Plan at the same time.
4.5. Option Price. The option price per each Share purchasable under
any Option granted pursuant to this Article 4 shall not be less than
100% of the Fair Market Value of such Share, as defined in Section 2.10
above. Other than pursuant to Section 8.2 hereof, the Committee shall
B-3
not without the approval of the Company's stockholders (a) lower the
option price per Share of an Option after it is granted, (b) cancel an
Option when the option price per Share exceeds the Fair Market Value of
the underlying Shares in exchange for another Award, or (c) take any
other action with respect to an Option that may be treated as a
repricing under the rules and regulations of the New York Stock
Exchange (or such other principal securities market on which the Shares
are traded).
4.6. Option Term. The term of each Option shall be fixed by the
Committee in its sole discretion; provided that no Option shall be
exercisable after the expiration of ten (10) years from the date the
Option is granted, except in the event of death or disability.
4.7. Exercise of Options. Vested Options granted under the Plan shall
be exercised by the Participant or by a Permitted Assignee thereof (or
by the Participant's executors, administrators, guardian or legal
representative, as may be provided in an Award Agreement) as to all or
part of the Shares covered thereby, by the giving of written notice of
exercise to the Company or its designated agent, specifying the number
of Shares to be purchased, accompanied by payment of the full purchase
price for the Shares being purchased, together with the amount required
to be withheld by the then current Internal Revenue Code and
Regulations and applicable state income taxes. Unless otherwise
provided in an Award Agreement, full payment of such purchase price
shall be made at the time of exercise and shall be made in cash or cash
equivalents (including certified check or bank check or wire transfer
of immediately available funds). The notice of exercise, accompanied by
such payment, shall be delivered to the Company at its principal
business office or such other office as the Committee may from time to
time direct, and shall be in such form, containing such further
provisions consistent with the provisions of the Plan, as the Committee
may from time to time prescribe. In no event may any Option granted
hereunder be exercised for a fraction of a Share. No adjustment shall
be made for cash dividends or other rights for which the record date is
prior to the date of such issuance.
4.8. Amount Exercisable. Each Option may be exercised, so long as it is
valid and outstanding, from time to time in part or as a whole, subject
to the following percentage limitations and any limitations with
respect to the number of Shares for which the Option may be exercised
at a particular time and to such other conditions as the Committee in
its discretion may specify upon granting the Option.
(a) Options may be exercised in accordance with the following
schedule of vesting:
Annual Cumulative
------ ----------
10% as of December 31st of the year of the grant 10%
15% as of the second December 31st following the date of the grant 25%
20% as of the third December 31st following the date of the grant 45%
25% as of the fourth December 31st following the date of the grant 70%
30% as of the fifth December 31st following the date of the grant; 100%
(b) If the Participant (i) dies while in the employ of the Company
or any Subsidiary, or (ii) retires in good standing from the
employ of the Company or any Subsidiary after attaining age 57, or
(iii) retires as a result of disability under the then established
rules of the Company or the Subsidiary, then options shall vest to
the extent of the higher of:
(1) 10% of the number of Shares covered by the Option for
each year that the Participant has been employed by the Company or
any Subsidiary; or
(2) the actual vested percentage determined pursuant to the
schedule in subparagraph (a) above, plus 50% of the unvested
remaining Shares;
determined as of the date of the Participant's death or
retirement, with no additional vesting thereafter; or
(c) If there is any Change of Control of the Company, as defined
below, regardless of the resulting price per Share of stock, then
options shall vest in accordance with the vesting provisions set
forth in the preceding subparagraph (b) hereof, and any Shares
remaining unvested thereafter shall vest in accordance with the
vesting schedule in subparagraph (a) above.
B-4
The right to purchase shall be cumulative and may be exercised as
to any Shares not previously purchased during the remainder of the term
of the Option.
For purposes of subparagraphs (b) and (c) above, years of
employment shall be measured from the date an Employee was first
employed by the Company or any Subsidiary and shall include periods of
employment prior to the time when the Subsidiary or division of the
Company was acquired by the Company. As used in subparagraph (c) above,
the term "Change of Control" of the Company refers to: (i) the date of
any consolidation or merger of the Company in which the Company is not
the continuing or surviving corporation or pursuant to which Shares of
the Company's stock would be converted into cash, securities or other
property; or (ii) the date of any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company, other than any
sale, lease, exchange or other transfer to any corporation where the
Company owns, directly or indirectly, at least 80% of the outstanding
voting securities of such corporation after any such transfer; or (iii)
the date of any plan or proposal for the liquidation or dissolution of
the Company; or (iv) the date any person (as such term is used in
Section 13(d) of the Securities Exchange Act of 1934), other than the
Old Republic International Corporation Employees Savings and Stock
Ownership Trust or any other trust established by or contributed to by
the Company or any of its Subsidiaries for the benefit of Employees of
the Company or its Subsidiaries, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 20% or
more of the Company's outstanding stock; or (v) the date, during any
period of twenty-four (24) consecutive months, on which individuals who
at the beginning of such period constitute the entire Board shall cease
for any reason to constitute a majority thereof.
4.9. Termination of Options Upon Severance of Employment. Except as
otherwise expressly provided herein, Options shall terminate
immediately upon severance of the employment relationship between the
Company and its Subsidiaries and the Participant for any reason, for or
without cause, other than death or retirement in good standing from the
employ of the Company or its Subsidiaries for reasons of age or
disability under the then established rules of the Company or the
Subsidiary. Whether authorized leave of absence, or absence on military
or government service, shall constitute severance of the employment
relationship between the Company and the Subsidiary and the Participant
shall be determined by the Committee at the time thereof.
(a) Death. In the event of the death of a Participant while in the
employ of the Company or any Subsidiary and before the date of
expiration of an Option held by such Participant, such Option
shall terminate on the earlier of its date of expiration or four
(4) years following the date of such death. After the death of the
Participant, the Participant's executors, administrators, or any
person or persons to whom the Participant's Option may be
transferred by will, by the laws of descent and distribution or by
beneficiary designation shall have the right, at any time prior to
such termination, to exercise the Option, in whole or in part. The
number of Shares vested and exercisable, however, shall be
determined as of the date of death, with no further vesting
thereafter.
(b) Retirement. If, before the date of expiration of an Option,
the Participant holding the Option shall be retired in good
standing from the employ of the Company or any Subsidiary for
reasons of age or disability under the then established rules of
the Company or the Subsidiary, the Option shall terminate on the
earlier of the normal date of expiration or four (4) years after
the date of such retirement. In the event of such retirement, the
Option shall be exercisable prior to the termination of such
Option to the extent to which the Participant was entitled to
exercise such Option immediately prior to such retirement unless
the provisions of Section 4.8(b) hereof concerning accelerated
vesting apply. An employment relationship between the Company and
the Participant shall be deemed to exist during any period in
which the Participant is employed by the Company or any
Subsidiary. If the Participant dies after retirement, but prior to
the expiration date of the Option, the Option period shall not be
extended but shall terminate on the earlier of the date of
expiration or four (4) years after the date of retirement. The
number of Shares vested and exercisable, however, shall be
determined as of the date of retirement, with no further vesting
thereafter.
(c) Change of Control of the Company. In the event of any
involuntary severance of the employment relationship between the
Participant and the Company or its Subsidiaries occurring within
eighteen (18) months after any Change of Control of the Company,
as defined in Section 4.8 hereof, such Option shall terminate on
the earlier of its scheduled date of expiration or six (6) months
following severance of the employment relationship.
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4.10. Requirements of Law. The Company shall not be required to sell or
issue any Shares under any Option if the issuance of such Shares shall
constitute a violation by the holder or the Company of any provisions
of any law or regulation of any governmental authority. In addition, in
connection with the Securities Act, upon exercise of any Option, the
Company shall not be required to issue such Shares unless the Committee
has received evidence satisfactory to it to the effect that the holder
of such Option will not transfer such Shares except pursuant to a
registration statement in effect under the Securities Act or unless an
opinion of counsel to the Company has been received by the Company to
the effect that such registration is not required. Any determination in
this connection by the Committee shall be final, binding and
conclusive. At the request of the Company to enable it to comply with
the Securities Act, the person exercising the Option shall also
represent in writing that the Shares acquired upon exercise of the
Option are being acquired for the holder's own account for investment
and not with a view to resale. In the event the Shares issuable on
exercise of an Option are not registered under the Securities Act, the
Company may imprint the following legend or any other legend which
counsel for the Company considers necessary or advisable to comply with
the Securities Act.
"The shares of stock represented by this certificate have
not been registered under the Securities Act of 1933 or
under the securities laws of any state and may not be sold
or transferred except upon such registration or upon receipt
by the Company of an opinion of counsel satisfactory to the
Company, in form and substance satisfactory to the Company,
that registration is not required for such sale or
transfer."
4.11. The Company may, but shall in no event be obligated to, register
any securities covered hereby pursuant to the Securities Act (as now in
effect or as hereafter amended); and in the event any Shares are so
registered the Company may remove any legend on certificates
representing such Shares. The Company shall make reasonable efforts to
cause the exercise of an Option or the issuance of Shares pursuant
thereto to comply with any law or regulation of any governmental
authority.
4.12. No Rights as Shareholder. No Option holder shall have rights as a
shareholder with respect to Shares covered by the Option until the date
of issuance of a stock certificate for such Shares; and, except as
otherwise provided in Section 8.2 hereof, no adjustment for dividends,
or otherwise, shall be made if the record date thereof is prior to the
date of issuance of such certificate.
5. OTHER STOCK UNIT AWARDS
5.1. Grants. Stock appreciation rights, restricted stock or other
Awards of units having a value equal to an identical number of Shares
("Other Stock Unit Awards") may be granted hereunder to Participants,
in addition to other Awards granted under the Plan. Other Stock Unit
Awards shall also be available as a form of payment of other Awards
granted under the Plan and other earned cash-based incentive
compensation.
5.2. Award Agreements. The terms of Other Stock Unit Awards granted
hereunder shall be set forth in a written Award Agreement which shall
contain provisions determined by the Committee and not inconsistent
with the Plan. The terms of such Awards need not be the same with
respect to each Participant.
5.3. Payment. Except as provided in Article 7 or as may be provided in
an Award Agreement, Other Stock Unit Awards may be paid in Shares, cash
or other property, or any combination thereof, in the sole discretion
of the Committee at the time of payment. Other Stock Unit Awards may be
paid in a lump sum or in installments or, in accordance with procedures
established by the Committee, on a deferred basis subject to the
requirements of Section 409A of the Code.
6. PERFORMANCE AWARDS
6.1. Grants. Performance Awards in the form of cash may be granted
hereunder to Participants, either alone or in addition to other Awards
granted under the Plan. The performance goals to be achieved for each
Performance Period shall be conclusively determined by the Committee
and shall be based upon the criteria set forth in Section 7.2 hereof.
6.2. Award Agreements. The terms of any Performance Award granted under
the Plan shall be set forth in a written Award Agreement which shall
contain provisions determined by the Committee and not inconsistent
with the Plan. The terms of Performance Awards need not be the same
with respect to each Participant.
6.3. Terms and Conditions. The performance criteria to be achieved
during any Performance Period and the length of the Performance Period
shall be determined by the Committee; provided, however, that a
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Performance Period shall not be shorter than twelve (12) months. The
amount of the Award to be distributed shall be conclusively determined
by the Committee.
6.4. Payment. Except as may otherwise be provided in an Award
Agreement, Performance Awards will be distributed only after the end of
the relevant Performance Period. Performance Awards shall be paid in
cash and may be paid in a lump sum or in installments following the
close of the Performance Period or, in accordance with procedures
established by the Committee, on a deferred basis subject to the
requirements of Section 409A of the Code.
7. CODE SECTION 162(m) PROVISIONS
7.1. Covered Employees. Notwithstanding any other provision of the
Plan, if the Committee determines at the time an Award is granted to a
Participant who is, or is likely to be, as of the end of the tax year
in which the Company would claim a tax deduction in connection with
such Award, a Covered Employee, then the Committee may provide that
this Article 7 is applicable to such Award.
7.2. Performance Criteria. If the Committee determines that an Award is
subject to this Article 7, the distribution of cash, Shares or other
property pursuant thereto, as applicable, shall be subject to the
achievement of one or more objective performance goals established by
the Committee, which shall be based on the attainment of specified
levels of one or any combination of the following: net sales; revenue;
revenue growth; operating income; pre- or after-tax income (before or
after allocation of corporate overhead and bonus); net earnings;
earnings per share; net income; division, group or corporate financial
goals; return on equity; total shareholder return; return on assets or
net assets; attainment of strategic and operational initiatives;
appreciation in and/or maintenance of the price of the Shares or any
other publicly-traded securities of the Company; market share; gross
profits; earnings (including earnings before taxes, earnings before
interest and taxes or earnings before interest, taxes, depreciation and
amortization); economic value-added models; comparisons with various
stock market indices; reductions in costs; cash flow (before or after
dividends); cash flow per share (before or after dividends); return on
capital (including return on total capital or return on invested
capital; cash flow return on investment; improvement in or attainment
of expense levels or working capital levels; and cash margins. Such
performance goals also may be based solely by reference to the
Company's performance or the performance of a Subsidiary, division,
business segment or business unit of the Company, or based upon the
relative performance of other companies or upon comparisons of any of
the indicators of performance relative to other companies. The
Committee may also exclude charges related to an event or occurrence
which the Committee determines should appropriately be excluded,
including (a) restructurings, discontinued operations, extraordinary
items, and other unusual or non-recurring charges, (b) an event either
not directly related to the operations of the Company or not within the
reasonable control of the Company's management, or (c) the cumulative
effects of tax or accounting changes in accordance with generally
accepted accounting principles. Such performance goals shall be set by
the Committee within the time period prescribed by, and shall otherwise
comply with the requirements of, Section 162(m) of the Code, and the
regulations thereunder.
7.3. Adjustments. Notwithstanding any provision of the Plan (other than
Section 7.5 hereof), with respect to any Award that is subject to this
Article 7, the Committee may adjust downwards, but not upwards, the
amount payable pursuant to such Award, and the Committee may not waive
the achievement of the applicable performance goals, except in the case
of the death or disability of the Participant or as otherwise
determined by the Committee in special circumstances.
7.4. Restrictions. The Committee shall have the power to impose such
other restrictions on Awards subject to this Article as it may deem
necessary or appropriate to ensure that such Awards satisfy all
requirements for "performance-based compensation" within the meaning of
Section 162(m) of the Code.
7.5. Impact of Change of Control. The terms of any Performance Award
may provide in the Award Agreement evidencing the Award that, upon a
"Change of Control" of the Company (as that term may be defined
therein), all Performance Awards shall be considered to be earned and
payable (either in full or pro rata based on the portion of Performance
Period completed as of the date of the Change of Control), and any
deferral or other restriction shall lapse and such Performance Awards
shall be immediately settled or distributed. For purposes hereof, a
"Change of Control" shall mean an event described in an Award Agreement
evidencing the Award or such other event as determined in the sole
discretion of the Board.
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7.6. Termination of Employment. The Committee shall determine and set
forth in each Award Agreement whether any Performance Awards granted in
such Award Agreement will continue to be exercisable, and the terms of
such exercise, on and after the date that a Participant ceases to be
employed by or to provide services to the Company or any Subsidiary,
whether by reason of death, disability, voluntary or involuntary
termination of employment or services, or otherwise. The date of
termination of a Participant's employment or services will be
determined by the Committee, which determination will be final.
7.7. Limitations on Grants to Individual Participant. Subject to
adjustment as provided in Section 8.2, no Participant may be granted
(i) Options during any thirty-six month period with respect to more
than 2,000,000 Shares, or (ii) Other Stock Unit Awards that are
denominated in Shares in any thirty-six month period with respect to
more than 400,000 Shares. In addition to the foregoing, the maximum
dollar value payable to any Participant in any twelve-month period with
respect to Performance Awards is $3,000,000.
8. GENERALLY APPLICABLE PROVISIONS
8.1. Amendment and Termination of the Plan. The Board may, from time to
time, alter, amend, suspend or terminate the Plan as it shall deem
advisable, subject to any requirement for stockholder approval imposed
by applicable law, including the rules and regulations of the New York
Stock Exchange (or such other principal securities market on which the
Shares are traded) provided that the Board may not amend the Plan in
any manner that would result in noncompliance with Rule 16b-3 of the
Exchange Act. In addition, no amendments to, or termination of, the
Plan shall in any way impair the rights of a Participant under any
Award previously granted without such Participant's consent.
8.2. Adjustments. In the event of any merger, reorganization,
consolidation, recapitalization, dividend or distribution (whether in
cash, shares or other property, other than a regular cash dividend),
stock split, reverse stock split, spin-off or similar transaction or
other change in corporate structure affecting the Shares or the value
thereof, such adjustments and other substitutions shall be made to the
Plan and to Awards as the Committee, in its sole discretion, deems
equitable or appropriate taking into consideration the accounting and
tax consequences, including such adjustments in the aggregate number,
class and kind of securities that may be delivered under the Plan and,
in the aggregate or to any one Participant, in the number, class, kind
and option or exercise price of securities subject to outstanding
Awards granted under the Plan (including, if the Committee deems
appropriate, the substitution of similar options to purchase the shares
of, or other awards denominated in the shares of, another company) as
the Committee may determine to be appropriate in its sole discretion;
provided, however, that the number of Shares subject to any Award shall
always be a whole number.
8.3. Transferability of Awards. Except as provided below, and except as
otherwise authorized by the Committee in an Award Agreement, no Award
and no Shares subject to Awards that have not been issued or as to
which any applicable restriction, performance or deferral period has
not lapsed, may be sold, assigned, transferred, pledged or otherwise
encumbered, other than by will, living trust or the laws of descent and
distribution, and such Award may be exercised during the life of the
Participant only by the Participant or the Participant's guardian or
legal representative. Notwithstanding the foregoing, an Award may be
assigned to a beneficiary pursuant to a written designation filed with
the Company during the Participant's lifetime (each transferee thereof,
a "Permitted Assignee"); provided that such Permitted Assignee shall be
bound by and subject to all of the terms and conditions of the Plan and
the Award Agreement relating to the transferred Award and shall execute
an agreement satisfactory to the Company evidencing such obligations;
and provided further that the Participant shall remain bound by the
terms and conditions of the Plan. The Company shall cooperate with any
Permitted Assignee and the Company's transfer agent in effectuating any
transfer permitted under this Section 8.3.
9. MISCELLANEOUS
9.1. Tax Withholding. The Company shall have the right to make all
payment or distributions pursuant to the Plan to a Participant of a
Permitted Assignee thereof (any such Participant or Permitted Assignee
hereafter referred to as a "Payee") net of any applicable federal,
state and local taxes required to be paid or withheld as a result of
the grant of any Performance Award or the exercise of an Option. The
Company or any Subsidiary shall have the right to withhold from wages
or other amounts otherwise payable to such Payee such withholding taxes
as may be required by law, or to otherwise require the Payee to pay
such withholding taxes. If the Payee shall fail to make such tax
payments as are required, the Company or its Subsidiaries shall, to the
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extent permitted by law, have the right to deduct any such taxes from
any payment of any kind otherwise due to such Payee or to take such
other action as may be necessary to satisfy such withholding
obligations.
9.2. Right of Discharge Reserved; Claims to Awards. Nothing in the Plan
nor the grant of an Award hereunder shall confer upon any Employee the
right to continue in the employment or service of the Company or any
Subsidiary or affect any right that the Company or any Subsidiary may
have to terminate the employment or service of (or to demote or to
exclude from future Awards under the Plan) any such Employee at any
time for any reason. Except as specifically provided by the Committee,
the Company shall not be liable for the loss of existing or potential
profit from an Award granted in the event of termination of an
employment or other relationship. No Employee or Participant shall have
any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Employees or Participants
under the Plan.
9.3. Prospective Recipient. The prospective recipient of any Award
under the Plan shall not, with respect to such Award, be deemed to have
become a Participant, or to have any rights with respect to such Award,
until and unless such recipient shall have executed an agreement or
other instrument evidencing the Award and delivered a copy thereof to
the Company, and otherwise complied with the then applicable terms and
conditions.
9.4. Substitute Awards. Notwithstanding any other provision of the
Plan, the terms of Substitute Awards may vary from the terms set forth
in the Plan to the extent the Committee deems appropriate to conform,
in whole or in part, to the provisions of the awards in substitution
for which they are granted.
9.5. Cancellation of Award. Notwithstanding anything to the contrary
contained herein, all outstanding Awards granted to any Participant
shall be canceled if the Participant, without the consent of the
Company, while employed by the Company or any Subsidiary or after
termination of such employment or service, establishes a relationship
with a competitor of the Company or any Subsidiary or engages in
activity that is in conflict with or adverse to the interest of the
Company or any Subsidiary, as determined by the Committee in its sole
discretion. The Committee may provide in an Award Agreement that if
within the time period specified in the Agreement the Participant
establishes a relationship with a competitor or engages in an activity
referred to in the preceding sentence, the Participant will forfeit any
gain realized on the vesting or exercise of the Award and must repay
such gain to the Company.
9.6. Stop Transfer Orders. All certificates for Shares delivered under
the Plan pursuant to any Award shall be subject to such stop-transfer
orders and other restrictions as the Committee may deem advisable under
the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Shares are then
listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
9.7. Nature of Payments. All Awards made pursuant to the Plan are in
consideration of services performed or to be performed for the Company
or any Subsidiary, division or business unit of the Company. Any income
or gain realized pursuant to Awards under the Plan constitutes a
special incentive payment to the Participant and shall not be taken
into account, to the extent permissible under applicable law, as
compensation for purposes of any of the employee benefit plans of the
Company or any Subsidiary except as may be determined by the Committee
or by the Board or board of directors of the applicable Subsidiary.
9.8. Other Plans. Nothing contained in the Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
specific cases.
9.9. Severability. If any provision of the Plan shall be held unlawful
or otherwise invalid or unenforceable in whole or in part by a court of
competent jurisdiction, such provision shall (a) be deemed limited to
the extent that such court of competent jurisdiction deems it lawful,
valid and/or enforceable and as so limited shall remain in full force
and effect, and (b) not affect any other provision of the Plan or part
thereof, each of which shall remain in full force and effect. If the
making of any payment or the provision of any other benefit required
under the Plan shall be held unlawful or otherwise invalid or
unenforceable by a court of competent jurisdiction, such unlawfulness,
invalidity or unenforceability shall not prevent any other payment or
benefit from being made or provided under the Plan, and if the making
of any payment in full or the provision of any other benefit required
under the Plan in full would be unlawful or otherwise invalid or
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unenforceable, then such unlawfulness, invalidity or unenforceability
shall not prevent such payment or benefit from being made or provided
in part, to the extent that it would not be unlawful, invalid or
unenforceable, and the maximum payment or benefit that would not be
unlawful, invalid or unenforceable shall be made or provided under the
Plan.
9.10. Construction. As used in the Plan, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words
"without limitation."
9.11. Unfunded Status of the Plan. The Plan is intended to constitute
an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant by the Company,
nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company. In
its sole discretion, the Committee may authorize the creation of trusts
or other arrangements to meet the obligations created under the Plan to
deliver the Shares or payments in lieu of or with respect to Awards
hereunder; provided, however, that the existence of such trusts or
other arrangements is consistent with the unfunded status of the Plan.
9.12. Governing Law. The Plan and all determinations made and actions
taken thereunder, to the extent not otherwise governed by the Code or
the laws of the United States, shall be governed by the laws of the
State of Illinois, without reference to principles of conflict of laws,
and construed accordingly.
9.13. Effective Date of Plan; Termination of Plan. The Plan shall be
effective as of February 23, 2006, subject to its approval by the
holders of the shares entitled to vote at a duly constituted meeting of
the stockholders of the Company within twelve (12) months thereafter.
The Plan shall be null and void and of no effect if the foregoing
condition is not fulfilled and in such event each Award shall,
notwithstanding any of the preceding provisions of the Plan, be null
and void and of no effect. Awards may be granted under the Plan at any
time and from time to time on or prior to the tenth anniversary of the
effective date of the Plan, on which date the Plan will expire except
as to Awards then outstanding under the Plan. Such outstanding Awards
shall remain in effect until they have been exercised or terminated, or
have expired.
9.14. Foreign Employees. Awards may be granted to Participants who are
foreign nationals or employed outside the United States, or both, on
such terms and conditions different from those applicable to Awards to
Employees employed in the United States as may, in the judgment of the
Committee, be necessary or desirable in order to recognize differences
in local law or tax policy. The Committee also may impose conditions on
the exercise or vesting of Awards in order to minimize the Company's
obligation with respect to tax equalization for Employees on
assignments outside their home country.
9.15. Compliance with Section 409A of the Code. This Plan is intended
to comply and shall be administered in a manner that is intended to
comply with Section 409A of the Code and shall be construed and
interpreted in accordance with such intent. To the extent that an Award
or the payment, settlement or deferral thereof is subject to Section
409A of the Code, the Award shall be granted, paid, settled or deferred
in a manner that will comply with Section 409A of the Code, including
regulations or other guidance issued with respect thereto, except as
otherwise determined by the Committee. Any provision of this Plan that
would cause the grant of an Award or the payment, settlement or
deferral thereof to fail to satisfy Section 409A of the Code shall be
amended to comply with Section 409A of the Code on a timely basis,
which may be made on a retroactive basis, in accordance with
regulations and other guidance issued under Section 409A of the Code.
9.16. Captions. The captions in the Plan are for convenience of
reference only, and are not intended to narrow, limit or affect the
substance or interpretation of the provisions contained herein.
9.17. Shareholder Approval and Termination. This Plan shall be
effective on the date it is approved by the affirmative vote of the
holders of a majority of the Company's securities present and entitled
to vote at a meeting duly held in accordance with the applicable laws
of Delaware. It shall terminate on February 23, 2016, provided,
however, that the Board may at any time amend, suspend or terminate the
Plan. No termination or amendment of the Plan may, without the consent
of the Participant to whom any Award shall have been theretofore
granted, adversely affect the rights of such Participant under such
Award.
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