THE COMMERCE GROUP, INC.
211 MAIN STREET ~ WEBSTER ~ MASSACHUSETTS 01570
April 11, 2002
To Our Stockholders:
I am pleased to invite you to attend the 2002 Annual Meeting of
Stockholders of The Commerce Group, Inc., which will be held at 9:00 a.m.
on Friday, May 17, 2002, in the Company's Underwriting Building, 11 Gore
Road (Route 16), Webster, Massachusetts.
The accompanying Notice of the Annual Meeting of Stockholders and
Proxy Statement set forth the business to come before this year's Annual
Meeting.
If you plan to attend the meeting, please bring a form of personal
identification with you and, if you are acting as proxy for another,
please bring written confirmation from the record owner that you are
acting as proxy.
Whether or not you expect to attend the meeting, please sign and date
the enclosed form of proxy and return it promptly in the accompanying
envelope to ensure that your shares will be represented. If you attend
the meeting, you may withdraw any proxy previously given and vote your
shares in person if you so desire.
Cordially,
ARTHUR J. REMILLARD, JR.
President, Chief Executive Officer
and Chairman of the Board
Table of Contents
Page
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS......................... -
GENERAL INFORMATION.............................................. 1
VOTES REQUIRED................................................... 1
COST OF SOLICITATION............................................. 2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................. 2
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.......... 4
GOVERNANCE OF THE COMPANY........................................ 4
REPORT OF THE AUDIT COMMITTEE.................................... 6
ELECTION OF DIRECTORS............................................ 7
EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS.................... 10
Summary Compensation Table.................................. 10
Option Grants in Last Fiscal Year........................... 11
Aggregated Fiscal Year-End Option/SAR Values................ 12
Long-Term Incentive Plan - Book Value Awards................ 13
COMPENSATION COMMITTEE REPORT.................................... 14
COMMON STOCK PERFORMANCE......................................... 16
DESCRIPTION OF AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN.. 17
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 22
INDEPENDENT AUDITORS............................................. 22
OTHER BUSINESS................................................... 22
STOCKHOLDER PROPOSALS............................................ 22
APPENDIX A - AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN.... A-1
The Commerce Group, Inc.
211 Main Street
Webster, MA 01570
(508) 943-9000
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2002
April 11, 2002
To Our Stockholders:
You are cordially invited to attend the 2002 Annual Meeting of
Stockholders of The Commerce Group, Inc. (the "Company") at the
Company's Underwriting Building located at 11 Gore Road (Route 16),
Webster, Massachusetts at 9:00 a.m. on Friday, May 17, 2002. The
meeting is called for the purpose of considering and acting upon:
1. A proposal to fix at 17 the number of directors of the
Company and to elect such directors.
2. A proposal to approve the Amended and Restated Incentive
Compensation Plan.
3. The transaction of such other business as may properly come
before the meeting or any adjournment or adjournments
thereof.
The close of business on March 22, 2002 was fixed by your Board
of Directors as the record date for the determination of
stockholders entitled to notice of and to vote at the meeting.
We urge you to attend and to participate at the meeting, no
matter how many shares you own. Even if you do not expect to attend
the meeting personally, we urge you to please vote, and then sign,
date and return the enclosed proxy card in the postpaid envelope
provided. If you receive more than one proxy card because your
shares are registered in different names or at different addresses,
please sign and return each proxy card so that all of your shares
will be represented at the meeting.
By Order of the Board of Directors
JOHN W. SPILLANE
Clerk
THE COMMERCE GROUP, INC.
211 Main Street
Webster, MA 01570
(508) 943-9000
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2002
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation
of Proxies by the Board of Directors of The Commerce Group, Inc. (the
"Company"). The Proxies will be used at the Annual Meeting of the
Stockholders of the Company on Friday, May 17, 2002 at 9:00 o'clock a.m.
at the Company's Underwriting Building located at 11 Gore Road (Route 16)
in Webster, Massachusetts and at any adjournment or adjournments thereof
(the "Annual Meeting"). The Company's Annual Report to Stockholders,
containing the financial statements for the year ended December 31, 2001
and the report of the Company's independent auditors, Ernst & Young LLP
thereon, is being mailed with this Proxy Statement to the Company's
stockholders of record at the close of business on March 22, 2002. The
Company mailed this Proxy Statement and related form of Proxy on or about
April 11, 2002.
VOTES REQUIRED
A Proxy is enclosed. Unless contrary instructions are indicated on
the Proxy, or the Proxy is revoked, all shares represented by Proxy
received will be voted FOR a proposal to fix at 17 the number of directors
of the Company, FOR the election of the nominees for directors named on
page 7, FOR approval of the Amended and Restated Incentive Compensation
Plan (the "Amended Plan"), and by the Proxy holders in their discretion on
any other business properly to come before the Annual Meeting. If a
stockholder specifies a different choice by means of the Proxy, the shares
will be voted as specified. A stockholder may revoke a Proxy at any time
prior to the time it is voted by filing with the Clerk of the Company, or
its transfer agent, a written notice of revocation or by delivering to the
Company, or its transfer agent, a duly executed Proxy bearing a later
date. Any stockholder who attends the Annual Meeting in person will not
be deemed thereby to revoke the Proxy, unless such stockholder
affirmatively indicates thereat his or her intention to vote the shares in
person.
So long as a quorum is present at the Annual Meeting, the Directors
shall be elected by a plurality of the votes cast at the Annual Meeting by
the holders of shares entitled to vote thereat. There is no cumulative
voting in the election of directors. With regard to the election of
directors, votes may be cast in favor or withheld; votes that are withheld
will have no effect on the outcome of the election of directors. Broker
non-votes and shares represented by any Proxy as to which the vote for
each director nominee has been withheld will be treated as shares present
or represented at the Annual Meeting for quorum purposes. (A "broker non-
vote" occurs when a registered broker holding a customer's shares in the
name of the broker has not received voting instructions on a matter from
the customer and is barred from exercising discretionary authority to vote
on the matter, which the broker indicates on the proxy.)
With regard to the proposal to approve the Amended Plan, the
affirmative vote of a majority of the votes cast on the proposal is
required for approval of the Amended Plan, provided that the total vote
cast on the proposal represents a majority of the shares of Common Stock
entitled to vote. For purposes of the vote on the Amended Plan, an
abstention or a broker non-vote will have the effect of a vote against the
proposal, unless holders of a majority of the Common Stock entitled to
vote on the proposal in fact cast votes, in person or by proxy, with
respect to that proposal, in which event neither an abstention nor a
broker non-vote will have any effect on the result of the vote.
Only the holders of record of shares of Common Stock at the close of
business on March 22, 2002 will be entitled to receive notice of and to
vote at the Annual Meeting.
1
At the close of business on March 22, 2002, the Company had 32,950,452
shares of Common Stock outstanding and entitled to be voted. Every
stockholder will be entitled to one vote for each share of Common Stock
recorded in his or her name on the books of the Company as of that date.
COST OF SOLICITATION
The cost of soliciting Proxies for the Annual Meeting will be borne
by the Company. Proxies may be solicited by directors, officers or
employees of the Company without additional compensation in person or by
telephone or telegram. The Company will use the services of Georgeson
Shareholder to aid in the solicitation of Proxies at a fee of $4,000 plus
expenses. The Company will also request persons, firms and corporations
holding shares in their names, or in the names of their nominees, which
shares are beneficially owned by others, to send this proxy material to
and obtain Proxies from such beneficial owners and will reimburse such
holders for their reasonable expenses in so doing.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 22,
2002 with respect to the beneficial ownership of shares of the Company's
Common Stock by the following individuals: (a) each person who is known to
the Company to own beneficially more than 5% of the outstanding shares of
such stock; (b) the Company's directors and nominees; (c) each of the
executive officers named in the Summary Compensation Table; and, (d) all
of the Company's directors and executive officers as a group. The
information in the tables and in the related notes has been furnished by
or on behalf of the indicated owners.
Name and address Amount of shares Percentage
of beneficial owner beneficially owned(1) of shares (1)
(a) Security ownership of
certain beneficial owners:
The Commerce Group, Inc. 2,968,454 9.0%
Employee Stock Ownership Plan
211 Main Street
Webster, MA 01570
(b) Security ownership of directors and
nominees:
Herman F. Becker 443,980 1.3%
Joseph A. Borski, Jr. 66,752 *
Eric G. Butler 177,424 *
Henry J. Camosse 207,866 *
Gerald Fels 666,515 (2) 2.0%
David R. Grenon 337,852 (3) 1.0%
Robert W. Harris 110,697 (4) *
Robert S. Howland 68,474 (5) *
John J. Kunkel 1,051,370 3.2%
Raymond J. Lauring 843,503 2.6%
Normand R. Marois 187,702 *
Suryakant M. Patel 579,434 1.8%
Arthur J. Remillard, Jr. 692,821 (6) 2.1%
Arthur J. Remillard, III 929,788 (7) 2.8%
Regan P. Remillard 609,889 (8) 1.8%
Gurbachan Singh 410,292 1.2%
John W. Spillane 758,355 (9) 2.3%
(c) Security ownership of named
executive officers:
Arthur J. Remillard, Jr. 692,821 (6) 2.1%
Gerald Fels 666,515 (2) 2.0%
Regan P. Remillard 609,889 (8) 1.8%
James A. Ermilio 26,789 (10) *
Arthur J. Remillard, III 929,788 (7) 2.8%
2
Name and address Amount of shares Percentage
of beneficial owner beneficially owned(1) of shares (1)
(d) All executive officers and 8,572,126 (11) 25.6%
directors as a group
(23 persons)
* Less than 1%.
(1) The indicated shares are those as to which the beneficial owner has
sole voting and investment power except as follows. As to the
shares held by the Company's Employee Stock Ownership Plan ("ESOP")
and allocated to participants' accounts, the beneficial owner has no
investment power and shared voting power in that, if he or she does
not exercise the power to vote the ESOP shares, the ESOP trustees
will vote said shares at the direction of the committee
administering the ESOP (the "ESOP Committee"). All other stock not
yet allocated to participants will be voted by the ESOP Committee.
ESOP Participants who are current employees of the Company or its
subsidiaries and who are 100% vested in their ESOP accounts can
annually elect to transfer out of the ESOP up to 100% of their
allocated Company stock in the form of an eligible rollover
distribution into another eligible retirement plan, such as a
qualified individual retirement arrangement. Approximately
2,191,000 shares held by the ESOP at December 31, 2001 were
allocated to the ESOP accounts of these individuals. ESOP
Participants who are former employees of the Company may generally
elect to withdraw from the ESOP the shares allocated to their
accounts at any time. Approximately 580,000 shares held by the ESOP
at December 31, 2001 were allocated to the ESOP accounts of these
individuals. The remaining approximately 219,000 shares held by the
ESOP at December 31, 2001 were allocated to the ESOP accounts of
Participants who have not yet reached 100% vesting in their account
balances. Disposition of these unvested shares is restricted under
the ESOP. Of the persons named in the table, only Joseph A. Borski,
Jr. and Gerald Fels are members of the ESOP Committee. Randall V.
Becker, an Executive Officer of the Company, is also a member of the
ESOP Committee. The indicated shares not held by the ESOP also
include shares owned beneficially by spouses, parents, children and
relatives who share the same home, trusts in which the named
individual or family member sharing the same home serves as a
trustee and corporations of which the named individual is an
executive officer or principal shareholder; the named individuals
disclaim any beneficial interest in shares so included. The
percentage of shares is calculated using 32,950,452 shares
outstanding at March 22, 2002 except for the executive officers
whose percentages are derived by dividing the shares listed by
outstanding shares plus their individual option shares exercisable
within sixty days.
(2) Includes 96,340 shares held by the ESOP and 147,462 shares that may
be acquired under options exercisable within sixty days.
(3) Includes 14,600 shares held by a trust of which Mr. Grenon's wife is
the trustee.
(4) Includes 55,849 shares held by a trust of which Mr. Harris is the
trustee and 39,228 shares held by a trust of which Mr. Harris' wife
is the trustee.
(5) Includes 48,474 shares held by a trust of which Mr. Howland is a co-
trustee with his son, 20,000 shares held by a trust of which Mr.
Howland's wife is the trustee.
(6) Includes 2,205 shares held by the ESOP and 147,463 shares that may
be acquired under options exercisable within sixty days.
(7) Includes 138,946 shares held by the ESOP, 117,263 shares held by
four trusts of which Mr. Remillard, III is the trustee, 22,855
shares held by a trust of which Mr. Remillard, III is a co-trustee
and 23,755 shares that may be acquired under options exercisable
within sixty days.
(8) Includes 7,615 shares held by the ESOP and 83,660 shares that may be
acquired under options exercisable within sixty days.
(9) Includes 32,440 shares held by trusts for the benefit of Mr.
Spillane's children and 6,212 shares held by a trust of which Mr.
Spillane's son is the trustee. Mr. Spillane disclaims any
beneficial interest in such trusts or such shares.
(10) Includes 1,253 shares held by the ESOP and 25,536 shares that may be
acquired under options exercisable within sixty days.
(11) Includes 350,679 shares held by the ESOP and 497,540 shares that may
be acquired under options exercisable within sixty days.
3
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than ten
percent of the Company's Common Stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities, if any, of the
Company. Executive officers, directors and greater than ten percent
beneficial owners are required to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no
other reports were required during the fiscal year ended December 31, 2001,
all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than ten percent beneficial owners were complied
with, except that John J. Kunkel, a director of the Company, filed one late
report.
GOVERNANCE OF THE COMPANY
Proxies are solicited for the 2002 Annual Meeting to give all holders
of Common Stock a chance to vote for the persons who are to be their
representatives in the governance of the Company.
The Company's directors are elected annually by the stockholders and
hold office for a term of one year or until their successors, if any, are
elected and duly qualified.
The Board of Directors (the "Board") held four meetings during 2001,
and the attendance of directors as a group was 97.2%. The Board has a
standing Audit Committee which held five meetings during 2001, a standing
Compensation Committee which held one meeting in 2001 and a standing
Nominating Committee which held one meeting during 2001. All of the
directors attended 75% or more of the aggregate of their respective Board
and Committee Meetings.
For information regarding the functions performed by the Audit
Committee and its membership, please refer to the "Report of the Audit
Committee", included in this Proxy Statement.
The Compensation Committee reviews the salary recommendations and
performance evaluations prepared by management for all officers and makes
recommendations to the Board for the salaries of the five highest paid
executive officers. This Committee also makes recommendations to the Board
regarding incentive compensation programs for officers and directors,
administers the existing Management Incentive Plan and has the authority to
grant awards under that Plan.
The Nominating Committee reviews the qualifications of prospective
directors and provides recommendations to the Board for the nomination of
directors. The Nominating Committee considers stockholder proposals for
directors which should be sent to the attention of the Assistant to the
President at the Company's principal office.
4
Directors, including those who are employees of the Company, receive
$1,500 for each meeting of the Board of Directors of the Company attended.
Directors, who are not employees of the Company, are paid $500 for each
committee meeting of the Board of Directors of the Company attended.
Directors, who are not employees of the Company and serve as a director of
Commerce Holdings, Inc. ("CHI"), a subsidiary of the Company, or CHI's
subsidiaries, The Commerce Insurance Company ("Commerce") and Citation
Insurance Company ("Citation"), are paid $500 for each meeting of the Board
of Directors of CHI, Commerce and Citation, attended. Directors, including
those who are employees of the Company and serve as a Director of ACIC
Holding Co., Inc. ("AHC"), or its subsidiary, American Commerce Insurance
Company ("ACIC"), are paid $2,000 for each AHC meeting and $2,200 ($2,000
through year end 2001) for each ACIC meeting attended, respectively, and
$1,000 for each committee meeting of the Board of Directors attended. AHC
is an 80% owned subsidiary of Commerce. Certain directors also serve as
directors of Bay Finance Company, Inc. and Clark-Prout Insurance Agency,
Inc., wholly-owned subsidiaries of the Company. All directors of the
Company, including those who are employees of the Company, receive an
annual stipend of $22,000. In addition, all directors of CHI, who are not
directors of the Company, receive an annual stipend of $22,000.
Directors also receive an annual Book Value Award ("BVA"), which
entitles the recipient to receive a cash payment for each BVA based upon
the increase in the book value of a share of Common Stock in excess of a
specified minimum target. In 2001, each director received a number of BVAs
approximately equal to 8.6% of the compensation paid to him as a director
of the Company during 2000. Each 2001 BVA entitles the director to receive
a cash payment equal to the book value of a share of Common Stock on
December 31, 2003, less the base price of such BVA. The base price for the
2001 BVAs ($29.99) is the book value of a share of Common Stock on December
31, 2000 ($23.16) increased at the rate of 9% per annum compounded annually
through December 31, 2003. For the purpose of this calculation, the
December 31, 2003 book value of a share of Common Stock is increased for
all cash dividends and the fair market value of all distributions of
property made by the Company which the director would have been entitled to
receive had he owned, from the date of the BVA grant until the expiration
date, that number of shares of Common Stock equal to the number of BVAs
under such award. The book value of a share of the Company's Common Stock
excludes changes in unrealized gains and losses on bonds and preferred
stocks. It is a condition to the receipt of any payment that may be due
under a 2001 BVA to a director that the recipient has been a director of
the Company continuously through April 30, 2004, unless his term shall have
been terminated because of death or for any reason approved by the Board of
Directors of the Company. Payments under the BVAs are accelerated in the
event of the sale of the Company. See "Executive Compensation and Other
Transactions" and "Compensation Committee Report" for a description of BVAs
granted to the Company's executive officers.
During 2000, the Company's Directors approved a Directors' Retirement
Compensation Plan (the "Retirement Plan"). The Retirement Plan becomes
effective for each Company Director (including Directors who are employees
of the Company) upon terminating service from the Company's Board of
Directors provided that such termination was not made under conditions
adverse to the Company's interest. Effective with the annual meeting
wherein the Director is not reappointed to the Board of Directors, and
provided benefits are not paid until such time as the Director has attained
the age of 65, the Company will pay an annual retirement benefit equal to
50% of the average annual total compensation of the Director for the
immediately preceding three full years ("three year average compensation").
The annual retirement benefit of 50% of the three year average compensation
vests at the rate of 4.0% for each year of Board of Directors service up to
a maximum of 100% vesting through termination of service. Payments
continue for a maximum of ten years over the remaining life of the
terminated Director, or his or her then spouse, if the Director pre-
deceases the spouse. No payments are to be made after the death of the
Director and spouse. Expenses related to the Retirement Plan in 2001
amounted to $178,000 and a total of $19,000 was paid under the Retirement
Plan to a retired Director.
5
REPORT OF THE AUDIT COMMITTEE
2001
In accordance with the rules established by the SEC, this report has
been prepared by the Audit Committee for inclusion in this proxy statement.
The Committee meets with the Company's internal and independent auditors,
with and without management present, to discuss the overall scope and plans
for their respective audits, and to review the results of their
examinations, their evaluations of the Company's internal controls, and the
overall quality of the Company's financial reporting. The Board of
Directors has adopted a written charter for the Audit Committee. Each
member of the Audit Committee satisfies the definition of an "independent
director" as established by the New York Stock Exchange.
As part of its ongoing activities, the Audit Committee has:
Reviewed and discussed with management the Company's audited
consolidated financial statements for the fiscal year ended December
31, 2001;
Discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, Communications
with Audit Committees, as amended; and,
Received the written disclosures and the letter from the independent
auditors required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees, and has discussed
with the independent auditors their independence.
Based on the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited
consolidated financial statements be included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 and be
filed with the SEC.
Respectively submitted,
Joseph A. Borski, Jr., Chairman
David R. Grenon
Suryakant M. Patel
6
ELECTION OF DIRECTORS
It is the intention of the persons named as Proxies in the
accompanying form of Proxy (unless otherwise specified by the stockholder
granting the proxy) to vote such Proxies (a) to fix the number of directors
for the ensuing year at 17, and (b) to elect the persons named in the
following table, all of whom are now members of the Board of Directors, to
serve until the next scheduled annual meeting and until their successors
are chosen and qualified. In the event, however, that any of the nominees
for membership on the Board of Directors becomes unavailable (which is not
now anticipated by the Company), the persons named as Proxies have
discretionary authority to vote for a substitute or to reduce the number of
directors to be determined and elected. The Board of Directors of the
Company has no reason to believe that any of the nominees will be unwilling
or unable to serve if elected.
Director
Name Position with the Company Age since
Arthur J. Remillard, Jr.(4) President, Chief Executive 71 1972
Officer, Chairman of
the Board, Director
Gerald Fels (2) Executive Vice President, 59 1976
Chief Financial Officer,
Director
Arthur J. Remillard, III (2) Senior Vice President - 46 1983
Policyholder Benefits,
Assistant Clerk, Director
John W. Spillane (2),(4) Clerk, Director 69 1972
Regan P. Remillard Senior Vice President,
Director 38 1993
Herman F. Becker (2),(4) Director 73 1972
Joseph A. Borski, Jr. (1),(3),(4) Director 68 1972
Eric G. Butler Director 74 1988
Henry J. Camosse (4) Director 71 1972
David R. Grenon (3),(4) Director 62 1972
Robert W. Harris (4) Director 70 1975
Robert S. Howland (4) Director 82 1972
John J. Kunkel (4) Director 90 1972
Raymond J. Lauring (4) Director 76 1972
Normand R. Marois (1),(4) Director 66 1972
Suryakant M. Patel (2),(3) Director 61 1983
Gurbachan Singh Director 63 1991
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
(4) Prior to the Company's incorporation in 1976, the named person was a Director of The
Commerce Insurance Company.
7
Arthur J. Remillard, Jr. has been the President, Chief Executive
Officer and Chairman of the Board of the Company since 1976. Mr.
Remillard, Jr. has been Chief Executive Officer and Chairman of the Board
of The Commerce Insurance Company ("Commerce") since 1972 and President of
Commerce from 1972 to November, 2001. Mr. Remillard, Jr. is also Vice
Chairman of the Governing Committee, Chairman of the Actuarial Committee, a
member of the Governing Committee Review Panel, Chairman of the Budget
Committee and a member of the Personnel Committee of the Commonwealth
Automobile Reinsurers ("C.A.R."). Mr. Remillard, Jr. is also Chairman of
the Governing Committee and a member of the Budget Committee, Executive
Committee and Nominating Committee of the Automobile Insurers Bureau of
Massachusetts ("A.I.B.").
Gerald Fels, a Certified Public Accountant, was appointed President
and Chief Operating Officer of Commerce in November, 2001, and Executive
Vice President of the Company in November 1989. From 1981 to November,
1989, Mr. Fels was Senior Vice President of the Company. Mr. Fels was the
Treasurer of the Company from 1976 to 1995 and of Commerce from 1975 to
1995. Mr. Fels has also been Chief Financial Officer of the Company since
1976 and of Commerce since 1975. Mr. Fels is also Treasurer and a director
of American Nuclear Insurers and an Advisory Committee Member of several
investment funds managed by Conning Capital Partners.
Arthur J. Remillard, III was appointed Senior Vice President-
Policyholder Benefits in 1988 and has been Assistant Clerk of the Company
since 1982. In August 2001, Mr. Remillard, III became responsible for the
Claim Operations of American Commerce Insurance Company. From 1981 to
1988, Mr. Remillard, III was Vice President-Mortgage Operations. In
addition, Mr. Remillard, III has also served on the Board of Governors of
the Insurance Fraud Bureau of the A.I.B. since 1991, the C.A.R. Claims
Advisory Committee since 1990 and the A.I.B. Claims Committee since 1991.
John W. Spillane has been counsel to and Clerk of the Company since
its incorporation and a practicing attorney since 1957. He is also a
director of Rovac Corporation, a seller of air conditioning equipment.
Regan P. Remillard was appointed President of American Commerce
Insurance Company in 2001, President of ACIC Holding Co., Inc. in 1998 and
Vice Chairman of the Board and Chief Executive Officer of American Commerce
Insurance Company in 1999. Mr. Remillard was appointed President of
Commerce West Insurance Company in 1996. Mr. Remillard was appointed
Senior Vice President of the Company in 1995. Mr. Remillard was General
Counsel of the Company from 1995 to February, 2000. From 1994 to 1995, Mr.
Remillard was a practicing attorney at Hutchins, Wheeler & Dittmar, a
Massachusetts law firm specializing in corporate law and litigation. From
1989 to 1993, Mr. Remillard was Government Affairs Monitor of the Company.
Mr. Remillard is a member of the Massachusetts Bar.
Herman F. Becker has been the owner of Sterling Realty, a real estate
agency, since 1962, as well as owner of ABCO Development Co. In addition,
since 1971, Mr. Becker has been the principal stockholder, President and
Treasurer of Huguenot Development Corp., a real estate development
corporation.
Joseph A. Borski, Jr. has been a self-employed Certified Public
Accountant since 1960.
Eric G. Butler was Vice President-Claims and the General Claims
Manager of Commerce and Citation from 1981 until his retirement in 1992.
8
Henry J. Camosse was the President of Henry Camosse & Sons Co., Inc.,
a building and masonry supplies company, from 1964 until his retirement in
1992.
David R. Grenon was Chairman Emeritus and Assistant Clerk of The
Protector Group Insurance Agency, Inc., a property and casualty insurance
agency headquartered in Worcester, Massachusetts from 1994 to 2001. Mr.
Grenon previously was the President of several property and casualty
insurance agencies located in Massachusetts, including The Protector Group
Insurance Agency, Inc., of which he was President and Chief Executive
Officer from 1981 to 1994. Mr. Grenon also was a director of CFX
Corporation and Safety Fund National Bank, a subsidiary of CFX Corporation.
CFX Corporation was acquired by Banknorth Group, Inc. (formerly People's
Heritage Financial Group, Inc,). Mr. Grenon is also President of E-C
Realty Corporation.
Robert W. Harris is retired. Prior to retirement, Mr. Harris was the
Treasurer of H.C. Bartlett Insurance Agency, Inc. from 1958 until 1987.
Robert S. Howland has been retired since 1985. Prior to retirement,
Mr. Howland was the Clerk of H.C. Bartlett Insurance Agency, Inc.
John J. Kunkel is President and Treasurer of Kunkel Buick & GMC Truck
and Treasurer of Kunkel Bus Company. He is also a licensed real estate
broker and licensed auto damage appraiser.
Raymond J. Lauring has been retired since 1983. Prior to retirement,
Mr. Lauring was the President of Lauring Construction Company.
Normand R. Marois is retired. Prior to retirement, Mr. Marois was
Chairman of the Board of Marois Bros., Inc., a contracting firm, since
1984. Mr. Marois was appointed a director of PipeDirect.com in 2000.
Suryakant M. Patel is retired. Prior to retirement, Dr. Patel was a
physician specializing in internal medicine since 1966.
Gurbachan Singh is retired. Prior to retirement, Dr. Singh was a
physician engaged in the practice of general surgery for more than 25
years.
The only family relationships among any of the executive officers or
directors of the Company are that Arthur J. Remillard, III and Regan P.
Remillard are the sons of Arthur J. Remillard, Jr. and that Randall V.
Becker, Treasurer and Chief Accounting Officer of the Company, is the son
of Herman F. Becker.
9
EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS
The following table contains a summary of the annual, long-term and other
compensation for each of the fiscal years ended December 31, 2001, 2000 and
1999, of those persons who were, at December 31, 2001, the Chief Executive
Officer and the other four most highly compensated executive officers of
the Company.
Summary Compensation Table
Long-term compensation
Awards Payments
Securities
Annual Underlying
Name and Compensation Options LTIP All Other
Principal Position Year Salary (#) Payouts(1) Compensation(2)
Arthur J. Remillard, Jr. 2001 $719,400 341,969 $ 255,556 $ 62,652
President, Chief Executive 2000 $660,000 191,465 $ 396,923 $ 60,652
Officer and Chairman of 1999 $600,563 147,463 $1,674,632 $ 57,077
the Board
Gerald Fels 2001 $396,000 186,528 $ 133,544 $ 75,807
Executive Vice President and 2000 $360,000 95,733 $ 201,992 $ 72,806
Chief Financial Officer 1999 $300,301 147,462 $ 841,631 $ 69,478
Regan P. Remillard 2001 $264,000 103,627 $ 98,060 $ 86,072
Senior Vice President 2000 $240,000 56,574 $ 79,022 $ 88,496
1999 $212,946 83,660 $ 271,401 $107,268
James A. Ermilio 2001 $240,000 74,267 $ 55,464 $ 48,378
Senior Vice President and 2000 $215,004 20,723 $ - $138,671
General Counsel 1999 $127,525 25,536 $ - $184,923
Arthur J. Remillard, III 2001 $215,100 65,633 $ 77,052 $ 54,616
Senior Vice President- 2000 $190,008 34,270 $ 85,120 $ 52,502
Policyholder Benefits and 1999 $161,269 23,755 $ 298,986 $ 50,429
Assistant Clerk
(1) Represents payments on Book Value Awards tied to increases in the book
value of a share of the Company's Common Stock and payments on Stock
Appreciation Rights tied to increases in the market value of a share
of the Company's Common Stock. Payments made in 2001 on Book Value
Awards were tied to increases in book value which matured in 2001.
The 2001 amounts include book value award payments of $11,536 each to
Arthur J. Remillard, Jr., Gerald Fels, Regan P. Remillard, and Arthur
J. Remillard, III related to their service as Directors of the
Company. No payments on Stock Appreciation Rights occurred in 2001.
(2) The 2001 amounts under "All Other Compensation" consist of directors
fees of $28,000 each to Arthur J. Remillard, Jr. and Arthur J.
Remillard, III, $48,000 each to Gerald Fels and Regan P. Remillard
and $22,000 to James A. Ermilio; the cost of group-term life
insurance (based on the Internal Revenue Service Uniform Cost Table)
provided by the Company in excess of $50,000 to Arthur J. Remillard,
Jr. of $8,652, to Gerald Fels of $1,807, to Regan P. Remillard of
$378, to James A. Ermilio of $378, and to Arthur J. Remillard, III of
$616; cash bonus of $9,000 to each of the named executive officers;
contributions of $17,000 made or accrued by the Company to the ESOP
for each of the named executive officers; and $11,944 to Regan P.
Remillard representing reimbursement of additional state income tax
expense incurred due to dual tax status in California and
Massachusetts. The amount of the Company's
10
contribution to the ESOP is determined annually by the respective
subsidiary Board of Directors. Benefits under the ESOP become
partially vested when a participant has completed three years of
service and fully vested after seven years of service.
The following table contains information concerning certain stock
options ("Options") granted to the Chief Executive Officer and the other
named executive officers during fiscal 2001:
Option Grants in Last Fiscal Year (1)
Individual Grants
Number of % of Total Potential Realizable Value at
Securities Options Granted Assumed Annual Rates of
Underlying to Employees Stock Price Appreciation
Options in Fiscal Exercise Expiration for Terms of Options
Name Granted(#)(2) Year Price (3) Date 5%(4) 10%(4)
Arthur J. Remillard, Jr. 341,969 28.9% $30.80 April 7, 2009 $5,030,364 $12,044,148
Gerald Fels 186,528 15.7% $30.80 April 7, 2009 $2,743,827 $ 6,569,516
Regan P. Remillard 103,627 8.7% $30.80 April 7, 2009 $1,524,353 $ 3,649,743
James A. Ermilio 74,267 6.3% $30.80 April 7, 2009 $1,092,468 $ 2,615,684
Arthur J. Remillard, III 65,633 5.5% $30.80 April 7, 2009 $ 965,461 $ 2,311,594
(1) See "Compensation Committee Report" for additional information
regarding the Company's current Management Incentive Plan, consisting
of Options and BVA grants under the Company's Plan approved by the
stockholders in 1994 ("Original Plan").
(2) During 2001, the Company granted Options under the Original Plan.
The Options entitle the recipient to purchase Common Stock at the
exercise price, on April 6, 2004, the vesting date or thereafter.
Options vest immediately in the event of the sale of the Company. It
is a condition to any Option exercise that the participant has been
in the continuous employ of the Company through January 6, 2004,
unless such employment shall have terminated due to the participant's
death or for any reason approved by the Company. Unexercised Options
shall terminate after the close of business on April 7, 2009. If the
recipient voluntarily terminates employment with the Company after
the vesting date options will be exercisable only during the three
months immediately following such termination of employment, after
which the Options shall terminate.
(3) The exercise price ($30.80) is the closing market price for a share
of Common Stock on April 6, 2001 (the Grant Date).
(4) The dollar amounts set forth under these columns are the result of
required calculations made at assumed 5% and 10% annual appreciation
rates above the $30.80 price noted in (3) from the grant date through
the expiration date, less the exercise price. These amounts are not
intended to indicate actual or projected future price appreciation,
if any, of the Company's Common Stock.
11
The following table shows information for the Chief Executive Officer
and the other named executive officers concerning the number of SARs
redeemed and the value realized upon redemption during the year ended
December 31, 2001 and the aggregate number and value of Options held as of
December 31, 2001. Stock options were outstanding at December 31, 2001
but none were available to be exercised during 2001. The Company granted
stock options for the first time in 1999, and these options become fully
exercisable on April 30, 2002.
Aggregated SAR Exercises in Last Fiscal Year
and Option/SAR Values at December 31, 2001 (1)
Number of Securities
Underlying Unexercised Value of Unexercised In-
Number of Value of SARs Options at the-Money Options at
SARs Redeemed Realized December 31, 2001(#)(3) December 31, 2001(4)(5)
NAME in 2001(#)(2) in 2001 Exercisable Unexercisable Exercisable Unexercisable
Arthur J. Remillard, Jr. 0 $ 0 0 680,897 $ 0 $5,446,167
Gerald Fels 0 $ 0 0 429,723 $ 0 $3,446,570
Regan P. Remillard 0 $ 0 0 243,861 $ 0 $1,962,156
James A. Ermilio 0 $ 0 0 120,526 $ 0 $ 926,194
Arthur J. Remillard, III 0 $ 0 0 123,658 $ 0 $ 983,222
(1) See "Compensation Committee Report" for additional information regarding the
Company's Original Plan, consisting of Option and BVA grants.
(2) SAR awards provide solely for cash payments. The number of SARs that expired
without payment in 2001 for the named executive officers were as follows:
Arthur J. Remillard, Jr - 152,512; Gerald Fels - 76,256; Regan P. Remillard -
32,446; James A. Ermilio - 6,933; Arthur J. Remillard, III - 24,569.
Options replaced the use of SARs with the 1999 grant. As a result of this
there are no longer any outstanding SARs.
(3) Options granted in 2001, 2000 and 1999 were unexercisable at December 31, 2001.
Options entitle the recipient to purchase Common Stock at the exercise price, on or
after April 6, 2004, April 5, 2003 and April 30, 2002, respectively, the vesting
dates, or such earlier date as determined by the Company's Board of Directors or as
otherwise provided for in the agreement.
(4) The estimated value of the unexercisable options, presented above, was calculated
assuming the market price of the Company's Common Stock on the exercise date would
be equal to the closing market price per share of the Company's Common Stock at
December 31, 2001 of $37.69 as reported by the New York Stock Exchange plus (only
for the options granted in 1999 and 2000) dividend distributions received by holders
of the Common Stock since the date of grant. Dividends are currently payable at a
rate of $1.20 per annum on a share of the Company's Common Stock. Set forth in note
5 below is the value of the options granted in 1999 that become exercisable on April
30, 2002 based upon the March 22, 2002 closing market price per share of the
Company's Common Stock.
(5) The options that first become exercisable on April 30, 2002 have an exercise price of
$32.81 per share less dividends paid of $3.48. Based upon the March 22, 2002
closing market price per share of the Company's Common Stock of $39.00, the value
(and number) of options that become exercisable on April 30, 2002 for the named
executive officers would be as follows:
Arthur J. Remillard, Jr. - $1,425,967 (147,463); Gerald Fels - $1,425,958
(147,462); Regan P. Remillard - $808,992 (83,660); James A. Ermilio - $246,933
(25,536); and Arthur J. Remillard, III - $229,711 (23,755).
12
The following table contains information concerning certain long-term
incentive awards granted in the form of book value awards ("BVAs") under
the Original Plan to the Chief Executive Officer and the other named
executive officers during fiscal 2001:
Long-Term Incentive Plan - Book Value Awards (1)
Estimated
future payouts
under non-stock
Number of price-based plans
Name rights(#)(2) Maturity date Target(3)
Arthur J. Remillard, Jr. 59,413 April 30, 2004 $101,596
Gerald Fels 35,060 April 30, 2004 $ 59,953
Regan P. Remillard 24,697 April 30, 2004 $ 42,232
James A. Ermilio 20,467 April 30, 2004 $ 34,999
Arthur J. Remillard, III 18,826 April 30, 2004 $ 32,192
(1) See "Compensation Committee Report" for additional information regarding the
Company's Original Plan, consisting of Option and BVA grants.
(2) During 2001, the Company granted BVAs which entitle the recipient to receive by
April 30, 2004, a cash payment for each BVA equal to the book value of a share of
Common Stock of the Company on December 31, 2003, less the base price of such BVA.
The base price for the 2001 BVAs ($29.99) is the book value of a share of Common
Stock on December 31, 2000 ($23.16), increased at the rate of 9% per annum
compounded annually through December 31, 2003. For the purpose of this calculation,
the book value of a share of Common Stock at December 31, 2003 is increased for all
cash dividends and the fair market value of all distributions of property made by
the Company which the recipient would have been entitled to receive had he owned
shares of Common Stock equal to the number of BVAs held by him from the date of
grant until the expiration date. The December 31, 2003 book value of a share of the
Company's Common Stock excludes changes in unrealized gains and losses of bonds and
preferred stocks. It is a condition to the receipt of any payment that may be due
under a BVA that the participant has been in the continuous employ of the Company
through April 30, 2004, unless such employment shall have terminated due to the
participant's death or for any reason approved by the Board of Directors of the
Company. Payments under the BVAs are accelerated in the event of the sale of the
Company.
(3) Future payouts, if any, under the BVAs are tied to increases in the book value of a
share of Common Stock and other factors. Therefore, it is not possible to determine
the future payouts. The amounts set forth in this column are the amounts that would
be paid if the December 31, 2001 book value of a share of the Common Stock of the
Company adjusted for treasury stock purchased in 2001 and excluding changes in
unrealized gains and losses of bonds and preferred stocks plus dividends paid in
2001 increased by $2.98 in each of the years ended 2002 and 2003. This amount
represents an average of net earnings per weighted average common share for 1999,
2000 and 2001, exclusive of the after-tax impact of realized gains and losses.
Although realized gains or losses are included in the calculation of book value,
these items have been excluded due to the uncertainty of their occurrence and,
therefore, the impact on the Company's future book value. There can be no assurance
that the Company's performance will continue with the same or similar trends.
13
COMPENSATION COMMITTEE REPORT
2001
The Compensation Committee (the "Committee") is responsible for
recommending to the Board of Directors the establishment of policies that
govern both annual compensation and the Management Incentive Plan for the
chief executive officer and other officers of the Company.
The Committee meets each year to review the base compensation of the
Company's officers, to grant awards under the Company's Management
Incentive Plan and, as appropriate, to recommend changes in that plan or
the pattern of incentive compensation awards.
The Company's compensation program is designed to reward executives
for strategic management and enhancement of stockholder value. In general,
the same compensation policies are applied to the chief executive officer
and to all of the other executive officers of the Company.
The Management Incentive Plan adopted by the stockholders in 1994,
provides incentive compensation based on Book Value Awards ("BVAs") and
Stock Options ("Options"). As can be seen from the Summary Compensation
Table, the Company has made significant incentive compensation payments
because the Company's book value and market value grew over the last
several years. Approximately 24.6% of total compensation paid to the chief
executive officer during 2001 was performance related. Approximately 20.9%
of total executive compensation paid during 2001 to the other named
executive officers who received LTIP payments, except for the chief
executive officer, was performance related as further explained below.
Performance for purposes of the Company's compensation program has
historically been measured by a combination of (1) the increase in the book
value of the Company's stock, through the use of BVAs, and (2) the increase
in market value of a share of the Company's stock through the use of SARs
and, beginning in 1999, through the use of Options which replaced SARs
(collectively, the "Program"). The BVAs and Options granted for 2001 were
determined by dividing the base compensation of each officer by the
Company's book value of $23.16 at December 31, 2000. The number of BVAs
was then weighted by a factor of two. The number of Options was weighted
by a factor ranging from two to twelve, based on an officer's relative
level of responsibility and potential to affect the Company's overall
performance under a formula determined by the Compensation Committee.
The Committee reviews and determines the targeted minimum increase in
book value and market value for purposes of the Program. Awards made under
the Program in 2001, under the book value portion of the calculation,
provide that no incentive compensation will be payable unless the book
value of the Company's Common Stock at December 31, 2003, plus the value of
dividends paid on the Common Stock between that date and December 31, 2000,
exceeds $29.99, which represents an approximately 29.5% increase from the
Company's book value per share of $23.16 at December 31, 2000. Increases
or decreases in book value per share related to changes in the market value
of bonds and preferred stocks, on an after-tax basis, are excluded from
this calculation. Changes in the value of common stocks, including
preferred stock mutual funds, on an after-tax basis, are included in this
calculation. For the BVAs granted in 2000 and 1999, the targeted
compounded annual growth rate was also 9.0%, or 29.5% for the three-year
period. In 2001, the Committee continued to recommend the 9.0% growth rate
to the Board of Directors as being in line with the Massachusetts insurance
marketplace.
14
Under the market value portion of the Program, incentive compensation
will be realizable by the officers under the stock options only if and to
the extent that the market price of the Company's common stock, at the time
of exercise, exceeds the exercise price of $30.80. Options granted in
1999, 2000 and 2001 become exercisable on April 30, 2002, April 5, 2003 and
April 6, 2004, respectively, and terminate after the close of business on
May 1, 2007, April 6, 2008 and April 7, 2009, respectively. The exercise
price ($30.80) of the options granted in 2001 was the closing market price
for a share of the Company's Common Stock on April 6, 2001 (the Grant
Date). Exercise prices of the options granted in 1999 and 2000 of $32.81
and $31.59, respectively represent an approximately 15.8% increase from
$28.34 and $27.29, respectively, the average of the daily high and low
market prices for the Common Stock for the three-month period ended March
31, 1999 and 2000, respectively. The minimum growth in the market value of
Common Stock required for the 1999 and 2000 Options to attain the initial
exercise price equates to a compounded annual rate of growth of 5.0% for
three years from the $28.34 and $27.29 average daily high and low price for
the three months ended March 31, 1999 and 2000, respectively. The stock
options granted in 1999, 2000 and 2001 were intended to qualify as
incentive stock options to the maximum extent permissible under the
Internal Revenue Code. No advance payments of incentive compensation are
contemplated in the BVA Program.
The Company maintains an Employee Stock Ownership Plan and a 401(k)
Plan. See "Executive Compensation and Other Transactions".
The base salary for each officer, other than the chief executive
officer, is recommended by the Company's management and reviewed and
approved by the Committee. The 2001 base salaries for the Company's
executive officers, other than the chief executive officer, increased on
average approximately 11.0% from 2000 base salaries. These increases were
intended to reflect increases in the cost of living, job performance during
2000, and base salary as compared to similar positions in the industry, all
considered in the context of the officers' total compensation. The
Committee established the chief executive officer's base salary for 2001,
an approximate 9.0% increase, after taking into account increases in the
cost of living and the chief executive officer's job performance during
2000, considered in the context of the Chief Executive Officer's total
compensation. Company management and the Committee review industry salary
surveys when establishing base salaries for all officers. As part of the
review of industry salary information, the Compensation Committee believed
it appropriate to increase base salaries for 2001 as noted above.
The Committee will continue during 2002 to carefully consider officer
compensation, and the components thereof, in relation to the Company's
performance compared to that of industry performance levels for comparable
companies and the performance history of the Company itself.
Respectively submitted,
Joseph A. Borski, Jr., Chairman
Normand R. Marois
15
COMMON STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on
the shares of Common Stock of the Company for the last five years with the
cumulative total return of the New York Stock Exchange Index and a group
of six peer property and casualty insurance companies. The peer group
consists of Baldwin & Lyons, Inc., W.R. Berkley, Mercury General
Corporation, Progressive Insurance Group, Selective Insurance Group, Inc.
and Twenty First Century Insurance Group.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG THE COMMERCE
GROUP, INC., PROPERTY AND CASUALTY INSURANCE PEER GROUP AND
THE NEW YORK STOCK EXCHANGE INDEX.
The line graph, appearing on Page 16, compares the yearly percentage
change in the Company's cumulative total shareholder return on common
stock with that of a group of six peer property and casualty insurance
companies and with the broad equity market index where the Company's
Common Stock is traded. The X-axis lists the "measurement period" of the
last five fiscal years beginning with December 31, 1996 and ending with
December 31, 2001. The Y-axis lists the dollar values starting with $100
and ending with $320 representing cumulative total return. The
information in the subsequent paragraph is the data plotted within the
graph.
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
The Commerce Group, Inc. $100 $134 $151 $116 $126 $181
Property and Casualty Peer
Group $100 $174 $201 $102 $152 $196
New York Stock Exchange Index $100 $132 $157 $171 $176 $160
This line graph assumes an investment of $100 in the Company's Common
Stock, the New York Stock Exchange Index and the group of six peer property
and casualty insurance companies on December 31, 1996 and reinvestment of
all dividends.
16
DESCRIPTION OF AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN
(See Appendix A)
Introduction
The Company's Board of Directors (the "Board") is seeking stockholder
approval of an Amended and Restated Incentive Compensation Plan (the
"Amended Plan"), a copy of which is included as Appendix A to this Proxy
Statement. The description of the Amended Plan set forth below is
qualified in its entirety by reference to Appendix A.
The Board and stockholders approved the original Management Incentive
Plan (the "Original Plan") in 1994.
On February 15, 2002, the Board unanimously authorized the
Compensation Committee to approve an Amended Plan, subject to stockholder
approval. Like the Original Plan, the primary purposes of the Amended Plan
are to enhance the ability of the Company to attract, retain and motivate
employees and other persons providing services to the Company, and to
provide incentives for such persons to contribute significantly to the
long-term performance and growth of the Company. The Amended Plan, like
the Original Plan, provides for awards in the form of stock options, book
value awards (or BVAs), stock appreciation rights (or SARs), restricted
stock, and performance stock units, although through the date of this Proxy
Statement, awards under the Original Plan have consisted solely of stock
options, BVAs and SARs.
Reasons for Amendment and Restatement of the Original Plan
The primary reason for the Board to recommend that the stockholders
approve the Amended Plan is to increase the number of shares of Common
Stock that may be awarded under the Original Plan. The Original Plan now
provides for the award of up to 2,500,000 shares of Common Stock. As of
the date of this Proxy Statement no shares of Common Stock had been issued
under the Original Plan, and there were outstanding stock options covering
2,442,356 shares of Common Stock, leaving up to 57,644 shares of Common
Stock available for additional awards under the Original Plan. If the
stockholders approve the Amended Plan, an additional 2,500,000 shares of
Common Stock will be available for issuance under the Amended Plan,
resulting in a total of 5,000,000 shares of Common Stock that may be issued
under the Amended Plan.
Stockholder approval of the Amended Plan will also:
a) extend the duration of the Original Plan to May 16, 2012 from May
20, 2004; and
b) implement various other changes that are intended to increase the
flexibility of the Board and the Compensation Committee of the Board (the
"Committee") to grant and administer awards under the Amended Plan
consistent with current compensation practices of comparable companies.
The Board believes that the adoption of the Amended Plan will enable
the Company to continue to provide an effective source of incentives to
reward and attract senior management employees, officers, directors and
other persons providing service to the Company and its Affiliated Companies
officers (as defined below) with a flexible program of stock-based awards
that can be adapted, in the Committee's discretion, to meet the varying
business needs of those companies.
Summary of Amended Plan
Eligible Participants. All directors, officers, and other senior
management employees of the Company or any of its Affiliated Companies
would be eligible to participate in the Amended Plan, at the sole
discretion of the Committee. The term "Affiliated Company" means any
corporation, limited liability company, partnership or other entity which,
directly or indirectly, is controlled by, controls, or is under common
control with the Company and includes all of the Company's current
subsidiaries. As of the date of this Proxy Statement, 13 non-employee
directors, 10 executive officers, and 21 non-executive employees of the
Company would be eligible to participate in the Amended Plan. The number
of employees selected to receive awards may vary from year to year.
17
Awards. Like the Original Plan, the Amended Plan provides for the
issuance of stock options, book value awards, stock appreciation rights,
restricted stock, and performance stock units. Stock options may include
options that qualify for special tax treatment under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") referred to as
"Incentive Stock Options" or "ISOs" - and options that do not qualify for
such special treatment that are referred to as "Non-Qualified Options" (and
collectively with ISOs, "options"). See "Certain United States Federal
Income Tax Consequences" below. The Amended Plan expressly authorizes the
Committee to grant reload options, which are described separately below.
The exercise price per share of Common Stock purchasable under an ISO may
not be less than 100% of the fair market value of the Common Stock on the
date of the award. The exercise price of a Non-Qualified Option may be
greater than, equal to or less than the fair market value of the Common
Stock on the date of the award.
Plan Administration. Awards under the Amended Plan will generally be
granted by the Committee. If necessary in order for any award to an
executive officer of the Company to be exempt under SEC Rule 16b-3 or
Section 162(m) of the Code, the Board expects that the administration of
the Amended Plan with respect to those awards will be managed by a
subcommittee that is composed solely of two or more non-employee directors
who satisfy the criteria both for a "non-employee director" as that term is
defined in Rule 16b-3 and an "outside director" within the meaning of
Section 162(m). See "Section 162(m) Limitations On Deductibility Of
Executive Compensation" below.
Committee Authority. As with the Original Plan, the Committee will
have the authority, in its discretion, to determine when awards under the
Amended Plan will be granted, to select the persons to whom awards will be
made, and to determine the type and size of each award, the exercise price
for each award, the fair market value of the Common Stock and all other
provisions relating to payment of the exercise price and exercisability of
options, BVAs and SARs, the terms and conditions for vesting, cancellation
and forfeiture of awards, and the other features applicable to each award
or type of award granted under the Amended Plan. The Committee will also
have the authority to modify, waive, extend or accelerate the terms and
conditions for vesting, exercisability, cancellation and forfeiture of
awards, to modify or cancel awards, and to determine whether the Common
Stock issued pursuant to awards should be restricted in any manner, and the
nature, terms and conditions of any such restrictions.
The Committee may grant any award alone, in addition to or in relation
to any other award. The terms of each award need not be identical, and the
Committee need not treat participants uniformly. Except as otherwise
provided by the Amended Plan or a particular award, any determination with
respect to an award may be made by the Committee at the time of award or at
any time thereafter. Other than possibly with respect to an award of
restricted stock, or as otherwise provided by a particular award, the
recipient of an award will not be obligated to make any payment to the
Company or any of its Affiliated Companies in exchange for such award. The
Committee shall determine whether awards are settled in whole or in part in
cash, Common Stock, other securities of the Company, awards or other
property.
The Amended Plan expressly provides that no eligible participant shall
have any claim or right to be granted an award, and the grant of an award
shall not be construed as giving a participant the right to be retained in
the employ of the Company or an Affiliated Company, or the right to
continue to provide services to the Company or an Affiliated Company, or
the right to continued employment in any particular position or at any
particular rate of compensation. Unless otherwise determined by the
Committee or expressly required by applicable law or the terms of a benefit
plan or severance program of the Company or an Affiliated Company, awards
received by participants under the Amended Plan shall not be deemed a part
of a participant's regular, recurring compensation for purposes of
calculating payments or benefits from any such benefit plan or severance
program of the Company or an Affiliated Company.
Shares Available For Issuance. Up to 5,000,000 shares of Common Stock
could be issued to participants under the Amended Plan. The market price
of the Common Stock on March 22, 2002, the record date, was $39.00.
If an award is forfeited, canceled, terminated or expires prior to the
issuance of shares to the Participant, the shares of Common Stock not
issued pursuant to such award will be available for future grants under the
Amended Plan. Previously owned shares that are tendered by a Participant
to pay the exercise price of an award and shares used to pay withholding
taxes will also not be counted towards the maximum number of shares
available for issuance under the Amended Plan. In addition, the maximum
number of shares potentially outstanding under the Amended Plan will not be
affected by the payment in cash of dividends or dividend equivalents in
connection with any outstanding award, the settlement of any stock
denominated award in cash, or the granting of a stock denominated award
which by its terms may be settled only in cash.
18
Reload Options. Under the Amended Plan, the Committee will
specifically be authorized to grant options with a so-called "reload"
feature. A reload option gives the participant the right to purchase a
number of shares of Common Stock equal to the number of shares of Common
Stock surrendered to pay the exercise price and used to pay the withholding
taxes applicable to an option exercise. Reload options do not increase the
net equity position of a participant. Their purpose is to facilitate
continued stock ownership in the Company by participants. A reload option
may be either an ISO or a Non-Qualified Option and will be granted subject
to such terms, conditions, restrictions and limitations as the Committee
may determine.
Change in Control. Upon a "Change in Control," as defined in the
Amended Plan or otherwise specified from time to time by the Committee, the
Committee may, in its discretion, accelerate, purchase, adjust or modify
awards or cause the awards to be assumed by the surviving corporation in a
corporate transaction.
Transferability. Unless otherwise determined by the Committee, any
award shall be exercisable during a participant's lifetime only by the
participant, and an Award shall not in any event be transferable without
the Committee's permission except in case of the death of the Participant
or by will or the laws of descent and distribution. The Committee may
permit (on such terms, conditions and limitations as it shall establish)
any Non-Qualified Option (including a reload option) or any share issued in
connection with an option exercise that is subject to restrictions on
transferability, to be transferred to a member of a participant's immediate
family or to a trust or similar vehicle for the benefit of a participant's
immediate family members. Except to the extent required by law, no award
or interest of any participant shall be subject to any lien, levy,
attachment, pledge, obligation, liability or bankruptcy of a participant.
Maximum Number of Shares Granted to any "Covered Employee." Under the
Amended Plan, the aggregate number of shares of Common Stock that may be
granted pursuant to options and SARs (including reload options) to any
person who is a "Covered Employee" for purposes of Section 162(m) of the
Code (described below) may not exceed 1,500,000 shares during any three
calendar years (the "Maximum Allocation"). The Original Plan provided that
not more than 500,000 shares could have been granted to any Covered
Employee during a single calendar year. The Covered Employees are the
Company's chief executive officer and the four next most highly compensated
officers. The Maximum Allocation will also apply to any other award to a
Covered Employee that is intended to be "performance-based compensation"
(as that term is used for purposes of Section 162(m) of the Code),
including without limitation stock unit awards, restricted stock awards,
and similar stock-based awards, as well as any type of Award under which
the benefit is measured in whole or in part by reference to a number of
Shares, such as a Book Value Award.
Adjustments. The maximum number of shares available for issuance
under the Amended Plan, the Maximum Allocation, the maximum number of
shares which may be granted as ISOs, the number of shares of Common Stock
covered by outstanding awards and the exercise price applicable to
outstanding options and SARs may be adjusted by the Committee, if the
Committee determines that any stock split, stock dividend, distribution,
recapitalization, merger, consolidation, reorganization, combination or
exchange of shares or other similar event equitably requires such an
adjustment. The Committee also has the discretion to amend any outstanding
award for the sole purpose of reducing the exercise price thereunder.
Amendment and Termination of the Amended Plan. Awards may not be made
under the Amended Plan after May 16, 2012, but awards outstanding at such
date may extend beyond that date. The number of shares of Common Stock
issuable pursuant to the Amended Plan may not be changed except by approval
of the stockholders or by adjustment in the event of corporate
reorganization or recapitalization or other dilutive event affecting the
Common Stock. The Board may otherwise further amend the Amended Plan from
time to time or terminate the Amended Plan in its entirety, provided that
no amendment may be made without stockholder approval if such approval is
necessary to comply with an applicable tax or regulatory requirement,
including any requirement for exemptive relief under Section 16(b) of the
Securities Exchange Act of 1934 or Section 162(m) of the Code.
New Plan Benefits and Potential 2002 Awards. It is not possible for
the Company to determine at this time who among the eligible Amended Plan
participants will actually receive the grant of awards, because awards are
to be granted from time to time by the Committee to those participants whom
the Committee determines in its discretion should receive awards, and
because the membership of the Committee will likely change from time to
time.
19
As of the date of this Proxy Statement, the Committee has not granted
any award under the Amended Plan. During the past several years, the
Committee has typically granted awards in April. The Board expects that
the Committee will grant Options and BVAs after the Annual Meeting, which
awards would be contingent upon stockholder approval of the Amended Plan.
There is, however, no current agreement or understanding between the
Committee and any officer or director with respect to any such award.
Certain United States Federal Income Tax Consequences
The following is a brief summary of the principal United States
Federal income tax consequences of awards and related transactions under
the Amended Plan, based on current United States Federal income tax laws.
This summary is not intended to be exhaustive, does not constitute tax
advice and, among other things, does not describe state, local or foreign
tax consequences.
Incentive Stock Options ("ISOs"). No taxable income is realized by a
participant upon the grant or exercise of an ISO. If shares of Common
Stock are issued to a participant pursuant to the exercise of an ISO and if
no disqualifying disposition of such shares is made by such participant
within two years after the date of grant or within one year after the
receipt of such shares by such participant, then (1) upon the sale of such
shares, any amount realized in excess of the option exercise price will be
taxed to such participant as a long-term capital gain and (2) no deduction
will be allowed to the Company.
The exercise of an ISO will give rise to an item of tax preference
that may result in alternative minimum tax liability for the participant.
The excess, if any, of the fair market value of the shares of Common Stock
at the time of an ISO exercise over the aggregate option exercise price
(the "Spread") generally constitutes a preference item in determining
alternative minimum taxable income for the purpose of the alternative
minimum tax. Alternative minimum taxable income in excess of the
taxpayer's exemption amount is subject to the alternative minimum tax,
which is imposed at graduated rates of up to 28% on individuals and is
payable to the extent it exceeds regular income tax. The payment of any
alternative minimum tax will not increase the optionee's basis for the
shares acquired for regular income tax purposes.
If shares of Common Stock received upon the exercise of an ISO are
disposed of prior to the expiration of either holding period described
above, such disposition would be a "disqualifying disposition," and
generally (1) the participant will realize ordinary income in the year of
disposition in an amount equal to the excess, if any, of the fair market
value of the shares on the date of exercise (or, if less, the amount
realized on the disposition of the shares) over the ISO exercise price
thereof, and (2) the Company will be entitled to deduct such amount. Any
other gain realized by the participant on such disposition will be taxed as
short-term or long-term capital gain, and will not result in any deduction
to the Company.
Subject to certain exceptions for disability or death, an ISO
generally will not be eligible for the Federal income tax treatment
described above if it is exercised more than three months following a
termination of employment.
Non-Qualified Options. No taxable income is realized by a participant
upon the grant of a Non-Qualified Option (including a reload option). Upon
the exercise of a Non-Qualified Option, the participant will recognize
ordinary compensation income in an amount equal to the Spread. Income and
payroll taxes are required to be withheld by the participant's employer on
the amount of ordinary income resulting to the participant from the
exercise of a Non-Qualified Option. The amount of the Spread generally is
deductible by the participant's employer for Federal income tax purposes,
subject to the possible limitations on deductibility of compensation paid
to certain executives pursuant to Section 162(m) of the Code (see "Section
162(m) Limitations On Deductibility Of Executive Compensation" below). The
participant's tax basis in shares of Common Stock acquired by exercise of a
Non-Qualified Option will be equal to the exercise price plus the amount
taxable as ordinary income to the participant as a consequence of such
exercise.
Upon a sale of the shares of Common Stock received by the participant
upon exercise of the option, any gain or loss will generally be treated for
Federal income tax purposes as long-term or short-term capital gain or
loss, depending upon the holding period of such stock. The participant's
holding period for shares acquired pursuant to the exercise of a Non-
Qualified Option begins on the date of exercise of such option.
Stock Appreciation Rights. Upon the exercise of a SAR, the
participant will recognize compensation income in an amount equal to the
cash received plus the fair market
20
value of the Common Stock received upon exercise. The participant's tax
basis in the shares of Common Stock received upon exercise will be equal to
the compensation income recognized with respect to the Common Stock, and
the holding period for such shares begins on the exercise date. Income and
payroll taxes are required to be withheld on the amount of compensation
attributable to the exercise of the SAR, whether the income is paid in cash
or shares. Upon the exercise of a SAR, the participant's employer will
generally be entitled to a deduction in the amount of the compensation
income recognized by the participant.
Restricted Stock. A recipient of Restricted Stock generally will be
subject to tax at ordinary income rates on the fair market value of the
Common Stock at the time the Common Stock is no longer subject to
forfeiture, minus any amount paid for such stock. A recipient who makes an
election under Section 83(b) of the Code within 30 days of the date of
issuance of the Restricted Stock, however, will realize ordinary income on
the date of issuance equal to the fair market value of the shares of
Restricted Stock at that time (measured as if the shares were unrestricted
and could be sold immediately), minus any amount paid for such stock. If
such an election is made, no taxable income will be realized when the
shares subject to that election are no longer subject to forfeiture. If the
shares subject to such election are forfeited, the recipient will not be
entitled to any deduction, refund or loss for tax purposes with respect to
the forfeited shares, except that the amount, if any, actually paid for the
shares and not repaid by the Company will be a capital loss. Upon sale of
the shares after the forfeiture period has expired, the holding period to
determine whether the recipient has long-term or short-term capital gain or
loss begins when the restriction period expires (or upon earlier issuance
of the shares, if the recipient elected immediate recognition of income
under Section 83(b) of the Code).
Section 162(m) Limitations On Deductibility Of Executive Compensation.
Approval of the Amended Plan will also constitute approval of options and
SARs for purposes of Section 162(m) of the Code. With certain exceptions,
Section 162(m) of the Code limits the deduction to either the Company or
the participant's employer, as applicable, for compensation paid to a
Covered Employee in excess of $1 million per executive per taxable year.
The deduction limit does not apply, however, to "qualified performance-
based compensation" (within the meaning of Section 162(m) of the Code).
Compensation to be paid to the Covered Employees under the Amended Plan is
intended to be qualified performance-based compensation.
Based upon regulations issued by the Internal Revenue Service,
compensation attributable to an option or SAR is deemed to constitute
qualified performance-based compensation if, among other things, (1) the
award is made by a committee comprised solely of non-employee directors,
(2) the Amended Plan states the maximum number of shares with respect to
which options and SARs may be granted during a specified period to any
employee, and (3) the Amended Plan is approved by stockholders after
adequate disclosure, including a general description of the class of
eligible employees and, in the case of the Amended Plan, a description of
the formula used to calculate the compensation to be paid if the
performance goal is attained or the maximum amount of compensation that
could be paid to any employee during a specified period.
The formula to calculate the maximum amount of compensation that could
be attributed to options or SARs granted to any Covered Employee is equal
to 1,500,000 (which is the maximum number of shares of Common Stock or
equivalent units that may be awarded to any Covered Employee during any
three calendar years) multiplied by the difference between the fair market
value of the Common Stock at the date of grant (which is the minimum
exercise price permitted under the Amended Plan for awards to Covered
Employees) and the fair market value of the Common Stock on the date of
exercise. The formula to calculate the maximum amount of compensation that
could be attributed to Book Value Awards is equal to 1,500,000 (which is
the maximum number of shares of Common Stock that may be referenced by such
awards to any Covered Employee during any three calendar years) multiplied
by the difference between the book value of the Common Stock at the date of
grant and the book value of the Common Stock on the date the value of the
Book Value Award is determined.
The Company believes that options, SARs and BVAs granted under the
Amended Plan will constitute qualified performance-based compensation if
the stockholders approve the Amended Plan at the Annual Meeting.
Recommendation of the Board
The Board unanimously recommends that stockholders vote for the
approval of the Amended Plan.
Assuming the presence of a quorum, the affirmative vote of a majority
of the votes cast by the holders of shares of Common Stock present and
entitled to vote on this item at
21
the Annual Meeting is required to approve the adoption of the Amended Plan.
An abstention or a broker non-vote will have the effect of a vote against
the Amended Plan, unless holders of a majority of the Common Stock entitled
to vote on the proposal in fact cast votes, in person or by proxy, with
respect to that proposal, in which event neither an abstention nor a broker
non-vote will have any effect on the result of the vote.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The immediate family of Raymond J. Lauring, a director of the
Company, owns more than a 10% equity interest in Lauring Construction
Company. Mr. Lauring has no ownership interest in Lauring Construction
Company. During 2001, Lauring Construction Company provided construction
and construction management services in connection with a contract for the
estimated $13 million renovation of a 160,000 square foot building
purchased by the Company. Terms of the contract provide for a fixed fee of
$650,000 for supervision and management of the project over the term of the
contract. There were no payments made on the supervision or management
services portion of the contract in 2001. Payments to Lauring Construction
Company in 2001 for actual materials used and construction work performed
on this project were $405,000 and payments for other work unrelated to the
project were $31,000.
Arthur J. Remillard, Jr. spends considerable time in Boston,
Massachusetts in furtherance of the Company's business interests and,
because of this, the Company provides office and part-time living
accommodations to him at a condominium owned by the Company in Boston and
the use, for business purposes, of an automobile owned by the Company. The
Company believes the non-business connected economic benefit (if any) to
Mr. Remillard, Jr. to be minimal.
INDEPENDENT AUDITORS
Fees for services performed by the Company's independent auditors,
Ernst & Young LLP, for the fiscal year ended December 31, 2001, were
$254,000 and were for the following services:
Audit fees $159,000
All other fees 95,000
Total $254,000
"All other fees" represent charges for state mandated audits of
subsidiaries and audits of Company sponsored retirement plans. There were
no services performed by Ernst & Young LLP during 2001 that would be
considered financial information design and implementation fees. The Audit
Committee considered the amount of fees charged by Ernst & Young LLP not
specifically related to the audit of the Company's consolidated financial
statements, and determined that amount is compatible with maintaining their
independence. Representatives of Ernst & Young LLP are expected to be
present at the Annual Meeting and will have the opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions. As they have in the past several years, the
Directors have not voted an independent auditor for 2002 as of the date of
this Proxy Statement. Management anticipates that the Directors will
consider the selection of an independent auditor for the 2002 fiscal year
at the first meeting of the Board of Directors following the Annual
Meeting.
OTHER BUSINESS
The Proxy confers discretionary authority with respect to any other
business, which may come before the Annual Meeting. The Board knows of no
other matters to be presented at the Annual Meeting. The persons named in
the Proxy will vote according to their best judgment if any matter not
included in this Proxy Statement does properly come before the Annual
Meeting.
STOCKHOLDER PROPOSALS
Any stockholder proposal intended to be presented at the 2003 Annual
Meeting must be received at the Company's principal office by December 13,
2002 for consideration of inclusion in the Proxy Statement and form of
Proxy related to that Meeting. The proposal must comply in all respects
with the rules and regulations of the Securities and Exchange Commission.
Proxies solicited by the Board for the 2003 Annual Meeting will confer
discretionary authority to vote on any matter to come before the Annual
Meeting with respect to which the Company does not receive notice prior to
February 25, 2003.
22
APPENDIX A
THE COMMERCE GROUP, INC.
AMENDED AND RESTATED INCENTIVE COMPENSATION PLAN
(As Amended and Restated Through May 17, 2002)
Section 1. Purpose and Duration
1.1 Purposes. The purposes of this Amended and Restated Incentive
Compensation Plan (the "Amended Plan") of The Commerce Group, Inc. (the
"Company") are to (1) enhance the ability of the Company and its present
and future Affiliated Companies (as defined below) to attract, retain and
motivate employees and other persons providing services to such companies,
and (2) provide incentives for such persons to contribute significantly to
the long-term performance and growth of the Company and its Affiliated
Companies.
1.2 Effective Date. Subject to the approval of the Amended Plan by
the stockholders of the Company, the Amended Plan is effective as of May
17, 2002 (the "Effective Date").
1.3 Expiration Date. The Amended Plan shall expire one day less than
ten years from the Effective Date. In no event shall any Award (as defined
below) be made under the Amended Plan after such expiration date (except
for Awards granted pursuant to commitments entered into prior to such
expiration date). Awards granted prior to such expiration date may extend
beyond such date.
Section 2. Definitions
As used in the Amended Plan:
"Affiliated Company" means any corporation, limited liability company,
partnership or other entity, which, directly or indirectly, controls, is
controlled by, or is under common control with the Company, including any
Subsidiary of the Company.
"Award" means any Option, Stock Appreciation Right, Book Value Award,
Performance Stock Unit, Restricted Stock or Stock Unit awarded under the
Amended Plan.
"Award Agreement" means a writing specified in Section 13.2.
"Board" means the Board of Directors of the Company.
"Book Value" means the book value of the Company determined in
accordance with accounting principles generally accepted in the United
States consistently applied, provided that the Committee in its sole
discretion may include in Book Value for purposes of the Amended Plan the
amount of any dividend paid on the Common Stock during the Performance
Cycle. In the event of any dispute as to Book Value, the Committee may
elect, in its sole discretion, to refer the matter to the Company's
independent auditors whose determination shall be final and binding.
"Book Value Award" means an Award to a Participant under
Section 8 hereof.
"Change in Control" means a reorganization, merger or consolidation of
the Company, sale or other disposition of all or substantially all of the
assets of the Company, liquidation, dissolution or similar transaction
(each a "Business Combination") that the Committee determines, either at
the time of or after the grant of an Award, constitutes a Change in Control
of the Company for purposes of the Amended Plan. Unless the Committee
otherwise determines, a "Change in Control" shall be deemed to have
occurred if:
1 Formerly known as The Commerce Group, Inc. Management Incentive Plan,
first adopted in 1994.
A-1
(1) holders of a majority of the outstanding shares of Common Stock
shall sell, in a single or related series of transactions, a majority of
the outstanding shares of Common Stock to a person or entity, or a group of
related persons or entities; or
(2) the Company engages in a Business Combination, unless immediately
following the consummation of such Business Combination both of the
following conditions are satisfied: (i) persons who held a majority of the
outstanding shares of Common Stock immediately prior to such Business
Combination hold a majority of the outstanding shares of common stock of
the entity resulting from such Business Combination (the "Resulting
Entity"), and (ii) at least one-half (1/2) of the members of the board of
directors of the Resulting Entity are persons who were Incumbent Directors
immediately prior to the consummation of the Business Combination (or
persons whom a majority of the then Incumbent Directors have designated to
serve on the Resulting Entity board of directors); or
(3) any person (including any entity or a group of persons and/or
entities acting in concert) acquires beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of more than
twenty-five percent (25.0%) of the combined voting power (calculated as
provided in Rule 13d-3 in the case of rights to acquire securities) of the
then outstanding voting securities of the Company; provided, however, that
for purposes of this clause, the following acquisitions shall not
constitute a Change in Control: (x) any acquisition directly from the
Company, and (y) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any entity controlled by
the Company; or
(4) if a tender offer (for which a filing has been made with the SEC
which purports to comply with the requirements of Section 14(d) of the
Exchange Act and the corresponding SEC rules) is made for the stock of the
Company and the person (including any entity or group of persons and/or
entities acting in concert) making the tender offer could own, by the terms
of the offer plus any shares owned by such person, stock constituting a
majority of the total voting power of the Company's outstanding voting
securities immediately following the consummation of such tender offer, in
which case the Change in Control will be deemed to have occurred three (3)
business days before the tender offer is to terminate unless the offer is
first withdrawn; or
(5) Incumbent Directors cease for any reason to constitute at least a
majority of the Board; or
(6) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" means the Compensation Committee of the Board or such
other committee that the Board may appoint to administer the Amended Plan
in accordance with Section 3.
"Company" means The Commerce Group, Inc., and any successor to such
corporation.
"Common Stock" means the common stock of the Company, $.50 par value
per Share, or any successor security.
"Covered Employee" means "covered employee" as such term is defined in
Section 162(m).
"Effective Date" means the date specified in Section 1.2.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means (1) with respect to Shares, the fair market
value thereof as of the relevant date, as determined in accordance with a
valuation methodology approved by the Committee in good faith but in no
event less than, in the case of newly issued stock, the par value per
Share, or (2) with respect to any other property, the fair market value as
determined by the Committee in good faith or in the manner established by
the Committee from time to time.
A-2
"Grant Date" means the effective date of an Award as specified by the
Committee and set forth in the applicable Award Agreement.
"Incentive Stock Option" means an option to purchase Shares awarded to
a Participant under the Amended Plan that is intended to meet the
requirements of Section 422 of the Code or any successor provision, which
Option may also constitute a Reload Option.
"Incumbent Director" means any individual who, as of the Effective
Date, was a member of the Board and any individual who becomes a director
subsequent to the Effective Date whose election, or nomination for election
by the Company's stockholders, was approved by a vote of at least a
majority of the then Incumbent Directors, but shall not include any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in SEC
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on behalf of
a person other than the Board.
"Non-Qualified Stock Option" means an option to purchase Shares
awarded to a Participant under the Amended Plan that is not intended to be
an Incentive Stock Option and may also constitute a Reload Option.
"Option" means an Incentive Stock Option or a Non-Qualified Stock
Option, either of which may also constitute a Reload Option.
"Outside Director" means a member of the Board who is both an "outside
director" within the meaning of Section 162(m) and a "non-employee
director" as that term is defined in Rule 16b-3.
"Parent" means a "parent corporation" of the Company as that term is
defined in Section 424 of the Code.
"Participant" means a person selected by the Committee to receive an
Award under the Amended Plan, and his or her permitted transferee.
"Performance Cycle" means the period of time selected by the Committee
during which performance or Book Value is measured for the purpose of
determining the extent to which an Award has been earned, the value of such
Award or both.
"Performance Stock Unit" means Shares awarded to a Participant under
Section 9 hereof.
"Reload Option" means an Option granted under Section 6.7.
"Restricted Period" means the period of time selected by the Committee
during which an award of Restricted Stock may be forfeited to the Company.
"Restricted Stock" means Shares awarded to a Participant under Section
10 hereof which are subject to forfeiture.
"Rule 16b-3" means Rule 16b-3 promulgated under Section 16(b) of the
Exchange Act, as such rule may be amended from time to time, or any
successor provision.
"SEC" means the United States Securities and Exchange Commission.
"Section 16 Person" means a Participant who is subject to the
reporting requirements of Section 16(a) of the Exchange Act.
"Section 162(m)" means Section 162(m) of the Code including the
regulations (final, temporary or, in the discretion of the Committee,
proposed) promulgated thereunder, or any successor provision.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of Common Stock.
A-3
"Stock Appreciation Right" or "SAR" means a right awarded to a
Participant under Section 7 hereof.
"Stock Unit" or "Unit" means a Share or a unit that is valued in whole
or in part by reference to, or otherwise based on, the Book Value, Fair
Market Value or other value of a Share awarded to a Participant under the
Amended Plan.
"Subsidiary" means a "subsidiary corporation" as that term is defined
in Section 424 of the Code.
Section 3. Administration
3.1 The Committee. The Amended Plan shall be administered by the
Committee; provided, however, that the Board shall at all times retain the
authority to limit, suspend or repeal any or all of the Committee's power
under the Amended Plan, either generally or in one or more specific
instances but in any case only on a prospective basis. The Committee, in
its discretion, may delegate some or all of its powers with respect to the
Amended Plan to a subcommittee thereof, in which event applicable
references to the Committee shall refer to such subcommittee. In the event
there is no Committee or the Board has suspended or repealed the
Committee's authority, the applicable references in the Amended Plan to the
Committee shall be deemed to refer to the Board.
3.2 Administration for Certain Classes of Participants.
3.2.1 Section 16 Persons. To the extent required or desirable in
order for Awards to be exempt under Rule 16b-3, the administration of the
Amended Plan with respect to Section 16 Persons shall be managed either by
(1) the Board or (2) the Committee (or a subcommittee thereof) that either
is composed solely of two or more Outside Directors or, following the
abstention or recusal of all members who are not Outside Directors, is
composed solely of two or more Outside Directors.
3.2.2 Covered Employees. To the extent required or desirable in
order for Awards to be exempt under Section 162(m), the administration of
the Amended Plan with respect to Covered Employees shall be managed by the
Committee (or a subcommittee thereof) that is composed solely of two or
more Outside Directors.
3.3 Authority of the Committee. The Committee shall have the
authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing the operation of the Amended Plan as it shall
consider advisable from time to time, to interpret the provisions of the
Amended Plan and any Award and to decide all disputes arising in connection
with the Amended Plan; provided, however, that the Board shall at all times
retain the authority to alter, suspend or repeal, either generally or in
one or more specific instances but in any case only on a prospective basis,
any or all of the administrative rules, guidelines, practices, decisions
and interpretations the Committee may adopt pursuant to this Section.
Unless altered, suspended or repealed by the Board, the Committee's
decisions and interpretations shall be final, binding and conclusive on all
parties concerned, including the Company, its stockholders, Affiliated
Companies, and Participants.
Section 4. Eligibility
The persons eligible to receive Awards under the Amended Plan shall be
all directors (including Non-Employee Directors), officers and senior
management employees of the Company or any of its Affiliated Companies. An
Award may be granted to any such person, in connection with hiring,
retention or otherwise, prior to the date the employee first performs
services for the Company or any Affiliated Company, provided that no such
Award shall become exercisable prior to the date that such person first
performs such services.
A-4
Section 5. Shares Available for Issuance Under the Amended Plan
5.1 Shares Issuable Under the Amended Plan. Subject to the following
provisions of this Section 5, the aggregate number of Shares that may be
issued to Participants pursuant to Awards granted under the Amended Plan
shall not exceed five million (5,000,000) shares. Common Stock issued
pursuant to Awards granted under the Amended Plan may be Shares that have
been authorized but unissued, or have been previously issued and reacquired
by the Company, or both.
5.2 Shares Not Deemed Delivered Under the Amended Plan. To the
extent one or more Shares covered by any Award are not delivered thereunder
because the Award is cancelled or forfeited, has expired, or is settled in
cash or because one or more Shares are deducted in connection with the
satisfaction of the applicable tax withholding obligation, such Shares
shall not be deemed to have been delivered for purposes of determining the
maximum number of Shares available for delivery under the Amended Plan as
set forth in Section 5.1.
5.3 Shares Used to Pay Exercise Price. If the exercise price of an
Option is satisfied by surrendering previously owned Shares (whether
surrender occurs by physical delivery or by attestation of ownership), only
the net number of additional Shares then issued shall be deemed to be
delivered upon that exercise for purposes of determining the maximum number
of Shares available for delivery under the Amended Plan as set forth in
Section 5.1.
5.4 Other Items Not Included in Amount of Shares Issued Under the
Amended Plan. The maximum number of Shares that may be issued under the
Amended Plan as set forth in Section 5.1 shall not be affected by (1) the
payment in cash of dividends or dividend equivalents in connection with
outstanding Awards, (2) the settlement of stock-denominated Awards in cash,
or (3) the granting of stock-denominated Awards which by their terms may be
settled only in cash.
5.5 Section 162(m) Limits.
(a) No Covered Employee may receive during any three (3) calendar
year period Options (including Reload Options and Incentive Stock Options)
and/or SARs covering more than one and one-half million (1,500,000) Shares
in the aggregate.
(b) For Stock Unit Awards, Restricted Stock Awards, Restricted Stock
Unit Awards and Performance Share Awards that are intended to be
"performance-based compensation" (as that term is used for purposes of
Section 162(m)), no more than one and one-half million (1,500,000) Shares
may be subject to such Awards granted to any one Covered Employee during
any three (3) calendar-year period. If, after Shares have been earned, the
delivery is deferred, any additional Shares attributable to dividends
during the deferral period shall be disregarded.
(c) For any type of Award not covered by either paragraph (a) or (b)
of this Section, (1) under which the benefit is measured in whole or in
part by reference to a number of Shares, including without limitation a
Book Value Award, and (2) which is intended to be "performance-based
compensation" (as that term is used for purposes of Section 162(m)), no
Covered Employee shall receive any such Award if the receipt of such Award
would result in that Covered Employee receiving during any three (3)
calendar-year period one or more such Awards that are measured in whole or
in part by reference to more than one and one-half million (1,500,000)
Shares, in the aggregate. If, after amounts have been earned with respect
to such Awards, the delivery of such amounts is deferred, any additional
amounts attributable to earnings during the deferral period shall be
disregarded.
Section 6. Options
6.1 Grant of Options. Subject to the terms and provisions of the
Amended Plan, the Committee may award Options and determine the number of
Shares to be covered by each Option, the exercise price therefor, the term
of the Option, and any other term, condition or limitation applicable to
the exercise of the Option. The Committee may grant Incentive Stock
Options, Non-Qualified Stock Options or a combination thereof. The
Committee may also grant Reload Options pursuant to Section 6.7.
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6.2 Exercise Price. The exercise price for each Option shall be
determined by the Committee in its sole discretion and may be greater than,
equal to or less than the Fair Market Value of the Common Stock on the
Grant Date.
6.3 Expiration. No Option may be exercised after the expiration of
one day less than ten (10) years from the Grant Date; provided, however,
that if an Incentive Stock Option is granted to a Participant who, together
with persons whose stock ownership is attributed to the Participant
pursuant to Section 424(d) of the Code, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company, its Parent (if any) or any Subsidiary, such Incentive Stock
Option may not be exercised after the expiration of the maximum period
permitted under Section 422(c) of the Code (which, as of the Effective
Date, was five (5) years from the Grant Date).
6.4 Certain Additional Provisions for Incentive Stock Options. The
following conditions shall apply to the grant of Incentive Stock Options,
provided that any of the conditions in Sections 6.4.1, 6.4.2 and 6.4.3
shall not apply if the Committee determines with the advice of counsel that
such condition is not required or desirable in order for an Incentive Stock
Option Award to satisfy the requirements of Section 422 of the Code.
6.4.1 Exercise Price. In the case of an Incentive Stock Option, the
exercise price shall be not less than one hundred percent (100%) of the
Fair Market Value of the Common Stock on the Grant Date; provided, however,
that if on the Grant Date the Participant (together with persons whose
stock ownership is attributed to the Participant pursuant to Section 424(d)
of the Code) owns stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company and Affiliated
Companies (to the extent aggregated for purposes of Section 424 of the
Code), the exercise price shall be not less than the exercise price
required under Section 422(c) of the Code (which, as of the Effective Date,
was one hundred and ten percent (110%) of the Fair Market Value of the
Common Stock on the Grant Date).
6.4.2 Exercisability. Subject to Section 13.3 and Section 13.7, the
aggregate Fair Market Value (determined on the Grant Date(s)) of the Shares
with respect to which Incentive Stock Options are exercisable for the first
time by any Participant during any calendar year (under all plans of the
Company, its Parent (if any) and any Subsidiary) shall not exceed the
maximum amount permissible under Section 422(d) of the Code (which, as of
the Effective Date, was $100,000).
6.4.3 Eligibility. Incentive Stock Options may be granted only to
persons who are employees (for purposes of Section 422 of the Code) of the
Company, its Parent (if any) or any Subsidiary on the Grant Date.
6.4.4 Compliance with Section 422 of the Code. The terms and
conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code or any successor provision, and anything in the
Amended Plan to the contrary notwithstanding, no term of the Amended Plan
relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted to the Committee
under the Amended Plan be so exercised, so as to disqualify the Amended
Plan or, without the consent of the Participant, any Incentive Stock Option
granted under the Amended Plan, under Section 422 of the Code.
6.4.5 Notice to Company of Disqualifying Disposition. Unless the
Committee otherwise specifies at the time of an Award, each Award Agreement
for an Incentive Stock Option shall provide that the Participant shall
notify the Company in writing promptly after the Participant makes a
Disqualifying Disposition of any Share received pursuant to the exercise of
an Incentive Stock Option. The term "Disqualifying Disposition" means any
disposition (including any sale) of Shares before the later of (a) two
years after the Participant was granted the Incentive Stock Option under
which the Participant acquired such Shares, or (b) one year after the
Participant acquired the Shares by exercising the Incentive Stock Option.
6.4.6 Substitute Options. Notwithstanding the provisions of Section
5.4, if the Company, its Parent (if any) or any Subsidiary consummates a
transaction described in Section 424(a) of the Code (relating to the
acquisition of property or stock from an
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unrelated corporation), the Committee may grant, to the extent permitted
under the Code, one or more Incentive Stock Options in substitution for
options granted by their former employer. The Committee, in its sole
discretion and consistent with Section 424(a) of the Code, shall determine
the exercise price of such substitute Options.
6.5 Non-Qualified Stock Option Presumption. Any Option granted
pursuant to the Amended Plan shall be presumed to be a Non-Qualified Stock
Option unless expressly designated as an Incentive Stock Option in the
applicable Award Agreement.
6.6 Exercise of Option.
6.6.1 Payment of Exercise Price. The Company shall have no
obligation to deliver any Share pursuant to any exercise of an Option until
payment in full of the exercise price therefor is received by the Company
(including as described in Section 6.6.4).
6.6.2 Manner of Payment. The payment of the exercise price may be
made in whole or in part in cash or by certified or bank check (in United
States currency) or as described in Section 6.6.4 or, to the extent
specified in an Award Agreement or otherwise permitted by the Committee at
the time of exercise, by delivery of a promissory note or Shares owned by
the Participant valued at their Fair Market Value on the date of exercise,
or such other lawful consideration as the Committee may determine, or any
combination of the foregoing, as determined by the Committee.
6.6.3 Delivery of Shares. Unless the Committee otherwise determines,
a Participant may surrender Shares in satisfaction of the exercise price
either by physically delivering one or more certificates evidencing Shares
that the Participant has owned for at least six (6) months and that are
freely transferable and not subject to any lien, claim or encumbrance, or
by delivering an attestation of such ownership in form and substance
acceptable to the Company, and in the case of an attestation, the number of
Shares delivered by the Company upon exercise shall be reduced by the
number deemed surrendered through such attestation. Without limiting the
scope of the immediately preceding sentence, if the Committee expressly
permits, pursuant to the relevant Award or otherwise, a Participant may
elect to satisfy the payment of an Option exercise price by directing the
Company to withhold, from the Shares otherwise issuable upon such exercise,
a number of Shares having an aggregate Fair Market Value equal to such
Option exercise price.
6.6.4 Broker Facilitated Exercise. Unless the Committee otherwise
determines, a Participant may elect to pay the exercise price upon the
exercise of an Option by irrevocably directing a third party to sell Shares
(or a sufficient portion of the Shares) acquired upon exercise of the
Option and remit to the Company as promptly as practicable a sufficient
portion of the sale proceeds to pay all or any portion of the exercise
price and any tax withholding resulting from such exercise.
6.7 Reload Options. If a Participant surrenders Shares (by delivery
or attestation) to pay the exercise price of an Option, and/or arranges to
have a portion of the Shares otherwise issuable upon exercise withheld or
sold to pay the applicable withholding taxes, the Participant may receive,
at the Committee's discretion, a new "Reload Option" equal to the sum of
the number of Shares tendered to pay the exercise price and the number of
Shares used to pay the withholding taxes. Reload Options may be any type
of Option permitted under the Amended Plan and the Code and will be granted
subject to such terms, conditions, restrictions and limitations as may be
determined by the Committee, from time to time. Reload Options may also be
granted in connection with the exercise of options granted under any other
plan of the Company that the Committee may designate from time to time.
Section 7. Stock Appreciation Rights
7.1 Grant of SAR Awards. A Stock Appreciation Right (or "SAR") is an
Award entitling the Participant to receive an amount in cash or Shares or a
combination thereof having a value equal to (or if the Committee shall so
specify in the Award Agreement, less than) the excess of the Fair Market
Value of a Share on the date of exercise over the Fair Market Value of a
Share on the Grant Date (or over the option exercise price, if the Stock
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Appreciation Right was granted in tandem with an Option) multiplied by the
number of Shares with respect to which the Stock Appreciation Right shall
have been exercised. Subject to the provisions of the Amended Plan, the
Committee may award SARs in tandem with an Option (at or after the award of
the Option), or alone and unrelated to an Option, and may determine in its
sole discretion the terms and conditions applicable thereto, including the
form of payment. An SAR granted in tandem with an Option shall terminate
to the extent that the related Option is exercised, and the related Option
shall terminate to the extent that the tandem SAR is exercised. Subject to
this Section 7.1 and to such rules as the Committee may, in its discretion
and for any reason whatsoever, impose, an SAR granted in connection with an
Option will be exercisable at such time or times, and only to the extent,
that a related Option is exercisable, and shall not be transferable except
to the extent that such related Option may be transferable.
7.2 Cancellation of Options. Notwithstanding that an Option at the
time of exercise shall not be accompanied by a related Stock Appreciation
Right, if the market price of the Shares subject to such Option exceeds the
exercise price of such Option at the time of its exercise, the Committee
may, in its discretion, cancel such Option, in which event the Company
shall pay to the person exercising such Option an amount equal to the
difference between the Fair Market Value of the Common Stock to have been
purchased pursuant to such exercise of such Option (determined on the date
the Option is cancelled) and the aggregate consideration to have been paid
by such person upon such exercise. Such payment shall be made by check,
bank draft, or by surrendering one or more Shares having a Fair Market
Value (determined on the date the payment is to be made) equal to the
amount of such payments, or by any combination thereof, as determined by
the Committee. The Committee may exercise its discretion under the first
sentence of this Section 7.2 only in the event of a written request of the
person exercising the Option, which request shall not be binding on the
Company.
Section 8. Book Value Awards
8.1 Grant of Book Value Awards. A Book Value Award is an Award
entitling the Participant to receive an amount in cash or Shares or a
combination thereof having a value equal to (or if the Committee shall
specify in the Award Agreement, less than) the excess of the Book Value of
a Share on a date selected by the Committee over the Book Value of a Share
on a previous date selected by the Committee multiplied by the number of
Book Value Award Units granted. There may be more than one Performance
Cycle in existence at any one time for Book Value Awards, and the duration
of Performance Cycles may differ from each other.
8.2 Performance Goal Adjustments. During any Performance Cycle, the
Committee may adjust the performance goals for such Performance Cycle as it
deems equitable in recognition of unusual or non-recurring events affecting
the Company, changes in applicable tax laws or accounting principles, or
such other factors as the Committee may determine, provided, however, that
the Committee may specify at the time an Award is made that the performance
goals applicable thereto may not be reduced during the term of the Award.
8.3 Payment of Book Value Award. As soon as practicable after the
end of a Performance Cycle, the Committee shall determine the value of the
compensation to which the Participant is entitled on the basis of the terms
of the Book Value Award. The payment value of a Book Value Award shall be
distributed to the Participant as soon as practicable thereafter.
Section 9. Performance Stock Units
9.1 Grant of Stock Unit Awards. A Performance Stock Unit is an Award
entitling the Participant to acquire one or more Shares upon the attainment
of specified performance goals. Subject to the provisions of the Amended
Plan, the Committee may award Performance Stock Units and determine the
performance goals applicable to each such Award, the number of such Shares
for each Performance Cycle, the duration of each Performance Cycle and all
other limitations and conditions applicable to the awarded Performance
Stock Units. There
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may be more than one Performance Cycle in existence at any one time, and
the duration of Performance Cycles may differ from each other. The payment
value of each Performance Stock Unit shall be equal to (or if the Committee
shall specify in the Award Agreement, less than) the Fair Market Value of
one Share on the date the Performance Stock Unit is earned or, in the
discretion of the Committee, on the date the Committee determines that the
Performance Stock Unit has been earned.
9.2 Performance Goal Adjustments. During any Performance Cycle, the
Committee may adjust the performance goals for such Performance Cycle as it
deems equitable in recognition of unusual or non-recurring events affecting
the Company, changes in applicable tax laws or accounting principles, or
such other factors as the Committee may determine, provided, however, that
the Committee may specify at the time an Award is made that the performance
goals applicable thereto may not be reduced during the term of the Award.
9.3 Payment of Performance Stock Unit Award. As soon as practicable
after the end of a Performance Cycle, the Committee shall determine the
number of Performance Stock Units which have been earned by the Participant
on the basis of performance in relation to the established performance
goals. The payment values of earned Performance Stock Units shall be
distributed to the Participant as soon as practicable thereafter.
Section 10. Restricted Stock
10.1 Grant of Restricted Stock Awards. A Restricted Stock Award is
an Award entitling the Participant to acquire Shares, subject to such
conditions and restrictions, including, without limitation, a Company right
during a specified period or periods to repurchase such Shares at their
original purchase price (or to require forfeiture of such Shares) upon the
Participant's termination of employment, as the Committee shall determine.
Subject to the provisions of the Amended Plan, the Committee may award
Shares of Restricted Stock and determine the purchase price (if any)
therefor, the duration of the Restricted Period during which, and the
conditions under which, the Shares may be forfeited to or repurchased by
the Company and the other terms and conditions of such Awards. Shares of
Restricted Stock may be issued for no cash consideration or such minimum
consideration as may be required by applicable law.
10.2 Restricted Period Requirements. Shares of Restricted Stock may
not be sold, assigned, transferred, pledged, hypothecated, margined or
otherwise encumbered, except as permitted by the Committee, during the
Restricted Period. Shares of Restricted Stock shall be evidenced in such
manner as the Committee may determine. Any certificate issued in respect
of Shares of Restricted Stock shall be registered in the name of the
Participant and, unless otherwise determined by the Committee, deposited by
the Participant, together with a stock power endorsed in blank, with the
Company. At the expiration of the Restricted Period, the Company shall
deliver such deposited certificate and stock power to the Participant.
10.3 Rights of Holders of Restricted Stock. A Participant shall have
all the rights of a stockholder with respect to the Restricted Stock
including voting and dividend rights, subject to restrictions on
transferability and Company repurchase or forfeiture rights described in
the Amended Plan and subject to any other condition determined by the
Committee and contained in the Award Agreement.
Section 11. Stock Units
11.1 Award of Stock Units. Subject to the provisions of the Amended
Plan, the Committee may award Stock Units subject to such terms,
restrictions, conditions, performance criteria, vesting requirements and
payment rules as the Committee shall determine.
11.2 Consideration. Shares awarded in connection with a Stock Unit
may be issued for no cash consideration or such minimum consideration as
may be required by applicable law.
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Section 12. Grant of Other Awards
The Committee shall have the authority to specify the terms and
provisions of other forms of equity-based or equity-related Awards not
described above which the Committee determines to be consistent with the
purposes of the Amended Plan and the interests of the Company, which Awards
may provide for cash payments based in whole or in part on the value or
future value of Shares, for the acquisition or future acquisition of
Shares, or any combination thereof. Other Awards may also include cash
payments (including the cash payment of dividend equivalents) under the
Amended Plan which may be based on one or more criteria determined by the
Committee that are unrelated to the value of the Shares and may be granted
in tandem with, or independent of, other Awards under the Amended Plan.
Section 13. General Provisions Applicable to Awards
13.1 Legal and Regulatory Matters. The delivery of Shares shall be
subject to compliance with (1) applicable federal and state laws and
regulations, (2) if the outstanding Shares are listed at the time on any
stock exchange or the Nasdaqr, the listing requirements of such exchange or
Nasdaqr, and (3) the Company's counsel's approval of all other legal
matters in connection with the issuance and delivery of the Shares. If the
sale of the Shares has not been registered under the Securities Act, the
Company may require, as a condition to delivery of the Shares, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of the Securities Act and may require that
the certificates evidencing the Shares bear an appropriate legend
restricting transfer.
13.2 Award Agreement. Each Award under the Amended Plan shall be
evidenced by a writing, specifying the terms and conditions thereof and
containing such other terms and conditions not inconsistent with the
provisions of the Amended Plan as the Committee considers necessary or
advisable to achieve the purposes of the Amended Plan or comply with
applicable tax and regulatory laws and accounting principles. A copy of
such document shall be provided to the Participant as soon as practicable
following the Grant Date, and the Committee may, but need not, require that
the Participant sign a copy of such document. Such document is referred to
in the Amended Plan as an "Award Agreement" regardless of whether any
Participant signature is required. In the event that the Committee does
not require the execution of such Award Agreement by the Participant, the
acceptance of the Award Agreement by the Participant shall constitute
agreement by the Participant to the terms, conditions, restrictions and
limitations set forth in the Amended Plan and the Award Agreement as well
as the administrative guidelines and practices of the Company in effect
from time to time.
13.3 Terms of Awards. The vesting, exercisability, payment and other
provisions applicable to an Award (which may include, without limitation,
restrictions on transferability or provision for mandatory resale to the
Company) shall be determined by the Committee and set forth in the
applicable Award Agreement. Each Award may be made alone, in addition to
or in relation to any other Award. The terms of each Award need not be
identical, and the Committee need not treat Participants uniformly.
Notwithstanding the foregoing, the Committee may accelerate (1) the vesting
or payment of any Award (including an Incentive Stock Option), (2) the
lapse of restrictions on any Award (including an Award of Restricted
Stock), and (3) the date on which any Option or SAR first becomes
exercisable, and except as otherwise provided by the Amended Plan or a
particular Award, any determination with respect to an Award may be made by
the Committee at the time of award or at any time thereafter.
13.4 Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Amended Plan, and any permitted
modification, or revocation thereof, shall be in writing filed with the
Committee at such times, in such form, and subject to such restrictions and
limitations, not inconsistent with the terms of the Amended Plan, as the
Committee shall specify.
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13.5 Payment of Awards. The Committee shall determine, at the time
of an Award or, with the Participant's permission, subsequent thereto,
whether an Award shall or may be settled in whole or in part in cash,
Common Stock, other securities of the Company, one or more other Awards, or
other property. The Committee may permit a Participant to defer all or any
portion of a payment under the Amended Plan, and may provide for the
crediting of interest on deferred amounts denominated in cash and dividend
equivalents on amounts denominated in Shares.
13.6 Dividends and Cash Payments. In the discretion of the
Committee, any Award to a Participant under the Amended Plan may provide
the Participant with (1) dividends or dividend equivalents payable
currently or deferred with or without interest and (2) cash payments in
lieu of or in addition to an Award.
13.7 Change in Control. In order to preserve the rights of a
Participant under an Award in the event of a Change in Control of the
Company, the Committee in its discretion may, at the time an Award is made
or at any time thereafter, take one or more of the following actions with
respect to the effect of a Change in Control on one or more Awards: (1)
provide for the acceleration of any time period relating to the exercise or
realization of the Award, (2) provide for the purchase of the Award upon
the Participant's request for an amount of cash or other property that
could have been received upon the exercise or realization of the Award had
the Award been currently exercisable or payable, (3) cause the Award to be
assumed, or new rights substituted therefor, by another entity, or (4) make
such other provision as the Committee may consider equitable and in the
best interests of the Company; provided, however, that no such action
pursuant to this Section shall materially and adversely affect the rights
of, or tax consequences to, a Participant (or beneficiary) under any Award
granted under the Amended Plan prior to the date such action is adopted by
the Committee, unless the affected Participant expressly consents in
writing to such material adverse effect.
13.8 Tax Withholding. The Company and its Subsidiaries shall have
the right to require payment of, or may deduct from any payment or delivery
of Shares made under the Amended Plan or otherwise due to the Participant,
or may permit Shares to be tendered or sold including Shares delivered or
vested in connection with an Award, in an amount sufficient to cover
withholding of any federal, state, local, foreign or other governmental
taxes or charges required by law or such greater amount of withholding as
the Committee shall determine from time to time and to take such other
action as may be necessary to satisfy any such withholding obligations.
Unless the Committee otherwise expressly permits, the aggregate Fair Market
Value of Shares withheld or surrendered for tax withholding may not exceed
the maximum amount allowed consistent with fixed plan accounting in
accordance with accounting principles generally accepted in the United
States applicable to the Company.
13.9 Termination of Employment. The Committee shall determine the
effect on an Award of the disability, death, retirement or other
termination of employment of a Participant. During the lifetime of a
Participant, all rights with respect to Awards shall be exercisable only by
such Participant or, if applicable, a permitted transferee, except to the
extent the Committee permits the Participant's legal representative,
guardian or designated beneficiary to receive payment of an Award or
exercise rights thereunder.
13.10 Events Not Deemed a Termination of Employment. For purposes of
the Amended Plan, the following events shall not be deemed a termination of
employment of a Participant:
(1) a transfer to the employment of the Company from an
Affiliated Company or from the Company to an Affiliated Company, or from
one Affiliated Company to another, or
(2) an approved leave of absence for military service or
sickness, or for any other purpose approved by the Company, if the
Participant's right to reemployment is guaranteed either by a statute or by
contract or under the policy pursuant to which the leave of absence was
granted or if the Committee otherwise so provides in writing.
For purposes of the Amended Plan, employees of an Affiliated Company
shall be deemed to have terminated their employment on the date on which
such Affiliated Company ceases to be an Affiliated Company.
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13.11 Amendments to Outstanding Awards. The Committee may amend,
modify or terminate any outstanding Award held by a Participant, including
substituting therefor another Award of the same or a different type,
changing the date of exercise or realization, converting an Incentive Stock
Option to a Non-Qualified Stock Option, or modifying or waiving the
restrictions with respect to any Share of Restricted Stock, provided,
however, that the Participant's consent to such action shall be required
unless the Committee determines that the action, taking into account any
related action, would not materially and adversely affect the Participant.
13.12 Adjustment to Plan. In the event of any stock dividend, stock
split (forward or reverse), combination or exchange of equity securities,
creation of a class of equity securities, reclassification, issuance of
warrants or rights to purchase Common Stock (at a price materially below
Fair Market Value), recapitalization, merger, consolidation,
reorganization, split-up, spin-off, other distribution (other than ordinary
cash dividends) of assets to stockholders, or any other similar event
affecting the Common Stock, the Committee, in order to reflect such change
in the Common Stock, may make any such adjustment as it may deem
appropriate, in its discretion, to (1) the maximum number of Shares that
may be issued under the Amended Plan as set forth in Section 5.1; (2) to
the extent permitted under Section 162(m), the maximum number of Shares
that may be granted pursuant to Section 5.5; and (3) to the extent
permitted under Section 422 of the Code, the maximum number of Shares that
may be granted pursuant to Section 5.1.
13.13 Adjustments to Awards. Upon the happening of any of the events
described in Section 13.13.1, a Participant's rights with respect to any
Award shall be adjusted as hereinafter provided, unless otherwise
specifically provided in the Award Agreement. The Committee in its
discretion may make provision for a cash payment with respect to an
outstanding Award held by a Participant, and/or make adjustments to any
measure of performance that relates to an Award.
13.13.1 Stock Splits and Recapitalizations. If (1) the Company
issues any of its Shares as a stock dividend upon or with respect to the
Shares, or (2) the Shares are subdivided or combined into a greater or
smaller number of Shares, or (3) upon a merger, consolidation,
reorganization, split-up, liquidation, combination, recapitalization or the
like of the Company, Shares are exchanged for other securities of the
Company, securities of another entity, or cash or other property, then each
Participant upon exercising an Award (for the purchase price to be paid
under the Award) shall be entitled to purchase such number of Shares, other
securities of the Company, securities of such other entity, cash or other
property as the Participant would have received if the Participant had been
the holder of the Shares with respect to which the Award is exercised at
all times between the Grant Date of the Award and the date of its exercise,
and appropriate adjustments shall be made in the purchase price per Share.
13.13.2 Restricted Stock. If any person owning Restricted Stock
receives new or additional or different shares or securities ("New
Securities") as a consequence of the occurrence of an event described in
Section 13.13.1, the New Securities shall be subject to all of the
conditions and restrictions applicable to the Restricted Stock with respect
to which such New Securities were issued.
13.13.3 Committee Determination. Notwithstanding any provision to
the contrary, no adjustment shall be made pursuant to Section 13.13.1 with
respect to any Incentive Stock Option, unless (1) the Committee, after
consulting with counsel for the Company, determines that such adjustment
would not constitute a modification, extension or renewal of such Incentive
Stock Option within the meaning of Section 424 of the Code, and would not
cause any adverse tax consequences for the holder of such Incentive Stock
Option or (2) the Participant holding such Incentive Stock Option consents
to the adjustment. No adjustment to an Incentive Stock Option shall be
made for any dividend paid in cash or in property other than securities of
the Company.
13.13.4 Fractional Shares. No fractional Shares shall be issued
under the Amended Plan. Any fractional Shares which, but for this Section,
would have been issued shall be deemed to have been issued and immediately
sold to the Company for their Fair Market Value, and the Participant shall
receive from the Company cash in lieu of such fractional Shares.
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13.13.5 Recapitalization. The Committee may adjust the number of
Shares subject to outstanding Awards and the exercise price and the terms
of outstanding Awards to take into consideration material changes in
accounting practices or principles, extraordinary dividends, acquisitions
or dispositions of stock or property, or any other event if the Committee
determines that such adjustment is appropriate to avoid an inequitable
result under the Amended Plan for any Participant or the Company's
stockholders.
13.13.6 Further Adjustment. Upon the happening of any of the
events described in Sections 13.13.1 or 13.13.5, the class and aggregate
number of Shares set forth in Sections 5.1 and 5.5 hereof that are subject
to Awards which previously have been or subsequently may be granted under
the Amended Plan shall be appropriately adjusted to reflect the events
described in such Sections. The Committee shall determine the specific
adjustments to be made under this Section 13.13.6.
13.14 Transferability. Unless otherwise determined by the
Committee, any Award granted under the Amended Plan shall be exercisable
during a Participant's lifetime only by the Participant, and the Award
shall not in any event be transferable except in case of the death of the
Participant or by will or the laws of descent and distribution. The
Committee may permit (on such terms, conditions and limitations as it
shall establish) any Non-Qualified Stock Option (including a Reload
Option) and/or any Share issued in connection with an Option exercise that
is subject to restrictions on transferability, to be transferred to a
member of a Participant's immediate family or to a trust or similar
vehicle for the benefit of a Participant's immediate family members.
Except to the extent required by law, no Award or interest of any
Participant in the Amended Plan shall be subject to any lien, levy,
attachment, pledge, obligation, liability or bankruptcy of a Participant.
Section 14. Miscellaneous
14.1 Rights Accompanying Grant of Award. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not
be construed as giving a Participant the right to be retained in the
employ of the Company or an Affiliated Company, or the right to continue
to provide services to the Company or an Affiliated Company, or the right
to continued employment in any particular position or at any particular
rate of compensation. The Company and its Affiliated Companies expressly
reserve the right to dismiss a Participant at any time free from any
liability or claim under the Amended Plan, except as expressly provided in
the applicable Award. Unless otherwise determined by the Committee or
expressly required by applicable law or the terms of a benefit plan or
severance program of the Company or an Affiliated Company, Awards received
by Participants under the Amended Plan shall not be deemed a part of a
Participant's regular, recurring compensation for purposes of calculating
payments or benefits from any such benefit plan or severance program of
the Company or an Affiliated Company.
14.2 Additional Compensation Arrangements. Nothing contained in the
Amended Plan shall prevent the Company from adopting other or additional
compensation arrangements for its employees.
14.3 Funding of Plan. Unless otherwise determined by the Committee
with the express authorization of the Board, the Amended Plan shall be
unfunded and shall not create (or be construed to create) a trust or a
separate fund or funds. The Amended Plan shall not establish any fiduciary
relationship between the Company and any Participant or other person. To
the extent any Participant holds any right by virtue of an Award granted
under the Amended Plan, such right shall constitute a general unsecured
liability of the Company and shall not confer upon any participant any
right, title, or interest in any asset of the Company.
14.4 Information to be Furnished to Committee. The Company and its
Affiliated Companies shall furnish the Committee with such data and
information as it determines may be required for it to discharge its
duties with respect to the Amended Plan. The records of the Company and
its Affiliated Companies as to an employee's or Participant's employment,
termination of employment, leave of absence, reemployment and compensation
shall be conclusive on all persons unless determined to be incorrect.
Participants and other persons entitled to benefits under the Amended Plan
must furnish the Committee such evidence, data or information as the
Committee considers desirable to carry out the terms of the Amended Plan.
A-13
14.5 Rights of Participant. Subject to the provisions of the
applicable Award, no Participant shall have any right as a stockholder
with respect to any Share to be distributed under the Amended Plan until
he or she becomes the holder thereof. A Participant to whom any Share is
awarded, including Shares of Restricted Stock, shall be considered the
holder of such Share at the time of the Award except to the extent
otherwise provided in the applicable Award Agreement.
14.6 Expenses of the Amended Plan. The expenses of the
administration of the Amended Plan shall be borne by the Company and its
Affiliated Companies. The Committee may require any Affiliated Company to
pay for the Shares issued under the Amended Plan to employees or other
persons associated with such Affiliated Company, and unless the Committee
otherwise provides, either at or after the grant of an Award, each
Affiliated Company shall be liable for the payment of cash due under the
Amended Plan with respect to any Participant to the extent that such
benefits are attributable to the services rendered for that Affiliated
Company by the Participant. Any dispute relating to liability of a
Subsidiary for cash payments shall be resolved by the Board in its sole
discretion.
14.7 Amendment, Suspension, or Termination of the Amended Plan. The
Board may amend, suspend or terminate the Amended Plan or any portion
thereof at any time, provided that (1) no amendment shall be made without
approval of the Company's stockholders if, in the opinion of Company
counsel, such stockholder approval is necessary to comply with any
applicable tax or regulatory requirement, including any requirement for
exemptive relief under Section 16(b) of the Exchange Act, or any successor
provision, or Section 162(m) or Section 422 of the Code or, if the
outstanding Shares then are listed on any stock exchange or Nasdaqr, the
listing requirements of such exchange or Nasdaqr, as applicable; and (2) no
such amendment, suspension or termination shall materially and adversely
affect the rights of, or tax consequences to, a Participant (or
beneficiary) under any Award granted under the Amended Plan prior to the
date such amendment, suspension or termination is adopted by the Board,
unless the affected Participant expressly consents in writing to such
material adverse effect; provided, however, that the limitations set forth
in this clause shall not apply to any adjustment made pursuant to Section
13.12 or Section 13.13.
Section 15. Legal Construction
15.1 Captions. The captions provided in the Amended Plan are
included solely for convenience of reference and shall not affect the
meaning of any provision of the Amended Plan or serve as a basis for
interpretation or construction of the Amended Plan.
15.2 Gender and Number. Where the context admits, words in any
gender shall include any other gender, words in the singular shall include
the plural, and the plural shall include the singular.
15.3 Evidence. Evidence required of anyone under the Amended Plan
may be by certificate, affidavit, document or other information which the
person acting on it considers pertinent and reliable, and signed, made or
presented by the proper party or parties.
15.4 Severability. In the event any provision of the Amended Plan is
held invalid or illegal for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Amended Plan, and the Amended
Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
15.5 Governing Law. The Amended Plan and all rights under the
Amended Plan and any Award shall be construed in accordance with and
governed by the internal laws of the Commonwealth of Massachusetts,
excluding any conflicts or choice of law rule or principle that might
otherwise refer construction or interpretation of the Amended Plan or any
Award to the substantive law of another jurisdiction.
A-14
PROXY
THE COMMERCE GROUP, INC.
11 GORE ROAD (Route 16)
WEBSTER, MASSACHUSETTS 01570
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of The Commerce Group, Inc. hereby
appoints Gerald Fels, Arthur J. Remillard, III and John W. Spillane (each
with power to act without the other and with power of substitution) as
proxies to represent the undersigned at the Annual Meeting of the Common
Stockholders of The Commerce Group, Inc. to be held at 9:00 a.m. on Friday,
May 17, 2002 and at any adjournment thereof, with all the power the
undersigned would possess if personally present, and to vote all shares of
Common Stock of the Company which the undersigned may be entitled to vote at
said Meeting, hereby revoking any proxy heretofore given.
THIS PROXY WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ON THE
REVERSE SIDE. IF NO SPECIFICATION IS MADE, IT IS THE INTENTION OF THE
PROXIES TO VOTE FOR A PROPOSAL TO FIX AT 17 THE NUMBER OF DIRECTORS OF THE
COMPANY, FOR ALL NOMINEES FOR DIRECTOR LISTED ON THE REVERSE SIDE AND FOR
PROPOSAL 2.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE SIDE SEE REVERSE SIDE
? Please mark
votes as in
this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" FIXING THE
NUMBER OF DIRECTORS AT 17 AND "FOR" ALL NOMINEES AND "FOR"
PROPOSAL 2.
1. FIXING THE NUMBER OF DIRECTORS OF THE COMPANY AT 17 AND ELECTION OF
DIRECTORS
Nominees: (01) Herman F. Becker, (02) Joseph A. Borski, Jr., (03) Eric G.
Butler, (04) Henry J. Camosse, (05) Gerald Fels, (06) David R. Grenon, (07)
Robert W. Harris, (08) Robert S. Howland, (09) John J. Kunkel, (10) Raymond
J. Lauring, (11) Normand R. Marois, (12) Suryakant M. Patel, (13) Arthur J.
Remillard, Jr., (14) Arthur J. Remillard, III, (15) Regan P. Remillard, (16)
Gurbachan Singh and (17) John W. Spillane.
FOR FIXING THE WITHHELD FROM FIXING THE 2.APPROVAL OF THE FOR AGAINST ABSTAIN
NUMBER OF DIRECTORS 0 NUMBER OF DIRECTORS AT 17 0 AMENDED AND RESTATED 0 0 0
AT 17 AND FOR AND WITHHELD FROM ALL INCENTIVE COMPENSATION
ALL NOMINEES NOMINEES PLAN
0
For fixing the number of Directors at 17 and for all nominees except
as noted above
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT 0
MARK HERE IF YOU PLAN TO ATTEND THE MEETING 0
Please sign exactly as your name(s) appear(s) on
this proxy card and return promptly in the envelope
provided. When signing as attorney, executor,
trustee or guardian, please give your full title.
Signature Date: Signature: Date: