proxy123107.htm
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act of 1934 (Amendment No. )
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Severn
Bancorp, Inc.
200
Westgate Circle, Suite 200, Annapolis, Maryland 21401
March 20,
2008
To
the Stockholders of Severn Bancorp, Inc.:
You are
cordially invited to attend the Annual Meeting of Stockholders of Severn
Bancorp, Inc. to be held on Wednesday, April 30, 2008, at 9:00 a.m. Eastern
Time, at The Greystone Grill, Severn Bank Building, 200 Westgate Circle,
Annapolis, MD 21401.
At the
Annual Meeting, you will be asked to elect two directors, each to serve for a
three-year term, ratify the appointment of Beard Miller Company LLP as
independent auditor of Severn Bancorp, Inc., adopt the Severn Bancorp, Inc. 2008
Equity Incentive Plan, and transact such other business as may properly come
before the Annual Meeting or any adjournments thereof.
The Board
of Directors unanimously recommends that you vote FOR the election of both of
the Board’s nominees for election as directors, FOR the ratification of Beard
Miller Company LLP as independent auditor for Severn Bancorp, Inc., and FOR the
adoption of the Severn Bancorp, Inc. 2008 Equity Incentive Plan. We encourage
you to read the accompanying Proxy Statement, which provides information about
Severn Bancorp, Inc. and the matters to be considered at the Annual
Meeting.
It
is important that your shares be represented at the Annual Meeting. Whether or
not you plan to attend the Annual Meeting, you are requested to complete, date,
sign and return the enclosed proxy card in the enclosed postage paid
envelope. Any proxy given may be revoked by you in writing or in
person at any time prior to its exercise.
Sincerely,
/s/
Alan J.
Hyatt
Chairman,
President and
Chief
Executive Officer
SEVERN
BANCORP, INC.
200
Westgate Circle, Suite 200
Annapolis,
Maryland 21401
(410)
260-2000
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD ON
April
30, 2008
NOTICE IS
HEREBY GIVEN that the Annual Meeting of Stockholders of Severn Bancorp, Inc.
will be held at The Greystone Grill, Severn Bank Building, 200 Westgate Circle,
Annapolis, Maryland 21401 on Wednesday, April 30, 2008, at 9:00 a.m., Eastern
Time, and at any adjournments thereof, for the following purposes, all of which
are more completely set forth in the accompanying Proxy Statement:
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1.
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To
elect Ronald P. Pennington and T. Theodore Schultz to serve as directors
for a three-year term;
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2.
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To
ratify the appointment of Beard Miller Company LLP as independent auditor
for Severn Bancorp, Inc. for the year ending December 31,
2008;
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3.
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To
adopt the Severn Bancorp, Inc. 2008 Equity Incentive Plan;
and
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4.
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To
transact such other business as may properly come before the Annual
Meeting and any postponements or adjournments of the
meeting.
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Except
for procedural matters, the Board of Directors is not aware of any other matters
that may come before the Annual Meeting and any adjournments of the
meeting.
Stockholders
of record at the close of business on March 7, 2008 are entitled to notice of
and to vote at the Annual Meeting and at any adjournments of the
meeting.
By Order
of the Board of Directors
/s/
S. Scott
Kirkley
Secretary
Annapolis,
Maryland
March 20,
2008
IT
IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN.
EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD PROMPTLY IN THE ENVELOPE PROVIDED. ANY PROXY GIVEN MAY
BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO ITS
EXERCISE.
PROXY
STATEMENT
FOR
SEVERN
BANCORP, INC.
200
WESTGATE CIRCLE, SUITE 200
ANNAPOLIS,
MARYLAND 21401
(410)
260-2000
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This
proxy statement contains information about the annual meeting of stockholders of
Severn Bancorp, Inc. to be held on Wednesday, April 30, 2008, at 9:00 a.m.
Eastern Time at The Greystone Grill, Severn Bank Building, 200 Westgate Circle,
Annapolis, Maryland 21401, and at any postponements or adjournments of the
meeting.
INFORMATION
ABOUT THE ANNUAL MEETING AND VOTING
Why
did you send me this proxy statement?
Severn
Bancorp, Inc. (the “Company”) sent you this Proxy Statement and the enclosed
proxy card because you were a stockholder of the Company on March 7, 2008, the
record date for the Annual Meeting (the “Record Date”). The Company’s
Board of Directors chose this day as the record date for stockholders entitled
to vote at the Annual Meeting of Stockholders. The Board of Directors
is soliciting your proxy to be voted at the Annual Meeting of
Stockholders.
This
Proxy Statement summarizes the information you need to know to cast an informed
vote at the meeting. However, you do not need to attend the meeting
to vote your shares. Instead, you may simply complete, sign and
return the enclosed proxy card.
The
Company began sending this Proxy Statement, Notice of Annual Meeting and the
enclosed proxy card on or about March 20, 2008 to all stockholders entitled to
vote. On Record Date, there were 10,066,679 shares of the Company’s
common stock issued and outstanding. The common stock is the
Company’s only class of stock outstanding. The Company’s Annual
Report/Form 10-K for the fiscal year ended December 31, 2007 accompanies this
Proxy Statement. The Annual Report/Form 10-K is not to be deemed a
part of the material for the solicitation of proxies.
How
do I vote by proxy?
You vote
your proxy by completing the enclosed proxy card in accordance with its
instructions, signing and dating the proxy card and returning it in the
postage-paid envelope. Your vote is important. Whether you plan to attend the
meeting or not, the Company urges you to complete, sign and date the enclosed
proxy card and to return it promptly in the envelope
provided. Returning the proxy card will not affect your right to
attend the meeting and vote.
If you
properly fill in your proxy card and send it to us in time to vote, your “proxy”
(one of the individuals named on your proxy card) will vote your shares as you
have directed. If you sign the proxy card but do not make specific
choices, your proxy will vote your shares as recommended by the Board of
Directors as follows:
• “FOR”
the election of both nominees for director,
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“FOR”
ratification of the appointment of Beard Miller Company LLP as independent
auditor for the year ending December 31, 2008,
and
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• “FOR”
the adoption of the Severn Bancorp, Inc. 2008 Equity Incentive
Plan.
In
addition, the proxy card confers authority on the proxy named in the proxy card
to vote with respect to:
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1.
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The
election of any person as a director should the nominee be unable to serve
or, for good cause, will not serve;
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2. Other
proposals for which management did not have notice by February 5, 2008;
and
3. Matters
incidental to the conduct of the meeting.
On these
other matters, your proxy will vote in accordance with the recommendation of the
Board of Directors, or, if no recommendation is given, in their own
discretion. At the time this Proxy Statement was mailed, the Company
knew of no matters that needed to be acted upon at the meeting, other than those
discussed in this Proxy Statement.
If you
hold your shares in “street name” through your broker, bank or other nominee,
you must vote in accordance with the voting instructions provided by that
institution.
How
many votes do I have?
The
number of votes you have is dependent on the number of shares of common stock
you own. Each share of common stock entitles you to one
vote. The proxy card indicates the number of shares of common stock
that you own.
Can
I change my vote after I return my proxy card?
Yes. Even
after you have submitted your proxy, you may change your vote at any time before
the proxy is exercised if you file with the Secretary of the Company either a
notice of revocation or a duly executed proxy bearing a later
date. You may also revoke the proxy if you attend the meeting in
person and so request. Attendance at the meeting will not by itself
revoke a previously granted proxy.
How
do I vote in person?
If you
plan to attend the meeting and vote in person, the Company will give you a
ballot form when you arrive. However, if you hold your shares in
“street name” through your broker, bank, or other nominee, you must bring a
proxy card and letter from the nominee authorizing you to vote the shares and
indicating that you were the beneficial owner of the shares on March 7, 2008,
the record date for voting.
What
constitutes a quorum?
The
presence at the meeting, in person or by proxy, of the holders of a majority of
the shares of common stock outstanding on the record date will constitute a
quorum, permitting the conduct of business at the meeting. Proxies
that are marked as abstentions and broker non-votes (described below) will be
included in the calculation of the number of shares considered to be present at
the meeting.
What
vote is required for each proposal?
The two
nominees for director who receive the most votes at the meeting will be
elected. If you do not vote for a particular nominee or you indicate
“withhold authority to vote” for a particular nominee on your
proxy card, your vote will not count either “for” or “against” the
nominee. Broker non-votes will have no effect on the results of the
vote.
In order
to ratify the selection of the independent auditor, the auditor must receive the
affirmative vote of a majority of the votes cast at the
meeting. Abstentions and broker non-votes will have no effect on the
results of the vote.
In order
to adopt the Severn Bancorp, Inc. 2008 Equity Incentive Plan, the Plan must
receive the affirmative vote of a majority of the votes cast at the
meeting. Abstentions and broker non-votes will have no effect on the
results of the vote.
In order
to approve any other matters that may properly come before the meeting,
generally, a majority of those votes cast by stockholders will be sufficient to
approve on the matter. However, there may be occasions where a
greater vote is required by law, the Company’s Articles of Incorporation or
Bylaws.
What
is a broker non-vote?
If you
hold your shares in “street name” through a broker, bank or other nominee, your
broker or nominee may not be permitted to exercise voting discretion on some of
the items to be acted upon at the annual meeting. Thus, if you do not give your
broker or nominee specific instructions, your shares may not be voted on those
items and will not be counted in determining the number of shares necessary for
approval for each item. Accordingly, a broker non-vote is when a
broker does not have discretionary authority as to certain shares to vote on a
particular matter and has not received instructions from the beneficial
owner.
Who
will bear the costs of solicitation of proxies?
The
Company will bear the costs of this solicitation, including the expense of
preparing, assembling, printing and mailing this Proxy Statement and the
material used in this solicitation of proxies. The proxies will be solicited
principally through the mail, but directors, officers and regular employees of
the Company may solicit proxies personally or by telephone. Although there is no
formal agreement to do so, the Company may reimburse banks, brokerage houses and
other custodians, nominees and fiduciaries for their reasonable expense in
forwarding these proxy materials to their principals. In addition,
the Company may pay for and utilize the services of individuals or companies it
does not regularly employ in connection with the solicitation of proxies;
however, the Company currently has no such arrangement.
STOCK
OWNERSHIP
The
following table shows the beneficial ownership of the Company’s common stock as
of March 7, 2008 by (i) each director and nominee for director; (ii) the
Company’s President and Chief Executive Officer, Chief Financial Officer, and
our other most highly compensated executive officers whose total compensation
exceeded $100,000 in 2007; and (iii) by all directors and executive officers as
a group.
The
securities “beneficially owned” by a person are determined in accordance with
the definition of “beneficial ownership” set forth in the regulations of the SEC
and, accordingly, include securities as to which the person has or shares voting
or investment power. Shares of Common Stock which a person has the
right to acquire within 60 days after March 7, 2008, the Record Date, are deemed
outstanding for computing the share ownership and percentage ownership of the
person having such right, but are not deemed outstanding for computing the
percentage of any other person. The same shares may be beneficially
owned by more than one person. Beneficial ownership may be disclaimed
as to certain of the securities.
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Amount
and
Nature
of
Beneficial
Ownership
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Ronald
P.
Pennington
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140,997(1)
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1.40%
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T.
Theodore
Schultz
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61,490(2)
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0.61%
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Directors Continuing
in Office:
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Louis
DiPasquale,
Jr.
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228,566(3)
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2.27%
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Alan
J.
Hyatt*
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1,593,351(4)
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15.82%
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Melvin
Hyatt
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197,500(5)
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1.96%
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S.
Scott
Kirkley*
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430,670(6)
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4.28%
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Melvin
E. Meekins, Jr.
*
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558,469(7)
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5.54%
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Albert
W.
Shields
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78,646(8)
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0.78%
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Keith
Stock
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128,966(9)
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1.28%
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Other Named Executive
Officer:
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Thomas
G.
Bevivino
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8,537(10)
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0.08%
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All
directors and executive officers as a group
(10
persons)
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3,427,192(11)
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33.92%
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*
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Also
a named executive officer for 2007.
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(1)
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Includes
139,182 shares owned by Mr. Pennington and his wife and 1,815 shares
issuable upon exercise of options exercisable within 60 days of the Record
Date.
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(2)
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Includes
41,525 shares owned by Mr. Schultz, 18,150 shares owned by Mr. Schultz and
his wife and 1,815 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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(3)
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Includes
80,027 shares owned by Mr. DiPasquale and 148,539 shares owned by Mr.
DiPasquale for the benefit of his
children.
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(4)
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Includes
87,437 shares owned by Mr. Alan Hyatt, 1,347,564 shares owned by Mr. Alan
Hyatt and his wife, 23,232 shares Mr. Alan Hyatt controls as custodian for
his children, 120,120 shares allocated to Mr. Alan Hyatt as a participant
in the Company’s Employee Stock Ownership Plan (“ESOP”), 7,260 shares
issuable upon exercise of options exercisable within 60 days of the Record
Date and 7,738 shares owned by Mrs. Hyatt. Mr. Alan Hyatt is
the nephew of Mr. Melvin Hyatt.
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(5)
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Includes
155,755 shares owned by Mr. Melvin Hyatt, 39,930 shares owned by Mr.
Melvin Hyatt and his wife, 1,815 shares issuable upon exercise of options
exercisable within 60 days of the Record Date. Mr. Melvin Hyatt
is the uncle of Mr. Alan Hyatt.
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(6)
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Includes
22,347 shares owned by Mr. Kirkley, 317,443 shares owned by Mr. Kirkley
and his wife, 83,620 shares allocated to Mr. Kirkley as a participant in
the ESOP and 7,260 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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(7)
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Includes
108,411 shares owned by Mr. Meekins, 317,990 shares owned by Mr. Meekins
and his wife, 124,808 shares allocated to Mr. Meekins as a participant in
the ESOP and 7,260 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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(8)
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Includes
1,815 shares issuable upon exercise of options exercisable within 60 days
of the Record Date.
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(9)
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Includes
54,551 shares owned by Mr. Stock, 72,600 shares held by First Financial
Partners, Inc., a private investment company of which Mr. Stock serves as
Chairman, and 1,815 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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(10)
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Includes
293 shares held by Mr. Bevivino and his wife, 984
shares allocated to Mr. Bevivino as a participant in the ESOP and 7,260
shares issuable upon exercise of options exercisable within 60 days of the
Record Date.
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(11)
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Includes,
among the other shares described above, a total of 329,532 shares
allocated to the executive officers as participants in the ESOP and a
total of 38,115 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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The
following table presents information regarding the beneficial ownership of
Common Stock as of March 7, 2008 by each person known to be the beneficial owner
of more than 5% of the outstanding Common Stock of the Company.
Name
and Address of Beneficial Owner
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Amount
and
Nature
of
Beneficial
Ownership
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Alan
J.
Hyatt(1)
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1,593,351
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15.82%
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Sharon
G. Hyatt
200
Westgate Circle, Suite 200
Annapolis,
Maryland 21401
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Louis
Hyatt(2)
200
Westgate Circle, Suite 200
Annapolis,
Maryland 21401
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1,045,952
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10.39%
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Melvin
E. Meekins, Jr.(3)
200
Westgate Circle, Suite 200
Annapolis,
Maryland 21401
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558,469
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5.54%
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(1)
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Includes
87,437 shares owned by Mr. Alan Hyatt, 1,347,564 shares owned by Mr. Alan
Hyatt and his wife, Sharon G. Hyatt, 23,232 shares Mr. Alan Hyatt controls
as custodian for his children, 120,120 shares allocated to Mr. Alan Hyatt
as a participant in the ESOP, 7,260 shares issuable upon exercise of
options exercisable within 60 days of the Record Date and 7,738 shares
owned by Mrs. Sharon Hyatt.
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(2)
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Includes
991,498 shares owned by Mr. Louis Hyatt, 52,489 shares owned by Mr. Louis
Hyatt and his wife, and 1,965 shares allocated to Mr. Louis Hyatt as a
participant in the ESOP. Mr. Louis Hyatt is the father of Mr.
Alan Hyatt and the brother of Mr. Melvin
Hyatt.
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(3)
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Includes
108,411 shares owned by Mr. Meekins, 317,990 shares owned by Mr. Meekins
and his wife, 124,808 shares allocated to Mr. Meekins as a participant in
the ESOP and 7,260 shares issuable upon exercise of options exercisable
within 60 days of the Record Date.
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DISCUSSION
OF PROPOSALS RECOMMENDED BY THE BOARD
Proposal
1: Election
of Directors
General. The
Company’s Board of Directors currently consists of nine members divided into
three classes as nearly equal in number as possible. The members of
each class are elected for a term of three years and until their successors are
elected and qualified. One class is elected annually. The
Board of Directors has nominated two directors for election at the annual
meeting, which is the number of directorships in the class that is to be elected
this year.
The Board
of Directors has nominated the persons named below, both of whom are present
members of the Board of Directors of the Company, for election to serve until
the 2011 annual meeting of stockholders:
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Principal
Occupation for Last Five Years
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Ronald
P. Pennington
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68
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Ronald P. Pennington has been
a director of the Company since its inception and a director of Severn
Savings Bank, FSB (the “Bank”) since 1980. Mr. Pennington has
owned and operated an independent tool distributorship since 1985, and now
is a retired investor.
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T.
Theodore Schultz
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68
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T. Theodore Schultz has
been a director of the Company since its inception and a director of the
Bank since 1986. Mr. Schultz is owner of Schultz and Company,
Inc., an Accounting and Tax Company. He is an enrolled agent,
accredited tax advisor with an accounting and tax practice in the
Annapolis, Maryland area since 1971.
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Directors Continuing in
Office.
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Principal
Occupation for Last Five Years
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The
directors continuing in office whose terms will expire at the 2009 annual
meeting of stockholders are:
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Louis
DiPasquale, Jr.
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85
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Louis DiPasquale, Jr.
has been a director of the Company since its inception and the Bank since
1946. Mr. DiPasquale has been the owner/operator of the Motel
Carlton in Baltimore, Maryland since 1964. Mr. DiPasquale
served as Secretary/Treasurer of the Bank from 1964 to
1978.
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Alan
J. Hyatt
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53
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Alan J. Hyatt has been
Chairman of the Board and President of the Bank since 1982, having
previously served as an officer and director since 1978. He has
also served as the Chairman of the Board and President of the Company
since 1990. Mr. Hyatt has been a partner in the law firm of
Hyatt & Weber, P.A., in Annapolis, Maryland since 1978, and is a real
estate broker with Arundel Realty Services, LLC, also in Annapolis,
Maryland. Mr. Hyatt spends approximately 50% of his
professional time on the affairs of the Bank and the Company and the
balance on his law practice.
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(1)
As of December 31, 2007
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Principal
Occupation for Last Five Years
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Melvin
E. Meekins, Jr.
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66
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Melvin E. Meekins, Jr.
joined the Bank as a director and Executive Vice President in April 1983,
and served in the same capacity for the Company. Mr. Meekins
was the Bank’s Principal Operating Officer and Executive Vice President
until his retirement effective December 31, 2007. Mr. Meekins
had been employed in the savings and loan industry since
1962.
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Keith
Stock
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55
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Keith Stock served as a
Director of the Bank and the Company from April 1990 to December 1993, and
was re-elected in 2003. Mr. Stock has
served as President of MasterCard Advisors, LLC, a MasterCard Worldwide
business, since 2004. Previously he served in management positions with
Capgemini Ernst & Young, AT Kearney and McKinsey & Co., as well as
Chairman and Chief Executive Officer of First Financial Investors, Inc.
and its bank holding company, St. Louis Bank, Fsb.
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The
directors continuing in office whose terms will expire at the 2010 annual
meeting of stockholders are:
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Melvin
Hyatt
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75
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Melvin Hyatt has been a
director of the Company since its inception and a director of the Bank
since 1978. He is a retired restaurant owner and was formerly
employed by the Housing Authority of the City of Annapolis,
Maryland. Mr. Hyatt is the uncle of Alan J. Hyatt and the
brother of Louis Hyatt.
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S.
Scott Kirkley
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55
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S. Scott Kirkley has
been a director and Secretary/Treasurer of the Bank since 1980, Senior
Vice President from 1989 to 2006, and now serves as Executive Vice
President. He has served in the same capacities for the Company
since 1990. Mr. Kirkley has been employed by the Bank on a
full-time basis since 1987 and has primary responsibility for the Bank’s
residential loan operations.
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Albert
W. Shields
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63
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Albert W. Shields was
elected as a director of the Company and the Bank in December
2003. He is presently the Vice President of Sales for the
Northeast Region of HD Builder Solutions Group. He was the
Chief Executive Officer of Floors, Inc. from 1986 until 2002 when the
company was sold to The Home Depot. Mr. Shields has been
involved in the real estate and development market, and the building
supply industry for the past 35 years.
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(1)
As of December 31, 2007
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The Board of Directors and
Committees. The Company’s Board of Directors generally meets
on a monthly basis, or as needed. During the year ended December 31,
2007, the Company’s Board of Directors met thirteen times. No
director attended fewer than 75% in the aggregate of (a) the total number of
board meetings held while the director was a member during the year ended
December 31, 2007 and (b) the total number of meetings held by committees on
which the director served during the year ended December 31, 2007.
It is the
policy of the Board of Directors to encourage directors to attend each annual
meeting of stockholders. Such attendance allows for direct
interaction between stockholders and members of the Board of
Directors. All the directors except Mr. Stock attended the 2007
Annual Meeting of Stockholders.
Director
Independence. The Board of Directors examines the independence
of the Company’s directors on an annual basis in both fact and appearance to
promote arms-length oversight. Based upon the definition of an
“independent director” under Rule 4200 of the Nasdaq Marketplace Rules, the
Board of Directors has determined that the Company has a majority of
“independent” directors that comprise its Board as required by the corporate
governance rules of Nasdaq. Independent directors as of December 31,
2007 consisted of: Louis DiPasquale, Jr., Melvin Hyatt, Ronald Pennington, T.
Theodore Schultz, Albert W. Shields and Keith Stock. The Board
determined that these directors are independent because they are not executive
officers or employees of the Company and otherwise satisfy all of the Nasdaq
independence requirements and, in the opinion of the Board of Directors, are not
individuals having a relationship which will interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. In
determining independence, the Board considered that Mr. Melvin Hyatt is the
uncle of Alan J. Hyatt, and the brother of Louis Hyatt; however, the Board
concluded that Mr. Melvin Hyatt was independent because he abstains from voting
on matters involving Alan J. Hyatt or Louis Hyatt.
Corporate Governance
Committee
On March
16, 2004, the Board of Directors adopted a Corporate Governance Committee
Charter. The Company’s Corporate Governance Committee is comprised of
at least three members, each appointed by the Board of Directors, and is
responsible for developing a set of corporate governance policies for the
Company. The Bank’s Corporate Governance Committee consists of Louis
DiPasquale, Jr.; Ronald Pennington; T. Theodore Schultz; Albert W. Shields; and
Keith Stock. The Corporate Governance Committee met in late 2006, and again in
early 2008. The Corporate Governance Committee, in addition to
setting corporate governance policies of the Company, is responsible for
establishing criteria for selecting new directors, and identifying, screening
and recruiting new directors. In addition, the Corporate Governance
Committee will select members for the various Board of Director committees,
determine director and committee member compensation and consider the
establishment of a process for stockholders to submit recommendations of
director candidates and to communicate with the Board.
Nominating
Committee
The
Company’s Nominating Committee consists of the full Board of Directors, however,
only the independent directors may vote on approval of
nominations. There is no written charter. The Board has
determined that the following directors are independent as defined under Rule
4200 of the Nasdaq Marketplace Rules: Louis DiPasquale, Jr.; Melvin
Hyatt; Ronald Pennington; T. Theodore Schultz; Albert W. Shields; and Keith
Stock. While the Nominating Committee will consider nominees
recommended by stockholders, it has not actively solicited recommendations from
stockholders for nominees nor established any procedures for this purpose, other
than the procedures contained in the Bylaws concerning nominations of candidates
by stockholders. The Company’s Bylaws provide that if a stockholder
wishes to submit nominations for directors, it should be done in writing and
sent to the Secretary of the Company at least 60 days prior to the Annual
Meeting of Stockholders. The Corporate Governance Committee intends
to consider whether policies and procedures for stockholder nominations are
necessary beyond those set forth in the Bylaws. The Company’s Board in its
capacity as the Nominating Committee met one time during 2007. This
year’s nominees were selected by the full Board and approved by the independent
directors after evaluating each nominee’s general business acumen, the nominee’s
knowledge of the Company and its business activities. In addition to
the aforementioned criteria,
the Board considers the investment in the Company made by the nominee as
demonstrated by the number of shares owned by each such nominee. The
Board’s process for identifying and evaluating director nominees relates to the
general business acumen and knowledge of the Company and its business
activities. Board membership longevity is also evaluated when
considering the nomination of current Board members. There was no
third party paid to identify or assist in finding candidates for the Board of
Directors.
Compensation
Committee
The
Company has no compensation committee because the Company has no
employees. The executive officers of the Company are employed and
paid by the Bank. The Bank has a Compensation Committee, the primary
functions of which are to determine the compensation of the Company’s executive
officers and to administer the Company’s equity compensation
plans. The role of the Compensation Committee is described in greater
detail under the section entitled “Compensation Discussion and Analysis.” The
Bank’s Compensation Committee consists of: Louis DiPasquale, Jr.;
Melvin Hyatt; Ronald Pennington; T. Theodore Schultz; Albert W. Shields; and
Keith Stock. Each of the members of the Bank’s Compensation Committee
is independent under the Nasdaq Marketplace Rules. The Compensation Committee
met two times in 2007.
Scope of Authority of the
Compensation Committee. The scope of the Compensation
Committee’s authority and responsibilities is set forth in its written charter,
which was filed as Appendix A to the Company’s proxy statement filed with the
Securities and Exchange Commission (“SEC”) on March 14, 2007. The
chairperson, in consultation with other members of the Committee sets the agenda
of each meeting. As provided under the Committee’s charter, the
Committee may delegate its authority to special subcommittees as the Committee
deems appropriate, consistent with the applicable law and Nasdaq listing
standards.
The Role of Management in
Determining or Recommending Executive Compensation. As part of
the review process, each executive is independently interviewed by the
Compensation Committee, and provides input into the performance of the Company
and the performance of each executive officer, including
himself. However, no executive officer participates in the
Compensation Committee’s deliberations or decisions.
Role of Compensation Consultants in
Determining or Recommending Executive Compensation. Under its
charter, the Compensation Committee has authority to retain, at the Company’s
expense, such counsel, consultants, experts and other professionals as it deems
necessary. To date, the Compensation Committee has not relied on
compensation consultants. Instead, the Compensation Committee
performs an informal survey of area companies and banks and reviews the
compensation practices of the surveyed companies.
Audit and Examining
Committee
T.
Theodore Schultz, Chairman, Ronald Pennington, Keith Stock and Albert W. Shields
serve as the Company’s Audit and Examining Committee. The Audit and Examining
Committee is a separately-designated committee. Each of the Audit and
Examining Committee members is an “independent director” under the Nasdaq
Marketplace Rules and the applicable SEC rules. The Audit and Examining
Committee’s responsibilities are described in a written charter that was adopted
by the Board of Directors of the Company and filed as Exhibit B to the Company’s
proxy statement filed with the SEC on March 14, 2007. The Audit and Examining
Committee purpose is to oversee the accounting and financial
reporting process of the Company and the audits of the financial statements of
the Company. In addition, it prepares an audit committee report as
required by the SEC’s rules to be included in the Company’s annual proxy
statement. The Board has determined that Keith Stock is the Audit and
Examining Committee’s “financial expert,” as such term is defined by applicable
federal securities laws. The Audit and Examining Committee met four
times in 2007.
Audit and Examining
Committee Report
The Audit
and Examining Committee has reviewed and discussed the Company’s audited
consolidated financial statements for the fiscal year ended December 31, 2007
with the Company’s management. The Audit and Examining Committee has discussed
with Beard Miller Company LLP, the Company’s independent auditor, the matters
required to be discussed by Statement on Auditing Standards No. 61, as amended,
Communication with Audit
Committees. The Audit and Examining Committee has received the written
disclosures and the letter from Beard Miller Company LLP required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, and has discussed with Beard Miller Company LLP the
independence of Beard Miller Company LLP. Based on the review and discussions
described in this paragraph, the Audit and Examining Committee recommended to
the Company’s Board of Directors that the Company’s audited consolidated
financial statements for the fiscal year ended December 31, 2007 be included in
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2007 for filing with the Securities and Exchange Commission.
Audit
and Examining Committee Members:
T.
Theodore Schultz, Chairman
Ronald
Pennington
Albert W.
Shields
Keith
Stock
The
information contained in this Audit and Examining Committee Report is not
“soliciting material” and has not been “filed” with the Securities and Exchange
Commission. This Audit and Examining Committee Report will not be
incorporated by reference into any of our future filings under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that
the Company may specifically incorporate it by reference into a future
filing.
Recommendation: The
Board recommends a vote “FOR” both nominees for director.
Proposal
2: Ratification of appointment of independent auditor.
General
The Audit
and Examining Committee has appointed Beard Miller Company LLP as independent
auditor for the year ending December 31, 2008. Although action by the
stockholders on this matter is not required, the Audit and Examining Committee
believes it is appropriate to seek stockholder ratification of the appointment
of the independent auditor to provide a forum for stockholders to express their
views with regard to the Audit and Examining Committee’s
appointment. If the stockholders do not ratify the selection of the
independent auditor, the Audit and Examining Committee will reconsider the
appointment, but is not required to change its selection. However,
even if you ratify the selection, the Audit and Examining Committee may still
appoint a new independent auditor at any time during the year if it believes
that a change would be in the best interests of the Company and its
stockholders.
Relationship
with Independent Auditor
Beard
Miller Company LLP, who performed audit services for us in 2007, including an
audit of the consolidated financial statements and services related to filings
with the Securities and Exchange Commission, has served as the Company’s auditor
since 2003. Representatives of Beard Miller Company LLP will be
present at the meeting, will be available to respond to your appropriate
questions and will be able to make such statements as they desire.
Audit Fees. The
aggregate fees billed by Beard Miller Company LLP for professional services
rendered for the audit of the Company’s annual financial statements for the
fiscal years ended December 31, 2007 and December 31, 2006 and the review of the
financial statements included in the Company’s Forms 10-Q for fiscal years 2007
and 2006 totaled $171,704 and $163,095, respectively.
Audit-Related
Fees. There were no fees billed by Beard Miller Company LLP
for assurance and related services that are reasonably related to the
performance of the audit or review of the Company’s financial statements for the
fiscal years ended December 31, 2007 and December 31, 2006 and that are not
disclosed in the paragraph captioned “Audit Fees” above.
Tax Fees. The
aggregate fees billed by Beard Miller Company LLP for professional services
rendered for tax compliance, tax advice and tax planning for the fiscal years
ended December 31, 2007 and December 31, 2006 were $29,281 and $17,750,
respectively.
All Other
Fees. There were no fees billed by Beard Miller Company LLP
for products and services, other than the services described in the paragraphs
“Audit Fees” and “Tax Fees” above for the fiscal years ended December 31, 2007
and December 31, 2006.
Policy
on Audit and Examining Committee Pre-Approval of Audit and Non-Audit Services of
Independent Auditor
Among its
other duties, the Audit and Examining Committee is responsible for appointing,
setting compensation and overseeing the work of the independent auditor. The
Audit and Examining Committee has established a policy regarding pre-approval of
all audit and non-audit services provided by the independent auditor. On an
ongoing basis, management communicates specific projects and categories of
service for which the advance approval of the Audit and Examining Committee is
requested. The Audit and Examining Committee reviews these requests and advises
management if the Audit and Examining Committee approves the engagement of the
independent auditor. Pursuant to its pre-approval policies and
procedures, the Audit and Examining Committee approved the foregoing audit and
permissible non-audit services provided by Beard Miller Company LLP in fiscal
2007.
The Audit
and Examining Committee reviews summaries of the services provided by Beard
Miller Company LLP and the related fees and has considered whether the provision
of non-audit services is compatible with maintaining the independence of Beard
Miller Company LLP.
Recommendation: The
Board of Directors recommends a vote “FOR” the ratification of the selection of
Beard Miller Company LLP as the independent auditor for the year ending December
31, 2008.
Proposal
3: Approval of the Severn Bancorp, Inc. 2008 Equity Incentive
Plan
In 1998
the stockholders approved the Stock Option and Incentive Plan (the “1998 Plan”)
which authorized 544,500 shares of Common Stock to be issued to key employees
and directors of the
Company,
the Bank and their affiliates. The 1998 Plan by its terms provides
that no option may be issued under the 1998 Plan after December,
2007. As of March 20, 2008, 122,815 shares of Common Stock were
subject to outstanding options granted under the 1998 Plan.
In order
to permit the continued use of equity-related incentives to attract and retain
key employees, directors and other persons who make significant contributions to
the Company, the Board has adopted, subject to stockholder approval, the 2008
Equity Incentive Plan (the “Incentive Plan”) to replace the 1998
Plan. The total number of shares authorized for issuance under the
Incentive Plan is 500,000 shares plus the number of shares subject to options
under the 1998 Plan which expire or are terminated without
exercise.
The
Company is submitting the Incentive Plan to stockholders for approval in
accordance with the Nasdaq Stock Market listing standards that require
stockholder approval of most equity-based compensation plans, including the
Incentive Plan. The Incentive Plan is also being submitted for
stockholder approval so that, among other reasons, the requisite stockholder
approval may be obtained to permit the issuance of incentive stock options under
the Internal Revenue Code of 1986, as amended (the “Code”) and to permit the
Company to deduct certain performance-based compensation under Section 162(m) of
the Code. The Incentive Plan is described below.
The
Incentive Plan will replace the 1998 Plan on a prospective basis. If
the Incentive Plan is approved by the Company’s stockholders, the Company
intends to make new grants under the Incentive Plan. Any awards
previously granted under the 1998 Plan will continue to vest and/or be
exercisable in accordance with their original terms and
conditions. If the Incentive Plan is not approved, the Company
generally will not be able to make equity awards to its directors, officers or
employees.
Description
of the Incentive Plan
The
following summary of the Incentive Plan is qualified in its entirety by the
specific language of the Incentive Plan, which is attached as Appendix A to this
proxy statement. Capitalized terms used but not defined below have
the meanings set forth in the Incentive Plan.
General
The
purposes of the Incentive Plan are to attract and promote the long-term
retention of key employees, directors and certain other persons who are in a
position to make significant contributions to the success of the Company, to
reward these employees, directors and other persons for their contributions, to
provide additional incentive to such employees, directors and other persons to
continue making similar contributions and to further align the interests of
these employees, directors and other persons with those of the Company’s
stockholders. To achieve these purposes, the Incentive Plan permits
grants of incentive stock options (“ISOs”), options not intended to qualify as
incentive stock options (“non-ISOs”), stock appreciation rights (“SARs”),
restricted and unrestricted stock awards, restricted stock units, performance
awards, supplemental cash grant awards and combinations of the foregoing
(collectively referred to as “Awards”). Awards of restricted and
unrestricted stock, restricted stock units and/or deferred stock may also be
issued to participants in connection with management or employee purchase
programs. Shares issuable under Awards that terminate unexercised,
shares subject to Awards that are later forfeited and shares that, at the
election of the plan participant, are withheld by the Company to pay the
exercise or purchase price of the Award or applicable withholding taxes will be
available for future Awards under the Incentive Plan and will not count against
the maximum number of shares that may be issued under the Incentive
Plan.
The
Incentive Plan is subject to Section 162(m) of the Code (the “Section 162(m)
Limitations”), which limits the deductibility of certain compensation in excess
of $1,000,000 per year paid by a publicly traded corporation to “Covered
Employees.” “Covered Employees” are determined at the end of the tax
year, and are the chief executive officer and any other employee of the Company
whose compensation is required to be reported to stockholders under applicable
SEC rules and regulations by reason of such employee’s being among the three (3)
highest compensated executive officers for the taxable year (other than the
chief executive officer and the chief financial officer).
Compensation
paid to Covered Employees will not be subject to the Section 162(m) Limitations
if it is considered “qualified performance-based compensation.” Under
the regulations to Section 162(m), compensation related to Awards is deemed to
constitute qualified performance-based compensation if the Award meets the
following conditions: (i) it is made by a committee of the board of directors
comprised solely of two or more outside directors; (ii) the plan under which the
Award is made sets forth the maximum number of shares with respect to Awards
that may be granted to any individual during a specified period; (iii) under the
terms of the Award, the amount of compensation that an employee can receive is
based solely on the satisfaction of pre-established subjective performance
criteria or an increase in the value of the Common Stock after the date of the
grant or award; and (iv) the material terms of plan are disclosed to and
approved by stockholders. As described in more detail below, the
terms of the Incentive Plan are intended to satisfy the foregoing requirements
with respect to Awards to “Covered Employees.”
Administration
The
Incentive Plan is administered by the Compensation Committee (the “Committee”)
of the Board of Directors, which has full and exclusive power to administer and
interpret the Incentive Plan, to grant Awards and to adopt such administrative
rules, regulations, procedures and guidelines governing the Incentive Plan and
the Awards as it may deem necessary in its sole discretion, from time to
time. The Committee is comprised solely of outside directors of the
Company who are intended to satisfy the requirements of independence under
applicable Nasdaq standards and the Section 162(m) Limitations, among
others. The Committee’s authority will include the authority to: (i)
determine the type of Awards to be granted under the Incentive Plan; (ii) select
Award recipients and determine the extent of their participation; (iii)
determine the method or formula for establishing the fair market value of the
Common Stock for various purposes under the Incentive Plan, provided however,
for purposes of determining the exercise price of ISOs, fair market value will
be determined in accordance with Treas. Reg. Section 1.422-2(e) and in the case
of Awards other than ISOs, fair market value will be determined in a manner that
complies with Section 409A of the Code; and (iv) establish all other terms,
conditions, restrictions and limitations applicable to Awards and the Common
Stock issued pursuant to Awards, including, but not limited to, those relating
to a participant’s retirement, death, disability, leave of absence or
termination of employment. The Committee may accelerate or defer the
vesting or payment of Awards, cancel or modify outstanding Awards, waive any
conditions or restrictions imposed with respect to Awards or the Common Stock
issued pursuant to Awards and make any and all other interpretations and
determinations which it deems necessary with respect to the administration of
the Incentive Plan, other than a reduction of the exercise price of an option
after the grant date and subject to the provisions of Section 162(m) of the Code
with respect to “Covered Employees”, and, in the case of ISOs, in a manner that
complies with Sections 422 and 424 of the Code and, in the case of Awards other
than ISOs, in a manner that complies with Section 409A of the
Code. The Committee’s right to make any decision, interpretation or
determination under the Incentive Plan shall be in its sole and absolute
discretion.
The
Committee may delegate some or all of its authority to one or more subcommittees
consisting of at least one Committee member. Additionally, the
Committee may, subject to criteria, limitations and instructions as the
Committee determines, delegate to an appropriate officer of the Company
the authority to determine the individual Participants and amount and nature of
the Award to be issued to such Participants; provided, that no Awards may be
made pursuant to such delegation to a Participant who is a Covered Employee
and/or is subject to Section 16(b) of the Securities Exchange Act of 1934, as
amended.
Eligibility
ISOs may
be granted under the Incentive Plan only to employees of the Company and its
subsidiaries. All current and future employees of the Company and its
subsidiaries, directors and other persons who, in the opinion of the Committee,
are in a position to make significant contributions to the success of the
Company, such as consultants and non-employee directors, are eligible to receive
all other types of Awards under the Incentive Plan.
Number
of Shares Available for Issuance
The
aggregate number of shares of Common Stock for which Awards may be granted under
the Incentive Plan is 500,000 shares of Common Stock; provided, however, that
such authorized share reserve shall be increased from time to time by a number
of shares equal to the number of shares of Common Stock that are issuable
pursuant to option grants outstanding under the 1998 Plan as of the Effective
Date (“Existing Options”) that but for the termination or suspension of the 1998
Plan, would otherwise have reverted to the share reserve of the 1998 Plan
pursuant to the terms thereof as a result of the expiration, termination,
cancellation or forfeiture of such options. As of the date of this proxy
statement, 122,815 shares of Common Stock are subject to Existing Options under
the 1998 Plan. Accordingly, if these options expire, the shares of
Common Stock subject to such options will also be available for issuance under
the Incentive Plan.
Shares
issuable under Awards that terminate unexercised, shares subject to Awards that
are later forfeited and shares that, at the election of the plan participant,
are withheld by the Company to pay the exercise or purchase price of the Award
or applicable withholding taxes will be available for future Awards under the
Incentive Plan and will not count against the maximum number of shares that may
be issued under the Incentive Plan. The maximum number of shares of
Common Stock that may be issued under the Incentive Plan also will not be
affected by (i) the payment in cash of dividends or dividend equivalents in
connection with outstanding Awards; (ii) the granting or payment of
stock-denominated Awards which by their terms may be settled only in cash; or
(iii) Awards that are granted through the assumption of, or in substitution for,
outstanding awards previously granted to individuals who have become employees
as a result of a merger, consolidation, or acquisition or other corporate
transaction involving the Company.
The
maximum number of shares of Common Stock for which Stock Options may be granted
to any person in any fiscal year and the maximum number of shares of Common
Stock subject to SARs granted to any person in any fiscal year each will be
100,000 shares. The maximum number of shares of Common Stock subject
to other Awards granted to any person in any fiscal year will be 100,000
shares. The foregoing provisions will be construed in a manner
consistent with Section 162(m).
Adjustments
In the
event of any stock dividend, stock split, combination or exchange of equity
securities, merger, consolidation, recapitalization, reorganization, divestiture
or other distribution of assets (other than ordinary cash dividends) to
stockholders, or any other event affecting the Common Stock that the Committee
deems, in its sole discretion, to be similar circumstances, the Committee may
make such adjustments as it may deem appropriate, in its discretion,
to:
·
|
the
maximum number of shares available for issuance under the Incentive
Plan;
|
·
|
the
maximum number of Awards and shares of Common Stock subject to Awards that
may be granted to any one
participant;
|
·
|
the
number or kind of shares of Common Stock covered by outstanding Awards in
a manner consistent with Sections 422 and 424 of the Code (in the case of
ISOs) and Section 409A of the Code (in the case of Awards that are subject
to Section 409A of the Code);
|
·
|
the
exercise price applicable to outstanding
Awards;
|
·
|
any
measure of performance that relates to an Award to the extent necessary to
reflect such change in the Common Stock;
and/or
|
·
|
any
other affected terms of any equity-based Award to the extent necessary to
reflect such change in Common
Stock.
|
Exercise
Price
The
Committee will determine the exercise price applicable to each ISO, non-ISO and
SAR, which will not be less than the fair market value of the Company’s Common
Stock at the time of the grant, as described in this proposal. The
Incentive Plan does not permit the repricing of options without prior
stockholder approval.
Options
Recipients
of stock options under the Incentive Plan will have the right to purchase Common
Stock at a stated exercise price, during a period of time and on such other
terms and conditions as are determined by the Committee and set forth in the
award. For ISOs, the recipient must be an employee, the exercise
price must be at least 100% (110% if issued to a greater than ten percent
stockholder of the Company) of the fair market value of the Company’s Common
Stock on the date of grant and the term cannot exceed ten years (five years if
issued to a greater than ten percent stockholder of the Company) from the date
of grant. The exercise price of a non-ISO must be at least 100% of
the fair market value of the Common Stock on the date of grant. An
option exercise price may be paid in cash or by check, bank draft or money order
payable to the order of the Company, or if permitted by the Committee and
subject to certain conditions, by delivery of shares (including by way of the
“attestation method”) of Common Stock [that have been owned by the recipient for
at least six months (unless the Board of Directors expressly approves a shorter
period) and] which have a fair market value on the date of exercise at least
equal to the exercise price, or an unconditional and irrevocable undertaking by
a broker to promptly deliver the necessary funds (including in connection with
so-called “cashless exercise” effected by such broker) or by a combination of
such methods. The Committee may at any time accelerate the time at
which all or any part of the option may be exercised. The maximum
number of shares of Common Stock with respect to ISOs that may be awarded under
the Incentive Plan will not exceed 500,000 shares of Common Stock plus the
number of shares of Common Stock that become available as a result of the
expiration, termination, cancellation or forfeiture of existing options under
the 1998 Plan, subject to adjustment as described above.
Stock
Appreciation Rights
SARs may
be granted under the Incentive Plan either alone or in tandem with stock
options. Generally, recipients of SARs are entitled to receive upon
exercise, cash or Common Stock (valued at the then fair market value of Common
Stock) equal to the fair market value of the shares subject to the SAR on the
date of exercise minus the fair market value of such shares on the date of grant
(110% in the case of a 10%
or greater stockholder), although certain other measurements also may be
used. A SAR granted in tandem with a stock option is exercisable only
if and to the extent that the option is exercised.
The
maximum number of shares of Common Stock with respect to which SARs may be
awarded under the Incentive Plan will not exceed 500,000 shares of Common Stock
subject to adjustment as described above.
Stock
Awards
The
Incentive Plan provides for restricted and unrestricted stock awards, restricted
stock units and deferred stock awards. Stock Awards allow the
recipient to acquire Common Stock for no consideration, nominal consideration or
any higher price determined by the Committee. In the case of
restricted stock awards, the shares acquired are subject to a vesting schedule
and other possible conditions determined by the Committee. A
restricted stock unit is an award denominated in restricted Common Stock,
pursuant to a formula determined by the Committee, which may be settled either
in restricted Common Stock or in cash, in the discretion of the Committee,
subject to such other terms, conditions, restrictions and limitations determined
by the Committee from time to time. A deferred stock award entitles
the recipient to receive Common Stock to be delivered in the
future. Delivery of the Common Stock will take place at such time or
times, and on such terms and conditions, as the Committee may
determine.
The
maximum number of shares of Common Stock with respect to which Stock Awards may
be awarded under the Incentive Plan will not exceed 500,000 shares of Common
Stock, subject to adjustment as described above.
Supplemental
Cash Awards
Under the
Incentive Plan and subject to applicable law, supplemental cash awards may be
granted to recipients of Awards to help defray taxes due as a result of the
Awards. The terms and conditions of supplemental cash awards are determined by
the Committee.
Performance
Awards
The
Incentive Plan provides for performance awards entitling the recipient to
receive Awards, with or without payment, upon achieving certain performance
goals determined by the Committee. At the discretion of the
Committee, any of the above-described Awards may be contingent on attainment of
performance goals which are based on certain pre-established
criteria. Performance goals may involve overall corporate
performance, operating group or business unit performance, personal performance
or any other category of performance determined by the Committee.
Termination
of Awards
Upon
termination of a recipient’s employment or other relationship with the Company
due to death, disability or retirement, except as otherwise determined by the
Committee: (i) stock options and SARs will automatically become exercisable in
full and will remain exercisable for a period of one year in the event of death
or disability, but not longer than the term of the stock option or SAR, and for
a period equal to the unexpired term of the stock option or SAR in the case of
retirement; (ii) all restricted stock and restricted stock units shall
automatically become free of all restrictions and conditions; and (iii) any
payment or benefit under deferred stock awards, performance awards and
supplemental grants shall be made by the Company. Retirement is defined in the
Incentive Plan as termination of employment with or service to the Company by a
participant other than by reason of death or permanent disability or termination
for cause at a time when such participant has attained age 65 or greater (age 70
in the case of non-employee directors); provided that such participant has
performed a minimum of five years of service for the Company.
Upon
termination of a recipient’s employment or other relationship with the Company
for any reason other than death, Disability or Retirement, except as otherwise
determined by the Committee: (i) stock options and SARs will remain exercisable
for a period of 90 days , but not longer than the term of the stock option or
SAR, to the extent that they were exercisable at the time of termination; (ii)
all restricted stock shall be transferred to the Company for purchase for the
amount of cash paid for such stock, or forfeited to the Company if no cash were
paid; and (iii), any payment or benefit under restricted stock units, deferred
stock awards, performance awards and supplemental grants to which the recipient
was not irrevocably entitled at the time of termination shall be forfeited and
such Awards cancelled as of the date of such termination.
In the
discretion of the Committee, all Awards held by a participant whose employment,
directorship, consulting, service or other relationship with the Company is
terminated for cause, as defined in the Incentive Plan, shall terminate
immediately.
Deferral
of Awards
In
connection with the adoption of the Incentive Plan, the Board of Directors may
adopt a deferred compensation plan that will permit participants in the
Incentive Plan to defer receipt of Awards granted pursuant to the Incentive
Plan. If deferred, the Awards would be paid at a future date pursuant
to the deferred compensation plan.
Section
162(m) Limitations
If the
Committee determines at the time an Award that is intended to qualify as
performance-based compensation for purposes of Section 162(m) of the Code is
granted to a recipient that such recipient is, or may be as of the end of the
tax year for which the Company would claim a tax deduction in connection with
such Award, a “Covered Employee,” then the Committee may provide that the Award
be subject to the achievement of specified levels of one or more of the
following performance goals, unless and until the Company’s stockholders approve
a change to such performance goals: operating income, net earnings, earnings
before interest, taxes, depreciation and amortization (EBITDA), earnings before
interest and taxes (EBIT), net income, earnings per share, total stockholder
return, cash flow, return on assets, decrease in expenses, Common Stock price,
price-earnings multiple, comparisons to market indices, sales growth, market
share, the achievement of certain quantitatively and objectively determinable
non-financial performance measures including, but not limited to, operational
measures, growth strategies, strategic initiatives, corporate development and
leadership development, and any combination of the foregoing. The
performance goals shall be determined and approved by the Committee no later
than the 90th day of the applicable fiscal year. Awards subject to
such conditions may not be adjusted upward; however, the Committee shall retain
the discretion to adjust such Awards downward. Prior to the payment
of any Award subject to these Section 162(m) Limitations, the Committee shall
certify in writing that the applicable performance goal was
satisfied.
The
Committee shall have the discretion to impose such other restrictions on Awards
as it may deem necessary or appropriate to ensure that such Awards qualify as
performance-based compensation for purposes of Section 162(m) of the Code. In
the event that applicable tax/and or securities laws change to permit the
Committee the discretion to alter the governing performance goals without
obtaining stockholder approval, the Committee shall have the sole discretion to
make such changes without obtaining stockholder approval. In
addition, in the event that the Committee determines that it is advisable to
grant Awards that shall not qualify as performance-based compensation for
purposes of Section 162(m) of the Code, the Committee may make such grants
without satisfying the Section 162(m) Limitations.
Change
in Control
The
Incentive Plan generally provides that, unless the Committee determines
otherwise at the time of grant with respect to a particular Award, in the event
of a change in control (as defined below), (1) any options and SARs shall
automatically become exercisable in full upon the occurrence of such change of
control, (2) any restricted stock shall automatically become free of all
restrictions and conditions upon the occurrence of such change of control, and
(3) any conditions on restricted stock units, deferred stock awards, performance
awards and supplemental grants which relate only to the passage of time and
continued employment shall automatically terminate upon the occurrence of such
change of control.
A change
in control means: (i) the occurrence of an event that would, if known to the
Company’s management, be required to be reported by the Company as a change in
control pursuant to the SEC’s Current Report on Form 8-K under to the Securities
Exchange Act of 1934, as amended (the “Exchange Act”); or (ii) the acquisition
or receipt, in any manner, by any person (as defined for purposes of the
Exchange Act) or any group of persons acting in concert, of direct or indirect
beneficial ownership (as defined for purposes of the Exchange Act) of more than
50% of the Company’s combined voting securities ordinarily having the right to
vote for the election of directors of the Company; or (iii) a change in the
constituency of the Board of Directors with the result that individuals (the
“Incumbent Directors”) who are members of the Board on the effective date of the
Incentive Plan cease for any reason to constitute at least a majority of the
Board of Directors, provided that any individual who is elected to the Board
after the effective date of the Incentive Plan and whose nomination for election
was unanimously approved by the Incumbent Directors shall be considered an
Incumbent Director beginning on the date of his or her election to the Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest (as
defined for purposes of the Exchange Act) with respect to the election or
removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a person other than the Board of Directors; or (iv)
the sale, exchange, liquidation or other disposition of all or more than 50% of
the Company’s business or assets; unless in any such case, at least a majority
of the Incumbent Directors determine, prior to the occurrence of such change in
control, that no change in control has or will have occurred; or (v) the
occurrence of a reorganization, merger, consolidation or other corporate
transaction involving the Company, in each case, with respect to which the
Company’s stockholders immediately prior to such transaction do not, immediately
after such transaction, own more than 50% of the combined voting securities
ordinarily having the right to vote for the election of directors of the Company
or other corporation resulting from such transaction; or (vi) the approval by
the Company’s stockholders of a complete liquidation or dissolution of the
Company; or (vii) any similar transaction, circumstance or event which the
Committee determines to constitute a change in control.
The
Committee may, in its discretion, at the time an Award is made or at any time
prior to, coincident with or after the time of a change in control: (i) require
the purchase and sale of any Awards for an amount of cash equal to the amount
which a participant could have obtained upon the exercise or realization of such
rights had such Awards been currently exercisable; (ii) make such adjustment to
the Awards then outstanding as the Committee deems appropriate to reflect such
change in control; (iii) if applicable, provide that such Awards shall be
cancelled upon the effectiveness of such Change of Control and converted into
the right to receive the same consideration as stockholders are receiving in
such Change of Control (net of any exercise price and/or purchase price payable
by the Participant and/or base amount in the case of a SAR); and/or (iv) cause
the Awards then outstanding to be assumed, or their rights substituted therefor,
by the surviving or acquiring corporation in such change in
control. The Committee may, in its discretion, include such further
provisions and limitations in any Award agreement as it may deem in the best
interests of the Company.
Additional
Cancellation Provisions
In any
instance where the rights of a recipient under an Award continue after
termination of their relationship with the Company, all of such rights shall
terminate and be forfeited if, in the determination of the Committee, the
recipient, at any time prior or subsequent to such termination, breached or
violated, in a material way, the terms of any agreement with the Company,
including any employment agreement, termination agreement, confidentiality
agreement, non-solicitation agreement or non-competition agreement or engaged or
engages in conduct that would have permitted the Company to terminate the
recipient’s employment for cause, as defined in the Incentive Plan, if the
recipient was still an employee of the Company.
Reduction
of Payments to Participants
If any
payment under the Incentive Plan constitutes a “parachute payment” within the
meaning of Section 280G of the Code and is subject to the non-deductibility
rules of Section 280G and the excise tax imposed by Section 4999 of the Code
(the “Excise Tax”), then such payment will be reduced, if on an after-tax basis
(including the Excise Tax), such reduction would result in the recipient
receiving a greater amount of the payment.
Summary
of Federal Income Tax Consequences
The
following is a brief summary of the principal United States federal income tax
consequences of transactions under the Incentive 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.
Non-ISOs. No taxable income
is recognized by a participant upon the grant of a non-ISO. Upon the
exercise of a non-ISO, the participant will recognize ordinary income in an
amount equal to the excess, if any, of the fair market value of the Common Stock
for which the option is exercised over the aggregate non-ISO exercise price,
even though that Common Stock may be subject to a restriction on transferability
or may be subsequently forfeited, in limited circumstances. Income
and payroll taxes are required to be withheld by the Company on the amount of
ordinary income resulting to the participant from the exercise of a
non-ISO. Any ordinary income recognized by the participant is
generally deductible by the Company for federal income tax purposes, subject to
the possible limitations on deductibility of compensation paid to some
executives under Section 162(m) of the Code. The participant’s tax
basis in Common Stock acquired by exercise of a non-ISO will be equal to the
exercise price plus the amount taxable as ordinary income to the
participant.
Upon a
sale of the Common Stock received by the participant upon exercise of the
non-ISO, 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 that stock. The participant’s holding period for
shares acquired after the exercise of a non-ISO begins on the date of exercise
of that option.
If the
participant pays the exercise price in full or in part by using shares of
previously acquired Common Stock, the exercise will not affect the tax treatment
described above and no gain or loss generally will be recognized to the
participant with respect to the previously acquired shares. The
shares received upon exercise which are equal in number to the previously
acquired shares used will have the same tax basis as the previously acquired
shares surrendered to the Company, and will have a holding period for
determining capital gain or loss that includes the holding period of the shares
used. The value of the remaining shares received by the participant
will be taxable to the participant as compensation, even though those shares may
be subject to sale restrictions. The remaining shares will have a tax
basis equal to the fair market value recognized by the participant as ordinary
income and the holding period will commence on the exercise
date. Shares used to pay applicable income and payroll taxes arising
from that exercise will generate taxable income or loss equal to the difference
between the tax basis of those shares and the amount of income and payroll taxes
satisfied with those shares. The income or loss will be treated as long-term or
short-term capital gain or loss depending on the holding period of the shares
used. Where the shares used to pay applicable income and payroll
taxes arising from that exercise generate a loss equal to the difference between
the tax basis of those shares and the amount of income and payroll taxes
satisfied with those shares, that loss may not be currently recognizable if,
within a period beginning 30 days before the exercise date and ending 30 days
after that date, the participant acquires or enters into a contract or option to
acquire additional Common Stock.
ISOs. No taxable
income is recognized by a participant upon the grant or exercise of an
ISO. If Common Stock is issued to a participant after the exercise of
an ISO and if no disqualifying disposition of those shares is made by that
participant within two years after the date of grant or within one year after
the receipt of those shares by that participant, then:
·
|
upon
the sale of those shares, any amount realized in excess of the option
exercise price will be taxed to that participant as a long-term capital
gain, and
|
·
|
the
Company will not be allowed a
deduction.
|
Additionally,
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.
If Common
Stock acquired upon the exercise of an ISO is disposed of prior to the
expiration of either holding period described above, that disposition would be a
“disqualifying disposition,” and generally:
·
|
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, and
|
·
|
the
Company will be entitled to deduct that
amount.
|
Any other
gain realized by the participant on that disposition will be taxed as short-term
or long-term capital gain, and will not result in any deduction to the
Company. If a participant pays the exercise price in full or in part
with previously acquired Common Stock, the exchange will not affect the tax
treatment of the exercise. Upon the exchange, no gain or loss
generally will be recognized upon the delivery of the previously acquired shares
to the Company, and the shares issued in replacement of the shares used to pay
the exercise price will have the same basis and holding period for capital gain
purposes as the previously acquired shares. A participant, however, would not be
able to utilize the holding period for the previously acquired shares for
purposes of satisfying the ISO statutory holding period requirements. Additional
Common Stock will have a basis of zero and a holding period that commences on
the date the Common Stock is issued to the participant upon exercise of the
ISO. If this exercise is affected using Common Stock previously
acquired through the exercise of an ISO, the exchange of the previously acquired
shares may be a disqualifying disposition of those shares of Common Stock if the
holding periods discussed above have not been met.
If an ISO
is exercised at a time when it no longer qualifies as an ISO, the option will be
treated as a non-ISO. Subject to some exceptions for permanent
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 (one year if termination is due to death
or disability, as defined in the Code).
Stock Appreciation
Rights. Upon the exercise of a SAR, the participant will
recognize ordinary income in an amount equal to the cash received plus the fair
market value of any Common Stock received from the exercise. The
participant’s tax basis in the Common Stock received in the exercise of the SAR
will be equal to the ordinary income recognized with respect to the Common
Stock. The participant’s holding period for shares acquired on the exercise of a
SAR 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 Company will generally be
entitled to a deduction in the amount of the ordinary income recognized by the
participant, subject to the possible limitations on deductibility of
compensation paid to some executives under Section 162(m) of the
Code.
Unrestricted and Restricted
Stock. Upon the grant of an unrestricted stock award, the participant
realizes ordinary income equal to the fair market value on the date of grant
minus the price paid for the shares awarded. A recipient of a restricted stock
award realizes ordinary income only as of and when the shares vest or are no
longer subject to a substantial risk of forfeiture (as defined in the
Code). The ordinary income realized on each vesting or transfer date
equals the fair market value on that date less any purchase price paid for the
shares. A recipient of a restricted stock award may, however, choose
or be required by the terms of the award to elect under Section 83(b) of the
Code to have the ordinary income associated with all of the restricted shares
realized and measured on the date of grant. A recipient who makes
such an election and later forfeits restricted shares may not claim a loss for
tax purposes. The Company will generally be entitled to a deduction
at the time and in the amount of the ordinary income recognized by the
participant, subject to the possible limitations on deductibility of
compensation paid to some executives under Section 162(m) of the
Code.
Restricted Stock
Units. A recipient of a restricted stock unit award realizes
ordinary income only as of and when the shares vest or are no longer subject to
a substantial risk of forfeiture (as defined in the Code). The
ordinary income realized on each vesting or transfer date equals the fair market
value on that date less the price paid for the shares. The Company
will generally be entitled to a deduction at the time and in the amount of the
ordinary income recognized by the participant, subject to the possible
limitations on deductibility of compensation paid to some executives under
Section 162(m) of the Code.
Performance Awards and Supplemental
Grants. The tax consequences of a performance award depend
upon the nature of the underlying award earned if and when the performance goals
are achieved. The recipient of a supplemental cash award realizes
ordinary income equal to the amount received, and the Company will generally be
entitled to a corresponding deduction.
Certain Limitations on Deductibility
of Executive Compensation. As discussed above, the Section
162(m) Limitations apply to all Awards granted under the Incentive Plan, unless
certain conditions are satisfied. Compensation under the Incentive
Plan is intended to satisfy those conditions and constitute “qualified
performance-based compensation.”
Amendment
and Termination
The
Incentive Plan may be amended or terminated by the Committee at any time,
without the approval of stockholders or participants, provided that no amendment
that would require stockholder
approval
under the applicable Nasdaq Stock Market listing standards, applicable law or
the Code, including but not limited to Section 162(m) and Section 422 (with
respect to ISOs), may become effective without stockholder approval. No Awards
may be granted under the Incentive Plan from and after April 30, 2018, unless
the Incentive Plan is otherwise terminated prior to that
date.
New
Plan Benefits
The Board
of Directors approved the Incentive Plan in February 2008, subject to
stockholder approval. To date, no Awards have been made under the
Incentive Plan and no determinations have been made with respect to the type or
number of Awards to be made under the Incentive Plan. In addition,
there were no options granted in 2007 under the 1998 Plan.
On March
5, 2008, the closing price of the Company’s Common Stock was $9.40 as reported
on the Nasdaq Capital Market.
Recommendation: The
Board of Directors recommends that you vote “FOR” the approval of the Severn
Bancorp, Inc. 2008 Equity Incentive Plan.
Equity
Compensation Plan Information
The following table provides certain
information as of December 31, 2007 with respect to the Company’s equity based
compensation plans.
Plan Category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
Number of
securities
remaining available
for future issuance
Under equity
compensation
plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plan approved by security holders
|
|
122,815
|
|
15.85
|
|
-
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Total
|
|
122,815
|
|
15.85
|
|
|
EXECUTIVE
AND DIRECTOR COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Background
Because
the Company does not have any employees, compensation decisions are made by the
Compensation Committee of the Bank’s Board of Directors. The
non-employee directors, consisting of Louis DiPasquale, Jr., Melvin Hyatt,
Ronald Pennington, T. Theodore Schultz, Albert W. Shields and Keith Stock serve
as members of the Compensation Committee. Melvin Hyatt, a director of
the Bank,
does not
participate in compensation decisions relating to our Chairman, President and
Chief Executive Officer Alan J. Hyatt, his nephew.
The
Compensation Committee operates under a written charter adopted by the Board of
Directors. The responsibilities of the Committee
include:
·
|
formulating,
evaluating and approving the compensation of the Company’s executive
officers;
|
·
|
overseeing
all compensation programs involving the issuance of the Company’s stock
and other equity securities of the Company;
and
|
·
|
reviewing
and discussing with the Company’s management the Compensation Discussion
and Analysis and preparing the Compensation Committee’s report thereon for
inclusion in the Company’s annual proxy
statement.
|
Objectives
of Our Compensation Program
The
primary objectives of the Compensation Committee with respect to executive
compensation are:
·
|
To
attract and retain the best possible executive
talent;
|
·
|
To
tie annual and long-term cash and stock incentives to achievement of
corporate and individual performance objectives;
and
|
·
|
To
align executives’ incentives with stockholder value
creation.
|
To
achieve these objectives, the Compensation Committee has implemented and
maintains compensation plans that tie a substantial portion of executives’
overall compensation to the financial performance of the Company. Overall, the
total compensation opportunity is intended to create an executive compensation
program that is set at the median competitive levels of comparable public
savings and loan companies.
The
Bank’s executive officers have no employment contracts. Annually, the
Bank’s Compensation Committee evaluates profiles of comparable financial
institutions to assure that the compensation to its executive officers is
comparable to its peer group. Other factors used by the Compensation Committee
in determining compensation for its executive officers include an assessment of
the overall financial condition of the Bank, including an analysis of the Bank’s
asset quality, interest rate risk exposure, capital position, net income and
consistency of earnings. The Bank’s return on average assets and return on
equity are considered and compared to its peer group. In addition,
the Compensation Committee interviews each executive officer individually and
collectively to evaluate performance of the Company and the individual executive
officers. This input is used to determine the total compensation
package for each executive officer, and the allocation between the different
components within the compensation package. The complexity of the activities of
the executive officers are considered, and intangible items are considered such
as the reputation and general standing of the Bank within the community and the
likelihood of continuing successful and profitable results.
Compensation
Components
Compensation
consists of the following components:
Base
Salary. Base salaries are used to attract and
retain employees by providing a portion of compensation that is not considered
“at risk.” Base salaries are designed to reward the performance of
our executive officers in the daily fulfillment of their responsibilities to
us. Base salaries for our executives are established based on the
scope of their responsibilities and historical compensation levels, taking into
account competitive market compensation paid by other companies for similar
positions. Generally, the Company believes that executive base salaries should
be targeted near the median of the range of salaries for executives in similar
positions and with similar responsibilities at comparable companies in line with
our compensation philosophy. Base salaries are reviewed annually, and adjusted
from time to time to realign salaries with market levels after taking into
account individual responsibilities, performance and experience.
Annual
Bonus. The purpose of the annual bonus program is
to align the interests of executive officers with Company stockholders by
motivating executive officers to achieve superior annual financial and annual
operational performance. Our annual bonus plan for our executives provides for a
discretionary cash bonus, dependent upon the level of achievement of corporate
and personal goals. In addition, the discretionary bonus for the executive
officers named in the proxy statement is determined based on the Company’s
performance compared to budgets and projections. The Board of
Directors establishes specific financial and operational goals for the Company
at the beginning of each year and annual discretionary bonus funding is in part
related to achievement of these annual goals. The Compensation
Committee approves the annual award for the Chief Executive Officer and for each
other Executive Officer.
Long-Term
Incentive Program. The Compensation Committee
believes that long-term performance is achieved through an ownership culture
that encourages long-term performance by our executive officers through the use
of stock-based awards. In connection with this, our board of directors had
adopted the Severn Bancorp, Inc. Stock Option and Incentive Plan (the “1998
Plan”), which was ratified by our stockholders at the 1998 annual meeting and
expired in 2007. The Board of Directors has recently adopted the
Severn Bancorp, Inc. 2008 Equity Incentive Plan (the “2008 Plan”), subject to
the approval of the Company’s stockholders. The purpose of the 2008
Plan is to enable the Company to (i) promote the long-term retention of
employees; (ii) further reward these employees, directors and other persons for
their contributions to the Company’s growth and expansion; (iii) provide
additional incentive to these employees, directors and other persons to continue
to make similar contributions in the future; and (iv) to further align the
interests of these employees, directors and other persons with those of the
Company’s stockholders. These purposes will be achieved by granting
to such employees, directors and other persons, in accordance with the 2008
Plan, Options, Stock Appreciation Rights, Restricted Stock or Unrestricted
Stock, Deferred Stock, Restricted Stock Units or Performance Awards
(collectively the “Awards”), for shares of the Company’s common
stock. By encouraging such stock ownership, the Company seeks to
attract, retain and motivate the best available personnel for positions of
substantial responsibility and to provide additional incentive to our directors
and key employees and to promote the success of the business. The Company
anticipates granting options under the 2008 Plan, and will consider other Awards
under the 2008 Plan when determining long-term incentive programs.
Other
Compensation. Our executive officers participate
in other employee benefit plans generally available to all employees, including
the following:
·
|
The
Bank maintains a 401(k) plan, and contributes, on behalf of each
participating employee, a matching contribution of 50% of salary deferred
by an employee up to 6% of each participant’s salary. The
Bank’s plan also allows a non-matching profit sharing contribution to be
determined at the discretion of the Board of
Directors.
|
·
|
The
Company maintains an Employee Stock Ownership Plan (the “ESOP”) for
employees of the Bank and its subsidiaries. The ESOP provides
an opportunity for the employees of the Bank to become stockholders and
thus strengthen their direct interest in the success of the
Bank. In addition, the ESOP assists the Bank in attracting and
retaining capable personnel. As of December 31, 2007, a total
of 792,356 shares of the Company’s Common Stock were owned by the ESOP, of
which 782,908 shares were allocated to
employees.
|
·
|
The
Bank provided Messrs. Meekins and Kirkley with the use of a company owned
automobile during 2007, and paid or reimbursed them for all insurance,
maintenance, registration and fuel costs. The Bank also
reimbursed Mr. Bevivino for automobile costs incurred relating to
inspections of construction sites made by Mr. Bevivino during
2007. Effective January 1, 2008, the Bank no longer provides
automobiles for Messrs. Meekins and Kirkley, and no longer reimburses Mr.
Bevivino for automobile costs incurred during inspections. The
Bank gave Mr. Meekins his automobile in December, 2007, and Mr. Kirkley
his automobile in 2008.
|
Determination
of Executive Compensation
Traditionally,
the Compensation Committee reviews our executive compensation program in
November of each year, although decisions in connection with new hires and
promotions are made on an as-needed basis. As part of the review
process, each executive provides input into the performance of the company and
the performance of each executive officer, including
himself. However, no executive officer participates in the
Compensation Committee’s deliberations or decisions. Each executive’s
current and prior compensation is considered in setting future
compensation. In addition, the Compensation Committee performs an
informal survey of area companies and banks and reviews the compensation
practices of the surveyed companies. To some extent, the compensation
plan (base salary, bonus and 2008 Plan) is similar to the elements used by many
companies; however, additional emphasis on fair treatment of all employees
requires that the Company limits executive salaries at a level that does not
prohibit us from competing for quality employees. The exact salary,
annual bonus and stock option grants are chosen in an attempt to balance our
competing objectives of fairness to all employees and attracting and retaining
executive officers. Based on the informal survey of area companies and banks,
the performance of the Company and each of the executive officers in 2007, the
Compensation Committee awarded a bonus to Messrs. Hyatt, Kirkley, and Bevivino
totaling approximately 25% to 30% less than the bonus awarded to them in
2006. The Compensation Committee also awarded a bonus to Mr. Meekins
totaling approximately 50% less than the bonus awarded to him in
2006. This larger percentage decrease for Mr. Meekins was because the
Compensation Committee concluded, that while Mr. Meekins performed at the same
level as the other executives during 2007, he would no longer serve in the same
capacity after his retirement effective December 31, 2007. In
addition, the Compensation Committee determined that Messrs. Hyatt, Kirkley and
Bevivino would receive a base salary increase of approximately 17%, 7% and 4%,
respectively. The Compensation Committee had given Messrs. Hyatt, and Bevivino a
base salary increase for 2007 of approximately 5%. Mr. Kirkley
received a base salary increase of approximately 6% for 2007. Mr. Meekins will
not receive a salary in 2008, but instead will begin receiving a director’s fee
as a non-employee director.
Accounting
and Tax Considerations
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R. This accounting standard requires us to record as
compensation expense the grant date fair value of a stock option over the life
of the option. Prior to the adoption of FAS 123R, no compensation
expense was required to be recorded in connection with stock options granted at
fair market value. The Compensation Committee intends to consider the
compensation expense of option grants when making future awards; however, given
that, traditionally, the Compensation Committee has not made large grants of
option awards to our executive officers and employees, the Company does not
expect that the compensation expense associated with option grants will have a
material adverse effect on our reported earnings.
Generally,
Section 162(m) of the Code, and the IRS regulations adopted under that section,
which are referred to collectively as Section 162(m), denies a deduction to any
publicly held corporation, such as the Company, for certain compensation
exceeding $1,000,000 paid during each calendar year to each of the chief
executive officer and the four other highest paid executive officers, excluding,
among other things, certain qualified performance-based
compensation. Our policy is to maximize the tax deductibility of
compensation paid to our most highly compensated executives under Section
162(m). For example, our proposed 2008 Equity Incentive Plan is
intended to satisfy an exemption for “qualified performance-based compensation”
under Section 162(m). The Company does not believe that Section
162(m) will have a material, adverse effect on us in 2008.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis section appearing above with our management. Based on
this review and these discussions, the Compensation Committee recommended to our
Board of Directors that the Compensation Discussion and Analysis Section be
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2007 and in this proxy statement.
Compensation
Committee Members:
The
information contained in this Compensation Committee Report is not “soliciting
material” and has not been “filed” with the Securities and Exchange
Commission. This Compensation Committee Report will not be
incorporated by reference into any of our future filings under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that
the Company may specifically incorporate it by reference into a future
filing.
Summary
Compensation Table
The
following table sets forth information regarding compensation earned by our
Chief Executive Officer, our Chief Financial Officer and our other most highly
compensated executive officers during the year ended December 31,
2007.
Summary
Compensation Table
Name
and Principal Position
|
|
|
|
|
All
Other
Compensation
(3)
|
|
|
|
|
|
|
|
|
Alan
J. Hyatt
|
2007
|
$278,000
|
$145,000
|
$
-
|
$10,698
|
$433,698
|
President
and Chief Executive Officer
|
2006
|
$265,000
|
$191,000
|
$16,515
|
$11,307
|
$483,822
|
|
|
|
|
|
|
|
Melvin
E. Meekins, Jr.
|
2007
|
$330,000
|
$ 68,000
|
$
-
|
$61,346
|
$459,346
|
Executive
Vice-President
|
2006
|
$318,250
|
$135,300
|
$17,519
|
$34,440
|
$505,509
|
|
|
|
|
|
|
|
S.
Scott Kirkley
|
2007
|
$236,000
|
$
60,000
|
$
-
|
$29,006
|
$325,006
|
Executive
Vice-President
|
2006
|
$225,000
|
$
82,500
|
$17,519
|
$24,396
|
$349,415
|
|
|
|
|
|
|
|
Thomas
G. Bevivino
|
2007
|
$167,000
|
$
35,000
|
$
-
|
$27,073
|
$229,073
|
Executive
Vice-President and Chief Financial Officer
|
2006
|
$159,000
|
$
50,000
|
$17,519
|
$12,262
|
$238,781
|
|
(1)
|
Amounts
reflect compensation for services rendered in year
indicated.
|
|
(2)
|
Amounts
were calculated utilizing the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123R, “Share-based Payments.” See
note 11 of the Consolidated Financial Statements in our Annual Report for
the year ended December 31, 2007 regarding assumptions underlying
valuation of equity awards.
|
|
(3)
|
All
other compensation for 2007 consisted of the following
elements:
|
Name
and Principal Position
|
|
Health
Care
Contribution
(a)
|
401
(k) Matching Contribution (b)
|
|
|
|
Alan
J. Hyatt
|
2007
|
$
-
|
$
5,125
|
$5,573
|
$
-
|
$10,698
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melvin
E. Meekins, Jr.
|
2007
|
$10,170
|
$
6,750
|
$5,573
|
$38,853
|
$61,346
|
Executive
Vice-President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Scott Kirkley
|
2007
|
$10,198
|
$
6,750
|
$5,573
|
$
6,485
|
$29,006
|
Executive
Vice-President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
G. Bevivino
|
2007
|
$10,160
|
$
6,060
|
$5,003
|
$
5,850
|
$27,073
|
Executive
Vice-President And Chief Financial Officer
|
|
|
|
|
|
|
|
(a)
|
Amounts
reflect contributions made by the Company for the executive’s health
insurance premiums in excess of the amounts the Company would otherwise
contribute.
|
|
(b)
|
Amounts
reflect matching contributions made by the Company for the executive’s
401(k) plan.
|
|
(c)
|
Amounts
reflect contributions made by the Company to the executive’s ESOP
account.
|
|
(d)
|
The
Company provided automobiles for the exclusive use of Mr. Meekins and Mr.
Kirkley. In addition, the Company also paid or reimbursed these
executives for all insurance, maintenance, registration and fuel
costs. Amounts shown reflect the aggregate incremental cost of
such automobiles including depreciation and other costs. The
Company gave the automobile used by Mr. Meekins to Mr. Meekins in December
2007, and the fair market value of the automobile totaling $24,595 is
included in his auto expenses reflected above. In addition, the
Company compensated Mr. Bevivino during 2007 for automobile costs incurred
while performing construction site
inspections.
|
Grants
of Plan-Based Awards
There
were no stock options or other stock awards granted in 2007 to the
above named executive officers.
Narrative
to Summary Compensation Table and Plan-Based Awards Table
The
Company does not have employment agreements with the executive officers. Salary
and bonus decisions concerning executive officers are made by the Compensation
Committee as described above in “Compensation Discussion and
Analysis.” There were no stock options or other awards granted in
2007 to the executive officers.
Outstanding
Equity Awards at Fiscal Year-End Table
The following table includes certain
information with respect to the value of all unexercised options previously
awarded to the executive officers listed in the Summary Compensation Table as of
December 31, 2007:
Outstanding Equity Awards at
Fiscal Year End 2007
|
|
|
|
Name
and Principal Position
|
Number
of Securities Underlying Unexercised
Options
Exercisable
|
Number
of Securities Underlying Unexercised Options
Unexercisable
|
|
|
|
|
|
|
|
Alan
J. Hyatt
President
and Chief Executive Officer
|
7,260
|
10,890(1)
|
$17.182
|
02/21/11
|
|
|
|
|
|
Melvin
E. Meekins, Jr.
Executive
Vice-President
|
7,260
|
10,890(1)
|
$15.620
|
02/21/11
|
|
|
|
|
|
S.
Scott Kirkley
Executive
Vice-President
|
7,260
|
10,890(1)
|
$15.620
|
02/21/11
|
|
|
|
|
|
Thomas
G. Bevivino
Executive
Vice-President and Chief Financial Officer
|
7,260
|
10,890(1)
|
$15.620
|
02/21/11
|
(1)
|
The
initial grant was for options to purchase 15,000 shares of Common
Stock. As a result of stock splits subsequent to the date of
grant, the number of shares subject to each option was adjusted to
18,150. The options vest in five equal annual installments of
20% upon each of the first five anniversaries of the date of grant on
February 21, 2006.
|
Options
Exercised and Stock Vested
No
options were exercised by an executive officer in
2007. The 1998 Stock Option and Incentive Plan did not
authorize the issuance of stock awards and the Company had no outstanding stock
awards during 2007.
Potential
Payments upon a Termination of Employment or Change in Control
The
Company does not have employment agreements, severance or “change in control”
agreements with our executive officers.
Under the
Company’s 1998 Plan, all outstanding stock options automatically will become
exercisable upon the termination of the employment of the holder due to death or
permanent disability.
In the
event of a “change in control,” as defined in the Company’s 1998 Plan, all
outstanding stock options will become immediately exercisable, as determined by
the Compensation Committee in its sole discretion. The Company’s 1998
Plan defines “change of control” to mean: (i) the sale of all, or a
material portion, of the assets of the Company; (ii) a merger or
recapitalization in the Company whereby the Company is not the surviving entity;
(iii) an acquisition by which a person becomes a controlling stockholder within
the meaning of federal banking regulations; or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder) of ten percent or more of the
outstanding voting securities of the Company by any person, entity, or group;
provided, however, that a change in control of the Company shall not include the
acquisition or disposition of securities of the Company by any person in control
of the Company at the time of the adoption of the plan and shall not include any
subsequent acquisition or disposition of the securities of the Company by any
person owned or controlled by, or under common control with, a person in control
of the Company at the time of the adoption of these plans.
In the
event of a change of control, the Compensation Committee, in their discretion,
will take one or a combination of the following actions to be effective as of
the date of such change in control:
·
|
provide
that such options shall be assumed, or equivalent options shall be
substituted by the acquiring or succeeding corporation,
or
|
·
|
provide
that the participants will receive upon the closing of the change in
control transaction a cash payment for each option surrendered equal to
the difference between (1) the market value of the consideration to be
received for each share of our common stock in the change in control
transaction times the number of shares subject to a surrendered option and
(2) the aggregate exercise price of such surrendered
options.
|
The
following table sets forth the intrinsic value of the unvested stock options
held by each executive officer named in the Summary Compensation Table as of
December 31, 2007 that would become vested upon termination of employment of the
executive due to death or permanent disability or, assuming that the
Compensation Committee so elects, the occurrence of a change in control as
described above:
Name
and Principal Position
|
Year
|
Amount (1)
|
|
|
|
Alan
J. Hyatt
President
and Chief Executive Officer
|
2007
|
$ -
|
|
|
|
Melvin
E. Meekins, Jr.
Executive
Vice-President
|
2007
|
$ -
|
|
|
|
S.
Scott Kirkley
Executive
Vice-President
|
2007
|
$ -
|
|
|
|
Thomas
G. Bevivino
Executive
Vice-President and Chief Financial Officer
|
2007
|
$ -
|
|
(1)
|
Calculated
based on the difference between the closing price of our common stock on
December 31, 2007 and the exercise price of unvested stock options as of
such date, multiplied by the number of outstanding
options.
|
In the
event that the employment of executive officers was terminated for any other
reason on December 31, 2007, none of the unvested options would vest and all
such options would expire.
In the
event that the employment of an executive officer was terminated due to
disability or death on December 31, 2007, they or their estate would be entitled
to payments under disability or life insurance plans that the Company maintain
for full-time employees.
Director
Compensation
The
Company does not compensate its directors. Each director of the
Company is also a director of the Bank. Meetings of the directors of
the Company are held immediately before or after meetings of the directors of
the Bank. Non-employee directors of the Bank received $2,200 and
$2,000 per meeting of the Board of Directors attended in 2007 and 2006,
respectively. In addition, each non-employee member of a committee of the Board
of Directors of the Bank received a fee for committee meetings attended in 2007
and 2006 as follows: $300 per Compliance Committee meeting; $600 per
Cash Audit Committee meeting; and $800 per Corporate Governance
Committee meeting. In addition, members of the Compensation
Committee, and the Audit and Examining Committee received fees of $800 and $850
per meeting attended for the years 2007 and 2006, respectively. The
Chairman of each committee received an additional $260 and $250 per meeting in
years 2007 and 2006, respectively. A total of $210,911 and $167,679
was paid as directors’ fees and committee fees for the Bank in 2007 and 2006,
respectively.
Effective
January 1, 2008, the non-employee directors are entitled to receive $2,300 per
attended meeting, with the Vice-Chairman receiving $5,500 per attended
meeting. In addition, each committee member will receive the
following: $300 per Compliance Committee meeting; $625 per Cash Audit Committee
meeting; $880 per Compensation Committee meeting; $800 per Corporate Governance
Committee meeting; and $880 per Audit and Examining Committee
meeting. The Chairman of the committees will receive a fee of up to
$270 per committee meeting. The Board members receive no additional
compensation for acting as the Nominating Committee.
Non-employee
directors were also eligible to receive stock options under the 1998
Plan. On February 21, 2006, each of Messrs. DiPasquale,
Melvin Hyatt, Pennington, Schultz, Shields and Stock each received an option to
purchase 1,815 shares of our common stock at an exercise price of $15.62 per
share. The options are exercisable immediately and terminate five years from the
date of grant. If the 2008 Plan is approved, non-employee directors
will be eligible to receive awards under that plan.
The
following table sets forth a summary of the compensation the Company paid to our
non-employee directors in 2007:
Director Compensation for
2007
|
|
Fees
earned or paid in cash(1)
|
|
|
|
|
|
Louis
DiPasquale, Jr.
|
2007
|
$28,100
|
$28,100
|
|
|
|
|
Melvin
Hyatt
|
2007
|
$30,300
|
$30,300
|
|
|
|
|
Ronald
P. Pennington
|
2007
|
$34,900
|
$34,900
|
|
|
|
|
T.
Theodore Schultz
|
2007
|
$36,260
|
$36,260
|
|
|
|
|
Albert
W. Shields
|
2007
|
$33,700
|
$33,700
|
|
|
|
|
Keith
Stock
|
2007
|
$34,050
|
$34,050
|
|
|
|
|
(1)
|
For
2007, each non-employee director received $2,200 for each Board of
Directors meeting, and fees ranging from $300 to $850 for each Board of
Directors committee meeting. In addition, the chairman of the
various Board of Directors committees received a fee of up to $260 per
committee meeting.
|
(2)
|
No
stock options were granted to directors in 2007, and the Company did not
incur any stock option expense in 2007 for prior grants. At December 31,
2007, the aggregate number of options awards outstanding for each director
was as follows: Melvin Hyatt 1,815; Ronald P. Pennington 1,815;
T. Theodore Schultz 1,815; Albert W. Shields 1,815; Keith Stock
1,815. Louis DiPasquale, Jr. exercised all of the options
granted to him by the Company.
|
Compensation
Committee Interlocks and Insider Participation
No member
of our Board’s Compensation Committee has served as one of our officers or
employees at any time. None of our executive officers serve as a member of the
compensation committee of any other company that has an executive officer
serving as a member of our Board of Directors. None of our executive officers
serve as a member of the board of directors of any other company that has an
executive officer serving as a member of our Board’s Compensation
Committee.
Melvin
Hyatt, a member of the Compensation Committee, is the brother of Louis Hyatt and
the uncle of Alan J. Hyatt, each of whom engaged in certain transactions with us
as described below.
Certain
Transactions With Related Persons
Our Board
of Directors is charged with monitoring and reviewing issues involving potential
conflicts of interest, and reviewing and approving all related party
transactions.
Alan J.
Hyatt, who is an affiliated person by virtue of his stock ownership and
positions as director and President of the Company and the Bank, is a partner of
the law firm of Hyatt & Weber, P.A., which serves as general counsel to the
Company and the Bank. The law firm of Hyatt & Weber, P.A.
received fees in the amount of $314,721 for services rendered to the Company and
to the Bank and its subsidiaries for the year ended December 31, 2007. The law
firm received $535,704 in fees from borrowers who obtained loans from the Bank
for the year ended December 31, 2007.
During
January, 2007, Hyatt & Weber, P.A. entered into a five year lease agreement
with HS West, LLC, a wholly owned subsidiary to lease office space from the
Company. The term of the lease is five years with the option to renew
the lease for three additional five year terms. The monthly lease
payment is $20,056, which increases 2% annually beginning with the third
anniversary of the lease. Total rental income received by the Company
during 2007 was $230,645. In addition, Hyatt & Weber, P.A.
reimburses the Company for its share of common area maintenance. The
total reimbursement for 2007 was $125,519.
Louis
Hyatt, a 10% stockholder and the brother of Melvin Hyatt and the father of Alan
J. Hyatt is a real estate broker at Hyatt Commercial, a wholly owned
subsidiary. As a real estate broker, Louis Hyatt earned $214,418 in
commissions from Hyatt Commercial during 2007. In addition, Hyatt
Commercial provided health insurance benefits to Louis Hyatt during 2007 at a
cost of $13,247.
In March
2007, the Company adopted written policies and procedures regarding approval of
transactions between the Company and any employee, officer, director and certain
of their family members and other related persons required to be reported under
Item 404 of Regulation S-K. Under these policies, a majority of the
disinterested members of the Audit and Examining Committee must approve any
transaction between the Company and any related party that involves more than
$10,000. If a majority of the members of the Audit and Examining
Committee are interested in the proposed transaction, then the transaction must
be approved by a majority of the disinterested members of the Board (excluding
directors who are employees of the Company). The Chair of the Audit
and Examining Committee has the delegated authority to pre-approve or ratify (as
applicable) any related party transaction in which the aggregate amount involved
is expected to be less than $120,000. In determining whether to
approve or ratify a related party transaction, the Audit and Examining Committee
will take into account, among other factors it deems appropriate, whether the
related party transaction is on terms no less favorable than terms generally
available to an unaffiliated third-party under the same or similar circumstances
and the extent of the related party’s interest in the
transaction. After adopting this policy, the Audit and Examining
Committee ratified each of the transactions described above and approved the
continuation of such transactions for the current year on substantially the same
term and conditions.
DATE
FOR SUBMISSION OF STOCKHOLDER PROPOSALS
FOR
INCLUSION IN PROXY STATEMENT
Any
proposal that a Company stockholder wishes to have included in the Company’s
proxy statement and form of proxy relating to the Company’s 2009 annual meeting
of stockholders under Rule 14a-8 of the Securities and Exchange Commission must
be received by the Company’s Secretary at Severn Bancorp, Inc., 200 Westgate
Circle, Suite 200, Annapolis, Maryland 21401 on or before November 20,
2008. Nothing in this paragraph shall be deemed to require the
Company to include in its proxy statement and form of proxy for such meeting any
stockholder proposal that does not meet the requirements of the Securities and
Exchange Commission in effect at the time, including Rule 14a-8.
In
addition, stockholders are notified that the deadline for providing the Company
timely notice of any stockholder proposal, submitted outside of the Rule 14a-8
process for consideration at the Company’s 2009 annual meeting of stockholders,
is March 2, 2009. As with respect to any proposal which the Company
does not have notice on or prior to March 2, 2009, discretionary authority shall
be granted to the persons designated in the Company’s proxy related to the 2009
annual meeting of stockholders to vote on such proposal.
ANNUAL
REPORT AND FINANCIAL STATEMENTS
A copy of
the Company’s Annual Report to Stockholders for the year ended December 31, 2007
accompanies this Proxy Statement.
Upon
receipt of a written request, the Company will furnish to any stockholder
without charge a copy of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007 and the exhibits thereto required to be filed with
the Commission under the Securities Exchange Act of 1934. Such written request
should be directed to:
S.
Scott Kirkley
Executive
Vice President and Secretary
Severn
Bancorp, Inc.
200
Westgate Circle, Suite 200
Annapolis,
Maryland 21401
The
Form 10-K is not part of the proxy solicitation materials.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, certain officers and persons who own more than 10% of its Common
Stock, to file with the Securities and Exchange Commission initial reports of
ownership of the Company’s equity securities and to all subsequent reports when
there are changes in such ownership. Based on a review of reports submitted to
the Company, the Company believes that during the fiscal year ended December 31,
2007 all Section 16(a) filing requirements applicable to the Company’s officers,
directors, and more than 10% owners were complied with on a timely
basis, including all required filings by the Company’s directors,
officers, and more than 10% beneficial owners on Forms 3, 4, or 5, as
applicable, to satisfy the reporting requirements under federal securities laws,
except for the following: Mr. Theodore Schultz reported the sale of shares of
the Company’s common stock late on a Form 4.
COMMUNICATIONS
WITH DIRECTORS
If any
stockholder wishes to communicate with a member of the Board of Directors, the
stockholder may communicate in writing to 200 Westgate Circle, Suite 200,
Annapolis, Maryland 21401, attention: S. Scott Kirkley, via first class mail, or
by facsimile at (410) 841-6296. Stockholders may also speak with the
directors who attend our annual meeting of Stockholders. All
communications received by Mr. Kirkley will be distributed to all members of the
Board of Directors.
OTHER
MATTERS
As of the
date of this Proxy Statement, the Board of Directors does not know of any other
matters to be presented for action by the Stockholders at the Annual Meeting.
If, however, any other matters not now known are properly brought before the
meeting, the persons named in the accompanying proxy will vote such proxy in
accordance with the determination of a majority of the Board of
Directors. The enclosed proxy confers discretionary authority to vote
with respect to any and all of the following matters that may come before the
Meeting: (i) matters which the Company did not receive
notice by
February 5, 2008 were to be presented at the meeting; (ii) approval of the
minutes of a prior meeting of the stockholders, if such approval does not amount
to ratification of the action taken at the meeting; (iii) the election of any
person to any office for which a bona fide nominee named in this Proxy Statement
is unable to serve or for good cause will not serve; (iv) any proposal omitted
from this Proxy Statement and the form of the proxy pursuant to Rules
14a-8 or 14a-9 under the Securities Exchange Act of 1934; and (v) matters
incident to the conduct of the meeting.
By order
of the Board of Directors
/s/
S. Scott
Kirkley
Secretary
Annapolis,
Maryland
March 20,
2008