<PAGE>
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[_] Preliminary Proxy Statement Commission Only (as permitted by
Rule 14a-6(e) (2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COMMISSION FILE NUMBER: 1-11885
ALLEGIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4095179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1430 WAUKEGAN ROAD 60085
MCGAW PARK, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(847) 689-8410
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
----------------
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
Common Stock, $1.00 par value New York Stock Exchange
Chicago Stock Exchange
Series A Junior Participating Preferred Stock Purchase New York Stock Exchange
Rights (currently traded with Common Stock) Chicago Stock Exchange
</TABLE>
----------------
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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<PAGE>
LOGO
ALLEGIANCE CORPORATION
1430 Waukegan Road
McGaw Park, Illinois 60085
March 23, 1998
NOTICE OF ANNUAL MEETING OF THE
STOCKHOLDERS OF ALLEGIANCE CORPORATION
The Annual Meeting of Stockholders of Allegiance Corporation, a Delaware
corporation (the "Company"), will be held at the Company's headquarters in
McGaw Park, Illinois at 1450 Waukegan Road (the Brien Laing Building), McGaw
Park, Illinois, on Thursday, May 7, 1998, at 10:30 a.m. CDT, for the following
purposes:
1. To elect three directors to hold office until the annual meeting in
2001;
2. To approve the adoption of the Company's 1998 Incentive Compensation
Program; and
3. To transact such other business, if any, as may properly be presented
at the meeting.
Only holders of record of the common stock of the Company at the close of
business on March 16, 1998, will be entitled to vote at the meeting. A proxy
statement with respect to the annual meeting accompanies and forms a part of
this Notice. The annual report of the Company for the fiscal year ended
December 31, 1997 also accompanies this proxy statement.
By order of the Board of Directors.
Sincerely,
/s/ Lester B. Knight
Lester B. Knight
Chairman of the Board and
Chief Executive Officer
/s/ William L. Feather
William L. Feather
Senior Vice President, Secretary
and General Counsel
YOUR VOTE IS IMPORTANT
If you have a touch-tone telephone, please utilize our toll-free proxy
voting service. To register your vote, simply call the number located on
your proxy card. If you respond by telephone, do not return your proxy card;
keep it for your records. If you choose to mail in your proxy card, please
mark, sign, and date your proxy card and return it promptly in the enclosed
envelope whether or not you plan to attend the meeting.
<PAGE>
ALLEGIANCE CORPORATION
1430 WAUKEGAN ROAD
MCGAW PARK, ILLINOIS 60085
PROXY STATEMENT
The enclosed proxy is solicited on behalf of the Board of Directors of the
Company for use at the Annual Meeting of Stockholders of the Company to be
held at 1450 Waukegan Road (the Brien Laing Building), McGaw Park, Illinois on
Thursday, May 7, 1998, at 10:30 a.m. and any adjournments thereof. This proxy
statement and accompanying proxy are first being mailed to stockholders on or
about March 23, 1998.
A proxy may be voted in writing or by telephone. A proxy card which is
properly executed, returned and not revoked will be voted in accordance with
the instructions indicated. A proxy voted by telephone and not revoked will be
voted in accordance with the stockholder's instructions. If no instructions
are given, proxies which are signed and returned or voted via telephone will
be voted in accordance with the recommendation of the Board of Directors on
the proposals. Proxies may be revoked at any time prior to the closing of the
polls for voting at the meeting by giving written notice to the secretary of
the Company, by executing a later-dated proxy in writing or by telephone, or
by attending the meeting and voting in person.
The Company's common stock, $1.00 par value (the "Common Stock"), is the
only issued and outstanding class of stock. Only stockholders of record at the
close of business on March 16, 1998 (the "Record Date") are entitled to notice
of and to vote at the meeting. At the close of business on the Record Date,
the Company had 57,353,120 shares of Common Stock outstanding and entitled to
vote. Each share of the Common Stock is entitled to one vote. A list of
stockholders entitled to vote at the meeting will be kept at the office of the
secretary of the Company, 1430 Waukegan Road, McGaw Park, Illinois 60085, for
a period of 10 days prior to the meeting.
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of three classes, as nearly
equal in number as possible. One of the three classes, comprising
approximately one-third of the directors, is elected each year to succeed the
directors whose terms are expiring. The number of directors of the Company is
currently eight. Directors hold office until the annual meeting for the year
in which their terms expire and until their successors are elected and
qualified, unless prior to that time, they have resigned, retired, or
otherwise left office.
The Board of Directors has nominated Connie R. Curran, Joseph F. Damico and
Arthur F. Golden for election as directors at the 1998 annual meeting. All
nominees are current directors of the Company. It is not contemplated that any
of these nominees will be unavailable for election, but if such a situation
should arise, the proxy will be voted in accordance with the best judgment of
the proxyholders unless a stockholder has directed otherwise. Directors are
elected by a plurality of the voting power of the shares of capital stock of
the Company present in person or represented by proxy at the meeting and
entitled to vote for the election of directors. Shares represented at the
meeting in person or by proxy but withheld or otherwise not cast for the
election of directors (including broker nonvotes) will have no effect on the
outcome of the election.
Each of the directors of the Company has been a director since 1996.
1
<PAGE>
NOMINEES FOR ELECTION AS DIRECTORS TO BE ELECTED
FOR A TERM OF THREE YEARS ENDING AT THE ANNUAL MEETING OF STOCKHOLDERS IN 2001
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE AND OTHER INFORMATION
---- --- ----------------------------------------------
<C> <C> <S>
Connie R. Curran........ 50 Since 1995, Ms. Curran has been the president of
CurranCare, Inc., a nationwide, hospital based,
home care management company. From 1990 to 1995,
she was the vice chairman and national director
of patient services of APM, Inc. Ms. Curran also
serves as a director of MacNeal Hospital.
Joseph F. Damico........ 44 Mr. Damico has been president and chief operating
officer of the Company since June 1996. From 1992
to September 1996, he was a corporate vice
president of Baxter International Inc.
("Baxter"). From 1979 to 1992, he held various
executive positions at Baxter Healthcare
Corporation. Mr. Damico also serves as a director
of Xillix Technologies Corp., a Canadian
corporation.
Arthur F. Golden........ 51 Since 1978, Mr. Golden has been a partner of
Davis Polk & Wardwell, a general practice law
firm. Mr. Golden joined Davis Polk & Wardwell in
1969. Davis Polk & Wardwell performs legal
services for the Company from time to time. He
also serves as a director of Borg Warner Security
Corporation.
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH NOMINEE FOR
DIRECTOR NAMED ABOVE.
DIRECTORS WHOSE TERMS OF OFFICE CONTINUE
TERMS EXPIRING AT THE ANNUAL MEETING OF STOCKHOLDERS IN 1999
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE AND OTHER INFORMATION
---- --- ----------------------------------------------
<C> <C> <S>
Kenneth D. Bloem........ 51 Since 1996, Mr. Bloem has been chief executive
officer of Georgetown University Medical Center.
From 1994 to 1996, Mr. Bloem was chief executive
officer of the Advisory Board Company, a
privately held research and publishing company.
From 1989 to 1994, he was president of Stanford
University Hospital.
David W. Grainger....... 70 Mr. Grainger was recently named senior chairman
of the board and since 1968 had served as
chairman of the board of W.W. Grainger, Inc., a
distributor of maintenance, repair and operating
equipment and supplies. He joined W.W. Grainger,
Inc. in 1952. Mr. Grainger served as a director
of Baxter from 1990 to 1996.
Lester B. Knight........ 39 Mr. Knight has been chairman of the board and
chief executive officer of the Company since June
1996. From 1992 to September 1996, he was an
executive vice president of Baxter. He was
elected a corporate vice president of Baxter in
1990. Mr. Knight served as a director of Baxter
from 1995 to 1996. Mr. Knight joined Baxter
Healthcare Corporation in 1981.
</TABLE>
2
<PAGE>
TERMS EXPIRING AT THE ANNUAL MEETING OF STOCKHOLDERS IN 2000
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
NAME AGE AND OTHER INFORMATION
---- --- ----------------------------------------------
<C> <C> <S>
Silas S. Cathcart....... 71 Mr. Cathcart is a director of General Electric
Company and The Quaker Oats Company. Mr. Cathcart
is also a trustee of Northern Funds Mutual Fund.
From 1985 to 1987, and from 1990 to 1996, Mr.
Cathcart served as a director of Baxter. From
1972 to 1986, he was chairman of the board of
Illinois Tool Works Inc. Mr. Cathcart was
chairman of the board of Kidder, Peabody Group
Inc., an investment banking firm, from 1988 to
1989, and president and chief executive officer
from 1987 to 1988.
Michael D. O'Halleran... 47 Mr. O'Halleran, president and chief operating
officer of Aon Group, Inc., the global insurance
brokerage and consulting operations of Aon
Corporation, joined Aon in 1987. Prior to joining
Aon, Mr. O'Halleran held senior operating
positions in the insurance and reinsurance
industries with such companies as Wausau
Insurance Companies, General Reinsurance and
Alexander Re.
</TABLE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
There were nine meetings of the Company's Board of Directors during the year
ended December 31, 1997. During 1997, all incumbent directors attended at
least 75% of the meetings of the Board of Directors and the committees thereof
on which they served.
The Board of Directors has two standing committees, the duties of which are
described in the Company's bylaws: the Audit and Public Policy Committee and
the Compensation and Nominating Committee.
The Audit and Public Policy Committee consists of six directors who are not
employees of the Company. The committee assists the Board of Directors in
fulfilling its responsibilities for the Company's accounting and financial
reporting practices and provides a channel for communication between the Board
of Directors and the Company's independent accountant. The committee also
assists the Board of Directors in establishing and monitoring compliance with
the ethical standards of the Company and reviews the policies and practices of
the Company to assure that they are consistent with its social
responsibilities to employees, customers, and society, including policies
relating to health and safety. In addition, the committee selects the
independent accountant of the Company and recommends to the Board of Directors
any change in the appointment of the independent accountant which the
committee deems to be in the best interests of the Company and its
stockholders. The members of the Audit and Public Policy Committee are Messrs.
O'Halleran (chairman), Bloem, Cathcart, Golden, and Grainger and Ms. Curran.
The Audit and Public Policy Committee met four times during 1997.
The Compensation and Nominating Committee consists of four directors who are
not employees of the Company. The committee determines the compensation of
officers and recommends to the Board of Directors that it ratify the
committee's determination of the compensation for the chairman of the board
and chief executive officer. It also exercises the authority of the Board of
Directors relating to the Company's employee benefit plans, including serving
as the administration committee of the Company's stock option and other stock
based plans. In addition, the committee assists and advises the Board of
Directors in connection with board membership, and board committee structure
and membership. The members of the Compensation and Nominating Committee are
Messrs. Cathcart (chairman), Bloem, and O'Halleran and Ms. Curran. Mr. Golden
served as a member of the committee until February 11, 1997. The Compensation
and Nominating Committee met four times during 1997.
3
<PAGE>
The Board of Directors will consider qualified candidates recommended by the
stockholders for designation as nominees for election as a director at the
Annual Meeting of Stockholders to be held in 1999 and subsequent years. In
order for a candidate recommended by a stockholder to be considered by the
Board of Directors for designation as a nominee for election at the Annual
Meeting of Stockholders to be held in 1999, the secretary of the Company must
receive the following information between February 6, 1999 and March 8, 1999:
(i) the name and address of such stockholder and of such candidate; (ii) a
representation that the stockholder is a holder of record of stock in the
Company and entitled to vote at the Annual Meeting of Stockholders; (iii) a
description of all arrangements or understandings between such stockholder and
such candidate and any other person or persons (naming such person or persons)
pursuant to which the nomination is being made by the stockholder; (iv) such
other information as would be required to be included in the proxy statement
filed pursuant to the proxy rules of the U.S. Securities and Exchange
Commission (the "Commission"); and (v) the consent of such nominee to serve as
a director of the Company if elected. The presiding officer of the Annual
Meeting of Stockholders will refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedures.
OWNERSHIP OF THE CAPITAL STOCK OF THE COMPANY
The following table sets forth information with respect to the number of
shares of Common Stock beneficially owned by: (i) each director of the
Company; (ii) the chairman of the board and chief executive officer, and the
four other most highly compensated executive officers of the Company named in
the table captioned "Summary Compensation Table" (the "Named Executive
Officers"); (iii) all directors and executive officers of the Company as a
group; and (iv) each stockholder known by the Company to be a beneficial owner
of more than 5% of any class of the Company's voting securities. The Company
believes that, except as otherwise noted, each individual named has sole
investment and voting power with respect to the shares of Common Stock
indicated as beneficially owned by such individual. Except as otherwise noted,
the information set forth below is reported as of March 12, 1998.
<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED (1) OWNED
- ------------------------ ------------ ------------
<S> <C> <C>
Kenneth D. Bloem (2)................................ 16,733 *
Silas S. Cathcart (2)............................... 17,988 *
Connie R. Curran (2)................................ 15,833 *
Joseph F. Damico.................................... 252,806 *
William L. Feather.................................. 64,551 *
Arthur F. Golden (2)................................ 15,833 *
David W. Grainger (2)............................... 23,621 *
Lester B. Knight.................................... 372,397 *
Peter B. McKee...................................... 135,354 *
Michael D. O'Halleran (2)........................... 15,833 *
Kathy Brittain White................................ 67,892 *
All directors and executive officers as a group (16
members)........................................... 1,310,516 2.28
FMR Corp............................................ 6,950,260(3) 12.11
Iridian Asset Management LLC........................ 3,398,800(4) 5.92
MacKay-Shields Financial Corporation................ 3,125,500(5) 5.45
</TABLE>
- --------
*Represents less than 1%
4
<PAGE>
(1) Calculated pursuant to Rule 13d-3 under the Securities Exchange Act of
1934 (the "Exchange Act"). Included in the data under "Common Stock
Beneficially Owned" are shares of Common Stock beneficially owned under
the Allegiance Corporation Retirement Plan, a qualified defined
contribution retirement plan (the "Retirement Plan") (the Retirement Plan
amounts are included as of February 28, 1998, the latest information
reasonably available). Also included are shares issuable pursuant to
options which are currently exercisable or exercisable within 60 days and
shares beneficially owned by family members of the named officer or
director or as to which voting and investment power is shared as follows:
as to Messrs. Bloem, Cathcart, Golden, Grainger, O'Halleran and Ms.
Curran, includes 15,833 shares issuable pursuant to options exercisable
within 60 days; Mr. Bloem--900 shares subject to shared voting and
investment power; Mr. Damico--120,657 shares issuable pursuant to
currently exercisable options and 366 shares subject to shared voting and
investment power; Mr. Feather--27,433 shares issuable pursuant to
currently exercisable options; Mr. Knight--192,182 shares issuable
pursuant to currently exercisable options and 6,300 shares subject to
shared voting and investment power; Mr. McKee--54,666 shares issuable
pursuant to currently exercisable options, 120 shares beneficially owned
by a child, and 3,460 shares subject to shared voting and investment
power; Ms. White--55,760 shares issuable pursuant to currently exercisable
options and 128 shares subject to shared voting and investment power. Of
the shares shown as beneficially owned by the officers and directors as a
group, 665,960 shares are issuable pursuant to options currently
exercisable or exercisable within 60 days, 13,046 shares shown as
beneficially owned by the officers and directors as a group are subject to
shared voting and investment power and 1,693 shares shown as beneficially
owned by the officers and directors as a group are beneficially owned by
family members of officers and directors. The directors and executive
officers as a group own approximately 2.28% of the outstanding Common
Stock.
(2) On May 8, 1998, each non-employee director will receive a stock option
grant to purchase 10,000 shares of Common Stock which will vest on the
last day of the term year in which the option is granted. A term year
begins on the first day following the annual meeting, or the day a person
first serves as an outside director, and ends the day of the succeeding
annual meeting.
(3) Amendment No. 1 to Schedule 13G was filed with the Commission by FMR Corp.
on February 9, 1998 and reported the beneficial ownership of 6,950,260
shares as of December 31, 1997. The address for FMR Corp. is 82 Devonshire
Street, Boston, Massachusetts 02109.
(4) Amendment No. 1 to Schedule 13G was jointly filed with the Commission on
January 28, 1998 by Iridian Asset Management LLC ("Iridian"), LC Capital
Management, LLC ("LC Capital"), CL Investors, Inc. ("CL Investors"), David
L. Cohen and Harold J. Levy. According to Amendment No. 1, Iridian, LC
Capital and CL Investors report beneficial ownership of 3,217,160 shares
of Common Stock, as to which each has sole voting and dispositive power.
David L. Cohen and Harold J. Levy, who each own 50% of the outstanding
common shares of CL Investors, report beneficial ownership of 3,398,800
shares as of December 31, 1997, as to which each has shared voting and
dispositive power, including 181,640 shares owned by First Eagle Fund of
America, Inc. The address for Iridian Asset Management LLC is 276 Post
Road West, Westport, Connecticut 06880-4704.
(5) A Schedule 13G was filed with the Commission by MacKay-Shields Financial
Corporation on February 13, 1998 which reported the beneficial ownership
of 3,125,500 shares as of December 31, 1997. The address for MacKay-
Shields Financial Corporation is 9 West 57th Street, New York, New York
10019.
5
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY OF BOARD OF DIRECTORS' COMPENSATION
Cash compensation of non-employee directors consists of a $1,000 fee for
each board and each committee meeting attended. Chairpersons of committees
receive an annual retainer of $3,000. Employee directors are not compensated
separately for their board or committee activities.
Consistent with the approach developed at the time of the Spin-Off (as
defined below), in order to align the directors' interests more closely with
the interests of all of the Company's stockholders, each non-employee director
receives an annual retainer in the form of stock options on 10,000 shares of
Common Stock. The grant price for the stock options is the fair market value
of a share of the Common Stock on the NYSE on the date of grant. The stock
options vest on the day of the annual meeting the year after they are granted,
and expire ten years from the grant date. In the event an outside director's
status as a director terminates for any reason, all outstanding option grants
will become fully exercisable.
SUMMARY OF COMPENSATION OF EXECUTIVE OFFICERS
The Company was incorporated in June 1996 as a wholly-owned subsidiary of
Baxter, and the Common Stock was distributed to the stockholders of Baxter on
September 30, 1996 (the "Spin-Off").
The following table sets forth a summary of the compensation of the Named
Executive Officers for the years ended December 31, 1996 and 1997; information
for prior years is omitted in accordance with the rules of the Commission. The
following table includes the compensation earned by the listed individuals as
employees of Baxter, in their old positions, from January 1, 1996 through
September 30, 1996 and as employees of the Company, in their new positions,
from October 1, 1996 through December 31, 1997. References to "stock options"
or "options" mean options to purchase Common Stock. The 1997 stock options
referred to in the following table, except as noted, were one-day options
granted as a part of the Allegiance Corporation Shared Investment Plan
("Shared Investment Plan"). The shares were purchased by the Named Executive
Officers at fair market value on the date of grant. The Shared Investment Plan
is further described following the table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS (3)
----------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR ($) (1) ($) (1) ($) (2) OPTIONS(#) ($) (4)
- ------------------ ---- ------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Lester B. Knight.. 1997 $450,000 $812,500 -- 125,000 $13,107
Chairman of the 1996 $420,600 $458,750 -- 576,549 $23,010
Board & Chief
Executive Officer
Joseph F. Damico.. 1997 $400,000 $500,000 -- 100,000 $11,736
President & Chief 1996 $335,169 $276,250 -- 361,972 $15,155
Operating Officer
Peter B. McKee.... 1997 $300,000 $270,000 -- 75,000 $ 9,000
Senior Vice Pres- 1996 $190,385 $550,000 -- 164,000 $ 346
ident & Chief Fi-
nancial Officer
Kathy Brittain 1997 $260,000 $210,000 -- 10,000 $ 7,800
White.............
Senior Vice 1996 $260,000 $178,125 -- 167,282 $ 4,500
President & Chief
Information
Officer
William L. Feath- 1997 $190,000 $110,000 -- 35,995 $ 5,728
er................
Senior Vice 1996 $160,165 $181,183 -- 81,308 $ 5,555
President,
Secretary &
General Counsel
</TABLE>
- --------
6
<PAGE>
(1) Amounts shown include cash compensation earned by the Named Executive
Officers during 1997, including amounts deferred at the election of those
officers. Bonuses are generally paid in the year following the year in
which they are earned.
(2) As permitted by the Commission's rules regarding disclosure of executive
compensation, this column excludes perquisites and other personal benefits
for the Named Executive Officers if their aggregate cost in 1997 did not
exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for the Named Executive Officers.
(3) All of the shares underlying the options granted to the Named Executive
Officers (with the exception of Mr. Feather) during 1997 were purchased on
the date of grant at an exercise price equal to the fair market value of
the Common Stock on the date of grant as part of the Shared Investment
Plan. Of Mr. Feather's 35,995 shares, 35,000 were purchased as part of the
Shared Investment Plan and 995 were granted to replace Baxter options
forfeited as a result of the Spin-Off.
(4) Amounts shown represent the Company's matching contributions in the
Retirement Plan and additional matching contributions in the Allegiance
Corporation Excess Benefit Plan, an unfunded non-qualified excess plan.
Those two amounts, expressed in the same order as described, are as
follows: Mr. Knight--$4,800, $8,307; Mr. Damico--$4,800, $6,936; Mr.
McKee--$4,800, $4,200; Ms. White--$4,800, $3,000 and Mr. Feather--$4,800,
$928.
SHARED INVESTMENT PLAN
On May 2, 1997, the Company implemented the Shared Investment Plan under
which the Company received approximately $54.8 million in cash from 141
members of the Company's senior management team who collectively purchased
approximately 2,400,000 shares of Common Stock. This plan more directly aligns
management and stockholder interests. Under the terms of the voluntary plan,
the participants used personal full-recourse loans to exercise one-day options
to purchase Common Stock granted on May 2, 1997 at the May 2, 1997 closing
price of $23.25 per share. The five year loans, borrowed from several
commercial banks, are the personal obligations of the participants. The
Company has agreed to guarantee repayment of the loans to the banks only in
the event of a default by a participant.
Under the terms of the Shared Investment Plan, there are several
restrictions on the sale of the purchased shares. Except in specified and
limited circumstances, including death, disability and corporate control
changes, no participant may sell any portion of the purchased shares before
the first anniversary of the exercise date (May 2, 1998). In addition, no
participant may sell any portion of the purchased shares unless all principal,
interest and prepayment fees due on the loan described above have been paid or
all sale proceeds are simultaneously applied first to the payment of such
amounts.
If any portion of the purchased shares is sold before April 3, 2000, the
participant is responsible for 100% of the loss and is entitled to receive
only 50% of the gain. If any portion of the purchased shares is sold on or
after April 3, 2000, the participant is responsible for 100% of the loss and
is entitled to receive 100% of the gain.
Under the terms of the plan, each participant is fully obligated to repay to
the banks all principal, interest, and other amounts on the loan when due and
payable. The Company may take all action relating to the participant and his
or her assets, which the Compensation and Nominating Committee deems
reasonable and necessary, to obtain full reimbursement for amounts the Company
pays to the banks pursuant to its loan guarantee.
7
<PAGE>
STOCK OPTION GRANTS
The following table contains information relating to stock option grants
made in 1997 under the Allegiance Corporation 1996 Incentive Compensation
Program ("1996 Program") to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED (#) FISCAL YEAR ($/SH) (2) DATE ($) (3)
- ---- ----------- ------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Mr. Knight...... 125,000 3.6% $23.25 05/02/97 $ 0
Mr. Damico...... 100,000 2.9% $23.25 05/02/97 $ 0
Mr. McKee....... 75,000 2.2% $23.25 05/02/97 $ 0
Ms. White....... 10,000 0.3% $23.25 05/02/97 $ 0
Mr. Feather..... 35,000 1.0% $23.25 05/02/97 $ 0
995 0.0% $25.38 01/03/07 $12,816
</TABLE>
- --------
(1) The options shown in this table, except for the options to purchase 995
shares granted to Mr. Feather, were granted as part of the Shared
Investment Plan on May 2, 1997 and expired on the date of grant. The Named
Executive Officers exercising the options granted on that day purchased
the shares at the exercise price on the date of grant, which was equal to
the fair market value of the Common Stock on that date. Consequently,
there was no value in the option grant. The Named Executive Officers paid
for the shares acquired with the proceeds of full recourse personal loans.
The loans are guaranteed by the Company only in the event of default. The
options to purchase 995 shares granted to Mr. Feather vest in three equal
installments on November 26 of 1997, 1998 and 1999. The 1996 Program
provides that if specified corporate change in control events occur, all
outstanding stock options become immediately exercisable.
(2) The exercise price shown is the closing price of the Common Stock on the
date of grant.
(3) All of the options granted on May 2, 1997 expired on the date of grant.
Consequently, there was no value in the option grant. The value shown for
Mr. Feather's 995 shares is based on the Black-Scholes option pricing
model. The material assumptions incorporated in the Black-Scholes model in
estimating the value of Mr. Feather's 995 shares include the following:
exercise price of $25.38; option term of seven years (which assumes that
the options will not be held full term); interest rate of 6.44%;
volatility of 44.85%; and dividends at the rate of $0.40 per share. The
actual value, if any, an optionee will realize upon exercise of an option
will depend upon the excess of the market value of the Common Stock over
the exercise price on the date the option is exercised. There is no
assurance the value realized by an optionee will be at or near the value
estimated by the Black-Scholes model.
8
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table summarizes option exercises which occurred during 1997
and the stock option grants outstanding on December 31, 1997 for the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING IN-THE-MONEY OPTIONS
SHARES OPTIONS AT AT FISCAL YEAR-END
ACQUIRED ON VALUE FISCAL YEAR-END (#) ($)(2)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) (1) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Mr. Knight..... 125,000 $ 0 192,183/384,366 $3,184,338/$6,368,676
Mr. Damico..... 100,000 $ 0 120,657/241,315 $2,010,154/$4,020,309
Mr. McKee...... 75,000 $ 0 54,667/109,333 $ 932,477/$1,864,953
Ms. White...... 10,000 $ 0 55,761/111,521 $ 886,215/$1,772,429
Mr. Feather.... 35,000 $ 0 27,103/ 55,200 $ 445,342/$ 900,691
</TABLE>
- --------
(1) The options exercised were granted as part of the Shared Investment Plan.
The options were granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant. The options were only
exercisable on the date of grant under a one-day option grant and
exercised the same day at fair market value, consequently no gains were
realized from the exercise.
(2) The dollar amounts in this column represent the number of exercisable and
unexercisable stock options which were "in-the-money" on December 31,
1997, multiplied by the difference between the closing price of the Common
Stock on December 31, 1997, which was $35.4375 per share, and the exercise
price of the stock options.
CHANGE IN CONTROL PLAN
The Company has adopted the Allegiance Corporation Change in Control Plan
("Change in Control Plan"). Pursuant to agreements entered into under the
Change in Control Plan, employees selected to participate (including each of
the Named Executive Officers) are entitled to separation pay and benefits
following a change in control of the Company and the employee's subsequent
termination of employment unless such termination is voluntary and unprovoked
or results from death, disability, retirement, or cause. An eligible
termination must occur within 24 months of the change in control or the
agreement entered into under the Change in Control Plan is void. Each
agreement will continue until October 1, 1999 and renew every three years from
that date unless a participant receives written notice from the Company of
termination of the agreement at least 90 days prior to the renewal date.
Under the Change in Control Plan, the separation pay equals either three
years' annualized base salary and target cash bonus ("Three Times
Compensation") or one year's annualized base salary and target cash bonus (as
has been determined by the Compensation and Nominating Committee of the Board
of Directors in its discretion depending on the employee's position) plus the
value of all deferred or unvested awards granted under the 1996 Program and
the 1998 Incentive Compensation Program, if approved by the Company's
stockholders (which Program is further described beginning on page 13).
In the event that any payments to those individuals receiving Three Times
Compensation would be subject to an excise tax under the Internal Revenue
Code, the Company will pay an additional gross-up amount for any excise tax
and federal, state, and local income taxes, such that the net amount of the
payments would be equal to the net payments after income taxes, had the excise
tax and resulting additional taxes not been imposed.
9
<PAGE>
REPORT OF THE COMPENSATION AND NOMINATING COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation and Nominating Committee of the Board of Directors (the
"Committee"), which is comprised of four independent outside directors,
establishes and administers the executive compensation programs for the
Company. In determining the appropriate compensation for the executive
officers, including the Named Executive Officers, the Committee relies on
input from leading compensation consultants and also reviews the
recommendations of management. There are no Committee interlocks and there is
no insider participation on the Committee. The Committee has provided the
following report on executive compensation for inclusion in this proxy
statement.
COMPENSATION PHILOSOPHY FOR EXECUTIVE OFFICERS
The Committee views compensation as a total package which includes annual
cash compensation of base salary and bonus, and long-term incentives. For
executive officers, including the Named Executive Officers, the total
compensation package is structured to have between 50% and 80% of compensation
at risk associated with achievement of key financial commitments and the
creation of value for stockholders. The Committee reviews executive
compensation annually to ensure that the Company and the stockholders benefit
from a total compensation structure which is consistent with competitive
practices, encourages superior leadership and management skills, motivates
management's long-term commitment to the Company, aligns the interests of
management with the interests of the stockholders, and rewards behavior which
produces the greatest results for the Company and the stockholders.
COMPENSATION ELEMENTS
The total compensation structure for executive officers, including the Named
Executive Officers, is targeted between the 50th and 75th percentile when
compared to other companies of similar size and focus. These companies are
reported in surveys whose participants include many companies in the Fortune
500, as well as other companies with which the Company and its subsidiaries
compete for executive talent. The companies used to compare compensation
include, but are not limited to, those companies included in the indices
utilized in the Comparison of Cumulative Total Return graph set forth on page
12.
Target annual cash compensation includes base salary and annual bonus. Both
salary and the target annual bonus are established for each executive officer
by comparing the responsibilities and accountabilities of each executive's
position to similar external positions, reviewing the executive's record of
value added results in key strategic and operational initiatives, the
importance of the executive's position to the Company in achieving critical
performance commitments, and the knowledge and experience of the executive.
When compared to other companies of similar size and focus, base salary is
targeted at median and annual bonus is targeted within the third quartile.
The 1997 Performance-Based Annual Incentive Plan ("1997 Incentive Plan")
provided incentive opportunities which linked financial rewards for all
domestic non-sales employees including the Named Executive Officers
(approximately 8,700 employees), to the achievement of the Company's Net
Earnings After Tax ("NEAT") and the specified free cash flow for the year. The
1997 Incentive Plan was intended to focus on all the employees and their
individual contributions and the direct impact of such contributions on the
Company's results, as well as support the Company's philosophy of sharing
goals, risks, and rewards. The Company exceeded its NEAT and free cash flow
goals and created the bonus pool as outlined in the 1997 Incentive Plan. The
actual bonus awards for participants, including the Named Executive Officers,
were determined based on a combination of the bonus pool established and the
participant's business unit's achievement of performance goals pre-determined
to be critical to the Company's overall success. The annual incentive award
that a Named Executive Officer is eligible to receive can range from zero to
two times their target award.
10
<PAGE>
Stock options are currently used as the main vehicle for driving long-term
performance. Over 2,000 employees, including the Named Executive Officers,
hold Company stock options. Stock option awards are determined at the time of
grant and are targeted to deliver long-term incentives competitive within the
third quartile of companies of similar size and focus. In 1997, the Named
Executive Officers received one-day option grants under the Shared Investment
Plan, which was implemented to encourage employee stock ownership and focus on
building value for the stockholders. The Shared Investment Plan is described
above.
The Company's philosophy with respect to the limitation on tax-deductibility
of executive compensation pursuant to Section 162(m) ("Section 162(m)") of the
Internal Revenue Code of 1986, as amended (the "Code"), is to maximize the
Company's tax deduction for compensation paid to its executives, to the extent
consistent with the Company's compensation policies and practices, and
business purposes. Section 162(m) generally disallows a deduction to publicly
traded corporations for certain compensation in excess of $1 million per year
paid to the Company's chief executive officer and the four other most highly
compensated executive officers under the proxy rules. This limitation does not
apply to certain compensation that is considered "performance-based" and that
meets certain requirements. The 1998 Incentive Compensation Program is being
submitted for stockholder approval, among other reasons, to enable certain
awards granted under this program to qualify as performance-based compensation
within the meaning of Section 162(m).
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
For purposes of determining Mr. Knight's 1998 salary and 1997 bonus award,
the Committee recognized the Company's overachievement of its NEAT and free
cash flow goals. Earnings per share grew 44%, and the Company generated
approximately $224,000,000 in free cash flow, more than twice the Company's
goal. The Committee also reviewed Mr. Knight's disciplined efforts in driving
total stockholder return. Since the Spin-Off, total stockholder return has
exceeded 140% and the Company's market capitalization has increased by over
$1,000,000,000. The Committee also took into consideration that Mr. Knight's
salary was set below the targeted median for companies of similar size and
focus in October 1996 and, based on the performance of the Company and of Mr.
Knight, his 1998 salary was increased to $500,000 to be more competitive and
he received a 1997 annual cash bonus award of $812,500 pursuant to the 1997
Incentive Plan.
Mr. Knight also reinforced his personal commitment to the Company and its
long-term success by purchasing 125,000 shares of Common Stock of the Company
through a one-day stock option grant as part of the Shared Investment Plan.
Beyond the one-day grant of options to purchase the Shared Investment Plan
shares, Mr. Knight received no stock options in 1997.
Compensation and Nominating
Committee
Silas S. Cathcart, Chairman
Kenneth D. Bloem
Connie R. Curran
Michael D. O'Halleran
11
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN
The following graph compares cumulative total stockholder return on the
Common Stock against a peer group of companies and the Standard and Poor's
MidCap 400 Index for a fifteen month period starting from the date of the
Spin-Off and ending December 31, 1997. The graph assumes $100 is invested in
the Common Stock at the opening market quotation on September 24, 1996 and in
each of the two indices at their respective closing prices on that day. It
also assumes that dividends are reinvested. The graph represents performance
over the period of time that the Company has been a publicly traded
organization and is not necessarily indicative of future price performance.
[PERFORMANCE GRAPH APPEARS HERE]
* Peer Group consists of C.R. Bard, Inc., Bergen Brunswig Corporation, Fisher
Scientific International, Inc., Maxxim Medical, Inc., McKesson Corporation,
and Owens & Minor, Inc.
<TABLE>
<CAPTION>
BASE INDEXED RETURNS
PERIOD QUARTER ENDING
--------- -----------------------------------------------------------
COMPANY / INDEX 24-SEP-96 30-SEP-96 31-DEC-96 31-MAR-97 30-JUN-97 30-SEP-97 31-DEC-97
--------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ALLEGIANCE CORP......... 100 120.00 184.83 148.70 183.82 209.79 240.49
PEER GROUP.............. 100 76.49 79.06 84.31 102.16 121.99 124.96
S&P MIDCAP 400 INDEX.... 100 100.89 107.00 105.41 120.91 140.35 141.52
</TABLE>
12
<PAGE>
PROPOSAL TO APPROVE THE ADOPTION OF THE ALLEGIANCE CORPORATION
1998 INCENTIVE COMPENSATION PROGRAM
The Board of Directors has placed on the agenda of the meeting a proposal
for the stockholders of the Company to approve the adoption of the Company's
1998 Incentive Compensation Program (the "1998 Program") which was approved
and adopted by the Board of Directors. The 1998 Program will become effective
as of February 5, 1998, subject to the approval of the Company's stockholders.
The complete text of the 1998 Program is included as Exhibit A to this proxy
statement. The following summary of the 1998 Program is qualified in its
entirety by reference to the complete text.
The 1998 Program is being submitted for stockholder approval so that, among
other reasons, certain awards granted under the 1998 Program that are intended
to qualify as "performance-based compensation" within the meaning of Section
162(m) may so qualify. Section 162(m) denies a deduction by an employer for
certain compensation in excess of $1 million per year paid by a publicly
traded corporation to the following individuals who are employed at the end of
the employer's taxable year ("Covered Employees"): the chief executive
officer, and the four most highly compensated executive officers (other than
the chief executive officer) for whom compensation disclosure is required
under the proxy rules. Certain compensation, including compensation based on
the attainment of performance goals, is excluded from this deduction limit if
certain requirements are met. One of these requirements is that the material
terms pursuant to which the compensation is to be paid be disclosed to and
approved by stockholders prior to payment. Accordingly, if the stockholders
approve the adoption of the 1998 Program and the other conditions of Section
162(m) relating to the exclusion for performance-based compensation are
satisfied, certain compensation paid to Covered Employees pursuant to the 1998
Program will not be subject to the deduction limit of Section 162(m).
GENERAL. The purpose of the 1998 Program is to increase stockholder value
and to advance the interests of the Company and its subsidiaries by providing
a variety of economic incentives ("Incentives") designed to attract, retain,
and motivate officers and other employees and by strengthening the mutuality
of interest between such employees and the Company's stockholders. All
officers and other full-time or part-time employees of the Company and its
subsidiaries (including employees who are directors of the Company) are
eligible to receive Incentives under the 1998 Program. As used in the 1998
Program, the term "subsidiary" means any business, whether or not
incorporated, in which the Company has a direct or indirect ownership
interest. As of December 31, 1997, the Company had approximately 19,800
employees worldwide.
The selection of employees who will receive Incentives under the 1998
Program is determined by the Compensation and Nominating Committee of the
Board of Directors (the "Committee") in its discretion. It is therefore not
possible to predict the benefits or amounts that will be received by or
allocated to particular individuals, groups of employees, or the Named
Executive Officers. Set forth elsewhere in this proxy statement is information
relating to outstanding options previously granted to the Named Executive
Officers under the 1996 Program.
ADMINISTRATION. The 1998 Program will be administered by the Committee which
shall consist of two or more non-employee directors within the meaning of Rule
16b-3 under the Exchange Act who also qualify as outside directors under
Section 162(m). The chief executive officer of the Company may exercise any or
all authority otherwise delegated to the Committee under the terms of the 1998
Program with respect to the grant or administration of Incentives (i) made to
or held by persons who, at the time of exercise of such authority, are not
subject to Section 16(a) of the Exchange Act, or (ii) which are not intended
to comply with Section 162(m). Participation, the grant of Incentives, and any
related performance goals intended to satisfy the requirements of Section
162(m) must be determined by the Committee.
TYPE OF AWARDS. Under the 1998 Program, the Company will have the ability to
grant Incentives to its employees and to employees of its subsidiaries, in any
one or a combination of forms including: (i) stock options; (ii) stock
appreciation rights ("SARs"); (iii) stock awards; (iv) restricted stock; (v)
performance shares; and (vi) other incentives, including cash.
13
<PAGE>
SHARES SUBJECT TO THE 1998 PROGRAM. The number of shares of Common Stock
which may be issued under the 1998 Program may not exceed 4,000,000 shares.
This represents approximately 6.97% of the outstanding shares of Common Stock
on March 16, 1998. On March 16, 1998, the price per share of Common Stock was
$38.25. The maximum number of shares of Common Stock that may be granted as
restricted stock or performance shares in any fiscal year to a participant in
the 1998 Program (a "Participant") shall be, in each case, 200,000. The
maximum number of shares of Common Stock that may be granted in total under
the 1998 Program in the form of restricted stock or performance shares shall
be, in each case, 1,000,000. The maximum number of shares that may be granted
through stock options or SARs in any fiscal year to a Participant shall be
750,000. The maximum number of shares that may be granted through a stock
award in any calendar year to a Participant shall be 5,000. These maximums and
the terms of any outstanding Incentives are subject to equitable adjustment in
the sole discretion of the Committee in certain events, including a merger,
reorganization, or stock dividend of the Company. Shares which are forfeited
by a Participant or reacquired by the Company through the exercise or
termination of any Incentive, or which are delivered by a Participant, or
retained by the Company as payment of the exercise price of a stock option, or
to satisfy tax withholding obligations shall be available again for Incentives
under the 1998 Program.
Shares available for Incentives under the 1998 Program are in addition to
shares available for incentives under the 1996 Program. Any awards previously
granted under the 1996 Program will remain outstanding pursuant to the terms
of the 1996 Program.
STOCK OPTIONS. Under the 1998 Program, the Committee may grant non-qualified
and incentive stock options to eligible employees to purchase shares of Common
Stock from the Company. Stock options may not be granted with an exercise
price less than the Fair Market Value (as defined in the 1998 Program) of the
Common Stock on the date of grant. The term of a stock option may not exceed
10 years from the date of grant. Subject to the foregoing, the 1998 Program
gives the Committee discretion, with respect to any such stock option, to
determine the number and purchase price of the shares subject to the option,
the terms of each option and the time or times during its terms when the
option becomes exercisable. Payment of the exercise price of a stock option
may be made by check, or in the discretion of the Committee, by the delivery
of Common Stock owned by the Participant that has been held by such
Participant for at least six months, or broker delivery of proceeds from the
sale of the Common Stock received upon option exercise or loan proceeds to pay
the exercise price all in accordance with Federal Reserve Board Regulation T,
if applicable, or in such other manner as the Committee in its sole discretion
shall determine. The Committee may grant dividend equivalents with any stock
option, payable in cash or shares of Common Stock and upon such conditions as
the Committee in its sole discretion deems appropriate.
STOCK APPRECIATION RIGHTS. An SAR may be granted in tandem with a stock
option granted under the 1998 Program or on a free-standing basis. Tandem SARs
may be granted either at or after the time of grant of a stock option,
provided that, in the case of an incentive stock option, a tandem SAR may be
granted only at the time of the grant of such option. The grant price of a
tandem SAR shall equal the option price of the related option. The grant price
of a free-standing SAR shall be equal to the Fair Market Value of a share of
Common Stock on the date of the grant of the SAR. Tandem SARs may be exercised
for all or part of the shares subject to the related option upon the surrender
of the right to exercise the equivalent portion of the related option. A
tandem SAR may be exercised only with respect to the shares for which its
related option is then exercisable. A tandem SAR shall terminate and no longer
be exercisable upon termination or exercise of the related stock option. Free-
standing SARs may be exercised upon such terms and conditions as the Committee
determines. Upon exercise of an SAR, the Company will pay to the employee in
cash, Common Stock, or a combination thereof, (the method of payment to be at
the discretion of the Committee), an amount of money equal to the excess
between the Fair Market Value of the Common Stock on the exercise date and the
grant
14
<PAGE>
price, multiplied by the number of SARs being exercised. The term of an SAR
granted under the 1998 Program shall be determined by the Committee; however,
the term of a tandem SAR shall not exceed the term of the related option and
the term of a free-standing SAR shall not exceed 10 years.
STOCK AWARDS. Stock awards consist of the transfer by the Company to
eligible employees of shares of Common Stock as additional compensation for
his or her services to the Company or a subsidiary of the Company. The
Committee shall designate the employees who shall be awarded stock awards
under the 1998 Program and determine the number and terms of the stock awards.
RESTRICTED STOCK. Any restricted stock granted as an Incentive shall be
subject to such restrictions as the Committee may determine, including,
without limitation, any of the following: (i) a prohibition against the sale,
assignment, transfer, pledge, hypothecation, or other encumbrance of the
shares of restricted stock for a specified period; (ii) a requirement that the
holder of shares of restricted stock forfeit (or in the case of shares sold to
a Participant, resell to the Company at his or her cost) such shares in the
event of termination of his or her employment during any period in which such
shares are subject to restrictions; (iii) a prohibition against employment of
the holder by any competitor of the Company or any of its subsidiaries or
against such holder's dissemination of any confidential information belonging
to the Company or any of its subsidiaries; or (iv) the attainment of pre-
established performance criteria.
Shares of restricted stock shall be registered in the name of the
Participant and each Participant who has been awarded shares of restricted
stock shall have such rights of a stockholder with respect to such shares as
the Committee may designate at the time of grant or award, including the right
to vote such shares and the right to receive dividends paid on such shares.
Unless otherwise provided by the Committee, stock dividends or other non-cash
dividends and any other securities distributed with respect to restricted
stock shall be subject to the same restrictions and other terms and conditions
as the restricted stock to which they are attributable. Shares of restricted
stock will be delivered free of all restrictions to the Participant (or to the
Participant's legal representative, beneficiary, or heir) when the shares are
no longer subject to forfeiture or restrictions on transfer.
PERFORMANCE SHARES. Performance shares consist of a grant by the Company to
an eligible employee of a contingent right to receive payment in the form of
shares of Common Stock upon the attainment of performance goals. Each
performance share shall entitle the Participant to payment of one share of
Common Stock upon the attainment of performance goals and other terms and
conditions specified by the Committee. Except as otherwise provided by the
Committee or pursuant to the Committee's discretion to make equitable
adjustments upon the occurrence of certain events (as described above), no
adjustment shall be made to performance shares awarded on account of cash
dividends which may be paid or other rights which may be provided to the
holders of Common Stock prior to the end of any performance period. The
Committee may, in its sole discretion, substitute cash for shares of Common
Stock otherwise required to be issued. The number of performance shares
granted, the terms and conditions thereof and the performance goals will be
determined by the Committee.
OTHER INCENTIVES. Other Incentives under the 1998 Program may consist of a
payment in cash or in stock by the Company to an eligible employee. The form,
amount, and the terms and conditions of other Incentives will be determined by
the Committee; provided, however, that the maximum dollar amount that may be
earned by any one Participant in any fiscal year for all annual cash awards
granted under the 1998 Program to such Participant shall be $2,000,000, and in
any fiscal year for all long-term cash awards granted under the 1998 Program
to such Participant shall be $5,000,000.
PERFORMANCE GOALS. Awards of restricted stock, performance shares and other
Incentives under the 1998 Program may be made subject to the attainment of
performance goals relating to one or more business criteria within the meaning
of Section 162(m), which shall include one or more of the following
15
<PAGE>
objective business criteria: stock price, sales, unit sales earnings, earnings
per share, net earnings after tax, return on equity, return on investments,
return on invested capital, pre-tax profit, post-tax profit, consolidated net
income, operating expenses, free cash flow, discounted cash flow, value added,
production, unit production volume and total stockholder return, as determined
by the Committee from time to time.
The 1998 Program is designed so that certain awards granted thereunder are
intended to comply with the requirements for "performance-based compensation"
under Section 162(m) ("Section 162(m) Awards"). With respect to such awards,
the 1998 Program shall be interpreted in a manner consistent with such
requirements. In the case of Section 162(m) Awards, the Committee shall
specify in a timely manner the performance goals and performance period for
achievement of such goals, and awards not intended as Section 162(m) Awards
shall be bifurcated from Section 162(m) Awards. Unless otherwise determined by
the Committee upon a specified termination of employment or a Change in
Control (as defined in the 1998 Program) of the Company, payment of Section
162(m) Awards shall be made only if, and to the extent that, the performance
goals are attained during the performance period and the Committee has
certified such attainment. Performance goals may include a level of
performance below which no payment may be made, and levels of performance at
which specified percentages (which may be greater than 100) of the awards
shall be paid or credited.
NONTRANSFERABILITY OF INCENTIVES. Except as otherwise provided by the
Committee, no Incentives granted under the 1998 Program may be transferred,
pledged, or assigned by the Participant except by will or the laws of descent
and distribution in the event of death, and the Company shall not be required
to recognize any attempted assignment of such rights by any Participant.
Except as otherwise provided by the Committee, during a Participant's
lifetime, awards may be exercised only by the Participant or the Participant's
guardian or legal representative. The Committee may provide that a grant of
any award may permit the transfer of the award by the Participant solely to
members of the Participant's immediate family or trusts or family partnerships
for the benefit of such persons, subject to such terms and conditions as may
be established by the Committee.
DURATION AND AMENDMENT OF THE 1998 PROGRAM. The 1998 Program shall remain in
effect until all Incentives granted under the 1998 Program have been satisfied
by the issuance of shares of Common Stock, lapse of restrictions or the
payment of cash, or have been terminated in accordance with the terms of the
1998 Program or the Incentive. No Incentive may be granted under the Program
after the tenth anniversary of its effective date. The Board of Directors may
amend, suspend, or discontinue the 1998 Program at any time; provided,
however, that no amendment, suspension, or discontinuance shall adversely
affect any outstanding benefit and if any law, agreement, or exchange on which
the Common Stock is traded requires stockholder approval for an amendment to
become effective, no such amendment shall become effective unless approved by
the requisite vote of the Company's stockholders.
WITHHOLDING. The Company has the right to withhold from any award or to
collect as a condition of any payment, any taxes required to be withheld by
law. At the Committee's discretion, a Participant may have shares withheld or
surrender previously-owned shares of Common Stock to the Company to fulfill
any tax withholding obligations.
ACCELERATION OF INCENTIVES. Pursuant to the 1998 Program, in the event of a
Change in Control of the Company, the restrictions on all outstanding shares
of restricted stock lapse immediately, all outstanding stock options will
become exercisable immediately and all performance goals shall be deemed to be
met and payment made immediately.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES. The following is a
general discussion of certain United States federal income tax consequences of
the granting, vesting, and exercise of Incentives under the 1998 Program and
the disposition of shares of Common Stock acquired under the 1998 Program.
This discussion does not address all aspects of United States
16
<PAGE>
federal income taxation that may be relevant to Participants in light of their
particular circumstances and does not address any tax consequences arising
under the laws of any state, local, or foreign jurisdiction. Furthermore, the
following discussion is based on current provisions of the Code, and
administrative and judicial interpretations as of the date hereof, all of
which are subject to change (possibly with retroactive effect).
Each Participant in the 1998 Program is urged to consult his or her own tax
adviser with respect to the United States federal income tax consequences of
the granting, vesting, and exercise of Incentives under the 1998 Program and
the disposition of shares of Common Stock acquired under the 1998 Program, as
well as any tax consequences arising under the laws of any state, local, or
other taxing jurisdiction.
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") significantly changed
the tax treatment of capital gains for individuals. Under the 1997 Tax Act,
the maximum capital gains tax rates for individuals are (i) 20% on gains from
the sales of capital assets held for more than 18 months, and (ii) 28% on
gains from sales of capital assets held for more than 12 months but not more
than 18 months. In contrast, the maximum individual ordinary income tax rate
is 39.6%.
Under existing United States federal income tax provisions, an employee who
is granted a stock option, SAR or a performance share under the 1998 Program
or who purchases or receives shares of restricted stock under the 1998 Program
will not normally realize any income, nor will the Company normally be
entitled to any deduction for federal income tax purposes in the year such
Incentive is granted. An employee who is granted a stock award under the 1998
Program will realize ordinary income in the year of the award in an amount
equal to the fair market value of the shares of Common Stock covered by the
award on the date it is made, and the Company will be entitled to a deduction
in an equal amount, subject to the application of Section 162(m). An employee
who receives a cash award will realize ordinary income in the year the award
is received, and the Company will be entitled to a corresponding deduction,
subject to the application of Section 162(m).
When a non-qualified stock option is exercised, the employee will realize
ordinary income measured by the excess of the aggregate fair market value of
shares of the Common Stock on the exercise date over the aggregate purchase
price of such shares of Common Stock, and the Company will be entitled to a
deduction (subject to the application of Section 162(m)) in the year the
option is exercised equal to the amount the employee is required to treat as
ordinary income. Assuming the shares acquired upon exercise of the option
constitute capital assets in the optionee's hand, any gain or loss, measured
by reference to the fair market value of the shares on the date of exercise,
recognized upon their ultimate disposition will be treated as capital gain or
loss to the optionee.
When a qualified incentive stock option is exercised, the employee will not
realize income. An optionee will be subject to tax only when he or she makes a
taxable sale or other taxable disposition of the stock acquired by exercise of
an incentive stock option. If at the time of such sale or disposition, the
optionee has held the shares for the required incentive stock option holding
period (two years from the date the option was granted and one year from the
date of exercise), (i) the optionee will recognize capital gain or loss if he
or she holds the shares as capital assets, such capital gain or loss measured
by the difference between the optionee's exercise price and the amount
realized from the sale or disposition; (ii) the Company will not be entitled
to a federal income tax deduction in connection with the exercise of the
option; and (iii) the excess of the fair market value of the shares at such
time over the exercise price will be taken into account in computing the
optionee's alternative minimum taxable income which may therefore subject the
optionee to alternative minimum tax.
If the optionee disposes of the shares acquired by exercise of an incentive
stock option before expiration of the incentive stock option holding period
described above, the optionee must treat as ordinary income in the year of
disposition an amount equal to the excess of (i) the fair market value of
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the shares on the exercise date, or (ii) the selling price of the shares,
whichever is less, over the amount of the option exercise price. The excess of
the selling price of such shares over their fair market value on the exercise
date will be capital gain, provided the optionee holds the shares as a capital
asset at the time of the disposition. Subject to the application of Section
162(m), the Company will be entitled to a deduction equal to the amount the
employee is required to treat as ordinary income.
In general, optionees may pay the option exercise price, in whole or in
part, by delivering previously owned shares of Common Stock. If the exercise
price of an option is paid by surrender of previously owned shares, the basis
of the shares received in replacement of the previously owned shares is
carried over. If the option is a non-qualified option, the gain recognized on
exercise is added to the basis. If the option is an incentive stock option,
the optionee will recognize gain if the shares surrendered were acquired
through the exercise of an incentive stock option (or through the Company's
employee stock purchase plan) and have not been held for the incentive stock
option holding period. This gain will be added to the basis of the shares
received in replacement of the previously owned shares.
An employee who receives an SAR must, upon exercising the SAR, recognize
ordinary income equal to the cash and the fair market value of any shares
received. Subject to the application of Section 162(m), the Company may claim
a tax deduction for the same amount in the tax year in which the SAR is
exercised.
Except as noted below, an employee is not subject to tax upon the grant of
restricted stock or performance shares. Instead, the restricted stock or
performance shares are subject to tax when they become transferable or are no
longer subject to a substantial risk of forfeiture. At that time, the employee
will recognize ordinary income equal to (i) the excess of the fair market
value of such restricted stock or performance shares over (ii) the price the
employee paid for these shares. However, within 30 days of receiving an award
of restricted stock or performance shares, an employee may elect to recognize
ordinary income as of the grant date in an amount equal to (i) the excess of
the fair market value of such restricted stock or performance shares on the
grant date over (ii) the price the employee paid for the restricted stock or
performance shares. Once the employee makes this election, he or she will not
recognize additional income at the time the stock becomes transferable or is
no longer subject to a substantial risk of forfeiture. If the employee
forfeits the shares after making this election, the employee may be able to
claim a capital loss equal to the excess of the amount he or she paid for the
shares over the amount he or she realized on the forfeiture. Subject to the
application of Section 162(m), the Company will be entitled to a deduction for
compensation paid in the same year and in the same amount as the ordinary
income realized by the employee with respect to the restricted stock and
performance shares.
Approval of the adoption of the 1998 Incentive Compensation Program will
require the affirmative vote of a majority of the shares of Common Stock
present and entitled to vote on the matter at the meeting. Accordingly,
abstentions will have the same effect as no votes, and broker non-votes
applicable to shares represented at the meeting will have no effect. The
persons named on the accompanying proxy will vote in accordance with the
choice specified thereon, or, if no choice is properly indicated, in favor of
the approval of the adoption of the 1998 Incentive Compensation Program.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE ADOPTION OF
THE 1998 INCENTIVE COMPENSATION PROGRAM.
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INDEPENDENT ACCOUNTANT
The Company's Certified Public Accountant for the year 1997 was Price
Waterhouse LLP, and such firm has been selected by the Audit and Public Policy
Committee of the Board of Directors to audit the Company's accounts for the
year 1998. Price Waterhouse LLP is expected to have a representative at the
1998 Annual Meeting of Stockholders who will be available to respond to
appropriate questions at that time and have an opportunity to make a statement
at the meeting if he or she so desires.
PROXY SOLICITATION EXPENSE
The expense of the proxy solicitation will be paid by the Company. In
addition to the solicitation of proxies by use of the mails, solicitation may
also be made by telephone, telegram, or personal interview by directors,
officers, and regular employees of the Company, none of whom will receive
additional compensation for any such solicitation. In addition, the Company
has retained Georgeson & Company Inc. to assist in the solicitation of proxies
for a fee of $11,000, plus reasonable out-of-pocket expenses. The Company
will, upon request, reimburse brokers, banks, and similar organizations for
reasonable out-of-pocket and reasonable clerical expenses incurred in
forwarding proxy materials to their principals.
FUTURE STOCKHOLDER PROPOSALS
From time to time stockholders present proposals which may be proper
subjects for inclusion in the proxy statement. To be included in the proxy
statement for the 1999 annual meeting, proposals must be received by the
Company no later than November 23, 1998.
In addition, stockholders may present proposals which are proper subjects
for consideration at an annual meeting, even if the proposal is not submitted
by the deadline for inclusion in the proxy statement. To do so, the
stockholder must comply with the procedures specified by the Company's bylaws.
The Company's bylaws require that all stockholders who intend to make
proposals at an annual stockholders meeting submit their proposals to the
Company during the period 60 to 90 days before the anniversary date of the
previous year's annual meeting. To be eligible for consideration at the 1999
annual meeting, proposals which have not been submitted by the deadline for
inclusion in the proxy statement must be received by the Company between
February 6, 1999 and March 8, 1999.
OTHER MATTERS
The Board of Directors knows of no matters to be presented at the annual
meeting other than the ones set forth in the Notice of Annual Meeting of
Stockholders. However, if any other matters do come before the meeting, it is
intended that the holders of the proxies will vote thereon in their
discretion.
By order of the Board of Directors.
/s/ William L. Feather
William L. Feather
Senior Vice President, Secretary and
General Counsel
1430 Waukegan Road
McGaw Park, Illinois
March 23, 1998
Each stockholder, whether or not he or she expects to be present in person
at the annual meeting, is requested to utilize our toll-free proxy voting
service to register his or her vote by telephone or to mark, sign, and date
the enclosed proxy card and return it promptly in the accompanying envelope.
A stockholder may revoke his or her proxy at any time prior to the closing
of the polls for voting at the meeting.
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EXHIBIT A
ALLEGIANCE CORPORATION
1998 INCENTIVE COMPENSATION PROGRAM
1. PURPOSE. The purpose of the Allegiance Corporation 1998 Incentive
Compensation Program (the "Program") is to increase stockholder value and to
advance the interests of Allegiance Corporation ("Allegiance") and its
subsidiaries (collectively, the "Company") by providing a variety of economic
incentives designed to attract, retain, and motivate officers and other
employees and by strengthening the mutuality of interest between such
employees and the Company's stockholders. As used in this Program, the term
"subsidiary" means any business, whether or not incorporated, in which the
Company has a direct or indirect ownership interest.
2. ADMINISTRATION.
2.1 ADMINISTRATION BY COMMITTEE. The Program shall be administered by the
Compensation and Nominating Committee of the Allegiance Board of Directors
(the "Committee"), which shall consist of two or more non-employee directors
within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") who also qualify as outside directors within the
meaning of Section 162(m) and the related regulations ("Section 162(m)"),
under the Internal Revenue Code of 1986 as amended (the "Code"). The Chief
Executive Officer of the Company may exercise any or all authority otherwise
delegated to the Committee under the terms of the Program with respect to the
grant or administration of incentives (a) made to or held by persons who, at
the time of the exercise of such authority, are not subject to Section 16(a)
of the Exchange Act, or (b) that are not intended to comply with Section
162(m).
2.2 AUTHORITY. Subject to the provisions of the Program, the Committee shall
have the authority to: (a) interpret the provisions of the Program, and
prescribe, amend, and rescind rules and procedures relating to the Program;
(b) grant incentives under the Program, in such forms and amounts and subject
to such terms and conditions as it deems appropriate, including, without
limitation, incentives that are made in combination with or in tandem with
other incentives (whether or not contemporaneously granted) or compensation or
in lieu of current or deferred compensation, and to determine the terms and
conditions of incentives, including the vesting and exercisability provisions
of options to purchase shares of Common Stock (as defined in Section 4.1)
("Stock Options") and stock appreciation rights ("SARs"), the restrictions on
awards of shares of Common Stock subject to restrictions ("Restricted Stock")
and the performance goals, measures and period for performance-based awards;
(c) modify the terms of, cancel and reissue, or repurchase outstanding
incentives, subject to Section 12.7; and (d) make all other determinations and
take all other actions as it deems necessary or desirable for the
administration of the Program; provided, however, that in no event shall the
Committee cancel any outstanding Stock Option for the purpose of reissuing an
option to the option holder at a lower exercise price. The determination of
the Committee on matters within its authority shall be conclusive and binding
on the Company and all other persons. The Committee shall comply with all
applicable law in administering the Program.
3. PARTICIPATION. Subject to the terms and conditions of the Program, the
Committee shall designate from time to time the employees of the Company
(including employees who are directors of Allegiance) who shall receive
incentives under the Program ("Participants"). All officers and other full-
time or part-time employees of the Company are eligible to receive incentives
under the Program. Participation, the grant of incentives and any related
performance goals that are intended to satisfy the requirements of Section
162(m), must be determined by the Committee.
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4. SHARES SUBJECT TO THE PROGRAM.
4.1 NUMBER OF SHARES RESERVED. Subject to adjustment in accordance with
Sections 4.2 and 4.3, the aggregate number of shares of Allegiance Common
Stock ("Common Stock") available for incentives under the Program shall be
four million (4,000,000) shares. All shares of Common Stock issued under the
Program may be authorized and unissued shares, treasury shares, or shares that
shall have been or may be reacquired by Allegiance in the open market, in
private transactions or otherwise. All of such shares may, but need not, be
issued pursuant to the exercise of Incentive Stock Options (as defined in
Section 5.1). The maximum number of shares of Common Stock that may be granted
in the form of Restricted Stock pursuant to an award or awards granted in any
fiscal year to a Participant shall be 200,000, subject to adjustment in
accordance with Section 4.3. The maximum number of shares of Common Stock that
may be granted in total under the Program in the form of Restricted Stock
shall be 1,000,000, subject to adjustment in accordance with Section 4.3. The
maximum number of shares of Common Stock that may be granted in the form of
performance shares ("Performance Shares") pursuant to an award or awards
granted in any fiscal year to a Participant shall be 200,000, subject to
adjustment in accordance with Section 4.3. The maximum number of shares of
Common Stock that may be granted in total under the Program in the form of
Performance Shares shall be 1,000,000, subject to adjustment in accordance
with Section 4.3. The maximum number of shares that may be granted in the form
of a Stock Option or SAR pursuant to an award or awards granted in any fiscal
year to a Participant shall be 750,000 shares, subject to adjustment in
accordance with Section 4.3.
The shares made available for incentives hereunder are in addition to the
shares made available for incentives under Allegiance's 1996 Incentive
Compensation Program.
4.2 REUSAGE OF SHARES.
(a) In the event of the exercise or termination (by reason of forfeiture,
expiration, cancellation, surrender, or otherwise) of any incentive under
the Program, that number of shares of Common Stock that was subject to the
incentive but not delivered shall be available again for incentives under
the Program.
(b) In the event that shares of Common Stock are delivered under the
Program and are thereafter forfeited or reacquired by Allegiance pursuant
to rights reserved upon the award thereof, such forfeited or reacquired
shares shall be available again for incentives under the Program.
(c) In the event that shares of Common Stock are delivered by an optionee
in full or partial payment to Allegiance for the exercise price of any
option under the Program, that number of shares of Common Stock delivered
shall be available again for incentives under the Program.
(d) In the event shares of Common Stock are retained by Allegiance
pursuant to a Participant's tax withholding election or are delivered by
the Participant to satisfy his or her tax withholding obligation, the
number of shares retained or delivered shall be available again for
incentives under the Program.
4.3 ADJUSTMENTS TO SHARES RESERVED. In the event of any merger,
consolidation, reorganization, recapitalization, spin-off, stock dividend,
stock split, exchange, or other distribution with respect to shares of Common
Stock or other change in the corporate structure or capitalization affecting
the Common Stock, the type and number of shares of stock that are or may be
subject to incentives under the Program, the maximum number of shares that may
be granted in the form of Restricted Stock, shares of Common Stock without
restrictions ("Stock Awards"), Performance Shares, a Stock Option or an SAR,
and the terms of any outstanding incentives (including the price at which
shares of stock may be issued pursuant to an outstanding incentive) shall be
equitably adjusted by the Committee, in its sole discretion, to preserve the
value of incentives awarded or to be awarded to Participants under the
Program.
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5. STOCK OPTIONS.
5.1 AWARDS. Subject to the terms and conditions of the Program, the
Committee shall designate the employees to whom Stock Options are to be
awarded under the Program and shall determine the number, type, and terms of
the Stock Options to be awarded to each of them. Each Stock Option shall
expire not later than 10 years after the date of grant. The option price per
share for any Stock Option awarded shall not be less than the Fair Market
Value (as defined in Section 12.9) of a share of Common Stock on the date the
Stock Option is granted ("Option Price"). The Committee shall designate each
Stock Option awarded under the Program as either a "nonqualified stock option"
for tax purposes or, with respect to a Stock Option that satisfies the
applicable requirements of Section 422 of the Code, as an "Incentive Stock
Option."
5.2 MANNER OF EXERCISE. A Stock Option may be exercised by notice to
Allegiance specifying the number of shares of Common Stock to be purchased and
prompt delivery to Allegiance of the payment of the Option Price by check or,
in the discretion of the Committee, by the delivery of shares of Common Stock
then owned by the Participant and having been held by such Participant for at
least six months, or certification of such ownership, or in such other manner
as the Committee, in its sole discretion, shall determine. In the discretion
of the Committee, payment may also be made by delivering a properly executed
exercise notice to Allegiance, together with a copy of irrevocable
instructions to a broker to deliver promptly to Allegiance the amount of sale
of the Common Stock received upon option exercise or loan proceeds to pay the
exercise price, all in accordance with Federal Reserve Board Regulation T, if
applicable.
5.3 DIVIDEND EQUIVALENTS. The Committee may grant dividend equivalents in
connection with any option granted under this Program. Such dividend
equivalents may be payable in cash or in shares of Common Stock upon such
terms and Conditions as the Committee in its sole discretion deems
appropriate.
6. STOCK APPRECIATION RIGHTS.
6.1 GRANT OF SARS. Subject to the terms and conditions of the Program, the
Committee shall designate the employees to whom SARs are to be awarded under
the Program and shall determine the number, type and terms of the SARs to be
awarded to each of them. An SAR may be granted in tandem with a stock option
granted under the Program, or the SAR may be granted on a free-standing basis.
Tandem SARs may be granted either at or after the time of grant of a Stock
Option, provided that, in the case of an Incentive Stock Option, a tandem SAR
may be granted only at the time of the grant of such option. The grant price
of a free-standing SAR shall be equal to the Fair Market Value of a share of
Common Stock on the date of grant of the SAR.
6.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part of
the shares subject to the related option upon the surrender of the right to
exercise the equivalent portion of the related option. A tandem SAR shall
terminate and no longer be exercisable upon termination or exercise of the
related Stock Option. A tandem SAR may be exercised only with respect to the
shares for which its related option is then exercisable.
6.3 EXERCISE OF FREE-STANDING SARS. Free-standing SARs may be exercised upon
such terms and conditions as the Committee, in its sole discretion,
determines.
6.4 TERM OF SARS. The term of an SAR granted under the Program shall be
determined by the Committee in its sole discretion; provided, however, that
such term shall not exceed the option term in the case of a tandem SAR, or ten
years in the case of a free-standing SAR.
6.5 PAYMENT OF SAR AMOUNT. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from Allegiance in an amount determined by
multiplying (a) the excess of the Fair Market
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Value of a share of Common Stock on the date of exercise over the grant price
of the SAR by (b) the number of shares with respect to which the SAR is
exercised.
At the discretion of the Committee, the payment to be made upon an SAR
exercise may be in cash, in shares of Common Stock of equivalent value, or in
some combination thereof.
7. STOCK AWARDS. Subject to the terms and conditions of the Program, the
Committee shall designate the employees who shall be awarded Stock Awards
under the Program and shall determine the number and terms of the Stock Awards
to be awarded to each of them. No person eligible to receive a Stock Award may
receive a Stock Award representing more than 5,000 shares of Common Stock in
any calendar year, subject to adjustment in accordance with Section 4.3.
8. RESTRICTED STOCK.
8.1 AWARDS. Subject to the terms and conditions of the Program, the
Committee shall designate the employees to whom Restricted Stock shall be
awarded or sold under the Program and determine the number of shares and the
terms and conditions of each such award.
8.2 RESTRICTIONS. All shares of Restricted Stock shall be subject to such
restrictions as the Committee may determine, including, without limitation,
any of the following:
(a) a prohibition against the sale, assignment, transfer, pledge,
hypothecation, or other encumbrance of the shares of Restricted Stock for a
specified period;
(b) a requirement that the holder of shares of Restricted Stock forfeit
(or in the case of shares sold to a Participant, resell to Allegiance at
his or her cost) such shares in the event of termination of his or her
employment during any period in which such shares are subject to
restrictions;
(c) a prohibition against employment of the holder by any competitor of
the Company or against such holder's dissemination of any confidential
information belonging to the Company; or
(d) the attainment of pre-established performance criteria.
All restrictions shall expire at such time as the Committee shall specify.
8.3 STOCKHOLDER RIGHTS. Shares of Restricted Stock shall be registered in
the name of the Participant. Each Participant who has been awarded shares of
Restricted Stock shall have such rights of a stockholder with respect to such
shares as the Committee may designate at the time of the award, including the
right to vote such shares and the right to receive dividends paid on such
shares. Unless otherwise provided by the Committee, stock dividends or other
non-cash dividends and any other securities distributed with respect to
Restricted Stock shall be subject to the same restrictions and other terms and
conditions as the Restricted Stock to which they are attributable.
8.4 LAPSE OF RESTRICTIONS. Shares of Restricted Stock will be delivered free
of all restrictions to the Participant (or to the Participant's legal
representative, beneficiary, or heir) when the shares are no longer subject to
forfeiture or restrictions on transfer.
9. PERFORMANCE SHARES.
9.1 AWARDS. Subject to the terms and conditions of the Program, the
Committee shall designate the employees to whom Performance Shares are to be
awarded and determine the number of shares and the terms and conditions of
each such award. Each Performance Share shall entitle the Participant to a
payment in the form of one share of Common Stock upon the attainment of
performance goals and other terms and conditions specified by the Committee.
9.2 NO ADJUSTMENTS. Except as otherwise provided by the Committee or in
Section 4.3, no adjustment shall be made in Performance Shares awarded on
account of cash dividends which may
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be paid or other rights which may be provided to the holders of Common Stock
prior to the end of any performance period.
9.3 SUBSTITUTION OF CASH. The Committee may, in its sole discretion,
substitute cash equal to the Fair Market Value (determined as of the date of
the issuance) of shares of Common Stock otherwise required to be issued to a
Participant hereunder.
10. OTHER INCENTIVES. In addition to the incentives described in Sections 5
through 9 above and subject to the terms and conditions of the Program, the
Committee may grant other incentives ("Other Incentives"), payable in cash or
in Common Stock, under the Program as it determines to be in the best interest
of the Company. Other Incentives may be in the form of annual awards, long-
term awards, or such other form of award as the Committee may, in its sole
discretion determine. The maximum dollar amount that may be earned by any one
Participant in any fiscal year for all annual cash awards granted under the
Program to such Participant shall be $2,000,000. The maximum dollar amount
that may be earned by any one Participant in any fiscal year for all long-term
cash awards granted under the Program to such Participant shall be $5,000,000.
11. PERFORMANCE GOALS. Awards of Restricted Stock, Performance Shares and
Other Incentives under the Program may be made subject to the attainment of
performance goals relating to one or more business criteria within the meaning
of Section 162(m), which shall include one or more of the following objective
business criteria: stock price, sales, unit sales earnings, earnings per
share, net earnings after tax, return on equity, return on investments, return
on invested capital, pre-tax profit, post-tax profit, consolidated net income,
operating expenses, free cash flow, discounted cash flow, value added,
production, unit production volume and total stockholder return, as determined
by the Committee from time to time.
The Program is designed so that certain awards granted thereunder are
intended to comply with the requirements for "performance-based compensation"
under Section 162(m). Insofar as may be applicable to such awards, the Program
shall be interpreted in a manner consistent with such requirements. With
respect to awards intended to comply with Section 162(m), the Committee shall
specify in a timely manner the performance goals with respect thereto, and the
performance period during which such performance goals are to be achieved. The
performance goals must be based on the objective business criteria described
in the foregoing paragraph. Any award that is not intended to satisfy Section
162(m) shall be bifurcated from awards that are so intended. Unless otherwise
determined by the Committee in connection with either a specified termination
of employment or the occurrence of a Change in Control (as defined in Section
12.8), payment with respect to awards that are intended to satisfy Section
162(m) shall be made only if, and to the extent that, the performance goals
with respect to the performance period are attained, and only after the
Committee has certified that the performance goals have been attained.
Performance goals may include a level of performance below which no payment
may be made, and levels of performance at which specified percentages (which
may be greater than 100) of the awards shall be paid or credited.
12. GENERAL.
12.1 EFFECTIVE DATE. The Program, which was adopted by the Allegiance Board
of Directors, shall be subject to the approval by a majority of the Allegiance
stockholders present and voting on the matter at the 1998 annual stockholders'
meeting. Upon approval of the stockholders, the effective date of the Program
shall be February 5, 1998.
12.2 DURATION. The Program shall remain in effect until all incentives
granted under the Program have been satisfied by the issuance of shares of
Common Stock, lapse of restrictions or the payment of cash, or have been
terminated in accordance with the terms of the Program or the incentive. No
incentive may be granted under the Program after the tenth anniversary of its
effective date.
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12.3 NONTRANSFERABILITY OF INCENTIVES. Except as otherwise provided by the
Committee, no incentive granted under the Program may be transferred, pledged,
or assigned by the employee except by will or the laws of descent and
distribution in the event of death, and Allegiance shall not be required to
recognize any attempted assignment of such rights by any Participant. Except
as otherwise provided by the Committee, during a Participant's lifetime,
awards may be exercised only by the Participant or by the Participant's
guardian or legal representative. The Committee may provide that a grant of an
award may permit the transfer of the award by the Participant solely to
members of the Participant's immediate family or trusts or family partnerships
for the benefit of such persons, subject to such terms and conditions as may
be established by the Committee.
12.4 COMPLIANCE WITH APPLICABLE LAW AND WITHHOLDING.
(a) The award of any benefit under the Program may also be made subject
to such other provisions as the Committee determines appropriate,
including, without limitation, provisions to comply with federal and state
securities laws or stock exchange requirements.
(b) If, at any time, Allegiance, in its sole discretion, determines that
the listing, registration, or qualification of any type of incentive, or
the shares of Common Stock issuable pursuant thereto, is necessary on any
securities exchange or under any federal or state securities or blue sky
law, or that the consent or approval of any governmental regulatory body is
necessary or desirable, the issuance of shares of Common Stock pursuant to
any incentive, or the removal of any restrictions imposed on shares subject
to an incentive, may be delayed until such listing, registration,
qualification, consent, or approval is effected.
(c) Allegiance shall have the right to withhold from any award under the
Program or to collect as a condition of any payment under the Program, as
applicable, any taxes required by law to be withheld. To the extent
permitted by the Committee, a Participant may elect to have any
distribution, or a portion thereof, otherwise required to be made under the
Program to be withheld or to surrender to Allegiance previously owned
shares of Common Stock to fulfill any tax withholding obligation.
12.5 NO CONTINUED EMPLOYMENT. Participation in the Program will not give any
Participant the right to be retained in the employ of the Company or any right
or claim to any benefit under the Program unless such right or claim has
specifically accrued under the terms of any incentive under the Program.
12.6 TREATMENT AS A STOCKHOLDER. No incentive granted to a Participant under
the Program shall create any rights in such Participant as a stockholder of
the Company until shares of Common Stock related to the incentive are
registered in the name of the Participant.
12.7 AMENDMENT OR DISCONTINUATION OF THE PROGRAM. The Board of Directors may
amend, suspend, or discontinue the Program at any time; provided, however,
that no amendment, suspension or discontinuance shall adversely affect any
outstanding benefit and if any law, agreement or exchange on which Common
Stock of Allegiance is traded requires stockholder approval for an amendment
to become effective, no such amendment shall become effective unless approved
by requisite vote of Allegiance's stockholders.
12.8 ACCELERATION OF INCENTIVES. Notwithstanding any provision in this
Program to the contrary or the normal terms of vesting in any incentive, (a)
the restrictions on all shares of Restricted Stock shall lapse immediately,
(b) all outstanding Stock Options will become exercisable immediately, and (c)
all performance goals shall be deemed to be met and payment made immediately
if a Change in Control occurs. For purposes of this Program, a "Change in
Control" shall have occurred if:
(1) any "Person," as such term is used in Section 13(d) and 14(d) of the
Exchange Act (other than Allegiance, any corporation owned, directly or
indirectly, by the stockholders of Allegiance in
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substantially the same proportions as their ownership of stock of
Allegiance, and any trustee or other fiduciary, holding securities under an
employee benefit plan of Allegiance or such proportionately owned
corporation), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
Allegiance representing 20% or more of the combined voting power of
Allegiance's then outstanding securities;
(2) during any period of not more than 24 months, individuals who at the
beginning of such period constitute the Board of Directors of Allegiance,
and any new director (other than a director designated by a Person who has
entered into an agreement with Allegiance to effect a transaction described
in paragraph (1), (3), or (4) of this Section 12.8) whose election by the
Board of Directors or nomination for election by Allegiance's stockholders
was approved by a vote of at least two-thirds of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(3) the stockholders of Allegiance approve a merger or consolidation of
Allegiance with any other corporation, other than (A) a merger or
consolidation which would result in the holders of the voting securities of
Allegiance outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 60% of the combined voting
power of the voting securities of Allegiance or such surviving entity
outstanding immediately after such merger or consolidation, or (B) a merger
or consolidation effected to implement a recapitalization of Allegiance (or
similar transaction) in which no Person acquires more than 20% of the
combined voting power of Allegiance's then outstanding securities; or
(4) the stockholders of Allegiance approve a plan of complete liquidation
of Allegiance or an agreement for the sale or disposition by Allegiance of
all or substantially all of its assets (or any transaction having a similar
effect).
The Committee may also determine, in its discretion, that a sale of a
substantial portion of Allegiance's assets or one of its businesses
constitutes a "Change in Control" with respect to incentives held by
Participants employed in the affected operation.
12.9 DEFINITION OF FAIR MARKET VALUE. Except as otherwise determined by the
Committee, the Fair Market Value of a share of Common Stock as of any date
shall be equal to the closing sale price of a share of Common Stock on that
date as reported on the New York Stock Exchange Composite Reporting Tape.
12.10. SEVERABILITY. Whenever possible, each provision in the Program and in
every award at any time granted under the Program shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of the Program or any award at any time granted under the Program shall be
held to be prohibited by or invalid under applicable law, then (a) such
provision shall be deemed amended to accomplish the objectives of the
provision as originally written to the fullest extent permitted by law, and
(b) all other provisions and every award at any time granted under the Program
shall remain in full force and effect.
12.11 NO STRICT CONSTRUCTION. No rule of strict construction shall be
applied against the Company, the Board of Directors, the Committee, or any
other person in the interpretation of any of the terms of the Program, any
award granted under the Program or any rule or procedure established by the
Board of Directors or the Committee.
12.12 GOVERNING LAW. The Program and all determinations made and actions
taken pursuant hereto shall be governed by the laws of the State of Delaware
without giving effect to the conflict of laws principles thereof.
A-7
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LOGO
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PROXY
[ALLEGIANCE LOGO]
Allegiance Corporation
1430 Waukegan Road
McGaw Park, Illinois 60085
(847) 689-8410
ALLEGIANCE CORPORATION
Proxy Solicited on Behalf of the Board of Directors of
Allegiance Corporation for the Annual Meeting of
Stockholders on May 7, 1998
The undersigned hereby appoint(s) Lester B. Knight, Kenneth D. Bloem and Michael
D. O'Halleran and each of them, as proxyholders, with the powers the undersigned
would possess if personally present at the May 7, 1998 Annual Meeting of
Stockholders. The proxyholders are granted full power of substitution to vote
all shares of common stock of Allegiance Corporation that the undersigned is
entitled to vote at the meeting, and at any adjournment thereof, upon all
subjects that may properly be presented at the meeting, including the matters
described in the proxy statement, subject to any direction indicated on the
reverse side of this card.
Election of Directors. Change of Address:
Nominees:
-------------------------------------------
1. Connie R. Curran -------------------------------------------
2. Joseph F. Damico -------------------------------------------
3. Arthur F. Golden -------------------------------------------
(If you have written in the above space,
please mark the corresponding box on the
reverse side of this card.)
. FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL .
Allegiance Corporation
1998 Annual Meeting of Stockholders
------------------------
ADMITTANCE TICKET
------------------------
Allegiance Corporation
1450 Waukegan Road
Brien Laing Building
McGaw Park, Illinois 60085
Thursday, May 7, 1998
10:30 a.m.
IMPORTANT: If you plan to attend the meeting, please check the box on the
reverse side or indicate your intent when you vote by telephone. You must show
this admittance ticket at the gate before entering the Allegiance campus and at
the registration desk on the day of the meeting.
DIRECTIONS: Allegiance Corporation is located between the Tri-State Tollway
(I-294/I-94) and Route 41, just south of Route 120 (Belvidere Road) and north of
Route 137 (Buckley Road), on the west side of Route 43 (Waukegan Road). After
passing through the Allegiance campus gate house, follow the signs to parking.
[INSERT MAP]
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<CAPTION>
Please mark your 8937
[X] votes as in this
example.
This proxy when properly executed will be voted in the manner directed below. If no
direction is made, this proxy will be voted FOR the election of directors and FOR proposal 2.
- ------------------------------------------------------------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR proposals 1 and 2.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of 2. To approve the adoption of the 1998
Directors [_] [_] Incentive Compensation Program [_] [_] [_]
(see reverse)
3. To transact such other business as may properly be presented at
For, except vote withheld from the following nominee(s): the meeting.
- --------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Mark this box if you
are reporting a
change of address.
Mark this box
if you will attend the
Annual Meeting.
NOTE: Please sign exactly as name appears hereon. Joint
owners should both sign. When signing as attorney,
executor, administrator, trustee or guardian, please
give full title as such.
___________________________________________________________
The signer hereby revokes all proxies heretofore given by the
signer to vote at said meeting or any adjournments thereof. ___________________________________________________________
SIGNATURE(S) DATE
.FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL.
Allegiance Corporation
Toll-Free Voting
Allegiance Corporation encourages you to take advantage of a new and convenient way
of voting your shares on matters to be covered at the 1998 Annual Meeting of Stockholders.
Voting your shares electronically through the telephone will eliminate the need to return
this proxy card.
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week, toll-free at
1-800-OK2-VOTE (1-800-652-8683). Have your proxy card (above) in hand when you call.
Please enter the control number which is located in the box above (just below the
perforation) and follow the voice instructions on how to vote.
Your electronic vote authorizes the named proxies to vote in the same manner as if you
marked, signed, dated and returned the proxy card.
If you choose to vote your shares electronically, please do not mail back this proxy card.
Your vote is important. Thank you for voting.
</TABLE>
