<PAGE> 1
UNITED STATES
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 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
</TABLE>
AZURIX CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE> 2
[AZURIX LOGO]
AZURIX CORP.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 13, 2000
TO OUR SHAREHOLDERS:
Notice is hereby given that the 2000 Annual Meeting of Shareholders of
Azurix Corp. will be held in the LaSalle Ballroom of the Doubletree Hotel at
Allen Center, 400 Dallas Street, Houston, Texas, at 10:00 a.m. Houston time on
Tuesday, June 13, 2000, for the following purposes:
1. To elect two directors to a term of office expiring at the annual
meeting of shareholders in 2003 and until their respective successors are
duly elected and qualified;
2. To consider and vote upon a proposal to approve and adopt the
Azurix Corp. 1999 Stock Plan in order to qualify grants under the plan as
performance-based compensation;
3. To ratify the appointment of Arthur Andersen LLP, independent
public accountants, as Azurix's auditors for the year ending December 31,
2000; and
4. To transact such other business as may properly be brought before
the meeting or any adjournment(s) thereof.
Holders of record of Azurix common stock at the close of business on April
17, 2000, will be entitled to notice of and to vote at the meeting or any
adjournment(s) thereof.
Whether or not you plan to attend the meeting, you are requested to sign
and return the enclosed proxy, for which a postage-paid, return envelope is
enclosed. The proxy must be signed and returned in order to be counted.
By Order of the Board of Directors,
PEGGY B. MENCHACA
Vice President and Secretary
Houston, Texas
May 1, 2000
<PAGE> 3
[AZURIX LOGO]
AZURIX CORP.
PROXY STATEMENT
This proxy statement and the accompanying form of proxy are being furnished
to the shareholders of Azurix Corp. ("Azurix") in connection with a solicitation
of proxies by the Board of Directors of Azurix to be used at the 2000 Annual
Meeting of Shareholders to be held in the LaSalle Ballroom of the Doubletree
Hotel at Allen Center, 400 Dallas Street, Houston, Texas, at 10:00 a.m. Houston
time on Tuesday, June 13, 2000. The mailing address of the principal executive
offices of Azurix is 333 Clay Street, Suite 1000, Houston, Texas 77002-7369.
This proxy statement and the related proxy are being first sent or given to
shareholders on or about May 1, 2000.
All shares represented by a properly executed proxy in the accompanying
form received in time for the meeting, and not revoked, will be voted. Unless
the shareholder otherwise specifies therein, such shares will be voted by the
persons named as proxy holders:
FOR the election of the two nominees for director named in this proxy
statement;
FOR approval of the Azurix Corp. 1999 Stock Plan; and
FOR ratification of the appointment of Arthur Andersen LLP as Azurix's
auditors for the year ending December 31, 2000.
Any shareholder giving a proxy may revoke it at any time provided written
notice of such revocation is received by Azurix's Corporate Secretary before
such proxy is voted; otherwise, if received in time, properly completed proxies
will be voted at the meeting in accordance with the instructions specified
thereon. Shareholders attending the meeting may revoke their proxies and vote in
person.
RECORD DATE AND VOTING AT THE MEETING
Holders of record at the close of business on April 17, 2000, the record
date, of Azurix's common stock (the "Common Stock") will be entitled to one vote
per share on all matters submitted to the meeting. At the close of business on
the record date, there were issued and outstanding 117,149,885 shares of Common
Stock entitled to vote. The holders of a majority of the shares entitled to
vote, whether present or represented by proxy, will constitute a quorum for the
transaction of business at the meeting. There are no other voting securities
outstanding.
Directors will be elected by a plurality of the votes cast at the meeting.
This means the two management nominees will be elected if they receive more
affirmative votes than any other nominees. A shareholder entitled to vote for
the election of directors can withhold authority to vote for all nominees for
director or can withhold authority to vote for certain nominees for director.
Only votes cast for a nominee will be counted, except that the accompanying
proxy will be voted for the two management nominees unless the proxy contains
instructions to the contrary. Abstentions and broker nonvotes will not be
counted and will have no effect on the outcome of the vote for directors. A
broker nonvote occurs when a broker submits a proxy that does not indicate a
vote for some of the proposals because the beneficially owners have not
instructed the broker on how to vote on such proposals and the broker does not
have discretionary authority to vote in the absence of instructions.
Approval of the Azurix Corp. 1999 Stock Plan and ratification of Arthur
Andersen LLP as Azurix's auditors for the year ending December 31, 2000 each
require the affirmative vote of the holders of a majority of the shares of
Common Stock present in person or by proxy and entitled to vote at the meeting.
For these
<PAGE> 4
proposals, an abstention will have the same legal effect as a vote against the
proposal. Broker nonvotes will not be counted as a vote for or against these
proposals.
ANNUAL REPORT
Azurix's annual report to shareholders for the year ended December 31,
1999, including financial statements, is being mailed herewith to all
shareholders entitled to vote at the annual meeting. The annual report does not
constitute a part of the proxy soliciting material.
ITEM 1.
ELECTION OF DIRECTORS
In accordance with Azurix's Restated Certificate of Incorporation, the
Board of Directors is divided into three classes, each of which serves for a
three-year term. Two directors are to be elected at the meeting. John H. Duncan
and Joseph W. Sutton are being nominated to serve until the annual meeting of
shareholders to be held in 2003 and until their respective successors have been
duly elected and qualified. Each of the nominees currently serves as a director
of Azurix. Although the Board of Directors does not expect either of the
nominees to become unable to serve, if such a situation should occur before the
meeting, it is expected that either (a) the persons named in the proxy will vote
for another nominee designated by the Board of Directors, or (b) the authorized
number of directors will be reduced accordingly. Proxies cannot be voted for a
greater number of persons than the number of nominees named on the enclosed form
of proxy. Shareholders may not cumulate their votes in the election of
directors.
The following information regarding the nominees for director and the other
directors, their principal occupations, employment history and directorships in
certain companies is as reported by the respective nominees and other directors.
Nominees for director for three-year terms ending in 2003:
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THESE NOMINEES.
<TABLE>
<S> <C>
JOHN H. DUNCAN Director since March 1999
PRIVATE INVESTOR Age 72
</TABLE>
Mr. Duncan's principal occupation has been investments since 1990. Mr.
Duncan is also a director of Enron Corp., EOTT Energy Corp. (the
general partner of EOTT Energy Partners, L.P.) and Group I Automotive
Inc.
<TABLE>
<S> <C>
JOSEPH W. SUTTON Director since March 1999
VICE CHAIRMAN, ENRON CORP. Age 52
</TABLE>
Mr. Sutton is Vice Chairman of Enron Corp. Mr. Sutton served as
President of Enron International, Inc. from January 1996 to July 1999,
and as its Chief Executive Officer from May 1998 to July 1999. From
January 1996 to May 1998, he also served as Enron International's Chief
Operating Officer. From 1995 to January 1996, Mr. Sutton served as
President and Chief Operating Officer and from 1992 to 1995 was a Vice
President of Enron Development Corp. Before joining Enron Development
Corp., Mr. Sutton served as a career officer in the U.S. Army.
Directors continuing in office until 2001:
<TABLE>
<S> <C>
JEFFREY K. SKILLING Director since November 1998
PRESIDENT AND CHIEF OPERATING OFFICER, ENRON CORP. Age 46
</TABLE>
Mr. Skilling has served as President and Chief Operating Officer of
Enron since January 1997. From January 1991 until December 1996, he
served as Chairman and Chief Executive Officer of Enron
2
<PAGE> 5
North America Corp. and its predecessor companies. Mr. Skilling is also
a director of Enron Corp. and the Houston Branch of the Federal Bank of
Dallas.
<TABLE>
<S> <C>
JOHN WAKEHAM Director since March 1999
FORMER U.K. SECRETARY OF STATE FOR ENERGY AND LEADER OF Age 67
THE HOUSES OF LORDS AND COMMONS
</TABLE>
Lord Wakeham is a retired former U.K. Secretary of State for Energy and
Leader of the Houses of Commons and Lords. He served as a Member of
Parliament from 1974 until his retirement from the House of Commons in
April 1992. Prior to his government service, Lord Wakeham managed a
large private practice as a chartered accountant. In the United
Kingdom, he is currently Chairman of the Press Complaints Commission
and Chairman or Director of a number of publicly traded U.K. companies.
Lord Wakeham is also a director of Enron Corp.
Directors continuing in office until 2002:
<TABLE>
<S> <C>
KENNETH L. LAY Director since November 1998
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, Age 58
ENRON CORP.
</TABLE>
Mr. Lay has been Chairman of the Board and Chief Executive Officer of
Enron Corp. for over five years. Mr. Lay is also a Director of Eli
Lilly and Company, Compaq Computer Corporation, EOTT Energy Corp. (the
general partner of EOTT Energy Partners, L.P.), Questia Media, Inc. and
Trust Company of the West.
<TABLE>
<S> <C>
REBECCA P. MARK Director since July 1998
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Age 45
</TABLE>
Ms. Mark has served as Chairman and Chief Executive Officer of Azurix
since July 1998. She served as Vice Chairman of Enron from May 1998 to
July 1999, as Chairman of Enron International Inc. from January 1996 to
July 1998, as Chairman and Chief Executive Officer of Enron Development
Corp. from July 1991 to July 1998 and Chairman of Enron Development
Corp. from July 1991 to January 1999. She was also Chief Executive
Officer of Enron International Inc. from January 1996 to May 1998 and
Vice President and Chief Development Officer of Enron Power Corp. from
July 1990 to July 1991. Enron International Inc., Enron Development
Corp. and Enron Power Corp. are wholly owned subsidiaries of Enron. Ms.
Mark is also a director of Enron Corp. and is a member of the Council
on Foreign Relations and The Chase Manhattan Corp. National Advisory
Board.
<TABLE>
<S> <C>
HERBERT S. WINOKUR, JR. Director since April 1999
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, Age 56
CAPRICORN HOLDINGS, INC.
</TABLE>
Mr. Winokur is Chairman and Chief Executive Officer of Capricorn
Holdings, Inc., a private investment company, and Managing General
Partner of Capricorn Investors, L.P., Capricorn Investors II, L.P. and
Capricorn Investors III, L.P., private investment partnerships
concentrating on investments in restructure situations, organized by
Mr. Winokur in 1987, 1994 and 1999, respectively. Prior to his current
appointment, Mr. Winokur was Senior Executive Vice President and a
director of Penn Central Corporation. Mr. Winokur is also a director of
Enron Corp., The WMF Group, Ltd., Mrs. Fields' Holding Company, Inc.,
CCC Information Services Group, Inc. and DynCorp.
3
<PAGE> 6
COMMITTEES OF THE BOARD AND MEETINGS
The Board of Directors has established an Executive Committee, an Audit and
Finance Committee, a Corporate Governance Committee and a Human Resources and
Compensation Committee. The Board of Directors held three regularly scheduled
meetings and two special meetings during the year ended December 31, 1999.
During 1999, each director attended at least 75% of the total number of meetings
of the Board of Directors and of the committees on which he or she serves.
Executive Committee. The Executive Committee possesses all of the powers of
the Board of Directors except where restricted by Azurix's bylaws or by
applicable law. During the year ended December 31, 1999, the Executive Committee
met two times. The Executive Committee is currently composed of Messrs. Lay
(Chairman) and Winokur and Ms. Mark.
Audit and Finance Committee. The Audit and Finance Committee reviews and
reports to the Board of Directors with respect to the selection, retention,
termination and terms of engagement of the independent public accountants, and
maintains communications among the Board of Directors, the independent public
accountants and Azurix's internal accounting staff with respect to accounting
and audit procedures. The Audit and Finance Committee also reviews, with
management and the independent auditors, Azurix's annual financial statements,
the adequacy of its internal accounting and control procedures and policies and
related matters. This committee periodically reviews the results of capital
expenditures and investments previously approved by the Board of Directors to
assess how the actual results compare with the original projections. This
committee may review other financial matters when requested by the Board of
Directors or by management. During the year ended December 31, 1999, the Audit
and Finance Committee met two times. The Audit and Finance Committee is
currently composed of Messrs. Winokur (Chairman) and Duncan.
Corporate Governance Committee. The Corporate Governance Committee
coordinates the functioning of the Board of Directors, including assessing the
membership of the Board of Directors and reviewing its processes and procedures.
This committee reviews on a periodic basis with the Chief Executive Officer
Azurix's organizational structure and corporate governance mechanisms. During
the year ended December 31, 1999, the Corporate Governance Committee met two
times. The Corporate Governance Committee is currently composed of Lord Wakeham
(Chairman) and Messrs. Lay and Sutton.
Human Resources and Compensation Committee. The Human Resources and
Compensation Committee's responsibility is to assure that senior executives of
Azurix and its wholly owned subsidiaries and members of the Board of Directors
are compensated effectively in a manner consistent with Azurix's stated
compensation strategy, internal equity considerations, competitive practices and
within the requirements of the appropriate regulatory bodies. This committee
reviews with the Chief Executive Officer matters relating to management
development and management succession. The committee also administers the Azurix
stock plan and reviews employee benefit programs and approves changes, where
appropriate. During the year ended December 31, 1999, the Human Resources and
Compensation Committee met three times. The Human Resources and Compensation
Committee is currently composed of Messrs. Duncan (Chairman) and Winokur.
CORPORATE GOVERNANCE GUIDELINES
On August 9, 1999, the Board of Directors adopted the Corporate Governance
Guidelines of the Board of Directors of Azurix. The Corporate Governance
Guidelines set forth procedures and guidelines to assist the Board of Directors
in discharging its responsibilities to Azurix and its shareholders. The
Corporate Governance Guidelines impose the following obligations on the Board of
Directors: (i) approval of requirement of legal and ethical conduct by Azurix,
its officers and employees and (ii) approval of Azurix's corporate strategy and
major management initiatives including general oversight of Azurix's business.
In addition, the Corporate Governance Guidelines set forth guidelines for
selection, compensation and evaluation of the Board of Directors and senior
executives of Azurix and require a succession plan with respect to senior
executives.
4
<PAGE> 7
DIRECTORS' COMPENSATION
On the date of Azurix's initial public offering, each nonemployee director
of Azurix received a grant of options to purchase 12,000 shares of Common Stock.
Each nonemployee director who served as chairman of a committee received an
additional 1,500 options. These grants were made under the Azurix Corp. 1999
Stock Plan at an exercise price of $19.00 per share, the initial public offering
price to shareholders. The number of options granted was determined using a
Black-Scholes equivalent theoretical stock option value and are exercisable for
10 years. Nonemployee director's compensation (annual service and meeting fees)
is targeted at the 75th percentile of the market for companies of similar size
to Azurix and is paid 100% in options to purchase shares of Common Stock.
Nonemployee director grants are made annually following Azurix's annual meeting
of shareholders and approval by the Board of Directors. If an individual is
appointed to the Board of Directors at a time other than the annual meeting of
shareholders, the newly appointed director may receive a grant of options at the
time such individual joins the board. Employee directors do not receive
additional compensation for serving on the Board of Directors or its committees.
5
<PAGE> 8
STOCK OWNERSHIP TABLES
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information concerning each person
known by Azurix to own beneficially more than 5% of the outstanding voting
shares of Azurix's Common Stock as of February 29, 2000.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES PERCENT
- ------------------------------------- ---------- -------
<S> <C> <C>
Atlantic Water Trust(1)(2)
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
Enron Corp.(2)
1400 Smith Street 78,536,532 67.0%
Houston, Texas 77002
Marlin Water Trust(2)
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890-0001
</TABLE>
- ---------------
(1) Atlantic Water Trust is a Delaware business trust. Atlantic Water Trust
holds 67.0% of Azurix's Common Stock.
(2) Each of Enron Corp., an Oregon corporation, and Marlin Water Trust, a
Delaware business trust, has a 50% voting interest in Atlantic Water Trust,
and each may be deemed to beneficially own all of the Azurix shares owned by
Atlantic Water Trust because of certain shared voting and dispositive
powers. Please read "Atlantic Water Trust."
ATLANTIC WATER TRUST
Atlantic Water Trust, a Delaware business trust, currently owns 78,536,532
shares of Common Stock. Each of Enron and Marlin Water Trust owns a 50% voting
interest in Atlantic Water Trust. Each of Marlin Water Trust and Enron has the
right and power at all times to appoint up to 50% of the members of the board of
directors of Atlantic Water Trust. Holders of Marlin Water Trust trust
certificates are entitled to exercise Marlin Water Trust's appointment rights.
If the Marlin Water Trust certificateholders defer exercising their appointment
rights, Enron has the right to appoint such members, but Marlin Water Trust has
the right, at any time, without cause, to remove any such members. To date,
Enron has appointed all of the directors of Atlantic Water Trust.
As long as Atlantic Water Trust owns a majority of Azurix's outstanding
voting stock, Marlin Water Trust has the right to direct Atlantic Water Trust to
elect or replace a percentage of Azurix's directors equal to 50% minus the
percentage of Azurix's outstanding voting stock held by persons other than
Atlantic Water Trust, Enron and its affiliates. Furthermore, Marlin Water Trust,
with the consent of the holders of a majority of Azurix's outstanding voting
stock held by persons other than Atlantic Water Trust, Enron and its affiliates,
has the right to direct Atlantic Water Trust to elect or replace half of
Azurix's directors. In the event that Azurix were to issue a class of preferred
stock, then, in each case, Marlin Water Trust's right to designate directors
would be reduced by the number of directors that may be elected by the Azurix
preferred stock holders entitled to elect directors as a class. Enron has the
right to direct Atlantic Water Trust to elect or replace the other half of
Azurix's directors. In all other circumstances, the board of directors of
Atlantic Water Trust will direct the voting of Atlantic Water Trust's shares of
Common Stock. Under the terms of the Atlantic Water Trust agreement, Enron can
be prevented from appointing more than half of Azurix's directors
6
<PAGE> 9
at any time. A copy of the Amended and Restated Trust Agreement of Atlantic
Water Trust has been filed with the Securities and Exchange Commission as an
exhibit to Azurix's Registration Statement on Form S-1 relating to Azurix's
initial public offering on June 9, 1999.
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Azurix Common Stock
and Enron common stock beneficially owned (unless otherwise indicated) by
Azurix's directors, the named executive officers in the Summary Compensation
Table below who are currently serving in such capacity, and all directors and
executive officers of Azurix as a group, as of February 29, 2000:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------
SOLE VOTING
SOLE VOTING SHARED VOTING AND LIMITED
AND AND OR NO
INVESTMENT INVESTMENT INVESTMENT PERCENT
TITLE OF CLASS NAME POWER(1)(2) POWER(1)(2) POWER(3)(4) OF CLASS
- -------------- ---- ----------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Azurix Corp.
Common Stock Rebecca P. Mark.................. 550,100 *
Colin F. Skellett................ 202,500 2,500 *
Amanda K. Martin................. 265,000 *
John C. Ale...................... 64,500 *
John H. Duncan................... 10,000 *
Kenneth L. Lay(5)................ 10,000 *
Jeffrey K. Skilling(5)........... 20,000 *
Joseph W. Sutton(5).............. 20,000 *
John Wakeham..................... 1,000 *
Herbert S. Winokur, Jr........... 22,500 *
All directors and executive
officers as a group (12
persons)....................... 1,237,350(5) 2,500 1.05%
Enron Corp.
Common Stock(6) Rebecca P. Mark.................. 104,240 31,432 *
Amanda K. Martin................. 116,804 2,791 *
John C. Ale...................... 2,390 *
John H. Duncan................... 168,962 58,000 180 *
Kenneth L. Lay................... 5,275,145 2,396,912(7) 267,532 1.09%
Jeffrey K. Skilling.............. 2,282,101 293,571 *
Joseph W. Sutton................. 1,098,487 908 130,885 *
John Wakeham..................... 14,112 321 *
Herbert S. Winokur, Jr........... 104,865 12,000(8) 180 *
All directors and executive
officers as a group (12
persons)....................... 9,173,609 2,468,155 736,547 1.69%
</TABLE>
- ---------------
* less than 1%
(1) With respect to Azurix Common Stock, includes shares subject to stock
options exercisable within 60 days after February 29, 2000, as follows: Ms.
Mark, 500,000 shares; Mr. Skellett, 200,000 shares; Ms. Martin, 250,000
shares; Mr. Ale, 62,500 shares; and all directors and executive officers as
a group, 1,082,750 shares.
(2) With respect to Enron common stock, includes shares subject to stock options
exercisable within 60 days after February 29, 2000, as follows: Ms. Martin,
116,804 shares; Mr. Ale, 2,390 shares; Mr. Duncan, 41,088 shares, for which
he has shared voting and investment power for 38,160 shares; Mr. Lay,
5,234,145 shares, for which he has shared voting and investment power for
1,615,330 shares; Mr. Skilling, 1,360,010 shares; Mr. Sutton, 891,514
shares; Lord Wakeham, 12,048 shares; Mr. Winokur, 33,728 shares; and all
directors and executive officers as a group, 7,698,227 shares.
(3) With respect to Enron common stock, includes restricted shares held under
Enron's 1991 and 1994 Stock Plans for certain individuals. Participants in
these plans have sole voting power and no investment power for restricted
shares awarded under the plans until such shares vest in accordance with the
plans' provisions. After vesting, the participant has sole investment and
voting powers.
7
<PAGE> 10
(4) With respect to Enron common stock, includes shares held under the Enron
Savings Plan and/or Enron Corp. Employee Stock Ownership Plan. Participants
under the saving plan instruct the savings plan trustee as to how the
participant's shares should be voted. Additionally, participants have
limited investment power with respect to shares in the savings plan.
Participants in the stock ownership plan have sole voting power and no
investment power prior to distribution of shares from the plan.
(5) Does not include 78,536,532 shares owned by Atlantic Water Trust with
respect to which Enron has shared voting and dispositive power. Messrs. Lay,
Skilling and Sutton in their capacities as Chairman of the Board and Chief
Executive Officer, as President and Chief Operating Officer and as Vice
Chairman, respectively, of Enron may be deemed to beneficially own such
shares as a result of their positions with Enron.
(6) Enron Corp., an Oregon corporation, has a 50% voting interest in Atlantic
Water Trust, and may be deemed to beneficially own all of the Azurix shares
owned by Atlantic Water Trust because of certain shared voting and
dispositive powers. Please read "Atlantic Water Trust" above.
(7) Includes 482,200 shares held in a charitable foundation in which Mr. Lay has
no pecuniary interest.
(8) Shares held in a charitable foundation in which Mr. Winokur has no pecuniary
interest.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report has been provided by Azurix's Human Resources and
Compensation Committee (the "Committee") of the Board of Directors in accordance
with current proxy statement disclosure requirements. The members of the
Committee are John H. Duncan (Chairman) and Herbert S. Winokur, Jr.
This material states Azurix's current overall compensation philosophy and
program objectives. Detailed descriptions of Azurix's compensation programs are
provided as well as information on Azurix's 1999 pay levels for the Chief
Executive Officer (the "CEO").
OVERALL OBJECTIVES OF THE EXECUTIVE COMPENSATION PROGRAM
Azurix's compensation philosophy and program objectives are directed by two
primary guiding principles. First, the program is intended to provide
competitive levels of compensation, at expected levels of performance, in order
to attract, motivate and retain talented executives. Second, the program is
intended to create an alignment of interests between Azurix's executives and
shareholders such that a significant portion of each executive's compensation is
directly linked to maximizing shareholder value.
In support of this philosophy, the executive compensation program is
designed to reward performance that is directly relevant to Azurix's success. As
such, Azurix attempts to provide incentive pay that varies based on corporate
and individual performance.
To accomplish these objectives, the Committee has structured the executive
compensation program with three primary underlying components: base salary,
annual incentives and long-term incentives (i.e., stock options). Certain other
executive benefits are also provided. The following sections describe Azurix's
plans by element of compensation and discuss how each component relates to
Azurix's overall compensation philosophy.
In reviewing this information, reference is often made to the use of
competitive market data. Azurix does not target a specific level of the market
for determining pay; rather, it reviews market data from the 50th to 90th
percentiles and evaluates performance in determining incentive compensation
levels. Several market data sources are used by Azurix. As a start-up company in
an acquisition growth mode, there was no effort made to assess how Azurix's
executive pay levels compared to the levels of pay provided by the companies in
the proxy peer group that is used in Azurix's total shareholder return graph,
since these companies vary significantly in size and scope of operations.
Instead, Azurix primarily utilized published survey data and data obtained from
independent consultants that are for general industry companies similar in size
(i.e., revenues) to Azurix. The
8
<PAGE> 11
published surveys include data on over 50 companies of comparable size to
Azurix, as measured by revenues. Emphasis is placed on the published data and
data obtained from consultants rather than on the data for proxy peers, since
the published data and consulting data are reflective of company size.
BASE SALARY PROGRAM
Azurix's base salaries for named executive officers, in aggregate, fall at
the market 50th percentile. Azurix periodically reviews its executive pay levels
to assess consistency with the external market. We believe it is crucial to
provide competitive salaries over time in order to attract and retain executives
who are highly talented and capable of creating added shareholder value.
Annual salary adjustments for Azurix are based on several factors: general
levels of market salary increases, individual performance, competitive base
salary levels and Azurix's overall financial results. Azurix reviews performance
considering total shareholder return, the level of recurring earnings, cash flow
and individual performance. These criteria are assessed qualitatively and are
not weighted. All base salary increases are based on a philosophy of
pay-for-performance and perceptions of an individual's long-term value to
Azurix. As a result, employees with higher levels of performance sustained over
time will be paid correspondingly higher salaries.
ANNUAL BONUS PLAN
In 1999, Azurix did not have in place a formal annual bonus plan. Instead,
given that Azurix was in its first year of operation, the Committee evaluated
Azurix's level of recurring earnings and cash flow and determined that no cash
bonuses should be paid to named executive officers of Azurix for 1999 results.
In making this determination, the Committee took into account that Azurix's
performance on other factors (such as share price) fell well below expectations.
Thus, the zero cash bonus payments emphasized Azurix's philosophy of
pay-for-performance.
In December 1999, Azurix made a stock option grant to named executive
officers (other than the CEO). These grants had an expected value of about
50%-60% of the target bonus for the officers. These awards were intended to
provide incentive opportunities tied to share price growth in lieu of any cash
bonuses for named executive officers. These December 1999 grants vest at the end
of six years, but vesting is accelerated if certain recurring net income
objectives as agreed to by the Board of Directors are achieved.
Azurix has put in place a short-term incentive plan structure for the year
2000, excluding the CEO, that is tied to company financial results and
individual performance. This plan provides for 50% of an employee's annual
incentive opportunity to be tied to individual goals that are operational and
financial in nature. This portion of the annual incentive will be payable in
cash. The remaining 50% of the annual incentive opportunity (on an expected
value basis) will be payable in Azurix stock options. These stock options vest
in 2006; however, vesting is accelerated if Azurix achieves certain net income
objectives tied to Azurix's business plan. Thus, employees will receive value
from this portion of the annual incentive program only if Azurix's stock price
rises, and employees will be able to exercise these options before six years
after grant only if a net income objective as established annually by the Board
of Directors is achieved. The CEO's bonus plan is based upon the accomplishment
of company and individual goals and objectives with payments purely at the
discretion of the Committee.
LONG-TERM INCENTIVE PLAN
Azurix's Long-Term Incentive Plan ("LTIP") is designed to focus executive
efforts on the long-term goals of Azurix and to maximize total return to our
shareholders. While Azurix's LTIP allows the Committee to use a variety of
long-term incentive devices, to date the Committee has relied solely on stock
option awards to provide long-term incentive opportunities to named executive
officers. (However, a limited number of restricted shares were issued to
selected Azurix executives to replace cash balance plan retirement benefits that
Azurix terminated in 1999.)
9
<PAGE> 12
Stock options align the interests of employees and shareholders by
providing value to the executive through stock price appreciation only. All
stock options have a 10-year term before expiration and the most recent grants
are fully vested over a period of three to six years from the date of grant.
Stock options were granted to the named executive officers in 1999 and it
is anticipated that stock option awards will be made periodically at the
discretion of the Committee in the future. The stock option grants made in
February 1999 were front-loaded multi-year awards equal to about three times the
market 75th percentile. This grant was intended to provide management with a
significant stake in creating shareholder value. The three-year front-load
feature of the grant is consistent with the common market practice of making
large front-loaded grants at the time of an initial public offering ("IPO"). The
market price of Azurix Common Stock is currently below the exercise price of
these options.
Azurix also made a special grant of 50,000 options each to Ms. Martin and
Mr. Skellett in December 1999 to recognize their performance and expected future
contributions to Azurix. These options vest at the end of six years; however,
vesting is accelerated if certain recurring net income objectives as agreed to
by the Board of Directors are achieved.
The Committee believes stock options are an important part of Azurix's
total executive pay program, since employees only receive income from the
options if Azurix's share price rises.
STOCK OWNERSHIP
As a part of aligning rewards to executives and returns to shareholders, in
February 2000, the Committee approved stock ownership guidelines providing that,
within two years, the Chairman and CEO be required to own Azurix stock having a
value equal to at least two times her annual base salary and each other Section
16(b) officer (as defined by the Securities Exchange Act of 1934, as amended) is
required to own Azurix stock having a value equal to at least 50% of his or her
annual base salary. For purposes of these guidelines, ownership includes grants
of restricted stock but does not include grants of stock options.
1999 CHIEF EXECUTIVE OFFICER PAY
As previously described, the Committee considers several factors in
developing an executive's compensation package. For the CEO, these include
competitive market practices (consistent with the philosophy described for other
executives), experience, achievement of strategic goals and the financial
success of Azurix.
Ms. Mark's annual salary was not adjusted in 1999. The CEO's base salary is
slightly below the market median.
Ms. Mark received no annual bonus for 1999 since Azurix's aggregate
performance on the measures described in the annual bonus section of this report
were well below aggressive internal company targets.
The Committee granted stock options for two million shares to Ms. Mark in
February 1999 as an incentive to increase shareholder value. These awards are
tied to performance in that the executive only realizes income from stock
options if the stock price rises. The grant was a multi-year award at the 75th
percentile of the market, which is consistent with common IPO market practice.
Ms. Mark also received 5,450 shares of restricted stock to compensate her for
the terminated cash balance retirement plan, as previously described.
$1 MILLION PAY DEDUCTIBILITY CAP
Under Section 162(m) of the Internal Revenue Code, public companies are
precluded from receiving a tax deduction on compensation paid to executive
officers in excess of $1 million, unless the compensation is qualified as
performance-based compensation under Section 162(m). Compensation related to
stock options and restricted stock under the Azurix Corp. 1999 Stock Plan does
not currently qualify as performance-based compensation under Section 162(m). To
qualify as performance-based compensation shareholder approval and certain other
requirements must be met. The Board of Directors has made recent amendments to
the plan designed to comply with the requirements of 162(m) and will present the
plan to shareholders at the 2000
10
<PAGE> 13
annual meeting for approval and adoption. The Committee believes that if the
plan is approved by shareholders, future compensation related to stock options
and performance-based restricted stock granted under the plan would be fully
deductible as performance-based compensation.
SUMMARY
The Committee is responsible for establishing compensation programs which
link rewards to the executives and returns to shareholders. By year-end 1999,
Azurix Common Stock decreased substantially from its June 1999 IPO price. As a
result, no cash bonuses were paid to Azurix named executive officers and their
December 1999 stock option grants (excluding the CEO) accelerate vesting based
solely on the financial performance of Azurix. In addition, long-term
compensation stock option grants to Azurix officers throughout 1999 have
resulted in no additional income due to the decrease in shareholder return.
Consequently, Azurix officers received only base salary in 1999. While we are
disappointed with the decreased shareholder return, we believe the compensation
plan designs do link to shareholder return and the Committee believes that the
Azurix management team will be more focused on increasing shareholder returns in
2000 and beyond.
Human Resources and Compensation Committee
John H. Duncan (Chairman)
Herbert S. Winokur, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From February 1999 until June 1999, Ms. Mark and Messrs. Lay and Skilling
served on the Stock Plan Committee, which administered the Azurix Corp. 1999
Stock Plan. Since June 1999, the Human Resources and Compensation Committee has
administered the 1999 Stock Plan and has consisted of Messrs. Duncan and
Winokur.
Each of Messrs. Lay, Skilling and Sutton was, during the fiscal year ended
December 31, 1999, an executive officer of Enron. In addition, each of Lord
Wakeham, Messrs. Duncan, Winokur, Lay and Skilling and Ms. Mark served during
such period, and continues to serve, on the Board of Directors of Enron.
11
<PAGE> 14
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for the years ended
December 31, 1998 and December 31, 1999 for Azurix's Chief Executive Officer,
each of the four other most highly compensated executive officers of Azurix who
served in such capacities as of December 31, 1999 and two former executive
officers of Azurix who would have been among the four other most highly
compensated executive officers of Azurix for the year ended December 31, 1999
had they not left Azurix prior to the end of fiscal 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rebecca P. Mark(1)..................... 1999 $710,000 $ -- $122,446(2) $ 41,089(3)(4)
Chairman and Chief Executive Officer 1998 145,306 -- 65,653(2) --
Colin F. Skellett...................... 1999 410,590 -- -- --
Vice Chairman, Operations 1998 105,825 85,000(5) -- --
Amanda K. Martin(1).................... 1999 400,000 -- -- 24,281(3)(4)
Executive Director and President, 1998 106,999 181,250 -- 350,000(6)
North America
John C. Ale............................ 1999 340,000 -- -- 174,903(3)(7)
Executive Director and General 1998 19,318 -- -- 312,638(8)
Counsel
Rodney L. Gray(1)(9)................... 1999 427,917 -- -- 2,599(4)
Former Vice Chairman, Finance, Risk 1998 156,269 101,250 -- --
Management and Investments and Chief
Financial Officer
Alexander A. Kulpecz(10)............... 1999 451,000 -- 255,342(11) 371,672(4)(10)
Former Executive Director, Europe, 1998 177,172 200,000(10) 188,613(11) 250,000(12)
Middle East, Asia, Africa
Edward N. Robinson(13)................. 1999 362,121 -- -- 23,815(3)(4)
Former Executive Director, Strategy 1998 51,042 -- -- --
and Corporate Development
</TABLE>
- ---------------
(1) Ms. Mark, Ms. Martin and Mr. Gray were paid by Enron and/or its affiliates
for the entire year ended December 31, 1998. The salary and bonus amounts
for 1998 shown in the table are the amounts of their total compensation
received from Enron that were allocated by Enron to Azurix and paid by
Azurix to Enron for services rendered to Azurix. Ms. Mark's bonus
arrangement is described below under "Employment Agreements." The bonus
amounts for 1998 allocated to Azurix by Enron for Mr. Gray and Ms. Martin
were based on qualitative criteria and were awarded in relation to the
formation of Azurix's strategic business development and corporate
financing organization, in the case of Mr. Gray, and Azurix's business
development effort for the Americas, in the case of Ms. Martin.
(2) Includes $101,146 and $62,419 reported as income and paid by Azurix for Ms.
Mark for personal airplane usage for 1999 and 1998, respectively.
(3) Includes shares of restricted stock granted on December 17, 1999 in lieu of
Azurix's continued participation in the Enron Cash Balance Plan as follows:
Ms. Mark, 5,450 shares vesting on December 31, 2000; Ms. Martin, 3,070
shares vesting on December 31, 2000; Mr. Ale, 2,610 shares vesting on
December 10, 2003; and Mr. Robinson, 3,070 shares vesting on November 9,
2003.
(4) Includes 1999 matching contributions paid by Azurix to Enron in connection
with the employee's participation in the Enron Corp. Savings Plan as
follows: Ms. Mark, $2,599; Ms. Martin, $2,599; Mr. Gray, $2,599; Mr.
Kulpecz, $2,599; and Mr. Robinson, $2,133.
(5) Mr. Skellett joined Azurix in October 1998 in conjunction with the
acquisition of Wessex Water Ltd. Mr. Skellett's bonus for 1998 was based on
qualitative criteria and was awarded in relation to the formation of
Azurix's technical and operational organization.
12
<PAGE> 15
(6) Represents compensation paid to Ms. Martin for forgoing compensation from
her previous employer, Enron Capital & Trade Resources Corp.
(7) Includes $126,470 in compensation received in connection with his overseas
assignment and $30,000 in connection with his relocation to Houston, Texas.
(8) Includes $312,638 in compensation paid to Mr. Ale for forgoing
distributions of income from his previous employer.
(9) Mr. Gray resigned as Vice Chairman, Chief Financial Officer and Director of
Azurix on November 30, 1999, and terminated his employment with Azurix
effective December 31, 1999. For a discussion of Mr. Gray's severance
arrangement, please read "Severance Agreements" below.
(10) Mr. Kulpecz joined Azurix during September 1998 and resigned all positions
at Azurix on November 30, 1999. Mr. Kulpecz's bonus for 1998 was based on
qualitative criteria and was awarded in relation to the formation of
Azurix's London office and business development effort for Europe, the
Middle East, Africa, Asia and the Pacific Rim. The amounts shown for 1999
include $124,472 paid in connection with Mr. Kulpecz's termination of
employment and $244,601 in compensation received in connection with his
overseas assignment. For a discussion of Mr. Kulpecz's severance agreement,
please read "Severance Agreements" below.
(11) Includes $255,342 and $127,533 for payment of 1999 and 1998 U.K. income
taxes, respectively.
(12) Represents a sign-on bonus for forgoing compensation from his previous
employer.
(13) Mr. Robinson resigned as Executive Director, Strategy and Corporate
Development and his employment terminated effective February 15, 2000. For
a discussion of Mr. Robinson's severance agreement, please read "Severance
Agreements" below.
13
<PAGE> 16
OPTION GRANTS TABLE
The following table sets forth information with respect to grants of stock
options to the named executive officers listed in the Summary Compensation
Table.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL AT ASSUMED RATES
NUMBER OF OPTIONS OF STOCK PRICE APPRECIATION
SHARES OF GRANTED TO FOR OPTION TERM(2)
COMMON STOCK EMPLOYEES EXERCISE -------------------------------
UNDERLYING IN FISCAL PRICE EXPIRATION
NAME OPTIONS GRANTED YEAR ($/SHARE)(1) DATE 0% 5% 10%
---- --------------- ----------- ------------ ---------- --- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rebecca P. Mark........ 2,000,000(3) 16.3% $ 16.72 2/2/09 $0 $21,040,000 $53,300,000
Colin F. Skellett...... 600,000(3) 4.9 16.72 2/2/09 0 6,312,000 15,990,000
75,000(4) 0.6 6.9375 12/17/09 0 327,000 829,500
50,000(5) 0.4 6.9375 12/17/09 0 218,000 553,000
Amanda K. Martin....... 1,000,000(3) 8.1 16.72 2/2/09 0 10,520,000 26,650,000
105,000(4) 0.8 6.9375 12/17/09 0 457,800 1,161,300
50,000(5) 0.4 6.9375 12/17/09 0 218,000 553,000
John C. Ale............ 250,000(3) 2.0 16.72 2/2/09 0 2,630,000 6,662,500
55,000(4) 0.4 6.9375 12/17/09 0 239,800 608,300
Rodney L. Gray(7)...... 1,000,000(3) 8.1 16.72 2/2/09 0 10,520,000 26,650,000
Alexander A.
Kulpecz(8)........... 1,000,000(3) 8.1 16.72 2/2/09 0 10,520,000 26,650,000
Edward N.
Robinson(9).......... 106,000(3) 0.9 16.72 2/2/09 0 1,115,120 2,824,900
394,000(6) 3.2 14.25 10/11/09 0 3,530,240 8,947,740
</TABLE>
- ---------------
(1) Options are granted at the market price of Azurix Common Stock on the date
of grant.
(2) The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission. There can be no assurance that the actual stock price
appreciation over the 10-year option term will be at the assumed 0%, 5% or
10% levels or at any other defined level. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized
from the option grants. The potential realizable value is calculated by
assuming that the fair market value of the Common Stock on the date of grant
of the options appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day at the appreciated price.
(3) Options granted on February 2, 1999, subject to vesting based on the
following schedule: Ms. Mark, 25% per year over four years; Mr. Skellett,
33 1/3% per year over three years; Ms. Martin, 25% per year over four years;
Mr. Ale, 25% per year over four years; Mr. Gray, 20% per year over five
years; Mr. Kulpecz, 20% per year over five years; and Mr. Robinson, 25% per
year over four years.
(4) Options granted on December 17, 1999, which are subject to 100% vesting on
the earlier of (a) December 17, 2005 and (b) the achievement in any year of
financial performance measures established by the Board of Directors with
respect to that year.
(5) Options granted on December 17, 1999, which are subject to (a) 25% vesting
upon the achievement in any year of financial performance measures
established by the Board of Directors with respect to that year and (b) 100%
vesting on December 17, 2005.
(6) Options granted on October 11, 1999, which vest 14% on the date of grant and
14% per year on each anniversary grant date through 2002 and 22% per year on
each anniversary grant date in years 2003 and 2004.
(7) Mr. Gray resigned as Vice Chairman, Chief Financial Officer and Director of
Azurix on November 30, 1999, and terminated his employment with Azurix
effective December 31, 1999. Mr. Gray retained
14
<PAGE> 17
200,000 Azurix stock options. For a discussion of Mr. Gray's severance
agreement, please read "Severance Agreements" below.
(8) Mr. Kulpecz resigned all positions with Azurix on November 30, 1999.
Pursuant to his stock option grant agreement, effective upon his
resignation, all of his Azurix stock options terminated. For a discussion of
Mr. Kulpecz's severance agreement, please read "Severance Agreements" below.
(9) Mr. Robinson resigned as Executive Director, Strategy and Corporate
Development and his employment terminated as of February 15, 2000. Under the
terms of his severance agreement, Mr. Robinson is entitled to retain 81,660
Azurix stock options. For a discussion of Mr. Robinson's severance
agreement, please read "Severance Agreements" below.
STOCK OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table discloses the options that were exercised by the named
executive officers during 1999 and sets forth the number and value of their
unexercised options as of December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES ON DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rebecca P. Mark........... 0 $0 0 2,000,000 0$ $ 0
Colin F. Skellett......... 0 0 0 725,000 0 250,000
Amanda K. Martin.......... 0 0 0 1,155,000 0 310,000
John C. Ale............... 0 0 0 305,000 0 110,000
Rodney L. Gray(2)......... 0 0 200,000 0 0 0
Alexander A. Kulpecz(3)... 0 0 0 0 0 0
Edward N. Robinson(4)..... 0 0 55,160 444,840 0 0
</TABLE>
- ---------------
(1) Based on the difference between the option exercise price and $8.9375, which
was the closing price of Azurix Common Stock on December 31, 1999.
(2) Mr. Gray resigned as Vice Chairman, Chief Financial Officer and Director of
Azurix on November 30, 1999, and terminated his employment with Azurix
effective December 31, 1999. Under the terms of his severance agreement, Mr.
Gray is entitled to retain 200,000 Azurix stock options. For a discussion of
Mr. Gray's severance agreement, please read "Severance Agreements" below.
(3) Mr. Kulpecz resigned all positions with Azurix on November 30, 1999.
Pursuant to his stock option grant agreement, effective upon his
resignation, all of his Azurix stock options terminated. For a discussion of
Mr. Kulpecz's severance agreement, please read "Severance Agreements" below.
(4) Mr. Robinson resigned as Executive Director, Strategy and Corporate
Development and his employment terminated as of February 15, 2000. Under the
terms of his severance agreement, Mr. Robinson is entitled to retain the
81,660 Azurix stock options that are vested as of his termination date. For
a discussion of Mr. Robinson's severance agreement, please read "Severance
Agreements" below.
PENSION PLANS
Mr. Skellett participates in the contributory defined benefit pension plan
maintained by Wessex Water Ltd, a wholly owned subsidiary of Azurix. The plan
provides retirement benefits based on service and pension eligible compensation.
The standard accrual rate is one-sixtieth of an employee's annual compensation
for each year of service, subject to a maximum of two-thirds of his annual
compensation. Certain senior executives of Wessex, including Mr. Skellett, are
provided with a top-up pension benefit allowing for an overall accrual rate of
one-thirtieth of the employee's annual compensation for each year of service,
subject to the standard maximum of two-thirds of his annual compensation. At
December 31, 1999, Mr. Skellett's credited
15
<PAGE> 18
years of service with Wessex was 36.6 years, his estimated credited years of
service at age 60 (normal retirement under the plan) was 42.2 years, his current
eligible compensation under the plan was approximately L255,000 ($411,825) and
his estimated annual benefit payable upon retirement was approximately L170,000
($274,550).
EMPLOYMENT AGREEMENTS
Ms. Mark entered into an employment agreement with Enron, effective May
1998 and expiring December 31, 2001, as Chairman of Enron International and Vice
Chairman of Enron. The agreement was amended when it was assumed by Azurix,
effective February 1, 1999, in connection with Ms. Mark's assumption of the role
as Chairman and Chief Executive Officer of Azurix, in addition to her role as
Vice Chairman of Enron. The agreement provides for an annual salary of not less
than $710,000. The agreement stipulates that bonus calculations for 1999 through
2001 will be determined prospectively. The agreement provides that Ms. Mark is
eligible to participate in either the Enron executive compensation long-term
incentive program or the Azurix stock incentive plan. The agreement also
provides for full vesting of specific grants and awards made to Ms. Mark under
long-term incentive plans maintained by Enron in the event of involuntary
termination, death or disability and, as recently amended, precludes full
vesting of long-term grants made under the Azurix stock incentive plan in the
event of termination. The agreement provides 100% of base pay and unpaid bonuses
through the contract term in the event of involuntary termination. The
employment agreement contains noncompetition provisions in the event of Ms.
Mark's termination of employment.
Mr. Skellett entered into an employment agreement with Wessex Water Ltd
which entitles Mr. Skellett to an annual salary of L254,000 ($410,590). The
agreement provides that Mr. Skellett is eligible to participate in the Azurix
stock incentive plan. Under his agreement, Mr. Skellett was granted stock
options to purchase 600,000 shares of Common Stock at an exercise price of
$16.72 per share, which options vest 33 1/3% per year over three years. The
employment agreement may be terminated by either Wessex or Mr. Skellett upon
twelve months' notice. The agreement otherwise terminates on Mr. Skellett's 60th
birthday. The agreement provides that Mr. Skellett will participate in an annual
bonus plan. The agreement prohibits Mr. Skellett from competing with Wessex for
one year following termination of employment.
Ms. Martin entered into an employment agreement with Enron Capital & Trade
Resources Corp., which subsequently was assigned to Azurix. The agreement runs
through August 31, 2003, and entitles Ms. Martin to an annual salary of
$400,000. In connection with the transfer of her agreement to Azurix, Ms. Martin
received a bonus of $350,000. The agreement provides that Ms. Martin will
participate in an annual incentive plan with a bonus target of between 100% and
200% of her annual base salary and that Ms. Martin is eligible to participate in
the Azurix stock incentive plan. Under her agreement, Ms. Martin was granted
stock options to purchase 1,000,000 shares of Common Stock at an exercise price
of $16.72 per share, which options vest 25% per year over four years. If Ms.
Martin is involuntarily terminated, which includes a termination by Azurix
without cause, then she will receive a monthly severance payment equal to 100%
of her monthly salary and unpaid annual bonuses until the end of the term of the
agreement as if she had not been terminated. In order to receive these payments,
Ms. Martin may not compete with Azurix during the term of the agreement
following an involuntary termination. The agreement also prohibits Ms. Martin
from competing with Azurix until six months after the termination of employment
or the expiration of the agreement.
Mr. Ale entered into an employment agreement with Azurix effective December
10, 1998, which runs through December 10, 2001. The agreement entitles Mr. Ale
to an annual salary of $340,000 and provides that Mr. Ale will participate in an
annual incentive plan with a bonus target of 100% of his annual base salary. The
agreement also provides that Mr. Ale is eligible to participate in the Azurix
stock incentive plan. Under his agreement, Mr. Ale was granted stock options to
purchase 250,000 shares of Common Stock at an exercise price of $16.72 per
share, which options vest 25% per year over four years. If Mr. Ale is
involuntarily terminated, which includes a termination by Azurix without cause,
then he will receive a monthly severance payment equal to 100% of his monthly
salary and annual bonus payments until the end of the term of the agreement as
if he had not been terminated. The agreement prohibits Mr. Ale from competing
with Azurix until the later of December 10, 2001 or one year following
termination of his employment.
16
<PAGE> 19
SEVERANCE AGREEMENTS
Mr. Gray resigned as Vice Chairman, Chief Financial Officer and Director of
Azurix on November 30, 1999, and terminated his employment with Azurix on
December 31, 1999. In connection with his resignation, Mr. Gray and Azurix
entered into a severance agreement that entitles Mr. Gray to receive monthly
payments equal to $71,666 beginning January 31, 2000 and terminating on February
15, 2004 and to retain 200,000 vested Azurix stock options. This agreement also
prohibits Mr. Gray from competing with Azurix until February 15, 2004.
Mr. Kulpecz resigned all positions with Azurix on November 30, 1999. In
connection with his resignation, Mr. Kulpecz and Azurix entered into a severance
agreement that entitles Mr. Kulpecz to receive monthly payments equal to $80,535
beginning December 31, 1999 and ending on August 31, 2001, and a payment of
$40,267 on September 14, 2001. Mr. Kulpecz is also entitled to monthly housing
payments of $8,456.59 beginning December 31, 1999 and ending on August 31, 2001
and a payment of $4,229 on September 14, 2001, and reimbursement of educational
expenses for his children in an amount not to exceed $83,787. Mr. Kulpecz is
also entitled to retain 116,232 Enron stock options that had vested prior to his
resignation. This agreement prohibits Mr. Kulpecz from competing with Azurix
until September 14, 2001.
Mr. Robinson resigned as Executive Director, Strategy and Corporate
Development and his employment terminated as of February 15, 2000. Mr. Robinson
and Azurix entered into a severance agreement that entitles Mr. Robinson to
receive a lump sum payment of $2,076,712 on February 29, 2000, and to retain
81,660 vested Azurix stock options. The agreement also prohibits Mr. Robinson
from competing with Azurix until November 9, 2004.
17
<PAGE> 20
PERFORMANCE GRAPH
The following performance graph compares the performance of Azurix's Common
Stock to the S&P 500 Index and the Edward Jones Water Utility Industry Index
from June 10, 1999, the date Azurix's Common Stock first commenced public
trading, to December 31, 1999. The Edward Jones Water Utility Industry Index
consists of the following companies: American Water Works Company, Inc.;
American States Water Company; California Water Service Group; Connecticut Water
Service, Inc.; Dominguez Services Corporation; E'town Corporation; Middlesex
Water Company; Philadelphia Suburban Corporation; SJW Corporation; Southwest
Water Company; and United Water Resources, Inc. The graph assumes that the value
of the investment in Azurix's Common Stock and each index was $100 at June 10,
1999 and that all dividends were reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN
BASED ON INITIAL INVESTMENT OF $100 ON JUNE 10, 1999
[GRAPH]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
6/10/99 6/30/99 9/30/99 12/31/99
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Azurix Corp. $100.00 $105.26 $ 90.46 $ 47.04
Standard & Poors' 500 $100.00 $105.36 $ 98.46 $112.77
Edward Jones' Water Utility $100.00 $103.28 $110.60 $103.54
</TABLE>
18
<PAGE> 21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, as a result of the extensive relationship among Azurix, Enron,
Atlantic Water Trust and Marlin Water Trust, Azurix entered into various
agreements. The following summaries of these agreements discuss the material
provisions of these agreements and are qualified completely by reference to the
full text of these agreements, copies of which have been filed as exhibits to
Azurix's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Enron currently provides office space to Azurix and various services such
as computer hardware and software and support services such as risk management,
accounts payable, payroll and information technology services. Costs are
allocated to Azurix based upon usage, or where no direct method can be
efficiently applied due to administrative burden, upon factors such as
annualized payroll or employee headcount. Employees, other than employees of our
operating subsidiaries, are covered by various employee benefit plans of Enron
such as medical, dental, life insurance and other benefit plans. These costs are
allocated to Azurix based upon Enron's costs of administering and providing the
benefit plans.
Enron paid approximately $72 million on behalf of Azurix to fund its
general, administrative and operating expenses from Azurix's inception on
January 29, 1998 through June 7, 1999, in addition to capital expenditures. This
included $28.5 million advanced to Azurix by Enron in connection with Azurix's
investment in a water and wastewater concession in Cancun, Mexico in December
1998, as well as advances relating to services provided to Azurix by Enron. The
amount paid by Enron was non-interest bearing and had no maturity date. Azurix
used a portion of the net proceeds received from its initial public offering to
repay this amount.
AGREEMENT REGARDING BUSINESS OPPORTUNITIES AND RELATED MATTERS
Enron and Azurix have entered into an agreement that limits the scope of
Azurix's business and provides that Enron and its affiliates may engage in water
related businesses, even if those businesses have a competitive impact on
Azurix. In general, Enron is permitted to engage in any business whatsoever,
including water, wastewater and other businesses competing with Azurix, and may
compete in public tenders against Azurix, provided the business is conducted and
opportunities are identified and developed through Enron's own personnel and not
through Azurix. If an opportunity in the water industry is presented to a person
who is an officer or director of both Enron and Azurix, the opportunity must
first be offered to Azurix, unless water constitutes a minority of the fair
market value of the opportunity, as determined by that officer or director in
good faith based on information available at the time.
In the agreement, Azurix acknowledges that Enron has fiduciary and
contractual obligations to other persons and entities under existing agreements
and relationships and has agreed that, in the event of a conflict between the
duties of Enron under the agreement and the duties of Enron to third parties
under agreements or relationships that existed on the date of execution of the
agreement, Enron will be entitled to perform its duties to such third parties
without any liability to Azurix.
The agreement provides that any standard of care, any duty of loyalty and
any other duty imposed by the agreement or under Delaware law or any other
applicable law, rule or regulation shall be modified, waived or limited as
required in order to permit Enron to act under the agreement and to make any
decision pursuant to the authority prescribed in the agreement so long as such
action is reasonably believed by Enron to be in, or not inconsistent with, the
agreement or the interests of Azurix. Azurix has agreed to indemnify Enron and
its officers, directors and employees against any claim that Enron's pursuit of
any water business was a breach of any duty owed by Enron to Azurix, provided
Enron has followed the rules described above.
Azurix's purpose clause contained in its certificate of incorporation
permits it to engage in the businesses of acquiring, owning, operating, and
managing water resources and activities incidental to those businesses, and such
other businesses as Enron may approve in its sole discretion. Azurix has agreed
not to amend its certificate of incorporation to expand its purpose clause
without Enron's prior written consent.
19
<PAGE> 22
The agreement restricts Enron and Azurix from taking action that might
cause either of them to violate any law or that would require either of them to
register as a public utility holding company under the Public Utility Holding
Company Act of 1935.
The agreement states that whenever a potential conflict of interest exists
or arises between Enron and Azurix, any resolution or course of action in
respect of such conflict of interest shall be permitted and deemed approved, and
will not constitute a breach of any duty stated or implied by law or equity, if
the resolution or course of action is authorized by the agreement or, by
operation of the agreement, is deemed to be fair and reasonable to Azurix. The
agreement states that any conflict of interest and any resolution of such
conflict of interest shall be conclusively deemed fair and reasonable to Azurix
if such conflict of interest or resolution is (i) approved by special approval
(the approval by a majority of the directors of Azurix not associated with
Enron); (ii) on terms no less favorable to Azurix than those generally being
provided to or available from unrelated third parties; and (iii) fair to Azurix,
taking into account the totality of the relationships between the parties
involved, including other transactions that may be particularly favorable or
advantageous to Azurix.
Enron may adopt a resolution or course of action that has not received
special approval. Enron and any person voting in connection with a special
approval will be authorized in connection with its determination of what is
"fair and reasonable" to Azurix and in connection with its resolution of any
conflict of interest to consider (i) the relative interests of any party to such
conflict, agreement, transaction or situation and the benefits and burdens
relating to such interest; (ii) any customary or accepted industry practices and
any customary or historical dealings with a particular person; (iii) any
applicable generally accepted accounting or engineering practices or principles;
and (iv) such additional factors as such person determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
In the absence of bad faith by Enron, the resolution, action or terms so
made, taken or provided by Enron with respect to such matter shall not
constitute a breach of the agreement or a breach of any standard of care, any
duty of loyalty or any other duty imposed by the agreement or under Delaware law
or any other law, rule or regulation.
Disputes under the agreement are to be resolved through arbitration. The
agreement will continue indefinitely, except that it will expire on the first
date on which both of the following occur (i) Enron and its affiliates do not
individually or collectively, directly or indirectly, own or have the power to
vote at least one-third of the shares of Azurix ordinarily entitled to vote for
the election of directors; and (ii) fewer than one-third of the directors of
Azurix are persons who are employees, officers or directors of Enron or of any
affiliate of Enron.
The mutual covenants and agreements in the agreement will be the
consideration given by each party to the other in support of the agreement. In
addition, the agreement states that Enron's investment in Atlantic Water Trust
was predicated on the execution and delivery of an agreement containing
substantially the terms set forth in the agreement.
SERVICES AGREEMENTS
Effective May 1, 1999, Azurix and Enron entered into an agreement pursuant
to which Enron provides various corporate staff and support services to Azurix.
These services include information technology, office space, building
maintenance, security and other office services as well as employee development
and training and other benefits programs. Azurix may also utilize Enron's
regulatory affairs, marketing affairs, treasury and risk assessment and control
departments. In addition, Azurix may continue to participate in portions of
Enron's corporate insurance program. The agreement provides that Azurix may use
the international offices of Enron and its affiliates for projects, subject to
mutual agreement with Enron or its affiliates on a project-by-project basis. The
agreement provides that Azurix will reimburse Enron for direct charges related
to the Enron services and facilities that it utilizes. Azurix will also be
allocated an amount for overhead charges related to Enron's corporate staff and
support services that it utilizes. This overhead charge will be allocated based
upon factors such as employee headcount, payroll and square footage. Azurix
believes the allocation methods and costs are reasonable. Costs for services
used under the agreement were approximately $5.2 million in 1999. The services
agreement with Enron is for an indefinite term, but may be terminated on 180
days' notice.
20
<PAGE> 23
Azurix currently has a sublease arrangement, and intends to enter into a
sublease agreement, with Enron providing for the use of office space in Houston,
Texas.
Azurix also entered into separate agreements with Enron that allowed Azurix
to use Enron's corporate aircraft on a time-sharing basis. These agreements
permitted Azurix to use any of the aircraft when available as determined by
Enron. For each flight conducted, Azurix was required to pay all flight
expenses, including the cost of returning the aircraft, and an additional fee
equal to 100% of the fuel, oil, lubricants and other additives used during the
flight. During 1999, Azurix incurred approximately $1.4 million in expenses
under these agreements. These agreements terminated on February 20, 2000.
CREDIT AGREEMENT
Effective May 1, 1999, Azurix entered into a credit agreement with Enron,
which was amended as of January 4, 2000. Under this agreement, Enron will
provide funds to Azurix for general, administrative and operating expenses,
including interest expenses. The credit agreement matures on the earlier of
December 15, 2001 or 90 days following the date that Enron and its affiliates do
not own or have the power to vote at least one-third of Azurix's capital stock
ordinarily entitled to vote for the election of directors and fewer than one-
third of Azurix's directors are officers, directors or employees of Enron or its
affiliates. The total commitment under the credit agreement is $180 million.
Advances under the facility will bear interest at the U.S. federal funds rate
plus 1.50%. Amounts borrowed under the credit agreement may be prepaid, in full
or in part, at any time during the term of the credit agreement. Amounts prepaid
may be reborrowed during the term of the credit agreement. The principal amount
outstanding under the credit agreement is limited to no more than $120 million
at any time during calendar year 2000 (unless Enron otherwise agrees in its sole
discretion) and $180 million at any time during calendar year 2001. As of
December 31, 1999, $53.3 million was outstanding under this credit agreement.
LICENSE AGREEMENT
Enron has licensed to Azurix the non-exclusive right to use the phrase "an
Enron Company" and its logo in identifying Azurix as part of the Enron
enterprise for use in its businesses permitted under the business opportunities
agreement described above, until the first date on which both of the following
occur (i) Enron and its affiliates do not individually or collectively, directly
or indirectly, own or have the power to vote at least one-third of the shares of
Azurix ordinarily entitled to vote for the election of directors and (ii) fewer
than one-third of the directors of Azurix are persons who are employees,
officers or directors of Enron or of any affiliate of Enron.
The license is royalty free, although Azurix bears costs associated with
its use under a related cost sharing agreement. The license agreement is for a
term of one year, and renews automatically and repetitively for similar terms,
unless terminated by either party upon 30 days' notice or earlier upon uncured
default. Following termination, Azurix must phase out use of existing materials
within 90 days. The cost sharing agreement provides for a sharing of Enron's
costs incurred to develop, maintain, enhance, promote or defend the licensed
trademarks. Azurix's share of such costs will be pro rata based on its earnings
before interest and taxes. Azurix does not anticipate that its share of such
costs will be material.
REGISTRATION RIGHTS AGREEMENT
Azurix entered into an agreement with Atlantic Water Trust that allows
Atlantic Water Trust to request Azurix to register 78,536,532 shares of Common
Stock owned by Atlantic Water Trust. Atlantic Water Trust has the right to
request one such registration during each 12-month period following the date of
the initial public offering of Common Stock, June 9, 1999, plus one additional
registration. The number of shares requested to be registered shall have an
aggregate offering price of at least $25 million. In addition, Atlantic Water
Trust has the right, which it may exercise at any time, to include such shares
in any registration of common stock made by Azurix in the future. Azurix has
agreed to cooperate fully in connection with any such registration and with any
offering made under the registration rights agreement and to pay all costs and
expenses, other than underwriting discounts and commissions, related to shares
sold by Atlantic Water Trust
21
<PAGE> 24
in connection with any such registration. The rights of Atlantic Water Trust
under the registration rights agreement are transferable by Atlantic Water
Trust. The agreement is for an indefinite term.
LETTER OF CREDIT OBLIGATIONS
Enron has made available letters of credit on behalf of Azurix's
subsidiaries in the aggregate amount of approximately $16 million as of December
31, 1999. Azurix has paid, or reimbursed Enron for, the fees associated with
these letters of credit.
GUARANTEE OF AZURIX NORTH AMERICA DEBT
Enron guaranteed debt and letter of credit obligations of up to $25 million
of Azurix North America to Comerica Bank under the terms of September 29, 1999
credit facilities in exchange for, among other things, the elimination of
requirements for various assets to be pledged. As of December 31, 1999, $6.7
million of indebtedness and $16.4 million of letter of credit obligations were
outstanding under these facilities, and thus guaranteed by Enron. Azurix paid to
Enron an initial fee of approximately $63,000 in respect of this guarantee.
These credit facilities were terminated as of March 31, 2000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires officers and directors of Azurix and persons who
beneficially own more than 10% of the Common Stock to file reports of ownership
and changes in ownership concerning the Common Stock with the Securities and
Exchange Commission and to furnish Azurix with copies of all Section 16(a) forms
they file. Based upon Azurix's review of the Section 16(a) filings that have
been received by Azurix, Azurix believes that all filings required to be made
under Section 16(a) during 1999 were timely made.
22
<PAGE> 25
ITEM 2.
APPROVAL OF THE 1999 STOCK PLAN
In February 1999, prior to Azurix's initial public offering, Azurix
established the Azurix Corp. 1999 Stock Plan (the "Plan"). The purposes of the
Plan are (i) to enhance Azurix's ability to attract and retain the services of
qualified key employees, officers and directors upon whose judgment, initiative
and efforts the successful conduct and development of Azurix's business largely
depends, and (ii) to provide additional incentives to such persons to devote
their utmost effort and skill to the advancement and betterment of Azurix, by
providing them an opportunity to participate in the ownership of Azurix and
thereby have an interest in the success and increased value of Azurix. Grants
under the Plan can take the form of stock options or awards of restricted stock.
As of December 31, 1999, options to purchase approximately 10,253,357 shares of
Common Stock and 121,895 shares of restricted stock had been granted under the
Plan.
On May 1, 2000, the Human Resources and Compensation Committee recommended,
and the Board of Directors adopted certain amendments to the Plan and
recommended that the Plan, as amended and restated, be presented to shareholders
at the 2000 Annual Meeting of Shareholders. The Plan is being proposed to
shareholders in order to qualify the Plan under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). The amendments adopted by the
Board of Directors on May 1, 2000 were principally designed to comply with the
requirements of Section 162(m) and do not increase the number of shares
available under the Plan. In addition, certain other amendments to the Plan were
approved by the Board that it believes are appropriate to update the Plan in
light of Azurix's becoming a publicly held corporation during 1999 and to obtain
approval of the Plan by the U.K. Inland Revenue under the U.K. Income and
Corporate Taxes Act 1988.
During 1999 and 2000, the Committee granted stock options and shares of
restricted stock under the Plan to eligible individuals, including grants to
"covered employees" within the meaning of Section 162(m) of the Code. Whether or
not Azurix's shareholders approve the Plan, stock options previously granted
under the Plan will remain outstanding and become exercisable pursuant to the
terms of the Plan and shares of restricted stock granted under the Plan will
vest in accordance with the terms of the Plan. However, if the Plan is not
approved by shareholders, Azurix will not be permitted to make any further
grants under the Plan.
The closing price of the Common Stock on the New York Stock Exchange on
April 26, 2000 was $7.1875 per share.
The material features of the Plan are discussed below. The discussion is
qualified in its entirety by reference to the full text of the Plan. A copy of
the Plan, as amended and restated, is attached to this proxy statement as
Exhibit A.
MATERIAL FEATURES OF THE PLAN
Participation and Administration. Employees of Azurix and its subsidiaries
and employees of Enron and its subsidiaries who perform services for Azurix are
eligible to participate in the Plan. The Human Resources and Compensation
Committee administers the Plan. The Committee is authorized to establish
administrative rules, to designate individuals to receive awards and the size of
such awards and to set the terms and conditions of such awards. Committee
members are required to be "non-employee directors" within the meaning of Rule
16b-3 under the Exchange Act and "outside directors" within the meaning of
Section 162(m) of the Code.
Nonemployee directors of Azurix are also eligible to participate in the
Plan. Under the Plan, grants to nonemployee directors are administered by the
full Board of Directors. Azurix currently has six nonemployee directors. For
information regarding the annual grant of stock options to nonemployee
directors, see "Directors' Compensation" above.
Shares Subject to the Plan. The maximum number of shares of Common Stock
that may be issued under the Plan is 17,583,284 shares, of which 25% may be
granted in the form of restricted stock and options for up to 7,500,000 shares
may be granted in the form of incentive stock options. As of December 31, 1999,
23
<PAGE> 26
approximately 7,208,032 shares remained available under the Plan. In the event a
stock option or restricted stock grant can no longer under any circumstances be
exercised or any shares of Common Stock are reacquired by Azurix pursuant to a
stock option or restricted stock agreement, the shares of Common Stock allocable
to the unexercised portion of such option or restricted stock grant will be
available for future grants or issuances under the Plan.
Stock Option Grants to Employees. Stock options granted under the Plan may
be in the form of either incentive stock options within the meaning of Section
422 of the Code or non-qualified stock options. As to grants of stock options to
employees, the Committee establishes the exercise price, which may not be less
than the fair market value of the shares of Common Stock on the date of grant.
The Committee also sets the term and provisions for termination of each option,
provided that no option may be exercisable more than ten years after the date it
is granted. No grantee may receive options for more than 2,000,000 shares in any
single calendar year.
Restricted Stock Grants to Employees. The Committee may issue to employees
grants of restricted stock. Restricted stock grants consist of shares of Common
Stock that are issued subject to such terms, restrictions and conditions as the
Committee may determine at the time of grant. The Committee is also authorized
to make grants of restricted stock which qualify as performance-based
compensation under Section 162(m) of the Code, such that (i) the issuance is
contingent upon attainment of pre-established performance criteria or (ii)
restrictions lapse contingent upon attainment of pre-established performance
criteria. The performance criteria to be used will be one or any combination of
the following: recurring after tax net income and/or cash flow at the Azurix
and/or subsidiary level, and earnings per share and/or total shareholder return
at the Azurix level, as determined at the sole discretion of the Committee. With
respect to grants of restricted stock qualifying as performance-based
compensation under Section 162(m) of the Code, no individual shall receive a
grant totaling more than 100,000 shares in any single year.
Stock Option Grants to Nonemployee Directors. As to grants of stock options
to nonemployee directors, the Plan will be administered by the full Board. The
Board selects the persons to receive stock option grants, determines the number
of shares to be awarded and sets the terms and provisions of each option granted
to nonemployee directors.
Adjustments. The Plan provides for adjustment of the aggregate number of
shares reserved for issuance under the Plan and the number of shares subject to
any outstanding option upon the occurrence of certain corporate transactions
affecting Azurix's capitalization. These transactions include, among other
things, extraordinary cash dividends, stock dividends, stock splits,
reorganizations, recapitalizations, mergers, consolidation, spin-offs or
exchanges of shares of Azurix's Common Stock.
Change in Control. In the event of (i) a Change in Control of Azurix (as
described in Section 8.2 of the Plan) or (ii) a Change in Control of Enron at
any time when Enron, directly or indirectly, owns 30% or more of the capital
stock of Azurix (as described in Section 8.1 of the Plan), then (a) any
outstanding shares of restricted stock shall be surrendered to Azurix and each
grantee shall receive a cash payment by Azurix in the an amount equal to the
number of shares of restricted stock surrendered multiplied by the fair market
value of a share of Common Stock and (b) all outstanding options shall be
surrendered to Azurix and each grantee shall receive a cash payment by Azurix in
an amount equal to the number of shares of Common Stock subject to options held
by such grantee multiplied by the difference between the exercise price for such
shares and the fair market value of a share of Common Stock.
Termination and Amendments. The Plan terminates on February 1, 2009 and no
stock options or grants of restricted stock may be awarded after that date. The
Board in its discretion may amend the Plan at any time except that shareholder
approval is required for any amendment that would (i) increase the number of
shares available for grant under the Plan, (ii) change the minimum exercise
price for grants of options, (iii) extend the maximum period during which grants
may be made under the Plan, or (iv) increase the maximum number of options or
shares of restricted stock any individual can receive in a single calendar year.
Plan Benefits. Future grants under the Plan are made at the Committee's
discretion. Accordingly, future awards under the Plan are not determinable at
this time. Information regarding past grants of stock options
24
<PAGE> 27
and restricted stock under the Plan to named executive officers in the Summary
Compensation Table is provided elsewhere in this proxy statement as part of the
disclosure of executive compensation. The following summarizes the grants made
in 1999 under the Plan to (i) all current executive officers of Azurix as a
group; (ii) all current directors of Azurix who are not executive officers as a
group; and (iii) all employees, including all current officers who are not
executive officers, as a group.
<TABLE>
<CAPTION>
SHARES OF
RESTRICTED
NUMBER OF STOCK
OPTIONS GRANTED GRANTED
--------------- -------------
<S> <C> <C>
All current executive officers as a group (6 persons).... 5,215,000 15,740
All directors who are not executive officers, as a group
(6 persons)............................................ 78,000 0
All employees who are not executive officers, as a
group.................................................. 4,960,357 106,155
</TABLE>
SECTION 162(m) OF THE INTERNAL REVENUE CODE.
Section 162(m) precludes a public corporation from taking a deduction for
compensation in excess of $1 million paid to its chief executive officer or any
of its four other highest-paid officers. However, compensation that qualifies
under Section 162(m) as "performance-based" is specifically exempt from the
deduction limit. Based on Section 162(m) and the regulations issued thereunder,
Azurix believes that compensation generated in connection with the exercise of
stock options that are granted under the Plan following shareholder approval of
the Plan should qualify as performance-based compensation and, accordingly,
Azurix's deductions for such compensation should not be limited by Section
162(m). The Plan has been designed to provide flexibility with respect to
whether restricted stock awards will qualify as performance-based compensation
under Section 162(m). Azurix believes that following shareholder approval of the
Plan certain awards of restricted stock under the Plan will so qualify and
Azurix's deductions with respect to such awards should not be limited by Section
162(m). However, certain awards of restricted stock will not qualify as
performance-based compensation, even following shareholder approval of the Plan,
and, therefore, Azurix's compensation expense deductions relating to such awards
will be subject to the Section 162(m) deduction limitation.
UNITED STATES FEDERAL INCOME TAX ASPECTS OF THE PLAN
Generally, no federal income tax is imposed on the optionee upon the grant
of a non-statutory stock option. In addition, Azurix is not entitled to a tax
deduction by reason of such a grant. Generally, upon the exercise of a
non-statutory stock option, the optionee will be treated as receiving
compensation taxable as ordinary income in the year of exercise in an amount
equal to the excess of the fair market value of the shares on the date of
exercise over the option price paid for such shares.
Upon the exercise of a non-statutory stock option, Azurix may claim a
deduction for compensation paid at the same time and in the same amount as
compensation income is recognized to the optionee assuming any federal income
tax withholding requirements are satisfied. Upon a subsequent disposition of the
shares received by the optionee upon exercise of a non-statutory stock option,
any appreciation after the date of exercise should qualify as a capital gain.
The incentive stock options under the Plan are intended to constitute
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code. Incentive stock options are subject to special federal income tax
treatment. No federal income tax is imposed on the optionee upon the grant or
exercise of incentive stock options if the optionee does not dispose of shares
acquired pursuant to the exercise within the two-year period beginning on the
date the option was granted or within the one-year period beginning on the date
the option was exercised (collectively, the "holding period"). If these
conditions are met and no tax is imposed on the optionee, then Azurix would not
be entitled to any deduction for federal income tax purposes in connection with
the grant or exercise of the option or the disposition of the underlying shares.
With respect to an incentive stock option, the difference between the fair
market value of the stock on the date of exercise and the exercise price
generally must be included in the optionee's alternative minimum taxable income.
25
<PAGE> 28
Upon disposition of the shares received upon exercise of an incentive stock
option after the holding period, the difference between the amount realized and
the exercise price should constitute a long-term capital gain or loss to the
optionee. If an optionee disposes of shares acquired pursuant to the exercise of
an incentive stock option prior to the end of the holding period, the optionee
will be treated as having received, at the time of disposition, compensation
taxable as ordinary income. In such event, Azurix may claim a deduction for
compensation paid at the same time and in the same amount as compensation is
treated as received by the optionee. The amount treated as compensation is the
excess of the fair market value of the shares at the time of exercise (or in the
case of a sale in which a loss would be recognized, the amount realized on the
sale if less) over the exercise price, and any amount realized in excess of the
fair market value of the shares at the time of exercise would be treated as
short-term or long-term capital gain, depending on the holding period of the
shares.
An individual who has been granted restricted stock under the Plan will not
realize taxable income at the time of grant, and Azurix will not be entitled to
a deduction at that time, assuming that the restrictions constitute a
substantial risk of forfeiture for federal income tax purposes. Upon expiration
of the forfeiture restrictions (i.e., as shares become vested), the holder will
realize ordinary income in an amount equal to the excess of the fair market
value of the shares at such time over the amount, if any, paid for such shares,
and, subject to the application of Section 162(m), Azurix will be entitled to a
corresponding deduction. Dividend equivalents, if any, accrued and paid to the
holder during the period that the forfeiture restrictions apply will also be
treated as compensation income to the holder and deductible as such by Azurix.
However, the recipient of restricted stock may elect to be taxed at the
time of grant of the restricted stock based upon the fair market value of the
shares on the date of the award. If the recipient makes this election, (a)
Azurix will be entitled to a deduction at the same time and in the same amount
(subject to the limitations contained in Section 162(m)), (b) dividends, if any,
paid to the recipient during the period the forfeiture restrictions apply will
be taxable as dividends and will not be deductible by Azurix, and (c) there will
be no further federal income tax consequences when the forfeiture restrictions
lapse.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION
OF THE AZURIX CORP. 1999 STOCK PLAN.
ITEM 3.
RATIFICATION OF APPOINTMENT OF AUDITORS
Pursuant to the recommendation of the Audit and Finance Committee, the
Board of Directors, subject to ratification by the shareholders, appointed
Arthur Andersen LLP, independent public accountants, to audit the consolidated
financial statements of Azurix for the year ending December 31, 2000. A
representative of Arthur Andersen LLP is expected to be present at the Annual
Meeting of Shareholders on June 13, 2000, will be offered the opportunity to
make a statement if such representative desires to do so and will be available
to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 2000.
SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Shareholders may propose matters to be presented at shareholders' meetings
and may also nominate persons to be directors. Formal procedures have been
established for those proposals and nominations.
PROPOSALS FOR 2001 ANNUAL MEETING
Shareholder proposals intended to be presented to the annual meeting of
shareholders to be held in 2001 must be received by Azurix, addressed to
Azurix's Corporate Secretary, 333 Clay Street, Houston, Texas 77002, no later
than January 3, 2001, to be included in the Azurix proxy statement and form of
proxy relating to that meeting.
26
<PAGE> 29
In addition, Azurix's bylaws provide that for business to be properly
brought before the annual meeting of shareholders, it must be either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise brought before the
meeting by or at the direction of the Board of Directors or (c) otherwise
properly brought before the meeting by a shareholder of Azurix who is a
shareholder of record at the time of giving of notice hereinafter provided for,
who shall be entitled to vote at such meeting and who complies with the
following notice procedures. In addition to any other applicable requirements,
for business to be brought before an annual meeting by a shareholder of Azurix,
the shareholder must have given timely notice in writing of the business to be
brought before an annual meeting of shareholders to the Secretary of Azurix. To
be timely, a shareholder's notice must be delivered or mailed to Azurix's
Secretary and received at Azurix's principal executive offices, 333 Clay Street,
Houston, Texas 77002, on or before January 3, 2001. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the annual meeting (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on
Azurix's books, of the shareholder proposing such business, (iii) the
acquisition date, the class and the number of shares of Common Stock which are
owned beneficially by the shareholder, (iv) any material interest of the
shareholder in such business and (v) a representation that the shareholder
intends to appear in person or by proxy at the meeting to bring the proposed
business before the meeting. Notwithstanding the foregoing bylaw provisions, a
shareholder shall also comply with all applicable requirements of the Exchange
Act, and the rules and regulations thereunder with respect to the matters set
forth in the foregoing bylaw provisions. Notwithstanding anything in Azurix's
bylaws to the contrary, no business shall be conducted at the annual meeting
except in accordance with the procedures outlined above.
NOMINATIONS FOR 2001 ANNUAL MEETING AND FOR ANY SPECIAL MEETINGS
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as directors. Nominations of persons for election
to Azurix's Board of Directors may be made at a meeting of shareholders (a) by
or at the direction of the Board of Directors or (b) by any shareholder of
Azurix who is a shareholder of record at the time of giving of notice
hereinafter provided for, who shall be entitled to vote for the election of
directors at the meeting and who complies with the following notice procedures.
Such nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of Azurix. To be timely, a shareholder's notice shall be delivered or mailed to
Azurix's Secretary and received at Azurix's principal executive offices, 333
Clay Street, Houston, Texas 77002, (i) with respect to an election to be held at
the annual meeting of shareholders to be held in 2001, on or before January 3,
2001, and (ii) with respect to an election to be held at a special meeting of
shareholders of Azurix for the election of directors, not later than the close
of business on the tenth day following the date on which notice of the date of
the meeting was mailed or public disclosure of the date of the meeting was made,
whichever first occurs. Such shareholder's notice to the Secretary shall set
forth (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, all information relating to the person
that is required to be disclosed in solicitations for proxies for election of
directors, or is otherwise required, pursuant to Regulation 14A under the
Exchange Act (including the written consent of such person to be named in the
proxy statement as a nominee and to serve as a director if elected); and (b) as
to the shareholder giving the notice, (i) the name and address, as they appear
on Azurix's books, of such shareholder, and (ii) the class and number of shares
of capital stock of Azurix which are beneficially owned by the shareholder. In
the event a person is validly designated as nominee to the Board of Directors
and shall thereafter become unable or unwilling to stand for election to the
Board of Directors, the Board of Directors or the shareholder who proposed such
nominee, as the case may be, may designate a substitute nominee. Notwithstanding
the foregoing bylaw provisions, a shareholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in the foregoing bylaw
provisions.
27
<PAGE> 30
GENERAL
As of the date of this proxy statement, the management of Azurix has no
knowledge of any business to be presented for consideration at the meeting other
than that described above. If any other business should properly come before the
meeting, it is intended that the shares represented by proxies will be voted
with respect thereto in accordance with the judgment of the persons named in
such proxies.
The cost of any solicitation of proxies will be borne by Azurix. In
addition to solicitation by use of the mails, certain officers and regular
employees of Azurix may solicit the return of proxies by telephone, telegraph or
personal interview. Arrangements may also be made with brokerage firms and other
custodians, nominees and fiduciaries for the forwarding of material to and
solicitation of proxies from the beneficial owners of Common Stock held of
record by such persons, and Azurix will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith.
By Order of the Board of Directors
PEGGY B. MENCHACA
Vice President and Secretary
Houston, Texas
May 1, 2000
28
<PAGE> 31
EXHIBIT A
AZURIX CORP.
1999 STOCK PLAN
(AS AMENDED AND RESTATED EFFECTIVE JUNE 13, 2000)
ARTICLE 1
PURPOSES OF THE PLAN
1.1 Purposes. The purposes of the Plan are (a) to enhance the Company's
ability to attract and retain the services of qualified key employees, officers
and directors upon whose judgment, initiative and efforts the successful conduct
and development of the Company's business largely depends, and (b) to provide
additional incentives to such persons or entities to devote their utmost effort
and skill to the advancement and betterment of the Company, by providing them an
opportunity to participate in the ownership of the Company and thereby have an
interest in the success and increased value of the Company.
ARTICLE 2
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
indicated:
2.1 Administrator. "Administrator" means the Human Resources and
Compensation Committee of the Board.
2.2 Affiliate. "Affiliate" shall mean (i) any entity that directly or
through one or more intermediaries is controlled by the Company, (ii) any entity
in which the Company has a significant equity interest as determined by the
Committee, or (iii) as used in Article 8 and in the term "Associate", as the
term "affiliate" is defined in Rule 12b-2 under the Securities Exchange Act of
1934, as amended, or any successor rule or regulation.
2.3 Affiliated Company. "Affiliated Company" means Enron Corp. or
"subsidiary corporation" of the Company or Enron Corp., whether now existing or
hereafter created or acquired, as those terms are defined in Sections 424(e) and
424(f) of the Code, respectively.
2.4 Associate. "Associate" is used to indicate a relationship with a
specified person and shall mean (i) any corporation, partnership or other
organization to which such specified person is an officer or partner or is,
directly or indirectly, the Beneficial Owner of ten percent (10%) or more of any
class of equity securities, (ii) any trust or other estate in which such
specified person has a substantial beneficial interest or as to which such
specified person serves as trustee or in a similar fiduciary capacity, (iii) any
relative or spouse of such specified person, or any relative of such spouse, who
has the same home as such specified person or who is a Director or officer of
the Company or any of its parents or Affiliates, and (iv) any person who is a
director or officer of such specified person or any of its parents or Affiliates
(other than the Company or any wholly-owned subsidiary of the Company).
2.5 Beneficial Owner. "Beneficial Owner" shall be defined by reference to
Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any
successor rule or regulation; provided, however, and without limitation, any
individual, corporation, partnership, group, association or other person or
entity which has the right to acquire any capital stock of the Company at any
time in the future, whether such right is contingent or absolute, pursuant to
any agreement, arrangement or understanding or upon exercise of conversion
rights, warrants or options, or otherwise, shall be the Beneficial Owner of such
capital stock.
2.6 Board. "Board" means the Board of Directors of the Company.
2.7 Change in Control. "Change in Control" means any of the events or
circumstances described in Article 8.
A-1
<PAGE> 32
2.8 Code. "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
2.9 Committee. "Committee" means a committee of two or more members of the
Board appointed to administer the Plan, as set forth in Section 7.1 hereof.
2.10 Common Stock. "Common Stock" means the Common Stock of the Company,
subject to adjustment pursuant to Section 4.3 hereof.
2.11 Disability. "Disability" means permanent and total disability as
defined in the long term disability benefit plan covering employees of the
Company, or if a Participant is not covered by such a plan, as determined by the
Administrator. The Administrator's determination of a Disability or the absence
thereof shall be binding on all interested parties.
2.12 Effective Date. "Effective Date" as to this restatement of the Plan
means June 13, 2000, or if later, the date the Plan is approved by shareholders
of the Company. No grants of Options or Restricted Stock shall be made under the
Plan prior to the Effective Date; provided, however, that this restatement of
the Plan shall not invalidate Options or Restricted Stock granted on or before
May 1, 2000.
2.13 Exercise Price. "Exercise Price" means the purchase price per share
of Common Stock payable upon exercise of an Option.
2.14 Fair Market Value. "Fair Market Value" shall mean, with respect to
any property (including, without limitation, any Common Stock or other
securities), the value of such property determined by such methods or procedures
as shall be established from time to time by the Committee; provided, that so
long as the closing price of Common Stock as reported in the "NYSE-Composite
Transactions" section of the Midwest edition of The Wall Street Journal is
reported, Fair Market Value with respect to a share of Common Stock on a
particular date shall mean such closing price of such Common Stock as so
reported for such date (or, if no prices are quoted for that date, as so quoted
for the last preceding date for which such prices were so quoted).
2.15 Incentive Option. "Incentive Option" means any Option designated and
qualified as an "incentive stock option" as defined in Section 422 of the Code.
2.16 Incentive Option Agreement. "Incentive Option Agreement" means an
Option Agreement with respect to an Incentive Option.
2.17 Nonqualified Option. "Nonqualified Option" means any Option that is
not an Incentive Option. To the extent that any Option designated as an
Incentive Option fails in whole or in part to qualify as an Incentive Option,
including, without limitation, for failure to meet the limitations applicable to
a 10% Shareholder or because it exceeds the annual limit provided for in Section
5.6 below, it shall to that extent constitute a Nonqualified Option.
2.18 Nonqualified Option Agreement. "Nonqualified Option Agreement" means
an Option Agreement with respect to a Nonqualified Option.
2.19 Option. "Option" means any option to purchase Common Stock granted
pursuant to the Plan.
2.20 Option Agreement. "Option Agreement" means the written agreement
entered into between the Company and the Optionee with respect to an Option
granted under the Plan.
2.21 Optionee. "Optionee" means a Participant who holds an Option.
2.22 Participant. "Participant" means an individual or entity that has
received a grant of an Option or a grant of Restricted Stock under the Plan, and
where permitted under the Plan, includes such person's successors and assigns.
2.23 Restricted Stock. "Restricted Stock" means shares of Common Stock
issued pursuant to Article 6 hereof, subject to any restrictions and conditions
as are established pursuant to such Article 6.
A-2
<PAGE> 33
2.24 Restricted Stock Agreement. "Restricted Stock Agreement" means the
written agreement entered into between the Company and a Participant with
respect to a grant of Restricted Stock offered under the Plan.
2.25 10% Shareholder. "10% Shareholder" means a person who, as of a
relevant date, owns or is deemed to own (by reason of the attribution rules
applicable under Section 424(d) of the Code) stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of an
Affiliated Company.
ARTICLE 3
ELIGIBILITY
3.1 General. Any employee of the Company (including employees who are
residents of the United Kingdom) or an Affiliated Company who is designated by
the Committee to receive a grant of an Option and/or a grant of Restricted Stock
under the Plan, and any individual who is a Director of the Company duly elected
by stockholders of the Company who is not an employee of the Company at the time
a grant is made, shall be eligible to be designated a Participant. However,
subject to the foregoing, only employees of the Company or an Affiliated
Company, within the meaning of section 424(e) or (f) of the Code, shall be
eligible to receive grants of Incentive Stock Options under the Plan. Grants may
be made to the same individual on more than one occasion.
3.2 Grants to Non-employee Directors. Any grant, and the provisions
applicable thereto, made under the Plan to an eligible non-employee director
must be approved by the Board.
ARTICLE 4
PLAN SHARES
4.1 Shares Subject to the Plan. A total of 17,583,284, subject to
adjustment as to number and kind of shares in the same manner as pursuant to
Section 4.3 hereof, of the Company's authorized shares of Common Stock may be
issued under the Plan, of which twenty five percent (25%) may be granted in the
form of Restricted Stock and Options for up to 7,500,000 shares may be granted
in the form of Incentive Options, subject to adjustment as to the number and
kind of shares in the same manner as pursuant to Section 4.3 hereof.
For purposes of this limitation, in the event that (a) all or any portion
of any Option or Restricted Stock granted or offered under the Plan can no
longer under any circumstances be exercised, or (b) any shares of Common Stock
are reacquired by the Company pursuant to an Incentive Option Agreement,
Nonqualified Option Agreement or Restricted Stock Agreement, the shares of
Common Stock allocable to the unexercised portion of such Option or such grant
of Restricted Stock, shall again be available for grant or issuance under the
Plan.
4.2 Accounting for Grants. For purposes of this Article 4, if a grant
under this Plan is denominated in shares of Common Stock, the number of shares
covered by such grant, or to which such grant relates, shall be counted on the
date of grant against the aggregate number of shares of Common Stock available
for making grants under the Plan; provided, however, that grants that operate in
tandem with (whether granted simultaneously with or at a different time from)
other grants may be counted or not counted under procedures adopted by the
Committee in order to avoid double counting.
4.3 Adjustments. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, shares of Common
Stock, other securities or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
shares of Common Stock or other securities of the Company (or other similar
corporate transaction or event) affects the shares of Common Stock such that an
adjustment
A-3
<PAGE> 34
is determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee may, subject to Section 4.4, in such manner
as it may deem equitable, adjust any or all of (a) the number and type of shares
of Common Stock (or other securities or property) which thereafter may be made
the subject of grants made under the Plan, (b) the number and type of shares of
Common Stock (or other securities or property) subject to outstanding grants
made under the Plan, and (c) the purchase or exercise price with respect to any
grant made under the Plan, or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding grant made under the Plan; provided,
however, that with respect to grants of Incentive Stock Options, no such
adjustment shall be authorized to the extent that such adjustment would cause
the Plan to violate Section 422(b)(1) of the Code or any successor provision
thereto; and provided further, that the number of shares of Common Stock subject
to any grant made under the Plan denominated in shares of Common Stock shall
always be a whole number.
4.4 If, and whenever, prior to the expiration of a grant theretofore made,
the Company shall effect a subdivision or consolidation of shares of Common
Stock or the payment of a stock dividend on shares of Common Stock without
receipt of consideration by the Company, the number of shares of Common Stock
with respect to which such grant may thereafter be vested or exercised (a) in
the event of an increase in the number of outstanding shares of Common Stock
shall be proportionately increased, and if the grant is an Option the purchase
price per share shall be proportionately reduced, and (b) in the event of a
reduction in the number of outstanding shares of Common Stock shall be
proportionately reduced, and if the grant is an Option the purchase price per
share shall be proportionately increased.
ARTICLE 5
OPTIONS
5.1 Option Agreement. Each Option granted pursuant to this Plan shall be
evidenced by an Option Agreement which shall specify the number of shares
subject thereto, vesting provisions relating to such Option, the Exercise Price
per share, and whether the Option is an Incentive Option or Nonqualified Option.
As soon as is practical following the grant of an Option, an Option Agreement
shall be duly executed and delivered by or on behalf of the Company to the
Optionee to whom such Option was granted. Each Option Agreement shall be in such
form and contain such additional terms and conditions, not inconsistent with the
provisions of this Plan, as the Administrator shall, from time to time, deem
desirable. Each Option Agreement may be different from each other Option
Agreement. No individual shall be granted Options totaling more than 2,000,000
shares of Common Stock in any single calendar year.
5.2 Exercise Price. The Exercise Price per share of Common Stock covered
by each Option shall be determined by the Administrator, subject to the
following: (a) the Exercise Price of an Incentive Option shall not be less than
100% of Fair Market Value on the date the Incentive Option is granted, (b) the
Exercise Price of a Nonqualified Option shall not be less than 100% of Fair
Market Value on the date the Nonqualified Option is granted, and (c) if the
person to whom an Option is granted is a 10% Shareholder on the date of grant,
the Exercise Price of an Incentive Option shall not be less than 110% of Fair
Market Value on the date the Option is granted.
5.3 Time and Method of Exercise. Subject to the provisions contained in
the Plan and in a Participant's Option Agreement, unexercised vested shares of
Common Stock under an Option may be exercised in whole or in part from time to
time by request to the Company. Payment of the exercise price and any applicable
tax withholding amounts must be made at the time of exercise, in whole or in
part, by delivery of a cashier's check or shares of Common Stock, or any
combination thereof having a Fair Market Value equal to such exercise price
provided that the Fair Market Value of shares of Common Stock so delivered shall
be equal to the closing price of such shares as reported in the
"NYSE -- Composite Transaction" section of the Midwest Edition of the Wall
Street Journal on the date of actual receipt by the Company of the notice
exercising the Option or, if no prices are so reported on such day, on the last
preceding day on which such prices of shares of Common Stock are so reported. An
Option may be exercised through a broker financed exercise pursuant to the
provisions of Regulation T of the Federal Reserve Board. If the Company receives
A-4
<PAGE> 35
payment of the purchase price for the exercise of the Option through a broker
financed exercise before the end of the third business day following the
broker's execution of the sale of shares of Common Stock for the financed
exercise, the exercise shall be effective at the time of such sale. Otherwise,
the exercise shall be effective when the Company receives payment of the
purchase price.
5.4 Term and Termination of Options. The term and provisions for
termination of each Option shall be as fixed by the Administrator, but no Option
may be exercisable more than ten (10) years after the date it is granted.
5.5 Vesting and Exercise of Options. Each Option shall vest and become
exercisable in one or more installments at such time or times, and subject to
such conditions for accelerated vesting, including without limitation the
achievement of specified performance goals or objectives, as may be determined
by the Administrator.
5.6 Annual Limit on Incentive Options. To the extent required for
"incentive stock option" treatment under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Common Stock shall
not, with respect to which Incentive Options granted under this Plan and any
other plan of the Company or any Affiliated Company become exercisable for the
first time by an Optionee during any calendar year, exceed $100,000.
5.7 Nontransferability of Options. No Option shall be assignable or
transferable except pursuant to the provisions of Section 11.1 of this Plan and
no Incentive Option may be transferred by the Optionee other than by will or the
laws of descent and distribution.
5.8 Rights as Shareholder. An Optionee or permitted transferee of an
Option shall have no rights or privileges as a shareholder with respect to any
shares covered by an Option until such Option has been duly exercised and
certificates representing shares purchased upon such exercise have been issued
to such person.
5.9 Grants to Residents and Citizens of Foreign Countries. Notwithstanding
anything to the contrary in this Article 5, the Committee may, in its
discretion, grant Options to residents and to citizens of countries other than
the United States of America with the requirement that the exercise thereof be
required to be made through a broker financed exercise as referenced in Section
5.3 above.
ARTICLE 6
RESTRICTED STOCK
6.1 Grants of Restricted Stock. A grant of Restricted Stock pursuant to a
Restricted Stock Agreement entitles the recipient to acquire shares of Common
Stock subject to such terms, restrictions and conditions as the Administrator
may determine at the time of grant.
6.2 Grants of Performance Based Restricted Stock. The Committee is
authorized to make grants of Restricted Stock which qualify as performance-based
compensation under Code Section 162(m), such that a) the issuance is contingent
upon attainment of pre-established performance criteria; or b) restrictions
lapse contingent upon attainment of pre-established performance criteria. The
performance criteria to be used with such grants shall be recurring after-tax
net income and/or cash flow, at the Company and/or subsidiary level, and
earnings per share and/or total shareholder return, at the Company level, as
determined at the sole discretion of the Committee. Performance criteria will be
established by the Committee prior to the beginning of each performance period,
defined as January 1 of each year, or such later date as permitted under the
Code, or applicable regulations. Notwithstanding any other provision of the
Plan, no individual shall receive a grant of Restricted Stock under this Section
6.2 totaling more than 100,000 shares of Common Stock in any single calendar
year. Recurring after-tax net income means after-tax net income subject to
adjustment by the Committee in its sole discretion for what the Committee
considers an unordinary or nonrecurring items of after-tax net income.
6.3 Restricted Stock Agreement. Each Restricted Stock Agreement shall be
in such form, and shall set forth the terms, conditions and restrictions of the
Restricted Stock, not inconsistent with the provisions of this
A-5
<PAGE> 36
Plan, as the Administrator shall, from time to time, deem desirable. Each
Restricted Stock Agreement may be different from each other Restricted Stock
Agreement.
6.4 Rights as a Shareholder. Upon becoming vested in Restricted Stock, a
Participant shall have the rights of a shareholder with respect to the
Restricted Stock granted pursuant to the Restricted Stock Agreement, including
voting and dividend rights, subject to the terms, restrictions and conditions as
are set forth herein and in the Restricted Stock Agreement. Unless the
Administrator shall determine otherwise, certificates evidencing shares of
Restricted Stock shall remain in the possession of the Company until such shares
have vested and are no longer subject to any restrictions on transfer in
accordance with the terms of the Restricted Stock Agreement.
6.5 Vesting of Restricted Stock. The Restricted Stock Agreement shall
specify the date or dates, the performance goals or objectives that must be
achieved, if any, and any other conditions on which the Restricted Stock may
vest.
6.6 Dividends. All dividends and distributions, or cash equivalent thereof
(whether cash, stock or otherwise), on unvested Restricted Stock shall be
withheld from the respective Participant and credited by the Company for the
Participant's account. At such time as a Participant becomes vested in a portion
of the grant of Restricted Stock, all accumulated credits for dividends and
distributions, or cash equivalent thereof attributable to such vested Restricted
Stock shall be released to the Participant. Interest shall not be paid on any
dividends or distributions or cash equivalent thereof, credited by the Company
for the account of a Participant. The Company shall have the option of paying
such credits for accumulated dividends or distributions or cash equivalent
thereof, in shares of Common Stock of the Company rather than in cash. If
payment is made in shares, the conversion to shares shall be at the Fair Market
Value. Dividends and distributions, or cash equivalent thereof credited on
non-vested Restricted Stock shall be forfeited in the same manner and at the
same time as the respective shares of Restricted Stock to which they are
attributable are forfeited.
6.7 Nonassignability of Rights. No Participant's right to acquire shares
of Restricted Stock shall be assignable or transferable except pursuant to the
provisions of Section 11.1 of this Plan.
ARTICLE 7
ADMINISTRATION OF THE PLAN
7.1 Administrator. Authority to control and manage the operation and
administration of the Plan shall be vested in the Committee consisting of two
(2) or more members of the Board who are "Non-Employee Directors" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and are "outside
directors" as referenced in Regulation 1.162-27(e)(3) issued under the Code (the
"Committee" or "Administrator"). Members of the Committee may be appointed from
time to time by, and shall serve at the pleasure of, the Board.
7.2 Powers of the Administrator. In addition to any other powers or
authority conferred upon the Administrator elsewhere in the Plan or by law, the
Administrator shall have full power and authority: (a) to determine the persons
to whom, and the time or times at which, Incentive Options or Nonqualified
Options and grants of Restricted Stock shall be granted, the number of shares to
be represented by each Option and grant of Restricted Stock and the
consideration, if any, to be received by the Company upon the exercise thereof;
(b) to construe and interpret provisions of the Plan and other documents and
agreements pertaining to the Plan; (c) to create, amend or rescind rules and
regulations relating to the Plan; (d) to determine the terms, conditions and
restrictions contained in, and the form of, Option Agreements and Restricted
Stock Agreements; (e) to determine the identity or capacity of any persons who
may be entitled to exercise a Participant's rights under any Option or
Restricted Stock Agreement granted under the Plan; (f) to correct any defect or
supply any omission or reconcile any inconsistency in the Plan or in any Option
Agreement or Restricted Stock Agreement; (g) to accelerate the vesting of any
Option or grant of Restricted Stock; (h) to extend the exercise date of any
Option and vesting date of any grant of Restricted Stock; (i) except for
changing the Exercise Price of a granted Option, to amend outstanding Option
Agreements and Restricted
A-6
<PAGE> 37
Stock Agreements to provide for, among other things, any change or modification
which the Administrator could have provided for upon the grant of an Option or
Restricted Stock or in furtherance of the powers provided for herein; and (j) to
make all other determinations necessary or advisable for the administration of
the Plan, but only to the extent not contrary to the express provisions of the
Plan. Any action, decision, interpretation or determination made in good faith
by the Administrator in the exercise of its authority conferred upon it under
the Plan shall be final and binding on the Company and all Participants.
7.3 Limitation on Liability. No employee of the Company or member of the
Board or Committee shall be subject to any liability with respect to duties
under the Plan unless the person acts fraudulently or in bad faith. To the
extent permitted by law, the Company shall indemnify each member of the Board or
Committee, and any employee of the Company with duties under the Plan, who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed proceeding, whether civil, criminal, administrative or
investigative, by reason of such person's conduct in the performance of duties
under the Plan.
ARTICLE 8
CHANGE IN CONTROL
8.1 Change in Control of Enron Corp. If at any time after the date the
Plan is adopted when Enron Corp. directly or indirectly owns thirty percent
(30%) or more of the capital stock of the Company, a transaction occurs which is
not approved, recommended or supported by a majority of the board of directors
of Enron Corp. in actions taken prior to, and with respect to, such transaction
in which:
(i) Enron Corp. merges or consolidates with any other entity (other
than one of Enron Corp.'s wholly owned subsidiaries) and is not the
surviving entity (or survives only as the subsidiary of another person or
entity),
(ii) Enron Corp. sells all or substantially all of its assets to any
other person or entity,
(iii) Enron Corp. is dissolved,
(iv) any third person or entity (other than the trustee or committee
of any qualified employee benefit plan of Enron Corp.), together with its
Affiliates and Associates, shall be, directly or indirectly, the Beneficial
Owner of at least thirty percent (30%) of the outstanding capital stock of
Enron Corp., or
(v) the individuals who constitute the members of Enron Corp.'s board
of directors on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election or
nomination for election by Enron Corp.'s stockholders was approved by a
vote of at least eighty percent (80%) of the directors comprising the
Incumbent Board (either by a specific vote or by approval of the proxy
statement of Enron Corp. in which such person is named as a nominee for
director, without objection to such nomination) shall be, for purposes of
this clause (v), considered as though such person were a member of the
Incumbent Board,
then within (a) ten days of the approval by the stockholders of Enron Corp. of
such merger, consolidation, sale of assets or dissolution as described in clause
(i), (ii) or (iii) of this Section 8.1, or (b) thirty (30) days of the
occurrence of such change of Beneficial Ownership or Directors as described in
clause (iv) or (v) of this Section 8.1, with respect to outstanding grants of
Restricted Stock made under Article 6, all such grants of Restricted Stock,
irrespective of whether they are then vested, shall be surrendered to the
Company by each grantee thereof and such grants shall thereupon be canceled by
the Company, and the grantee shall receive a cash payment by the Company in an
amount equal to the number of Shares subject to the grant of Restricted Stock
held by such grantee multiplied by the Fair Market Value of a Share on the date
determined by the Administrator (as constituted prior to any change described in
clause (iv) or (v)) to be the date of cancellation and surrender of such Options
if any such change of Beneficial Ownership or Directors occurs other than
pursuant to a tender or exchange offer, whichever is appropriate, and with
respect to outstanding grants of Options made under Article 5, all such
outstanding Options irrespective of whether they are then exercisable, shall be
surrendered (at such time as may be necessary to comply with Rule 16b-3 under
the
A-7
<PAGE> 38
Securities Exchange Act of 1934, as amended, if applicable) to the Company by
each grantee thereof and such Options shall thereupon be cancelled by the
Company, and the grantee shall receive a cash payment by the Company in an
amount equal to the number of Shares subject to the Options held by such grantee
multiplied by the difference between (x) and (y) where (y) equals the purchase
price per Share covered by the Option, and (x) equals the Fair Market Value of a
Share on the date determined by the Administrator (as constituted prior to any
change described in clause (iv) or (v)) to be the date of cancellation and
surrender of such Options if any such change of Beneficial Ownership or
directors occurs other than pursuant to a tender or exchange offer, whichever is
appropriate.
8.2 Change in Control of the Company. If a transaction occurs after the
date the Plan is adopted in which as a result of a transaction that has not been
approved, recommended or supported by a majority of the board of directors of
the Company in actions taken prior to, and with respect to, such transaction:
(i) the Company merges or consolidates with any other entity (other
than one of the Company's wholly owned subsidiaries) and is not the
surviving entity (or survives only as the subsidiary of another person
or entity), or
(ii) the individuals who constitute the members of Company's Board
on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a Director subsequent to the date of the public offering whose
election or nomination for election by the Company's stockholders was
approved by a vote of at least eighty percent (80%) of the Directors
comprising the Incumbent Board (either by a specific vote or by approval
of the proxy statement of the Company in which such person is named as a
nominee for Director, without objection to such nomination) shall be,
for purposes of this clause (ii), considered as though such person were
a member of the Incumbent Board,
then within (a) ten days of the approval by the stockholders of the Company of
such merger or consolidation as described in clause (i) of this Section 8.2 or
(b) thirty (30) days of the occurrence of such change of Directors as described
in clause (ii) of this Section 8.2, then with respect to outstanding grants of
Restricted Stock made under Article 6, all such grants of Restricted Stock,
irrespective of whether they are then vested, shall be surrendered to the
Company by each grantee thereof and such grants shall thereupon be canceled by
the Company, and the grantee shall receive a cash payment by the Company in an
amount equal to the number of Shares subject to the grant of Restricted Stock
held by such grantee multiplied by the Fair Market Value of a Share on the date
determined by the Administrator (as constituted prior to any change described in
clause (ii)) to be the date of cancellation and surrender of such Options, and
with respect to outstanding grants of Options made under Article 5, all such
outstanding Options, irrespective of whether they are then exercisable, shall be
surrendered (at such time as may be necessary to comply with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended) to the Company by each grantee
thereof and such Options shall thereupon be canceled by the Company, and the
grantee shall receive a cash payment by the Company in an amount equal to the
number of Shares subject to the Options held by such grantee multiplied by the
difference between (x) and (y) where (y) equals the purchase price per Share
covered by the Option, and (x) equals (1) the per share price offered to
stockholders of the Company in any such merger or consolidation, or (2) the Fair
Market Value of a Share on the date determined by the Administrator (as
constituted prior to any change described in clause (ii)) to be the date of
cancellation and surrender of such Options. In the event that the consideration
offered to stockholders of the Company in any transaction described in this
Section 8.2 consists of anything other than cash, the Administrator (as
constituted prior to such transaction) shall determine the fair cash equivalent
of the portion of the consideration offered which is other than cash.
A-8
<PAGE> 39
ARTICLE 9
AMENDMENT AND TERMINATION OF THE PLAN
9.1 Amendments. The Board in its discretion may terminate the Plan at any
time with respect to any shares of Common Stock for which a grant has not
theretofore been made. The Board shall have the right to alter or amend the Plan
or any part thereof from time to time; provided, that no change in any grant
theretofore made may be made which would impair the rights of the recipient of a
grant without the consent of such recipient; and provided further, that
notwithstanding any other provision of the Plan or any grant agreement, without
the approval of the stockholders of the Company no such amendment or alteration
shall be made that would:
(i) increase the total number of shares of Common Stock available for
grants under the Plan, except as provided in Article 4 hereof;
(ii) change the minimum exercise price for grant of Options;
(iii) extend the maximum period during which grants may be made under
the Plan; or
(iv) increase the maximum number of shares of Common Stock for which
Options may be granted under Section 5.1 or shares of performance-based
Restricted Stock that may be granted under Section 6.2 to any individual in
any calendar year.
The Board may alter or amend the Plan to comply with requirements under the
Code relating to Incentive Options or other types of options which give
Optionees more favorable tax treatment than that applicable to Options granted
under this Plan as of its Effective Date. Upon any such alteration or amendment,
any outstanding Option granted hereunder may, if the Administrator so determines
and if permitted by applicable law, be subject to the more favorable tax
treatment afforded to an Optionee pursuant to such terms and conditions.
9.2 Plan Termination. Unless the Plan shall theretofore have been
terminated, the Plan shall terminate on February 1, 2009 and no Options or
grants of Restricted Stock may be granted under the Plan thereafter, but Option
Agreements and Restricted Stock Agreements then outstanding shall continue in
effect in accordance with their respective terms and provisions.
9.3 Employees in Foreign Countries. The Board shall have the authority to
adopt such modifications, procedures, and subplans as may be necessary or
desirable to comply with provisions of the laws of foreign countries in which
the Company or its Affiliated Companies may operate to assure the viability of
the benefits from grants made to eligible employees employed in such countries
and to meet the objectives of the Plan.
ARTICLE 10
TAX WITHHOLDING
10.1 Withholding. The Company shall have the power to withhold, or require
a Participant to remit to the Company, an amount sufficient to satisfy the
minimum applicable Federal, state, and local tax withholding requirements with
respect to any Options exercised or Restricted Stock issued under the Plan. To
the extent permissible under applicable tax, securities and other laws, the
Administrator may, in its sole discretion and upon such terms and conditions as
it may deem appropriate, permit a Participant to satisfy his or her obligation
to pay any such tax, up to an amount equivalent to settle the minimum statutory
tax withholding rates for federal and state tax purposes including payroll taxes
by (a) directing the Company to apply shares of Common Stock to which the
Participant is entitled as a result of the exercise of an Option or as a result
of the purchase of or lapse of restrictions on Restricted Stock or (b)
delivering to the Company shares of Common Stock owned by the Participant. The
shares of Common Stock so applied or delivered in satisfaction of the
Participant's tax withholding obligation shall be valued at their Fair Market
Value as of the date of measurement of the amount of income subject to
withholding.
A-9
<PAGE> 40
ARTICLE 11
MISCELLANEOUS
11.1 Benefits Not Alienable. No grant of an Option or Restricted Stock and
no right under any such grant shall be assignable, alienable, saleable or
transferable by a Participant other than:
(a) by will or by the laws of descent and distribution;
(b) pursuant to a "domestic relations order" as defined in Section 414
of the Code or Section 206 of the Employee Retirement Income
Security Act of 1974, as amended;
(c) by transfer by an eligible Participant, subject to such rules as
the Committee may adopt to preserve the purposes of the Plan
(including limiting such transfer to Participants who are
directors or senior executives), to:
(I) a member of his or her Immediate Family,
(II) a trust solely for the benefit of the Participant and his or
her immediate Family, or
(III) a partnership or limited liability company whose only partners
or shareholders are the Participant and his or her Immediate
Family members,
(d) by designation, in a manner established by the Committee, of a
beneficiary or beneficiaries to exercise the rights of the
Participant and to receive any property distributable with respect
to any grant upon the death of the Participant.
Each transferee described in (b) and (c) above is hereafter referred
to as a "Permitted Transferee", provided that the Committee is notified in
writing of the terms and conditions of any transfer intended to be
described in (b) or (c) and the Committee determines that the transfer
complies with the requirements of the Plan and the applicable grant
agreement. Any purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance that does not qualify under (a), (b), (c) or (d)
shall be void and unenforceable against the Company. "Immediate Family"
means, with respect to a particular Participant, the Participant's spouse,
children or grandchildren (including adopted and stepchildren).
The terms and provisions of Option Agreements and Restricted Stock
Agreements shall be binding upon the beneficiaries, executors and administrators
of the Participant and on the Permitted Transferees of the Participant
(including the beneficiaries, executors and administrators of the Permitted
Transferees), except that Permitted Transferees shall not reassign any such
agreement other than by will or by the laws of descent and distribution. A grant
and underlying agreement shall be exercised only by the Participant (or his or
her attorney in fact or guardian) (including, in the case of a transferred grant
and underlying agreement, by a Permitted Transferee), or, in the case of the
Participant's death, by the Participant's executor or administrator (including,
in the case of a transferred grant and underlying agreement, by the executor or
administrator of the Permitted Transferee), and all exercises of a grant shall
be accompanied by sufficient payment, as determined by the Company, to meet its
withholding tax obligation on such exercise or by other arrangements
satisfactory to the Committee to provide for such payment. Any unauthorized
attempt at assignment, transfer, pledge or other disposition of a grant made
under the Plan shall be without effect.
11.2 No Enlargement or Employee Rights. This Plan is strictly a voluntary
undertaking on of the Company and shall not be deemed to constitute a contract
between the Company and any Participant to be consideration for, or an
inducement to, or a condition of, the employment of any Participant. Nothing
contained in the Plan shall be deemed to give the right to any Participant to be
retained as an employee of the Company or any Affiliated Company or to interfere
with the right of the Company or any Affiliated Company to discharge any
Participant at any time.
11.3 Application of Funds. Any proceeds received by the Company from the
sale of Common Stock pursuant to Option Agreements, except as otherwise provided
herein, will be used for general corporate purposes.
A-10
<PAGE> 41
ARTICLE 12
APPROVED SHARE OPTION SCHEME FOR UK PARTICIPANTS
12.1 Purpose. The purpose of these additional sections is to obtain
Approved Share Option Scheme status for UK Participants under the Plan. These
sections are to be read as a continuation of the Plan and modify the Options
granted thereunder only in relation to UK resident Participants who are granted
Options under the Plan with additional sections. They do not add to or modify
the Plan in respect of any other category of Participant.
12.2 Additional Definitions. The following additional capitalized
definitions shall have the respective meanings set forth below:
(a) "Act" shall mean the Income and Corporation Taxes Act 1988.
(b) "Approved Option" shall mean an Option granted under the Plan with
additional sections to a UK Participant while the Plan with additional
sections is approved by the UK Inland Revenue under the Act.
(c) "Limit" shall mean the greater of
(i) L100,000 or
(ii) if there were Relevant Emoluments for the preceding Year of
Assessment, four times the amount of the Relevant Emoluments for the
current or preceding Year of Assessment (whichever of those years gives
the greater amount) or
(iii) if there were no Relevant Emoluments for the preceding Year
of Assessment, four times the amount of the Relevant Emoluments for the
period of 12 months beginning with the first day during the current Year
of Assessment in respect of which there are Relevant Emoluments.
(d) "Relevant Emoluments" shall mean such of the emoluments of the UK
Participant as are liable to be paid under deduction of PAYE income tax.
(e) "UK Participant" shall mean an employee or director of the Company
or any participating Affiliate who satisfies the eligibility criteria in
Article 3 of the Plan (as modified by Article 12).
(f) "Year of Assessment" shall mean a year beginning on any 6th of
April and ending on the following 5th of April.
12.3 Modified Definitions. The following definitions in Article 2 of the
Plan shall be modified as set forth below in relation to Approved Options only
and shall be so construed throughout the Plan:
(a) "Affiliate" shall mean any company which is both a Subsidiary of
the Company (as defined by Section 736 of the Companies Act 1985) and under
the Control of the Company (as defined by Section 840 of the Act) and which
is for the time being designated by the Committee as a participating
Affiliate.
(b) "Option" shall mean Non-Qualified Options only.
(c) "Common Stock" shall mean shares of Common Stock of the Company
which satisfy the provisions of paragraph 10 to 14 inclusive of Schedule 9
to the Act.
12.4 Omitted Definitions. The following definitions in Article 2 shall be
treated as having been omitted therefrom in relation to Approved Options only
and the Plan shall accordingly be constructed throughout as if all references to
such definitions had been omitted:
(i) "Incentive Option" and "Incentive Option Agreement".
(ii) "Restricted Stock" and "Restricted Stock Agreement".
A-11
<PAGE> 42
12.5 Nonapplicable Sections. Sections 4.3 and 4.4 shall not apply to
Approved Options.
12.6 Variation of Share Capital. In the event of any variation of the
share capital of the Company by way of capitalization or rights issue,
consolidation, subdivision or reduction of capital or otherwise, the number of
Shares subject to any Approved Option and the Exercise Price for each of those
Shares shall be adjusted in such manner as the Committee decide to be fair and
reasonable provided that:
(i) the aggregate amount payable on the exercise of an Approved Option
in full is not increased
(ii) the Exercise Price for a Share is not reduced below its par value
(iii) no adjustment shall be made without the prior approval of the
Board of Inland Revenue and
(iv) following the adjustment the Shares continue to satisfy the
conditions specified in paragraphs 10 to 14 inclusive of Schedule 9 to the
Act.
12.7 Eligibility. Article 3 shall be modified in relation to Approved
Options so that:
(a) only Directors of the Company or a participating Affiliate who are
required to devote substantially the whole of their time to their duties
and in any case not less than 25 hours per week (excluding meal breaks),
and
(b) Employees who are not Directors of the Company or a participating
Affiliate who are required to devote substantially the whole of their time
to their duties and in any case not less than 20 hours per week (excluding
meal breaks) who are not ineligible to participate in the Plan by virtue of
paragraph 8 of Schedule 9 to the Act (material interest in a close company)
shall be eligible to be designated a Participant.
12.8 Grants of Options.
A. Exercise Price. The provisions of Section 5.1(i) of the Plan shall
be modified in relation to Approved Options as if the words: "shall be
specified in the Award Agreement and" had been included immediately after
the word "Option" in line 1 thereof.
B. Time and Method of Exercise. Section 5.1(ii) of the Plan shall be
modified in relation to Approved Options so that an Option may only be
exercised by a Participant giving notice to the Company in writing of the
number of Shares in respect of which he wishes to exercise the Option
accompanied by the appropriate payment either in cash or by the delivery of
irrevocable instructions to a broker to deliver promptly to the Company an
amount equal to the relevant exercise price. No Approved Option may be
exercised by a UK Participant who has become ineligible to participate in
the Plan by virtue of paragraph 8 of Schedule 9 to the Act (material
interest in a close company).
12.9 Restricted Stock. The provisions of Article 6 of the Plan shall not
apply to Approved Options.
12.10 General.
A. Further Limitations on the Amount of Awards. No Approved Options
shall be granted to UK Participants if at the relevant date of grant the
aggregate Exercise Price of all subsisting Approved Options granted under
the Plan and any other plan established by the Company or any associated
company of the Company and approved by the Inland Revenue under the
provisions of Schedule 9 to the Act (other than a savings-related share
option scheme) would exceed the Limit.
B. Limits on Transfer of Awards. Section 11.1 of the Plan shall be
modified so that Approved Options will only be exercisable for the period
of 12 months following the death of the relevant UK Participant. The
provisions of Section 11.1(b) and Section 11.1(c) shall not apply to
Approved Options.
C. Issue or Transfer of Shares. The appropriate number of Shares shall
be allotted or transferred (as the case may be) within 30 days following
the exercise of an Option.
A-12
<PAGE> 43
12.11 Amendments to the Plan. No amendments to the Plan which relate to an
Approved Option shall be effective unless they are approved by the UK Inland
Revenue.
12.12 No Adjustments of Awards. The provisions of Article 8 of the Plan
shall not apply to Approved Options.
A-13
<PAGE> 44
[AZURIX LOGO]
<PAGE> 45
PROXY
[AZURIX LOGO] AZURIX CORP.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AZURIX CORP.
FOR ANNUAL MEETING ON JUNE 13, 2000
The Undersigned hereby appoints Rebecca P. Mark, John C. Ale and Peggy B.
Menchaca, or any of them, and any substitute or substitutes, to be the attorneys
and proxies of the undersigned at the Annual Meeting of Shareholders of Azurix
Corp. ("Azurix") to be held at 10:00 a.m. Houston time on Tuesday, June 13,
2000, in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400
Dallas St., Houston, Texas, or at any adjournment thereof, and to vote at such
meeting the shares of stock of Azurix that the undersigned held of record on the
books of Azurix on the record date for the meeting.
ELECTION OF DIRECTORS, NOMINEES: (change of address/comments)
John H. Duncan
Joseph W. Sutton -------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
(If you have written in the above
space, please mark the corresponding
box on the reverse side of this card)
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE -------------
APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY SEE REVERSE
BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF SIDE
DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR SHARES -------------
UNLESS YOU SIGN AND RETURN THIS CARD.
<PAGE> 46
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS
1, 2 AND 3.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of
Directors. [ ] [ ]
(see reverse)
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------
o FOR AGAINST ABSTAIN
2. Approval of the
Azurix Corp. 1999 [ ] [ ] [ ]
Stock Plan in order
to qualify grants
under the plan as
performance-
based
compensation.
o o FOR AGAINST ABSTAIN
3. Ratification of appointment of [ ] [ ] [ ]
independent accountants
4. In the discretion of the proxies named Change of Address/
herein, the proxies are authorized to Comments on [ ]
vote upon other matters as are Reverse Side
properly brought before the meeting.
All as more particularly described in the Proxy Statement relating to
such meeting, receipt of which is hereby acknowledged.
Please sign exactly as name appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
SIGNATURE(S) DATE
O FOLD AND DETACH HERE O
[AZURIX LOGO] THIS IS YOUR PROXY
YOUR VOTE IS IMPORTANT.
IF YOU NEED ASSISTANCE IN ANY OF THE FOLLOWING AREAS:
O ADDRESS CHANGES - LEGAL TRANSFERS
O CONSOLIDATION OF ACCOUNTS - ELIMINATE MULTIPLE ACCOUNTS FOR ONE HOLDER AND
CERTAIN DUPLICATE SHAREHOLDER MAILINGS GOING TO ONE ADDRESS. (Annual reports
and proxy materials would continue to be mailed to each shareholder.)
JUST CALL OUR TRANSFER AGENT'S TELEPHONE RESPONSE CENTER:
(800)519-3111 OR (201)324-1225
OR WRITE TO:
FIRST CHICAGO TRUST COMPANY OF NEW YORK
A DIVISION OF EQUISERVE
P.O. BOX 2500
JERSEY CITY, NJ 07303-2500
http://www.equiserve.com
FOR EARNINGS INFORMATION, CALL (713)646-9531
