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File No. 70-8791
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Amendment No. 1 to
Form U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
THE COLUMBIA GAS SYSTEM, INC.
20 Montchanin Road
Wilmington, DE 19807
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(Names of company or companies filing this statement
and addresses of principal executive offices)
L.J. Bainter, Treasurer
The Columbia Gas System, Inc.
20 Montchanin Road
Wilmington, DE 19807
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(Name and address of agent for service)
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The Application-Declaration as previously filed is hereby amended to
file the exhibit listed below:
Item 6. Exhibits and financial statements.
(a) Exhibits
A-2 Portions of The Columbia Gas System, Inc. Proxy
Statement discussing the proposed adoption of the
Long-Term Incentive Plan
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
THE COLUMBIA GAS SYSTEM, INC.
Date: February 16, 1996 By: /s/ L. J. Bainter
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L. J. Bainter, Treasurer
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EXHIBIT INDEX
(a) Exhibits
A-2 Portions of The Columbia Gas System, Inc. Proxy
Statement discussing the proposed adoption of the
Long-Term Incentive Plan
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EXHIBIT A-2
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
EXECUTIVE COMPENSATION REPORT TO STOCKHOLDERS
1996 EXECUTIVE COMPENSATION PLAN CHANGES
Following the Corporation's emergence from Chapter 11 protection, the
Compensation Committee (the "Committee") of the Corporation's Board of Directors
approved a new total compensation program for the executive group, effective in
1996. The Committee felt strongly that a more aggressive PAY FOR PERFORMANCE
compensation program was needed to focus management's attention on the
Corporation's NEW strategic business initiatives and financial performance
objectives. The Committee believes that the design and execution of the new
executive compensation program is critical to the Corporation's future success
and wants to emphasize several key concepts going forward into 1996.
- - Greater amounts of the executives' pay packages will be PLACED AT RISK
and will be based upon CREATING LONG-TERM VALUE FOR THE STOCKHOLDERS.
- - The new program will TIE COMPENSATION MORE CLOSELY TO THE FORTUNES OF
THE STOCKHOLDERS through the use of a combination of cash and
STOCK-BASED INCENTIVE COMPENSATION PLANS.
- - Emphasis will be placed on the achievement of both short and longer
term internal VALUE ADDED PERFORMANCE MEASURES as well as STOCKHOLDER
RETURN EXPECTATIONS in relationship to peers.
- - The program will provide highly competitive financial rewards for
meeting or exceeding financial targets.
In order to accomplish these objectives and to FOCUS MANAGEMENT'S ATTENTION on
the new competitive business environment, the Committee has decided that awards
for the most senior executives under the 1996 program will be based on the newly
installed COLUMBIA VALUE ADDED FINANCIAL PERFORMANCE MEASURES. Value added
measures determine the real value of particular investments by the extent the
return on that investment exceeds the cost of the investment, including the cost
of capital.
The new executive compensation program also includes a component to bring
special attention to the important area of STOCKHOLDER RETURN. The Corporation's
Total Stockholder Return performance (stock price appreciation plus dividend
accruals) will be compared to the S&P Natural Gas Utility Index as included in
this Annual Proxy Statement. It is, generally, the intent of the Committee to
provide awards of options when the Corporation's Total Stockholder Return
exceeds the median of companies which comprise this peer group. Consequently,
any potential value to participants will come only when the stock price
appreciates and the stockholders likewise benefit from increased market
appreciation. Contingent or restricted stock may also be awarded in very limited
applications.
1995 EXECUTIVE COMPENSATION PROGRAM
The compensation philosophy described below is the basis for the 1995
compensation program. Any compensation decisions described or listed in the
enclosed tables were made relevant to that plan year. The executive compensation
program and respective philosophic concepts will be changed as described above,
under the 1996 program, to reflect the Board of Directors' newly expressed
position on pay for performance.
GENERAL - Through the Committee, the Board of Directors has developed an
executive compensation philosophy and programs to implement that philosophy.
These programs combine to form the basis of the total compensation plan for
senior management of the Corporation and its subsidiaries (the "System").
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COMPENSATION PHILOSOPHY - The Board of Directors believes that total
compensation is not only payment for services rendered to the System, but also a
means to provide a strong motivational vehicle for the achievement of key
financial and strategic goals. The System provides executives with the
opportunity to increase their total compensation above base salary through
annual and longer term incentive compensation programs. Incentive compensation
goals are established such that their achievement will result in added value to
the System over reasonable periods of time. This is how compensation is linked
to corporate performance. The System's executive compensation program is
designed to:
- provide annual cash compensation and benefit levels that
target the median of the marketplace in similar-sized utility
and industrial companies;
- maintain equitable relationships among the compensation
levels established for all jobs within the System;
- provide for the recognition of performance delivered year-to-
year and over the long term; and
- ensure that appropriate controls are in place for
compensation to be fully earned.
Because of the System's size and integrated nature, a number of well-known
utility and industrial executive compensation surveys are utilized to determine
competitive remuneration for executives. Most of the companies in the S&P
Natural Gas Utility Index are included in one or more of these surveys. However,
no single executive compensation survey covers all of the companies in the S&P
Natural Gas Utility Index.
IMPLEMENTATION OF PHILOSOPHY - The System's executive compensation program is
administered by the Committee. The Committee is composed of six independent,
non-employee Directors. As of December 31, 1995, the System's executive total
compensation program consisted of the following:
1. Base Salary Program
2. Annual Incentive Compensation Plan
3. Long-Term Incentive Plan
4. Benefit Plans
5. Other Arrangements
1. Base Salary Program - A base salary range is established for each
executive position based on a comparison of compensation levels of
similar positions in the external market. Competitive base salary
levels are needed to attract and retain competent executives.
Individual performance reviews are conducted at least annually and are
used, along with the relative position of the individual's salary
within the salary range, to determine if any increase to base salary is
warranted. Increases are based on individual performance and are not
automatic. Based on the utility and industrial compensation surveys
referred to above, the base salary levels for the named executive
officers as a group approximate the median for similar executives with
corporations of similar size and complexity. A range of merit
opportunities is preestablished on a uniform basis and the level of an
increase within that range is based on an assessment of an individual's
management skills and achievement against a variety of preestablished
corporate and operating company goals. Through December 31, 1995, these
goals included specific Return on Invested Capital (ROIC) performance
measures as well as other organizational goals pertaining to an
executive's individual business unit. Each of the goals is weighted and
assigned to each individual according to its importance and impact on
the business unit. The achievement of financial measures is given high
priority, but the percentage will vary based on the individual's
position within the organization.
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2. Annual Incentive Compensation Plan - This plan, which was adopted in
1987, provided the opportunity for payment of cash awards to key
employees for attainment of specific goals which contributed directly
to the present and future financial health of the System. The plan was
suspended in mid-1991 and continued in suspension through 1995. The
plan has been amended and restated and will be implemented, effective
January 1, 1996. Awards for 1996 performances will not be made until
1997 after financial results for 1996 are final.
An interim cash performance award program was authorized by the
Committee in 1992. Eligibility for consideration in the Interim Cash
Performance Award Program was based on the individual's level of
responsibility within the organization and ability to contribute to the
financial performance of the company. The award opportunities for 1994
ranged from zero to 20 percent of an individual's annual salary based
on performance against pre-set goals. In 1995 the maximum was increased
to 35 percent. The higher the achievement and contribution to the
Corporation, the larger the potential award could be. Performance
measures included specific ROIC financial targets as reflected in the
Corporation's strategic business plan and other organizational goals
which can contribute to the success of the company. The award for 1994
performance was made in 1995 and, for the executive officers named in
the Summary Compensation Table, is shown in that table. The award for
1995 performance will not be determined or awarded until later in 1996.
This interim program will end with the implementation of the revised
program referred to above, effective January 1, 1996.
3. Long-Term Incentive Plan - The Long-Term Incentive Plan, which was
adopted in 1986, provided additional incentives to officers and other
key employees of System companies through the granting of incentive
stock options, non-qualified stock options, stock appreciation rights
and/or contingent stock awards. The plan was administered by the
Committee, no member of which was eligible to participate in the plan.
The Committee considered both organizational level and individual
performance in determining eligibility and the number of shares to be
awarded. This plan was suspended in mid-1991 and continued in
suspension through 1994. The Committee at its December 20, 1994 meeting
decided that it would be appropriate to resume this plan during 1995
and made awards at its March 1995 meeting which are reported in the
Options Table of this Proxy Statement. The plan terminated by its terms
on September 18, 1995. Subject to stockholder approval, the System is
planning to adopt a new Long-Term Incentive Plan as described elsewhere
in this Proxy Statement.
4. Benefit Plans - The System maintains savings, retirement, medical,
dental, long-term disability, life insurance and other benefit plans of
general applicability. Federal regulations establish limits on the
benefits which may be paid under savings and retirement plans qualified
under the Internal Revenue Code ("IRC"). To maintain compliance, the
System caps benefits under the qualified plans at the required levels.
To provide comparable benefits to more highly compensated employees,
the System has established a Thrift Restoration Plan and a Pension
Restoration Plan, both of which are non-qualified and unfunded.
However, the Pension Restoration Plan may be funded through a trust
arrangement at the election of the beneficiary once a threshold
liability of $100,000 has been reached. The Committee views these
supplemental plans as part of base compensation.
5. Other Arrangements - When circumstances warrant, the Corporation and
other companies in the System can enter into agreements seeking to
retain the services of experienced management during periods of
financial uncertainty. Such agreements were entered into in July 1991
and expired in 1993. In order to retain experienced management, the
Committee authorized the execution of new agreements upon approval by
the Bankruptcy Court. These employment agreements have been terminated
and are no longer in effect; however, payments were made pursuant to
these agreements in 1995 as described elsewhere in this Proxy Statement
under "Employment Agreements" and as shown on the Summary Compensation
Table. Mr. Richard, the new Chairman, CEO, and President of the
Corporation, and Mr. Schwolsky, a Senior Vice President and Chief Legal
Officer of the Corporation, were granted employment agreements upon
hire. For a more detailed description of the agreements, please see
"Employment Agreements" elsewhere in this Proxy Statement.
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DEDUCTIBILITY OF COMPENSATION - The Committee has reviewed the potential impact
on the System of Section 162(m) of the IRC which imposes a limit on tax
deductions that the System may claim for annual compensation in excess of one
million dollars paid to any of the CEO and the four other most highly
compensated executive officers. The Committee has determined that under current
compensation arrangements, the impact of Section 162(m) on the System would be
limited, if applicable at all, and, therefore, has decided not to take any
action at this time to meet the requirements for an exemption for "performance
based compensation" for the Annual Incentive Compensation Plan. However, it is
contemplated that such a deduction will be pursued where available for the
proposed Long- Term Incentive Plan.
EVALUATION PROCESS - Each year, the Board of Directors of the Corporation
reviews and approves strategic business and financial plans for the Corporation
and each of its subsidiaries. In addition to various business strategies, these
plans include specific financial targets such as ROIC or other measures to
evaluate whether stockholder value has increased.
The goals set forth in these strategic plans are the bases for evaluating the
performance of the CEO of the Corporation and other senior executives whose
compensation falls under the direct purview of the Committee. Attainment of
meaningful strategic objectives over reasonable time periods increases value to
stockholders, and the increased compensation opportunities for executives are
directly linked to the attainment of these objectives.
1995 CHIEF EXECUTIVE OFFICER'S PAY
Base Salary - At its March 14, 1995 meeting the Committee decided that Mr.
Croom's base salary should be increased to $740,000 (a 6.9 percent increase to
be effective April 1, 1995). This merit increase was made within the guidelines
established under the System's executive compensation program as described
above. This compensation action competitively positioned Mr. Croom's base pay
within the established salary range and reflected the salary movement of similar
positions in the Corporation's peer group comparisons.
Effective as of the close of business on April 28, 1995, Oliver G. Richard III
was elected Chairman, CEO and President of the Corporation. John H. Croom
retired effective May 1, 1995.
To attract an executive of this caliber, the Corporation entered into an
employment agreement with Mr. Richard that provides a base salary of $750,000
per year, subject to such increases as may be approved by the Board. The
agreement provides for contingent stock grants of 10,000 shares of the
Corporation's common stock upon Mr. Richard's commencement of employment with
the Corporation, and 5,000 shares per year on December 31 of each of the years
1995, 1996, and 1997, if he is employed by the Corporation on those dates. In
addition, subject to the receipt of necessary approvals, on the thirtieth day
after the Corporation's discharge from bankruptcy, Mr. Richard was to receive a
grant of options to purchase, at the then prevailing market price, 100,000
shares of the Corporation's common stock. Since the options could not be issued
as of the thirtieth day following the Corporation's discharge from bankruptcy as
the Long-Term Incentive Plan was no longer in effect and no successor plan had
been approved by the stockholders, Mr. Richard, in addition to receiving the
options when issued, will receive a cash payment equal to the excess, if any, of
the actual grant price over the fair market value of the shares on the thirtieth
day following discharge from bankruptcy.
Under the terms of the employment agreement, the Corporation compensated Mr.
Richard for certain items that he forfeited as a result of his terminating
employment with New Jersey Resources Corporation. This compensation is reflected
in the "All Other Compensation" column of the Summary Compensation Table.
Besides being eligible to participate in all incentive compensation plans and
employee benefit programs provided to other senior executives of the System, Mr.
Richard may receive, upon retirement, supplemental pension payments to make up
the difference, if any, between the System's pension benefits and those Mr.
Richard would have received from his previous employer. In the opinion of two
outside consulting firms, the compensation offered to Mr. Richard was reasonable
and necessary in order to attract an outsider to assume the responsibilities of
CEO. Based thereon, the Committee approved the employment agreement.
ANNUAL INCENTIVE PLAN - Under the provisions of the Interim Annual Incentive
Plan as described above, on March 14, 1995, the Committee approved a cash award
for Mr. Croom of $400,000 to recognize the attainment during 1994 of
predetermined financial performance targets based primarily on corporate and
operating company ROIC goals and because of his extraordinary leadership in
bankruptcy reorganization which created the framework for a resolution to
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the bankruptcy. This award was granted in accordance with the Corporation's "Pay
for Performance" compensation philosophy for its executives. An award, if any,
for Mr. Richard for 1995 will not be determined until later in 1996.
LONG-TERM INCENTIVE PLAN - As noted above, Mr. Richard will receive awards of
stock options pursuant to his employment agreement to be issued under the new
Long-Term Incentive Plan, which, subject to approval by stockholders and
regulatory agencies, will be effective February 21, 1996. In addition, subject
to the Corporation's receipt of such approvals for the plan, Mr. Richard will
receive restricted stock as compensation for performance based upon his
contributions and the increase in stock price from April 28, 1995 to December
28, 1995, the thirtieth day after the Corporation's emergence from bankruptcy.
To provide an additional incentive to Mr. Richard to continue his employment
with the Corporation, only 20 percent of the restricted stock would be vested
each year, with the first 20 percent being vested January 2, 1997, and an
additional 20 percent being vested on the first business day of each succeeding
calendar year. Because the issuance of the restricted stock is subject to
stockholder and regulatory approval of the new Long-Term Incentive Plan, Mr.
Richard's employment agreement has been amended not only to provide for the
issuance of restricted stock, but also to provide a cash bonus in lieu of the
restricted stock if such aforesaid approval is not obtained. In addition, Mr.
Richard may receive an award under the proposed new Long-Term Incentive Plan.
By the Compensation Committee:
Wilson K. Cadman, Chairman James P. Heffernan
Robert H. Beeby James R. Thomas, II
William E. Lavery William R. Wilson
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3. ADOPTION OF A LONG-TERM INCENTIVE PLAN
THE BOARD OF DIRECTORS HAS DETERMINED THAT THE LONG-TERM INCENTIVE PLAN
IS IN THE BEST INTERESTS OF THE CORPORATION AND ALL ITS STOCKHOLDERS AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR PROPOSAL THREE.
On February 21, 1996, the Board of Directors approved the Long-Term Incentive
Plan ("LTIP") attached hereto as Exhibit A, subject to the approval of
stockholders and the U.S. Securities and Exchange Commission ("SEC") pursuant to
the Public Utility Holding Company Act of 1935. The purpose of the LTIP is to
provide long-term incentives to those officers and key employees ("Employees")
who, in the opinion of the Compensation Committee of the Board (the
"Committee"), make, or may make, substantial contributions to the Corporation
through their ability and efforts and members of the Board who are not employees
("Outside Directors"). The LTIP will be effective as of February 21, 1996, upon
approval by a vote of the holders of a majority of the common stock of the
Corporation present or represented and entitled to vote at the Annual Meeting
and SEC approval, and will terminate on February 20, 2006. The following general
description of the LTIP is qualified in its entirety by reference to Exhibit A,
annexed hereto, which consists of a copy of the LTIP.
A total of 3,000,000 shares of the Corporation's common stock will be made
available for issuance under the LTIP, subject to adjustment to prevent dilution
or enlargement of rights under the LTIP, and no participant may be awarded more
than 20 percent of that total. Based on the criteria set forth below, with
respect to option grants for Outside Directors, approximately 390,000 shares are
expected to be issued to Outside Directors over the life of the LTIP. The term
of the LTIP is ten years; hence, no award may be granted more than ten years
after the effective date. Although the Committee will determine which positions
have the potential to make a substantial contribution to the Corporation, it is
currently contemplated that approximately 170 Employees will be considered
eligible under the LTIP. Awards may take several forms: incentive stock options,
nonqualified stock options, stock appreciation rights, contingent stock awards,
restricted stock awards or any award in other forms that the Committee may in
its discretion deem appropriate, but in any event which are consistent with the
LTIP's purpose, including any combination of the foregoing. Employees would be
eligible to receive any form of award permitted under the LTIP. Outside
Directors would be eligible only for options which do not qualify as incentive
stock options under Section 422 of the IRC (nonqualified stock option
hereinafter called "NQOs") according to the formula set forth in the LTIP, as
described below.
PLAN ADMINISTRATION
With respect to Employees, the LTIP will be administered by the Committee, which
consists of Directors who qualify both as "disinterested persons" under Rule
16b-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and "Outside Directors" under Section 162(m) of the IRC
and the regulations promulgated thereunder. The Board of Directors may suspend,
terminate or amend the LTIP at any time but may not adopt any amendment that
would (i) materially increase the benefits accruing to participants, (ii)
materially increase the maximum number of shares issued under the LTIP, subject
to equitable adjustment as described below, or (iii) materially modify the
LTIP's eligibility requirements. In the event of any change affecting the number
of outstanding shares of the Corporation, by reason of any stock dividend,
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or the like, the Committee shall make an equitable adjustment in the
aggregate number of shares or awards issued under the LTIP. The termination or
any modification or amendment of the LTIP may not, without a participant's
consent, affect rights under an award previously granted. Nevertheless, the
Corporation may terminate the LTIP at any time provided that full and equitable
compensation is made to participants with respect to awards previously granted.
With respect to Outside Directors, the LTIP is designed to be a "formula plan"
meeting the requirements of Exchange Act Rule 16b-3(c)(2) and, accordingly, is
intended to be self-governing. To this end, and except as specified therein with
respect to ministerial matters, the Committee has no discretionary authority
over any transaction under the LTIP with regard to Outside Directors. Consistent
with the limited discretion over the LTIP regarding the portions of the plan
governing awards to Outside Directors, the LTIP may not be amended more that
once every six months except as may be consistent with Exchange Act Rule
16b-3(c)(ii)(B) and no amendment may change the basis on which awards are made
to Outside Directors.
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OPTIONS
Options to purchase the Corporation's common stock may be awarded under the LTIP
as either incentive stock options ("ISOs"), which are qualified under Section
422 of the IRC, or NQOs. The price at which shares of common stock may be
purchased upon exercise of an ISO shall be not less than 100 percent of the fair
market value of the stock on the date the option is granted. The initial
exercise price on a NQO will be 100 percent of the fair market value as of the
date the option is granted and the agreement reflecting the NQO shall provide
that the exercise price will be reduced by cumulative dividends paid on the
Corporation's common stock while the NQO is outstanding and unexercised. The
fair market value of shares under an individual's ISO first exercisable in any
one calendar year will not exceed $100,000.
Options cannot be exercisable earlier than six months from the date of grant and
must be exercised within ten years. The amount of awards to each participant
will be based upon the evaluation of his/her position and an evaluation of the
Corporation's Total Stockholder Return (defined as market appreciation and
dividends in a fiscal year) as compared to a group of peer companies. Awards to
Employees may be made for reasons other than Total Stockholder Return
performance subject to the discretion of the Committee. Payment in full of the
exercise price must be made upon the exercise of a stock option.
NQO awards to Outside Directors shall be made if the Corporation's Total
Stockholder Return for a fiscal year exceeds the median of the Total Stockholder
Return for the group of peer companies utilized for comparison purposes in the
Corporation's Annual Proxy Statement. If the Corporation's Total Stockholder
Return falls in the third quartile of the peer group, then options shall be
granted to each Outside Director to purchase 3,000 shares of common stock. If
the Corporation's Total Stockholder Return falls in the fourth quartile of the
peer group, then options shall be granted to each Outside Director to purchase
6,000 shares of common stock. No stock option awards can be made to Outside
Directors if the Total Stockholder Return is at or below the median of the group
for a calendar year.
NQOs for Outside Directors, if any, would be granted effective as of 90 days
after the close of the Corporation's fiscal year for Total Stockholder Return
performance for the preceding fiscal year. Grants to Outside Directors would
vest one-third upon the date of the grant, one-third upon the first anniversary
of the grant and one-third upon the second anniversary of the grant. The
purchase price per share of stock for Outside Directors' awards would be 100
percent of the fair market value of the stock on the day the option is granted.
For awards to Outside Directors, "fair market value" means the average of the
high and low sales prices per share of the Corporation's common stock on The New
York Stock Exchange as reported in The Wall Street Journal for such date. The
agreement reflecting the Outside Director NQO will provide that this price will
be reduced by cumulative dividends paid on the Corporation's common stock while
the NQO is outstanding and unexercised.
Upon termination of employment due to death, disability or retirement, vested
options may be exercised within 24 months of such event except that ISOs
generally must be exercised within one year in the case of disability or three
months in the case of retirement. If termination occurs for any other reason,
all options must be exercised within three months after termination to the
extent such options are exercisable at termination. Upon a "change in control"
as defined in the LTIP, all options will automatically vest.
STOCK APPRECIATION RIGHTS
Under the LTIP, NQOs may, but need not, be accompanied by stock appreciation
rights ("SARs"). SARs entitle the recipient to elect to surrender the option and
receive shares of common stock, cash, or a combination thereof in an amount
equal in value to the excess of the aggregate fair market value of the shares
with respect to which the SAR is exercised, based on the closing price as of the
exercise date, over the grant price of such shares. The initial grant price on a
SAR will be 100 percent of the fair market value as of the date the option is
granted, but the agreement reflecting the SAR may provide that the grant price
may be reduced by cumulative dividends paid on the Corporation's common stock
while the SAR is outstanding and unexercised. A SAR is subject to all other
terms and conditions of the option to which it relates.
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CONTINGENT OR RESTRICTED STOCK
The LTIP also provides for the award to Employees of the right to receive shares
of common stock, subject to certain restrictions or contingencies, either in the
form of a contingent stock award or a restricted stock award. Shares awarded as
a contingent stock award will not be issued in the name of the recipient, and
the recipient shall not have the rights of a stockholder until all contingencies
expire. Shares issued as a restricted stock award will be issued in the name of
the recipient, and the recipient shall have all the rights of a stockholder for
all such shares, although (1) either the recipient shall not receive possession
of the shares until all restrictions on such shares lapse, or (2) if the
recipient receives possession, the shares will contain a legend as to their
restricted status. The amounts, terms and conditions of an individual award will
vary in response to business objectives as determined by the Committee. A
recipient will forfeit his/her awards upon termination of employment unless
otherwise provided by the award agreement or the Committee.
Provisions in the LTIP allow shares to be earned after termination if the
participant's salary is continued through an employment agreement, severance
program or comparable arrangement. Upon a "change in control" as defined in the
LTIP, contingent stock awards and restricted stock awards will automatically
vest, and all restrictions and contingencies will be assumed to have been
satisfied.
TRANSFERABILITY
Generally, all awards under the LTIP are non-transferable except by will or in
accordance with the laws of descent and distribution. During the life of the
participant, awards may be exercised only by such participant, and the Committee
may permit a participant to designate a beneficiary to exercise or receive any
rights that may exist upon the participant's death.
FEDERAL TAX CONSEQUENCES
Under present federal income tax law, the Corporation believes that the award of
a stock option or SAR generally creates no federal income tax consequences for
the recipient or the Corporation. In general, the optionee has no federal
taxable income upon exercising an ISO (except that the alternative minimum tax
may apply), and the Corporation receives no deduction when an ISO is exercised.
Upon exercising a NQO, the recipient must recognize ordinary income equal to the
difference between the exercise price and the fair market value of the stock on
the date of exercise and the Corporation will generally be entitled to a
deduction for the same amount. Generally, there are no federal income tax
consequences to the Corporation in connection with a disposition of shares
acquired under an option except that the Corporation may be entitled to a
deduction in the case of a disposition of shares acquired under an ISO before
the applicable ISO holding period has been satisfied.
With respect to a contingent stock award, a participant will be taxable on cash,
stock or other property when it is actually paid or made available and the
Corporation will be entitled to a deduction at such time. With respect to a
restricted stock award, the participant must recognize ordinary income equal to
the fair market value of the shares or other property received at the time the
shares or other property become transferable or are not subject to a substantial
risk of forfeiture, whichever occurs earlier, over the amount (if any) paid by
the participant. The Corporation will be entitled to a deduction for the same
amount at that time except as limited by Section 162(m) of the IRC. Different
federal income tax rules may apply with respect to participants who are subject
to Exchange Act Section 16. With respect to restricted stock awards, a
participant may make a special election under Section 83(b) of the IRC to be
taxed immediately.
The preceding discussion is only a general summary of certain federal income tax
consequences arising from participation in the LTIP and should not be used for a
determination of an individual's unique tax situation. It is suggested that the
individual consult with a tax advisor regarding the applicability of federal,
state and local tax laws to his/her particular situation.
UNLESS THEY ARE DIRECTED OTHERWISE BY STOCKHOLDERS, THE PROXIES INTEND TO
VOTE "FOR" PROPOSAL THREE.
