UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
1-6047 GPU, Inc. 13-5516989
(a Pennsylvania corporation)
300 Madison Avenue
Morristown, New Jersey 07962-1911
Telephone (973) 455-8200
1-3141 Jersey Central Power & Light Company 21-0485010
(a New Jersey corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-446 Metropolitan Edison Company 23-0870160
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
1-3522 Pennsylvania Electric Company 25-0718085
(a Pennsylvania corporation)
2800 Pottsville Pike
Reading, Pennsylvania 19640-0001
Telephone (610) 929-3601
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the issuer's classes of voting
stock, as of July 29, 1998, was as follows:
Shares
Registrant Title Outstanding
- ---------- ----- -----------
GPU, Inc. Common Stock, $2.50 par value 127,927,087
Jersey Central Power & Light Company Common Stock, $10 par value 15,371,270
Metropolitan Edison Company Common Stock, no par value 859,500
Pennsylvania Electric Company Common Stock, $20 par value 5,290,596
<PAGE>
GPU, Inc. and Subsidiary Companies
Quarterly Report on Form 10-Q
June 30, 1998
Table of Contents
-----------------
Page
PART I - Financial Information
Consolidated Financial Statements:
GPU, Inc.
---------
Balance Sheets 3
Statements of Income 5
Statements of Cash Flows 6
Jersey Central Power & Light Company
------------------------------------
Balance Sheets 7
Statements of Income 9
Statements of Cash Flows 10
Metropolitan Edison Company
---------------------------
Balance Sheets 11
Statements of Income 13
Statements of Cash Flows 14
Pennsylvania Electric Company
-----------------------------
Balance Sheets 15
Statements of Income 17
Statements of Cash Flows 18
Combined Notes to Consolidated Financial Statements 19
Combined Management's Discussion and Analysis
of Financial Condition and Results of
Operations 52
PART II - Other Information 77
Signatures 80
---------------------------------
The financial statements (not examined by independent accountants) reflect
all adjustments (which consist of only normal recurring accruals) which are, in
the opinion of management, necessary for a fair statement of the results for the
interim periods presented.
This combined Quarterly Report on Form 10-Q is separately filed by GPU,
Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and
Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. None of
these registrants make any representations as to information relating to the
other registrants. This combined Form 10-Q supplements and updates the 1997
Annual Report on Form 10-K, filed by the individual registrants with the
Securities and Exchange Commission and should be read in conjunction therewith.
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Statements made
that are not historical facts are forward-looking and, accordingly, involve
risks and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. Although such
forward-looking statements have been based on reasonable assumptions, there is
no assurance that the expected results will be achieved. Some of the factors
that could cause actual results to differ materially include, but are not
limited to: the effects of regulatory decisions; changes in law and other
governmental actions and initiatives; the impact of deregulation and increased
competition in the industry; industry restructuring; expected outcomes of legal
proceedings; generating plant performance; fuel prices and availability; and
uncertainties involved with foreign operations including political risks and
foreign currency fluctuations.
2
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
-----------------------------
June 30, December 31,
1998 1997
------------ --------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
In service, at original cost $10,782,924 $11,150,677
Less, accumulated depreciation 4,260,228 4,050,165
---------- ----------
Net utility plant in service 6,522,696 7,100,512
Construction work in progress 251,272 250,050
Other, net 160,291 159,009
---------- ----------
Net utility plant 6,934,259 7,509,571
---------- ----------
Other Property and Investments:
GPUI Group equity investments (Note 4) 650,970 596,679
Goodwill, net 549,206 581,364
Nuclear decommissioning trusts, at market (Note 1) 654,812 579,673
Nuclear fuel disposal trust, at market 112,418 108,652
Other, net 140,255 252,335
---------- ----------
Total other property and investments 2,107,661 2,118,703
---------- ----------
Current Assets:
Cash and temporary cash investments 122,835 85,099
Special deposits 21,261 27,093
Accounts receivable:
Customers, net 273,482 290,247
Other 103,184 104,441
Unbilled revenues 154,564 147,162
Materials and supplies, at average cost or less:
Construction and maintenance 158,790 187,799
Fuel 38,231 40,424
Investment held for sale - 106,317
Deferred income taxes 76,672 83,962
Prepayments 188,167 55,613
Other - 1,023
---------- ----------
Total current assets 1,137,186 1,129,180
---------- ----------
Deferred Debits and Other Assets:
Competitive transition charge (Note 1 & 2) 1,909,360 -
Other regulatory assets, net (Note 1) 1,599,207 1,547,478
Deferred income taxes 1,573,731 383,169
Other 183,292 134,833
---------- ----------
Total deferred debits and other assets 5,265,590 2,065,480
---------- ----------
Total Assets $15,444,696 $12,822,934
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
-----------------------------
June 30, December 31,
1998 1997
------------ --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 331,958 $ 314,458
Capital surplus 1,008,574 755,040
Retained earnings 1,947,585 2,140,712
Accumulated other comprehensive income/(loss)(Note 6) (35,375) (29,296)
---------- ----------
Total 3,252,742 3,180,914
Less, reacquired common stock, at cost 79,856 80,984
---------- ----------
Total common stockholders' equity 3,172,886 3,099,930
Cumulative preferred stock:
With mandatory redemption 86,500 91,500
Without mandatory redemption 66,478 66,478
Subsidiary-obligated mandatorily
redeemable preferred securities 330,000 330,000
Long-term debt 4,041,386 4,325,972
---------- ----------
Total capitalization 7,697,250 7,913,880
---------- ----------
Current Liabilities:
Securities due within one year 353,171 631,934
Notes payable 487,160 353,214
Obligations under capital leases 140,810 138,919
Accounts payable 357,436 413,791
Taxes accrued 81,281 48,304
Interest accrued 64,835 83,947
Deferred energy credits 15,254 25,645
Other 356,684 325,681
---------- ----------
Total current liabilities 1,856,631 2,021,435
---------- ----------
Deferred Credits and Other Liabilities:
Deferred income taxes 2,527,314 1,566,131
Unamortized investment tax credits 118,360 123,162
Three Mile Island Unit 2 future costs 458,919 448,808
Nonutility generation contract loss liability 1,810,350 -
Other 975,872 749,518
---------- ----------
Total deferred credits and other liabilities 5,890,815 2,887,619
---------- ----------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $15,444,696 $12,822,934
========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
(Except Per Share Data)
---------------------------------------------
Three Months Six Months
Ended June 30, ` Ended June 30,
-------------- - --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $1,015,087 $ 942,783 $2,058,196 $1,993,795
--------- --------- --------- ---------
Operating Expenses:
Fuel 100,353 91,412 197,053 190,026
Power purchased and interchanged 253,470 238,107 519,215 488,819
Deferral of energy costs, net (9,310) 478 (11,330) 6,729
Other operation and maintenance 262,845 248,441 501,228 453,840
Depreciation and amortization 134,868 115,058 262,016 230,256
Taxes, other than income taxes 57,239 81,746 114,758 176,403
--------- --------- --------- ---------
Total operating expenses 799,465 775,242 1,582,940 1,546,073
--------- --------- --------- ---------
Operating Income Before Income Taxes 215,622 167,541 475,256 447,722
Income taxes 50,316 34,732 116,609 118,655
--------- --------- --------- ---------
Operating Income 165,306 132,809 358,647 329,067
--------- --------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 229 313 549 661
Equity in undistributed earnings
of affiliates, net (Note 4) 13,193 20,087 30,844 52,314
Other income/(expense), net (3,650) 518 40,912 6,231
Income taxes 711 (6,054) (18,720) (11,497)
--------- --------- ---------- ---------
Total other income and deductions 10,483 14,864 53,585 47,709
--------- --------- ---------- ---------
Income Before Interest Charges
and Preferred Dividends 175,789 147,673 412,232 376,776
--------- --------- --------- ---------
Interest Charges and Preferred Dividends:
Interest on long-term debt 77,882 56,526 161,934 113,635
Other interest 8,859 11,294 17,843 18,639
Allowance for borrowed funds used
during construction (1,276) (1,258) (2,347) (2,443)
Dividends on subsidiary-obligated mandatorily
redeemable preferred securities 7,222 7,222 14,444 14,444
Preferred stock dividends of subsidiaries 2,917 3,174 5,892 6,601
--------- --------- --------- ---------
Total interest charges and
preferred dividends 95,604 76,958 197,766 150,876
--------- --------- --------- ---------
Minority interest net income 248 466 749 613
--------- --------- --------- ---------
Income Before Extraordinary Item 79,937 70,249 213,717 225,287
Extraordinary item (net of income tax
benefit of $195,090)(Note 2) (275,110) - (275,110) -
--------- --------- --------- -------
Net Income/(Loss) $ (195,173) $ 70,249 $ (61,393)$ 225,287
========= ========= ========= =========
Basic - Earnings Per Avg. Common Share
Before Extraordinary Item $ 0.62 $ 0.58 $ 1.69 $ 1.87
Extraordinary Item (2.16) - (2.16) -
--------- --------- --------- -------
Basic - Earnings Per Avg. Common Share $ (1.54) $ 0.58 $ (0.47)$ 1.87
========= ========= ========= =========
Avg. Common Shares Outstanding 127,892 120,690 126,218 120,660
========= ========= ========= =========
Diluted - Earnings Per Avg. Common Share
Before Extraordinary Item $ 0.62 $ 0.58 $ 1.69 $ 1.86
Extraordinary Item (2.16) - (2.16) -
--------- --------- --------- -------
Diluted - Earnings Per Avg. Common Share $ (1.54) $ 0.58 $ (0.47)$ 1.86
========= ========= ========= =========
Avg. Common Shares Outstanding 128,162 120,972 126,493 120,934
========= ========= ========= =========
Cash Dividends Paid Per Share $ .515 $ .500 $ 1.015 $ .985
========= ========= ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
5
</TABLE>
<PAGE>
GPU, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Six Months
Ended June 30,
----------------------
1998 1997
---- ----
Operating Activities:
Net income/(loss) $ (61,393) $ 225,287
Extraordinary item (net of income tax
benefit of $195,090) 275,110 -
-------- ------
Income before extraordinary item 213,717 225,287
Adjustments to reconcile income to cash provided:
Depreciation and amortization 282,400 239,640
Amortization of property under capital leases 26,838 27,642
Gain on sale of investments (38,812) -
Equity in undistributed (earnings)/losses
of affiliates, net of distributions received (26,911) (40,846)
Nuclear outage maintenance costs, net 11,149 13,499
Deferred income taxes and investment tax
credits, net (53,316) 5,188
Deferred energy and capacity costs, net (10,403) 6,729
Accretion income (4,920) (5,380)
Allowance for other funds used
during construction (549) (661)
Changes in working capital:
Receivables 17,310 (29,830)
Materials and supplies 8,709 (7,866)
Special deposits and prepayments (127,685) (110,456)
Payables and accrued liabilities (43,264) (20,682)
Nonutility generation contract buyout costs (20,417) (46,550)
Other, net 23,592 (14,602)
-------- --------
Net cash provided by operating activities 257,438 241,112
-------- --------
Investing Activities:
Capital expenditures:
GPU Energy companies (163,403) (158,462)
GPUI Group (39,387) (87,213)
Proceeds from sale of investments 146,700 -
Contributions to decommissioning trusts (24,239) (20,601)
Other, net 2,431 25,265
-------- --------
Net cash used for investing activities (77,898) (241,011)
-------- --------
Financing Activities:
Issuance of long-term debt - 114,271
Increase in notes payable, net 133,946 168,206
Retirement of long-term debt (375,496) (103,129)
Capital lease principal payments (25,426) (26,587)
Issuance of common stock 269,448 -
Redemption of preferred stock of subsidiaries (15,000) (20,000)
Dividends paid on common stock (126,274) (118,828)
-------- --------
Net cash provided/(required) by
financing activities (138,802) 13,933
-------- --------
Effect of exchange rate changes on cash (3,002) (710)
-------- --------
Net increase in cash and temporary
cash investments from above activities 37,736 13,324
Cash and temporary cash investments, beginning of year 85,099 31,604
-------- --------
Cash and temporary cash investments, end of period $ 122,835 $ 44,928
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 188,293 $ 151,079
======== ========
Income taxes paid $ 160,974 $ 112,718
======== ========
New capital lease obligations incurred $ 28,910 $ 30,123
======== ========
Common stock dividends declared but not paid $ 65,874 $ 60,361
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
----------------------------
June 30, December 31,
1998 1997
------------- --------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
In service, at original cost $4,638,568 $4,671,568
Less, accumulated depreciation 2,115,382 2,007,427
--------- ---------
Net utility plant in service 2,523,186 2,664,141
Construction work in progress 112,191 124,887
Other, net 106,739 92,654
--------- ---------
Net utility plant 2,742,116 2,881,682
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 385,992 343,434
Nuclear fuel disposal trust, at market 112,418 108,652
Other, net 8,937 8,951
--------- ---------
Total other property and investments 507,347 461,037
--------- ---------
Current Assets:
Cash and temporary cash investments 8,741 2,994
Special deposits 5,997 6,778
Accounts receivable:
Customers, net 142,928 153,753
Other 27,245 18,225
Unbilled revenues 72,247 59,687
Materials and supplies, at average cost or less:
Construction and maintenance 82,753 90,037
Fuel 15,137 14,260
Deferred income taxes 24,168 27,536
Prepayments 122,384 14,468
--------- ---------
Total current assets 501,600 387,738
--------- ---------
Deferred Debits and Other Assets:
Other regulatory assets, net (Note 1) 798,156 736,476
Deferred income taxes 172,778 154,708
Other 24,324 19,909
--------- ---------
Total deferred debits and other assets 995,258 911,093
--------- ---------
Total Assets $4,746,321 $4,641,550
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
7
</TABLE>
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
-----------------------------
June 30, December 31,
1998 1997
-------------- --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 153,713 $ 153,713
Capital surplus 510,769 510,769
Retained earnings 938,437 875,639
--------- ---------
Total common stockholder's equity 1,602,919 1,540,121
Cumulative preferred stock:
With mandatory redemption 86,500 91,500
Without mandatory redemption 37,741 37,741
Company-obligated mandatorily
redeemable preferred securities 125,000 125,000
Long-term debt 1,173,424 1,173,304
--------- ---------
Total capitalization 3,025,584 2,967,666
--------- ---------
Current Liabilities:
Securities due within one year 2,511 12,511
Notes payable 167,016 115,254
Obligations under capital leases 93,505 79,419
Accounts payable:
Affiliates 15,556 27,167
Other 110,403 113,822
Taxes accrued 6,285 3,966
Deferred energy credits 15,254 25,645
Interest accrued 26,596 26,021
Other 105,115 76,529
--------- ---------
Total current liabilities 542,241 480,334
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 647,728 644,562
Unamortized investment tax credits 52,075 54,675
Nuclear fuel disposal fee 137,915 134,326
Three Mile Island Unit 2 future costs 114,755 112,227
Other 226,023 247,760
--------- ---------
Total deferred credits and other liabilities 1,178,496 1,193,550
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,746,321 $4,641,550
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
8
</TABLE>
<PAGE>
<TABLE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
--------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues $ 478,894 $ 478,226 $ 951,228 $ 988,669
-------- -------- --------- --------
Operating Expenses:
Fuel 23,084 21,781 42,744 46,070
Power purchased and interchanged:
Affiliates 11,953 2,839 15,068 7,206
Others 155,025 138,162 308,705 279,106
Deferral of energy and capacity costs, net (9,310) 478 (11,330) 6,729
Other operation and maintenance 113,030 114,472 213,760 216,277
Depreciation and amortization 68,685 59,428 131,679 121,238
Taxes, other than income taxes 23,677 53,668 47,534 112,828
-------- -------- --------- --------
Total operating expenses 386,144 390,828 748,160 789,454
-------- -------- --------- --------
Operating Income Before Income Taxes 92,750 87,398 203,068 199,215
Income taxes 26,875 16,747 59,351 46,092
-------- -------- --------- --------
Operating Income 65,875 70,651 143,717 153,123
-------- -------- --------- --------
Other Income and Deductions:
Allowance for other funds used during
construction 193 136 468 267
Other income/(expense), net 2,653 (3,310) 4,918 147
Income taxes (1,289) (2,418) (2,342) (2,827)
-------- -------- --------- --------
Total other income and deductions 1,557 (5,592) 3,044 (2,413)
-------- -------- --------- --------
Income Before Interest Charges and
Dividends on Preferred Securities 67,432 65,059 146,761 150,710
-------- -------- --------- --------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 21,849 22,577 43,641 45,345
Other interest 3,058 5,167 5,587 7,658
Allowance for borrowed funds used
during construction (435) (601) (918) (1,204)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,675 2,675 5,350 5,350
-------- -------- --------- --------
Total interest charges and dividends
on preferred securities 27,147 29,818 53,660 57,149
-------- -------- --------- --------
Net Income 40,285 35,241 93,101 93,561
Preferred stock dividends 2,565 2,879 5,303 6,041
-------- -------- --------- --------
Earnings Available for Common Stock $ 37,720 $ 32,362 $ 87,798 $ 87,520
======== ======== ========= ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
9
</TABLE>
<PAGE>
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Six Months
Ended June 30,
----------------------
1998 1997
---- ----
Operating Activities:
Net income $ 93,101 $ 93,561
Adjustments to reconcile income to cash provided:
Depreciation and amortization 143,726 127,837
Amortization of property under capital leases 14,771 15,294
Nuclear outage maintenance costs, net 6,602 9,487
Deferred income taxes and investment tax
credits, net (29,294) (6,224)
Deferred energy and capacity costs, net (10,403) 6,729
Accretion income (4,920) (5,380)
Allowance for other funds used
during construction (468) (267)
Changes in working capital:
Receivables (10,754) (7,813)
Materials and supplies 6,407 1,329
Special deposits and prepayments (107,136) (102,194)
Payables and accrued liabilities 11,051 (33,305)
Nonutility generation contract buyout costs (15,000) (30,500)
Other, net 18,135 4,777
-------- --------
Net cash provided by operating activities 115,818 73,331
-------- --------
Investing Activities:
Capital expenditures (84,117) (78,509)
Contributions to decommissioning trusts (13,547) (9,016)
Other, net (3,850) (5,659)
-------- --------
Net cash used for investing activities (101,514) (93,184)
-------- --------
Financing Activities:
Increase in notes payable, net 51,762 161,493
Retirement of long-term debt - (54,191)
Capital lease principal payments (14,811) (13,705)
Redemption of preferred stock (15,000) (20,000)
Dividends paid on common stock (25,000) (40,000)
Dividends paid on preferred stock (5,508) (6,324)
-------- --------
Net cash provided/(required)
by financing activities (8,557) 27,273
-------- --------
Net increase in cash and temporary
cash investments from above activities 5,747 7,420
Cash and temporary cash investments, beginning of year 2,994 1,321
-------- --------
Cash and temporary cash investments, end of period $ 8,741 $ 8,741
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 57,725 $ 64,008
======== ========
Income taxes paid $ 97,162 $ 63,634
======== ========
New capital lease obligations incurred $ 28,852 $ 8,187
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
----------------------------
June 30, December 31,
1998 1997
------------- --------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
In service, at original cost $2,212,765 $2,411,810
Less, accumulated depreciation 966,200 919,771
--------- ---------
Net utility plant in service 1,246,565 1,492,039
Construction work in progress 50,000 45,435
Other, net 31,416 39,056
--------- ---------
Net utility plant 1,327,981 1,576,530
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 192,145 168,110
Other, net 11,977 11,958
--------- ---------
Total other property and investments 204,122 180,068
--------- ---------
Current Assets:
Cash and temporary cash investments 2,856 6,116
Special deposits 1,030 1,055
Accounts receivable:
Customers, net 55,646 65,156
Other 21,331 29,399
Unbilled revenues 45,837 39,747
Materials and supplies, at average cost or less:
Construction and maintenance 23,877 38,597
Fuel 7,225 11,323
Deferred income taxes 2,945 2,945
Prepayments 23,277 6,762
--------- ---------
Total current assets 184,024 201,100
--------- ---------
Deferred Debits and Other Assets:
Competitive transition charge (Note 1 & 2) 1,024,970 -
Other regulatory assets, net (Note 1) 291,291 450,687
Deferred income taxes 579,156 87,332
Other 28,047 14,069
--------- ---------
Total deferred debits and other assets 1,923,464 552,088
--------- ---------
Total Assets $3,639,591 $2,509,786
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
11
</TABLE>
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
----------------------------
June 30, December 31,
1998 1997
------------- --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 66,273 $ 66,273
Capital surplus 370,200 370,200
Retained earnings 84,390 268,634
Accumulated other comprehensive income (Note 6) 14,316 12,487
--------- ---------
Total common stockholder's equity 535,179 717,594
Cumulative preferred stock 12,056 12,056
Company-obligated mandatorily
redeemable preferred securities 100,000 100,000
Long-term debt 576,926 576,924
--------- ---------
Total capitalization 1,224,161 1,406,574
--------- ---------
Current Liabilities:
Securities due within one year 22 22
Notes payable 76,826 67,279
Obligations under capital leases 30,731 38,372
Accounts payable:
Affiliates 49,216 62,873
Other 96,623 95,589
Taxes accrued 10,587 21,455
Interest accrued 16,946 15,903
Other 38,805 33,351
--------- ---------
Total current liabilities 319,756 334,844
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 765,945 412,692
Three Mile Island Unit 2 future costs 229,409 224,354
Unamortized investment tax credits 28,132 29,134
Nuclear fuel disposal fee 31,154 30,343
Nonutility generation contract loss liability 792,830 -
Other 248,204 71,845
--------- ---------
Total deferred credits and other liabilities 2,095,674 768,368
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $3,639,591 $2,509,786
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
12
</TABLE>
<PAGE>
<TABLE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
----------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 226,030 $ 208,554 $ 460,778 $ 463,814
-------- -------- --------- ---------
Operating Expenses:
Fuel 26,172 22,037 52,243 46,526
Power purchased and interchanged:
Affiliates 3,565 2,610 5,418 6,957
Others 45,598 49,560 100,483 105,200
Other operation and maintenance 55,032 57,376 107,285 103,032
Depreciation and amortization 26,455 26,098 52,718 51,931
Taxes, other than income taxes 15,504 13,054 31,053 29,754
-------- -------- --------- ---------
Total operating expenses 172,326 170,735 349,200 343,400
-------- -------- --------- ---------
Operating Income Before Income Taxes 53,704 37,819 111,578 120,414
Income taxes 15,344 9,516 32,906 37,998
-------- -------- --------- ---------
Operating Income 38,360 28,303 78,672 82,416
-------- -------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction 36 122 81 301
Other income/(expense), net (9,665) 1,761 (9,381) 2,104
Income taxes 4,254 (897) 3,766 (922)
-------- -------- --------- ---------
Total other income and deductions (5,375) 986 (5,534) 1,483
-------- -------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 32,985 29,289 73,138 83,899
-------- -------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 10,624 11,040 21,247 22,294
Other interest 1,800 1,960 4,553 3,628
Allowance for borrowed funds used
during construction (237) (164) (440) (411)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,250 2,250 4,500 4,500
-------- -------- --------- ---------
Total interest charges and dividends
on preferred securities 14,437 15,086 29,860 30,011
-------- -------- --------- ---------
Income Before Extraordinary Item 18,548 14,203 43,278 53,888
Extraordinary item (net of income tax
benefit of $132,810) (Note 2) (187,280) - (187,280) -
-------- -------- --------- -------
Net Income/(Loss) (168,732) 14,203 (144,002) 53,888
Preferred stock dividends 121 121 242 242
-------- -------- --------- ---------
Earnings/(Loss) Available for Common Stock $(168,853) $ 14,082 $ (144,244) $ 53,646
======== ======== ========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
13
</TABLE>
<PAGE>
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Six Months
Ended June 30,
----------------------
1998 1997
---- ----
Operating Activities:
Net income/(loss) $(144,002) $ 53,888
Extraordinary item (net of income tax
benefit of $132,810) 187,280 -
-------- ------
Income before extraordinary item 43,278 53,888
Adjustments to reconcile income to cash provided:
Depreciation and amortization 58,232 56,400
Amortization of property under capital leases 7,294 7,276
Nuclear outage maintenance costs, net 3,029 2,673
Deferred income taxes and investment tax
credits, net (10,824) 10,244
Allowance for other funds used
during construction (81) (301)
Changes in working capital:
Receivables 11,488 (17,024)
Materials and supplies 3,676 (1,973)
Special deposits and prepayments (16,490) (10,139)
Payables and accrued liabilities (34,367) 10,795
Nonutility generation contract buyout costs (5,417) (11,050)
Other, net 11,153 (20,393)
-------- --------
Net cash provided by operating activities 70,971 80,396
-------- --------
Investing Activities:
Capital expenditures (29,206) (36,630)
Contributions to decommissioning trusts (8,060) (8,877)
Other, net 56 (23)
-------- --------
Net cash used for investing activities (37,210) (45,530)
-------- --------
Financing Activities:
Issuance of long-term debt - 13,577
Increase in notes payable, net 9,547 8,883
Retirement of long-term debt - (20,000)
Capital lease principal payments (6,326) (7,632)
Dividends paid on common stock (40,000) (25,000)
Dividends paid on preferred stock (242) (357)
-------- --------
Net cash required by
financing activities (37,021) (30,529)
--------- --------
Net increase/(decrease) in cash and temporary
cash investments from above activities (3,260) 4,337
Cash and temporary cash investments, beginning of year 6,116 1,901
-------- --------
Cash and temporary cash investments, end of period $ 2,856 $ 6,238
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 28,884 $ 30,032
======== ========
Income taxes paid $ 38,428 $ 30,349
======== ========
New capital lease obligations incurred $ 39 $ 14,613
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
-----------------------------
June 30, December 31,
1998 1997
------------- -----------
(Unaudited)
ASSETS
Utility Plant:
<S> <C> <C>
In service, at original cost $2,731,674 $2,812,720
Less, accumulated depreciation 1,133,790 1,091,965
--------- ---------
Net utility plant in service 1,597,884 1,720,755
Construction work in progress 74,250 69,089
Other, net 21,632 26,110
--------- ---------
Net utility plant 1,693,766 1,815,954
--------- ---------
Other Property and Investments:
Nuclear decommissioning trusts, at market (Note 1) 76,675 68,129
Other, net 7,061 7,071
--------- ---------
Total other property and investments 83,736 75,200
--------- ---------
Current Assets:
Cash and temporary cash investments - -
Special deposits 2,508 2,449
Accounts receivable:
Customers, net 72,980 71,338
Other 33,316 21,051
Unbilled revenues 36,480 47,728
Materials and supplies, at average cost or less:
Construction and maintenance 40,722 47,853
Fuel 15,869 14,841
Deferred income taxes 7,589 7,589
Prepayments 46,619 29,856
--------- ---------
Total current assets 256,083 242,705
--------- ---------
Deferred Debits and Other Assets:
Competitive transition charge (Note 1 & 2) 884,390 -
Other regulatory assets, net (Note 1) 509,760 360,315
Deferred income taxes 725,913 55,698
Other 46,997 13,118
--------- ---------
Total deferred debits and other assets 2,167,060 429,131
--------- ---------
Total Assets $4,200,645 $2,562,990
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
15
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
---------------------------
<CAPTION>
In Thousands
----------------------------
June 30, December 31,
1998 1997
------------- --------
(Unaudited)
LIABILITIES AND CAPITALIZATION
Capitalization:
<S> <C> <C>
Common stock $ 105,812 $ 105,812
Capital surplus 285,486 285,486
Retained earnings 336,927 393,708
Accumulated other comprehensive income (Note 6) 7,247 6,332
--------- ---------
Total common stockholder's equity 735,472 791,338
Cumulative preferred stock 16,681 16,681
Company-obligated mandatorily
redeemable preferred securities 105,000 105,000
Long-term debt 626,444 676,444
--------- ---------
Total capitalization 1,483,597 1,589,463
--------- ---------
Current Liabilities:
Securities due within one year 50,011 30,011
Notes payable 108,818 77,581
Obligations under capital leases 16,070 19,939
Accounts payable:
Affiliates 37,214 24,811
Other 48,081 62,483
Taxes accrued 12,480 15,966
Interest accrued 19,836 20,902
Other 32,720 19,654
--------- ---------
Total current liabilities 325,230 271,347
--------- ---------
Deferred Credits and Other Liabilities:
Deferred income taxes 1,091,758 478,182
Three Mile Island Unit 2 future costs 114,755 112,227
Unamortized investment tax credits 38,153 39,353
Nuclear fuel disposal fee 15,577 15,172
Nonutility generation contract loss liability 1,017,520 -
Other 114,055 57,246
--------- ---------
Total deferred credits and other liabilities 2,391,818 702,180
--------- ---------
Commitments and Contingencies (Note 1)
Total Liabilities and Capitalization $4,200,645 $2,562,990
========= =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
16
</TABLE>
<PAGE>
<TABLE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
---------------------------------
(Unaudited)
<CAPTION>
In Thousands
---------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues $ 250,355 $ 247,862 $ 514,010 $ 537,615
-------- -------- --------- ---------
Operating Expenses:
Fuel 42,667 42,993 85,101 89,216
Power purchased and interchanged:
Affiliates 909 422 1,153 2,074
Others 50,098 50,385 104,812 104,513
Other operation and maintenance 65,080 64,447 125,113 118,335
Depreciation and amortization 27,740 27,705 53,384 53,401
Taxes, other than income taxes 18,058 15,024 36,021 33,821
-------- -------- --------- ---------
Total operating expenses 204,552 200,976 405,584 401,360
-------- -------- --------- ---------
Operating Income Before Income Taxes 45,803 46,886 108,426 136,255
Income taxes 11,217 12,631 31,020 43,144
-------- -------- --------- ---------
Operating Income 34,586 34,255 77,406 93,111
-------- -------- --------- ---------
Other Income and Deductions:
Allowance for other funds used during
construction - 55 - 93
Other income, net 1,654 1,110 1,733 1,255
Income taxes (719) (427) (705) (496)
-------- -------- --------- ---------
Total other income and deductions 935 738 1,028 852
-------- -------- --------- ---------
Income Before Interest Charges and
Dividends on Preferred Securities 35,521 34,993 78,434 93,963
-------- -------- --------- ---------
Interest Charges and Dividends
on Preferred Securities:
Interest on long-term debt 11,862 12,104 23,974 24,219
Other interest 2,215 2,244 4,459 4,243
Allowance for borrowed funds used
during construction (604) (493) (989) (828)
Dividends on company-obligated mandatorily
redeemable preferred securities 2,297 2,297 4,594 4,594
-------- -------- --------- ---------
Total interest charges and dividends
on preferred securities 15,770 16,152 32,038 32,228
-------- -------- --------- ---------
Income Before Extraordinary Item 19,751 18,841 46,396 61,735
Extraordinary item (net of income tax
benefit of $62,280) (Note 2) (87,830) - (87,830) -
-------- -------- --------- -------
Net Income/(Loss) (68,079) 18,841 (41,434) 61,735
Preferred stock dividends 231 174 347 318
-------- -------- --------- ---------
Earnings/(Loss) Available for Common Stock $ (68,310) $ 18,667 $ (41,781) $ 61,417
========= ======== ========== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
17
</TABLE>
<PAGE>
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
In Thousands
----------------------
Six Months
Ended June 30,
----------------------
1998 1997
---- ----
Operating Activities:
Net income/(loss) $ (41,434) $ 61,735
Extraordinary item (net of income tax
benefit of $62,280) 87,830 -
-------- ------
Income before extraordinary item 46,396 61,735
Adjustments to reconcile income to cash provided:
Depreciation and amortization 53,814 49,396
Amortization of property under capital leases 4,088 4,079
Nuclear outage maintenance costs, net 1,518 1,339
Deferred income taxes and investment tax
credits, net (969) 1,711
Allowance for other funds used
during construction - (93)
Changes in working capital:
Receivables (2,709) (19,707)
Materials and supplies (1,472) (7,222)
Special deposits and prepayments (16,822) (2,530)
Payables and accrued liabilities (6,426) 5,290
Nonutility generation contract buyout costs - (5,000)
Other, net (10,337) (7,867)
-------- --------
Net cash provided by operating activities 67,081 81,131
-------- --------
Investing Activities:
Capital expenditures (46,735) (41,908)
Contributions to decommissioning trusts (2,632) (2,708)
-------- --------
Net cash used for investing activities (49,367) (44,616)
-------- --------
Financing Activities:
Issuance of long-term debt - 49,875
Increase/(Decrease) in notes payable, net 31,237 (21,759)
Retirement of long-term debt (30,000) (26,000)
Capital lease principal payments (3,604) (4,257)
Dividends paid on common stock (15,000) (30,000)
Dividends paid on preferred stock (347) (347)
-------- --------
Net cash required by financing activities (17,714) (32,488)
-------- --------
Net increase in cash and temporary
cash investments from above activities - 4,027
Cash and temporary cash investments, beginning of year - -
-------- ------
Cash and temporary cash investments, end of period $ - $ 4,027
======== ========
Supplemental Disclosure:
Interest and preferred dividends paid $ 33,016 $ 31,773
======== ========
Income taxes paid $ 35,859 $ 31,278
======== ========
New capital lease obligations incurred $ 19 $ 7,323
======== ========
The accompanying notes are an integral part of the consolidated financial
statements
18
<PAGE>
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GPU, Inc., a Pennsylvania corporation, is a holding company registered
under the Public Utility Holding Company Act of 1935. GPU, Inc. does not
directly operate any utility properties, but owns all the outstanding common
stock of three domestic electric utilities serving customers in New Jersey --
Jersey Central Power & Light Company (JCP&L) -- and Pennsylvania -- Metropolitan
Edison Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The
customer service, transmission and distribution operations of these electric
utilities are conducting business under the name GPU Energy. JCP&L, Met-Ed and
Penelec considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc. which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain legal, accounting, financial and
other services to the GPU companies. All of these companies considered together
are referred to as "GPU."
These notes should be read in conjunction with the notes to consolidated
financial statements included in the 1997 Annual Report on Form 10-K. The
December 31, 1997 balance sheet data contained in the attached financial
statements was derived from audited financial statements. For disclosures
required by generally accepted accounting principles, see the 1997 Annual Report
on Form 10-K.
1. COMMITMENTS AND CONTINGENCIES
COMPETITION AND THE CHANGING REGULATORY ENVIRONMENT
---------------------------------------------------
The Emerging Competitive Market and Stranded Costs:
- ---------------------------------------------------
The current market price of electricity being below the cost of some
utility-owned generation and power purchase commitments, combined with the
ability of some customers to choose their energy suppliers, has created the
potential for stranded costs in the electric utility industry. These stranded
costs, while potentially recoverable in a regulated environment, are at risk in
a deregulated and competitive environment.
In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888,
which permits electric utilities to recover their legitimate and verifiable
stranded costs incurred when a wholesale customer purchases power from another
supplier using the utility's transmission system. In addition, Pennsylvania
adopted comprehensive legislation (Customer Choice Act) in 1996 which provides
for the restructuring of the electric utility industry and will permit utilities
the opportunity to recover their prudently incurred stranded costs through a
Pennsylvania Public Utility Commission (PaPUC) approved
19
<PAGE>
competitive transition charge (CTC), subject to certain conditions, including
that utilities attempt to mitigate these costs. In 1997, the New Jersey Board of
Public Utilities (NJBPU) released Phase II of the Energy Master Plan (NJEMP),
which proposes that New Jersey electric utilities should have an opportunity to
recover their stranded costs associated with generating capacity commitments and
caused by electric retail competition, provided that they attempt to mitigate
these costs. Implementing legislation, which has not yet been introduced, is
necessary to effect the restructuring programs by the NJEMP.
In June 1997, Met-Ed and Penelec filed with PaPUC their proposed
restructuring plans to implement competition and customer choice in Pennsylvania
as required by the Customer Choice Act. In June 1998, the PaPUC entered final
orders (Restructuring Orders) on the restructuring plans. In the Restructuring
Orders, the PaPUC, among other things, established a CTC which (a) would not
ensure Met-Ed and Penelec full recovery of the costs under their contracts with
nonutility generators (NUGs) as required by state and federal law; (b)
disallowed certain stranded cost claims by Met-Ed and Penelec; (c) lowered
unbundled transmission and distribution (T&D) rates for Met-Ed and Penelec by
reallocating certain T&D costs to generation; and (d) advanced the phase-in for
retail choice to January 2, 2000. Accordingly, Met-Ed and Penelec have written
off in the second quarter before taxes, $320 million and $150 million,
respectively. For additional information, see Note 2 Accounting for
Non-recurring Items.
On July 20, 1998, Met-Ed and Penelec appealed the Restructuring Orders to
the Commonwealth Court claiming more than 40 errors of law. Met-Ed and Penelec
have also filed complaints in the U.S. District Court seeking both declaratory
and injunctive relief challenging, among other things, the PaPUC's refusal in
the Restructuring Orders to ensure full recovery of the costs of NUG contracts,
as required by state and federal law.
In addition, on July 20, 1998 Met-Ed and Penelec filed Alternative
Restructuring Plans (Alternative Plans) with the PaPUC based on the provision in
the Customer Choice Act that enables a utility to file an alternate plan if the
PaPUC rejects the utility's initial plan. Met-Ed and Penelec believe that in the
Restructuring Orders, the PaPUC has objected to essentially the entirety of
their original restructuring plans and has therefore rejected these plans. On
August 5, 1998, the PaPUC rejected the Alternative Plans as invalid. Met-Ed and
Penelec intend to appeal this action to the Commonwealth Court. Highlights of
the Alternative Plans are presented in the Competitive Environment section of
Management's Discussion and Analysis.
Unless the Restructuring Orders are substantially modified consistent with
the Alternative Plans (in particular removing the proposed reduction of T&D
rates), there would be an adverse effect on Met-Ed and Penelec's future
earnings, except to the extent offset by spending reductions.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey as required by the NJEMP.
JCP&L estimates that its total above-market costs related to power purchase
commitments and company-owned generation, on a present value basis at September
30, 1998, is $1.6 billion. The $1.6 billion excludes above-market generation
costs related to the Oyster Creek Nuclear Generating Station (Oyster Creek).
These estimates are subject to significant uncertainties
20
<PAGE>
including the future market price of both electricity and other competitive
energy sources, as well as the timing of when these above-market costs become
stranded due to customers choosing another supplier. In July 1997, JCP&L
proposed, in its restructuring plan, recovery of its remaining Oyster Creek
plant investment as a regulatory asset, through a nonbypassable charge to
customers. At June 30, 1998, JCP&L's net investment in Oyster Creek was $697
million. Highlights of this plan are presented in the Competitive Environment
section of Management's Discussion and Analysis.
In February 1998, hearings with respect to JCP&L's stranded cost and
unbundled rate filings were completed before an Administrative Law Judge (ALJ)
and a recommended decision is scheduled to be issued in August. The NJBPU is not
expected to issue final decisions until legislation is enacted, but to date no
legislation has been introduced.
The inability of JCP&L to recover its stranded costs in whole or in part
would result in the recording of liabilities for above-market NUG costs,
decommissioning costs, and writedowns of uneconomic generation plant and
regulatory assets recorded in accordance with Statement of Financial Accounting
Standards No. 71 (FAS 71), "Accounting for the Effects of Certain Types of
Regulation." The inability to recover these stranded costs would have a material
adverse effect on GPU's results of operations.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $286 million; Met-Ed $297 million; Penelec $532 million) at
June 30, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, repurchase GPU, Inc.
common stock, and to reduce acquisition debt of the GPUI Group. It is
anticipated that definitive purchase agreements will be entered into in November
1998 and the divestiture completed by mid-1999, subject to the timely receipt of
the necessary regulatory and other approvals.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each own a 50% interest in the station, and will share equally
in the net sale proceeds. The sale, which is subject to various federal and
state regulatory approvals, is expected to be completed in the first quarter of
1999.
Nonutility Generation Agreements:
- ---------------------------------
Pursuant to the requirements of the federal Public Utility Regulatory
Policies Act (PURPA) and state regulatory directives, the GPU Energy companies
have entered into power purchase agreements with NUGs for the purchase of energy
and capacity for remaining periods of up to 23 years. The following table shows
actual payments from 1995 through 1997, and estimated payments from 1998 through
2002.
21
<PAGE>
Payments Under NUG Agreements
-----------------------------
(in Millions)
Total JCP&L Met-Ed Penelec
----- ----- ------ -------
1995 $670 $381 $131 $158
1996 730 370 168 192
1997 759 384 172 203
* 1998 783 393 173 217
1999 789 395 167 227
2000 877 402 222 253
2001 916 411 261 244
2002 940 423 272 245
* The 1998 amounts consist of actual payments through June 30, 1998 and
estimated payments for the remainder of the year.
As of June 30, 1998, NUG facilities covered by agreements having 1,666 MW
(JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW) of capacity were in service. While
a few of these NUG facilities are dispatchable, most are must-run and generally
obligate the GPU Energy companies to purchase, at the contract price, the output
up to the contract limits. Substantially all unbuilt NUG facilities for which
the GPU Energy companies have executed agreements are fully dispatchable.
The emerging competitive generation market has created uncertainty
regarding the forecasting of the companies' energy supply needs, which has
caused the GPU Energy companies to change their supply strategy to seek
shorter-term agreements offering more flexibility. The GPU Energy companies'
future supply plan will likely focus on short- to intermediate-term commitments
and reliance on spot market purchases. The projected cost of energy from new
generation supply sources has also decreased due to improvements in power plant
technologies and lower forecasted fuel prices. As a result of these
developments, the rates under virtually all of the GPU Energy companies' NUG
agreements for facilities currently in operation are substantially in excess of
current and projected prices from alternative sources.
The GPU Energy companies are seeking to reduce the above-market costs of
these NUG agreements by: (1) attempting to convert must-run agreements to
dispatchable agreements; (2) attempting to renegotiate prices of the agreements;
(3) offering contract buyouts (see Management's Discussion and Analysis - The
GPU Energy Companies' Supply Plan,); and (4) initiating proceedings before
federal and state agencies, and in the courts, where appropriate. In addition,
the GPU Energy companies intend to avoid, to the maximum extent practicable,
entering into any new NUG agreements that are not needed or not consistent with
current market pricing, and are supporting legislative efforts to repeal PURPA.
These efforts may result in claims against GPU for substantial damages. There
can be no assurance as to the extent to which these efforts will be successful
in whole or in part.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns
and/or restructurings of current power purchase contracts in return for cash
payments. In January 1998, Met-Ed and Penelec entered into
22
<PAGE>
definitive buyout agreements with two bidders. These agreements are contingent
upon Met-Ed and Penelec obtaining a PaPUC order allowing for the full recovery
of the buyout payments through retail rates.
In February 1997, Met-Ed and Penelec entered into revised power purchase
agreements with AES Power Corporation (AES) for 377 MW and 80 MW of capacity and
related energy, respectively, related to a combined-cycle generating facility
that AES plans to construct in Pennsylvania. Met-Ed and Penelec have paid $63.4
million and $5 million, respectively, to previous developers and AES to
terminate the original power purchase agreements. In November 1997, in response
to an offer from AES, Met-Ed and Penelec agreed to increase the contract
capacity under the agreements by 163 MW. If the revised power purchase
agreements with AES are not approved by the PaPUC, Met-Ed and Penelec have
agreed to pay AES up to an additional $29 million and $6 million, respectively.
There can be no assurance as to the outcome of this matter.
The GPU Energy companies are currently recovering certain of their NUG
costs (including certain buyout costs) from customers. However, the PaPUC
Restructuring Orders do not provide for the collection from customers of a
substantial portion of above-market NUG costs. Met-Ed and Penelec are contesting
the Restructuring Orders. Although the Pennsylvania legislation and the NJEMP in
New Jersey both include provisions for the recovery of costs under NUG
agreements and certain NUG buyout costs, there can be no assurance that the GPU
Energy companies will continue to be able to recover similar costs which may be
incurred in the future. (See Management's Discussion and Analysis - Competitive
Environment for additional discussion.)
This discussion of "Nonutility Generation Agreements" contains estimates
which are based on current knowledge and expectations of the outcome of future
events. The estimates are subject to significant uncertainties, including
changes in fuel prices, improvements in technology, the changing regulatory
environment and the deregulation of the electric utility industry.
Regulatory Assets, Net:
- -----------------------
On June 30, 1998, Met-Ed and Penelec received final PaPUC Restructuring
Orders. The Restructuring Orders, among other things, essentially remove from
regulation the costs associated with providing electric generation service to
Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and
Penelec have discontinued the application of FAS 71 and adopted the provisions
of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated
Enterprises - Accounting for the Discontinuation of Application of FASB
Statement No. 71" with respect to their electric generation operations,
effective April 1, 1998. The transmission and distribution portion of Met-Ed and
Penelec's operations will continue to be subject to the provisions of FAS 71.
See Note 2 - Accounting for Non-recurring Items.
JCP&L will discontinue the application of FAS 71 and apply FAS 101 for its
electric generation operations no later than when it receives NJBPU approval of
its restructuring plans.
Regulatory Assets, Net as reflected in the June 30, 1998 and December 31,
1997 Consolidated Balance Sheets in accordance with the provisions of FAS 71,
were as follows:
23
<PAGE>
GPU, Inc. and Subsidiary Companies Assets (in thousands)
- ---------------------------------- ----------------------------
June 30, December 31,
1998 1997
------------- ---------
Competitive transition charge per PaPUC Order $1,832,780 $ -
Return recognized 76,580 -
--------- ---------
Total competitive transition charge (CTC) $1,909,360 $ -
========= =========
Other regulatory assets, net:
Reserve for generation divestiture (JCP&L) $ 122,409 $ -
Phase II reserve for generation divestiture 440,541 -
Income taxes recoverable through future rates 412,710 510,680
Income taxes refundable through future rates (57,475) (89,247)
Net investment in TMI-2 67,458 83,951
TMI-2 decommissioning costs 76,398 257,180
Nonutility generation contract buyout costs 139,708 245,568
Unamortized property losses 83,619 99,532
Other postretirement benefits 75,431 89,569
Environmental remediation 43,174 90,308
N.J. unit tax 36,583 39,797
Unamortized loss on reacquired debt 34,525 40,489
Load and demand-side management programs 21,932 23,164
N.J. low-level radwaste disposal 26,496 31,479
DOE enrichment facility decommissioning 30,306 33,472
Nuclear fuel disposal fee 22,556 21,512
Storm damage 31,252 31,097
Deferred nonutility generation costs
not in current rates - 24,857
Other regulatory liabilities (17,691) (13,959)
Other regulatory assets 9,275 28,029
--------- ---------
Total other regulatory assets, net $1,599,207 $1,547,478
========= =========
JCP&L Assets (in thousands)
- ----- ---------------------
June 30, December 31,
1998 1997
------------- --------
Other regulatory assets, net:
Reserve for generation divestiture $ 122,409 $ -
Income taxes recoverable through future rates 140,920 128,111
Income taxes refundable through future rates (35,964) (37,759)
Net investment in TMI-2 67,458 75,541
TMI-2 decommissioning costs 23,398 30,024
Nonutility generation contract buyout costs 132,208 140,500
Unamortized property losses 83,540 94,726
Other postretirement benefits 48,147 49,807
Environmental remediation 43,174 61,324
N.J. unit tax 36,583 39,797
Unamortized loss on reacquired debt 27,342 28,729
Load and demand-side management programs 21,932 23,164
N.J. low-level radwaste disposal 26,496 31,479
DOE enrichment facility decommissioning 18,679 21,223
Nuclear fuel disposal fee 22,016 23,781
Storm damage 31,252 31,097
Other regulatory liabilities (16,665) (11,467)
Other regulatory assets 5,231 6,399
--------- ---------
Total other regulatory assets, net $ 798,156 $ 736,476
========= =========
24
<PAGE>
Met-Ed Assets (in thousands)
- ------ ---------------------
June 30, December 31,
1998 1997
------------- --------
Competitive transition charge per PaPUC Order $ 974,860 $ -
Return recognized 50,110 -
--------- ---------
Total competitive transition charge (CTC) $1,024,970 $ -
========= =========
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 123,060 $ 116,303
Income taxes refundable through future rates (12,201) (12,614)
Nonutility generation contract buyout costs 7,500 12,500
Other postretirement benefits 27,284 27,436
Unamortized loss on reacquired debt 3,153 3,411
DOE enrichment facility decommissioning 7,751 8,166
Other regulatory liabilities (940) (1,014)
Other regulatory assets 223 216
--------- ---------
Subtotal $ 155,830 $ 154,404
--------- ---------
Generation related:
- -------------------
Income taxes recoverable through future rates $ - $ 62,624
Income taxes refundable through future rates - (9,135)
Unamortized property losses 79 2,650
Other postretirement benefits - 12,326
Environmental remediation - 4,121
Unamortized loss on reacquired debt 140 1,918
Nuclear fuel disposal fee 302 (1,511)
Other regulatory liabilities - (1,432)
Other regulatory assets 642 3,227
--------- ---------
Subtotal $ 1,163 $ 74,788
--------- ---------
Other:
- ------
Phase II reserve for generation divestiture $ 96,421 $ -
Net investment in TMI-2 - 1,187
TMI-2 decommissioning costs 36,530 145,103
Nonutility generation contract buyout costs - 63,868
Deferred nonutility generation costs
not in current rates - 10,265
Other regulatory assets 1,347 1,072
--------- ---------
Subtotal $ 134,298 $ 221,495
--------- ---------
Total other regulatory assets, net $ 291,291 $ 450,687
========= =========
Penelec Assets (in thousands)
- ------- ---------------------
June 30, December 31,
1998 1997
------------- --------
Competitive transition charge per PaPUC Order $ 857,920 $ -
Return recognized 26,470 -
--------- ---------
Total competitive transition charge (CTC) $ 884,390 $ -
========= =========
25
<PAGE>
Other regulatory assets, net: Transmission & Distribution related:
Income taxes recoverable through future rates $ 148,730 $ 142,549
Income taxes refundable through future rates (9,310) (9,516)
Unamortized loss on reacquired debt 3,690 4,116
DOE enrichment facility decommissioning 3,876 4,083
Other regulatory liabilities (86) (46)
--------- ---------
Subtotal $ 146,900 $ 141,186
--------- ---------
Generation related:
Income taxes recoverable through future rates $ - $ 61,093
Income taxes refundable through future rates - (20,223)
Unamortized property losses - 2,156
Environmental remediation - 24,863
Unamortized loss on reacquired debt 200 2,315
Nuclear fuel disposal fee 238 (758)
Other regulatory assets 686 15,964
--------- ---------
Subtotal $ 1,124 $ 85,410
--------- ---------
Other:
Phase II reserve for generation divestiture 344,120
-
Net investment in TMI-2 - 7,223
TMI-2 decommissioning costs 16,470 82,053
Nonutility generation contract buyout costs - 28,700
Deferred nonutility generation costs
not in current rates - 14,592
Other regulatory assets 1,146 1,151
--------- ---------
Subtotal $ 361,736 $ 133,719
--------- ---------
Total other regulatory assets, net $ 509,760 $ 360,315
========= =========
Competitive transition charge: Represents the stranded cost recovery amounts
allowed by the PaPUC, and a recognized return, which are to be collected from
customers of Met-Ed and Penelec, beginning January 1, 1999, over eleven-year and
eight-year transition periods, respectively. Stranded costs, as defined by the
Pennsylvania Competition Act, include an electric utility's known and measurable
generation-related costs, which would have been recoverable in the former
regulated market, but are not recoverable in a competitive electric generation
market.
Reserve for generation divestiture (JCP&L): Represents generation divestiture
shortfall which is probable of recovery in future rates, inclusive of
transaction costs.
Phase II reserve for generation divestiture (Met-Ed and Penelec): Represents
generation divestiture CTC shortfall to be addressed in a Phase II rate
restructuring order, inclusive of transaction costs.
Income taxes recoverable/refundable through future rates: Represents amounts
deferred due to the implementation of FAS 109, "Accounting for Income Taxes," in
1993.
Net investment in TMI-2: Represents costs that are recoverable through rates for
the GPU Energy companies' remaining investment in the plant and fuel core.
26
<PAGE>
TMI-2 decommissioning costs: Represents costs that are recoverable through rates
for the GPU Energy companies' radiological decommissioning and the cost of
removal of nonradiological structures and materials in accordance with the 1995
site-specific study (in 1998 dollars). For additional information, see Nuclear
Plant Retirement Costs.
Nonutility generation contract buyout costs: Represents amounts incurred for
terminating power purchase contracts with NUGs, for which rate recovery has been
granted or is probable.
Unamortized property losses: Consists mainly of costs associated with JCP&L's
Forked River project, which are included in rates.
Other postretirement benefits: Includes costs associated with the adoption of
FAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which are deferred in accordance with Emerging Issues Task Force
(EITF) Issue 92-12, "Accounting for OPEB Costs by Rate-Regulated
Enterprises."
Environmental remediation: Consists of amounts related to the investigation and
remediation of several manufactured gas plant sites formerly owned by JCP&L, as
well as several other JCP&L sites; Penelec's Seward station property; and future
closure costs of various ash disposal sites for the GPU Energy companies. For
additional information, see Environmental Matters.
N.J. unit tax: Represents certain state taxes, with interest, for which JCP&L
received NJBPU approval in 1993 to recover over a ten-year period.
Unamortized loss on reacquired debt: Represents premiums and expenses incurred
in the early redemption of long-term debt. In accordance with FERC regulations,
reacquired debt costs are amortized over the remaining original life of the
retired debt.
Load and demand-side management (DSM) programs: Consists of load management
costs and other DSM program expenditures that are currently being recovered,
with interest, through JCP&L's retail base rates and demand-side factor. Also
includes provisions for lost revenues between base rate cases and performance
incentives.
N.J. low-level radwaste disposal: Represents the estimated assessment for the
siting of a disposal facility for low-level waste from Oyster Creek, less
amortization, as allowed in JCP&L's rates.
Department of Energy (DOE) enrichment facility decommissioning: Represents
payments to the DOE over a 15-year period which began in 1994.
Nuclear fuel disposal fee: Represents amounts recoverable through rates for
estimated future disposal costs for spent nuclear fuel at Oyster Creek and Three
Mile Island Unit 1 (TMI-1) in accordance with the Nuclear Waste Policy Act of
1982.
Storm damage: Relates to incremental noncapital costs associated with various
storms in the JCP&L service territory that are not recoverable through
insurance. These amounts were deferred based upon past rate recovery precedent.
An annual amortization amount is included in JCP&L's retail base rates and is
charged to expense.
27
<PAGE>
Deferred nonutility generation costs not in current rates: Represents
incremental NUG operating costs incurred above amounts reflected in Met-Ed and
Penelec's current rates, for which rate recovery is probable but has not yet
been granted (see Management's Discussion and Analysis - Competitive
Environment).
Accounting Matters:
- -------------------
In June 1998, Statement of Financial Accounting Standards No. 133 (FAS
133), "Accounting for Derivative Instruments and Hedging Activities" was issued.
FAS 133 requires that companies recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or reported as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to
adopt this statement in the first quarter of 2000. GPU is in the process of
evaluating the impact of FAS 133.
Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires that regulatory assets meet the recovery criteria of FAS 71 on an
ongoing basis in order to avoid a write-down. In addition, FAS 121 requires that
long-lived assets, identifiable intangibles, capital leases and goodwill be
reviewed for impairment whenever events occur or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. FAS 121
also requires the recognition of impairment losses when the carrying amounts of
those assets are greater than the estimated cash flows expected to be generated
from the use and eventual disposition of the assets. See Note 2 Accounting for
Non-recurring Items.
Should the restructuring proceeding in New Jersey result in substantial
disallowance of certain capital additions; the disallowance of certain stranded
costs; reduction in cost of capital allowances on certain elements of plant and
cost deferrals; and tariff rate unbundling reflecting an allocation of costs to
the transmission and distribution activities lower than that proposed by JCP&L,
management believes that the outcome of that proceeding would have a material
adverse effect on GPU's future earnings.
NUCLEAR FACILITIES
------------------
The GPU Energy companies have made investments in three major nuclear
projects -- TMI-1 and Oyster Creek, both of which are operating generation
facilities, and TMI-2, which was damaged during a 1979 accident. TMI-1 and TMI-2
are jointly owned by JCP&L, Met-Ed and Penelec in the percentages of 25%, 50%
and 25%, respectively. Oyster Creek is owned by JCP&L. At June 30, 1998 and
December 31, 1997, the GPU Energy companies' net investment in TMI-1 and Oyster
Creek, including nuclear fuel, was as follows:
28
<PAGE>
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
----- ------------
June 30, 1998
-------------
JCP&L $ 33 $697
Met-Ed 65 -
Penelec 33 -
--- ---
Total $131 $697
=== ===
Net Investment (in millions)
----------------------------
TMI-1 Oyster Creek
December 31, 1997
-----------------
JCP&L $155 $701
Met-Ed 300 -
Penelec 147 -
--- ---
Total $602 $701
=== ===
The GPU Energy companies' net investment in TMI-2 at June 30, 1998 was $68
million for JCP&L and $84 million, (JCP&L $76 million; Met-Ed $1 million; and
Penelec $7 million) at December 31 1997. JCP&L is collecting revenues for TMI-2
on a basis which provides for the recovery of its remaining investment in the
plant by 2008. On June 30, 1998, Met-Ed and Penelec received final PaPUC
Restructuring Orders. The companies discontinued the application of FAS 71 and
adopted the provisions of FAS 101 with respect to their electric generation
operations. Accordingly, Met-Ed and Penelec wrote-off their remaining investment
in TMI-2 of $1 million and $7 million, respectively. See Note 2 Accounting for
Non-recurring Items.
Costs associated with the operation, maintenance and retirement of nuclear
plants have continued to be significant and less predictable than costs
associated with other sources of generation, in large part due to changing
regulatory requirements, safety standards, availability of nuclear waste
disposal facilities and experience gained in the construction and operation of
nuclear facilities. The GPU Energy companies may also incur costs and experience
reduced output at their nuclear plants because of the prevailing design criteria
at the time of construction and the age of the plants' systems and equipment. In
addition, for economic or other reasons, operation of these plants for the full
term of their operating licenses cannot be assured. Also, not all risks
associated with the ownership or operation of nuclear facilities may be
adequately insured or insurable. Consequently, the recovery of costs associated
with nuclear projects, including replacement power, any unamortized investment
at the end of each plant's useful life (whether scheduled or premature), the
carrying costs of that investment and retirement costs, is not assured. (See
Competition and the Changing Regulatory Environment.)
In addition to the continued operation of the Oyster Creek facility, JCP&L
has been exploring the sale or early retirement of the plant to mitigate costs
associated with its continued operation. In July 1998, GPU, Inc. announced that
it was unable to identify a buyer for the Oyster Creek facility. A final
decision on the plant will not be made until the NJBPU rules on JCP&L's
restructuring filing. If a decision is made to retire the plant early,
retirement would likely occur in 2000. Although management believes that the
current rate structure would allow for the recovery of and return on its net
investment in the plant and provide for decommissioning costs, there can be no
assurance that such costs will be fully recoverable. (See Management's
Discussion and Analysis - Competitive Environment).
29
<PAGE>
In July 1998, GPU entered into a Letter of Intent to sell TMI-1 to AmerGen
Energy Company, LLC (AmerGen), a joint venture between PECO Energy and British
Energy. The Letter of Intent initiates a 90-day period during which GPU and
AmerGen will seek to negotiate a definitive agreement for the purchase and sale
of TMI-1 and AmerGen will complete its due diligence review of the TMI-1
facility. Highlights of the Letter of Intent are presented in the Competitive
Environment section of Management's Discussion and Analysis.
TMI-2:
- ------
The 1979 TMI-2 accident resulted in individual claims for alleged personal
injury (including claims for punitive damages), which are material in amount,
have been asserted against GPU, Inc. and the GPU Energy companies. Approximately
2,100 of such claims were filed in the United States District Court for the
Middle District of Pennsylvania. Some of the claims also seek recovery for
injuries from alleged emissions of radioactivity before and after the accident.
At the time of the TMI-2 accident, as provided for in the Price-Anderson
Act, the GPU Energy companies had (a) primary financial protection in the form
of insurance policies with groups of insurance companies providing an aggregate
of $140 million of primary coverage, (b) secondary financial protection in the
form of private liability insurance under an industry retrospective rating plan
providing for up to an aggregate of $335 million in premium charges under such
plan, and (c) an indemnity agreement with the NRC for up to $85 million,
bringing their total financial protection up to an aggregate of $560 million.
Under the secondary level, the GPU Energy companies are subject to a
retrospective premium charge of up to $5 million per reactor, or a total of $15
million (JCP&L $7.5 million; Met-Ed $5 million; Penelec $2.5 million).
In October 1995, the U.S. Court of Appeals for the Third Circuit ruled that
the Price-Anderson Act provides coverage under its primary and secondary levels
for punitive as well as compensatory damages, but that punitive damages could
not be recovered against the Federal Government under the third level of
financial protection. In so doing, the Court of Appeals referred to the "finite
fund" (the $560 million of financial protection under the Price-Anderson Act) to
which plaintiffs must resort to get compensatory as well as punitive damages.
The Court of Appeals also ruled that the standard of care owed by the
defendants to a plaintiff was determined by the specific level of radiation
which was released into the environment, as measured at the site boundary,
rather than as measured at the specific site where the plaintiff was located at
the time of the accident (as the defendants proposed). The Court of Appeals also
held that each plaintiff still must demonstrate exposure to radiation released
during the TMI-2 accident and that such exposure had resulted in injuries. In
1996, the U.S. Supreme Court denied petitions filed by GPU, Inc. and the GPU
Energy companies to review the Court of Appeals' rulings.
In June 1996, the District Court granted a motion for summary judgment
filed by GPU, Inc. and the GPU Energy companies, and dismissed all of the 2,100
pending claims. The Court ruled that there was no evidence which created a
genuine issue of material fact warranting submission of plaintiffs' claims to a
jury. The plaintiffs have appealed the District Court's ruling to
30
<PAGE>
the Court of Appeals for the Third Circuit, before which the matter is
pending. There can be no assurance as to the outcome of this litigation.
Based on the above, GPU, Inc. and the GPU Energy companies believe that any
liability to which they might be subject by reason of the TMI-2 accident will
not exceed their financial protection under the Price-Anderson Act.
NUCLEAR PLANT RETIREMENT COSTS
------------------------------
Retirement costs for nuclear plants include decommissioning the
radiological portions of the plants and the cost of removal of nonradiological
structures and materials. The disposal of spent nuclear fuel is covered
separately by contracts with the DOE.
In 1990, the GPU Energy companies submitted a report, in compliance with
Nuclear Regulatory Commission (NRC) regulations, setting forth a funding plan
(employing the external sinking fund method) for the decommissioning of their
nuclear reactors. Under this plan, the GPU Energy companies intend to complete
the funding for Oyster Creek and TMI-1 by the end of the plants' license terms,
2009 and 2014, respectively. The TMI-2 funding completion date is 2014,
consistent with TMI-2's remaining in long-term storage and being decommissioned
at the same time as TMI-1. Based on NRC studies, a comparable funding target was
developed for TMI-2 which took the accident into account. Under the NRC
regulations, the funding targets (in 1998 dollars) are as follows:
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
JCP&L $ 46 $ 73 $314
Met-Ed 92 146 -
Penelec 46 73 -
--- --- ---
Total $184 $292 $314
=== === ===
The funding targets, while not considered cost estimates, are reference
levels designed to assure that licensees demonstrate adequate financial
responsibility for decommissioning. While the NRC regulations address activities
related to the removal of the radiological portions of the plants, they do not
establish residual radioactivity limits nor do they address costs related to the
removal of nonradiological structures and materials.
In 1995, a consultant to GPUN performed site-specific studies of the TMI
site, including both Units 1 and 2, and of Oyster Creek, that considered various
decommissioning methods and estimated the cost of decommissioning the
radiological portions and the cost of removal of the nonradiological portions of
each plant, using the prompt removal/dismantlement method. GPUN management has
reviewed the methodology and assumptions used in these studies, is in agreement
with them, and believes the results are reasonable. The NRC may require an
acceleration of the decommissioning funding for Oyster Creek if the plant is
retired early. The retirement cost estimates under the site-specific studies are
as follows (in 1998 dollars):
31
<PAGE>
(in millions)
Oyster
TMI-1 TMI-2 Creek
----- ----- -----
Radiological decommissioning $337 $410 $397
Nonradiological cost of removal 83 34 * 38
--- --- ---
Total $420 $444 $435
=== === ===
* Net of $11.6 million spent as of June 30, 1998.
Each of the GPU Energy companies is responsible for retirement costs in
proportion to its respective ownership percentage.
In July 1998, GPU entered into a Letter of Intent to sell TMI-1 to AmerGen.
The Letter of Intent provides, among other things, that upon closing, Amergen
will assume all TMI-1 decommissioning liabilities beyond $320 million, the
amount to which GPU has agreed to fund the trusts. If all the necessary
regulatory approvals, as well as certain Internal Revenue Service (IRS) rulings,
are obtained, then the transfer of all the TMI-1 decommissioning liabilities and
expenses to AmerGen will take place at the financial closing.
The ultimate cost of retiring the GPU Energy companies' nuclear facilities
may be different from the cost estimates contained in these site-specific
studies. Such costs are subject to (a) the escalation of various cost elements
(for reasons including, but not limited to, general inflation), (b) the further
development of regulatory requirements governing decommissioning, (c) the
technology available at the time of decommissioning, and (d) the availability of
nuclear waste disposal facilities.
The GPU Energy companies charge to depreciation expense and accrue
retirement costs based on amounts being collected from customers. Customer
collections are contributed to external trust funds. These deposits, including
the related earnings, are classified as Nuclear decommissioning trusts, at
market on the Consolidated Balance Sheets. Accounting for retirement costs may
change based upon the FASB Exposure Draft discussed below.
The FASB has issued an Exposure Draft titled "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets," which includes
nuclear plant retirement costs. If the Exposure Draft is adopted, Oyster Creek
and TMI-1 future retirement costs would have to be recognized as a liability
immediately, rather than the current industry practice of accruing these costs
in accumulated depreciation over the life of the plants. A regulatory asset for
amounts probable of recovery through rates would also be established. Any
amounts not probable of recovery through rates would have to be charged to
expense. (For TMI-2, a liability (in 1998 dollars) has already been recognized,
based on the 1995 site-specific study because the plant is no longer operating
(see TMI-2)). The effective date of this accounting change has not yet been
established.
TMI-1 and Oyster Creek:
- -----------------------
The NJBPU has granted JCP&L annual revenues for TMI-1 and Oyster Creek
retirement costs of $2.5 million and $13.5 million, respectively. These annual
revenues are based on both the NRC funding targets for radiological
32
<PAGE>
decommissioning costs and a site-specific study which was performed in 1988 for
nonradiological costs of removal. The Stipulation of Final Settlement approved
by the NJBPU in 1997 allows for JCP&L's future collection of retirement costs to
increase annually to $5.2 million and $22.5 million for TMI-1 and Oyster Creek,
respectively, beginning in 1998, based on the 1995 site-specific study
estimates.
The PaPUC has granted Met-Ed annual revenues for TMI-1 retirement costs of
$8.5 million based on both the NRC funding target for radiological
decommissioning costs and the 1988 site-specific study for nonradiological costs
of removal. The PaPUC also granted Penelec annual revenues of $4.2 million for
its share of TMI-1 retirement costs, on a basis consistent with that granted
Met-Ed. As part of their restructuring plans filed with the PaPUC in June 1997,
Met-Ed and Penelec have requested that these amounts be increased to reflect the
estimated retirement costs contained in the 1995 site-specific study for
radiological decommissioning and nonradiological costs of removal. On June 30,
1998, Met-Ed and Penelec received final PaPUC Restructuring Orders, which
granted recovery of TMI-1 decommissioning costs as part of the CTC. The PaPUC,
however rejected Met-Ed and Penelec's proposed TMI-1 decommissioning recovery
period and inflation assumptions. Met-Ed and Penelec have appealed the
Restructuring Orders to the Commonwealth Court and have filed complaints in the
U.S. District Court. Met-Ed and Penelec have filed revised stranded cost claims
for TMI-1 decommissioning in their Alternative Plans. On August 5, 1998, the
PaPUC rejected the Alternative Plans as invalid. Met-Ed and Penelec intend to
appeal this action to the Commonwealth Court.
The amounts charged to depreciation expense for the six months ended June
30, 1998 and the provisions for the future expenditure of these funds, which
have been made in accumulated depreciation, are as follows:
(in millions)
Oyster
TMI-1 Creek
----- -----
Amount expensed for the six months ended June 30, 1998:
JCP&L $ 3 $ 11
Met-Ed 4 -
Penelec 2 -
--- ---
$ 9 $ 11
=== ===
(in millions)
Oyster
TMI-1 Creek
----- -----
Accumulated depreciation provision at June 30, 1998:
JCP&L $ 43 $246
Met-Ed 79 -
Penelec 34 -
--- ---
$156 $246
==== ====
Management believes that any TMI-1 and Oyster Creek retirement costs, in
excess of those currently recognized for ratemaking purposes, should be
recoverable from customers.
33
<PAGE>
TMI-2:
- ------
The estimated liabilities for TMI-2 future retirement costs (reflected as
Three Mile Island Unit 2 Future Costs on the Consolidated Balance Sheets) as of
June 30, 1998 and December 31, 1997 are as follows:
(in millions)
GPU JCP&L Met-Ed Penelec
--- ----- ------ -------
June 30, 1998 $459 $115 $229 $115
December 31, 1997 $449 $112 $225 $112
These amounts are based upon the 1995 site-specific study estimates (in
1998 and 1997 dollars, respectively) discussed above and an estimate for
remaining incremental monitored storage costs of $16 million (JCP&L $4 million;
Met-Ed $8 million; Penelec $4 million) as of June 30, 1998 and December 31,
1997, as a result of TMI-2's entering long-term monitored storage in 1993. The
GPU Energy companies are incurring annual incremental monitored storage costs of
approximately $1 million (JCP&L $250 thousand; Met-Ed $500 thousand; Penelec
$250 thousand).
Offsetting the $459 million liability at June 30, 1998 is $255 million
which management believes is probable of recovery from customers and included in
Competitive transition charge (Met-Ed $107 million; Penelec $67 million) and
Other regulatory assets, net (JCP&L $27 million; Met-Ed $37 million; Penelec $17
million) on the Consolidated Balance Sheets, and $246 million (JCP&L $96
million; Met-Ed $110 million; Penelec $40 million) in trust funds for TMI-2 and
included in Nuclear decommissioning trusts, at market on the Consolidated
Balance Sheets. Earnings on trust fund deposits are included in amounts shown on
the Consolidated Balance Sheets under Competitive transition charge and Other
regulatory assets. TMI-2 decommissioning costs charged to depreciation expense
during the six months ended June 30, 1998 amounted to $7 million (JCP&L $1
million; Met-Ed $5 million; Penelec $1 million).
The NJBPU has granted JCP&L, TMI-2 decommissioning revenues for the NRC
funding target and allowances for the cost of removal of nonradiological
structures and materials. In addition, JCP&L is recovering its share of TMI-2's
incremental monitored storage costs. The Stipulation of Final Settlement
approved by the NJBPU in 1997 adjusts JCP&L's future revenues for retirement
costs based on the 1995 site-specific study estimates, beginning in 1998. On
June 30, 1998, Met-Ed and Penelec received final PaPUC Restructuring Orders,
which granted recovery of TMI-2 decommissioning costs as part of the CTC. The
PaPUC rejected the companies' proposed TMI-2 decommissioning recovery period and
inflation assumptions but allowed Met-Ed and Penelec to defer as a regulatory
asset those amounts that are above which was provided for in the CTC.
At June 30, 1998, the accident-related portion of TMI-2 radiological
decommissioning costs is considered to be $73 million (JCP&L $18 million, Met-Ed
$37 million; Penelec $18 million), which is the difference between the 1995
TMI-1 and TMI-2 site-specific study estimates (in 1998 dollars). In connection
with rate case resolutions at the time, JCP&L, Met-Ed and Penelec made
contributions to irrevocable external trusts relating to their shares of the
accident-related portions of the decommissioning liability. In 1990,
34
<PAGE>
JCP&L contributed $15 million and in 1991, Met-Ed and Penelec contributed $40
million and $20 million, respectively, to irrevocable external trusts. These
contributions were not recovered from customers and have been expensed. The GPU
Energy companies will not pursue recovery from customers for any of these
amounts contributed in excess of the $73 million accident-related portion
referred to above.
JCP&L intends to seek recovery for any increases in TMI-2 retirement costs,
and Met-Ed and Penelec intend to seek recovery for any increases in the
nonaccident-related portion of such costs, but recognize that recovery cannot be
assured.
INSURANCE
---------
GPU has insurance (subject to retentions and deductibles) for its
operations and facilities including coverage for property damage, liability to
employees and third parties, and loss of use and occupancy (primarily
incremental replacement power costs). There is no assurance that GPU will
maintain all existing insurance coverages. Losses or liabilities that are not
completely insured, unless allowed to be recovered through ratemaking, could
have a material adverse effect on the financial position of GPU.
The decontamination liability, premature decommissioning and property
damage insurance coverage for the TMI station and for Oyster Creek totals $2.7
billion per site. In accordance with NRC regulations, these insurance policies
generally require that proceeds first be used for stabilization of the reactors
and then to pay for decontamination and debris removal expenses. Any remaining
amounts available under the policies may then be used for repair and restoration
costs and decommissioning costs. Consequently, there can be no assurance that in
the event of a nuclear incident, property damage insurance proceeds would be
available for the repair and restoration of that station.
The Price-Anderson Act limits GPU's liability to third parties for a
nuclear incident at one of its sites to approximately $9.9 billion. Coverage for
the first $200 million of such liability is provided by private insurance. The
remaining coverage, or secondary financial protection, is provided by
retrospective premiums payable by all nuclear reactor owners. Under secondary
financial protection, a nuclear incident at any licensed nuclear power reactor
in the country, including those owned by the GPU Energy companies, could result
in assessments of up to $88 million per incident for each of the GPU Energy
companies' two operating reactors, subject to an annual maximum payment of $10
million per incident per reactor. In addition to the retrospective premiums
payable under the Price-Anderson Act, the GPU Energy companies are also subject
to retrospective premium assessments of up to $26.5 million (JCP&L $17.0
million; Met-Ed $6.3 million; Penelec $3.2 million) in any one year under
insurance policies applicable to nuclear operations and facilities.
The GPU Energy companies have insurance coverage for incremental
replacement power costs resulting from an accident-related outage at their
nuclear plants. Coverage commences after a 17 week waiting period at $3.5
million per week, and after 23 weeks of an outage, continues for three years
beginning at $1.8 million and $2.6 million per week for the first year for
Oyster Creek and TMI-1, respectively, decreasing to 80% of such amounts for
years two and three.
35
<PAGE>
ENVIRONMENTAL MATTERS
---------------------
As a result of existing and proposed legislation and regulations, and
ongoing legal proceedings dealing with environmental matters, including but not
limited to acid rain, water quality, ambient air quality, global warming,
electromagnetic fields, and storage and disposal of hazardous and/or toxic
wastes, GPU may be required to incur substantial additional costs to construct
new equipment, modify or replace existing and proposed equipment, remediate,
decommission or cleanup waste disposal and other sites currently or formerly
used by it, including formerly owned manufactured gas plants (MGP), coal mine
refuse piles and generation facilities.
To comply with Titles I and IV of the federal Clean Air Act Amendments of
1990 (Clean Air Act), the GPU Energy companies expect to spend up to $248
million (JCP&L $44 million; Met-Ed $98 million; Penelec $106 million) for air
pollution control equipment by the year 2000, of which approximately $242
million (JCP&L $43 million; Met-Ed $96 million; Penelec $103 million) has
already been spent. In developing their least-cost plan to comply with the Clean
Air Act, the GPU Energy companies will continue to evaluate major capital
investments compared to participation in the sulfur dioxide (SO2) emission
allowance market, the expected nitrogen oxide (NOx) emissions trading market and
the use of low-sulfur fuel or retirement of facilities. In 1994, the Ozone
Transport Commission (OTC), consisting of representatives of 12 northeast states
(including New Jersey and Pennsylvania) and the District of Columbia, proposed
reductions in NOx emissions it believes necessary to meet ambient air quality
standards for ozone and the statutory deadlines set by the Clean Air Act.
Effective November 1997, the Pennsylvania Environmental Quality Board adopted
regulations implementing the OTC's proposed NOx reductions and in December 1997,
the New Jersey Department of Environmental Protection developed a proposal with
the electric utility industry on a plan to implement the OTC's proposed NOx
reductions. The GPU Energy companies expect that the U.S. Environmental
Protection Agency (EPA) will approve state implementation plans, including those
in Pennsylvania and New Jersey, and that as a result, they will spend an
estimated $6 million (JCP&L $0.2 million; Met-Ed $2.8 million; Penelec $3.0
million) (included in the above total), to meet the 1999 seasonal reductions
agreed upon by the OTC. The OTC has stated that it anticipates that additional
NOx reductions will be necessary to meet the Clean Air Act's 2005 National
Ambient Air Quality Standard for ozone. However, the specific requirements that
will have to be met at that time have not been finalized. In addition, in July
1997 the EPA adopted new, more stringent rules on ozone and particulate matter.
Several groups have filed suit in the U.S. Court of Appeals to overturn these
new air quality standards on the grounds that, among other things, they are
based on inadequate scientific evidence. Also, legislation has been introduced
in the Congress that would impose a four-year moratorium on any new standards
under the Clean Air Act. The GPU Energy companies are unable to determine what
additional costs, if any, will be incurred if the EPA rules are upheld.
GPU has been formally notified by the EPA and state environmental
authorities that it is among the potentially responsible parties (PRPs) who may
be jointly and severally liable to pay for the costs associated with the
investigation and remediation at hazardous and/or toxic waste sites in the
following number of instances (in some cases, more than one company is named for
a given site):
36
<PAGE>
JCP&L MET-ED PENELEC GPUN GPU INC. TOTAL
----- ------ ------- ---- -------- -----
7 4 2 1 1 12
In addition, certain of the GPU companies have been requested to
participate in the remediation or supply information to the EPA and state
environmental authorities on several other sites for which they have not been
formally named as PRPs, although the EPA and state authorities may nevertheless
consider them as PRPs. Certain of the GPU companies have also been named in
lawsuits requesting damages (which are material in amount) for hazardous and/or
toxic substances allegedly released into the environment. The ultimate cost of
remediation will depend upon changing circumstances as site investigations
continue, including (a) the existing technology required for site cleanup, (b)
the remedial action plan chosen and (c) the extent of site contamination and the
portion attributed to the GPU companies involved.
In 1997, the EPA filed a complaint against GPU, Inc. in the United States
District Court for the District of Delaware for enforcement of its unilateral
order issued against GPU, Inc. to clean up the former Dover Gas Light Company
(Dover) manufactured gas production site in Dover, Delaware. Dover was part of
the AGECO/AGECORP group of companies from 1929 until 1942 and GPU, Inc. emerged
from the AGECO/AGECORP reorganization proceedings. All of the common stock of
Dover was sold in 1942 by a member of the AGECO/AGECORP group to an unaffiliated
entity, and was subsequently acquired by Chesapeake Utilities Corporation.
According to the complaint, the EPA is seeking up to $0.5 million in past costs,
$4.2 million for work in connection with the cleanup of the Dover site and
approximately $19 million in penalties. GPU, Inc. has responded to the EPA
complaint stating that such claims should be dismissed because, among other
things, they are barred by the operation of the Final Decree entered by the
United States District Court for the Southern District of New York at the
conclusion of the 1946 reorganization proceedings of AGECO/AGECORP. Chesapeake
Utilities Corporation has also sued GPU, Inc. for a contribution to the cleanup
of the Dover site. In December 1997, the Court refused to dismiss the complaint;
GPU, Inc. has requested that the Court reconsider its decision. There can be no
assurance as to the outcome of these proceedings.
Pursuant to federal environmental monitoring requirements, Penelec has
reported to the Pennsylvania Department of Environmental Protection (PaDEP) that
contaminants from coal mine refuse piles were identified in storm water run-off
at Penelec's Seward station property. Penelec signed a modified Consent Order,
which became effective December 1996, that establishes a schedule for submitting
a plan for long-term remediation, based on future operating scenarios. Penelec
currently estimates that the remediation of the Seward station property will
range from $12 million to $20 million and has a recorded liability of $12
million at June 30, 1998. These cost estimates are subject to uncertainties
based on continuing discussions with the PaDEP as to the method of remediation,
the extent of remediation required and available cleanup technologies. Penelec
expects recovery of these remediation costs in Phase II of its restructuring
proceeding and has recorded a corresponding deferred debit of approximately $12
million at June 30, 1998.
In 1997, the GPU Energy companies filed with the PaDEP applications for
re-permitting seven (JCP&L - one; Met-Ed - three; Penelec - three) operating ash
disposal sites, including projected site closure procedures and related
37
<PAGE>
cost estimates. The cost estimates for the closure of these sites range from
approximately $17 million to $22 million, and a liability of $17 million (JCP&L
$1 million; Met-Ed $4 million; Penelec $12 million) is reflected on the
Consolidated Balance Sheets at June 30, 1998. JCP&L has requested recovery of
its share of closure costs in its restructuring plan filed with the NJBPU in
July 1997. Met-Ed and Penelec expect recovery of these costs in Phase II of
their restructuring proceedings. As a result, a deferred debit of $16 million is
reflected on the Consolidated Balance Sheets at June 30, 1998.
JCP&L has entered into agreements with the New Jersey Department of
Environmental Protection for the investigation and remediation of 17 formerly
owned MGP sites. JCP&L has also entered into various cost-sharing agreements
with other utilities for most of the sites. As of June 30, 1998, JCP&L has spent
approximately $29 million in connection with the cleanup of these sites. In
addition, JCP&L has recorded an estimated environmental liability of $46 million
relating to expected future costs of these sites (as well as two other
properties). This estimated liability is based upon ongoing site investigations
and remediation efforts, which generally involve capping the sites and pumping
and treatment of ground water. Moreover, the cost to clean up these sites could
be materially in excess of $46 million due to significant uncertainties,
including changes in acceptable remediation methods and technologies.
In 1997, JCP&L's request to establish a Remediation Adjustment Clause for
the recovery of MGP remediation costs was approved by the NJBPU as part of the
Stipulation of Final Settlement. At June 30, 1998, JCP&L had recorded on its
Consolidated Balance Sheet a regulatory asset of $37 million. JCP&L is
continuing to pursue reimbursement from its insurance carriers for remediation
costs already spent and for future estimated costs. In 1994, JCP&L filed a
complaint with the Superior Court of New Jersey against several of its insurance
carriers, relative to these MGP sites. Pretrial discovery is continuing.
OTHER COMMITMENTS AND CONTINGENCIES
-----------------------------------
Year 2000 Issue:
- ----------------
GPU is addressing the year 2000 issue as it relates to its business,
operations and operating systems, and its business dealings with third parties
including customers, banks, partners, vendors, suppliers and service providers.
Comprehensive reviews of all computers, equipment, systems and applications are
being performed; remediation plans are being developed; and certain corrective
actions have begun. GPU's remediation plans include, among other things, the
upgrade or replacement of computers, equipment and computer software. Management
currently believes that adequate resources are being allocated to this project
and anticipates that GPU's remediation efforts will, in all material respects,
be completed by the end of 1999. However, if GPU or critical third parties on
which GPU relies are unable to successfully correct their year 2000 issue on a
timely basis, certain computers, equipment, systems and applications may not
function properly, which could have a material adverse effect on GPU's
operations and financial condition. Among other things, GPU's operations could
be affected by a temporary inability to process transactions, send bills or
operate electric generating stations, as well as by interruptions of electric
service and reduced customer service. There can be no assurance as to the
outcome of this matter.
38
<PAGE>
As part of their year 2000 solution, the GPU Energy companies have
purchased and are installing an integrated information system (Project
Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999.
The GPU Energy companies currently estimate they will spend $24.2 million
(JCP&L $10.6 million; Met-Ed $7.4 million; Penelec $6.2 million) on year 2000
remediation of their computers, equipment and computer software. Of the $24.2
million, approximately $6.7 million (JCP&L $3 million; Met-Ed $2 million;
Penelec $1.7 million) would have been spent in any event because of maintenance
and cyclical replacement plans that are already in place. Also, an additional
$8.1 million (JCP&L, Met-Ed and Penelec $2.7 million each) would have been
needed to be spent on modifications to systems that are being replaced by
Project Enterprise.
The GPUI Group currently estimates it will spend approximately $9.2 million
to address the year 2000 issue, primarily to replace or modify equipment.
GPUI Group:
- -----------
At June 30, 1998, the GPUI Group had investments totaling approximately
$2.4 billion in businesses and facilities located in foreign countries. Although
management attempts to mitigate the risk of investing in certain foreign
countries by securing political risk insurance, the GPUI Group faces additional
risks inherent to operating in such locations, including foreign currency
fluctuations (see Management's Discussion and Analysis - GPUI Group).
At June 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$526 million; GPU, Inc. has also guaranteed up to an additional $893 million of
GPUI Group obligations. Of this amount, $725 million is included in Long-term
debt and Securities due within one year on GPU's Consolidated Balance Sheet at
June 30, 1998; $30 million of that amount relates to a GPU International, Inc.
revolving credit agreement; and $138 million relates to various other
obligations of the GPUI Group.
GPU International, Inc. has ownership interests in three NUG projects which
have long-term power purchase agreements with Niagara Mohawk Power Corporation
(NIMO). In July 1997, NIMO and 16 independent power producers (IPP), including
the GPUI Group, executed a master agreement providing for the restructuring or
termination of 29 power purchase agreements, pursuant to which NIMO has agreed
to pay an aggregate of $3.6 billion in cash and/or debt securities, and to issue
an aggregate of 46 million shares of NIMO common stock. In June 1998, NIMO
executed the master agreement whereby each of the IPP agreements were negotiated
independently and resulted in lump sum payments and/or new contracts with NIMO.
At that time, two of GPUI's NUG projects were restructured; and the third NUG
project has until August 31, 1998 to complete its restructuring. GPUI has
deferred its net gain on the proceeds received from the settlement, which
ensures recovery of the investment, and will recognize the gain in income over
the ten year period of their restructured agreements with NIMO or until such
time as an independent system operator (ISO) is established in New York State.
The ISO for New York is expected to be implemented as early as 1999, at which
time the net deferred gain resulting from the lump sum proceeds will be
recognized in income.
39
<PAGE>
Midlands Electricity (Midlands) has invested in a power project in Pakistan
(Uch Power Project) which was originally scheduled to begin commercial operation
in late 1998. The Uch Power Project is a 586 MW facility of which Midlands is a
40% owner. The Pakistani government-owned utility has recently issued a notice
of intent to terminate certain key project agreements. The notice asserts that
various forms of corruption were involved in the original granting of the
agreements to the Uch investors by the predecessor Pakistani government. GPU
Electric believes that this notice is similar to notices received by other
independent power projects in Pakistan.
The Uch investors, including Midlands, strongly deny the allegations and
intend to pursue all available legal options to enforce their contractual rights
under the project agreements. The Uch investors are continuing to explore
remedies to the situation with officials of the Pakistani government. Through
its 50% ownership in Midlands, GPU Electric's current investment in the Uch
Power Project is approximately $30 million. In addition, the project lenders
could require investors to make additional investments to the project under
certain conditions. GPU Electric's share of the additional investment could
amount to a maximum of approximately $14 million. There can be no assurance as
to the outcome of this matter.
Other:
GPU's capital programs, for which substantial commitments have been
incurred and which extend over several years, contemplate expenditures of $545
million (JCP&L $198 million; Met-Ed $89 million; Penelec $110 million; Other
$148 million) during 1998.
The GPU Energy companies have entered into long-term contracts with
nonaffiliated mining companies for the purchase of coal for certain generating
stations in which they have ownership interests. The contracts, which expire at
various dates between 1998 and 2007, require the purchase of either fixed or
minimum amounts of the stations' coal requirements. The price of the coal under
the contracts is based on adjustments of indexed cost components. The GPU Energy
companies' share of the cost of coal purchased under these agreements is
expected to aggregate $171 million (JCP&L $26 million; Met-Ed $55 million;
Penelec $90 million) for 1998.
JCP&L has entered into agreements with other utilities to purchase capacity
and energy for various periods through 2004. These agreements will provide for
up to 614 MW in 1998, declining to 529 MW in 1999 and 345 MW in 2000, through
the expiration of the final agreement in 2004. Payments pursuant to these
agreements are estimated to be $129 million in 1998, $111 million in 1999, $83
million in 2000, $92 million in 2001, and $101 million in 2002.
In accordance with the Nuclear Waste Policy Act of 1982 (NWPA), the GPU
Energy companies have entered into contracts with, and have been paying fees to,
the DOE for the future disposal of spent nuclear fuel in a repository or interim
storage facility. In December 1996, the DOE notified the GPU Energy companies
and other standard contract holders that it will be unable to begin acceptance
of spent nuclear fuel for disposal by 1998, as mandated by the NWPA. The DOE
requested recommendations from contract holders for handling the delay. In
January 1997, the GPU Energy companies, along with other electric utilities and
state agencies, petitioned the U.S. Court of Appeals
40
<PAGE>
to, among other things, permit utilities to cease payments into the Federal
Nuclear Waste Fund until the DOE complies with the NWPA. The DOE's inability to
accept spent nuclear fuel by 1998 could have a material impact on GPU's results
of operations, as additional costs may be incurred to build and maintain interim
on-site storage at Oyster Creek. TMI-1 has sufficient on-site storage capacity
to accommodate spent nuclear fuel through the end of its licensed life. In June
1997, a consortium of electric utilities, including GPUN, filed a license
application with the NRC seeking permission to build an interim above-ground
disposal facility for spent nuclear fuel in northwestern Utah. There can be no
assurance as to the outcome of these matters.
New Jersey and Connecticut have established the Northeast Compact, to
construct a low-level radioactive waste disposal facility in New Jersey, which
should commence operation by the end of 2003. GPUN's total share of the cost for
developing, constructing and site licensing the facility is estimated to be $58
million, which will be paid through 2002. Through June 30, 1998, $6 million has
been paid. As a result, at June 30, 1998, a liability of $52 million is
reflected on the Consolidated Balance Sheets. JCP&L is recovering these costs
from customers, and a regulatory asset has also been recorded. In February 1998,
the New Jersey Low-Level Radwaste Facility Siting Board (Siting Board) voted to
suspend the siting process in New Jersey. The Siting Board is reviewing its
legal and financial obligations, subject to review from the Governor. GPUN
cannot determine at this time what effect, if any, this matter will have on its
operations.
Pennsylvania, Delaware, Maryland and West Virginia have established the
Appalachian Compact to construct a facility for the disposal of low-level
radwaste in those states, including low-level radwaste from TMI-1. To date,
pre-construction costs of $33 million, out of an estimated $88 million, have
been paid. Eleven nuclear plants have so far shared equally in the
pre-construction costs; GPUN has contributed $3 million on behalf of TMI-1.
Pennsylvania has stated that it may suspend the search for a low level radwaste
disposal site in the state. GPUN cannot determine at this time what effect, if
any, this may have on its operations.
JCP&L's two operating nuclear units are subject to the NJBPU's annual
nuclear performance standard. Operation of these units at an aggregate annual
generating capacity factor below 65% or above 75% would trigger a charge or
credit based on replacement energy costs. At current cost levels, the maximum
annual effect on net income of the performance standard charge at a 40% capacity
factor would be approximately $11 million before tax. While a capacity factor
below 40% would generate no specific monetary charge, it would require the issue
to be brought before the NJBPU for review. The annual measurement period, which
begins in March of each year, coincides with that used for the Levelized Energy
Adjustment Clause.
At June 30, 1998, GPU, Inc. and consolidated affiliates had 9,325 employees
worldwide, of which 8,967 employees were located in the U.S. The majority of the
U.S. workforce is employed by the GPU Energy companies, of which 4,800 are
represented by unions for collective bargaining purposes. JCP&L, Met-Ed and
Penelec's collective bargaining agreements with the International Brotherhood of
Electrical Workers expire in 1999, 2000 and 2002, respectively. Penelec and the
Utility Workers Union of America have entered into a new three-year agreement
which expires in 2001.
41
<PAGE>
During the normal course of the operation of its businesses, in addition to
the matters described above, GPU is from time to time involved in disputes,
claims and, in some cases, as a defendant in litigation in which compensatory
and punitive damages are sought by the public, customers, contractors, vendors
and other suppliers of equipment and services and by employees alleging unlawful
employment practices. While management does not expect that the outcome of these
matters will have a material effect on GPU's financial position or results of
operations, there can be no assurance that this will continue to be the case.
2. ACCOUNTING FOR NON-RECURRING ITEMS
Extraordinary Item - FAS 101 Write-off for Pennsylvania Operations:
Historically, the rates an electric utility charges its customers have been
based on the utility's costs of operation. As a result, the GPU Energy companies
were required to account for the economic effects of cost-based ratemaking
regulation under the provisions of Statement of Financial Accounting Standards
No. 71 (FAS 71), "Accounting for the Effects of Certain Types of Regulation."
FAS 71 requires regulated entities, in certain circumstances, to defer, as
regulatory assets, the impact on operations of costs expected to be recovered in
future rates.
In response to the continuing deregulation of the electric utility
industry, the Securities and Exchange Commission (SEC) has questioned the
continued applicability of FAS 71 by investor-owned utilities with respect to
their electric generation operations. In response to these concerns, the
Financial Accounting Standards Board's (FASB) EITF concluded in June 1997 that
utilities are no longer subject to FAS 71, for a separable portion of their
business, when they know details of their individual transition plans. The EITF
also concluded that utilities can continue to carry previously recorded
regulated assets, as well as any newly established regulated assets (including
those related to generation), on their balance sheets if regulators have
guaranteed a regulated cash flow stream to recover the cost of these assets.
On June 30, 1998, Met-Ed and Penelec received final PaPUC Restructuring
Orders. The Restructuring Orders, among other things, essentially remove from
regulation the costs associated with providing electric generation service to
Pennsylvania consumers, effective January 1, 1999. Accordingly, Met-Ed and
Penelec have discontinued the application of FAS 71 and adopted the provisions
of Statement of Financial Accounting Standards No. 101 (FAS 101), "Regulated
Enterprises - Accounting for the Discontinuation of Application of FAS 71" with
respect to their electric generation operations, effective April 1, 1998. The
transmission and distribution portion of Met-Ed and Penelec's operations will
continue to be subject to the provisions of FAS 71. JCP&L expects to discontinue
the application of FAS 71 and adopt FAS 101 for its electric generation
operations no later than when it receives NJBPU approval of its restructuring
plans.
Met-Ed and Penelec's generation-related stranded costs at December 31,
1998, stranded costs approved for rate recovery from customers, and amounts
written-off as of June 30, 1998, are summarized as follows:
42
<PAGE>
(in millions)
Met-Ed Penelec Total
------ ------- -----
Nonutility generation (NUG) commitments $ 816.1 $1,052.0 $1,868.1
Company-owned generation 140.0 (222.5) (82.5)
Generation-related regulatory assets and regulatory liabilities:
Income taxes recoverable through
future rates 47.6 31.9 79.5
Merrill Creek 51.4 - 51.4
Other post retirement benefits 12.3 - 12.3
Consumer education costs 9.4 11.5 20.9
Deferred energy costs/(credits)
at December 31, 1996 (1.4) 8.6 7.2
Other deferred costs, net 5.2 12.9 18.1
------- ------- -------
Total 124.5 64.9 189.4
Nuclear decommissioning costs 136.6 85.3 221.9
NUG contract buyout costs 127.9 54.8 182.7
------- ------- -------
Total stranded costs at
December 31, 1998 1,345.1 1,034.5 2,379.6
Stranded costs approved for rate recovery
in PaPUC Orders (CTC receivable) 974.9 857.9 1,832.8
CTC return recognized 50.1 26.5 76.6
------- ------- -------
Pre-tax write-offs at June 30, 1998
as a result of PaPUC Orders 320.1 150.1 470.2
Tax effect 132.8 62.3 195.1
------- ------- -------
Net write-offs at June 30, 1998 $ 187.3 $ 87.8 $ 275.1
======= ======= =======
FAS 121 Impairment Tests on Generation Facilities:
In accordance with FAS 121, GPU performed impairment tests on the June 30,
1998 net book value of the GPU Energy companies' generation facilities. These
tests determined that GPU's net investment in TMI-1 was impaired. No impairment
existed for the fossil fuel and hydroelectric generating plants or for the
Oyster Creek Nuclear Station as of that date. GPU's investment in TMI-1 was
written down by $472 million (pre-tax) (JCP&L $123 million; Met-Ed $235 million;
Penelec $114 million) to reflect its fair market value.
Re-establishment of TMI-1 Impairment as a Regulatory Asset:
The amount written off for TMI-1 ($472 million) was re-established as a
regulatory asset since management believes it is probable of recovery in the
43
<PAGE>
restructuring process due to expected gains on the sale of the fossil fuel and
hydroelectric generating plants being projected to exceed the TMI-1 writedown
amount.
3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS
GPU's use of derivative financial and commodity instruments is principally
limited to the GPUI Group. GPU does not hold or issue derivative financial or
commodity instruments for trading purposes.
Interest Rate Swap Agreements:
- ------------------------------
The GPUI Group uses interest rate swap agreements to manage the risk of
increases in variable interest rates. At June 30, 1998, these agreements covered
approximately $1.3 billion of debt and are scheduled to expire on various dates
through November 2007. The GPUI Group records amounts paid and received under
the agreements as adjustments to the interest expense of the underlying debt
since the swaps are related to specific assets, liabilities or anticipated
transactions of the GPUI Group. For the six months ended June 30, 1998, fixed
rate interest expense exceeded variable rate interest by approximately $9.2
million.
4. GPUI GROUP EQUITY INVESTMENTS
The GPUI Group uses the equity method of accounting for investments in
which it has the ability to exercise significant influence over the operating
and financial policies of the investee (generally evidenced by a 20% to 50%
ownership interest). Investments accounted for under the equity method follow:
Ownership
Investment Location of Operations Percentage
- ---------- ---------------------- ----------
Midlands Electricity plc United Kingdom 50%
Mid-Georgia Cogen, L.P. United States 50%
Prime Energy, L.P. United States 50%
Onondaga Cogen, L.P. United States 50%
Pasco Cogen, Ltd. United States 50%
GPU Solar, Inc. United States 50%
Termobarranquilla S.A. Colombia 29%
Selkirk Cogeneration Partners, L.P. United States 19%
EnviroTech Investment Fund United States 10%
Ballard Generation Systems, Inc. Canada 10%
Project Orange Associates, L.P. United States 4%
OLS Power, L.P. United States 1%
Summarized financial information for the GPUI Group's equity method
investments (which are not consolidated in the financial statements), including
both the GPUI Group's ownership interests and the non-ownership interests, is as
follows:
44
<PAGE>
Ownership
------------------------------
Balance Sheet Data (in thousands) GPUI Group Other Owners
- --------------------------------- ---------- ------------
June 30, 1998
Current Assets $ 203,244 $ 321,828
Noncurrent Assets 2,663,417 3,382,498
Current Liabilities (861,884) (926,964)
Long-Term Debt (1,145,534) (1,768,101)
Other Noncurrent Liabilities (265,529) (349,756)
--------- ---------
Equity in Net Assets $ 593,714 $ 659,505
========= =========
December 31, 1997
Current Assets $ 284,033 $ 391,018
Noncurrent Assets 2,918,125 3,616,461
Current Liabilities (755,499) (814,572)
Long-Term Debt (1,497,982) (2,086,257)
Other Noncurrent Liabilities (307,504) (396,675)
--------- ---------
Equity in Net Assets $ 641,173 $ 709,975
========= =========
Ownership
------------------------------
Earnings Data (in thousands) GPUI Group Other Owners
For the six months ended June 30, 1998
- --------------------------------------
Operating Revenues $ 665,058 $ 712,278
Depreciation and Amortization (39,831) (39,322)
Operating Income 90,513 104,440
Other Income and Deductions (5,592) 666
Interest and Preferred Dividends (54,077) (67,540)
------- -------
Equity in Net Income $ 30,844 $ 37,566
======= =======
For the six months ended June 30, 1997
- --------------------------------------
Operating Revenues $ 729,269 $ 790,137
Depreciation and Amortization (39,242) (47,579)
Operating Income 121,369 124,389
Other Income and Deductions (4,620) 9,205
Interest and Preferred Dividends (64,433) (75,010)
------- -------
Equity in Net Income $ 52,316 $ 58,584
======= =======
For the six months ended June 30, 1998 and 1997, the GPUI Group received cash
distributions totaling $3.9 million and $11.5 million, respectively.
As of June 30, 1998 and December 31, 1997, GPUI Group equity investments on
the Consolidated Balance Sheets included goodwill (net of accumulated
amortization) of approximately $24 million and $66 million, respectively, which
is amortized to expense over periods not exceeding 40 years. Amortization
expense for the six months ended June 30, 1998 and 1997 amounted to $0.8 million
and $0.3 million, respectively. In January 1998, the GPUI Group recorded a
decrease in goodwill of $41.2 million as a result of GPU Electric's sale of its
50% stake in Solaris Power. In July 1998, GPU Electric sold its 10.36% stake in
Allgas Energy Limited which it had acquired as part of the sale of Solaris Power
in January 1998.
45
<PAGE>
5. SEGMENT INFORMATION
In 1997, GPU adopted Statement of Financial Accounting Standards No. 131
(FAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires the reporting of certain financial information by
business segment and geographic area. For the purpose of providing segment
information, the GPU Energy companies consist of the three domestic electric
utility companies serving customers in Pennsylvania and New Jersey, as well as
Genco, GPUN, GPU Telcom and GPUS. The GPUI Group primarily develops, owns and
operates generation, transmission and distribution facilities in the United
States and in foreign countries. GPU AR is engaged in energy services and retail
energy sales. Corporate represents the activities of GPU, Inc., a registered
holding company. GPU's reportable segments are strategic business units that are
managed separately due to their different operating and regulatory environments.
GPU's segment information is as follows:
46
<PAGE>
Balance Sheet Segment Data (in thousands)
Current Noncurrent Current
June 30, 1998 Assets Assets Liabilities
- ------------- ------- ---------- -----------
Domestic:
GPU Energy companies $ 914,875 $11,781,747 $1,218,254
GPUI Group* 76,776 290,753 66,558
Less: GPUI Group equity investments
included above (45,584) (249,369) (38,906)
Add: Original equity investment and
income/(loss) less dividends to date - 88,685 -
GPU AR 3,083 32 4,498
Corporate 273 6,265 193,414
--------- ---------- ---------
Subtotal 949,423 11,918,113 1,443,818
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia 135,371 1,705,505 400,522
United Kingdom* 147,975 2,202,805 807,677
Other* 62,077 332,850 27,592
Less: GPUI Group equity investments
included above (157,660) (2,414,048) (822,978)
Add: Original equity investment and
income/(loss) less dividends to date - 562,285 -
--------- ---------- ---------
Subtotal 187,763 2,389,397 412,813
--------- ---------- ---------
Consolidated Total $1,137,186 $14,307,510 $1,856,631
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
June 30, 1998 Debt Liabilities Expenditures
- ------------- --------- ------------------------
Domestic:
GPU Energy companies $2,398,794 $5,725,478 $ 163,381
GPUI Group* 220,440 57,518 22,832
Less: GPUI Group equity investments
included above (220,440) (17,811) (2,133)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - 136 22
Corporate - 1,947 -
--------- --------- ---------
Subtotal 2,398,794 5,767,268 184,102
--------- --------- ---------
Foreign: (GPUI Group only)
Australia 1,244,240 71,808 9,046
United Kingdom* 1,127,380 236,228 50,735
Other* 196,066 63,229 14,288
Less: GPUI Group equity investments
included above (925,094) (247,718) (55,381)
Add: Original equity investment and
income/(loss) less dividends to date - - -
--------- --------- ---------
Subtotal 1,642,592 123,547 18,688
--------- --------- ---------
Consolidated Total $4,041,386 $5,890,815 $ 202,790
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
47
<PAGE>
Balance Sheet Segment Data (in thousands) (continued)
Current Noncurrent Current
December 31, 1997 Assets Assets Liabilities
- ----------------- ------- ----------- -----------
Domestic:
GPU Energy companies $ 831,269 $ 9,015,913 $1,140,492
GPUI Group* 81,027 352,139 90,097
Less: GPUI Group equity investments
included above (43,777) (182,384) (21,360)
Add: Original equity investment and
income/(loss) less dividends to date - 79,458 -
GPU AR 4,961 161 3,301
Corporate 165 6,313 155,977
--------- ---------- ---------
Subtotal 873,645 9,271,600 1,368,507
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 86,226 2,091,619 558,496
United Kingdom* 188,462 2,152,977 785,152
Other* 114,786 396,078 43,419
Less: GPUI Group equity investments
included above (240,256) (2,735,741) (734,139)
Add: Original equity investment and
income/(loss) less dividends to date 106,317 517,221 -
--------- ---------- ---------
Subtotal 255,535 2,422,154 652,928
--------- ---------- ---------
Consolidated Total $1,129,180 $11,693,754 $2,021,435
========= ========== =========
Other Cash
Long-Term Noncurrent Capital
December 31, 1997 Debt Liabilities Expenditures
- ----------------- --------- ------------------------
Domestic:
GPU Energy companies $2,448,672 $2,721,527 $ 356,416
GPUI Group* 263,378 46,880 111,125
Less: GPUI Group equity investments
included above (171,665) (12,321) (120)
Add: Original equity investment and
income/(loss) less dividends to date - - -
GPU AR - - -
Corporate - 1,418 -
--------- --------- ---------
Subtotal 2,540,385 2,757,504 467,421
--------- --------- ---------
Foreign: (GPUI Group only)
Australia* 1,485,639 115,390 1,811,921
United Kingdom* 1,367,471 245,105 77,706
Other* 258,794 64,803 1,213
Less: GPUI Group equity investments
included above (1,326,317) (295,183) (89,624)
Add: Original equity investment and
income/(loss) less dividends to date - - -
--------- --------- ---------
Subtotal 1,785,587 130,115 1,801,216
--------- --------- ---------
Consolidated Total $4,325,972 $2,887,619 $2,268,637
========= ========= =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
48
<PAGE>
Earnings Segment Data (in thousands)
Depreciation
For the six months Operating and Operating
ended June 30, 1998 Revenues Amortization Income
- ------------------- -------- ------------ ------
Domestic:
GPU Energy companies $1,907,021 $ 237,781 $ 300,488
GPUI Group* 93,464 5,026 14,454
Less: GPUI Group equity investments
included above (56,371) (4,668) (15,099)
Add: Equity in undistributed earnings
of affiliates, net - - -
GPU AR 5,217 - (1,173)
Corporate - - (2,292)
--------- ---------- ---------
Subtotal 1,949,331 238,139 296,378
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia 93,589 20,763 58,675
United Kingdom* 595,643 28,448 78,713
Other* 28,320 9,829 295
Less: GPUI Group equity investments
included above (608,687) (35,163) (75,414)
Add: Equity in undistributed earnings
of affiliates, net - - -
--------- ---------- ---------
Subtotal 108,865 23,877 62,269
--------- ---------- ---------
Consolidated Total $2,058,196 $ 262,016 $ 358,647
========= ========== =========
Other Interest and
For the six months Income and Preferred
ended June 30, 1998 Deductions Dividends Net Income
- ------------------- ---------- --------- ----------
Domestic:
GPU Energy companies $ (1,456) $ 121,450 $ (97,528)
GPUI Group* 3,485 10,277 7,662
Less: GPUI Group equity investments
included above 1,127 (10,173) (3,799)
Add: Equity in undistributed earnings
of affiliates, net 3,799 - 3,799
GPU AR 34 - (1,139)
Corporate (989) 3,244 (6,525)
--------- ---------- ---------
Subtotal 6,000 124,798 (97,530)
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia 17,622 55,940 20,357
United Kingdom* (3,389) 58,569 16,755
Other* 1,842 2,363 (975)
Less: GPUI Group equity investments
included above 4,465 (43,904) (27,045)
Add: Equity in undistributed earnings
of affiliates, net 27,045 - 27,045
--------- ---------- ---------
Subtotal 47,585 72,968 36,137
--------- ---------- ---------
Consolidated Total $ 53,585 $ 197,766 $ (61,393)
========= ========== =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
49
<PAGE>
Earnings Segment Data (in thousands)(continued)
Depreciation
For the six months Operating and Operating
ended June 30, 1997 Revenues Amortization Income
- ------------------- --------- ------------ -------
Domestic:
GPU Energy companies $1,969,328 $ 226,570 $ 328,650
GPUI Group* 75,697 4,799 13,576
Less: GPUI Group equity investments
included above (66,218) (4,469) (13,748)
Add: Equity in undistributed earnings/
(losses) of affiliates, net - - -
GPU AR - - (1,400)
Corporate - - (5,517)
--------- ---------- ---------
Subtotal 1,978,807 226,900 321,561
-------- ---------- ---------
Foreign: (GPUI Group only)
Australia* 73,808 4,772 23,376
United Kingdom* 576,596 28,122 86,965
Other* 27,635 5,235 4,786
Less: GPUI Group equity investments
included above (663,051) (34,773) (107,621)
Add: Equity in undistributed earnings/
of affiliates, net - - -
--------- ---------- ---------
Subtotal 14,988 3,356 7,506
--------- ---------- ---------
Consolidated Total $1,993,795 $ 230,256 $ 329,067
========= ========== =========
Other Interest and
For the six months Income and Preferred
ended June 30, 1997 Deductions Dividends Net Income
- ------------------- ---------- ----------- ----------
Domestic:
GPU Energy companies $ (78) $ 125,989 $ 202,583
GPUI Group* (1,634) 10,573 1,369
Less: GPUI Group equity investments
included above 975 (10,084) (2,689)
Add: Equity in undistributed earnings/
(losses) of affiliates, net 2,689 - 2,689
GPU AR - - (1,400)
Corporate (110) 2,621 (8,248)
--------- ---------- ---------
Subtotal 1,842 129,099 194,304
--------- ---------- ---------
Foreign: (GPUI Group only)
Australia* (8,295) 12,129 2,952
United Kingdom* (533) 55,680 30,752
Other* 1,423 8,317 (2,255)
Less: GPUI Group equity investments
included above 3,645 (54,349) (49,627)
Add: Equity in undistributed earnings
of affiliates, net 49,627 - 49,627
--------- ---------- ---------
Subtotal 45,867 21,777 31,449
--------- ---------- ---------
Consolidated Total $ 47,709 $ 150,876 $ 225,753
========= ========== =========
* Includes the effect of consolidating the GPUI Group's ownership interest in
investments accounted for under the equity method (pro-rata consolidation),
which are not consolidated in the audited consolidated financial statements.
50
<PAGE>
6. COMPREHENSIVE INCOME
For the six months ended June 30, 1998 and 1997, comprehensive
income/(loss) was as follows:
(in thousands)
Six months
Ended June 30,
--------------
GPU, Inc. and Subsidiary Companies 1998 1997
- ---------------------------------- ---- ----
Net income/(loss) $ (61,393) $225,287
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains on investments 2,744 1,902
Foreign currency translation (8,823) (3,182)
------- -------
Total other comprehensive income/(loss) (6,079) (1,280)
------- -------
Comprehensive income/(loss) $(67,472) $224,007
======= =======
Met-Ed
- ------
Net income/(loss) $(144,002) $ 53,888
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains on investments 1,829 1,268
------- -------
Comprehensive income/(loss) $(142,173) $ 55,156
======= =======
Penelec
- -------
Net income/(loss) $ (41,434) $ 61,735
------- -------
Other comprehensive income/(loss), net of tax:
Net unrealized gains on investments 915 634
------- -------
Comprehensive income/(loss) $ (40,519) $ 62,369
======== =======
51
<PAGE>
COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GPU, Inc. owns all the outstanding common stock of three domestic electric
utilities -- Jersey Central Power & Light Company (JCP&L), Metropolitan Edison
Company (Met-Ed) and Pennsylvania Electric Company (Penelec). The customer
service, transmission and distribution operations of these electric utilities
are conducting business under the name GPU Energy. JCP&L, Met-Ed and Penelec
considered together are referred to as the "GPU Energy companies." The
generation operations of the GPU Energy companies are conducted by GPU
Generation, Inc. (Genco) and GPU Nuclear, Inc. (GPUN). GPU, Inc. also owns all
the common stock of GPU International, Inc., GPU Power, Inc. and GPU Electric,
Inc., which develop, own and operate generation, transmission and distribution
facilities in the United States and in foreign countries. Collectively, these
are referred to as the "GPUI Group." Other wholly-owned subsidiaries of GPU,
Inc. are GPU Advanced Resources, Inc. (GPU AR), a subsidiary engaging in energy
services and retail energy sales; GPU Telcom Services, Inc. (GPU Telcom), a
subsidiary engaging in certain telecommunications-related businesses; and GPU
Service, Inc. (GPUS), which provides certain legal, accounting, financial and
other services to the GPU companies. All of these companies considered together
are referred to as "GPU."
GPU RESULTS OF OPERATIONS
-------------------------
GPU incurred a net loss of $195.2 million for the second quarter ended June
30, 1998, compared with earnings of $70.3 million for the quarter ended June 30,
1997. The loss per share on a diluted basis for the second quarter 1998 was
$1.54, compared with earnings per share of $0.58 in 1997. The second quarter
1998 results were affected by an extraordinary charge of $275.1 million, or
$2.16 per share, as a result of the Pennsylvania Public Utility Commission's
(PaPUC) June 30, 1998 Restructuring Orders (Restructuring Orders) on Met-Ed and
Penelec's restructuring plans which were filed with the PaPUC in accordance with
Pennsylvania's Electricity Generation Customer Choice Act (Customer Choice Act).
In its Restructuring Orders, the PaPUC did not provide for the collection from
customers of a substantial portion of above market nonutility generation (NUG)
costs. Excluding this extraordinary item, GPU's earnings for the second quarter
ended June 30, 1998 would have been $79.9 million, or $0.62 per share.
For the six months ended June 30, 1998, GPU incurred a net loss of $61.4
million, or $0.47 per share compared with earnings of $225.3 million, or $1.86
per share for the six months ended June 30, 1997. Excluding the extraordinary
item mentioned above, earnings for the six months ended June 30, 1998 would have
been $213.7 million, or $1.69 per share. The earnings decrease on this basis was
due to lower income from GPU's domestic utility operations, which are conducted
by GPU Energy, and the dilutive effect of the sale of GPU, Inc. common stock in
February 1998. GPU Energy's earnings reduction for the six month period was
mainly due to the absence in 1998 of the step increase in unbilled revenue
recorded by Met-Ed and Penelec as a result of including their energy cost rates
(ECRs) in base rates and the cessation of deferred energy accounting, both
effective January 1, 1997; increased expenses related to the reengineering of
business processes to position the GPU Energy companies for deregulation.
52
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
Partially offsetting the earnings decrease for the six months ended June
30, 1998 versus the six months ended June 30, 1997, was higher GPUI Group income
due to gains on the sale of its interest in Solaris Power (Solaris) and the sale
of half its interest in the Mid-Georgia cogeneration plant (Mid-Georgia). These
gains were partially offset by lower Midlands Electricity plc (Midlands)
earnings due in part to lower weather-related sales.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1998 increased 7.7% to $1.02
billion, as compared to the second quarter of 1997. For the six months ended
June 30, 1998, revenues increased 3.2% to $2.06 billion as compared to the same
period last year. The components of the changes are as follows:
(in millions)
----------------------------------
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
GPU Energy companies:
Kilowatt-hour (KWH) revenues $ 19.9 $(18.8)
Energy-related revenues 15.4 17.3
GPU Telcom revenues 0.9 5.8
Other revenues (25.4) (66.6)
----- -----
Total GPU Energy companies 10.8 (62.3)
GPUI Group 58.2 121.5
GPU AR 3.3 5.2
----- -----
Total increase in revenues $ 72.3 $ 64.4
===== =====
GPU Energy Companies
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due primarily
to higher weather-related sales due to warmer June weather this year versus
cooler than normal weather last year, an increase in the number of residential
customers, and increased commercial customer usage.
The decrease in KWH revenues for the six month period was primarily due to
the absence in 1998 of the step increase in unbilled revenue recorded by Met-Ed
and Penelec as a result of including their ECRs in base rates. KWH revenues now
include Met-Ed and Penelec's energy and tax revenues, consistent with the
inclusion of their ECRs and State Tax Adjustment Surcharges (STAS) in base
rates, effective January 1, 1997.
Energy-related revenues (JCP&L only)
- ------------------------------------
Generally, changes in energy-related revenues do not affect earnings as
they reflect corresponding changes in JCP&L's levelized energy adjustment clause
(LEAC) billed to customers and expensed. The increase for the three and six
month periods was due primarily to increased sales to other utilities, higher
energy cost rates and higher residential and commercial customer sales.
53
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
GPU Telcom revenues
- -------------------
GPU Telcom, a subsidiary engaged in certain telecommunication related
businesses, was formed in 1997. Its 1998 revenues were derived from contracts
for the leasing and construction of telecommunication infrastructure.
Other revenues
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The decrease for the three and six
month periods is primarily due to a decrease in revenue taxes as a result of New
Jersey tax legislation that eliminated the gross receipts and franchise tax on
utility bills and replaced it with a sales tax, a corporate business tax, and a
transitional energy facilities assessment effective January 1, 1998. (See
COMPETITIVE ENVIRONMENT.)
GPUI Group
The increase in GPUI Group revenues for the three and six month periods
was due mainly to the inclusion of revenues from GPU PowerNet (PowerNet), which
was acquired by GPU Electric in November 1997.
GPU AR
GPU AR, which was formed in the second quarter of 1997, derived its
revenues from energy sales to customers who chose it as their energy supplier as
part of the retail access pilot programs in Pennsylvania (see COMPETITIVE
ENVIRONMENT). Some of GPU AR's customers are located in the GPU Energy
companies' service territories.
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged (PP&I)
- ---------------------------------------
Changes in the energy component of PP&I expense do not significantly
affect JCP&L's earnings since these cost variances are passed through the LEAC.
However, beginning on January 1, 1997, such cost variances for Met-Ed and
Penelec are not subject to deferred accounting and have a current impact on
earnings.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
For JCP&L, changes in fuel and deferral of energy and capacity costs, net
do not affect earnings as they are offset by corresponding changes in energy
revenues. Effective January 1, 1997, Met-Ed and Penelec ceased deferred energy
accounting as their ECRs were combined with base rates; therefore, cost
variances have a current impact on earnings. Lower fuel costs for Penelec
contributed slightly to earnings for the six months ended June 30, 1998.
54
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------
Other operation and maintenance (O&M)
- -------------------------------------
The increase in other O&M expenses for the three and six month periods was
due primarily to increased GPUI Group O&M expenses resulting from the inclusion
of PowerNet. The inclusion of O&M expenses for GPU Telcom, which was formed in
1997, also contributed to the increase for the three and six month periods. Also
contributing to the increase for the six month period were expenses related to
the reengineering of business processes to position the GPU Energy companies for
deregulation.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and
six month periods was due mainly to the inclusion of PowerNet. A charge related
to JCP&L's Final Settlement representing the portion of JCP&L's return on equity
which exceeds the maximum amount allowed and must be applied against JCP&L's
stranded costs also contributed to the increase for the three month period.
Taxes, other than income taxes
- ------------------------------
For JCP&L, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues. However,
effective January 1, 1997, Met-Ed and Penelec's STAS were combined with base
rates and are no longer subject to annual adjustment. This did not have a
significant impact on earnings for the first six months of 1998.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Equity in undistributed earnings of affiliates, net
- ---------------------------------------------------
The decrease in equity in undistributed earnings of affiliates, net for
the three and six month periods was primarily due to decreased Midlands earnings
due in part to lower weather-related sales.
Other income/(expense), net
- ---------------------------
The increase in other income/(expense), net for the six month period was
due primarily to gains realized by the GPUI Group from the sales of its interest
in Solaris, and half its interest in Mid-Georgia in the first quarter of 1998.
This increase was partially offset in the second quarter of 1998 by a charge to
terminate a contract with one of Met-Ed's wholesale customers.
55
<PAGE>
GPU RESULTS OF OPERATIONS (continued)
- -------------------------------------
INTEREST CHARGES AND PREFERRED DIVIDENDS:
- -----------------------------------------
Interest on long-term debt
- --------------------------
The increase in interest on long-term debt for the three and six month
periods was due primarily to debt associated with the PowerNet acquisition. A
portion of this debt was reduced in 1998 from proceeds received from GPU
Electric's sale of its interest in Solaris and the sale of GPU, Inc. common
stock.
Other interest
- --------------
The decrease in other interest for the three and six month periods was due
to lower JCP&L short-term debt levels.
JCP&L RESULTS OF OPERATIONS
---------------------------
JCP&L's earnings for the second quarter ended June 30, 1998 were $37.7
million, compared to 1997 second quarter earnings of $32.3 million. The increase
in earnings was due primarily to a second quarter 1997 charge of $5.5 million to
settle a lawsuit related to the termination of the Freehold NUG contract. For
the six months ended June 30, 1998, earnings were $87.8 million compared to
$87.5 million for the same period last year.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1998 increased 0.1% to $478.9
million, as compared to the second quarter of 1997. For the six months ended
June 30, 1998, revenues decreased 3.8% to $951.2 million as compared to the same
period last year. The components of the changes are as follows:
(in millions)
----------------------------------
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
KWH revenues $ 15.5 $ 13.3
Energy-related revenues 16.0 17.5
Other revenues (30.8) (68.2)
----- -----
Increase/(decrease) in revenues $ 0.7 $(37.4)
===== =====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three and six month periods was due to
higher weather-related sales due to warmer June weather this year versus cooler
than normal weather last year, an increase in the number of residential
customers, and increased commercial customer usage.
56
<PAGE>
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------------------
Energy-related revenues
- -----------------------
Changes in energy-related revenues do not affect earnings as they reflect
corresponding changes in the LEAC billed to customers and expensed. The increase
for the three and six month periods was due primarily to increased sales to
other utilities, higher energy cost rates and higher residential and commercial
customer sales.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. The decrease for the three and six
month periods is primarily due to a decrease in revenue taxes as a result of New
Jersey tax legislation that eliminated the gross receipts and franchise tax on
utility bills and replaced it with a sales tax, a corporate business tax, and a
transitional energy facilities assessment effective January 1, 1998. (See
COMPETITIVE ENVIRONMENT.)
OPERATING EXPENSES:
- -------------------
Power purchased and interchanged
- --------------------------------
Changes in the energy component of PP&I expense do not significantly affect
earnings since these cost variances are passed through the LEAC.
Fuel and Deferral of energy and capacity costs, net
- ---------------------------------------------------
Changes in fuel and deferral of energy and capacity costs, net do not
affect earnings as they are offset by corresponding changes in energy revenues.
Other operation and maintenance
- -------------------------------
The decrease in other O&M expenses for the three and six month periods was
primarily due to lower tree trimming and insurance expenses. For the six month
period, this decrease was partially offset by higher expenses related to the
reengineering of business processes to position JCP&L for deregulation.
Depreciation and amortization
- -----------------------------
The increase in depreciation and amortization expense for the three and six
month periods was due primarily to additions to plant in service and slightly
higher depreciation rates. A charge related to JCP&L's Final Settlement
representing the portion of JCP&L's return on equity which exceeds the maximum
amount allowed and must be applied against JCP&L's stranded costs also
contributed to the increase for the three month period.
Taxes, other than income taxes
- ------------------------------
Generally, changes in taxes other than income taxes do not significantly
affect earnings as they are substantially recovered in revenues.
57
<PAGE>
JCP&L RESULTS OF OPERATIONS (continued)
- ---------------------------
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The increase in other income/(expense), net for the three and six month
periods was due primarily to a second quarter 1997 charge of $5.5 million to
settle a lawsuit related to the termination of the Freehold NUG contract.
MET-ED RESULTS OF OPERATIONS
----------------------------
Met-Ed incurred a loss for the second quarter ended June 30, 1998 of
$168.9 million, compared to 1997 second quarter earnings of $14.0 million. The
decrease was due to an extraordinary charge of $187.3 million, for writeoffs in
connection with the PaPUC's Restructuring Order. Excluding the extraordinary
charge, earnings for the second quarter of 1998 would have been $18.4 million.
The increase in earnings on this basis was primarily due to increased KWH sales
to customers partially offset by a charge to terminate a contract with one of
Met-Ed's wholesale customers.
For the six months ended June 30, 1998, losses amounted to $144.2 million
compared to earnings of $53.6 million for the same period last year. Excluding
the extraordinary charge mentioned above, earnings would have been $43.0
million. This earnings decrease was due primarily to the absence in 1998 of the
step increase in unbilled revenue as a result of Met-Ed including its ECR in
base rates and the cessation of deferred energy accounting, both effective
January 1, 1997.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1998 increased 8.4% to $226.0
million, as compared to the second quarter of 1997. For the six months ended
June 30, 1998, revenues decreased 0.7% to $460.8 million as compared to the same
period last year. The components of the changes are as follows:
(in millions)
----------------------------------
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
KWH revenues $ 12.7 $(6.8)
Other revenues 4.8 3.8
---- ---
Increase/(decrease) in revenues $ 17.5 $(3.0)
==== ====
Kilowatt-hour revenues
- ----------------------
The increase in KWH revenues for the three month period was due mainly to
higher weather-related sales and increased commercial customer usage. The
decrease in KWH revenues for the six month period was due primarily to the
absence in 1998 of the step increase in unbilled revenue as a result of Met-Ed
including its ECR in base rates, amounting to $13 million.
58
<PAGE>
MET-ED RESULTS OF OPERATIONS (continued)
- ----------------------------------------
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Met-Ed ceased deferred energy accounting as its
ECR was combined with base rates. Thus, energy cost variances now have a current
impact on earnings.
Other operation and maintenance
- -------------------------------
The decrease in other O&M expenses for the three month period was primarily
due to lower expenses related to maintenance of substation equipment and
overhead lines.
The increase in other O&M expenses for the six month period was due to
increased expenses related to the reengineering of business processes to
position Met-Ed for deregulation and for maintenance of substation equipment and
overhead lines. Additionally, increased other postretirement benefits costs
affected both the three and six month periods.
Taxes, other than income taxes
- ------------------------------
Effective January 1, 1997, Met-Ed's STAS was combined with base rates and
is no longer subject to annual adjustment. The change for the six month period
did not have a significant impact on earnings.
OTHER INCOME AND DEDUCTIONS:
- ----------------------------
Other income/(expense), net
- ---------------------------
The decrease in other income/(expense), net for the three and six month
periods was due to a charge to terminate a contract with one of Met-Ed's
wholesale customers.
PENELEC RESULTS OF OPERATIONS
-----------------------------
Penelec incurred a loss for the second quarter ended June 30, 1998 of $68.3
million, compared to 1997 second quarter earnings of $18.7 million. The decrease
was due to an extraordinary charge of $87.8 million, for writeoffs in connection
with the PaPUC's Restructuring Order. Excluding the extraordinary charge,
earnings for the second quarter of 1998 would have been $19.5 million.
59
<PAGE>
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------
For the six months ended June 30, 1998, losses amounted to $41.8 million
compared to earnings of $61.4 million for the same period last year. Excluding
the extraordinary charge mentioned above, earnings would have been $46.0
million. This earnings decrease was due primarily to the absence in 1998 of the
step increase in unbilled revenue as a result of Penelec including its ECR in
base rates and the cessation of deferred energy accounting, both effective
January 1, 1997.
OPERATING REVENUES:
- -------------------
Operating revenues for the second quarter of 1998 increased 1.0% to $250.4
million, as compared to the second quarter of 1997. For the six months ended
June 30, 1998, revenues decreased 4.4% to $514.0 million as compared to the same
period last year. The components of the changes are as follows:
(in millions)
---------------------------------
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
KWH revenues $ 1.7 $(20.1)
Other revenues 0.8 (3.5)
----- -----
Increase/(decrease) in revenues $ 2.5 $(23.6)
===== =====
Kilowatt-hour revenues
- ----------------------
The decrease in KWH revenues for the six month period was primarily due to
the absence in 1998 of the step increase in unbilled revenue as a result of
Penelec including its ECR in base rates, amounting to $15 million. Also
contributing to the decrease were lower weather-related sales and decreased
customer usage.
Other revenues
- --------------
Generally, changes in other revenues do not affect earnings as they are
offset by corresponding changes in expense. However, lower transmission revenues
negatively affected the six month earnings comparison.
OPERATING EXPENSES:
- -------------------
Fuel and Power purchased and interchanged
- -----------------------------------------
Effective January 1, 1997, Penelec ceased deferred energy accounting as its
ECR was combined with base rates. Thus, energy cost variances now have a current
impact on earnings. Lower fuel costs and reserve capacity expense contributed to
earnings for the first six months of 1998.
60
<PAGE>
PENELEC RESULTS OF OPERATIONS (continued)
- -----------------------------
Other operation and maintenance
- -------------------------------
The increase in other O&M expenses for the six month period was primarily
due to increased storm and emergency related activity and increased expenses
related to the reengineering of business processes to position Penelec for
deregulation.
Taxes, other than income taxes
- ------------------------------
Effective January 1, 1997, Penelec's STAS was combined with base rates and
is no longer subject to annual adjustment. The change for the six month period
did not have a significant impact on earnings.
<PAGE>
61
<PAGE>
GPUI GROUP
----------
The GPUI Group develops, owns and operates electric generation,
transmission and distribution facilities in the U.S. and foreign countries. It
has also made investments in certain advanced technologies related to the
electric power industry. The GPUI Group has ownership interests in transmission,
distribution and supply businesses in England and Australia. It also has
ownership interests in nine operating cogeneration plants in the U.S. totaling
1,147 megawatts (MW) (of which the GPUI Group's equity interest represents 458
MW) of capacity, and ten operating generating facilities located in foreign
countries totaling 3,820 MW (of which the GPUI Group's equity interest
represents 713 MW) of capacity. It also has investments in five generating
facilities under construction totaling 1,833 MW (of which the GPUI Group's
equity interest represents 339 MW) of capacity. The business of the GPUI Group
includes investment, development and operation of these businesses and, when
appropriate, purchase and sale of interests in particular businesses.
At June 30, 1998, GPU, Inc.'s aggregate investment in the GPUI Group was
$526 million; GPU, Inc. has also guaranteed up to an additional $893 million of
GPUI Group obligations. GPU, Inc. has Securities and Exchange Commission (SEC)
approval to finance investments in foreign utility companies (FUCOs) and exempt
wholesale generators (EWGs) up to an aggregate amount equal to 100% of GPU's
average consolidated retained earnings, or approximately $2.1 billion as of June
30, 1998. At June 30, 1998, GPU, Inc. has remaining authorization to finance
approximately $856 million of additional investments in FUCOs and EWGs.
On June 1, 1998, Mid-Georgia, a 300 MW facility located in Kathleen,
Georgia, began commercial operation. GPU International, Inc., the operator of
the plant, and Sonat Energy Services Company each owns 50% of the facility.
Mid-Georgia has a 30-year power purchase agreement to sell energy on a
dispatchable basis to Georgia Power.
Management expects that the GPUI Group will provide a substantial portion
of GPU's future earnings growth and intends on making additional investments in
its business activities. The timing and amount of these investments, however,
will depend upon the availability of appropriate opportunities and financing
capabilities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Year 2000 Issue
- ---------------
GPU is addressing the year 2000 issue as it relates to its business,
operations and operating systems, and its business dealings with third parties
including customers, banks, partners, vendors, suppliers and service providers.
Comprehensive reviews of all computers, equipment, systems and applications are
being performed; remediation plans are being developed; and certain corrective
actions have begun. GPU's remediation plans include, among other things, the
upgrade or replacement of computers, equipment and computer software. Management
currently believes that adequate resources are being allocated to this project
and anticipates that GPU's remediation efforts will,
62
<PAGE>
in all material respects, be completed by the end of 1999. However, if GPU or
critical third parties on which GPU relies are unable to successfully correct
their year 2000 issue on a timely basis, certain computers, equipment, systems
and applications may not function properly, which could have a material adverse
effect on GPU's operations and financial condition. Among other things, GPU's
operations could be affected by a temporary inability to process transactions,
send bills or operate electric generating stations, as well as by interruptions
of electric service and reduced customer service. There can be no assurance as
to the outcome of this matter.
As part of their year 2000 solution, the GPU Energy companies have
purchased and are installing an integrated information system (Project
Enterprise) that will help them manage business growth and meet the mandates of
electric utility deregulation. The system is scheduled to be fully operational
in early 1999.
The GPU Energy companies currently estimate they will spend $24.2 million
(JCP&L $10.6 million; Met-Ed $7.4 million; Penelec $6.2 million) on year 2000
remediation of their computers, equipment and computer software. Of the $24.2
million, approximately $6.7 million (JCP&L $3 million; Met-Ed $2 million;
Penelec $1.7 million) would have been spent in any event because of maintenance
and cyclical replacement plans that are already in place. Also, an additional
$8.1 million (JCP&L, Met-Ed and Penelec $2.7 million each) would have been
needed to be spent on modifications to systems that are being replaced by
Project Enterprise.
The GPUI Group currently estimates it will spend approximately $9.2 million
to address the year 2000 issue, primarily to replace or modify equipment.
Capital Expenditures
- --------------------
GPU Energy Companies
The GPU Energy companies' capital spending for the six months ended June
30, 1998 was $163 million (JCP&L $84 million; Met-Ed $29 million; Penelec $47
million; Other $3 million), and was used primarily for new customer connections
and to maintain and improve existing transmission and distribution facilities.
For 1998, capital expenditures are forecasted to be $410 million (JCP&L $198
million; Met-Ed $89 million; Penelec $110 million; Other $13), mainly related to
the GPU Energy companies and will be used primarily for ongoing system
development and to implement Project Enterprise. Expenditures for maturing
obligations will total $43 million (JCP&L $13 million; Penelec $30 million) in
1998. A substantial portion of the GPU Energy companies' 1998 capital outlays
will be satisfied through internally generated funds.
GPUI Group
The GPUI Group's capital spending was $39 million for the six months ended
June 30, 1998. For 1998, capital expenditures are forecasted to be $135 million.
Expenditures for maturing obligations will total $589 million in 1998. A
substantial portion of the GPUI Group's 1998 capital outlays will be required to
be satisfied through external financings.
63
<PAGE>
Financing
GPU, Inc.
GPU, Inc. has received SEC approval to issue and sell up to $300 million of
unsecured debentures through 2001. Further significant investments by the GPUI
Group, or otherwise, may require GPU, Inc. to issue additional debt and/or
common stock (see GPUI GROUP for a discussion of GPU, Inc.'s remaining
investment authorization).
GPU Energy Companies
As a result of Pennsylvania legislation (see COMPETITIVE ENVIRONMENT),
Met-Ed and Penelec may sell securitized transition bonds through a separate
trust or other special purpose entity, and would use the proceeds to reduce
stranded costs resulting from customer choice, including NUG contract buyout
costs (see THE GPU ENERGY COMPANIES' SUPPLY PLAN), and to reduce capitalization.
The timing and amount of any sale will depend upon the resolution of legal
challenges and receipt of a favorable ruling from the Internal Revenue Service,
as well as market conditions. It is expected that similar legislation will be
introduced in New Jersey to permit the sale of securitized transition bonds. See
COMPETITIVE ENVIRONMENT for further discussion of these bonds.
In May 1998, JCP&L redeemed $10 million stated value of cumulative
preferred stock pursuant to mandatory sinking fund provisions. In June 1998,
JCP&L redeemed $5 million stated value of cumulative preferred stock pursuant to
mandatory and optional sinking fund provisions.
JCP&L and Penelec have regulatory authority to issue and sell first
mortgage bonds (FMBs), including secured medium-term notes, and preferred stock
through June 1999. Met-Ed has similar authority through December 1999. Under
existing authorizations, JCP&L, Met-Ed and Penelec may issue these senior
securities in aggregate amounts of $145 million, $190 million and $70 million,
respectively, of which up to $100 million for JCP&L and Met-Ed and $70 million
for Penelec may consist of preferred stock. Met-Ed and Penelec are seeking
regulatory approvals to issue and sell senior notes and preferred securities in
aggregate amounts of $250 million and $725 million, respectively, of which up to
$125 million for each company may consist of preferred securities. The GPU
Energy companies also have regulatory authority to incur short-term debt, a
portion of which may be through the issuance of commercial paper.
The GPU Energy companies' bond indentures and articles of incorporation
include provisions that limit the amount of long-term debt, preferred stock and
short-term debt the companies may issue. The GPU Energy companies' interest and
preferred dividend coverage ratios are currently in excess of indenture and
charter restrictions. The amount of FMBs that the GPU Energy companies could
issue based on the bondable value of property additions is in excess of amounts
currently authorized.
Current plans call for the GPU Energy companies to issue senior securities
during the next three years to fund the redemption of maturing senior
securities, refinance outstanding senior securities if economic, and finance
construction activities.
64
<PAGE>
COMPETITIVE ENVIRONMENT
-----------------------
Managing the Transition
- -----------------------
As competition in the electric utility industry increases, the price of
electricity and quality of customer service will be critical. GPU has been
active both on the federal and state levels in helping to shape electric
industry restructuring while seeking to protect the interests of its
shareholders and customers, and is attempting to assess the impact that these
competitive pressures and other changes will have on its financial condition and
results of operations.
In October 1997, GPU announced its intention to begin a process to sell,
through a competitive bid process, up to all of the fossil-fuel and
hydroelectric generating facilities owned by the GPU Energy companies. These
facilities, comprised of 26 operating stations, support organizations and
development sites, total approximately 5,300 MW (JCP&L 1,900 MW; Met-Ed 1,300
MW; Penelec 2,100 MW) of capacity and have a net book value of approximately
$1.1 billion (JCP&L $286 million; Met-Ed $297 million; Penelec $532 million) at
June 30, 1998. The net proceeds from the sale would be used to reduce the
capitalization of the respective GPU Energy companies and may also be applied to
reduce short-term debt, finance further acquisitions, repurchase GPU, Inc.
common stock, and to reduce acquisition debt of the GPUI Group. It is
anticipated that definitive purchase agreements will be entered into in November
1998 and the divestiture completed by mid-1999, subject to the timely receipt of
the necessary regulatory and other approvals.
In August 1998, Penelec and New York State Electric & Gas Corporation
(NYSEG) entered into definitive agreements with Edison Mission Energy to sell
the Homer City Station for a total purchase price of approximately $1.8 billion.
Penelec and NYSEG each owns a 50% interest in the station, and will share
equally in the net sale proceeds. The sale, which is subject to various federal
and state regulatory approvals, is expected to be completed in the first quarter
of 1999.
In addition to the continued operation of the Oyster Creek Nuclear
Generating Station (Oyster Creek), JCP&L has been exploring the sale or early
retirement of the plant to mitigate costs associated with its continued
operation. In July 1998, GPU, Inc. announced that it was unable to identify a
buyer for the facility. A final decision on the plant will not be made until the
New Jersey Board of Public Utilities (NJBPU) rules on JCP&L's restructuring
filing.
In July 1998, GPU entered into a Letter of Intent to sell Three Mile Island
Unit 1 (TMI-1) to AmerGen Energy Company, LLC (AmerGen), a joint venture between
PECO Energy and British Energy. The Letter of Intent initiates a 90-day period
during which GPU and AmerGen will seek to negotiate a definitive agreement for
the purchase and sale of TMI-1 and AmerGen will complete its due diligence
review of the TMI-1 facility.
Terms of the Letter of Intent (which assumes a December 31, 1999 closing
date) are summarized as follows:
65
<PAGE>
- - The total cash purchase price is $100.6 million, which represents $23
million to be paid at financial closing for the plant, and $77.6 million
for the nuclear fuel in the reactor to be paid in five equal annual
installments beginning on December 31, 2000.
- - AmerGen would make certain contingent payments of up to $80 million for the
period January 1, 2002 through December 31, 2010 depending on the actual
energy market clearing prices through 2010.
- - GPU will purchase the energy and capacity from TMI-1 from January 1, 2000
through December 31, 2001, at predetermined rates.
- - At financial closing, GPU will make additional deposits into the TMI-1
decommissioning trusts to bring the trust totals up to $320 million. If
these trust funds cannot be transferred to AmerGen in a tax-effective
manner, GPU will maintain the funds on AmerGen's behalf until they can be
transferred without adverse tax consequences. At financial closing, AmerGen
will assume all liability and obligation for decommissioning TMI-1.
- - GPU will continue to own and hold the license for Three Mile Island Unit 2
(TMI-2), which would not be included in the sale agreement. No liability
for TMI-2 or its decommissioning will be assumed by AmerGen.
- - AmerGen will employ all employees located at TMI-1 at financial closing,
and will also have the opportunity to offer positions to GPUN's
headquarters staff. GPU will be responsible for all severance payments
associated with these employees for a one year period following financial
closing. AmerGen will accept the current collective bargaining agreement
covering TMI-1 union employees.
The sale will be subject to the satisfaction of various conditions,
including the receipt of federal and state regulatory approvals prior to
financial closing. Among other things, the regulatory approvals must be
reasonably satisfactory to the parties and contain no terms or conditions which
would have a material adverse effect on TMI-1 or the cost of the transaction to
GPU, including GPU's full recovery of TMI-1 decommissioning costs. In addition,
certain rulings from the Internal Revenue Service will be necessary with respect
to the maintenance or transfer of the decommissioning trusts at the closing.
There can be no assurance as to the outcome of these matters.
Recent Regulatory Actions
- -------------------------
Pennsylvania
- ------------
In 1996, Pennsylvania adopted comprehensive legislation which provides for
the restructuring of the electric utility industry. The legislation, among other
things, permits one-third of Pennsylvania retail consumers to choose their
electric supplier beginning January 1, 1999, two-thirds to choose by January 1,
2000 and all retail consumers to do so by January 1, 2001. The legislation
requires the unbundling of rates for transmission, distribution and generation
services. Utilities would have the opportunity to recover their prudently
incurred stranded costs that result from customers choosing
66
<PAGE>
another supplier through a PaPUC approved competitive transition charge (CTC),
subject to certain conditions, including that they attempt to mitigate these
costs. For a discussion of stranded costs, see Note 1 of the Notes to
Consolidated Financial Statements - Competition and the Changing Regulatory
Environment.
The legislation provides utilities the opportunity to reduce their stranded
costs through the issuance of transition bonds with maturities of up to 10
years. The sale proceeds could be used to buy out or buy down uneconomic NUG
contracts, to reduce capitalization, or both. Principal and interest payments on
the bonds would be paid by all distribution service customers through a
nonbypassable intangible transition charge. Reduced financing costs associated
with the sale of transition bonds would be used to provide rate reductions for
all customers. In order to securitize stranded costs, each Pennsylvania utility
is required to file with the PaPUC for a qualified rate order. Met-Ed and
Penelec expect to file for such rate orders during 1999.
Effective January 1, 1997, transmission and distribution (T&D) rates
charged to Pennsylvania retail customers are generally capped for 4 1/2 years,
and generation rates are generally capped for up to nine years. Transmission and
distribution of electricity will continue as a regulated monopoly. An
independent system operator (ISO) will be responsible for coordinating the
generation and transmission of electricity in an efficient and nondiscriminatory
manner.
In June 1997, Met-Ed and Penelec filed with the PaPUC their proposed
restructuring plans to implement competition and customer choice in
Pennsylvania. In June 1998, the PaPUC entered Restructuring Orders on the plans.
The following are the highlights of the Restructuring Orders:
- - While recommending no overall rate reductions, the Restructuring Orders
have adopted lower unbundled T&D rates than the companies requested, by
reallocating certain T&D costs to generation. This reallocation results in
annual T&D rate reductions of approximately $59 million for Met-Ed and $68
million for Penelec, beginning January 1, 1999.
- - Rejected the proposed use of a NUG Cost Rate to recover payments to NUGs in
excess of amounts in current rates. The PaPUC has provided for a one-time
determination of above-market NUG costs which would be recovered through a
CTC, beginning January 1, 1999. Also, the PaPUC rejected Met-Ed and
Penelec's requested recovery of 1997 and 1998 operating NUG deferrals,
amounting to a disallowance of approximately $24 million for Met-Ed and $33
million for Penelec.
- - Accepted Met-Ed and Penelec's proposed two stage ratemaking process for
their fossil-fuel and hydroelectric generation asset divestiture (See
Managing the Transition) whereby the ultimate level of stranded costs and
resulting CTC rates would be determined after the actual net divestiture
proceeds are known. Interim CTC rates would be established based upon the
level of stranded costs approved in stage one.
- - Adopted a market line higher than that recommended by Met-Ed and Penelec in
determining stranded costs.
67
<PAGE>
- - Rejected Met-Ed and Penelec's proposal to adopt a levelized generation
credit (shopping credit) for customers who choose alternative suppliers.
Instead, the PaPUC-mandated shopping credit would rise over time consistent
with the recommended market line determination and would provide for an
approximately 10% guaranteed savings for shopping customers.
- - Approved Met-Ed and Penelec's NUG buyout costs, but rejected their request
for rate cap exceptions to recover these costs from retail customers.
- - Modified Met-Ed and Penelec's proposed nuclear decommissioning recovery
period and inflation assumptions and provided for recovery in Met-Ed and
Penelec's respective CTC periods.
- - Adopted an accelerated phase-in period which provides for customer choice
for two-thirds of retail customers by January 2, 1999 and the remaining
one-third by January 2, 2000.
On July 20, 1998, Met-Ed and Penelec appealed the Restructuring Orders to
the Commonwealth Court claiming more than 40 errors of law. Met-Ed and Penelec
have also filed complaints in the U.S. District Court seeking both declaratory
and injunctive relief challenging, among other things, the PaPUC's refusal in
the Restructuring Orders to ensure full recovery of the costs of NUG contracts,
as required by state and federal law.
In addition, on July 20, 1998 Met-Ed and Penelec filed Alternative
Restructuring Plans (Alternative Plans) with the PaPUC based on the provision in
the Customer Choice Act that enables a utility to file an alternate plan if the
PaPUC rejects the utility's initial plan. Met-Ed and Penelec believe that in the
Restructuring Orders, the PaPUC has objected to essentially the entirety of
their original restructuring plans and has therefore rejected these plans.
The major elements of the Alternative Plans were as follows:
- - Met-Ed and Penelec eliminated, modified or postponed until Phase II certain
stranded cost claims. This action reduced the stranded cost claims by $130
million for Met-Ed and $150 million for Penelec from the previously
requested amounts. The Phase II proceeding would adjust the CTC level to
reflect the impact of the generating facilities sale proceeds.
- - A rate mechanism to recover the costs of operating NUG projects over their
contract lives that fully reconciles to actual market prices.
- - T&D rates of 2.50 and 2.51 cents/kwh for Met-Ed and Penelec, respectively.
The Restructuring Orders reflected a 2.26 cents/kwh rate for Met-Ed and a
2.01 cents/kwh rate for Penelec.
- - CTC rates were requested which allow full stranded cost recovery (other
than NUGs and nuclear decommissioning, which are proposed to be recovered
over the lives of the contracts or related plants) over a seven year period
for Met-Ed and a two year period for Penelec.
68
<PAGE>
- - The generation tariffs (or shopping credits) were established to allow
overall savings to shopping customers of 2.5% for Met-Ed and 5% for
Penelec.
- - If the Alternative Plans are ultimately rejected, Met-Ed and Penelec have
stated that they would retain for shareholders any net proceeds above book
value for generating facilities sold through the divestiture program,
rather than the previous proposal that would have applied those net
proceeds to offset other stranded costs.
On August 5, 1998, the PaPUC rejected the Alternative Plans as invalid.
Met-Ed and Penelec intend to appeal this action to the Commonwealth Court. There
can be no assurance as to the outcome of these proceedings.
In 1997, the PaPUC issued a final order that sets forth the guidelines for
retail access pilot programs in Pennsylvania that give customers the ability to
choose their electricity supplier. These pilot programs include residential,
commercial and industrial class customers, and utilities are required to commit
about 5% of load to retail access programs and unbundle their rates to allow
customers to choose their electric generation supplier. The pilot program began
November 1, 1997 and will run until the first phase of retail competition begins
on January 1, 1999. Met-Ed and Penelec's pilot programs include approximately 5%
of each company's load.
New Jersey
- ----------
In April 1997, the NJBPU issued final Findings and Recommendations for
Restructuring the Electric Power Industry in New Jersey and submitted the plan
to the Governor and the Legislature for their consideration. The NJBPU had
recommended, among other things, that certain electric retail customers be
permitted to choose their supplier beginning October 1998, expanding to include
all retail customers by July 1, 2000. It is currently expected that retail
competition in New Jersey will not commence before the second quarter of 1999.
The NJBPU also recommended a near-term electric rate reduction of 5% to 10% with
the phase-in of retail competition, as well as additional rate reductions
accomplished as a result of new energy tax legislation, as discussed below.
The NJBPU has proposed that utilities have an opportunity to recover their
stranded costs associated with generating capacity commitments provided that
they attempt to mitigate these costs. Also, NUG contracts which cannot be
mitigated would be eligible for stranded cost recovery. The determination of
stranded cost recovery by the NJBPU would be undertaken on a case-by-case basis,
with no guaranty for full recovery of these costs. A separate market transition
charge (MTC) would be established for each utility to allow utilities to recover
stranded costs over 4 to 8 years. The MTC would be capped to ensure that
customers experience the NJBPU's recommended overall rate reduction of 5-10%.
New Jersey is also considering securitization as a mechanism to help mitigate
stranded costs.
In addition, the NJBPU is proposing that utilities unbundle their rates and
allow customers to choose their electric generation supplier. Transmission and
distribution of electricity would continue as a regulated
69
<PAGE>
monopoly and utilities would be responsible for connecting customers to the
system and for providing distribution service. Transmission service would be
provided by an ISO, which would be responsible for maintaining the reliability
of the regional power grid and would be regulated by the Federal Energy
Regulatory Commission (FERC).
In July 1997, New Jersey enacted energy tax legislation which eliminated
the 13% gross receipts and franchise tax on utility bills effective January 1,
1998. Utilities are collecting from customers a 6% sales tax and paying a
corporate business tax which amounts to 1-2% of revenues. Utilities are also
paying a transitional energy facilities assessment which will phase out over
five years and result in a 5-6% rate reduction to customers.
In July 1997, JCP&L filed with the NJBPU its proposed restructuring plan
for a competitive electric marketplace in New Jersey. Included in the plan were
stranded cost, unbundled rate and restructuring filings. In December 1997, JCP&L
submitted supplemental information regarding the proposed sale of its
fossil-fuel and hydroelectric generating facilities (see Managing the
Transition). Highlights of the plan include:
- - Some electric retail customers would be able to choose their supplier
beginning on October 1, 1998, as initially recommended by the NJBPU,
expanding to include all retail customers by July 1, 2000.
- - As required by the NJBPU's final findings and recommendations, JCP&L would
unbundle its rates and these rates would apply to all distribution customers,
with the exception of a Production Charge, which would be charged only to
customers who do not choose an alternative energy supplier. The proposed
unbundled rate structure would include:
-- a flat monthly Customer Charge for the costs associated with
metering, billing and customer account administration.
-- a Delivery Charge consisting of capital and O&M costs associated
with the transmission and distribution system; the recovery of
regulatory assets, including those associated with generation; the
cost of social programs; and certain costs related to the proposed
ratemaking treatment of Oyster Creek.
-- a Market Energy and Capacity (MEC) Charge would be established on a
monthly basis for a six-month period for electricity provided to
customers for whom JCP&L continues to act as their electric
generation supplier. JCP&L would be the supplier of last resort for
customers who cannot or do not wish to purchase energy from an
alternative supplier. The MEC would be based upon competitively
"bidding out" the discrepancy between projected needs and projected
resources. JCP&L would true-up the MEC charges for sales differences
against its actual cost to provide that power, plus interest. The
true-up would be recovered from, or credited to, the customers who
were customers during that period, based upon their usage during
such period. The MEC would be established every six months.
70
<PAGE>
-- a Societal Benefits Charge to recover demand-side management costs,
manufactured gas plant remediation costs, and nuclear
decommissioning costs.
-- a MTC to recover non-NUG stranded generation costs (other than
Oyster Creek). This charge would include both owned generation and
utility purchase power commitments. It is expected that the MTC
would be in effect for less than a three-year period.
-- a NUG Transition Charge (NTC) to recover ongoing above-market NUG
costs over the life of the contracts and provide a mechanism to flow
through to customers the benefits of future NUG mitigation efforts.
The NTC would be subject to an annual true-up for actual cost
escalations or reductions, changes in availability or dispatch
levels and other cost variations over the life of each NUG project.
The NTC would also be subject to adjustment in the future to reflect
additional NUG buyout or restructuring costs and any related
savings.
- - The unbundling plan calls for an estimated 10% rate reduction, of which 2.1%
became effective as part of JCP&L's Stipulation of Final Settlement (Final
Settlement) approved by the NJBPU in 1997. The remaining reductions would be
phased in over a two-year period beginning after the commencement of retail
choice, and would be achieved through, among other things, the proposed early
retirement of Oyster Creek for ratemaking purposes in September 2000 and, if
legislation is enacted, the securitization of certain above-market costs. In
addition to this rate reduction, JCP&L customers would receive an additional
rate reduction of approximately 6% to be phased in over the next five years
as a result of energy tax legislation signed into law in July 1997.
- - In addition to the continued operation of the Oyster Creek facility, JCP&L is
exploring the early retirement of the plant to mitigate costs associated with
its continued operation. A final decision on the plant's future will not be
made until the NJBPU rules on JCP&L's restructuring filing. Nevertheless,
JCP&L has proposed that the NJBPU approve an early retirement of Oyster Creek
in September 2000, for ratemaking purposes. The ratemaking treatment being
requested for Oyster Creek is as follows:
-- The market value of Oyster Creek's generation output would be
recovered in the Production Charge.
-- The above-market operating costs would be recovered as a component
of the Delivery Charge through September 2000. If the plant is
operated beyond that date, these costs would not be included in
customer rates.
-- Existing Oyster Creek regulatory assets would, like other regulatory
assets, be recovered as part of the Delivery Charge.
-- Oyster Creek decommissioning costs would, like TMI-1 decommissioning
costs, be recovered as a component of the Societal Benefits Charge.
71
<PAGE>
-- JCP&L's net investment in Oyster Creek would be recovered through
the Delivery Charge as a levelized annuity, effective with the
commencement of retail choice through its original expected
operating life, 2009.
- - Stranded costs at the time originally proposed by the NJBPU for initial
customer choice (September 30, 1998), on a present value basis, are estimated
at $1.6 billion, of which $1.5 billion is for above-market NUG contracts. The
$1.6 billion excludes above-market generation costs related to Oyster Creek.
Numerous parties have intervened in this proceeding and are actively
contesting various aspects of JCP&L's filings, including, among other things,
recovery by JCP&L of plant capital additions since its last base rate case in
1992, projections of future electricity prices on which stranded cost recovery
calculations are based, the appropriate level of return and the appropriateness
of earning a return on stranded investment.
Consultants retained by the NJBPU Staff, the Division of Ratepayer Advocate
and other parties have proposed that JCP&L's stranded cost recoveries should be
substantially lower than the levels JCP&L is seeking.
In a February 1998 order, the NJBPU substantially affirmed an ALJ ruling
which required that rates be unbundled based on the 1992 cost of service levels
which were the basis for JCP&L's last base rate case, but clarified that (1)
JCP&L could update its 1992 cost of service study to reflect adjustments
consistent with the NJBPU approved Final Settlement which, among other things,
recognized certain increased expense levels and reductions to base rates and (2)
all of the other updated post-1992 cost information that JCP&L had submitted in
the proceeding should remain in the record, which the NJBPU will utilize after
issuance of the ALJ's initial decision to establish a reasonable level of rates
going forward.
Furthermore, the NJBPU emphasized in its order that the final unbundled
rates established as a result of this proceeding will be lower than the current
bundled rates. This directive has been recognized in JCP&L's July 1997
restructuring plan which proposed annual revenue reductions totaling
approximately $185 million. The NJBPU will render final and comprehensive
decisions on the precise level of aggregate rate reductions required in order to
accomplish its primary goals of introducing retail competition and lowering
electricity costs for consumers.
If the NJBPU were to accept the positions of various parties or their
consultants, or were ultimately to deny JCP&L's request to recover post-1992
capital additions and increased expenses, it would have a material adverse
impact on JCP&L's stranded cost recovery, restructuring proceeding and future
earnings.
Hearings with respect to the stranded cost and unbundled rate filings have
been completed and an ALJ recommended decision is scheduled to be issued in
August. The NJBPU is not expected to issue final decisions until after
legislation is enacted, but to date no legislation has been introduced.
Evidentiary hearings before the NJBPU with respect to the separate restructuring
filing were held jointly with the other New Jersey utilities,
72
<PAGE>
and briefs have been filed. A NJBPU decision is expected coincident with
decisions in the stranded cost and unbundled rates proceedings. There can be no
assurance as to the outcome of these proceedings.
JCP&L has received NJBPU approval for a one-year pilot program offering
customers in Monroe Township, New Jersey, a choice of their electric energy
supplier. The pilot program began in September 1997, and can be extended until
the first phase of competition begins in October 1998. Since it is expected that
the start of retail competition will be delayed beyond October 1998, JCP&L
recently requested an extension of the program through the second quarter of
1999. Monroe Township had been exploring the possibility of establishing its own
municipal electric system.
Other
In November 1997, the FERC issued an order to the Pennsylvania-New
Jersey-Maryland (PJM) Power Pool which, among other things, directed the GPU
Energy companies to implement a single-system transmission rate, effective
January 1, 1998. The implementation of a single-system rate is not expected to
affect total transmission revenues. It would, however, increase the pricing for
transmission service in Met-Ed and Penelec's service territories and reduce the
pricing for transmission service in JCP&L's service territory.
The GPU Energy companies have requested the FERC to reconsider its ruling
requiring a single-system transmission rate. The FERC's ruling may also have an
effect on the GPU Energy companies' distribution rates since the PaPUC has
ordered a rate cap effective January 1, 1997 and the NJBPU has recommended a
5-10% rate reduction effective with the implementation of customer choice. There
can be no assurance as to the outcome of this matter.
Also in 1997, the PJM Power Pool converted to a limited liability company
governed by an independent board of managers and the FERC approved the
supporting PJM companies' application to permit the PJM Interconnection to be
recognized as an ISO.
Several bills have been introduced in Congress providing for a
comprehensive restructuring of the electric utility industry. These bills
propose, among other things, retail choice for all utility customers beginning
as early as January 1999, the opportunity for utilities to recover their
prudently incurred stranded costs in varying degrees, and repeal of both the
Public Utility Regulatory Policies Act (PURPA) and the Public Utility Holding
Company Act of 1935 (PUHCA).
The Clinton administration announced a Comprehensive Electricity
Competition Plan which proposes, among other things, customer choice by January
1, 2003, stranded cost recovery, reliability standards, environmental
provisions, and the repeal of both PURPA and PUHCA. The plan does, however,
allow states to opt out of the mandate if they believe consumers would be better
served by an alternative policy. The administration's plan was submitted to
Congress in June 1998.
73
<PAGE>
Nonutility Generation Agreements
- --------------------------------
Pursuant to the requirements of PURPA and state regulatory directives, the
GPU Energy companies have entered into power purchase agreements with NUGs for
the purchase of energy and capacity for remaining periods of up to 23 years.
Although a few of these facilities are dispatchable, most are must-run and
generally obligate the GPU Energy companies to purchase, at the contract price,
the output up to the contract limits. As of June 30, 1998, facilities covered by
these agreements having 1,666 MW (JCP&L 905 MW; Met-Ed 356 MW; Penelec 405 MW)
of capacity were in service. Although the Pennsylvania legislation and the NJEMP
in New Jersey both include provisions for the recovery of costs under NUG
agreements and certain NUG buyout costs, there can be no assurance that the GPU
Energy companies will continue to be able to recover similar costs which may be
incurred in the future. (See Note 1 of the Notes to Consolidated Financial
Statements - Competition and the Changing Regulatory Environment.)
The GPU Energy companies intend to avoid, to the maximum extent
practicable, entering into any new NUG agreements that are not needed or not
consistent with current market pricing and continue to support legislative
efforts to repeal PURPA. They are also attempting to renegotiate, and in some
cases buy out, existing high cost long-term NUG agreements (see THE GPU ENERGY
COMPANIES' SUPPLY PLAN).
THE GPU ENERGY COMPANIES' SUPPLY PLAN
-------------------------------------
Managing Nonutility Generation
- ------------------------------
The GPU Energy companies are seeking to reduce the above-market costs of
NUG agreements by: (1) attempting to convert must-run agreements to dispatchable
agreements; (2) attempting to renegotiate prices of the agreements; (3) offering
contract buyouts; and (4) initiating proceedings before federal and state
agencies, and in the courts, where appropriate. In addition, the GPU Energy
companies intend to avoid, to the maximum extent practicable, entering into any
new NUG agreements that are not needed or not consistent with current market
pricing and are supporting legislative efforts to repeal PURPA. These efforts
may result in claims against GPU for substantial damages. There can, however, be
no assurance as to what extent these efforts will be successful in whole or in
part.
In 1997, the NJBPU approved a Stipulation of Final Settlement which, among
other things, provides for the recovery of costs associated with the buyout of
the Freehold Cogeneration project. The Final Settlement provides for recovery
through the LEAC of: (1) buyout costs up to $130 million, and 50% of any costs
from $130 million to $140 million, over a seven-year period for the termination
of the Freehold power purchase agreement. The Freehold cost recovery was granted
on an interim basis subject to refund, pending further review by the NJBPU,
before which the matter is pending.
In 1997, Met-Ed and Penelec issued requests for proposals (RFPs) to 24 NUG
projects which currently supply a total of approximately 760 MW under power
purchase agreements. The RFPs requested the NUGs to propose buyouts, buydowns
and/or restructurings of current power purchase contracts in return
74
<PAGE>
for cash payments. In January 1998, Met-Ed and Penelec entered into definitive
buyout agreements with two bidders. These agreements are contingent upon Met-Ed
and Penelec obtaining a PaPUC order allowing for the full recovery of the buyout
payments through retail rates. Based on the PaPUC's Restructuring Orders in
Met-Ed and Penelec's proceedings which provides a CTC mechanism that fails to
guarantee full and timely cost recovery, management believes that recovery of
these buyout payments will not be acceptable to Met-Ed and Penelec. Full
recovery of these payments was requested in the Alternative Plans filed by
Met-Ed and Penelec in July 1998. On August 5, 1998, the PaPUC rejected the
Alternative Plans as invalid. Met-Ed and Penelec intend to appeal this action to
the Commonwealth Court. There can be no assurance as to the outcome of this
matter.
ACCOUNTING MATTERS
------------------
Statement of Financial Accounting Standards No. 71 (FAS 71), "Accounting
for the Effects of Certain Types of Regulation," applies to regulated utilities
that have the ability to recover their costs through rates established by
regulators and charged to customers. In response to the continuing deregulation
of the electric utility industry, the SEC has questioned the continued
applicability of FAS 71 by investor-owned utilities with respect to their
electric generation operations. In response to these concerns, the Financial
Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) concluded
in June 1997 that utilities are no longer subject to FAS 71, for a separable
portion of their business, when they know details of their individual transition
plans. The EITF also concluded that utilities can continue to carry previously
recorded regulated assets, as well as any newly established regulated assets
(including those related to generation), on their balance sheets if regulators
have guaranteed a regulated cash flow stream to recover the cost of these
assets.
On June 30, 1998, Met-Ed and Penelec received PaPUC Restructuring Orders on
their restructuring plans. The Restructuring Orders, among other things,
essentially remove from regulation the costs associated with providing electric
generation service to Pennsylvania consumers, effective January 1, 1999.
Accordingly, Met-Ed and Penelec have discontinued the application of FAS 71 and
adopted the provisions of Statement of Financial Accounting Standards No. 101
(FAS 101), "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71" with respect to their electric generation
operations, effective April 1, 1998. The transmission and distribution portion
of Met-Ed and Penelec's operations will continue to be subject to the provisions
of FAS 71. JCP&L will discontinue the application of FAS 71 and adopt FAS 101
for its electric generation operations no later than when it receives NJBPU
approval of its restructuring plans.
In accordance with Statement of Financial Accounting Standards No. 121 (FAS
121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," GPU performed impairment tests on the June 30, 1998
net book value of the GPU Energy companies' generation facilities. These tests
determined that GPU's net investment in TMI-1 was impaired. No impairment
existed for the fossil fuel and hydroelectric generating plants or for Oyster
Creek as of that date. GPU's investment in TMI-1 was written down
75
<PAGE>
by $472 million (pre-tax) (JCP&L $123 million; Met-Ed $235 million; Penelec $114
million) to reflect its fair market value. The amount written off was
re-established as a regulatory asset since management believes it is probable of
recovery in the restructuring process due to expected gains on the sale of the
fossil fuel and hydroelectric generating plants being projected to exceed the
TMI-1 writedown amount.
In June 1998, Statement of Financial Accounting Standards No. 133 (FAS
133), "Accounting for Derivative Instruments and Hedging Activities" was issued.
FAS 133 requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. To
comply with this statement, GPU will be required to include its derivative
transactions on its balance sheet at fair value, and recognize the subsequent
changes in fair value as either gains or losses in earnings or reported as a
component of other comprehensive income, depending upon the intended use and
designation of the derivative as a hedge. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. GPU expects to
adopt this statement in the first quarter of 2000. GPU is in the process of
evaluating the impact of FAS 133.
76
<PAGE>
PART II
ITEM 1 - LEGAL PROCEEDINGS
-----------------
Information concerning the current status of certain legal
proceedings instituted against the GPU, Inc. and the GPU Energy
companies discussed in Part I of this report in Combined Notes to
Consolidated Financial Statements is incorporated herein by
reference and made a part hereof.
ITEM 5 - OTHER EVENTS
------------
On August 6, 1998, the Board of Directors of GPU, Inc. adopted a
Shareholders Rights Plan (The Plan) that is intended to assure fair
and equal treatment for all GPU, Inc. shareholders in the event of a
hostile takeover attempt. The Plan requires approval by the SEC
under the Public Utility Holding Company Act of 1935. The Plan is
not being adopted because of any specific takeover offer or threat
and is designed to encourage a potential acquirer to negotiate with
the Board of Directors a fair price for all shareholders to realize
the long-term value of their investment in GPU, Inc.
Following approval of the Plan by the SEC, GPU will make a
distribution of one right for each outstanding share of GPU, Inc's
common stock. Shareholders are not required to take any action to
receive their rights distribution.
Prior to the date upon which the rights would become exercisable
under the Plan, GPU, Inc's outstanding stock certificates will
represent both the shares of GPU, Inc. common stock and the rights,
and the rights will trade only with the shares. Upon a "triggering
event" under the Plan (ten days after a person or group acquires or
announces, without the prior consent of the Board of Directors, a
tender or exchange offer to acquire ten percent or more of GPU,
Inc's outstanding common stock), the rights will become exercisable
and will trade independently of the outstanding shares.
After a party acquires ten percent or more of GPU, Inc. common
stock, each right, except those held by an acquiring person, will
entitle the holder to purchase at the exercise price additional GPU,
Inc. common shares having a current market value of two times the
exercise price.
If GPU is acquired in a merger or other business combination after a
person has acquired ten percent of GPU, Inc. common stock, each
right, except those held by an acquiring person, will entitle the
holder to purchase, at the exercise price, common stock of the
acquirer or the surviving company having a current market value of
two times the exercise price.
77
<PAGE>
GPU may redeem the rights at one-tenth of one cent per right at the
direction of the Board of Directors at any time before an
acquisition of ten percent of GPU, Inc.'s common stock.
A copy of the related shareholder rights agreement is being filed
as an exhibit.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments Defining the Rights of Security Holders,
including Indentures.
Form of Rights Agreement between GPU, Inc. and
ChaseMellon Shareholder Services, L.L.C.
(10) Material Contracts.
A - Severance Protection Agreement for Dennis P.
Baldassari, dated June 5, 1997.
B - Severance Protection Agreement for Thomas G.
Broughton, dated June 5, 1997.
C - Severance Protection Agreement for John G. Graham,
dated June 5, 1997.
D - Severance Protection Agreement for Fred D. Hafer,
dated June 5, 1997.
E - Severance Protection Agreement for Ira H. Jolles,
dated June 5, 1997.
F - Severance Protection Agreement for Bruce L. Levy,
dated June 5, 1997.
G - Severance Protection Agreement for Robert L. Wise,
dated June 5, 1997.
(12) Statements Showing Computation of Ratio of Earnings to
Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends Based on SEC
Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
78
<PAGE>
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
(b) Reports on Form 8-K:
GPU, Inc.:
Dated May 22, 1998, under Item 5 (Other Events).
Dated May 27, 1998, under Item 5 (Other Events). (Form 8-K/A)
Dated June 5, 1998, under Item 5 (Other Events).
Dated July 17, 1998, under Item 5 (Other Events).
Dated July 21, 1998, under Item 5 (Other Events).
Dated August 3, 1998, under Item 5 (Other Events).
Jersey Central Power & Light Company:
Dated July 17, 1998, under Item 5 (Other Events).
Metropolitan Edison Company:
Dated May 26, 1998, under Item 5 (Other Events). Dated May 27,
1998, under Item 5 (Other Events). (Form 8-K/A) Dated June 5,
1998, under Item 5 (Other Events). Dated July 17, 1998, under
Item 5 (Other Events). Dated July 21, 1998, under Item 5 (Other
Events).
Pennsylvania Electric Company:
Dated May 22, 1998, under Item 5 (Other Events).
Dated May 27, 1998, under Item 5 (Other Events). (Form 8-K/A)
Dated June 5, 1998, under Item 5 (Other Events).
Dated July 17, 1998, under Item 5 (Other Events).
Dated July 21, 1998, under Item 5 (Other Events).
Dated August 3, 1998, under Item 5 (Other Events).
79
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GPU, INC.
August 14, 1998 By: /s/ J. G. Graham
---------------------
J. G. Graham, Senior Vice President
(Chief Financial Officer)
August 14, 1998 By: /s/ F. A. Donofrio
---------------------
F. A. Donofrio, Vice President
and Comptroller
(Chief Accounting Officer)
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
August 14, 1998 By: /s/ D. Baldassari
---------------------
D. Baldassari, President
(Principal Operating Officer)
August 14, 1998 By: /s/ D. W. Myers
---------------------
D. W. Myers, Vice President
and Comptroller
(Principal Accounting Officer)
80
EXHIBITS TO BE FILED BY EDGAR
(4) Instruments Defining the Rights of Security Holders, including Indentures.
Form of Rights Agreement between GPU, Inc. and ChaseMellon Shareholder
Services, L.L.C.
(10) Material Contracts.
A - Severance Protection Agreement for Dennis P. Baldassari, dated June 5,
1997.
B - Severance Protection Agreement for Thomas G. Broughton, dated June 5,
1997.
C - Severance Protection Agreement for John G. Graham, dated June 5, 1997.
D - Severance Protection Agreement for Fred D. Hafer, dated June 5, 1997.
E - Severance Protection Agreement for Ira H. Jolles, dated June 5, 1997.
F - Severance Protection Agreement for Bruce L. Levy, dated June 5, 1997.
G - Severance Protection Agreement for Robert L. Wise, dated June 5, 1997.
(12) Statements Showing Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
Based on SEC Regulation S-K, Item 503
A - GPU, Inc. and Subsidiary Companies B - JCP&L C - Met-Ed D - Penelec
(27) Financial Data Schedules
A - GPU, Inc. and Subsidiary Companies
B - JCP&L
C - Met-Ed
D - Penelec
Exhibit 4
- --------------------------------------------------------------------------------
GPU, INC.
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Rights Agent
----------------------------------------
Form of Rights Agreement
Dated as of August __, 1998
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
Page
Section 1. Certain Definition 2
Section 2. Appointment of Rights Agent 5
Section 3. Issue of Rights Certificates 5
Section 4. Form of Rights Certificates 8
Section 5. Countersignature and Registration 9
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates 10
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights 11
Section 8. Cancellation and Destruction of Rights Certificates 14
Section 9. Reservation and Availability of Common Stock 15
Section 10. Common Stock Record Date 16
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights 17
Section 12. Certificate of Adjusted Purchase Price or Number of Shares 31
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power 31
Section 14. Additional Covenant 35
Section 15. Fractional Rights and Fractional Shares 35
Section 16. Rights of Action 37
Section 17. Agreement of Rights Holders 38
Section 18. Rights of Certificate Holder Not Deemed a Stockholder 39
Section 19. Concerning the Rights Agent 39
Section 20. Merger or Consolidation or Change of Name of Rights Agent 40
Section 21. Duties of Rights Agent 41
Section 22. Change of Rights Agent 45
Section 23. Issuance of New Rights Certificates 46
Section 24. Exchange 47
Section 25. Redemption and Termination 48
Section 26. Notice of Certain Events 50
Section 27. Notices 51
Section 28. Supplements and Amendments 52
Section 29. Determination and Actions by the Board of Directors, etc. 53
Section 30. Successors 53
Section 31. Benefits of this Agreement 54
Section 32. Severability 54
Section 33. Governing Law 54
Section 34. Counterparts 54
Section 35. Descriptive Headings 54
<PAGE>
Exhibit A - Form of Rights Certificate
Exhibit B - Form of Summary of Rights
ii
<PAGE>
RIGHTS AGREEMENT
This Agreement, dated as of August __, 1998, between GPU, Inc., a
Pennsylvania corporation (the "Company"), and ChaseMellon Shareholder
Services, L.L.C. (the "Rights Agent").
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has authorized and
declared a dividend distribution of one common stock purchase right (a "Right")
for each outstanding share of Common Stock, par value $2.50 per share, of the
Company (the "Common Stock") outstanding at the close of business on the tenth
business day following the first public announcement by the Company of receipt
of approval of the dividend by the Securities and Exchange Commission pursuant
to the Public Utility Holding Company Act of 1935 (the "Record Date"), each
Right representing the right to purchase one tenth of a share of Common Stock,
upon the terms and subject to the conditions set forth herein, and has further
authorized and directed the issuance of one Right with respect to each share of
Common Stock that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date or the Expiration Date
(as such terms are hereinafter defined); provided, however, that Rights may be
issued with respect to shares of Common Stock that shall become outstanding
after the Distribution Date and prior to the earlier of the Redemption Date and
the Expiration Date in accordance with the provisions of Section 23 of this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
<PAGE>
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, without the prior approval of the Board of Directors of the
Company, shall be the Beneficial Owner of 10% or more of the shares of Common
Stock then outstanding or who was such a Beneficial Owner at any time after the
date hereof, whether or not such Person continues to be the Beneficial Owner of
10% or more of the outstanding shares of Common Stock, but shall not include the
Company, any subsidiary of the Company (as such term is hereinafter defined),
any employee benefit plan of the Company or any of its subsidiaries or any
entity holding shares of Common Stock organized, appointed or established by the
Company or any of its subsidiaries for or pursuant to the terms of any such plan
or any trustee or administrator of any such plan; provided, however, that no
Person shall be an Acquiring Person if such Person became the Beneficial Owner
of shares of Common Stock or otherwise became an Acquiring Person (but for the
operation of this proviso) inadvertently (or in the good faith belief that an
acquisition of Common Shares would not cause it to become an Acquiring Person or
was unaware of this Rights Agreement) if both (i) within three Business Days
after such Person discovers that it would otherwise have become an Acquiring
Person such Person notifies the Board of Directors of the Company that such
Person would (absent the operation of this proviso) have become an Acquiring
Person inadvertently and (ii) within ten Business Days after such notification
(or such greater time period as the Board of Directors of the Company may set by
a duly adopted resolution prior to such tenth Business Day), such Person divests
itself of a sufficient number of shares of Common Stock so that such Person is
no longer the Beneficial Owner of 10% or more of the outstanding shares of
Common Stock.
2
<PAGE>
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right or obligation to acquire (whether such
right or obligation is exercisable or effective immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights (other than these Rights),
warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or to "beneficially
own," securities tendered pursuant to a tender or exchange offer made
by such Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or (B)
the right to vote pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however, that a
Person shall be not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this clause (B) if the
agreement, arrangement or understanding to vote such security (1)
arises solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in accordance
with, the applicable rules and regulations of the Exchange Act and (2)
3
<PAGE>
is not also then reportable by such person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with any
which such Person or any of such Person's Affiliates or Associates has
agreement, arrangement or understanding (whether or not in
writing), for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in clause (B) of
subparagraph (ii) of this paragraph (c)) or disposing of any
securities of the Company.
(d) "Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New Jersey are
authorized or obligated by law or executive order to close.
(e) "Close of business" on any given date shall mean 5:00
P.M., Massachusetts time, on such date; provided, however, that if such date is
not a Business Day it shall mean 5:00 P.M., New Jersey time, on the next
succeeding Business Day.
(f) "Common Stock" shall mean the Common Stock, par value $2.50
per share, of the Company, except that "Common Stock" when used with reference
to any Person other than the Company shall mean the capital stock with the
greatest voting power, or the equity securities or other equity interest having
power to control or direct the management, of such Person or, if such Person is
a subsidiary of another Person, the Person which ultimately controls such
first-mentioned Person and which has issued and outstanding such capital stock,
equity securities or equity interests.
(g) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(h) "Rights Agreement" shall mean this Agreement, including as it
may hereafter be amended.
4
<PAGE>
(i) "Stock Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such. However, a Stock Acquisition Date shall not occur if a Person does
not become an Acquiring Person by reason of the proviso in the definition of
"Acquiring Person".
(j) A "subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or voting interests is owned, directly or indirectly, by such Person, or which
is otherwise controlled by such Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company in accordance with the terms
and conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable, upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and in no event be
liable for, the acts or omissions of any such co-Rights Agent. In the event the
Company appoints one or more Co-Rights Agents, the respective duties of the
Rights Agents and any Co-Rights Agents shall be as the Company shall determine.
Section 3. Issue of Rights Certificates
(a) Until the earlier of (i) the Stock Acquisition Date, (ii)
the tenth Business Day after the date of the commencement of, or first public
announcement of the intent of any Person (other than the Company, any subsidiary
of the Company, or any employee benefit plan of the Company or any of its
subsidiaries or any trustee or administrator of any such plan in its capacity as
such) to commence (which intention to commence remains in effect for five
5
<PAGE>
business days after such announcement), a tenderor exchange offer which would
result in such Person becoming an Acquiring Person or, if such event occurs
before the Record Date, the Record Date (or such later date determined by the
Board of Directors of the Company which date shall not be later than the date
specified in (i)) (the earlier of such dates being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for Common
Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights (and the right to
receive certificates therefor) will be transferable only in connection with the
transfer of the underlying shares of Common Stock (including a transfer to the
Company); provided, however, that if a tender or exchange offer is terminated
prior to the occurrence of the Distribution Date, then no Distribution Date
shall occur as a result of that tender or exchange offer. As soon as practicable
after the Distribution Date, the Rights Agent will send by first-class, insured,
postage prepaid mail, to each record holder of the Common Stock as of the close
of business on the Distribution Date, at the address of such holder shown on the
records of the Company, a certificate for Rights, in substantially the form of
Exhibit B hereto (the "Rights Certificates"), evidencing one Right for each
share of Common Stock so held. As of and after the Distribution Date, the Rights
will be evidenced solely by such Rights Certificates.
(b) With respect to certificates for the Common Stock outstanding as
of the date of this Agreement, until the Distribution Date (or earlier
redemption, expiration or termination of the Rights), the Rights will be
evidenced by such certificates for the Common Stock and the registered holders
of the Common Stock shall also be the registered holders of the associated
Rights. Until the Distribution Date (or earlier redemption, expiration or
termination of the Rights), the surrender for transfer of any of the
certificates for the Common Stock outstanding on the Record Date shall also
6
<PAGE>
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. Upon the request of the holder of any shares of
Common Stock or, after the Distribution Date, the holder of any Rights, the
Company shall, at its expense, provide a copy of the Summary of Rights in the
form attached hereto as Exhibit C.
(c) Certificates for the Common Stock issued (or which become
outstanding) after the Effective Date (or as soon thereafter as is reasonably
practicable), but prior to the earlier of the Distribution Date or the
Expiration Date (as such term is hereinafter defined), shall be deemed also to
be certificates for Rights, and shall have impressed, printed, stamped, written
or otherwise affixed onto them the following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Rights Agreement
between GPU, Inc. and ChaseMellon Shareholder Services, L.L.C.
(the "Rights Agent") dated as of August __, 1998 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices
of GPU, Inc.. Under certain circumstances, as set forth in the
Rights Agreement, such Rights may be redeemed, may expire, or may
be evidenced by separate certificates and will no longer be
evidenced by this certificate. GPU, Inc. will mail to the holder
of this certificate a copy of the Rights Agreement without charge
within fifteen days after receipt of a written request therefor.
Under certain circumstances, Rights issued to Acquiring Persons
(as defined in the Rights Agreement) or certain related persons
and any subsequent holder of such Rights may become null and
void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Stock represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any of such certificates shall also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificate. If the Company purchases or otherwise acquires shares of Common
7
<PAGE>
Stock prior to the Distribution Date, any Rights associated with such Common
Stock shall be deemed canceled and retired so that the Company shall not be
entitled to exercise any Right associated with the shares of Common Stock which
are no longer outstanding.
Section 4. Form of Rights Certificates
(a) The Rights Certificates (and the forms of election to
purchase shares and of assignment to be printed on the reverse thereof) shall
each be substantially in the form set forth in Exhibit A hereto and may have
such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 23 hereof, the Rights Certificates,
whenever distributed, on their face shall entitle the holders thereof to
purchase such number of shares (or fractions thereof) of Common Stock as shall
be set forth therein at the price per share set forth therein (the "Purchase
Price"), but the number of such shares and the Purchase Price shall be subject
to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section
3(a) or Section 23 hereof that represents Rights beneficially owned by an
Acquiring Person or any Associate or Affiliate thereof and any Rights
Certificate issued at any time upon the transfer of any Rights to such an
Acquiring Person or any Associate or Affiliate thereof or to any nominee of such
Acquiring Person, Associate or Affiliate, and any Rights Certificate issued
pursuant to Section 6 or Section 11 upon transfer, exchange, replacement or
adjustment of any other Rights Certificate referred to in this sentence, shall
contain the following legend:
8
<PAGE>
The Rights represented by this Rights Certificate were issued to
a Person who was an Acquiring Person or an Affiliate or an
Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement). Accordingly, this Rights Certificate and
the Rights represented hereby are null and void.
The provisions of Section 7(e) of this Rights Agreement shall be operative
whether or not the foregoing legend is contained on any such Rights Certificate.
Section 5. Countersignature and Registration. The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, any Vice Chairman of the Board, any President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Rights Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent, and issued and delivered
by the Company with the same force and effect as though the person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Rights Agreement any such person was not such an
officer.
Following the Distribution Date, the Rights Agent will keep or cause
to be kept, at one of its offices, books for registration and transfer of the
Rights Certificates issued hereunder. Such books shall show the names and
9
<PAGE>
addresses of the respective holders of the Rights Certificates, the number of
Rights evidenced on its face by each of the Rights Certificates and the
certificate number and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
Subject to the provisions of Section 4(b), Section 7(e) and Section 15 hereof,
at any time after the close of business on the Distribution Date, and at or
prior to the close of business on the Expiration Date, any Rights Certificate or
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or Rights Certificates, entitling the registered holder to
purchase a like number of shares (or fractions thereof) of Common Stock as the
Rights Certificate or Rights Certificates surrendered then entitled such holder
to purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate shall make such request in writing delivered to
the Rights Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the principal
office of the Rights Agent. Thereupon the Rights Agent shall countersign and
deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
10
<PAGE>
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights
(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon presentation of the Rights Certificate, with the
appropriate form of election to purchase on the reverse side thereof duly
executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each share of Common Stock (or
such other number of shares or other securities) as to which the Rights are
exercised, at or prior to the earlier of (i) the close of business on August 6,
2008 (the "Final Expiration Date"), or (ii) the time at which the Rights are
redeemed as provided in Section 25 hereof (such earlier time being herein
referred to as the "Expiration Date"). Notwithstanding any other provision of
this Agreement, any Person who prior to the Distribution Date becomes a record
holder of shares of Common Stock may exercise all of the rights of a registered
holder of a Rights Certificate with respect to the Rights associated with such
shares of Common Stock in accordance with and subject to the provisions of this
Agreement, including the provisions of Sections 4(b), 6 and 7(e) hereof, as of
the date such Person becomes a record holder of shares of Common Stock.
(b) Subject to the terms and conditions set forth herein,
including the provisions of Sections 11 and 13 hereof, when exercisable, each
Right shall represent the right to purchase one tenth of a share of Common
Stock. The Purchase Price for each full share of Common Stock pursuant to the
exercise of a Right shall initially be $120 (being $12 per one tenth of a share
of Common Stock), shall be subject to adjustment from time to time as provided
in Sections 11 and 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
11
<PAGE>
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the appropriate form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the shares (or other securities
or property) to be purchased and an amount equal to any applicable transfer tax
(as determined by the Rights Agent) in cash, or by certified check or bank draft
payable to the order of the Company, the Rights Agent shall, subject to Section
21(k), thereupon promptly (i) (A) requisition from any transfer agent of the
shares of Common Stock (or make available, if the Rights Agent is the transfer
agent) certificates for the number of shares of Common Stock to be purchased and
the Company hereby irrevocably authorizes its transfer agent to comply with all
such requests, or (B) if the Company, in its sole discretion, shall have elected
to deposit the shares of Common Stock issuable upon exercise of the Rights
hereunder into a depositary, requisition from the depositary agent depositary
receipts representing such number of shares of Common Stock as are to be
purchased (in which case certificates for the shares of Common Stock represented
by such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company will direct the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash,
if any, to be paid in lieu of issuance of fractional shares in accordance with
Section l5, (iii) promptly after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt promptly
deliver such cash to or upon the order of the registered holder of such Rights
Certificate. In the event that the Company is obligated to issue other
securities of the Company, and/or distribute other property pursuant to Section
11(a), the Company will make all arrangements necessary so that such other
securities and/or property are available for distribution by the Rights Agent,
12
<PAGE>
if and when appropriate. In addition, in the case of an exercise of the Rights
by a holder pursuant to Section 11(a)(ii), the Rights Agent shall return such
Rights Certificate to the registered holder thereof after imprinting, stamping
or otherwise indicating thereon that the rights represented by such Rights
Certificate no longer include the rights provided by Section 11(a)(ii) of the
Rights Agreement and if less than all the Rights represented by such Rights
Certificate were so exercised, the Rights Agent shall indicate on the Rights
Certificate the number of Rights represented thereby which continue to include
the rights provided by Section 11(a)(ii).
(d) In case the registered holder of any Rights Certificate shall
exercise (except pursuant to Section 11(a)(ii)) less than all the Rights
evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the
Rights remaining unexercised shall be issued by the Rights Agent and delivered
to the registered holder of such Rights Certificate or to his duly authorized
assigns, subject to the provisions of Section l5 hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the time an Acquiring Person first becomes such, any Rights
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any Affiliate
or Associate thereof) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any Affiliate
or Associate thereof) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such and receives such Rights pursuant to either (A) a
transfer (whether or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has a continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Corporation has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
13
<PAGE>
Section 7(e), shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The
Corporation shall use all reasonable efforts to insure that the provisions of
this Section 7(e) and Section 4(b) hereof are complied with, but shall have no
liability to any holder of Right Certificates or other Person as a result of its
failure to make any determinations with respect to an Acquiring Person or its
Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless the certificate contained in the
appropriate form of election to purchase set forth on the reverse side of the
Rights Certificate surrendered for such exercise shall have been completed and
signed by the registered holder thereof and the Company shall have been provided
with such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for such purpose and cancellation or,
if surrendered to the Rights Agent for such purpose, shall be canceled by it,
and no Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Rights Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Rights Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all canceled Rights Certificates to the Company, or shall,
14
<PAGE>
at the written request of the Company, destroy such canceled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Common Stock. The
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued shares of Common Stock, or any
authorized and issued shares of Common Stock held in its treasury, the number of
shares of Common Stock that will be sufficient to permit the exercise in full of
all outstanding Rights and, after the occurrence of an event specified in
Section 11, shall so reserve and keep available a sufficient number of shares of
Common Stock (and/or other securities) which may be required to permit the
exercise in full of the Rights pursuant to this Agreement.
So long as the shares of Common Stock (and, after the occurrence of
an event specified in Section 11, any other securities) issuable upon the
exercise of the Rights may be listed on any national securities exchange, the
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares (or other securities) reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all shares of Common Stock, Common Stock
and/or other securities delivered upon exercise of Rights shall, at the time of
delivery of the certificates for such shares or other securities (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable shares or securities.
The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates or
of any certificates for shares of Common Stock and/or other securities upon the
exercise of Rights. The Company shall not, however, be required to pay any
15
<PAGE>
transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a person other than, or in respect of the issuance or
delivery of the shares of Common Stock and/or other securities in a name other
than that of, the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for shares of
Common Stock and/or other securities in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
The Company shall use its best efforts to (i) file, as soon as
practicable following the Distribution Date, a registration statement under the
Securities Act of 1933 (the "Act"), with respect to the securities purchasable
upon exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with a prospectus
at all times meeting the requirements of the Act) until the date of the
expiration of the rights provided by Section 11(a)(ii). The Company will also
take such action as may be appropriate under the blue sky laws of the various
states.
Section 10. Common Stock Record Date. Each person in whose name
any certificate for shares of Common Stock (and/or other securities) is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of the shares of Common Stock and/or other securities
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly presented and payment of
the Purchase Price (and any applicable transfer taxes) was made; provided,
however, that if the date of such presentation and payment is a date upon which
the Common Stock (and/or other securities) transfer books of the Company are
closed, such person shall be deemed to have become the record holder of such
16
<PAGE>
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Common Stock (and/or other securities) transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a
stockholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after
the date of this Agreement (A) declare a dividend on the Common Stock
payable in shares or fractional units of shares of Common Stock, (B)
subdivide the outstanding Common Stock, (C) combine the outstanding
Common Stock into a smaller number of shares or (D) issue any shares
of its capital stock in a reclassification of the Common Stock
(including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this Section
11(a), and Section 7(e), the Purchase Price in effect at the time of
the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number of shares
(or fractions thereof) of Common Stock and the number and kind of
shares of capital stock issuable on such date upon exercise of a
Right, shall be proportionately adjusted so that the holder of any
17
<PAGE>
Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock and other
securities which, if such Right had been exercised immediately prior
to such date and at a time when the Common Stock transfer books of the
Company were open, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event
shall the consideration to be paid upon exercise of one Right be less
than the aggregate par value of the shares of capital stock of the
Company issuable upon exercise of one Right. If an event occurs which
would require an adjustment under both Section 11(a)(i) and Section
11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall
be in addition to, and shall be made prior to any adjustment required
pursuant to Section 11(a)(ii).
(ii) Subject to Section 24 hereof, in the event any Person,
alone or together with its Affiliates and Associates, shall become an
Acquiring Person, then proper provision shall be made so that each
holder of a Right, except as provided in Section 7(e) hereof, shall,
for a period of 60 days (or such other longer period as may be
established by action of a majority of the Board of Directors) after
the later of the occurrence of any such event and the effective date
of an appropriate registration statement pursuant to Section 9, have a
right to receive, upon exercise thereof at the then current Purchase
Price in accordance with the terms of this Agreement, such number of
shares (or fractions thereof) of Common Stock as shall equal the
result obtained by (x) multiplying the then current Purchase Price for
a full share of Common Stock by the then number of one tenths of a
share of Common Stock for which a Right is exercisable immediately
18
<PAGE>
prior to the first occurrence of such event and dividing that product
by (y) 50% of the current market price per one full share of Common
Stock (determined pursuant to Section 11(d)) on the date of such first
occurrence (such number of one tenths of a share being referred to as
the "number of Adjustment Shares").
(iii) In the event that the number of shares of Common
Stock which are authorized but not outstanding or reserved for
issuance for purposes other than upon exercise of the Rights is not
sufficient to permit the exercise in full of the Rights in accordance
with the foregoing subparagraph (ii), then, in the event the Rights
become so exercisable, the Company shall (A) determine the excess of
(1) the value of the Adjustment Shares issuable upon the exercise of a
Right (the "Current Value") over (2) the Purchase Price (such excess,
the "Spread"), and (B) with respect to each Right, make adequate
provision to substitute for the Adjustment Shares, upon exercise of
the Rights and payment of the applicable Purchase Price, (1) cash, (2)
a reduction in the Purchase Price, (3) other equity securities of the
Company (including, without limitation, shares of preferred stock
which a majority of the Board of Directors of the Company have deemed
to have the same value as shares of Common Stock (such shares of
preferred stock, "Common Stock Equivalents")), (4) debt securities of
the Company, (5) other assets, or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where
such aggregate value has been determined by a majority of the Board of
Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors
of the Company; provided, however, that if the Company shall not have
made adequate provision to deliver value pursuant to clause (B) above
19
<PAGE>
within thirty (30) days following the Stock Acquisition Date, then the
Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, shares
of Common Stock (to the extent available) and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the
Spread. If the Board of Directors of the Company shall determine in
good faith that it is likely that sufficient additional shares of
Common Stock could be authorized for issuance upon exercise in full of
the Rights, the thirty (30) day period set forth above may be extended
to the extent necessary, but not more than one hundred and fifty days
(150) days after the Stock Acquisition Date, in order that the Company
may seek stockholder approval for the authorization of such additional
shares (such period, as it may be extended, the "Substitution
Period"). To the extent that the Company determines that some action
need be taken pursuant to the first and/or second sentences of this
subparagraph (iii), the Company (x) shall provide, subject to Section
7(e) hereof, that such action shall apply uniformly to all outstanding
Rights, and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement and shall give concurrent
written notice to the Rights Agent stating that the exercisability of
the Rights has been temporarily suspended, as well as a public
announcement and notice to the Rights Agent at such time as the
suspension is no longer in effect. For purposes of this subparagraph
(iii), the value of the Common Stock shall be the Current Market Price
20
<PAGE>
(as determined pursuant to Section 11(d) hereof) per share of Common
Stock on the Stock Acquisition Date and the value of any Common Stock
Equivalent shall be deemed to be the same as the value of Common Stock
on such date. The Company shall give the Rights Agent notice of the
selection of any Common Stock Equivalent under this subparagraph
(iii). In the event any applicable law, regulation, requirement of any
federal or state agency, commission or authority, or agreements or
instruments in effect on the Stock Acquisition Date (a "Restriction")
prohibits all or part of the payments or distributions required
hereunder, payments or distributions shall be made pro rata to holders
of Rights to the extent permitted and the Company shall advise the
Rights Agent of any unpaid amounts. If any or all such Restrictions
shall thereafter lapse, additional payments or distributions shall be
made to the extent permitted pro rata to all holders of Rights until
all unpaid amounts have been paid in full. If payment has been
postponed in full or in part as aforesaid, the Company shall notify
all holders of Rights of such postponement and of the maximum amount
that may be paid or distributed consistent with any Restriction. Such
notice shall describe all such Restrictions, specify the amount, if
any, that may be paid or distributed and the amount of the payment of
which must be postponed, and describe the efforts being undertaken by
the Company to eliminate all such Restrictions. At such time as the
Company may make additional payments or distributions, the Company
shall so notify all holders of Rights, which notice shall indicate the
maximum additional amount that the Company may then pay or distribute.
The Company shall use its best efforts to eliminate expeditiously any
and all Restrictions so as to permit the full payment
21
<PAGE>
or distribution of amounts acquired hereunder. During such time as
amounts are unpaid the Company shall not make any distributions on, or
repurchases of, or any shares of Common Stock.
(b) If the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Common Stock entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Common Stock (or shares having substantially the same
rights and privileges as shares of Common Stock ("equivalent common stock") or
securities convertible into Common Stock or equivalent common stock) at a price
per share of Common Stock or per share of equivalent common stock (or having a
conversion price per share, if a security convertible into Common Stock or
equivalent common stock) less than the current market price (as defined in
Section 11(d) per share of Common Stock on such record date, the Purchase Price
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
on such record date, plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock and/or
equivalent common stock to be offered (and/or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
current market price and the denominator of which shall be the number of shares
of Common Stock outstanding on such record date, plus the number of additional
shares of Common Stock and/or equivalent common stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
22
<PAGE>
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be determined reasonably and with good faith to the
holders of Rights by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent and shall be
binding on the Rights Agent. Shares of Common Stock owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed; and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) If the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a regular
quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Common Stock, but including
any dividend payable in stock other than Preferred Stock) or subscription rights
or warrants (excluding those referred to in Section 11(b)), the Purchase Price
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the current market price (as defined in Section
11(d)) per share of Common Stock on such record date, less the fair market value
(as determined reasonably and with good faith to the holders of Rights by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent)
of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants distributable in respect
of one share of Common Stock and the denominator of which shall be current
market price per share of the Common Stock; provided, however, that in no event
23
<PAGE>
shall the consideration to be paid upon exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. Such adjustments shall be made successively whenever such
a record date is fixed; and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, other than
in Section 11(a)(iii), the "current market price" per share of Common Stock on
any date shall be deemed to be the average of the daily closing prices per share
of such Common Stock for the 30 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date; provided, however, that in
the event that the current per share market price of the Common Stock is
determined during a period following the announcement by the issuer of such
Common Stock of (A) a dividend or distribution on such Common Stock payable in
shares of such Common Stock or securities convertible into shares of such Common
Stock or (B) any subdivision, combination or reclassification of such Common
Stock, and prior to the expiration of 30 Trading Days after the ex-dividend date
for such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the "current
market price" shall be properly adjusted to take into account ex-dividend
trading. The closing price for each day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the shares
of Common Stock are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
24
<PAGE>
on which the shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported by
the National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common Stock selected by the Board of Directors of the Company.
If on any such date no market maker is making a market in the Common Stock, the
fair value of such shares on such date as determined reasonably and with good
faith by the Board of Directors of the Company shall be used and shall be
binding on the Rights Agent. The term, "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading is open for the transaction of business or, if
the shares of Common Stock are not listed or admitted to trading on any national
securities exchange, a Business Day. If the Common Stock is not publicly held or
not so listed or traded, "current market price" per share shall mean the fair
value per share determined reasonably and with good faith to the holders of
Rights by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent.
(ii) For the purpose of any computation hereunder, the
"current market price" of any other security shall be determined in the same
manner as set forth above for the Common Stock in clause (i) of this Section
11(d).
(e) Anything herein to the contrary notwithstanding, no adjustment
in the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
25
<PAGE>
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a share of Common Stock or other share
of any other capital stock. Notwithstanding the first sentence of this Section
11(e), any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three years from the date of the transaction which mandates
such adjustment or (ii) the Expiration Date.
(f) If as a result of any provision of Section 11(a) or Section
13(a), the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the shares
of Common Stock contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10, 13 and 15 hereof with respect to the Common
Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Purchase Price hereunder shall evidence the right
to purchase, at the adjusted Purchase Price, the number of shares of Common
Stock purchasable from time to time hereunder upon exercise of the Rights, all
subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Section 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of shares (or
fractions thereof) of Common Stock (calculated to the nearest one-millionth)
obtained by (i) multiplying (x) the number of one tenths of a share of Common
26
<PAGE>
Stock covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares of Common Stock purchasable upon the exercise
of a Right. Each of the Rights outstanding after the adjustment in the number of
Rights shall be exercisable for the number of one one-thousandths of a share of
Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 15 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
27
<PAGE>
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one tenths of a share of Common Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per share and the number of
shares which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated or par value, if any, of the
shares of Common Stock or other securities issuable upon exercise of the Rights,
the Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock or other securities at such
adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
the shares of Common Stock and other capital stock or securities of the Company,
if any, issuable upon such exercise over and above the shares of Common Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
28
<PAGE>
(m) Anything to the contrary in this Section 11 notwithstanding, the
Company, by action of a majority of the Board of Directors, shall be entitled to
make such reductions in the Purchase Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that it in its sole
discretion shall determine to be advisable in order that any consolidation or
subdivision of the Common Stock, issuance wholly for cash of any shares of
Common Stock at less than the current market price, issuance wholly for cash of
shares of Common Stock or securities which by their terms are convertible into
or exchangeable for shares of Common Stock, stock dividends or issuance of
rights, options or warrants referred to hereinabove in this Section 11,
hereafter made by the Company to holders of its Common Stock shall not be
taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
subsidiary of the Company in a transaction which does not violate Section 11(o)
hereof), (ii) merge with or into any other Person (other than a subsidiary of
the Company in a transaction which does not violate Section 11(o) hereof, or
(iii) sell or transfer (or permit any subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its subsidiaries in one or more transactions each of which
does not violate Section 11(o) hereof), if (x) at the time of or immediately
after such consolidation, merger, sale or transfer there are any charter or
by-law provisions or any rights, warrants or other instruments or securities
outstanding or agreements in effect or other actions taken, which would
materially diminish or otherwise eliminate the benefits intended to be afforded
by the Rights or (y) prior to, simultaneously with or immediately after such
consolidation, merger or sale, the stockholders of the Person who constitutes,
29
<PAGE>
or would constitute, the "Principal Party" for purposes of Section 13(a) hereof
shall have received a distribution of Rights previously owned by such Person or
any of its Affiliates and Associates. The Company shall not consummate any such
consolidation, merger, sale or transfer unless prior thereto the Company and
such other Person shall have executed and delivered to the Rights Agent a
certificate certifying compliance with this Section 11(n).
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23 or Section 26 hereof, take
(or permit any subsidiary to take) any action the purpose of which is to, or if
at the time such action is taken it is reasonably foreseeable that the effect of
such action is to, materially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in
the event that the Company shall at any time after the date of this Agreement
and prior to the Distribution Date (i) declare or pay a dividend on the
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, (iii) combine or consolidate the
outstanding Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in a reclassification of the outstanding Common
Stock, then in any such case, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter but prior to
the Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a
fraction the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
30
<PAGE>
outstanding immediately following the occurrence of such event. The adjustments
provided for in this Section 11(p) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination, consolidation
or reclassification is effected.
(q) The exercise of Rights under Section 11(a)(ii) shall only result
in the loss of rights under Section 11(a)(ii) to the extent so exercised and
shall not otherwise affect the rights represented by the Rights under this
Rights Agreement, including the rights represented by Section 13.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Rights Agent and with each transfer agent for the Common Stock a
copy of such certificate and (c) mail a brief summary thereof to each holder of
a Rights Certificate in accordance with Section 26 hereof. The Rights Agent
shall be fully protected in relying on any such certificate and on any
adjustment therein contained and shall not be deemed to have knowledge of such
adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power.
(a) In the event that, on or following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person, (y) any Person shall consolidate with the Company,
or merge with and into the Company and the Company shall be the continuing or
surviving corporation of such merger and, in connection with such merger, all or
part of the shares of Common Stock shall be changed into or exchanged for stock
or other securities of any other Person or cash or any other property or all
holders of shares of Common Stock are not treated alike or following the merger
31
<PAGE>
or consolidation the holders of Common Stock immediately prior to the
transaction do not hold in the same proportion all of the voting power of the
corporation surviving the transaction, or (z) the Company shall sell, mortgage
or otherwise transfer (or one or more of its subsidiaries shall sell, mortgage
or otherwise transfer), in one or more transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
subsidiaries (taken as a whole) to any other Person, then, and in each such
case, proper provision shall be made so that (i) following the Distribution
Date, each holder of a Right, shall have the right to receive, upon the exercise
thereof at the then current Purchase Price in accordance with the terms of this
Agreement, such number of shares of freely tradable Common Stock of the
Principal Party (as hereinafter defined), free and clear of liens, rights of
call or first refusal, encumbrances or other adverse claims, as shall be equal
to the result obtained by (1) multiplying the then current Purchase Price for
one full share of Common Stock by the number of one tenths of a share of Common
Stock for which a Right is then exercisable and dividing that product by (2) 50%
of the current market price per one full share of the Common Stock of such
Principal Party (determined pursuant to Section 11(d) hereof) on the date of
consummation of such consolidation, merger, sale or transfer; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger sale or transfer, all the obligations and duties of
the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such Principal Party, it being specifically
intended that the provisions of Section 11 hereof shall apply to such Principal
Party; and (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common Stock
in accordance with Section 9 hereof) in connection with such consummation as may
be necessary to assure that the provisions hereof shall thereafter be
32
<PAGE>
applicable, as nearly as reasonably may be, in relation to its shares of Common
Stock thereafter deliverable upon the exercise of the Rights.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in (x) or
(y) of the first sentence of this Section 13, the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to the
merger or consolidation (including, if applicable, the Company if it
is the surviving corporation); and
(ii) in the case of any transaction described in (z) of
the first sentence in this Section 13, the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect subsidiary or Affiliate of another Person, "Principal Party"
shall refer to such other Person; (2) in case such Person is a subsidiary,
directly or indirectly, or Affiliate of more than one Person, the Common Stocks
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Stock having the
greatest aggregate market value; and (3) in case such Person is owned, directly
or indirectly, by a joint venture formed by two or more Persons that are not
owned, directly or indirectly, by the same Person, the rules set forth in (1)
and (2) above shall apply to each of the chains of ownership having an interest
in such joint venture as if such party were a "Subsidiary" of both or all of
such joint venturers and the Principal Parties in each such chain shall bear the
33
<PAGE>
obligations set forth in this Section 13 in the same ratio as their direct or
indirect interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and each Principal Party and
each other Person who may become a Principal Party as a result of such
consolidation, merger, sale or transfer shall have a sufficient number of shares
of its authorized Common Stock which have not been issued or reserved for
issuance in order to permit the exercise in full of the Rights in accordance
with this Section 13 and shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger, sale or transfer of assets mentioned in
paragraph (a) of this Section 13, the Principal Party at its own expense will
(i) prepare and file a registration statement under the Act
with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, will use its best
efforts to cause such registration statement to become effective as
soon as practicable after such filing and will use its best efforts to
cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
Expiration Date;
(ii) use its best efforts to qualify or register the Rights
and the securities purchasable upon exercise of the Rights under the
blue sky laws of such jurisdictions as may be necessary or
appropriate; and
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates
34
<PAGE>
which comply in all material respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. The rights under this Section 13
shall be in addition to the rights to exercise Rights and adjustments under
Section 11(a)(ii) and, if applicable, the right to receive shares of Common
Stock in exchange for the Rights pursuant to Section 24 hereof and shall survive
any exercise or exchange thereunder.
Section 14. Additional Covenant. Notwithstanding any other
provision of this Agreement, no adjustment to the Purchase Price, the
number of shares (or fractions of a share) of Common Stock or other securities
for which a Right is exercisable or the number of Rights outstanding or any
similar adjustment shall be made or be effective if such adjustment would have
the effect of reducing or limiting the benefits the holders of the Rights would
have had absent such adjustment, including, without limitation, the benefits
under Section 11(a)(ii) and Section 13, unless the terms of this Agreement are
amended so as to preserve such benefits.
Section 15. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(n),
or to distribute Rights Certificates which evidence fractional Rights. In lieu
of such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 15(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price of the Rights for any day shall
be the last sale price, regular way, or, in case no such sale takes place on
35
<PAGE>
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading, or if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by NASDAQ
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
selected by the Board of Directors of the Company. If on any such date no such
market maker is making a market in the Rights the fair value of the Rights on
such date as determined reasonably and with good faith to the holders of Rights
by the Board of Directors of the Company shall be used and shall be binding on
the Rights Agent.
(b) The Company shall not be required to issue fractions of
shares of Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock. In lieu of
fractional shares of Common Stock, the Company may pay to the registered holders
of Right Certificates at the time such Rights are exercised as herein provided
an amount in cash equal to the same fraction of the current market value of a
share of Common Stock.
(c) Following the occurrence of one of the transactions or
events specified in Section 11 giving rise to the right to receive shares
of Common Stock or other securities upon the exercise or exchange of a Right,
the Company shall not be required to issue fractions of shares of Common Stock
36
<PAGE>
upon exercise or exchange of the Rights or to distribute certificates which
evidence fractional shares of Common Stock. In lieu of fractional shares of
Common Stock or of any such other securities, the Company may pay to the
registered holders of Right Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of a unit or share of such securities, as the case may be. For
purposes of this Section 15(c), the current market value of any such unit or
share shall be the closing price of a share of Common Stock (as determined
pursuant to Section 11(d)(ii) hereof) for the Trading Day immediately prior to
the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any
fractional shares upon exercise of a Right.
Section 16. Rights of Action. All rights of action in respect of
this Agreement (other than rights of action given to the Rights Agent under
Section 19 hereof) are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and shall be entitled to specific performance
of the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
37
<PAGE>
Holders of Rights shall be entitled to recover the reasonable costs and
expenses, including attorneys' fees, incurred by them in any action to enforce
the provisions of this Agreement in which they successfully prosecute their
claims.
Section 17. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer;
(c) subject to Section 6 and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or a beneficial interest in a Right or other Person as a result of
its inability to perform any of its obligations under this Agreement by reason
of any preliminary or permanent injunction or other order, decree or ruling
issued by a court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
38
<PAGE>
executive order promulgated or enacted by any governmental authority,
prohibiting or otherwise restraining performance of such obligation; provided,
however, the Company shall not have sought or otherwise cooperated in obtaining
such order, decree or ruling and must use its best efforts to have any such
order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 18. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of Common Stock
or any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 26 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions thereof.
Section 19. Concerning the Rights Agent. The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and disbursements and other disbursements incurred in
the administration and execution of this Agreement and the exercise and
performance of its duties hereunder. The Company shall indemnify the Rights
Agent for, and hold it harmless against, any loss, liability, claim or expense
("Loss") arising out of or in connection with its duties under this Agreement,
39
<PAGE>]
including the costs and expenses of defending itself against any Loss, unless
such Loss shall have been determined by a court of competent jurisdiction to be
a result of the Rights Agent's gross negligence or intentional misconduct. The
obligations of the Company under this section shall survive the termination of
this Agreement.
The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration of this Agreement in reliance upon any Rights Certificate or
certificate for Common Stock or for other securities of the Company, instrument
of assignment or transfer, power of attorney, endorsement, affidavit, letter,
notice, direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons.
The Company shall give the Rights Agent notice as promptly as
reasonably practicable of the date set for the Record Date.
Section 20. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the corporate trust
business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a successor
Rights Agent under the provisions of Section 22 hereof. In case at the time such
successor Rights Agent shall succeed to the agency created by this Agreement,
any of the Rights Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the countersignature of the
40
<PAGE>
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates in this Agreement.
In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 21. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel
selected by it (who may be legal counsel for the Company), and the opinion of
such counsel shall be full and complete authorization and protection to the
Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person) be
proved or established by the Company prior to taking or suffering any action
41
<PAGE>
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, any Vice
Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for
its own gross negligence, bad faith or intentional misconduct. In no case,
however, will the Rights Agent be liable for special, indirect, incidental or
consequential loss or damages of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the possibility
of such damages.
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Rights Certificates (except as to the fact that it has countersigned the
Rights Certificates) or be required to verify the same, but all such statements
and recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in respect of
the validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any Rights becoming null and void
pursuant to Section 7(e) hereof or for any breach by the Company of any covenant
or condition contained in this Agreement or in any Rights Certificate; nor shall
it be responsible for any adjustment required under the provisions of Sections
11 or 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it be
responsible for any determination by the Board of Directors of the Company of
the current market value of the Rights, Common Stock, or any other security
42
<PAGE>
pursuant to the provisions of Section 15 hereof; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Rights Certificate or as to whether any shares of
Common Stock will, when so issued, be validly authorized and issued, fully paid
and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed
to accept instructions with respect to the performance of its duties hereunder
and certificates delivered pursuant to any provision hereof from the Chairman of
the Board, any Vice Chairman of the Board, the President, any Vice President, or
the Secretary of the Company, and is authorized to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer. Any application by the Rights Agent for
written instructions from the Company may at the option of the Rights Agent, set
forth in writing any action proposed to be taken or omitted by the Rights Agent
with respect to its duties or obligations under this Agreement and the date on
and/or after which such action taken or omitted in accordance with a proposal
included in any such application on or after the date specified therein (which
date shall not be less than three Business Days after the date any such officer
actually receives such application, unless any such officer shall have consented
in writing to an earlier date) unless, prior to taking or omitting any such
43
<PAGE>
action, the Rights Agent has received written instructions from the Company in
response to such application specifying the action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or by
or through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, omission, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company or to the holders of the
Rights resulting from any such act, omission, default, neglect or misconduct,
provided reasonable care was exercised in the selection and continued employment
thereof.
(j) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if there shall be reasonable grounds for believing that repayment of such funds
or adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
44
<PAGE>
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Company.
Section 22. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Stock by registered or certified mail, and,
subsequent to the Distribution Date, to holders of the Rights Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock by registered or certified mail, and, subsequent to the
Distribution Date, to the holders of the Rights Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of 30 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Rights Certificate (who shall, with such notice, submit his
Rights Certificate for inspection by the Company), then the registered holder of
any Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be either (a) a corporation organized
and doing business under the laws of the United States or of any state, in good
standing, which is authorized under such laws to exercise corporate trust powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000 or (b) an affiliate of such a corporation. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Right
Agent without further act or deed; but the predecessor Rights Agent shall
45
<PAGE>
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any further assurance, conveyance, act
or deed necessary for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Stock, and, if
such appointment occurs after the Distribution Date, mail a notice thereof in
writing to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 22, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 23. Issuance of New Rights Certificates. Notwithstanding any
of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price per share and the number or kind or class of
shares or other securities or property purchasable under the Rights Certificates
made in accordance with the provisions of this Agreement. In addition, in
connection with the issuance or sale of Common Stock following the Distribution
Date and prior to the Expiration Date, the Company shall with respect to shares
of Common Stock so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, or upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Company prior to the
Distribution Date, issue Right Certificates representing the appropriate number
of Rights in connection with such issuance or sale; provided, however, that (i)
the Company shall not be obligated to issue any such Right Certificate if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Right Certificate shall be issued, and (ii)
46
<PAGE>
no Right Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option,
at any time prior to the time that any Person becomes an Acquiring Person,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to the provisions of Section
7(e) hereof) for Common Stock of the Company at an exchange ratio equal to of
the lesser of (i) three shares of Common Stock per Right, appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof and (ii) a pro rata portion of the total number of shares
of Common Stock available for issuance at the time of the Board action (such
exchange ratio being hereinafter referred to as the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any such
Subsidiary, any entity holding Common Shares for or pursuant to the terms of any
such plan or any trustee, administrator or fiduciary of such a plan), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the shares of Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors
of the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights (other than rights to exercise such Rights pursuant to
Section 13, which shall be in addition to the rights under this Section) shall
be to receive that number of Common Shares equal to the number of such rights
held by such holder multiplied by the Exchange Ratio. The Company shall promptly
47
<PAGE>
give public notice of any such exchange; provided, however, that the failure to
give, or any defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such exchange to all
of the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will set the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 7(e) hereof)
held by each holder of Rights.
Section 25. Redemption and Termination.
(a) (i) The Board of Directors of the Company may, at its option,
at any time prior to 5:00 P.M., New Jersey time, on the earlier of (x) the Stock
Acquisition Date or (y) the Final Expiration Date, redeem all but not less than
all of the then outstanding Rights at the redemption price of $.001 per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). This Agreement shall
terminate and be of no further force and effect if the Effective Date shall not
have occurred by December 31, 1998 (or such later date as may be determined by
resolution adopted by Board of Directors before such date).
(ii) In addition, a majority of the Board of Directors of the
Company may, at its option, at any time following the Stock Acquisition Date and
the expiration of the period during which the rights of holders of Rights
pursuant to Section 11(a)(ii) hereof may be exercised as a result of the
occurrence of such Stock Acquisition Date, but prior to any event described in
clause (x), (y), or (z) of Section 13(a) hereof, redeem all but not less than
48
<PAGE>
all of the then outstanding Rights at the Redemption Price in connection with
any such event in which all holders of shares of Common Stock are treated alike
and not involving an Acquiring Person or an Affiliate or Associate of an
Acquiring Person or any Person in which the Acquiring Person or an Affiliate or
Associate of an Acquiring Person has an interest, or any other Person acting
directly or indirectly on behalf of or in concert with any such Acquiring
Person, Associate or Affiliate (other than involvement by an Acquiring Person,
Affiliate, Associate or such other Person solely as a holder of shares of Common
Stock (of the Company) being treated like all other such holders) or (z)
following the occurrence of an event set forth in, and the expiration of any
period during which the holder of Rights may exercise the rights under, Section
11(a)(ii) if and for as long as the Acquiring Person is not thereafter the
Beneficial Owner of securities representing ten percent or more of the voting
power of all securities of the Company generally entitled to vote for the
election of directors of the Company.
(b) Immediately upon the date for redemption set forth (or
determined in the manner specified) in a resolution of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
Within ten days after the action of the Board of Directors ordering any such
redemption of the Rights, the Company shall give notice of such redemption to
the Rights Agent and the holders of the then outstanding Rights by mailing such
notice to the Rights Agent and to all such holders at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the Transfer Agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be deemed
49
<PAGE>
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.
Section 26. Notice of Certain Events. In case the Company at any
time on or after the Distribution Date shall propose (a) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company) or
(b) to offer to the holders of Preferred Stock rights or warrants to subscribe
for or to purchase any additional shares of Preferred Stock or shares of stock
of any class or any other securities, rights or options, or (c) to effect any
reclassification of its Preferred Stock (other than a reclassification involving
only the subdivision of outstanding shares of Preferred Stock), or (d) to effect
any consolidation or merger into or with, or to effect any sale or other
transfer (or to permit one or more of its subsidiaries to effect any sale or
other transfer), in one or more transactions, of more than 50% of the assets or
earning power of the Company and its subsidiaries (taken as a whole) to, any
other Person, or (e) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to each holder of a
Rights Certificate, in accordance with Section 26 hereof, a notice of such
proposed action, which shall specify the record date for the purposes of such
stock dividend, distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered by
clause (a) or (b) above at least 20 days prior to the record date for
determining holders of the shares of Preferred Stock for purposes of such
action, and in the case of any such other action, at least 20 days prior to the
50
<PAGE>
date of the taking of such proposed action or the date of participation therein
by the holders of the shares of Preferred Stock whichever shall be the earlier.
In case any of the events set forth in Section 11(a)(ii) of this
Agreement shall occur, then, in any such case, the Company shall as soon as
practicable thereafter give to each holder of a Rights Certificate, in
accordance with Section 26 hereof, a notice of the occurrence of such event,
which shall specify the event and the consequences of the event to holders of
Rights under Section 11(a)(ii) hereof.
Section 27. Notices. Notices or demands authorized by this Agreement
to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
GPU, Inc.
310 Madison Avenue
Morristown, NJ 07962-1957
Subject to the provisions of Section 22, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
450 West 43rd Street, 10th Floor
New York, New York 10001
Attention: Vice President - Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall
51
<PAGE>
be sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 28. Supplements and Amendments. Prior to the Distribution
Date, the Company may from time to time supplement or amend any provision of
this Agreement in any respect without the approval of any holders of
certificates representing Common Stock and the Rights. From and after the
Distribution Date, the Company may from time to time supplement or amend this
Agreement without the approval of any holders of Right Certificates in order (i)
to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder or (iv) to change or
supplement the provisions hereunder in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Rights Certificates (other than an Acquiring Person or an Affiliate
or Associate of an Acquiring Person); provided, however, that this Agreement may
not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable, or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment, provided that
such supplement or amendment does not adversely affect the rights or obligations
of the Rights Agent under Section 19 or Section 21 of this Agreement and such
amendment or supplement shall be effective regardless of whether or when
52
<PAGE>
executed by the Rights Agent. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of shares of Common Stock.
Section 29. Determination and Actions by the Board of Directors,
etc.. The Board of Directors of the Company shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board, or the Company, or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including, without limitation, a
determination to redeem or not redeem the Rights or to amend the Agreement and
whether any proposed amendment adversely affects the interests of the holders of
Right Certificates). For all purposes of this Agreement, any calculation of the
number of shares of Common Stock or other securities outstanding at any
particular time, including for purposes of determining the particular percentage
of such outstanding shares of Common Stock or any other securities of which any
Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Exchange Act as in effect on the date of this Agreement. All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Right Certificates and all
other parties, and (y) not subject the Board to any liability to the holders of
the Right Certificates or holders of shares of Common Stock.
Section 30. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
53
<PAGE>
Section 31. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, the Common Stock) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Stock).
Section 32. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 33. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Pennsylvania and for all purposes shall be governed by
and construed in accordance with the laws of such State applicable to contracts
to be made and to be performed entirely within such State; provided, however,
that all provisions regarding the rights, duties and obligations of the Rights
Agent shall be governed by and construed in accordance with the laws of the
State of New York applicable to contracts made and to be performed entirely
within such State.
Section 34. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 35. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: GPU, INC.
--------------------------- ---------------------------
By
Name: Name:
Title: Title:
Attest: CHASEMELLON SHAREHOLDER
SERVICES L.L.C.
By
--------------------------- ---------------------------
Name: Name:
Title: Title:
55
<PAGE>
Exhibit A
[Form of Rights Certificate]
Certificate No. R- __________ Rights
NOT EXERCISABLE AFTER August ___, 2008 OR EARLIER IF NOTICE
OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.001 PER RIGHT
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. [THE RIGHTS
REPRESENTED BY THIS CERTIFICATE WERE ISSUED TO A PERSON WHO
WAS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE AMENDED
AND RESTATED RIGHTS AGREEMENT). THIS RIGHT CERTIFICATE AND
THE RIGHTS REPRESENTED HEREBY ARE NULL AND VOID.]*
Rights Certificate
GPU, Inc.
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof subject to the terms, provisions and conditions of the Rights
Agreement dated as of August __, 1998 (the "Rights Agreement") between GPU,
Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder
Services, L.L.C. (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M. (New Jersey time) on August __, 2008 at the principal
office of the Rights Agent, or its successors as Rights Agent, one tenth of a
fully paid, nonassessable share of Common Stock of the Company, at a purchase
price of $120 per one share of Common Stock (the "Purchase Price"), being $12
_________
* The portion of the legend in brackets shall be inserted only if applicable.
<PAGE>
per one tenth of a share, upon presentation and surrender of this Rights
Certificate with the appropriate Form of Election to Purchase duly executed. The
number of Rights evidenced by this Rights Certificate (and the number of shares
which may be purchased upon exercise thereof) set forth above, and the Purchase
Price set forth above, are the number and Purchase Price as of August __, 1998,
based on the Common Stock as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the
number of shares of Common Stock or other securities which may be purchased upon
the exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal office of the Company and are
also available upon written request to the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office of the Rights Agent, may be exercised for
another Rights Certificate or Rights Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Rights evidenced by the Rights Certificate or
Rights Certificates surrendered shall have entitled such holder to purchase. If
this Rights Certificate shall be exercised (other than pursuant to Section
11(a)(ii) of the Rights Agreement) in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised. If this Rights Certificate shall
be exercised in whole or in part in pursuant to Section 11(a)(ii) of the Rights
57
<PAGE>
Agreement, the holder shall be entitled to receive this Rights Certificate duly
marked to indicate that such exercise has occurred as set forth in the Rights
Agreement.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $.001 per Right.
No fractional shares of Common Stock will be issued upon the
exercise of any Right or Rights evidenced hereby, which may, at the election of
the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Common
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
58
<PAGE>
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of , 19 .
Attest: GPU, INC.
By
--------------------- ---------------------
Name: Name:
Title: Title:
Countersigned:
[ ]
----------------------
Authorized Signature
59
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED hereby
----------------------------------------
sells, assigns and transfers unto
------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
-----------------------
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: , 19
----------------- --
----------------------------------------
Signature
Signature Guaranteed:
60
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is or was an Acquiring Person or an Affiliate or Associate
of an Acquiring Person.
Dated: , 19 ------------------------------
------------------ --- Signature
NOTICE
The signature to the foregoing Assignment must correspond to the
name as written upon the face of this Rights Certificate in every particular,
without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the Beneficial Owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement) and such Assignment or Election to Purchase will not be honored.
61
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the
Rights Certificate other than pursuant to Section 11(a)(ii)
of the Rights Agreement.)
To GPU, INC.:
The undersigned hereby irrevocably elects to exercise Rights
represented by this Rights Certificate to purchase the shares of Common Stock
(or such other securities of the Company or any other Person) issuable upon the
exercise of the Rights and requests that certificates for such shares be issued
in the name of:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
The Rights Certificate indicating the balances, if any, of such
Rights which may still be exercised pursuant to each of Section 11(a)(ii) and
Section 13 of the Rights Agreement shall be returned to the undersigned unless
such person requests that the Rights Certificate be registered in the name of
and delivered to:
Please insert social security or other identifying number (complete
only if Rights Certificate is to be registered in a name other than the
undersigned)
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated: , 19
-------------------- --
-------------------------------------------
Signature
Signature Guaranteed:
62
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is or was an Acquiring Person or an Affiliate or Associate
of an Acquiring Person.
Dated: , 19
-------------------- ---
------------------------------------------------
Signature
NOTICE
The signature to the foregoing Election to Purchase must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the Beneficial Owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement) and such Assignment or Election to Purchase will not be honored.
63
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights Certificate
pursuant to Section 11(a)(ii) of the Rights Agreement.)
To GPU, INC.:
The undersigned hereby irrevocably elects to exercise Rights
represented by this Rights Certificate to purchase the shares of Common Stock
(or such other securities of the Company) issuable upon the exercise of the
Rights and requests that certificates for such shares be issued in the name of:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
The Rights Certificate indicating the balances, if any, of such
Rights which may still be exercised pursuant to each of Section 11(a)(ii) and
Section 13 of the Rights Agreement shall be returned to the undersigned unless
such person requests that the Rights Certificate be registered in the name of
and delivered to:
Please insert social security or other identifying number (complete
only if Rights Certificate is to be registered in a name other than the
undersigned)
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: , 19
-------------------- ----
------------------------------------
Signature
Signature Guaranteed:
64
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned,
it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is or was an Acquiring Person or an Affiliate or Associate
of an Acquiring Person.
Dated: , 19
--------------------- -----
-------------------------------------
Signature
NOTICE
The signature to the foregoing Election to Purchase must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the Beneficial Owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement) and such Assignment or Election to Purchase will not be honored.
65
<PAGE>
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE
COMMON STOCK
On August 6, 1998, the Board of Directors of GPU, Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of common stock, par value $2.50 per share (the "Common Stock"), of the
Company to stockholders of record as of the close of business on the tenth
business day following the first public announcement by the Company of receipt
of approval of the dividend by the Securities and Exchange Commission pursuant
to the Public Utility Holding Company Act of 1935 (the "Record Date"). Except as
set forth below, each Right, when exercisable, entitles the registered holder to
purchase from the Company one tenth of a share of Common Stock, at a price of
$120 per one share of Common Stock (the "Purchase Price), being $12 per one
tenth of a share of Common Stock, subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.
Until the earlier to occur of (i) a public announcement that,
without the prior consent of the Board of Directors of the Company, a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 10% or more of the
outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) ten
business days (or such later date as the Board may determine) following the
commencement of (or a public announcement of an intention to make) a tender
offer or exchange offer which would result in any person or group and related
persons having beneficial ownership of 10% or more of the outstanding shares of
Common Stock without the prior consent of the Board of Directors of the Company,
or (the earliest of such dates being called the "Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Stock certificates
outstanding as of the Record Date, by such Common Stock certificate and no
separate Rights Certificates will be distributed. The Rights Agreement provides
that, until the Distribution Date, the Rights will be transferred with and only
with Common Stock certificates. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Stock certificates issued
after the Record Date (or as soon thereafter as practicable) upon transfer or
new issuance of the Common Stock will contain a notation incorporating the
Rights Agreement by reference. Until the Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for transfer of any
certificates for Common Stock outstanding as of the Record Date, will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate, even without such notation. As soon as
practicable following the Distribution Date, separate certificates evidencing
66
<PAGE>
the Rights ("Rights Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date, and the
separate Rights Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on August 6, 2008, unless earlier redeemed by the Company as
described below.
In the event that any person becomes an Acquiring Person, each
holder of a Right generally will thereafter have the right for a 60 day period
after the later of the date of such event or the effectiveness of an appropriate
registration statement (or such other longer period set by the Board of
Directors) to receive upon exercise of the Right that number of shares of Common
Stock (or, under certain circumstances, other securities) having an average
market value during a specified time period (immediately prior to the occurrence
of a Person becoming an Acquiring Person) of two times the then current Purchase
Price (such right being called the "Subscription Right"). Notwithstanding the
foregoing, following the occurrence of a Person becoming an Acquiring Person,
all Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by the Acquiring Person or any affiliate or
associate thereof will be null and void. In addition, the Board of Directors of
the Company may, at its option, at any time following the Stock Acquisition Date
and prior to the time an Acquiring Person becomes the beneficial owner of more
than 50% of the outstanding shares of Common Stock, exchange all or part of the
then outstanding Rights (other than Rights beneficially owned by an Acquiring
Person or its affiliates or associates, which Rights have become void) for
shares of Common Stock at an exchange ratio equal to the lesser of (i) three
shares of Common Stock per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar occurrence, and (ii) a pro rata portion of the
total number of shares of Common Stock then available for issuance (such
exchange ratio, the "Exchange Ratio"). Immediately upon such action by the Board
of Directors, the right to exercise the exchanged Rights with respect to the
Subscription Right will terminate and each such Right with respect to the
Subscription Right will thereafter represent the right to receive a number of
shares of Common Stock equal to the Exchange Ratio.
In the event that, at any time following the Stock Acquisition Date,
the Company is acquired in a merger or other business combination transaction or
50% or more of the Company's assets or earning power are sold (in one
transaction or a series of transactions), proper provision shall be made so that
each holder of a Right (except a Right voided as set forth above) shall
thereafter have the right to receive, upon the exercise thereof at the then
current exercise price of the Right, that number of shares of common stock of
the acquiring company (or, in the event there is more than one acquiring
company, the acquiring company receiving the greatest portion of the assets or
earning power transferred) which at the time of such transaction would have a
market value of two times the exercise price of the Right (such right being
called the "Merger Right"). The holder of a Right will continue to have the
67
<PAGE>
Merger Right whether or not such holder exercises the Subscription Right or the
Right is exchanged in lieu of the Subscription Right.
The Purchase Price payable, the number of Rights and the number of
shares of the Common Stock or other securities or property issuable upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision, combination
or reclassification of the Common Stock, (ii) upon the grant to holders of the
Common Stock of certain rights or warrants to subscribe for Common Stock or
certain convertible securities at less than the current market price of the
Common Stock or (iii) upon the distribution to holders of the Common Stock of
evidences of indebtedness or assets (excluding regular quarterly cash dividends
out of earnings or retained earnings and dividends payable in Common Stock) or
of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustments in the Purchase Price will
be required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractions of shares will be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Common Stock
on the last trading date prior to the date of exercise.
At any time prior to the earlier to occur of (i) the close of
business on the Stock Acquisition Date or (ii) the expiration of the Rights, the
Company may redeem the Rights in whole, but not in part, at a price of $.001 per
Right (the "Redemption Price"), which redemption shall be effective upon the
action of the Board of Directors. Additionally, following the Stock Acquisition
Date and the expiration of the period during which the Subscription Right is
exercisable, the Board of Directors may redeem the then outstanding Rights in
whole, but not in part, at the Redemption Price provided that such redemption is
in connection with a merger or other business combination transaction or series
of transactions involving the Company in which all holders of Common Stock are
treated alike but not involving an Acquiring Person (or any person who was an
Acquiring Person) or it affiliates or associates. Upon the effective date of the
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised or exchanged, the holder thereof, as
such, will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
Except as set forth above, the terms of the Rights may be amended by
the Board of Directors of the Company (i) prior to the Distribution Date in any
manner, and (ii) on or after the Distribution Date to cure any ambiguity, to
correct or supplement any provision of the Rights Agreement which may be
68
<PAGE>
defective or inconsistent with any other provisions, or in any manner not
adversely affecting the interests of the holders of the Rights.
A copy of the Rights Agreement has been filed with the Securities
and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
69
Exhibit 10-A
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), Jersey Central Power & Light Company (the
"Company") and Dennis P. Baldassari (the "Executive") amends and restates the
former Severance Protection Agreement dated February 7, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
<PAGE>
(a) If the Executive's employment with the Company and with all other
Affiliates of the Corporation shall be terminated (1) by the Company for Cause
or Disability, (2) by reason of the Executive's death, or (3) by the Executive
other than for Good Reason, the Company shall pay to the Executive his Accrued
Compensation. In addition to the foregoing, if the Executive's employment is
terminated by the Company for Disability or by reason of the Executive's death,
the Company shall pay to the Executive or his beneficiaries a Pro Rata Bonus.
The Executive's entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefits plans and other
applicable programs and practices then in effect.
(b) If the Executive's employment with the Company and with all other
Affiliates of the Corporation shall be terminated for any reason other than as
specified in Section 2(a), the Executive shall be entitled to the following:
(1) the Company shall pay the Executive all Accrued Compensation
and a Pro Rata Bonus;
(2) the Company shall pay the Executive as severance pay and in
lieu of any further compensation for periods subsequent to the Termination Date,
an amount determined by multiplying (A) two times the sum of (i) the Executive's
Base Amount and (ii) the Executive's Bonus Amount, by (B) a fraction, the
numerator of which is the number of months, not to exceed twenty-four (24), in
the period beginning on the Termination Date and ending on the Executive's
Normal Retirement Date (as defined in the Company's Employee Pension Plan), and
the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four (24), or if
earlier, until the Executive's Normal Retirement Date (as defined in the
Company's Employee Pension Plan) (the "Continuation Period"), the Company shall
at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder with respect to the foregoing
coverages and benefits shall be reduced to the extent that the Executive obtains
any such coverages and benefits pursuant to a subsequent
2
<PAGE>
employer's benefit plans, in which case the Company may reduce any of the
coverages or benefits it is required to provide the Executive hereunder so long
as the aggregate coverages and benefits of the combined benefit plans is no less
favorable to the Executive than the coverages and benefits required to be
provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit
any benefits to which the Executive, his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following the Executive's termination of employment, including without
limitation, retiree medical and life insurance benefits;
(4) the Company shall pay or reimburse the Executive for the
costs, fees and expenses of outplacement assistance services (not to exceed
twenty percent (20%) of the sum of (A) the Executive's Base Amount and (B) the
Executive's Bonus Amount) provided by any outplacement agency selected by the
Executive; and
(5) the Company shall provide to the Executive the use of a
Company-leased vehicle, at no cost to the Executive, until the earlier of (A)
the date occurring six (6) months after the Termination Date or (B) the
Executive's sixty-fifth (65th) birthday, after which date the Executive shall
have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the Company without
Cause (1) within twelve (12) months prior to a Change in Control or (2) prior to
the date of a Change in Control but the Executive reasonably demonstrates that
such termination (A) was at the request of a third party who has indicated an
intention or taken steps reasonably calculated to effect a Change in Control (a
"Third Party") and who effectuates a Change in Control or (B) otherwise arose in
connection with, or in anticipation of, a Change in Control which has been
threatened or proposed and which actually occurs, such termination shall be
deemed to have occurred after a Change in Control, provided a Change in Control
shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
----------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), and the regulations thereunder) or any affiliate of
such Person, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the "Total Payments"), is
3
<PAGE>
or will be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, are collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Total Payments.
(2) Determination By Accountant. All mathematical
---------------------------
determinations, and all determinations as to whether any of the Total Payments
are "parachute payments" (within the meaning of Section 280G of the Code), that
are required to be made under this Section 2(d), including determinations as to
whether a Gross-Up Payment is required, the amount of such Gross-Up Payment and
amounts relevant to the last sentence of this Section 2(d)(2), shall be made by
an independent accounting firm selected by the Executive from among the six (6)
largest accounting firms in the United States (the "Accounting Firm"), which
shall provide its determination (the "Determination"), together with detailed
supporting calculations regarding the amount of any Gross-Up Payment and any
other relevant matter, both to the Company and the Executive by no later than
ten (10) days following the Termination Date, if applicable, or such earlier
time as is requested by the Company or the Executive (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive and the Company with a written
statement that such Accounting Firm has concluded that no Excise Tax is payable
(including the reasons therefor) and that the Executive has substantial
authority not to report any Excise Tax on his federal income tax return. If a
Gross-Up Payment is determined to be payable, it shall be paid to the Executive
within twenty (20) days after the Determination (and all accompanying
calculations and other material supporting the Determination) is delivered to
the Company by the Accounting Firm. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive, absent manifest error. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments not made by the Company should have been made
("Underpayment"), or that Gross-Up Payments will have been made by the Company
which should not have been made ("Overpayments"). In either such event, the
Accounting Firm shall determine the amount of the Underpayment or
4
<PAGE>
Overpayment that has occurred. In the case of an Underpayment, the amount of
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive. In the case of an Overpayment, the Executive shall, at the
direction and expense of the Company, take such steps as are reasonably
necessary (including the filing of returns and claims for refund), follow
reasonable instructions from, and procedures established by, the Company, and
otherwise reasonably cooperate with the Company to correct such Overpayment,
provided, however, that (i) the Executive shall not in any event be obligated to
return to the Company an amount greater than the net after-tax portion of the
Overpayment that he has retained or has recovered as a refund from the
applicable taxing authorities and (ii) this provision shall be interpreted in a
manner consistent with the intent of Section 2(d)(1), which is to make the
Executive whole, on an after-tax basis, from the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the
Executive repaying to the Company an amount which is less than the Overpayment.
(e) The amounts provided for in Sections 2(a) and 2(b)(1), (2) and (4)
shall be paid in a single lump sum cash payment within thirty (30) days after
the Executive's Termination Date (or earlier, if required by applicable law).
(f) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in this Section 2 shall
be in lieu of any other severance pay to which the Executive may be entitled
under the GPU System Severance Procedure or any other plan, agreement or
arrangement of the Company or any other Affiliate of the Corporation.
3. Notice of Termination. Following a Change in Control, any intended
---------------------
termination of the Executive's employment by the Company shall be communicated
by a Notice of Termination from the Company to the Executive, and any intended
termination of the Executive's employment by the Executive for Good Reason shall
be communicated by a Notice of Termination from the Executive to the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
6
<PAGE>
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses last given by each party to the other, provided that all
notices to the Company shall be directed to the attention of the Board with a
copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a
7
<PAGE>
waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
any party which are not expressly set forth in this Agreement.
11. Successors; Binding Agreement.
------------------------------
(a) This Agreement shall be binding upon and shall inure to the benefit
of the Company, the Corporation and their respective Successors and Assigns. The
Company and the Corporation shall require their respective Successors and
Assigns to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company and/or the Corporation would be
required to perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the
-----------------
entire agreement between the parties hereto, and supersedes all prior
agreements, if any, understandings and arrangements, oral or written, between
the parties hereto, with respect to the subject matter hereof.
15. Definitions.
-----------
15.1. Accrued Compensation. For purposes of this Agreement,
--------------------
"Accrued Compensation" shall mean all amounts of compensation for services
rendered to the Company or any other Affiliate that have been earned or accrued
through the Termination Date but that have not been paid as of the Termination
Date including (a) base salary, (b) reimbursement for
8
<PAGE>
reasonable and necessary business expenses incurred by the Executive on behalf
of the Company during the period ending on the Termination Date, (c) vacation
pay and (d) bonuses and incentive compensation; provided, however, that Accrued
Compensation shall not include any amounts described in clause (a) or clause (d)
that have been deferred pursuant to any salary reduction or deferred
compensation elections made by the Executive.
15.2. Affiliate. For purposes of this Agreement, "Affiliate"
---------
means any entity, directly or indirectly, controlled by, controlling or under
common control with the Corporation or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement, "Base
-----------
Amount" shall mean the Executive's annual base salary at the rate in effect as
of the date of a Change in Control or, if greater, at any time thereafter,
determined without regard to any salary reduction or deferred compensation
elections made by the Executive.
15.4. Bonus Amount. For purposes of this Agreement, "Bonus
------------
Amount" shall mean the greater of (a) the target annual bonus payable to the
Executive under the Incentive Plan in respect of the fiscal year during which
the Termination Date occurs or (b) the highest annual bonus paid or payable
under the Incentive Plan in respect of any of the three full fiscal years ended
prior to the Termination Date or, if greater, the three (3) full fiscal years
ended prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a termination of
-----
employment is for "Cause" if the Executive has been convicted of a felony or the
termination is evidenced by a resolution adopted in good faith by two-thirds of
the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed substantially
to perform his reasonably assigned duties with the Company (other than a failure
resulting from the Executive's incapacity due to physical or mental illness or
from the assignment to the Executive of duties that would constitute Good
Reason) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance, signed by a duly
authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
9
<PAGE>
(b) intentionally engaged in conduct which is
demonstrably and materially injurious to the Corporation or the Company;
provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in this Section 15.5(b) until (1) there shall have been
delivered to the Executive a copy of a written notice, signed by a duly
authorized officer of the Company, setting forth that the Executive was guilty
of the conduct set forth in this Section 15.5(b) and specifying the particulars
thereof in detail, and (2) the Executive shall have been provided an opportunity
to be heard in person by the Board of Directors of the Corporation (with the
assistance of the Executive's counsel if the Executive so desires). No act, nor
failure to act, on the Executive's part, shall be considered "intentional"
unless the Executive has acted, or failed to act, with a lack of good faith and
with a lack of reasonable belief that the Executive's action or failure to act
was in the best interest of the Corporation and the Company. Notwithstanding
anything contained in this Agreement to the contrary, no failure to perform by
the Executive after a Notice of Termination is given to the Company by the
Executive shall constitute Cause for purposes of this Agreement.
15.6. Change in Control. A "Change in Control" shall mean the
-----------------
occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from the
Corporation) of any common stock of the Corporation ("Common Stock") or other
voting securities of the Corporation entitled to vote generally for the election
of directors (the "Voting Securities") by any "Person" (as the term person is
used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty percent (20%) or more of the then outstanding shares of
Common Stock or the combined voting power of the Corporation's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a Non-Control Acquisition
(as hereinafter defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i)
an employee benefit plan (or a trust forming a part thereof) maintained by (A)
the Corporation or (B) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Corporation (a "Subsidiary") (ii) the Corporation
or its Subsidiaries, or (iii) any Person in connection with a Non-Control
Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of August 1, 1996, are
members of the Board of Directors of the Corporation (the "Incumbent Board"),
cease for any reason to constitute at least seventy percent (70%) of the members
of the Board of Directors of the Corporation; provided, however, that if the
election, or nomination for election by the Corporation's shareholders, of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement, be considered as
a member of the Incumbent Board; provided further, however, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board of Directors of the Corporation (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or reorganization with
or into the Corporation or in which securities of the
Corporation are issued, unless such merger,
consolidation or reorganization is a "Non-Control
Transaction." A "Non-Control Transaction" shall mean a
merger, consolidation or reorganization with or into
the Corporation or in which securities of the
Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of all or
substantially all of the assets of the Corporation to
any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the acquisition of
Common Stock or Voting Securities by the Corporation which, by reducing the
number of shares of Common Stock or Voting Securities then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject
Person, provided that if a Change in Control would occur (but for the operation
of this sentence) as a result of the
12
<PAGE>
acquisition of shares of Common Stock or Voting Securities by the Corporation,
and after such share acquisition by the Corporation, the Subject Person becomes
the Beneficial Owner of any additional shares of Common Stock or Voting
Securities which increases the percentage of the then outstanding shares of
Common Stock or Voting Securities Beneficially Owned by the Subject Person, then
a Change in Control shall occur.
15.7. Company and Corporation. For purposes of this Agreement,
-----------------------
all references to the Company and the Corporation shall include their respective
Successors and Assigns.
15.8. Disability. For purposes of this Agreement, "Disability"
----------
shall mean a physical or mental infirmity which impairs the Executive's ability
to substantially perform his duties with the Company for six (6) consecutive
months, and within the time period set forth in a Notice of Termination given to
the Executive (which time period shall not be less than thirty (30) days), the
Executive shall not have returned to full-time performance of his duties;
provided, however, that if the Company's Voluntary Employees Beneficiary
Association Long Term Disability Income Plan, or any successor plan (the
"Disability Plan"), is then in effect, the Executive shall not be deemed
disabled for purposes of this Agreement unless the Executive is also eligible
for "Total Disability" (as defined in the Disability Plan) benefits (or similar
benefits in the event of a successor plan) under the Disability Plan.
15.9. Good Reason. (a) For purposes of this Agreement, "Good
-----------
Reason" shall mean the occurrence after a Change in Control of any of the
following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the Executive's annual
base salary;
13
<PAGE>
(3) the relocation of the offices of the Company at
which the Executive is principally employed to a location more than twenty-five
(25) miles from the location of such offices immediately prior to such
relocation, or the Company's requiring the Executive to be based anywhere other
than at such offices, except to the extent the Executive was not previously
assigned to a principal place of duty and except for required travel on the
Company's business to an extent substantially consistent with the Executive's
previous business travel obligations;
(4) the failure by the Company to pay to the Executive
any portion of the Executive's current compensation or to pay to the Executive
any portion of an installment of deferred compensation under any deferred
compensation program of the Company in which the Executive participated, within
seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to continue in
effect (without reduction in benefit level, and/or reward opportunities) any
material compensation or employee benefit plan in which the Executive was
participating immediately prior to such failure by the Company, including, but
not limited to, any of the plans listed in Appendix A hereto, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) to continue to
provide the Executive with compensation and benefits, in the aggregate, at least
equal (in terms of benefit levels and/or reward opportunities) to those provided
for under each other compensation or employee benefit plan, program and practice
in which the Executive was participating immediately prior to such failure by
the Company;
(6) the failure of the Company to obtain from its
Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the Executive's
employment by the Company which is not effected pursuant to a Notice of
Termination satisfying the terms set forth in the definition of Notice of
Termination (and, if applicable, the terms set forth in the definition of
Cause).
(b) Any event or condition described in Section
15.9(a)(1) through (7) which occurs (1) within twelve (12) months prior to a
Change in Control or (2) prior to a Change in Control but which the Executive
reasonably demonstrates (A) was at the request of a Third Party who effectuates
a Change in Control or (B) otherwise arose in connection with, or in
14
<PAGE>
anticipation of a Change in Control which has been threatened or proposed and
which actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
15.10. Incentive Plan. For purposes of this Agreement,
--------------
"Incentive Plan" shall mean the Incentive Compensation Plan for Elected
Officers, or any successor annual incentive plan, maintained by the Company or
any other Affiliate.
15.11. Notice of Termination. For purposes of this Agreement,
---------------------
following a Change in Control, "Notice of Termination" shall mean a written
notice of termination of the Executive's employment, signed by the Executive if
to the Company or by a duly authorized officer of the Company if to the
Executive, which indicates the specific termination provision in this Agreement,
if any, relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this Agreement, "Pro Rata
--------------
Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction
the numerator of which is the number of days in such fiscal year through the
Termination Date and the denominator of which is 365; provided, however, that
the Pro Rata Bonus shall be reduced, but not below zero, to the extent of any
bonus the Executive is entitled to receive pursuant to the Incentive Plan in
respect of the fiscal year (denoted a "Performance Period" under the Incentive
Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this Agreement,
----------------------
"Successors and Assigns" shall mean, with respect to the Company or the
Corporation, a corporation or other entity acquiring all or substantially all
the assets and business of the Company or the Corporation, as the case may be
(including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean (a) in the case of the Executive's death, his date
of death, (b) if the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time basis
during such thirty (30) day period) and (c) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of Termination
(which, in the case of a termination for Cause shall not be less than thirty
(30) days, and in the case of a termination for Good Reason shall not
15
<PAGE>
be more than sixty (60) days, from the date such Notice of Termination is
given); provided, however, that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination in good
faith notifies the other party that a dispute exists concerning the basis for
the termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been taken).
Notwithstanding the pendency of any such dispute, the Company shall continue to
pay the Executive his Base Amount and continue the Executive as a participant in
all compensation, incentive, bonus, pension, profit sharing, medical,
hospitalization, dental, life insurance and disability benefit plans in which he
was participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in accordance with this Section whether or not
the dispute is resolved in favor of the Company, and the Executive shall not be
obligated to repay to the Company any amounts paid or benefits provided pursuant
to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By: /s/ Fred D. Hafer
------------------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
Jersey Central Power & Light Company
By: /s/ Fred D. Hafer
-------------------------------
ATTEST: Fred D. Hafer
Chief Executive Officer
Secretary
By: /s/ Dennis P. Baldassari
-------------------------------
Dennis P. Baldassari
16
Exhibit 10-B
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU Nuclear, Inc. (the "Company") and
Thomas G. Broughton (the "Executive") amends and restates the former
Severance Protection Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-
<PAGE>
four (24) months following a Change in Control, the Executive shall be entitled
to the following compensation and benefits:
(a) If the Executive's employment with the Company and with all other
Affiliates of the Corporation shall be terminated (1) by the Company for Cause
or Disability, (2) by reason of the Executive's death, or (3) by the Executive
other than for Good Reason, the Company shall pay to the Executive his Accrued
Compensation. In addition to the foregoing, if the Executive's employment is
terminated by the Company for Disability or by reason of the Executive's death,
the Company shall pay to the Executive or his beneficiaries a Pro Rata Bonus.
The Executive's entitlement to any other compensation or benefits shall be
determined in accordance with the Company's employee benefits plans and other
applicable programs and practices then in effect.
(b) If the Executive's employment with the Company and with all other
Affiliates of the Corporation shall be terminated for any reason other than as
specified in Section 2(a), the Executive shall be entitled to the following:
(1) the Company shall pay the Executive all Accrued Compensation
and a Pro Rata Bonus;
(2) the Company shall pay the Executive as severance pay and in
lieu of any further compensation for periods subsequent to the Termination Date,
an amount determined by multiplying (A) two times the sum of (i) the Executive's
Base Amount and (ii) the Executive's Bonus Amount, by (B) a fraction, the
numerator of which is the number of months, not to exceed twenty-four (24), in
the period beginning on the Termination Date and ending on the Executive's
Normal Retirement Date (as defined in the Company's Employee Pension Plan), and
the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four (24), or if
earlier, until the Executive's Normal Retirement Date (as defined in the
Company's Employee Pension Plan) (the "Continuation Period"), the Company shall
at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder
2
<PAGE>
with respect to the foregoing coverages and benefits shall be reduced to the
extent that the Executive obtains any such coverages and benefits pursuant to a
subsequent employer's benefit plans, in which case the Company may reduce any of
the coverages or benefits it is required to provide the Executive hereunder so
long as the aggregate coverages and benefits of the combined benefit plans is no
less favorable to the Executive than the coverages and benefits required to be
provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit
any benefits to which the Executive, his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following the Executive's termination of employment, including without
limitation, retiree medical and life insurance benefits;
(4) the Company shall pay or reimburse the Executive for the
costs, fees and expenses of outplacement assistance services (not to exceed
twenty percent (20%) of the sum of (A) the Executive's Base Amount and (B) the
Executive's Bonus Amount) provided by any outplacement agency selected by the
Executive; and
(5) the Company shall provide to the Executive the use of a
Company-leased vehicle, at no cost to the Executive, until the earlier of (A)
the date occurring six (6) months after the Termination Date or (B) the
Executive's sixty-fifth (65th) birthday, after which date the Executive shall
have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the Company
without Cause (1) within twelve (12) months prior to a Change in Control or (2)
prior to the date of a Change in Control but the Executive reasonably
demonstrates that such termination (A) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control (a "Third Party") and who effectuates a Change in Control or
(B) otherwise arose in connection with, or in anticipation of, a Change in
Control which has been threatened or proposed and which actually occurs, such
termination shall be deemed to have occurred after a Change in Control, provided
a Change in Control shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
-----------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the
3
<PAGE>
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder) or any affiliate of such Person, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (the "Total Payments"), is or will be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax, imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Total Payments.
(2) Determination By Accountant. All mathematical determinations,
---------------------------
and all determinations as to whether any of the Total Payments are "parachute
payments" (within the meaning of Section 280G of the Code), that are required to
be made under this Section 2(d), including determinations as to whether a
Gross-Up Payment is required, the amount of such Gross-Up Payment and amounts
relevant to the last sentence of this Section 2(d)(2), shall be made by an
independent accounting firm selected by the Executive from among the six (6)
largest accounting firms in the United States (the "Accounting Firm"), which
shall provide its determination (the "Determination"), together with detailed
supporting calculations regarding the amount of any Gross-Up Payment and any
other relevant matter, both to the Company and the Executive by no later than
ten (10) days following the Termination Date, if applicable, or such earlier
time as is requested by the Company or the Executive (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive and the Company with a written
statement that such Accounting Firm has concluded that no Excise Tax is payable
(including the reasons therefor) and that the Executive has substantial
authority not to report any Excise Tax on his federal income tax return. If a
Gross-Up Payment is determined to be payable, it shall be paid to the Executive
within twenty (20) days after the Determination (and all accompanying
calculations and other material supporting the Determination) is delivered to
the Company by the Accounting Firm. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive, absent manifest error. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments not made by
4
<PAGE>
the Company should have been made ("Underpayment"), or that Gross-Up Payments
will have been made by the Company which should not have been made
("Overpayments"). In either such event, the Accounting Firm shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the amount of such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. In the case of an Overpayment,
the Executive shall, at the direction and expense of the Company, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established by,
the Company, and otherwise reasonably cooperate with the Company to correct such
Overpayment, provided, however, that (i) the Executive shall not in any event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that he has retained or has recovered as a refund
from the applicable taxing authorities and (ii) this provision shall be
interpreted in a manner consistent with the intent of Section 2(d)(1), which is
to make the Executive whole, on an after-tax basis, from the application of the
Excise Tax, it being understood that the correction of an Overpayment may result
in the Executive repaying to the Company an amount which is less than the
Overpayment.
(e) The amounts provided for in Sections 2(a) and 2(b)(1), (2)
and (4) shall be paid in a single lump sum cash payment within thirty (30) days
after the Executive's Termination Date (or earlier, if required by applicable
law).
(f) The Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment
except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in this Section
2 shall be in lieu of any other severance pay to which the Executive may be
entitled under the GPU System Severance Procedure or any other plan, agreement
or arrangement of the Company or any other Affiliate of the Corporation.
3. Notice of Termination. Following a Change in Control, any
----------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered
6
<PAGE>
or sent by certified mail, return receipt requested, postage prepaid, addressed
to the respective addresses last given by each party to the other, provided that
all notices to the Company shall be directed to the attention of the Board with
a copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or
7
<PAGE>
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by any party which are not expressly set
forth in this Agreement.
11. Successors; Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Company, the Corporation and their respective Successors and
Assigns. The Company and the Corporation shall require their respective
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto, and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto, with respect to the subject matter hereof.
15. Definitions.
-----------
15.1.Accrued Compensation. For purposes of this Agreement,
"Accrued Compensation" shall mean all amounts of compensation for services
rendered to the Company or any other Affiliate that have been earned or accrued
through the Termination Date but that have not been paid as of the Termination
Date including (a) base salary, (b) reimbursement for reasonable and necessary
business expenses incurred by the Executive on behalf of the Company during the
period ending on the Termination Date, (c) vacation pay and (d) bonuses and
8
<PAGE>
incentive compensation; provided, however, that Accrued Compensation shall not
include any amounts described in clause (a) or clause (d) that have been
deferred pursuant to any salary reduction or deferred compensation elections
made by the Executive.
15.2. Affiliate. For purposes of this Agreement, "Affiliate" means
---------
any entity, directly or indirectly, controlled by, controlling or under common
control with the Corporation or any corporation or other entity acquiring,
directly or indirectly, all or substantially all the assets and business of the
Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement, "Base Amount"
-----------
shall mean the Executive's annual base salary at the rate in effect as of the
date of a Change in Control or, if greater, at any time thereafter, determined
without regard to any salary reduction or deferred compensation elections made
by the Executive.
15.4. Bonus Amount. For purposes of this Agreement, "Bonus Amount"
------------
shall mean the greater of (a) the target annual bonus payable to the Executive
under the Incentive Plan in respect of the fiscal year during which the
Termination Date occurs or (b) the highest annual bonus paid or payable under
the Incentive Plan in respect of any of the three full fiscal years ended prior
to the Termination Date or, if greater, the three (3) full fiscal years ended
prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a termination of
-----
employment is for "Cause" if the Executive has been convicted of a felony or the
termination is evidenced by a resolution adopted in good faith by two-thirds of
the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed substantially to
perform his reasonably assigned duties with the Company (other than a failure
resulting from the Executive's incapacity due to physical or mental illness or
from the assignment to the Executive of duties that would constitute Good
Reason) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance, signed by a duly
authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
(b) intentionally engaged in conduct which is demonstrably
and materially injurious to the Corporation or the Company; provided, however,
that no termination of the
9
<PAGE>
Executive's employment shall be for Cause as set forth in this Section 15.5(b)
until (1) there shall have been delivered to the Executive a copy of a written
notice, signed by a duly authorized officer of the Company, setting forth that
the Executive was guilty of the conduct set forth in this Section 15.5(b) and
specifying the particulars thereof in detail, and (2) the Executive shall have
been provided an opportunity to be heard in person by the Board of Directors of
the Corporation (with the assistance of the Executive's counsel if the Executive
so desires).
No act, nor failure to act, on the Executive's part, shall be
considered "intentional" unless the Executive has acted, or failed to act, with
a lack of good faith and with a lack of reasonable belief that the Executive's
action or failure to act was in the best interest of the Corporation and the
Company. Notwithstanding anything contained in this Agreement to the contrary,
no failure to perform by the Executive after a Notice of Termination is given to
the Company by the Executive shall constitute Cause for purposes of this
Agreement.
15.6. Change in Control. A "Change in Control" shall mean the
------------------
occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from the Corporation)
of any common stock of the Corporation ("Common Stock") or other voting
securities of the Corporation entitled to vote generally for the election of
directors (the "Voting Securities") by any "Person" (as the term person is used
for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty percent (20%) or more of the then outstanding shares of
Common Stock or the combined voting power of the Corporation's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a Non-Control Acquisition
(as hereinafter defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i)
an employee benefit plan (or a trust forming a part thereof) maintained by (A)
the Corporation or (B) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Corporation (a "Subsidiary") (ii) the Corporation
or its Subsidiaries, or (iii) any Person in connection with a Non-Control
Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of August 1, 1996, are members of
the Board of Directors of the Corporation (the "Incumbent Board"), cease for any
reason to constitute at least seventy percent (70%) of the members of the Board
of Directors of the Corporation; provided, however, that if the election, or
nomination for election by the Corporation's shareholders, of any new director
was approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Agreement, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Corporation (a "Proxy Contest") including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or reorganization with or
into the Corporation or in which securities of the
Corporation are issued, unless such merger,
consolidation or reorganization is a "Non-Control
Transaction." A "Non-Control Transaction" shall mean a
merger, consolidation or reorganization with or into
the Corporation or in which securities of the
Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then outstanding
common stock or Voting Securities as a result of the acquisition of Common Stock
or Voting Securities by the Corporation which, by reducing the number of shares
of Common Stock or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of shares of Common
12
<PAGE>
Stock or Voting Securities by the Corporation, and after such share acquisition
by the Corporation, the Subject Person becomes the Beneficial Owner of any
additional shares of Common Stock or Voting Securities which increases the
percentage of the then outstanding shares of Common Stock or Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall occur.
15.7. Company and Corporation. For purposes of this
-----------------------
Agreement, all references to the Company and the Corporation shall include their
respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
----------
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9.Good Reason. (a) For purposes of this Agreement,
-----------
"Good Reason" shall mean the occurrence after a Change in Control of any of the
following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the Executive's
annual base salary;
13
<PAGE>
(3) the relocation of the offices of the Company at
which the Executive is principally employed to a location more than twenty-five
(25) miles from the location of such offices immediately prior to such
relocation, or the Company's requiring the Executive to be based anywhere other
than at such offices, except to the extent the Executive was not previously
assigned to a principal place of duty and except for required travel on the
Company's business to an extent substantially consistent with the Executive's
previous business travel obligations;
(4) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation or to pay to the
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company in which the Executive
participated, within seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to continue in
effect (without reduction in benefit level, and/or reward opportunities) any
material compensation or employee benefit plan in which the Executive was
participating immediately prior to such failure by the Company, including, but
not limited to, any of the plans listed in Appendix A hereto, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) to continue to
provide the Executive with compensation and benefits, in the aggregate, at least
equal (in terms of benefit levels and/or reward opportunities) to those provided
for under each other compensation or employee benefit plan, program and practice
in which the Executive was participating immediately prior to such failure by
the Company;
(6) the failure of the Company to obtain from its
Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the Executive's
employment by the Company which is not effected pursuant to a Notice of
Termination satisfying the terms set forth in the definition of Notice of
Termination (and, if applicable, the terms set forth in the definition of
Cause).
(b) Any event or condition described in Section
15.9(a)(1) through (7) which occurs (1) within twelve (12) months prior to a
Change in Control or (2) prior to a Change in Control but which the Executive
reasonably demonstrates (A) was at the request of a Third Party who effectuates
a Change in Control or (B) otherwise arose in connection with, or in
14
<PAGE>
anticipation of a Change in Control which has been threatened or proposed and
which actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
15.10. Incentive Plan. For purposes of this Agreement,
--------------
"Incentive Plan" shall mean the Incentive Compensation Plan for Elected
Officers, or any successor annual incentive plan, maintained by the Company or
any other Affiliate.
15.11. Notice of Termination. For purposes of this Agreement,
---------------------
following a Change in Control, "Notice of Termination" shall mean a written
notice of termination of the Executive's employment, signed by the Executive if
to the Company or by a duly authorized officer of the Company if to the
Executive, which indicates the specific termination provision in this Agreement,
if any, relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this Agreement,
--------------
"Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365; provided,
however, that the Pro Rata Bonus shall be reduced, but not below zero, to the
extent of any bonus the Executive is entitled to receive pursuant to the
Incentive Plan in respect of the fiscal year (denoted a "Performance Period"
under the Incentive Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this Agreement,
----------------------
"Successors and Assigns" shall mean, with respect to the Company or the
Corporation, a corporation or other entity acquiring all or substantially all
the assets and business of the Company or the Corporation, as the case may be
(including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean (a) in the case of the Executive's death, his date
of death, (b) if the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time basis
during such thirty (30) day period) and (c) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of Termination
(which, in the case of a termination for Cause shall not be less than thirty
(30) days, and in the case of a termination for Good Reason shall not
15
<PAGE>
be more than sixty (60) days, from the date such Notice of Termination is
given); provided, however, that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination in good
faith notifies the other party that a dispute exists concerning the basis for
the termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been taken).
Notwithstanding the pendency of any such dispute, the Company shall continue to
pay the Executive his Base Amount and continue the Executive as a participant in
all compensation, incentive, bonus, pension, profit sharing, medical,
hospitalization, dental, life insurance and disability benefit plans in which he
was participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in accordance with this Section whether or not
the dispute is resolved in favor of the Company, and the Executive shall not be
obligated to repay to the Company any amounts paid or benefits provided pursuant
to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By: /s/ Fred D. Hafer
---------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
GPU Nuclear, Inc.
By: /s/ Fred D. Hafer
-----------------------
ATTEST: Fred D. Hafer
Chairman
Secretary
By: /s/ Thomas G. Broughton
------------------------
Thomas G. Broughton
16
Exhibit 10-C
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU Service, Inc. (the "Company") and
John G. Graham (the "Executive") amends and restates the former Severance
Protection Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
<PAGE>
(a) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated (1) by the
Company for Cause or Disability, (2) by reason of the Executive's death, or (3)
by the Executive other than for Good Reason, the Company shall pay to the
Executive his Accrued Compensation. In addition to the foregoing, if the
Executive's employment is terminated by the Company for Disability or by reason
of the Executive's death, the Company shall pay to the Executive or his
beneficiaries a Pro Rata Bonus. The Executive's entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefits plans and other applicable programs and practices then in
effect.
(b) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated for any reason
other than as specified in Section 2(a), the Executive shall be entitled to the
following:
(1) the Company shall pay the Executive all
Accrued Compensation and a Pro Rata Bonus;
(2) the Company shall pay the Executive as
severance pay and in lieu of any further compensation for periods subsequent to
the Termination Date, an amount determined by multiplying (A) two times the sum
of (i) the Executive's Base Amount and (ii) the Executive's Bonus Amount, by (B)
a fraction, the numerator of which is the number of months, not to exceed
twenty-four (24), in the period beginning on the Termination Date and ending on
the Executive's Normal Retirement Date (as defined in the Company's Employee
Pension Plan), and the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four
(24), or if earlier, until the Executive's Normal Retirement Date (as defined in
the Company's Employee Pension Plan) (the "Continuation Period"), the Company
shall at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder with respect to the foregoing
coverages and benefits shall be reduced to the extent that the Executive obtains
any such coverages and benefits pursuant to a subsequent employer's benefit
plans, in which case the Company may reduce any of the coverages or benefits it
is required to provide
2
<PAGE>
the Executive hereunder so long as the aggregate coverages and benefits of the
combined benefit plans is no less favorable to the Executive than the coverages
and benefits required to be provided hereunder. This Section 2(b)(3) shall not
be interpreted so as to limit any benefits to which the Executive, his
dependents or beneficiaries may be entitled under any of the Company's employee
benefit plans, programs or practices following the Executive's termination of
employment, including without limitation, retiree medical and life insurance
benefits;
(4) the Company shall pay or reimburse the
Executive for the costs, fees and expenses of outplacement assistance services
(not to exceed twenty percent (20%) of the sum of (A) the Executive's Base
Amount and (B) the Executive's Bonus Amount) provided by any outplacement agency
selected by the Executive; and
(5) the Company shall provide to the Executive
the use of a Company-leased vehicle, at no cost to the Executive, until the
earlier of (A) the date occurring six (6) months after the Termination Date or
(B) the Executive's sixty-fifth (65th) birthday, after which date the Executive
shall have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated
by the Company without Cause (1) within twelve (12) months prior to a Change in
Control or (2) prior to the date of a Change in Control but the Executive
reasonably demonstrates that such termination (A) was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change in Control (a "Third Party") and who effectuates a Change in
Control or (B) otherwise arose in connection with, or in anticipation of, a
Change in Control which has been threatened or proposed and which actually
occurs, such termination shall be deemed to have occurred after a Change in
Control, provided a Change in Control shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
-----------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), and the regulations thereunder) or any affiliate of
such Person, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (the "Total Payments"), is or will be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties with respect to such excise
3
<PAGE>
tax (such excise tax, together with any such interest and penalties, are
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax, imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Total Payments.
(2) Determination By Accountant. All
mathematical determinations, and all determinations as to whether any of the
Total Payments are "parachute payments" (within the meaning of Section 280G of
the Code), that are required to be made under this Section 2(d), including
determinations as to whether a Gross-Up Payment is required, the amount of such
Gross-Up Payment and amounts relevant to the last sentence of this Section
2(d)(2), shall be made by an independent accounting firm selected by the
Executive from among the six (6) largest accounting firms in the United States
(the "Accounting Firm"), which shall provide its determination (the
"Determination"), together with detailed supporting calculations regarding the
amount of any Gross-Up Payment and any other relevant matter, both to the
Company and the Executive by no later than ten (10) days following the
Termination Date, if applicable, or such earlier time as is requested by the
Company or the Executive (if the Executive reasonably believes that any of the
Total Payments may be subject to the Excise Tax). If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive and the Company with a written statement that such Accounting Firm has
concluded that no Excise Tax is payable (including the reasons therefor) and
that the Executive has substantial authority not to report any Excise Tax on his
federal income tax return. If a Gross-Up Payment is determined to be payable, it
shall be paid to the Executive within twenty (20) days after the Determination
(and all accompanying calculations and other material supporting the
Determination) is delivered to the Company by the Accounting Firm. Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive, absent manifest error. As a result of uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the
Company should have been made ("Underpayment"), or that Gross-Up Payments will
have been made by the Company which should not have been made ("Overpayments").
In either such event, the Accounting Firm shall determine the amount of the
Underpayment or Overpayment that has occurred. In the case of an Underpayment,
the amount of such Underpayment shall be promptly paid by the Company to or for
the benefit of the Executive. In the case of an Overpayment, the Executive
shall, at the direction and expense
4
<PAGE>
of the Company, take such steps as are reasonably necessary (including the
filing of returns and claims for refund), follow reasonable instructions from,
and procedures established by, the Company, and otherwise reasonably cooperate
with the Company to correct such Overpayment, provided, however, that (i) the
Executive shall not in any event be obligated to return to the Company an amount
greater than the net after-tax portion of the Overpayment that he has retained
or has recovered as a refund from the applicable taxing authorities and (ii)
this provision shall be interpreted in a manner consistent with the intent of
Section 2(d)(1), which is to make the Executive whole, on an after-tax basis,
from the application of the Excise Tax, it being understood that the correction
of an Overpayment may result in the Executive repaying to the Company an amount
which is less than the Overpayment.
(e) The amounts provided for in Sections 2(a)
and 2(b)(1), (2) and (4) shall be paid in a single lump sum cash payment within
thirty (30) days after the Executive's Termination Date (or earlier, if required
by applicable law).
(f) The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Executive in any
subsequent employment except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in
this Section 2 shall be in lieu of any other severance pay to which the
Executive may be entitled under the GPU System Severance Procedure or any other
plan, agreement or arrangement of the Company or any other Affiliate of the
Corporation.
3. Notice of Termination. Following a Change in Control, any
----------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such
5
<PAGE>
termination of employment), (b) the Executive's hearing before the Board of
Directors of the Corporation as contemplated in Section 15.5 of this Agreement
or (c) the Executive seeking to obtain or enforce any right or benefit provided
by this Agreement or by any other plan or arrangement maintained by the Company
under which the Executive is or may be entitled to receive benefits; provided,
however, that the payment of fees and expenses pursuant to this Section 4(c)
shall be made only after, and only to the extent that, the Executive is
unsuccessful in his attempt to obtain or enforce such right or benefit through
the procedures established under the Legal Defense Fund maintained by the
Company under the GPU System Companies Master Executives' Benefits Protection
Trust (or any similar fund under a successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, addressed to the
respective addresses last given by each party to the other, provided that all
notices to the Company shall be directed to the attention of the Board with a
copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery
6
<PAGE>
thereof or on the third business day after the mailing thereof, except that
notice of change of address shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by any party
which are not expressly set forth in this Agreement.
7
<PAGE>
11. Successors; Binding Agreement.
----------------------------------
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Company, the Corporation and their respective
Successors and Assigns. The Company and the Corporation shall require their
respective Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto, and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto, with respect to the subject matter hereof, it being understood that this
Agreement shall not supersede or in any way be construed to amend or modify the
provisions of the letter agreement dated as of June 5, 1997 between the Company
and the Executive.
15. Definitions.
-----------
15.1. Accrued Compensation. For purposes of this
Agreement, "Accrued Compensation" shall mean all amounts of compensation for
services rendered to the Company or any other Affiliate that have been earned or
accrued through the Termination Date but that have not been paid as of the
Termination Date including (a) base salary, (b) reimbursement for reasonable and
necessary business expenses incurred by the Executive on behalf of the Company
during the period ending on
8
<PAGE>
the Termination Date, (c) vacation pay and (d) bonuses and incentive
compensation; provided, however, that Accrued Compensation shall not include any
amounts described in clause (a) or clause (d) that have been deferred pursuant
to any salary reduction or deferred compensation elections made by the
Executive.
15.2. Affiliate. For purposes of this Agreement,
"Affiliate" means any entity, directly or indirectly, controlled by, controlling
or under common control with the Corporation or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement,
"Base Amount" shall mean the Executive's annual base salary at the rate in
effect as of the date of a Change in Control or, if greater, at any time
thereafter, determined without regard to any salary reduction or deferred
compensation elections made by the Executive.
15.4. Bonus Amount. For purposes of this Agreement,
"Bonus Amount" shall mean the greater of (a) the target annual bonus payable to
the Executive under the Incentive Plan in respect of the fiscal year during
which the Termination Date occurs or (b) the highest annual bonus paid or
payable under the Incentive Plan in respect of any of the three full fiscal
years ended prior to the Termination Date or, if greater, the three (3) full
fiscal years ended prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a
termination of employment is for "Cause" if the Executive has been convicted of
a felony or the termination is evidenced by a resolution adopted in good faith
by two-thirds of the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed
substantially to perform his reasonably assigned duties with the Company (other
than a failure resulting from the Executive's incapacity due to physical or
mental illness or from the assignment to the Executive of duties that would
constitute Good Reason) which failure continued for a period of at least thirty
(30) days after a written notice of demand for substantial performance, signed
by a duly authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
(b) intentionally engaged in conduct which is
demonstrably and materially injurious to the Corporation or the Company;
provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in this
9
<PAGE>
Section 15.5(b) until (1) there shall have been delivered to the Executive a
copy of a written notice, signed by a duly authorized officer of the Company,
setting forth that the Executive was guilty of the conduct set forth in this
Section 15.5(b) and specifying the particulars thereof in detail, and (2) the
Executive shall have been provided an opportunity to be heard in person by the
Board of Directors of the Corporation (with the assistance of the Executive's
counsel if the Executive so desires). No act, nor failure to act, on the
Executive's part, shall be considered "intentional" unless the Executive has
acted, or failed to act, with a lack of good faith and with a lack of reasonable
belief that the Executive's action or failure to act was in the best interest of
the Corporation and the Company. Notwithstanding anything contained in this
Agreement to the contrary, no failure to perform by the Executive after a Notice
of Termination is given to the Company by the Executive shall constitute Cause
for purposes of this Agreement.
15.6. Change in Control. A "Change in Control" shall
-----------------
mean the occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from
the Corporation) of any common stock of the Corporation ("Common Stock") or
other voting securities of the Corporation entitled to vote generally for the
election of directors (the "Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of twenty percent (20%) or more of the then outstanding
shares of Common Stock or the combined voting power of the Corporation's then
outstanding Voting Securities; provided, however, in determining whether a
Change in Control has occurred, Voting Securities which are acquired in a
Non-Control Acquisition (as hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control. A "Non-Control Acquisition"
shall mean an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) the Corporation or (B) any corporation or other
Person of which a majority of its voting power or its voting equity securities
or equity interest is owned, directly or indirectly, by the Corporation (a
"Subsidiary") (ii) the Corporation or its Subsidiaries, or (iii) any Person in
connection with a Non-Control Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of
August 1, 1996, are members of the Board of Directors of the Corporation (the
"Incumbent Board"), cease for any reason to constitute at least seventy percent
(70%) of the members of the Board of Directors of the Corporation; provided,
however, that if the election, or nomination for election by the Corporation's
shareholders, of any new director was approved by a vote of at least two-thirds
of the Incumbent Board, such new director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board; provided further, however,
that no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Corporation
(a "Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or
reorganization with or into the Corporation or in which
securities of the Corporation are issued, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
with or into the Corporation or in which securities of
the Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition
of all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the acquisition of
Common Stock or Voting Securities by the Corporation which, by reducing the
number of shares of Common Stock or Voting Securities then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject
Person, provided that if a Change in Control would
12
<PAGE>
occur (but for the operation of this sentence) as a result of the acquisition
of shares of Common Stock or Voting Securities by the Corporation, and after
such share acquisition by the Corporation, the Subject Person becomes the
Beneficial Owner of any additional shares of Common Stock or Voting Securities
which increases the percentage of the then outstanding shares of Common Stock
or Voting Securities Beneficially Owned by the Subject Person, then a Change
in Control shall occur.
15.7. Company and Corporation. For purposes of this
Agreement, all references to the Company and the Corporation shall include their
respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9. Good Reason. (a) For purposes of this
Agreement, "Good Reason" shall mean the occurrence after a Change in Control of
any of the following events or conditions:
(1) a change in the Executive's status,
title, position or responsibilities (including reporting responsibilities)
which, in the Executive's reasonable judgment, represents an adverse change from
his status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the
Executive's annual base salary;
13
<PAGE>
(3) the relocation of the offices of the
Company at which the Executive is principally employed to a location more than
twenty-five (25) miles from the location of such offices immediately prior to
such relocation, or the Company's requiring the Executive to be based anywhere
other than at such offices, except to the extent the Executive was not
previously assigned to a principal place of duty and except for required travel
on the Company's business to an extent substantially consistent with the
Executive's previous business travel obligations;
(4) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation or to pay to the
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company in which the Executive
participated, within seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to
continue in effect (without reduction in benefit level, and/or reward
opportunities) any material compensation or employee benefit plan in which the
Executive was participating immediately prior to such failure by the Company,
including, but not limited to, any of the plans listed in Appendix A hereto,
unless a substitute or replacement plan has been implemented which provides
substantially identical compensation or benefits to the Executive or (B) to
continue to provide the Executive with compensation and benefits, in the
aggregate, at least equal (in terms of benefit levels and/or reward
opportunities) to those provided for under each other compensation or employee
benefit plan, program and practice in which the Executive was participating
immediately prior to such failure by the Company;
(6) the failure of the Company to obtain from
its Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the
Executive's employment by the Company which is not effected pursuant to a Notice
of Termination satisfying the terms set forth in the definition of Notice of
Termination (and, if applicable, the terms set forth in the definition of
Cause).
(b) Any event or condition described in
Section 15.9(a)(1) through (7) which occurs (1) within twelve (12) months prior
to a Change in Control or (2) prior to a Change in Control but which the
Executive reasonably demonstrates (A) was at the request of a Third Party who
effectuates a Change in Control or (B) otherwise arose in connection with, or in
14
<PAGE>
anticipation of a Change in Control which has been threatened or proposed and
which actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
15.10. Incentive Plan. For purposes of this
--------------
Agreement, "Incentive Plan" shall mean the Incentive Compensation Plan for
Elected Officers, or any successor annual incentive plan, maintained by the
Company or any other Affiliate.
15.11. Notice of Termination. For purposes of this
---------------------
Agreement, following a Change in Control, "Notice of Termination" shall mean a
written notice of termination of the Executive's employment, signed by the
Executive if to the Company or by a duly authorized officer of the Company if to
the Executive, which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this
--------------
Agreement, "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount
multiplied by a fraction the numerator of which is the number of days in such
fiscal year through the Termination Date and the denominator of which is 365;
provided, however, that the Pro Rata Bonus shall be reduced, but not below zero,
to the extent of any bonus the Executive is entitled to receive pursuant to the
Incentive Plan in respect of the fiscal year (denoted a "Performance Period"
under the Incentive Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this
----------------------
Agreement, "Successors and Assigns" shall mean, with respect to the Company or
the Corporation, a corporation or other entity acquiring all or substantially
all the assets and business of the Company or the Corporation, as the case may
be (including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this
----------------
Agreement, "Termination Date" shall mean (a) in the case of the Executive's
death, his date of death, (b) if the Executive's employment is terminated for
Disability, thirty (30) days after Notice of Termination is given (provided that
the Executive shall not have returned to the performance of his duties on a
full-time basis during such thirty (30) day period) and (c) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a termination for Cause shall not be less
than thirty (30) days, and in the case of a termination for Good Reason shall
not be more than sixty (60) days, from the date such Notice of
15
<PAGE>
Termination is given); provided, however, that if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination in good faith notifies the other party that a dispute exists
concerning the basis for the termination, the Termination Date shall be the date
on which the dispute is finally determined, either by mutual written agreement
of the parties, or by the final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been taken). Notwithstanding the pendency of any such dispute, the
Company shall continue to pay the Executive his Base Amount and continue the
Executive as a participant in all compensation, incentive, bonus, pension,
profit sharing, medical, hospitalization, dental, life insurance and disability
benefit plans in which he was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved in accordance with this
Section whether or not the dispute is resolved in favor of the Company, and the
Executive shall not be obligated to repay to the Company any amounts paid or
benefits provided pursuant to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By: /s/ Fred D. Hafer
------------------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
GPU Service, Inc.
By: /s/ Fred D. Hafer
------------------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
By: /s/ John G. Graham
-------------------------------
John G. Graham
16
Exhibit 10-D
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU Service, Inc. (the "Company") and
Fred D. Hafer (the "Executive") amends and restates the former Severance
Protection Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Company and the Board of
Directors of the Corporation (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
<PAGE>
(a) If the Executive's employment with the Company and with all
other Affiliates of the Corporation shall be terminated (1) by the Company for
Cause or Disability, (2) by reason of the Executive's death, or (3) by the
Executive other than for Good Reason and other than during the six (6)-month
period following the date of a Change in Control, the Company shall pay to the
Executive his Accrued Compensation. In addition to the foregoing, if the
Executive's employment is terminated by the Company for Disability or by reason
of the Executive's death, the Company shall pay to the Executive or his
beneficiaries a Pro Rata Bonus. The Executive's entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefits plans and other applicable programs and practices then in
effect.
(b) If the Executive's employment with the Company and with all
other Affiliates of the Corporation shall be terminated for any reason other
than as specified in Section 2(a), the Executive shall be entitled to the
following:
(1) the Company shall pay the Executive all Accrued
Compensation and a Pro Rata Bonus;
(2) the Company shall pay the Executive as severance pay
and in lieu of any further compensation for periods subsequent to the
Termination Date, an amount determined by multiplying (A) two times the sum of
(i) the Executive's Base Amount and (ii) the Executive's Bonus Amount by (B) a
fraction, the numerator of which is the number of months, not to exceed
twenty-four (24), in the period beginning on the Termination Date and ending on
the Executive's Normal Retirement Date (as defined in the Company's Employee
Pension Plan), and the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four (24), or if
earlier, until the Executive's Normal Retirement Date (as defined in the
Company's Employee Pension Plan) (the "Continuation Period"), the Company shall
at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder
2
<PAGE>
with respect to the foregoing coverages and benefits shall be reduced to the
extent that the Executive obtains any such coverages and benefits pursuant to a
subsequent employer's benefit plans, in which case the Company may reduce any of
the coverages or benefits it is required to provide the Executive hereunder so
long as the aggregate coverages and benefits of the combined benefit plans is no
less favorable to the Executive than the coverages and benefits required to be
provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit
any benefits to which the Executive, his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following the Executive's termination of employment, including without
limitation, retiree medical and life insurance benefits;
(4) the Company shall pay or reimburse the Executive for
the costs, fees and expenses of outplacement assistance services (not to exceed
twenty percent (20%) of the sum of (A) the Executive's Base Amount and (B) the
Executive's Bonus Amount) provided by any outplacement agency selected by the
Executive.
(5) the Company shall provide to the Executive the use of
a Company-leased vehicle, at no cost to the Executive, until the earlier of (A)
the date occurring six (6) months after the Termination Date or (B) the
Executive's sixty-fifth (65th) birthday, after which date the Executive shall
have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the Company
without Cause (1) within twelve (12) months prior to a Change in Control or (2)
prior to the date of a Change in Control but the Executive reasonably
demonstrates that such termination (A) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control (a "Third Party") and who effectuates a Change in Control or
(B) otherwise arose in connection with, or in anticipation of, a Change in
Control which has been threatened or proposed and which actually occurs, such
termination shall be deemed to have occurred after a Change in Control.
(d) (1) Gross-Up Payment. In the event it shall be
-----------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the Internal Revenue Code
3
<PAGE>
of 1986, as amended (the "Code"), and the regulations thereunder) or any
affiliate of such Person, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (the "Total
Payments"), is or will be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Total Payments.
(2) Determination By Accountant. All mathematical
---------------------------
determinations, and all determinations as to whether any of the Total Payments
are "parachute payments" (within the meaning of Section 280G of the Code), that
are required to be made under this Section 2(d), including determinations as to
whether a Gross-Up Payment is required, the amount of such Gross-Up Payment and
amounts relevant to the last sentence of this Section 2(d)(2), shall be made by
an independent accounting firm selected by the Executive from among the six (6)
largest accounting firms in the United States (the "Accounting Firm"), which
shall provide its determination (the "Determination"), together with detailed
supporting calculations regarding the amount of any Gross-Up Payment and any
other relevant matter, both to the Company and the Executive by no later than
ten (10) days following the Termination Date, if applicable, or such earlier
time as is requested by the Company or the Executive (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive and the Company with a written
statement that such Accounting Firm has concluded that no Excise Tax is payable
(including the reasons therefor) and that the Executive has substantial
authority not to report any Excise Tax on his federal income tax return. If a
Gross-Up Payment is determined to be payable, it shall be paid to the Executive
within twenty (20) days after the Determination (and all accompanying
calculations and other material supporting the Determination) is delivered to
the Company by the Accounting Firm. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive, absent manifest error. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments not made by
4
<PAGE>
the Company should have been made ("Underpayment"), or that Gross-Up Payments
will have been made by the Company which should not have been made
("Overpayments"). In either such event, the Accounting Firm shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the amount of such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. In the case of an Overpayment,
the Executive shall, at the direction and expense of the Company, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established by,
the Company, and otherwise reasonably cooperate with the Company to correct such
Overpayment, provided, however, that (i) the Executive shall not in any event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that he has retained or has recovered as a refund
from the applicable taxing authorities and (ii) this provision shall be
interpreted in a manner consistent with the intent of Section 2(d)(1), which is
to make the Executive whole, on an after-tax basis, from the application of the
Excise Tax, it being understood that the correction of an Overpayment may result
in the Executive repaying to the Company an amount which is less than the
Overpayment.
(e) The amounts provided for in Sections 2(a) and 2(b)(1), (2) and
(4) shall be paid in a single lump sum cash payment within thirty (30) days
after the Executive's Termination Date (or earlier, if required by applicable
law).
(f) The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment
except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in this Section
2 shall be in lieu of any other severance pay to which the Executive may be
entitled under the GPU System Severance Procedure or any other plan, agreement
or arrangement of the Company or any other Affiliate of the Corporation.
3. Notice of Termination. Following a Change in Control, any
---------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered
6
<PAGE>
or sent by certified mail, return receipt requested, postage prepaid, addressed
to the respective addresses last given by each party to the other, provided that
all notices to the Company shall be directed to the attention of the Board with
a copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
---------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
-------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the
7
<PAGE>
same or at any prior or subsequent time. No agreement or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by any party which are not expressly set forth in this Agreement.
11. Successors; Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Company, the Corporation and their respective
Successors and Assigns. The Company and the Corporation shall require their
respective Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or
interest hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto with respect to the subject matter hereof.
15. Definitions.
------------
15.1. Accrued Compensation. For purposes of this Agreement,
"Accrued Compensation" shall mean all amounts of compensation for services
rendered to the Company and any other Affiliate that have been earned or accrued
through the Termination Date but that have not been paid as of the Termination
Date including (a) base salary, (b) reimbursement for reasonable and necessary
business expenses incurred by the
8
<PAGE>
Executive on behalf of the Company during the period ending on the Termination
Date, (c) vacation pay and (d) bonuses and incentive compensation; provided,
however, that Accrued Compensation shall not include any amounts described in
clause (a) or clause (d) that have been deferred pursuant to any salary
reduction or deferred compensation elections made by the Executive.
15.2. Affiliate. For purposes of this Agreement,"Affiliate"
---------
means any entity, directly or indirectly, controlled by, controlling or under
common control with the Corporation or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement,
-----------
"Base Amount" shall mean the Executive's annual base salary at the rate in
effect as of the date of a Change in Control or, if greater, at any time
thereafter, determined without regard to any salary reduction or deferred
compensation elections made by the Executive. 15.4. Bonus Amount. For purposes
of this Agreement, "Bonus Amount" shall mean the
greater of (a) the target annual bonus payable to the Executive under the
Incentive Plan in respect of the fiscal year during which the Termination Date
occurs or (b) the highest annual bonus paid or payable under the Incentive Plan
in respect of any of the three full fiscal years ended prior to the Termination
Date or, if greater, the three (3) full fiscal years ended prior to the Change
in Control.
15.5. Cause. For purposes of this Agreement, a termination
-----
of employment is for "Cause" if the Executive has been convicted of a felony or
the termination is evidenced by a resolution adopted in good faith by two-thirds
of the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed substantially
to perform his reasonably assigned duties with the Company (other than a failure
resulting from the Executive's incapacity due to physical or mental illness or
from the assignment to the Executive of duties that would constitute Good
Reason) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance, signed by a duly
authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
9
<PAGE>
(b) intentionally engaged in conduct which is
demonstrably and materially injurious to the Corporation or the Company;
provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in this Section 15.5(b) until (1) there shall have been
delivered to the Executive a copy of a written notice, signed by a duly
authorized officer of the Company, setting forth that the Executive was guilty
of the conduct set forth in this Section 15.5(b) and specifying the particulars
thereof in detail, and (2) the Executive shall have been provided an opportunity
to be heard in person by the Board of Directors of the Corporation (with the
assistance of the Executive's counsel if the Executive so desires).
No act, nor failure to act, on the Executive's part,
shall be considered "intentional" unless the Executive has acted, or failed to
act, with a lack of good faith and with a lack of reasonable belief that the
Executive's action or failure to act was in the best interest of the Corporation
and the Company. Notwithstanding anything contained in this Agreement to the
contrary, no failure to perform by the Executive after a Notice of Termination
is given to the Company by the Executive shall constitute Cause for purposes of
this Agreement.
15.6. Change in Control. A "Change in Control" shall
-----------------
mean the occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from the
Corporation) of any common stock of the Corporation ("Common Stock") or other
voting securities of the Corporation entitled to vote generally for the election
of directors (the "Voting Securities") by any "Person" (as the term person is
used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty percent (20%) or more of the then outstanding shares of
Common Stock or the combined voting power of the Corporation's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Corporation or (B) any corporation or other Person of
which a majority of its voting power or its voting equity securities or equity
interest is owned, directly or indirectly, by the Corporation (a "Subsidiary")
(ii) the Corporation or its Subsidiaries, or (iii) any Person in connection with
a "Non-Control Transaction" (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of August 1, 1996, are members
of the Board of Directors of the Corporation (the "Incumbent Board"), cease for
any reason to constitute at least seventy percent (70%) of the members of the
Board of Directors of the Corporation; provided, however, that if the election,
or nomination for election by the Corporation's shareholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of this Agreement, be considered as a
member of the Incumbent Board; provided further, however, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board of Directors of the Corporation (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or
reorganization with or into the Corporation or in which
securities of the Corporation are issued, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
with or into the Corporation or in which securities of
the Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation or any
Subsidiary, or (iv) any Person who,
immediately prior to such merger,
consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then outstanding
Common Stock or Voting Securities as a result of the acquisition of Common Stock
or Voting Securities by the Corporation which, by reducing the number of shares
of Common Stock or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of shares of Common
12
<PAGE>
Stock or Voting Securities by the Corporation, and after such share acquisition
by the Corporation, the Subject Person becomes the Beneficial Owner of any
additional shares of Common Stock or Voting Securities which increases the
percentage of the then outstanding shares of Common Stock or Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall occur.
15.7. Company and Corporation. For purposes of this
-----------------------------------------------------
Agreement, all references to the Company and the Corporation shall include their
respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
----------
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9. Good Reason. (a) For purposes of this Agreement,
-----------
"Good Reason" shall mean the occurrence after a Change in Control of any of the
following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the Executive's
annual base salary;
13
<PAGE>
(3) the relocation of the offices of the Company
at which the Executive is principally employed to a location more than
twenty-five (25) miles from the location of such offices immediately prior to
such relocation, or the Company's requiring the Executive to be based anywhere
other than at such offices, except to the extent the Executive was not
previously assigned to a principal place of duty and except for required travel
on the Company's business to an extent substantially consistent with the
Executive's previous business travel obligations;
(4) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation or to pay to the
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company in which the Executive
participated, within seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to continue
in effect (without reduction in benefit level, and/or reward opportunities) any
material compensation or employee benefit plan in which the Executive was
participating immediately prior to such failure by the Company, including, but
not limited to, any of the plans listed in Appendix A hereto, unless a
substitute or replacement plan has been implemented which provides substantially
identical compensation or benefits to the Executive or (B) to continue to
provide the Executive with compensation and benefits, in the aggregate, at least
equal (in terms of benefit levels and/or reward opportunities) to those provided
for under each other compensation or employee benefit plan, program and practice
in which the Executive was participating immediately prior to such failure by
the Company;
(6) the failure of the Company to obtain from its
Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the Executive's
employment by the Company which is not effected pursuant to a Notice of
Termination satisfying the terms set forth in the definition of Notice of
Termination (and, if applicable, the terms set forth in the definition of
Cause).
(b) Any event or condition described in Section
15.9(a)(1) through (7) which occurs (1) within twelve (12) months prior to a
Change in Control or (2) prior to a Change in Control but which the Executive
reasonably demonstrates (A) was at the request of a Third Party who effectuates
a Change in Control or (B) otherwise arose in connection with, or in
14
<PAGE>
anticipation of a Change in Control which has been threatened or proposed and
which actually occurs, shall constitute Good Reason for purposes of this
Agreement Control.
15.10. notwithstanding that it occurred prior to a Change in
Incentive Plan. For purposes of this Agreement, "Incentive Plan" shall mean the
- --------------
Incentive Compensation Plan for Elected Officers, or any successor annual
incentive plan, maintained by the Company or any other Affiliate.
15.11. Notice of Termination. For purposes of this Agreement,
--------------------
following a Change in Control, "Notice of Termination" shall mean a written
notice of termination of the Executive's employment, signed by the Executive if
to the Company or by a duly authorized officer of the Company if to the
Executive, which indicates the specific termination provision in this Agreement,
if any, relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this Agreement, "Pro Rata
--------------
Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction
the numerator of which is the number of days in such fiscal year through the
Termination Date and the denominator of which is 365; provided, however, that
the Pro Rata Bonus shall be reduced, but not below zero, to the extent of any
bonus the Executive is entitled to receive pursuant to the Incentive Plan in
respect of the fiscal year (denoted a "Performance Period" under the Incentive
Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this Agreement,
----------------------
"Successors and Assigns" shall mean, with respect to the Company or to the
Corporation, a corporation or other entity acquiring all or substantially all
the assets and business of the Company or the Corporation, as the case may be,
(including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean (a) in the case of the Executive's death, his date
of death, (b) if the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time basis
during such thirty (30) day period) and (c) if the
15
<PAGE>
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination for Cause shall
not be less than thirty (30) days, and in the case of a termination for Good
Reason shall not be more than sixty (60) days, from the date such Notice of
Termination is given); provided, however, that if within thirty (30) days after
any Notice of Termination is given the party receiving such Notice of
Termination in good faith notifies the other party that a dispute exists
concerning the basis for the termination, the Termination Date shall be the date
on which the dispute is finally determined, either by mutual written agreement
of the parties, or by the final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been taken). Notwithstanding the pendency of any such dispute, the
Company shall continue to pay the Executive his Base Amount and continue the
Executive as a participant in all compensation, incentive, bonus, pension,
profit sharing, medical, hospitalization, dental, life insurance and disability
benefit plans in which he was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved in accordance with this
Section whether or not the dispute is resolved in favor of the Company, and the
Executive shall not be obligated to repay to the Company any amounts paid or
benefits provided pursuant to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
ATTEST: By:/s/ Ira H. Jolles
-----------------
Ira H. Jolles
Senior Vice President and
General Secretary Counsel
GPU Service, Inc.
ATTEST: By:/s/ Ira H. Jolles
-----------------
Ira H. Jolles
Senior Vice President and
General Secretary Counsel
By:/s/ Fred D. Hafer
-----------------
Fred D. Hafer
16
Exhibit 10-E
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU Service, Inc. (the "Company") and Ira
H. Jolles (the "Executive") amends and restates the former Severance Protection
Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty- four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
<PAGE>
(a) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated (1) by the
Company for Cause or Disability, (2) by reason of the Executive's death, or (3)
by the Executive other than for Good Reason, the Company shall pay to the
Executive his Accrued Compensation. In addition to the foregoing, if the
Executive's employment is terminated by the Company for Disability or by reason
of the Executive's death, the Company shall pay to the Executive or his
beneficiaries a Pro Rata Bonus. The Executive's entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefits plans and other applicable programs and practices then in
effect.
(b) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated for any reason
other than as specified in Section 2(a), the Executive shall be entitled to the
following:
(1) the Company shall pay the Executive all
Accrued Compensation and a Pro Rata Bonus;
(2) the Company shall pay the Executive as
severance pay and in lieu of any further compensation for periods subsequent to
the Termination Date, an amount determined by multiplying (A) two times the sum
of (i) the Executive's Base Amount and (ii) the Executive's Bonus Amount, by (B)
a fraction, the numerator of which is the number of months, not to exceed
twenty-four (24), in the period beginning on the Termination Date and ending on
the Executive's Normal Retirement Date (as defined in the Company's Employee
Pension Plan), and the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four
(24), or if earlier, until the Executive's Normal Retirement Date (as defined in
the Company's Employee Pension Plan) (the "Continuation Period"), the Company
shall at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder with respect to the foregoing
2
<PAGE>
coverages and benefits shall be reduced to the extent that the Executive obtains
any such coverages and benefits pursuant to a subsequent employer's benefit
plans, in which case the Company may reduce any of the coverages or benefits it
is required to provide the Executive hereunder so long as the aggregate
coverages and benefits of the combined benefit plans is no less favorable to the
Executive than the coverages and benefits required to be provided hereunder.
This Section 2(b)(3) shall not be interpreted so as to limit any benefits to
which the Executive, his dependents or beneficiaries may be entitled under any
of the Company's employee benefit plans, programs or practices following the
Executive's termination of employment, including without limitation, retiree
medical and life insurance benefits;
(4) the Company shall pay or reimburse the
Executive for the costs, fees and expenses of outplacement assistance services
(not to exceed twenty percent (20%) of the sum of (A) the Executive's Base
Amount and (B) the Executive's Bonus Amount) provided by any outplacement agency
selected by the Executive; and
(5) the Company shall provide to the Executive
the use of a Company-leased vehicle, at no cost to the Executive, until the
earlier of (A) the date occurring six (6) months after the Termination Date or
(B) the Executive's sixty-fifth (65th) birthday, after which date the Executive
shall have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the
Company without Cause (1) within twelve (12) months prior to a Change in Control
or (2) prior to the date of a Change in Control but the Executive reasonably
demonstrates that such termination (A) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control (a "Third Party") and who effectuates a Change in Control or
(B) otherwise arose in connection with, or in anticipation of, a Change in
Control which has been threatened or proposed and which actually occurs, such
termination shall be deemed to have occurred after a Change in Control, provided
a Change in Control shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), and the
3
<PAGE>
regulations thereunder) or any affiliate of such Person, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise (the "Total Payments"), is or will be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including any Excise Tax, imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Total Payments.
(2) Determination By Accountant. All
---------------------------
mathematical determinations, and all determinations as to whether any of the
Total Payments are "parachute payments" (within the meaning of Section 280G of
the Code), that are required to be made under this Section 2(d), including
determinations as to whether a Gross-Up Payment is required, the amount of such
Gross-Up Payment and amounts relevant to the last sentence of this Section
2(d)(2), shall be made by an independent accounting firm selected by the
Executive from among the six (6) largest accounting firms in the United States
(the "Accounting Firm"), which shall provide its determination (the
"Determination"), together with detailed supporting calculations regarding the
amount of any Gross-Up Payment and any other relevant matter, both to the
Company and the Executive by no later than ten (10) days following the
Termination Date, if applicable, or such earlier time as is requested by the
Company or the Executive (if the Executive reasonably believes that any of the
Total Payments may be subject to the Excise Tax). If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive and the Company with a written statement that such Accounting Firm has
concluded that no Excise Tax is payable (including the reasons therefor) and
that the Executive has substantial authority not to report any Excise Tax on his
federal income tax return. If a Gross-Up Payment is determined to be payable, it
shall be paid to the Executive within twenty (20) days after the Determination
(and all accompanying calculations and other material supporting the
Determination) is delivered to the Company by the Accounting Firm. Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive, absent manifest error. As a result of uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments not made by the
Company should have been made ("Underpayment"), or that
4
<PAGE>
Gross-Up Payments will have been made by the Company which should not have been
made ("Overpayments"). In either such event, the Accounting Firm shall determine
the amount of the Underpayment or Overpayment that has occurred. In the case of
an Underpayment, the amount of such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. In the case of an Overpayment,
the Executive shall, at the direction and expense of the Company, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established by,
the Company, and otherwise reasonably cooperate with the Company to correct such
Overpayment, provided, however, that (i) the Executive shall not in any event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that he has retained or has recovered as a refund
from the applicable taxing authorities and (ii) this provision shall be
interpreted in a manner consistent with the intent of Section 2(d)(1), which is
to make the Executive whole, on an after-tax basis, from the application of the
Excise Tax, it being understood that the correction of an Overpayment may result
in the Executive repaying to the Company an amount which is less than the
Overpayment.
(e) The amounts provided for in Sections 2(a) and
2(b)(1), (2) and (4) shall be paid in a single lump sum cash payment within
thirty (30) days after the Executive's Termination Date (or earlier, if required
by applicable law).
(f) The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise and no such payment shall be offset or reduced by the
amount of any compensation or benefits provided to the Executive in any
subsequent employment except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in
this Section 2 shall be in lieu of any other severance pay to which the
Executive may be entitled under the GPU System Severance Procedure or any other
plan, agreement or arrangement of the Company or any other Affiliate of the
Corporation.
3. Notice of Termination. Following a Change in Control, any
----------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
-----------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered
6
<PAGE>
or sent by certified mail, return receipt requested, postage prepaid, addressed
to the respective addresses last given by each party to the other, provided that
all notices to the Company shall be directed to the attention of the Board with
a copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a
7
<PAGE>
waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
any party which are not expressly set forth in this Agreement.
11. Successors; Binding Agreement.
----------------------------------
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Company, the Corporation and their respective
Successors and Assigns. The Company and the Corporation shall require their
respective Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto, and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto, with respect to the subject matter hereof, it being understood that this
Agreement shall not supersede or in any way be construed to amend or modify the
provisions of the letter agreement dated as of June 5, 1997 between the Company
and the Executive.
15. Definitions.
-----------
15.1. Accrued Compensation. For purposes of this
-------------------------------------------
Agreement, "Accrued Compensation" shall mean all amounts of compensation for
services rendered to the Company or any other
8
<PAGE>
Affiliate that have been earned or accrued through the Termination Date but that
have not been paid as of the Termination Date including (a) base salary, (b)
reimbursement for reasonable and necessary business expenses incurred by the
Executive on behalf of the Company during the period ending on the Termination
Date, (c) vacation pay and (d) bonuses and incentive compensation; provided,
however, that Accrued Compensation shall not include any amounts described in
clause (a) or clause (d) that have been deferred pursuant to any salary
reduction or deferred compensation elections made by the Executive.
15.2. Affiliate. For purposes of this Agreement,
---------
"Affiliate" means any entity, directly or indirectly, controlled by, controlling
or under common control with the Corporation or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement,
-----------
"Base Amount" shall mean the Executive's annual base salary at the rate in
effect as of the date of a Change in Control or, if greater, at any time
thereafter, determined without regard to any salary reduction or deferred
compensation elections made by the Executive.
15.4. Bonus Amount. For purposes of this Agreement,
------------
"Bonus Amount" shall mean the greater of (a) the target annual bonus payable to
the Executive under the Incentive Plan in respect of the fiscal year during
which the Termination Date occurs or (b) the highest annual bonus paid or
payable under the Incentive Plan in respect of any of the three full fiscal
years ended prior to the Termination Date or, if greater, the three (3) full
fiscal years ended prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a
------
termination of employment is for "Cause" if the Executive has been convicted of
a felony or the termination is evidenced by a resolution adopted in good faith
by two-thirds of the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed
substantially to perform his reasonably assigned duties with the Company (other
than a failure resulting from the Executive's incapacity due to physical or
mental illness or from the assignment to the Executive of duties that would
constitute Good Reason) which failure continued for a period of at least thirty
(30) days after a written notice of demand for substantial performance, signed
by a duly authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
9
<PAGE>
(b) intentionally engaged in conduct which is
demonstrably and materially injurious to the Corporation or the Company;
provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in this Section 15.5(b) until (1) there shall have been
delivered to the Executive a copy of a written notice, signed by a duly
authorized officer of the Company, setting forth that the Executive was guilty
of the conduct set forth in this Section 15.5(b) and specifying the particulars
thereof in detail, and (2) the Executive shall have been provided an opportunity
to be heard in person by the Board of Directors of the Corporation (with the
assistance of the Executive's counsel if the Executive so desires).
No act, nor failure to act, on the Executive's
part, shall be considered "intentional" unless the Executive has acted, or
failed to act, with a lack of good faith and with a lack of reasonable belief
that the Executive's action or failure to act was in the best interest of the
Corporation and the Company. Notwithstanding anything contained in this
Agreement to the contrary, no failure to perform by the Executive after a Notice
of Termination is given to the Company by the Executive shall constitute Cause
for purposes of this Agreement.
15.6. Change in Control. A "Change in Control" shall
-----------------
mean the occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from
the Corporation) of any common stock of the Corporation ("Common Stock") or
other voting securities of the Corporation entitled to vote generally for the
election of directors (the "Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of twenty percent (20%) or more of the then outstanding
shares of Common Stock or the combined voting power of the Corporation's then
outstanding Voting Securities; provided, however, in determining whether a
Change in Control has occurred, Voting Securities which are acquired in a
Non-Control Acquisition (as hereinafter defined) shall not constitute an
acquisition which would cause a Change in Control. A "Non-Control Acquisition"
shall mean an acquisition by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (A) the Corporation or (B) any corporation or other
Person of which a majority of its voting power or its voting equity securities
or equity interest is owned, directly or indirectly, by the Corporation (a
"Subsidiary") (ii) the Corporation or its Subsidiaries, or (iii) any Person in
connection with a Non-Control Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of
August 1, 1996, are members of the Board of Directors of the Corporation (the
"Incumbent Board"), cease for any reason to constitute at least seventy percent
(70%) of the members of the Board of Directors of the Corporation; provided,
however, that if the election, or nomination for election by the Corporation's
shareholders, of any new director was approved by a vote of at least two-thirds
of the Incumbent Board, such new director shall, for purposes of this Agreement,
be considered as a member of the Incumbent Board; provided further, however,
that no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened "Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board of Directors of the Corporation
(a "Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or
reorganization with or into the Corporation or in which
securities of the Corporation are issued, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
with or into the Corporation or in which securities of
the Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person (the "Subject Person")
acquired Beneficial Ownership of more than the permitted amount of the then
outstanding common stock or Voting Securities as a result of the acquisition of
Common Stock or Voting Securities by the Corporation which, by reducing the
number of shares of Common Stock or Voting Securities then outstanding,
increases the proportional number of shares Beneficially Owned by the Subject
Person, provided that if a Change in Control would occur (but for the operation
of this sentence) as a result of the acquisition of shares of Common Stock or
Voting Securities by the
12
<PAGE>
Corporation, and after such share acquisition by the Corporation, the Subject
Person becomes the Beneficial Owner of any additional shares of Common Stock or
Voting Securities which increases the percentage of the then outstanding shares
of Common Stock or Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.
15.7. Company and Corporation. For purposes of this
-----------------------
Agreement, all references to the Company and the Corporation shall include their
respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
----------
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9. Good Reason. (a) For purposes of this
------------
Agreement, "Good Reason" shall mean the occurrence after a Change in Control of
any of the following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the
Executive's annual base salary;
(3) location of the offices of the Company at
which the Executive is principally employed to a location more than twenty-five
(25) miles from the location of
13
<PAGE>
such offices immediately prior to such relocation, or the Company's requiring
the Executive to be based anywhere other than at such offices, except to the
extent the Executive was not previously assigned to a principal place of duty
and except for required travel on the Company's business to an extent
substantially consistent with the Executive's previous business travel
obligations;
(4) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation or to pay to the
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company in which the Executive
participated, within seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to
continue in effect (without reduction in benefit level, and/or reward
opportunities) any material compensation or employee benefit plan in which the
Executive was participating immediately prior to such failure by the Company,
including, but not limited to, any of the plans listed in Appendix A hereto,
unless a substitute or replacement plan has been implemented which provides
substantially identical compensation or benefits to the Executive or (B) to
continue to provide the Executive with compensation and benefits, in the
aggregate, at least equal (in terms of benefit levels and/or reward
opportunities) to those provided for under each other compensation or employee
benefit plan, program and practice in which the Executive was participating
immediately prior to such failure by the Company;
(6) the failure of the Company to obtain from
its Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the
Executive's employment by the Company which is not effected pursuant to a Notice
of Termination satisfying the terms set forth in the definition of Notice of
Termination (and, if applicable, the terms set forth in the definition of
Cause).
(b) Any event or condition described in
Section 15.9(a)(1) through (7) which occurs (1) within twelve (12) months prior
to a Change in Control or (2) prior to a Change in Control but which the
Executive reasonably demonstrates (A) was at the request of a Third Party who
effectuates a Change in Control or (B) otherwise arose in connection with, or in
anticipation of a Change in Control which has been threatened or proposed and
which actually occurs, shall constitute Good Reason for purposes of this
Agreement notwithstanding that it occurred prior to a Change in Control.
14
<PAGE>
15.10. Incentive Plan. For purposes of this Agreement,
--------------
"Incentive Plan" shall mean the Incentive Compensation Plan for Elected
Officers, or any successor annual incentive plan, maintained by the Company or
any other Affiliate.
15.11. Notice of Termination. For purposes of this
---------------------
Agreement, following a Change in Control, "Notice of Termination" shall mean a
written notice of termination of the Executive's employment, signed by the
Executive if to the Company or by a duly authorized officer of the Company if to
the Executive, which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this Agreement,
--------------
"Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365; provided,
however, that the Pro Rata Bonus shall be reduced, but not below zero, to the
extent of any bonus the Executive is entitled to receive pursuant to the
Incentive Plan in respect of the fiscal year (denoted a "Performance Period"
under the Incentive Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this
----------------------
Agreement, "Successors and Assigns" shall mean, with respect to the Company or
the Corporation, a corporation or other entity acquiring all or substantially
all the assets and business of the Company or the Corporation, as the case may
be (including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this
----------------
Agreement, "Termination Date" shall mean (a) in the case of the Executive's
death, his date of death, (b) if the Executive's employment is terminated for
Disability, thirty (30) days after Notice of Termination is given (provided that
the Executive shall not have returned to the performance of his duties on a
full-time basis during such thirty (30) day period) and (c) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a termination for Cause shall not be less
than thirty (30) days, and in the case of a termination for Good Reason shall
not be more than sixty (60) days, from the date such Notice of Termination is
given); provided, however, that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination in good
faith notifies the other party that a dispute exists concerning the basis for
the
15
<PAGE>
termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been taken).
Notwithstanding the pendency of any such dispute, the Company shall continue to
pay the Executive his Base Amount and continue the Executive as a participant in
all compensation, incentive, bonus, pension, profit sharing, medical,
hospitalization, dental, life insurance and disability benefit plans in which he
was participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in accordance with this Section whether or not
the dispute is resolved in favor of the Company, and the Executive shall not be
obligated to repay to the Company any amounts paid or benefits provided pursuant
to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By: /s/ Fred D. Hafer
---------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
GPU Service, Inc.
By: /s/ Fred D. Hafer
---------------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
By: /s/ Ira H. Jolles
---------------------
Ira H. Jolles
16
Exhibit 10-F
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU International, Inc. (the "Company")
and Bruce L. Levy (the "Executive") amends and restates the former Severance
Protection Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
<PAGE>
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
(a) If the Executive's employment with the Company and with
all other Affiliates of the Corporation shall be terminated (1) by the Company
for Cause or Disability, (2) by reason of the Executive's death, or (3) by the
Executive other than for Good Reason, the Company shall pay to the Executive his
Accrued Compensation. In addition to the foregoing, if the Executive's
employment is terminated by the Company for Disability or by reason of the
Executive's death, the Company shall pay to the Executive or his beneficiaries a
Pro Rata Bonus. The Executive's entitlement to any other compensation or
benefits shall be determined in accordance with the Company's employee benefits
plans and other applicable programs and practices then in effect.
(b) If the Executive's employment with the Company and with
all other Affiliates of the Corporation shall be terminated for any reason other
than as specified in Section 2(a), the Executive shall be entitled to the
following:
(1) the Company shall pay the Executive all Accrued
Compensation and a Pro Rata Bonus;
(2) the Company shall pay the Executive as severance pay
and in lieu of any further compensation for periods subsequent to the
Termination Date, an amount determined by multiplying (A) two times the sum of
(i) the Executive's Base Amount and (ii) the Executive's Bonus Amount, by (B) a
fraction, the numerator of which is the number of months, not to exceed
twenty-four (24), in the period beginning on the Termination Date and ending on
the Executive's Normal Retirement Date (as defined in the Company's Employee
Pension Plan), and the denominator of which is twenty-four (24).
(3)for a number of months equal to twenty-four (24), or
if earlier, until the Executive's Normal Retirement Date (as defined in the
Company's Employee Pension Plan) (the "Continuation Period"), the Company shall
at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive
2
<PAGE>
and his dependents and beneficiaries, than the most favorable of such coverages
and benefits referred to above. The Company's obligation hereunder with respect
to the foregoing coverages and benefits shall be reduced to the extent that the
Executive obtains any such coverages and benefits pursuant to a subsequent
employer's benefit plans, in which case the Company may reduce any of the
coverages or benefits it is required to provide the Executive hereunder so long
as the aggregate coverages and benefits of the combined benefit plans is no less
favorable to the Executive than the coverages and benefits required to be
provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit
any benefits to which the Executive, his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following the Executive's termination of employment, including without
limitation, retiree medical and life insurance benefits;
(4) the Company shall pay or reimburse the Executive for the
costs, fees and expenses of outplacement assistance services (not to exceed
twenty percent (20%) of the sum of (A) the Executive's Base Amount and (B) the
Executive's Bonus Amount) provided by any outplacement agency selected by the
Executive; and
(5) the Company shall provide to the Executive the use of a
Company-leased vehicle, at no cost to the Executive, until the earlier of (A)
the date occurring six (6) months after the Termination Date or (B) the
Executive's sixty-fifth (65th) birthday, after which date the Executive shall
have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the Company
without Cause (1) within twelve (12) months prior to a Change in Control or (2)
prior to the date of a Change in Control but the Executive reasonably
demonstrates that such termination (A) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control (a "Third Party") and who effectuates a Change in Control or
(B) otherwise arose in connection with, or in anticipation of, a Change in
Control which has been threatened or proposed and which actually occurs, such
termination shall be deemed to have occurred after a Change in Control, provided
a Change in Control shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
------------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the
3
<PAGE>
Corporation's assets (within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereunder) or any
affiliate of such Person, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (the "Total
Payments"), is or will be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including any Excise Tax, imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Total Payments.
(2) Determination By Accountant. All mathematical
---------------------------
determinations, and all determinations as to whether any of the Total Payments
are "parachute payments" (within the meaning of Section 280G of the Code), that
are required to be made under this Section 2(d), including determinations as to
whether a Gross-Up Payment is required, the amount of such Gross-Up Payment and
amounts relevant to the last sentence of this Section 2(d)(2), shall be made by
an independent accounting firm selected by the Executive from among the six (6)
largest accounting firms in the United States (the "Accounting Firm"), which
shall provide its determination (the "Determination"), together with detailed
supporting calculations regarding the amount of any Gross-Up Payment and any
other relevant matter, both to the Company and the Executive by no later than
ten (10) days following the Termination Date, if applicable, or such earlier
time as is requested by the Company or the Executive (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive and the Company with a written
statement that such Accounting Firm has concluded that no Excise Tax is payable
(including the reasons therefor) and that the Executive has substantial
authority not to report any Excise Tax on his federal income tax return. If a
Gross-Up Payment is determined to be payable, it shall be paid to the Executive
within twenty (20) days after the Determination (and all accompanying
calculations and other material supporting the Determination) is delivered to
the Company by the Accounting Firm. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive, absent manifest error. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments not made by
4
<PAGE>
the Company should have been made ("Underpayment"), or that Gross-Up Payments
will have been made by the Company which should not have been made
("Overpayments"). In either such event, the Accounting Firm shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the amount of such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. In the case of an Overpayment,
the Executive shall, at the direction and expense of the Company, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established by,
the Company, and otherwise reasonably cooperate with the Company to correct such
Overpayment, provided, however, that (i) the Executive shall not in any event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that he has retained or has recovered as a refund
from the applicable taxing authorities and (ii) this provision shall be
interpreted in a manner consistent with the intent of Section 2(d)(1), which is
to make the Executive whole, on an after-tax basis, from the application of the
Excise Tax, it being understood that the correction of an Overpayment may result
in the Executive repaying to the Company an amount which is less than the
Overpayment.
(e) The amounts provided for in Sections 2(a) and 2(b)(1), (2) and
(4) shall be paid in a single lump sum cash payment within thirty (30) days
after the Executive's Termination Date (or earlier, if required by applicable
law).
(f) The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment
except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in
this Section 2 shall be in lieu of any other severance pay to which the
Executive may be entitled under the GPU System Severance Procedure or any other
plan, agreement or arrangement of the Company or any other Affiliate of the
Corporation.
3. Notice of Termination. Following a Change in Control, any
----------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
---------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered
6
<PAGE>
or sent by certified mail, return receipt requested, postage prepaid, addressed
to the respective addresses last given by each party to the other, provided that
all notices to the Company shall be directed to the attention of the Board with
a copy to the Secretary of the Company. All notices and communications shall be
deemed to have been received on the date of delivery thereof or on the third
business day after the mailing thereof, except that notice of change of address
shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
-----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the
7
<PAGE>
same or at any prior or subsequent time. No agreement or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have
been made by any party which are not expressly set forth in this Agreement.
11. Successors; Binding Agreement.
----------------------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Company, the Corporation and their respective Successors and
Assigns. The Company and the Corporation shall require their respective
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the State of New Jersey
without giving effect to the conflict of laws principles thereof. Any action
brought by any party to this Agreement shall be brought and maintained in a
court of competent jurisdiction in Morris County in the State of New Jersey.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto, and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto, with respect to the subject matter hereof.
15. Definitions.
------------
15.1. Accrued Compensation. For purposes of this Agreement,
--------------------
"Accrued Compensation" shall mean all amounts of compensation for services
rendered to the Company or any other Affiliate that have been earned or accrued
through the Termination Date but that have not been paid as of the Termination
Date including (a) base salary, (b) reimbursement for reasonable and necessary
business expenses incurred by the Executive on behalf of the Company during the
period ending on
8
<PAGE>
the Termination Date, (c) vacation pay and (d) bonuses and incentive
compensation; provided, however, that Accrued Compensation shall not include any
amounts described in clause (a) or clause (d) that have been deferred pursuant
to any salary reduction or deferred compensation elections made by the
Executive.
15.2. Affiliate. For purposes of this Agreement, "Affiliate" means
---------
any entity, directly or indirectly, controlled by, controlling or under common
control with the Corporation or any corporation or other entity acquiring,
directly or indirectly, all or substantially all the assets and business of the
Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement, "Base Amount"
----------
shall mean the Executive's annual base salary at the rate in effect as of the
date of a Change in Control or, if greater, at any time thereafter, determined
without regard to any salary reduction or deferred compensation elections made
by the Executive.
15.4. Bonus Amount. For purposes of this Agreement, "Bonus Amount"
------------
shall mean the greater of (a) the target annual bonus payable to the Executive
under the Incentive Plan in respect of the fiscal year during which the
Termination Date occurs or (b) the highest annual bonus paid or payable under
the Incentive Plan in respect of any of the three full fiscal years ended prior
to the Termination Date or, if greater, the three (3) full fiscal years ended
prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a termination of
-----
employment is for "Cause" if the Executive has been convicted of a felony or the
termination is evidenced by a resolution adopted in good faith by two-thirds of
the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed substantially to
perform his reasonably assigned duties with the Company (other than a failure
resulting from the Executive's incapacity due to physical or mental illness or
from the assignment to the Executive of duties that would constitute Good
Reason) which failure continued for a period of at least thirty (30) days after
a written notice of demand for substantial performance, signed by a duly
authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
(b) intentionally engaged in conduct which is demonstrably and
materially injurious to the Corporation or the Company; provided, however, that
no termination of the Executive's employment shall be for Cause as set forth in
this
9
<PAGE>
Section 15.5(b) until (1) there shall have been delivered to the Executive a
copy of a written notice, signed by a duly authorized officer of the Company,
setting forth that the Executive was guilty of the conduct set forth in this
Section 15.5(b) and specifying the particulars thereof in detail, and (2) the
Executive shall have been provided an opportunity to be heard in person by the
Board of Directors of the Corporation (with the assistance of the Executive's
counsel if the Executive so desires).
No act, nor failure to act, on the Executive's part, shall be
considered "intentional" unless the Executive has acted, or failed to act, with
a lack of good faith and with a lack of reasonable belief that the Executive's
action or failure to act was in the best interest of the Corporation and the
Company. Notwithstanding anything contained in this Agreement to the contrary,
no failure to perform by the Executive after a Notice of Termination is given to
the Company by the Executive shall constitute Cause for purposes of this
Agreement.
15.6. Change in Control. A "Change in Control" shall mean the occurrence
-----------------
during the term of the Agreement of:
(a) An acquisition (other than directly from the Corporation) of any
common stock of the Corporation ("Common Stock") or other voting securities of
the Corporation entitled to vote generally for the election of directors (the
"Voting Securities") by any "Person" (as the term person is used for purposes of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty
percent (20%) or more of the then outstanding shares of Common Stock or the
combined voting power of the Corporation's then outstanding Voting Securities;
provided, however, in determining whether a Change in Control has occurred,
Voting Securities which are acquired in a Non-Control Acquisition (as
hereinafter defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i)
an employee benefit plan (or a trust forming a part thereof) maintained by (A)
the Corporation or (B) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Corporation (a "Subsidiary") (ii) the Corporation
or its Subsidiaries, or (iii) any Person in connection with a Non-Control
Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of August 1, 1996, are members of the
Board of Directors of the Corporation (the "Incumbent Board"), cease for any
reason to constitute at least seventy percent (70%) of the members of the Board
of Directors of the Corporation; provided, however, that if the election, or
nomination for election by the Corporation's shareholders, of any new director
was approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Agreement, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Corporation (a "Proxy Contest") including by
reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or
reorganization with or into the Corporation or in which
securities of the Corporation are issued, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
with or into the Corporation or in which securities of
the Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or
11
<PAGE>
reorganization constitute at least seventy
percent (70%) of the members of the board of
directors of the Surviving Corporation, or a
corporation beneficially directly or
indirectly owning a majority of the Voting
Securities of the Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then outstanding
common stock or Voting Securities as a result of the acquisition of Common Stock
or Voting Securities by the Corporation which, by reducing the number of shares
of Common Stock or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of shares of Common Stock or Voting Securities by
the Corporation, and after such share acquisition by the Corporation, the
Subject Person becomes the Beneficial Owner of any additional shares of Common
Stock or Voting Securities which increases the percentage of the then
outstanding shares of Common Stock or Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
12
<PAGE>
15.7. Company and Corporation. For purposes of this
-----------------------
Agreement, all references to the Company and the Corporation shall include their
respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
----------
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9. Good Reason. (a) For purposes of this Agreement,
-----------
"Good Reason" shall mean the occurrence after a Change in Control of any of the
following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the Executive's
annual base salary;
(3) the relocation of the offices of the Company
at which the Executive is principally employed to a location more than
twenty-five (25) miles from the location of such offices immediately prior to
such relocation, or the Company's requiring the Executive to be based anywhere
other than at such offices, except to the extent the Executive was not
previously assigned to a principal place of duty and except for required travel
on the Company's business to an extent substantially consistent with the
Executive's previous business travel obligations;
13
<PAGE>
(4) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Company in which the Executive participated, within
seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to continue in effect
(without reduction in benefit level, and/or reward opportunities) any material
compensation or employee benefit plan in which the Executive was participating
immediately prior to such failure by the Company, including, but not limited to,
any of the plans listed in Appendix A hereto, unless a substitute or replacement
plan has been implemented which provides substantially identical compensation or
benefits to the Executive or (B) to continue to provide the Executive with
compensation and benefits, in the aggregate, at least equal (in terms of benefit
levels and/or reward opportunities) to those provided for under each other
compensation or employee benefit plan, program and practice in which the
Executive was participating immediately prior to such failure by the Company;
(6) the failure of the Company to obtain from its
Successors or Assigns the express assumption and agreement required under
Section 11 hereof; or
(7) any purported termination of the Executive's employment
by the Company which is not effected pursuant to a Notice of Termination
satisfying the terms set forth in the definition of Notice of Termination (and,
if applicable, the terms set forth in the definition of Cause).
(b) Any event or condition described in Section 15.9(a)(1)
through (7) which occurs (1) within twelve (12) months prior to a Change in
Control or (2) prior to a Change in Control but which the Executive reasonably
demonstrates (A) was at the request of a Third Party who effectuates a Change in
Control or (B) otherwise arose in connection with, or in anticipation of a
Change in Control which has been threatened or proposed and which actually
occurs, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to a Change in Control.
15.10. Incentive Plan. For purposes of this
--------------
Agreement, "Incentive Plan" shall
mean the Annual Performance Award
Plan, or any successor annual
incentive plan, maintained by the
Company or any other Affiliate.
14
<PAGE>
15.11. Notice of Termination. For purposes of this
---------------------
Agreement, following a Change in Control, "Notice of Termination" shall mean a
written notice of termination of the Executive's employment, signed by the
Executive if to the Company or by a duly authorized officer of the Company if to
the Executive, which indicates the specific termination provision in this
Agreement, if any, relied upon and which sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
15.12. Pro Rata Bonus. For purposes of this Agreement,
--------------
"Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365; provided,
however, that the Pro Rata Bonus shall be reduced, but not below zero, to the
extent of any bonus the Executive is entitled to receive pursuant to the
Incentive Plan in respect of the fiscal year (denoted a "Performance Period"
under the Incentive Plan) in which the Termination Date occurs.
15.13. Successors and Assigns. For purposes of this
----------------------
Agreement, "Successors and Assigns" shall mean, with respect to the Company or
the Corporation, a corporation or other entity acquiring all or substantially
all the assets and business of the Company or the Corporation, as the case may
be (including this Agreement) whether by operation of law or otherwise.
15.14. Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean (a) in the case of the Executive's death, his date
of death, (b) if the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time basis
during such thirty (30) day period) and (c) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of Termination
(which, in the case of a termination for Cause shall not be less than thirty
(30) days, and in the case of a termination for Good Reason shall not be more
than sixty (60) days, from the date such Notice of Termination is given);
provided, however, that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination in good
faith notifies the other party that a dispute exists concerning the basis for
the termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been taken).
Notwithstanding the pendency of any such
15
<PAGE>
dispute, the Company shall continue to pay the Executive his Base Amount and
continue the Executive as a participant in all compensation, incentive, bonus,
pension, profit sharing, medical, hospitalization, dental, life insurance and
disability benefit plans in which he was participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved in
accordance with this Section whether or not the dispute is resolved in favor of
the Company, and the Executive shall not be obligated to repay to the Company
any amounts paid or benefits provided pursuant to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By:/s/ Fred D. Hafer
-----------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
GPU International, Inc.
By:/s/ Fred D. Hafer
-----------------
ATTEST: Fred D. Hafer
Chairman
Secretary
By:/s/ Bruce L. Levy
-----------------
Bruce L. Levy
16
Exhibit 10-G
SEVERANCE PROTECTION AGREEMENT
------------------------------
THIS AGREEMENT made as of the 5th day of June, 1997, by and
between GPU, Inc. (the "Corporation"), GPU Generation Inc. (the "Company") and
Robert L. Wise (the "Executive") amends and restates the former Severance
Protection Agreement dated February 6, 1997.
WHEREAS, the Board of Directors of the Corporation and the Board
of Directors of the Company (the "Boards") recognize that the possibility of a
Change in Control (as hereinafter defined) exists and that the threat or the
occurrence of a Change in Control can result in significant distraction of the
Company's key management personnel because of the uncertainties inherent in such
a situation;
WHEREAS, the Boards have determined that it is essential and in
the best interest of the Company, and the Corporation and its stockholders, for
the Company to retain the services of the Executive in the event of a threat or
occurrence of a Change in Control and to ensure the Executive's continued
dedication and efforts in such event without undue concern for the Executive's
personal financial and employment security; and
WHEREAS, in order to induce the Executive to remain in the
employ of the Company, particularly in the event of a threat or the occurrence
of a Change in Control, the Company desires to enter into this Agreement with
the Executive to provide the Executive with certain benefits in the event the
Executive's employment is terminated as a result of, or in connection with, a
Change in Control.
NOW, THEREFORE, in consideration of the respective agreements of
the parties contained herein, it is agreed as follows:
1. Term of Agreement. This Agreement shall commence as of
------------------
November 1, 1996, and shall continue in effect until October 31, 1998 (the
"Term"); provided, however, that on November 1, 1997, and on each November 1
thereafter, the Term shall automatically be extended for one (1) year unless
either the Executive or the Company shall have given written notice to the other
at least ninety (90) days prior thereto that the Term shall not be so extended;
provided, further, however, that following the occurrence of a Change in
Control, the Term shall not expire prior to the expiration of twenty-four (24)
months after such occurrence.
2. Termination of Employment. If, during the Term, the
---------------------------
Executive's employment with the Company and with all other Affiliates of the
Corporation shall be terminated within twenty-four (24) months following a
Change in Control, the Executive shall be entitled to the following compensation
and benefits:
<PAGE>
(a) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated (1) by the
Company for Cause or Disability, (2) by reason of the Executive's death, or (3)
by the Executive other than for Good Reason, the Company shall pay to the
Executive his Accrued Compensation. In addition to the foregoing, if the
Executive's employment is terminated by the Company for Disability or by reason
of the Executive's death, the Company shall pay to the Executive or his
beneficiaries a Pro Rata Bonus. The Executive's entitlement to any other
compensation or benefits shall be determined in accordance with the Company's
employee benefits plans and other applicable programs and practices then in
effect.
(b) If the Executive's employment with the Company and
with all other Affiliates of the Corporation shall be terminated for any reason
other than as specified in Section 2(a), the Executive shall be entitled to the
following:
(1) the Company shall pay the Executive all
Accrued Compensation and a Pro Rata Bonus;
(2) the Company shall pay the Executive as
severance pay and in lieu of any further compensation for periods subsequent to
the Termination Date, an amount determined by multiplying (A) two times the sum
of (i) the Executive's Base Amount and (ii) the Executive's Bonus Amount, by (B)
a fraction, the numerator of which is the number of months, not to exceed
twenty-four (24), in the period beginning on the Termination Date and ending on
the Executive's Normal Retirement Date (as defined in the Company's Employee
Pension Plan), and the denominator of which is twenty-four (24).
(3) for a number of months equal to twenty-four
(24), or if earlier, until the Executive's Normal Retirement Date (as defined in
the Company's Employee Pension Plan) (the "Continuation Period"), the Company
shall at its expense continue on behalf of the Executive and his dependents and
beneficiaries the life insurance, disability, medical, dental and
hospitalization coverages and benefits provided to the Executive immediately
prior to the Change in Control or, if greater, the coverages and benefits
provided at any time thereafter. The coverages and benefits (including
deductibles and costs) provided in this Section 2(b)(3) during the Continuation
Period shall be no less favorable to the Executive and his dependents and
beneficiaries, than the most favorable of such coverages and benefits referred
to above. The Company's obligation hereunder with respect to the foregoing
coverages and benefits shall be reduced to the extent that the Executive obtains
any such coverages and benefits pursuant to a subsequent employer's
2
<PAGE>
benefit plans, in which case the Company may reduce any of the coverages or
benefits it is required to provide the Executive hereunder so long as the
aggregate coverages and benefits of the combined benefit plans is no less
favorable to the Executive than the coverages and benefits required to be
provided hereunder. This Section 2(b)(3) shall not be interpreted so as to limit
any benefits to which the Executive, his dependents or beneficiaries may be
entitled under any of the Company's employee benefit plans, programs or
practices following the Executive's termination of employment, including without
limitation, retiree medical and life insurance benefits;
(4) the Company shall pay or reimburse the Executive for
the costs, fees and expenses of outplacement assistance services (not to exceed
twenty percent (20%) of the sum of (A) the Executive's Base Amount and (B) the
Executive's Bonus Amount) provided by any outplacement agency selected by the
Executive; and
(5) the Company shall provide to the Executive the use of a
Company-leased vehicle, at no cost to the Executive, until the earlier of (A)
the date occurring six (6) months after the Termination Date or (B) the
Executive's sixty-fifth (65th) birthday, after which date the Executive shall
have the option to purchase the vehicle at its "blue book" value.
(c) If the Executive's employment is terminated by the Company
without Cause (1) within twelve (12) months prior to a Change in Control or (2)
prior to the date of a Change in Control but the Executive reasonably
demonstrates that such termination (A) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control (a "Third Party") and who effectuates a Change in Control or
(B) otherwise arose in connection with, or in anticipation of, a Change in
Control which has been threatened or proposed and which actually occurs, such
termination shall be deemed to have occurred after a Change in Control, provided
a Change in Control shall actually have occurred.
(d) (1) Gross-Up Payment. In the event it shall be
-----------------
determined that any payment or distribution of any type to or for the benefit of
the Executive, by the Company, the Corporation, any Affiliate, any Person (as
defined in Section 15.6(a) hereof) who acquires ownership or effective control
of the Corporation or ownership of a substantial portion of the Corporation's
assets (within the meaning of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code"), and the regulations thereunder) or any affiliate of
such Person, whether paid or payable or distributed or distributable pursuant to
the
3
<PAGE>
terms of this Agreement or otherwise (the "Total Payments"), is or will be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Total Payments.
(2) Determination By Accountant. All mathematical determinations,
and all determinations as to whether any of the Total Payments are "parachute
payments" (within the meaning of Section 280G of the Code), that are required to
be made under this Section 2(d), including determinations as to whether a
Gross-Up Payment is required, the amount of such Gross-Up Payment and amounts
relevant to the last sentence of this Section 2(d)(2), shall be made by an
independent accounting firm selected by the Executive from among the six (6)
largest accounting firms in the United States (the "Accounting Firm"), which
shall provide its determination (the "Determination"), together with detailed
supporting calculations regarding the amount of any Gross-Up Payment and any
other relevant matter, both to the Company and the Executive by no later than
ten (10) days following the Termination Date, if applicable, or such earlier
time as is requested by the Company or the Executive (if the Executive
reasonably believes that any of the Total Payments may be subject to the Excise
Tax). If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive and the Company with a written
statement that such Accounting Firm has concluded that no Excise Tax is payable
(including the reasons therefor) and that the Executive has substantial
authority not to report any Excise Tax on his federal income tax return. If a
Gross-Up Payment is determined to be payable, it shall be paid to the Executive
within twenty (20) days after the Determination (and all accompanying
calculations and other material supporting the Determination) is delivered to
the Company by the Accounting Firm. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive, absent manifest error. As a
result of uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments not made by the Company should have been made
("Underpayment"), or that Gross-Up Payments will have been made by the Company
which should
4
<PAGE>
not have been made ("Overpayments"). In either such event, the Accounting Firm
shall determine the amount of the Underpayment or Overpayment that has occurred.
In the case of an Underpayment, the amount of such Underpayment shall be
promptly paid by the Company to or for the benefit of the Executive. In the case
of an Overpayment, the Executive shall, at the direction and expense of the
Company, take such steps as are reasonably necessary (including the filing of
returns and claims for refund), follow reasonable instructions from, and
procedures established by, the Company, and otherwise reasonably cooperate with
the Company to correct such Overpayment, provided, however, that (i) the
Executive shall not in any event be obligated to return to the Company an amount
greater than the net after-tax portion of the Overpayment that he has retained
or has recovered as a refund from the applicable taxing authorities and (ii)
this provision shall be interpreted in a manner consistent with the intent of
Section 2(d)(1), which is to make the Executive whole, on an after-tax basis,
from the application of the Excise Tax, it being understood that the correction
of an Overpayment may result in the Executive repaying to the Company an amount
which is less than the Overpayment.
(e) The amounts provided for in Sections 2(a) and 2(b)(1),
(2) and (4) shall be paid in a single lump sum cash payment within thirty (30)
days after the Executive's Termination Date (or earlier, if required by
applicable law).
(f) The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Executive in any subsequent employment
except as provided in Section 2(b)(3).
(g) The severance pay and benefits provided for in
this Section 2 shall be in lieu of any other severance pay to which the
Executive may be entitled under the GPU System Severance Procedure or any other
plan, agreement or arrangement of the Company or any other Affiliate of the
Corporation.
3. Notice of Termination. Following a Change in Control, any
----------------------
intended termination of the Executive's employment by the Company shall be
communicated by a Notice of Termination from the Company to the Executive, and
any intended termination of the Executive's employment by the Executive for Good
Reason shall be communicated by a Notice of Termination from the Executive to
the Company.
5
<PAGE>
4. Fees and Expenses. The Company shall pay all legal fees and
------------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (a) the termination of the
Executive's employment by the Company or by the Executive for Good Reason
(including all such fees and expenses, if any, incurred in contesting, defending
or disputing the basis for any such termination of employment), (b) the
Executive's hearing before the Board of Directors of the Corporation as
contemplated in Section 15.5 of this Agreement or (c) the Executive seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company under which the Executive is
or may be entitled to receive benefits; provided, however, that the payment of
fees and expenses pursuant to this Section 4(c) shall be made only after, and
only to the extent that, the Executive is unsuccessful in his attempt to obtain
or enforce such right or benefit through the procedures established under the
Legal Defense Fund maintained by the Company under the GPU System Companies
Master Executives' Benefits Protection Trust (or any similar fund under a
successor trust).
5. Transfer of Employment. Notwithstanding any other provision
----------------------
herein to the contrary, the Company shall cease to have any further obligation
or liability to the Executive under this Agreement if (a) the Executive's
employment with the Company terminates as a result of the transfer of his
employment to any other Affiliate of the Corporation, (b) this Agreement is
assigned to such other Affiliate, and (c) such other Affiliate expressly assumes
and agrees to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no assignment had taken
place. Any Affiliate to which this Agreement is so assigned shall be treated as
the "Company" for all purposes of this Agreement on or after the date as of
which such assignment to the Affiliate, and the Affiliate's assumption and
agreement to so perform this Agreement, becomes effective.
6. Corporation's Obligation. The Corporation agrees that it will
------------------------
take such steps as may be necessary to cause the Company (or any Affiliate that
has become the "Company" pursuant to Section 5 hereof) to meet each of its
obligations to the Executive under this Agreement.
7. Notice. For the purposes of this Agreement, notices and all
------
other communications provided for in the Agreement (including any Notice of
Termination) shall be in writing, shall be signed by the Executive if to the
Company or by a duly authorized officer of the Company if to the Executive, and
shall be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage
6
<PAGE>
prepaid, addressed to the respective addresses last given by each party to the
other, provided that all notices to the Company shall be directed to the
attention of the Board with a copy to the Secretary of the Company. All notices
and communications shall be deemed to have been received on the date of delivery
thereof or on the third business day after the mailing thereof, except that
notice of change of address shall be effective only upon receipt.
8. Nature of Rights. The Executive shall have the status of a
----------------
mere unsecured creditor of the Company and the Corporation with respect to his
right to receive any payment under this Agreement. This Agreement shall
constitute a mere promise by the Company and the Corporation to make payments in
the future of the benefits provided for herein. It is the intention of the
parties hereto that the arrangements reflected in this Agreement shall be
treated as unfunded for tax purposes and, if it should be determined that Title
I of ERISA is applicable to this Agreement, for purposes of Title I of ERISA.
Except as provided in Section 2(g), nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company, the Corporation or
any other Affiliate of the Corporation and for which the Executive may qualify,
nor shall anything herein limit or reduce such rights as the Executive may have
under any other agreements with the Company, the Corporation or any other
Affiliate of the Corporation. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan or program of the
Company, the Corporation or any other Affiliate of the Corporation shall be
payable in accordance with such plan or program, except as explicitly modified
by this Agreement.
9. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, defense, recoupment, or other right which
the Company may have against the Executive or others.
10. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive, the Corporation and the
Company. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreement or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by any party
which are not expressly set forth in this Agreement.
7
<PAGE>
11. Successors; Binding Agreement.
----------------------------------
(a) This Agreement shall be binding upon and shall
inure to the benefit of the Company, the Corporation and their respective
Successors and Assigns. The Company and the Corporation shall require their
respective Successors and Assigns to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company and/or the
Corporation would be required to perform it if no such succession or assignment
had taken place.
(b) Neither this Agreement nor any right or interest
hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal personal representative.
12. Governing Law. This Agreement shall be governed by and
--------------
construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to the conflict of laws principles thereof.
Any action brought by any party to this Agreement shall be brought and
maintained in a court of competent jurisdiction in Berks County in the
Commonwealth of Pennsylvania.
13. Severability. The provisions of this Agreement shall be
------------
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability of the other provisions hereof.
14. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement between the parties hereto, and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto, with respect to the subject matter hereof.
15. Definitions.
-------------
15.1.Accrued Compensation. For purposes of this Agreement,
--------------------
"Accrued Compensation" shall mean all amounts of compensation for services
rendered to the Company or any other Affiliate that have been earned or accrued
through the Termination Date but that have not been paid as of the Termination
Date including (a) base salary, (b) reimbursement for reasonable and necessary
business expenses incurred by the Executive on behalf of the Company during the
period ending on the Termination Date, (c) vacation pay and (d) bonuses and
incentive compensation; provided, however, that Accrued
8
<PAGE>
Compensation shall not include any amounts described in clause (a) or clause (d)
that have been deferred pursuant to any salary reduction or deferred
compensation elections made by the Executive.
15.2. Affiliate. For purposes of this Agreement,
----------
"Affiliate" means any entity, directly or indirectly, controlled by, controlling
or under common control with the Corporation or any corporation or other entity
acquiring, directly or indirectly, all or substantially all the assets and
business of the Corporation, whether by operation of law or otherwise.
15.3. Base Amount. For purposes of this Agreement,
-----------
"Base Amount" shall mean the Executive's annual base salary at the rate in
effect as of the date of a Change in Control or, if greater, at any time
thereafter, determined without regard to any salary reduction or deferred
compensation elections made by the Executive.
15.4. Bonus Amount. For purposes of this Agreement,
------------
"Bonus Amount" shall mean the greater of (a) the target annual bonus payable to
the Executive under the Incentive Plan in respect of the fiscal year during
which the Termination Date occurs or (b) the highest annual bonus paid or
payable under the Incentive Plan in respect of any of the three full fiscal
years ended prior to the Termination Date or, if greater, the three (3) full
fiscal years ended prior to the Change in Control.
15.5. Cause. For purposes of this Agreement, a
------
termination of employment is for "Cause" if the Executive has been convicted of
a felony or the termination is evidenced by a resolution adopted in good faith
by two-thirds of the Board of Directors of the Corporation that the Executive:
(a) intentionally and continually failed
substantially to perform his reasonably assigned duties with the Company (other
than a failure resulting from the Executive's incapacity due to physical or
mental illness or from the assignment to the Executive of duties that would
constitute Good Reason) which failure continued for a period of at least thirty
(30) days after a written notice of demand for substantial performance, signed
by a duly authorized officer of the Company, has been delivered to the Executive
specifying the manner in which the Executive has failed substantially to
perform, or
(b) intentionally engaged in conduct which is
demonstrably and materially injurious to the Corporation or the Company;
provided, however, that no termination of the Executive's employment shall be
for Cause as set forth in this Section 15.5(b) until (1) there shall have been
delivered to the
9
<PAGE>
Executive a copy of a written notice, signed by a duly authorized officer of the
Company, setting forth that the Executive was guilty of the conduct set forth in
this Section 15.5(b) and specifying the particulars thereof in detail, and (2)
the Executive shall have been provided an opportunity to be heard in person by
the Board of Directors of the Corporation (with the assistance of the
Executive's counsel if the Executive so desires).
No act, nor failure to act, on the Executive's part, shall be
considered "intentional" unless the Executive has acted, or failed to act, with
a lack of good faith and with a lack of reasonable belief that the Executive's
action or failure to act was in the best interest of the Corporation and the
Company. Notwithstanding anything contained in this Agreement to the contrary,
no failure to perform by the Executive after a Notice of Termination is given to
the Company by the Executive shall constitute Cause for purposes of this
Agreement.
15.6. Change in Control. A "Change in Control" shall mean the
-----------------
occurrence during the term of the Agreement of:
(a) An acquisition (other than directly from the Corporation)
of any common stock of the Corporation ("Common Stock") or other voting
securities of the Corporation entitled to vote generally for the election of
directors (the "Voting Securities") by any "Person" (as the term person is used
for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty percent (20%) or more of the then outstanding shares of
Common Stock or the combined voting power of the Corporation's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a Non-Control Acquisition
(as hereinafter defined) shall not constitute an acquisition which would cause a
Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i)
an employee benefit plan (or a trust forming a part thereof) maintained by (A)
the Corporation or (B) any corporation or other Person of which a majority of
its voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Corporation (a "Subsidiary") (ii) the Corporation
or its Subsidiaries, or (iii) any Person in connection with a Non-Control
Transaction (as hereinafter defined);
10
<PAGE>
(b) The individuals who, as of August 1, 1996, are
members of the Board of Directors of the Corporation (the "Incumbent Board"),
cease for any reason to constitute at least seventy percent (70%) of the members
of the Board of Directors of the Corporation; provided, however, that if the
election, or nomination for election by the Corporation's shareholders, of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement, be considered as
a member of the Incumbent Board; provided further, however, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board of Directors of the Corporation (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest; or
(c) The consummation of:
(1) A merger, consolidation or
reorganization with or into the Corporation or in which
securities of the Corporation are issued, unless such
merger, consolidation or reorganization is a
"Non-Control Transaction." A "Non-Control Transaction"
shall mean a merger, consolidation or reorganization
with or into the Corporation or in which securities of
the Corporation are issued where:
(A) the shareholders of the
Corporation, immediately before such merger,
consolidation or reorganization, own
directly or indirectly immediately following
such merger, consolidation or
reorganization, at least sixty percent (60%)
of the combined voting power of the
outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in substantially
the same proportion as their ownership of
the Voting Securities immediately before
such merger, consolidation or
reorganization,
11
<PAGE>
(B) the individuals who
were members of the Incumbent Board
immediately prior to the execution of the
agreement providing for such merger,
consolidation or reorganization constitute
at least seventy percent (70%) of the
members of the board of directors of the
Surviving Corporation, or a corporation
beneficially directly or indirectly owning a
majority of the Voting Securities of the
Surviving Corporation, and
(C) no Person other than
(i) the Corporation, (ii) any Subsidiary,
(iii) any employee benefit plan (or any
trust forming a part thereof) that,
immediately prior to such merger,
consolidation or reorganization, was
maintained by the Corporation, the Surviving
Corporation, or any Subsidiary, or (iv) any
Person who, immediately prior to such
merger, consolidation or reorganization had
Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting
Securities or common stock of the
Corporation, has Beneficial Ownership of
twenty percent (20%) or more of the combined
voting power of the Surviving Corporation's
then outstanding voting securities or its
common stock.
(2) A complete liquidation or
dissolution of the Corporation; or
(3) The sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer to a
Subsidiary).
Notwithstanding the foregoing, a Change in Control shall
not be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the then outstanding
common stock or Voting Securities as a result of the acquisition of Common Stock
or Voting Securities by the Corporation which, by reducing the number of shares
of Common Stock or Voting Securities then outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of shares of Common Stock or Voting Securities by
the Corporation, and after such share acquisition by the Corporation,
12
<PAGE>
15.7. Company and Corporation.
-----------------------
For purposes of this Agreement, all references to the Company and the
Corporation shall include their respective Successors and Assigns.
15.8. Disability. For purposes of this Agreement,
----------
"Disability" shall mean a physical or mental infirmity which impairs the
Executive's ability to substantially perform his duties with the Company for six
(6) consecutive months, and within the time period set forth in a Notice of
Termination given to the Executive (which time period shall not be less than
thirty (30) days), the Executive shall not have returned to full-time
performance of his duties; provided, however, that if the Company's Voluntary
Employees Beneficiary Association Long Term Disability Income Plan, or any
successor plan (the "Disability Plan"), is then in effect, the Executive shall
not be deemed disabled for purposes of this Agreement unless the Executive is
also eligible for "Total Disability" (as defined in the Disability Plan)
benefits (or similar benefits in the event of a successor plan) under the
Disability Plan.
15.9.Good Reason. (a) For purposes of this Agreement,
-----------
"Good Reason" shall mean the occurrence after a Change in Control of any of the
following events or conditions:
(1) a change in the Executive's status, title,
position or responsibilities (including reporting responsibilities) which, in
the Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities as in effect immediately prior
thereto; the assignment to the Executive of any duties or responsibilities
which, in the Executive's reasonable judgment, are inconsistent with his status,
title, position or responsibilities; or any removal of the Executive from or
failure to reappoint or reelect him to any of such offices or positions, except
in connection with the termination of his employment for Disability, Cause, as a
result of his death or by the Executive other than for Good Reason;
(2) a reduction in the rate of the Executive's
annual base salary;
(3) the relocation of the offices of the Company
at which the Executive is principally employed to a location more than
twenty-five (25) miles from the location of such offices immediately prior to
such relocation, or the Company's requiring the Executive to be based anywhere
other than at such offices, except to the extent the Executive was not
previously assigned to a principal place of duty and except for required travel
on the Company's business to an extent substantially consistent with the
Executive's previous business travel obligations;
13
<PAGE>
the Subject Person becomes the Beneficial Owner of any additional shares of
Common Stock or Voting Securities which increases the percentage of the then
outstanding shares of Common Stock or Voting Securities Beneficially Owned by
the Subject Person, then a Change in Control shall occur.
(4) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Company in which the Executive participated, within
seven (7) days of the date such compensation is due;
(5) the failure by the Company (A) to continue in effect
(without reduction in benefit level, and/or reward opportunities) any material
compensation or employee benefit plan in which the Executive was participating
immediately prior to such failure by the Company, including, but not limited to,
any of the plans listed in Appendix A hereto, unless a substitute or replacement
plan has been implemented which provides substantially identical compensation or
benefits to the Executive or (B) to continue to provide the Executive with
compensation and benefits, in the aggregate, at least equal (in terms of benefit
levels and/or reward opportunities) to those provided for under each other
compensation or employee benefit plan, program and practice in which the
Executive was participating immediately prior to such failure by the Company;
(6) the failure of the Company to obtain from its Successors
or Assigns the express assumption and agreement required under Section 11
hereof; or
(7) any purported termination of the Executive's employment
by the Company which is not effected pursuant to a Notice of Termination
satisfying the terms set forth in the definition of Notice of Termination (and,
if applicable, the terms set forth in the definition of Cause).
(b) Any event or condition described in Section 15.9(a)(1)
through (7) which occurs (1) within twelve (12) months prior to a Change in
Control or (2) prior to a Change in Control but which the Executive reasonably
demonstrates (A) was at the request of a Third Party who effectuates a Change in
Control or (B) otherwise arose in connection with, or in anticipation of a
Change in Control which has been threatened or proposed and which actually
occurs, shall constitute Good Reason for purposes of this Agreement
notwithstanding that it occurred prior to a Change in Control.
15.10. Incentive Plan. For purposes of this Agreement, "Incentive Plan"
--------------
shall mean the Incentive Compensation Plan for Elected Officers, or any
successor annual incentive plan, maintained by the Company or any other
Affiliate.
14
<PAGE>
15.11. Notice of Termination. For purposes of this Agreement,
---------------------
following a Change in Control, "Notice of Termination" shall mean a written
notice of termination of the Executive's employment, signed by the Executive if
to the Company or by a duly authorized officer of the Company if to the
Executive, which indicates the specific termination provision in this Agreement,
if any, relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
15.12.Pro Rata Bonus. For purposes of this Agreement,
--------------
"Pro Rata Bonus" shall mean an amount equal to the Bonus Amount multiplied by a
fraction the numerator of which is the number of days in such fiscal year
through the Termination Date and the denominator of which is 365; provided,
however, that the Pro Rata Bonus shall be reduced, but not below zero, to the
extent of any bonus the Executive is entitled to receive pursuant to the
Incentive Plan in respect of the fiscal year (denoted a "Performance Period"
under the Incentive Plan) in which the Termination Date occurs. 15.13.
Successors and Assigns. For purposes of this Agreement, "Successors and
Assigns" shall mean, with respect to the Company or the Corporation, a
corporation or other entity acquiring all or substantially all the assets and
business of the Company or the Corporation, as the case may be (including this
Agreement) whether by operation of law or otherwise.
15.14.Termination Date. For purposes of this Agreement,
----------------
"Termination Date" shall mean (a) in the case of the Executive's death, his date
of death, (b) if the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a full-time basis
during such thirty (30) day period) and (c) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of Termination
(which, in the case of a termination for Cause shall not be less than thirty
(30) days, and in the case of a termination for Good Reason shall not be more
than sixty (60) days, from the date such Notice of Termination is given);
provided, however, that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination in good
faith notifies the other party that a dispute exists concerning the basis for
the termination, the Termination Date shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, or by the
final judgment, order or decree of a court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal
15
<PAGE>
having been taken). Notwithstanding the pendency of any such dispute, the
Company shall continue to pay the Executive his Base Amount and continue the
Executive as a participant in all compensation, incentive, bonus, pension,
profit sharing, medical, hospitalization, dental, life insurance and disability
benefit plans in which he was participating when the notice giving rise to the
dispute was given, until the dispute is finally resolved in accordance with this
Section whether or not the dispute is resolved in favor of the Company, and the
Executive shall not be obligated to repay to the Company any amounts paid or
benefits provided pursuant to this sentence.
IN WITNESS WHEREOF, the Corporation and the Company have caused
this Agreement to be executed by their duly authorized officers and the
Executive has executed this Agreement as of the day and year first above
written.
GPU, Inc.
By: /s/ Fred D. Hafer
-----------------
ATTEST: Fred D. Hafer
Chairman, President and
Chief Executive Officer
Secretary
GPU Generation Inc.
By: /s/ Fred D. Hafer
-----------------
ATTEST: Fred D. Hafer
Chief Executive Officer
Secretary
By: /s/ Robert L. Wise
------------------
Robert L. Wise
16
Exhibit 12A
Page 1 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
------------ --------
OPERATING REVENUES $2,058,196 $1,993,795
--------- ---------
OPERATING EXPENSES 1,582,940 1,546,073
Interest portion of rentals (A) 13,956 11,814
Fixed charges of service company
subsidiaries (B) 1,325 1,417
--------- ---------
Net expense 1,567,659 1,532,842
--------- ---------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 2,896 3,104
Equity in undistributed earnings
of affiliates, net 30,844 52,314
Other income, net 40,912 6,231
Minority interest net income (749) (613)
--------- --------
Total other income and deductions 73,903 61,036
--------- --------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 564,440 $ 521,989
========= =========
FIXED CHARGES:
Interest on funded indebtedness $ 162,614 $ 115,427
Other interest (C) 32,932 32,708
Preferred stock dividends of
subsidiaries on a pretax basis (E) 9,521 10,304
Interest portion of rentals (A) 13,956 11,814
--------- ---------
Total fixed charges $ 219,023 $ 170,253
========= =========
RATIO OF EARNINGS TO FIXED CHARGES 2.58 3.07
==== ====
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (D) 2.58 3.07
==== ====
<PAGE>
Exhibit 12A
Page 2 of 2
GPU, INC. AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
- ------------------------
NOTES:
(A) GPU has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Represents fixed charges of GPU Service, Inc. and GPU Nuclear, Inc. which
are accounted for as operating expenses in the consolidated income
statement. GPU has removed the fixed charges from operating expenses and
included such amounts in fixed charges as interest on funded indebtedness
and other interest for this statement.
(C) Includes dividends on subsidiary-obligated mandatorily redeemable
preferred securities of $14,444 for the six month periods ended June 30,
1998 and 1997, respectively.
(D) GPU, Inc., the parent holding company, does not have any preferred stock
outstanding, therefore, the ratio of earnings to combined fixed charges
and preferred stock dividends is the same as the ratio of earnings to
fixed charges.
(E) Calculation of preferred stock dividends of subsidiaries on a pretax basis
is as follows:
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
---------- -------
Income before provision for income taxes and
preferred stock dividends of subsidiaries $354,938 $362,040
Income before extraordinary item in 1998
and preferred stock dividends of subsidiaries 219,609 231,888
Pretax earnings ratio 161.6% 156.1%
Preferred stock dividends of subsidiaries 5,892 6,601
Preferred stock dividends of subsidiaries on
a pretax basis 9,521 10,304
Exhibit 12B
Page 1 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
Six Months Ended
June 30, June 30,
1998 1997
------------ --------
OPERATING REVENUES $ 951,228 $ 988,669
--------- ---------
OPERATING EXPENSES 748,160 789,454
Interest portion of rentals (A) 5,099 5,381
--------- ---------
Net expense 743,061 784,073
--------- ---------
OTHER INCOME:
Allowance for funds used
during construction 1,386 1,471
Other income, net 4,918 147
--------- ---------
Total other income 6,304 1,618
--------- ---------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $ 214,471 $ 206,214
========= =========
FIXED CHARGES:
Interest on funded indebtedness $ 43,641 $ 45,345
Other interest (B) 10,937 13,008
Interest portion of rentals (A) 5,099 5,381
--------- ---------
Total fixed charges $ 59,677 $ 63,734
========= =========
RATIO OF EARNINGS TO FIXED CHARGES 3.59 3.24
==== ====
Preferred stock dividend requirement $ 5,303 $ 6,041
Ratio of income before provision for
income taxes to net income (C) 166.3% 152.3%
--------- ---------
Preferred stock dividend requirement
on a pretax basis 8,819 9,200
Fixed charges, as above 59,677 63,734
--------- ---------
Total fixed charges and
preferred stock dividends $ 68,496 $ 72,934
========= =========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.13 2.83
==== ====
<PAGE>
Exhibit 12B
Page 2 of 2
JERSEY CENTRAL POWER & LIGHT COMPANY AND SUBSIDIARY COMPANY
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
- -------------------------
NOTES:
(A) JCP&L has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable preferred
securities of $5,350 for the six month periods ended June 30, 1998 and
1997, respectively.
(C) Represents income before provision for income taxes of $154,794 and
$142,480 for the six month periods ended June 30, 1998 and 1997,
respectively, divided by net income of $93,101 and $93,561, respectively
for the same periods.
Exhibit 12C
Page 1 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
Six Months Ended
---------------------------
June 30, June 30,
1998 1997
----------- --------
OPERATING REVENUES $460,778 $463,814
------- -------
OPERATING EXPENSES 349,200 343,400
Interest portion of rentals (A) 4,979 2,503
------- -------
Net expense 344,221 340,897
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 521 712
Other income/(expense), net (9,381) 2,104
------- -------
Total other income and deductions (8,860) 2,816
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $107,697 $125,733
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 21,247 $ 22,294
Other interest (B) 9,053 8,128
Interest portion of rentals (A) 4,979 2,503
------- -------
Total fixed charges $ 35,279 $ 32,925
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.05 3.82
==== ====
Preferred stock dividend requirement $ 242 $ 242
Ratio of income before provision for
income taxes to net income (C) 167.3% 172.2%
------- -------
Preferred stock dividend requirement
on a pretax basis 405 417
Fixed charges, as above 35,279 32,925
------- -------
Total fixed charges and
preferred stock dividends $ 35,684 $ 33,342
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.02 3.77
==== ====
<PAGE>
Exhibit 12C
Page 2 of 2
METROPOLITAN EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
- -------------------------
NOTES:
(A) Met-Ed has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable preferred
securities of $4,500 for the six month periods ended June 30, 1998 and
1997, respectively.
(C) Represents income before provision for income taxes of $72,418 and $92,808
for the six month periods ended June 30, 1998 and 1997, respectively,
divided by income before extraordinary item of $43,278 and net income of
$53,888, respectively for the same periods.
Exhibit 12D
Page 1 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
Six Months Ended
--------------------------
June 30, June 30,
1998 1997
----------- --------
OPERATING REVENUES $514,010 $537,615
------- -------
OPERATING EXPENSES 405,584 401,360
Interest portion of rentals (A) 2,474 2,166
------- -------
Net expense 403,110 399,194
------- -------
OTHER INCOME AND DEDUCTIONS:
Allowance for funds used
during construction 989 921
Other income, net 1,733 1,255
------- -------
Total other income and deductions 2,722 2,176
------- -------
EARNINGS AVAILABLE FOR FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS (excluding
taxes based on income) $113,622 $140,597
======= =======
FIXED CHARGES:
Interest on funded indebtedness $ 23,974 $ 24,219
Other interest (B) 9,053 8,837
Interest portion of rentals (A) 2,474 2,166
------- -------
Total fixed charges $ 35,501 $ 35,222
======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.20 3.99
==== ====
Preferred stock dividend requirement $ 347 $ 318
Ratio of income before provision for
income taxes to net income (C) 168.4% 170.7%
------- -------
Preferred stock dividend requirement
on a pretax basis 584 543
Fixed charges, as above 35,501 35,222
------- -------
Total fixed charges and
preferred stock dividends $ 36,085 $ 35,765
======= =======
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 3.15 3.93
==== ====
<PAGE>
Exhibit 12D
Page 2 of 2
PENNSYLVANIA ELECTRIC COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS SHOWING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS BASED ON SEC REGULATION S-K, ITEM 503
(In Thousands)
----------------------------------------------------------------------
UNAUDITED
NOTES:
(A) Penelec has included the equivalent of the interest portion of all rentals
charged to income as fixed charges for this statement and has excluded
such components from Operating Expenses.
(B) Includes dividends on company-obligated mandatorily redeemable preferred
securities of $4,594 for the six month periods ended June 30, 1998 and
1997, respectively.
(C) Represents income before provision for income taxes of $78,121 and
$105,375 for the six month periods ended June 30, 1998 and 1997,
respectively, divided by income before extraordinary item of $46,396 and
net income of $61,735, respectively for the same periods.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000040779
<NAME> GPU, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,934,259
<OTHER-PROPERTY-AND-INVEST> 2,107,661
<TOTAL-CURRENT-ASSETS> 1,137,186
<TOTAL-DEFERRED-CHARGES> 5,312,460
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 15,491,566
<COMMON> 331,958
<CAPITAL-SURPLUS-PAID-IN> 1,008,574
<RETAINED-EARNINGS> 1,912,210 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,172,886 <F2>
416,500 <F3>
66,478
<LONG-TERM-DEBT-NET> 4,041,386
<SHORT-TERM-NOTES> 487,160
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 350,671
2,500
<CAPITAL-LEASE-OBLIGATIONS> 2,694
<LEASES-CURRENT> 140,810
<OTHER-ITEMS-CAPITAL-AND-LIAB> 6,810,481
<TOT-CAPITALIZATION-AND-LIAB> 15,491,566
<GROSS-OPERATING-REVENUE> 2,058,196
<INCOME-TAX-EXPENSE> 116,609
<OTHER-OPERATING-EXPENSES> 1,582,940
<TOTAL-OPERATING-EXPENSES> 1,699,549
<OPERATING-INCOME-LOSS> 358,647
<OTHER-INCOME-NET> 53,585
<INCOME-BEFORE-INTEREST-EXPEN> 412,232
<TOTAL-INTEREST-EXPENSE> 197,766 <F4>
<NET-INCOME> (61,393) <F5>
0
<EARNINGS-AVAILABLE-FOR-COMM> (61,393)
<COMMON-STOCK-DIVIDENDS> 126,274
<TOTAL-INTEREST-ON-BONDS> 179,883
<CASH-FLOW-OPERATIONS> 257,438
<EPS-PRIMARY> (.47) <F5>
<EPS-DILUTED> (.47) <F5>
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) OF
<F1> ($35,375).
<F2> INCLUDES REACQUIRED COMMON STOCK OF $79,856.
<F3> INCLUDES SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F3> SECURITIES OF $330,000.
<F4> INCLUDES DIVIDENDS ON SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE
<F4> PREFERRED SECURITIES OF $14,444 AND PREFERRED STOCK DIVIDENDS OF
<F4> SUBSIDIARIES OF $5,892.
<F5> INCLUDES MINORITY INTEREST NET (INCOME)/LOSS OF ($749) AND
<F5> AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $275,110
<F5> ($2.16 PER SHARE).
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000053456
<NAME> JERSEY CENTRAL POWER & LIGHT COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,742,116
<OTHER-PROPERTY-AND-INVEST> 507,347
<TOTAL-CURRENT-ASSETS> 501,600
<TOTAL-DEFERRED-CHARGES> 995,258
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,746,321
<COMMON> 153,713
<CAPITAL-SURPLUS-PAID-IN> 510,769
<RETAINED-EARNINGS> 938,437
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,602,919
211,500 <F1>
37,741
<LONG-TERM-DEBT-NET> 1,173,424
<SHORT-TERM-NOTES> 126,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 40,616
<LONG-TERM-DEBT-CURRENT-PORT> 11
2,500
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 93,505
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,457,705
<TOT-CAPITALIZATION-AND-LIAB> 4,746,321
<GROSS-OPERATING-REVENUE> 951,228
<INCOME-TAX-EXPENSE> 59,351
<OTHER-OPERATING-EXPENSES> 748,160
<TOTAL-OPERATING-EXPENSES> 807,511
<OPERATING-INCOME-LOSS> 143,717
<OTHER-INCOME-NET> 3,044
<INCOME-BEFORE-INTEREST-EXPEN> 146,761
<TOTAL-INTEREST-EXPENSE> 53,660 <F2>
<NET-INCOME> 93,101
5,303
<EARNINGS-AVAILABLE-FOR-COMM> 87,798
<COMMON-STOCK-DIVIDENDS> 25,000 <F3>
<TOTAL-INTEREST-ON-BONDS> 88,165
<CASH-FLOW-OPERATIONS> 115,818
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F1> SECURITIES OF $125,000.
<F2> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F2> PREFERRED SECURITIES OF $5,350.
<F3> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000065350
<NAME> METROPOLITAN EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,327,981
<OTHER-PROPERTY-AND-INVEST> 204,122
<TOTAL-CURRENT-ASSETS> 184,024
<TOTAL-DEFERRED-CHARGES> 1,923,464
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 3,639,591
<COMMON> 66,273
<CAPITAL-SURPLUS-PAID-IN> 370,200
<RETAINED-EARNINGS> 98,706 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 535,179
100,000 <F2>
12,056
<LONG-TERM-DEBT-NET> 576,926
<SHORT-TERM-NOTES> 31,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 45,726
<LONG-TERM-DEBT-CURRENT-PORT> 22
0
<CAPITAL-LEASE-OBLIGATIONS> 30
<LEASES-CURRENT> 30,731
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,307,821
<TOT-CAPITALIZATION-AND-LIAB> 3,639,591
<GROSS-OPERATING-REVENUE> 460,778
<INCOME-TAX-EXPENSE> 32,906
<OTHER-OPERATING-EXPENSES> 349,200
<TOTAL-OPERATING-EXPENSES> 382,106
<OPERATING-INCOME-LOSS> 78,672
<OTHER-INCOME-NET> (5,534)
<INCOME-BEFORE-INTEREST-EXPEN> 73,138
<TOTAL-INTEREST-EXPENSE> 29,860 <F3>
<NET-INCOME> (144,002) <F4>
242
<EARNINGS-AVAILABLE-FOR-COMM> (144,244)
<COMMON-STOCK-DIVIDENDS> 40,000 <F5>
<TOTAL-INTEREST-ON-BONDS> 42,838
<CASH-FLOW-OPERATIONS> 70,971
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $14,316.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $4,500.
<F4> INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $187,280.
<F5> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000077227
<NAME> PENNSYLVANIA ELECTRIC COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,693,766
<OTHER-PROPERTY-AND-INVEST> 83,736
<TOTAL-CURRENT-ASSETS> 256,083
<TOTAL-DEFERRED-CHARGES> 2,167,060
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,200,645
<COMMON> 105,812
<CAPITAL-SURPLUS-PAID-IN> 285,486
<RETAINED-EARNINGS> 344,174 <F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 735,472
105,000 <F2>
16,681
<LONG-TERM-DEBT-NET> 626,444
<SHORT-TERM-NOTES> 55,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 53,218
<LONG-TERM-DEBT-CURRENT-PORT> 50,011
0
<CAPITAL-LEASE-OBLIGATIONS> 2,664
<LEASES-CURRENT> 16,070
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,539,485
<TOT-CAPITALIZATION-AND-LIAB> 4,200,645
<GROSS-OPERATING-REVENUE> 514,010
<INCOME-TAX-EXPENSE> 31,020
<OTHER-OPERATING-EXPENSES> 405,584
<TOTAL-OPERATING-EXPENSES> 436,604
<OPERATING-INCOME-LOSS> 77,406
<OTHER-INCOME-NET> 1,028
<INCOME-BEFORE-INTEREST-EXPEN> 78,434
<TOTAL-INTEREST-EXPENSE> 32,038 <F3>
<NET-INCOME> (41,434) <F4>
347
<EARNINGS-AVAILABLE-FOR-COMM> (41,781)
<COMMON-STOCK-DIVIDENDS> 15,000 <F5>
<TOTAL-INTEREST-ON-BONDS> 48,880
<CASH-FLOW-OPERATIONS> 67,081
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> INCLUDES ACCUMULATED OTHER COMPREHENSIVE INCOME OF $7,247.
<F2> REPRESENTS COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
<F2> SECURITIES.
<F3> INCLUDES DIVIDENDS ON COMPANY-OBLIGATED MANDATORILY REDEEMABLE
<F3> PREFERRED SECURITIES OF $4,594.
<F4> INCLUDES AN AFTER-TAX CHARGE FOR AN EXTRAORDINARY ITEM OF $87,830.
<F5> REPRESENTS COMMON STOCK DIVIDENDS PAID TO PARENT CORPORATION.
</FN>
</TABLE>
