<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/ / Preliminary proxy statement
/X/ Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
VARITY CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VARITY CORPORATION
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Not Applicable
(2) Aggregate number of securities to which transaction applies:
Not Applicable
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
Not Applicable
(4) Proposed maximum aggregate value of transaction:
Not Applicable
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
Not Applicable
(2) Form, schedule or registration statement no.:
Not Applicable
(3) Filing party:
Not Applicable
(4) Date filed:
Not Applicable
<PAGE> 2
VARITY CORPORATION
672 Delaware Avenue
Buffalo, New York 14209-2202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting (the "Meeting") of
Stockholders of Varity Corporation (the "Company") will be held at the Hyatt
Regency Buffalo, Two Fountain Plaza, Buffalo, New York on Thursday, the 23rd day
of May, 1996 at 9:00 a.m. for the following purposes:
(1) to elect twelve (12) directors;
(2) to ratify the appointment of independent auditors;
(3) to consider and act upon a proposal by the Board of Directors to
approve amendments to the Shareholder Value Incentive Plan;
(4) to consider and act upon a proposal by the Board of Directors to
approve the Supplemental Retirement and Deferred Compensation Plan for
Employees;
(5) to consider and act upon a shareholder proposal, if properly presented,
relating to director compensation; and
(6) to transact such other business as may properly come before the Meeting
or any adjournment or adjournments thereof.
The close of business on April 4, 1996 has been fixed as the record date
for the determination of stockholders who will be entitled to receive notice of
and to vote at the Meeting.
By Order of the Board of Directors
KENNETH L. WALKER
Secretary
Buffalo, New York
April 26, 1996
STOCKHOLDERS MAY EXERCISE THEIR RIGHTS BY ATTENDING THE MEETING OR BY
COMPLETING A FORM OF PROXY. SHOULD YOU BE UNABLE TO ATTEND THE MEETING IN
PERSON, KINDLY DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT IN THE
ENVELOPE PROVIDED AT YOUR EARLIEST CONVENIENCE. IF YOU ATTEND THE MEETING, YOU
MAY VOTE YOUR SHARES IN PERSON, EVEN THOUGH YOU HAVE PREVIOUSLY SIGNED AND
RETURNED YOUR PROXY. IF YOU DO NOT VOTE YOUR SHARES IN PERSON, YOUR SHARES WILL
BE VOTED IN ACCORDANCE WITH YOUR INSTRUCTIONS AS INDICATED ON YOUR PROXY. IN THE
ABSENCE OF INSTRUCTIONS, YOUR SHARES WILL BE VOTED: FOR THE PERSONS NOMINATED AS
DIRECTORS IN ITEM 1 AND FOR ITEMS 2, 3, AND 4 AS LISTED ON THE FORM OF PROXY;
AGAINST ITEM 5 AS LISTED ON THE FORM OF PROXY; AND AT THE PROXYHOLDER'S
DISCRETION ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
<PAGE> 3
VARITY CORPORATION
672 Delaware Avenue
Buffalo, New York 14209-2202
PROXY STATEMENT
This statement is being furnished in connection with the solicitation by
the Board of Directors and management of Varity Corporation ("Varity" or the
"Company") of proxies for use at the Annual Meeting of Stockholders (the
"Meeting") of the Company, to be held on May 23, 1996 for the purposes set forth
in the foregoing Notice of Meeting, and any adjournment thereof.
The holders of shares representing not less than one-third of the total
voting power of the shares entitled to be voted at the Meeting, present in
person or by proxy, shall constitute a quorum. The Company had 39,325,426 shares
of Common Stock and 2,001,000 shares of Class II Preferred Stock outstanding on
April 4, 1996. Each share of Common Stock has one vote on each matter in
question. Each share of Preferred Stock has approximately 0.98 votes on each
matter in question. Shareholders of record at the close of business on April 4,
1996 are entitled to vote. The first date on which this proxy statement and
accompanying proxy card are being mailed to stockholders is on or about April
26, 1996. Abstentions and broker non-votes shall not be counted as either for or
against a matter or nominee, but the shares represented by such abstention or
broker non-vote shall be considered present at the Meeting for quorum purposes.
1. ELECTION OF DIRECTORS
The Board of Directors is elected annually and may consist of such number
between 6 and 24 members as the directors may from time to time determine. The
directors have determined that the number of directors following the Meeting
shall be 12. Directors are elected by a plurality of the votes cast by the
holders of voting securities at the Meeting. UNLESS AUTHORITY TO VOTE IS
WITHHELD, SHARES REPRESENTED BY PROPERLY EXECUTED PROXIES IN FAVOR OF THE
PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY WILL BE VOTED FOR THE ELECTION
OF THE NOMINEES NAMED BELOW. The term of office for each director will be from
the date of the Meeting at which he is elected until the 1997 Annual Meeting of
Stockholders of Varity or until his successor is elected or appointed. In the
event of any vacancy on the Board of Directors prior to the Meeting, a majority
of the directors then in office may fill such vacancy until a successor shall be
elected and qualified.
Information regarding the nominees is set forth below:
PAUL M. F. CHENG, age 59, is the Chairman of Inchcape Pacific Limited, an
Asian marketing and distribution subsidiary of Inchcape, plc. He is also a
director of Inchcape, plc. Mr. Cheng was elected a director of the company in
January, 1995. He is also the Chairman of N. M. Rothschild and Sons (Hong Kong)
Limited and a director of The Union Insurance Society of Canton Limited, Sino
Land Company Ltd., and Sino Hotels (Holding) Ltd.
WILLIAM A. CORBETT, age 64, is Chairman of The New Providence Development
Company Limited, a real estate development company in the Bahamas. He was a
partner in the law firm of Fraser & Beatty in Toronto from 1964 until October,
1995. Mr. Corbett was first elected a director of the Company in 1984. He is
also a director of Cara Operations Limited and CFM International Inc.
THOMAS N. DAVIDSON, age 56, is a private investor. He also serves as
Chairman of Nu-Tech Precision Metal Inc., a nuclear reactor construction
company. He served as the Chairman of General Trust Corporation until 1993,
Cardinal Crest Partners until 1993 and Reeftor Industries Ltd. until 1991. Mr.
Davidson was first elected a director of the Company in 1987. He is also a
director of Canada Publishing Corporation, Buffalo Brass Company, Derlan
Industries and MDC Corporation.
ROBERT M. GATES, age 52, is a consultant, author, and lecturer. He is the
former Director of the United States Central Intelligence Agency. Prior to
serving as Director, Mr. Gates served as Deputy National
<PAGE> 4
Security Adviser and Assistant to the President of the United States. Mr. Gates
was first elected a director of the Company in 1993. He is also a director of
TRW, Inc. and NACCO Industries.
LUIZ F. KAHL, age 59, is the former President of Carborundum Company and
former Chief Executive of BP Advanced Materials. Mr. Kahl was first elected a
director of the Company in 1993. He is also a director of National Fuel Gas
Company.
VINCENT D. LAURENZO, age 56, is retired. He has been Vice Chairman of the
Board of Directors of the Company since 1988. Mr. Laurenzo served as President
of Varity Corporation from 1981 until his retirement on November 1, 1994. He was
first elected a director of the Company in 1982.
W. DARCY MCKEOUGH, age 63, is Chairman of McKeough Investments Ltd., a
private investment company. Mr. McKeough was first elected a director of the
Company in 1986. He also serves as a director of Canada General Tower Limited,
Canadian Imperial Bank of Commerce, Intertan Inc., McKeough Sons Co. Ltd.,
Mediacom Inc., Noranda Inc., Numac Energy, and St. Mary's Cement Corporation.
SIR BRYAN NICHOLSON, age 63, is Chairman of British United Provident
Association, a U.K. health service company. Sir Bryan Nicholson is also
currently President of the Confederation of British Industry and has served as
the non-executive Chairman of Varity Europe Limited (a subsidiary of the
Company) since January, 1993. He is the former Chairman and Chief Executive
Officer of the British Post Office. Sir Bryan Nicholson was first elected a
director of the Company in 1993. He is also a director of British United
Provident Association and GKN, PLC., both in the UK.
VICTOR A. RICE, age 55, has been Chairman of the Board of Directors and
Chief Executive Officer of the Company since 1980. He was first elected a
director of the Company in 1978. Mr. Rice also serves as a director of American
Precision Industries, International Murex Technologies Corporation and Louisiana
Land and Exploration Company.
WARREN S. RUSTAND, age 53, is the Executive Chairman and Chief Executive
Officer of Rural Metro Corporation, an ambulance and fire protection service
company. He is also the Chairman and CEO of the Cambridge Company Ltd., and
Chairman of Health Partners. He also serves as a director of Rural Metro
Corporation, 20/20 Laser Centers, and Ventana Group Systems. Mr. Rustand has
been a director since 1989.
WILLIAM R. TESCHKE, age 66, is a corporate director. He served as a
consultant to the Bank of Nova Scotia from 1985 until 1992 and previously served
as Deputy Minister of the Canadian Department of Industry, Trade and Commerce
and Regional Industrial Expansion. He was first elected a director of the
Company in 1985. Mr. Teschke also serves as a director of Pratt and Whitney
Canada, and The Gore Mutual Insurance Company.
THE HONORABLE ROBIN H. WARRENDER, age 68, served from 1986 until February
1993 as Chairman and Chief Executive of London Wall Holdings plc (the holding
company of a group of Lloyds of London underwriting agencies) which was placed
into receivership in February 1994. Mr. Warrender was first elected a director
in 1982.
DIRECTORS' COMMITTEES AND MEETINGS
The Board of Directors met six times during the fiscal year ended January
31, 1996. During the fiscal year, each director of the Company attended 75% or
more of the total number of Board Meetings and 75% or more of the total number
of committee meetings for each committee on which he served, except that Mr.
Cheng was unable to attend two board meetings during the fiscal year.
The Company's Audit Committee during the fiscal year ended January 31, 1996
consisted of Directors Rustand, Gates, Laurenzo, McKeough, and Teschke. The
Audit Committee reviews the financial statements of the Company, the scope and
results of the internal and external audits of the Company, the internal
financial controls of the Company, significant or unusual transactions between
the Company and its associates
2
<PAGE> 5
and procedures that are being followed to ensure compliance with the Company
Ethics Policy. The Audit Committee met three times during the fiscal year ended
January 31, 1996.
The Company's Human Resources Committee during the fiscal year ended
January 31, 1996 consisted of Directors Nicholson, Cheng, Davidson, and Rice.
The Human Resources Committee reviews the status of human resources and
succession planning throughout the Company. The Human Resources Committee met
four times during the fiscal year ended January 31, 1996.
The Compensation Committee during the fiscal year ended January 31, 1996
consisted of Directors Davidson, Corbett, Kahl, and Warrender. The Compensation
Committee has sole authority for the administration of salaries, pensions, and
other compensation, as well as terms and conditions of employment, of senior
executives. The Compensation Committee also has sole authority to administer any
equity based compensation plan. The Compensation Committee met six times during
the fiscal year ended January 31, 1996.
DIRECTORS' FEES AND COMPENSATION
Directors receive an annual retainer of $25,000 plus $1,000 for each Board
meeting attended ($500 for Board meetings held by teleconference). The chairman
of a committee receives $2,500 for each committee meeting attended and other
committee members receive $2,000 for each committee meeting attended. The
Chairman and members of a committee each receive $500 for each committee meeting
held by teleconference in which they participate. Only one attendance fee,
however, is paid for multiple Board and committee meetings on the same day.
Directors are also reimbursed for travel expenses in connection with meetings.
Directors who are Company employees do not receive Board attendance or committee
attendance fees.
Directors who are not employees of the Company, upon retirement from the
Board of Directors, have been entitled to a payment which equals $10,000 times
the number of years that the retiring director has served as a non-employee
director of the Company, up to a maximum of ten years. On March 26, 1996, the
Company's Board of Directors terminated the retirement program for non-employee
directors and adopted a director share ownership plan. All amounts due under the
non-employee directors' retirement program will be converted, based on the fair
market value of Varity's common stock on May 23, 1996, into Varity share units
under the director share ownership plan. Under the director share ownership
plan, on February 21st of each year after 1996, for each of the first ten years
of service as a Varity director, the Company will credit each non-employee
director's account under the plan with a number of Varity share units equal to
the number resulting from dividing 10,000 by the fair market value of Varity's
common stock on that day. Each director also has the option to defer all or a
portion of his directors' fees and retainer into the director share ownership
plan and receive Varity share units equal to 120% of the fair market value of
Varity Common Stock. The value of the share units under the director share
ownership plan will be paid in cash to a director only upon his leaving Varity's
Board of Directors. The Company believes that the director share ownership plan
will assist directors in increasing their share ownership interest. During the
fiscal year ended January 31, 1996, the Company adopted a director share
ownership policy to encourage each of Varity's directors to hold at least 1,500
Varity shares within three years.
Under the current Shareholder Value Incentive Plan approved by the
shareholders, each non-employee director in office immediately following each
annual shareholder meeting receives a grant of options to purchase 3,000 Varity
common shares at a premium, as determined by a formula, above the average
closing price of the shares on the New York Stock Exchange for the final 20
trading days in the preceding January. On May 25, 1995, each non-employee
director was granted 3,000 options with an exercise price set at a 45% premium.
Under the Shareholder Value Incentive Plan amendments, as proposed to
shareholders in this proxy statement, each non-employee director in office
immediately following the 1996 Annual Meeting and on each February 21st
thereafter will receive a grant of premium trigger options to purchase 3,000
shares with an exercise price set at the fair market value on the date of grant
and a vesting price set at a premium, as determined by formula, above the
average closing price of the shares on the New York Stock Exchange for the last
20 trading days of January immediately preceding the grant, provided however in
any case each option shall be fully exercisable on the ninth anniversary of the
grant date.
3
<PAGE> 6
Sir Bryan Nicholson is compensated L80,000 annually as the non-executive
Chairman of Varity Europe Limited. In addition he is eligible to receive a short
term incentive award based on the performance of the Company. For fiscal 1995 he
received an award of L24,240.
DIRECTORS' AND OFFICERS' SHARE OWNERSHIP
The table below sets forth, as of April 4, 1996, the beneficial ownership
(as defined by the Securities and Exchange Commission, the "SEC") of the
Company's equity securities by the directors and executive officers of the
Company. As of April 4, 1996, Mr. Laurenzo and Mr. Rice beneficially owned
respectively (including shares issuable upon exercise of options exercisable
within 60 days of April 4, 1996) approximately 1.1% and 1.6% of the Company's
outstanding Common Stock. As of April 4, 1996, no other director or executive
officer of the Company individually beneficially owned more than 1% of the
Company's outstanding Common Stock. As of April 4, 1996, all directors and
executive officers as a group beneficially owned approximately 4.2% of the
Company's Common Stock. As of April 4, 1996 no director or executive officer
owned any Class II Preferred Stock.
<TABLE>
<CAPTION>
COMMON
SHARES(1)
----------
<S> <C>
P. M. F. Cheng.................................. 3,000
W. A. Corbett (2)............................... 10,100
T. N. Davidson.................................. 15,480
R. M. Gates..................................... 6,290
L. F. Kahl...................................... 10,500
V. D. Laurenzo.................................. 450,090
W. D. McKeough.................................. 15,000
B. Nicholson.................................... 10,379
V. A. Rice...................................... 629,907
W. S. Rustand................................... 9,100
W. R. Teschke................................... 11,500
R. H. Warrender................................. 9,100
N. D. Arnold.................................... 134,712
J. H. Chandler.................................. 41,500
J. A. Gilroy.................................... 117,673
J. E. Utley..................................... 99,171
All Directors and Executive Officers as a Group
(27 Persons).................................. 1,684,561
- ---------------
<FN>
Notes:
(1) Includes the following shares of the Company's Common Stock issuable upon
the exercise of options which are exercisable within 60 days of April 4,
1996: for Mr. Cheng 3,000 shares, Mr. Gates 6,000 shares, Mr. Laurenzo
378,890 shares, Mr. Rice 541,087 shares, all other Directors 9,000 shares
each, Mr. Arnold 116,967 shares, Mr. Chandler 35,000, Mr. Gilroy 111,063
shares, Mr. Utley 92,400 shares and all directors and executive officers as
a group (27 persons) 1,467,436 shares. Includes also share units held
through the Company's Retirement Equity and Deferred Compensation Plan: for
Mr. Chandler 6,500 shares and Mr. Utley 3,000 shares.
(2) From 1964 until October, 1995, Mr. Corbett was a partner of Fraser & Beatty,
who have provided and continue to provide legal advice to the Company.
</TABLE>
Thomas N. Davidson, a director of the Company, filed late with the SEC one
required report relating to one transaction involving Common Stock of the
Company. John E. Utley and Anthony T. Williams, executive officers of the
Company, each filed late with the SEC one report relating to one transaction
involving Common
4
<PAGE> 7
Stock of the Company. In making this statement, the Company has relied on the
written representations of its incumbent directors and executive officers and
copies of the reports that they have filed with the SEC.
2. RATIFICATION OF AUDITORS (ITEM 2)
UNLESS OTHERWISE SPECIFIED, SHARES REPRESENTED BY MANAGEMENT PROXIES WILL
BE VOTED FOR THE APPROVAL OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP, AS
INDEPENDENT AUDITORS OF THE COMPANY, TO HOLD OFFICE UNTIL THE NEXT ANNUAL
MEETING OF STOCKHOLDERS. KPMG Peat Marwick LLP were initially appointed as
auditors of the Company at the 1990 Annual Meeting of Stockholders.
To the knowledge of the Company, neither KPMG Peat Marwick LLP nor any of
its partners has any direct or indirect financial interest in the Company or any
of the Company's subsidiaries.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS OF THE COMPANY FOR
THE FISCAL YEAR ENDING JANUARY 31, 1997.
3. APPROVAL OF AMENDMENTS TO SHAREHOLDER VALUE INCENTIVE PLAN (ITEM 3)
The Board of Directors has approved and recommended to the shareholders the
approval of amendments to the Shareholder Value Incentive Plan (as proposed to
be amended, the "Plan"). The Shareholder Value Incentive Plan was originally
approved by the shareholders in 1993 and provides for the award of stock
options, restricted stock and performance shares. Approval of the amendments to
the Plan requires the affirmative vote of a majority of the voting power present
in person or represented by proxy at the Meeting and entitled to vote. UNLESS
OTHERWISE SPECIFIED, SHARES REPRESENTED BY MANAGEMENT PROXIES WILL BE VOTED FOR
THE PLAN AS APPROVED BY THE BOARD OF DIRECTORS.
DESCRIPTION OF AMENDMENTS
In view of recent tax legislation which limits the deductibility of
executive compensation paid to certain executive officers of the Company unless
such compensation is "performance-based" and to provide the Company with
additional flexibility in granting awards under the Plan, the Company proposes
certain amendments to the Plan as follows:
-- Limit the maximum number of shares with respect to stock options
that may be awarded to any participant in the Plan in any year to 500,000
shares.
-- Prohibit the Committee from increasing the amount of compensation
payable under any performance-based award to the extent such an increase
would cause the award to lose its qualification as performance-based
compensation.
-- Provide the Committee with additional discretion with resect to the
treatment of awards upon a participants death, disability, retirement or
other termination of employment.
-- Permit the grant of transferable stock options.
-- Amend the terms of the grant of options to Directors.
-- Delete the provision that restricted applicability of the Plan to
awards payable in shares, measured by referring to stock prices or
otherwise considered derivative securities within the meaning of Section 16
of the Securities Exchange Act of 1934 (the "Exchange Act").
PLAN DESCRIPTION
The following description of the Plan, is qualified in its entirety by
reference to the Plan as amended. References in the following description of the
Plan to the exercise of discretion by the Compensation Committee of the Board of
Directors (the "Committee") do not apply to the portion of the Plan relating to
Directors' Options.
5
<PAGE> 8
ADMINISTRATION
The Plan will be administered by the Committee, each member of which is
required to be a "disinterested person" within the meaning of Rule 16b-3 or any
successor rule under the Exchange Act.
SHARES SUBJECT TO THE PLAN
The maximum number of shares of Common Stock of the Company which may be
issued pursuant to awards under the Plan is not changed by the proposed
amendment and remains as 10% of the shares of Common Stock outstanding from time
to time; provided that no more than 1,000,000 shares may be issued pursuant to
incentive stock options under the Plan. The shares issued under the Plan prior
to the proposed amendment will be counted against the shares which may be issued
under the Plan. The proposed amendment will provide an additional limitation by
establishing the number of shares with respect to which stock options and stock
appreciation rights may be granted in a calendar year to any employee. The
proposed per employee maximum is 500,000 shares per calendar year.
At April 4, 1996, the closing price of the Company's Common Stock as
reported on the New York Stock Exchange was $43.00.
GRANTS OF AWARDS
Subject to the provisions of the Plan, the Committee (i) determines and
designates eligible employees; (ii) grants awards to eligible employees; (iii)
determines the form or forms of award to be granted; (iv) determines the terms
of each award; (v) establishes performance objectives for awards; (vi)
determines the price at which shares of Common Stock may be offered under each
award; and (vii) interprets, construes and administers the Plan and any related
award agreement and defines the terms employed therein. No options granted
pursuant to the Plan are transferable other than by will or by the laws of
descent and distribution; provided that the proposed amendment will give the
Committee the discretion to grant transferable options and to amend outstanding
options to make them transferable and such additional transferability rights
will be set forth in the applicable individual award agreements.
For purposes of the Plan, "eligible employee" means an employee of any
participating company whose responsibilities and decisions, in the judgment of
the Committee, significantly affect the management, growth, performance or
profitability of any participating company, and "participating company" means
the Company or any subsidiary or other company related to the Company; provided
that there are additional limitations for incentive stock options. Because the
grant of awards under the Plan is at the discretion of the Committee, it is not
possible to indicate which persons may receive awards under the Plan or the
amount of such awards. However, there are approximately 300 persons employed by
participating companies, as of April 4, 1996, who would be eligible as a class
and from among whom the Committee could select participants.
STOCK OPTIONS
The Committee will determine the terms and conditions of the options
granted under the Plan, including the type of option and the time and manner in
which each option becomes exercisable. Generally, the exercise period for any
option, including any extension which the Committee may from time to time decide
to grant, may not exceed ten years from the date of grant. The option price per
share will be determined by the Committee at the time any option is granted and
may not be less than the fair market value or, in the case of an incentive stock
option granted to a ten percent stockholder, 110% of the fair market value, on
the date the option is granted.
Except as otherwise provided in the Plan, the option exercise price must be
paid to the Company at the time of exercise either in cash or in such other
consideration as the Committee deems appropriate, including stock owned by the
optionee. The Committee may provide, in its discretion, that all or a portion of
the option exercise price may be paid by the eligible employee's promissory
note, which may be secured or unsecured, bearing interest, if any, at a rate
specified by the Committee and subject to such other terms and conditions as the
Committee may specify.
6
<PAGE> 9
At the discretion of the Committee, an eligible employee who exercises an
option using shares of stock to pay the exercise price or related withholding
taxes may receive a replacement option for the same number of shares that the
eligible employee delivers to the Company in such payment. The exercise price
per share for the replacement option will be not less than the fair market value
of a share of stock at the time the replacement option is issued, and the term
of the replacement option will be the same as the remaining balance of the term
of the original option.
The Plan contains special rules covering the time of exercise of options in
the case of an employee recipient's death, disability, retirement or other
termination of employment. The proposed amendment grants the Committee the
authority to extend the post-termination exercise period for options.
On March 25, 1996 the Committee approved the grant of ten-year term options
to senior and other management executives with an exercise price set at fair
market value of a share of Common Stock on the date of grant. Each of these
options becomes fully exercisable at such time that the Common Stock closes at
or above a premium price of $46.37, on the New York Stock Exchange for 10
consecutive trading days; provided that each option becomes exercisable no later
than nine years after the date of the grant. For 1996, the premium represents a
30% increase over the average closing price of the Common Stock on the New York
Stock Exchange for the last 20 trading days in January 1996.
NEW PLAN BENEFITS
VARITY CORPORATION SHAREHOLDER
VALUE INCENTIVE PLAN
<TABLE>
<CAPTION>
OPTIONS PREMIUM PRICE
---------------------------------- FOR EXERCISE
NAME AND POSITION OPTIONS GRANTED EXERCISE PRICE OF OPTIONS(1)
--------------------------------- --------------- -------------- -------------
<S> <C> <C> <C>
V.A. Rice, Chairman and Chief 148,135 $40.50 $ 46.37
Executive Officer
N.D. Arnold, Senior Vice 36,205 $40.50 $ 46.37
President, Chief Financial
Officer
J.H. Chandler, Senior Vice 30,073 $40.50 $ 46.37
President, Chief Administrative
Officer
J.A. Gilroy, Senior Vice 80,275 $40.50 $ 46.37
President, Chief Operating
Officer
J.E. Utley, Senior Vice 35,165 $40.50 $ 46.37
President, Strategic Marketing
Executive Officer Group 458,348 $40.50 $ 46.37(2)
Non-Executive Officer Employee 431,115 $40.50 $ 46.37(3)
Group
- ---------------
<FN>
(1) The price represents the average closing price of Common Stock on the New
York Stock Exchange (the "NYSE") for the last 20 trading days in January
1996 increased by the average five year U.S. government bond average annual
percentage yield during the last 20 trading days in January 1996 compounded
five times.
(2) 26,200 of the 458,348 options granted to the Executive Officer Group do not
contain a premium price vesting requirement, but vest over a three year
period. None of the named officers received any such options.
(3) 138,300 of the 431,115 options granted to Non-Executive Officer Employees do
not contain a premium price vesting requirement, but vest over a three year
period.
</TABLE>
7
<PAGE> 10
PERFORMANCE SHARE AWARDS
The Committee shall determine a performance period (the "Performance
Period") of one or more years and performance objectives for grants of
performance share awards. Performance Periods may overlap and eligible employees
may participate simultaneously with respect to performance share awards for
which different Performance Periods are prescribed.
At the beginning of a Performance Period, the Committee determines, with
respect to that Performance Period, the range of dollar values or number of
shares, if any, to be paid to an eligible employee as an award if the relevant
measure of Company performance for the Performance Period is met. Each
performance share award may be paid in whole shares of Common Stock (together
with any cash representing fractional shares of stock), or cash, or a
combination of stock and cash either as a lump sum payment or in annual
installments, all as the Committee determines.
If, during the course of a Performance Period, significant events occur, as
determined by the Committee, including, but not limited to, a reorganization of
the Company, which the Committee expects to have a substantial effect on a
performance objective during such Performance Period, the Committee may revise
such objective; provided, however, that in the case of any award which is
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the
"Code"), if the award agreement so provides, the Committee shall have no
discretion to increase the amount of compensation payable under the award to the
extent such an increase would cause the award to lose its qualification as such
performance-based compensation.
The Plan contains special rules covering performance share awards in the
case of an employee recipient's death, disability, retirement or other
termination prior to the end of the Performance Period.
RESTRICTED STOCK INCENTIVE SHARES
Restricted stock incentive shares are subject to a restriction period
(after which restrictions lapse) commencing on the date the award is granted and
ending on such date or upon the achievement of such performance or other
criteria as the Committee determines (the "Restriction Period"). Except in the
case of restricted stock incentive shares received as the result of the exercise
of an option, as payment for a performance share award, or in exchange for cash
compensation otherwise payable to an eligible employee, the Committee shall
include performance criteria in determining the Restriction Period for
restricted stock incentive shares.
Except as otherwise provided in the Plan, no restricted stock incentive
shares received by an eligible employee may be sold or transferred during the
Restriction Period.
The Plan contains special rules covering the lapse of restrictions and/or
the forfeiting of restricted stock incentive shares in the case of an employee
recipient's death, disability or other termination prior to the lapse of the
Restriction Period.
OTHER STOCK-BASED AWARDS
The Committee may grant other awards under the Plan which are denominated
in stock units or pursuant to which shares of Common Stock or cash may be
acquired.
DIRECTORS' OPTIONS
The proposed amendment provides that on the date of the 1996 Meeting of the
Company's shareholders, and on each February 21 thereafter, subject to
shareholder approval, each non-employee member of the Board of Directors of the
Company in office on such grant date will automatically be granted an option to
purchase 3,000 shares of Common Stock at a price equal to the closing price of
the Common Stock on the New York Stock Exchange trading day preceding the date
of grant.
Each option granted to a Director becomes fully exercisable on the earlier
of nine years after the date of the grant or the date on which the Common Stock
closes on the New York Stock Exchange for at least 10
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<PAGE> 11
consecutive trading days at a premium price to be set at the time of grant. The
premium price equals the average closing price of the Common Stock on the New
York Stock Exchange for the last 20 trading days in the preceding January
increased by the average five year U.S. government bond average annual
percentage yield during the last 20 trading days in the preceding January
compounded five times. For 1996, the premium price is $46.37. Each option
expires on the tenth anniversary of the date of grant; provided that if a person
or group of persons acquires or obtains the right to acquire 25% or more of the
outstanding Common Stock within a twelve-month period, all options held by
Directors become immediately exercisable. Exercisability of the option is not
dependent upon the Director's continuing service on the Board.
The purchase price of an option granted to a Director is required to be
paid to the Company at the time of exercise either in cash, or in shares of
stock already owned by the optionee for at least six months at the time of
exercise (or such other period as the Company's regular independent auditors may
specify to avoid adverse accounting treatment).
AMENDMENT OR DISCONTINUANCE
The Board may, at any time, amend or terminate the Plan. The Plan may also
be amended by the Committee, provided that all such amendments must be reported
to the Board. No amendment may become effective unless approved by affirmative
vote of the Company's stockholders if such approval is necessary or if the
failure to obtain such approval would adversely affect the compliance of the
Plan with Rule 16b-3 or any successor rule under the Securities Exchange Act of
1934 or any other rule or regulation.
ADJUSTMENTS; CHANGE IN CONTROL
In the event of any recapitalization, reclassification, split-up or
consolidation of shares of stock, separation (including a spin-off), dividend on
shares of Common Stock payable in capital stock, or other similar change in
capitalization of the Company, merger or consolidation of the Company or sale by
the Company of all or a portion of its assets, or other similar event, the
Committee may make such appropriate adjustments in the option prices of
outstanding options, in the number and kind of securities which may be issued
pursuant to awards under the Plan, including awards then outstanding, and in the
aggregate number of shares with respect to which awards may be granted as the
Committee deems equitable with a view toward maintaining the proportionate
interest of the participant and preserving the value of the award.
The Committee in its discretion may include provisions in an award that
become effective upon a change in control of the Company (as defined by the
Committee) and that provide for acceleration of the exercisability of, the lapse
of restrictions on, or the payment under, the award. In the case of options,
such provisions may also include the right, in lieu of exercising such option,
to elect to surrender all or part of such option to the Company and to receive
cash in an amount equal to the excess of (i) the higher of (x) the fair market
value of a share of stock on the date such right is exercised and (y) the
highest price paid for stock or, in the case of securities convertible into
stock or carrying a right to acquire stock, the highest effective price (based
on the prices paid for such securities) at which such securities are convertible
into stock or at which stock may be acquired, by any person or group whose
acquisition of voting securities has resulted in a change of control of the
Company over (ii) the exercise price per share under the option, multiplied by
the number of shares of stock with respect to which such right is exercised.
Such provisions may be included in an award at the time of grant of the award or
thereafter.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal federal income tax consequences
associated with grants of options and other awards under the Plan. This summary
is based on the provisions of the Code, the Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect as of the date hereof. It does not describe all federal income tax
consequences under the Plan, nor does it describe foreign, state or local tax
consequences.
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<PAGE> 12
STOCK OPTIONS
In general, a grant of a stock option will not be a taxable event to a
recipient and it will not result in a deduction to the Company. The tax
consequences associated with exercise of a stock option granted under the Plan,
and with the subsequent disposition of Common Stock acquired on exercise of such
an option will depend in part on whether the option is an incentive stock option
(within the meaning of Section 422 of the Code) or a non-qualified stock option.
Upon the exercise of a non-qualified stock option, the participant will
recognize ordinary taxable income equal to the excess of the fair market value
of the Common Stock received upon exercise over the exercise price. The Company
will generally be able to claim a deduction in an equivalent amount. Any gain or
loss upon a subsequent sale or exchange of the Common Stock will be capital gain
or loss, long-term or short-term depending on the holding period for the Common
Stock.
Generally, a participant will not recognize ordinary taxable income at the
time of exercise of an incentive stock option and no deduction will be available
to the Company, provided the option is exercised while the participant is an
employee or within three months following termination of employment (longer, in
the case of termination of employment by reason of disability or death). If an
incentive stock option granted under the Plan is exercised after these periods,
the exercise will be treated for federal income tax purposes as the exercise of
a non-qualified stock option. Also, incentive stock options granted under the
Plan to any participant will be treated as non-qualified stock options to the
extent they (together with any other incentive stock options granted after 1986
under other plans of the Company and its subsidiaries) first become exercisable
in any calendar year for Common Stock having a fair market value, determined as
of the date of grant, in excess of $100,000.
If Common Stock acquired upon exercise of an incentive stock option is sold
or exchanged more than one year after the date of exercise and more than two
years from the date of grant of the option, any gain or loss will be long-term
capital gain or loss. If Common Stock acquired upon exercise of an incentive
stock option is disposed of prior to the expiration of these one-year or
two-year holding periods (a "Disqualifying Disposition"), the participant will
recognize ordinary income at the time of disposition, and the Company will
generally be able to claim a deduction, in an amount equal to the excess of the
fair market value of the Common Stock at the date of exercise over the exercise
price. Any additional gain will be treated as capital gain, long-term or
short-term depending on how long the Common Stock has been held. Where Common
Stock is sold or exchanged in a Disqualifying Disposition (other than certain
related party transactions) for an amount less than its fair market value at the
date of exercise, any ordinary income recognized in connection with the
Disqualifying Disposition will be limited to the amount of gain, if any,
recognized in the sale or exchange, and any loss will be a long-term or
short-term capital loss, depending on how long the Common Stock has been held.
Although the exercise of an incentive stock option as described above would
not produce ordinary taxable income to the participant, it would result in an
increase in the participant's alternative minimum taxable income and may result
in an alternative minimum tax liability.
RESTRICTED STOCK
A participant who receives shares of restricted stock will generally
recognize ordinary income at the time the restrictions on transferability lapse.
The amount of ordinary income so recognized will be the fair market value of the
Common Stock at the time the income is recognized, determined without regard to
any restrictions other than restrictions which by their terms will never lapse.
This amount is generally deductible for federal income tax purposes by the
Company. Dividends paid with respect to Common Stock that is nontransferable
will be ordinary compensation income to the participant (and generally
deductible by the Company).
In lieu of the treatment described above, a participant may elect immediate
recognition of income under Section 83(b) of the Code. In such event, the
participant will recognize as income the fair market value of the restricted
stock at the time of grant (determined without regard to any restrictions other
than restrictions
10
<PAGE> 13
which by their terms will never lapse), and the Company will generally be
entitled to a corresponding deduction. Dividends paid with respect to Shares as
to which a proper Section 83(b) election has been made will not be deductible to
the Company. If a Section 83(b) election is made and the restricted stock is
subsequently forfeited, the participant will not be entitled to any offsetting
tax deduction.
PERFORMANCE SHARE AND OTHER AWARDS
With respect to performance share awards and other awards under the Plan
not described above, generally, when a participant receives payment with respect
to an award granted under the Plan, the amount of cash and the fair market value
of the Common Stock received will be ordinary income to such participant and
will be allowed as a deduction for federal income tax purposes of the Company.
PAYMENT OF WITHHOLDING TAXES
The Company may withhold, or require a participant to remit to the Company,
an amount sufficient to satisfy any federal, state or local withholding tax
requirements associated with awards under the Plan.
SPECIAL RULES
Special rules may apply to a participant who is subject to Section 16(b) of
the Securities Exchange Act of 1934 (generally directors, executive officers and
10% stockholders). Certain additional special rules apply if the exercise price
for an option is paid for in Common Stock previously owned by the optionee
rather than in cash.
LIMITATION ON DEDUCTIBILITY
Section 162(m) of the Code generally limits the deductible amount of annual
compensation paid (including, unless an exception applies, compensation
otherwise deductible in connection with awards granted under the Plan) by a
public company to a "covered employee" (the chief executive officer and the four
other most highly compensated executive officers of the Company) to no more than
$1 million. The Company currently intends to structure stock options granted
under the Plan to comply with the exception to nondeductibility under Section
162(m) of the Code for performance-based compensation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
4. APPROVAL OF SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
FOR EMPLOYEES (ITEM 4)
The Board of Directors has approved and recommends to the shareholders the
approval of the Supplemental Retirement and Deferred Compensation Plan for
Employees (the "Supplemental Plan"). Approval of the Supplemental Plan requires
the affirmative vote of majority of the voting power present in person or
represented by proxy at the Meeting and entitled to vote. UNLESS OTHERWISE
SPECIFIED, SHARES REPRESENTED BY MANAGEMENT PROXIES WILL BE VOTED FOR THE
SUPPLEMENTAL PLAN AS APPROVED BY THE BOARD OF DIRECTORS.
PLAN DESCRIPTION
The following description of the Supplemental Plan is qualified in its
entirety by reference to the Supplemental Plan, a copy of which is attached as
Annex A to this proxy statement. The Supplemental Plan has been adopted by the
Company's Board of Directors, subject to shareholder approval.
GENERAL
The Supplemental Plan is comprised of three parts as detailed below,
providing for supplemental benefits under certain retirement plans of the
Company and for deferral of compensation.
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<PAGE> 14
ADMINISTRATION
The Supplemental Plan will be administered by the Compensation Committee of
the Board of Directors (the "Committee"), each member of which is required to be
a "disinterested person" within the meaning of Rule 16b-3 or any successor rule
under the Securities Exchange Act of 1934. The Committee shall designate those
employees entitled to participate in the Supplemental Plan in a manner
consistent with the terms of the Supplemental Plan. There are approximately 20
persons employed by participating companies, as of April 4, 1996, who would be
eligible as a class and from among whom the Committee could select participants.
RETIREMENT BENEFITS
The Supplemental Plan provides that a participant who participates in the
Company's tax-qualified defined contribution retirement plan (the "Retirement
Plan") shall have additional benefits under the Supplemental Plan in an amount
equal to the excess of (i) the amount of employer contributions that would have
been credited to the participant's account under the Retirement Plan without
regard to the benefit limitations of the Retirement Plan and without regard to
any election to defer compensation under the Supplemental Plan (or any other
nonqualified deferred compensation plan maintained by the Company) over (ii) the
amount of contributions allocated to the account of the participant under the
Retirement Plan for that calendar year. A participant's account will be credited
with such additional contributions and with earnings or losses periodically
deemed to have accrued on the participant's retirement benefits pursuant to the
investment rules established by or in accordance with the Supplemental Plan (the
"Investment Rules").
In addition, the retirement benefits of a participant may include
additional contribution amounts determined, and set forth in a written
resolution, by the Committee in its discretion.
SAVINGS BENEFITS
The Supplemental Plan provides that a participant who has elected to make
compensation reduction contributions on his or her behalf to the tax-qualified
retirement plan maintained for employees of the participant's employer pursuant
to Section 401(k) and related provisions of the Code (the "Savings Plan") in an
amount at least equal to the maximum allowed by applicable law shall have
additional benefits under the Supplemental Plan in an amount equal to the
aggregate amount (if any) by which any employer matching contributions which an
employer otherwise would make, or be deemed to make, under the Savings Plan with
respect to the participant are limited during any calendar year (i) by the
benefit limitations of the Savings Plan or (ii) because of any election to defer
compensation under the Supplemental Plan (or any other nonqualified deferred
compensation plan maintained by the participant's employer). A participant's
account will be credited with such additional contributions and with earnings or
losses periodically deemed to have accrued on the participant's Savings Benefits
pursuant to the Investment Rules.
DEFERRED COMPENSATION
Each participant may elect that either or both of the following (subject to
certain limits) be payable only as deferred compensation under the Supplemental
Plan: (a) salary or Board of Directors retainer or fees otherwise payable to the
participant during a plan year, or (b) bonus amounts otherwise payable to the
participant with respect to a plan year.
The election to defer compensation must be made no later than the December
31st immediately preceding the commencement of the plan year for which such
deferral is to take effect. Notwithstanding the foregoing, a participant may
make such an election within 30 days after first becoming eligible to
participate in the Supplemental Plan, with respect to (i) salary or Board of
Directors retainer or fees payable after the effective date of the election or
(ii) bonus payments to be made for performance during the plan year in which the
election is made. The election to defer compensation shall be irrevocable and
shall continue in effect for the plan year to which it applies, and a
participant may make an irrevocable election with respect to the deferral of
compensation which shall remain in effect for all future plan years until
changed in writing, which change shall apply prospectively to the plan year
beginning after the date of the written change of election.
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<PAGE> 15
Deferred compensation shall be adjusted periodically to reflect deemed
earnings or losses in accordance with the Investment Rules.
INVESTMENT RULES FOR COMPANY COMMON STOCK
Participants who are selected and designated by the Committee as entitled
to make deemed investment elections with respect to Common Stock ("Equity
Participants" or "Global Equity Participants") may elect to have the deemed
investment earnings or losses on their benefits payable under the Supplemental
Plan determined on the basis of deemed investments in Common Stock pursuant to
the rules set forth in the Supplemental Plan. The maximum number of shares of
Common Stock in which Equity Participants and Global Equity Participants may be
deemed to have invested pursuant to the Supplemental Plan shall be 500,000.
Each Equity Participant may make a written irrevocable election to (i) have
all or a portion of his or her retirement benefits, savings benefits and
deferred compensation under the Supplemental Plan (collectively the "Benefits")
deemed invested in Common Stock; or (ii) change his or her deemed investment
election from Common Stock to another deemed investment alternative available
under the investment rules of the Supplemental Plan; provided, however, that
such an election shall be effective no earlier than six months from the date it
is made.
The Committee, in its discretion, may provide for matching contributions in
an amount equal to the fair market value on the matching date of up to 20% of
the number of shares of Common Stock deemed acquired on behalf of such Equity
Participant under the Supplemental Plan during the preceding plan year and such
additional benefits shall be deemed to be invested for purposes of the
Supplemental Plan in Common Stock. Notwithstanding any provision of this
Supplemental Plan to the contrary, Benefits shall be distributable only in cash.
In addition, participants designated as Global Equity Participants by the
Committee may make an annual election to have up to $2,500 (or such other amount
established by the Committee) of their Benefits deemed invested in Common Stock;
provided, however, that such an election shall be effective no earlier than six
months from the date it is made. Additionally, on the last day of the plan year
which includes the effective date of the election, the Global Equity
Participant's Benefits will be increased by an amount equal to 65% of the fair
market value on such date of the Common Stock deemed acquired on behalf of such
Global Equity Participant pursuant to the Supplemental Plan during such plan
year and such additional benefits shall be deemed to be invested for purposes of
the Supplemental Plan in Common Stock. A Global Equity Participant may not
change his or her deemed investment election with respect to such Benefits from
Common Stock to another deemed investment alternative available under the
investment rules of the Supplemental Plan.
All Benefits that an Equity Participant or a Global Equity Participant
elects to have deemed invested in Common Stock shall be credited to a
bookkeeping account under the Supplemental Plan in the form of deemed shares of
Common Stock. The number of deemed shares of Common Stock so credited shall be
equal to the number of shares having an aggregate fair market value on the
effective date of the election (no earlier than six months from the date it is
made) equal to the amount of Benefits for which the deemed election is made.
VESTING AND PAYMENT
No amount shall be payable to a participant under the Supplemental Plan to
the extent it represents retirement benefits or savings benefits (each as
described above) that would have been forfeited under the vesting provisions (if
any) of the Retirement Plan or the Savings Plan (as the case may be) if payable
thereunder; provided that all benefits will become vested upon a change in
control, as defined in the plan. Deferred compensation payable to a participant
under the Supplemental Plan shall be fully vested at all times.
Except as otherwise provided, benefits payable under the Supplemental Plan
shall be paid to a participant either: (i) in a cash lump sum within 30 business
days after the first date on which the participant is no longer employed by an
employer or any other subsidiary or affiliate of the Company; or, (ii) if
elected by the
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<PAGE> 16
participant in accordance with the Supplemental Plan and if such termination of
employment is (x) for a reason other than death and occurs after the sum of the
participants age and full years of service with the Company, its subsidiaries
and affiliates equals at least 55 or (y) by reason of disability, (A) in a cash
lump sum within 30 business days after the first anniversary of the date on
which the participant is no longer employed by an employer or any other
subsidiary or affiliate of the Company or (B) in annual installments for up to
fifteen years following such termination of employment.
SOURCE OF PAYMENT
All payments provided for under the Supplemental Plan shall be paid in cash
from the general funds of the Company; provided, however, that such payments
shall be reduced by the amount of any payments made to the participant or his or
her beneficiary from any trust or special or separate fund established by the
Company to assist it in making such payments.
NEW PLAN BENEFITS
VARITY CORPORATION SUPPLEMENTAL RETIREMENT
AND DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE(1)
----------------------------------------------------------- ---------------
<S> <C>
V.A. Rice, Chairman and Chief Executive Officer $ 146,753
N.D. Arnold, Senior Vice President, Chief Financial Officer $ 36,640
J. H. Chandler, Senior Vice President, Chief Administrative
Officer $ 30,208
J.A. Gilroy, Senior Vice President, Chief Operating Officer $ 0
J. E. Utley, Senior Vice President, Strategic Marketing $ 41,463
Executive Officer Group $ 47,622
- ---------------
<FN>
(1) The amounts set forth in the table represent amounts that would have been
credited (other than matching contributions or other contributions for
Global Equity Participants) to the accounts of the individuals or group
listed for the Company's last fiscal year as if the Supplemental Plan had
been in effect. Estimated annual payments to be made by the Company for
current service cannot be determined because amounts to be credited will
depend on, among other things, the compensation of participants and
elections made by participants under other benefit plans of the Company.
</TABLE>
AMENDMENT OR DISCONTINUANCE
The Committee may, at any time, amend, suspend or terminate the
Supplemental Plan, provided that all such amendments must be reported to the
Board. No amendment may become effective unless approved by affirmative vote of
the Company's stockholders if such approval is necessary to comply with Rule
16b-3 or any successor rule under the Securities Exchange Act of 1934 or any
other rule or regulation.
ADJUSTMENTS
In the event of any recapitalization, reclassification, split-up or
consolidation of shares of stock, separation (including a spin-off), dividend on
shares of Common Stock payable in capital stock, or other similar change in
capitalization of the Company, merger or consolidation of the Company or sale by
the Company of all or a portion of its assets, or other similar event, the
Committee may make such appropriate adjustments in the number and kind of
securities or other property in which an Equity Participant's or Global Equity
Participant's investment is deemed made under the Supplemental Plan, and in the
aggregate number of shares with respect to which investments may be deemed to be
made under the Supplemental Plan as the Committee deems equitable with a view
toward maintaining the proportionate interest of the participant and preserving
the value of the Supplemental Plan.
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<PAGE> 17
CHANGE OF CONTROL
Notwithstanding the other provisions of the Supplemental Plan, each
participant's Benefits (to the extent not previously paid) shall be payable (i)
to the participant in a cash lump sum as soon as practicable, but not later than
10 business days, after a Change in Control, or (ii) to the participant's
beneficiary in a cash lump sum as soon as practicable following the
participant's death. Change of Control is defined generally as any of the
following: (i) on or after the effective date of the Supplemental Plan, any
person or group of persons becomes the beneficial owner of securities of the
Company representing 25% or more of the combined voting power of the Company's
then outstanding securities; (ii) at any time subsequent to the effective date
of the Supplemental Plan there shall be elected to the Board of Directors any
director or directors whose election by the Board of Directors was not approved
by a vote of at least a majority of the directors (the "Prior Board") then still
in office who were either directors on the effective date of the Supplemental
Plan or whose election was previously so approved; (iii) a reorganization,
merger, consolidation, combination, corporate restructuring or similar
transaction (an "Event") occurs in which the beneficial owners of the Company
immediately prior to the Event do not, following such Event, beneficially own
more than 60% of the combined Voting Power; (iv) an Event occurs which results
in new directors constituting 25% or more of the board of Directors; or (v) the
Board of Directors adopts a resolution to the effect that, for purposes of the
Supplemental Plan, a Change of Control has occurred.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
5. SHAREHOLDER PROPOSAL -- RELATING TO DIRECTOR COMPENSATION (ITEM 5)
An individual holding 300 shares in trust has indicated his intention to
present a proposal at the 1996 Annual Meeting. The name and address of the
shareholder proponent will be furnished by the Company promptly upon receipt of
a request therefor. In accordance with applicable rules of the Securities and
Exchange Commission, the proposal of such shareholder (for which neither the
Company nor its Board of Directors has any responsibility) is set forth below:
The shareholders of Varity Corporation request the Board of Directors take
the necessary steps to amend the company's governing instruments to adopt the
following: Beginning on the 1997 Varity Corporation fiscal year all members of
the Board of Director's total compensation will be solely in shares of Varity
Corporation common stock each year. No other compensation of any kind will be
paid.
SUPPORTING STATEMENT
For many years the Rossi family have been submitting for shareholder vote,
at this corporation as well as other corporations, proposals aimed at putting
management on the same playing field as the shareholders. This proposal would do
just that.
A few corporations have seen the wisdom in paying directors solely in
stock. Most notably, Scott Paper and Travelers. Ownership in the Company is the
American way. We feel that this method of compensation should be welcomed by
anyone who feels they have the ability to direct a major corporation's fortunes.
The directors would receive shares each year. If the corporation does well,
the directors will make more money in the value of the stock they receive and
the dividend that usually rise with more profits. If things go bad, they will be
much more inclined to correct things, because it will be coming directly out of
their pockets. Instead of the way it is done now, where directors receive the
same compensation for good or bad performance.
The proponent of this proposal has owned shares in this company for a
number of years and never received a dividend. If the directors were paid in
stock, the directors wouldn't have been near as patient about paying a dividend
as the proponent has been patient about receiving a dividend.
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<PAGE> 18
THE COMPANY'S RESPONSE TO THE SHAREHOLDER PROPOSAL
The Company has a strong record of using director and senior executive
compensation to align the interests of directors, senior executives, and
shareholders. During the past three years the Compensation Committee of the
Company's Board of Directors has: (1) adopted a stock ownership policy which
requires senior executives to own between 15,000 and 60,000 Company common
shares; (2) based bonuses for the Company's management solely on the principles
of Economic Value Added, which requires continuously improving profits after
charging for the debt and equity invested in the Company; and (3) granted stock
options which generally require the Company's stock to appreciate significantly
before executives and directors benefit.
During the fiscal year ended January 31, 1996, the Compensation Committee
of the Company's Board of Directors reviewed the Company's director stock
ownership and compensation policies in light of its goal to ensure that the
interests of the Company's directors and shareholders are aligned. The Committee
found that through ownership of shares and stock options the current members of
the Company's Board of Directors do have a significant interest in the Company's
stock. The Committee believes that significant Company share ownership by
directors is the most effective way to align these interests.
Paying directors only in Company stock however does not necessarily
accomplish this goal, and would create an unfair income tax burden for directors
who would be forced to sell shares to pay the income taxes on their stock
compensation or to pay those taxes without receiving any cash. As a result,
extremely qualified individuals might resign or reject membership on the
Company's Board of Directors. The Committee has adopted a director stock
ownership policy to encourage each director of the Company to own at least 1,500
shares of the Company's stock within three years of joining the Company's Board
of Directors. At $40 per share, 1,500 shares represents $60,000, which is more
than twice each director's annual retainer. The Committee's action in March,
1996 of terminating the directors retirement plan further aligns the interests
of the Company's directors and shareholders. The amounts due to each director
under that plan will be converted into stock interests under the directors share
ownership plan.
Adoption of the shareholder proposal requires the affirmative vote of a
majority of the voting power present in person or represented by proxy at the
Meeting and entitled to vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE SHAREHOLDER PROPOSAL
AND UNLESS OTHERWISE SPECIFIED, SHARES REPRESENTED BY MANAGEMENT PROXIES WILL BE
VOTED AGAINST THE SHAREHOLDER PROPOSAL.
6. EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report of the Compensation Committee of the Board of Directors
provides an overview of the Company's compensation philosophy and executive
compensation programs. It discusses compensation-related decisions in general,
and specifically those relating to the Company's Chief Executive Officer, for
the fiscal year ending January 31, 1996 ("Fiscal 1995").
THE EXECUTIVE COMPENSATION PROGRAMS' OVERALL OBJECTIVES
The Company's executive compensation programs have been designed to support
the Company's goal of enhancing shareholder value by providing incentives that
will attract, reward and retain highly-qualified executives critical to the
long-term success of the Company. The Company's policy is to establish overall
base salary and target bonus at approximately median competitive levels. Median
competitive levels are determined by an independent consulting firm based on its
proprietary data bank of approximately 400 industrial companies in the United
States ( the "Comparison Group"). The Comparison Group includes six of the nine
companies in the S & P 500 Machinery group (excluding Varity), and two of the
four companies in the S & P 500 Auto Parts group, which two groups are shown on
the graph under "Performance Graph". The Company's objective is to pay salaries
that range from 80% of the median competitive level to 120% of the competitive
level. The Chief Executive Officer and his direct reports in fiscal 1995 were
paid salaries on average of 106% of
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<PAGE> 19
median. However, as a result of the relationship between executive compensation
and corporate performance, in any particular year the Company's executives may
be paid more or less than executives of companies included in the Comparison
Group depending on the Company's performance. The Company's philosophy
recognizes the key role played by executives and is based upon the belief that
providing variable incentives to meet and exceed corporate goals will contribute
to the goal of providing above-average shareholder returns.
The Annual Performance Plan remains entirely based on Economic Value Added
("EVA") targets. The Company's EVA target as determined by the Compensation
Committee is the improvement in operating profit or loss of the Company after a
charge for the capital (both debt and equity) invested in the Company. The EVA
targets for operating groups and business units are established on a similar
basis.
The Compensation Committee approved premium trigger stock option grants for
senior executives (which include all the named and certain other executive
officers) in Fiscal 1995 at an exercise price set at the fair market value and a
vesting price set at a premium price of 45% above the average stock closing
price for the last twenty trading days in January, 1995. This premium for senior
executives, when combined with EVA targets for the Company, is intended to
further align management and shareholder interests and lead to higher Company
stock prices.
AN OVERVIEW OF EXECUTIVE COMPENSATION PLANS
The Company's executive compensation programs have three components: base
salary, annual incentive and long-term incentive. A discussion of the
Committee's decisions regarding executive compensation and an overview of the
various elements are presented below.
BASE SALARY PROGRAM
The Company's base salary program is intended to provide base salary ranges
that reflect median salary levels of the Comparison Group. Base salaries are
periodically adjusted to reflect each individual executive's performance and
contribution to the overall financial results of the Company, the length of time
in the position, and changes in salary levels of the Comparison Group. The
Compensation Committee, based upon research and advice provided by independent
consultants, annually reviews salary levels for similar positions of the
Comparison Group. No specific weights are attributed to these various factors
when determining base salaries.
Pursuant to an employment agreement described below under "Employment
Agreement", Mr. Rice was guaranteed a minimum annual base salary of $645,000.
This guaranteed minimum was below the actual paid and was not a factor in
determining an appropriate salary.
ANNUAL PERFORMANCE PLANS
The Fiscal 1995 Annual Performance Plan provided competitive annual
variable pay opportunities to senior executives and other management employees
based solely upon achievement of annual improvements in EVA. The amount of the
annual bonus for senior executives and other management employees for Fiscal
1995 was based solely upon performance in relation to an annual EVA target
previously established. For headquarters executives this annual bonus was based
solely on the Company's EVA performance. For executives of the Company's
business groups, their annual bonus was based, depending on level of
responsibility, either solely on their business group's EVA performance or on a
combination of the Company's and their business group's EVA performance. Those
targets were applied for all bonuses under the Annual Performance Plan and the
target bonus amount is established for each executive as a percentage of base
salary. The percentage of base salary which is used for the target bonus is
established by job grade groupings which in turn are based on levels of
responsibility for the Company's performance. The target bonus percentage is
higher as the job grade, and therefore the level of responsibility, increases.
If the EVA performance goal is met, 100% of the target bonus is paid. If
EVA performance improves but is less than the EVA goal, the bonus paid will be
proportionally less than the target bonus. If EVA performance exceeds the EVA
goal, the target bonus plus an additional bonus will be earned by the executive.
17
<PAGE> 20
In the case of an additional bonus, half is paid to the executive at the time
that the target bonus is paid and the other portion of the additional bonus is
carried forward into the next year to be paid subject to future results. If
there is a decline in EVA performance, all or a portion of any bonus carried
forward could be forfeited and could result in a negative bonus which would be
carried forward to future years where it would reduce the bonus to be paid in
future years. This plan could result in higher than competitive compensation for
superior EVA performance or lower than competitive compensation for Company
performance not meeting EVA goals. For Fiscal 1995 the EVA financial targets
were met by the Company.
LONG-TERM INCENTIVE PLANS
On May 12, 1995, the Compensation Committee granted to senior executives
10-year term options at fair market value. These options become exercisable on
the earlier of nine years after the date of grant or date on which the Common
Stock closes on the New York Stock Exchange for 10 consecutive trading days at a
premium price set at 45% above the average closing price for the Company's
Common Stock on the New York Stock Exchange for the last 20 trading days in
January, 1995. The 45% premium equals the percentage resulting from five
compoundings of the five year United States government bond average annual
percentage yield during the last 20 trading days in January, 1995.
The number of options granted was determined by the Compensation Committee
based on an independent consultant's analysis of award grants necessary to
provide above median long term awards for similarly situated executives at
approximately 400 other companies. Within the data base of these 400 companies
are six of the nine companies in the S & P 500 Machinery group (excluding
Varity), and two of the four companies in the S & P 500 Auto Parts group, which
two groups are shown on the graph under "Performance Graph". Grants made were
determined to be above the median value of awards made by these companies.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The Company's executive compensation programs are designed to provide
awards based on individual, operating group, and overall Company performance
measures. It is the policy of the Company to minimize executive compensation
that is non-deductible for tax purposes to the extent that there is no adverse
effect on this performance related approach or the Company's ability to provide
competitive compensation.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Compensation Committee annually reviews Mr. Rice's base salary. A
salary range for the CEO based on the Comparison Group data is established with
the assistance of an independent compensation consultant. In determining salary
adjustments within the set salary range, various factors are taken into account,
none of which have specific weights attributed to them. These factors include
individual performance, responsibility, time in position, current salary, and
Company performance.
In Fiscal 1993, EVA bonus targets for annual incentive plan purposes were
introduced for senior executives and management throughout the Company. Based on
the Company's fiscal 1995 EVA performance versus target, all employees at
Varity's headquarters, including Mr. Rice, earned a bonus at approximately their
target bonus level. As with all senior executives of the Company, part of Mr.
Rice's Fiscal 1995 bonus was payable in cash and part carried forward to the
next fiscal year. Payment of the amount carried forward is dependent on EVA
performance in the fiscal year ending January 31, 1997.
In addition, on May 12, 1995, the Compensation Committee granted Mr. Rice
options based on the same criteria used for other employees of the Company. The
grant provided for options to purchase 100,850 shares of Common Stock at fair
market value with a term of ten years, exercisable on the earlier of nine years
after the date of grant or the date on which the Common Stock closes on the New
York Stock Exchange for ten consecutive trading days at or above $52.51, which
is a 45% premium over the average closing prices of the Company's Common Stock
on the New York Stock Exchange for the last 20 trading days of January 1995.
18
<PAGE> 21
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Thomas N. Davidson, Chairman
William A. Corbett
Luiz F. Kahl
The Honorable Robin H. Warrender
19
<PAGE> 22
PERFORMANCE GRAPH
The following chart and graph sets forth the cumulative total shareholder
return for the five year period ending January 31, 1996, for Varity, the S & P
500, the S & P Machinery group and the S & P Auto Parts Aftermarket group. The
Company has chosen to show the S & P Machinery group since Varity is part of the
S & P Machinery group. Historically, the Company has also shown the S & P Auto
Parts Aftermarket group since a significant portion of Varity's sales has been
of automotive parts, even though that group is significantly more automotive
aftermarket related than Varity's automotive parts business. The S & P Auto
Parts Aftermarket group is down to four companies and is aftermarket oriented
while less than 10% of the Company's sales are automotive aftermarket related.
As a result, the Company plans next year to discontinue use of the S & P Auto
Parts Aftermarket group in its proxy statement performance graph.
<TABLE>
<CAPTION>
MEASUREMENT AT S&P
FISCAL YEAR ENDED MACHINERY S&P AUTO
JANUARY 31 VARITY S&P 500 (DIVERSIFIED) PARTS
- ------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1991 100 100 100 100
1992 72 123 109 180
1993 138 136 117 226
1994 212 153 169 270
1995 160 154 157 240
1996 174 213 207 294
</TABLE>
20
<PAGE> 23
EXECUTIVE COMPENSATION TABLES
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information concerning
the compensation of the Company's Chief Executive Officer and each of the other
four most highly compensated executive officers of the Company at the fiscal
year end January 31, 1996.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION
------------------------------------ AWARDS(2) PAYOUTS
OTHER ------------- --------
ANNUAL SECURITIES LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS (#) ($) ($)(3)(4)
- ------------------------- ----- ------- ------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
V. A. RICE 1995 804,000 733,464 37,098 100,850 0 156,292
Chairman and Chief 1994 780,000 881,699 79,881 163,200 0 114,946
Executive Officer 1993 700,000 630,104 163,131 189,600 0 1,201,860
N. D. ARNOLD 1995 307,500 181,076 14,094 22,650 0 49,702
Senior Vice President, 1994 300,000 219,017 7,207 36,800 0 41,754
Chief Financial Officer 1993 285,000 164,930 64,919 46,950 0 284,889
J. H. CHANDLER (5) 1995 295,000 164,611 16,672 21,700 0 44,030
Senior Vice President, 1994 234,577 190,644 54,154 35,000 0 19,054
Chief Administrative 1993 0 0 0 0 0 0
Officer
J. A. GILROY 1995 350,000 311,558 0 48,300 0 0
Senior Vice President, 1994 350,000 345,166 0 42,950 0 0
Chief Operating Officer 1993 315,000 223,986 7,271 51,900 243,083 90,340
J. E. UTLEY 1995 330,000 212,690 0 24,300 0 56,592
Senior Vice President, 1994 330,000 258,729 0 40,500 179,236 588,150
Strategic Marketing 1993 315,000 184,414 0 51,900 166,737 3,824
- ---------------
<FN>
(1) Represents amount for tax gross-ups for (a) moving expenses, (b)
interest-free stock purchase loan (1993), (c) tax return preparation fees
and (d) club membership fees. The amounts also include annual director's
fees of $25,000 for Mr. Rice. The amount for 1993 also includes the implied
value of interest on the interest-free stock purchase loans.
(2) As of January 31, 1996 there were no shares of restricted stock outstanding.
(3) The amounts for 1995 are those amounts contributed by the Company: (a) under
the Company's savings plans ($11,788, $4,151, $2,158, and $3,465
respectively for Messrs. Rice, Arnold, Chandler and Utley) and (b) with
respect to the basic retirement and savings components of the Company's
Retirement Equity and Deferred Compensation Plan (the "Deferral Plan")
($144,504, $45,551, $41,872, and $53,127, respectively, for Messrs. Rice,
Arnold, Chandler and Utley).
(4) All amounts deferred from a participant's salary or bonus under the Deferral
Plan are included in the salary or bonus columns of the table for the year
earned. Any profits and/or losses on these deferred amounts are not
reflected in the above table since the return on these funds is based upon
an assumed investment in one or more funds selected by the participant from
those designated by the Company.
(5) Mr. Chandler joined the Company on April 5, 1994.
</TABLE>
21
<PAGE> 24
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
% OF
TOTAL
OPTIONS
GRANTED POTENTIAL REALIZABLE VALUE
NUMBER OF TO EXERCISE AT ASSUMED ANNUAL RATES OF
SECURITIES EMPLOYEES OR STOCK PRICE APPRECIATION FOR
UNDERLYING IN BASE OPTION TERM
OPTIONS FISCAL PRICE EXPIRATION --------------------------------
NAME GRANTED(1) YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- --------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
V. A. Rice 100,850 17.15 43.00 5/11/05 2,727,232 6,911,342
N. D. Arnold 22,650 3.85 43.00 5/11/05 612,516 1,552,225
J. H. Chandler 21,700 3.69 43.00 5/11/05 586,821 1,487,121
J. A. Gilroy 48,300 8.21 43.00 5/11/05 1,306,151 3,310,043
J. E. Utley 24,300 4.13 43.00 5/11/05 657,132 1,665,301
All Named Executive
Officers 319,050 54.25 43.00(2) 5/11/05(2) 8,627,712 21,864,496
All Shareholders(3) 1,067,493,100
Named Exec. Off. Gain as .08%
a Percentage of All
Stockholders' Gain
- ---------------
<FN>
(1) Messrs. Rice, Arnold, Chandler, Gilroy and Utley were granted options by the
Compensation Committee on May 12, 1995 at which time the Company's Common
Stock's market price was $43.00. All such options were granted with an
exercise price of $43.00. Such options may only be exercised prior to May
12, 2004 if the Company's Common Stock closes on the New York Stock Exchange
for ten consecutive trading days at or above $52.51 per share. This trigger
price of $52.51 was set at 45% above the average closing price of the
Company's Common Stock on the New York Stock Exchange for the last 20
trading days in January, 1995. All options have a ten year term.
(2) One stock option grant of 12,300 was made to one executive officer on
November 6, 1995 at an exercise price of $38.00 per share which was the
market price at that time. Those options expire on November 5, 2005. Those
options have a ten year term and may only be exercised prior to November 6,
2004 if the Company's Common Stock closes on the New York Stock Exchange for
ten consecutive trading days at or above $52.51 per share.
(3) As of January 31, 1996, there were 39,478,296 shares of Common Stock
outstanding. The calculations shown for the 5% and 10% assumed annual rates
of stock price appreciation would result from share prices of $70.04 and
$111.53, respectively on May 11, 2005. The potential realizable value
assumes the shares are held for ten years. Actual gains will be dependent on
future stock market conditions and there can be no assurance that these
amounts will be achieved.
</TABLE>
22
<PAGE> 25
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY
FY-END(#) OPTIONS AT
-------------- FY-END($)
SHARES VALUE -----------------
ACQUIRED ON REALIZED EXERCISABLE EXERCISABLE
NAME EXERCISE(#) ($) /UNEXERCISABLE /UNEXERCISABLE
---- ------------ --------- -------------- -----------------
<S> <C> <C> <C> <C>
V. A. Rice 60,000 1,888,350 541,087 4,784,373
/100,850 /0
N. D. Arnold 20,000 626,400 116,967 884,044
/22,650 /0
J. H. Chandler 0 0 35,000 0
/21,700 /0
J. A. Gilroy 0 0 111,063 411,972
/48,300 /0
J. E. Utley 0 0 92,400 0
/24,300 /0
</TABLE>
PENSION PLANS
UNITED KINGDOM PENSION PLAN
Executive officers of the Company located in the United Kingdom are
eligible to participate in a Varity Group Executive Pension Scheme (the "U. K.
Pension Plan") for senior U.K. management, which includes a defined benefit
plan. Pension income in the defined benefit plan at normal retirement is based
on the employee's years of service and his average base salary (excluding
performance-related bonuses) received during his last three years of employment
and is not subject to offset by the amount of U.K. social security benefits.
In addition to United Kingdom social security benefits to which such a
person may be entitled, the following table illustrates the amount of annual
pension benefits (in U.K. pounds) payable from the defined benefit plan on a
straight life annuity basis to an individual with the indicated earnings and
years-of-service at the individual's normal retirement date.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ --------------- --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Pounds Pounds Pounds Pounds Pounds Pounds Pounds
Sterling 100,000 Sterling 25,137 Sterling 37,705 Sterling 50,273 Sterling 63,415 Sterling 63,224 Sterling 63,033
150,000 38,470 57,705 76,940 96,749 96,557 96,366
200,000 51,803 77,705 103,606 130,082 129,890 129,699
250,000 65,137 97,705 130,273 163,415 163,224 163,033
300,000 78,470 117,705 156,940 196,749 196,557 196,366
</TABLE>
Mr. Gilroy is a member of the defined benefit plan. Mr. Gilroy had
remuneration (salary as set forth in the Summary Compensation Table) of U.S.
$350,000 (approximately Pounds sterling 232,000) for Fiscal 1995 and
7 years of credited service.
23
<PAGE> 26
VARITY KELSEY-HAYES PENSION PLAN
The Company's Varity Kelsey-Hayes subsidiary sponsors a defined benefit
retirement income plan which was frozen on January 1, 1995. This plan covered
substantially all Varity Kelsey-Hayes salaried employees prior to January 1,
1995.
Pension benefits from the defined benefit retirement plan are calculated by
averaging the participant's highest consecutive 60 months of compensation of the
final 120 consecutive months compensation (but not in excess of $150,000), and
providing 1% of the first $7,800 thereof and 1 1/3% of the remainder for each of
the first 30 years of service, and and 1/2% and 2/3% respectively for each of
the next 10 years of service. No additional service time may be earned after
January 1, 1995 under this plan. Benefits paid under this plan are not subject
to offset for social security benefits.
The following table illustrates the annual pension benefits payable from
the Varity Kelsey-Hayes pension plan to a person in the specified earnings and
years of service classifications at normal retirement date.
<TABLE>
<CAPTION>
5-YEAR
AVERAGE
ANNUAL 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
EARNINGS SERVICE SERVICE SERVICE SERVICE SERVICE SERVICE
- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 6,407 $ 9,610 $12,813 $16,017 $19,220 $20,922
$100,000 $13,073 $19,610 $26,147 $32,683 $39,220 $42,498
$150,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
$200,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
$250,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
$300,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
$350,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
$400,000 $19,740 $29,610 $39,480 $49,350 $59,220 $64,155
</TABLE>
Mr. Utley is a member of the Varity Kelsey-Hayes' retirement income plan
and for fiscal 1995 had total compensation of $542,690 (salary and bonus as set
forth in the Summary Compensation Table) which is in excess of $150,000 (the
plan limit). Mr. Utley has 12 years and 9 months of service.
SUPPLEMENTAL PENSION ARRANGEMENTS
In conjunction with the reincorporation of the Company in the United States
in 1991, the Canadian defined benefit plan in which the Company's headquarters
employees who relocated from Canada to the United States (the "Headquarters
Transferees") had participated was replaced by the Deferral Plan, a defined
contribution plan in which they now participate. The retirement income they will
receive under the Deferral Plan, particularly if they retire early, would be
significantly less relative to their compensation as active employees than it
would have been under the Canadian defined benefit plan and significantly less,
on the same basis, than is generally the case for employees of comparable
companies.
To address this inequity, during 1992 and 1993 the Compensation Committee's
predecessor committee approved the supplemental retirement benefits described
below for the seven Headquarters Transferees, including Messrs. Arnold and Rice.
In the case of Mr. Rice, this supplemental retirement benefits was also granted
in consideration of the obligations undertaken by him in the employment contract
("Employment Agreement") described below under "Employment Agreement", including
his obligation to use his best efforts to plan and provide for an effective and
orderly succession to his position.
Each of the Headquarters Transferees will receive annual supplemental
pension benefits which, together with amounts payable under the basic retirement
element of the Deferral Plan, the commuted value of benefits accrued under, or
paid in lieu of, one portion of the Company's former Canadian defined benefit
plan and in the case of Headquarters Transferees other than Mr. Rice the
commuted value of benefits under another portion of the Company's former
Canadian defined benefit plan (each as adjusted to reflect earnings or losses
periodically deemed to have accrued and expressed as a life annuity), will equal
45% of final average cash compensation (with a surviving spouse benefit equal to
60% of the basic benefit) if the Headquarters
24
<PAGE> 27
Transferee retires at age 55, increased (other than in the case of Mr. Rice) by
0.125 percentage points for each month by which retirement is deferred from age
55. In March 1994, the benefits were amended to provide immediate vesting for
those executives below age 55, including Messrs. Arnold and Rice, and the
percentage of final average cash compensation to be paid under the plan
(including the amounts payable under other plans as described above) shall grow
ratably to 45% at age 55. Final average cash compensation is the average of the
highest three years' compensation, consisting of base salary and bonus, for the
10 fiscal years prior to retirement or, in the case of Mr. Rice, the average of
the highest three years' base salary plus the average of the highest three
years' bonus for the six 12-month periods ending with the date of retirement.
For this purpose, base salary will be not less than $732,028 and bonus will be
not less than 70% and not more than 100% of base salary. In addition Mr. Rice is
entitled upon retirement to a cash lump sum supplemental pension benefit of
$1,500,000. The Employment Agreement with Mr. Rice also provides that his
retirement date may be extended one year at the option of the Company on six
months' notice to Mr. Rice and from year to year thereafter by mutual agreement
and that, in the case of any such deferral, the minimum final average base
salary specified above ($732,028) will be increased by 5%, and the percentage of
final average cash compensation specified above (45%) will be increased by 1.5
percentage points, for each year of deferral.
These supplemental pension benefits will be paid in cash following
termination in the form and at the times available under any of the payment
options provided for in the Deferral Plan, including as an annuity, in a cash
lump sum at the time of termination or in the following year, or in annual
installments, as elected by the participant in accordance with the terms of the
Deferral Plan, or upon a change in control of the Company. In the event of
death, disability or (subject to a Headquarters Transferee having a combined
total of 65 years of age and service) involuntary dismissal, all supplemental
pension benefits will remain payable as if employment had continued until age 55
(or, in the case of Mr. Rice, the expected or deferred date of retirement),
except that the time of payment will reflect the actual date of termination. The
Company is required to fund the supplemental pension benefits through a trust
which has been established for the payment of benefits under the Deferral Plan.
Amounts deposited in the trust will be subject to claims of general creditors of
the Company.
Supplemental pension benefits will not be paid if payments become due after
termination of employment under the employment termination agreements described
below under "Termination Arrangements."
EMPLOYMENT AGREEMENT
The Company, on September 23, 1992, entered into an Employment Agreement
with Mr. Rice which sets out the terms and conditions of his employment,
specifies compensation arrangements and provides for the payment of supplemental
pension benefits. Among other things, the Employment Agreement specifies a
minimum annual base salary of $645,000 for Mr. Rice. The Employment Agreement
was to expire on September 1, 1996 but has been extended as described under
"Supplemental Pension Arrangements." The Employment Agreement also provides for
the continued participation by Mr. Rice in all incentive and other employee
benefit programs and for the payment of supplemental pension benefits following
retirement as more fully described under "Supplemental Pension Arrangements."
TERMINATION ARRANGEMENTS
The Company has entered into agreements with the executive officers named
in the Summary Compensation Table and certain other key executive officers which
provide that, these key executives would be entitled to these benefits under
certain circumstances during a protection period ("Protection Period") of two
years after a change in control at the Company, except in the case of Mr. Rice,
Mr. Arnold, Mr. Chandler, and Mr. Gilroy for whom the Protection Period is five
years after a change in control at the Company. For purposes of these agreements
a change in control is deemed to have occurred if; (i) any person or group
should acquire or have the right to acquire 25% or more of the combined voting
power of the Company's then outstanding securities ("Voting Power"); (ii) any
director were elected to the Board of Directors without the approval of a
majority of the directors (the "Prior Board") then in office who were either
directors at the date of the agreement or whose election was previously so
approved; (iii) a reorganization, merger, consolidation, combination, corporate
restructuring or similar transaction (an "Event") occurs in which the beneficial
25
<PAGE> 28
owners of the Company immediately prior to the Event do not, following such
Event, beneficially own more than 60% of the combined Voting Power; (iv) an
Event occurs which results in new directors constituting 25% or more of the
Board of Directors; (v) the Board of Directors shall have adopted a resolution
to the effect that, for purposes of the agreement, a change in control of the
Company has occurred. Under Mr. Rice's agreement a change in control would also
be deemed to have occurred if any director were elected to the Board of
Directors without Mr. Rice's approval.
If Mr. Rice's employment by the Company terminates, other than by reason of
death or disability, during his Protection Period he shall be entitled to the
benefits provided by his termination agreement. If, during the applicable
Protection Period, the employment by the Company of any other of these key
executives terminates, other than for cause, disability, death, or resignation
for good reason, then such executive shall be entitled to the benefits provided
by his or her termination agreement.
The termination benefits under these agreements include the payment of: (1)
salary, vacation pay and bonus compensation earned through the employee's
termination date; and (2) a lump sum payment equal to a multiple of the total
annual cash compensation (other than bonuses) at the time of termination or the
occurrence of such event, whichever is greater, and the highest incentive bonus
earned during any of the previous three fiscal years. This multiple would be 4.4
in the case of Mr. Rice and 3.35 in the case of the other key executives,
reflecting in each case, the imputed value of foregone employee benefits. In
addition, such persons could require the Company to purchase all stock options
granted prior to June 23, 1993 which are still outstanding at the time of
termination at a price for each option equal to the difference between the
exercise price and the higher of the market value of the Common Stock at the
time of termination or the highest price per share paid by a person or group who
has acquired or has the right to acquire 25% or more of the outstanding Common
Stock. In the alternative, such persons could exercise such options and would be
entitled to five-year interest-free loans from the Company to finance such
exercise. All benefits for such persons accrued under supplemental retirement,
excess retirement and deferred compensation plans would immediately vest in
full. Such persons would also be entitled to an additional amount as
reimbursement for any tax payable because (i) the benefits received have been
treated as other than reasonable compensation for personal services actually
rendered and (ii) the Company provided an interest free loan in connection with
the exercise of stock options. Additionally, each key executive would be
entitled to reimbursement of any legal expenses incurred to enforce the
executive's rights to these termination benefits.
7. OTHER STOCKHOLDER OWNERSHIP
The ownership position of stockholders who, to the knowledge of the
Company, (based on filings with the SEC, except for the holdings of Canada
Development Investment Corporation), are the beneficial owners of more than 5%
of the outstanding Common Stock or Class II Preferred Stock of the Company and
certain other information are set forth in the following table:
26
<PAGE> 29
VARITY STOCK BENEFICIALLY OWNED OR OVER WHICH CONTROL OR DIRECTION EXERCISED
<TABLE>
<CAPTION>
SHARES PERCENT OF CLASS(1)
OWNERSHIP OF DEEMED TO BE ----------------------
TITLE OF OUTSTANDING BENEFICIALLY CURRENT BENEFICIAL
NAME OF BENEFICIAL OWNER CLASS SHARES OWNED OWNERSHIP OWNERSHIP
- ---------------------------------- ---------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
FMR Corp. and Fidelity
Magellan Fund &
Research Corporation
111 Devonshire Street
Boston, Massachusetts Common 5,327,216(2) 5,327,216 13.5 13.5
Neuberger & Berman L.P.
605 Third Avenue
New York, New York Common 2,559,799(3) 2,559,799 6.5 6.5
Canada Development
Investment Corp.
Scotia Plaza
Suite 2703
Toronto, Ontario Class II 1,250,000 1,250,000 62.5 62.5
Common -- 416,662(4) -- 1.0
Brian J. Stark &
Michael A. Roth
10556 N.Port Washington Road
Mequon, Wisconsin Class II 750,000 750,000(5) 37.5 37.5
Common -- 250,000(6) -- 0.6
- ---------------
<FN>
NOTES:
(1) Percentages are calculated on the basis of the number of outstanding shares
as of the record date, excluding securities held by or for the account of
the Company or its subsidiaries, plus Common Stock deemed outstanding under
the rules of the SEC (shares which will be outstanding if a shareholder
exercises his particular conversion or option rights which are exercisable
within 60 days). The shares of Class II Preferred Stock are convertible at
any time at a conversion price of Cdn. $75.00 (U.S. $61.50) per share of
Common Stock.
(2) As reported in, and based solely upon a Schedule 13G dated February 14, 1996
filed with the Securities and Exchange Commission by FMR Corp. According to
that report FMR Corp. beneficially owns 5,327,216 Common Shares and Fidelity
Magellan Fund owns 4,131,800 of those Common Shares beneficially owned by
FMR Corp.
(3) As reported in, and based solely upon a Schedule 13G dated February 12, 1996
filed with the Securities and Exchange Commission by Neuberger & Berman L.P.
(4) Represents 416,662 shares of Common Stock issuable upon the conversion of
1,250,000 shares of Class II Preferred Stock.
(5) As reported in, and based solely upon a Schedule 13D dated March 8, 1996
filed with the Securities and Exchange Commission by Messrs. Stark and Roth.
According to that report 413,000 shares of Class II Preferred Stock are held
by Stark Trading and 337,000 shares of Class II Preferred Stock are held by
Staro Partners (formerly Stark Investments) and Messrs. Stark and Roth have
shared power to vote and dispose of all such shares.
(6) Represents 250,000 shares of Common Stock issuable upon conversion of
750,000 shares of Class II Preferred Stock.
</TABLE>
27
<PAGE> 30
8. STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
Business to be raised by a stockholder will not be considered at the Annual
Meeting to be held in 1997 unless a notice complying with the Company's
Certificate of Incorporation is received at the principal executive office of
Varity at least fifty (50) days prior to that meeting. Stockholders wishing to
invoke the provisions of the rules of the SEC regarding the inclusion of a
proposal in Varity's proxy material for its Annual Meeting of Stockholders to be
held in 1997 must submit such proposals to Varity, in accordance with these
rules, for receipt not later than December 20, 1996.
9. OTHER MATTERS
As of this date, the Board of Directors does not know of any business to be
brought before the meeting other than as specified above. However, if any other
matters properly come before the meeting, it is the intention of the persons
named in the enclosed proxy to vote such proxy in accordance with their judgment
on such matters.
10. SOLICITATION OF PROXIES
A proxy may be revoked by notice in writing to the Secretary at any time
prior to the exercise thereof.
The Company intends to request banks and brokers who hold shares in their
names or custody, or in the name of nominees for others, to forward copies of
the proxy material to those persons for whom they hold such shares and to
request authority for the execution of proxies. The Company has also retained
the firm of Georgeson & Company to assist in the solicitation of proxies. The
fee of such firm, estimated to be approximately $7,500 plus expenses, as well as
other costs of soliciting proxies, will be borne by the Company.
Kenneth L. Walker
Secretary
April 26, 1996
28
<PAGE> 31
VARITY CORPORATION
SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
FOR EMPLOYEES
EFFECTIVE AS OF MARCH 1, 1996
<PAGE> 32
VARITY CORPORATION
SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
FOR EMPLOYEES
EFFECTIVE AS OF MARCH 1, 1996
SECTION 1
PURPOSE AND EFFECTIVE DATE
1.1 The purpose of the Varity Corporation Supplemental Retirement and
Deferred Compensation Plan For Employees is to assist Varity Corporation in
attracting and retaining executives who will make a significant contribution to
its business success.
1.2 This Plan is adopted effective as of March 1, 1996 (the "Effective
Date"), and it shall apply to Retirement Benefits and Savings Benefits accrued
on or after such date and Deferred Compensation Benefits in respect of salary,
bonus or director's annual retainer and other fees otherwise payable on or after
such date; provided, however, that this Plan shall be subject to approval by the
affirmative votes of the holders of a majority of the securities of Varity
Corporation present, or represented, and entitled to vote thereon at the next
following meeting of such security holders duly held.
SECTION 2
DEFINITIONS
When used herein, the following terms shall have the following meanings:
2.1 "Act" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
2.2 "Beneficiary" means the beneficiary or beneficiaries designated in
accordance with Section 12 to receive the amount, if any, payable upon the
death of a Participant.
2.3 "Benefit Limitations" means the provisions included in the
Retirement Plan or Savings Plan in order to implement the limitations
included in Sections 401(a)(17), 401(k)(3), 401(m)(2), 402(g)(1) and 415 of
the Code (including provisions, if any, excluding an employee from Plan
participation altogether).
2.4 "Board of Directors" means the Board of Directors of the Company.
2.5 "Change in Control" of the Company means any of the following
events:
(i) on or after the effective date of the Plan, any person (which,
for all purposes hereof, shall include, without limitation, an
individual, sole proprietorship, partnership, unincorporated
association, unincorporated syndicate, unincorporated organization,
trust, body corporate and a trustee, executor, administrator or other
legal representative) (a "Person") or any group of two or more Persons
acting in concert becomes the beneficial owner, directly or indirectly,
of securities of the Company representing, or acquires the right to
control or direct, or to acquire through the conversion of securities or
the exercise of warrants or other rights to acquire securities, 25% or
more of the combined voting power of the Company's then outstanding
securities; provided that for the purposes of the Plan, (A) "voting
power" means the right to vote for the election of directors, and (B)
any determination of percentage combined voting power shall be made on
the basis that (x) all securities beneficially owned by the Person or
group or over which control or direction is exercised by the Person or
group which are convertible into securities carrying voting rights have
been converted (whether or not then convertible) and all options,
warrants or other rights which may be exercised to acquire securities
beneficially owned by the Person or group or over which control or
direction is exercised by the Person or group have been exercised
(whether or not then exercisable), and (y) no
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<PAGE> 33
such convertible securities have been converted by any other Person and
no such options, warrants or other rights have been exercised by any
other Person; or
(ii) at any time subsequent to the effective date of the Plan there
shall be elected or appointed to the Board of Directors any director or
directors whose appointment or election by the Board of Directors or
nomination for election by the Company's shareholders was not approved
by a vote of at least a majority of the directors then still in office
who were either directors on the effective date of the Plan or whose
election or appointment or nomination for election was previously so
approved; or
(iii) a reorganization, merger, consolidation, combination,
corporate restructuring or similar transaction (an "Event"), in each
case, in respect of which the beneficial owners of the outstanding
Company voting securities immediately prior to such Event do not,
following such Event, beneficially own, directly or indirectly, more
than 60% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of
the Company and any entity which directly or indirectly through one or
more entities owns or controls more than 50% of the voting stock or
common stock of the Company immediately after the Event (a "Parent") in
substantially the same proportions as their ownership, immediately prior
to such Event of the oustanding Company voting securities; or
(iv) an Event involving the Company as a result of which 25% or
more of the members of the board of directors of the Parent or the
Company are not persons who were members of the Board of Directors
immediately prior to the earlier of (x) the Event, (y) execution of an
agreement the consummation of which would result in the Event, or (z)
announcement by the Company of an intention to effect the Event; or
(v) the Board of Directors adopts a resolution to the effect that,
for purposes of the Plan, a Change in Control has occurred.
2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.7 "Committee" means the Compensation Committee of the Board of Directors
(or a successor committee of the Board).
2.8 "Common Stock" means common stock, $0.01 par value per share, of the
Company.
2.9 "Company" means Varity Corporation, a Delaware corporation, or any
successor under the provisions of Section 13.2.
2.10 "Compensation Reduction Agreement" means an agreement executed by a
Participant pursuant to Section 6 in the form designated by the Committee from
time to time.
2.11 "Deferred Compensation" means the compensation deferred pursuant to
Section 6 of the Plan, including any deemed earnings (or losses) thereon.
2.12 "Disability" means disability as defined in the Varity Corporation
Disability Income Protection Program.
2.13 "Employer" means the Company and any subsidiary or affiliate of the
Company that becomes an Employer in accordance with Section 13.1. Effective as
of the Company has determined that K-H Corporation, Kelsey-Hayes Company and
Dayton Walther Corporation shall be Employers for purposes of this Plan.
2.14 "Equity Participant" means a Participant who is selected and
designated from time to time as an Equity Participant entitled to make deemed
investment elections with respect to Common Stock pursuant to Section 7.2 and
7.3 hereof.
2.15 "Global Equity Participant" means a Participant who is selected and
designated from time to time as a Global Equity Participant entitled to make
deemed investment elections with respect to Common Stock pursuant to Section 7.4
hereof.
A-2
<PAGE> 34
2.16 "Investment Rules" means the rules set forth in Section 7 hereof with
respect to deemed investments in Company common stock and the rules established
by the Committee from time to time for the purpose of determining deemed
investment earnings or losses on benefits payable under the Plan; provided,
however, that such rules shall not be changed retroactively without the written
consent of each affected Participant. Such rules need not provide for uniform
investment returns for all Participants, and may give due consideration to the
wishes of Participants in selecting deemed investment vehicles. Such rules shall
offer a broad range of deemed investment alternatives providing materially
different risk and return characteristics which are, in the judgment of the
Committee, appropriate for Participants.
2.17 "Participant" means any employee of an Employer who is selected to
participate in the Plan in accordance with Section 3.
2.18 "Plan" means the Varity Corporation Supplemental Retirement and
Deferred Compensation Plan For Employees as set forth herein and as amended and
restated from time to time.
2.19 "Plan Year" means the 12-month period commencing each February 1 and
ending on January 31.
2.20 "Retirement Benefits" means the benefits described in Section 4 of the
Plan.
2.21 "Retirement Plan" means, with respect to a Participant, the
tax-qualified defined contribution retirement plan (other than the Savings Plan)
maintained for employees of the Participant's Employer pursuant to Section
401(a) of the Code, as such plan is amended and restated from time to time.
2.22 "Savings Benefits" means the benefits described in Section 5 of the
Plan.
2.23 "Savings Plan" means, with respect to a Participant, the tax-qualified
retirement plan (as amended and restated from time to time) maintained for
employees of the Participant's Employer pursuant to Section 401(k) and related
provisions of the Code.
SECTION 3
PARTICIPATION
3.1 An employee of an Employer shall become a Participant in the Plan upon
selection and designation as a Participant by the Committee. The selection of
Participants shall be consistent with the provisions of Section 10.2 hereof.
3.2 The participation of any Participant may be suspended or terminated by
the Committee at any time, but no such suspension or termination shall operate
to reduce any benefits accrued by the Participant under the Plan prior to the
date of suspension or termination.
SECTION 4
RETIREMENT BENEFITS
4.1 Subject to the provisions of Section 8 (Vesting and Payment), the
amount of Retirement Benefits for a Plan Year payable to or in respect of a
Participant who participates in the Retirement Plan (or who would participate in
the Retirement Plan but for the Benefit Limitations) shall equal the sum of:
(a) the excess of (i) the amount of contributions that would have been
credited to the Participant's Account under the Retirement Plan for the
calendar year ending within the Plan Year determined without regard to the
Benefit Limitations and without regard to any election to defer
compensation under Section 6 of this Plan (or any other nonqualified
deferred compensation plan maintained by the Participant's Employer) over
(ii) the amount of contributions allocated to the account of the
Participant under the Retirement Plan for that calendar year; plus
(b) earnings or losses periodically deemed to have accrued on the
Participant's Retirement Benefits pursuant to the Investment Rules.
A-3
<PAGE> 35
4.2 The Retirement Benefits of a Participant may include additional
contribution amounts determined, and set forth in a written resolution, by the
Committee (or, in the case of Participants who are not subject to Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a
subcommittee appointed by the Committee) in its discretion (any such additional
amounts shall be adjusted for earnings or losses periodically deemed to have
accrued on such additional Retirement Benefits pursuant to the Investment
Rules).
SECTION 5
SAVINGS BENEFITS
5.1 As a condition of receiving Savings Benefits, a Participant must have
elected to make compensation reduction contributions on his or her behalf to the
Savings Plan in an amount at least equal to the maximum allowed by Section
402(g) of the Code.
5.2 Subject to the provisions of Section 8 (Vesting and Payment), the
amount of Savings Benefits payable to or in respect of a Participant shall equal
the sum of:
(a) the aggregate amount (if any) by which any employer matching
contributions which an Employer otherwise would make, or be deemed to make,
under the Savings Plan with respect to the Participant are limited during
any calendar year (i) by the Benefit Limitations or (ii) because of any
election to defer compensation under Section 6 of this Plan (or any other
nonqualified deferred compensation plan maintained by the Participant s
Employer); plus
(b) earnings or losses periodically deemed to have accrued on the
Participant's Savings Benefits pursuant to the Investment Rules.
SECTION 6
DEFERRED COMPENSATION
6.1 Each Participant may execute and file with the Company a Compensation
Reduction Agreement electing that either or both of the following be payable
only as Deferred Compensation under the Plan:
(a) salary or Board of Directors retainer or fees otherwise payable to
the Participant during a Plan Year, in multiples of 5% of such salary or
Board of Directors fees, rounded to the nearest $100 (or such other
percentages or amounts as the Committee may specify); provided, however,
that no such election shall result in the current payment of salary at a
rate below $15,000 per Plan Year (or such other minimum amount that the
Committee may specify);
(b) bonus amounts otherwise payable to the Participant with respect to
a Plan Year, in multiples of 5% of such amounts, rounded to the nearest
$1,000 (or such other percentages or amounts as the Committee may specify);
provided, however, that no such election shall result in deferral of more
than 100% of the Participant's bonus with respect to any Plan Year.
6.2 (a) The election to defer compensation pursuant to Section 6.1 must be
made no later than the December 31 immediately preceding the commencement of the
Plan Year for which such deferral is to take effect. Notwithstanding the
foregoing, a Participant may make such an election within 30 days after first
becoming eligible to participate in the Plan, with respect to (i) salary or
Board of Directors retainer or fees payable after the effective date of the
election or (ii) bonus payments to be made for performance during the Plan Year
in which the election is made. Notwithstanding any provision of this Plan to the
contrary, a Participant's election to defer salary or bonus in effect
immediately prior to the Effective Date hereof under the Company's Retirement
Equity and Deferred Compensation Plan or the Deferred Compensation and
Supplemental Retirement Plan-II shall continue in effect under this Plan for
salary or bonus payable on or after the Effective Date.
A-4
<PAGE> 36
(b) The election to defer compensation pursuant to a Compensation Reduction
Agreement shall be irrevocable and shall continue in effect for the Plan Year to
which it applies, and a Participant may make an irrevocable election with
respect to the deferral of compensation which shall remain in effect for all
future Plan Years until changed in writing, which change (except to the extent
its effective date is deferred pursuant to Section 7) shall apply prospectively
to the Plan Year beginning after the date of the written change of election.
Elections for subsequent Plan Years shall not affect Deferred Compensation from
prior years, which shall be distributed only in accordance with the terms of the
Plan.
6.3 Deferred Compensation shall be adjusted periodically to reflect deemed
earnings or losses in accordance with the Investment Rules.
SECTION 7
INVESTMENT RULES FOR COMPANY COMMON STOCK
7.1 Participants who are selected and designated by the Committee as Equity
Participants or as Global Equity Participants may elect to have the deemed
investment earnings or losses on their benefits payable under the Plan
determined on the basis of deemed investments in Common Stock pursuant to the
rules set forth in this Section 7. Subject to adjustment as set forth in Section
7.5 hereof, the maximum number of shares of Common Stock in which Equity
Participants and Global Equity Participants may be deemed to have invested
pursuant to this Plan shall be 500,000.
7.2 Each Equity Participant may make a written irrevocable election (in
accordance with the rules established from time to time by the Committee) to
have all or a portion of his or her Retirement Benefits, Savings Benefits and
Deferred Compensation (collectively the "Benefits") deemed invested in Common
Stock; provided, however, that such an election shall be effective no earlier
than six months from the date it is made; and provided further, however, that,
notwithstanding any provision of this Plan to the contrary, if any such election
is made or is in effect with respect to Deferred Compensation benefits to be
deferred under a Compensation Reduction Agreement, a change in the amount of
compensation to be deferred pursuant to the Compensation Reduction Agreement
shall not go into effect before six months after the date of the change. An
Equity Participant may also make a written irrevocable election (in accordance
with the rules established from time to time by the Committee) to change his or
her deemed investment election from Common Stock to another deemed investment
alternative available under the Investment Rules; provided, however, that such
an election shall be effective no earlier than six months from the date it is
made; and provided further, however, that, notwithstanding any provision of this
Plan to the contrary, if any such election is made or is in effect with respect
to Deferred Compensation benefits to be deferred under a Compensation Reduction
Agreement, a change in the amount of compensation to be deferred pursuant to the
Compensation Reduction Agreement shall not go into effect before six months
after the date of the change.
7.3 All Benefits that an Equity Participant elects to have deemed invested
in Common Stock shall be credited to a bookkeeping account under the Plan in the
form of deemed shares of Common Stock. The number of deemed shares of Common
Stock so credited shall be equal to the number of shares having an aggregate
fair market value on the effective date of the election (no earlier than six
months from the date it is made) equal to the amount of Benefits for which the
deemed election is made. The Committee, in its discretion, may provide for
matching contributions on the following terms: effective on the last day of the
Plan Year following each Plan Year during which an election made by an Equity
Participant under this Section 7.3 is effective (the "Matching Date"), the
Equity Participant's Benefits may be increased by an amount equal to the fair
market value on the Matching Date of up to 20% of the number of shares of Common
Stock deemed acquired on behalf of such Equity Participant under this Section
7.3 during the preceding Plan Year and such additional benefits shall be deemed
to be invested for purposes of the Plan in Common Stock; provided, however, that
such additional benefits shall be credited to the Equity Participant's account
only if he or she remains employed by the Company and retains his or her deemed
investment election in the shares of Common Stock credited during the preceding
Plan Year through the Matching Date; provided further, however, that if an
Equity Participant's employment terminates before the Matching Date by reason of
his or her death or Disability and the Equity Participant has retained his or
her investment election through the date
A-5
<PAGE> 37
of termination, then such additional benefits shall be credited to the Equity
Participant's account at the time of termination. The Committee s determination
with respect to matching contributions need not be uniform as to all
Participants or as to all Benefits of a Participant. Notwithstanding any
provision of this Plan to the contrary, Benefits shall be distributable only in
cash.
7.4 In addition, Participants who are selected and designated as Global
Equity Participants by the Committee may make an annual election (on such date
and in accordance with such rules as established by the Committee) to have up to
$2,500 (or such other amount established by the Committee) of their Benefits
deemed invested in Common Stock; provided, however, that such an election shall
be effective no earlier than six months from the date it is made. All Benefits
that a Global Equity Participant elects to have deemed invested in Common Stock
shall be credited to a bookkeeping account under the Plan in the form of deemed
shares of Common Stock. The number of deemed shares of Common Stock so credited
shall be equal to the number of shares having an aggregate fair market value on
the effective date of the election (no earlier than six months from the date it
is made) equal to the amount of Benefits for which the deemed election is made.
Additionally, on the last day of the Plan Year which includes the effective date
of the election, the Global Equity Participant's Benefits will be increased by
an amount equal to the fair market value on such date of 65% of the number of
shares of Common Stock deemed acquired on behalf of such Global Equity
Participant pursuant to this Section 7.4 during such Plan Year and such
additional benefits shall be deemed to be invested for purposes of the Plan in
Common Stock. A Global Equity Participant may not change his or her deemed
investment election with respect to such Benefits from Common Stock to another
deemed investment alternative available under the Investment Rules.
7.5 In the event of any recapitalization, reclassification, split-up or
consolidation of shares of Common Stock, separation (including a spin-off),
dividend on shares of Common Stock payable in capital stock, or other similar
change in capitalization of the Company or a merger or consolidation of the
Company or sale by the Company of all or a portion of its assets, or other
similar event, the Committee may make such appropriate adjustments in the number
and kind of securities or other property in which an Equity Participant's or
Global Equity Participant's investment is deemed made under the Plan, and in the
aggregate number of shares of Common Stock with respect to which investments may
be deemed to be made under the Plan, as the Committee deems equitable with a
view toward maintaining the proportionate interest of the Equity Participant or
the Global Equity Participant and preserving the value of the Plan.
7.6 As of each date on which a cash dividend is paid on Common Stock, the
account of each Equity Participant and Global Equity Participant shall be
credited with a number of deemed shares of Common Stock determined by (i)
multiplying the amount of such dividend (per share) by the number of shares of
Common Stock in such account, and (ii) dividing the total so determined by the
fair market value of a share of Common Stock on the date of payment of such cash
dividend. Additions to such accounts pursuant to this Section 7.6 shall continue
until the Benefits are fully paid.
SECTION 8
VESTING AND PAYMENT
8.1 Except as provided in Section 8.4, no amount shall be payable to a
Participant or his or her Beneficiary under the Plan to the extent it represents
Retirement Benefits or Savings Benefits (or earnings thereon) that would have
been forfeited under the vesting provisions (if any) of the Retirement Plan or
the Savings Plan (as the case may be) if payable thereunder; provided, however,
that all Retirement Benefits and Savings Benefits shall become immediately
vested in full upon a Change in Control. Deferred Compensation payable to a
Participant or his or her Beneficiary under the Plan shall be fully vested at
all times.
8.2 Except as provided in Sections 8.1, 8.3 and 8.4, Retirement Benefits,
Savings Benefits and Deferred Compensation shall be paid to a Participant (or to
his or her Beneficiary in the event of the Participant's death) either:
(i) in a cash lump sum within 30 business days after the first date on
which the Participant is no longer employed by an Employer or any other
subsidiary or affiliate of the Company (with the payment
A-6
<PAGE> 38
including all deemed earnings or losses calculated in accordance with the
Investment Rules through such date); or
(ii) in a cash lump sum within 30 business days after the first
anniversary of the date on which the Participant is no longer employed by
an Employer or any other subsidiary or affiliate of the Company (with the
payment including all deemed earnings or losses calculated in accordance
with the Investment Rules through such anniversary), if elected by the
Participant in accordance with the provisions of Section 8.3 and if such
termination of employment is (x) for a reason other than death and occurs
after the sum of the Participant's age and full years of service with the
Company, its subsidiaries or affiliates equals at least 55 or (y) by reason
of Disability; or
(iii) in annual installments for up to fifteen years following such
termination of employment, if elected by the Participant in accordance with
the provisions of Section 8.3 and if such termination of employment is (x)
for a reason other than death and occurs after the sum of the Participant's
age and full years of service with the Company, its subsidiaries or
affiliates equals at least 55, or (y) by reason of Disability. The first
such installment shall be payable within 15 business days after the end of
the fiscal quarter (based on a January 31 fiscal year) during which
termination of employment occurs (or the fiscal quarter during which the
first anniversary of termination of employment occurs if elected by the
Participant in accordance with the provisions of Section 8.3), and each
subsequent installment shall be payable within 15 business days after the
end of each fiscal quarter which includes the anniversary of such
termination. The amount of each such installment shall be determined by
dividing the amount credited to the Participant under the Plan at the end
of the fiscal quarter (including all deemed earnings or losses, calculated
in accordance with the Investment Rules, credited through such date) by the
number of installments remaining to be paid.
8.3 Each Participant may elect to be paid under the Plan in a lump sum
under Section 8.2(i) or, upon termination of employment due to Disability or for
a reason other than death and the sum of the Participant's age and full years of
service with the Company, its subsidiaries or affiliates equals at least 55, in
a deferred lump sum under Section 8.2(ii) or in up to fifteen annual
installments under Section 8.2(iii). Such an election must be made in the form
designated by the Committee from time to time, must be made within 30 days after
a Participant first becomes eligible to participate in the Plan, and shall be
irrevocable once filed with the Company; provided, however, that the Committee
may in its discretion permit a Participant to file a new election as to the form
of payment if such election is filed (and such permission is granted) at least
one year in advance of termination of employment; provided further, however,
that a Participant's payment election in effect immediately prior to the
Effective Date hereof under the Company's Retirement Equity and Deferred
Compensation Plan or the Deferred Compensation and Supplemental Retirement
Plan-II shall continue in effect under this Plan unless modified as set forth
above. In the absence of a timely election by a Participant pursuant to the
first sentence of this Section 8.3, the Participant shall be deemed to have
elected to be paid in a lump sum under Section 8.2(i).
8.4 Notwithstanding the provisions of Sections 8.1, 8.2 or 8.3 to the
contrary, each Participant's Retirement Benefits, Savings Benefits and Deferred
Compensation shall (to the extent not previously paid) be payable (i) to the
Participant in a cash lump sum as soon as practicable, but not later than 10
business days, after a Change in Control (including all deemed earnings or
losses credited through the date of the Change in Control, calculated in
accordance with the Investment Rules), or (ii) to the Participant's Beneficiary
in a cash lump sum as soon as practicable following the Participant's death
(including all deemed earnings or losses credited through the date of death,
calculated in accordance with the Investment Rules).
SECTION 9
SOURCE OF PAYMENT
9.1 All payments provided for under the Plan shall be paid in cash from the
general funds of the Company; provided, however, that such payments shall be
reduced by the amount of any payments made to the Participant or his or her
Beneficiary from any trust or special or separate fund established by the
Company
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<PAGE> 39
to assure such payments. The Company shall establish and maintain a trust, the
assets of which shall be subject to the claims of the Company's creditors in the
event of the Company's insolvency, in order to provide a source of funds to
assist it in the meeting of its liabilities hereunder. At the end of each Plan
Year and at the time of termination of employment of a Participant, the Company
shall be required to irrevocably deposit additional cash or other property to
the trust in an amount sufficient to pay each Participant who has terminated
employment with the Company prior to such time (or his or her Beneficiary) the
benefits of such Participant accrued pursuant to the terms of the Plan as of the
close of the Plan Year (or in the case of a termination of employment, as of the
time of such termination). Amounts payable to Participants or Beneficiaries
hereunder shall be payable from the assets of such trust. To the extent that any
Participant or Beneficiary acquires a right to receive payments from the Company
hereunder, such right shall be no greater than the right of an unsecured
creditor of the Company.
SECTION 10
ADMINISTRATION AND INTERPRETATION OF THE PLAN
10.1 The Plan shall be administered by the Committee. The Committee shall
have full discretion, power and authority to interpret, construe and administer
the Plan, to provide for claims review procedures, and to review claims for
benefits under the Plan. The Committee's interpretations and constructions of
the Plan and the actions taken thereunder by the Committee shall be binding and
conclusive on all persons and for all purposes.
10.2 To the extent that the Plan provides benefits which would be provided
under the Retirement Plan or Savings Plan but for the limitations imposed by
Section 415 of the Code, the Plan is intended to be an "excess benefit plan"
within the meaning of the Act. To the extent that the Plan provides other
benefits, the Plan is intended to be an unfunded deferred compensation plan "for
a select group of management or highly compensated employees" within the meaning
of the Act. Each provision of the Plan shall be administered, interpreted and
construed to carry out such intention, and any provision that cannot be so
administered, interpreted and construed shall, to that extent, be disregarded.
Notwithstanding any other provisions of the Plan to the contrary, if at any time
the Committee determines that an employee selected to be a Participant does not
satisfy the criteria for such a "select group" within the meaning of the Act,
such employee shall be deemed not to have participated in the Plan and shall
have accrued no benefit under the Plan; provided, however, that the Company
shall make an immediate lump-sum payment to the employee equal to the amount of
benefits the employee would have accrued under the Plan as of the date of such
determination if the employee had been a Participant in the Plan.
10.3 The Committee shall establish and maintain Plan records and may
arrange for the engagement of such accounting, actuarial or legal advisors, who
may be advisors to the Company, and make use of such agents and clerical or
other personnel as it shall require or may deem advisable for purposes of the
Plan. The Committee may rely upon the written opinion of such advisors engaged
by the Committee. The Committee may appoint a subcommittee (which may include
one or more Participants) to assist it in carrying out its administrative duties
under the Plan as they relate to Participants who are not subject to Section 16
of the Exchange Act.
10.4 To the maximum extent permitted by law, no member of the Board of
Directors, the Committee or any subcommittee appointed pursuant to Section 10.3
hereof shall be personally liable by reason of any contract or other instrument
executed by him or her or on his or her behalf in his or her capacity as a
member of the Board of Directors, the Committee or such subcommittee nor for any
mistake of judgment made in good faith, and the Company shall indemnify and hold
harmless, directly from its own assets (including the proceeds of any insurance
policy the premiums of which are paid from the Company's own assets), each
member of the Board of Directors, the Committee, and any subcommittee appointed
pursuant to Section 10.3 hereof and each other officer, employee, or director of
the Company to whom any duty or power relating to the administration or
interpretation of the Plan or to the management or control of the assets of the
Plan may be delegated or allocated, against any cost or expense (including
counsel fees) or liability (including any sum
A-8
<PAGE> 40
paid in settlement of a claim with the approval of the Company) arising out of
any act or omission to act in connection with the Plan unless arising out of
such person's own fraud or bad faith.
SECTION 11
AMENDMENT AND TERMINATION
11.1 The Plan may be amended, suspended or terminated, in whole or in part,
by the Committee, but no such action shall retroactively impair or otherwise
adversely affect the rights of any person to benefits under the Plan which have
accrued prior to the date of such action, as determined by the Committee;
provided, however, that any such amendment shall be subject to the approval of
the Company's shareholders to the extent such approval is required in order to
comply with Rule 16b-3 promulgated by the Securities and Exchange Commission
under Section 16 of the Exchange Act.
SECTION 12
DESIGNATION OF BENEFICIARIES
12.1 Each Participant who participates in the Plan shall file with the
Company a written designation of one or more persons as the Beneficiary who
shall be entitled to receive the amount, if any, payable under the Plan upon his
or her death. A Participant may, from time to time, revoke or change his or her
Beneficiary designation without the consent of any prior Beneficiary by filing a
new designation with the Company. The last such designation received by the
Company shall be controlling; provided, however, that no designation, or change
or revocation thereof, shall be effective unless received by the Company prior
to the Participant's death, and in no event shall it be effective as of a date
prior to such receipt.
12.2 If no such Beneficiary designation is in effect at the time of a
Participant's death, or if no designated Beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his or her Beneficiary and shall receive the
payment of the amount, if any, payable under the Plan upon his or her death. If
the Committee is in doubt as to the right of any person to receive such amount,
the Committee may retain such amount, without liability for any interest
thereon, until the rights thereto are determined, or the Committee may pay such
amount into any court of appropriate jurisdiction and such payment shall be a
complete discharge of the liability of the Plan and the Company therefor.
SECTION 13
GENERAL PROVISIONS
13.1 Any subsidiary or affiliate of the Company may, upon approval by the
Committee, adopt the Plan and become an Employer under the terms of the Plan.
Each Employer shall bear the costs of the benefits provided under the Plan with
respect to persons employed by it (subject to the allocation of costs among
Employers by the Committee, in the case of Participants employed by more than
one Employer). However, the Company shall be liable to each Participant for all
payments provided for under the Plan, except as otherwise provided in Section
9.1 hereof.
13.2 This Plan shall be binding upon and inure to the benefit of the
Company, its subsidiaries and affiliates, and their successors and assigns and
the Participant, his or her Beneficiary or designees and his or her estate.
Nothing in this Plan shall preclude the Company from consolidating or merging
into or with, or transferring all or substantially all of its assets to, another
corporation which assumes this Plan and all obligations of the Company
hereunder. Upon such a consolidation, merger or transfer of assets and
assumption, the term "Company" shall refer to such other corporation and this
Plan shall continue in full force and effect.
13.3 Neither the Plan nor any action taken hereunder shall be construed as
giving to a Participant or any employee the right to be retained in the employ
of an Employer or any other subsidiary or affiliate of the
A-9
<PAGE> 41
Company or as affecting the right of an Employer or such a subsidiary or
affiliate to dismiss any Participant or employee with or without cause.
13.4 The Company may provide for the withholding from any benefits payable
under this Plan all Federal, state, city or other taxes as shall be required
pursuant to any law or governmental regulation or ruling.
13.5 No right to any amount payable at any time under the Plan may be
assigned, transferred, pledged, or encumbered, either voluntarily or by
operation of law, except as provided expressly herein as to payments to a
Beneficiary or as may otherwise be required by law.
13.6 If the Committee shall find that any person to whom any amount is or
was payable hereunder is unable to care for his or her affairs because of
illness or accident, or has died, then the Committee, if it so elects, may
direct that any payment due him or her or his or her estate (unless a prior
claim therefore has been made by a duly appointed legal representative) or any
part thereof be paid or applied for the benefit of such person or to or for the
benefit of his or her spouse, children or other dependents, an institution
maintaining or having custody of such person, any other person deemed by the
Committee to be a proper recipient on behalf of such person otherwise entitled
to payment, or any of them, in such manner and proportion as the Committee may
deem proper. Any such payment shall be in complete discharge of the liability
therefor of the Company, the Plan or the Committee or any member, officer or
employee thereof.
13.7 All elections, designations, requests, notices, instruction, and other
communications from a Participant, Beneficiary or other person to the Committee
or the Company pursuant to the Plan shall be in such form as is prescribed from
time to time by the Committee, shall be mailed by first-class mail or delivered
to such location as shall be specified by the Committee, and shall be deemed to
have been given and delivered only upon actual receipt thereof at such location.
13.8 Except as otherwise expressly provided, the benefits payable under
this Plan shall be in addition to all other benefits provided for employees of
the Company.
13.9 The captions preceding the sections and articles hereof have been
inserted solely as a matter of convenience and in no way define or limit the
scope or intent of any provisions of the Plan.
13.10 To the extent not preempted by Federal law, this Plan shall be
governed by the laws of the State of New York, without regard to the principles
of conflict of laws thereof, as from time to time in effect.
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<PAGE> 42
<TABLE>
<CAPTION>
Item 1-Election of the following nominees as Directors: Item 2-Ratify the Appointment of KPMG Peat Marwick
L.L.P. as Independent Auditors
<S> <C> <C> <C> <C> <C>
For Withheld P.M.F. Cheng, W.A. Corbett, T.N. Davidson, FOR AGAINST ABSTAIN
For All R.M. Gates, L.F. Kahl, V.D. Laurenzo, W.D. / / / / / /
McKeough, B.H. Nicholson, V.A. Rice,
W.S. Rustand, W.R. Teschke and R.H. Warrender.
/ / / / Withheld For: (Enter the name of the nominee
you wish to withhold authority to vote)
______________________________________________
<C> <C>
Item 3-Approve the Amendments to the Shareholder Item 4-Approve the Supplemental
Value Incentive Plan Retirement and Deferral
Compensation Plan for Employees
<C> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
/ / / / / / / / / / / /
<C> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" ITEM 5. The undersigned hereby acknowledges
Item 5-Consider a Shareholder Proposal relating receipt of the Notice of Annual
to Director Compensation Meeting of Shareholders and a
Proxy Statement for the Annual Meeting.
<C> <C> <C> <C>
FOR AGAINST ABSTAIN
/ / / / / / Dated:____________________________,1996
_______________________________________
_______________________________________
(Signature if held jointly)
FOLD AND DETACH HERE
</TABLE>
PLEASE MARK, DATE AND SIGN AS YOUR NAME APPEARS ON THIS PROXY AND RETURN IN THE
ENCLOSED ENVELOPE. IF ACTING AS EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN,
ETC., YOU SHOULD SO INDICATE WHEN SIGNING. IF THE SIGNER IS A CORPORATION,
PLEASE SIGN THE FULL CORPORATE NAME, BY DULY AUTHORIZED OFFICER. IF SHARES ARE
HELD JOINTLY, EACH SHAREHOLDER NAMED SHOULD SIGN.
<PAGE> 43
VARITY CORPORATION
WORLD HEADQUARTERS
672 DELAWARE AVENUE
BUFFALO, NEW YORK 14209
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Neil D. Arnold, Frederick J. Chapman
or Kenneth L. Walker, proxies of the undersigned with power of substitution to
vote all shares of stock of the undersigned in Varity, a Delaware corporation,
with like effect as if the undersigned were personally present and voting at
the annual meeting of shareholders of Varity to be held on May 23, 1996 and at
any adjournment or adjournments thereof, one the following matters and, at
their discretion, upon any other business which may properly come before the
meeting.
Anyone giving a proxy may revoke it at any time prior to the voting
thereof by signing, dating and delivering a subsequent proxy or written notice
to the Corporate Secretary of Varity or by attending the meeting and
notifying the Corporate Secretary of his or her intention to vote in person.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
FOLD AND DETACH HERE
