<PAGE>
(YANKEE ENERGY LETTERHEAD)
YANKEE ENERGY SYSTEM, INC.
Notice of Annual Meeting of Shareholders
January 31, 1997
Meriden, CT
December 13, 1996
To the Shareholders:
The Annual Meeting of Shareholders of Yankee Energy System,
Inc., a Connecticut corporation, will be held at the Ramada Plaza
Hotel and Conference Center, 275 Research Parkway, Meriden,
Connecticut (see map on back cover) on Friday, January 31, 1997
at 10:30 a.m. for the following purposes:
1. To elect two directors for terms to expire at the 2000
Annual Meeting of Shareholders;
2. To approve the 1996 Long-Term Incentive Compensation
Plan;
3. To ratify the appointment of Arthur Andersen LLP as
independent auditors for the year 1997; and
4. To transact any other business which may properly come
before the meeting.
Only shareholders of record at the close of business on
December 2, 1996 will be entitled to notice of and to vote at the
meeting or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the
Board of Directors,
/s/ Mary J. Healey
Mary J. Healey
Vice President, General
Counsel and Secretary
<PAGE>
PROXY STATEMENT
This Proxy Statement is furnished to the shareholders of
Yankee Energy System, Inc. ("Yankee Energy" or the "Company") in
connection with the solicitation of proxies on behalf of the
Yankee Energy Board of Directors (the "Board") to be voted at the
Annual Meeting of Shareholders on January 31, 1997 and at any
adjournment(s) thereof (the "1997 Annual Meeting") for the
purposes set forth in the accompanying Notice of Annual Meeting
of Shareholders (the "Notice"). This Proxy Statement, the
Notice, the related proxy card and the 1996 Annual Report to
Shareholders are being mailed to shareholders beginning on or
about December 13, 1996. Yankee Energy's principal place of
business is 599 Research Parkway, Meriden, Connecticut 06450-
1030.
PROXIES
- -------
The proxies named on the enclosed proxy card were appointed
by the Board to vote the shares represented by the proxy card.
Upon receipt by the Company of a properly signed and dated proxy
card, the shares represented thereby will be voted in accordance
with the instructions on the proxy card. If a shareholder does
not return a signed proxy card, those shares so represented
cannot be voted by proxy. Shareholders are urged to mark the
boxes on the proxy card to show how their shares are to be voted.
If a shareholder returns a signed proxy card without marking the
boxes, the shares represented by the proxy card will be voted for
the election of directors and in favor of the other proposals set
forth in the Notice. The proxy card also confers discretionary
authority on the proxies to vote on any other matter not current-
ly known to management that may properly come before the meeting.
Any proxy delivered pursuant to this solicitation is revocable at
the option of the person(s) executing the same (i) upon receipt
by the Company before the proxy is voted of a duly executed proxy
bearing a later date, (ii) by written notice of revocation to the
Secretary of the Company received before the proxy is voted or
(iii) by such person(s) voting in person at the 1997 Annual
Meeting.
VOTING STOCK
- -------------
The record date for the determination of shareholders
entitled to notice of and to vote at the 1997 Annual Meeting was
the close of business on December 2, 1996. On such date there
were 10,449,554 shares of Common Stock outstanding and entitled
to vote. Each share of Common Stock is entitled to one vote.
The presence, in person or by proxy, of holders of a majority of
the outstanding shares of Common Stock entitled to vote shall
constitute a quorum at the 1997 Annual Meeting. Votes will be
totaled at the 1997 Annual Meeting by two inspectors of election
appointed by the Board.
OWNERSHIP OF VOTING STOCK BY MANAGEMENT
- ---------------------------------------
The following table sets forth certain information with
respect to the beneficial ownership of the Common Stock of the
Company as of November 30, 1996 by (i) each director and nominee
for director of the Company, (ii) each executive officer named in
the Summary Compensation Table, and (iii) all directors and
executive officers as a group. Except as indicated by footnote,
the persons named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Name of Shares Beneficially
Beneficial Owner Owned (1)
- ----------------- ------------
<S> <C>
Michael E. Bielonko(2) 5,317
Sanford Cloud, Jr. 1,079
Charles E. Gooley(3) 4,759
Mary J. Healey(4) 2,786
Thomas J. Houde(5) 3,398
Eileen S. Kraus 2,735
Frederick M. Lowther(6) 3,725
Leonard A. O'Connor 3,480
Emery G. Olcott 3,285
Branko Terzic(7) 8,340
Nicholas L. Trivisonno(8) 4,409
Patricia M. Worthy 300
Directors and Executive
Officers As a Group
(14 persons)(9) 46,348
</TABLE>
- --------------------
(1) As of November 30, 1996, each of the directors and executive
officers identified above and all directors and executive offi-
cers of the Company as a group beneficially owned less than one
percent of the outstanding Common Stock of the Company. The
number of shares shown includes 450 shares of restricted stock
held by each of Messrs. Cloud and Trivisonno, 300 shares of
restricted stock held by Ms. Kraus and Ms. Worthy, and 150 shares
of restricted stock held by each of Messrs. Lowther, O'Connor and
Olcott granted under the Company's Non-Employee Directors'
Restricted Stock Plan, which shares had not vested by November
30, 1996. The number of shares shown also includes 364 shares of
restricted stock held by Ms. Healey, 516 shares of restricted
stock held by Mr. Houde and 3,000 shares of restricted stock held
by Mr. Terzic granted under the Company's 1991 Long-Term
Incentive Compensation Plan, which shares had not vested by
November 30, 1996. Pursuant to the terms of each plan, such
individuals have the power to vote and receive dividends with
respect to such shares but do not have dispositive power with
respect to such shares until such shares are vested.
(2) Includes 150 shares owned by Mr. Bielonko's children and
2,400 shares subject to currently exercisable stock options.
(3) Includes 3,000 shares subject to currently exercisable stock
options.
(4) Includes 840 shares subject to currently exercisable stock
options.
(5) Includes 1,000 shares subject to currently exercisable stock
options.
(6) Includes 325 shares owned by Mr. Lowther's spouse.
(7) Includes 4,000 shares subject to currently exercisable stock
options.
(8) Includes 2,058 shares held jointly with Mr. Trivisonno's
spouse, with whom he shares voting and investment power.
(9) Includes an aggregate of 6,153 shares of non-vested
restricted stock held by directors and executive officers and an
aggregate of 12,000 shares subject to currently exercisable stock
options held by executive officers.
The above shares do not include amounts that have been
credited to participating directors' stock unit accounts under
the Company's Non-Employee Director Deferred Compensation Plan.
1. ELECTION OF DIRECTORS
---------------------
The Company's Restated Certificate of Incorporation provides
that the directors of the Company shall be divided into three
classes, as nearly equal in number as possible, with each class
having a three-year term. The Board, pursuant to the Company's
Restated Certificate of Incorporation, has fixed the number of
directorships at nine. The Board has nominated Frederick M.
Lowther and Emery G. Olcott for election to serve as directors of
the Company until the 2000 Annual Meeting of Shareholders of the
Company and until their successors are elected and qualified.
Mr. Leonard A. O'Connor has completed his term as director and
will not be standing for reelection at the 1997 Annual Meeting.
The Board is searching for a qualified candidate to fill this
vacancy. Proxies may not be voted for a greater number of
persons than the number of nominees named. Each nominee is
currently a director of the Company. In the event either of the
nominees becomes unavailable for election to the Board, an event
which the Board does not expect, the shares represented by a
proxy may be voted for a substitute nominee to be designated by
the Board or a committee thereof, unless the proxy withholds
authority to vote for all nominees.
The Board would like to take this opportunity to acknowledge
Mr. O'Connor's service to the Company as a director since 1989
and as a member of the Audit and Finance Committees, including
serving as Chairman of the Finance Committee since February 1996.
His friends and colleagues on the Board and at the Company thank
him for his many contributions to the Company and wish him well
in the years to come.
If a quorum is present at the 1997 Annual Meeting, the
election of directors will require the affirmative vote of a
plurality of the votes cast by the shares of Common Stock of the
Company entitled to vote. Abstentions by holders of such shares
and broker non-votes with respect to the election of directors
will not be included in determining whether nominees have
received the vote of such plurality.
The following information relates to the nominees named
above and to the other directors of the Company whose terms will
continue after the 1997 Annual Meeting.
<PAGE>
<TABLE>
<CAPTION>
NOMINEES FOR TERMS EXPIRING IN 2000
Principal Occupation and
Other Information
-------------------------
<S> <C>
Frederick M. Lowther Partner in the law firm of Dickstein,
Age 53 Shapiro, Morin & Oshinsky, LLP,
Director since 1992 Washington, D.C., since 1973. He has
been a member of the firm's Executive
Committee and chairman of its
Compensation Committee since 1989.
- -----------------------------------------------------------------
Emery G. Olcott President and Chief Executive Officer of
Age 58 Canberra Industries, Inc., Meriden, CT
Director since 1989 manufacturer and distributor of
analytical instruments and chemicals)
and its wholly-owned subsidiary, Packard
Instrument Co., since 1971. He is a
trustee of the Loomis Chaffee School in
Windsor, CT.
</TABLE>
- -----------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THESE
NOMINEES
<PAGE>
<TABLE>
<CAPTION>
OTHER DIRECTORS
- ---------------
Terms Expiring Principal Occupation and
in 1998: Other Information
- -------------- -------------------------
<S> <C>
Eileen S. Kraus Chairman, Connecticut, Fleet National
Age 58 Bank since December 1, 1995.
Director since 1990 Previously, she was President of Shawmut
Bank of Connecticut, N.A. and Vice
Chairman of Shawmut National Corporation
from September 1992 until December 1,
1995, Vice Chairman, Consumer Banking
and Marketing Groups of The Connecticut
National Bank and Shawmut Bank, N.A.
from 1990 until 1992 and Executive Vice
President, Consumer Banking and
Marketing Groups of The Connecticut
National Bank and Shawmut Bank, N.A.,
from 1988 to 1990. She is a director of
CPC International, Kaman Corporation and
The Stanley Works. She is also a
trustee and executive committee member
of Kingswood-Oxford School, vice
president of Horace Bushnell Memorial
Hall, and a director and executive
committee member of the Connecticut
Business and Industry Association.
- -----------------------------------------------------------------
Branko Terzic Chairman, President and Chief Executive
Age 49 Officer of Yankee Energy System, Inc.
Director since 1994 and its subsidiaries. Mr. Terzic became
Chairman in August 1995, Chief Executive
Officer in March 1995 and President in
September 1994. He was also Chief
Operating Officer from September 1994
to March 1995. From June 1993 to
September 1994, Mr. Terzic was Managing
Director of Arthur Andersen Economic
Consulting, Washington, D.C. From
October 1990 to May 1993, he served as a
Commissioner of the Federal Energy
Regulatory Commission.
- -----------------------------------------------------------------
Patricia M. Worthy Professor, Howard University School of
Age 52 Law since 1992. Previously, she served
Director Since May 1996 as Chief of Staff and Legal Counsel to
Mayor Sharon Kelly of Washington, D.C.
from 1991 to 1992 and was Commissioner,
District of Columbia Public Service
Commission from 1980 to 1983. From 1983
to 1991, she served as Chairman of the
Commission. She served as a member of
the Board of the public broadcasting
network, WETA, and serves as Chairman of
the District of Columbia Judicial
Nomination Commission.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OTHER DIRECTORS
- ---------------
Terms Expiring Principal Occupation and
in 1999: Other Information
- -------------- -------------------------
<S> <C>
Sanford Cloud, Jr. President and Chief Executive Officer of
Age 52 The National Conference of Christians
Director Since 1995 and Jews, Inc., New York, NY since April
1994. Previously, he was a partner in
the law firm of Robinson & Cole,
Hartford, CT from January 1993 until
March 1994 and Vice President of Aetna
Life and Casualty Co. from December 1986
until December 1992. Mr. Cloud is a
director of The Advest Group, Inc. He
also serves as Chairman of The
Children's Fund of Connecticut.
- -----------------------------------------------------------------
Nicholas L. Trivisonno Chairman and Chief Executive Officer of
Age 49 ACNielsen since November 1996.
Director since 1990 Previously, he was Chairman (Elect) and
Chief Executive Officer of ACNielsen
since January 1996 and Vice President of
Finance and Chief Financial Officer of
The Dun and Bradstreet Corporation from
September 1995 until November 1996.
From October 1993 until July 1995, he
served as Executive Vice President-
Strategic Planning and Group President
of GTE Corp., and served as Senior Vice
President-Finance from 1989 until
October 1993. He is a director of
Rayonier Incorporated. He also serves
on the Boards of Junior Achievement and
St. Joseph's Medical Center, and is a
trustee and corporation member of Babson
College.
</TABLE>
- -----------------------------------------------------------
<PAGE>
Board Committees and Meetings
- -----------------------------
Standing committees of the Board include the Executive
Committee, the Audit Committee, the Finance Committee, the
Organization and Compensation Committee and the Committee on
Board Affairs (formerly the Committee on Directors).
The Executive Committee is currently composed of Branko
Terzic (Chairperson), Emery G. Olcott and Nicholas L. Trivisonno.
The Executive Committee has certain powers and authority of the
Board in the management and control of the business of the
Company between meetings of the Board. The Executive Committee
met once during fiscal 1996.
The Audit Committee is currently composed of Nicholas L.
Trivisonno (Chairperson), Sanford Cloud, Jr., Eileen S. Kraus,
Leonard A. O'Connor and Patricia M. Worthy. The Audit Committee
oversees the Company's internal accounting controls, recommends
to the Board the appointment of a firm of certified public
accountants to conduct the annual audit of the Company's
financial statements, reviews reports from the independent
auditors and makes such recommendations to the Board as it deems
appropriate. The Audit Committee met three times during fiscal
1996.
The Finance Committee is currently composed of Leonard A.
O'Connor (Chairperson), Sanford Cloud, Jr. and Nicholas L.
Trivisonno. The Finance Committee is responsible for reviewing
the dividend policy and the financial plans and budgets of the
Company in order to determine whether they are fiscally sound and
consistent with the Company's overall business goals. The
Finance Committee met two times during fiscal 1996.
The Organization and Compensation Committee is currently
composed of Emery G. Olcott (Chairperson), Eileen S. Kraus and
Frederick M. Lowther. The Organization and Compensation
Committee is responsible for organization, succession and
executive compensation and administers the Company's Annual and
1991 Long-Term Incentive Compensation Plans, the Non-Employee
Directors' Restricted Stock Plan and the Non-Employee Director
Deferred Compensation Plan. The Organization and Compensation
Committee met seven times during fiscal 1996.
The Committee on Board Affairs is currently composed of
Eileen S. Kraus (Chairperson), Frederick M. Lowther and Emery G.
Olcott. The Committee on Board Affairs recommends to the Board
criteria for the selection of candidates for director, evaluates
candidates and recommends nominees to fill vacancies on the Board
and seeks input from all non-employee directors on CEO
performance which forms the basis for a report to the
Organization and Compensation Committee and a recommendation to
the Board. The Committee on Board Affairs also reviews and makes
recommendations to the Board on the compensation program for all
non-employee directors. The Committee on Board Affairs met six
times during fiscal 1996.
The Board held nine meetings during the fiscal year ended
September 30, 1996. Each director attended at least 75 percent
of the aggregate of (i) the total number of meetings of the
Board, and (ii) the total number of meetings held by all
committees of the Board on which such director served.
Director Compensation
- ---------------------
In fiscal year 1996, non-employee directors received an
annual retainer of $9,000, a portion of which was paid in Common
Stock of the Company as described below. Chairpersons of Board
committees received an additional annual retainer of $1,500.
Non-employee directors also received $700 for each Board and
committee meeting attended. Committee chairpersons received $800
for each Board committee meeting attended. Directors who are
full-time employees of the Company or a subsidiary receive no
additional compensation for services as a member of the Board or
any committee of the Board.
A part of each non-employee director's annual retainer was
paid in shares of Common Stock of the Company valued at $3,600
(or such slightly higher amount as is needed to avoid any
fractional shares). Those shares were purchased on the open
market and payment was made at the Board meeting immediately
following the Annual Meeting of Shareholders in February 1996.
The balance of the annual retainer was paid in cash at the end of
each quarter in June, September and December. In 1996, each non-
employee director received 149 shares of Common Stock of the
Company based on a fair market value of $24.125 per share on the
date of purchase.
As of October 1, 1996, non-employee directors receive an
annual retainer of $15,000, and of that amount, $10,000 is in
Common Stock of the Company paid in equal installments on a
quarterly basis in December, March, June and September.
Chairpersons of Board committees receive an additional annual
retainer of $1,500. Non-employee directors now receive $1,000
for each Board and Committee meeting attended.
Under the Non-Employee Directors' Restricted Stock Plan,
established in 1991 to promote ownership of the Company's Common
Stock by members of the Board, each non-employee director, upon
his or her election or reelection to the Board, receives an award
of 450 restricted shares of the Company's Common Stock. One-
third of such restricted shares of Common Stock vests each year
at subsequent annual meetings of shareholders. The Board may
make appropriate adjustments in share amounts in the event of any
change in the Company's Common Stock, such as a stock split, or
other change in the Company's corporate structure or distribution
to shareholders. Participants in the plan have voting rights and
rights to receive dividends and other distributions with respect
to such shares, but until their vesting, such shares are subject
to the plan's provisions on forfeiture and restrictions on
disposition. In February 1996, Mr. Cloud and Mr. Trivisonno each
received 450 shares upon election to a three-year term, and 150
shares vested for all non-employee directors upon completion of a
year of their respective terms.
The Company's Non-Employee Director Deferred Compensation
Plan permits non-employee directors to defer all or a portion of
total fees for all services rendered as a director, including
meeting fees, committee chairperson retainers, quarterly
retainers paid in the Company's Common Stock and vested shares of
restricted stock awarded pursuant to the Company's Non-Employee
Directors' Restricted Stock Plan. A non-employee director may
elect to have deferred cash compensation credited to either a
cash account or a stock unit account. Amounts credited to a
director's cash account will be credited on a monthly basis with
interest at an annual rate equal to the rate of return of Yankee
Gas Services Company ("Yankee Gas"), the Company's principal
operating subsidiary, as filed with the Connecticut Department of
Public Utility Control. Amounts credited to a director's stock
unit account will be credited initially as a dollar amount which
shall be converted into stock units on a quarterly basis by
dividing the dollar amount by the closing price of the Company's
Common Stock on the last day of each quarter. Stock units will
be further credited with an amount equal to the dividends payable
if the stock represented by the stock units had been outstanding.
Quarterly retainers paid in the Company's Common Stock and vested
shares of restricted stock deferred by a director pursuant to the
Non-Employee Director Deferred Compensation Plan will be
automatically allocated to such director's stock unit account.
A non-employee director may also elect among various options
as to how and when compensation deferred pursuant to the Plan
will be paid to the director. The director may elect to commence
payment of deferred compensation at a specified future date or
after the date on which the participant ceases to be a director
for any reason. A director may also elect to receive payment as
single lump sum or over a fixed period of time. Amounts credited
to the director's cash account will be paid in cash. Amounts
credited to the director's stock unit account will be paid in
cash or in shares of the Company's Common Stock, based on the
prior election of the director.
Certain Transactions
- --------------------
During fiscal year 1996, the Company engaged the law firm of
Dickstein, Shapiro, Morin and Oshinsky, LLP, of which Frederick
M. Lowther, a director of the Company, is a partner.
ORGANIZATION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
- -----------------------------------------------------------
The Organization and Compensation Committee of the Board
(the "Committee"), which is comprised of three non-employee
directors, is responsible for recommending to the Board the
Company's executive compensation policies and the annual
compensation of the Company's executive officers and other
members of senior management. In connection with these
responsibilities, the Committee has exclusive authority to
administer the Company's 1991 Long-Term Incentive Compensation
Plan, including the grant of stock options and other awards, and
oversees the Non-Employee Directors' Restricted Stock Plan and
the Non-Employee Director Deferred Compensation Plan.
Executive Compensation Policies
- -------------------------------
The Company's executive compensation policies are designed
to attract and retain high quality executives critical to the
long-term success of the Company, to motivate and reward
achievement of performance goals and to align the interest of
executive officers with the interest of the Company's other
shareholders. Consistent with this philosophy, the Company has
established a competitive and appropriate total compensation
package for executive officers and other members of senior
management consisting primarily of base salary, annual cash bonus
pursuant to the Company's Annual Incentive Compensation Plan and
stock options, restricted stock grants and stock appreciation
rights pursuant to the Company's 1991 Long-Term Incentive
Compensation Plan. Executive officers' salaries are positioned
to be consistent with the competitive practice of a peer group
(the "Peer Group") of investor-owned gas utilities located
throughout the United States with annual revenues and operating
characteristics similar to Yankee Gas. The Company's
incentive plans are designed so that the total executive
compensation package is competitive with the Peer Group. The
Board intends to generally ensure that compensation expenses are
deductible under Section 162(m) of the Internal Revenue Code.
Section 162(m) generally disallows a tax deduction for public
companies for compensation, other than qualifying performance-
based compensation, over $1 million paid to certain executive
officers.
Elements of Executive Compensation
- ----------------------------------
Base Salary. The Company maintains formal salary grades and
ranges for its executive officers. Positions are graded based
upon responsibility level. Salary ranges at each position are
established at the market average of the Peer Group. In 1996,
salary increases were determined based on individual performance,
the location of the individual's salary in the position's salary
range and a competitive increase in the payroll budget.
Annual Incentive Compensation Plan. Executive officers are
eligible to receive an annual performance-based cash award
pursuant to the Company's Annual Incentive Compensation Plan.
The Board established this plan to enhance the Company's
financial and operating performance, customer service, employee
safety and corporate efficiency. Each year, the Committee
establishes corporate and individual performance goals for the
Chief Executive Officer ("CEO") and other executive officers
based upon strategic priorities. The 1996 performance goals were
based on customer service satisfaction, profitability and en-
hancement of shareholder value, expansion of markets and market
growth, and public and employee safety. The goals are weighted
relative to their importance to the Company and the relative
impact each executive officer will have upon their results. Each
executive has a threshold, target and maximum incentive amount
expressed as a percentage of base salary. In 1996, these amounts
were 15 percent, 30 percent and 45 percent, respectively, of base
salary for the CEO, and 10 percent, 20 percent and 30 percent,
respectively, for the other executive officers. The Committee
may adjust the incentive cash award amount by an index or
"modifier" determined by the Committee. The modifier is based on
the Company's actual profit performance and serves to maintain a
correlation between an executive officer's incentive cash award
and the returns realized by the Company's shareholders. The
index may modify award amounts by as much as 50 percent. In
1996, incentive cash awards were increased by ten percent to
reflect the modifier. The plan is intended to pay fully
competitive annual cash compensation when performance against
goals matches the target level.
At the end of each fiscal year, the Committee reviews a
management report on results versus goals and meets with the CEO
to evaluate the performance of the other executive officers. The
Committee also meets in the absence of the CEO to evaluate his
performance. As part of the process, the Committee receives a
report from the Committee on Board Affairs on CEO performance
which is developed from input received from all non-employee
directors. This performance, expressed as a percentage with
attainment of all goals rated as 100 percent, is used in the
determination of annual cash bonus amounts. The Committee has
the authority to modify the mechanical results of applying the
terms of the plan when the Committee, exercising sound business
judgment, deems it prudent to do so.
Long-Term Incentive Compensation Plan. Pursuant to the
terms of the 1991 Long-Term Incentive Compensation Plan, the
Committee has the authority to award to executive officers and
other key employees restricted stock, stock options and stock
appreciation rights. The ability to grant a variety of awards
enables the Committee to respond to changing strategic,
competitive, regulatory, tax and accounting forces in an
efficient manner. Over time and through the use of the grant of
awards, the Committee intends to achieve the objective of causing
the executive officers and other senior management to be
significant shareholders of the Company so that their interests
are aligned with the interests of the Company's other
shareholders.
In 1996, the Committee made awards of non-qualified stock
options to executive officers and senior management. Stock
options are granted at market price, and as a result, only have
value if the stock price appreciates in value from the date the
options are granted. Stock options, therefore, provide executive
officers additional performance incentives. Stock option awards
are made annually, generally in January, and are based on
percentages of base salary at the time the awards are made. The
percentage for the Chief Executive Officer is 50 percent. The
percentage for officers is 40 percent or 20 percent, depending on
the level of officer responsibility. The levels for directors
and non-directors eligible for stock option awards are 20 percent
or 15 percent, depending on the level of responsibility.
CEO Compensation
- ----------------
The 1996 compensation for Mr. Terzic, the Company's CEO, was
determined substantially in conformance with the policies applied
to all other executive officers of the Company. The Committee
received a report on CEO performance from the Committee on Board
Affairs which was based on input from all non-employee directors.
The Committee then evaluated the performance of the CEO and
reported its compensation recommendation to the Board. For 1996,
the base salary of Mr. Terzic was established by an employment
agreement he entered into upon joining the Company in September
1994. Incentive cash compensation for Mr. Terzic was based on
performance against a series of four stated goals, reflecting a
combination of both corporate and individual objectives. The
four goals, in summary, were (i) implement a strategic corporate
business development plan; (ii) implement and achieve objectives
in Yankee Energy's business plan for subsidiary diversification;
(iii) create an effective Yankee Gas marketing program to
increase revenues; and (iv) implement an executive
development/succession planning process. Based on all
information available to it, the Committee concluded that Mr.
Terzic had achieved his goals. The Committee quantified Mr.
Terzic's goal-related performance at 100 percent of target. Mr.
Terzic's incentive cash award of $81,000 was derived by applying
a factor of 1.1 times Mr. Terzic's bonus of 27 percent of base
pay.
EMERY G. OLCOTT (Chairman)
EILEEN S. KRAUS
FREDERICK M. LOWTHER
EXECUTIVE COMPENSATION
- ----------------------
Summary Compensation Table
- --------------------------
The following table sets forth certain information regarding
the compensation paid by the Company and its subsidiaries to the
five most highly compensated executive officers of the Company at
the end of the last fiscal year.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------
Name and
Principal Fiscal
Position Year Salary($) Bonus($)
- ------------- ----- --------- --------
<S> <C> <C> <C>
Branko Terzic(3) 1996 268,125 81,000
Chairman, 1995 257,292 72,500
President and 1994 11,494 0
Chief Executive
Officer
Charles E. Gooley 1996 170,000 33,300
Executive 1995 162,671 29,900
Vice President 1994 143,500 36,000
Michael E. Bielonko 1996 139,725 31,900
Vice President 1995 133,708 21,900
and Chief 1994 127,125 30,000
Financial Officer
Mary J. Healey 1996 114,800 20,200
Vice President, 1995 107,850 12,200
General Counsel 1994 94,962 15,000
and Secretary
Thomas J. Houde 1996 109,175 23,600
Vice President 1995 100,958 17,100
1994 99,583 22,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (continued)
Long Term Compensation
----------------------
Awards
----------------------
Name and Restricted Securities
Principal Fiscal Stock Underlying
Position Year Awards($)(1) Options/SARs(#)
- ------------- ------ --------- -------------
<S> <C> <C> <C>
Branko Terzic(3) 1996 0 12,600
Chairman, 1995 0 0
President and 1994 83,880 10,000
Chief Executive
Officer
Charles E. Gooley 1996 0 6,400
Executive 1995 0 0
Vice President 1994 0 7,500
Michael E. Bielonko 1996 0 5,300
Vice President 1995 0 0
and Chief 1994 0 6,000
Financial Officer
Mary J. Healey 1996 0 4,300
Vice President, 1995 0 0
General Counsel 1994 0 2,100
and Secretary
Thomas J. Houde 1996 0 4,100
Vice President 1995 0 0
1994 0 2,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (continued)
Name and
Principal Fiscal All Other
Position Year Compensation($)(2)
- --------- ------ ----------------
<S> <C> <C>
Branko Terzic(3) 1996 0
Chairman, 1995 0
President and 1994 86,669
Chief Executive
Officer
Charles E. Gooley 1996 0
Executive 1995 2,029
Vice President 1994 1,980
Michael E. Bielonko 1996 0
Vice President 1995 2,029
and Chief 1994 1,980
Financial Officer
Mary J. Healey 1996 1,000
Vice President, 1995 2,609
General Counsel 1994 1,980
and Secretary
Thomas J. Houde 1996 0
Vice President 1995 2,029
1994 1,980
</TABLE>
- --------------------
(1) The amount shown represents the value of the restricted
stock award, calculated by multiplying the closing market price
of the Company's Common Stock on the date of grant by the number
of shares awarded. Restricted stock holdings as of September 30,
1996, and their value on such date, based on the value of an
equivalent number of unrestricted shares were: Mr. Terzic, 3,000
shares ($64,125); Ms. Healey, 364 shares, ($7,873); and Mr.
Houde, 516 shares ($11,161). The restrictions on these shares
lapse on an annual basis in accordance with the following
schedule: 10 percent in the first year, 15 percent in the second
year and 25 percent in each of the following three years.
Dividends are paid on these shares.
(2) This compensation includes the dollar value of the Company's
match under the Company's 401(k) Plan.
In December 1995 and 1996, Ms. Healey received $1,200 and
$1,000 payments, respectively, in lieu of participating in the
Company's medical insurance plan.
(3) Mr. Terzic was elected President and Chief Operating Officer
as of September 15, 1994, Chief Executive Officer as of March 1,
1995 and Chairman as of August 22, 1995.
Option Grants in Last Fiscal Year
- ---------------------------------
The following table sets forth certain information with
respect to grants of stock options under the Company's 1991 Long-
Term Incentive Compensation Plan made to the individuals named in
the Summary Compensation Table during the fiscal year ended
September 30, 1996.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------------
Number of Percent
Securities of Total
Underlying Options
Options Granted to Exercise
Granted Employees in Price
(#) (1) Fiscal Year ($/Sh)
----------- -------------- --------
<S> <C> <C> <C>
Branko Terzic 12,600 19% $23.69
Charles E. Gooley 6,400 10 23.69
Michael E. Bielonko 5,300 8 23.69
Mary J. Healey 4,300 7 23.69
Thomas J. Houde 4,100 6 23.69
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Expiration Price Appreciation
Date for Option Term(2)
---------- -------------------------
5%($) 10%($)
----- -----
<S> <C> <C> <C>
Branko Terzic 01/23/06 $187,740 $475,776
Charles E. Gooley 01/23/06 95,360 241,664
Michael E. Bielonko 01/23/06 78,970 200,128
Mary J. Healey 01/23/06 64,070 162,368
Thomas J. Houde 01/23/06 61,090 154,816
</TABLE>
(1) Option grants vest ratably over five years on each of the
first five anniversary dates.
(2) The dollar amounts under these columns are the result of
calculations at the five and ten percent rates set by the
Securities and Exchange Commission and, therefore, are not
intended to forecast possible future appreciation, if any, of
the Company's stock price.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
- ---------------------------------------------------
The following table sets forth certain information with
respect to the individuals named in the Summary Compensation
Table regarding options held as of September 30, 1996.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
-------------------------------------------------
Shares Value
Acquired on Realized
Exercise (#) ($)
------------------------------------
<S> <C> <C>
Branko Terzic 0 0
Charles E. Gooley 0 0
Michael E. Bielonko 0 0
Mary J. Healey 0 0
Thomas J. Houde 0 0
</TABLE>
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying in-the-Money
Unexercised Options
Options at At Fiscal
Fiscal Year End (#) Year-End($)(1)
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------------------------------------------------
<S> <C> <C>
Branko Terzic 4,000 / 18,600 $6,000/$9,000
Charles E. Gooley 3,000 / 10,900 $3,735/$5,603
Michael E. Bielonko 2,400 / 8,900 $2,988/$4,482
Mary J. Healey 840 / 5,560 $1,046/$1,569
Thomas J. Houde 1,000 / 5,600 $1,245/$1,868
</TABLE>
- --------------------
(1) Based on the fair market value of the Company's Common Stock
as of September 30, 1996 ($22.875), less the exercise price of
the options.
Executive Agreements
- ---------------------
Effective September 14, 1994, the Company entered into an
employment agreement with Branko Terzic, the Company's Chairman,
President and Chief Executive Officer. The agreement provides
that Mr. Terzic shall receive a base salary of at least $250,000
a year. Pursuant to the terms of the agreement, Mr. Terzic has
received 4,000 shares of restricted Common Stock of the Company,
non-qualified stock options to purchase 10,000 shares of the
Company's Common Stock and a $25,000 signing bonus. In addition,
the agreement provides that if, after a "change in control" of
the Company, (i) Mr. Terzic terminates his employment with the
Company by reason of (a) a material reduction in his authority,
duties or responsibilities or (b) a reduction in his total
compensation in violation of the terms of the agreement, or (ii)
the Company terminates Mr. Terzic's employment for a reason other
than death or disability or cause, Mr. Terzic will be entitled to
a severance payment. The amount payable to Mr. Terzic upon the
occurrence of any of the foregoing events is equal to three times
Mr. Terzic's base salary then in effect. Such amount is
immediately due and payable upon his termination. A "change in
control" is deemed to have occurred if any person becomes the
beneficial owner, directly or indirectly, of 25% or more of the
Company's Common Stock or there is a change in the majority of
the members of the Board in connection with certain transactions,
including any tender offer or merger of the Company. The
agreement will be automatically renewed on each successive
January 1, unless not later than December 15 of the preceding
year, one of the parties notifies the other of the desire not to
extend the agreement.
The Company also has entered into Change in Control
Executive Severance Agreements with each of Messrs. Gooley,
Bielonko, Houde and Ms. Healey. The intent of the agreements is
to assure continuity in the management of the operations of the
Company in the event of a "change in control". A change in
control is defined as occurring when (i) any person becomes the
beneficial owner, directly or indirectly, of 25% or more of the
Company's Common Stock, (ii) there is a change in the majority of
the Board during a 25-month period, (iii) a consolidation or
merger of the Company is consummated in which the Company is not
the continuing or surviving corporation or pursuant to which the
Company's Common Stock would be converted into cash, securities
or other property, other than a merger of the Company in which
the holders of the Company's Common Stock have the same
proportionate ownership of Common Stock of the surviving
corporation, (iv) the consummation of any sale, lease, exchange
or other transfer of a majority of the Company's assets, (v) the
Company's shareholders approve any plan or proposal for the
liquidation or dissolution of the Company, or (vi) the Board
determines that a change in control has occurred. These
agreements provide that in the event that the executive officer's
employment is terminated within two years of a change in control
either by (i) the Company for reasons other than for disability,
death or cause, or (ii) the executive officer due to (a) material
diminution in status, position, duties or responsibilities, (b) a
reduction in total compensation, or (c) assignment to a location
more than 50 miles from the executive officer's current place of
employment, the executive officer is entitled to a severance
payment. The amount payable upon the occurrence of any of the
foregoing events is two times the sum of the executive officer's
annual base salary at the date of the change in control plus the
average annual incentive compensation paid to the executive
officer in the two fiscal years prior to the fiscal year in which
the change in control occurs. In addition, the executive officer
shall be entitled to participate in all benefit plans in which
such officer participated in prior to the termination, and if the
executive officer is age 55 or older on the date of termination
of employment, such officer shall be entitled to receive service
credit under the Company's pension plans until his or her normal
retirement date. The agreements will be automatically renewed on
each successive January 1, unless not later than December 1 of
the preceding year, one of the parties notifies the other that he
or she does not wish to extend the agreement, except that the
agreement shall be automatically extended for 24 months after any
change in control.
Retirement Plans
- ----------------
The following table sets forth the annual pension benefits
payable upon normal retirement at age 65, pursuant to the Yankee
Energy System, Inc. Retirement Plan (the "Retirement Plan",
described below) and the Company's Excess Benefit Plan (the
"Excess Benefit Plan", described below), based upon the average
annual earnings and years of service indicated.
<TABLE>
<CAPTION>
Average Annual Earnings
for the Highest Consecutive
60 Months of Last 120 Months
Prior to Normal Retirement Years of Service
- --------------------------- ----------------------------------
15 20 25
-- -- --
<S> <C> <C> <C>
$ 75,000 $15,841 $21,121 $ 26,402
125,000 27,091 36,121 45,152
175,000 38,341 51,121 63,902
225,000 49,591 66,121 82,652
275,000 60,841 81,121 101,402
325,000 72,091 96,121 120,152
375,000 83,341 111,121 138,902
</TABLE>
<TABLE>
<CAPTION>
Average Annual Earnings
for the Highest Consecutive
60 Months of Last 120 Months
Prior to Normal Retirement Years of Service
- --------------------------- ----------------------------------
30 35 40
-- -- --
<S> <C> <C> <C>
$ 75,000 $ 31,682 $ 36,962 $ 38,837
125,000 54,182 63,212 66,337
175,000 76,682 89,462 93,837
225,000 99,182 115,712 121,337
275,000 121,682 141,962 148,837
325,000 144,182 168,212 176,337
375,000 166,672 194,462 203,837
</TABLE>
- -------------------------
Pursuant to provisions of the Internal Revenue Code,
compensation earned that is used in calculating retirement
benefits under the Retirement Plan is limited to a maximum of
$150,000. This affects the benefit calculation for certain
individuals and effectively reduces their benefits under the
Retirement Plan. The Company's Excess Benefit Plan provides
benefits not payable under the Retirement Plan due to the
$150,000 limitation. The maximum annual benefit that can be paid
in 1996 to a participant from a tax qualified benefit plan is
$120,000.
All employees of the Company, including the executive
officers named in the Summary Compensation Table, are entitled to
participate in the Retirement Plan, which is a non-contributory,
defined benefit retirement plan. Retirement benefits are based
on years of credited service and the employee's average annual
earnings, which is the average of an employee's five highest
years of earnings during the last ten years of employment. The
benefits presented are based on straight life annuity and do not
take into account any reduction for joint and survivorship
annuity payments. The Retirement Plan provides for several
optional forms of benefit payments, including a straight life
annuity option, a contingent annuitant option, a ten-year certain
and life option and a level income option. Retirement benefits
under the Retirement Plan are not reduced by the employee's
Social Security benefits. Contributions, which are actuarially
determined, are made to the Retirement Plan by the Company for
the benefit of all employees covered by the Retirement Plan. The
Retirement Plan provides for continued benefit accruals for
employees who work beyond age 65.
As of September 30, 1996, the years of credited service
under the Retirement Plan for Messrs. Terzic, Gooley, Bielonko,
Houde, and Ms. Healey were 4, 15, 19, 17 and 7, respectively.
The years of credited service for the executive officers named
above include prior service under the Northeast Utilities Service
Company Retirement Plan.
Under federal law, an employee's benefits under a qualified
pension plan, such as the Retirement Plan, are limited to certain
amounts. The Company has adopted the Excess Benefit Plan in
which all of the executive officers named in the Summary
Compensation Table participate. The Excess Benefit Plan
supplements the benefits of a participant in the Retirement Plan
in an amount by which such participant's benefits under the
Retirement Plan are limited by law. The Excess Benefit Plan also
provides for the payment of additional retirement benefits in the
same manner as under the Retirement Plan on remuneration paid
under certain management incentive plans. The Excess Benefit
Plan is an unfunded plan that is not intended to meet the
qualification requirements of Section 401 of the Internal Revenue
Code.
In addition, the Company also has a Supplemental Executive
Retirement Plan that credits Mr. Terzic with two years of service
for each of the first five years of his employment. Credit for
succeeding years will be in accordance with the provisions of the
Retirement Plan.
Corporate Performance Graph
- ----------------------------
The following graph and table compares the total shareholder
returns over the last five fiscal years to the Standard & Poor's
500 Stock Index ("S&P 500") and Standard & Poor's Utility Index
("S&P Utilities"). Total return values for the S&P 500, S&P
Utilities and Yankee Energy were calculated based on cumulative
total return values assuming the reinvestment of dividends. The
shareholder return shown on the graph below is not necessarily
indicative of future performance.
[GRAPH]
<TABLE>
<CAPTION>
TOTAL SHAREHOLDER RETURNS
FISCAL YANKEE S&P S&P
YEAR ENERGY 500 UTILITIES
- ------ ------ ---- ---------
<S> <C> <C> <C>
1991 100 100 100
1992 127 111 114
1993 175 125 141
1994 149 130 122
1995 157 169 156
1996 178 203 168
</TABLE>
2. APPROVAL OF 1996 LONG-TERM INCENTIVE COMPENSATION PLAN
------------------------------------------------------
The Board has unanimously adopted and recommended that the
shareholders consider and approve the 1996 Long-Term Incentive
Compensation Plan (the "1996 Plan"). Such approval at the Annual
Meeting will require the affirmative vote of the holders of a
majority of the shares of the Company's Common Stock represented
at the Annual Meeting. Abstentions by holders of such shares
with respect to voting on the 1996 Plan will have the effect of a
vote against the 1996 Plan. Broker non-votes, however, will not
have any effect.
The Company currently operates the 1991 Long-Term Incentive
Compensation Plan, which was approved by the Company's
shareholders on February 22, 1991 and which has been amended from
time to time (the "1991 Plan"). The maximum number of shares of
Common Stock subject to award under the 1991 Plan is 163,004. As
of September 30, 1996, under the 1991 Plan, 20,532 shares of
Common Stock had been issued pursuant to the exercise of options
or stock awards,options to purchase an additional 116,200 shares
were outstanding, 18,000 shares subject to stock appreciation
rights were outstanding and 5,492 shares were subject to
outstanding restricted stock awards. 2,780 shares currently are
available for future grants under the 1991 Plan. To assure that
shares are available to provide future incentives to those
officers, executive and managerial employees of the Company and
any subsidiaries who will be responsible for the Company's future
growth and continued success, the Board of Directors has adopted
the 1996 Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS
PROPOSAL
The following constitutes a brief discussion of the material
features of the 1996 Plan and is qualified in its entirety by
reference to a copy of the 1996 Plan, which is attached as
Exhibit A to this Proxy Statement.
Nature and Purpose
- ------------------
The stated purposes of the 1996 Plan are the same as those
of the 1991 Plan: (i) to attract and retain outstanding
executives in key management positions of the Company and any
subsidiaries of the Company, (ii) to promote the achievement of
long-term corporate goals through the use of performance-based
incentives, (iii) to create parallel interests between executives
and shareholders by providing for some portion of executive
compensation in the form of common stock, and (iv) to reward
performance and to foster Company identification on the part of
key middle managers.
The 1996 Plan is designed to meet these objectives by
offering stock incentive awards and performance-based incentives
to those persons whose performance or potential contribution will
benefit the Company. The 1996 Plan empowers the Company to award
officers, executives and managerial employees of the Company and
its subsidiaries incentive and non-qualified stock options
("Options"), stock appreciation rights ("SARs") and stock grants
("Awards") (collectively, "Plan Benefits"). The 1996 Plan also
empowers the Company to award to eligible individuals any
combination of any or all of these Plan Benefits, subject to
certain limitations.
Persons to whom Plan Benefits are made are sometimes
referred to as "participants." References to "incentive stock
options" are to incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code").
Duration
- --------
The 1996 Plan provides that it will terminate upon the
earlier of (i) October 22, 2006 or (ii) the date on which all
shares available for issuance under the 1996 Plan shall have been
issued pursuant to stock awards and the exercise or cancellation
of options and SARs granted thereunder. Plan Benefits
outstanding on October 22, 2006 will continue to have full force
and effect in accordance with the provisions of the instruments
evidencing such Plan Benefits. The Board of Directors may modify
or amend the 1996 Plan from time to time without shareholder
approval. Any such modification or amendment and any termination
of the 1996 Plan will not impair the rights of any person with
respect to Plan Benefits previously awarded.
Administration
- --------------
The 1996 Plan will be administered by the Board, whose
construction and interpretation of the terms and provisions of
the 1996 Plan are final and conclusive. The Board may delegate
any or all of its powers under the Plan to the Company's
Organization and Compensation Committee or any other committee
(the "Committee") appointed by the Board. Members of the
Committee serve at the discretion of the Board. If a Committee
is appointed by the Board to administer the 1996 Plan, all
references to the Board in the Plan and in this proxy statement
shall relate to such Committee, unless the context otherwise
requires. The Board may in its sole discretion grant Options and
SARs, issue shares upon exercise of such Options and SARs, and
grant Awards, all as provided in the 1996 Plan. The Board has
the authority, subject to the express provisions of the 1996
Plan, to construe the 1996 Plan and its related agreements, to
prescribe, amend and rescind the rules and regulations relating
to the 1996 Plan, to determine the terms and provisions of the
respective Plan Benefit agreements, which need not be identical,
and to make all other determinations in the judgment of the Board
as may be necessary or desirable for the administration of the
1996 Plan. The 1996 Plan provides that Committee members must be
"outside directors" as that term is used in the regulations
related to Section 162 of the Internal Revenue Code and
"non-employee directors" as that term is used in Rule 16b-
3 (or any successor rule) under the Securities Exchange Act of
1934.
Shares Subject to the 1996 Plan
- -------------------------------
The stock to be offered under the 1996 Plan consists of
shares of the Company's Common Stock, $5.00 par value. The last
sale price for the Common Stock as reported by the New York Stock
Exchange on September 30, 1996 was $22.875 per share. The
maximum number of shares of Common Stock in respect of which Plan
Benefits may be granted pursuant to the 1996 Plan may not exceed
523,000 (subject to adjustment for stock splits, stock dividends,
recapitalizations and the like), except that this number of
shares will be increased by that number of shares as to which
awards granted under the Company's 1991 Plan may lapse, expire,
terminate or be canceled. The shares may be authorized and
unissued shares, treasury shares or shares purchased on the open
market. If the Company reacquires shares granted under the 1996
Plan, or if an Option or SAR expires or terminates without having
been exercised in full, the reacquired or unexercised shares will
be available as subsequent Plan Benefits under the 1996 Plan.
Shares of Common Stock issued pursuant to the 1996 Plan may be
subject to such restrictions on transfer, repurchase rights or
other restrictions as may be determined by the Board.
Eligibility and Employment
- --------------------------
All officers, executive and managerial employees of the
Company or any of its subsidiaries are eligible to receive Plan
Benefits pursuant to the 1996 Plan. As of September 30, 1996,
approximately 11 persons were eligible to participate in the 1996
Plan.
The selection of participants in, and the nature and size of
Plan Benefits granted under, the 1996 Plan are wholly within the
discretion of the Board. However, under the 1996 Plan, the
maximum number of shares with respect to which Options or SARs
may be granted to any employee, including cancellations and
repricings which may occur, shall be limited to 50,000 shares in
any calendar year. The Board's designation of a participant in
any year does not require the Board to designate such person to
receive Plan Benefits in any other year.
With respect to the 1996 Plan, the Board has made no
determination regarding the selection of particular participants
to receive Plan Benefits or the nature of any Plan Benefits to be
granted, and it is not determinable what, if any, Plan Benefits,
the Board may have granted under the 1996 Plan had it been in
effect during 1996. However, under the 1991 Plan, the table
below shows the number of Plan Benefits granted to such persons
or groups listed in such table during the Company's last fiscal
year, since the inception of the 1991 Plan and that remain
outstanding as of November 30, 1996.
<TABLE>
<CAPTION>
Number of Number of
Number of Securities Securities
Securities Underlying Underlying
Underlying Plan Benefits Plan Benefits
Plan Benefits Since 1991 Outstanding
Granted Plan as of
in 1996 Inception 11/30/96
------------ ----------- -----------
<S> <C> <C> <C>
Branko Terzic 12,600 22,600 22,600
Charles E. Gooley 6,400 13,900 13,900
Michael E. Bielonko 5,300 11,300 11,300
Mary J. Healey 4,300 6,400 6,400
Thomas J. Houde 4,100 6,600 6,600
All current executive officers as a group:
36,500 62,700 62,700
All current employees, including all current officers who
are not executive officers, as a group:
24,700 50,300 50,300
</TABLE>
An option or SAR shall terminate if the participant ceases
to be employed by the Company or a subsidiary for any reason,
including retirement but other than death, except that in the
case of a participant who terminates employment as the result of
permanent and total disability, normal retirement as defined in
the Company's pension plan or early retirement with approval of
the Board of Directors, any portion of such Option or SAR which
was otherwise exercisable on the date of termination of the
participant's employment may be exercised within a one-year
period following the date on which the participant ceased to be
so employed, or within the three-month period following such date
in the case of an Incentive Stock Option, but in no event after
the expiration of the exercise period. Any such exercise may be
made only to the extent of the number of shares subject to the
Option or SAR which were exercisable on the date of the
participant's termination of employment. If the participant dies
during the applicable one-year or three-month period, the Option
or SAR shall be exercisable by the participant's personal
representatives, heirs or legatees to the same extent and during
the same period that the participant could have exercised the
Option or SAR on the date of his or her death. If a participant
dies while an employee of the Company or a subsidiary, any Option
or SAR granted to such participant may be exercised by the
participant's personal representatives or heirs to the extent
that the participant could have exercised the option or SAR on
the date of his or her death. Unless exercised, such Option or
SAR shall terminate upon the earlier of the expiration of one
year from the date of the participant's death or the expiration
of the exercise period.
Transferability
- ---------------
No Plan Benefits granted under the 1996 Plan, and no right
or interest therein, is assignable or transferable by a
participant except by will or the laws of descent and
distribution or, with respect to Awards, non-qualified stock
options and SARs, pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code or Title I of the
Employee Retirement Income Security Act ("ERISA") or the rules
promulgated thereunder.
Recapitalization, Change in Control and Reorganization
- ------------------------------------------------------
The 1996 Plan provides that if dividends are payable in
Common Stock of the Company or in the event there are splits,
sub-divisions or combinations of shares of Common Stock of the
Company, the number of shares subject to outstanding Options and
SARs, and Awards as to which restrictions have not lapsed, and
the grant price of such Plan Benefits, as applicable, will be
adjusted proportionately.
Upon the occurrence of a Change in Control (as defined in
the 1996 Plan), except as the Board may expressly provide
otherwise, all restrictions and conditions applicable to Awards
then outstanding shall be deemed satisfied as of the date of the
Change of Control and all Options awarded at least six (6) months
prior to the Change of Control shall be exercisable as of such
date. Any SAR exercised upon or subsequent to the occurrence of
a Change in Control shall be paid in cash.
In the case of any tender or exchange offer, merger,
consolidation or other business combination or sale of all or
substantially all of the assets of the Company, which does not
constitute a Change in Control, or in the case of a
reorganization or liquidation of the Company, the Board of the
Company, or the board of directors of any corporation assuming
the obligations of the Company hereunder, shall, as to
outstanding Plan Benefits, (i) make appropriate provision for the
protection of any such outstanding Plan Benefits by the
substitution on an equitable basis of appropriate stock of the
Company or of the merged, consolidated or otherwise reorganized
corporation which will be issuable in respect of the shares of
Common Stock of the Company; provided only that the excess of the
aggregate fair market value of the shares subject to the Plan
Benefits immediately after such substitution over the purchase
price thereof is not more than the excess of the aggregate fair
market value of the shares subject to such Plan Benefits
immediately before such substitution over the purchase price
thereof, (ii) upon written notice to the participants, provide
that all unexercised Plan Benefits must be exercised within a
specified number of days of the date of such notice or such Plan
Benefits will be terminated, or (iii) upon written notice to the
participants, provide that the Company or the merged,
consolidated or otherwise reorganized corporation shall have the
right, upon the effective date of any such merger, consolidation,
sale of assets or reorganization, to purchase all Plan Benefits
held by each participant and unexercised as of that date at an
amount equal to the aggregate fair market value on such date of
the shares subject to the Plan Benefits held by such Participant
over the aggregate purchase or grant price therefor, such amount
to be paid in cash or, if stock of the merged, consolidated or
otherwise reorganized corporation is issuable in respect of the
shares of the Common Stock of the Company, then, in the
discretion of the Board in stock of such merged, consolidated or
otherwise reorganized corporation equal in fair market value to
the aforesaid amount. In any such case the Board shall, in good
faith, determine fair market value and may, in its discretion,
advance the lapse of any waiting or installment periods and
exercise dates.
Stock Options
- -------------
Options granted under the 1996 Plan may be in the form of
incentive stock options or non-qualified stock options. Options
may be granted under the 1996 Plan on such terms and conditions
not inconsistent with the provisions of the 1996 Plan and in such
form as the Board may from time to time approve.
The option exercise price per share of Common Stock
purchasable under an Option granted under the 1996 Plan shall be
determined by the Board at the time of grant, provided that the
exercise price shall not be less than the fair market value of
the Common Stock on the date of grant or, in the case of an
incentive stock option to be granted to a participant owning
stock having more than ten percent of the total combined voting
power of all classes of stock of the Company or any subsidiary,
the exercise price per share shall be not less than 110 percent
of the fair market value of such stock on the date of grant.
The term of each Option granted under the 1996 Plan shall be
fixed by the Board; however, the term of any Option may not
exceed ten years from the date of grant, except that the term of
any incentive stock option granted to a participant owning stock
possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or any subsidiary
may not exceed five years.
An Option granted under the 1996 Plan shall be exercisable
at such time or times and subject to such conditions as shall be
determined by the Board at the date of grant and as set forth in
the instrument evidencing the Option. With respect to incentive
stock options, the aggregate fair market value (determined as of
the date of grant) of the number of shares with respect to which
such incentive stock options are exercisable for the first time
by a participant during any calendar year may not exceed $100,000
or such other limit as may be established under Section 422 of
the Internal Revenue Code.
An Option granted under the 1996 Plan may be exercised as
provided in the instrument evidencing the option; however, no
partial exercise of the option may be for less than ten shares.
Payment of the exercise price may be made with cash, with shares
of Common Stock of the Company or with a combination of cash and
stock. The Board may, in its discretion, accelerate the date of
exercise of any installments of any Options; provided that no
acceleration will be made that would violate the annual vesting
limitation contained in Section 422(d) of the Internal Revenue
Code with respect to incentive stock options.
Stock Appreciation Rights
- -------------------------
Under the 1996 Plan, an SAR may be granted in tandem with,
in addition to or independent of any other Plan Benefit. An SAR
entitles the holder to receive, without payment, an amount equal
to the excess, if any, of the fair market value of a share of the
Common Stock on the date of exercise over the grant price of such
share, multiplied by the number of shares as to which the holder
is exercising the SAR. The Company will pay such amount to the
holder in cash or in shares of Common Stock or a combination
thereof, as the Board may in its sole discretion determine.
An SAR may be exercised by a participant in accordance with
procedures established by the Board or as otherwise provided in
the instrument evidencing the SARs. The Board may also determine
that an SAR shall be automatically exercised on one or more
specified dates.
Stock Awards
- ------------
The Board may make awards of shares of Common Stock to
participants in its discretion, subject to such terms and
conditions as the Board deems appropriate, including, without
limitation, restrictions on the pledging, sale, assignment,
transfer or other disposition of such shares.
Federal Income Tax Consequences
- -------------------------------
Based on current provisions of the Internal Revenue Code,
and the existing regulations thereunder, certain anticipated
federal income tax consequences with respect to the several types
of Plan Benefits are described below.
At Grant of Options and SARs
A participant will not recognize any taxable income at the
time a stock option or an SAR is granted, and the Company will
not be entitled to a federal income tax deduction at that time.
Exercise of Incentive Stock Options
No ordinary income will be recognized by a participant
holding an incentive stock option at the time of exercise. The
excess of the fair market value of the shares at the time of
exercise over the aggregate option price will be an adjustment to
alternative minimum taxable income for purposes of the federal
"alternative minimum tax" at the date of exercise. If the
participant holds the shares for the greater of two years after
the date the option was granted or one year after the acquisition
of such shares, the difference between the amount realized upon
disposition of the shares and the aggregate option exercise price
will constitute a long-term capital gain or loss, as the case may
be, and the Company will not be entitled to a federal income tax
deduction. If the shares are disposed of in a sale, exchange or
other "disqualifying disposition" within two years after the date
of grant or within one year after the date of exercise, the
participant will realize taxable ordinary income in an amount
equal to the excess of the fair market value of the shares
purchased at the time of exercise over the aggregate option
exercise price, and the Company will usually be entitled to a
federal income tax deduction equal to such amount. Any gain
earned by the participant in excess of this amount likely will be
capital gain. Under proposed Treasury regulations, if a
participant exercises an incentive stock option by tendering
shares previously acquired by the exercise of an incentive stock
option, a disqualifying disposition may occur, and the
participant may recognize income and be subject to other basis
allocation and tax holding period requirements.
Exercise of Non-Qualified Stock Options
Taxable ordinary income will be recognized by the
participant at the time of exercise of a non-qualified stock
option in an amount equal to the excess of the fair market value
of the shares purchased at the time of such exercise over the
aggregate option exercise price. The Company will usually be
entitled to a corresponding federal income tax deduction. At the
time of a subsequent sale of the shares, the participant will
generally recognize a taxable capital gain or loss based upon the
difference between the per share selling price and the per share
fair market value at the time of exercise. If the instrument
evidencing a non-qualified stock option permits and the
participant pays all or part of the non-qualified exercise price
by tendering shares owned by the participant, the tax
consequences described above apply except that the number of
shares surrendered in payment of the option exercise price shall
have the same basis and tax holding period as the shares
surrendered. The additional shares received upon such exercise
have a tax basis equal to the cash paid with the exercise plus
the amount of taxable ordinary income recognized on such
exercise, and the shares have a tax holding period that commences
on the date of exercise.
Exercise of Stock Appreciation Rights
Upon the exercise of an SAR, the participant will realize
taxable ordinary income on the amount of cash received and/or the
then current fair market value of the shares of Common Stock
received, and the Company will usually be entitled to a
corresponding federal income tax deduction. The participant's
basis in any shares of Common Stock received will be equal to the
amount of ordinary income upon which the participant was taxed.
Upon any subsequent disposition, any gain or loss realized will
be a capital gain or loss.
Restricted Awards
A participant receiving a restricted stock grant will not
recognize income, and the Company will not be allowed a deduction
at the time such shares of restricted stock are granted. While
the restrictions on the shares are in effect, a participant will
recognize compensation income equal to the amount of the
dividends received, and the Company or its subsidiaries will be
allowed a deduction in a like amount. When the restrictions on
the shares are removed or lapse, the excess of the fair market
value of the shares on the date the restrictions are removed or
lapse over the amount paid, if any, by the participant for the
shares will be ordinary income to the participant and will be
allowed as a deduction for federal income tax purposes to the
Company or its subsidiary. Upon disposition of the shares, the
gain or loss recognized by the participant will be treated as
capital gain or loss, and the capital gain or loss will be
short-term or long-term depending upon the period of time the
shares are held by the participant following the removal or lapse
of the restrictions. If the restrictions do not lapse and the
shares are forfeited by the participant and thus returned to the
Company, there will be no federal income tax consequences to
either the participant or the Company.
Withholding Taxes
Withholding taxes must be paid at the time of exercise of
any non-qualified stock option or SAR. Withholding taxes must
also be paid in respect of any restricted stock when the
restrictions thereon lapse. In respect of all other Plan
Benefits, withholding taxes must be paid whenever income to the
participant is recognized for tax purposes.
General
Because the tax consequences to a participant may vary
depending upon the participant's individual situation, each
participant should consult his or her personal tax advisor
regarding the federal, and any state, local or foreign, tax
consequences to the participant.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS
PROPOSAL.
3. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
---------------------------------------------------
The firm of Arthur Andersen LLP served as independent
auditors for the Company for the fiscal year ended September 30,
1996. Pursuant to the recommendation of the Audit Committee,
the Board has appointed that firm to continue in that capacity
for the fiscal year 1997, and recommends that a resolution be
presented to shareholders at the 1997 Annual Meeting to ratify
their appointment.
In the event the shareholders fail to ratify the
appointment of Arthur Andersen LLP, the Board will appoint other
independent public accountants as auditors. Representatives of
Arthur Andersen LLP will attend the 1997 Annual Meeting. They
will have the opportunity to make a statement and respond to
appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
THIS PROPOSAL
OTHER MATTERS
- -------------
The Board does not know of any matters that will be
presented for action at the 1997 Annual Meeting other than those
described above and matters incident to the conduct of the
meeting. If, however, any other matters not presently known to
management should come before the 1997 Annual Meeting, it is
intended that the shares represented by the accompanying proxy
will be voted on such matters in accordance with the discretion
of the holders of such proxy.
COST OF SOLICITATION
- ---------------------
The cost of soliciting proxies will be borne by the
Company. Proxies may be solicited by directors, officers or
regular employees of the Company in person, by telephone or
telegram. The Company has retained Morrow & Company, Inc., New
York, to assist in the solicitation and sending of proxy
material. The Company will pay approximately $6,000 for these
services.
SHAREHOLDER PROPOSALS FOR 1998
- ------------------------------
Pursuant to Securities and Exchange Commission regulations,
shareholder proposals submitted for next year's proxy statement
must be received by the Company no later than the close of
business on August 15, 1997 to be considered. Proposals should
be addressed to Mary J. Healey, Vice President, General Counsel
and Secretary, Yankee Energy System, Inc., 599 Research Parkway,
Meriden, CT 06450-1030.
Shareholders holding at least five percent of the voting
power of the issued and outstanding Common Stock of the Company
may nominate candidates for election to the Board if a written
notice setting forth (i) the name, age, business address and
residence address of each person to be nominated, (ii) the
principal occupation or employment of each such person, (iii)
the number of shares of capital stock of the Company which are
beneficially owned by each such person, (iv) a statement that
each such person is willing to be nominated and (v) such other
information concerning each such person as would be required
under the rules of the Securities and Exchange Commission to be
included in a proxy statement soliciting proxies for the
election of such person as a director is submitted and received
by the Secretary of the Company not less than 90 days prior to a
meeting of shareholders called for election of directors.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
APPENDIX
---------
Shown on pages 5 through 7 are photographs of the Yankee
Energy directors.
The graph on page 22 specifically shows the growth in a
$100 initial investment and reinvestment of dividends in Yankee
Energy, the S&P 500 and the S&P Utilities from fiscal years 1991
through 1996. Year-end values are shown for each investment in
the corresponding table underneath the graph. For the five years
ended September 30, 1996, a $100 investment in Yankee Energy grew
to $178; a $100 investment in the S&P 500 grew to $203; and a
$100 investment in the S&P Utilities grew to 168.
Shown on the last page is a map which provides directions
to the location of the Company's Annual Meeting.
<PAGE>
PROXY YANKEE ENERGY SYSTEM, INC. PROXY
Proxy for Annual Meeting of Shareholders--January 31, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Sanford Cloud, Jr., Branko
Terzic and Nicholas L. Trivisonno, or either of them, each with
full power of substitution, proxies of the undersigned, to act
for and to vote, as and to the extent specified, all shares of
common stock of Yankee Energy System, Inc. held by the
undersigned at the Annual Meeting to be held on January 31, 1997
and any adjournment thereof upon the matters set forth hereon and
upon such other business that may properly come before the
meeting or any adjournment thereof.
THIS PROXY FORM, WHEN PROPERLY EXECUTED AND RETURNED, WILL BE
VOTED AS AND TO THE EXTENT SPECIFIED BY THE UNDERSIGNED. WHERE
NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,
2 AND 3.
(Continued on reverse side)
<PAGE>
The Board of Directors recommends a Vote FOR Proposals 1, 2 & 3.
I plan to attend the meeting
- -----
1. Election of Directors: FREDERICK M. LOWTHER and EMERY G.
OLCOTT
FOR all WITHHOLD To vote for all nominees,
nominees AUTHORITY mark "FOR" box. To withhold
listed above to vote for authority to vote for any
(except as marked all nominees individual nominee, cross out
to the contrary) listed above that nominee's name.
2. Approval of the 1996 Long-Term Incentive Compensation Plan
FOR AGAINST ABSTAIN
---- ------- -------
3. Ratification of Arthur Andersen LLP as independent auditors
of Yankee Energy System, Inc. for its fiscal year ended
September 30, 1997.
FOR AGAINST ABSTAIN
---- ------- -------
The undersigned hereby also
acknowledge(s) receipt of
notice of said meeting and the
related proxy statement.
If you receive more than
one copy of the annual Date:___________________,199_
report and do not wish to
in the future, please Signed_______________________
check this box _________.
Signed_______________________
Please sign this Proxy exactly as
your name appears hereon. When
shares are held by joint tenants,
both should sign. When signing as
an attorney, executor,
administrator, or guardian, please
give full title as such. If a
corporation, please sign in full
corporate name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
<PAGE>
For your convenience, please retain these department phone
numbers and addresses:
Yankee Energy System, Inc.
News and Information
1-800-YES-9989
Yankee Energy System, Inc. has a 24 hour toll-free news and
information service which includes current news releases, a
Chairman's message, earnings and dividend information as well as
access to the transfer agent or the Company's Investor Relations
Department.
Investor Relations Contact:
Steven P. Eschbach, CFA
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
Phone: (203) 639-4459
Fax: (203) 639-4011
ChaseMellon Transfer Agent
1-800-288-9541
Shareholders who have questions about their accounts or desire to
transfer their stock from one name to another should contact
ChaseMellon at the above telephone number from 8 a.m. to 8 p.m.
Eastern Time or write:
For Transfers and Transfer Inquiries:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
All Other Inquiries:
ChaseMellon Shareholder Services, L.L.C.
P.O. Box 590 Overpeck Centre
Ridgefield Park, NJ 07660
<PAGE>
EXHIBIT A
YANKEE ENERGY SYSTEM, INC.
1996 LONG-TERM INCENTIVE COMPENSATION PLAN
SECTION 1. Purpose.
- ---------- --------
The purposes of the 1996 Long-Term Incentive Compensation
Plan (the "Plan") are (i) to attract and retain outstanding
executives in key management portions of Yankee Energy System,
Inc. (the "Company") and any subsidiaries of the Company
(collectively the "Related Corporations"), (ii) to promote the
achievement of long-term corporate goals through the use of
performance-based incentives, (iii) to create parallel interests
between executives and shareholders by providing for some portion
of executive compensation in the form of common stock, and (iv)
to reward performance and to foster Company identification on the
part of key middle managers.
The Plan will provide a means whereby officers, executive
and managerial employees of the Company and any Related
Corporations may (a) purchase stock in the Company pursuant to
options which qualify as "incentive stock options" ("Incentive
Stock Options") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), (b) purchase stock in the Company
pursuant to options granted hereunder which do not qualify as
Incentive Stock Options ("Non-Qualified Options"); (c) may be
awarded stock in the Company ("Awards"); and (d) may receive
stock appreciation rights ("SARs"). Both Incentive Stock Options
and Non-Qualified Options are referred to hereafter individually
as an "Option" and collectively as "Options." As used herein,
the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation" as those terms are defined in Section
424 of the Code. Options, Awards and SARs are referred to
hereafter individually as a "Plan Benefit" and collectively as
"Plan Benefits." Officers, executive and managerial employees of
the Company and any Related Corporations are referred to herein
as "Participants."
SECTION 2. Administration.
- ---------- ---------------
2.1 Board of Directors and the Committee. The Plan will be
administered by the Board of Directors of the Company whose
construction and interpretation of the terms and provisions
hereof shall be final and conclusive. The Board of Directors may
in its sole discretion grant Options, issue shares upon exercise
of such Options, grant Awards and grant SARs all as provided in
the Plan. The Board of Directors shall have authority, subject
to the express provisions of the Plan, to construe the Plan and
its related agreements, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and
provisions of the respective Option, Award and SAR agreements,
which need not be identical, and to make all other determinations
in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may
correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or
determination made in good faith. The Board of Directors may
delegate any or all of its powers under the Plan to the
Organization and Compensation Committee or other Committee (the
"Committee") appointed by the Board of Directors consisting of at
least two members of the Board of Directors, who shall serve at
the discretion of the Board of Directors. If Plan Benefits are
to be approved solely by a Committee, the members of the
Committee shall at all times be: (i) "outside directors" as that
term is defined in Treas. Reg. Section 1.162-27(e)(3) (or any
successor regulation); and (ii) "non-employee directors" within
the meaning of Rule 16b-3 (or any successor rule) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as such terms are interpreted from time to time. If the
Committee is so appointed, all references to the Board of
Directors herein shall mean and relate to such Committee, unless
the context otherwise requires.
2.2 Compliance with Section 162(m) of the Code. Section
162(m) of the Code generally limits the tax deductibility to
publicly held companies of compensation in excess of $1,000,000
paid to certain "covered employees" ("Covered Employees"). It is
the Company's intention to preserve the deductibility of such
compensation to the extent it is reasonably practicable and to
the extent it is consistent with the Company's compensation
objectives. For purposes of this Plan, Covered Employees of the
Company shall be those employees of the Company described in
Section 162(m)(3) of the Code.
SECTION 3. Eligibility.
- ---------- ------------
3.1 Incentive Stock Options. Participants shall be
eligible to receive Incentive Stock Options pursuant to the Plan;
provided that no Participant shall be granted any Incentive Stock
Option under the Plan who, at the time such Option is granted,
owns, directly or indirectly, Common Stock of the Company
possessing more than 10% of the total combined voting power of
all classes of stock of the Company or of its Related
Corporations, unless the requirements of Section 6.6(b) hereof
are satisfied. In determining whether this 10% threshold has
been reached, the stock attribution rules of Section 424(d) of
the Code shall apply.
3.2 Non-Qualified Options, Awards and SARs. Non-Qualified
Options, Awards and SARs may be granted to any Participant.
3.3 Generally. The Board of Directors may take into
consideration a Participant's individual circumstances in
determining whether to grant Plan Benefits. Granting of Plan
Benefits for any individual shall neither entitle that individual
to, nor disqualify that individual from, participation in any
other grant of Plan Benefits.
SECTION 4. Stock Subject to Plan.
- ---------- ----------------------
Subject to adjustment as provided in Sections 9 and 10
hereof, the stock to be offered under the Plan shall consist of
shares of the Company's Common Stock, $5.00 par value, and the
maximum number of shares which will be reserved for issuance, and
in respect of which Plan Benefits may be granted pursuant to the
provisions of the Plan, shall not exceed in the aggregate five
hundred twenty-three thousand (523,000) shares, except that this
number of shares will be increased by that number of shares as to
which awards granted under the Company's 1991 Long-Term Incentive
Compensation Plan may lapse, expire, terminate or be cancelled.
Such shares may be authorized and unissued shares, treasury
shares or shares purchased on the open market. If an Option or
SAR granted hereunder shall expire or terminate for any reason
without having been exercised in full, or if the Company shall
reacquire any unvested shares issued pursuant to Awards, any such
shares so reacquired shall again be available for subsequent
grants of Plan Benefits under the Plan. Stock issued pursuant to
the Plan may be subject to such restrictions on transfer,
repurchase rights or other restrictions as shall be determined by
the Board of Directors.
SECTION 5. Granting of Plan Benefits.
- ---------- --------------------------
Plan Benefits may be granted under the Plan at any time
after adoption of the Plan by the Board of Directors and prior to
October 22, 2006; provided, however, that nothing in the Plan
shall be construed to obligate the Company to grant Plan Benefits
to a Participant or anyone claiming under or through a
Participant. The date of grant of Plan Benefits under the Plan
will be the date specified by the Board of Directors at the time
the Board of Directors grants such Plan Benefits; provided,
however, that such date shall not be prior to the date on which
the Board of Directors takes such action. The Board of Directors
shall have the right, with the consent of a Participant, to
convert an Incentive Stock Option granted under the Plan to a
Non-Qualified Option pursuant to Section 6.7. Plan Benefits may
be granted alone or in addition to other grants under the Plan.
SECTION 6. Special Provisions Applicable to Options and SARs.
- ---------- --------------------------------------------------
6.1 Purchase Price and Shares Subject to Options and SARs.
(a) The purchase price per share of Common Stock
deliverable upon the exercise of an Option shall be
determined by the Board of Directors; provided, however,
that the exercise price shall not be less than 100% of the
fair market value of such Common Stock on the day the Option
is granted (except as modified in Section 6.6(b) hereof in
the case of an Incentive Stock Option).
(b) Options granted under the Plan may provide for the
payment of the exercise price by delivery of (i) cash or a
check payable to the order of the Company in an amount equal
to the exercise price of such Options, (ii) shares of Common
Stock of the Company owned by the Participant having a fair
market value equal in amount to the exercise price of the
Options being exercised, or (iii) any combination of (i) and
(ii). The fair market value of any shares of the Company's
Common Stock which may be delivered upon exercise of an
Option shall be determined by the Board of Directors. The
Board of Directors may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise
Options and sell the shares of Common Stock thereby
acquired, pursuant to a brokerage or similar arrangement,
approved in advance by the Board of Directors, and to use
the proceeds from such sale as payment of the purchase price
of such shares.
(c) If, at the time an Option is granted under the
Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the last business
day for which the prices or quotes discussed in this
sentence are available prior to the date such Option is
granted (the "Determination Date") and shall mean (i) the
average (on the Determination Date) of the high and low
prices of the Common Stock on the principal national
securities exchange on which the Common Stock is traded, if
such Common Stock is then traded on a national securities
exchange; (ii) the last reported sale price (on the
Determination Date) of the Common Stock on The Nasdaq Stock
Market if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or
average of bid prices) last quoted (on the Determination
Date) by an established quotation service for over-the-
counter securities, if the Common Stock is not reported on
The Nasdaq Stock Market. However, if the Common Stock is
not publicly traded at the time an Option is granted under
the Plan, "fair market value" shall be deemed to be the fair
value of the Common Stock as determined by the Board of
Directors after taking into consideration all factors which
it deems appropriate, including, without limitation, recent
sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
(d) The maximum number of shares with respect to which
Options or SARs may be granted to any employee, including
any cancellations or repricings which may occur, shall be
limited to 50,000 shares in any calendar year.
6.2 Duration of Options and SARs. Subject to Section
6.6(b) hereof, each Option and SAR and all rights thereunder
shall be expressed to expire on such date as the Board of
Directors may determine, but in no event later than ten years
from the day on which the Option or SAR is granted and shall be
subject to earlier termination as provided herein.
6.3 Exercise of Options and SARs.
(a) Subject to Section 6.6(b) hereof, each Option and
SAR granted under the Plan shall be exercisable at such time
or times and during such period as shall be set forth in the
instrument evidencing such Option or SAR. To the extent
that an Option or SAR is not exercised by a Participant when
it becomes initially exercisable, it shall not expire but
shall be carried forward and shall be exercisable, on a
cumulative basis, until the expiration of the exercise
period. No partial exercise may be for less than ten (10)
full shares of Common Stock (or its equivalent).
(b) The Board of Directors shall have the right to
accelerate the date of exercise of any installments of any
Option or SAR; provided that the Board of Directors shall
not accelerate the exercise date of any installment of any
Option granted to a Participant as an Incentive Stock Option
(and not previously converted into a Non-Qualified Option
pursuant to Section 6.7) if such acceleration would violate
the annual vesting limitation contained in Section 422(d)(1)
of the Code, which provides generally that the aggregate
fair market value (determined at the time the Option is
granted) of the stock with respect to which Incentive Stock
Options granted to any Participant are exercisable for the
first time by such Participant during any calendar year
(under all plans of the Company and any Related
Corporations) shall not exceed $100,000.
6.4 Nontransferability of Options and SARs.
No Option or SAR granted under the Plan shall be assignable
or transferable by the Participant, either voluntarily or by
operation of law, except by will or the laws of descent and
distribution or, with respect to Non-Qualified Options and SARs,
pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security
Act ("ERISA") or the rules promulgated thereunder. During the
life of the Participant, the Option or SAR shall be exercisable
only by him or her. If any Participant should attempt to dispose
of or encumber his or her Options or SARs, other than in
accordance with the applicable terms of a Non-Qualified Stock
Option Agreement or SAR Agreement, his or her interest in such
Options or SARs shall terminate.
6.5 Effect of Termination of Employment or Death on Options
and SARs.
(a) If a Participant ceases to be employed by the
Company or a Related Corporation for any reason, including
retirement but other than death, any Option or SAR granted
to such Participant under the Plan shall immediately
terminate; provided, however, that in the case of a
Participant who terminates employment as the result of
permanent and total disability, normal retirement as defined
in the Company's pension plan or early retirement with
approval of the Board of Directors, any portion of such
Option or SAR which was otherwise exercisable on the date of
termination of the Participant's employment may be exercised
within a one-year period following the date on which the
Participant ceased to be so employed, or within the three-
month period following such date in the case of an Incentive
Stock Option, but in no event after the expiration of the
exercise period. Any such exercise may be made only to the
extent of the number of shares subject to the Option or SAR
which were purchasable or exercisable on the date of such
termination of employment. If the Participant dies during
the applicable one-year or three-month period, the Option or
SAR shall be exercisable by the Participant's personal
representatives, heirs or legatees to the same extent and
during the same period that the Participant could have
exercised the Option or SAR on the date of his or her death.
(b) If the Participant dies while an employee of the
Company or any Related Corporation, any Option or SAR
granted to such Participant under the Plan shall be
exercisable by the Participant's personal representatives,
heirs or legatees, for the purchase of or exercise relative
to that number of shares and to the same extent that the
Participant could have exercised the Option or SAR on the
date of his or her death. The Option or SAR or any
unexercised portion thereof shall terminate unless so
exercised prior to the earlier of the expiration of one year
from the date of such death or the expiration of the
exercise period.
6.6 Designation of Incentive Stock Options; Limitations.
Options granted under the Plan which are intended to be
Incentive Stock Options qualifying under Section 422 of the Code
shall be designated as Incentive Stock Options and shall be
subject to the following additional terms and conditions:
(a) Dollar Limitation. The aggregate fair market
value (determined at the time the option is granted) of the
Common Stock for which Incentive Stock Options are
exercisable for the first time during any calendar year by
any person under the Plan (and all other incentive stock
option plans of the Company and any Related Corporations)
shall not exceed $100,000. In the event that Section
422(d)(1) of the Code is amended to alter the limitation set
forth therein so that following such amendment such
limitation shall differ from the limitation set forth in
this Section 6.6(a), the limitation of this Section 6.6(a)
shall be automatically adjusted accordingly.
(b) 10% Shareholder. If any Participant to whom an
Incentive Stock Option is to be granted pursuant to the
provisions of the Plan is on the date of grant the owner of
stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any Related
Corporations, then the following special provisions shall be
applicable to the Incentive Stock Option granted to such
individual:
(i) The option price per share of the Common
Stock subject to such Incentive Stock Option shall not
be less than 110% of the fair market value of one share
of Common Stock on the date of grant; and
(ii) The option exercise period shall not exceed
five years from the date of grant.
In determining whether the 10% threshold has been reached,
the stock attribution rules of Section 424(d) of the Code
shall apply.
(c) Except as modified by the preceding provisions of
this Section 6.6, all of the provisions of the Plan shall be
applicable to Incentive Stock Options granted hereunder.
6.7 Conversion of Incentive Stock Options into Non-
Qualified Options; Termination of Incentive Stock Options.
The Board of Directors, at the written request of any
Participant, may in its discretion take such actions as may be
necessary to convert such Participant's Incentive Stock Options
(or any installments or portions of installments thereof) that
have not been exercised on the date of conversion into Non-
Qualified Options at any time prior to the expiration of such
Incentive Stock Options, regardless of whether the Participant is
an employee of the Company or a Related Corporation at the time
of such conversion. Such actions may include, but not be limited
to, extending the exercise period or reducing the exercise price
of the appropriate installments of such Options. At the time of
such conversion, the Board of Directors (with the consent of the
Participant) may impose such conditions on the exercise of the
resulting Non-Qualified Options as the Board of Directors in its
discretion may determine, provided that such conditions shall not
be inconsistent with the Plan. Nothing in the Plan shall be
deemed to give any Participant the right to have such
Participant's Incentive Stock Options converted into Non-
Qualified Options, and no such conversion shall occur until and
unless the Board of Directors takes appropriate action. The
Board of Directors, with the consent of the Participant, may also
terminate any portion of any Incentive Stock Option that has not
been exercised at the time of such termination.
6.8 Stock Appreciation Rights.
An SAR is the right to receive, without payment by the
participant, an amount equal to the excess, if any, of the fair
market value of a share of Common Stock on the date of exercise
over the grant price, which amount will be multiplied by the
number of shares with respect to which the SARs shall have been
exercised. The grant of SARs under the Plan shall be subject to
the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the
express terms of the Plan, as the Board of Directors shall deem
desirable:
(a) Grant. SARs may be granted in tandem with, in
addition to or completely independent of any Plan Benefit.
(b) Grant Price. The grant price of an SAR may be the
fair market value of a share of Common Stock on the date of
grant or such other price as the Board of Directors may
determine.
(c) Exercise. An SAR may be exercised by a
Participant in accordance with procedures established by the
Board of Directors or as otherwise provided in any agreement
evidencing any SARs. The Board of Directors may provide
that an SAR shall be automatically exercised on one or more
specified dates.
(d) Form of Payment. Payment by the Company upon
exercise of an SAR may be made in cash, in shares of Common
Stock or any combination thereof, as the Board of Directors
shall determine, provided, however, that any SAR exercised
upon or subsequent to the occurrence of a Change in Control
(as defined in Section 10(b) hereof) shall be paid in cash.
(e) Fair Market Value. Fair market value shall be
determined in accordance with Section 6.1(c) with the
"Determination Date" being determined by reference to the
date of grant or the date of exercise of an SAR, as
applicable.
6.9 Rights as a Shareholder.
The holder of an Option or SAR shall have no rights as a
shareholder with respect to any shares covered by the Option or
SAR until the date of issue of a stock certificate to him or her
for such shares. Except as otherwise expressly provided in the
Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock
certificate is issued.
6.10 Special Provisions Applicable to Non-Qualified Options
and SARs Granted to Covered Employees.
In order for the full value of Non-Qualified Options or SARs
granted to Covered Employees to be deductible by the Company for
federal income tax purposes, the Company may intend for such Non-
Qualified Options or SARs to be treated as "qualified
performance-based compensation" as described in Treas. Reg.
Section 1.162-27(e) (or any successor regulation). In such case,
Non-Qualified Options or SARs granted to Covered Employees shall
be subject to the following additional requirements:
(a) such options and rights shall be granted only by
the Committee; and
(b) the exercise price of such Options and the grant
price of such SARs granted shall in no event be less than
the fair market value of the Common Stock as of the date of
grant of such Options or SARs.
SECTION 7. Special Provisions Applicable to Awards.
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7.1 Grants of Awards.
The Board of Directors may grant a Participant an Award
subject to such terms and conditions as the Board of Directors
deems appropriate, including, without limitation: restrictions on
the pledging, sale, assignment, transfer or other disposition of
such shares; the requirement that the Participant forfeit all or
a portion of such shares back to the Company upon voluntary or
other termination (for any reason other than death, permanent and
total disability, normal retirement as defined in the Company's
pension plan or early retirement with the approval of the Board);
and provisions disallowing a Participant receiving an Award from
making, in connection with such Award, the election permitted
under Section 83(b) of the Code.
7.2 Conditions. Approvals of Awards may be subject to the
following conditions:
(a) Each Participant receiving an Award shall enter
into an agreement (a "Stock Restriction Agreement") with the
Company, if required by the Board of Directors, in a form
specified by the Board of Directors agreeing to such terms
and conditions of the Award as the Board of Directors deems
appropriate.
(b) Shares issued and transferred to a Participant
pursuant to an Award may, if required by the Board of
Directors, be deposited with the Treasurer or other officer
of the Company designated by the Board of Directors to be
held until the lapse of the restrictions upon such shares,
and each Participant shall execute and deliver to the
Company stock powers enabling the Company to exercise its
rights hereunder.
(c) Certificates for shares issued pursuant to an
Award shall, if the Company shall deem it advisable, bear a
legend to the effect that they are issued subject to
specified restrictions.
(d) Certificates representing the shares issued
pursuant to an Award shall be registered in the name of the
Participant and shall be owned by such Participant. Such
Participant shall be the holder of record of such shares for
all purposes, including voting and receipt of dividends paid
with respect to such shares.
7.3 Nontransferability.
Shares issued pursuant to an Award may not be sold,
assigned, transferred, alienated, commuted, anticipated, or
otherwise disposed of (except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order
as defined by the Code or Title I of ERISA or the rules
promulgated thereunder), or pledged or hypothecated as collateral
for a loan or as security for the performance of any obligation,
or be otherwise encumbered, and are not subject to attachment,
garnishment, execution or other legal or equitable process, prior
to the lapse of restrictions on such shares, and any attempt at
action in contravention of this Section shall be null and void.
If any Participant should attempt to dispose of or encumber his
or her shares issued pursuant to an Award prior to the lapse of
the restrictions imposed on such shares, his or her interest in
such shares awarded to him or her shall terminate.
7.4 Effect of Termination of Employment or Death on Awards.
If, prior to the lapse of restrictions applicable to Awards,
the Participant ceases to be an employee of the Company or the
Related Corporations for any reason other than death, permanent
and total disability, normal retirement or early retirement with
the approval of the Board of Directors, Awards to such
Participant, as to which restrictions have not lapsed, shall be
forfeited to the Company, effective on the date of the
Participant's termination of employment. The Board of Directors
shall have the sole power to decide in each case whether leaves
of absence shall be deemed a termination of employment.
SECTION 8. Requirements of Law.
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8.1 Violations of Law. No shares shall be issued and
delivered upon exercise of any Option or the making of any Award
or the payment of any SAR unless and until, in the opinion of
counsel for the Company, any applicable registration requirements
of the Securities Act of 1933, any applicable listing
requirements of any national securities exchange on which stock
of the same class is then listed, and any other requirements of
law or of any regulatory bodies having jurisdiction over such
issuance and delivery, shall have been fully complied with. Each
Participant may, by accepting Plan Benefits, be required to
represent and agree in writing, for himself or herself and for
his or her transferees by will or the laws of descent and
distribution, that the stock acquired by him, her or them is
being acquired for investment. The requirement for any such
representation may be waived at any time by the Board of
Directors.
8.2 Compliance with Rule 16b-3. The intent of this Plan is
to qualify for the exemption provided by Rule 16b-3 under the
Exchange Act. To the extent any provision of the Plan does not
comply with the requirements of Rule 16b-3, it shall be deemed
inoperative to the extent permitted by law and deemed advisable
by the Board of Directors and shall not affect the validity of
the Plan. In the event Rule 16b-3 is revised or replaced, the
Board of Directors may exercise discretion to modify this Plan in
any respect necessary to satisfy the requirements of the revised
exemption or its replacement.
SECTION 9. Recapitalization.
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In the event that dividends are payable in Common Stock of
the Company or in the event there are splits, sub-divisions or
combinations of shares of Common Stock of the Company, the number
of shares available under the Plan shall be increased or
decreased proportionately, as the case may be, and the number of
shares deliverable upon the exercise thereafter of any Option
previously granted shall be increased or decreased
proportionately, as the case may be, without change in the
aggregate purchase price, the number of shares subject to Awards
as to which restrictions have not lapsed shall be increased or
decreased proportionately, as the case may be, and the number of
shares to which granted SARs relate shall be increased or
decreased proportionately, as the case may be, and the grant
price of such SARs shall be decreased or increased
proportionately, as the case may be.
SECTION 10. Change in Control and Reorganization.
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(a) For purposes of this Plan, a Change in Control
shall mean (i) the acquisition by a third person, including
a "person" as defined in Section 13(d)(3) of the Exchange
Act, of beneficial ownership (as defined in Rule 13d-3 under
the Exchange Act) directly or indirectly, of securities of
the Company representing twenty-five percent (25%) or more
of the total number of votes that may be cast for the
election of the directors of the Company; or (ii) as the
result of, or in connection with, any tender or exchange
offer, merger, consolidation or other business combination,
sale of assets or one or more contested elections, or any
combination of the foregoing transactions, the persons who
were directors of the Company shall cease to constitute a
majority of the Board of the Company. In the event of a
Change of Control of the Company, except as the Board of
Directors may expressly provide otherwise, all restrictions
and conditions applicable to Awards then outstanding shall
be deemed satisfied as of the date of the Change of Control
and all Options awarded at least six (6) months prior to the
Change of Control shall be exercisable as of such date. Any
SAR exercised upon or subsequent to the occurrence of a
Change in Control shall be paid in cash.
(b) In the case of any tender or exchange offer,
merger, consolidation or other business combination or sale
of all or substantially all of the assets of the Company,
which does not constitute a Change in Control, or in the
case of a reorganization or liquidation of the Company, the
Board of Directors of the Company, or the board of directors
of any corporation assuming the obligations of the Company
hereunder shall, as to outstanding Plan Benefits, (i) make
appropriate provision for the protection of any such
outstanding Plan Benefits by the substitution on an
equitable basis of appropriate stock of the Company or of
the merged, consolidated or otherwise reorganized
corporation which will be issuable in respect of the shares
of Common Stock of the Company; provided only that the
excess of the aggregate fair market value of the shares
subject to the Plan Benefits immediately after such
substitution over the purchase price thereof is not more
than the excess of the aggregate fair market value of the
shares subject to such Plan Benefits immediately before such
substitution over the purchase price thereof, (ii) upon
written notice to the Participants, provide that all
unexercised Plan Benefits must be exercised within a
specified number of days of the date of such notice or such
Plan Benefits will be terminated, or (iii) upon written
notice to the Participants, provide that the Company or the
merged, consolidated or otherwise reorganized corporation
shall have the right, upon the effective date of any such
merger, consolidation, sale of assets or reorganization, to
purchase all Plan Benefits held by each Participant and
unexercised as of that date at an amount equal to the
aggregate fair market value on such date of the shares
subject to the Plan Benefits held by such Participant over
the aggregate purchase or grant price therefor, such amount
to be paid in cash or, if stock of the merged, consolidated
or otherwise reorganized corporation is issuable in respect
of the shares of the Common Stock of the Company, then, in
the discretion of the Board of Directors, in stock of such
merged, consolidated or otherwise reorganized corporation
equal in fair market value to the aforesaid amount. In any
such case the Board of Directors shall, in good faith,
determine fair market value and may, in its discretion,
advance the lapse of any waiting or installment periods and
exercise dates.
SECTION 11. No Special Employment Rights.
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Nothing contained in the Plan or in any Plan Benefit
documentation shall confer upon any Participant receiving a grant
of any Plan Benefit any right with respect to the continuation of
his or her employment by the Company (or any Related Corporation)
or interfere in any way with the right of the Company (or any
Related Corporation), subject to the terms of any separate
employment agreement to the contrary, at any time to terminate
such employment or to increase or decrease the compensation of
the Participant from the rate in existence at the time of the
grant of any Plan Benefit. Whether an authorized leave of
absence or absence in military or government service shall
constitute termination of employment shall be determined by the
Board of Directors in accordance with applicable law.
SECTION 12. Amendment of the Plan.
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The Board of Directors may at any time and from time to time
suspend or terminate all or any portion of the Plan or modify or
amend the Plan in any respect. The termination or any
modification or amendment of the Plan shall not, without the
consent of a recipient of any Plan Benefit, affect his or her
rights under any Plan Benefit previously granted. With the
consent of the affected Participant, the Board of Directors may
amend outstanding agreements relating to any Plan Benefit in a
manner not inconsistent with the Plan. The Board of Directors
hereby reserves the right to amend or modify the terms and
provisions of the Plan and of any outstanding Options to the
extent necessary to qualify any or all Options under the Plan for
such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive stock
options under Section 422 of the Code, provided, however, that
the consent of a Participant is required if such amendment or
modification would cause unfavorable income tax treatment for
such Participant.
SECTION 13. Withholding.
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The Company's obligation to deliver shares of stock upon the
exercise of any Option or SAR or the granting of an Award and to
make payment upon exercise of any SAR shall be subject to the
satisfaction by the Participant of all applicable federal, state
and local income and employment tax withholding requirements.
SECTION 14. Effective Date and Duration of the Plan.
- ----------- ----------------------------------------
14.1 Effective Date. The Plan shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option
granted under the Plan shall become exercisable unless and until
the Plan shall have been approved by the Company's shareholders.
If such shareholder approval is not obtained within 12 months
after the date of the Board's adoption of the Plan, then any
Incentive Stock Options previously granted under the Plan shall
terminate and no further Incentive Stock Options shall be
granted. Subject to such limitation, Options, SARs and Awards
may be granted under the Plan at any time after the effective
date and before the date fixed herein for termination of the
Plan.
14.2 Duration. Unless sooner terminated in accordance with
Section 10 hereof, the Plan shall terminate upon the earlier of
(i) the tenth anniversary of the date of its adoption by the
Board of Directors or (ii) the date on which all shares available
for issuance under the Plan shall have been issued pursuant to
any Awards or the exercise or cancellation of Options and SARs
granted hereunder. If the date of termination is determined
under (i) above, then Plan Benefits outstanding on such date
shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such Plan Benefits.
SECTION 15. Governing Law.
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The Plan and all actions taken thereunder shall be governed
by the laws of the State of Connecticut.
