Tender-Offer Solicitation/Recommendation Statement — Schedule 14D-9
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 14D9 American Business Products 14 77K
2: EX-99.1 Excerpts From the Company`S Proxy Statement 25 124K
7: EX-99.10 Severance Agreement (Richard G. Smith) 10 45K
8: EX-99.11 Severance Agreement (Geoffrey L. Greulich) 11 47K
9: EX-99.12 Letter Agreement 2 14K
10: EX-99.13 Letter Agreement 2 14K
11: EX-99.14 Letter Agreement 2 13K
12: EX-99.15 Letter Agreement 3 18K
13: EX-99.16 Employment Agreement (Larry L. Gellerstedt, Iii) 18 65K
14: EX-99.17 Separation Agreement (Larry L. Gellerstedt, Iii) 8 32K
15: EX-99.18 Offer to Purchase (Profit Sharing Retirement Plan) 4 21K
16: EX-99.19 Offer to Purchase (Employee Savings Plan) 4 21K
3: EX-99.5 Shareholder Letter 2± 11K
4: EX-99.7 Confidentiality Agreement 4 18K
5: EX-99.8 Severance Agreement (Raymond J. Wilson) 10 46K
6: EX-99.9 Severance Agreement (John H. Karr) 10 46K
EX-99.1 — Excerpts From the Company`S Proxy Statement
Exhibit Table of Contents
EXHIBIT 1
DIRECTOR COMPENSATION
Nonemployee directors of the Company are compensated for their services
through a combination of cash, restricted stock awards and stock option grants.
Each nonemployee director may elect to defer some or all of his cash
compensation. The specifics are described below.
CASH COMPENSATION
Nonemployee directors receive a quarterly retainer fee of $3,750 plus
$1,100 for each meeting of the Board of Directors attended, and a nonemployee
Chairman of the Board receives an additional fee of $500 for each meeting of the
Board of Directors attended. Nonemployee directors who are members of the
Executive Committee, the Compensation Committee, the Audit Committee or the
Finance and Strategic Planning Committee receive $750 for each committee meeting
attended, and nonemployee chairmen of these committees receive an additional fee
of $500 for each committee meeting attended. Nonemployee directors who were
members of the Search Committee received $1,100 for each committee meeting
attended, and the nonemployee chairman of this committee received an additional
$500 for each committee meeting attended. Directors who are salaried employees
of the Company or any of its subsidiaries generally do not receive fees for
their services as directors. However, Mr. Carmody continued to receive
nonemployee directors' fees for the period November 7, 1997 to March 30, 1998,
during which he served as Interim President and Chief Executive Officer of the
Company. See "Table 1: Summary Compensation Table."
The Board of Directors asked Mr. Northrop to provide additional services in
assisting the Company's management personnel and in transitioning management.
For these additional services, Mr. Northrop was paid $40,000 during fiscal 1998.
NONCASH COMPENSATION
1993 Directors Stock Incentive Plan. The American Business Products, Inc.
1993 Directors Stock Incentive Plan, effective as of October 1, 1993, and as
amended December 11, 1996 and May 8, 1998 (the "1993 DSIP"), currently provides
for the discretionary grant of nonqualified stock options ("NSOs") to directors
who are not otherwise compensated employees of the Company or its subsidiaries.
The 1993 DSIP also provides that as of the date of the annual shareholders
meeting at the beginning of each year for which a nonemployee director is
reelected or continues to serve as a director, he will receive an award of 100
shares of the Common Stock, subject to certain restrictions ("restricted
stock"). Newly elected directors receive an award of 200 shares. No director may
receive more than 2,000 shares of restricted stock under this plan.
Ten directors currently are eligible to participate in the 1993 DSIP.
During the fiscal year ended December 31, 1998, the plan committee granted NSOs
to purchase 4,000 shares of the Common Stock at an option price of $22.50 per
share to each of the following directors of the Company: Messrs. Ackerman,
Harris, Huie, Keller, McDonald, McGlaughlin, Miller, Northrop and Stokely.
During the fiscal year ended December 31, 1998, the plan committee awarded 100
shares of restricted stock to each of Messrs. Ackerman, Harris, Huie, Keller,
McDonald, McGlaughlin, Miller, Northrop and Stokely. Upon his election to the
Board of Directors, the plan committee awarded 200 shares of restricted stock to
Mr. Rogers.
Subject to approval of the shareholders, the Board of Directors has adopted
the American Business Products, Inc. 1999 Incentive Compensation Plan, a new
plan designed to provide incentive compensation to both nonemployee directors
and key employees of the Company. (See Proposal 2 -- APPROVAL AND ADOPTION OF
THE AMERICAN BUSINESS PRODUCTS, INC. 1999 INCENTIVE COMPENSATION PLAN.) The new
plan is designed to replace the 1993 DSIP, and any shares authorized under that
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plan that remain available for issuance will be "transferred" to the new plan.
The company is using this method of transferring available shares rather than
asking for additional new shares for the new plan in order to avoid shareholder
dilution. If any awards are made under the 1993 DSIP between the date of this
proxy and the shareholders' approval of the new 1999 Incentive Compensation
Plan, the number of shares available under the new plan will be diminished. Upon
shareholder approval of the new plan, no further grants or awards shall be made
under the 1993 DSIP.
Deferred Compensation Plan for Directors. The Company maintains the
Deferred Compensation Plan for Directors in which all nonemployee directors of
the Company are eligible to participate. If a director elects to participate,
the director may elect to defer retainer fees, meeting fees or all fees
otherwise payable to him for service on the Board of Directors. At the election
of each participant, amounts deferred under the plan prior to April 1, 1994 are
treated as if invested under either a "cash deferral program" or a "phantom
stock program." Under the cash deferral program, the deferred fees are credited
with deemed interest at a rate determined from time to time by a committee
appointed by the Board of Directors of the Company. Under the phantom stock
program, the deferred fees are treated as if applied to purchase shares of the
Common Stock of the Company. A bookkeeping account is set up for the participant
which is credited with a number of "stock units" equal to the number of shares
of Common Stock that could have been purchased with the fees at the time of
deferral. The number of stock units credited to the participant is adjusted
periodically to account for dividends, stock splits and other events affecting
the number of outstanding shares, as if the stock units were actual shares of
the Common Stock. All amounts deferred under the plan on or after April 1, 1994
are invested under the cash deferral program.
Generally, a participant will receive payment of his benefit under the plan
in quarterly installments over five years, in cash, beginning after he attains
age 70 or, if later, after he retires or otherwise leaves the Board of Directors
of the Company. The amount of each cash payment is determined, in the case of
the cash deferral program, by the amount of fees deferred plus the interest
accrued thereon or, in the case of the phantom stock program, by the number of
stock units credited to the participant's account and the market value per share
of the Common Stock. If a participant dies before receiving full payment of his
benefit under the plan, the remaining amount will be paid in a lump sum, in
cash, to his beneficiary.
Of the executive officers of the Company named in the Summary Compensation
Table, only Mr. Carmody received fees for services as a director. Mr. Carmody
received no fees for his service as a director prior to his retirement from
employment with the Company on June 30, 1996; thereafter, he received fees for
his services as a nonemployee director and Chairman of the Board of Directors
until May 8, 1998. No amounts have been deferred by Mr. Carmody under the plan.
For the 1998 fiscal year, $105,936.94 representing deemed interest at the rate
of 10.29% was credited pursuant to the cash deferral program under the plan and
241.49 stock units representing dividends on phantom stock units, were credited
pursuant to the phantom stock program under the plan for the benefit of all
current nonemployee directors participating in the plan as a group.
Deferred Compensation Investment Plan (Directors). The Deferred
Compensation Investment Plan (Directors) was implemented as a one-time deferral
plan in 1985 for nonemployee directors of the Company. No directors other than
those who elected to participate in 1985 have entered the plan. Each participant
could elect to defer some or all of his 1985 annual compensation for services as
a director to be invested in the plan. The Company has invested the deferred
funds in company-owned life insurance contracts, but the Company may change its
investment at any time. The maximum annual amount of benefit payable to a fully
vested participant is specified in the participant's joiner agreement with the
Company but may be reduced due to certain adverse changes in federal income tax
provisions.
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A participant's vested benefit will never fall below the amount of the
deferral, plus interest compounded at an annual rate of 12%.
A participant becomes fully vested in his benefit (i) if he remains on the
Board of Directors to age 60, (ii) if prior to retirement, he becomes disabled
or dies, or (iii) upon a change in control of the Company. Upon retirement or
other termination of service as a director after attaining age 60, a participant
(or his beneficiary if he dies) generally will receive equal monthly payments,
beginning at the later of age 70 or retirement, for a period of ten years. If a
participant terminates his service on the Board of Directors prior to attaining
age 60 for reasons other than death or disability, he or his beneficiary will
receive a lump-sum payment of the amount of compensation he has deferred, plus
interest compounded at an annual rate of 12%.
In fiscal 1998, no amounts were paid under the plan to any current
director, no amounts were deferred by any current director, and the Company
incurred expense of $50,808 for all current and retired directors who
participate in this plan.
Consulting Agreement with Henry Curtis VII. In May 1998, Henry Curtis VII
retired from his 28-year career with the Company. Mr. Curtis most recently
served as a Vice President of the Company from 1995 until his retirement, and
continues to serve as a director of the Company. In recognition of his
dedication and service to the Company, and in exchange for his assistance in
transitioning certain duties, the Company entered into a consulting agreement
with Mr. Curtis, dated May 26, 1998, which provided certain payments and
benefits through December 31, 1998. Further, any stock options held by Mr.
Curtis on December 31, 1998 became 100% exercisable and remain exercisable until
March 31, 1999. The Company also agreed to make certain payments to him each
year (beginning in 2000) to assist him with the cost of group health insurance
coverage for himself and his family until he reaches age 65.
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EXECUTIVE COMPENSATION
Table 1 summarizes by various categories, for the fiscal years ended
December 31, 1998, 1997 and 1996, the total compensation earned by (i) the Chief
Executive Officer of the Company, (ii) each of the four most highly compensated
executive officers of the Company who were serving as executive officers at
December 31, 1998 and whose salary and bonus for the fiscal year ended December
31, 1998 exceeded $100,000, and (iii) the Interim Chief Executive Officer of the
Company from January 1, 1998 through March 30, 1998 (collectively referred to as
the "named executive officers"). For information regarding the various factors
considered by the Compensation Committee in recommending the compensation of the
Chief Executive Officer of the Company and, generally, the other executive
officers of the Company, see "Compensation and Nominating Committee Report"
below.
TABLE 1: SUMMARY COMPENSATION TABLE
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LONG-TERM
COMPENSATION AWARDS
-----------------------
RESTRICTED SECURITIES
ANNUAL COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND --------------------------- AWARDS OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) ($) (#) (3)
------------------ ---- --------- -------- ---------- ---------- ------------
L.L. Gellerstedt, III (4)........... 1998 $341,138 $100,000 $250,000 50,000 0
President and Chief Executive
Officer
T.R. Carmody (5).................... 1998 142,252 0 0 0 94,852
Interim President and Chief 1997 45,000 0 0 0 39,047
Executive Officer from November 7, 1996 237,500 0 0 0 878,026
1997 through March 30, 1998
R.G. Smith.......................... 1998 235,800 115,190 0 24,000 12,398
Vice President 1997 220,000 0 0 84,000 11,801
Finance and Chief 1996 200,000 75,000 0 5,000 0
Financial Officer
R.J. Wilson (6)..................... 1998 146,300 73,478 0 14,000 4,631
Corporate Controller 1997 70,771 17,500 0 8,000 0
J. H. Karr (7)...................... 1998 131,900 63,164 0 14,000 4,271
Treasurer and Assistant Secretary 1997 62,500 15,625 0 7,000 25,000
C.R. Williams (8)................... 1998 108,719 80,060 0 29,000 469
Vice President and Chief
Information Officer
---------------
(1) Includes before-tax contributions made to the Employee Savings Plan, the
Company's tax-qualified Code Section 401(k) plan, during fiscal 1998 by
Messrs. Smith, Wilson and Karr, and during fiscal 1997 by Mr. Smith.
(2) Reflects cash bonus awards earned by Messrs. Smith, Wilson, Karr and
Williams, and a stock bonus award earned by Mr. Gellerstedt during the
respective fiscal years for the achievement of performance criteria pursuant
to the Annual Management Incentive Bonus Plan. In October 1998, before any
amounts under the Company's Bonus Plan were earned or calculable, Mr.
Gellerstedt recommended to the Compensation Committee that his bonus for
1998 be limited to $100,000 and that any excess over $100,000 that the
Compensation Committee might otherwise have considered granting to him under
the
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Bonus Plan formula be used, at the discretion of the Compensation Committee,
for merit bonuses to other employees. The Compensation Committee, in
exercising its sole right to determine bonuses, honored Mr. Gellerstedt's
recommendation and set his 1998 bonus under the Plan at $100,000. At the end
of the performance period, the actual bonus formula resulted in an excess of
$135,000, which the Compensation Committee granted as discretionary bonuses
(in addition to any bonuses earned under the 1998 Bonus Plan) to selected
executives based on their efforts during 1998 and contributions to overall
results that were viewed as substantial.
(3) All Other Compensation earned during fiscal 1998 includes the following: (i)
Company contributions to the Profit Sharing Plan, the Company's
tax-qualified profit sharing retirement plan: Mr. Smith -- $6,646, Mr.
Wilson -- $3,220, and Mr. Karr -- $2,984; (ii) Company matching
contributions to the Employee Savings Plan: Mr. Smith -- $1,600, Mr.
Wilson -- $772, and Mr. Karr -- $716; (iii) group term life insurance
premiums paid by the Company: Mr. Smith -- $893, Mr. Wilson -- $639, Mr.
Karr -- $571, and Mr. Williams -- $469; (iv) a special bonus paid in lieu of
certain contributions to the Profit Sharing Plan due to limitations imposed
by the Internal Revenue Service: Mr. Smith -- $3,259; and (v) the following
payments to Mr. Carmody attributable to the period January 1, 1998 through
March 30, 1998 during which he served as Interim President and Chief
Executive Officer: nonemployee directors' quarterly retainer fee -- $5,325,
nonemployee directors' meeting fees -- $5,450, Supplemental Retirement
Income Plan -- $43,750, Deferred Compensation Investment Plan
(Executives) -- $13,950, transfer of automobile -- $8,877, and payments for
community activities -- $17,500.
All Other Compensation earned during fiscal 1997 includes the following: (i)
Company contributions to the Profit Sharing Plan: Mr. Smith -- $5,424; (ii)
Company contributions to the Employee Savings Plan: Mr. Smith -- $1,600;
(iii) a special bonus paid in lieu of certain contributions to the Profit
Sharing Plan due to limitations imposed by the Internal Revenue Service: Mr.
Smith -- $4,777; (iv) the following payments to Mr. Carmody attributable to
the period November 7 through December 31, 1997 during which he served as
Interim President and Chief Executive Officer: nonemployee directors'
quarterly retainer fee -- $2,188, nonemployee directors' meeting fees
-- $3,200, Supplemental Retirement Income Plan -- $25,521, and Deferred
Compensation Investment Plan (Executives) -- $8,138; and (v) with respect to
Mr. Karr -- $25,000 representing a moving allowance.
All Other Compensation earned during fiscal 1996 includes the following: (i)
Company contributions to the Profit Sharing Plan: Mr. Carmody -- $7,950;
(ii) premiums paid by the Company for life insurance policies, any proceeds
of which are payable to the respective beneficiaries designated by the named
executive officers: Mr. Carmody -- $1,310; (iii) a special bonus paid in
lieu of certain contributions to the Profit Sharing Plan due to limitations
imposed by the Internal Revenue Service: Mr. Carmody -- $32,166; (iv)
expense incurred by the Company under the Deferred Compensation Investment
Plan (Executives): Mr. Carmody -- $39,000; (v) the cash surrender value of a
life insurance policy transferred to Mr. Carmody on September 9,
1996 -- $675,600; and (vi) expense incurred by the Company under the
Supplemental Retirement Income Plan: Mr. Carmody -- $122,000.
(4) Mr. Gellerstedt became President and Chief Executive Officer of the Company
as of March 30, 1998.
(5) Mr. Carmody retired from his employment with the Company on June 30, 1996;
his 1996 salary is attributable to the period January 1, 1996 to June 30,
1996. From November 7, 1997 through March 30, 1998, Mr. Carmody held the
positions of Interim President and Chief Executive Officer; his 1997 salary
is attributable to the period November 7, 1997 through December 31, 1997;
his 1998 salary is attributable to the period January 1, 1998 through March
30, 1998. See "Employment and Other Agreements" for a description of the
agreement pursuant to which Mr. Carmody served.
(6) Mr. Wilson began employment and became the Company's Corporate Controller as
of June 30, 1997.
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(7) Mr. Karr began employment with the Company on June 30, 1997, and became
Treasurer on July 23, 1997 and Assistant Secretary on December 9, 1998.
(8) Mr. Williams began employment with the Company and became the Vice President
and Chief Information Officer on March 30, 1998.
OPTION GRANTS
Table 2 sets forth information regarding the number and terms of stock
options granted to the named executive officers during the fiscal year ended
December 31, 1998. Included in such information, in accordance with the rules
and regulations of the Commission, is the potential realizable value of each
option granted, calculated using the 5% and 10% option pricing model.
TABLE 2: OPTION GRANTS IN LAST FISCAL YEAR
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POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (1) FISCAL YEAR (PER/SH) (2) DATE (3) 5% 10%
---- ----------- ------------ ------------ ---------- -------- ----------
L.L. Gellerstedt............ 50,000 10.71 $22.4375 3/30/08 $705,541 $1,787,979
T.R. Carmody................ 0 -- -- -- -- --
R.G. Smith.................. 24,000 5.14 $21.5625 12/09/08 325,452 824,761
R.J. Wilson................. 14,000 3.00 $21.5625 12/09/08 189,847 481,111
J. H. Karr.................. 14,000 3.00 $21.5625 12/09/08 189,847 481,111
C.R. Williams............... 5,000 1.07 $ 22.50 05/08/08 70,750 179,296
24,000 5.14 $21.5625 12/09/08 225,453 824,761
---------------
(1) 50,000 options were granted to Mr. Gellerstedt on March 30, 1998, which were
immediately exercisable, pursuant to the provisions of his offer of
employment. An aggregate of 76,000 options were granted to the named
executive officers on December 9, 1998, under the terms of the American
Business Products, Inc. 1991 Stock Incentive Plan (the "1991 Stock Incentive
Plan"). Other than the options granted to Mr. Gellerstedt, the options will
become exercisable in increments, with 25% of the option shares becoming
exercisable on the first anniversary of the date of grant, an additional 25%
of the option shares becoming exercisable on each successive anniversary
date, with full exercisability occurring on the fourth anniversary date.
(2) The exercise price of an option may be paid in cash, by delivery of shares
of the Common Stock, by broker-assisted cashless exercise or by a
combination thereof, subject to certain conditions. To the extent that the
exercise price of an option is paid with shares of the Common Stock, the
optionee may be eligible for a reload option if he is still employed by the
Company at the time of exercise. The options granted on December 9, 1998 are
limited to one reload. A reload option is an option granted for the same
number of shares as is exchanged in payment of the exercise price and is
subject to all of the same terms and conditions as the original option
except for the exercise price, which is the fair market value of the Common
Stock on the date the reload option is granted.
(3) The options were granted for a term of 10 years, subject to earlier
termination upon occurrence of certain events related to termination of
employment or change of control of the Company.
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OPTION EXERCISES
Table 3 sets forth the number of shares of the Common Stock acquired upon
the exercise of options by the named executive officers during the fiscal year
ended December 31, 1998, including the aggregate value of gains on the date of
exercise. The table also sets forth (i) the number of shares covered by
unexercised options (both exercisable and unexercisable) as of December 31,
1998, and (ii) the respective values of "in-the-money" options, which represent
the positive spread between the exercise price of existing options and the fair
market value of the Common Stock at December 31, 1998, which was $23.50.
TABLE 3: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
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FISCAL YEAR-END
---------------------------------------------------------
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
EXERCISES DURING YEAR OPTIONS IN-THE-MONEY OPTIONS
-------------------------- AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
L.L. Gellerstedt............ 0 $0 50,000 0 $53,125 $ 0
T.R. Carmody................ 0 0 33,000 0 216,500 0
R.G. Smith.................. 0 0 23,500 89,500 71,406 246,968
R.J. Wilson................. 0 0 2,000 20,000 7,375 49,250
J.H. Karr................... 0 0 1,750 19,250 6,453 46,484
C.R. Williams............... 0 0 0 29,000 0 51,500
LONG-TERM INCENTIVE COMPENSATION
Table 4 sets forth information regarding the long-term incentive awards
granted to the named executive officers during the fiscal year ended December
31, 1998. Included in this information, in accordance with the rules and
regulations of the Commission, are the potential threshold, target and maximum
amounts of future payments under awards that are not based on the Company's
stock price.
TABLE 4: LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
[Enlarge/Download Table]
PERFORMANCE
NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS
SHARES, UNITS PERIOD UNTIL UNDER NON-STOCK PRICE-BASED PLANS
OR OTHER MATURATION OR -------------------------------------
NAME RIGHTS(#)(1) PAYOUT THRESHOLD($) TARGET($) MAXIMUM($)
---- ------------- ----------------- ------------ --------- ----------
L.L. Gellerstedt(2)............ 0 -- $ 0 $ 0 $ 0
R.G. Smith..................... 70,000 1/1/99 - 12/31/00 14,000 70,000 175,000
1/1/99 - 21/31/01 14,000 70,000 175,000
R.J. Wilson.................... 35,000 1/1/99 - 12/31/00 7,000 35,000 87,500
1/1/99 - 12/31/01 7,000 35,000 87,500
J.H. Karr...................... 30,000 1/1/99 - 12/31/00 6,000 30,000 75,000
1/1/99 - 12/31/01 6,000 30,000 75,000
C.R. Williams.................. 35,000 1/1/99 - 12/31/00 7,000 35,000 87,500
1/1/99 - 12/31/01 7,000 35,000 87,500
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---------------
(1) Payouts of awards for the 1999-2000 performance period and the 1999-2001
performance period are tied to achieving specified levels of economic profit
(as defined elsewhere in this proxy statement). The target amount will be
earned for each period if 100% of the targeted economic profit goal
established for that period is achieved. The threshold amount for each
period will be earned at the achievement of 87% of the targeted goals,
whereas the maximum awards will only be earned for achieving 127% of the
target performance goals.
(2) Mr. Gellerstedt did not receive long-term incentive awards in fiscal year
1998 other than those reported in Table 1: Summary Compensation Table and
Table 2: Option Grants in Last Fiscal Year, which were made to him under the
provisions of his offer of employment. After year-end, the Board of
Directors approved a separate long-term incentive arrangement for Mr.
Gellerstedt that is discussed in more detail in the Compensation and
Nominating Committee Report on Executive Compensation as well as in the
section covering Compensatory Plans and Arrangements.
COMPENSATORY PLANS AND ARRANGEMENTS
Set forth below is information regarding the Company's compensatory plans
and arrangements under which the named executive officers have vested rights to
receive future payments in an amount exceeding $100,000. Consistent with the
Company's pay-for-performance philosophy, the Company currently does not intend
to include any new participants under the Supplemental Retirement Income Plan.
Supplemental Retirement Income Plan. The Supplemental Retirement Income
Plan (the "SRIP") is a nonqualified plan established for the benefit of certain
executives that generally provides fixed monthly cash payments for life upon
retirement, with guaranteed payments to the participant or his beneficiary for a
minimum of 15 years. Annual payments generally are equal to 50% of the highest
annual compensation (base salary plus bonus) paid to a vested participant during
the last three years in which the participant received his annual salary prior
to reaching age 62, but amounts payable under the plan are subject to dollar
limits set by the Board of Directors for each participant.
Mr. Carmody, who retired on June 30, 1996, is entitled to and is receiving
benefits of $175,000 per year under the plan. Benefit payments of $43,750 under
the SRIP attributable to the period January 1, 1998 through March 30, 1998,
during which Mr. Carmody served as Interim President and Chief Executive Officer
of the Company are included in "Table 1: Summary Compensation Table." Expenses
incurred by the Company in fiscal 1998 for the benefit of Mr. Carmody were
$128,183. None of the other named executive officers participates in or has any
vested benefit under the SRIP.
Deferred Compensation Investment Plan (Executives). The Deferred
Compensation Investment Plan (Executives) is a nonqualified plan that permitted
certain executives to make a one-time election to defer a specified amount of
his 1985 annual compensation. The maximum annual amount of benefit payable to a
fully vested participant is specified in the participant's joiner agreement with
the Company but may be reduced due to certain adverse changes in federal income
tax provisions. A participant's vested benefit will never fall below the amount
of the deferral, plus interest compounded at an annual rate of 12%.
Mr. Carmody, who retired on June 30, 1996, is entitled to and is receiving
his maximum benefit of $55,800 per year under the plan. Benefits of $13,950
attributable to the period January 1, 1998 through March 30, 1998, during which
Mr. Carmody served as Interim President and Chief Executive Officer of the
Company are included in "Table 1: Summary Compensation Table." Expenses incurred
by the Company for
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the benefit of Mr. Carmody in fiscal 1998 were $40,875. None of the other named
executive officers participates in or has any vested benefit under this plan.
EMPLOYMENT AND OTHER AGREEMENTS
Larry L. Gellerstedt, III. In its offer of employment to Mr. Gellerstedt,
the Company agreed to provide certain compensation and benefits to him, in
addition to certain signing incentives. The signing incentives are reported in
other portions of this proxy. In addition to establishing his base salary and a
minimum annual bonus for 1998, the Company agreed to develop a long-term
incentive program for Mr. Gellerstedt upon the acceptance of his strategic plan
for the Company. It was the Board's intent that this long-term incentive
arrangement would, over time, provide potential ownership opportunities for Mr.
Gellerstedt of up to two to two and one-half percent of the outstanding shares
of the Company. In addition, the Company agreed to provide certain perquisites
to Mr. Gellerstedt, including an automobile allowance. Mr. Gellerstedt is
eligible to participate in the Company's employee benefit plans pursuant to the
eligibility provisions of those plans. The salary and signing incentives
provided to Mr. Gellerstedt are more fully described in the "Compensation and
Nominating Committee Report -- Chief Executive Officer Compensation."
Also, pursuant to the offer letter, if the Company terminates Mr.
Gellerstedt's employment without cause (as defined in the offer letter) during
the first two years of his employment, or if Mr. Gellerstedt voluntarily
terminates during that period for good reason (as defined in the offer letter),
the Company would continue his base salary plus the amount of his most recent
bonus under the Bonus Plan and group health insurance for 12 months. Further, in
the event of his termination of employment by the Company (or his voluntary
termination for good reason) within two years following a change in control of
the Company, the Company will pay Mr. Gellerstedt three times the sum of his
base salary then in effect plus the amount of his most recent bonus under the
Bonus Plan and will continue his group health insurance coverage for 36 months.
Payments made to Mr. Gellerstedt under the change in control provisions will be
limited or reduced to avoid the imposition of the golden parachute excise taxes.
Prior to payment of any severance or change in control benefits, Mr. Gellerstedt
agrees to sign a restrictive covenant containing noncompete, nonsolicitation and
nondisclosure provisions to protect the Company for a period of one year
following his termination.
On February 25, 1999, the Company established the terms of Mr.
Gellerstedt's compensation for 1999 and the details of the long-term incentive
arrangement provided for in his offer of employment. For 1999, Mr. Gellerstedt's
base salary will remain at $450,000. He will participate in the Bonus Plan for
1999 (discussed in more detail in the Compensation Committee Report) on the same
basis as the Company's other senior executives, except that his annual target
award will be 65% of his base salary. Under the long-term incentive arrangement,
Mr. Gellerstedt was granted 232,000 stock options with an exercise price equal
to the fair market value of the Company's stock on the date of grant. These
options become exercisable in 25% increments on each of the first four
anniversaries of the grant and have a ten-year term. Mr. Gellerstedt also was
granted 131,000 shares of performance-based restricted stock that may vest in
part or in full, or may be forfeited, based on the Company's growth in earnings
per share over the next three years. The grants of stock options and
performance-based restricted stock were made under the terms of the Company's
1999 Incentive Compensation Plan, contingent on the approval by shareholders of
that plan, which is sought under Proposal 2 of this proxy statement.
The Company and Mr. Gellerstedt have entered into discussions concerning
the provisions of a formal employment agreement. It is the intention of both
parties to finalize this agreement in early 1999.
9
Thomas R. Carmody. Effective November 7, 1997, the Company entered into an
agreement with Thomas R. Carmody pursuant to which Mr. Carmody served as the
Company's Interim President and Chief Executive Officer until March 30, 1998,
the effective date of Mr. Gellerstedt's appointment as President and Chief
Executive Officer of the Company. In exchange for his service, Mr. Carmody
received a salary of $142,252 for the period from January 1, 1998 through March
30, 1998. Mr. Carmody was also paid regular nonemployee director fees for the
period from January 1, 1997 through May 8, 1998. See "Table 1: Summary
Compensation Table."
Richard G. Smith. The Company entered into an agreement with Richard G.
Smith, dated July 25, 1995, pursuant to which Mr. Smith serves as Vice President
and Chief Financial Officer of the Company, specifying the terms of his
employment. The Company also entered into a separation agreement with Mr. Smith
dated February 14, 1998, which superseded and revoked the separation provisions
in the July 25, 1995 agreement. The separation agreement provides that, upon the
involuntary termination of Mr. Smith's employment by the Company without cause
(as defined in the separation agreement) within five years following the date of
the separation agreement, the Company will pay Mr. Smith severance pay equal to
$18,333.33 a month for a period of 18 months. In addition, the separation
agreement provides that upon a termination without cause, the committee
administering the 1991 Stock Incentive Plan (or a successor plan) will
immediately accelerate the vesting of any outstanding stock options held by Mr.
Smith on the date of his termination and will extend the term of exercisability
of those options until 12 months following the date of his termination.
Raymond J. Wilson. The Company entered into an agreement with Raymond J.
Wilson, dated May 8, 1997, pursuant to which Mr. Wilson serves as Corporate
Controller of the Company. Under that agreement, Mr. Wilson is entitled to
participate in the Company's management bonus plan. Mr. Wilson is also entitled
to participate in the Company's stock option plan. If the Company terminates Mr.
Wilson's employment without cause, the Company must provide Mr. Wilson with nine
months of salary.
John H. Karr. The Company entered into an agreement with John H. Karr
dated June 26, 1997, pursuant to which Mr. Karr serves as Treasurer of the
Company. Under that agreement, Mr. Karr is entitled to participate in the
Company's management bonus plan. Mr. Karr is also entitled to participate in the
Company's stock option plan, and was provided a special payment of $25,000 to
defray the expense of relocation. That payment must be repaid on a prorated
basis if Mr. Karr's employment with the Company is terminated within 25 months
of July 15, 1997. If the Company terminates Mr. Karr's employment without cause,
the Company must provide Mr. Karr with nine months of salary, outplacement
services at a cost of not more than $15,000, and, at the Company's election,
either fully vest any Company contributions on Mr. Karr's behalf in the
Company's Profit Sharing Plan and Employee Savings Plan or provide an additional
severance amount equal to the amount of any unvested contributions.
Christopher R. Williams. The Company entered into an agreement with
Christopher R. Williams, dated March 24, 1998, pursuant to which Mr. Williams
serves as Chief Information Officer for the Company. Under that agreement, Mr.
Williams is guaranteed to receive a minimum bonus for fiscal year 1998 of 35
percent of his 1998 earned salary. In addition, the agreement provided that
management would recommend a grant of 5,000 stock options to Mr. Williams for
1998. If the Company terminates Mr. Williams' employment without cause, the
Company must provide him with nine months of base salary plus outplacement
services at a cost of $15,000.
10
COMPENSATION AND NOMINATING COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1998, the members of the
Compensation Committee were Messrs. Huie (Chairman), Ackerman, Harris and
Stokely, and Mr. Miller replaced Mr. Ackerman on January 1, 1999. None of them
is or has ever been an officer or employee of the Company. There were no
interlocking relationships between any executive officers of the Company and any
entity whose directors or executive officers served on the Company's
Compensation Committee. The arrangement pursuant to which payments were made to
Mr. Northrop for certain services rendered by him is described above in
"Director Compensation." None of the other members of the Compensation Committee
engaged in transactions or had relationships requiring disclosure under Item 404
of Regulation S-K in the fiscal year ended December 31, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The arrangement pursuant to which payments were made to Mr. Northrop for
certain services rendered by him is described above in "Director Compensation."
There were no other transactions or relationships requiring disclosure under
Item 404 of Regulation S-K for the fiscal year ended December 31, 1998.
COMPENSATION AND NOMINATING COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
This report by the Compensation Committee of the Board of Directors
discusses the strategy and objectives according to which the Compensation
Committee makes decisions about compensation for the Company's executive
officers. The Compensation Committee is composed entirely of independent,
nonemployee directors.
COMPENSATION STRATEGY AND OBJECTIVES
As part of its annual duties and particularly in conjunction with the
Company's selection and employment of a new Chief Executive Officer, the
Compensation Committee reviewed the overall executive compensation program. The
Compensation Committee's main focus in structuring the compensation program for
the Company's executive officers is to enhance shareholder value. The
Compensation Committee views the executive compensation program as one of the
key means by which this goal will be accomplished.
The underlying objectives of the program support the development of a
capable and highly-qualified senior executive team. As a starting point, the
Compensation Committee believes it is critical to have a compensation program
that enables the Company to attract and retain talented executives. For this
reason, the Compensation Committee has adopted a philosophy of providing target
annual cash compensation opportunities at the median of the comparison group,
and in order to more effectively emphasize long-term performance for 1999, by
providing target long-term incentive compensation opportunities at the 75th
percentile of the comparison group. This approach supports the Committee's
determination that a significant portion of total compensation should consist of
short-term and long-term incentive pay that will only be received if aggressive
business and financial results are achieved. Further, it is the Compensation
Committee's view that the interests of executives should be more closely aligned
with those of shareholders, and that providing stock-based compensation is an
appropriate means of reaching this objective.
To ensure that the overall executive program is competitive and supports
the objectives outlined, the Compensation Committee believes it is important to
consider pay levels and practices at the companies with
11
whom the Company competes for talented executives. Each year, the Compensation
Committee compares the components of the Company's executive pay program with
those in place at a group of companies that manufacture durable goods (both
within and outside the industry). Once the companies are identified for the
comparison group, the applicable information relative to those companies is
adjusted for size differentials. The Compensation Committee relies upon the
assistance of professional consultants in the preparation of the comparison
group information. The Compensation Committee believes this comparison group
represents the Company's competitors for hiring executives, and recognizes that
the executive talent market is broader than either its direct competitors or the
companies included in the stock performance graph peer group.
The three primary components of executive pay -- base salary, annual
incentive compensation and long-term incentive compensation -- are discussed in
more detail in the following sections of this report.
EXECUTIVE OFFICER COMPENSATION
Base Salaries. For both the 1998 and 1999 fiscal years, the Compensation
Committee targeted base salaries for executive officers at the 50th percentile
of pay levels for comparable positions at the companies in the comparison group.
The Compensation Committee determines base salaries for executive officers after
considering the recommendations of the Chief Executive Officer. The Compensation
Committee recommends a base salary for the Chief Executive Officer to the Board
of Directors for its approval.
Salary levels are based on market pay levels and other relevant factors,
such as the Company's performance and the individual executive's performance,
experience, responsibilities and contribution potential. Salary levels may vary
above or below the market pay levels when all these factors are considered,
based on the Compensation Committee's subjective assessment of the factors
listed above.
In December 1998, the Compensation Committee reviewed market salary levels
for executive officers. The results of that analysis showed that the salaries
paid for 1998 were somewhat below the Company's 50th percentile objective of
that comparison group. Based on this analysis, the Compensation Committee
approved the Chief Executive Officer's recommendations to increase base salaries
for selected executives for fiscal year 1999. After considering these increases,
base salaries for the executive officers as a whole should be closer to, but
remain slightly below, the market 50th percentile.
Short-Term Incentive Compensation. Under the Company's Annual Management
Incentive Bonus Plan (the "Bonus Plan"), the Company's executive officers and
other key employees have the opportunity to earn annual cash bonuses based on
the degree to which specified performance goals are met. The goals established
for this program are consistent with the Company's business objectives for the
year. In this manner, the Bonus Plan clearly and directly links executive pay to
performance results achieved.
Under the Bonus Plan for 1998, the specific performance goals for the
Company were recommended by the Chief Executive Officer and approved by the
Compensation Committee. For the Chief Executive Officer and the Chief Financial
Officer, earnings per share was the sole basis for any awards that could be
earned for the year. For other executive officers, awards were weighted 75% on
company financial performance (actual adjusted income before interest and taxes)
and 25% on individual objectives.
The Compensation Committee established performance measures at "threshold",
"target" and "maximum" performance levels for each performance measure. Once the
threshold goals are met, awards earned may range from 5% to 100% of base salary
for the Chief Executive Officer, from 5% to 80% of base salary for the Chief
Financial Officer, and from 5% to 70% of base salary for other executives, based
on how actual
12
results compare to the goals set. In addition, performance between designated
levels is recognized by straight-line interpolation.
In determining the results achieved for 1998, the Compensation Committee
concluded that income or expense items stemming from any unusual and significant
activities, or that resulted from business unit consolidations, should be
excluded for purposes of calculating bonuses. The Compensation Committee also
believed it would be in the best interests of the shareholders to set a
threshold corporate performance level below which no bonuses would be earned
(regardless of other corporate or individual performance). For 1998, the
Compensation Committee established this performance threshold at a 12% return on
shareholders' equity, calculated after considering any adjustments described
above.
Actual results for 1998 were slightly above target levels for the
performance measures. Based on this, bonuses earned based on financial
performance were paid at slightly above target levels. Bonuses paid for the
individual portion of awards varied by executive, with all but one achieving
results that earned payments for this portion of the award that were between
target and maximum levels. Bonuses earned by named executive officers under the
Bonus Plan of 1998 are disclosed in "Table 1: Summary Compensation Table."
Several executive officers hired during 1997 and 1998 negotiated guaranteed
minimum bonuses for the 1998 year as one of the terms of their employment.
Actual amounts earned by each of these executives under the Bonus Plan, based on
the Company's results for the year as well as their individual performance,
exceeded the guaranteed amounts.
In developing the provisions of the Bonus Plan for 1999, the Compensation
Committee determined to make certain changes to the program. Awards for 1999
performance will be based solely on corporate and/or operating company financial
results achieved, rather than having a portion based on individual performance.
The Compensation Committee believes this change will more closely link executive
rewards with the results achieved for shareholders, particularly for senior
executives whose responsibilities should be focused on meeting shareholder
expectations.
Performance measures for 1999 awards will include economic profit in
addition to continuing the prior focus on revenues and earnings per share. For
this purpose, economic profit is the excess of after tax income before financing
costs over the cost of the invested capital used to generate that income,
assuming a weighted average cost of capital of 10% after taxes. Minor
adjustments to income are made to reverse goodwill amortization and other
noncash expense. The term "invested capital" means total assets less excess
cash, intercompany notes receivable, certain deferred tax assets and
interest-free current liabilities, plus adjustments to include the value of
significant leased assets and to state goodwill at cost. The inclusion of the
economic profit measure is intended to help ensure that executives' actions are
directed towards increasing shareholder value in each business unit.
Threshold, target and maximum levels of performance measures will be
established. Based on the level of achievement of the performance measures,
participants may earn a threshold, target or maximum award, based on a
percentage of base salary or stated dollar amount. To enhance the overall
competitiveness of the program, target awards were increased so they approximate
the 50th percentile of the market for all executive officers. Finally, the
Compensation Committee determined that it would be appropriate to strengthen the
performance aspects of the plan. To do so, awards for 1999 may vary from 20% of
target awards when a threshold level of performance is achieved to a maximum
award of 250%, which can only be earned if aggressive business goals are met.
13
Long-Term Incentive Compensation. The Compensation Committee strongly
believes that a significant portion of executive pay should be provided through
longer-term incentive compensation that promotes stock ownership and aligns the
interests of executives with those of shareholders.
Historically, the long-term incentive compensation program for executive
officers has been based primarily on grants of stock options. As part of its
overall review of the executive compensation program, the Compensation Committee
approved changes in the long-term incentive portion of the program. To further
improve the competitiveness of the overall program, and to emphasize the
importance of achieving long-term results, the Compensation Committee approved
the setting of target long-term incentive award opportunities for executives at
the 75th percentile for comparable positions at the companies in the comparison
group, as discussed earlier in this report. In addition to granting stock
options in December 1998, the Compensation Committee approved a program to begin
in 1999 that provides for cash payments to participants based on the extent to
which specified goals for economic profit are met in three-year performance
periods. For this plan, the term "economic profit" has the same meaning as
described in the Bonus Plan for 1999 under "Short Term Incentive Compensation"
above.
This new program is intended to reinforce the Company's strategic goal of
increasing shareholder value. It will require Company and operating unit
executives to meet aggressive economic profit goals to earn rewards. Specific
performance levels -- at threshold, target and maximum -- will be set for the
Company as a whole and for individual business units. As under the short-term
incentive plan, payments are highly leveraged and may vary significantly based
on the degree to which the established performance goals are met. Threshold
level performance will result in awards at 20% of target, whereas maximum level
performance will yield awards that are equal to 250% of target. To phase in the
plan, two partial performance periods and one full period began on January 1,
1999. The partial periods cover one and two-year performance cycles, and the
full period covers a three-year time period. On an ongoing basis, a new
three-year performance period will begin each year.
To determine the number of options to grant to each participant and the
size of each participant's target long-term cash incentive award, the
Compensation Committee has established award size guidelines or targets that
vary by level of responsibility. Each year, the target annualized long-term
award opportunities generally will be more heavily weighted toward stock options
and less to cash performance awards, although this mix may change from year to
year at the Compensation Committee's discretion. Actual awards also may vary
somewhat based on the Compensation Committee's judgment as to individual
performance and overall Company success, among other factors.
In December 1998, the Compensation Committee granted stock options to
executive officers and other key employees as permitted under the 1991 Stock
Incentive Plan. This plan provides that the Compensation Committee may make
grants of incentive or nonqualified stock options to selected key employees. The
stock options granted have a term of ten years, and most become exercisable in
25% increments annually beginning on the first anniversary of the grant. Stock
options also were granted to selected named executives who were hired during
1998 pursuant to those executives' starting compensation packages. Stock options
granted to named executive officers during the fiscal year ended December 31,
1998 and year-end option values are reflected in "Executive
Compensation -- Table 2: Options Grants in Last Fiscal Year" and "Executive
Compensation -- Table 3: Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Values." The 1991 Stock Incentive Plan also permits the award of
restricted stock to key employees. No restricted stock grants were made to named
executive officers (other than the Chief Executive Officer, as discussed below)
during 1998.
14
CHIEF EXECUTIVE OFFICER COMPENSATION
Two individuals served in the Chief Executive Officer position for the
Company during 1998. As indicated in the Summary Compensation Table, Mr. Carmody
(a retired Chief Executive Officer of the Company) provided services as Interim
Chief Executive Officer until March 30, 1998. Mr. Carmody performed these
services at the specific request of the Board of Directors, and details of his
compensation for the period of service were negotiated between the Compensation
Committee and Mr. Carmody. See "Executive Compensation -- Employment and Other
Agreements."
Mr. Gellerstedt joined the Company as President and Chief Executive Officer
on March 30, 1998. Upon hire, the Compensation Committee agreed to pay Mr.
Gellerstedt an annual base salary of $400,000 (which increased to $450,000 in
May 1998 upon his election as Chairman of the Board of Directors) and a minimum
guaranteed short-term incentive payment of $100,000 for 1998. Mr. Gellerstedt's
package also included signing incentives in the form of (1) an award of 11,142
shares of restricted stock (with value of approximately $250,000 and which
became vested and transferable as of December 31, 1998), and (2) a grant of
50,000 stock options with an exercise price of $22.4375 which became immediately
exercisable and have a term of 10 years. The Compensation Committee believes the
signing incentives awarded to Mr. Gellerstedt were competitive with those being
offered to newly-hired chief executive officers in comparable situations.
In October 1998, before any amounts under the Company's Bonus Plan were
earned or calculable, Mr. Gellerstedt recommended to the Compensation Committee
that his bonus for 1998 be limited to $100,000 and that any excess over $100,000
that the Compensation Committee might otherwise have considered granting to him
under the Bonus Plan formula be used, at the discretion of the Compensation
Committee, for merit bonuses to other employees. The Compensation Committee, in
exercising its sole right to determine bonuses, honored Mr. Gellerstedt's
recommendation and set his 1998 bonus under the Plan at $100,000. At the end of
the performance period, the actual bonus formula resulted in an excess of
$135,000, which the Compensation Committee granted as discretionary bonuses (in
addition to any bonuses earned under the 1998 Bonus Plan) to selected executives
based on their efforts during 1998 and contributions to overall results that
were viewed as substantial. The bonuses paid to the named executive officers are
disclosed in "Table 1: Summary Compensation Table."
As part of his offer of employment, the Compensation Committee agreed to
develop a long-term incentive arrangement for Mr. Gellerstedt designed to
increase his ownership in the Company upon the Board of Directors' acceptance of
his strategic plan for the Company. Mr. Gellerstedt's strategic plan was
approved by the Board of Directors in late 1998. In recognition of this
accomplishment, the Committee and the Board established the elements of Mr.
Gellerstedt's 1999 compensation package, and developed a long-term arrangement
designed to increase his ownership in the Company. The details of his 1999
compensation, and his long-term incentive arrangement, are discussed in the
Employment and Other Agreements section of this proxy statement.
CODE SECTION 162(M) POLICY
It is the responsibility of the Compensation Committee to address issues
raised by Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). That section limits the Company's ability to deduct annual compensation
in excess of $1,000,000 paid to its chief executive officer and/or the next four
most highly compensated executives. Certain compensation that qualifies as
"performance-based" may be exempt from the Code Section 162(m) limit. It is the
Compensation Committee's intent to preserve the
15
maximum deductions for the Company; however, the Compensation Committee reserves
the right to authorize nondeductible compensation if it believes that it is in
the Company's best interest.
The Compensation Committee wishes to extend its sincere appreciation to F.
Duane Ackerman, who provided keen insight and significant knowledge in his
service on the Compensation Committee, particularly in the 1998 fiscal year. Mr.
Ackerman resigned from the Board of Directors as of December 31, 1998, due to
other commitments. Mr. Miller has been appointed to fill Mr. Ackerman's position
on the Compensation Committee.
W. Stell Huie (Chairman)
Hollis L. Harris
C. Douglas Miller
William B. Stokely, III
16
PROPOSAL 2 -- APPROVAL AND ADOPTION OF THE
AMERICAN BUSINESS PRODUCTS, INC. 1999 INCENTIVE COMPENSATION PLAN
GENERAL
In December 1998, the Company's Board of Directors adopted the American
Business Products, Inc. 1999 Incentive Compensation Plan (the "ICP") to become
effective as of February 15, 1999, subject to the approval of our shareholders
at the Annual Shareholder Meeting.
The ICP is designed to replace the Company's existing 1991 Stock Incentive
Plan and 1993 Directors Stock Incentive Plan. In order to avoid further
shareholder dilution, the Company is not seeking additional new shares for the
ICP, but instead any shares authorized under those plans, as well as any shares
authorized under the Company's prior 1981 Stock Option Plan, that remain
available for issuance will be "transferred" to the ICP. In addition, any shares
previously granted as options and/or restricted stock under those plans that
become available again due to forfeiture or cancellation of those rights will
also become available for issuance under the ICP.
The purpose of the ICP is to encourage and enable eligible employees and
nonemployee directors to obtain a proprietary interest in the Company by
acquiring the Common Stock. The Company believes that the ICP will provide
eligible employees and nonemployee directors with an added incentive to
stimulate their efforts in promoting the growth, efficiency and profitability of
the Company and its related companies and to encourage them to continue in the
employ of the Company and its related companies. The ICP may also help to
attract outstanding employees and outside directors to the service of the
Company and its related companies.
The ICP has been designed to permit the Compensation Committee to provide
"performance-based" compensation to the Company's key employees in various
forms. In its discretion, the Compensation Committee may make awards under the
ICP based on the performance measures or combination of performance measures
described in the ICP. It is the Company's intent that this type of
performance-based award be exempt from the provisions of Section 162(m) of the
Code, which limit the amount of the Company's deductions for compensation in
excess of $1,000,000 to each of the top five executive officers. Shareholder
approval of the ICP is necessary for these awards to be exempt from those
provisions.
The following is a brief summary of the principal features of the ICP.
TYPES OF AWARDS
The ICP provides for the following types of awards:
- stock options;
- restricted stock;
- performance shares; and
- performance-based cash awards.
Stock options granted under the ICP may be incentive stock options ("ISOs"),
nonqualified stock options ("NSOs") and reload options. The Company intends that
ISOs granted under the ICP qualify as incentive stock options under Section 422
of the Code. NSOs are stock options that do not qualify as ISOs. Restricted
stock is an award of shares, often subject to vesting or trading restrictions.
Performance shares are generally
18
phantom shares of stock, often subject to vesting restrictions.
Performance-based cash awards may be short-term or long-term incentive awards,
payable in cash. Stock options, restricted stock, performance shares and
performance-based cash awards are collectively referred to hereunder as
"Awards."
ADMINISTRATION
The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the ICP. The Committee will have full discretionary
authority to decide to whom and when to grant an Award, the type of Award
granted, the number of shares of the Common Stock covered by the Award and the
terms, conditions, performance criteria, restrictions and other provisions of
the Award. The Committee will decide whether and to what extent Awards to key
employees will be structured to conform with Code sec.162(m) requirements
applicable to performance-based compensation. The Committee will interpret the
provisions of the ICP, establish and rescind any rules and regulations relating
to the ICP, decide the terms and provisions of any agreements made under the ICP
and determine how to administer the ICP. All decisions of the Committee and its
actions with respect to the ICP are final, binding and conclusive.
SHARES AVAILABLE
Initially, the maximum number of shares that may be issued under the ICP
will be 609,076 shares of the Common Stock. This number has been reached by
consolidating the shares that currently remain available under the Company's
existing 1981 Stock Incentive Plan, 1991 Stock Incentive Plan, and 1993
Directors Stock Incentive Plan. Of this number, a maximum of 600,000 shares may
be issued as ISOs and a maximum of 400,000 shares may be issued as restricted
stock. The Board determined that no further grants or awards will be made under
the prior plans after February 14, 1999, and the remaining available stock under
those plans would be made available only under the new ICP, subject to
shareholder approval. If the shareholders should fail to approve this proposal,
the existing plans shall continue in operation. This use of existing available
stock does not create any additional dilution for the shareholders of the Common
Stock.
The number of shares available under the ICP will be adjusted by shares of
the Common Stock subject to Awards under the ICP that are forfeited, canceled or
expired without the issuance of the Common Stock, shares of the Common Stock
tendered to the Company in payment of the exercise price of a stock option
and/or in satisfaction of income tax or other withholding obligations under the
ICP or the three prior plans, shares of Common Stock subject to option grants
(but not restricted stock awards) under the prior plans that are forfeited,
canceled or expired without the issuance of Common Stock, and shares of Common
Stock, to the extent authorized by the Company's Board of Directors for purposes
of the ICP, repurchased by the Company in the open market or in a private
transaction.
As of the record date (March 1, 1999), the fair market value of the Common
Stock that would be subject to Awards under the ICP was $18.25 per share.
ELIGIBILITY
Key employees and nonemployee directors of the Company and its related
companies are eligible to participate in the ICP. As of the record date (March
1, 1999), approximately 80 key employees and 10 nonemployee directors were
eligible to participate in the ICP.
19
STOCK OPTIONS
Grant and Transferability of Stock Options. Stock options granted under
the ICP represent rights to purchase shares of the Common Stock within a fixed
period of time and at a specified price per share (the "exercise price"). The
Committee is authorized in its sole discretion to grant ISOs, NSOs or both for
the purchase of the Company's Common Stock. Only key employees may receive ISOs.
Unless the Committee specifies otherwise, an optionee may transfer a stock
option only by will or by the laws of descent and distribution. A maximum of
500,000 shares may be granted as stock options to any individual during any one
calendar year.
Exercise Price. An optionee does not pay any consideration for the grant
of a stock option. The exercise price of each stock option will be the fair
market value of the Common Stock on the date of grant (110% of the fair market
value of the Common Stock for an ISO optionee who owns more than 10% of the
voting power of all classes of stock of either the Company or any "parent" or
"subsidiary" of the Company as defined in Code sec.424). For purposes of
granting stock options, the term "fair market value" shall mean the closing
price on the date of grant. Notwithstanding any other provision of the ICP other
than the provisions related to adjustments due to corporate transactions, the
exercise price of a stock option may not be changed after its date of grant,
either by amendment, replacement, cancellation, regrant or any other method
which would have the effect of a repricing of the stock option.
Exercise of Stock Options. Each stock option granted under the ICP may be
exercised on such dates, during such periods and for such number of shares as
may be determined by the Committee. The Committee will specify in a stock option
agreement the manner in which stock options will become exercisable, as well as
any conditions, restrictions and contingencies to which the stock option may be
subject. Such conditions, restrictions and contingencies may consist of a
requirement of continuous service and/or the satisfaction of one or more
performance goals. However, upon an optionee's death, disability, or retirement
after age 60, any outstanding stock option will become immediately exercisable
for the full number of shares subject to the stock option. In the event of a
change of control of the Company (as defined in the ICP), all stock options
become immediately exercisable for the full number of shares. In addition, the
Committee always has the power to accelerate the exercisability of any stock
option granted under the ICP.
Upon the exercise of a stock option, the optionee must pay the exercise
price of the stock option. The exercise price may be paid in cash, by the
transfer to the Company of unrestricted shares of the Common Stock previously
acquired by the optionee, by broker-assisted cashless exercise, by any
combination of the foregoing methods or by any other form of payment permitted
by the Committee. An optionee will first have ownership rights as a shareholder
of the Company only when the optionee has paid the exercise price of the stock
option in full and the shares have been issued to the optionee.
Expiration Date. Although the Committee will decide the term of each stock
option, the term may generally not exceed ten years from the date of grant (or
five years from the date of grant for an ISO optionee who owns more than 10% of
the voting power of all classes of stock of either the Company or any "parent"
or "subsidiary" of the Company as defined in Code sec.424). The expiration date
of any stock option is the earliest to occur of:
- the tenth anniversary of the date of grant;
- the date three months following the date of the optionee's termination of
employment with the Company and all of its related companies for any
reason other than dismissal for cause, death, disability or retirement
after age 60;
20
- the two-year anniversary of the optionee's termination of employment with
the Company and its related companies due to death, disability or
retirement after age 60; or
- the date of the optionee's termination of employment with the Company and
all of its related companies due to dismissal for cause (as defined in
the ICP).
If all or part of an ISO is not exercised within three months of the optionee's
termination of employment for any reason other than death or disability, to the
extent the option remains exercisable, the unexercised portion thereof will be
treated as an NSO. If all or part of an ISO is not exercised within one year
following the optionee's termination of employment due to death or disability,
to the extent the option remains exercisable, the unexercised portion thereof
will be treated as an NSO. The Committee at all times retains the authority to
extend the expiration date of a stock option as long as the extended expiration
date is not later than the tenth anniversary of the date of grant.
Reload Options. Unless the Committee specifies otherwise, each stock
option will be accompanied by one reload option. Reload options may be granted
only to individuals who are actively employed by the Company or a related
company at the time the grant is to be made. A reload option is a stock option
that is granted to an optionee who pays for all or part of a stock option with
shares of the Common Stock. A reload option is subject to all of the same terms
and conditions as the original stock option, except that the exercise price for
the reload option will be the fair market value of the Common Stock as of the
date of grant of such reload option.
RESTRICTED STOCK
The Committee may award restricted stock to key employees and nonemployee
directors in its discretion. Unless otherwise specified by the Committee,
restricted stock will generally become vested on the fourth anniversary of the
date of the Award. The Committee will specify in a restriction agreement the
manner in which restricted stock will vest and become nonforfeitable, as well as
any conditions, restrictions and contingencies to which the restricted stock may
be subject. Such conditions, restrictions and contingencies may consist of a
requirement of continuous service and/or the satisfaction of one or more
performance goals. A recipient of restricted stock will have immediate rights of
ownership in the shares of restricted stock, including the right to vote the
shares and the right to receive dividends with respect to the shares. However,
unless otherwise specified by the Committee, a recipient may not transfer shares
of restricted stock while such shares are still subject to restriction. Any
individual may not receive more than 250,000 shares of restricted stock in any
one calendar year.
Awards of restricted stock that remain subject to time-based vesting
schedules at the time of a recipient's death, disability or retirement after age
60 or upon a change in control of the Company (as defined in the ICP) will
become immediately vested and nonforfeitable. Awards of restricted stock that
remain subject to any other type of vesting schedule (such as satisfaction of
certain performance requirements) will become proportionately vested and
nonforfeitable, based on the portion of the performance period completed with
target level performance being deemed achieved as of the date of the recipient's
death, disability, or retirement after age 60, or the date of a change in
control of the Company (as defined in the ICP). If an Award does not have a
designated target level of performance, the performance level which, if met,
would result in the vesting of the lowest number of shares will be considered
the target level. If a recipient of a restricted stock Award terminates
employment for any reason other than death, disability or retirement after age
60, then any Awards of restricted stock that remain subject to restriction will
be forfeited. The Committee will always have the right to accelerate the vesting
of any restricted stock awarded under the ICP.
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The Committee will make Awards of restricted stock to nonemployee directors
of the Company in accordance with the following formula: upon initial election
to the Board of Directors, 200 shares; as of the first day of each year for
which the director is reelected or continues to serve as a director, 100 shares;
and as of the date of the annual shareholders meeting which follows an employee
director's retirement and continuance as a director, 200 shares. A nonemployee
director may not receive more than a total of 2,000 shares. The restricted stock
granted to nonemployee directors will not vest until the first anniversary of
the date of the Award, but the vesting will accelerate upon a director's
becoming disabled, reaching age 70 and retiring from the Board of Directors,
dying or ceasing to serve on the Board of Directors for any reason or upon a
change in control of the Company (as defined in the ICP). These provisions
related to nonemployee directors are a continuation of the provisions of the
1993 Directors Stock Incentive Plan, which previously was approved by the
shareholders.
PERFORMANCE SHARES
The Committee may award performance shares to key employees and nonemployee
directors in its sole discretion. A performance share is the right, subject to
such conditions, restrictions and contingencies as the Committee determines and
specifies in the performance share agreement, to receive one share of the Common
Stock in the future. When the Committee awards a performance share, it will
establish a bookkeeping account for the recipient to reflect the number of
performance shares awarded to the recipient. On each date that a dividend is
distributed by the Company on the Common Stock, the recipient's performance
share account will be credited with an additional whole or fractional number of
performance shares. The number of additional performance shares to be credited
will be determined by dividing the product of the dividend value times the
number of performance shares standing in the recipient's account on the dividend
record date by the fair market value of the Common Stock on the date of dividend
distribution. Any individual may not receive an Award of more than 250,000
shares of performance shares in any one calendar year.
The Committee will specify in a performance share agreement the manner in
which performance shares will vest and become nonforfeitable, as well as any
conditions, restrictions and contingencies to which the performance shares may
be subject. Such conditions, restrictions and contingencies may consist of a
requirement of continuous service and/or the satisfaction of one or more
performance goals. Unless otherwise specified by the Committee, a recipient may
not transfer performance shares, and all performance shares will be forfeited as
of the date of the optionee's termination of employment for any reason. When
performance shares vest, the participant will receive the same number of shares
of the Common Stock as the number of performance shares standing in the
participant's account.
Awards of performance shares that remain subject to any type of vesting
schedule (such as satisfaction of certain performance requirements) will become
proportionately vested and nonforfeitable, based on the portion of the
performance period completed with target level performance being deemed achieved
as of the date of the recipient's death, disability, or retirement after age 60
or the date of a change in control of the Company (as defined in the ICP). If an
Award does not have a designated target level of performance, the performance
level which, if met, would result in the vesting of the lowest number of shares
will be considered the target level. If a recipient of a performance share Award
terminates employment for any reason other than death, disability or retirement
after age 60, then any Awards of performance shares that remain subject to
restriction will be forfeited. The Committee will always have the right to
accelerate the vesting of any restricted stock awarded under the ICP.
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PERFORMANCE-BASED CASH AWARDS
The Committee may award performance-based cash awards to key employees and
nonemployee directors in its sole discretion. A performance-based cash award is
the right, subject to such conditions, restrictions and contingencies as the
Committee determines and specifies in the cash award agreement, to receive a
specified amount (or possible range of amounts) of cash in the future. An
individual may not receive payment (determined at the end of the applicable
performance period) of more than $2,500,000 in performance-based cash awards in
any one calendar year.
The Committee will specify in a performance-based cash award agreement (or
other documents communicating the award to the recipient) the performance
requirements, the time period on which the performance will be measured, and any
other conditions, restrictions and contingencies on the award. Conditions,
restrictions and contingencies may consist of a requirement of continuous
service and any other requirements as may be specified by the Committee. The
conditions may be based on short-term or long-term performance periods. A
recipient may not transfer performance-based cash awards.
In the event of a recipient's death, disability or retirement after age 60,
any Awards of performance-based cash awards that remain subject to any type of
vesting schedule (such as satisfaction of certain performance requirements), but
the performance period for which ends during the year, may become
proportionately vested and nonforfeitable, based on the portion of the
performance period completed, but only if performance measures have been met, as
measured at the end of the performance period. If a performance-based cash award
remains subject to a restriction, but the performance period for that Award does
not end during the year of the recipient's death, disability or retirement after
age 60, then such Award will be forfeited. Upon a change in control of the
Company (as defined in the ICP), any performance-based cash Awards that remain
subject to any type of vesting schedule (such as satisfaction of certain
performance requirements) but the performance period for which ends during the
year, will become proportionately vested and nonforfeitable, based on the
portion of the performance period completed with target level performance being
deemed achieved as of the date of the change in control of the Company. If an
Award does not have a designated target level of performance, the performance
level which, if met, would result in the vesting of the lowest cash amount will
be considered the target level. If a performance-based cash award remains
subject to a restriction upon a change in control, but the performance period
for that Award does not end during the year of the change in control, then such
Award will be forfeited. If a recipient of a performance-based cash Award
terminates employment for any reason other than death, disability or retirement
after age 60, then any performance-based cash Awards that remain subject to
restriction will be forfeited. The Committee will always have the right to
accelerate the vesting of any performance-based cash award under the ICP.
Within a reasonable period following the completion of the performance
period, the participant will receive a single sum cash payment of any
performance-based cash award earned for that period.
PERFORMANCE MEASURES.
It is the Company's intent that Awards made under the ICP may be structured
to comply with the "performance-based" compensation provisions of Code Section
162(m), at the Committee's discretion. Therefore, amounts payable with respect
to grants of options and/or awards of restricted stock, performance shares or
performance-based cash awards may be determined based on the attainment of
written performance goals approved by the Committee for a performance period
established by the Committee no more than 90 days after the commencement of the
performance period or, if less, the number of days which is equal to 25% of the
relevant performance period.
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The performance goals, which must be objective, will be based upon one or
more of the following performance measures: (i) earnings per share; (ii)
consolidated earnings before or after interest, taxes, depreciation and/or
amortization; (iii) net operating profit before or after interest, taxes,
depreciation and/or amortization; (iv) net operating income; (v) book value per
share; (vi) return on shareholders' equity; (vii) return on assets; (viii)
return on capital; (ix) capital structure; (x) profitability of an identifiable
business unit or product; (xi) maintenance or improvement of profit margins;
(xii) stock price; (xiii) market share; (xiv) gross or net revenues or sales;
(xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) gross or net
profit; (xix) expense management; or (xx) economic profit. The foregoing
criteria may relate to the Company, one or more of its subsidiaries, one or more
of its divisions or units or any combination of the foregoing and may be applied
on an absolute basis, growth or decline basis, or be relative to one or more
peer group companies or indices, or any combination thereof, all as the
Committee determines. To the degree consistent with Code sec.162(m), the
performance goals may be calculated without regard to extraordinary items.
If the Committee elects to subject Awards to restrictions based on
performance measures, the ICP and Awards made under the ICP will meet the Code
sec.162(m) requirements for the exemption of performance-based compensation. If
at any time the membership of the Committee does not meet the requirements for
Code sec.162(m) compliance, a subcommittee may be formed to make certain
determinations and take actions on behalf of the Committee in order to meet the
requirements for compliance. Any payment of compensation with respect to an
Award which is intended to be performance-based compensation will be subject to
the written certification of the Committee that the performance measures were
satisfied. Shareholder approval of the ICP is necessary for the Awards to meet
the Code sec.162(m) exemption.
TERMINATION AND AMENDMENT
Generally, the ICP will remain in effect for ten years; however, the Board
of Directors may terminate or amend the ICP at any earlier time. The ICP will
remain in effect as long as any awards are outstanding. If the Board amends the
ICP, the amendment will not adversely affect the rights of individuals who have
outstanding awards unless such individuals agree to such amendment. The
Committee may amend any agreement under the ICP if the amended agreement is
signed by the Company and the applicable participant.
ADJUSTMENTS
If the Company is involved in a corporate transaction (including but not
limited to any recapitalization, reclassification, merger, consolidation,
split-up, spin-off, or combination/exchange of shares) which constitutes a
change in control of the Company under the ICP, then the Committee will make an
appropriate and equitable adjustment to the number and kind of shares that are
issuable under the ICP, will take action to adjust the number and kind of shares
of Stock subject to outstanding Awards, will take action to adjust the exercise
price of outstanding stock options, and will make any other equitable
adjustments.
Additionally, if the Company is involved in a corporate transaction which
does not constitute a change in control under the ICP, but which requires
shareholder approval, the Committee may make certain decisions regarding the
stock to which outstanding Awards pertain, the number of resulting Awards, and
the vesting and/or exercisability of the Awards.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a brief general description of the consequences under the
Code of the receipt or exercise of awards under the ICP:
Incentive Stock Options. An optionee has no tax consequences upon grant
or, generally, upon exercise of an ISO. An optionee will recognize income when
he or she sells or exchanges the shares acquired upon exercise of an ISO. This
income will be taxed at the applicable capital gains rate if the sale or
exchange occurs after the expiration of the requisite holding periods.
Generally, the requisite holding periods expire two years after the date of
grant of the ISO and one year after the date of acquisition of the Common Stock
pursuant to the exercise of the ISO.
If an optionee disposes of the Common Stock acquired pursuant to exercise
of an ISO before the expiration of the requisite holding periods, the optionee
will recognize compensation income in an amount equal to the difference between
the exercise price and the lesser of (i) the fair market value of the shares on
the date of exercise and (ii) the price at which the shares are sold. This
amount will be taxed at ordinary income rates. If the sale price of the shares
is greater than the fair market value on the date of exercise, the difference
will be recognized as gain by the optionee and taxed at the applicable capital
gains rate. If the sale price of the shares is less than the exercise price, the
optionee will recognize a capital loss equal to the excess of the exercise price
over the sale price.
An optionee may have tax consequences upon exercise of an ISO if the
aggregate fair market value of shares of the Common Stock subject to ISOs which
first become exercisable by an optionee in any one calendar year exceeds
$100,000. If this occurs, the excess shares will be treated as though they are
subject to an NSO instead of an ISO. Upon exercise of an option with respect to
these shares, the optionee will have the tax consequences described below with
respect to the exercise of NSOs.
Finally, except to the extent that an optionee has recognized income with
respect to the exercise of an ISO (as described in the preceding paragraphs),
the amount by which the fair market value of a share of the Common Stock at the
time of exercise of the ISO exceeds the exercise price will be included in
determining an optionee's alternative minimum taxable income, and may cause the
optionee to incur an alternative minimum tax liability in the year of exercise.
There will be no tax consequences to the Company upon issuance or,
generally, upon exercise of an ISO. However, to the extent that an optionee
recognizes ordinary income upon exercise, as described above, the Company
generally will have a deduction in the same amount.
Nonqualified Stock Options. Neither the Company nor the optionee has
income tax consequences from the grant of NSOs. Generally, in the tax year when
an optionee exercises NSOs, the optionee recognizes ordinary income in the
amount by which the fair market value of the shares at the time of exercise
exceeds the exercise price for such shares. The Company generally will have a
deduction in the same amount as the ordinary income recognized by the optionee
in the Company's tax year in which or with which the optionee's tax year (of
exercise) ends.
Restricted Stock. A holder of restricted stock will recognize income upon
its receipt, but generally only to the extent that it is not subject to a
substantial risk of forfeiture. If the restricted stock is subject to
restrictions that lapse over a period of time, so that the holder becomes vested
in a portion of the shares as the restrictions lapse, the holder will recognize
income in any tax year only with respect to the shares that become
nonforfeitable during that year. The income recognized will be equal to the fair
market value of those shares, determined as of the time that the restrictions on
those shares lapse. That income generally will be taxable at
25
ordinary income tax rates. The Company generally will be entitled to a deduction
in an amount equal to the amount of ordinary income recognized by the holder of
the restricted stock.
A holder of restricted stock may elect instead to recognize ordinary income
for the taxable year in which he or she receives an award of restricted stock in
an amount equal to the fair market value of all shares of restricted stock
awarded to him or her (even if the shares are subject to forfeiture). That
income will be taxable at ordinary income tax rates. Any such election must be
made within 30 days after the transfer of the restricted stock to the holder. At
the time of disposition of the shares, a holder who has made such an election
will recognize gain in an amount equal to the difference between the sales price
and the fair market value of the shares at the time of the award. Such gain will
be taxable at the applicable capital gains rate. The Company will generally be
entitled to a deduction in an amount equal to the amount of ordinary income
recognized by the holder at the time of his election.
Performance Shares. A recipient of performance shares will not recognize
income upon grant of the performance shares, as long as they are subject to a
substantial risk of forfeiture. If the performance shares are subject to
restrictions that lapse in increments over a period of time, so that the holder
becomes vested in a portion of the shares as the restrictions lapse, the holder
will recognize income in any tax year only with respect to the shares that
become nonforfeitable (and for which shares of the Common Stock are issued)
during that year. The income recognized will be equal to the fair market value
of the shares issued as determined at the time of share issuance. That income
generally will be taxable at ordinary income tax rates. The Company generally
will be entitled to a deduction in an amount equal to the amount of ordinary
income recognized by the holder of the performance shares.
Performance-Based Cash Awards. A recipient of a performance-based cash
award will not have any tax consequences upon grant of the award. At the close
of the performance period, payments under performance-based cash awards under
the ICP are made in cash. Therefore, the recipient will receive ordinary income
in the amount of the payment in the year in which the cash is paid.
Code Section 162(m) Limitation on Company Deductions. No federal income
tax deduction is allowed for compensation paid to a "covered employee" in any
taxable year of the Company to the extent that such compensation exceeds
$1,000,000. For this purpose, "covered employees" are generally the chief
executive officer of the Company and the four next most highly compensated
officers of the Company, and the term "compensation" generally includes gross
income, including taxable amounts resulting from the exercise of stock options
or stock appreciation rights or the receipt of restricted stock. This deduction
limitation does not apply to compensation that is (1) commission-based
compensation, (2) performance-based compensation, (3) compensation which would
not be includable in an employee's gross income, and (4) compensation payable
under a written binding contract in existence on February 17, 1993, and not
materially modified thereafter.
ERISA. The ICP is not, and is not intended to be, an employee benefit plan
or tax-qualified retirement plan. The ICP is not, therefore, subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Code
Section 401(a).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO APPROVE AND ADOPT THE 1999 INCENTIVE COMPENSATION PLAN.
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Dates Referenced Herein and Documents Incorporated by Reference
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