SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Minnesota Power & Light Company
...............................................................................
(Name of Registrant as Specified in Its Charter)
Philip R. Halverson
...............................................................................
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
......................................................................
2) Aggregate number of securities to which transaction applies:
......................................................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
......................................................................
4) Proposed maximum aggregate value of transaction:
......................................................................
5) Total fee paid:
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/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ...........................................
2) Form, Schedule or Registration Statement No.: ......................
3) Filing Party: ......................................................
4) Date Filed: ........................................................
[LOGO OF MINNESOTA POWER]
NOTICE AND PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, May 14, 1996
Duluth, Minnesota
[LOGO OF MINNESOTA POWER]
Dear Shareholder:
We cordially invite you to attend Minnesota Power's 1996 Annual Meeting
of Shareholders on Tuesday, May 14, 1996 at 2 p.m. in the auditorium at the
Duluth Entertainment Convention Center (DECC). The DECC is located on the
waterfront at 350 Harbor Drive in Duluth. Free parking is available in the
adjoining lot. On behalf of the Board of Directors, we encourage you to attend.
This year there are 14 nominees standing for election to the Board.
Two members of the Board, Sister Kathleen Hofer and Charles Russell, will
not stand for reelection. We thank them for their contributions to the success
of the Company. We are pleased to have standing for election, for the first
time, D. Michael Hockett, Jack R. Kelly, Jr., and George L. Mayer. Mr.
Hockett is Chairman and CEO of ADESA Corporation, our new automobile auction
subsidiary. Mr. Kelly was Chairman of ADESA until it joined Minnesota Power
last July. He continues to be a valued advisor to ADESA, serving on its board
of directors. Mr. Mayer, a seasoned real estate investor and manager,
will contribute to the Company's ongoing real estate investment strategy.
We recommend for your approval the Executive Long-Term Incentive
Compensation Plan and the Director Long-Term Stock Incentive Plan. The plans are
designed to more closely link the interest of Directors and management to those
of our shareholders.
It is important that your shares be represented at the Annual Meeting.
At your earliest convenience, please sign, date, and mail the enclosed proxy
card in the envelope provided.
Prior to our Annual Meeting this year, you will have a special
opportunity to learn more about the newest member of Minnesota Power's team,
ADESA Corporation. Key members of ADESA management will be on hand with displays
and information booths describing ADESA's many services to the automotive
industry. As a special plus, the ADESA team will conduct a live automobile
auction, with licensed car dealers selling and bidding on cars. The ADESA
management team will make presentations and answer your questions over a box
lunch. Visit with the car dealers as well. This program will be very informative
and fun. Review the enclosed information and, if you plan to participate, please
fill out the enclosed reply card and return it with your proxy.
A summary of the Annual Meeting proceedings will be mailed in early
June to all shareholders.
Thank you for your continued support. We look forward to seeing you in
May.
Sincerely,
Arend J. Sandbulte Edwin L. Russell
Chairman President and Chief Executive Officer
MINNESOTA POWER & LIGHT COMPANY
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - MAY 14, 1996
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of Minnesota Power & Light Company
will be held in the auditorium at the Duluth Entertainment Convention Center,
350 Harbor Drive, Duluth, Minnesota, on Tuesday, May 14, 1996 at 2 p.m. for the
following purposes:
1. To elect a Board of 14 Directors to serve for the ensuing year;
2. To appoint Price Waterhouse LLP as the Company's independent
accountants for 1996;
3. To vote upon a proposal to approve the Minnesota Power Executive
Long-Term Incentive Compensation Plan;
4. To vote upon a proposal to approve the Minnesota Power Director
Long-Term Stock Incentive Plan; and
5. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Shareholders of record on the books of the Company at the close of
business on March 15, 1996 are entitled to notice of and to vote at the Annual
Meeting.
All shareholders are cordially invited and encouraged to attend the
meeting in person. The holders of a majority of the shares entitled to vote at
the meeting must be present in person or by proxy to constitute a quorum.
We would appreciate your signing and returning the enclosed proxy card
at your earliest convenience to facilitate an efficient tally of your votes.
By order of the Board of Directors,
Philip R. Halverson
Corporate Secretary
Dated at Duluth, Minnesota
March 20, 1996
If you have not received the Minnesota Power 1995 Annual Report, which
includes financial statements, kindly notify Minnesota Power Shareholder
Services, 30 West Superior Street, Duluth, MN 55802, telephone number
1-800-535-3056 or 1-218-723-3974, and a copy will be sent to you.
MINNESOTA POWER & LIGHT COMPANY
30 West Superior Street
Duluth, Minnesota 55802
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PROXY STATEMENT
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Solicitation
The Proxy accompanying this statement is solicited on behalf of the
Board of Directors of Minnesota Power & Light Company (Minnesota Power or
Company) for use at the Annual Meeting of Shareholders to be held on May 14,
1996, and any adjournments thereof. The purpose of the meeting is to elect a
Board of 14 Directors to serve for the ensuing year, to appoint Price Waterhouse
LLP as the Company's independent accountants for 1996, to vote upon a proposal
to approve the Executive Long-Term Incentive Compensation Plan, to vote upon a
proposal to approve the Director Long-Term Stock Incentive Plan, and to transact
such other business as may properly come before the meeting. All properly
executed proxies received at or before the meeting, and entitled to vote, will
be voted at the meeting.
This Proxy Statement and enclosed proxy card were first mailed on or
about March 20, 1996. Each proxy delivered pursuant to this solicitation is
revocable any time before it is voted, by written notice delivered to the
Corporate Secretary of the Company.
The Company expects to solicit proxies primarily by mail. Proxies also
may be solicited in person and by telephone at a nominal cost by regular or
retired employees of the Company. The expenses of such solicitation are the
ordinary ones in connection with preparing, assembling, and mailing the material
and also include charges and expenses of brokerage houses and other custodians,
nominees, or other fiduciaries for communicating with shareholders. Additional
solicitation of proxies will be made by mail, telephone, and in person by
Corporate Investor Communications, Inc., a firm specializing in the solicitation
of proxies, at a cost to the Company of approximately $6,000 plus expenses. The
total amount of such expenses will be borne by the Company.
Outstanding Shares and Voting Procedures
The outstanding shares of capital stock of the Company, as of March 15,
1996, were as follows:
Preferred Stock 5% Series ($100 par value)........................113,358 shares
Serial Preferred Stock $7.36 Series (without par value)...........170,000 shares
Serial Preferred Stock A $7.125 Series (without par value)........100,000 shares
Serial Preferred Stock A $6.70 Series (without par value).........100,000 shares
Common Stock (without par value) ..............................31,647,905 shares
Each share of the Company's preferred stocks and Common Stock of record
on the books of the Company at the close of business on March 15, 1996, is
entitled to notice of the Annual Meeting and to one vote.
1
The affirmative vote of a majority of the shares of stock present and
entitled to vote at the Annual Meeting is required for election of each director
and for approval of the other items to be acted upon by shareholders. An
automated system administered by the Company's Shareholder Services Department
tabulates the votes. Abstentions are included in determining the number of
shares present and voting and are treated as votes against the particular
proposal. Broker non-votes are not counted for or against any particular
proposal.
Proposals of Shareholders for the Annual Meeting
Scheduled for May 13, 1997
All proposals from shareholders to be considered at the Annual Meeting
scheduled for May 13, 1997 must be received by the Corporate Secretary at 30
West Superior Street, Duluth, Minnesota 55802, not later than November 20, 1996.
Security Ownership of Certain Beneficial Owners and Management
The following table lists the only persons known to the Company who own
beneficially as of March 1, 1996, more than 5 percent of any class of the
Company's voting securities. Unless otherwise indicated, the beneficial owners
shown have sole voting and investment power over the shares listed.
Number of Shares Percentage
Title of Class Name and Address of Beneficial Owner Beneficially Owned of the Class
- -------------- ------------------------------------ ------------------ ------------
Serial Preferred American General Corporation 15,400 9.1%
Stock 2929 Allen Parkway
Houston, TX 77019
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Serial Preferred ISACO 150,000 75.0%
Stock A c/o IDS Trust
P.O. Box 1450
Minneapolis, MN 55485
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Serial Preferred HARE & Co. 30,000 15.0%
Stock A c/o Bank of New York
P.O. Box 11203
New York, NY 10249
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Serial Preferred Auer & Co. 10,000 5.0%
Stock A c/o Bankers Trust Co.
P.O. Box 704
New York, NY 10015
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Serial Preferred Sigler & Co. 10,000 5.0%
Stock A c/o Manufacturers Hanover Trust Co.
P.O. Box 50000
Newark, NJ 07101-8006
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Common Stock Mellon Bank, N.A. 4,696,793 15.0%
One Mellon Bank Center
Pittsburgh, PA 15258
- -----------------------------------------------------------------------------------------------------------------------
American General has shared power with American General Life and
Accident Insurance Company (AGLA) to vote or direct the vote and to dispose or
direct the disposition of 10,000 shares, and with American General Life
Insurance Company of New York (AGNY) to vote or direct the vote and to dispose
or direct the disposition of 5,400 shares. AGLA and AGNY, wholly owned
subsidiaries of American General, are the record owners of these shares.
Mellon Bank holds 4,548,344 shares in its capacity as Trustee of the
Minnesota Power and Affiliated Companies Employee Stock Ownership Plan and Trust
(ESOP). Generally, these shares will be voted in accordance with instructions
received by Mellon Bank from participants in the ESOP.
2
The following table presents the shares of Common Stock of the Company
(Common Stock) beneficially owned by directors, nominees for director, executive
officers named in the Summary Compensation Table appearing subsequently in this
Proxy Statement, and all directors and executive officers of the Company as a
group, as of March 15, 1996. Unless otherwise indicated, the persons shown have
sole voting and investment power over the shares listed.
Name of Beneficial Owner Shares Name of Beneficial Owner Shares
- ------------------------ ------ ------------------------ ------
Merrill K. Cragun 3,200 Charles A. Russell 7,264
Dennis E. Evans 5,400 Edwin L. Russell 16,557
D. Michael Hockett 0 Arend J. Sandbulte 31,055
Sr. Kathleen Hofer 0 Nick Smith 1,225
Peter J. Johnson 3,840 Bruce W. Stender 1,461
Jack R. Kelly, Jr. 1,500 Donald C. Wegmiller 2,891
George L. Mayer 21,000 Donnie R. Crandell 2,373
Paula F. McQueen 2,200 Robert D. Edwards 10,035
Robert S. Nickoloff 6,926 David G. Gartzke 4,734
Jack I. Rajala 8,260 Jack R. McDonald 10,219
Directors and Executive Officers as a Group (26 in Group) 144,659
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Each director, nominee for director, and executive officer owns
only a fraction of 1 percent of any class of Company stock and all
directors and executive officers as a group also own less than 1
percent of any class.
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Mr. Hockett, Director of Minnesota Power and Chairman and CEO of ADESA
Corporation, holds a 15 percent ownership interest in ADESA, which links
his financial interest with that of the Company.
Consistent with her vows as a member of the Benedictine Order, Sr.
Kathleen Hofer owns no stock of the Company.
Voting and investment power for all shares is shared with his spouse.
Includes 16,209 shares for which voting and investment power is shared
with his spouse and 348 shares owned as custodian for his children.
Includes 3,634 shares for which voting and investment power is shared with
his spouse.
Includes 505 shares owned by his spouse.
Includes 2,420 shares owned by his spouse.
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ITEM NO. 1 - ELECTION OF DIRECTORS
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The Board expects that all of the nominees will be available for
election. In the event, however, that any of them should become unavailable, it
is intended that the proxy would be voted for a nominee or nominees who would be
designated by the Board, unless the Board reduces the number of directors
serving on the Board.
In connection with its acquisition of ADESA in July 1995, the Company
appointed Mr. Hockett as a director, effective July 26, 1995, and agreed to
nominate Mr. Hockett (or an alternate nominee selected by a majority of the
ADESA management shareholders) for election by the shareholders at the 1996,
1997, and 1998 Annual Meetings, and thereafter if ADESA management has not then
exercised its right to sell or the Company has not exercised its right to
purchase ADESA management's 17 percent ownership interest in ADESA Corporation.
3
Directors Standing for Election
Director
Since
--------
PHOTO MERRILL K. CRAGUN, 64, Brainerd, MN. President of Cragun 1991
Corp., a resort and conference center. Director of MP Real
Estate Holdings, Inc. (MP Real Estate), and MP Water
Resources, Inc. (MP Water Resources).
PHOTO DENNIS E. EVANS, 57, Minneapolis, MN. Member of the Executive 1986
and the Executive Compensation Committees. President and
Chief Executive Officer (CEO) of the Hanrow Financial Group,
Ltd., a merchant banking firm. Director of MP Water
Resources, ADESA Corporation (ADESA), Angeion
Corporation, and Astrocom Corporation.
PHOTO D. MICHAEL HOCKETT, 53, Indianapolis, IN. Chairman and CEO 1995
of ADESA. He was previously CEO and President of ADESA
and, before that, CEO of the four auto auction companies
that became subsidiaries of ADESA when it was formed in 1992.
PHOTO PETER J. JOHNSON, 59, Tower, MN. Member of the Electric 1994
Operations Committee. President and CEO of Hoover
Construction Company, a highway and heavy construction
contractor. Chairman of Michigan Limestone Operations,
which produces limestone. Director of Queen City Federal
Savings, and of Queen City Bancorp, Inc.
PHOTO JACK R. KELLY, JR., 61, Atlanta, GA. Director of ADESA 1996
(was Chairman until July 1995). A general partner in
Noro-Moseley Partners, a venture capital firm with
committed capital of approximately $150 million focusing
on growth companies in the Southeast.
PHOTO GEORGE L. MAYER, 51, Essex, CT. Founder and President of --
Manhattan Realty Group which manages various real estate
properties located predominantly in northeastern United
States. A consultant to the board of directors of Schwaab,
Inc., the country's largest manufacturer of handheld rubber
stamps and associated products.
- --------------------------------------------------------------------------------
A wholly owned subsidiary of Minnesota Power,
except that Minnesota Power owns 83 percent of ADESA.
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4
Director
Since
--------
PHOTO PAULA F. McQUEEN, 49, Punta Gorda, FL. Member of the 1993
Executive and Audit Committees. Partner of Webb, McQueen &
Co., P.L., a certified public accounting firm. President and
CEO of Allied Engineering & Testing Inc., an engineering and
materials testing company. She was previously Director and
President of PGI Sales Incorporated, a southwest Florida
community developer. Director of MP Water Resources, MP
Real Estate Holdings, and SouthTrust Bank of Southwest
Florida, N.A.
PHOTO ROBERT S. NICKOLOFF, 66, St. Paul, MN. Chairman of the 1986
Executive Compensation Committee and member of the Executive
Committee. Chairman of the Board of Medical Innovation
Capital, Inc., and General Partner of Medical Innovation
Partners and Medical Innovation Partners II, all venture
capital firms. Self-employed as an attorney. Director of
ADESA, and Green Tree Financial Corporation.
PHOTO JACK I. RAJALA, 56, Grand Rapids, MN. Member of the Executive 1985
and the Electric Operations Committees. Chairman and CEO of
Rajala Companies and Director and President of Rajala Mill
Company, which manufacture and trade lumber. Director of Grand
Rapids State Bank.
PHOTO EDWIN L. RUSSELL, 51, Duluth, MN. President and CEO of 1995
Minnesota Power. Member of the Executive and the Electric
Operations Committees. Director of ADESA, MP Water
Resources, MP Real Estate Holdings, American
Paging, Inc., American Photo Booths, Inc., Lake Superior
Center, United Way of Greater Duluth, and Advantage
Minnesota. He was previously Group Vice President of
J. M. Huber Corporation, a $1.5 billion diversified
manufacturing and natural resources company.
PHOTO AREND J. SANDBULTE, 62, Duluth, MN. Chairman of Minnesota 1983
Power and the Executive Committee. He was President of
Minnesota Power until May 1995 and CEO until January
1996. Chairman of Superior Water, Light and Power
Company and MP Water Resources. Director of
ADESA, and St. Mary Land and Exploration Company.
PHOTO NICK SMITH, 59, Duluth, MN. Member of the Executive 1995
Compensation and Electric Operations Committees. Chairman of
and attorney with Fryberger, Buchanan, Smith & Frederick,
P.A., a law firm. Director of MP Water Resources.
Chair and CEO of Northeast Ventures Corporation, a venture
capital firm investing in northeastern Minnesota.
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A wholly owned subsidiary of Minnesota Power,
except that Minnesota Power owns 83 percent of ADESA.
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5
Director
Since
--------
PHOTO BRUCE W. STENDER, 54, Duluth, MN. Member of the Audit 1995
Committee. President and CEO of Labovitz Enterprises, Inc.
which owns and manages hotel properties. Director of ADESA.
Chairman of the Sota Tech Fund, a non-profit corporation
developing new technologies, and Vice Chairman of the
Benedictine Health System, the parent corporation for a
group of non-profit health care providers.
PHOTO DONALD C. WEGMILLER, 57, Minneapolis, MN. Chairman of the 1992
Audit Committee and member of the Executive Compensation
Committee. President and CEO of Management Compensation
Group/HealthCare, a national executive compensation and
benefits consulting firm. He was previously Vice Chairman and
President of Health Span Health System and President and CEO
of Health One Corporation, diversified health services
organizations. Director of G. D. Searle and Co., HBO &
Company, Medical Graphics Corporation, Health Providers
Insurance Company, InPhyNet Medical Management, Inc., Life
Rate Systems, Inc., and Possis Medical, Inc.
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A wholly owned subsidiary of Minnesota Power,
except that Minnesota Power owns 83 percent of ADESA.
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Board and Committee Meetings in 1995
During 1995, the Board of Directors held nine meetings. The Executive
Committee, which held five meetings during 1995, provides oversight of corporate
financial matters, performs the functions of a director nominating committee,
and is authorized to exercise the authority of the Board in the intervals
between meetings. Shareholders may recommend nominees for director to the
Executive Committee by addressing the Corporate Secretary of the Company, 30
West Superior Street, Duluth, Minnesota 55802. The Audit Committee, which held
five meetings in 1995, recommends the selection of independent accountants,
reviews and evaluates the Company's accounting and financial practices, and
reviews and recommends approval of the annual audit report. The Executive
Compensation Committee, which held four meetings in 1995, ensures that
compensation and benefit arrangements for Company officers and other key
executives are equitable, competitive with the marketplace, and consistent with
corporate objectives. The Electric Operations Committee, which held three
meetings in 1995, provides oversight of the Company's MP-Electric business unit.
The Directors sitting on the board of MP Water Resources, Inc., and MP Real
Estate Holdings, Inc., both wholly owned subsidiaries, will have oversight of
Minnesota Power's water operations and real estate operations, respectively. All
directors attended 75 percent or more of the
6
aggregate number of meetings of the Board of Directors and applicable committee
meetings in 1995.
Certain Relationships and Related Transactions
ADESA Relationships
On December 19, 1995 ADESA Corporation, the Company's subsidiary,
purchased Eagle Investments II, LLC (Eagle), an Indiana limited liability
company, from five members of the ADESA Corporation's Executive Management team,
including Mr. Hockett, ADESA's Chairman and CEO, who owned 90 percent of Eagle.
Eagle's only asset was a jet aircraft which was to be used by ADESA in managing
its growing number of auction sites. ADESA paid Eagle $99,000 as the cash
purchase price for these interests. An additional $1,814,795, representing the
principal and interest owing on a Note held by Bank One, N.A., Indianapolis, was
paid to Eagle and the jet aircraft is now owned free and clear of liens. Eagle
paid $1,881,318 for the aircraft, license, and other associated acquisition
costs on July 11, 1995, and invested $52,216 in the aircraft for improvements
and maintenance. Upon subsequent evaluation, it was determined that ownership of
a jet aircraft would no longer be necessary, and ADESA has now sold the
aircraft.
ADESA leases space on an annual basis for its principal offices in an
office building located at 1919 S. Post Road, Indianapolis, Indiana, from CIL,
Inc., an entity that is wholly owned by Mr. Hockett. ADESA paid an aggregate of
$148,488 in lease payments to CIL during 1995. Management believes that the
terms of the lease are comparable to terms that could be obtained by ADESA from
unrelated parties for comparable rental property. As specified under a services
agreement with CIL, ADESA received $19,200 in fees from CIL for providing
certain general and administrative services to CIL. ADESA had an outstanding
receivable from CIL at December 31, 1995 of $95,541 arising from the purchase of
automobiles at ADESA-Indianapolis and certain construction costs incurred by
ADESA at 1919 S. Post Road, Indianapolis, Indiana which were to be reimbursed by
CIL. Such receivables were paid in the normal course of business.
Mr. Hockett and Mr. Dave Hill, a director and executive officer of
ADESA, and Mr. Hill's son own an automobile dealership that has participated as
a seller and a buyer at certain of ADESA's auction facilities. In addition, Mr.
Hockett, Mr. Hill, and Mr. Larry Wechter, a director and executive officer of
ADESA, are directors and officers of the corporation which owns such dealership.
Such dealership settles its accounts on the same terms as any third-party
customer at ADESA auctions, and, in the ordinary course, ADESA had outstanding
receivables from the dealership of $95,231 at December 31, 1995 representing the
unremitted purchase price of automobiles purchased at auction which were
remitted by ADESA to the sellers net of ADESA's fees. Such receivables were paid
in the normal course of business. The dealership paid fees to ADESA in the
aggregate of $21,610 during 1995 for use of auction facilities.
7
Messrs. Hockett, Hill, and Wechter are shareholders of a corporation
which owns a corporation which has participated as a seller and a buyer at
certain of ADESA's auction facilities. In addition, Mr. Wechter is director of
such corporation. Such corporation settles its accounts on the same terms as any
third-party customer at ADESA's auctions, and, in the ordinary course ADESA had
outstanding receivables from such corporation of $16,170 at December 31, 1995
representing the unremitted purchase price of automobiles purchased at auction
which were remitted by ADESA to the sellers net of ADESA's fees. Such
receivables were paid in the normal course of business. The corporation paid
fees to ADESA in the aggregate of $13,634 during 1995 for use of auction
facilities.
Other Relationships
Robert S. Mars, Jr., who retired from the Board of Directors effective
May 9, 1995, is Chairman of W.P.& R.S. Mars Company, an industrial equipment and
supply firm. In the normal course of business through May 9 in 1995 the Company
and its subsidiaries purchased $86,737 worth of tools, equipment, and repair
services from Mars Company. Some of these tools, equipment, and repair services
were purchased pursuant to competitive bids, and others were purchased directly
from inventory of the company as required. It is the opinion of the Company that
such purchases were made at prices that were competitive with others in this
area.
See the disclosure herein of transactions by the Company with
Norwest Bank and with LAREX, Inc. under "Compensation Committee Interlocks and
Insider Participation."
8
Compensation of Executive Officers
The following information describes compensation paid in the years
1993 through 1995 for the Company's five highest paid executive officers.
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------
Year Annual Compensation Long-Term All Other
Compensation Compensation
----------------------------------------------------
Name and Principal Position Salary Bonus Payouts - LTIP ($)
($) ($) Payouts ($)
- ------------------------------------------------------------------------------------------------------------------
Arend J. Sandbulte 1995 371,090 191,014 0 48,974
Chairman and Chief Executive 1994 352,587 45,953 0 74,925
Officer 1993 362,625 93,470 31,440 63,107
Jack R. McDonald 1995 206,219 139,407 0 24,477
Executive Vice President-Finance 1994 196,154 15,727 0 25,951
and Corporate Development 1993 194,417 28,000 22,270 22,117
Robert D. Edwards 1995 208,481 110,132 0 16,588
Executive Vice President 1994 196,154 30,860 0 20,173
and President-MP-Electric 1993 196,167 35,000 22,270 17,740
Donnie R. Crandell 1995 172,827 53,963 0 20,261
Senior Vice President- 1994 37,635 5,340 0 2,199
Corporate Development 1993 108,517 10,909 0 6,334
David G. Gartzke 1995 165,089 57,924 0 11,013
Senior Vice President- 1994 140,446 17,440 0 14,126
Finance and CFO 1993 139,167 11,360 0 11,134
- -------------------------------------------------------------------------------------------------------------------
Amounts shown include compensation earned by the named executive officers, as
well as amounts earned but deferred at the election of those officers. The
"Bonus" column is comprised of amounts earned pursuant to Results Sharing and
the Annual Incentive Plan.
The amounts shown represent the fair market value of shares of Common Stock
reportable for 1993, based upon corporate performance during the four-year
period ended December 31, 1993.
Mr. Sandbulte stepped down from the Office of Chief Executive Officer
effective January 23, 1996, consistent with his retirement plans.
The amounts shown for 1995 include the following Company contributions for the
named executive officers:
Annual Company
Annual Company Contribution to the Above-Market Interest
Annual Company Contribution to the Supplemental Earned on Compensation
Contribution to the Employee Stock Executive Deferred Under Executive
Name Flexible Benefit Plan Ownership Plan Retirement Plan Incentive Plan
- ------------------------- ---------------------- ---------------------- --------------------- --------------------------
Arend J. Sandbulte $9,975 $3,004 $25,257 $10,738
Jack R. McDonald 8,100 3,004 11,063 2,310
Robert D. Edwards 6,825 3,004 5,563 1,196
Donnie R. Crandell 6,825 3,004 1,521 0
David G. Gartzke 6,006 2,644 1,723 640
The Company made investments in corporate-owned life insurance which will
recover the cost of these above-market benefits if actuarial factors and other
assumptions are realized.
9
LONG-TERM INCENTIVE PLANS TABLE
Awards in Last Fiscal Year
Estimated Future Payouts
under Non-Stock Price-Based
Plans
(a) (b) (c) (d) (e)
Number of Performance or
Shares, Other Period
Units or Until
Other Maturation or
Name Rights (#) Payout Target (#) Maximum (#)
- ------------------ ------------ --------------- -------------- ------------
Arend J. Sandbulte 3,600 1/95 - 12/98 3,600 6,000
Jack R. McDonald 2,850 1/95 - 12/98 2,850 4,750
Robert D. Edwards 2,850 1/95 - 12/98 2,850 4,750
Donnie R. Crandell 1,000 1/95 - 12/98 1,000 1,666
David G. Gartzke 1,525 1/95 - 12/98 1,525 2,541
Payouts (from 0 to maximum) under the Long-Term Incentive Plan are
based upon the total shareholder return ranking of the Company in comparison to
a peer group of ten Upper Midwest utilities (60%) and the S&P 500 (40%). The
Company must rank in the 55th percentile of the peer group or above the 40th
percentile of the S&P 500 for any award to be earned. The target award is earned
if the Company ranks in the 73rd percentile of the peer group and the 70th
percentile of the S&P 500; and the maximum award is earned if the Company ranks
first or second in the peer group and at the 90th percentile of the S&P 500.
Payouts are made in cash and Company Common Stock.
10
Retirement Plans
The following table sets forth examples of the estimated annual
retirement benefits that would be payable to participants in the Company's
Retirement Plan and Supplemental Executive Retirement Plan after various periods
of service, assuming no changes to the plans and retirement at the normal
retirement age of 65:
PENSION PLAN TABLE
Years of Service
------------------------------------------------------------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------------------
$125,000 $15,000 $33,750 $40,000 $46,250 $52,500
150,000 18,000 40,500 48,000 55,500 63,000
175,000 21,000 47,250 56,000 64,750 73,500
200,000 24,000 54,000 64,000 74,000 84,000
225,000 27,000 60,750 72,000 83,250 94,500
250,000 30,000 67,500 80,000 92,500 105,000
300,000 36,000 81,000 96,000 111,000 126,000
400,000 48,000 108,000 128,000 148,000 168,000
500,000 60,000 135,000 160,000 185,000 210,000
600,000 72,000 162,000 192,000 222,000 252,000
700,000 84,000 189,000 224,000 259,000 294,000
- --------------------------------------------------------------------------------
Represents the highest annualized average compensation (salary and
bonus) received for 48 consecutive months during the employee's last 15
years of service with the Company. For determination of the pension
benefit, the 48-month period for highest average salary may be different
from the 48-month period of highest aggregate bonus compensation.
Retirement benefit amounts shown are in the form of a straight-life
annuity to the employee and are based on amounts listed in the Summary
Compensation Table under the headings Salary and Bonus. Retirement benefit
amounts shown are not subject to any deduction for Social Security or other
offset amounts. The Retirement Plan provides that the benefit amount at
retirement is subject to adjustment in future years to reflect cost of living
increases to a maximum adjustment of 3 percent per year. As of December 31,
1995, the executive officers named in the Summary Compensation Table had the
following number of years of credited service under the plan:
Arend J. Sandbulte 31 years Donnie R. Crandell 14 years
Jack R. McDonald 28 years David G. Gartzke 20 years
Robert D. Edwards 19 years
With certain exceptions, the Internal Revenue Code of 1986, as amended,
(Code) presently restricts the aggregate amount of annual pension which may be
paid to an employee under the Retirement Plan to $120,000, which amount is
11
subject to adjustment in future years to reflect cost of living increases. The
Company's Supplemental Executive Retirement Plan provides for supplemental
payments by the Company to eligible executives (including the executive officers
named in the Summary Compensation Table) in amounts sufficient to maintain total
retirement benefits upon retirement at a level which would have been provided by
the Retirement Plan if benefits were not restricted by the Code.
Compensation of Directors
Employee directors receive no additional compensation for their
services as directors. In 1995, the Company paid each director an annual
retainer fee of $5,000 and 500 shares of Common Stock under the terms of the
Company's Director Stock Plan. In addition, each director was paid $850 for each
Board, Committee, and subsidiary board meeting attended, except that $500 was
paid for attendance at a second meeting held the same day as another meeting.
Each director who is the Chairman of a Committee received an additional $150 for
each Committee meeting attended. A $250 fee was paid for conference call
meetings. Directors may elect to defer all or a part of the cash portion of
their retainer fees and meeting fees. The shares of Common Stock paid to
directors during 1995 had an average market price of $26.13 per share. The
Company also provides life insurance of $5,000 on the life of each director at
an aggregate cost to the Company of $938 in 1995.
The Board has a Long-Term Incentive Plan which provides a compensation
program similar to that provided to the executive officers by the Long-Term
Incentive Plan (as described in the Executive Compensation Committee Report
below), except that the directors' maximum award opportunity is 600 shares of
Common Stock every other year. The plan awards Common Stock to the directors if,
over a four-year period commencing with each even numbered year, the total
return to the Company's shareholders (that is, stock price appreciation plus
reinvested dividends) ranks at or above the 55th percentile of a pre-selected
group of ten comparable utilities or above the 40th percentile of the Standard &
Poor's 500 (S&P 500). The size of the award varies depending upon the extent to
which the Company's total return exceeds the above total returns. No awards were
paid to directors for the four-year period ending December 31, 1995 because the
Company's stock performance was below both threshold total returns.
Effective January 1, 1996, directors will receive automatic grants of
stock options every year and performance shares every other year pursuant to the
new Director Long-Term Stock Incentive Plan, which is being presented to
shareholders for approval at this Annual Meeting and which is described in
greater detail later in this Proxy Statement. Awards of stock under the current
Long-Term Incentive Plan will no longer be made after the end of the current
four-year performance period (1994 - 1997).
12
Employment Contracts
The Company entered into employment agreements effective May 1, 1995
with Robert D. Edwards and David G. Gartzke in which each executive agreed to
remain an employee of the Company through May 31, 1998 at an annual base salary
that is not less than his respective 1995 base salary.
Report of Board Executive Compensation Committee on Executive Compensation
Described below are the compensation policies of the Executive
Compensation Committee of the Board of Directors effective for 1995 with respect
to the executive officers of the Company. Composed entirely of independent
outside directors, the Executive Compensation Committee is responsible for
recommending to the Board the policies which govern the executive compensation
program of the Company and for administering those policies. To assist the
Executive Compensation Committee in connection with the performance of such
responsibilities for 1995, the Board retained the services of Hewitt Associates
LLC, a benefits and compensation consulting firm. Hewitt Associates has been
retained in this capacity since 1986.
The role of the executive compensation program is to help the Company
achieve its corporate goals by motivating performance, rewarding positive
results, and encouraging teamwork. Recognizing that the potential impact an
individual employee has on the attainment of corporate goals tends to increase
at higher levels within the Company, the executive compensation program provides
greater variability in compensating individuals based on results achieved as
their levels within the Company rise. In other words, individuals with the
greatest potential impact on achieving the stated goals have the greatest amount
to gain when goals are achieved and the greatest amount at risk when goals are
not achieved.
The program also recognizes that, in order to attract and retain
exceptional executive talent, compensation must be competitive in the national
market when measured against comparable firms within that market. For those
executives engaged primarily or exclusively in electric operations, the relevant
market for purposes of comparison is other electric utilities throughout the
country which, on average, are comparable in size to the Company. For those
executives engaged substantially in the Company's diversification activities,
the appropriate market for purposes of comparison includes both electric
utilities and general industry. Comparisons with the general industry market
allow recognition of skills required in diversification activities and
compensation levels of executives in other industries.
To determine market levels of compensation for executive officers in
1995, the Executive Compensation Committee relied upon comparative information
provided by Hewitt Associates, based on the same 15 electric utilities and 25
industrial companies previously selected by Hewitt Associates and used for
13
comparison purposes for the past seven years. The Executive Compensation
Committee believes that these companies are appropriate for market compensation
comparison, primarily because they are approximately the same size as the
Company as measured by sales revenue.
The Executive Compensation Committee determined that executive base
salary plus additional performance-based compensation at the target level should
approximate the midpoint of the range of base salary plus total
performance-based compensation in the appropriate market. Executive compensation
actually paid by the Company for 1995 fell within the mid-range of executive
compensation paid by the comparable companies.
Since compensation has remained well below amounts that would be
affected by Section 162(m) of the Internal Revenue Code of 1986, as amended, the
Company had no policy in 1995 regarding the deductibility of qualifying
compensation paid to executive officers under that section.
As described below, executive officers of the Company receive a
compensation package which consists of four basic elements: base salary,
performance-based compensation, supplemental executive benefits, and
perquisites.
Base Salary
Base salaries are set at a level so that, if the target level of
performance is achieved under the performance-based plans as described below,
executive officers' total compensation, including amounts paid under each of the
performance-based compensation plans, will be near the midpoint of market
compensation as described in the preceding four paragraphs. Base salaries of the
executive officers (not including the CEO) were increased on average by 5.2
percent in 1995, reflecting market adjustments and merit increases.
Performance-Based Compensation
Performance goals are approved in advance by the Executive Compensation
Committee and the Board. A target level of performance under the
performance-based plans represents performance that is either consistent with or
above budget, or represents average performance as measured against the peer
group described below. With target performance, executive compensation will be
near the midpoint of the relevant market. If no performance awards are earned,
compensation of the Company's executive officers will be near the 40th
percentile of the market, while performance at increments above the target level
will result in total compensation above the midpoint of the market.
The Company's performance-based compensation plans include:
- Results Sharing. The Results Sharing award opportunity rewards annual
performance of the executive's responsibility area as well as overall
corporate performance. Results Sharing awards are available to all
employees on the
14
same percentage of pay basis and are intended to focus employee
attention on both responsibility area performance and corporate
performance generally. Target performance will result in an award of
2.5 percent of base salary. Results Sharing awards equaling 7.3 percent
of base salary were earned by executive officers and employees in the
MP-Electric business unit in 1995 because MP-Electric substantially
exceeded its operating income budget and achieved its other business
unit goals. Awards averaging 5.7 percent of base pay were earned by
executive officers and employees in the corporate business unit as a
result of superior operating income achieved by MP-Electric.
- Annual Incentive Plan. The Annual Incentive Plan is intended to focus
executive attention on superior performance of the Company in
comparison to other companies. The Annual Incentive Plan rewards
near-term corporate performance as measured by the Company's ranking in
relation to (i) a peer group of ten electric utility companies
operating in the same geographic region as the Company (Upper Midwest)
selected by Hewitt Associates, and (ii) the companies listed in the S&P
500 Index. The full award opportunity is earned if Company performance
equals or exceeds the 90th percentile for all performance measures when
measured against performance of both the peer group utilities and the
S&P 500 companies. The target level of performance is achieved if the
Company's performance is at the 60th percentile. At the target level,
the executive officers (not including the CEO) would earn awards
ranging from 15 percent to 24 percent of base salary depending on their
level of responsibility. At the target level, the CEO would earn an
award of 36 percent of his base salary. Based on 1995 results, the
executive officers (not including the CEO) earned awards averaging 15.6
percent of base salary under this plan. This award resulted from the
MP-Electric business unit achieving maximum performance under the plan
with respect to its operating income goal, the Company achieving below
target performance with respect to its earnings per share goal, and
total shareholder return performance at the 64th percentile when
compared to the peer group of 10 utilities.
In addition to the foregoing, strategic goals were established pursuant
to the plan by the Executive Compensation Committee for each executive
officer named in the Summary Compensation Table. These goals relate to
the performance of the business unit within the scope of responsibility
of each officer. Each executive officer (not including the CEO) may be
awarded up to 10 percent of base salary, though higher awards may
result from superior earnings performance of the business unit for
which the officer is responsible. Target performance would result in
payment of an award equal to 4 percent of base salary. The CEO may be
awarded up to 15 percent of his salary, with a target of 6 percent. The
executive officer responsible for MP-Electric
15
achieved an award equal to 25 percent of base salary as determined by a
formula setting the size of his award based on operating income of MP-
Electric. The other three executive officers (not including the CEO)
received awards in the range of 9 percent to 10 percent of base salary
for achieving strategic and earnings goals in their respective areas of
responsibility.
- Long-Term Incentive Plan. The Long-Term Incentive Plan is designed
to motivate long-term strategic planning and reward long-term corporate
performance, as measured by total shareholder return. In January of
each year the executive officers are given a maximum award opportunity
of a stated number of shares of the Company's Common Stock based upon
the Company's performance over a four-year performance period. Sixty
percent of the award opportunity is based upon rank among a peer group
of ten utilities operating in the same geographic region as the Company
(Upper Midwest), and forty percent of the award opportunity is based on
rank among the S&P 500 companies. For the four-year performance period
ending December 31, 1995, the maximum award opportunity was 6,000
shares for the CEO. The maximum award ranged from 1,500 to 5,000 shares
for the other executive officers. The maximum award opportunity is
earned if the Company ranks first or second in the peer group and at or
above the 90th percentile among the S&P 500 companies. The Company must
achieve at least a 55th percentile ranking among a peer group of
utilities or a 40th percentile ranking among the S&P 500 companies for
any award to be earned. For the four-year performance period ending
December 31, 1995, no awards were earned because the Company did not
achieve total shareholder return required for a payout under the plan.
Supplemental Executive Benefits
The Company has established a Supplemental Executive Retirement Plan
(SERP) to treat employees, including the executive officers, equitably by
replacing benefits not provided by the Company's Flexible Benefit Plan and the
Employee Stock Ownership Plan due to government-imposed limits and to provide
retirement benefits which are competitive with those offered by other businesses
with which the Company competes for managerial talent. The SERP also provides
employees whose salaries exceed the salary limitations for tax-qualified plans
imposed by the Code with additional benefits such that they receive in aggregate
the benefits they would have been entitled to receive had such limitations not
been imposed.
The Company has also adopted Executive Investment Plans whereby
executive officers may enter into agreements with the Company to irrevocably
defer a portion of their compensation until after termination of service,
retirement, or death. The Executive Investment Plans are non-qualified deferred
compensation plans, under which benefits result wholly from deferred
compensation.
16
Perquisites
The Company provides various perquisites to assist selected executive
officers in fulfilling their business responsibilities in a cost and
time efficient manner, to the extent they are consistent with competitive
practice. Perquisites provided by the Company to the named executive officers
did not exceed the lesser of $50,000 or 10 percent of the total salary and bonus
shown for them in the Summary Compensation Table. The perquisites provided by
the Company were reviewed by the Executive Compensation Committee and determined
to be reasonable and in line with electric utility companies of comparable size.
Chief Executive Officer Compensation
Effective June 1, 1995, the Executive Compensation Committee increased
Mr. Sandbulte's (CEO in 1995) base salary by 5.7 percent to reflect his
contributions to the Company. Under the Company's Results Sharing Plan, the CEO
was awarded $21,226, or 5.7 percent of his base salary, because MP-Electric
achieved operating income well above its budget and achieved its other business
unit goals. Under the Annual Incentive Plan, the CEO earned $112,788, or 29.7
percent of base salary in 1995 because the MP-Electric business unit achieved
maximum performance under the plan with respect to its operating income goal,
the Company achieved below target performance with respect to its earnings per
share, and total shareholder return performance at the 64th percentile when
compared to a peer group of ten electric utility companies. Also under the
Annual Incentive Plan, the CEO was awarded $57,000, or 15 percent of his base
salary, for accomplishing Individual Strategic Goals assigned to him by the
Executive Compensation Committee, which included consummation of the ADESA
acquisition and successfully guiding the transition by ADESA to membership on
the Minnesota Power team, and successfully executing the management succession
plan adopted by the Board. No award was earned in 1995 by the CEO under the
Long-Term Incentive Plan because the Company did not achieve the threshold total
shareholder return required for payout under the plan.
March 20, 1996
Executive Compensation Committee
Robert S. Nickoloff, Chairman
Charles A. Russell Dennis E. Evans
Donald C. Wegmiller Nick Smith
Compensation Committee Interlocks and Insider Participation
The members of the Executive Compensation Committee are Robert S.
Nickoloff, Chairman, Dennis E. Evans, Charles A. Russell, Nick Smith, and
Donald C. Wegmiller.
17
- - Norwest Bank Relationships. Director Charles A. Russell, who, by reason of
his retirement, is not standing for reelection to the Board of Directors,
retired as Chairman and CEO of Norwest Bank Minnesota North, N.A. on
December 31, 1995. Norwest has loan commitments under which the Company is
required to pay certain fees or maintain compensating balances, although
during 1995 Norwest did not hold notes of the Company for loans pursuant to
these arrangements. Additionally, Reach All Partnership, in which the
Company held an 82 1/2 percent ownership interest through its subsidiaries,
had a secured working capital line of credit with Norwest under which $3.8
million was outstanding, with interest payable at prime rate plus 2 1/2
percent per annum. Principal and interest due under this loan were paid in
full during October 1995 in connection with the termination of Reach All's
operations. Reach All's financial arrangements with Norwest were entered
into before the Company purchased its ownership interest in Reach All. It
is the opinion of management that these financial arrangements reflected
market rates.
- - LAREX Economic Development Project. In 1995 the Company began developing
plans for an energy park to be located on its property adjacent to its
Boswell Energy Center in Cohasset, MN. The first tenant of the energy park
will be LAREX International, Inc. LAREX developed a process to extract from
certain tree species a substance that is used in a variety of commercial
applications. The Company, through a subsidiary, entered into a contract to
pay M. A. Mortenson Company $1.7 million for construction of the buildings
to be occupied by LAREX, and agreed to lease these buildings to LAREX. The
Iron Range Rehabilitation and Redevelopment Board (IRRRB), a local economic
development agency, has agreed to purchase the buildings from the Company's
subsidiary when LAREX occupies the building upon completion of
construction, for an amount equal to the cost of construction, and the
subsidiary will then assign the building lease to the IRRRB. Construction
is expected to be complete in May 1996. The Company will enter into a
separate ground lease with LAREX at an economic development rate which the
Company will offer to other tenants of the energy park. It is expected the
Company will also provide financing to LAREX in the amount of $200,000
under the customary terms of the Company's Economic Development Program.
This financing will be used to purchase equipment in which the Company will
retain a security interest. LAREX is expected to provide quality jobs and
represents an important first step in the development of the energy park.
LAREX was founded in 1993 by Medical Innovation Fund II of Minneapolis and
Northeast Ventures of Duluth. To date, LAREX's owners have invested $3.25
million in LAREX as follows: Medical Innovation Fund II has invested $2.5
million and holds 58.5 percent of all stock currently outstanding;
Northeast Ventures has invested $750,000 and holds 18 percent of the
currently issued and outstanding stock; and the remaining investment and
stock is held by various employees of LAREX. In addition to the foregoing,
in return for an investment of
18
approximately $1 million, LAREX has issued Kolya Management Company (i) a
promissory note convertible into LAREX stock with market value equal to the
face value of the note at the time of LAREX's next stock offering and (ii)
a warrant giving Kolya the right to purchase, at market value, additional
stock of LAREX with an aggregate value of approximately $500,000. Also,
Northeast Ventures invested an additional $250,000 in LAREX receiving in
return a note and warrants with the same terms described in the preceding
sentence.
Minnesota Power Director Robert Nickoloff serves as a General Partner of
Medical Innovation Partners II, possessing a 20 percent ownership interest.
Medical Innovation Partners II is the general partner of Medical Innovation
Fund II. In addition, Mr. Nickoloff serves on the boards of directors of
Northeast Ventures and LAREX. Northeast Ventures is a $7.8 million venture
capital fund investing in northeastern Minnesota. Minnesota Power purchased
a 21 percent interest in Northeast Ventures for $1 million in 1989 at a
time when there were no relationships between Northeast Ventures and
Minnesota Power or its Directors or employees. Minnesota Power invested in
Northeast Ventures as an economic development contribution and has agreed
that it would not withdraw its investment. Mr. Gregory Sandbulte, the son
of Minnesota Power Chairman Arend Sandbulte, is currently president of
Northeast Ventures. Mr. Nick Smith serves as chairman and CEO of Northeast
Ventures, and is a member of the Minnesota Power and LAREX boards of
directors. Geraldine R. VanTassel, Vice President - Corporate Resource
Planning of Minnesota Power, is a director of Northeast Ventures. Mr.
Gregory Sandbulte and Mr. Smith, along with a third party, are general
partners in Kolya Management Company, holding a five percent ownership
interest. Mr. Bo Nickoloff, the son of Mr. Robert Nickoloff, is an employee
of LAREX.
19
Minnesota Power Common Stock Performance
The following graph compares the Company's cumulative total shareholder
return on its Common Stock with the cumulative return of the S&P 500 and the
Duff & Phelps Electric Utility Index over the preceding five calendar years. The
Duff & Phelps Electric Utility Index includes 89 of the largest investor-owned
electric utilities in the U.S. The calculations assume a $100 investment on
December 31, 1990, and reinvestment of all dividends at the time paid.
[GRAPHIC MATERIAL OMITTED - PERFORMANCE GRAPH]
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Minnesota Power 100.00 132.22 147.85 149.59 124.34 150.54
S&P 500 100.00 130.34 140.27 154.34 156.44 215.01
Duff & Phelps Electrics 100.00 128.78 140.24 153.30 137.05 175.38
- --------------------------------------------------------------------------------
ITEM NO. 2 - APPOINTMENT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors of the Company has
recommended the appointment of Price Waterhouse as independent accountants for
the Company for the year 1996. Price Waterhouse has acted in the same capacity
since October 1963.
A representative of the accounting firm will be present at the Annual
Meeting of Shareholders, will have an opportunity to make a statement if he or
she so desires, and will be available to respond to appropriate questions.
In connection with the 1995 audit, Price Waterhouse reviewed the
Company's annual report, examined the related financial statements, and reviewed
interim financial statements and certain of the Company's filings with the
Federal Energy Regulatory Commission and the Securities and Exchange Commission.
The Board of Directors recommends a vote in favor of the appointment of
Price Waterhouse as the Company's independent accountants for 1996.
20
- --------------------------------------------------------------------------------
ITEM NO. 3 - RECOMMENDED APPROVAL OF THE
MINNESOTA POWER
EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN
- --------------------------------------------------------------------------------
At its meeting on January 22 and 23, 1996, the Board of Directors
adopted the Minnesota Power Executive Long-Term Incentive Compensation Plan
(Plan), subject to approval by the shareholders. The following is a summary of
the material features of the Plan.
The Plan is intended to replace the existing Long-Term Incentive Plan,
which has four-year performance periods, the last of which will end on December
31, 1998.
A vote in favor of the Plan will be deemed also to be a vote in favor
of the performance goals as set forth in the Plan.
Purpose of the Plan
The purpose of the Plan is to promote the success and enhance the value
of the Company by linking participants' personal interests to those of Company
shareholders and customers, providing participants with an incentive for
outstanding performance. The Plan is further intended to assist the Company in
its ability to motivate, attract and retain the services of participants upon
whom the successful conduct of its operations is largely dependent.
Effective Date and Duration
The Plan became effective on January 1, 1996, subject to approval by
the shareholders, and shall remain in effect, subject to the right of the Board
of Directors to terminate the Plan at any time, until all shares subject to the
Plan shall have been purchased or acquired. No grants may be made under the Plan
after the tenth anniversary of the effective date.
Amendments
The Board may, at any time and from time to time, alter, amend,
suspend or terminate the Plan in whole or in part; provided, however, that no
amendment which requires shareholder approval in order for the Plan to continue
to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended,
(Exchange Act) shall be effective unless approved by the shareholders.
Administration of the Plan
The Plan will be administered by the Executive Compensation Committee
of the Board of Directors (which consists exclusively of outside directors) or
by such other committee (Committee) consisting of not less than three
non-employee directors appointed by the Board of Directors. The Committee will,
to the extent necessary, be comprised solely of directors qualified to
administer the Plan pursuant to Rule 16b-3 of the Exchange Act and Treas. Reg.
Section 1.162-27(e)(3) with respect to grants made to certain key executive
officers (Key Executives). Compliance with this requirement is one of the
factors necessary to enable the
21
Company to avoid the income tax deduction limitations under Section 162(m) of
the Code (Section 162(m) Limitations) on annual compensation in excess of
$1,000,000.
Shares Subject to the Plan
The Plan authorizes the grant of up to 2,100,000 shares of Minnesota
Power Common Stock. Shares underlying grants that lapse, are forfeited or are
not paid in stock may be reused for subsequent grants. Shares may be (i)
authorized but unissued shares of Common Stock or (ii) shares purchased on the
open market. The market value of Company Common Stock as of March 1, 1996 was
$27.625.
If any corporate transaction occurs that causes a change in the
capitalization of the Company, the Committee is authorized to make such
adjustments to the number and class of shares of stock delivered, and the number
and class and/or price of shares of Common Stock subject to outstanding grants
made under the Plan, as it deems appropriate and equitable to prevent dilution
or enlargement of participants' rights.
Eligibility and Participation
Employees eligible to participate in the Plan include officers and key
employees of the Company and its subsidiaries, as determined by the Committee,
including employees who are members of the Board of Directors, but excluding
directors who are not employees. It is anticipated that the approximate number
of employees who will be eligible initially to participate under the Plan will
be at least 100.
Grants under the Plan
Stock Options
The Committee may grant incentive stock options (ISOs), nonqualified
stock options or a combination thereof under the Plan. The option price for each
such grant shall be the closing sale price of Company stock on the date of
grant. Options shall expire at such times as the Committee determines at the
time of grant; provided, however, that no option shall be exercisable later than
the tenth anniversary of its grant. Simultaneously with the grant of an option,
a participant may receive dividend equivalents, which entitle the participant to
a right to receive the value of the dividends paid with respect to the number of
shares held under option from the date of grant to the date of exercise. The
Committee will determine at the time that dividend equivalents are granted the
conditions, if any, to which the payment of such dividend equivalents is
subject.
Options granted under the Plan shall be exercisable at such times and
subject to such restrictions and conditions as the Committee shall approve;
provided that no option may be exercisable prior to six (6) months following its
grant. The option exercise price is payable in cash, in shares of Common Stock
of the Company having a fair market value equal to the exercise price, by share
withholding or in a combination of the foregoing. The Committee may allow, along
with other means of exercise, cashless exercise as permitted under the Federal
Reserve Board's Regulation T, subject to the applicable securities laws.
22
Stock Appreciation Rights
Stock Appreciation Rights (SARs) granted under the Plan may be in the
form of freestanding SARs, tandem SARs or a combination thereof. The base value
of a freestanding SAR shall be equal to the closing sale price of a share of
Company Common Stock on the date of grant. The base value of a tandem SAR shall
be equal to the option price of the related option. No SAR granted under the
Plan may be exercisable prior to six (6) months following its grant. The term of
any SAR granted under the Plan shall be determined by the Committee, provided
that such term may not exceed ten (10) years.
Freestanding SARs may be exercised upon such terms and conditions as
are imposed by the Committee and set forth in the SAR grant agreement. A tandem
SAR may be exercised only with respect to the shares of Common Stock of the
Company for which its related option is exercisable.
Upon exercise of an SAR, a participant will receive the excess of the
fair market value of a share of Company Common Stock on the date of exercise
over the base value multiplied by the number of shares with respect to which the
SAR is exercised. Payment due to the participant upon exercise may be made in
cash, in shares of Company Common Stock having a fair market value equal to such
cash amount, or in a combination of cash and shares, as determined by the
Committee.
The maximum number of SARs which may be granted to any one participant
under the Plan in any calendar year is 20,000.
Restricted Stock
Restricted stock may be granted in such amounts and subject to such
terms and conditions as determined by the Committee.
Restricted stock may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated until the end of the applicable restricted
period; provided, however, that in no event may restricted stock granted under
the Plan vest prior to six (6) months following the date of its grant.
Participants holding restricted stock may exercise full voting rights
with respect to those shares during the restricted period and shall be credited
with regular cash dividends and other distributions paid with respect to such
shares. Subject to the Committee's right to determine otherwise at the time of
grant, dividends or distributions credited during the restricted period shall be
subject to the same restrictions on transferability and forfeitability as the
shares of restricted stock with respect to which they were paid. All dividends
credited shall be paid promptly following the vesting of the share of restricted
stock to which such dividends or other distributions relate.
Performance Units and Performance Shares
Performance units and performance shares may be granted in the amounts
and subject to such terms and conditions as determined by the Committee. The
23
Committee shall set performance goals, which, depending on the extent to which
they are met during the performance periods established by the Committee, will
determine the number and/or value of performance units/shares that will be paid
out to participants. Performance periods shall, in all cases, be at least six
(6) months in length.
Simultaneously with the grant of performance shares, the participant
may be granted dividend equivalents with respect to such performance shares.
Dividend equivalents shall constitute rights to be paid amounts equal to the
dividends declared on an equal number of outstanding shares on all payment dates
occurring during the period between the grant date of the performance shares and
the date the performance shares are earned or paid out.
Participants shall receive payment of the value of performance
units/shares earned after the end of the performance period, or at such later
time as the Committee may determine. Payment of performance units/shares shall
be made in cash and/or shares of Common Stock which have an aggregate fair
market value equal to the value of the earned performance units/shares after the
end of the applicable performance period, in such combination as the Committee
determines. Such shares may be granted subject to any restrictions deemed
appropriate by the Committee.
Unless and until the Committee proposes a change in such goals for
shareholder vote or applicable tax and/or securities laws change to permit
Committee discretion to alter such performance goals without obtaining
shareholder approval, to avoid the Section 162(m) Limitations, the performance
goals to be used for purposes of grants to Key Executives shall be based upon
any one or more of the following:
Total shareholder return (measured as the sum of share appreciation and
dividends declared).
Return on invested capital, assets, or net assets.
Share earnings/earnings growth.
Cash flow/cash flow growth.
Cost of services to consumers.
Growth in revenues, sales, operating income, net income, stock price
and/or earnings per share.
Return on shareholders equity.
Economic value created.
Customer satisfaction and/or customer service quality.
Operating effectiveness
24
The maximum payout to any one participant (i) with respect to
performance units granted in any calendar year is 200% of base salary determined
at the earlier of the beginning of the performance period and the time the
performance goals are set by the Committee and (ii) with respect to performance
shares in any calendar year is 20,000 shares.
Other Grants
The Committee may make other grants which may include, without
limitation, the grant of shares of Common Stock based upon certain specified
conditions and the payment of shares in lieu of cash under other Company
incentive or bonus programs in such manner and at such times as the Committee
determines.
Termination of Employment
In the event a participant's employment is terminated during a
performance period, before grants become exercisable or vested, or after they
become exercisable but before exercise, the Committee shall determine, at the
time of grant, participants' rights, if any, with respect to such grants.
Transferability
Grants may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution. A participant's rights shall be exercisable only by the
participant during his or her lifetime.
Change in Control
As of the effective date of a change in control,
(i) any option or SAR outstanding shall become immediately
exercisable;
(ii) any restriction period and restrictions imposed on restricted
stock shall be deemed to have expired;
(iii) the superior number of performance shares granted for the
entire performance period including dividend equivalents
for the entire performance period shall be paid out, in cash
or in stock, as determined by the Committee; and
(iv) any earned performance units or performance shares (as
increased by any dividend equivalents to the date of payment)
not yet paid out shall be paid out immediately, in cash or in
stock, as determined by the Committee. There shall not,
however, be any accelerated payout with respect to performance
grants made less than six (6) months prior to the change in
control.
For purposes of the above, a change in control of the Company shall be
deemed to have occurred as of the first day that any one or more of the
following events have occurred:
(i) the dissolution or liquidation of the Company;
25
(ii) a reorganization, merger or consolidation of the Company with
one or more unrelated corporations, as a result of which the
Company is not the surviving corporation;
(iii) the sale, exchange, transfer or other disposition of shares of
the Company Common Stock (or of the shares of the stock of any
person that is a shareholder of the Company) in one or more
transactions, related or unrelated, to one or more entities
unrelated to the Company if, as a result of such transactions,
any entity (or any entity and its affiliates) owns more than
twenty percent (20%) of the voting power of the outstanding
Company Common Stock;
(iv) a reorganization, merger or consolidation of the Company with
one or more unrelated corporations, if immediately after the
consummation of such transaction less than a majority of the
Board of Directors of the surviving corporation is comprised
of Continuing Directors. Continuing Director shall mean (i)
each member of the Board of Directors of the Company, while
such person is a member of the Board, who is not the other
party to the transaction, an Affiliate or Associate (as these
terms are defined in the Securities Exchange Act of 1934, as
amended) of such other party to the transaction, or a
representative of such other party or of any such Affiliate or
Associate, and was a member of the Board immediately prior to
the initial public announcement of a proposal relating to a
reorganization, merger or consolidation involving such other
party, or an Affiliate or Associate of such other party or
(ii) any person who subsequently becomes a member of the
Board, while such person is a member of the Board, who is not
the other party to the transaction, or an Affiliate or
Associate thereof, or a representative of such other party to
the transaction or of any such Affiliate or Associate, if such
person's nomination for election to the Board is recommended
or approved by two-thirds of the Continuing Directors then in
office; or
(v) the sale of all or substantially all of the assets of the
Company.
26
New Plan Benefits
Minnesota Power
Executive Long-Term Incentive Compensation Plan
- -------------------------------------------------------------------------------------------
Dollar Value of Number of
Name & Position Dollar Value Number of Performance Shares Performance Shares
of Options Options
- -------------------------------------------------------------------------------------------
Arend J. 0 0
Sandbulte, 1. 0 1. 0
Chairman & Chief 2. 0 2. 0
Executive Officer 3. 0 3. 0
- -------------------------------------------------------------------------------------------
Jack R. McDonald, 0 0
Executive Vice 1. 0 1. 0
President-Finance 2. 0 2. 0
and Corporate 3. 0 3. 0
Development
- -------------------------------------------------------------------------------------------
Robert D. Edwards, $37,653 5,570
Executive Vice 1. $ 43,338 1. 1,514
President and 2. 86,677 2. 3,028
President-MP-Electric 3. 173,353 3. 6,056
- -------------------------------------------------------------------------------------------
Donnie R. $26,269 3,886
Crandell, Senior 1. $ 30,228 1. 1,056
Vice 2. 60,456 2. 2,112
President-Corporate 3. 120,912 3. 4,224
Development
- -------------------------------------------------------------------------------------------
David G. Gartzke, $29,595 4,378
Senior Vice 1. $ 34,064 1. 1,190
President-Finance 2. 68,128 2. 2,380
and CFO 3. 136,255 3. 4,760
- -------------------------------------------------------------------------------------------
Executive Group $293,702 43,447
1. $ 344,416 1. 12,032
2. 688,803 2. 24,063
3. 1,377,607 3. 48,126
- -------------------------------------------------------------------------------------------
Non-Executive N/A N/A
Director Group
- -------------------------------------------------------------------------------------------
Non-Executive $508,764 75,261
Officer Employee 1. $ 811,891 1. 28,363
Group 2. 1,623,753 2. 56,725
3. 3,247,506 3. 113,450
- -------------------------------------------------------------------------------------------
Each Nominee for N/A N/A
Election as
Director
- -------------------------------------------------------------------------------------------
Each Associate of N/A N/A
any of such
Directors,
Executive Officers
or Nominees
- -------------------------------------------------------------------------------------------
Each other person N/A N/A
who received or is
to receive 5% of
such Options
- -------------------------------------------------------------------------------------------
- ------------------
1. Threshold
2. Target
3. Superior
27
The table reflects the number of stock options and performance shares
granted pursuant to the Plan on January 2, 1996, subject to approval of the Plan
by the shareholders.
The dollar value of the stock options is based on a combination
Black-Scholes, binomial pricing method. The stock options vest 50 percent on
January 2, 1997 and 50 percent on January 2, 1998, are exercisable at $28.625
per share, and expire on January 2, 2006. The value of the performance shares is
based on $28.625, the closing price of Minnesota Power Common Stock on January
2, 1996. Performance shares carry dividend equivalents which add to the number
of shares subject to the grant. Threshold, target, and superior award numbers in
the table reflect dividend equivalents expected to be accrued over the two year
performance period at the current dividend rate.
It is contemplated that additional grants under the Plan will be made
annually.
Federal Income Tax Consequences
The following is a brief description of the federal tax consequences
related to options awarded under the Plan.
Consequences to the Optionholder
Grant
- -----
There are no federal income tax consequences to the optionholder solely
by reason of the grant of ISOs and non-ISOs under the Plan.
Exercise
- --------
The exercise of an ISO is not a taxable event for regular federal
income tax purposes if certain requirements are satisfied, including the
restriction providing that the optionholder generally must exercise the option
no later than three (3) months following the termination of his or her
employment. However, such exercise may give rise to an alternative minimum tax
liability (see "Alternative Minimum Tax" below).
Upon the exercise of a non-ISO, the optionholder will generally
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares of Company Common Stock at the time of exercise over the
amount paid as the exercise price. The ordinary income recognized in connection
with the exercise by an optionholder of a non-ISO will be subject to both wage
and employment tax withholding.
The optionholder's tax basis in the shares acquired pursuant to the
exercise of an option will be the amount paid upon exercise plus, in the case of
a non-ISO, the amount of ordinary income recognized by the optionholder upon
exercise.
28
Qualifying Disposition
- ----------------------
If an optionholder disposes of shares of Company Common Stock acquired
upon the exercise of an ISO in a taxable transaction, and such disposition
occurs more than two years from the date on which the option is granted and more
than one year after the date on which the shares are transferred to the
optionholder pursuant to the exercise of the ISO, the optionholder will
recognize long-term capital gain or loss equal to the difference between the
amount realized upon such disposition and the optionholder's adjusted basis in
such shares (generally the option exercise price).
Disqualifying Disposition
- -------------------------
If the optionholder disposes of shares of Company Common Stock acquired
upon the exercise of an ISO (other than in certain tax-free transactions) within
two years from the date on which the ISO is granted or within one year after the
transfer of the shares to the optionholder pursuant to the exercise of the ISO,
then at the time of disposition the optionholder will generally recognize
ordinary income equal to the lesser of (i) the excess of such share's fair
market value on the date of exercise over the exercise price paid by the
optionholder or (ii) the optionholder's actual gain (i.e., the excess, if any,
of the amount realized on the disposition over the exercise price paid by the
optionholder). If the total amount realized on a taxable disposition (including
return of capital and capital gain) exceeds the fair market value on the date of
exercise, then the optionholder will recognize a capital gain in the amount of
such excess. If the optionholder incurs a loss on the disposition (i.e., if the
total amount realized is less than the exercise price paid by the optionholder),
then the loss will be a capital loss.
Other Disposition
- -----------------
If an optionholder disposes of shares of Company Common Stock acquired
upon exercise of a non-ISO in a taxable transaction, the optionholder will
recognize capital gain or loss in an amount equal to the difference between his
or her basis (as discussed above) in the shares sold and the total amount
realized upon disposition. Any such capital gain or loss (and any capital gain
or loss recognized on a disqualifying disposition of shares of Company Common
Stock acquired upon exercise of ISOs as discussed above) will be long-term
depending on whether the shares of Company Common Stock were held for more than
one year from the date such shares were transferred to the optionholder.
Alternative Minimum Tax
- -----------------------
Alternative minimum tax (AMT) is imposed in addition to, but only to
the extent it exceeds, the optionholder's regular tax for the taxable year.
Generally, AMT is computed at the rate of 26% on the excess of a taxpayer's
alternative minimum taxable income (AMTI) over the exemption amount, but only if
such excess amount does not exceed $175,000 ($87,500 in the case of married
29
individuals filing separate returns). The AMT tax rate is 28% of such excess
amount over the $175,000 ($87,500) amount. For these purposes, the exemption
amount is $45,000 for joint returns or returns of surviving spouses ($33,750 for
single taxpayers and $22,500 for married individuals filing separate returns),
reduced by 25% of the excess AMTI over $150,000 for joint returns or returns of
surviving spouses ($112,500 for single taxpayers and $75,000 for married
individuals filing separate returns). A taxpayer's AMTI is essentially the
taxpayer's taxable income adjusted pursuant to the AMT provisions and increased
by items of tax preference.
The exercise of ISOs (but not non-ISOs) will generally result in an
upward adjustment to the optionholder's AMTI in the year of exercise by an
amount equal to the excess, if any, of the fair market value of the stock on the
date of exercise over the exercise price. The basis of the stock acquired, for
AMT purposes, will equal the exercise price increased by the prior upward
adjustment of the taxpayer's AMTI due to the exercise of the option. This will
result in a corresponding downward adjustment to the optionholder's AMTI in the
year the stock is disposed of.
Consequences to the Company
There are no federal income tax consequences to the Company by reason
of the grant of ISOs or non-ISOs or the exercise of ISOs (other than
disqualifying dispositions).
At the time the optionholder recognizes ordinary income from the
exercise of a non-ISO, the Company will be entitled to a federal income tax
deduction in the amount of the ordinary income so recognized (as described
above), provided that the Company satisfies its withholding obligations
described below. To the extent the optionholder recognizes ordinary income by
reason of a disqualifying disposition of the stock acquired upon exercise of
ISOs, the Company will be entitled to a corresponding deduction in the year in
which the disposition occurs. Any deduction to which the Company may be entitled
may be limited by reason of the Section 162(m) Limitations, as described above.
The Company will be required to report to the Internal Revenue Service
any ordinary income recognized by any optionholder by reason of the exercise of
a non-ISO. The Company will be required to withhold income and employment taxes
(and pay the employer's shares of employment taxes) with respect to ordinary
income recognized by the optionholder upon the exercise of non-ISOs.
Other Tax Consequences
The foregoing discussion is not a complete description of the federal
income tax aspects of ISOs and non-ISOs under the Plan. In addition,
administrative and judicial interpretations of the application of the federal
income tax laws are subject to change. Furthermore, the foregoing discussion
does not address state or local tax consequences.
30
- --------------------------------------------------------------------------------
ITEM NO. 4 - RECOMMENDED APPROVAL OF THE
MINNESOTA POWER
DIRECTOR LONG-TERM STOCK INCENTIVE PLAN
- --------------------------------------------------------------------------------
At its meeting on January 22 and 23, 1996, the Board of Directors
adopted the Minnesota Power Director Long-Term Stock Incentive Plan (Plan),
subject to approval by the shareholders. The following is a summary of the
material features of the Plan.
The Plan is intended to replace the existing Director Long-Term
Incentive Plan, which has four-year performance periods, the last of which will
end on December 31, 1997. The Plan will cover the performance share grants
currently held under the old plan.
A vote in favor of the Plan will be deemed also to be a vote in favor
of the performance goals set forth in the Plan and a vote in favor of the grant
of shares under the old Directors' Long-Term Incentive Plan and the goals
relating thereto, all as set forth in the Plan.
Purpose of the Plan
The purpose of the Plan is to promote the success and enhance the value
of the Company by linking directors' personal interests to those of Company
shareholders. The Plan is further intended to assist the Company in its ability
to motivate, attract and retain highly qualified individuals to serve as
directors of the Company.
Effective Date and Duration
The Plan became effective on January 1, 1996, subject to approval by
the shareholders, and shall remain in effect, subject to the right of the Board
of Directors to terminate the Plan at any time, until all shares subject to the
Plan shall have been purchased or acquired. No grants may be made under the Plan
after the tenth anniversary of the effective date.
Amendments
The Board may, at any time and from time to time, alter, amend, suspend
or terminate the Plan in whole or in part; provided, however, that no amendment
which requires shareholder approval in order for the Plan to continue to comply
with Rule 16b-3 under the Exchange Act shall be effective unless approved by the
shareholders. Any provision of the Plan stating the amount, price and timing of
securities to be issued under the Plan shall not be amended more than once every
six months, other than to comport with changes in the Internal Revenue Code, the
Employee Retirement Income Security Act of 1974 or the rules thereunder.
31
Administration of the Plan
The Plan will be administered by a committee (Committee) appointed by
the Board of Directors consisting of not less than three persons who are not
eligible to participate in the Plan. Members of the Committee need not be
members of the Board.
Shares Subject to the Plan
The Plan authorizes the grant of up to 150,000 shares of Minnesota
Power Common Stock. Shares underlying grants that lapse or are forfeited may be
reused for subsequent grants. Shares may be (i) authorized but unissued shares
of Common Stock or (ii) shares purchased on the open market. The market value of
Company Common Stock as of March 1, 1996 was $27.625.
If any corporate transaction occurs that causes a change in the
capitalization of the Company, the Committee shall make such adjustments to the
number and class of shares of stock delivered, and the number and class and/or
price of shares of Common Stock subject to outstanding grants made under the
Plan, as it deems appropriate and equitable to prevent dilution or enlargement
of participants' rights.
Eligibility and Participation
Only non-employee directors of the Company are eligible to participate
in the Plan. The number of directors who will be eligible initially to
participate under the Plan will be 12.
Grants under the Plan
Stock Options
- -------------
On January 2, 1996 and on every January 2nd thereafter, each
non-employee director of the Company will receive a grant of 725 stock options.
The exercise price for each such grant shall be the closing sale price of
Company Common Stock on the date of grant. Options shall expire on the tenth
anniversary of the date of grant.
Options granted under the Plan shall be exercisable 50% on the first
anniversary of the date of grant and the remaining 50% on the second anniversary
of the date of grant. The option exercise price is payable in cash, in shares of
Common Stock of the Company having a fair market value equal to the exercise
price, by share withholding, cashless exercise or in a combination of the
foregoing.
Performance Shares
- ------------------
On January 2, 1996 and on every second January 2nd thereafter, each
non-employee director of the Company will receive a grant of performance shares
equal in number to $10,000 divided by the closing sale price of Company Common
Stock on the date of grant. Performance periods shall end on the December 31st
two years after the date of grant.
32
The participant shall also receive dividend equivalents with respect to
the number of performance shares subject to the grant. The dividend equivalents
credited on each Common Stock ex-dividend date during the performance period
shall be in the form of additional performance shares, shall be added to the
number of performance shares subject to the grant and shall equal the number of
shares (including fractional shares) that could be purchased on the ex-dividend
date, based on the closing sale price as reported in the consolidated
transaction reporting system on that date, with cash dividends that would have
been paid on performance shares, if such performance shares were shares.
The performance goal for each performance period is total shareholder
return (defined as stock price appreciation plus dividends reinvested on the
ex-dividend date throughout the performance period, divided by the fair market
value of a share at the beginning of the performance period) for the Company in
comparison to the total shareholder return for the 16 companies set forth in the
Plan over the performance period. The fair market value of shares is defined as
the closing price as reported on the composite reporting system on the first day
of the performance period.
First Performance Cycle (1996-1997)
- --------------------------------------------------------------------------------
Threshold Target Superior
- --------------------------------------------------------------------------------
% Payout 50% 100% 200%
- --------------------------------------------------------------------------------
Goal 40th percentile 50th percentile 75th percentile
- --------------------------------------------------------------------------------
Subsequent Performance Cycles (1998-1999 and thereafter)
- --------------------------------------------------------------------------------
Threshold Target Superior
- --------------------------------------------------------------------------------
% Payout 50% 100% 200%
- --------------------------------------------------------------------------------
Goal 47th percentile 65th percentile 88th percentile
- --------------------------------------------------------------------------------
No awards will be paid if the threshold percentiles are not reached.
Earned awards will range from 50% to 200% of the number of performance shares
granted (as increased by the dividend equivalents), based on the percentile
performance achieved by the Company. Straight line interpolation will be used
for results between those specified, rounded down to the nearest whole share.
Subject to the provisions for termination or change in control, 50% of
any earned performance shares (as increased by the dividend equivalents) shall
be paid after the end of the performance period promptly after determination of
the extent to which performance goals have been met. The remaining 50% of the
earned performance shares (as increased by the dividend equivalents) shall
continue to accrue dividend equivalents until paid out as set forth in the next
sentence. One-
33
half of the remaining earned performance shares (as increased by the dividend
equivalents) shall be paid out on the next January 2. The remaining performance
shares shall continue to accrue dividend equivalents and shall be paid out on
the following January 2.
Termination of Director Status
In the event a participant ceases to be a director of the Company by
reason of retirement or death:
(i) before the exercise period commences for an option, any
options not yet exercisable shall become exercisable
immediately and be exercisable in full at any time during the
one year period after retirement or death;
(ii) after the exercise period commences for an option, such
options may be exercised in full at any time during the one
year period after retirement or death, but in no event after
the exercise period has expired;
(iii) during a performance period for performance shares, the
participant (or his or her beneficiary or estate) shall
receive a payment of any earned performance shares (as
increased by dividend equivalents), promptly after
determination of the extent to which performance goals have
been met. The payout shall be prorated based upon the number
of months elapsed as of the date of retirement or death in
relation to the full performance period; and
(iv) after the end of a performance period, but before any or all
earned performance shares have been paid out, the participant
(or his or her beneficiary or estate) shall be entitled to a
full payout of all earned performance shares (as increased by
the dividend equivalents), which shall be paid promptly after
such occurrence.
Retirement is defined as resignation upon reaching retirement age, or
otherwise resigning or not standing for reelection with the approval of the
Board.
In the event a participant ceases to be a director of the Company for
any other reason (other than upon a change in control):
(i) all options not yet exercisable or exercised shall be
forfeited;
(ii) all performance shares and related dividend equivalent not yet
earned shall be forfeited; and
(iii) earned performance shares (as increased by dividend
equivalents) shall continue to accrue dividend equivalents
and shall be paid out as and when provided in Section 7.6
of the Plan.
34
Transferability
Grants may not be sold, transferred, pledged, assigned or otherwise
alienated or hypothecated, other than by will or by the laws of descent and
distribution. A participant's rights shall be exercisable only by the
participant during his or her lifetime.
Change in Control
As of the effective date of a change in control:
(i) any options outstanding shall become immediately exercisable;
(ii) the higher of (x) 100% of the number of performance shares
granted for the entire performance period and (y) the payout
based on actual performance for the performance period ending
on the date of the change in control (in either case after
giving effect to the accumulation of dividend equivalents),
prorated to reflect the number of months in the performance
period up to the date of the change in control in relation to
the full performance period, shall be paid out immediately in
shares; and
(iii) all earned performance shares (as increased by dividend
equivalents) not yet paid out shall be paid out immediately in
shares. There shall not, however, be any accelerated payout
with respect to performance share grants made less than six
(6) months prior to the change in control.
For purposes of the above, a change in control of the Company shall be
deemed to have occurred as of the first day that any one or more of the
following events have occurred:
(i) the dissolution or liquidation of the Company;
(ii) a reorganization, merger or consolidation of the Company with
one or more unrelated
corporations, as a result of which the Company is not the
surviving corporation;
(iii) the sale, exchange, transfer or other disposition of shares of
the Company Common Stock (or of the shares of the stock of any
person that is a shareholder of the Company) in one or more
transactions, related or unrelated, to one or more entities
unrelated to the Company if, as a result of such transactions,
any entity (or any entity and its affiliates) owns more than
twenty percent (20%) of the voting power of the outstanding
Company Common Stock; or
(iv) the sale of substantially all of the assets of the Company.
35
New Plan Benefits
Minnesota Power
Director Long-Term Stock Incentive Plan
(including award under old plan)
- ----------------------------------------------------------------------------------------------------------
Dollar Value of Number of
Dollar Value Number of Dollar Value Number of Performance Performance
Name & Position of Shares Shares of Options Options Shares Shares
- ----------------------------------------------------------------------------------------------------------
Non-Executive $176,845 6,178 $58,812 8,700 1. $69,044 1. 2,412
Director Group
2. 138,087 2. 4,824
3. 276,174 3. 9,648
- ----------------------------------------------------------------------------------------------------------
Each Nominee for $17,175 600 $4,901 725 1. $5,754 1. 207
Election as
Director 2. 11,507 2. 402
3. 23,015 3. 804
- ----------------------------------------------------------------------------------------------------------
- -------------------
1. Threshold
2. Target
3. Superior
The table reflects the number of stock options and performance shares
granted pursuant to the Plan on January 2, 1996, subject to approval of the Plan
by the shareholders.
The dollar value of the stock options is based on a combination
Black-Scholes, binomial pricing method. The stock options vest 50% on January 2,
1997 and 50% on January 2, 1998, are exercisable at $28.625 per share, and
expire on January 2, 2006. Performance shares carry dividend equivalents which
add to the number of shares subject to the grant. Threshold, target, and
superior award numbers in the table reflect dividend equivalents expected to be
accrued over the two year performance period at the current dividend rate. The
table also reflects the maximum award number and dollar value of shares granted
under the old Plan for the 1994 - 1997 performance cycle. The value of the
performance shares and the awards under the old Plan is based on $28.625, the
closing price of Minnesota Power Common Stock on January 2, 1996.
Additional grants of stock options will be made annually, and
additional grants of performance shares will be made every other year.
36
Federal Income Tax Consequences
The following is a brief description of the federal tax consequences
related to options awarded under the Plan.
Consequences to the Optionholder
Grant
- -----
There are no federal income tax consequences to the optionholder solely
by reason of the grant of an option under the Plan.
Exercise
- --------
Upon the exercise of an option, the optionholder will generally
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares of Company Common Stock at the time of exercise over the
amount paid as the exercise price.
The optionholder's tax basis in the shares acquired pursuant to the
exercise of an option will be the amount paid upon exercise plus the amount of
ordinary income recognized by the optionholder upon exercise.
Disposition of Shares Acquired Under an Option
- ----------------------------------------------
If an optionholder disposes of shares of Company Common Stock acquired
upon exercise of an option in a taxable transaction, the optionholder will
recognize capital gain or loss in an amount equal to the difference between his
basis (as discussed above) in the shares sold and the total amount realized upon
disposition. Any such capital gain or loss will be long-term depending on
whether the shares of Company Common Stock were held for more than one year from
the date such shares were transferred to the optionholder.
Consequences to the Company
There are no federal income tax consequences to the Company by reason
of the grant of options.
At the time the optionholder recognizes ordinary income from the
exercise of an option, the Company will be entitled to a federal income tax
deduction in the amount of the ordinary income so recognized (as described
above).
The Company will be required to report to the Internal Revenue Service
any ordinary income recognized by any optionholder by reason of the exercise of
an option.
37
Other Tax Consequences
The foregoing discussion is not a complete description of the federal
income tax aspects of options under the Plan. In addition, administrative and
judicial interpretations of the application of the federal income tax laws are
subject to change. Furthermore, the foregoing discussion does not address state
or local tax consequences.
Old Plan
The Company has previously made grants to outside directors under the
Directors' Long-Term Incentive Plan, which provides for maximum award
opportunities of 600 shares of Company Common Stock every other year. One
performance period (1994 - 1997) is still running under this plan, although no
new performance period will commence in 1996. On and after the effective date of
the new Plan, the shares relating to the existing performance period shall be
deemed to be covered by the new Plan and shall be counted against the number of
shares available under the new Plan, and their grant and the performance goals
shall be deemed to have been approved by Company shareholders by their approval
of the new Plan.
The old plan awards a maximum of 600 shares of Common Stock to each
outside director if, over a four-year period commencing with each even-numbered
year, total shareholder return (TSR) equals or exceeds (i) median TSR compared
to a pre-selected group of comparable utilities (listed below) and/or (ii) the
40th percentile TSR compared to companies in the Standard & Poor's 500. No
awards are granted to directors if Company results are below both of these
threshold performance levels. The comparison to comparable utilities and to the
S&P 500 companies is weighted 60 percent and 40 percent, respectively.
The first comparator group is comprised of:
MidAmerican Energy Company
IES Industries, Inc.
Interstate Power Company
Madison Gas & Electric Company
Northern States Power Company
Otter Tail Power Company
Wisconsin Energy Corporation
WPL Holdings, Inc.
Northwestern Public Service Company
Wisconsin Public Service Corporation
The second comparator group is the companies comprising the S&P 500.
38
After calculation of the Company's TSR ranking within the first and
second comparator groups, the schedule below indicates the percent of the
Director's Performance Award Opportunity actually earned.
Utility TSR Ranking
---------------------------------------------------------------
1-2 60 68 76 84 92 100
---------------------------------------------------------------
3 48 56 64 72 80 88
---------------------------------------------------------------
4 36 44 52 60 68 76
---------------------------------------------------------------
5 24 32 40 48 56 64
---------------------------------------------------------------
6 12 20 28 36 44 52
---------------------------------------------------------------
7-11 0 8 16 24 32 40
---------------------------------------------------------------
0-40 50 60 70 80 90
TSR Percentile Ranking in S&P 500
TSR is defined as:
TSR = Stock price appreciation + reinvested dividends
-----------------------------------------------------
Initial stock price
- Stock prices for the beginning and end of the period are the closing
prices on the composite reporting system on the first and last business
days of the period.
- Dividends are assumed to be reinvested on the ex-dividend date at the
closing stock prices on that date.
- Calculation of TSR for the S&P 500 group is based on the companies
included in the S&P 500 Index as of the end of the period.
- --------------------------------------------------------------------------------
OTHER BUSINESS
- --------------------------------------------------------------------------------
The Board of Directors does not know of any other business to be
presented at the meeting. However, if any other matters properly come before the
meeting, it is the intention of the persons named in the accompanying proxy to
vote pursuant to the proxies in accordance with their judgment in such matters.
It is important that all proxy cards be forwarded promptly in order
that the necessary vote may be present at the meeting. We respectfully request
that you sign and return the accompanying proxy card at your earliest
convenience.
By order of the Board of Directors,
Dated March 20, 1996
Philip R. Halverson
Corporate Secretary
39
Appendix
Appendix A Minnesota Power Executive Long-Term Incentive Compensation Plan
Appendix B Minnesota Power Director Long-Term Stock Incentive Plan
Appendix A
MINNESOTA POWER
EXECUTIVE LONG-TERM
INCENTIVE COMPENSATION PLAN
Effective 01/01/96
MINNESOTA POWER
EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN
1. Establishment, Purpose and Duration
1 Establishment of the Plan. Minnesota Power & Light Company,
a Minnesota corporation (hereinafter referred to as the "Company"), hereby
establishes an incentive compensation plan to be known as the "Minnesota Power
Executive Long-Term Incentive Compensation Plan" (hereinafter referred to as the
"Plan"), as set forth in this document. The Plan permits the grant of
Nonqualified Stock Options (NQSO), Incentive Stock Options (ISO), Stock
Appreciation Rights (SAR), Restricted Stock, Performance Units, Performance
Shares and other grants.
The Plan shall become effective as of January 1, 1996 (the "Effective
Date"), subject to shareholder approval, and shall remain in effect as provided
in Section 1.3 herein.
2 Purpose of the Plan. The purpose of the Plan is to promote
the success and enhance the value of the Company by linking the personal
interests of Participants to those of Company shareholders and customers,
providing Participants with an incentive for outstanding performance.
The Plan is further intended to assist the Company in its ability to
motivate, attract and retain the services of Participants upon whom the
successful conduct of its operations is largely dependent.
3 Duration of the Plan. The Plan shall commence on the
Effective Date, as described in Section 1.1 herein, and shall remain in effect,
subject to the right of the Board of Directors to terminate the Plan at any time
pursuant to Article 15 herein, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may a Grant be made under the Plan on or after the tenth anniversary of the
Effective Date.
2. Definitions
Whenever used in the Plan, the following terms shall have the meanings
set forth below and, when such meaning is intended, the initial letter of the
word is capitalized:
1 "Base Value" of an SAR shall have the meaning set forth in
Section 7.1 herein.
2 "Board" or "Board of Directors" means the Board of Directors of
the Company.
3 "Cause" means: (i) willful misconduct on the part of a Participant
that is detrimental to the Company or (ii) the conviction of a Participant for
the commission of a felony or crime involving moral turpitude. "Cause" under
either (i) or (ii) shall be determined in good faith by the Committee.
4 "Change in Control" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
(a) the dissolution or liquidation of the Company;
(b) a reorganization, merger or consolidation of the Company
with one or more unrelated corporations, as a result of which
the Company is not the surviving corporation;
(c) the sale, exchange, transfer or other disposition of shares of
the common stock of the Company (or shares of the stock of any
person that is a shareholder of the Company) in one or more
transactions, related or unrelated, to one or more Persons
unrelated to the Company if, as a result of such transactions,
any Person (or any Person and its affiliates) owns more than
twenty percent (20%) of the voting power of the outstanding
common stock of the Company; or
(d) a reorganization, merger or consolidation of the Company with
one or more unrelated corporations, if immediately after the
consummation of such transaction less than a majority of the
board of directors of the surviving corporation is comprised of
Continuing Directors. Continuing Director shall mean (i) each
member of the Board of Directors of the Company, while such
person is a member of the Board, who is not the other party to
the transaction, an Affiliate or Associate (as these terms are
defined in the Exchange Act) of such other party to the
transaction, or a representative of such other party or of any
such Affiliate or Associate, and was a member of the Board
immediately prior to the initial public announcement of a
proposal relating to a reorganization, merger or consolidation
involving such other party, or an Affiliate or Associate of such
other party or (ii) any person who subsequently becomes a member
of the Board, while such person is a member of the Board, who is
not the other party to the transaction, or an Affiliate or
Associate thereof, or a representative of such other party to
the transaction or of any such Affiliate or Associate, if such
person's nomination for election to the Board is recommended or
approved by two-thirds of the Continuing Directors then in
office;
(e) the sale of all or substantially all the assets of the Company.
5 "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
6 "Committee" means the committee, as specified in Article 3,
appointed by the Board to administer the Plan with respect to Grants.
7 "Company" means Minnesota Power & Light Company, a Minnesota
corporation, or any successor thereto as provided in Article 17 herein.
8 "Director" means any individual who is a member of the Board of
Directors of the Company.
9 "Disability" shall have the meaning ascribed to such term under
Section 22(e)(3) of the Code.
2
10 "Dividend Equivalent" means, with respect to Shares subject to
Options or Performance Shares, a right to an amount equal to dividends declared
on an equal number of outstanding Shares.
11 "Eligible Employee" means an employee who is eligible to
participate in the Plan, as set forth in Section 5.1 herein.
12 "Employee" means any full-time employee of the Company or of the
Company's Subsidiaries, who is not covered by any collective bargaining
agreement to which the Company or any of its Subsidiaries is a party. Directors
who are not otherwise employed by the Company shall not be considered Employees
under the Plan. For purposes of the Plan, transfer of employment of a
Participant between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
13 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, or any successor act thereto.
14 "Exercise Period" means the period during which an SAR or Option
is exercisable, as set forth in the related Grant Agreement.
15 "Fair Market Value" means the closing sale price as reported in
the composite reporting system or, if there is no such sale on the relevant
date, then on the last previous day on which a sale was reported.
16 "Freestanding SAR" means an SAR that is granted independently of
any Options.
17 "Grant" means, individually or collectively, a grant under the
Plan of NQSOs, ISOs, SARs, Restricted Stock, Performance Units, Performance
Shares or any other type of grant permitted under Article 10 of the Plan.
18 "Grant Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions applicable
to a Grant made to a Participant under the Plan.
19 "Incentive Stock Option" or "ISO" means an option to purchase
Shares, granted under Article 6 herein, which is designated as an
Incentive Stock Option and satisfies the requirements of Section 422 of the
Code.
20 "Insider means an Employee who is, on the relevant date, an
officer, director or ten percent (10%) beneficial owner of the Common Stock of
the Company, as defined under Section 16 of the Exchange Act.
21 "Named Executive Officer" means a Participant who, as of the
date of vesting and/or payout of a Grant, is one of the group of "covered
employees," as defined in the Regulations promulgated under Code Section 162(m),
or any successor statute.
3
22 "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
23 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
24 "Option Price" means the price at which a Share may be purchased
by a Participant pursuant to an Option, as determined by the Committee and set
forth in the Option Grant Agreement.
25 "Participant" means an Employee who has outstanding a Grant made
under the Plan.
26 "Performance Unit" means a Grant made to an Employee, as
described in Article 9 herein.
27 "Performance Share" means a Grant made to an Employee, as
described in Article 9 herein.
28 "Period of Restriction" means the period during which the
transfer of Restricted Stock is limited, as provided in Article 8 herein.
29 "Person shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof
including usage in the definition of a "group" in Section 13(d) thereof.
30 "Restricted Stock" means a Grant of Shares made to a Participant
pursuant to Article 8 herein.
31 "Retirement" shall, with respect to a Participant, have the
meaning ascribed to such term in the tax-qualified defined benefit pension plan
maintained by the Company for the benefit of such Participant.
32 "Shares" means the shares of common stock of the Company, without
par value.
33 "Stock Appreciation Right" or "SAR" means a right, granted alone
or in connection with a related Option, designated as an SAR, to receive a
payment on the day the right is exercised, pursuant to the terms of Article 7
herein. Each SAR shall be denominated in terms of one Share.
34 "Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company as that term is defined in Section 424(f) of the
Code.
35 "Tandem SAR" means an SAR that is granted in connection
with a related Option, the exercise of which shall require forfeiture of the
right to purchase a Share under the related Option (and when a Share is
purchased under the Option, the Tandem SAR shall be similarly canceled).
4
3. Administration
1 The Committee. The Plan shall be administered by the
Executive Compensation Committee of the Board, or by any other Committee
appointed by the Board consisting of not less than three (3) non-employee
Directors. The members of the Committee shall be appointed from time to time by,
and shall serve at the discretion of, the Board of Directors.
The Committee, to the extent necessary, shall be comprised solely of
Directors who are eligible to administer the Plan pursuant to Rule 16b-3 under
the Exchange Act and Treas. Reg. 1.162-27(e)(3) with respect to Grants made to
Named Executive Officers. However, if for any reason the Committee does not
qualify to administer the Plan, as contemplated by Rule 16b-3 under the Exchange
Act or Treas. Reg. 1.162-27(e)(3), the Board of Directors may appoint a new
Committee so as to comply with Rule 16b-3 and Treas. Reg. 1.162-27(e)(3).
2 Authority of the Committee. The Committee shall have full
power except as limited by law, the Articles of Incorporation and the Bylaws of
the Company, subject to such other restricting limitations or directions as may
be imposed by the Board and subject to the provisions herein, to determine the
size and types of Grants; to determine the terms and conditions of such Grants
in a manner consistent with the Plan; to construe and interpret the Plan and any
agreement or instrument entered into under the Plan; to establish, amend or
waive rules and regulations for the Plan's administration; and (subject to the
provisions of Article 15 herein) to amend the terms and conditions of any
outstanding Grant. Further, the Committee shall make all other determinations
which may be necessary or advisable for the administration of the Plan. As
permitted by law, the Committee may delegate its authorities as identified
hereunder.
3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its shareholders, Employees, Participants and their
estates and beneficiaries.
4 Costs. The Company shall pay all costs of administration of the
Plan.
4. Shares Subject to the Plan
1 Number of Shares. Subject to Section 4.2 herein, the maximum
number of Shares available for grant under the Plan shall be two million
(2,000,000). Shares underlying lapsed or forfeited Grants, or Grants that are
not paid in stock, may be reused for other Grants. Shares may be (i) authorized
but unissued shares of Common Stock or (ii) shares purchased on the open market.
2 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, share combination or other change in the corporate structure
of the Company affecting the Shares, such adjustment shall be made in the number
and class of Shares which may be delivered under the Plan, and in the number and
class of and/or price of Shares subject to outstanding Grants made under the
Plan, as may be determined to be appropriate and equitable by the Committee, in
its sole discretion, to prevent dilution or enlargement of rights; provided,
however, that the number of Shares subject to any Grant shall always be a whole
number.
5
5. Eligibility and Participation
1 Eligibility. Persons eligible to participate in the Plan include
all officers and key employees of the Company and its Subsidiaries, as
determined by the Committee, including Employees who are members of the Board,
but excluding Directors who are not Employees.
2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees those to
whom Grants shall be made and shall determine the nature and amount of each
Grant.
6. Stock Options
1 Grant of Options. Subject to the terms and conditions of the Plan,
Options may be granted to an Eligible Employee at any time and from time to
time, as shall be determined by the Committee. The Committee shall have complete
discretion in determining the number of Shares subject to Options granted to
each Participant (subject to Article 4 herein) and consistent with the
provisions of the Plan, in determining the terms and conditions pertaining to
such Options; provided, however, the maximum number of shares subject to Options
which may be granted to any single Participant during any one calendar year is
twenty thousand (20,000). The Committee may grant ISOs, NQSOs or a combination
thereof.
2 Option Grant Agreement. Each Option grant shall be evidenced by
an Option Grant Agreement that shall specify the Option Price, the duration of
the Option, the number of Shares to which the Option pertains, the Exercise
Period and such other provisions as the Committee shall determine. The Option
Grant Agreement also shall specify whether the Option is intended to be an ISO
or a NQSO.
3 Option Price. The Option Price for each Option granted under the
Plan shall be the Fair Market Value of a Share on the date of grant.
4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary of its date
of grant.
5 Dividend Equivalents. Simultaneously with the grant of an Option,
the Participant receiving the Option may be granted Dividend Equivalents with
respect to the Shares subject to such Option. Dividend Equivalents shall
constitute rights to amounts equal to the dividends declared on an equal number
of outstanding Shares on all payment dates occurring during the period between
the grant date of an Option and the date the Option is exercised. The Committee
shall determine at the time Dividend Equivalents are granted the conditions, if
any, to which the payment of such Dividend Equivalents is subject.
6 Exercise of and Payment for Options. Options granted under the
Plan shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve, which need not be
the same for each Grant or for each Participant. However, in no event may an
Option granted under the Plan become exercisable prior to six (6) months
following the date of its grant.
6
A Participant may exercise an Option at any time during the Exercise
Period. Options shall be exercised by the delivery of a written notice of
exercise to the Company, setting forth the number of Shares with respect to
which the Option is to be exercised, accompanied by provisions for full payment
for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), (c) by share withholding or
(d) by a combination of (a), (b) and/or (c).
The Committee also may allow cashless exercise as permitted under
Federal Reserve Board's Regulation T, subject to applicable securities law
restrictions, or by any other means which the Committee determines to be
consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of
exercise of an Option and provisions for full payment therefor, the Company
shall deliver to the Participant, in the Participant's name, Share certificates
in an appropriate amount based upon the number of Shares purchased under the
Option(s).
7 Restrictions on Share Transferability. The Committee may impose
such restrictions on any Shares acquired pursuant to the exercise of an Option
under the Plan as it may deem advisable, including, without limitation,
restrictions to comply with applicable Federal securities laws, with the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded and with any blue sky or state securities laws applicable
to such Shares.
8 Termination of Employment. Each Option Grant Agreement shall set
forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participant's employment with the Company
and its Subsidiaries. Such provisions shall be determined in the sole discretion
of the Committee, shall be included in the Option Grant Agreement entered into
with Participants, need not be uniform among all Options granted pursuant to the
Plan or among Participants and may reflect distinctions based on the reasons for
termination of employment.
9 Nontransferability of Options. No Option granted under the Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all Options granted to a Participant under the Plan shall be
exercisable during his or her lifetime only by such Participant or his or her
legal representative.
7. Stock Appreciation Rights
1 Grant of SARs. Subject to the terms and conditions of the Plan,
an SAR may be granted to an Eligible Employee at any time and from time to time,
as shall be determined by the Committee. The Committee may grant Freestanding
SARs, Tandem SARs or any combination of these forms of SAR.
7
The Committee shall have complete discretion in determining the number
of SARs granted to each Participant (subject to Article 4 herein) and,
consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such SARs; provided, however, the maximum number of
SARs which may be granted to any single Participant during any one calendar year
is twenty thousand (20,000).
The Base Value of a Freestanding SAR shall equal the Fair Market Value
of a Share on the date of grant of the SAR. The Base Value of Tandem SARs shall
equal the Option Price of the related Option. In no event shall any SAR granted
hereunder become exercisable within the first six (6) months of its grant.
2 SAR Grant Agreement. Each SAR grant shall be evidenced by an SAR
Grant Agreement that shall specify the number of SARs granted, the Base Value,
the term of the SAR (not to exceed ten (10) years), the Exercise Period and such
other provisions as the Committee shall determine.
3 Exercise of Tandem SARs. Tandem SARs may be exercised for all or
part of the Shares subject to the related Option upon the surrender of the right
to exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
Notwithstanding any other provision of the Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
4 Exercise of Freestanding SARs. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole discretion,
imposes upon them.
5 Exercise and Payment of SARs. A Participant may exercise an SAR
at anytime during the Exercise Period. SARs shall be exercised by the delivery
of a written notice of exercise to the Company, setting forth the number of SARs
being exercised. Upon exercise of an SAR, a Participant shall be entitled to
receive payment from the Company in an amount equal to the product of:
(a) the excess of (i) the Fair Market Value of a Share on the date
of exercise over (ii) the Base Value of the SAR, multiplied by
(b) the number of Shares with respect to which the SAR is exercised.
At the sole discretion of the Committee, the payment upon SAR exercise
may be in cash, in Shares of equivalent value, or in some combination thereof.
8
6 Termination of Employment. Each SAR Grant Agreement shall set
forth the extent to which the Participant shall have the right to exercise the
SAR following termination of the Participant's employment with the Company and
its Subsidiaries. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the SAR Grant Agreement entered into with
Participants, need not be uniform among all SARs granted pursuant to the Plan or
among Participants and may reflect distinctions based on the reasons for
termination of employment.
7 Nontransferability of SARs. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all SARs
granted to a Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant or his or her legal representative.
8. Restricted Stock
1 Grant of Restricted Stock. Subject to the terms and conditions
of the Plan, Restricted Stock may be granted to Eligible Employees at any time
and from time to time, as shall be determined by the Committee. The Committee
shall have complete discretion in determining the number of shares of Restricted
Stock granted to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and conditions
pertaining to such Restricted Stock.
2 Restricted Stock Grant Agreement. Each Restricted Stock grant
shall be evidenced by a Restricted Stock Grant Agreement that shall specify the
Period or Periods of Restriction, the number of Restricted Stock Shares granted
and such other provisions as the Committee shall determine.
3 Transferability. Except as provided in this Article 8, Restricted
Stock granted herein may not be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Grant Agreement. However, in no event may any Restricted Stock granted under the
Plan become vested in a Participant prior to six (6) months following the date
of its grant. All rights with respect to the Restricted Stock granted to a
Participant under the Plan shall be available during his or her lifetime only to
such Participant.
4 Certificate Legend. Each certificate representing Restricted
Stock granted pursuant to the Plan may bear a legend substantially as follows:
"The sale or other transfer of the shares of stock represented by
this certificate, whether voluntary, involuntary or by operation of
law, is subject to certain restrictions on transfer as set forth in
the Minnesota Power Executive Long-Term Incentive Compensation
Plan, and in a Restricted Stock Grant Agreement. A copy of such
Plan and such Agreement may be obtained from Minnesota Power &
Light Company."
The Company shall have the right to retain the certificates representing
Restricted Stock in the Company's possession until such time as all restrictions
applicable to such Shares have been satisfied.
5 Removal of Restrictions. Except as otherwise provided in this
Article 8, Restricted Stock shall become freely transferable by the
Participant after the last day of the Period of Restriction applicable thereto.
Once Restricted Stock is released from the restrictions, the Participant
shall be entitled to have the legend referred to in Section 8.4 removed from
his or her stock certificate.
9
6 Voting Rights. During the Period of Restriction, Participants
holding Restricted Stock may exercise full voting rights with respect to
those Shares.
7 Dividends and Other Distributions. During the Period of
Restriction, Participants holding Restricted Stock shall be credited with all
regular cash dividends paid with respect to all Shares while they are so held.
All cash dividends and other distributions paid with respect to Restricted Stock
shall be credited to Participants subject to the same restrictions on
transferability and forfeitability as the Restricted Stock with respect to which
they were paid. If any such dividends or distributions are paid in Shares, such
Shares shall be subject to the same restrictions on transferability and
forfeitability as the Restricted Stock with respect to which they were paid.
Subject to the restrictions on vesting and the forfeiture provisions, all
dividends credited to a Participant shall be paid to the Participant promptly
following the full vesting of the Restricted Stock with respect to which such
dividends were paid. The provisions of this Section 8.7 are subject to the right
of the Committee to determine otherwise at the time of grant.
8 Termination of Employment. Each Restricted Stock Grant
Agreement shall set forth the extent to which the Participant shall have the
right to receive unvested Restricted Shares following termination of the
Participant's employment with the Company and its Subsidiaries. Such provisions
shall be determined in the sole discretion of the Committee, shall be included
in the Restricted Stock Grant Agreement entered into with Participants, need not
be uniform among all grants of Restricted Stock or among Participants and may
reflect distinctions based on the reasons for termination of employment.
9. Performance Units and Performance Shares
1 Grant of Performance Units and Performance Shares. Subject to
the terms of the Plan, Performance Units and/or Performance Shares may be
granted to an Eligible Employee at any time and from time to time, as shall be
determined by the Committee. The Committee shall have complete discretion in
determining the number of Performance Units and/or Performance Shares granted to
each Participant (subject to Article 4 herein) and, consistent with the
provisions of the Plan, in determining the terms and conditions pertaining to
such Grants; provided, however, the maximum payout to any single Participant
with respect to Performance Units granted in any one calendar year shall be 200%
of base salary determined at the earlier of the beginning of the Performance
Period and the time the performance goals are set by the Committee and with
respect to Performance Shares shall be twenty thousand (20,000) shares.
2 Performance Unit/Performance Share Grant Agreement. Each grant
of Performance Units and/or Performance Shares shall be evidenced by a
Performance Unit and/or Performance Share Grant Agreement that shall specify the
number of Performance Units and/or Performance Shares granted, the initial value
(if applicable), the Performance Period, the performance goals and such other
provisions as the Committee shall determine, including, but not limited to, any
right to Dividend Equivalents during or after the Performance Period.
10
3 Value of Performance Units/Shares. Each Performance Unit shall
have an initial value that is established by the Committee at the time of grant.
The value of a Performance Share shall equal the value of one Share. The
Committee shall set performance goals in its discretion which, depending on the
extent to which they are met, will determine the number and/or value of
Performance Units/Shares that will be paid out to the Participants. The time
period during which the performance goals must be met shall be called a
"Performance Period." Performance Periods shall, in all cases, be at least six
(6) months in length.
Unless and until the Committee proposes for shareholder vote a change
in the general performance goals set forth below, the attainment of which shall
serve as a basis for the determination of the number and/or value of Performance
Units and/or Performance Shares granted under the Plan, the performance goals to
be used for purposes of grants to Named Executive Officers shall be based upon
any one or more of the following:
(a) Total shareholder return (measured as the sum of Share
appreciation and dividends declared).
(b) Return on invested capital, assets or net assets.
(c) Share earnings/earnings growth.
(d) Cash flow/cash flow growth.
(e) Cost of services to consumers.
(f) Growth in revenues, sales, operating income, net income, stock
price and/or earnings per share.
(g) Return on shareholders equity.
(h) Economic value created.
(i) Customer satisfaction and/or customer service quality.
(j) Operating effectiveness.
In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance goals without obtaining
shareholder approval of such changes and without losing any income tax benefits
to the Company, the Committee shall have sole discretion to make such changes
without obtaining shareholder approval.
4 Earning of Performance Units/Shares. After the applicable
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive payout with respect to the Performance Units/Shares earned
by the Participant over the Performance Period, to be determined as a function
of the extent to which the corresponding performance goals have been achieved.
11
5 Form and Timing of Payment of Performance Units/Shares.
Payment of earned Performance Units/Shares shall be made following the close of
the applicable Performance Period or at such later time as the Committee, in its
sole discretion, may determine. The Committee, in its sole discretion, may pay
earned Performance Units/Shares in cash or in Shares (or in a combination
thereof), which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period. Such Shares may be granted subject to any restrictions deemed
appropriate by the Committee.
6 Dividend Equivalents. Simultaneously with the grant of Performance
Shares, the Participant may be granted Dividend Equivalents with respect to such
Performance Shares. Dividend Equivalents shall constitute rights to amounts
equal to the dividends declared on an equal number of outstanding Shares on all
payment dates occurring during the period between the grant date and the date
the Performance Shares are earned or paid out. The Committee shall determine at
the time Dividend Equivalents are granted the conditions, if any, to which the
payment of such Dividend Equivalents is subject.
7 Termination of Employment. Each Grant Agreement shall set forth
the extent to which the Participant shall have the right to receive a
Performance Unit/Share payout following termination of the Participant's
employment with the Company and its Subsidiaries. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the
Grant Agreement entered into with the Participants, need not be uniform among
all grants of Performance Units/Shares or among Participants and may reflect
distinctions based upon reasons for termination of employment.
8 Nontransferability. Performance Units/Shares may not be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, a
Participant's rights under the Plan shall be exercisable during the
Participant's lifetime only by the Participant or the Participant's legal
representative.
10. Other Grants
The Committee shall have the right to make other Grants which may
include, without limitation, the grant of Shares based on certain conditions,
the payment of cash based on performance criteria established by the Committee,
and the payment of Shares in lieu of cash under other Company incentive or bonus
programs. Payment under or settlement of any such Grants shall be made in such
manner and at such times as the Committee may determine.
11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries other
than the spouse.
12
12. Deferrals
The Committee may permit a Participant to defer such Participant's
receipt of the payment of cash or the delivery of Shares that would otherwise be
due to such Participant by virtue of (1) the exercise of an SAR or (2) the
satisfaction of any requirements or goals with respect to any Grants. If any
such deferral election is permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
13. Rights of Employees
1 Employment. Nothing in the Plan shall interfere with or limit in
any way the right of the Company to terminate any Participant's employment at
any time, for any reason or no reason in the Company's sole discretion, nor
confer upon any Participant any right to continue in the employ of the Company.
2 Participation. No Employee shall have the right to be selected to
receive a Grant under the Plan, or, having been so selected, to be selected to
receive a future Grant.
14. Change in Control
Upon the occurrence of a Change in Control, as defined herein, unless
otherwise specifically prohibited by the terms of Article 18 herein or unless
the Committee provides otherwise prior to the Change in Control:
(a) Any and all Options and SARs granted hereunder shall become
immediately exercisable;
(b) Any restriction periods and restrictions imposed on Restricted
Stock shall be deemed to have expired;
(c) With respect to all outstanding Grants of Performance Units,
Performance Shares and other performance-based Grants, there
shall be paid out immediately to Participants the superior number
of Performance Units or Shares granted for the entire Performance
Period as increased by Dividend Equivalents for the entire
Performance Period. Payment shall be made in cash or in stock, as
determined by the Committee. However, there shall not be an
accelerated payout under this Section 14(c) with respect to Grants
of Performance Units, Performance Shares or other performance-based
Grants which were made less than six (6) months prior to the
effective date of the Change in Control; and
13
(d) All earned Performance Units, Performance Shares and other
performance-based Grants (as increased by any Dividend Equivalents
to the date of payment) not yet paid out shall be paid out
immediately, in cash or in stock, as determined by the Committee.
15. Amendment, Modification and Termination
1 Amendment, Modification and Termination. The Board may, at any
time and from time to time, alter, amend, suspend or terminate the Plan in whole
or in part; provided, however, that no amendment which requires shareholder
approval in order for the Plan to continue to comply with Rule 16b-3 under the
Exchange Act, including any successor to such Rule, shall be effective unless
such amendment shall be approved by the requisite vote of the shareholders of
the Company entitled to vote thereon.
2 Grants Previously Made. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Grant previously made
under the Plan, without the written consent of the Participant holding such
Grant unless such termination, modification or amendment is required by
applicable law.
16. Withholding
1 Tax Withholding. The Company shall have the power and the right
to deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy Federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to a
Grant made under the Plan.
2 Share Withholding. With respect to withholding required upon
the exercise of Options or SARs, upon the lapse of restrictions on Restricted
Stock, or upon any other taxable event arising out of or as a result of Grants
made hereunder, Participants may elect, subject to the approval of the
Committee, to satisfy the withholding requirement, in whole or in part, by
having the Company withhold Shares having a Fair Market Value on the date the
tax is to be determined equal to the minimum statutory total tax which could be
imposed on the transaction. All elections shall be irrevocable, made in writing
and signed by the Participant.
17. Successors
All obligations of the Company under the Plan, with respect to Grants
made hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
14
18. Legal Construction
1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine, the
plural shall include the singular and the singular shall include the plural.
2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
3 Requirements of Law. The making of Grants and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
Notwithstanding any other provision set forth in the Plan, if required
by the then-current Section 16 of the Exchange Act, any "derivative security" or
"equity security" offered pursuant to the Plan to any Insider may not be sold or
transferred within the minimum time limits specified or required in such rule.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16a-1 under the Exchange Act.
4 Securities Law Compliance. With respect to Insiders, transactions
under the Plan are intended to comply with all applicable conditions of the
Federal securities laws. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
5 Governing Law. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with, and
governed by, the laws of the State of Minnesota.
MINNESOTA POWER
By Edwin L. Russell
---------------------------
Its Chief Executive Officer
Attest:
By Philip R. Halverson
-----------------------------------
Corporate Secretary
15
Appendix B
MINNESOTA POWER
DIRECTOR LONG-TERM
STOCK INCENTIVE PLAN
Effective 01/01/96
MINNESOTA POWER
DIRECTOR LONG-TERM STOCK INCENTIVE PLAN
1. Establishment, Purpose and Duration
1 Establishment of the Plan. Minnesota Power & Light Company,
a Minnesota corporation (hereinafter referred to as the "Company"), hereby
establishes an outside director plan to be known as the "Minnesota Power
Director Long-Term Stock Incentive Plan" (hereinafter referred to as the
"Plan"), as set forth in this document. The Plan provides for the automatic
grant of Stock Options and Performance Shares to non-employee directors.
The Plan shall become effective as of January 1, 1996 (the "Effective
Date"), subject to shareholder approval, and shall remain in effect as provided
in Section 1.3 herein.
2 Purpose of the Plan. The purpose of the Plan is to promote
the success and enhance the value of the Company by linking the personal
interests of directors to those of Company shareholders. The Plan is further
intended to assist the Company in its ability to motivate, attract and retain
highly qualified individuals to serve as directors of the Company.
3 Duration of the Plan. The Plan shall commence on the
Effective Date, as described in Section 1.1 herein, and shall remain in effect,
subject to the right of the Board of Directors to terminate the Plan at any time
pursuant to Article 12 herein, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may a Grant be made under the Plan on or after the tenth anniversary of the
Effective Date.
4 Long-Term Incentive Plan. The Company has previously made
grants to outside directors under the Directors' Long-Term Incentive Plan, which
provides for maximum award opportunities of 600 shares of Company common stock
every other year. The terms of this plan are set forth in Annex A hereto. One
performance period (1994-1997) is still running under this plan, although no new
performance period will commence in 1996. On and after the Effective Date, the
shares relating to the existing performance period shall be deemed to be covered
by this Plan and shall be counted against the number of shares available under
this Plan, and their grant and the performance goals shall be deemed to have
been approved by Company shareholders by their approval of this Plan.
2. Definitions
Whenever used in the Plan, the following terms shall have the meanings
set forth below and, when such meaning is intended, the initial letter of the
word is capitalized:
1 "Board" or "Board of Directors" means the Board of Directors of
the Company.
2 "Change in Control" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
(a) the dissolution or liquidation of the Company;
(b) a reorganization, merger or consolidation of the Company
with one or more unrelated corporations, as a result of which the
Company is not the surviving corporation;
(c) the sale, exchange, transfer or other disposition of shares
of the common stock of the Company (or shares of the stock of any
person that is a shareholder of the Company) in one or more
transactions, related or unrelated, to one or more Persons
unrelated to the Company if, as a result of such transactions,
any Person (or any Person and its affiliates) owns more than
twenty percent (20%) of the voting power of the outstanding
common stock of the Company; or
(d) the sale of all or substantially all the assets of the Company.
3 "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
4 "Committee" means the committee, as specified in
Article 3, appointed by the Board to administer the Plan with respect to Grants.
5 "Company" means Minnesota Power & Light Company, a Minnesota
corporation, or any successor thereto as provided in Article 15 herein.
6 "Director" means any individual who is a member of the
Board of Directors of the Company.
7 "Dividend Equivalent" means, with respect to Shares subject to
Performance Shares, a right to be paid an amount equal to any and all dividends
declared on an equal number of outstanding Shares.
8 "Employee" means any full-time employee of the Company or of the
Company's Subsidiaries, who is not covered by any collective bargaining
agreement to which the Company or any of its Subsidiaries is a party. Directors
who are not otherwise employed by the Company shall not be considered Employees
under the Plan.
2
9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
10 "Exercise Period" means the period during which an Option is
exercisable, as set forth in the related Grant Agreement.
11 "Fair Market Value" means the closing sale price as reported in
the composite reporting system or, if there was no such sale on the relevant
date, then on the last previous day on which a sale was reported.
12 "Grant" means, individually or collectively, a grant under the
Plan of Stock Options and Performance Shares and the grant made under the
Directors' Long-Term Incentive Plan referred to in Section 1.4 herein.
13 "Grant Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions applicable
to a Grant made to a Participant under the Plan.
14 "Insider" means an Employee who is, on the relevant date, an
officer, director or ten percent (10%) beneficial owner of the common stock of
the Company, as defined under Section 16 of the Exchange Act.
15 "Option or "Stock Option" means an option to purchase Shares,
granted under Article 6 herein.
16 "Option Price" means the price at which a Share may be purchased
by a Participant pursuant to an Option, set forth in the Grant Agreement.
17 "Participant" means any person who is elected or appointed to
the Board of Directors of the Company and who is not an Employee.
18 "Performance Period" means the time period during which
performance goals must be met.
19 "Performance Share" means a Grant made to a Participant, as
described in Article 7 herein.
20 "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof
including usage in the definition of a "group" in Section 13(d) thereof.
21 "Plan Year" means the period commencing on the Effective Date of
the Plan and ending the next following December 31 and thereafter the calendar
year.
3
22 "Retirement" means resignation from the Board upon reaching
retirement age, or otherwise resigning or not standing for reelection with the
approval of the Board.
23 "Shares" means the shares of common stock of the Company,
without par value.
24 "Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company as that term is defined in Section 424(f) of the
Code.
3. Administration
1 The Committee. The Plan shall be administered by a committee (the
"Committee") appointed by the Board consisting of not less than three persons
who are not eligible to participate in the Plan. The members of the Committee
shall be appointed from time to time by, and shall serve at the discretion of,
the Board of Directors. Members of the Committee need not be members of the
Board.
2 Authority of the Committee. The Committee shall have full power
except as limited by law, the Articles of Incorporation and the Bylaws of the
Company, subject to such other restricting limitations or directions as may be
imposed by the Board and subject to the provisions herein, to construe and
interpret the Plan and any agreement or instrument entered into under the Plan
and to establish, amend or waive rules and regulations for the Plan's
administration. Further, the Committee shall make all other determinations which
may be necessary or advisable for the administration of the Plan. As permitted
by law, the Committee may delegate its authorities as identified hereunder.
3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its shareholders, the Participants and their estates and
beneficiaries.
4 Costs. The Company shall pay all costs of administration of the
Plan.
4. Shares Subject to the Plan
1 Number of Shares. Subject to Section 4.2 herein, the maximum
number of Shares available for grant under the Plan shall be one hundred fifty
thousand (150,000). Shares underlying lapsed or forfeited grants may be reused
for other grants. Shares may be (i) authorized but unissued shares of common
stock or (ii) shares purchased on the open market.
4
2 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, share combination or other change in the corporate structure
of the Company affecting the Shares, such adjustment shall be made in the number
and class of Shares which may be delivered under the Plan, and in the number and
class of and/or price of Shares subject to outstanding Grants made under the
Plan, as may be determined to be appropriate and equitable by the Committee, in
its sole discretion, to prevent dilution or enlargement of rights; provided,
however, that the number of Shares subject to any Grant shall always be a whole
number.
5. Eligibility and Participation
Persons eligible to participate in the Plan are any persons elected or
appointed to the Board of Directors of the Company, who are not Employees.
6. Stock Options
1 Grant of Options. On the first business day after the
Effective Date and on each January 2nd thereafter (or on the first business day
thereafter if January 2nd is not a business day), 725 Options shall be granted
to each Participant.
2 Option Grant Agreement. Each Option grant shall be evidenced by
an Option Grant Agreement that shall specify the Option Price, the duration of
the Option, the number of Shares to which the Option pertains and the Exercise
Period.
3 Option Price. The Option Price for each Option grant under the
Plan shall be the Fair Market Value of a Share on the date of grant.
4 Duration of Options. Each Option shall expire on the tenth
anniversary of the date of grant.
5 Exercise Period and Exercise. 50% of the Options shall become
exercisable on the first anniversary of the date of grant; the remaining 50% of
the Options shall become exercisable on the second anniversary of the date of
grant.
Subject to the provisions of Article 8 herein, a Participant may
exercise an Option at any time during the Exercise Period. Options shall be
exercised by the delivery of a written notice of exercise to the Company,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by provisions for full payment for the Shares.
5
The Option Price upon exercise of any Option shall be payable to the
Company in full either (a) in cash or its equivalent, (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), (c) by share withholding,
(d) by cashless exercise or (e) by a combination of (a), (b) (c) and/or (d).
As soon as practicable after receipt of a written notification of
exercise of an Option and provisions for full payment therefor, the Company
shall deliver to the Participant, in the Participant's name, Share certificates
in an appropriate amount based upon the number of Shares purchased under the
Option(s).
7. Performance Shares
1 Grant of Performance Shares. On the first business day after the
Effective Date and on every second January 2nd thereafter (or on the first
business day thereafter, if January 2nd is not a business day), Performance
Shares, equal in number to $10,000 divided by the Fair Market Value for a Share
on the date of Grant, shall be granted to each Participant.
2 Dividend Equivalents. The Participant shall also
receive Dividend Equivalents with respect to the number of Performance Shares
subject to the Grant. The Dividend Equivalents credited on each common stock
ex-dividend date during the Performance Period shall be in the form of
additional Performance Shares, shall be added to the number of Performance
Shares subject to the Grant and shall equal the number of Shares (including
fractional Shares) that could be purchased on the ex-dividend date, based on the
closing sale price as reported in the consolidated transaction reporting system
on that date, with cash dividends that would have been paid on Performance
Shares, if such Performance Shares were Shares.
3 Performance Share Grant Agreement. Each grant of Performance
Shares shall be evidenced by a Performance Share Grant Agreement that shall
specify the date of grant, the number of Performance Shares granted and the
Performance Period. Performance Periods shall end on the December 31st two years
after the date of grant.
Performance Goals. The Performance Goal for each Performance Period is
total shareholder return (defined as stock price appreciation plus dividends
reinvested on the ex-dividend date throughout the Performance Period, divided by
the Fair Market Value of a share at the beginning of the Performance Period) for
the Company in comparison to the total shareholder return for the 16 companies
set forth in Annex B hereto over the Performance Period.
6
First Performance Cycle (1996-1997)
Threshold Target Superior
--------- ------ --------
% Payout 50% 100% 200%
Goal 40th percentile 50th percentile 75th percentile
Subsequent Performance Cycles (1998-1999 and thereafter)
Threshold Target Superior
--------- ------ --------
% Payout 50% 100% 200%
Goal 47th percentile 65th percentile 88th percentile
No awards will be paid if the threshold percentiles are not reached.
Earned awards will range from 50% up to 200% of the number of Performance Shares
granted (as increased by the Dividend Equivalents), based on the percentile
reached. Straight line interpolation will be used for results between those
specified, rounded down to the nearest whole Share.
If any company listed on Annex B hereto no longer exists, whether by
merger into another company, dissolution or for any other reason, no replacement
company shall be named unless the number of companies still remaining on the
list is reduced below 12, in which case the Company's independent compensation
consulting firm shall select replacement companies to bring the number back to
16.
4 Earning of Performance Shares. After the applicable Performance
Period has ended, the holder of Performance Shares shall receive a payout with
respect to the Performance Shares earned by the Participant over the Performance
Period, to be determined as a function of the extent to which the corresponding
performance goals have been achieved.
5 Form and Timing of Payment of Performance Shares. Subject to the
provisions of Articles 8 and 11, 50% of any earned Performance Shares (as
increased by the Dividend Equivalents) shall be paid after the end of the
Performance Period promptly after determination of the extent to which
Performance Goals have been met. The remaining 50% of the earned Performance
Shares (as increased by the Dividend Equivalents) shall continue to accrue
Dividend Equivalents, as set forth in Section 7.2 above, until paid out as set
forth in the next sentence. One-half of the remaining earned Performance Shares
(as increased by the Dividend Equivalents) shall be paid out on the first
business day in January, 1999. The remaining Performance Shares shall continue
to accrue Dividend Equivalents and shall be paid out on the first business day
in January, 2000.
Payment shall be made in Minnesota Power common stock.
7
8. Termination of Director Status
1 Retirement or Death. In the event a Participant ceases to be a
Director of the Company by reason of Retirement or death
(i) before the Exercise Period commences for a Stock Option
Grant, any Stock Options not yet exercisable shall become
exercisable immediately and may be exercisable in full at
any time during the one year period after Retirement or death;
(ii) after the Exercise Period commences for a Stock Option Grant,
such Stock Options may be exercised in full at any time during the
one year period after Retirement or death, but in no even after
the Exercise Period has expired;
(iii) during a Performance Period for Performance Shares, the
Participant (or his beneficiary or estate) shall receive a payment
of any earned Performance Shares (as increased by the Dividend
Equivalents), promptly after determination of the extent to which
Performance Goals have been met. The payment shall be prorated
based upon the number of complete and partial calendar months
within the Performance Period which have elapsed as of the date of
Retirement or death in relation to the number of calendar months
in the full Performance Period; and
(iv) after the end of a Performance Period, but before any or all
earned Performance Shares have been paid out, the Participant (or
his beneficiary or estate) shall be entitled to a full payout of
all earned Performance Shares (as increased by the Dividend
Equivalents), which shall be paid promptly after such occurrence.
2 Other. Except as set forth in Article 11 herein, in the event a
participant ceases to be a director of the Company for any other reason
(i) all Stock Options not yet exercisable or exercised shall be
forfeited;
(ii) all Performance Shares and related Dividend Equivalents
not yet earned shall be forfeited; and
(iii) all earned Performance Shares (as increased by Dividend
Equivalents) shall continue to accrue Dividend Equivalents and
shall be paid out as and when provided in Section 7.6 above.
8
9. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee and will be effective only when filed by the
Participant in writing with the Committee during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
The spouse of a married Participant domiciled in a community property
jurisdiction shall join in any designation of beneficiary or beneficiaries other
than the spouse.
10. Continuation of Directors in Same Status
Nothing in the Plan or any action taken pursuant to the Plan
shall be construed as creating or constituting evidence of any agreement or
understanding, express or implied, that the Company will retain a Director as a
director or in any other capacity for any period of time or at a particular
retainer or other rate of compensation, as conferring upon any Participant any
legal or other right to continue as a director or in any other capacity, or as
limiting, interfering with or otherwise affecting the right of the Company to
terminate a Participant in his capacity as a director or otherwise at any time
for any reason, with or without cause, and without regard to the effect that
such termination might have upon him as a Participant under the Plan.
11. Change in Control
Upon the occurrence of a Change in Control, as defined herein, unless
otherwise specifically prohibited by the terms of Article 16 herein:
(a) Any and all Options granted hereunder shall become immediately
exercisable;
(b) With respect to all outstanding Grants of Performance
Shares, the Committee (i) shall determine the greater of (x) the
payout at 100% of the number of Performance Shares granted for
the entire Performance Period and (y) the payout based upon
actual performance for the Performance Period ending as of the
effective date of the Change in Control, in either case after
giving effect to accumulation of Dividend Equivalents and (ii)
shall pay to the Participants immediately the greater of such
amounts, in Shares, prorated based upon the number of complete
and partial calendar months within the Performance Period which
have elapsed as of the effective date of the Change in Control
in relation to the number of calendar months in the full
Performance Period. However, there shall not be an accelerated
payout under this Section 11(b) with respect to Grants of
Performance Shares which were made less than six (6) months
prior to the effective date of the Change in Control; and
9
(c) All earned Performance Shares (as increased by Dividend
Equivalents) not yet paid out shall be paid out immediately.
12. Amendment, Modification and Termination
1 Amendment, Modification and Termination. The Board may, at
any time and from time to time, alter, amend, suspend or terminate the Plan in
whole or in part; provided, however, that no amendment which requires
shareholder approval in order for the Plan to continue to comply with Rule 16b-3
under the Exchange Act, including any successor to such Rule, shall be effective
unless such amendment shall be approved by the requisite vote of the
shareholders of the Company entitled to vote thereon. Notwithstanding the
foregoing, any provision of the Plan that either states the amount and price of
securities to be issued under the Plan and specifies the timing of such
issuances, or sets forth a formula that determines the amount, price and timing
of such issuances, shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, or the rules thereunder.
2 Grants Previously Made. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Grant previously made
under the Plan, without the written consent of the Participant holding such
Grant unless such termination, modification or amendment is required by
applicable law.
13. Restrictions on Share Transferability
The Committee may impose such restrictions on any Shares acquired
pursuant to the exercise of an Option or the payment of Performance Shares under
the Plan as it may deem advisable, including, without limitation, restrictions
to comply with applicable Federal securities laws, with the requirements of any
stock exchange or market upon which such Shares are then listed and/or traded
and with any blue sky or state securities laws applicable to such Shares.
14. Nontransferability
No Options or Performance Shares granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, a
Participant's rights under the Plan shall be exercisable during his or her
lifetime only by such Participant or his or her legal representative.
10
15. Successors
All obligations of the Company under the Plan, with respect to Grants
made hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
16. Legal Construction
1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine, the
plural shall include the singular and the singular shall include the plural.
2 Severability. In the event any provision of the Plan shall
be held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
3 Requirements of Law. Neither the Plan nor the Company shall
be obligated to issue any shares of common stock pursuant to the Plan at any
time unless and until all applicable requirements imposed by any federal and
state securities and other laws, rules and regulations, by any regulatory
agencies or by any stock exchanges upon which the common stock may be listed
have been fully met. As a condition precedent to any issuance of shares of
common stock and delivery of certificates evidencing such shares pursuant to the
Plan, the Board or the Committee may require a Participant to take any such
action or make any such covenants, agreements and representations as the Board
or the Committee, as the case may be, in its discretion deems necessary or
advisable to ensure compliance with such requirements. The Company shall in no
event be obligated to register the shares of common stock deliverable under the
Plan pursuant to the Securities Act of 1933, as amended, or to qualify or
register such shares under any securities laws of any state upon their issuance
under the Plan or at any time thereafter, or to take any other action in order
to cause the issuance and delivery of such shares under the Plan or any
subsequent offer, sale, or other transfer of such shares to comply with any such
law, regulation or requirement. Participants are responsible for complying with
all applicable federal and state securities and other laws, rules, and
regulations in connection with any offer, sale, or other transfer of the shares
of common stock issued under the Plan or any interest therein including, without
limitation, compliance with the registration requirements of the Securities Act
of 1933 as amended (unless an exception therefrom is available) or with the
provisions of Rule 144 promulgated thereunder, if applicable, or any successor
provisions. Certificates for shares of common stock may be legended as the
Committee shall deem appropriate.
Notwithstanding any other provision set forth in the Plan, if required
by the then-current Section 16 of the Exchange Act, any "derivative security" or
"equity security" offered pursuant to the Plan to any Insider may not be sold or
transferred within the minimum time limits specified or required in such rule.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16a-1 under the Exchange Act.
11
4 Securities Law Compliance. With respect to Insiders,
transactions under the Plan are intended to comply with all applicable
conditions of the Federal securities laws. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
Governing Law. To the extent not preempted by Federal law,
the Plan, and all agreements hereunder, shall be construed in accordance with,
and governed by, the laws of the State of Minnesota.
.
.
.
MINNESOTA POWER
By E. L. Russell
----------------------------
Its Chief Executive Officer
Attest:
By Philip R. Halverson
----------------------------------------
Corporate Secretary
12
ANNEX A
Directors' Long-Term Incentive Plan
The plan awards a maximum of 600 shares of common stock to
each outside director if, over a four-year period commencing with each
even-numbered year, total shareholders return (TSR) equals or exceeds (i) median
TSR compared to a pre-selected group of comparable utilities (listed below)
and/or (ii) the 40.0 percentile TSR compared to companies in the Standard &
Poor's 500. No awards are granted to directors if Company results are below both
of these threshold performance levels. The comparison to comparable utilities
and to the S&P 500 companies is weighted 60% and 40%, respectively.
The first comparator group is comprised of:
Midamerican Energy Company
IES Industries, Inc.
Interstate Power Company
Madison Gas & Electric Company
Northern States Power Company
Otter Tail Power Company
Wisconsin Energy Corporation
WPL Holdings, Inc.
Northwestern Public Service Company
Wisconsin Public Service Corporation
The second comparator group is the companies comprising the
S&P 500.
After calculation of the Company's TSR ranking within the
first and second comparator groups, the schedule below indicates the percent of
the Director's Performance Award Opportunity actually earned.
Utility TSR Ranking
- -------------------
-----------------------------------------------------------------
1-2 60 68 76 84 92 100
-----------------------------------------------------------------
3 48 56 64 72 80 88
-----------------------------------------------------------------
4 36 44 52 60 68 76
-----------------------------------------------------------------
5 24 32 40 48 56 64
-----------------------------------------------------------------
6 12 20 28 36 44 52
-----------------------------------------------------------------
7-11 0 8 16 24 32 40
-----------------------------------------------------------------
0-40 50 60 70 80 90
TSR Percentile Ranking in S&P 500
---------------------------------
13
TSR is defined as:
TSR = Stock price appreciation + reinvested dividends
-----------------------------------------------
Initial stock price
- Stock prices for the beginning and end of the period are the
closing prices on the composite reporting system on the first
and last business days of the period.
- Dividends are assumed to be reinvested on the ex-dividend
date at the closing stock prices on that date.
- Calculation of TSR for the S&P 500 group is based on the
companies included in the S&P 500 Index as of the end of the
period.
14
ANNEX B
Black Hills Corp.
Central & South West
CILCORP Inc.
Eastern Utilities Assoc.
Florida Progress Corp.
Hawaiian Electric Indust.
Mid American Energy
MDU Resources Group
Montana Power Co.
New England Electric Sys.
PacifiCorp
Potomac Electric Power
Public Service Enterprise
SCEcorp
TECO Energy Inc.
UtiliCorp United, Inc.
15
