On March 13, 2000, Dayton Ventures, Inc. and Dayton Ventures LLC, affiliates of Kohlberg Kravis Roberts & Co. LLC (KKR), purchased a combination of trust preferred securities issued by a trust established by DPL, voting preferred shares of DPL and warrants to purchase common shares of DPL for an aggregate of $550 million. The trust preferred securities were redeemed at par in 2001 with proceeds of a new issuance of trust preferred securities and DPL Senior Notes. The 6.6 million Series B voting preferred shares have voting power not exceeding 4.9% of the total outstanding voting power of DPL’s voting securities and were purchased by Dayton Ventures LLC for an aggregate purchase price of $68 thousand. The warrants to purchase 31.6 million common shares (representing approximately 19.9% of the common shares then outstanding) have a term of 12 years, an exercise price of $21 per share, and were purchased by Dayton Ventures LLC for an aggregate purchase price of $50 million. DPL has agreed to pay KKR an annual management, consulting and financial services fee of $1.0 million. The agreement also states that the Company will provide KKR with an opportunity to provide investment banking services on such terms as the parties may agree and at such time as any such services may be required. The Company has agreed to reimburse KKR and their affiliates all reasonable expenses incurred in connection with the services provided under this agreement, including travel expenses and expenses of its counsel. At December 31, 2003, DPL had paid KKR the annual $1.0 million management, consulting and financial services fee, paid $2.0 million in fees relating to managing KKR-sponsored investment funds, and subscribed to invest up to $190 million over time in KKR-sponsored investment funds.
The Securityholders and Registration Rights Agreement among DPL, DPL Capital Trust I, Dayton Ventures LLC and Dayton Ventures, Inc. gives affiliates of KKR the right to designate one person for election to, and one person to attend as a non-voting observer at all meetings of the DPL and DP&L Boards of Directors for as long as Dayton Ventures LLC and its affiliates continue to beneficially own at least 12.64 million common shares of DPL, including shares issuable upon exercise of warrants. Scott M. Stuart, a director during fiscal 2003, and George R. Roberts, a non-voting observer, were the KKR designees in 2003 pursuant to this agreement. Mr. Stuart resigned from the Board and Mr. Roberts ceased to be a non-voting observer of the Board as of April 2004.
In 1996, the Company entered into a consulting contract pursuant to which Peter H. Forster agreed to (i) serve, in a non-employee capacity, as Chairman of the Board of Directors of the Company, DP&L and MVE, a subsidiary of the Company that is primarily responsible for the management of the Company’s financial asset portfolio, and as Chairman of the Executive Committee of the Board of Directors of the Company and (ii) provide advisory and strategic planning consulting services. The consulting contract automatically renewed for a one-year term on each December 31 unless either party gave at least 15 months’ written notice of nonrenewal. The consulting contract would have continued for at least 36 months following a change of control. The Company was also obligated to require any successor to all or substantially all of its business or assets to assume the consulting contract. In April 2003, Mr. Forster’s Consulting Agreement was modified to amend Annex A to his agreement (regarding the MVE Incentive Program, described below).
For his service as Chairman, Mr. Forster’s contract provided for (i) director’s and similar fees as are customarily paid to other non-employee directors, including stock awards under DP&L’s Directors’ Deferred Stock Compensation Plan; (ii) an additional opportunity for Mr. Forster to receive 35,000 of the Company’s common shares on each January 1 during the term of the contract, subject to earning and vesting criteria; (iii) participation in DP&L’s 1991 Amended Directors’ Deferred Compensation Plan; and (iv) other compensation and benefits as are customarily provided to other non-employee directors of the Company and DP&L.
For his service as a consultant, Mr. Forster’s contract provided for (i) an annual base consulting fee of $650,000 for the year ended December 31, 2003, and (ii) for calendar years 2000 and after, a bonus calculated in accordance with the MVE Incentive Program. The MVE Incentive Program provided for incentive compensation (an MVE Payment) based on the cumulative cash distributed to the Company or attributable to each separate investment made by any private equity partnership in which the Company has invested at any time prior to the termination of his contract, less the amount invested, expenses, bonuses previously paid and any losses, in which losses not offset against any year’s cash return are carried over and applied against cash returned in future years. Mr. Forster’s consulting contract stated that for 2003 and for each calendar year thereafter, Mr. Forster’s MVE Payment was equal to 2.75% of such amount.
Mr. Forster’s contract also provided for other benefits, including, without limitation, life, health, accident and disability insurance, and a death benefit of $1.0 million to Mr. Forster’s beneficiary and indemnification.
Ms. Muhlenkamp served as President and director of MVE from November 1998 and Group Vice President and interim Chief Financial Officer of the Company and DP&L from April 2003 to May 16, 2004. During 2003, her employment terms were governed by an employment agreement dated December 14, 2001 and a letter agreement dated December 15, 2000 that was signed in 2002.
The term of Ms. Muhlenkamp’s employment agreement commenced on December 14, 2001 and continued thereafter until terminated by the Company or Ms. Muhlenkamp at any time, with or without cause, upon 180 days written notice, except that if the Company terminated the agreement for cause (as defined in the agreement), no such notice was required. The agreement would have terminated upon Ms. Muhlenkamp’s death or disability. The Company was also obligated to require any successor to all or substantially all of its business or assets to assume her employment agreement.
Ms. Muhlenkamp’s agreement provided for (i) an annual base salary to be determined from time to time; (ii) an MVE Payment calculated in accordance with the MVE Incentive Program; and (iii) other standard fringe benefits, including medical, life and disability insurance, retirement benefits and continued participation in the Company’s Key Employees Deferred Compensation Plan. Ms. Muhlenkamp’s annual base salary was $314,000 in 2001, $364,000 in 2002 and $434,000 in 2003. Ms. Muhlenkamp’s employment agreement stated that for 2003 and for each calendar year thereafter, Ms. Muhlenkamp’s MVE Payment was equal to 2.25%.
Ms. Muhlenkamp’s agreement also provided for other benefits, including, without limitation, medical, life and disability insurance and retirement benefits.
In June 2001, with the approval of the Compensation Committee and Executive Committee, of which Mr. Forster was Chairman, the Company’s subsidiaries, MVE, of which Mr. Forster was Chairman, Miami Valley Development Company (MVDC) and Miami Valley Insurance Company, Inc. (MVIC), each entered into a management services agreement (the MSAs) with Valley Partners, Inc. (Valley) for the provision of ongoing oversight and management of each subsidiary’s financial asset holdings following a change of control of DPL or sale of the financial assets portfolio to an unaffiliated third party. Valley was a Florida corporation the sole stockholders, directors and officers of which are Mr. Forster and Ms. Muhlenkamp. Valley was formed in May 2001 following the Company’s initial receipt of third party interest in a transaction involving the Company and the MSAs were entered into during a time when the Company was negotiating with potential buyers of DPL and its financial asset portfolio. The MSAs by their terms would not become effective until this occurred.
The MSAs provided for the buyer of DPL or the financial asset portfolio to pay an annual management fee to Valley equal to 5% of the amount calculated pursuant to the MVE Incentive Program. However, under their consulting contract and employment agreement at the time the MSAs were entered into, Mr. Forster and Ms. Muhlenkamp, respectively, did not have any obligation to continue to provide management services for the financial asset portfolio following a sale of the portfolio or a change of control of DPL. At the time the MSAs were entered into, under his consulting contract, the Company and its subsidiaries were required to make MVE Payments to Mr. Forster equal to 2% of net realized profit on the financial asset portfolio. The Company and its subsidiaries were also required to provide an additional 3% for other MVE principals and staff, including Ms. Muhlenkamp whose percentage was subject to annual allocation. Subsequently, pursuant to amended agreements with the Company, Mr. Forster’s MVE Payment allocation percentage was increased to 2.75% and Ms. Muhlenkamp’s was set at the remaining 2.25%. The MSAs similarly provided that, in the event of the sale of all or any part of the financial asset portfolio, the transferee (and its subsequent transferees) would be required to assume the transferor’s obligations under the MSAs. Subsequent to the entering of the MSAs, Mr. Forster and Ms. Muhlenkamp each signed letter agreements agreeing that their MVE Payments would be paid to Valley as the annual management fee. The payments under the MSAs were to be payable irrespective of whether MVE, MVDC or MVIC or the transferee availed itself of the services, and regardless of whether Mr. Forster and Ms. Muhlenkamp personally performed the services or whether Valley engaged others to do so. Pursuant
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to the MSAs, certain accounting and administrative software and related hardware used to monitor the financial asset portfolio were to be transferred to Valley without additional consideration on the effective date of the MSAs. The MSAs were signed by Ms. Muhlenkamp on behalf of Valley and Mr. Koziar, MVE Secretary/Treasurer, on behalf of MVE, MVDC and MVIC.
In October 2001, with the approval of the Compensation Committee and the Executive Committee, the Company entered into an Administrative Services Agreement (the ASA) with Valley and the individual trustees of certain master trusts that hold the assets of various executive and director compensation plans. The ASA engaged Valley to provide administrative and recordkeeping functions on behalf of the master trusts upon a change of control of the Company in exchange for a 1.25% administration fee based on the market value of all assets of the master trusts. The ASA also called for Valley to provide investment advice as requested by the trustees. The 1.25% fee payable to Valley under the ASA was in addition to the annual management fee payable to Valley.
In October 2001, the Company and DP&L also entered into a Trustee Fee Agreement (the TFA) with Richard Chernesky, Richard Broock and Frederick Caspar, attorneys at Chernesky, Heyman & Kress P.L.L., a law firm that represents the Company. Upon a change of control of the Company or DP&L, Messrs. Chernesky, Broock and Caspar would become the sole trustees of the master trusts and would succeed to all of the duties of the Company’s Compensation Committee under the compensation plans funded through the master trusts in exchange for an annual fee of $500,000. This fee would not be reduced by payments made to Valley under the ASA.
On April 26, 2004, the Company entered into a new Trustee Fee Agreement (New TFA) with Messrs. Chernesky, Broock and Caspar that will become effective upon a change of control of the Company or DP&L. If the New TFA becomes effective, then it provides that Messrs. Chernesky, Broock and Caspar will serve as the sole trustees of the master trusts in exchange for an annual fee of $250,000 during the New TFA’s term. On October 14, 2004, at the request of the Company and DP&L, Messrs. Chernesky, Broock and Caspar submitted their resignations to the Company and DP&L.
The MSAs, ASA and TFA (the “Valley Partners Agreements”) were terminated by an agreement executed in January 2004, but effective as of December 15, 2003. The financial assets have not been sold or transferred and therefore the agreements never became effective and no compensation was ever paid under them.
18 Subsequent EventsAudit Committee Investigation and Related Matters
On March 10, 2004, the Company’s controller, Daniel Thobe, sent a memorandum (the Thobe Memorandum) to W August Hillenbrand, the Chairman of the Audit Committee of the Board of Directors (the Audit Committee). The Thobe Memorandum expressed Mr. Thobe’s “concerns, perspectives and viewpoints” regarding financial reporting and governance issues within the Company. The four general categories of issues identified by Mr. Thobe were: (i) “disclosure issues” concerning agreements with Valley Partners, Inc. (a company owned by Peter H. Forster, formerly DPL’s Chairman, and Caroline E. Muhlenkamp, formerly DPL’s Group Vice President and interim Chief Financial Officer), the reporting of executive perquisite compensation in the Company’s proxy statement, segment reporting concerning the Company’s subsidiary, MVE, and disclosure of Ms. Muhlenkamp’s compensation; (ii) “internal control issues” including a lack of information regarding certain journal entries and a lack of supporting documentation for travel-related expenses of certain senior executives; (iii) “process issues,” which include the processes relating to recent amendments to the Company’s deferred compensation plans, the classification of Mr. Forster as an independent contractor, and untimely payroll processing; and (iv) “communication issues” relating to changes to the 2003 management bonus that were not communicated to the staff and “current practices and processes” that have created an unfavorable “tone at the top” environment.
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On March 15, 2004, the Audit Committee retained the law firm of Taft, Stettinius & Hollister LLP (TS&H) to represent the Committee in an independent review of each of the matters raised by the Thobe Memorandum. TS&H subsequently retained an accounting firm as a forensic accountant to assist in this review. On April 27, 2004, TS&H submitted a written report of its findings to the members of the Audit Committee (the Report). A copy of the Report is filed as an exhibit to this Form 10-K. TS&H stated in its Report that no person had indicated to it, nor had it uncovered in the course of its review, any uncorrected material inaccuracies in the Company’s books and records. Further, TS&H reported that it had determined that some of Mr. Thobe’s concerns were based on incomplete information or were matters of judgment. TS&H did, however, recommend further follow-up by the Audit Committee and improvements relating to disclosures, communication, access to information, internal controls and the culture of the Company in certain areas.
The findings in the Report include:
(i) No material deficiency was found concerning the amounts reported as perquisites received by named executive officers in the Company’s recent proxy filings.
(ii) No new information was uncovered that would cause TS&H to conclude that the Company must change its position on the issue of segment reporting for its MVE, Inc. subsidiary. TS&H stated that the Company should continue to make this accounting judgement. As discussed in Note 13, the Company has since reevaluated the financial reporting requirements under FASB Statement of Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and Related Information” and concluded it was appropriate in 2003 to begin reporting its Financial Asset Portfolio as a separate business segment because of the increased executive-level attention and emphasis on financial reporting during the year.
(iii) There is evidence of a reasonable basis for the Company’s position that Ms. Muhlenkamp was not an executive officer prior to her appointment as Group Vice President and interim Chief Financial Officer in April 2003.
(iv) TS&H did not discover any uncorrected material inaccuracies in the Company’s journal entries.
(v) There is evidence to support the Company’s position that Mr. Forster was an independent contractor for tax purposes. The Company has consistently taken this position since 1996.
(vi) The Company’s employee bonus program appears to have been handled by the Company in accordance with its discretionary authority.
(vii) TS&H’s recommendation that the Company disclose and file certain agreements with Valley Partners, Inc., which are no longer in effect. Such disclosure is made in this Form 10-K and the agreements are attached as Exhibits.
(viii) Approximately $355,000 of business expense reimbursements of Mr. Forster and Ms. Muhlenkamp for the years 2001 through 2003 lacked complete documentation that would verify a business purpose. The Report also stated that approximately $335,000 of expenses related to use of the corporate aircraft by Messrs. Koziar and Forster and Ms. Muhlenkamp for the years 2001 through 2003 also lack complete documentation that would verify a business purpose. The Report stated Messrs. Koziar and Forster and Ms. Muhlenkamp have stated that they believe all such charges are legitimate business expenses.
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(ix) The Company’s deferred compensation plans were amended in December 2003, with the approval of the Compensation Committee to permit cash distributions to participants with balances in excess of $500,000 or mandated share holding amounts from their respective deferred compensation accounts. The effect was to permit cash distributions from such accounts only to Messrs. Forster and Koziar and Ms. Muhlenkamp. According to the report, the Company’s loss of future deductibility of the distributions to Mr. Koziar and Ms. Muhlenkamp resulted in a reduction in the Company’s after-tax income for 2003 of approximately $9.5 million. TS&H viewed the planning, presentation and adoption of these plan amendments as a process weakness by the Company’s management that should be addressed by the Compensation and Audit Committees. Note 7- Deferred Compensation Distributions contains disclosure of the resulting deferred compensation distributions to management. Notwithstanding this findings, as discussed in Note 7 and Note 16, the Company has initiated legal proceedings challenging the effectiveness of these amendments.
(x) An isolated instance of untimely payroll processing appears to have been caused by employee miscommunication during the period the Company converted its payroll to the ADP system.
(xi) The report notes several instances of weakness in internal communication and recommends that the Audit Committee review internal communication and employee access to information at the Company, as well as coordination with outside legal and accounting professionals.
(xii) The Report also notes that a scrubbing software program was installed and used on Mr. Forster’s computer before Mr. Forster delivered his computer to TS&H for forensics analysis.
(xiii) The Report includes recommendations for strengthening policies or procedures, or otherwise addressing the substance of TS&H’s findings.
Based upon information received after issuing the Report, TS&H revised its analysis and prepared a supplement to the Report, dated May 25, 2004 (the Supplement).
According to the Supplement:
(i) Except as specifically modified or amplified by the Supplement, the findings, conclusions and recommendations of the Report remain unchanged.
(ii) While additional information concerning business purpose was provided for many more of the travel and expense reimbursements, no additional documentation or receipts were provided by Mr. Forster or Ms. Muhlenkamp.
(iii) Additional information and documentation provided by senior management verified a business purpose for more of the personal usage of corporate aircraft by Messrs. Forster and Koziar and Ms. Muhlenkamp, thereby decreasing the potential underreported taxable income for such individuals from the original estimate of $335,000 to approximately $225,180.
(iv) TS&H reviewed the historical accrual of deferred compensation for Messrs. Forster and Koziar and Ms. Muhlenkamp from 1998 through 2003 and was provided some form of documentation relating to the Compensation Committee’s action or state of knowledge regarding each of the deferred compensation awards except for an award to Mr. Forster in the amount of $100,000 and an award to Ms. Muhlenkamp in the amount of $1,017,620.
The Audit Committee considered the Report and Supplement at a meeting held on May 16, 2004. After its review and consideration, the Audit Committee recommended that the full Board of Directors accept the Report and the Supplement. At a meeting held on May 16, 2004, the Board of Directors accepted the Report and Supplement, including the findings and recommendations set forth therein.
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The Audit Committee and the Company’s senior management continue to evaluate the Report and Supplement, and are considering what additional action, if any, to take in response to the findings and recommendations therein.
Governmental and Regulatory Inquiries
On or about June 24, 2004, the SEC commenced a formal investigation into the issues raised by the Thobe Memorandum. The Company is cooperating with the investigation.
On April 7, 2004, the Company received notice that the staff of the Public Utilities Commission of Ohio (PUCO) is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum. On May 27, 2004, the PUCO ordered DP&L to file a plan of utility financial integrity that outlines the actions the Company has taken or will take to insulate DP&L utility operations and customers from its unregulated activities. DP&L must file this plan within 120 days of the filing of its Form 10-K with the SEC. The Company and DP&L intend to comply with this order and to cooperate with the PUCO’s continuing investigation.
On May 20, 2004, the staff of the SEC notified the Company that it was conducting an inquiry covering the exempt status of the Company under the Public Utility Holding Company Act of 1935. The staff of the SEC has requested the Company provide certain documents and information on a voluntary basis. The Company is cooperating with the inquiry. On October 8, 2004, DPL received a notice from the SEC that a question exists as to whether such exemption from the Public Utility Holding Company Act may be detrimental to the public interest or the interests of investors or consumers. Under applicable rules, DPL will lose its exemption 30 days following this notice and be required to register as a holding company under the Public Utility Holding Company Act and become subject to additional regulation thereunder. However, DPL may delay the requirement to become registered so long as it files a good faith application seeking an order of exemption from the Securities and Exchange Commission. DPL will remain exempt pending a decision from the Securities and Exchange Commission on that application. DPL believes it has a good faith basis for seeking an order of exemption and expects to make a filing seeking that order within the 30 day period. DPL cannot predict what action the Securities and Exchange Commission may take in connection with its application or whether it will be able to remain an exempt holding company.
On May 28, 2004, the U.S. Attorney’s Office for the Southern District of Ohio, assisted by the Federal Bureau of Investigation, notified the Company that it has initiated an inquiry involving matters connected to the Company’s internal investigation. The Company is cooperating with this investigation.
Commencing on or about June 24, 2004, the Internal Revenue Service (IRS) has issued a series of data requests to the Company regarding issues raised in the Thobe Memorandum. The staff of the IRS has requested that the Company provide certain documents, including but not limited to, matters concerning executive/director deferred compensation plans, management stock incentive plans and MVE financial statements. The Company is cooperating with these requests.
On August 2, 2004 in order to strengthen MVIC’s financial position, the Vermont Department of Banking, Insurance, Securities and Health Care Administration notified MVIC of MVIC’s requirement to reduce its intercompany receivable to a maximum no greater than MVIC’s total capital and surplus plus $250,000 minimum capital. As a result, the Company plans to transfer $27.6 million from its operating cash to its subsidiary MVIC in satisfaction of this requirement during the fourth quarter of 2004. These funds will not be available for general operating purposes.
Private Placement of Notes
On March 25, 2004, the Company completed a $175 million private placement of unsecured 8% series Senior Notes due March 2009. The Senior Notes are not redeemable prior to maturity except that the Company has the right to redeem the notes for a make-whole payment at the adjusted treasury rate plus 0.25%. The proceeds from these notes were used to provide partial funding for the retirement of $500 million of the 6.82% series Senior Notes due 2004. The 6.82% series Senior Notes were redeemed on April 6, 2004.
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R e p o r t o f I n d e p e n d e n t R e g i s t e r e d P u b l i c A c c o u n t i n g F i r m
KPMG
The Board of Directors
DPL Inc.:
We have audited the accompanying consolidated balance sheet of DPL Inc. and subsidiaries (the Company) as of December 31, 2003, and the related consolidated statements of results of operations, shareholders’ equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the consolidated financial statement schedule, “Schedule II – Valuation and Qualifying Accounts” for the year ended December 31, 2003. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DPL Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.
/s/ KPMG | |
Kansas City, Missouri | |
| |
November 1, 2004 | |
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R e p o r t o f I n d e p e n d e n t R e g i s t e r e d P u b l i c A c c o u n t i n g F i r m
To the Board of Directors and Shareholders of DPL Inc.:
In our opinion, the accompanying consolidated balance sheet of DPL Inc. and its subsidiaries at December 31, 2002, and the related consolidated statements of results of operations, of cash flows, and of shareholders’ equity present fairly, in all material respects the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule, “Schedule II – Valuation and Qualifying Accounts” for the two years ended December 31, 2002, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2, to the consolidated financial statements for the years ended December 31, 2002 and 2001 have been restated.
/s/ PRICEWATERHOUSECOOPERS LLP.
Philadelphia, PA
January 27, 2003, except for Note 2 which is as of October 28, 2004.
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S e l e c t e d Q u a r t e r l y I n f o r m a t i o n (Unaudited)
| | For the three months ended | |
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$ in millions except per share amounts | | March 31, 2003 | | June 30, 2003 | | Sept. 30, 2003 | | Dec. 31,
2003 (a) | |
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| | (as previously
reported) | | (as restated) | | (as previously
reported) | | (as restated) | | (as previously
reported) | | (as restated) | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | |
Electric revenues | | $ | 295.1 | | $ | 295.1 | | $ | 270.9 | | $ | 270.9 | | $ | 322.6 | | $ | 322.6 | | $ | 292.4 | |
Other revenues, net of fuel costs | | | 2.4 | | | 2.4 | | | 2.7 | | | 2.7 | | | 2.7 | | | 2.7 | | | 2.2 | |
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Total revenues | | | 297.5 | | | 297.5 | | | 273.6 | | | 273.6 | | | 325.3 | | | 325.3 | | | 294.6 | |
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Operating Expenses | | | | | | | | | | | | | | | | | | | | | | |
Fuel | | | 56.6 | | | 56.6 | | | 51.6 | | | 51.6 | | | 65.1 | | | 65.1 | | | 61.3 | |
Purchased power | | | 19.4 | | | 19.4 | | | 26.0 | | | 26.0 | | | 26.4 | | | 26.4 | | | 16.1 | |
Operation and maintenance (b) | | | 39.1 | | | 39.5 | | | 51.0 | | | 49.5 | | | 43.7 | | | 46.0 | | | 64.8 | |
Depreciation and amortization | | | 34.7 | | | 34.7 | | | 35.0 | | | 35.0 | | | 35.8 | | | 35.8 | | | 33.4 | |
General taxes | | | 28.7 | | | 28.7 | | | 26.0 | | | 26.0 | | | 28.2 | | | 28.2 | | | 26.0 | |
Amortization of regulatory assets, net | | | 12.1 | | | 12.1 | | | 10.7 | | | 10.7 | | | 12.5 | | | 12.5 | | | 13.7 | |
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Total operating expenses (b) | | | 190.6 | | | 191.0 | | | 200.3 | | | 198.8 | | | 211.7 | | | 214.0 | | | 215.3 | |
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Operating Income | | | 106.9 | | | 106.5 | | | 73.3 | | | 74.8 | | | 113.6 | | | 111.3 | | | 79.3 | |
| | | | | | | | | | | | | | | | | | | | | | |
Investment income (loss) (b) | | | (3.6 | ) | | (3.5 | ) | | (8.5 | ) | | (8.5 | ) | | 54.5 | | | 60.6 | | | 27.2 | |
Interest expense | | | (45.4 | ) | | (45.4 | ) | | (44.9 | ) | | (44.9 | ) | | (46.2 | ) | | (46.2 | ) | | (45.2 | ) |
Shareholder litigation | | | — | | | — | | | — | | | — | | | — | | | — | | | (76.7 | ) |
Other income (deductions) | | | 0.1 | | | 0.1 | | | 32.0 | | | 32.0 | | | (3.8 | ) | | (3.8 | ) | | (2.6 | ) |
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Income Before Income Taxes and Cumulative Effect of Accounting Change (b) | | | 58.0 | | | 57.7 | | | 51.9 | | | 53.4 | | | 118.1 | | | 121.9 | | | (18.0 | ) |
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Income tax expense (b) | | | 21.9 | | | 21.8 | | | 17.8 | | | 18.4 | | | 44.4 | | | 45.8 | | | (2.5 | ) |
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Income Before Cumulative Effect of Accounting Change (b) | | | 36.1 | | | 35.9 | | | 34.1 | | | 35.0 | | | 73.7 | | | 76.1 | | | (15.5 | ) |
Cumulative effect of accounting change, net of tax | | | 17.0 | | | 17.0 | | | — | | | — | | | — | | | — | | | — | |
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Net Income | | $ | 53.1 | | $ | 52.9 | | $ | 34.1 | | $ | 35.0 | | $ | 73.7 | | $ | 76.1 | | $ | (15.5 | ) |
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Average Number of Common Shares Outstanding (millions) | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 119.8 | | | 119.6 | | | 120.0 | | | 119.8 | | | 119.4 | | | 119.9 | | | 119.9 | |
Diluted | | | 119.8 | | | 121.8 | | | 120.0 | | | 122.0 | | | 119.4 | | | 121.4 | | | 119.9 | |
Earnings Per Share of Common Stock – Basic | | | | | | | | | | | | | | | | | | | | | | |
Income before accounting change | | $ | 0.30 | | $ | 0.30 | | $ | 0.28 | | $ | 0.29 | | $ | 0.62 | | $ | 0.63 | | $ | (0.13 | ) |
Cumulative effect of accounting change | | | 0.14 | | | 0.14 | | | — | | | — | | | — | | | — | | | — | |
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Total Basic | | $ | 0.44 | | $ | 0.44 | | $ | 0.28 | | $ | 0.29 | | $ | 0.62 | | $ | 0.63 | | $ | (0.13 | ) |
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Earnings Per Share of Common Stock – Diluted | | | | | | | | | | | | | | | | | | | | | | |
Income before accounting change | | $ | 0.30 | | $ | 0.29 | | $ | 0.28 | | $ | 0.29 | | $ | 0.62 | | $ | 0.63 | | $ | (0.13 | ) |
Cumulative effect of accounting change | | | 0.14 | | | 0.14 | | | — | | | — | | | — | | | — | | | — | |
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Total Diluted | | $ | 0.44 | | $ | 0.43 | | $ | 0.28 | | $ | 0.29 | | $ | 0.62 | | $ | 0.63 | | $ | (0.13 | ) |
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Dividends Paid Per Share of Common Stock | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | |
91
| | For the three months ended | |
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$ in millions except per share amounts | | March 31, 2002 | | June 30, 2002 | | Sept. 30, 2002 | | Dec. 31, 2002 | |
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| | (as previously
reported) | | (as restated) | | (as previously
reported) | | (as restated) | | (as previously
reported) | | (as restated) | | (as previously
reported) | | (as restated) | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | |
Electric revenues | | $ | 271.7 | | $ | 271.7 | | $ | 278.5 | | $ | 278.5 | | $ | 341.1 | | $ | 341.1 | | $ | 282.2 | | $ | 282.2 | |
Other revenues, net of fuel costs | | | 3.6 | | | 3.6 | | | 3.2 | | | 3.2 | | | 3.6 | | | 3.6 | | | 2.5 | | | 2.5 | |
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Total revenues | | | 275.3 | | | 275.3 | | | 281.7 | | | 281.7 | | | 344.7 | | | 344.7 | | | 284.7 | | | 284.7 | |
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Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | |
Fuel | | | 48.0 | | | 48.0 | | | 54.2 | | | 54.2 | | | 70.7 | | | 70.7 | | | 54.1 | | | 54.1 | |
Purchased power | | | 21.1 | | | 21.1 | | | 20.2 | | | 20.2 | | | 26.2 | | | 26.2 | | | 11.8 | | | 11.8 | |
Operation and maintenance (b) | | | 38.5 | | | 52.3 | | | 35.9 | | | 38.7 | | | 38.0 | | | 20.0 | | | 47.0 | | | 44.6 | |
Depreciation and amortization | | | 33.4 | | | 33.4 | | | 33.4 | | | 33.4 | | | 35.5 | | | 35.5 | | | 31.8 | | | 31.8 | |
General taxes (b) | | | 26.9 | | | 26.9 | | | 26.1 | | | 26.1 | | | 29.8 | | | 29.8 | | | 29.0 | | | 28.9 | |
Amortization of regulatory assets, net | | | 11.5 | | | 11.5 | | | 11.4 | | | 11.4 | | | 13.5 | | | 13.5 | | | 11.7 | | | 11.7 | |
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Total operating expenses (b) | | | 179.4 | | | 193.2 | | | 181.2 | | | 184.0 | | | 213.7 | | | 195.7 | | | 185.4 | | | 182.9 | |
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| | | | | | | | | | | | | | | | | | | | | | |
Operating Income (b) | | | 95.9 | | | 82.1 | | | 100.5 | | | 97.7 | | | 131.0 | | | 149.0 | | | 99.3 | | | 101.8 | |
| | | | | | | | | | | | | | | | | | | | | | |
Investment income (loss) (b) | | | 6.1 | | | 7.6 | | | (111.9 | ) | | (110.2 | ) | | 14.0 | | | 14.0 | | | (13.9 | ) | | (13.8 | ) |
Interest expense | | | (44.4 | ) | | (44.4 | ) | | (43.6 | ) | | (43.6 | ) | | (45.8 | ) | | (45.8 | ) | | (45.6 | ) | | (45.6 | ) |
Other income (deductions) (b) | | | 7.6 | | | 7.6 | | | (13.4 | ) | | (13.4 | ) | | 5.0 | | | 5.0 | | | (3.2 | ) | | (3.3 | ) |
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Income Before Income Taxes (a) | | | 65.2 | | | 52.9 | | | (68.4 | ) | | (69.5 | ) | | 104.2 | | | 122.2 | | | 36.6 | | | 39.1 | |
| | | | | | | | | | | | | | | | | | | | | | |
Income tax expense (b) | | | 24.6 | | | 19.6 | | | (25.0 | ) | | (25.4 | ) | | 39.5 | | | 46.8 | | | 11.2 | | | 12.6 | |
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Net Income (b) | | $ | 40.6 | | $ | 33.3 | | $ | (43.4 | ) | $ | (44.1 | ) | $ | 64.7 | | $ | 75.4 | | $ | 25.4 | | $ | 26.5 | |
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Average Number of Common Shares Outstanding (millions) | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 119.1 | | | 119.4 | | | 119.2 | | | 119.4 | | | 119.0 | | | 119.5 | | | 119.1 | | | 119.5 | |
Diluted | | | 123.6 | | | 126.1 | | | 119.2 | | | 119.4 | | | 119.0 | | | 121.6 | | | 119.1 | | | 121.6 | |
Net Earnings (Loss) Per Share of Common Stock – Basic | | $ | 0.34 | | $ | 0.28 | | $ | (0.36 | ) | $ | (0.37 | ) | $ | 0.54 | | $ | 0.63 | | $ | 0.21 | | $ | 0.22 | |
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Net Earnings (Loss) Per Share of Common Stock – Diluted | | $ | 0.33 | | $ | 0.26 | | $ | (0.36 | ) | $ | (0.37 | ) | $ | 0.54 | | $ | 0.62 | | $ | 0.21 | | $ | 0.22 | |
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Dividends Paid Per Share of Common Stock | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | | $ | 0.235 | |
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(a) Net income was reduced by approximately $0.39 per common share due to shareholders litigation costs. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(b) The following tables identify the adjustments made to the unaudited quarterly Consolidated Statements of Results of Operations as previously released. See Note 2 to the financial statements for additional information regarding those adjustments.
($ in millions) | | 2003 Net Income Increase (Decrease) | |
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| | For the Three Months Ended | |
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Description of Adjustment | | March 31 | | June 30 | | September 30 | |
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Stock distributions (1) | | $ | — | | $ | — | | $ | 6.1 | |
Supplemental Executive Retirement Plan (2) | | | (0.1 | ) | | 1.4 | | | (0.3 | ) |
Stock incentive units (3) | | | (0.2 | ) | | 0.1 | | | (1.4 | ) |
Accrued expenses (4) | | | — | | | — | | | (0.5 | ) |
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Sub-total pre-tax impact | | | (0.3 | ) | | 1.5 | | | 3.9 | |
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Income taxes (6) | | | 0.1 | | | (0.6 | ) | | (1.5 | ) |
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Total Net Income Impact (7) | | $ | (0.2 | ) | $ | 0.9 | | $ | 2.4 | |
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($ in millions) | | 2002 Net Income Increase (Decrease) | |
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| | For the Three Months Ended | |
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Description of Adjustment | | March 31 | | June 30 | | September 30 | | December 31 | |
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Stock distributions (1) | | $ | 1.5 | | $ | 1.5 | | $ | — | | $ | — | |
Supplemental Executive Retirement Plan (2) | | | 1.6 | | | (0.7 | ) | | 0.2 | | | 2.7 | |
Stock incentive units (3) | | | (15.4 | ) | | (1.9 | ) | | 17.8 | | | (0.1 | ) |
Accrued expenses (4) | | | — | | | — | | | — | | | (0.1 | ) |
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Sub-total pre-tax impact | | | (12.3 | ) | | (1.1 | ) | | 18.0 | | | 2.5 | |
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Income taxes on non-deductible costs (5) | | | — | | | — | | | — | | | (0.4 | ) |
Income taxes (6) | | | 5.0 | | | 0.4 | | | (7.3 | ) | | (1.0 | ) |
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Total Net Income Impact (7) | | $ | (7.3 | ) | $ | (0.7 | ) | $ | 10.7 | | $ | 1.1 | |
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(1) Reflects adjustment to record income for stock dividends received that had originally been recorded entirely as a return of capital.
2003 and 2002 Consolidated Statement of Results of Operations: Adjustment increased Investment Income by the amounts set forth in this table.
(2) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, to include in the plan an executive who had not been previously considered a plan participant, and to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan. Adjustments made subsequent to 2000 reflect revisions to actuarial computations to consider impact of those settlements on future actuarial calculations for the plan.
2003 Consolidated Statement of Results of Operations: Adjustment (increased) decreased Operation and Maintenance expense by approximately $(0.2) million, $1.4 million and $(0.3) million in the first quarter through the third quarter, respectively. Adjustment also increased Investment Income by approximately $0.1 million in both the first and third quarters.
2002 Consolidated Statement of Results of Operations: Adjustment (increased) decreased Operation and Maintenance expense by approximately $1.5 million, $(0.8) million, $0.1 million and $2.7 million in the first quarter through the fourth quarter, respectively. Adjustment also increased Investment Income by approximately $0.1 million in each of the first, second and third quarters.
(3) Reflects adjustment to record outstanding stock incentive units at fair value at each balance sheet date following a change in the operation of the Management Stock Incentive Plan made as of January 1, 2002, that allowed certain retirees to diversify stock incentive awards to investments other than DPL common stock.
2003 and 2002 Consolidated Statement of Results of Operations: Adjustment (increased) decreased Operation and Maintenance expense by the amounts set forth in this table.
(4) Reflects adjustment to record accrued expenses in the period in which these items were incurred.
2003 Consolidated Statement of Results of Operations: Adjustment increased Operation and Maintenance expense by $0.4 million in the third quarter, increased Other Income by $0.1 million and $0.7 million in the third and fourth quarters, respectively, decreased Investment Income by $0.3 million in the third quarter, and decreased General Taxes by $0.1 million in the fourth quarter.
2002 Consolidated Statement of Results of Operations: Adjustment decreased Other Income by $0.1 million in the fourth quarter.
(5) Reflects adjustment to record tax expense for non-deductible costs not previously considered and provisions for estimated tax exposures.
2002 Consolidated Statement of Results of Operations: Adjustment increased Income Tax expense by the amount set forth in this table.
(6) Reflects income taxes related to the above non-tax adjustments.
Consolidated Statement of Results of Operations: Adjustment (increased) decreased Income Tax expense by the amounts set forth in the table.
(7) Reflects difference in Net Income as originally reported and as disclosed in this table of Selected Quarterly Information.
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Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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On March 7, 2003, the Company was notified by PricewaterhouseCoopers LLP, the Company’s independent accountants, at that time, that it declined to stand for reelection by the Finance and Audit Review Committee of the Board of Directors as the Company’s independent accountants for the year ended December 31, 2003.
The reports of PricewaterhouseCoopers LLP on the Company’s financial statements for the years ended December 31, 2002 and 2001 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.
In connection with the audits of the Company’s financial statements for the years ended December 31, 2002 and 2001 and through March 7, 2003, there had been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference thereto in its report on the Company’s financial statements for such years.
No reportable event of the type described in Item 304(a)(1)(v) of Regulation S-K occurred during years ended December 31, 2002 and 2001 and through March 7, 2003.
On April 9, 2003, the Finance and Audit Review Committee of the Board of Directors of the Company engaged KPMG LLP as the Company’s independent accountants for the year ended December 31, 2003. This appointment concluded a competitive bidding process by the Company that began in late February 2003.
Item 9A – Controls and Procedures |
|
For the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and interim Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Attached as exhibits 31(a) and 31(b) to this annual report are certifications of the Chief Executive Officer and the interim Chief Financial Officer required in accordance with Rule 13a-14 of the Exchange Act. This portion of the Company’s annual report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.
There were no changes in the Company’s internal control over financial reporting that occurred during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, during their year-end review, KPMG LLP (KPMG), the Company’s independent accountants, identified and reported to management and the Audit Committee of the Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB). Reportable conditions are matters coming to the attention of the auditors that, in their judgment, relate to significant deficiencies in the design or operation of internal control and could adversely affect the organization’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. A material weakness is a reportable condition in which the design or operation of one or more internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.
The two material weaknesses identified are:
| (1) An ineffective process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) for executive deferred |
94
| compensation distributions made during 2003, including, without limitation, insufficient supporting documentation submitted to the Company’s tax department for purposes of calculating the income tax provision and the lack of effective communication between and among senior management, counsel and the Company’s tax and compensation experts. Absent review of specific deferred compensation records by the Company’s outside auditors, income tax balances for 2003 may have been improperly stated at December 31, 2003. Management concurred with KPMG’s observations relating to income tax reporting of executive compensation. The Company further evaluated its internal processes relating to executive compensation and has implemented internal control improvements in this area; and |
| |
| (2) A complex and manual process for accounting and reporting transactions in the Company’s financial asset portfolio, including, (i) separate reporting structures for MVE accounting and corporate accounting that do not allow for a review of the entire process, (ii) the lack of a complete accounting manual for financial asset portfolio accounting that contemplates all investment transactions that occur on a regular basis and (iii) ineffective communication between the MVE and corporate accounting groups that does not ensure that all investment portfolio transactions are identified, accumulated and reported in accordance with generally accepted accounting principles. Specifically, in 2003 private equity fund distributions in the form of stock of underlying investments were initially accounted for by management entirely as return of capital transactions. A large element of each distribution should have been accounted for as income rather than a return of capital. As a result, results for the third quarter 2003 were required to be revised. Similar transactions in prior years were also accounted for inappropriately and were revised. Management concurred with KPMG’s observations relating to investment portfolio accounting and acknowledged the need for improvement. The Company further evaluated its accounting processes relating to its investment portfolio and has implemented internal control improvements in this area. |
The reportable conditions that are not believed to be material weaknesses are conditions related to: (i) payroll processing and the fact that the Company has two separate payroll processes, one for the majority of personnel and one for the Company’s senior executives, (ii) the lack of a quality and change control process for the preparation and submission of SEC filings on Form 10-K and Form 10-Q, (iii) the lack of significant progress made by management in assessing the Company’s internal controls in preparation for Sarbanes-Oxley Section 404 implementation and KPMG’s belief that the Company will identify control weaknesses requiring remediation, (iv) the Company’s process for executive travel and entertainment expense reporting and reimbursement and the lack of sufficient supporting documentation for reported business expenses of certain executives to support deductibility for tax purposes, (v) the lack of a comprehensive controller function to monitor the accounting function in the Company and (vi) inadequate segregation of duties for certain accounting transactions and activities processed at the executive level, including payroll, benefit plans, other compensation plans, time and expense reporting by senior management and preparation and submission of SEC filings.
The material weaknesses and reportable conditions identified above, if unaddressed, could result in errors in the Company’s consolidated financial statements.
Management concurred with KPMG’s observations relating to payroll processing (particularly those relating to executive compensation), external reporting processes, and executive travel and entertainment expense reporting. The Company further evaluated these areas and implemented appropriate internal control improvements.
Management acknowledged KPMG’s observations relating to Sarbanes-Oxley Section 404 implementation and increased resources dedicated to this effort. Additionally, the Company has improved its communications both within the organization and with KPMG regarding the status of the implementation process, project scope, preliminary results and remediation efforts. Management
95
also acknowledged the need for a more comprehensive controller function. The Company reviewed the accounting processes performed outside the corporate controller’s area and reassigned responsibility for these processes as deemed appropriate for improved internal controls. Finally, management concurred with KPMG’s observations regarding segregation of duties related to specific activities performed by the prior interim chief financial officer and acknowledged that improvements were needed in this area. The Company plans to use the Sarbanes-Oxley Section 404 implementation process to further assist in identifying and reassigning responsibility for activities that require additional segregation of duties.
The Company will continue to evaluate the material weaknesses and reportable conditions and will take all necessary action to correct the internal control deficiencies identified. The Company will also further develop and enhance its internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements. The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this review to further assist in identifying and correcting any control deficiencies. As expected, this review has revealed control weaknesses, which the Company has reported to the Audit Committee. The Company has since taken steps to strengthen its internal controls in these areas, including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions. These actions have been successful in eliminating a large percentage of the deficiencies noted, but additional remediation activities continue. Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review. At this time, the Company has not completed its review of the existing controls and their effectiveness. Unless the material weaknesses described above and any identified during this review are remedied, there can be no assurances that management will be able to assert that the Company’s internal control over financial reporting is effective in the management report required to be included in the Annual Report for the year ended December 31, 2004, pursuant to the rules adopted by the SEC under Section 404, when those rules take effect.
96
PART III
Item 10 – Directors and Executive Officers of the Registrant |
|
Directors and Executive Officers
Name and Age | | Principal Occupation, Business Experience and Directorships |
| |
|
Robert D. Biggs | 61 | | Director since 2004; Executive Chairman since May 16, 2004. Retired Managing Partner, PricewaterhouseCoopers, Indianapolis, Indiana since October 1999; Managing Partner, PricewaterhouseCoopers July 1992 to October 1999. |
| | | |
Paul R. Bishop | 61 | | Director since 2003; Chairman and Chief Executive Officer, H-P Products, Inc., Louisville, Ohio (manufacturer of central vacuum, VACUFLO, and fabricated tubing and fittings for industry) since 2001; President, H-P Products, Inc. from 1996 to 2001. Mr. Bishop is a Director of Hawk Corporation and is a member of Stark Development Board, Mt. Union College Board and Aultman Health Foundation. |
| | | |
James F. Dicke, II | 58 | | Director since 1990; Chairman and Chief Executive Officer, Crown Equipment Corporation, New Bremen, Ohio (international manufacturer and distributor of electric lift trucks and material handling products) since 2002; President, Crown Equipment Corporation from 1980 to 2002. Mr. Dicke is a Director of Gulf States Paper Co. and a Trustee of Trinity University. Mr. Dicke also is a Commissioner of the Smithsonian American Art Museum. |
| | | |
Ernie Green | 65 | | Director since 1991; President and Chief Executive Officer, Ernie Green Industries, Dayton, Ohio (automotive components manufacturer) since 1981. Mr. Green is a Director of Pitney Bowes Inc. and Eaton Corp. |
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Jane G. Haley | 73 | | Director since 1978; Chairman, President and Chief Executive Officer, Gosiger, Inc., Dayton, Ohio (national importer and distributor of machine tools) since 1972. Mrs. Haley is a Director of The Ultra-Met Company, ONA America and American Machine Tool Distributors’ Association and is a Trustee of The University of Dayton and Chaminade-Julienne High School. |
| | | |
Glenn E. Harder | 53 | | Director since 2004; President, GEH Advisory Services, LLC since October 2002; Executive Vice President and CFO, Coventor, Inc. from May 2000 to October 2002; Executive Vice President and CFO, Carolina Power & Light Company from August 1995 to March 2000. Mr. Harden is the Executive Leader, Business Services of Baptist State Convention of North Carolina since February 2004. |
| | | |
W August Hillenbrand | 63 | | Director since 1992; Vice-Chairman since May 16, 2004. Principal, Hillenbrand Capital Partners and Retired President and Chief Executive Officer, Hillenbrand Industries, Batesville, Indiana (a diversified public holding company that manufactures caskets, hospital furniture, hospital supplies and provides funeral planning services) since 2001; Chief Executive Officer, Hillenbrand Industries from 1999 to 2000. Mr. Hillenbrand is a Director of Hillenbrand Industries and Pella Corporation and is a Trustee of Batesville Girl Scouts and Trustee Emeritus of Denison University. |
| | | |
Lester L. Lyles, General USAF (Ret.) | 58 | | Director since 2004; Commander Air Force Materiel Command from April 2000 to August 2003; The 27 th Vice Chief of Staff of the United States Air Force from 1999 to 2000. General Lyles is a Trustee of Wright State University, a Director and member of the Audit Committee of General Dynamics Corp., and a Director of MTC Technologies. He is also a member of the President’s Commission on U.S. Space Policy. |
| | | |
James V. Mahoney | 59 | | Director since 2004; President and Chief Executive Officer of DPL Inc. and DP&L since May 16, 2004; President, DPL Energy LLC, a wholly-owned subsidiary responsible for wholesale and retail energy sales and marketing since 2003; President, Energy Market Solutions, an energy consulting firm from August 2002 to January 2003; President and Chief Executive Officer, EarthFirst Technologies, Incorporated, a company that licenses evolving technologies for environmental and alternate energy solutions from August 2001 to August 2002; Senior Vice President, PG&E National Energy Group, a wholesale power supplier from May 1999 to July 2001; Senior Vice President, U.S. Generating Company from March 1998 to May 1999. Mr. Mahoney serves on the Rebuilding Together Dayton Board and is the Vice Chair of the 2004 Fund Campaign for Culture Works. Mr. Mahoney joined the Company in 2003. |
97
Ned J. Sifferlen, PhD. | 63 | | Director since 2004; President Emeritus, Sinclair Community College from September, 2003 to present; President, Sinclair Community College from September, 1997 to August, 2003. Dr. Sifferlen is Chairman of the Board of Directors of Good Samaritan Hospital and is a Director on the Board for both Premier Health Partners and Think TV Public Television. |
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Executive Officers who are not Directors
Name and Age | | Position, Principal Occupation,
Business Experience and Directorships |
| |
|
Miggie E. Cramblit | 49 | | Vice President and General Counsel, DPL Inc. and DP&L since June 2003; Counsel and Corporate Secretary, Greater Minnesota Synergy from October 2001 to June 2003; Chief Operating Officer, Family Financial Strategies from June 1999 to May 2001; Vice President and General Counsel, Reliant Energy/Minnegasco from December 1990 to May 1999. Ms. Cramblit joined the Company in 2003. |
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Pamela Holdren | 42 | | Interim Chief Financial Officer since May 16, 2004; Treasurer, DPL Inc. and DP&L since June 2003; Controller, MVE, Inc. from January 2002 to June 2003; Manager, Financial Planning, DPL Inc. and DP&L from August 2001 to January 2002; Group Controller, DPL Inc. and DP&L from January 2000 to August 2001; Group Controller, Giddings & Lewis from November 1997 to November 1999. Ms. Holdren joined the Company in 2000. |
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Arthur G. Meyer | 54 | | Vice President, and Corporate Secretary, DPL Inc. and DP&L since August 2002; Vice President, Legal and Corporate Affairs, DP&L from November 1997 to August 2002. Mr. Meyer joined the Company in 1992. |
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Gary Stephenson | 39 | | Vice President, Commercial Operations of DPL Inc. and DP&L since September 17, 2004; Vice President, Commercial Operations, InterGen from April 2002 to September 2004; Vice President, Portfolio Management, PG&E National Energy Group (successor to PG&E Energy Trading) from January 2000 to April 2002; Director, Portfolio Management, PG&E Energy Trading from January 1998 to December 1999. |
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Patricia K. Swanke | 45 | | Vice President, Operations, DP&L since September 1999 currently responsible for electric transmission and distribution operations; Managing Director, DP&L from September 1996 to September 1999. Ms. Swanke serves on various community boards including the Dayton Arts Center Foundation Board, the Board of the K12 Gallery for Youth and the Dayton Mayor’s Commission on Adult Literacy. Ms. Swanke joined the Company in 1990. |
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Daniel L. Thobe | 53 | | Corporate Controller of DPL Inc. and DP&L since July 21, 2003, Vice President, Financial Services, Moto Franchise Corporation from February 2003 to July 2003 (successor to Moto Photo, Inc).; Corporate Controller, Moto Photo, Inc. from June 2000 to February 2003; Vice President, Controller and Chief Accounting Officer, Roberds, Inc. from November 1999 to June 2000; Vice President, Corporate Controller, Breuners Home Furnishings Corporation from June 1997 to November 1999. Mr. Thobe joined the Company in 2003. |
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W. Steven Wolff | 50 | | President, Power Production, DPL Inc. and DP&L since 2003; Vice President, Power Production, DPL Inc. and DP&L from August 2002 to January 2003; Director, Power Production, DP&L from January 2002 to August 2002; Manager, O.H. Hutchings Station, DP&L from August 2001 to January 2002; Captain, US Navy from January 1998 to August 2001. Mr. Wolff is a board member of the Ohio Valley Electric Corporation, Manufacturer’s Business Utility, University of Dayton Corporate Executive Council and Victoria Theatre Association. Mr. Wolff joined the Company in 2001. |
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Director and Management Changes
Effective May 16, 2004, the Board of Directors unanimously elected current directors Robert D. Biggs as Executive Chairman and W August Hillenbrand as Vice-Chairman. The Board of Directors also appointed DPLE President, James V. Mahoney, as President and Chief Executive Officer of the Company and DP&L and current Treasurer, Pamela Holdren, as interim Chief Financial Officer of the Company and DP&L.
The elections and appointments follow the retirement of Stephen F. Koziar, Jr., director, President and Chief Executive Officer of the Company and DP&L, director and Secretary/Treasurer of MVE, and the resignations of Peter H. Forster, Chairman of the Board, director and consultant to the Company, DP&L and MVE, and Caroline E. Muhlenkamp, director and President of MVE and Group Vice President and interim Chief Financial Officer of the Company and DP&L. In connection with Mr. Koziar’s retirement and Mr. Forster and Ms. Muhlenkamp’s resignations, each of the Company, Mr. Koziar, Mr. Forster and Ms. Muhlenkamp reserved all rights under applicable law and under any existing agreements. Mr. Forster and Ms. Muhlenkamp have filed a lawsuit against the Company, DP&L and MVE claiming that they were wrongfully terminated and are entitled to certain rights and benefits. The Company, DP&L and MVE have filed a lawsuit against Mr. Koziar, Mr. Forster and Ms. Muhlenkamp alleging that they breached their fiduciary duties and breached their consulting and employment contracts. (See Note 16 of Notes to Consolidated Financial Statements.)
On September 17, 2004 the Company appointed Gary Stephenson as Vice President, Commercial Operations.
On September 28, 2004 the Company and DP&L appointed Glenn E. Harder, General Lester L. Lyles, Dr. Ned J. Sifferlen and James V. Mahoney to the Board of Directors to fill vacancies created by resignations and retirement.
Audit Committee
The Company has a separately-designated standing audit committee (the Audit Committee) that oversees the Company’s auditing, accounting, financial reporting and internal control functions, appoints the Company’s independent public accounting firm and approves the accounting firm’s services. The Audit Committee currently consists of W August Hillenbrand, Chairman, Ernie Green, Jane G. Haley and Glenn E. Harder, each of whom is an “independent director” as defined in Section 303A.02 of the New York Stock Exchange listing standards and Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended. The Board has determined that Mr. Harder qualifies as an “audit committee financial expert” within the meaning of SEC regulations.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires DPL’s directors and executive officers to file reports of ownership and changes of ownership of DPL common shares and common share units with the Securities and Exchange Commission. DPL believes that during fiscal 2003 all filing requirements applicable to its directors and executive officers were timely met, except that in February 2004 (i) Form 5s reporting quarterly deferrals of directors’ fees into restricted share units during 2003 were filed for each Messrs. Bishop, Danis, Dicke, Forster, Grebe, Green, Hillenbrand, Holmes, Roberts and Stuart and Mrs. Haley and (ii) Form 5s reporting conversion to cash of common share units in December 2003 were filed for each of Messrs. Forster and Koziar and Ms. Muhlenkamp.
Corporate Governance
In February 2004, DPL’s Board amended its Corporate Governance Guidelines and amended its Code of Business Conduct and Ethics to comply with the requirements of the new federal legislation generated by the Sarbanes-Oxley Act of 2002 and the 2003 standards of the NYSE.
The Company’s Code of Business Conduct and Ethics applies to all Company employees, officers (including the executive chairman, chief executive officer, chief financial officer and chief accounting officer) and directors. Any changes or waivers to the Code of Business Conduct and Ethics for the Company’s chief executive officer, chief financial officer, chief accounting officer or persons performing similar functions will be disclosed to shareholders in the Company’s filings with the SEC.
The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee are posted on the Company’s website at www.dplinc.com.
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Item 11 - Executive Compensation |
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Summary Compensation Table
Set forth below is certain information concerning the compensation of the Chief Executive Officer and each of the four most highly compensated executive officers of DPL and its major subsidiary, DP&L, and for its consultant for the last three fiscal years, for services rendered in all capacities.
| | | | Annual
Compensation | | Long Term
Compensation | | | |
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| | | |
Name and Principal Position | | Year | | Salary
($) | | Bonus
($) | | Other Annual
Compensation
(1)
($) | | Securities
underlying
Options
(2)
(#) | | LTIP
(3)
($) | | All Other
Compensation
(4)
($) | |
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|
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|
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Stephen F. Koziar, Jr. (5) | | | 2003 | | | 600,000 | | | 2,320,000 | (6) | | 4,206 | | | — | | | 2,365,000 | | | 6,000 | |
Former President and Chief | | | 2002 | | | 375,000 | | | 210,000 | (7) | | 5,026 | | | 300,000 | | | — | | | 1,000 | |
Executive Officer DPL Inc. and DP&L | | | 2001 | | | 302,000 | | | — | | | 4,346 | | | — | | | — | | | 1,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
Caroline E. Muhlenkamp (8) | | | 2003 | | | 434,000 | | | 3,761,000 | (9) | | 851 | | | — | | | 943,000 | | | 2,000 | |
Former Group Vice President and | | | 2002 | | | 364,000 | | | 98,000 | (7) | | 959 | | | 300,000 | | | — | | | 1,000 | |
interim Chief Financial Officer | | | 2001 | | | 314,000 | | | — | | | 885 | | | — | | | 691,000 | | | 1,000 | |
DPL Inc. and DP&L | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
James V. Mahoney (10) | | | 2003 | | | 425,000 | | | 150,000 | (7) | | 258,000 | (15) | | 100,000 | | | 184,000 | | | 5,000 | |
President and Chief Executive Officer | | | 2002 | | | — | | | — | | | | | | — | | | — | | | — | |
DPL Inc. and DP&L | | | 2001 | | | — | | | — | | | | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
W. Steven Wolff (11) | | | 2003 | | | 250,000 | | | 113,000 | (7) | | | | | — | | | 279,000 | | | 1,000 | |
President, DPL Power Production | | | 2002 | | | 200,000 | | | 54,000 | (7) | | | | | — | | | — | | | 1,000 | |
DPL Inc. and DP&L | | | 2001 | | | 119,000 | | | 16,250 | (7) | | | | | — | | | — | | | 1,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
Patricia K. Swanke | | | 2003 | | | 230,000 | | | 80,000 | (7) | | | | | — | | | 193,000 | | | 1,000 | |
Vice President, Operations | | | 2002 | | | 215,000 | | | 72,797 | (7) | | | | | — | | | — | | | 1,000 | |
DP&L | | | 2001 | | | 190,000 | | | 73,625 | (7) | | | | | — | | | — | | | 1,000 | |
| | | | | | | | | | | | | | | | | | | | | | |
Peter H. Forster (12) | | | 2003 | | | 650,000 | | | 5,300,000 | (13) | | | | | — | | | 700,000 | | | 249,000 | (14) |
Former Chairman and Consultant | | | 2002 | | | 650,000 | | | 100,000 | (7) | | | | | 100,000 | | | — | | | 39,375 | (14) |
DPL Inc. and DP&L | | | 2001 | | | 600,000 | | | — | | | | | | — | | | 844,000 | | | 43,000 | (14) |
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(1) | Amounts in this column represent payments by the Company in reimbursement of tax obligations incurred by each person for group life insurance. |
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(2) | Amounts in this column represent a grant of stock options to each person under the DPL Stock Option Plan. See “Option Grants in Last Fiscal Year.” In connection with litigation brought against Messrs. Forster and Koziar and Ms. Muhlenkamp (see Item 3 - Legal Proceedings), the Company may seek to revoke certain of these options. Further, the DPL Inc. Stock Option Plan provides that “no single Participant shall receive Options with respect to more than 2,500,000 shares.” The September 24, 2002 grant of 300,000 options to Mr. Forster brought his total options to 2.7 million. Under Mr. Forster’s Option Agreement, the DPL Inc. Stock Option Plan document controls. Therefore, this table reflects a conforming total of 2.5 million options. |
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(3) | Amounts in this column represent annualized incentives earned based on achievement of predetermined total return to shareholder measures and under a long-term incentive program for individuals managing all financial assets. In 2003, total return to shareholders met the criteria and amounts were earned; in 2002 and 2001 total return to shareholders did not meet the criteria and no incentive was earned. In 2003 and 2002 no incentives based on performance of financial assets were earned; in 2001 incentive based on financial asset performance was earned by Mr. Forster and Ms. Muhlenkamp. |
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(4) | All Other Compensation includes: (i) employer matching contributions of $1,000 on behalf of each person, other than Mr. Forster, under the DP&L Employee Savings Plan made to the DPL Inc. Employee Stock Ownership Plan and (ii) for 2003, insurance premiums for term life policies paid on behalf of each person. |
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(5) | Mr. Koziar retired as President and Chief Executive Officer of DPL and DP&L on May 16, 2004. |
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(6) | $1.9 million of the amount shown for Mr. Koziar represents a discretionary payment. The amount of this payment was calculated by applying the benefit formula that had been in effect under the Company’s Supplemental Executive Retirement Plan (SERP) to the compensation earned by Mr. Koziar from the effective date of Mr. Koziar’s entry date into the SERP (August 1, 1969). The discretionary payment was calculated as if Mr. Koziar continued to participate in the SERP through April 30, 2003. Mr. Koziar’s participation in the SERP was terminated in 2000 in anticipation of an acquisition of the Company that was not completed. $420,000 of the amount shown represents compensation based on achievement of specific predetermined operating and management goals in the year indicated and paid in the year earned or in the following year. |
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(7) | The amount in this column represents compensation based on achievement of specific predetermined operating and management goals in the year indicated and paid in the year earned or in the following year. Amounts do not include distributions of earnings that had been previously deferred. |
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(8) | Ms. Muhlenkamp resigned as Group Vice President and interim CFO on May 16, 2004. |
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(9) | $3.4 million of the amount shown for Ms. Muhlenkamp represents a discretionary payment. The amount of this payment was calculated by applying the benefit formula that had been in effect under the SERP to the compensation earned by Ms. Muhlenkamp from the effective date of Ms. Muhlenkamp’s purported entry date into the SERP (July 1, 1991). The discretionary payment was calculated as if Ms. Muhlenkamp continued to participate in the SERP through April 30, 2003. Ms. Muhlenkamp’s participation in the SERP was terminated in 2000 in anticipation of an acquisition of the Company that was not completed. $361,000 of the amount shown represents compensation based on achievement of specific predetermined operating and management goals in the year indicated and paid in the year earned or in the following year. The discretionary payments made to Ms. Muhlenkamp were not calculated in accordance with the SERP to the extent that the amount credited to her account reflected increased salary and years-of-service credits. |
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(10) | Mr. Mahoney joined DPL in January 2003. Mr. Mahoney was appointed CEO of DPL and DP&L on May 16, 2004. |
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(11) | Mr. Wolff joined DPL in August 2001. |
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(12) | Mr. Forster resigned as Chairman and consultant to the Company on May 16, 2004. |
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(13) | $4.9 million of the amount shown for Mr. Forster represents a discretionary payment.. The amount of this payment was calculated by applying the benefit formula that had been in effect under the SERP to the compensation earned by Mr. Forster from the effective date of Mr. Forster’s entry date into SERP (June 1, 1974). The present value of such annual benefit stream was credited to Mr. Forster’s deferred compensation plan account in 2003. $400,000 of the amount shown represents compensation based on achievement of specific predetermined operating and management goals in the year indicated and paid in the year earned or in the following year. |
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(14) | Represents the amount of fees and value of stock awards received for services as a director. |
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(15) | Represents relocation expense reimbursement, grossed-up to reimburse for the additional tax liability. |
Option Grants in Last Fiscal Year
The following table sets forth information concerning individual grants of stock options made to each person listed on the Summary Compensation Table and the fiscal year ended December 31, 2003.
Individual Grants
Name | | Number of
securities
underlying
options
granted
(#) (1) | | % of Total
Options
Granted to
Employees in
Fiscal Year | | Exercise
Price
($/Sh) | | Expiration
Date | | Grant Date
Present Value | |
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James V. Mahoney | | | 100,000 | | | 100% | | $ | 15.88 | | 1/3/13 | | $ | 376,900 | |
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(1) | Options granted pursuant to the DPL Inc. Stock Option Plan on January 3, 2003. These options vest in five cumulative installments of 20% on December 31, 2003, 2004, 2005, 2006 and 2007. |
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(2) | The grant date present value was determined using the Black-Scholes pricing model. Significant assumptions used in the model were: expected volatility 35.0%, risk-free rate of return 4.05%, dividend yield of 5.08% and time of exercise 8 years. |
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning exercise of stock options during fiscal 2003 by each person listed on the Summary Compensation Table and the fiscal year-end value of unexercised options.
Name | | Shares
acquired on
exercise
(#) | | Value
realized | | Number of securities underlying
unexercised options at fiscal
year end
(#) | | Value of unexercised in-the
money options at fiscal year-end
(1) | |
| |
| |
| |
| |
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| | | | | | | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| | | | | | | |
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|
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|
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Peter H. Forster (2) (3) | | | — | | | — | | | — | | | 2,500,000 | | | — | | | 593,000 | |
Stephen F. Koziar, Jr. (3) | | | — | | | — | | | — | | | 795,000 | | | — | | | 1,779,000 | |
James V. Mahoney | | | — | | | — | | | — | | | 100,000 | | | — | | | 500,000 | |
Caroline E. Muhlenkamp (3) | | | — | | | — | | | — | | | 1,305,000 | | | — | | | 1,779,000 | |
Patricia K. Swanke | | | — | | | — | | | — | | | 50,000 | | | — | | | — | |
W. Steven Wolff | | | — | | | — | | | — | | | — | | | — | | | — | |
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(1) | Unexercised options were in-the-money if the fair market value of the underlying shares exceeded the exercise price of the option at December 31, 2003. |
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(2) | The DPL Inc. Stock Option Plan provides that “no single Participant shall receive Options with respect to more than 2,500,000 shares.” The September 24, 2002 grant of 300,000 options to Mr. Forster brought his total options to 2.7 million. Under Mr. Forster’s Option Agreement, the DPL Inc. Stock Plan document controls. Therefore, this table reflects a conforming total of 2.5 million options. |
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(3) | The Company, DP&L and MVE have filed a lawsuit against Messrs. Forster and Koziar and Ms. Muhlenkamp alleging breach of fiduciary duty and breach of their respective employment agreements. (See Item 3 – Legal Proceedings.) In connection with that litigation, the Company may seek to revoke certain of these options. |
Pension Plans
The following table sets forth the estimated total annual benefits payable under the DP&L Retirement Income Plan and the Supplemental Executive Retirement Plan, if applicable, to each person listed on the Summary Compensation Table at normal retirement date (age 65) based upon years of credited service and final average annual compensation (including base and incentive compensation) for the three highest years during the last five years:
| | Total Annual Retirement Benefits for
Years of Credited Service at Age 65 | |
Annual Earnings
Final Average | |
| |
| 10 Years | | 15 Years | | 20 Years | | 30 Years | |
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|
| |
|
| |
|
| |
|
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$ 200,000 | | $ | 48,288 | | $ | 72,432 | | $ | 96,576 | | $ | 128,821 | |
400,000 | | | 105,288 | | | 157,932 | | | 210,576 | | | 242,821 | |
600,000 | | | 162,288 | | | 243,432 | | | 324,576 | | | 356,821 | |
800,000 | | | 219,288 | | | 328,932 | | | 438,576 | | | 470,821 | |
1,000,000 | | | 276,288 | | | 414,432 | | | 552,576 | | | 584,821 | |
1,200,000 | | | 233,288 | | | 499,932 | | | 666,576 | | | 698,821 | |
1,400,000 | | | 390,288 | | | 585,432 | | | 780,576 | | | 812,821 | |
The years of credited service are Mr. Forster - 23 years; Mr. Koziar – 34 yrs.; Ms. Muhlenkamp – 13 yrs.; Mr. Mahoney – 0 yrs.; Mr. Wolff – 1 yr.; and Ms. Swanke – 13 years. Benefits are computed on a straight-life annuity basis, are subject to deduction for Social Security benefits and may be reduced by benefits payable under retirement plans of other employers.
Deferred Compensation Distributions
DPL maintains a Key Employee Deferred Compensation Plan (the DCP) and a 1991 Amended Directors’ Deferred Compensation Plan (the Directors’ DCP and collectively with the DCP, the Deferred Compensation Plans) for certain senior executives, directors and other key employees. The Deferred Compensation Plans generally enable participants to defer all or a portion of their cash compensation earned in a particular year. If an individual elects to defer any amount, such deferred amounts are reported as compensation in the year earned and are credited to the individual’s
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deferred compensation plan account. The Company has funded its obligations to participants through a trust, which is included in the Consolidated Balance Sheet in “Other Assets – Other.” Deferred compensation plan account balances accrue earnings based on the investment options selected by the participant. Interest, dividends and market value changes are reflected in the individual’s deferred compensation plan account. Deferred compensation plan account balances generally are paid following the termination of the participant’s employment with the Company, in a lump sum or over time as determined by the participant’s deferral election form, and in-service distributions generally are not allowed. In certain circumstances the plan provides for a 10% penalty for early withdrawal. Payments under the DCP are in cash or DPL common shares, provided that distributions attributable to investments in DPL common shares must be paid in common shares . As discussed above (see Item 3 - Legal Proceedings), certain amendments to the Deferred Compensation Plans purportedly made in December 2003 had the effect of eliminating some of these restrictions for certain senior executives and facilitating these executive officers to receive cash distribution from their deferred compensation balances. The Company has initiated legal proceedings challenging the validity of these amendments and the distributions.
The Company also has maintained a Management Stock Incentive Plan (the MSIP and together with the Deferred Compensation Plans, the Plans) for key employees selected by the Compensation Committee. New awards under the MSIP were discontinued in 2000. Under the MSIP, the Committee granted Stock Incentive Units (SIUs) to MSIP participants, with each SIU representing one DPL common share. SIUs were earned based on the achievement of performance criteria set by the Compensation Committee and vested over time (subject to acceleration of earning and vesting on the occurrence of certain events or at the discretion of the Company’s Chief Executive Officer or the Compensation Committee). Earned SIUs were credited to a participant’s account under the MSIP and accrue dividends like DPL common shares. Under the MSIP, earned and vested SIUs are to be paid in DPL common shares in a lump sum or over time as determined by the participant’s deferral election.
The Company has found that restated versions of the MSIP exist that incorporate amendments purportedly made in May 2002 and December 2003, but the Company is unable to substantiate that the Board or the Compensation Committee ever authorized those amendments. The May 2002 purported amendment provided that effective January 1, 2002, upon termination of employment of a participant who also participates in the DCP, the participant’s earned SIUs would be transferred to the participant’s deferred compensation account and deemed invested in shares of DPL common stock. Six months after termination of the participant’s employment, the participant or the Company would be entitled to elect to allocate the value of the credited DPL common shares to other investments under the DCP that are designated by the participant. The December 2003 purported amendment would have deleted a provision, added in 2000 when the Company’s Stock Option Plan was adopted, locking up until January 1, 2005 certain MSIP awards that previously had been granted to participants who were receiving options under the new Stock Option Plan. The Company has initiated legal proceedings which challenge the validity of that purported amendment. (See Item 3 - Legal Proceedings.)
The Compensation Committee has the authority to amend, modify or terminate each Plan. Notwithstanding the uncertain the validity of the purported amendments to the plans, the Company has accounted for the plans as they have been administered.
The Company maintains a Supplemental Executive Retirement Plan (the SERP). In February 2000, the Compensation Committee approved certain modifications to the SERP. A copy of the SERP as amended through February 2000 is attached as Exhibit 10(e). The Company has found that a restated version of the SERP exists that incorporates amendments purportedly made in December 2002 concerning payments to be made in the event of a change of control. However, the Company is unable to substantiate that the Board or the Compensation Committee ever authorized those amendments.
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In 2000, in anticipation of the possible acquisition of the Company, the participation by certain officers (including Mr. Koziar and Ms. Muhlenkamp) in the Company’s SERP terminated. The present value of each officer’s accrued benefit under the SERP as determined by DPL’s actuary ($3.5 million for Mr. Koziar and $1.4 million for Ms. Muhlenkamp) was then credited to each officer’s deferred compensation plan account. The present value calculation for Ms. Muhlenkamp was not computed in accordance with the SERP to the extent that the amount credited to her account reflected increased salary and years-of-service credits. Subsequently, in April 2003, as Mr. Koziar and Ms. Muhlenkamp had continued their employment with the Company and no acquisition of the Company had occurred, the Compensation Committee approved discretionary payments to these individuals. The discretionary payments were calculated as if Mr. Koziar and Ms. Muhlenkamp continued to participate in the SERP through April 30, 2003. The discretionary payments made in 2003 were $1.9 million for Mr. Koziar and $3.4 million for Ms. Muhlenkamp. The discretionary payments made to Ms. Muhlenkamp were not calculated in accordance with the SERP to the extent that the amount she received reflected increased salary and years-of-service credits.
In April 2003, the Compensation Committee also approved a discretionary payment to Mr. Forster. Mr. Forster elected to have this amount credited to his deferred compensation plan account. The discretionary payment, in the amount of $4.9 million, was calculated as if Mr. Forster continued to participate in the SERP through April 30, 2003. Mr. Forster’s participation in the SERP was terminated in 1997 upon his retirement from the Company. The discretionary payment made in 2003 represented the difference in the net present value of the SERP benefit Mr. Forster would have received if he had been entitled to continue to accrue benefits under the SERP through April 30, 2003 and the amount he was awarded in 1997 based upon his calculated benefit at that date.
In December 2003, a number of amendments purportedly were made to the DCP, the MSIP and the Directors’ DCP. The Company has not been able to substantiate that the amendments purportedly made to the Directors’ DCP were ever approved by the Compensation Committee of the Board. Moreover, the Company has initiated legal proceedings challenging the validity of the amendments purportedly made to the DCP, the MSIP and Directors DCP. (See Item 3 - Legal Proceedings.) The purported amendments included the following:
| • | The DCP purportedly was amended to provide that if, as of December 2, 2003 and as to DCP participants who were employed by or providing ongoing consulting services to DPL on that date or thereafter, the amount credited to the participant’s deferred compensation plan account (excluding amounts deemed invested in DPL common shares) was in excess of $500,000, the Company would pay to the participant in cash the balance over $250,000. The purported DCP amendment also provided for distribution of the excess over $450,000 in a participant’s deferred compensation plan account on December 31 of each year beginning in 2004, if the deferred compensation plan account exceeded $500,000. As of the date this purported amendment was to have taken effect, Messrs. Forster and Koziar and Ms. Muhlenkamp were the only eligible participants. |
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| • | The Directors’ DCP purportedly was amended to provide for similar distributions beginning December 31, 2004. The Plan accounts of all of the Directors are deemed to be invested in DPL common shares, and no distributions will be made to the Directors as a result of the amendment. |
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| • | The MSIP purportedly was amended to delete a provision, added in 2000 when the Company’s Stock Option Plan was adopted, locking up until January 1, 2005 certain MSIP awards that previously had been granted to participants who were receiving options under the new Stock Option Plan. In addition, the MSIP purportedly was modified to allow conversion of SIUs to other investments at the discretion of the CEO, or in the case of the CEO’s own SIUs, at the discretion of the Compensation Committee. |
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| • | In connection with the purported December 2003 DCP amendments, Mr. Forster, Mr. Koziar and Ms. Muhlenkamp exchanged letters with the Company in which they purportedly consented to the purported amendments. The letters also provided, with respect to their MSIP accounts, that, notwithstanding the MSIP requirement that SIUs be paid solely in DPL common shares, each could request that his or her SIUs in excess of the shares required to be held under the Company’s Executive Management Share Ownership Guidelines be converted to cash and the cash transferred to his or her deferred compensation plan account. The Company’s records do not reflect that the MSIP was ever amended to provide for requests to convert excess shares into cash and distribute that cash to the participant’s deferred compensation account. |
As a result of the purported DCP and MSIP amendments and the letters’ provisions, as well as the discretionary payments described above, the following transfers were made from the MSIP to the Deferred Compensation Plan account for Mr. Koziar 11,818 SIU’s at $21.15 per share; Mr. Forster 108,973 SIUs at $21.15 per share; and Ms. Muhlenkamp 336,952 SIUs at $21.15 per share. In addition pre-tax distributions of $7.1 million, $9.7 million and $16.3 million were made from their deferred compensation plan accounts to Mr. Forster, Mr. Koziar and Ms. Muhlenkamp, respectively, in December 2003.
Following the December 2003, purported amendments to the DCP and MSIP and the resulting distributions made to Mr. Forster, Mr. Koziar and Ms. Muhlenkamp, the Company began an internal investigation of those events. As a result of that investigation, the Company initiated legal proceedings challenging the validity of those amendments and the propriety of those distributions. (See Item 1 - Business - Recent Developments, and Item 3 - Legal Proceedings.)
Consulting Contract and Employment Agreements
Peter H. Forster
Mr. Forster served as non-employee Chairman of the Board of Directors and consultant to the Company, DP&L and MVE from January 1, 1997 to May 16, 2004 pursuant to a consulting contract, dated December 31, 1996, as amended. The consulting contract automatically renewed for a one-year term on each December 31 unless either party gave at least 15 months’ written notice of nonrenewal. The consulting contract would have continued for at least 36 months following a change of control. The Company was also obligated to require any successor to all or substantially all of its business or assets to assume the consulting contract.
Mr. Forster resigned on May 16, 2004. In connection with Mr. Forster’s resignation, the Company reserved all rights and defenses and Mr. Forster reserved all rights and entitlements under applicable law and under any existing contract between Mr. Forster, the Company and all of its subsidiaries. Mr. Forster, along with Ms. Muhlenkamp, filed a lawsuit against the Company, DP&L and MVE claiming that he was wrongfully terminated and is entitled to certain rights and benefits. The Company, DP&L and MVE have filed a lawsuit against Mr. Forster alleging that he breached his fiduciary duties and breached his consulting contract and claim that they no longer owe Mr. Forster any further benefits under his contract. (See Item 3 – Legal Proceedings.) In those proceedings, Mr. Forster claims that he is entitled to rights and benefits under purported agreements with the Company. The Company has confirmed that only certain of these purported agreements were properly approved. The following description of Mr. Forster’s consulting contract is a summary of the contract that the Company believes was in effect at the time of his resignation.
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Compensation and Indemnification
For his service as Chairman, Mr. Forster’s contract provided for (i) director’s and similar fees as are customarily paid to other non-employee directors, including stock awards under DP&L’s Directors’ Deferred Stock Compensation Plan; (ii) an additional opportunity for Mr. Forster to receive 35,000 of the Company’s common shares on each January 1 during the term of the contract, subject to earning and vesting criteria; (iii) participation in DP&L’s 1991 Amended Directors’ Deferred Compensation Plan; and (iv) other compensation and benefits as are customarily provided to other non-employee directors of the Company and DP&L.
For his service as a consultant, Mr. Forster’s contract provided for (i) an annual base consulting fee of $650,000 for the year ended December 31, 2003 and (ii) for calendar years 2000 and after, a bonus calculated in accordance with the MVE Incentive Program. The MVE Incentive Program provided for incentive compensation (an MVE Payment) based on the cumulative cash distributed to the Company or attributable to each separate investment made by any private equity partnership in which the Company has invested at any time prior to the termination of his contract, less the amount invested, expenses, bonuses previously paid and any losses, in which losses not offset against any year’s cash return are carried over and applied against cash returned in future years. Mr. Forster’s consulting contract stated that for 2003 and for each calendar year thereafter, Mr. Forster’s MVE Payment was equal to 2.75% of such amount.
Mr. Forster’s contract also stated that the Company and DP&L would provide Mr. Forster with life, health, accident and disability insurance benefits and will pay a death benefit of $1.0 million to Mr. Forster’s beneficiary upon Mr. Forster’s death during the term of the contract.
Mr. Forster’s contract stated that the Company and DP&L will indemnify Mr. Forster against any and all losses, liabilities, damages, expenses (including attorneys’ fees), judgments and amounts paid in settlement incurred by Mr. Forster in connection with any claim, action, suit or proceeding (whether civil, criminal, administrative or investigative), including any action by or in the right of either the Company or DP&L, by reason of any act or omission to act in connection with the performance of his duties under the contract to the full extent that the Company and DP&L are permitted to indemnify a director, officer, employee or agent against the foregoing under Ohio law, including, without limitation, Section 1701.13(E) of the Ohio Revised Code.
In connection with Mr. Forster’s resignation, the Company agreed to advance reasonable attorney’s fees incurred by Mr. Forster in defending any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, including any action brought derivatively on behalf of the Company, by reason of any act or omission by Mr. Forster to act as director, trustee, officer, employee or agent to the full extent permitted by Ohio law. Any such advancement of expenses was subject to the Company’s receipt of an undertaking by Mr. Forster to repay any such amounts unless it is ultimately determined that he is entitled to be indemnified by the Company as authorized by Article VII of the Company’s Code of Regulations and Ohio law. However, the lawsuit filed by the Company, DP&L and MVE against Mr. Forster seeks a declaration that he is not entitled to such advancements and must repay advances already made because he is unable to demonstrate entitlement to such indemnification.
Termination
Mr. Forster’s contract may be terminated upon written notice by (i) the Company or DP&L on account of Mr. Forster’s disability or for “cause” or (ii) Mr. Forster for “good reason.”
“Cause” is defined as (i) commission of a felony, (ii) embezzlement, (iii) the illegal use of drugs or (iv) if no change of control has occurred (other than a change of control resulting from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets), the failure by Mr. Forster to substantially perform his duties (other than any failure resulting from his physical or mental illness or other physical or mental incapacity) as determined by the Board of Directors.
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“Good Reason” is defined as (i) the failure to elect Mr. Forster to Chairman of the Board of Directors or Chairman of the Executive Committee for any reason, other than Mr. Forster’s termination due to death or disability, by the Company or DP&L for cause, or by Mr. Forster for good reason; (ii) the assignment of any duties inconsistent with the duties contemplated by the consulting contract without Mr. Forster’s consent; (iii) if within 36 months after the date of a change of control (other than a change of control resulting from the commencement of a tender offer or the Company entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets), Mr. Forster determines that he is unable to discharge his duties effectively; (iv) the failure of the Company or DP&L to obtain the assumption of the contract by any successor; (v) the termination of the contract by the Company or DP&L without satisfying the applicable requirements; or (vi) any other material breach of the contract by the Company or DP&L.
Upon termination of the contract for any reason, including expiration of the term, the contract provided for (i) a lump sum cash payment to Mr. Forster of the directors’ fees and base consulting fees through the date of termination; (ii) the continuation of Mr. Forster’s MVE Payment on an annual basis; (iii) continuation of medical benefits to Mr. Forster and his spouse for life and to any of Mr. Forster’s eligible dependents; and (iv) payment of all other accrued benefits to which Mr. Forster was entitled through the date of termination. The contract also stated that all earned and vested stock awards granted to Mr. Forster pursuant to the Directors’ Deferred Stock Plan and all compensation deferred under the Directors’ Deferred Compensation Plan would be payable to Mr. Forster in accordance with the terms of such plan.
If the contract is terminated prior to the expiration of the term by Mr. Forster for good reason or by the Company or DP&L, other than for cause or Mr. Forster’s disability, and Mr. Forster was not entitled to receive change of control benefits for a change of control (other than a change of control resulting from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets), then, in addition to the payments and benefits described above, the consulting contract provided for (i) a lump sum cash payment equal to the amount of the annual base consulting fees that would have been payable for the remainder of the term; (ii) all unearned and/or unvested stock incentive units awarded under the MSIP and all unearned and/or unvested stock awards granted under the Directors’ Deferred Stock Plan would be deemed fully earned and vested; and (iii) continuation of all life, medical, accident and disability insurance for Mr. Forster, his spouse and his eligible dependents for the remainder of the term.
Change of Control
Mr. Forster’s contract also provided for benefits and payments after the occurrence of a “change of control” (as such term is defined in the agreement). Upon a change of control, the contract stated that the Company and DP&L would transfer cash or other property in an amount sufficient to fund all benefits and payments to the master trust. In addition, the contract provided a gross-up payment if any excise tax was imposed upon a change of control such that Mr. Forster was in the same after-tax position as if no excise tax was imposed.
If a change of control occurred (other than a change of control resulting from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets), the contract provided for (i) a lump sum cash payment to Mr. Forster equal to the sum of (a) 200% of the annual base consulting fees; (b) 200% of the average annual bonus paid to Mr. Forster for the three years immediately preceding the date of the change of control; and (c) any gross-up payment payable to Mr. Forster for excise taxes; (ii) payment of one-half of the amount calculated in clause (i) in consideration of Mr. Forster’s agreement to be subject to a non-compete covenant; (iii) all unearned and/or unvested stock incentive units awarded under the MSIP and all unearned and/or unvested stock awards granted under the Directors’ Deferred Stock Plan would be deemed fully earned and vested; and (iv) continuation of all life, medical, accident and disability insurance for Mr. Forster, his spouse and his eligible dependents until the third anniversary of the date of the change of control.
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If a tender offer was commenced or the Company or DP&L entered into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets, then upon any subsequent termination of Mr. Forster’s contract at any time within 36 months of the change of control and prior to the occurrence of another change of control or the consummation of such tender offer or agreement, Mr. Forster’s contract provided for the benefits and payments described above unless the contract was terminated for cause, on account of Mr. Forster’s death or disability or by Mr. Forster without good reason. However, in the event of such a change of control, if the tender offer or agreement was abandoned or terminated, and a majority of the original directors and/or their successors (as such terms are defined in the contract) determined that the tender offer or agreement would not effectuate or otherwise result in a change of control and provide written notice of such determination, then a subsequent termination would have not entitled Mr. Forster to these benefits. Neither the Company nor DP&L experienced a change of control while Mr. Forster served as Chairman and consultant to the Company.
February 2004 Letters
Mr. Koziar executed two letters (each dated as of February 2, 2004) to Mr. Forster, both of which were agreed to and acknowledged by Mr. Forster. In addition, Mr. Koziar sent a letter to Mr. Forster dated February 3, 2004. The letters described new terms and modifications to Mr. Forster’s consulting contract, an amended version of which was attached to the February 2, 2004 letter. The modifications included:
| • | changing Mr. Forster’s severance compensation after a change of control from 200% of the average annual bonus paid to Mr. Forster for the three years prior to his termination to 200% of the average of his incentive compensation for the three of the last ten years prior to his termination, whether or not consecutive, that yielded the highest average incentive compensation; |
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| • | adding a “clarification” that a transferee of all or a portion of the Company’s interest in the financial asset portfolio will be required specifically to assume the Company’s obligation to pay Mr. Forster the MVE Incentive Payment pursuant to Annex A of his contract; |
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| • | increasing the duration of Mr. Forster’s non-compete agreement from two to three years; |
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| • | increasing Mr. Forster’s consulting fee to $750,000; and |
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| • | entitling Mr. Forster to receive gross-up payments for any excise taxes on the date of termination rather than 15 days after such date. |
An amended contract was never signed by the Company. In addition, neither the Board nor the Compensation Committee approved or authorized the modifications and new terms described above. The Company, DP&L and MVE have commenced litigation seeking a declaration that the amendments described above were not effective. However, in the litigation action brought by Mr. Forster and Ms. Muhlenkamp, in which they allege a breach of contract, Mr. Forster claims that the letters governed his relationship with the Company and that he is entitled to the benefits contained therein. (See Item 3 – Legal Proceedings.)
Stephen F. Koziar, Jr.
Mr. Koziar served as the President and Chief Executive Officer of the Company and DP&L from January 1, 2003 to May 16, 2004 pursuant to an employment agreement dated October 17, 2002 and a letter agreement dated December 15, 2000. Mr. Koziar also served as a director and
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Secretary/Treasurer of MVE from 1998 until his retirement. The term of Mr. Koziar’s employment agreement was through December 31, 2005 unless terminated by the Company or Mr. Koziar at any time, with or without cause, upon 180 days written notice.
Mr. Koziar retired from the Company on May 16, 2004. In connection with his retirement, the Company reserved all rights and defenses and Mr. Koziar reserved all rights and entitlements under applicable law and under any existing agreement. The Company, DP&L and MVE have filed a lawsuit against Mr. Koziar alleging that he breached his fiduciary duties and breached his employment agreement and claim that they no longer owe Mr. Koziar any further benefits under his contract. (See Item 3 - Legal Proceedings.)
The Company has initiated legal proceedings against Mr. Koziar relating to, among other things, his employment agreement (see Item 3 – Legal Proceedings). The Company has found that two versions of Mr. Koziar’s employment agreement exist, the initial version and an amended version. However, the Company has not been able to confirm that the amended version was ever approved by the Compensation Committee or the Board of Directors. Therefore, the initial version has been attached hereto as Exhibit 10(i), and is reflected in the following discussion. The Company also has found two versions of the December 15, 2000 letter agreement with Mr. Koziar featuring different averaging formulas for determining the incentive compensation payment following a change of control. The Company believes that the version that was a three-most-recent years averaging formula attached as Exhibit 10(n), rather than taking the highest three years of the past ten, is the original version and it has not been able to substantiate that the other version was ever approved by the Compensation Committee or the Board of Directors. The following discussion reflects the documents attached as Exhibits 10(i) and 10(n).
Compensation and Indemnification
Mr. Koziar’s employment agreement provided for (i) an annual base salary of not less than $600,000; (ii) participation in the Management Incentive Compensation Plan (MICP); (iii) eligibility to be granted options under DPL’s Stock Option Plan; (iv) participation in other incentive programs; and (v) such fringe benefits (including medical, life and disability insurance benefits and retirement benefits) as are generally made available to other executive level employees.
Mr. Koziar’s agreement stated that the Company and DP&L will indemnify Mr. Koziar against any and all losses, liabilities, damages, expenses (including attorneys’ fees), judgments and amounts paid in settlement incurred by Mr. Koziar in connection with any claim, action, suit or proceeding (whether civil, criminal, administrative or investigative), including any action by or in the right of either the Company or DP&L, by reason of any act or omission to act in connection with the performance of his duties under the contract to the full extent that the Company and DP&L are permitted to indemnify a director, officer, employee or agent against the foregoing under Ohio law, including, without limitation, Section 1701.13(E) of the Ohio Revised Code.
In connection with Mr. Koziar’s retirement, the Company agreed to advance reasonable attorney’s fees incurred by Mr. Koziar in defending any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, including any action brought derivatively on behalf of the Company, by reason of any act or omission by Mr. Koziar to act as director, trustee, officer, employee or agent to the full extent permitted by Ohio law. Any such advancement of expenses was subject to the Company’s receipt of an undertaking by Mr. Koziar to repay any such amounts unless it is ultimately determined that he is entitled to be indemnified by the Company as authorized by Article VII of the Company’s Code of Regulations and Ohio law. However, the lawsuit filed by the Company, DP&L and MVE against Mr. Koziar seeks a declaration that he is not entitled to such advancements and must repay advances already made because he is unable to demonstrate entitlement to such indemnification.
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Termination
Mr. Koziar’s employment agreement was terminable by the Company without “cause” on 180 days prior written notice, or with “cause” without prior notice; Mr. Koziar could terminate the agreement on 180 days written notice. “Cause” is defined as (i) the commission of a felony, (ii) embezzlement, (iii) the illegal use of drugs, or (iv) the failure by Mr. Koziar to substantially perform his duties under the agreement (other than any such failure resulting from his physical or mental illness or other physical or mental incapacity) as determined by the Board of Directors of DPL.
If Mr. Koziar’s employment was terminated for any reason, the December 15, 2000 letter agreement provided for (i) a lump sum cash payment to Mr. Koziar equal to the sum of his full base salary through the date of termination and the amount of the awards earned pursuant to any incentive compensation plan that have not been paid (other than any deferred compensation plan in which he made a contrary installment election); (ii) continuation of medical benefits for him and his spouse for life; and (iii) payment of any other accrued benefits to which he was entitled through the date of termination.
If Mr. Koziar’s employment was terminated prior to December 31, 2005 by the Company without “cause”, other than in connection with a change of control, or by Mr. Koziar, and at the time of termination, any of the following executive positions are filled by more than one person: President or Chief Operating Officer of (1) DPL, (2) DP&L or (3) DPL Energy LLC; then the employment agreement states that: (i) the Company and DP&L will pay Mr. Koziar’s base salary through December 31, 2005; (ii) the Company and DP&L would pay Mr. Koziar the annual bonus he would have received pursuant to the MICP for the year during which termination occurs had he still been employed as of the last day of such year; and (iii) any unvested options granted under the Company’s Stock Option Plan would be deemed fully vested. However, the Company and DP&L would not have those obligations, if Mr. Koziar’s employment was terminated for “cause”.
The other version of Mr. Koziar’s agreement, which the Company does not believe became effective, removed all provisions regarding “cause”. Under that version, the agreement was terminable by any party at any time on 180 days written notice. Any termination at a time when (a) any of the following executive positions were filled by more than one person: President or Chief Operating Officer of (1) DPL, (2) DP&L or (3) DPL Energy LLC, or (4) a new CEO of DPL had been elected would have required that: (i) the Company and DP&L would pay Mr. Koziar’s base salary through December 31, 2005; (ii) the Company and DP&L would pay Mr. Koziar the annual bonus he would have received pursuant to the MICP for the year during which termination occurs had he still been employed as of the last day of such year; and (iii) any unvested options granted under the Company’s Stock Option Plan would have been deemed fully vested. Additionally, that version of Mr. Koziar’s agreement contained a provision under which Mr. Koziar would refrain for two years from participating in certain forms of competition with DPL and DP&L.
In addition to the above, if Mr. Koziar’s employment was terminated due to his death, then Mr. Koziar’s estate would be entitled to his base compensation through December 31, 2005.
Change of Control
If a change of control occurred (other than a change of control resulting from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets), Mr. Koziar’s December 15, 2000 letter agreement provided for (i) a lump sum cash payment to Mr. Koziar equal to the sum of 200% of (a) the annual base salary and (b) the average of the last three annual award payments made to Mr. Koziar under the MICP prior to the change of control, including any portion of the payments he elected to have credited to his deferred compensation plan account; (ii) payment of one-half of the amount calculated in clause (i) in consideration of Mr. Koziar’s agreement to be subject to non-compete and confidentiality covenants; (iii) gross-up payments for excise taxes; and (iv) any and all awarded stock incentive units pursuant to the MSIP (other than to the extent related to a completed period for which the determination of the number of earned stock incentive units had
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already been made; and not to exceed the number of stock incentive units comprising the target award under the applicable stock incentive award regardless of the potential to earn more than such target award) being deemed earned stock incentive units which are vested, and all such earned stock incentive units shall be payable. Mr. Koziar’s agreement permitted Mr. Koziar to defer the payment described in clause (ii), in which event the amount would be credited to his deferred compensation plan account. In addition, if Mr. Koziar’s agreement was terminated within twelve months of such change of control, his agreement stated that Mr. Koziar would receive the benefits described below unless such termination is for cause or due to Mr. Koziar’s death or disability.
Under the December 15, 2000 letter agreement, if a tender offer was commenced or the Company or DP&L entered into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets, then upon any subsequent termination of Mr. Koziar’s agreement within 36 months of the change of control and prior to the occurrence of another change of control or the consummation of such tender offer or agreement, Mr. Koziar’s agreement provided for (i) the payments described above; (ii) in the event that the change of control preceded the completion of a period in which Mr. Koziar could have earned compensation pursuant to the MICP or any other incentive plan (other than the MSIP), a lump sum cash payment to Mr. Koziar equal to the average of the last three annual award payments to him under the MICP or other incentive plan (other than the MSIP), including any portion of such payments that he elected to have credited to his deferred compensation plan account (a second version of the letter agreement calculated this average based on the three calendar years out of the last ten consecutive years which yielded the highest average of incentive compensation); (iii) payment of any cash or shares of the Company’s stock awarded pursuant to the MICP or any action taken by the Board of Directors prior to the change of control which had been deferred; provided, however, that any deferral election that Mr. Koziar selected would remain in effect; and (iv) continuation of all life, health, accident and disability insurance until the third anniversary of the date of the change of control or until an essentially equivalent benefit was made available to Mr. Koziar by a subsequent employer at no cost to Mr. Koziar; provided, however, that such benefits and payments would not be made if the agreement was terminated by the Company or DP&L for cause, by Mr. Koziar, or on account of Mr. Koziar’s death or disability. In the event of such a change of control, if the tender offer or agreement was abandoned or terminated, and a majority of the original directors and/or their successors determine that the tender offer or agreement would not effectuate or otherwise result in a change of control and provide written notice of such determination, then a subsequent termination would not entitle Mr. Koziar to the benefits described above.
Upon any change of control, Mr. Koziar’s letter agreement stated that the Company and DP&L would transfer cash or other property in an amount sufficient to fund all change of control benefits and payments to the master trust. In addition, the letter agreement provided a gross-up payment if any excise tax was imposed upon a change of control such that Mr. Koziar was in the same after-tax position as if no excise tax was imposed. Neither the Company nor DP&L experienced a change of control while Mr. Koziar was employed by the Company.
Caroline E. Muhlenkamp
Ms. Muhlenkamp served as director and President of MVE from November 1998 and Group Vice President and interim Chief Financial Officer of the Company and DP&L from April 2003 to May 16, 2004. During 2003, her employment terms were governed by an employment agreement dated as of December 14, 2001 and a letter agreement dated December 15, 2000 that was signed in 2002.
Ms. Muhlenkamp and the Company are presently engaged in legal proceedings that relate, in part, to her employment agreement (see Item 3 – Legal Proceedings). In those proceedings, Ms. Muhlenkamp claims that she is entitled to rights and benefits under purported agreements with the Company. The Company believes that only certain of these purported agreements were properly approved. The following description of Ms. Muhlenkamp’s employment agreement is a summary of the agreement that the Company believes was in effect at the time of her resignation.
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The term of Ms. Muhlenkamp’s employment agreement commenced on December 14, 2001 and continued thereafter until terminated by the Company or Ms. Muhlenkamp at any time, with or without cause, upon 180 days written notice, except that if the Company terminated the agreement for cause (as defined in the agreement), no such notice was required. The agreement would have terminated upon Ms. Muhlenkamp’s death or disability. The Company was also obligated to require any successor to all or substantially all of its business or assets to assume her employment agreement.
Ms. Muhlenkamp resigned on May 16, 2004. In connection with Ms. Muhlenkamp’s resignation, the Company reserved all rights and defenses and Ms. Muhlenkamp reserved all rights and entitlements under applicable law and under any existing agreements. Ms. Muhlenkamp, along with Mr. Forster, filed a lawsuit against the Company, DP&L and MVE claiming that she was wrongly terminated and is entitled to certain rights and benefits. The Company, DP&L and MVE have filed a lawsuit against Ms. Muhlenkamp alleging that she breached her fiduciary duties and breached her employment contract and claim that they no longer owe Ms. Muhlenkamp any further benefits under her contact. (See Item 3 - Legal Proceedings.)
Compensation and Indemnification
Ms. Muhlenkamp’s agreement provided for (i) an annual base salary to be determined from time to time; (ii) an MVE Payment calculated in accordance with the MVE Incentive Program; and (iii) other standard fringe benefits, including medical, life and disability insurance, retirement benefits and continued participation in the Company’s Key Employees Deferred Compensation Plan. Ms. Muhlenkamp’s annual base salary was $314,000 in 2001, $364,000 in 2002 and $434,000 in 2003. Ms. Muhlenkamp’s employment agreement stated that for 2003 and for each calendar year thereafter, Ms. Muhlenkamp’s MVE Payment was equal to 2.25%.
Other versions of Ms. Muhlenkamp’s agreement, which the Company does not believe were authorized, also provided for her eligibility to receive options under DPL’s Stock Option Plan and to participate in the MICP. In addition, such versions stated that the Company and DP&L would indemnify her against any and all losses, liabilities, damages, expenses (including attorneys’ fees), judgments and amounts paid in settlement incurred by Ms. Muhlenkamp in connection with any claim, action, suit or proceeding (whether civil, criminal, administrative or investigative), including any action by or in the right of either the Company or DP&L, by reason of any act or omission to act in connection with the performance of her duties under the contract to the full extent that the Company and DP&L are permitted to indemnify a director, officer, employee or agent against the foregoing under Ohio law, including, without limitation, Section 1701.13(E) of the Ohio Revised Code.
In connection with Ms. Muhlenkamp’s resignation, the Company agreed to advance reasonable attorney’s fees incurred by Ms. Muhlenkamp in defending any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, including any action brought derivatively on behalf of the Company, by reason of any act or omission by Ms. Muhlenkamp to act as director, trustee, officer, employee or agent to the full extent permitted by Ohio law. Any such advancement of expenses was subject to the Company’s receipt of an undertaking by Ms. Muhlenkamp to repay any
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such amounts unless it is ultimately determined that she is entitled to be indemnified by the Company as authorized by Article VII of the Company’s Code of Regulations and Ohio law. However, the lawsuit filed by the Company, DP&L and MVE against Ms. Muhlenkamp seeks a declaration that she is not entitled to such advancements and must repay advances already made because she is unable to demonstrate entitlement to such indemnification.
Termination
Ms. Muhlenkamp’s employment agreement stated that the Company and DP&L would continue to make Ms. Muhlenkamp’s MVE Payment on an annual basis unless the Company terminated her “for cause,” (In the litigation with the Company, Ms. Muhlenkamp has argued that based on other versions of the employment agreement, the “for cause” termination provisions have been eliminated and the Company is required to continue to make these MVE Payments annually under all circumstances. The Company disputes that argument.) The December 15, 2000 letter agreement included termination provisions that differ from Ms. Muhlenkamp’s employment agreement. If terminated for any reason at any time, the December 15, 2000 letter agreement provided for (i) a lump sum cash payment to Ms. Muhlenkamp equal to the sum of (a) Ms. Muhlenkamp’s annual base salary through the date of termination and (b) any awards earned, with respect to any completed period, pursuant to the MVE Incentive Program or any other incentive compensation that had not yet been paid, other than any deferred compensation plan in which Ms. Muhlenkamp made a contrary installment election; (ii) benefits under the medical plan for Ms. Muhlenkamp for life and for her eligible dependents; and (iii) all other accrued benefits to which Ms. Muhlenkamp was entitled through the date of termination; provided, however, that if Ms. Muhlenkamp’s agreement terminated upon her death or disability, the Company and DP&L would pay to her estate or to Ms. Muhlenkamp her annual base salary through December 31, 2005.
Other versions of Ms. Muhlenkamp’s agreement, which the Company does not believe were authorized, also provided that if the agreement was terminated prior to the expiration of its term by the Company or DP&L (other than after a change of control in which Ms. Muhlenkamp would be entitled to payment of benefits) or by Ms. Muhlenkamp, and at the time of such termination there were no unfilled senior positions at MVE, the agreement provided for (i) continued payment of Ms. Muhlenkamp’s annual base salary through December 31, 2005; (ii) payment of the annual bonus that Ms. Muhlenkamp would have received under the MICP for the year in which termination occurs had she been employed as of the last day of such year; and (iii) the vesting of any unvested options granted to Ms. Muhlenkamp under the Company’s Stock Option Plan.
Change of Control
If a change of control occurred, then Ms. Muhlenkamp’s December 15, 2000 letter agreement provided for payments and benefits similar to those available to Mr. Koziar, with the only exception being that for Ms. Muhlenkamp, the incentive compensation included award payments pursuant to the MVE Incentive Program only. Neither the Company nor DP&L experienced a change of control while Ms. Muhlenkamp was employed by the Company.
February 2004 Letter
Mr. Koziar executed a letter agreement with Ms. Muhlenkamp, dated as of February 2, 2004, which was agreed to and acknowledged by Ms. Muhlenkamp. The letter agreement described new terms and modifications to Ms. Muhlenkamp’s employment agreement, an amended version of which was attached thereto. A copy of a revised change of control letter agreement was given to Ms. Muhlenkamp. The modifications included:
| • | changing Ms. Muhlenkamp’s severance compensation after a change of control from 200% of the average annual award payments under the MVE Incentive Program paid to Ms. Muhlenkamp for the three years prior to her termination to 200% of the average of her incentive compensation for the three of the last ten years prior to her termination, whether or not consecutive, that yielded the highest average incentive compensation; |
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| • | adding a “clarification” that a transferee of all or a portion of the Company’s interest in the financial asset portfolio would be required specifically to assume the Company’s obligation to pay Ms. Muhlenkamp the MVE Incentive Payment pursuant to Annex A of her agreement; and |
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| • | increasing the duration of Ms. Muhlenkamp’s non-compete agreement from two to three years. |
The amended agreement was never signed by the Company. In addition, neither the Board nor the Compensation Committee approved or authorized the modifications and new terms described above. The Company, DP&L and MVE have commenced litigation seeking a declaration that the amendments described above were not effective. However, in the litigation action brought by Mr. Forster and Ms. Muhlenkamp, in which they allege a breach of contract, Ms. Muhlenkamp claims that the amended agreement governed her employment with the Company and that she is therefore entitled to the benefits contained therein. (See Item 3 – Legal Proceedings.)
James V. Mahoney
Mr. Mahoney has served as the President of DPLE since January 3, 2003, pursuant to an employment agreement and letter agreement dated January 3, 2003. The term of Mr. Mahoney’s employment agreement is indefinite until terminated by the Company or Mr. Mahoney, with or without cause, upon 30 days written notice; provided that the Company may terminate the agreement with cause without prior notice. The agreement also automatically terminates upon Mr. Mahoney’s death or disability.
Mr. Mahoney was appointed President and Chief Executive Officer of the Company and DP&L by the Board of Directors on May 16, 2004.
Compensation
Mr. Mahoney’s agreement provides for (i) an annual base salary of not less than $425,000; (ii) participation in the MICP, in which during 2003, he had the opportunity to earn $200,000 at 100% of the target performance; (iii) participation in the Company’s Long Term Incentive Plan, in which during 2003, he had the opportunity to earn $400,000 at 100% of target performance; (iv) stock options to purchase up to 100,000 shares of common stock; and (v) such fringe benefits (including medical, life and disability insurance benefits and qualified retirement benefits) as are generally made available to other executive level employees. Awards earned pursuant to the Long Term Incentive Plan will vest in three equal installments on December 31 of each year, commencing with the year in which an award is granted.
Termination
If Mr. Mahoney’s employment is terminated for any reason at any time, Mr. Mahoney’s letter agreement provides for (i) a lump sum cash payment to Mr. Mahoney equal to the sum of his full base salary through the date of termination and the amount of any awards, with respect to any completed period which, pursuant to the MICP or any other incentive plan in which he participates (other than any deferred compensation plan in which he elected a contrary installment), have been earned but not yet paid and (ii) payment of any other accrued benefits to which Mr. Mahoney is entitled.
If the Company or DP&L terminates Mr. Mahoney’s employment without cause and a change of control has not occurred or is not pending, then Mr. Mahoney’s employment agreement provides for (a) a payment to Mr. Mahoney equal to the sum of his full base salary then in effect, and the benefits described above, provided that Mr. Mahoney executes and delivers a release pursuant to which he fully and unconditionally releases any claims that he may have against the Company and its affiliates. Certain other benefits would have applied if Mr. Mahony had not been offered the position of President and CEO of DPL on or before December 31, 2004.
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Change of Control
If Mr. Mahoney’s employment is terminated within 36 months of a change of control, Mr. Mahoney’s letter agreement provides for (i) a lump sum cash payment equal to the sum of (a) the average of the three highest of the last ten annual award payments made pursuant to the MICP or other incentive plan, including any portion deferred to his deferred compensation plan account, if the termination precedes the actual determination of such incentive compensation or the completion of a period in which he could have earned incentive compensation, (b) an amount equal to 200% of the sum of his annual base salary, before deduction of any deferred amounts, and the average of the three highest of the last ten annual award payments made under the MICP, including any portion deferred to his deferred compensation plan account, (c) one half of the amount payable in clause (b) in consideration of Mr. Mahoney’s agreement to non-compete and confidentiality provisions, (d) any cash or shares of Company common stock previously earned under the MICP or pursuant to action by the Board of Directors but not yet paid, and (e) gross-up payments for excise taxes; and (ii) continuation of all life, medical, accident and disability insurance for Mr. Mahoney and his eligible dependents until the third anniversary of the date of termination or the date an essentially equivalent benefit is made available to Mr. Mahoney by a subsequent employer.
Mr. Mahoney’s letter agreement states that the benefits described above would not be available if such termination is by (i) the Company or DP&L for cause or on account of Mr. Mahoney’s disability; (ii) Mr. Mahoney without “good reason” and the change of control does not result from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets; (iii) Mr. Mahoney for any reason and the change of control results from the commencement of a tender offer or the Company or DP&L entering into an agreement to merge or consolidate or to sell, lease, exchange or otherwise transfer or dispose of all or substantially all of its assets; or (iv) Mr. Mahoney’s death. “Good Reason” for Mr. Mahoney is defined as (i) assignment of duties inconsistent with the written objectives of his position, a change in his reporting responsibilities, his removal from or any failure to re-elect Mr. Mahoney to his position or office; (ii) failure to have his annual base salary raised when salary adjustments are historically made; (iii) a reduction in his base salary; (iv) failure by the Company or DP&L to continue a benefit plan, including incentive plans; (v) the relocation of the Company’s principal executive offices outside of Montgomery, Ohio, if at the time of a change of control, Mr. Mahoney is based at the principal offices; (vi) being required to base more than fifty miles from the location he was based at the time of the change of control or the failure to reimburse for moving expenses if Mr. Mahoney consents to moving his base and permanent residence; (vii) excessive travel that necessitates overnight absences; (viii) the failure by the Company or DP&L to obtain the assumption of his agreement by any successor; (ix) termination without cause or without being provided with a notice of termination; and (x) if, within 36 months of a change of control, Mr. Mahoney determines that he cannot effectively discharge his duties.
Upon a change of control, Mr. Mahoney’s letter agreement states that the Company and DP&L will transfer cash or other property in an amount sufficient to fund all change of control benefits and payments to the master trust. In addition, the letter agreement provides a gross-up payment if any excise tax is imposed upon a change of control such that Mr. Mahoney is in the same after-tax position as if no excise tax was imposed.
If Mr. Mahoney’s employment is terminated within 36 months of a change of control due to his disability, his letter agreement provides for benefits under the Company’s and DP&L’s salary continuation plan or disability insurance. If Mr. Mahoney’s employment is terminated for cause subsequent to a change of control, his letter agreement provides for compensation for services previously rendered as if he were terminated without the occurrence of a change of control.
Further, if a tender offer or a potential agreement is abandoned or terminated and a majority of the original directors and/or their successors determine that the tender offer or agreement will not effectuate or otherwise result in a change of control and provide written notice of such determination, then a subsequent termination will not entitle Mr. Mahoney to the benefits described above.
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Robert D. Biggs
Mr. Biggs has served as the Chairman of the Board of Directors of DPL and DP&L since May 16, 2004, and he was appointed Executive Chairman of DPL and DP&L pursuant to an employment agreement, dated July 21, 2004 and effective as of May 16, 2004. The term of Mr. Biggs’ employment agreement is through May 16, 2006 and automatically renews for one-year periods unless terminated, with or without cause, by the Company, DP&L or Mr. Biggs upon 90 days written notice; provided that the Company or DP&L may terminate Mr. Biggs for cause without prior notice. The agreement also automatically terminates upon Mr. Biggs’ death or disability. Mr. Biggs’ agreement includes non-compete and confidentiality provisions.
Compensation and Indemnification
Mr. Biggs’ agreement provides for (i) an annual base salary of $250,000; (ii) his eligibility to receive an annual bonus under the MICP; (iii) stock options to purchase 200,000 shares of Company common stock at an exercise price to be determined pursuant to the DPL Inc. Stock Option Plan and that will vest and become exercisable as to 50% of the shares on each of May 16, 2005 and
May 16, 2006; (iv) an annuity that provides Mr. Biggs with a lifetime annual benefit of $71,000 and that includes a joint and survivor benefit feature that provides 30% of his annual annuity benefit to his surviving spouse for her lifetime in consideration of the existing pension benefits that Mr. Biggs has foregone to accept employment with the Company; (v) a tax gross-up such that if any annuity taxes or other related taxes are imposed, Mr. Biggs is in the same after-tax position as if no taxes were imposed; (vi) fringe benefits as are generally provided to non-employee directors; and (vii) term life insurance policy with a death benefit of $500,000. In addition, the Company will provide Mr. Biggs with the use of corporate aircraft in connection with his travel between Dayton and his home in Florida and will pay a tax gross-up in respect of such use. On October 5, 2004, Mr. Biggs signed a Letter Agreement with the Company to clarify that the effective date for the grant of stock options entitling Mr. Biggs to purchase 200,000 common shares pursuant to his employment agreement was October 5, 2004 and not May 16, 2004.
Mr. Biggs’ agreement states that the Company and DP&L will indemnify him against any and all losses, liabilities, damages, expenses (including attorney’s fees), judgments and amounts paid in settlement incurred by Mr. Biggs in connection with any claim, action, suit or proceeding (whether civil, criminal, administrative or investigative), including any action by or in the right of either the Company or DP&L, by reason of any act or omission to act in connection with the performance of his duties under the agreement to the full extent that the Company and DP&L are permitted to indemnify a director, officer, employee or agent against the foregoing under the respective Codes of Regulations of the Company and DP&L and Ohio law, including, without limitation, Section 1701.13(E) of the Ohio Revised Code.
Termination
If Mr. Biggs’ employment is terminated for any reason, Mr. Biggs’ agreement provides for (i) his annual base salary through the date of his termination and (ii) any accrued benefits under the Company’s and DP&L’s compensation or benefit plans or arrangements in accordance with their terms, including any unpaid bonuses payable in respect of a completed fiscal year.
If Mr. Biggs’ employment is terminated without cause prior to a change of control, then in addition to the payments and benefits described above, Mr. Biggs’ agreement provides for (i) a lump sum cash payment equal to the aggregate amount of his annual base salary during the remainder of his term; (ii) continued benefits during the remainder of the term; and (iii) the vesting of all awarded stock options; provided that Mr. Biggs executes and delivers a release pursuant to which he fully and unconditionally releases any claims that he may have against the Company or DP&L.
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Change of Control
If within one year of a change of control Mr. Biggs’ employment either is not extended by the Company or is terminated without cause, Mr. Biggs’ agreement provides for (i) a lump sum cash payment equal to the sum of (a) 200% of the annual base salary; (b) 200% of the annual bonus paid or payable to Mr. Biggs for the calendar year immediately preceding the year of his termination (if Mr. Biggs has not had the opportunity to earn an annual bonus prior to his termination, then the annual bonus shall be deemed to be $250,000); and (c) a gross-up payment if any excise tax is imposed upon a change of control such that Mr. Biggs is in the same after-tax position as if no excise tax was imposed; (ii) the continuation of his benefits for two years following his termination; and (iii) the vesting of all of his awarded stock options; provided that Mr. Biggs executes and delivers a release pursuant to which he fully and unconditionally releases any claims that he may have against the Company or DP&L. If the change of control that occurred was only the commencement of a tender offer, the tender offer is abandoned or terminated and a majority of the original directors and/or their successors determine that the tender offer will not effectuate or otherwise result in a change of control and provide written notice of such determination, then a subsequent termination will not entitle Mr. Biggs to the benefits described above.
W. Steven Wolff
Mr. Wolff has served as an executive employee of the Company since September 17, 2003 pursuant to an employment agreement dated September 17, 2003 and a letter agreement dated November 1, 2002. The term of Mr. Wolff’s employment agreement is indefinite until terminated by the Company, with or without cause, upon 30 days’ notice or by Mr. Wolff upon 180 days’ written notice; provided that the Company may terminate the agreement with cause without prior notice. The agreement also terminates automatically upon Mr. Wolff’s death or disability.
Compensation
Mr. Wolff’s agreement provides for (i) an annual base salary of not less than $250,000; (ii) participation in such short-term and long-term bonus, incentive compensation, deferred compensation and similar plans as the Company or the Compensation Committee may determine; and (iii) such fringe benefits as are generally made available to all other employees, the Executive Medical Plan, the annual physical program and financial planning services in effect from time to time.
Termination
If Mr. Wolff’s employment is terminated without “cause” and he is not entitled to receive the benefits described below, then the agreement provides for payment of his annual base salary in installments over the one-year period after the date of termination; provided that Mr. Wolff executes and delivers a release pursuant to which he fully and unconditionally releases any claims that he may have against the Company and its affiliates.
“Cause” for purposes of Mr. Wolff’s employment agreement is defined as (i) commission of a felony, (ii) embezzlement, (iii) the illegal use of drugs, or (iv) the failure by Mr. Wolff to substantially perform his duties hereunder (other than any such failure resulting from his physical or mental illness or other physical or mental incapacity) as reasonably determined by the Company.
If Mr. Wolff’ s employment is terminated for any reason at any time, his letter agreement provides for (i) a lump sum cash payment to Mr. Wolff equal to his full base salary through the date of termination; (ii) the amount of the awards, with respect to any completed period, which pursuant to the MICP or any other incentive plan (other than any deferred compensation plan in which he made a contrary installment election) have been earned but not paid; and (iii) payment of any other accrued benefits to which he is entitled through the date of termination.
For a period of one year after termination of Mr. Wolff’s employment, Mr. Wolff’s employment agreement states that Mr. Wolff is required to provide assistance as may be necessary to facilitate a smooth and orderly transition of duties.
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Change of Control
If Mr. Wolff’s employment is terminated in connection with a change of control, his letter agreement provides for payments and benefits similar to those described for Mr. Mahoney except that Mr. Wolff’s non-compete provisions are effective for two years after termination whereas Mr. Mahoney’s non-compete provisions are effective for three years after termination.
Patricia K. Swanke
Ms. Swanke has served as an executive employee since September 17, 2003, pursuant to an employment agreement dated September 17, 2003 and a letter agreement dated November 1, 2002. The term of Ms. Swanke’s employment agreement is indefinite until terminated by the Company, with or without cause, upon 30 days’ notice or by Ms. Swanke upon 180 days written notice; provided that the Company may terminate the agreement with cause without prior notice. The agreement also terminates automatically upon Ms. Swanke’s death or disability. Ms. Swanke’s letter agreement includes non-compete and confidentiality provisions.
Compensation
Ms. Swanke’s employment agreement provides for (i) an annual base salary of not less than $230,000; (ii) participation in such short-term and long-term bonus, incentive compensation, deferred compensation and similar plans as the Company or the Compensation Committee may determine; and (iii) such fringe benefits as are generally made available to all other employees, the Executive Medical Plan, the annual physical program and financial planning services in effect from time to time.
Termination
If Ms. Swanke’s employment is terminated without cause and she is not entitled to receive the benefits described below, then the agreement provides for payment of her annual base salary in installments over the one-year period after the date of termination; provided that Ms. Swanke executes and delivers a release pursuant to which she fully and unconditionally releases any claims that she may have against the Company and its affiliates. The definition of “cause” is identical to the definition provided in Mr. Wolff’s summary.
If Ms. Swanke’ s employment is terminated for any reason at any time, her letter agreement provides for (i) a lump sum cash payment equal to her full base salary through the date of termination; (ii) the amount of the awards, with respect to any completed period which, pursuant to the MICP or any other incentive plan (other than any deferred compensation plan in which she made a contrary installment election) that have been earned but not paid; and (iii) payment of any other accrued benefits to which she was entitled through the date of termination.
For a period of one year after termination of Ms. Swanke’s employment, Ms. Swanke’s employment agreements states that Ms. Swanke is required to provide assistance as may be necessary to facilitate a smooth and orderly transition of duties.
Change of Control
If Ms. Swanke’s employment is terminated within 36 months of a change of control, Ms. Swanke’s letter agreement provides for (i) a lump sum cash payment equal to the sum of (a) the average annual award that she earned under the MICP for the previous three years, if the termination precedes the actual determination of such incentive compensation or the completion of a period in which she could have earned incentive compensation, (b) an amount equal to 300% of the sum of her annual base salary, before deduction of any deferred amounts, and the average annual award she earned under the MICP for the previous three years, (c) any cash or shares of the Company’s common stock previously earned under the MICP or pursuant to action by the Board of Directors but not yet paid, and (d) gross-up payments; and (ii) continuation of all life, medical, accident and disability insurance for Ms. Swanke and her eligible dependents until the third anniversary of the date of termination or the date an essentially equivalent benefit is made available to Ms. Swanke by a subsequent employer.
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Ms. Swanke’s letter agreement states that the benefits above would not be available if such termination is by (i) the Company for cause or on account of Ms. Swanke’s disability; (ii) Ms. Swanke without good reason, as defined in Mr. Mahoney’s employment agreement description, or (iii) Ms. Swanke’s death.
Upon a change of control, Ms. Swanke’s letter agreement states that the Company will transfer cash or other property in an amount sufficient to fund all change of control benefits and payments to the master trust.
If Ms. Swanke’s employment is terminated within 36 months of a change of control due to her disability, her letter agreement provides for benefits under the Company’s salary continuation plan or disability insurance. If Ms. Swanke’s employment is terminated for cause subsequent to a change of control, her letter agreement provides for compensation for services previously rendered as if she were terminated without the occurrence of a change of control.
Further, if a tender offer or a potential agreement is abandoned or terminated and a majority of the original directors and/or their successors determine that the tender offer or agreement will not effectuate or otherwise result in a change of control and provide written notice of such determination, then a subsequent termination will not entitle Ms. Swanke to the benefits described above.
Director Compensation
In 2003, director compensation for each non-employee director consisted of an annual retainer of $55,000, a committee chair retainer of $10,000, Board meeting fees of $5,000 per meeting, committee meeting fees of $4,000 per meeting and a special meeting fee of $3,000 per meeting. In 2002 and 2001, non-employee directors received 1,500 common share units annually for services as a director.
DPL maintains a Director Deferred Compensation Plan in which payment of directors’ fees may be deferred. The director fees of those directors who have designated their director fees to be deferred are invested in DPL common share units. Under the Director Deferred Compensation Plan, directors are entitled to receive a lump sum payment or payments in installments over a period up to 20 years upon their retirement or resignation from the Board.
On July 21, 2004, the Company and DP&L entered into an employment agreement with Robert D. Biggs, who became Executive Chairman of the Board effective May 16, 2004. Mr. Biggs retired as a Managing Partner of PricewaterhouseCoopers LLP (PwC) in 1999 and received retirement benefits from PwC which, if continued, could have affected whether PwC qualifies as an independent auditing firm for the Company. PwC was DP&L’s and the Company’s independent auditor until March 2003 and was required to give its consent to the filing of this Form 10-K. In order for PwC to continue to qualify as an independent auditor, Mr. Biggs has agreed to accept his retirement benefit from PwC in the form of an annuity which provides an annual retirement benefit that is $71,000 less than the amount he previously received from PwC directly. To compensate Mr. Biggs for the resulting reduction in his PwC retirement benefits, the Company and DP&L purchased an annuity that will pay Mr. Biggs $71,000 per year for life in addition to the compensation described in Item 11-Executive Compensation. The Company and DP&L will also provide Mr. Biggs with gross-up payments for any income taxes incurred by him in connection with the annuity such that Mr. Biggs is in the same after-tax position as if no income taxes had been imposed. On October 5, 2004, the Company, DP&L and Mr. Biggs signed a letter agreement modifying his employment agreement to clarify that the effective date for the grant of stock options to Mr. Biggs pursuant to his employment agreement was October 5, 2005 and not May 16, 2004. Upon Mr. Biggs’ death, Mr. Biggs’ spouse will receive an annual amount equal to 30% of the total annuity payable to Mr. Biggs for life. This arrangement will continue to be binding even if Mr. Biggs no longer serves as Executive Chairman.
Compensation Committee Interlocks and Insider Participants
The Compensation Committee makes all compensation decisions. During fiscal 2003, the members of the Compensation Committee were Jane G. Haley, Chair, James F. Dicke, II, Ernie Green and W August Hillenbrand. No interlocking relationship exists between the Company’s Board of Directors or Compensation Committee and the boards of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past.
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Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
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Equity Compensation Plan Information
The following table sets forth certain information as of December 31, 2003, with respect to the Company’s equity compensation plans under which shares of the Company’s equity securities may be issued.
Plan category | | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights | | Weighted average
exercise price of
outstanding options,
warrants and rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a) | |
| |
| |
| |
| |
Equity compensation plans approved by security holders: | | | | | | | | | | |
DPL Inc. Stock Option Plan (1) | | | 6,960,168 | | | $ 20.81 | | | 1,039,832 | |
Equity compensation plans not approved by security holders: | | | | | | | | | | |
Directors’ Deferred Stock Compensation Plan (2) | | | 279,939 | | | N/A | | | See Notes 2 and 4 | |
Management Stock Incentive Plan (3) | | | 1,103,308 | | | N/A | | | See Notes 3 and 4 | |
| |
|
| | | | | | | |
Total | | | 8,343,415 | | | | | | | |
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(1) | The DPL Inc. Stock Option Plan provides that “no single Participant shall receive Options with respect to more than 2,500,000 shares.” the September 24, 2002 grant of 300,000 options to Mr. Forster brought his total options to 2.7 million. Under Mr. Forster’s Option Agreement, the DPL Inc. Stock Option Plan document controls. Therefore, this table reflects a conforming total of 2.5 million options. |
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(2) | The Directors’ Deferred Stock Compensation Plan (the “Directors’ Stock Plan”) provided for the annual award of DPL common shares to non-employee directors for services as a director. All shares awarded under the Directors’ Stock Plan are transferred to the Master Trust. There was no stated maximum number of shares that may have been awarded under the Directors’ Stock Plan. |
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(3) | The Management Stock Incentive Plan provides for the award of SIUs to executives. Earning of SIUs is dependent on the achievement of long-term incentives, including the performance of DPL over various performance periods. For each SIU that is earned and vests, a participant receives the equivalent of one DPL common share plus dividend equivalents from the date of award. |
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(4) | DPL has secured its obligations under the Directors’ Deferred Stock Compensation Plan and the Management Stock Incentive Plan by market purchases of DPL common shares by the Master Trust. Accordingly, issuance of shares to directors or executives under these plans will not increase the number of DPL common shares issued. |
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to the beneficial ownership of common shares and Series B voting preferred shares of DPL as of May 12, 2004 by each person or group known by the Company to own more than 5% of the common shares or Series B voting preferred shares. Ownership percentages are based on 126,501,404 common and 6,600,000 Series B voting preferred shares outstanding as of May 12, 2004.
| | Common Shares
Beneficially Owned | | Series B Voting Preferred Shares
Beneficially Owned | |
| |
| |
| |
Name and Address | | Number | | Percent of Class | | Number | | Percent of Class | |
| |
| |
| |
| |
| |
Dayton Ventures LLC (1)
…c/o Kohlberg Kravis
Roberts & Co. LP
9 W. 57th Street
New York, NY 10019 | | | 31,560,000(2) | | | 24.9% | | | 6,600,000(3) | | | 100% | |
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(1) | Dayton Ventures LLC is a Delaware limited liability company, the sole members of which are KKR 1996 Fund L.P. and KKR Partners II, L.P. As a member of each of KKR 1996 GP LLC and Strata LLC, the ultimate parent entities of KKR 1996 Fund L.P. and KKR Partners II, L.P., respectively, each of Messrs. Scott M. Stuart, a director in 2003 and George R. Roberts, a non-voting observer in 2003, of DPL and DP&L, may be deemed to beneficially own any shares or warrants beneficially owned by Dayton Ventures LLC, although each such individual disclaims beneficial ownership of such shares and warrants. |
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(2) | Dayton Ventures LLC does not own any common shares. Represents the number of common shares issuable upon exercise of warrants. |
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(3) | The 6,600,000 Series B voting preferred shares were issued to Dayton Ventures LLC in a transaction with KKR and represent up to 4.9% of the outstanding voting power of DPL’s voting securities and may be redeemed on a share for share basis to the extent common shares are issued upon exercise of the warrants held by Dayton Ventures LLC. |
The determination that there were no other persons, entities or groups known to the Company to beneficially own more than 5% of the Company’s equity securities was based on a review of all statements filed with respect to the Company since the beginning of the past fiscal year with the SEC pursuant to Section 13(d) or 13(g) of the Exchange Act.
Security Ownership of Management
Set forth below is information concerning the beneficial ownership of common shares of DPL by each Director, person named in the Summary Compensation Table and of all Directors and Officers of the Company as a group as of May 12, 2004.
Name | | Amount and Nature of
Beneficial Ownership | | Percent of
Class – (1) (2) (3) | |
| |
| |
| |
Robert D. Biggs | | | 2,419 | | | — | |
Paul R. Bishop | | | 9,053 | | | — | |
James F. Dicke II | | | 269,884 | | | 0.2 | |
Peter H. Forster | | | 968,349 | | | 0.8 | |
Ernie Green | | | 152,963 | | | 0.1 | |
Jane G. Haley | | | 189,135 | | | 0.1 | |
W August Hillenbrand | | | 159,248 | | | 0.1 | |
Stephen F. Koziar, Jr. | | | 197,533 | | | 0.2 | |
James V. Mahoney | | | 4,263 | | | — | |
Caroline E. Muhlenkamp | | | 69,608 | | | 0.1 | |
Patricia K. Swanke | | | 14,388 | | | — | |
W. Steven Wolff | | | 15,452 | | | — | |
| | | | | | | |
Total Directors and Officers as a group (4) | | | 2,068,296 | | | 1.6 | |
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(1) | Ownership percentages are based on 126,501,404 common shares outstanding as of May 12, 2004. |
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(2) | The number of shares shown represents in each instance less than 1% of the outstanding common shares of DPL. There were 5,781,346 common shares and common share units, or 1.6% of the total number of common shares, beneficially owned by all directors and officers of DPL and DP&L as a group at May 12, 2004, excluding shares beneficially owned by an affiliate of KKR, an investment company. See “Certain Relationship and Related Transactions”. The number of shares shown includes (i) 159,998 common shares transferred to the Master Trust for non-employee directors pursuant to the Directors’ Deferred Stock Compensation Plan, (ii) 200,000 common shares subject to presently exercisable options for current non-employee directors except Mr. Forster and (iii) 236,165 share units with no voting rights held by non-employee directors under the Directors’ Deferred Compensation Plan as follows: Mr. Biggs – 2,419 units; Mr. Bishop – 9,053 units; Mr. Dicke – 59,937 units; Mr. Green – 53,369 units; Mrs. Haley – 61,047 units and Mr. Hillenbrand – 50,340 units. |
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(3) | The number of shares shown for other individuals includes common shares, restricted share units with no voting rights, and stock options that are exercisable. |
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(4) | The group includes all current directors and executive officers listed under Item 10 as of May 12, 2004. |
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Item 13 - Certain Relationships and Related Transactions |
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On March 13, 2000, Dayton Ventures, Inc. and Dayton Ventures LLC, affiliates of Kohlberg Kravis Roberts & Co. LLC (KKR), purchased a combination of trust preferred securities issued by a trust established by DPL, voting preferred shares of DPL and warrants to purchase common shares of DPL for an aggregate of $550 million. The trust preferred securities were redeemed at par in 2001 with proceeds of a new issuance of trust preferred securities and DPL Senior Notes. The 6.6 million Series B voting preferred shares have voting power not exceeding 4.9% of the total outstanding voting power of DPL’s voting securities and were purchased by Dayton Ventures LLC for an aggregate purchase price of $68 thousand. The warrants to purchase 31.6 million common shares (representing approximately 19.9% of the common shares then outstanding) have a term of 12 years, an exercise price of $21 per share, and were purchased by Dayton Ventures LLC for an aggregate purchase price of $50 million. DPL has agreed to pay KKR an annual management, consulting and financial services fee of $1.0 million. The agreement also states that the Company will provide KKR with an opportunity to provide investment banking services on such terms as the parties may agree and at such time as any such services may be required. The Company has agreed to reimburse KKR and their affiliates all reasonable expenses incurred in connection with the services provided under this agreement, including travel expenses and expenses of its counsel. At December 31, 2003, DPL had paid KKR the annual $1.0 million management, consulting and financial services fee, paid $2.0 million in fees relating to managing KKR-sponsored investment funds, and subscribed to invest up to $190 million over time in KKR-sponsored investment funds.
The Securityholders and Registration Rights Agreement among DPL, DPL Capital Trust I, Dayton Ventures LLC and Dayton Ventures, Inc. gives affiliates of KKR the right to designate one person for election to, and one person to attend as a non-voting observer at all meetings of, the DPL and DP&L Boards of Directors for as long as Dayton Ventures LLC and its affiliates continue to beneficially own at least 12.64 million common shares of DPL, including shares issuable upon exercise of warrants. Scott M. Stuart, a director during fiscal 2003, and George R. Roberts, a non-voting observer, were the KKR designees in 2003 pursuant to this agreement. Mr. Stuart resigned from the Board and Mr. Roberts ceased to be a non-voting observer of the Board as of April 2004.
In 1996, the Company entered into a consulting contract pursuant to which Peter H. Forster agreed to (i) serve, in a non-employee capacity, as Chairman of the Board of Directors of the Company, DP&L and MVE, and as Chairman of the Executive Committee of the Board of Directors of the Company and (ii) provide advisory and strategic planning consulting services. The terms and conditions of such consulting contract are described in Item 11 - Consulting Contract and Employment Agreements in this Form 10-K.
Mr. Forster resigned on May 16, 2004. In connection with Mr. Forster’s resignation, the Company reserved all rights and defenses and Mr. Forster reserved all rights and entitlements under applicable law and under any existing agreement between Mr. Forster, the Company and all of its subsidiaries. Mr. Forster has filed a lawsuit against the Company, DP&L and MVE alleging claims against the Company, DP&L and MVE for breach of contract, conversion, promissory estoppel and declaratory judgment relating to his consulting agreement. The Company, DP&L and MVE have filed a lawsuit against Mr. Forster alleging that he breached his fiduciary duties and breached his consulting contract and claim that they no longer owe Mr. Forster any further benefits under his contract. (See Item 3 - Legal Proceedings.) In those proceedings, Mr. Forster claims that he is entitled to rights and benefits under purported agreements with the Company. The Company has confirmed that only certain of these purported agreements were properly approved.
In June 2001, the Company’s subsidiaries, MVE, of which Mr. Forster was Chairman, Miami Valley Development Company (MVDC) and Miami Valley Insurance Company, Inc. (MVIC), each entered into a management services agreement (the MSAs) with Valley Partners, Inc. (Valley) for the provision of ongoing oversight and management of each subsidiary’s financial asset holdings following a change of control of DPL or sale of the financial assets portfolio to an unaffiliated third party. Valley was a Florida corporation the sole stockholders, directors and officers of which were Mr. Forster and Ms. Muhlenkamp.
124
The MSAs provided for the buyer of DPL or the financial asset portfolio to pay an annual management fee to Valley calculated in the same manner as MVE Payments were calculated under the MVE Incentive Program, except based upon 5% of the net realized profit rather than the 2.75% or 2.25% percentages each for Mr. Forster and Ms. Muhlenkamp, respectively. Subsequent to the entering of the MSAs, Mr. Forster and Ms. Muhlenkamp each signed letter agreements agreeing that their MVE Payments would be paid to Valley as the annual management fee. The payments under the MSAs were to be payable irrespective of whether MVE, MVDC or MVIC or the transferee availed itself of the services, and regardless of whether Mr. Forster and Ms. Muhlenkamp personally performed the services or whether Valley engaged others to do so. Pursuant to the MSAs, certain accounting and administrative software and related hardware used to monitor the financial asset portfolio were to be transferred to Valley without additional consideration on the effective date of the MSAs. The MSAs were signed by Ms. Muhlenkamp on behalf of Valley and Mr. Koziar, MVE Secretary/Treasurer, on behalf of MVE, MVDC and MVIC.
In October 2001, the Company entered into an Administrative Services Agreement (the ASA) with Valley and the individual trustees of certain master trusts which hold the assets of various executive and director compensation plans. The ASA engaged Valley to provide administrative and recordkeeping functions on behalf of the master trusts upon a change of control of the Company in exchange for a 1.25% administration fee based on the market value of all assets of the master trusts. The ASA also called for Valley to provide investment advice as requested by the trustees. The 1.25% fee payable to Valley under the ASA was in addition to the annual management fee payable to Valley.
In October 2001, the Company and DP&L also entered into a Trustee Fee Agreement (the TFA) with Richard Chernesky, Richard Broock and Frederick Caspar, attorneys at Chernesky, Heyman & Kress P.L.L., a law firm that represents the Company. Upon a change of control of the Company or DP&L, Messrs. Chernesky, Broock and Caspar would become the sole trustees of the master trusts and would succeed to all of the duties of the Company’s Compensation Committee under the compensation plans funded through the master trusts in exchange for an annual fee of $500,000. This fee would not be reduced by payments made to Valley under the ASA.
The MSAs, ASA and TFA (the “Valley Partners Agreements”) were terminated by an agreement executed in January 2004, but effective as of December 15, 2003. The financial assets have not been sold or transferred and therefore the agreements never became effective and no compensation was ever paid under them. Mr. Forster’s and Ms. Muhlenkamp’s consulting and compensation arrangements were governed by the terms of the consulting contract between the Company, DP&L and Mr. Forster and the employment agreement between the Company, DP&L and Ms. Muhlenkamp, respectively, as described above.
125
On February 2 and 3, 2004, Mr. Koziar sent letters to Mr. Forster and Ms. Muhlenkamp purporting to amend their consulting and employment agreements to provide change of control protections regarding their MVE payments. In addition, on February 2, 2004, Mr. Koziar sent Mr. Forster a letter purporting to amend his consulting agreement to provide additional terms and to increase his compensation. However, none of those amendments had been approved by the Compensation Committee.
On April 26, 2004, the Company entered into a new Trustee Fee Agreement (New TFA) with Messrs. Chernesky, Broock and Caspar that will become effective upon a change of control of the Company or DP&L. If the New TFA becomes effective, then it provides that Messrs. Chernesky, Broock and Caspar will serve as the sole trustees of the master trusts in exchange for an annual fee of $250,000 during the New TFA’s term. On October 14, 2004, at the request of the Company and DP&L, Messrs. Chernesky, Broock and Caspar submitted their resignations to the Company and DP&L.
The Company has reviewed the termination of the Valley Partners Agreements, and the amendments and agreements sent to Mr. Forster and Ms. Muhlenkamp on February 2, 2004, and has initiated legal proceedings asserting breach of fiduciary duty by Messrs. Forster and Koziar and Ms. Muhlenkamp, and challenging the propriety and/or validity of those terminations, amendments and agreements. (See Item 3 - Legal Proceedings.)
Item 14 – Principal Accountant Fees and Services |
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The following table presents the aggregate fees billed for professional services rendered to DPL by KPMG LLP in 2003 and PricewaterhouseCoopers LLP for 2003 and 2002. Other than as set forth below, no professional services were rendered or fees billed by KPMG LLP during 2003 or PricewaterhouseCoopers LLP during 2003 and 2002.
KPMG LLP | | Fees Paid
2003 | | Fees Paid
2002 | |
| |
| |
| |
Audit Services (1) | | $ | 343,333 | | | — | |
Audit-Related Services (2) | | | 94,000 | | | — | |
Tax Services (3) | | | — | | | — | |
All Other Services (4) | | | — | | | — | |
| |
|
| |
|
| |
Total | | $ | 437,333 | | | — | |
PricewaterhouseCoopers LLP | | Fees Paid
2003 | | Fees Paid
2002 | |
| |
|
| |
|
| |
Audit Services (1) | | $ | 303,900 | | $ | 614,000 | |
Audit-Related Services (2) | | | 140,000 | | | 57,000 | |
Tax Services (3) | | | 62,400 | | | 238,000 | |
All Other Services (4) | | | — | | | 1,000 | |
| |
|
| |
|
| |
Total | | $ | 506,300 | | $ | 910,000 | |
|
| (1) | Audit services consist of professional services rendered for the audit of the Company’s annual financial statements and the reviews of the quarterly financial statements. |
| (2) | Audit-related services are those rendered to the Company for assurance and related services. |
| (3) | Tax services are those rendered to the Company for tax compliance, tax planning and advice. |
| (4) | Other services performed include certain advisory services in connection with accounting research and do not include any fees for financial information systems design and implementation. |
Pre-Approval Policies and Procedures of the Audit Committee
Pursuant to its charter, the Audit Committee pre-approves all audit and permitted non-audit services, including engagement fees and terms thereof, to be performed for the Company by the independent auditors, subject to the exceptions for certain non-audit services that are approved by the Audit Committee prior to the completion of the audit in accordance with Section 10A of the Securities Exchange Act of 1934, as amended. The Audit Committee must also pre-approve all internal control-related services to be provided by the independent auditors. The Audit Committee will generally pre-approve a list of specific services and categories of services, including audit, audit-related and other services, for the upcoming or current fiscal year, subject to a specified cost level. Any material service that is not included in the approved list of services must be separately pre-approved by the Audit Committee. In addition, all audit and permissible non-audit services in excess of the pre-approved cost level, whether or not such services are included on the pre-approved list of services, must be separately pre-approved by the Chairman of the Audit Committee.
The Audit Committee may form and delegate to a subcommittee consisting of one or more members (provided that such person(s) are independent directors) its authority to grant pre-approvals of audit, permitted non-audit services and internal control-related services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Audit Committee at its next scheduled meeting.
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PART IV
Item 15 - Exhibits, Financial Statement Schedule and Reports on Form 8-K
| Page No. |
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(a) The following documents are filed as part of this report: | |
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1. Financial Statements | |
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Consolidated Statements of Results of Operations for each of the three years in the period ended December 31, 2003 | 42 |
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003 | 43 |
Consolidated Balance Sheets at December 31, 2003 and 2002 | 44 |
Consolidated Statement of Changes to Shareholders’ Equity for each of the three years in the period ended December 31, 2003 | 46 |
Notes to Consolidated Financial Statements | 47 |
Report of Independent Registered Public Accounting Firm - KPMG | 89 |
| Report of Independent Registered Public Accounting Firm - PwC | 90 |
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2. Financial Statement Schedule | |
| |
For each of the three years in the period ended December 31, 2003: | |
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Schedule II – Valuation and Qualifying Accounts | 138 |
The information required to be submitted in Schedules I, III, IV and V is omitted as not applicable or not required under rules of Regulation S-X.
3. Exhibits
The exhibits filed as a part of this Annual Report on Form 10-K are:
| | | | Incorporated Herein by
Reference as Filed With |
| | | |
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2(a) | | Copy of the Agreement of Merger among DPL Inc., Holding Sub Inc. and DP&L dated January 6, 1986 | | Exhibit A to the 1986 Proxy Statement (File No. 1-2385) |
| | | | |
2(b) | | Copy of Asset Purchase Agreement, dated December 14, 1999, between The Dayton Power and Light Company, Indiana Energy, Inc., and Number-3CHK, Inc. | | Exhibit 2 to Report on Form 10-Q for the quarter ended September 30, 2000
(File No. 1-9052) |
| | | | |
3(a) | | Copy of Amended Articles of Incorporation of DPL Inc. dated September 25, 2001 | | Exhibit 3 to Report on Form 10-K/A for the year ended December 31, 2001
(File No. 1-2385) |
127
3(b) | | Code of Regulations of DPL Inc. | | Exhibit 3(b) to Form 8-K filed on May 3, 2004 (File No. 1-9052) |
| | | | |
4(a) | | Copy of Composite Indenture dated as of October 1, 1935, between DP&L and The Bank of New York, Trustee with all amendments through the Twenty-Ninth Supplemental Indenture | | Exhibit 4(a) to Report on Form 10-K for the year ended December 31, 1985 (File No. 1-2385) |
| | | | |
4(b) | | Copy of the Thirtieth Supplemental Indenture dated as of March 1, 1982, between DP&L and The Bank of New York, Trustee | | Exhibit 4(h) to Registration Statement No. 33-53906 |
| | | | |
4(c) | | Copy of the Thirty-First Supplemental Indenture dated as of November 1, 1982, between DP&L and The Bank of New York, Trustee | | Exhibit 4(h) to Registration Statement No. 33-56162 |
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4(d) | | Copy of the Thirty-Second Supplemental Indenture dated as of November 1, 1982, between DP&L and The Bank of New York, Trustee | | Exhibit 4(i) to Registration Statement No. 33-56162 |
| | | | |
4(e) | | Copy of the Thirty-Third Supplemental Indenture dated as of December 1, 1985, between DP&L and The Bank of New York, Trustee | | Exhibit 4(e) to Report on Form 10-K for the year ended December 31, 1985 (File No. 1-2385) |
| | | | |
4(f) | | Copy of the Thirty-Fourth Supplemental Indenture dated as of April 1, 1986, between DP&L and The Bank of New York, Trustee | | Exhibit 4 to Report on Form 10-Q for the quarter ended June 30, 1986 (File No. 1-2385) |
| | | | |
4(g) | | Copy of the Thirty-Fifth Supplemental Indenture dated as of December 1, 1986, between DP&L and The Bank of New York, Trustee | | Exhibit 4(h) to Report on Form 10-K for the year ended December 31, 1986 (File No. 1-9052) |
| | | | |
4(h) | | Copy of the Thirty-Sixth Supplemental Indenture dated as of August 15, 1992, between DP&L and The Bank of New York, Trustee | | Exhibit 4(i) to Registration Statement No. 33-53906 |
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4(i) | | Copy of the Thirty-Seventh Supplemental Indenture dated as of November 15, 1992, between DP&L and The Bank of New York, Trustee | | Exhibit 4(j) to Registration Statement No. 33-56162 |
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4(j) | | Copy of the Thirty-Eighth Supplemental Indenture dated as of November 15, 1992, between DP&L and The Bank of New York, Trustee | | Exhibit 4(k) to Registration Statement No. 33-56162 |
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4(k) | | Copy of the Thirty-Ninth Supplemental Indenture dated as of January 15, 1993, between DP&L and The Bank of New York, Trustee | | Exhibit 4(k) to Registration Statement No. 33-57928 |
| | | | |
4(l) | | Copy of the Fortieth Supplemental Indenture dated as of February 15, 1993, between DP&L and The Bank of New York, Trustee | | Exhibit 4(m) to Report on Form 10-K for the year ended December 31, 1992 (File No. 1-2385) |
128
4(m) | | Copy of Forty-First Supplemental Indenture dated as of February 1, 1999, between DP&L and The Bank of New York, Trustee | | Exhibit 4(m) to Report on Form 10-K for the year ended December 31, 1998 (File No. 1-2385) |
| | | | |
4(n) | | Copy of the Revolving Credit Agreement dated as of December 18, 2002 between DPL Inc., KeyBank National Association (as agent), Bank One, NA (as agent), and the banks named therein | | Exhibit 4(n) to Report on Form 10-K for the year ended December 31, 2002 (File No. 1-9052) |
| | | | |
4(o) | | Copy of the Note Purchase Agreement dated as of April 6, 1999 for $500.0 million of 6.32% Senior Notes due 2004 | | Exhibit 4 to Report on Form 10-Q dated June 30, 1999 (File No. 1-9052) |
| | | | |
4(p) | | Copy of Rights Agreement between DPL Inc. and Equiserve Trust Company, N.A. | | Exhibit 4 to Report on Form 8-K dated September 25, 2001 (File No. 1-9052) |
| | | | |
4(q) | | Copy of Securities Purchase Agreement dated as of February 1, 2000 by and among DPL Inc. and DPL Capital Trust I, Dayton Ventures LLC and Dayton Ventures Inc. and certain exhibits thereto | | Exhibit 99(b) to Schedule TO-I dated February 4, 2000 (File No. 1-9052) |
| | | | |
4(r) | | Copy of Forty-Second Supplemental Indenture dated as of September 1, 2003, between DP&L and The Bank of New York, Trustee | | Filed herewith as Exhibit 4(r) |
| | | | |
4(s) | | Copy of Revolving Credit Agreement dated as of December 12, 2003, between Dayton Power & Light Company, Harris Nesbitt Corp. (as agent), KeyBank National Association (as agent and lead arranger) and the banks named therein | | Filed herewith as Exhibit 4(s) |
| | | | |
4(t) | | Copy of Term Loan Agreement dated as of December 22, 2003, among DPL Inc., LaSalle Bank National Association (as agent), KeyBank National Association (as agent and lead arranger) and the banks named therein | | Filed herewith as Exhibit 4(t) |
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4(u) | | Officer’s Certificate of DPL Inc. establishing $175 million Senior Note due 2009, dated March 25, 2004 | | Exhibit 4.1 to Form 8-K, filed on March 29, 2004 (File No. 1-9052) |
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4(v) | | Exchange and Registration Rights Agreement dated March 25, 2004 between DPL Inc. and the purchasers | | Exhibit 4.2 to Form 8-K, filed on March 29, 2004 (File No. 1-9052) |
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4(w) | | Indenture dated as of March 1, 2000 between DPL Inc. and Bank One Trust Company, National Association | | Exhibit 4(b) to Registration Statement No. 333-37972 |
129
4(x) | | Officer’s Certificate of DPL Inc. establishing exchange notes, dated March 1, 2000 | | Exhibit 4(c) to Registration Statement No. 333-37972 |
| | | | |
4(y) | | Exchange and Registration Rights Agreement dated as of August 24, 2001 between DPL Inc., Morgan Stanley & Co., Incorporated, Bank One Capital Markets, Inc., Fleet Securities, Inc. and NatCity Investments, Inc. | | Exhibit 4(a) to Registration Statement No. 333-74568 |
| | | | |
4(z) | | Officer’s Certificate of DPL Inc. establishing exchange notes, dated August 31, 2001 | | Exhibit 4(c) to Registration Statement No. 333-74568 |
| | | | |
4(aa) | | Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of New York, Trustee | | Exhibit 4(a) to Registration Statement No. 333-74630 |
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4(bb) | | First Supplemental Indenture dated as of August 31, 2001 relating to the subordinated debentures between DPL Inc. and The Bank of New York | | Exhibit 4(b) to Registration Statement No. 333-74630 |
| | | | |
4(cc) | | Amended and Restated Trust Agreement dated as of August 31, 2001 relating to DPL Capital Trust II, the Capital Securities and the Common Securities among DPL Inc., the depositor, The Bank of New York, as property trustee, The Bank of New York (Delaware), as Delaware trustee, and Allen M. Hill and Stephen F. Koziar, Jr., as administrative trustees, and the holders, from time to time, of undivided beneficial interests in DPL Capital Trust II | | Exhibit 4(c) to Registration Statement No. 333-74630 |
| | | | |
4(dd) | | Exchange and Registration Rights Agreement dated as of August 24, 2001 among DPL Inc., DPL Capital Trust II and Morgan Stanley & Co., Incorporated | | Exhibit 4(d) to Registration Statement No. 333-74630 |
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4(ee) | | Copy of Revolving Credit Agreement dated as of June 1, 2004 between the Dayton Power and Light Company, KeyBank National Association (as agent and arranger) and LaSalle Bank National Association | | Filed herewith as Exhibit 4(ee) |
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10(a)* | | Copy of Directors’ Deferred Stock Compensation Plan amended December 31, 2000 | | Exhibit 10(a) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052) |
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10(b)* | | Copy of Directors’ Deferred Compensation Plan amended December 31, 2000 | | Exhibit 10(b) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052) |
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10(c)* | | Copy of Management Stock Incentive Plan amended December 31, 2000 | | Exhibit 10(c) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052) |
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10(d)* | | Copy of Key Employees Deferred Compensation Plan amended December 31, 2000 | | Exhibit 10(d) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052) |
130
10(e)* | | Copy of Supplemental Executive Retirement Plan amended February 1, 2000 | | Filed herewith as Exhibit 10(e) |
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10(f)* | | Copy of Stock Option Plan | | Exhibit 10(f) to Report on Form 10-K for the year ended December 31, 2000 (File No. 1-9052) |
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10(g)* | | Consulting contract dated as of December 31, 1996 between DPL Inc., The Dayton Power and Light Company and Peter H. Forster | | Exhibit 10(g) to Report on Form 10-K for the year ended December 31, 2002 (File No. 1-9052) |
| | | | |
10(h)* | | Employment agreement dated as of March 21, 2000 between DPL Inc. and Elizabeth M. McCarthy | | Exhibit 10(h) to Report on Form 10-K for the year ended December 31, 2002 (File No. 1-9052) |
| | | | |
10(i)* | | Employment agreement dated as of October 17, 2002 between DPL Inc., The Dayton Power and Light Company and Stephen F. Koziar, Jr. | | Exhibit 10(i) to Report on Form 10-K for the year ended December 31, 2002 (File No. 1-9052) |
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10(j)* | | Employment agreement dated as of January 3, 2003 between DPL Inc. and James V. Mahoney | | Filed herewith as Exhibit 10(j) |
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10(k)* | | Employment agreement dated as of September 17, 2003, between DPL Inc. and W. Steven Wolff | | Filed herewith as Exhibit 10(k) |
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10(l)* | | Employment agreement dated as of September 17, 2003, between DPL Inc. and Patricia K. Swanke | | Filed herewith as Exhibit 10(l) |
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10(m)* | | Employment agreement dated as of December 14, 2001, between DPL Inc., The Dayton Power and Light Company and Caroline E. Muhlenkamp | | Filed herewith as Exhibit 10(m) |
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10(n)* | | Change of Control Agreement dated as of December 15, 2000 between DPL Inc., The Dayton Power and Light Company and Stephen F. Koziar, Jr. and Management Stock Option Agreements dated February 1, 2000 and September 24, 2002 between DPL Inc. and Stephen F. Koziar Jr. | | Filed herewith as Exhibit 10(n) |
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10(o)* | | Change of Control Agreement dated as of January 3, 2003, between DPL Inc., The Dayton Power and Light Company and James V. Mahoney and Management Stock Option Agreement dated as of January 3, 2003 between DPL Inc. and James V. Mahoney | | Filed herewith as Exhibit 10(o) |
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10(p)* | | Change of Control Agreement as amended dated as of September 10, 2004 between DPL Inc., The Dayton Power and Light Company and W. Steven Wolff | | Exhibit 10(dd) to Report on Form 8-K filed September 23, 2004 (File No. 1-9052) |
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10(q)* | | Change of Control Agreement dated as of September 15, 2000 between DPL Inc., The Dayton Power and Light Company and Patricia K. Swanke and Management Stock Option Agreement dated as of January 1, 2001 between DPL Inc. and Patricia K. Swanke | | Filed herewith as Exhibit 10(q) |
131
10(r)* | | Change of Control Agreement dated as of December 15, 2000 between DPL Inc., The Dayton Power and Light Company and Caroline E. Muhlenkamp and Management Stock Option Agreements dated as of February 1, 2000 and September 24, 2002 between DPL Inc. and Caroline E. Muhlenkamp | | Filed herewith as Exhibit 10(r) |
| | | | |
10(s)* | | Management Services Agreement dated June 20, 2001 between Valley Partners, Inc. and each of MVE, Inc., Miami Valley Development Company and Miami Valley Insurance Company | | Filed herewith as Exhibit 10(s) |
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10(t)* | | Administrative Services Agreement dated October 4, 2001 among Valley Partners, Inc., DPL Inc., The Dayton Power and Light Company and the Trustees named therein | | Filed herewith as Exhibit 10(t) |
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10(u)* | | Letter agreement dated December 15, 2003, terminating Management Services Agreement dated June 20, 2001 between Valley Partners, Inc. and each of MVE, Inc., Miami Valley Development Company and Miami Valley Insurance Company and Administrative Services Agreement dated October 4, 2001 among Valley Partners, Inc., DPL Inc., The Dayton Power and Light Company and the Trustees named therein | | Filed herewith as Exhibit 10(u) |
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10(v)* | | Amended and Restated Master Trust Agreement, dated as of January 1, 2001 by and among The Dayton Power and Light Company, the grantor, DPL Inc., and Bank of America, N.A., Richard J. Chernesky, Richard A. Broock, and Frederick J. Caspar | | Filed herewith as Exhibit 10(v) |
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10(w)* | | Second Amended and Restated Master Trust Agreement, dated as of January 1, 2001, by and among The Dayton Power and Light Company, the grantor, DPL Inc., Bank One Trust Company, N.A., Richard J. Chernesky, Richard A. Broock, and Frederick J. Caspar | | Filed herewith as Exhibit 10(w) |
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10(x)* | | Trustee Fee Agreement dated as of April 26, 2004, by and among Richard J. Chernesky, Richard A. Broock and Frederick J. Caspar, solely in their capacities as trustees of the Master Trusts and not individually and DPL Inc., and The Dayton Power and Light Company | | Filed herewith as Exhibit 10(x) |
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10(aa)* | | Long Term Incentive Plan of DPL Inc. dated as of January 20, 2003 | | Filed herewith as Exhibit 10(aa) |
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10(bb)* | | Employment agreement dated as of July 21, 2004, Stock Option Letter Agreement dated as of October 5, 2004 and Stock Option Plan Agreement dated as of October 5, 2004 between DPL Inc., The Dayton Power and Light Company and Robert D. Biggs | | Exhibits 10.1, 10.2 and 10.3 to Report on Form 8-K filed October 8, 2004 (File No. 1-9052) |
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10(ee)* | | Employment Agreement and Change of Control Agreement as of September 10, 2004 between DPL Inc. and Gary Stephenson | | Exhibit 10(ee) to Report on Form 8-K filed on September 10, 2004 (File No. 1-9052) |
132
10(ff)* | | MVE Incentive Program – Annex A and Letter to Peter H. Forster as of February 16, 2000 and Management Stock Option Agreements dated as of February 1, 2000 and September 24, 2002 between DPL Inc. and Peter H. Forster | | Filed herewith as Exhibit 10(ff) |
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10(gg)* | | Employment agreement dated as of June 9, 2003, as amended by attached letter dated October 18, 2004 between DPL Inc., the Dayton Power and Light Company and Miggie E. Cramblit | | Filed herewith as Exhibit 10(gg) |
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10(hh)* | | Employment Agreement and Change of Control Agreement dated as of July 21, 2003 between DPL Inc. and Daniel L. Thobe | | Filed herewith as Exhibit 10(hh) |
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16 | | Letter regarding Change in Certifying Accountant | | Exhibit 16(a) to Form 8-K, filed on March 13, 2003
(File No. 1-9052) |
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18 | | Copy of preferability letter relating to change in accounting for unbilled revenues from Price Waterhouse LLP | | Exhibit 18 to Report on Form 10-K for the year ended December 31, 1987 (File No. 1-9052) |
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21 | | List of Subsidiaries of DPL Inc. | | Filed herewith as Exhibit 21 |
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23(a) | | Consent of KPMG LLP | | Filed herewith as Exhibit 23(a) |
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23(b) | | Consent of PricewaterhouseCoopers LLP | | Filed herewith as Exhibit 23(b) |
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31(a) | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith as Exhibit 31(a) |
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31(b) | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith as Exhibit 31(b) |
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32(a) | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith as Exhibit 32(a) |
| | | | |
32(b) | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | Filed herewith as Exhibit 32(b) |
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99(a) | | Report of Taft, Stettinius & Hollister LLP, dated April 26, 2004 | | Filed herewith as Exhibit 99(a) |
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99(b) | | Supplement to the April 26, 2004 Report of Taft, Stettinius & Hollister LLP, dated May 15, 2004 | | Filed herewith as Exhibit 99(b) |
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99(c) | | Complaint filed in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida – Peter H. Forster and Caroline E. Muhlenkamp v. DPL Inc., The Dayton Power and Light Company and MVE, Inc. | | Filed herewith as Exhibit 99(c) |
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99(d) | | Complaint filed in Montgomery County Court of Common Pleas, Montgomery County, Ohio – DPL Inc., The Dayton Power and Light Company and MVE, Inc. v. Peter H. Forster, Caroline E. Muhlenkamp and Stephen F. Koziar, Jr. | | Filed herewith as Exhibit 99(d) |
*Management contract or compensatory plan.
133
Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, DPL Inc. has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of DPL Inc. and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2003.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DPL INC. |
| |
November 5, 2004 | By: | /s/ JAMES V. MAHONEY |
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| | James V. Mahoney
President and Chief Executive Officer
(principal executive officer) |
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November 5, 2004 | | /s/ PAMELA HOLDREN |
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|
| | Pamela Holdren
Treasurer and interim Chief Financial Officer
(principal financial and principal accounting officer) |
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November 5, 2004 | | /s/ DANIEL L. THOBE |
| |
|
| | Daniel L. Thobe
Corporate Controller |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ R. D. BIGGS | | Director and Executive Chairman | | November 5, 2004 |
| | | | |
(R. D. Biggs) | | | | |
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/s/ P. R. BISHOP | | Director | | November 5, 2004 |
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(P. R. Bishop) | | | | |
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/s/ J. F. DICKE, II | | Director | | November 5, 2004 |
| | | | |
(J. F. Dicke, II) | | | | |
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/s/ E. GREEN | | Director | | November 5, 2004 |
| | | | |
(E. Green) | | | | |
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/s/ J. G. HALEY | | Director | | November 5, 2004 |
| | | | |
(J. G. Haley) | | | | |
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| | Director | | November 5, 2004 |
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(G.E. Harder) | | | | |
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/s/ W A. HILLENBRAND | | Director and Vice-Chairman | | November 5, 2004 |
| | | | |
(W A. Hillenbrand) | | | | |
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| | Director | | November 5, 2004 |
| | | | |
(L. L. Lyles) | | | | |
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/s/ J. V. MAHONEY | | Director, President and Chief Executive Officer (principal executive officer) | | November 5, 2004 |
| | | | |
(J. V. Mahoney) | | | | |
| | | | |
| | Director | | November 5, 2004 |
| | | | |
(N. J. Sifferlen) | | | | |
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/s/ P. HOLDREN | | Treasurer and interim Chief Financial Officer (principal financial and principal accounting officer) | | November 5, 2004 |
| | | | |
(P. Holdren) | | | | |
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/s/ D. L. THOBE | | Corporate Controller | | November 5, 2004 |
| | | | |
(D. L. Thobe) | | | | |
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Schedule II
DPL Inc.
VALUATION AND QUALIFYING ACCOUNTS
Ended December 31,
$ in thousands
Description | | Balance at
Beginning of
Period | | Additions | | Deductions
(1) | | Balance at
End of Period | |
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|
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2003: | | | | | | | | | | | | | |
Deducted from accounts receivable-- | | | | | | | | | | | | | |
Provision for uncollectible accounts | | $ | 11,094 | | $ | 3,672 | | $ | 8,763 | | $ | 6,003 | |
2002: | | | | | | | | | | | | | |
Deducted from accounts receivable-- | | | | | | | | | | | | | |
Provision for uncollectible accounts | | $ | 12,464 | | $ | 3,612 | | $ | 4,982 | | $ | 11,094 | |
2001: | | | | | | | | | | | | | |
Deducted from accounts receivable-- | | | | | | | | | | | | | |
Provision for uncollectible accounts | | $ | 6,851 | | $ | 11,461 | | $ | 5,848 | | $ | 12,464 | |
(1) amounts written off, net of recoveries of accounts previously written off
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