THE READER'S DIGEST ASSOCIATION, INC.
2001 INCOME CONTINUATION PLAN
FOR SENIOR MANAGEMENT
ARTICLE I
Purpose of Plan
1.1 The purpose of The Reader's Digest Association, Inc.
2001 Income Continuation Plan for Senior Management (the "Plan")
is to provide certain officers and key employees of The Reader's
Digest Association, Inc. (the "Company") with appropriate
assurances of continued income and other benefits for a
reasonable period of time in the event that the participant's
employment with the Company terminates under any of the
circumstances described herein, thereby encouraging the continued
attention and dedication of the participants to ensure the
continued success of the Company.
ARTICLE II
Eligibility for Participation
2.1 The Board of Directors of the Company (the "Board")
shall in its absolute discretion select the participants to be
covered by the Plan from time to time.
2.2 Participation in the Plan shall not in any respect be
deemed to grant the participant either a right to continued
participation in the Plan or a right to continued employment and
such employment remains terminable at will by either the Company
or the participant at any time for any reason or for no reason.
ARTICLE III
Term
3.1 The Plan shall have an indefinite term.
3.2 The Board may not terminate the participation of a
participant in the Plan, suspend or terminate the Plan, or amend
the Plan so as to impair the rights of any participant in the
Plan unless the Board has provided written notice to any
participant whose participation in the Plan is affected by such
suspension, termination or amendment at least twenty-four (24)
months in advance of such suspension, termination or amendment.
3.3 Subject to Section 3.2 above, the Board may, at any
time and from time to time, modify or amend, in whole or in part,
any or all of the provisions of the Plan, or suspend or terminate
it entirely.
ARTICLE IV
Causes of Termination
4.1 If the Company terminates a participant's employment
involuntarily, other than for reasons described in Section 4.5
below, during the twenty-four (24) months following a Change in
Control (as defined below), the benefits described in Article V
hereof shall become payable to the participant.
4.2 Subject to the provisions of Section 4.3 below, if a
participant terminates his employment due to Constructive
Termination (as defined below) during the twenty-four (24) months
following a Change in Control, and within 120 days of the
participant's knowledge of the event constituting Constructive
Termination, the benefits described in Article V hereof shall
become payable to the participant. For the purposes of the Plan,
"Constructive Termination" means any of the following events,
without the written consent of the participant:
(a) the assignment to a participant of any duties
inconsistent in any respect with his position (including status,
offices, titles and reporting requirements), duties,
responsibilities and authority with the Company immediately prior
to the Change in Control, or a material change or a substantial
diminution in his authority, reporting responsibilities, titles
or offices as in effect immediately prior to the Change in
Control, or the removal from or failure to re-elect the
participant to any such position or office; provided that
termination of the participant's employment for Cause (as defined
below), death, Total Disability (as defined in the Company's Long
Term Disability Plan) or mandatory retirement pursuant to the
Company's retirement policy shall not constitute a Constructive
Termination event under the Plan;
(b) a reduction in the participant's base salary;
(c) a reduction in the participant's target incentive
opportunities under the Management Incentive Compensation Plan or
the Senior Management Incentive Plan, as applicable (each, as
applicable, the "Incentive Compensation Plan"), or the Company's
1994 Key Employee Long Term Incentive Plan (the "KELTIP");
(d) a relocation of the participant to an office
located anywhere other than within seventy-five (75) miles of a
participant's primary office immediately prior to the Change in
Control, except for required travel on Company business to an
extent substantially consistent with the participant's business
travel obligations immediately prior to the Change in Control;
(e) any failure by the Company to continue in effect
any employee benefit plan or fringe benefit program provided by
the Company in which a participant participates (or the Company's
elimination or material reduction of the participant's
participation in such plan or program) that, by itself or in the
aggregate, is material to a participant's total compensation and
benefits from the Company, unless there shall have been
instituted a replacement or substitute plan or fringe benefit
program providing comparable benefits or compensation providing
comparable value;
(f) any failure by the Company to comply with and
satisfy Section 6.1 below; or
(g) any failure by the Company to permit the
participant to participate in any new or additional compensation,
incentive, employee benefit or fringe benefit plan or program
that is made generally available to senior management of the
Company or its successor, if such plan or program would be
material to the participant's total compensation and benefits.
4.3 A termination of employment by a participant shall not
constitute a Constructive Termination unless the participant
provides notice to the Board stating that in the participant's
opinion an event constituting Constructive Termination has
occurred and setting forth in reasonable detail the relevant
facts and circumstances. If such event is isolated, inadvertent
and insubstantial in nature, during the ten (10) business
day-period after receipt of such notice (the "10-day cure
period"), the Company may remedy or otherwise cure the situation
to the participant's satisfaction or persuade the participant
that the facts and circumstances do not constitute an event
constituting Constructive Termination, and, in such case, the
event shall not be treated as a Constructive Termination event
under the Plan. If the Company shall, within such 10-day cure
period, remedy or otherwise cure the situation, a recurrence
thereof or another occurrence constituting Constructive
Termination shall constitute a new event for purposes of Section
4.2 above.
Nothing herein shall require the participant to remain
in the Company's employ beyond the expiration of the 10-day cure
period in order to qualify for the benefits described in Article
V hereof. Any good-faith determination made by the participant
of an event constituting Constructive Termination shall be
conclusive.
4.4 For the purposes of the Plan, a "Change in Control"
means:
(a) if the Company's equity capital structure consists
of Class A Non-Voting Common Stock and Class B Voting Common
Stock, as in effect on the date of adoption of this provision,
then an acquisition (other than directly from the Company) or
holding by a Person or a Group (other than a Permitted Holder) of
Beneficial Ownership of shares representing at least 35% of the
combined voting power of the outstanding voting securities of the
Company entitled to vote generally in the election of Directors
(the "Outstanding Company Voting Power"), if following such
acquisition or at the time of such holding, the Funds do not own,
in the aggregate, at least 50% of the Outstanding Company Voting
Power; provided, however, that a Business Combination satisfying
clauses 4.4(d)(i) through (iii) below shall not constitute a
Change in Control;
(b) if the Company's equity capital structure is
different from that described in subparagraph 4.4(a) above, then
an acquisition (other than directly from the Company) or holding
by a Person or a Group (other than a Permitted Holder) of
Beneficial Ownership of shares representing 20% or more of either
(i) the then outstanding shares of common stock of the Company
(the "Outstanding Company Common Stock") or (ii) the combined
voting power of the outstanding voting securities of the Company
entitled to vote generally in the election of Directors (the
"Outstanding Company Voting Power"), if following such acquisition
or at the time of such holding, the Funds do not own, in the
aggregate, at least 30% of the Outstanding Company Voting Power;
provided, however, that a Business Combination satisfying clauses
4.4(d)(i) through (iii) below shall not constitute a Change in
Control;
(c) if the Directors who were members of the Board on
the date of adoption of this provision (the "Initial Directors")
and any Directors whose election by the Company's stockholders
was approved by a majority of the Company's Directors then still
in office who were either Incumbent Directors or whose election
or nomination for election was previously so approved, but
excluding any such individual whose election as a Director occurs
as a result of an actual or threatened proxy contest or consent
solicitation by or on behalf of a person other than the Company
or the Board (the "Approved Directors, and together with the
Initial Directors, the "Incumbent Directors"), shall cease for
any reason to constitute at least a majority of the Board;
(d) consummation of a Business Combination, other than
a transaction
(i) in which all or substantially all of the
stockholders of the Company receive Beneficial Ownership of
more than 60% of the voting securities of the company
resulting from the Business Combination,
(ii) in which at least a majority of the board of
directors of the resulting company are Incumbent Directors,
and
(iii) after which no Person or Group has Beneficial
Ownership of 35% or more of the voting securities of the
resulting company, who did not own at least such percentage
of stock of the Company immediately before the Business
Combination; or
(e) stockholder approval of a complete liquidation or
dissolution of the Company.
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur solely because any Person or Group
has Beneficial Ownership of shares of Outstanding Company Common
Stock or Outstanding Company Voting Power greater than or equal
to the 35% or 20% thresholds in subsections 4.4(a) and 4.4(b)
above (as the case may be) as a result of the acquisition by the
Company of common stock or other voting securities which reduces
the number of shares of Outstanding Company Common Stock or
reduces the Outstanding Company Voting Power; provided, that if,
after such acquisition by the Company, such Person or Group
obtains Beneficial Ownership of shares of common stock or other
voting securities that increases the percentage of Outstanding
Company Common Stock or Outstanding Company Voting Power
Beneficially Owned by such person while such Person or Group has
met the 35% or 20% threshold in subsections 4.4(a) and 4.4(b)
above (as the case may be), a Change in Control shall then be
deemed to occur.
For purposes of this Section 4.4:
"Beneficial Ownership" shall have the meaning given to
that term under Rule 13d-3 under the Securities Exchange Act of
1934.
"Business Combination" shall mean a merger,
consolidation or reorganization involving the Company or its
subsidiaries or a sale, lease, exchange or other disposition of
all or substantially all of the Company's assets.
"Director" shall mean a member of the Board.
"Funds" shall mean the DeWitt Wallace-Reader's Digest
Fund, Inc. and the Lila Wallace-Reader's Digest Fund, Inc.
"Group" shall have the meaning given to that term under
Rule 13d-5 under the Securities Exchange Act of 1934.
"Permitted Holder" shall mean (i) the Funds and (ii)
the Company or an employee benefit plan of the Company or a
corporation controlled by the Company.
"Person" shall have the meaning given to that term
under Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934.
"Securities Exchange Act of 1934" shall mean the
Securities Exchange Act of 1934, as amended from time to time.
4.5 (a) If the Company shall terminate a participant's
employment involuntarily by reason of: (i) Cause; (ii) Total
Disability (as defined in the Company's Long Term Disability
Plan); (iii) mandatory retirement pursuant to the Company's
retirement policy; or (iv) death, then no benefits shall become
payable to a participant under the Plan.
(b) For the purposes of the Plan, "Cause" shall mean:
(i) the willful and continued failure of the
participant to perform substantially the participant's
duties with the Company (other than any such failure
resulting from incapacity due to physical or mental illness
or following the participant's delivery of a notice of
termination for Constructive Termination), after a written
demand for substantial performance is delivered to the
participant by the Board that specifically identifies the
manner in which the Board believes that the participant has
not substantially performed the participant's duties;
(ii) the willful engaging by the participant in
illegal conduct or gross misconduct either of which is
materially and demonstrably injurious to the Company; or
(iii) the participant's conviction of, or plea of
guilty or nolo contendere to, a felony.
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(c) For purposes of this Section 4.5, no act, or
failure to act, on the part of the participant shall be
considered "willful" unless it is done, or omitted to be done, by
the participant in bad faith or without reasonable belief that
the participant's action or omission was in the best interests of
the Company. Any act, or failure to act, based upon authority
given pursuant to a resolution duly adopted by the Board or upon
the instructions of the Chief Executive Officer of the Company or
a senior officer of the Company or based upon the advice of
counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by the participant in good faith and
in the best interests of the Company. The cessation of
employment of the participant shall not be deemed to be for Cause
unless and until there shall have been delivered to the
participant a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the entire
membership of the Board (excluding the participant, if the
participant is a member of the Board) at a meeting of the Board
called and held for such purpose (after reasonable notice is
provided to the participant and the participant is given an
opportunity, together with counsel for the participant, to be
heard before the Board), finding that, in the good faith opinion
of the Board, the participant is guilty of any of the conduct
described in Section 4.5(b), and specifying the particulars
thereof in detail.
4.6 Notice of any termination of employment by the Company
or by a participant pursuant to this Article IV shall be given in
writing and shall specify the effective date of termination.
4.7 In no event shall a voluntary resignation or retirement
by a participant give rise to any benefits under the Plan;
provided, that a termination of employment under Section 4.2
shall not be treated as a voluntary resignation or retirement.
ARTICLE V
Benefits
5.1 In the event of a participant's termination of
employment covered by Section 4.1 or 4.2 above, the Company shall
provide to the participant:
(a) within ten (10) days following the participant's
date of termination of employment, a lump sum payment of (i) the
participant's annual base salary earned through the date of
termination of employment to the extent not theretofore paid and
(ii) the product of (x) the higher of (A) the participant's
annual target bonus under the Incentive Compensation Plan in the
Company's fiscal year in which the participant's date of
termination of employment occurs and (B) the average of the three
(3) highest annual cash bonuses earned by the participant under
the Incentive Compensation Plan during the five-year period
immediately preceding the Company's fiscal year in which the
participant's date of termination of employment occurs (such
higher amount of (A) and (B), hereinafter referred to as the
"Severance Bonus Amount") and (y) a fraction, the numerator of
which is the number of days in the fiscal year in which the date
of termination of employment occurs through the date of
termination of employment and the denominator of which is 365
(for purposes of determining the Severance Bonus Amount, (a) any
bonus awarded for any fiscal year in which the participant was
employed for less than twelve (12) full months shall be
annualized, (b) any bonus earned by a participant for a fiscal
year shall be treated as earned in such fiscal year,
notwithstanding whether payment is deferred, and (c) if a
participant was not employed by the Company (or a successor to
the Company) for the entire five-year period preceding the
Company's fiscal year in which the date of termination of
employment occurs, only the years during which the participant was
so employed shall be considered for purposes of determining the
average in clause (B) above; Annex A to the Plan sets forth
illustrative examples of the calculation of the Severance Bonus
Amount);
(b) within ten (10) days following the participant's
date of termination of employment, a lump sum payment equal to
the product of (i) three (3) and (ii) the participant's annual
base salary at the rate of pay in effect immediately prior to the
participant's date of termination of employment or, if higher,
immediately prior to the Change in Control;
(c) within ten (10) days following the participant's
date of termination of employment, a lump sum payment equal to
the product of (i) three (3) and (ii) the Severance Bonus Amount;
and
(d) outplacement counseling services at the Company's
sole expense commensurate with the participant's position and as
customarily provided by the Company immediately prior to the
Change in Control, or, if greater, after the Change in Control.
5.2 In addition to the severance payments described in
Section 5.1 above, in the event of a termination of employment
covered by Section 4.1 or 4.2 above, all outstanding performance
share awards and similar long-term incentive awards previously
granted to the participant under the KELTIP or under a similar
plan maintained by the Company or any successor to the Company
("Performance Awards") shall immediately vest in the participant
and such Performance Awards shall be paid out in cash based upon
a deemed percentage earn-out of such Performance Awards at the
greater of (a) the participant's target award for such
Performance Awards, and (b) the average of the Company's three
(3) highest percentages of Performance Awards earned by the
participant, whether received by the participant or deferred,
during the five-year period immediately preceding the Company's
fiscal year in which the date of termination occurs, to be paid
in a lump sum within ten (10) days following the participant's
date of termination of employment; provided, however, that in
computing such payment, in the event that the participant was not
employed by the Company (or a successor to the Company) for the
entire five-year period preceding the Company's fiscal year in
which the date of termination of employment occurs, only the
years during which the participant was employed by the Company
shall be considered for purposes of determining the averages in
clause (b) above.
5.3 (a) In the event of a participant's termination of
employment covered by Section 4.1 or 4.2 above, the Company shall
arrange for the participant to be permitted to continue to
participate, during the three-year period following the
participant's date of termination of employment, in all medical,
dental and group life insurance plans provided by the Company to
active employees, on a basis such that the participant's benefits
thereunder (taking into account any required employee
contributions, co-payments and similar costs imposed on active
employees and the tax treatment of such participation for the
participant) are comparable to those that the participant would
have received if the participant had remained an active employee
during such three-year period. Notwithstanding the foregoing, if
such continued participation is not permissible under the general
terms and conditions of any such welfare plan or if such
continued participation would have adverse consequences for the
participant, then the Company shall not be required to permit
such continued participation, but shall instead provide the
participant with alternative benefits substantially similar to
those that the participant would have been entitled to receive
under such welfare plan, at an after-tax cost to the participant
that is not materially greater than the cost that the participant
would have incurred, if the participant's participation had been
permissible; provided that if the Company reasonably determines
that such alternative benefits are not available on commercially
reasonable terms, the Company may elect instead to pay to the
participant, in a single cash lump sum, an amount equal to the
pre-tax cost that the Company would have incurred to provide such
benefits to the participant as an active employee under the
applicable welfare plan.
(b) In any event, the benefits otherwise required to
be provided under this Section 5.3 shall cease if and to the
extent that, by virtue of the participant's employment with
another employer, the participant becomes eligible under that
employer's plan or plans for medical, dental or group life
insurance benefits, as the case may be.
(c) The continued coverage required to be provided
under this Section 5.3 shall apply to each of the participant's
eligible dependents who was receiving such benefits under the
applicable welfare plan as of the participant's date of
termination of employment to the extent he or she remains
eligible.
(d) In the event of a participant's termination of
employment covered by Section 4.1 or 4.2 above, the eligibility
of the participant and of his eligible dependents, if any, for
"COBRA" continuation coverage under Section 4980B of the Internal
Revenue Code of 1986, as amended (the "Code") shall begin on the
date such coverage ceases to be provided (whether as a result of
the expiration of the three-year period following termination of
employment, the Company's decision to pay the lump sum cash
payment provided for above in lieu of such coverage, as a result
of the operation of Section 5.3(b), or otherwise).
5.4 The provisions of this Section 5.4 shall govern the
treatment of a participant who experiences a termination of
employment covered by Section 4.1 or 4.2 above for purposes of
the participant's benefits under such of the Nonqualified Plans
(as defined in the next sentence) in which the participant is a
participant immediately before such termination of employment,
notwithstanding any provision to the contrary in the Nonqualified
Plans. The "Nonqualified Plans" means The Readers Digest
Association, Inc. Executive Retirement Plan (the "Executive
Retirement Plan"), The Reader's Digest Association, Inc.
Executive Cash Balance Plan (the "Executive Cash Balance Plan")
and the Excess Benefit Retirement Plan of The Reader's Digest
Association, Inc. (the "Excess Cash Balance Plan").
(a) Executive Retirement Plan. In the event of a
participant's termination of employment covered by Section 4.1 or
4.2 above, if the participant is a participant in the Executive
Retirement Plan immediately prior to such termination of
employment, the participant shall be treated for purposes of
eligibility for and accrual of retirement benefits under the
Executive Retirement Plan, as if the participant had remained an
active employee during the three-year period following the
participant's date of termination of employment (except that such
three-year period shall not be included in the calculation of any
Credited Service for purposes of Section 4.4 under the Executive
Retirement Plan), and such participant's Retirement Salary (as
defined in the Executive Retirement Plan) shall be determined as
of the participant's date of termination of employment. In
addition, at the end of such three-year period, such
participant's accrued Normal Retirement Benefits (as defined in
the Executive Retirement Plan) under the Executive Retirement
Plan shall vest in full. Furthermore, all requirements to obtain
any consent of the Compensation Committee of the Board under
Section 4.2 of the Executive Retirement Plan shall be waived.
(b) Executive Cash Balance Plan. In the event of a
participant's termination of employment covered by Section 4.1 or
4.2 above, if the participant is a participant in the Executive
Cash Balance Plan immediately prior to such termination of
employment, the participant's entire account balance under such
plan shall immediately vest as of the participant's date of
termination of employment. In addition, the Company shall pay to
the participant within ten (10) days following the participant's
date of termination of employment a cash lump sum amount equal to
1.5 times the Contribution Credits (as defined in the Executive
Cash Balance Plan) that would have been made to the participant's
account under the Executive Cash Balance Plan, assuming that:
(i) the participant had remained an active employee during the
one-year period following the participant's termination of
employment and (ii) the participant's Compensation (as defined in
the Executive Cash Balance Plan) for such period was equal to the
sum of (1) the participant's annual base salary at the rate
described in Section 5.1(b)(ii) hereof and (2) the Severance
Bonus Amount.
(c) Excess Cash Balance Plan and Qualified Retirement
Plan. In the event of a participant's termination of employment
covered by Section 4.1 or 4.2 above, if the participant is a
participant in the Excess Cash Balance Plan immediately prior to
such termination of employment, the participant's benefit under
the Excess Cash Balance Plan shall be adjusted so that the
participant's combined retirement benefits under the Excess Cash
Balance Plan and The Readers Digest Association, Inc. Retirement
Plan (the "Qualified Retirement Plan") are equal to the
retirement benefits to which the participant would have been
entitled if the participant's entire account balance under each
plan had vested as of the participant's date of termination of
employment. In addition, unless the participant participates in
either the Executive Retirement Plan or the Executive Cash
Balance Plan, the Company shall pay to the participant within ten
(10) days following the participant's date of termination of
employment a cash lump sum amount equal to 1.5 times the Base
Credit (as defined in the Excess Cash Balance Plan) that would
have been made to the participant's cash balance accounts under
the Excess Cash Balance Plan and the Qualified Retirement Plan,
assuming that: (i) the participant had remained an active
employee during the one-year period following the participant's
termination of employment, (ii) Base Pay (as defined in the
Qualified Retirement Plan) was equal to the participant's annual
base salary at the rate described in Section 5.1(b)(ii) hereof,
and (iii) the participant's age during such period remained the
same as the participant's age as of the date of termination.
(d) General Provisions. (i) Lump Sum Payments. The
Company shall permit participants who are participants in any of
the Nonqualified Plans to elect, at such times and in accordance
with such procedures as it may establish from time to time,
whether any retirement benefits to which the participant may be
entitled under any such Nonqualified Plan (including by operation
of this Section 5.4) shall be paid to the participant in a lump
sum within ten (10) days following any termination of a
participant's employment covered by Section 4.1 or 4.2 above. If
any participant so elects, then such lump sum payment shall be
made regardless of any provision to the contrary in the
applicable Nonqualified Plan. Further, notwithstanding any
provision in any of the Nonqualified Plans, the Company shall not
be permitted to pay any retirement benefits under any
Nonqualified Plan in a lump sum to any participant who has a
termination of employment covered by Section 4.1 or 4.2 above who
has not so elected. Any such lump sum amount shall be calculated
in accordance with Section 5.4(d)(ii) below, but in no event will
the assumed starting date for the benefit be earlier than the
last day of the three-year period following the participant's
date of termination.
(ii) Actuarial Equivalents. Whenever it is
necessary, to implement the provisions of this Section 5.4,
to determine a lump sum or other actuarial equivalent
amount, such determination shall be made using the actuarial
assumptions in effect under the applicable Nonqualified Plan
or the Qualified Retirement Plan, as applicable; provided,
that in the case of the Qualified Retirement Plan, the
assumptions specified in the second paragraph of the
definition of "Equivalent Actuarial Value" under the
Qualified Retirement Plan shall be used.
(iii) Time and Form of Payment. Except as
specifically provided above, the time and form of payment of
retirement benefits to any participant under any
Nonqualified Plan shall be as provided in such Nonqualified
Plan; provided that in no event shall such benefits be
payable to a participant who has a termination of employment
covered by Section 4.1 or 4.2 above before the end of the
three-year period with respect to which severance payments
and benefits are paid or payable hereunder, except as
provided in Section 5.4(d) above.
(e) Retiree Medical Benefits. (i) Enhancement of
Benefits. In the event of a participant's termination of
employment covered by Section 4.1 or 4.2 above: (A) if the
participant is a participant in the Executive Retirement Plan
immediately prior to the participant's date of termination of
employment, the participant shall be treated for purposes of
eligibility for any retiree medical benefits under the Executive
Retirement Plan as having continued as an employee of the Company
for the three-year period following the participant's date of
termination of employment, and all requirements to obtain any
consents (including, without limitation, consent of the
Compensation Committee of the Board) in order to receive any such
benefits shall be waived; (B) if the participant is a participant
in the Executive Cash Balance Plan, all requirements to obtain
any consents (including, without limitation, consent of the
Compensation Committee of the Board) in order to receive retiree
medical benefits under the Executive Cash Balance Plan shall be
waived; and (C) any retiree medical benefits to which the
participant is entitled from the Company shall commence when the
participant ceases to receive coverage pursuant to Section 5.3
above (whether as a result of the expiration of the three-year
period following termination of employment, the Company's
decision to pay the lump sum cash payment provided for above in
lieu of such coverage, as a result of the operation of Section
5.3(b), or otherwise).
(ii) Means of Providing Benefits. In the event
that by virtue of the enhancement of a participant's retiree
medical benefits pursuant to Section 5.4(e)(i) above, the
Company determines that it is not possible to provide such
benefits on the same basis as if the participant had been
entitled to such benefits without regard to Section
5.4(e)(i), or if doing so would have adverse consequences
for the participant, the Company shall arrange to provide
such benefits on a different basis, such that the
participant's benefits (taking into account any required
retiree contributions, co-payments and similar costs imposed
on active employees and the tax treatment of such coverage
for the participant) are comparable to those that the
participant would have received if the participant had been
entitled to such benefits without regard to Section
5.4(e)(i). Notwithstanding the foregoing, if such coverage
is not permissible under the general terms and conditions of
the applicable retiree medical plan, then the Company shall
not be required to provide such benefits under such plan,
but shall instead provide the participant with alternative
benefits substantially similar to those that the participant
would have been entitled to receive under such plan, at an
after-tax cost to the participant that is not materially
greater than the cost that the participant would have
incurred, if such coverage had been permissible; provided
that if the Company reasonably determines that such
alternative benefits are not available on commercially
reasonable terms, the Company may elect instead to pay to
the participant, in a single cash lump sum, an amount equal
to the pre-tax cost that the Company would have incurred to
provide such benefits to the participant under the
applicable retiree medical plan.
5.5 The Company may withhold from any benefits payable
under the Plan all federal, state, local or other taxes as shall
be required to be withheld pursuant to any law or governmental
regulation or ruling.
5.6 Each participant shall enter into an agreement (in the
form set forth as Exhibit A to the Agreement) not to solicit
employees of the Company or its subsidiaries against the
interests of the Company during the two-year period following a
termination of employment, without the prior written consent of
the Board or a committee thereof appointed to administer the
Plan, and not to disclose any confidential information relating
to the Company's business at any time, except as may be provided
in the agreement. Such agreement shall be subject to exclusive
jurisdiction in the federal or state courts of Westchester County
in New York State. Notwithstanding the foregoing, any provisions
providing for the forfeiture of awards or the recovery of gains
from the exercise of awards under the 1989 Key Employee Long Term
Incentive Plan or the KELTIP (or applicable award agreements
under such plans) shall no longer apply upon and following a
Change in Control.
5.7 (a) No participant shall be required to mitigate the
amount of any benefits provided for in this Article V by seeking
other employment or otherwise, nor shall the amount of any
monthly or lump sum benefits provided for in the Plan be reduced
by any compensation earned by the participant as a result of
employment after the date of termination of employment by the
Company.
(b) The Company's obligation to make the payments
provided for in the Plan and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense, or other claim, right or action that the
Company may have against a participant or a third party.
5.8 Except as otherwise provided herein, no provision of
the Plan or any benefit provided hereunder shall reduce any
amounts otherwise payable, or in any way diminish a participant's
existing rights, or rights which may accrue to the participant
solely as a result of the passage of time, under any pension or
welfare plan, incentive plan or other contract, plan or
arrangement maintained by the Company.
5.9 (a) Anything in the Plan or any other plan, agreement
or arrangement to the contrary notwithstanding, in the event it
shall be determined that any Payment to a participant would be
subject to the Excise Tax, then the participant shall be entitled
to receive an additional payment (the "Gross-Up Payment") in an
amount such that, after payment by the participant of all taxes
(and any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes and
employment taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, the participant retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. The
Company's obligation to make Gross-Up Payments under this Section
5.9 shall not be conditioned upon the participant's termination
of employment.
(b) Subject to the provisions of Section 5.9(c), all
determinations required to be made under this Section 5.9,
including whether and when a Gross-Up Payment is required, the
amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by KPMG
LLP, or such other nationally recognized certified public
accounting firm as may be designated by the participant (the
"Accounting Firm"). The Accounting Firm shall provide detailed
supporting calculations both to the Company and the participant
within fifteen (15) business days of the receipt of notice from
the participant that there has been a Payment or such earlier
time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting the Change in Control, the
participant may appoint another nationally recognized accounting
firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 5.9, shall be paid by the
Company to the participant within five (5) days of the receipt of
the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the
participant. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments that will not have been made by the
Company should have been made (the "Underpayment"), consistent
with the calculations required to be made hereunder. In the
event the Company exhausts its remedies pursuant to Section
5.9(c), and the participant thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the
benefit of the participant.
(c) The participant shall notify the Company in
writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of the
Gross-Up Payment. Such notification shall be given as soon as
practicable, but no later than ten (10) business days after the
participant is informed in writing of such claim. The
participant shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid. The
participant shall not pay such claim prior to the expiration of
the 10-day period following the date on which the participant
gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the participant in writing
prior to the expiration of such period that the Company desires
to contest such claim, the participant shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with
contesting such claim as the Company shall reasonably
request in writing from time to time, including, without
limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in
order effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and
penalties) incurred in connection with such contest, and shall
indemnify and hold the participant harmless, on an after-tax
basis, for any Excise Tax or income tax and employment tax
(including interest and penalties) imposed as a result of such
representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 5.9(c),
the Company shall control all proceedings taken in connection
with such contest, and, at its sole discretion, may pursue or
forgo any and all administrative appeals, proceedings, hearings
and conferences with the applicable taxing authority in respect
of such claim and may, at its sole discretion, either direct the
participant to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the participant
agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and
in one or more appellate courts, as the Company shall determine;
provided, however, that, if the Company directs the participant
to pay such claim and sue for a refund, the Company shall advance
the amount of such payment to the participant, on an
interest-free basis, and shall indemnify and hold the participant
harmless, on an after-tax basis, from any Excise Tax or income
tax and employment tax (including interest or penalties) imposed
with respect to such advance or with respect to any imputed
income in connection with such advance; and provided, further,
that any extension of the statute of limitations relating to
payment of taxes for the taxable year of the participant with
respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with
respect to which the Gross-Up Payment would be payable hereunder,
and the participant shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the participant of an
amount advanced by the Company pursuant to Section 5.9(c), the
participant becomes entitled to receive any refund with respect
to such claim, the participant shall (subject to the Company's
complying with the requirements of Section 5.9(c)) promptly pay
to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the participant of an amount
advanced by the Company pursuant to Section 5.9(c), a
determination is made that the participant shall not be entitled
to any refund with respect to such claim and the Company does not
notify the participant in writing of its intent to contest such
denial of refund prior to the expiration of ten (10) days after
such determination, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
(e) Notwithstanding any other provision of this
Section 5.9, the Company may, in its sole discretion, withhold
and pay over to the Internal Revenue Service or any other
applicable taxing authority, for the benefit of the participant,
all or any portion of any Gross-Up Payment, and the participant
hereby consents to such withholding; provided, that such
withholding and payment shall in no event place the participant in
a less favorable tax position than had such payments been made to
the participant by the Company.
(f) Definitions. The following terms shall have the
following meanings for purposes of this Section 5.9.
(i) "Excise Tax" shall mean the excise tax
imposed by Section 4999 of the Code, together with any
interest or penalties imposed with respect to such excise
tax.
(ii) A "Payment" shall mean any payment or
distribution in the nature of compensation (within the
meaning of Section 280G(b)(2) of the Code) to or for the
benefit of the participant, whether paid or payable pursuant
to the Plan or otherwise.
ARTICLE VI
General Provisions
6.1 The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the businesses or assets of the
Company to expressly assume and adopt the Plan.
6.2 If any participant entitled to receive benefits under
Article V of the Plan as a result of a termination of employment
covered by Section 4.1 or 4.2 above should die while any amounts
are still payable to the participant hereunder, all unpaid
benefits under the Plan with respect to such participant shall be
paid to the participant's designated beneficiary or, if no
designation has been made, to the participant's estate.
6.3 The Company agrees to pay as incurred (within ten (10)
days following the Company's receipt of an invoice from the
participant), to the fullest extent permitted by law, all legal
fees and expenses that the participant may reasonably incur as a
result of any contest (regardless of the outcome thereof) by the
Company, the participant or others of the validity or
enforceability of, or liability under, any provision of the Plan
or any guarantee of performance thereof (including as a result of
any contest by the participant about the amount of any payment
pursuant to the Plan), plus, in each case, interest on any
delayed payment at the applicable federal rate provided for in
Section 7872(f)(2)(A) of the Code.
6.4 Nothing contained in the Plan shall be construed as a
contract of employment between the Company and any participant,
or as a right of any participant to continue in the employ of the
Company, or as a limitation of the right of the Company to
discharge any participant, with or without Cause.
6.5 The Plan shall be administered as an unfunded plan
designed primarily for the purpose of providing benefits to a
select group of management or highly compensated employees of the
Company. Payments under the Plan shall at all times be made
solely from the general assets of the Company. No assets shall
be segregated or earmarked in respect of any amount due
hereunder. The Plan and the amounts due hereunder shall not
constitute a trust.
6.6 Any notice or other communication pursuant to the Plan
intended for a participant shall be deemed given when personally
delivered to such participant or sent to such participant by
registered or certified mail, return receipt requested, at such
participant's residence address as it appears on the records of
the Company, or at such other address as such participant shall
have specified by notice to the Company in the manner herein
provided. Any notice or other communication pursuant to the Plan
intended for the Company shall be deemed given when personally
delivered to the Secretary by registered or certified mail,
return receipt requested, at its headquarters in Pleasantville,
New York 10570, or at such other address as the Company shall
have specified by notice to the participants in the manner herein
provided.
6.7 Except as provided in Section 6.2, a participant may
not assign, anticipate, transfer, pledge, hypothecate or alienate
in any manner any interest arising under the Plan, nor shall any
such interest be subject to attachment, bankruptcy proceedings or
to any other legal processes or to the interference or control of
creditors or others.
6.8 Except as specifically provided otherwise herein,
determinations under the Plan shall be made by the Board. If any
body of law should be used or applied in determining the meaning
or effect of the Plan, it shall be the law of the State of New
York. Any dispute under this Plan shall be subject to the
exclusive jurisdiction in the federal or state courts of
Westchester County in New York State, and by becoming a
participant in the Plan, each participant shall be treated as
having consented to such exclusive jurisdiction.
6.9 Any reference to a specific policy, plan or program in
this Plan shall be deemed to include any similar policy, plan or
program of the Company then in effect that is the predecessor of,
the successor to, or the replacement for, such specific policy,
plan or program.
6.10 In the construction of the Plan, the masculine shall
include the feminine and the singular the plural, and vice-versa,
in all cases where such meaning would be appropriate.
6.11 In the event any provision of the Plan, if challenged,
would be declared invalid, illegal or unenforceable, such
provision shall be construed and enforced as if it had been more
narrowly drawn so as not to be illegal, invalid or unenforceable
and the validity, legality and enforceability of the remaining
provisions shall not be affected or impaired thereby.
6.12 In the event a participant receives severance benefits
under Article V of the Plan, such participant shall not be
entitled to severance or termination benefits under any other
severance plan of the Company or its affiliates, including,
without limitation, the Company's Income Continuation Plan for
Senior Management, or under any individual employment or
severance agreement, unless such individual agreement otherwise
specifies for certain payments to be made thereunder in addition
to, or in lieu of, the severance benefits under Article V.
ANNEX A - Examples of Severance Bonus Amount
Set forth below are illustrative examples of calculations of the
Severance Bonus Amount under Section 5.1(a):
A. Target Bonus Exceeds Average Highest Bonus
- - Target Bonus = $350,000
Highest Bonuses
In Last Five Years = $500,000
= $100,000
= $200,000
= $200,000
= $100,000
- - Average Highest Bonuses = $300,000
- - Severance Bonus Amount = $350,000
B. Average Highest Bonus (one year annualized) Exceeds Target Bonus
- - Target Bonus = $200,000
- - Highest Bonuses
In Last Five Years = $300,000
(employed six months)
= $200,000
= $400,000
= $200,000
= $100,000
- - Average Highest Bonuses = $400,000
- - Severance Bonus Amount = $400,000
C. Average Highest Bonuses (employed two years) Exceeds Largest Bonus
- - Target Bonus = $250,000
- - Highest Bonuses
In Past Five Years
(only employed 2 years) = $300,000
= $400,000
- - Average of Highest Bonuses = $350,000
- - Severance Bonus Amounts = $350,000
EXHIBIT A - Non Solicitation Agreement
[Name of Participant]
The Reader's Digest Association, Inc.
Reader's Digest Road
Pleasantville, NY 10570
Dear [Name of Participant]:
Under Section 5.2 of the 2001 Income Continuation Plan (the
"Plan") of The Reader's Digest Association, Inc. (the "Company"),
each participant in the Plan is required to enter into a
non-solicitation and confidentiality agreement. In consideration
of your participation in the Plan, you agree as follows:
1. You will not, without the written consent of the Company
signed by the Chief Human Resources Officer or the General
Counsel of the Company, during the two-year period following
your termination of employment with the Company, attempt,
directly or indirectly, to solicit, induce or hire (or identify
for solicitation, inducement or hire) any non-clerical employee
of the Company or its affiliates to be employed by, or to
perform services for, you or any person or entity with which
you are associated (including, but not limited to, due to your
employment by, consultancy for, equity interest in, or creditor
relationship with such person or entity) or any person or
entity from which you receive direct or indirect compensation
or fees as a result of such solicitation, inducement or hire
(or the identification for solicitation, inducement or hire).
2. You will not, without the written consent of the Chief Human
Resources Officer or the General Counsel of the Company, at any
time following your termination of employment with the Company,
disclose to anyone outside the Company or its affiliates, or
use in other than the Company's or its affiliate's business,
any confidential information or proprietary information
relating to the business of the Company or its affiliates,
acquired by you during employment with the Company or its
affiliates.
3. This letter agreement shall be governed by and interpreted
in accordance with the laws of the State of New York applicable
to contracts executed in and to be wholly performed within that
State. I hereby agree and consent to exclusive jurisdiction of
any dispute under this letter agreement in the federal or state
courts of Westchester County in New York State.
If the foregoing represents your understanding, please indicate
your agreement and acceptance by executing below and returning
one fully executed copy of this agreement to the undersigned.
Very truly yours,
THE READER'S DIGEST ASSOCIATION,
INC.
By
-----------------------------------
Name:Gary S. Rich
Title: Senior Vice President,
Human Resources
Agreed to and accepted as of April ___, 2001:
- -------------------------------------
Name: [Name of Executive]