-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KeSy0mxqXUOTzWJ5JMHFpWqkKTDllP2UeJxAKQ176DFWvikc3EeLnxIylAMX+SxF XTYcDy/X8Fo7o+WIdVxJEw== 0000897069-99-000316.txt : 19990518 0000897069-99-000316.hdr.sgml : 19990518 ACCESSION NUMBER: 0000897069-99-000316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERSTATE ENERGY CORP CENTRAL INDEX KEY: 0000352541 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 391380265 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09894 FILM NUMBER: 99627586 BUSINESS ADDRESS: STREET 1: 222 WEST WSHNGTON AVENUE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523110 MAIL ADDRESS: STREET 1: P O BOX 2568 CITY: MADISON STATE: WI ZIP: 53701-2568 FORMER COMPANY: FORMER CONFORMED NAME: WPL HOLDINGS INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IES UTILITIES INC CENTRAL INDEX KEY: 0000052485 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 420331370 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04117 FILM NUMBER: 99627587 BUSINESS ADDRESS: STREET 1: 200 FIRST ST SE STREET 2: IES TOWER CITY: CEDAR RAPIDS STATE: IA ZIP: 52401 BUSINESS PHONE: 3193984411 FORMER COMPANY: FORMER CONFORMED NAME: IOWA ELECTRIC LIGHT & POWER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IOWA RAILWAY & LIGHT CORP DATE OF NAME CHANGE: 19670629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WISCONSIN POWER & LIGHT CO CENTRAL INDEX KEY: 0000107832 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 390714890 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00337 FILM NUMBER: 99627588 BUSINESS ADDRESS: STREET 1: 222 W WASHINGTON AVE CITY: MADISON STATE: WI ZIP: 53703 BUSINESS PHONE: 6082523311 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Name of Registrant, State of Commission Incorporation, Address of Principal IRS Employer File Number Executive Offices and Telephone Number Identification Number - ----------- -------------------------------------- --------------------- 1-9894 INTERSTATE ENERGY CORPORATION 39-1380265 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 0-4117-1 IES UTILITIES INC. 42-0331370 (an Iowa corporation) Alliant Tower Cedar Rapids, Iowa 52401 Telephone (319)398-4411 0-337 WISCONSIN POWER AND LIGHT COMPANY 39-0714890 (a Wisconsin corporation) 222 West Washington Avenue Madison, Wisconsin 53703 Telephone (608)252-3311 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past (90) days. Yes X No _____ This combined Form 10-Q is separately filed by Interstate Energy Corporation, IES Utilities Inc. and Wisconsin Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. Number of shares outstanding of each class of common stock as of April 30, 1999: Interstate Energy Corporation Common stock, $.01 par value, 78,116,598 shares outstanding IES Utilities Inc. Common stock, $2.50 par value, 13,370,788 shares outstanding (all of which are owned beneficially and of record by Interstate Energy Corporation) Wisconsin Power and Light Company Common stock, $5 par value, 13,236,601 shares outstanding (all of which are owned beneficially and of record by Interstate Energy Corporation) CONTENTS Page ---- Part I. Financial Information Item 1. Consolidated Financial Statements Interstate Energy Corporation: Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 4 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 7 Notes to Consolidated Financial Statements 8 IES Utilities Inc.: Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 10 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 11 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 13 Notes to Consolidated Financial Statements 14 Wisconsin Power and Light Company: Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 15 Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 16 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 18 Notes to Consolidated Financial Statements 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Part II. Other Information 33 Item 1. Legal Proceedings 33 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 35 2 DEFINITIONS Certain abbreviations or acronyms used in the text and notes of this combined Form 10-Q are defined below: Abbreviation or Acronym Definition - ----------------------- ---------- Cargill Cargill Incorporated CEMS Continuous Emission Monitoring System Corporate Services Alliant Energy Corporate Services, Inc. Dth Dekatherm EAC Energy Adjustment Clause EPA United States Environmental Protection Agency IEC Interstate Energy Corporation IESU IES Utilities Inc. IPC Interstate Power Company IUB Iowa Utilities Board Kewaunee Kewaunee Nuclear Power Plant MAEC MidAmerican Energy Company McLeod McLeodUSA Inc. MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MW Megawatt MWH Megawatt-Hour NOx Nitrogen Oxides OCA Office of Consumer Advocate PGA Purchased Gas Adjustment Polsky Polsky Energy Corporation PSCW Public Service Commission of Wisconsin PUHCA Public Utility Holding Company Act of 1935 Resources Alliant Energy Resources, Inc. SEC Securities and Exchange Commission SIP State Implementation Plan Whiting Whiting Petroleum Corporation WP&L Wisconsin Power and Light Company WPSC Wisconsin Public Service Corporation 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31 1999 1998 - -------------------------------------------------------------------------------- (in thousands, except per share amounts Operating revenues: Electric utility $ 351,338 $ 357,751 Gas utility 133,684 130,046 Nonregulated and other 61,833 68,486 --------- --------- 546,855 556,283 --------- --------- - -------------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 65,404 69,556 Purchased power 52,065 56,147 Cost of utility gas sold 81,343 77,280 Other operation 130,365 157,352 Maintenance 23,812 25,259 Depreciation and amortization 73,640 69,832 Taxes other than income taxes 27,239 26,977 --------- --------- 453,868 482,403 --------- --------- - -------------------------------------------------------------------------------- Operating income 92,987 73,880 --------- --------- - -------------------------------------------------------------------------------- Interest expense and other: Interest expense 33,400 30,924 Allowance for funds used during construction (1,934) (1,503) Preferred dividend requirements of subsidiaries 1,676 1,674 Miscellaneous, net (6,771) (3,877) --------- --------- 26,371 27,218 --------- --------- - -------------------------------------------------------------------------------- Income before income taxes 66,616 46,662 --------- --------- - -------------------------------------------------------------------------------- Income taxes 24,872 17,787 --------- --------- - -------------------------------------------------------------------------------- Net income $ 41,744 $ 28,875 ========= ========= - -------------------------------------------------------------------------------- Average number of common shares outstanding 77,780 76,579 ========= ========= - -------------------------------------------------------------------------------- Earnings per average common share (basic and diluted) $ 0.54 $ 0.38 ========= ========= - -------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 4,884,916 $ 4,866,152 Gas 517,775 515,074 Other 409,844 409,711 ------------ ----------------- 5,812,535 5,790,937 Less - Accumulated depreciation 2,917,085 2,852,605 ------------ ----------------- 2,895,450 2,938,332 Construction work in progress 133,054 119,032 Nuclear fuel, net of amortization 40,709 44,316 ------------ ----------------- 3,069,213 3,101,680 Other property, plant and equipment, net of accumulated depreciation and amortization of $189,289 and $178,248, respectively 354,075 355,100 ------------ ----------------- 3,423,288 3,456,780 ------------ ----------------- - ------------------------------------------------------------------------------ Current assets: Cash and temporary cash investments 54,183 31,827 Accounts receivable: Customer, less allowance for doubtfu accounts of $2,594 and $2,518, respectively 96,973 102,966 Other, less allowance for doubtful accounts of $499 and $490, respectively 22,273 26,054 Notes receivable, less allowance for doubtful accounts of $117 and $120, respectively 9,433 13,392 Production fuel, at average cost 44,397 54,140 Materials and supplies, at average cost 55,025 53,490 Gas stored underground, at average cost 12,489 26,013 Regulatory assets 26,628 30,796 Prepaid gross receipts tax 16,882 22,222 Other 24,316 30,767 ------------ ----------------- 362,599 391,667 ------------ ----------------- - ------------------------------------------------------------------------------ Investments: Investment in McLeodUSA Inc. 431,255 320,280 Nuclear decommissioning trust funds 245,024 225,803 Investment in foreign entities 119,124 68,882 Other 52,619 54,776 ------------ ----------------- 848,022 669,741 ------------ ----------------- - ------------------------------------------------------------------------------ Other assets: Regulatory assets 278,147 284,467 Deferred charges and other 159,066 156,682 ------------ ----------------- 437,213 441,149 ------------ ----------------- - ------------------------------------------------------------------------------ Total assets $ 5,071,122 $ 4,959,337 ============ ================= - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 INTERSTATE ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - ------------------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) Capitalization: Common stock - $.01 par value - authorized 200,000,000 shares; outstanding 77,935,693 and 77,630,043 shares, respectively $ 779 $ 776 Additional paid-in capital 913,728 905,130 Retained earnings 540,282 537,372 Accumulated other comprehensive income 237,434 163,017 ----------------- ----------------- Total common equity 1,692,223 1,606,295 ----------------- ----------------- Cumulative preferred stock of subsidiaries: Par/Stated Authorized Shares Mandatory Value Shares Outstanding Series Redemption ----- ------ ----------- ------ ---------- $ 100 * 449,765 4.40% - 6.20% No 44,977 44,977 $ 25 * 599,460 6.50% No 14,986 14,986 $ 50 466,406 366,406 4.30% - 6.10% No 18,320 18,320 $ 50 ** 216,381 4.36% - 7.76% No 10,819 10,819 $ 50 ** 545,000 6.40% Yes *** 27,250 27,250 ----------------- ----------------- 116,352 116,352 Less: unamortized expenses (2,819) (2,854) ----------------- ----------------- Total cumulative preferred stock of subsidiaries 113,533 113,498 ----------------- ----------------- Long-term debt (excluding current portion) 1,545,251 1,543,131 ----------------- ----------------- 3,351,007 3,262,924 ----------------- ----------------- * 3,750,000 authorized shares in total between the two classes ** 2,000,000 authorized shares in total between the two classes *** $53.20 mandatory redemption price - ------------------------------------------------------------------------------------------------------------------------ Current liabilities: Current maturities and sinking funds 54,084 63,414 Variable rate demand bonds 56,975 56,975 Commercial paper 64,000 64,500 Notes payable 50,027 51,784 Capital lease obligations 12,146 11,978 Accounts payable 163,589 204,297 Accrued taxes 106,845 84,921 Other 113,414 111,685 ----------------- ----------------- 621,080 649,554 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------------------------ Other long-term liabilities and deferred credits: Accumulated deferred income taxes 738,168 691,624 Accumulated deferred investment tax credits 75,949 77,313 Environmental liabilities 68,192 68,399 Customer advances 35,964 37,171 Capital lease obligations 11,499 13,755 Other 169,263 158,597 ----------------- ----------------- 1,099,035 1,046,859 ----------------- ----------------- - ------------------------------------------------------------------------------------------------------------------------ Total capitalization and liabilities $ 5,071,122 $ 4,959,337 ================= ================= - ------------------------------------------------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6 INTERSTATE ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 1999 1998 - ----------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 41,744 $ 28,875 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 73,640 69,832 Amortization of nuclear fuel 5,024 5,437 Amortization of deferred energy efficiency expenditures 7,930 8,240 Deferred taxes and investment tax credits (1,799) (13,424) Refueling outage provision 2,415 1,299 Impairment of oil and gas properties - 6,746 Other (2,070) 1,197 Other changes in assets and liabilities: Accounts receivable 9,774 20,221 Notes receivable 3,959 2,091 Production fuel 9,743 7,289 Materials and supplies (1,535) (1,543) Gas stored underground 13,524 21,544 Prepaid gross receipts tax 5,340 4,912 Accounts payable (40,708) (23,964) Accrued taxes 21,924 29,699 Adjustment clause balances 9,168 14,220 Benefit obligations and other 12,079 (398) ----------------- ----------------- Net cash flows from operating activities 170,152 182,273 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends declared (38,834) (36,580) Proceeds from issuance of common stock 8,538 2,828 Net change in Alliant Energy Resources, Inc. credit facility 42,995 29,562 Proceeds from issuance of other long-term debt 11,994 41 Reductions in other long-term debt (62,310) (1,013) Net change in short-term borrowings (2,257) (67,676) Principal payments under capital lease obligations (3,369) (4,106) Other 113 (423) ----------------- ----------------- Net cash flows used for financing activities (43,130) (77,367) ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cashflows used for investing activities: Construction and acquisition expenditures: Utility (41,638) (39,160) Nonregulated businesses (49,198) (22,554) Nuclear decommissioning trust funds (15,437) (13,642) Shared savings expenditures (4,247) (1,808) Other 5,854 7,032 ----------------- ----------------- Net cash flows used for investing activities (104,666) (70,132) ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Net increase in cash and temporary cash investments 22,356 34,774 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 31,827 27,329 ----------------- ----------------- - ----------------------------------------------------------------------------------------------------- ----------------- ----------------- Cash and temporary cash investments at end of period $ 54,183 $ 62,103 ================= ================= - ----------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 31,952 $ 32,237 ================= ================= Income taxes $ 4,600 $ 11,892 ================= ================= Noncash investing and financing activities: Capital lease obligations incurred $ 1,414 $ 1,039 ================= ================= - ----------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7 INTERSTATE ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The interim consolidated financial statements included herein have been prepared by IEC, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include IEC and its consolidated subsidiaries (WP&L, IESU, IPC, Resources and Corporate Services). These financial statements should be read in conjunction with the financial statements and the notes thereto included in IEC's, IESU's and WP&L's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of IESU's, WP&L's and IPC's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 2. IEC's comprehensive income, and the components of other comprehensive income (loss), net of taxes, were as follows (in thousands):
For the Three Months Ended March 31, 1999 1998 -------------- --------------- Net income $ 41,744 $ 28,875 Other comprehensive income (loss): Unrealized gain on securities, net of tax (1) 75,031 61,829 Foreign currency translation adjustments (614) 55 -------------- --------------- Other comprehensive income 74,417 61,884 -------------- --------------- Comprehensive income $ 116,161 $ 90,759 ============== =============== (1) Primarily due to the adjustment to the estimated fair value each quarter of IEC's investment in McLeod.
IESU and WP&L had no comprehensive income in the periods presented. 8 3. Certain financial information relating to IEC's significant business segments is presented below:
Regulated Domestic Utilities Nonregulated IEC ------------------------------------------- Electric Gas Other Total Businesses Other Consolidated ------------------------------------------------------------------------------------ (in thousands) Three Months Ended March 31, 1999 -------------- Operating revenues $351,338 $133,684 $9,204 $494,226 $53,199 ($570) $546,855 Operating income (loss) 68,615 23,939 2,354 94,908 (1,836) (85) 92,987 Net income (loss) 44,767 (1,906) (1,117) 41,744 Three Months Ended March 31, 1998 -------------- Operating revenues $357,751 $130,046 $8,409 $496,206 $60,322 ($245) $556,283 Operating income (loss) 55,837 22,376 1,831 80,044 (5,499) (665) 73,880 Net income (loss) 33,177 (3,999) (303) 28,875
Resources' (i.e. the nonregulated businesses) assets increased $150 million during the first quarter of 1999, primarily due to the increase in market value of its investment in McLeod and additional investments in foreign entities. Intersegment revenues were not material to IEC's operations and there was no single customer whose revenues exceeded 10% or more of IEC's consolidated revenues. 4. The provisions for income taxes are based on the estimated annual effective tax rate, which differs from the federal statutory rate of 35% principally due to: state income taxes, tax credits, effects of utility rate making and certain nondeductible expenses. 5. At March 31, 1999, IEC had $119.1 million of investments in foreign entities on its Consolidated Balance Sheets that included: (a) investments in several New Zealand utility entities; (b) investments in several generation facilities in China; and (c) an investment in an international venture capital fund. IEC accounts for the China investments under the equity method and the other investments under the cost method. The geographic concentration of IEC's investments in foreign entities at March 31, 1999, included investments of approximately $85.7 million in New Zealand, $32.9 million in China and $0.5 million in other countries. 6. In October 1998, the Board of Directors of IEC adopted a new Shareowner Rights Plan (new plan) to replace IEC's former plan that expired on February 22, 1999. The new plan was approved on January 15, 1999 by the SEC. On January 20, 1999, the Board of Directors declared a dividend of one common share purchase right (right) on each outstanding share of IEC's common stock which was issued on February 22, 1999 to coincide with the expiration of the former plan. Rights under the new plan will be exercisable only if a person or group acquires, or announces a tender offer to acquire, 15% or more of IEC's common stock. Each right will initially entitle shareowners to buy one-half of one share of IEC's common stock. The rights will only be exercisable in multiples of two at an initial price of $95.00 per full share, subject to adjustment. If any shareowner acquires 15% or more of the outstanding common stock of IEC, each right (subject to limitations) will entitle its holder to purchase, at the right's then current exercise price, a number of common shares of IEC or of the acquirer having a market value at the time of twice the right's per full share exercise price. The Board of Directors is also authorized to reduce the 15% thresholds to not less than 10%. 9 IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------- (in thousands) Operating revenues: Electric utility $ 140,017 $ 140,649 Gas utility 61,296 60,395 Steam and other 7,952 7,234 --------- --------- 209,265 208,278 --------- --------- - ----------------------------------------------------------------------------- Operating expenses: Electric and steam production fuels 26,589 30,649 Purchased power 13,150 11,049 Cost of gas sold 37,912 37,657 Other operation 47,439 47,002 Maintenance 9,904 10,991 Depreciation and amortization 25,482 24,335 Taxes other than income taxes 12,616 12,306 --------- --------- 173,092 173,989 --------- --------- - ----------------------------------------------------------------------------- Operating income 36,173 34,289 --------- --------- - ----------------------------------------------------------------------------- Interest expense and other: Interest expense 13,204 13,075 Allowance for funds used during construction (849) (765) Miscellaneous, net (857) 279 --------- --------- 11,498 12,589 --------- --------- - ----------------------------------------------------------------------------- Income before income taxes 24,675 21,700 --------- --------- - ----------------------------------------------------------------------------- Income taxes 10,216 10,040 --------- --------- - ----------------------------------------------------------------------------- Net income 14,459 11,660 --------- --------- - ----------------------------------------------------------------------------- Preferred dividend requirements 229 229 --------- --------- - ----------------------------------------------------------------------------- Earnings available for common stock $ 14,230 $ 11,431 ========= ========= - ----------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 10 IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 2,148,059 $ 2,140,322 Gas 199,209 198,488 Steam 55,794 55,797 Common 106,732 106,940 ------------- --------------- 2,509,794 2,501,547 Less - Accumulated depreciation 1,237,623 1,209,204 ------------- --------------- 1,272,171 1,292,343 Construction work in progress 57,141 48,991 Leased nuclear fuel, net of amortization 23,559 25,644 ------------- --------------- 1,352,871 1,366,978 Other property, plant and equipment, net of accumulated depreciation and amortization of $1,984 and $1,948, respectively 5,586 5,623 ------------- --------------- 1,358,457 1,372,601 ------------- --------------- - ------------------------------------------------------------------------------ Current assets: Cash and temporary cash investments 585 4,175 Temporary cash investments with associated companies - 53,729 Accounts receivable: Customer, less allowance for doubtful accounts of $1,056 and $1,058, respectively 17,543 16,703 Associated companies 2,466 2,662 Other, less allowance for doubtful accounts of $363 and $357, respectively 10,158 10,346 Production fuel, at average cost 13,306 11,863 Materials and supplies, at average cost 25,972 25,591 Gas stored underground, at average cost 5,887 12,284 Regulatory assets 19,324 23,487 Prepayments and other 3,879 4,185 ------------- --------------- 99,120 165,025 ------------- --------------- - ------------------------------------------------------------------------------ Investments: Nuclear decommissioning trust funds 95,398 91,691 Other 6,236 6,019 ------------- --------------- 101,634 97,710 ------------- --------------- - ------------------------------------------------------------------------------ Other assets: Regulatory assets 133,491 137,908 Deferred charges and other 15,201 15,734 ------------- --------------- 148,692 153,642 ------------- --------------- - ------------------------------------------------------------------------------ Total assets $ 1,707,903 $ 1,788,978 ============= =============== - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 11 IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - -------------------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) Capitalization: Common stock - $2.50 par value - authorized 24,000,000 shares; 13,370,788 shares outstanding $ 33,427 $ 33,427 Additional paid-in capital 279,042 279,042 Retained earnings 245,626 275,372 ------------------ ----------------- Total common equity 558,095 587,841 Cumulative preferred stock, not mandatorily redeemable - $50 par value - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320 Long-term debt (excluding current portion) 551,086 602,020 ------------------ ----------------- 1,127,501 1,208,181 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Current liabilities: Current maturities and sinking funds 51,140 50,140 Capital lease obligations 12,132 11,965 Notes payable to associated companies 9,694 - Accounts payable 30,117 43,953 Accounts payable to associated companies 13,930 22,487 Accrued payroll and vacations 9,311 6,365 Accrued interest 10,082 12,045 Accrued taxes 64,480 55,295 Accumulated refueling outage provision 9,020 6,605 Environmental liabilities 5,660 5,660 Other 16,928 17,617 ------------------ ----------------- 232,494 232,132 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 224,893 224,510 Accumulated deferred investment tax credits 28,603 29,243 Environmental liabilities 29,027 29,195 Pension and other benefit obligations 27,283 25,655 Capital lease obligations 11,427 13,679 Other 26,675 26,383 ------------------ ----------------- 347,908 348,665 ------------------ ----------------- - -------------------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $ 1,707,903 $ 1,788,978 ================== ================= - -------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
12 IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 14,459 $ 11,660 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 25,482 24,335 Amortization of leased nuclear fuel 3,499 4,010 Amortization of deferred energy efficiency expenditures 6,064 6,070 Deferred taxes and investment tax credits (473) (8,822) Refueling outage provision 2,415 1,299 Other 146 319 Other changes in assets and liabilities: Accounts receivable (456) 2,796 Production fuel (1,443) 197 Materials and supplies (381) (1,249) Gas stored underground 6,397 10,509 Accounts payable (22,393) (12,292) Accrued taxes 9,185 13,262 Adjustment clause balances 4,809 9,466 Benefit obligations and other 5,776 5,449 ------------------ ----------------- Net cash flows from operating activities 53,086 67,009 ------------------ ----------------- - ------------------------------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends declared (43,976) (14,000) Dividends payable (4,840) 14,000 Preferred stock dividends (229) (229) Reductions in long-term debt (50,000) - Net change in short-term borrowings 9,694 - Principal payments under capital lease obligations (3,369) (4,106) Other (3) - ------------------ ------------------ Net cash flows used for financing activities (92,723) (4,335) ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction expenditures - utility (16,621) (19,198) Nuclear decommissioning trust funds (1,502) (1,502) Other 441 72 ------------------ ------------------ Net cash flows used for investing activities (17,682) (20,628) ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and temporary cash investments (57,319) 42,046 ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 57,904 230 ------------------ ------------------ - ------------------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 585 $ 42,276 ================== ================== - ------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid during the period for: Interest $ 13,989 $ 12,378 ================== ================== Income taxes $ 7,334 $ 11,804 ================== ================== Noncash investing and financing activities - Capital lease obligations incurred $ 1,414 $ 1,039 ================== ================== - ------------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
13 IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Except as modified below, the IEC Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to IESU. IEC Notes 5 and 6 do not relate to IESU and, therefore, are not incorporated by reference. 1. The interim consolidated financial statements included herein have been prepared by IESU, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include IESU and its consolidated wholly-owned subsidiary, IES Ventures Inc. IESU is a subsidiary of IEC. These financial statements should be read in conjunction with the financial statements and the notes thereto included in IESU's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of IESU's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 14 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------ (in thousands) Operating revenues: Electric utility $ 149,944 $ 151,310 Gas utility 51,794 50,318 Water 1,252 1,175 ---------- ----------- 202,990 202,803 ---------- ----------- - ------------------------------------------------------------------------------ Operating expenses: Electric production fuels 27,366 28,897 Purchased power 24,000 28,602 Cost of gas sold 31,181 30,714 Other operation 26,108 34,003 Maintenance 9,103 9,967 Depreciation and amortization 31,139 29,258 Taxes other than income taxes 7,702 7,711 ---------- ----------- 156,599 169,152 ---------- ----------- - ------------------------------------------------------------------------------ Operating income 46,391 33,651 ---------- ----------- - ------------------------------------------------------------------------------ Interest expense and other: Interest expense 9,865 8,383 Allowance for funds used during construction (923) (656) Miscellaneous, net (4,344) (1,867) ---------- ----------- 4,598 5,860 ---------- ----------- - ------------------------------------------------------------------------------ Income before income taxes 41,793 27,791 ---------- ----------- - ------------------------------------------------------------------------------ Income taxes 15,505 10,193 ---------- ----------- - ------------------------------------------------------------------------------ Net income 26,288 17,598 ---------- ----------- - ------------------------------------------------------------------------------ Preferred dividend requirements 828 828 ---------- ----------- - ------------------------------------------------------------------------------ Earnings available for common stock $ 25,460 $ 16,770 ========== =========== - ------------------------------------------------------------------------------ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 15 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS March 31, 1999 December 31, ASSETS (Unaudited) 1998 - -------------------------------------------------------------------------------- (in thousands) Property, plant and equipment: Utility - Plant in service - Electric $ 1,847,950 $ 1,839,545 Gas 246,188 244,518 Water 26,584 26,567 Common 219,715 219,268 -------------- ----------------- 2,340,437 2,329,898 Less - Accumulated depreciation 1,199,761 1,168,830 -------------- ----------------- 1,140,676 1,161,068 Construction work in progress 63,950 56,994 Nuclear fuel, net of amortization 17,151 18,671 -------------- ----------------- 1,221,777 1,236,733 Other property, plant and equipment, net of accumulated depreciation and amortization of $44 for both years 630 630 -------------- ----------------- 1,222,407 1,237,363 -------------- ----------------- - -------------------------------------------------------------------------------- Current assets: Cash and temporary cash investments 9,496 1,811 Accounts receivable: Customer 9,932 13,372 Associated companies 1,921 3,019 Other 7,307 8,298 Production fuel, at average cost 14,851 20,105 Materials and supplies, at average cost 21,117 20,025 Gas stored underground, at average cost 5,924 10,738 Regulatory assets 3,707 3,707 Prepaid gross receipts tax 16,882 22,222 Other 1,413 6,987 -------------- ----------------- 92,550 110,284 -------------- ----------------- - -------------------------------------------------------------------------------- Investments: Nuclear decommissioning trust funds 149,627 134,112 Other 15,476 15,960 -------------- ----------------- 165,103 150,072 -------------- ----------------- - -------------------------------------------------------------------------------- Other assets: Regulatory assets 74,788 76,284 Deferred charges and other 113,058 111,147 -------------- ----------------- 187,846 187,431 -------------- ----------------- - -------------------------------------------------------------------------------- Total assets $ 1,667,906 $ 1,685,150 ============== ================= - -------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 16 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31, 1999 December 31, CAPITALIZATION AND LIABILITIES (Unaudited) 1998 - --------------------------------------------------------------------------------------------------------- (in thousands, except share amounts) Capitalization: Common stock - $5 par value - authorized 18,000,000 shares; 13,236,601 shares outstanding $ 66,183 $ 66,183 Additional paid-in capital 199,438 199,438 Retained earnings 305,181 294,309 ----------------- ----------------- Total common equity 570,802 559,930 ----------------- ----------------- Cumulative preferred stock, not mandatorily redeemable without par value - authorized 3,750,000 shares, maximum aggregate stated value $150,000,000: $100 stated value - 449,765 shares outstanding 44,977 44,977 $25 stated value - 599,460 shares outstanding 14,986 14,986 ----------------- ----------------- Total cumulative preferred stock 59,963 59,963 ----------------- ----------------- Long-term debt (excluding current portion) 414,603 414,579 ----------------- ----------------- 1,045,368 1,034,472 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Current liabilities: Variable rate demand bonds 56,975 56,975 Notes payable 50,000 50,000 Notes payable to associated companies 1,102 26,799 Accounts payable 70,884 84,754 Accounts payable to associated companies 16,468 20,315 Accrued payroll and vacations 5,052 5,276 Accrued interest 8,093 6,863 Accrued taxes 16,502 740 Other 10,197 13,860 ----------------- ----------------- 235,273 265,582 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Other long-term liabilities and deferred credits: Accumulated deferred income taxes 243,750 245,489 Accumulated deferred investment tax credits 32,705 33,170 Customer advances 33,253 34,367 Environmental liabilities 11,644 11,683 Other 65,913 60,387 ----------------- ----------------- 387,265 385,096 ----------------- ----------------- - --------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $ 1,667,906 $ 1,685,150 ================= ================= - --------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
17 WISCONSIN POWER AND LIGHT COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income $ 26,288 $ 17,598 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 31,139 29,258 Amortization of nuclear fuel 1,525 1,427 Deferred taxes and investment tax credits (1,578) (1,607) Other (1,617) (457) Other changes in assets and liabilities: Accounts receivable 5,529 15,460 Production fuel 5,254 4,889 Materials and supplies (1,092) (32) Gas stored underground 4,814 8,768 Prepaid gross receipts tax 5,340 4,912 Accounts payable (17,717) (3,302) Accrued taxes 15,762 10,396 Adjustment clause balances 7,157 3,691 Benefit obligations and other 2,814 (361) --------------------- --------------------- Net cash flows from operating activities 83,618 90,640 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for financing activities: Common stock dividends (14,588) (14,586) Preferred stock dividends (828) (828) Net change in short-term borrowings (25,697) (42,500) --------------------- --------------------- Net cash flows used for financing activities (41,113) (57,914) --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash flows used for investing activities: Construction expenditures - utility (18,967) (15,584) Nuclear decommissioning trust funds (13,935) (12,140) Shared savings expenditures (2,519) (1,808) Other 601 477 --------------------- --------------------- Net cash flows used for investing activities (34,820) (29,055) --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Net increase in cash and temporary cash investments 7,685 3,671 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of period 1,811 2,492 --------------------- --------------------- - --------------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at end of period $ 9,496 $ 6,163 ===================== ===================== - --------------------------------------------------------------------------------------------------------------- Supplemental cash flow information: Cash paid (refunded) during the period for: Interest $ 8,468 $ 8,150 ===================== ===================== Income taxes $ (357) $ 1,668 ===================== ===================== - --------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
18 WISCONSIN POWER AND LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Except as modified below, the IEC Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to WP&L. IEC Notes 5 and 6 do not relate to WP&L and, therefore, are not incorporated by reference. 1. The interim consolidated financial statements included herein have been prepared by WP&L, without audit, pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements include WP&L and its consolidated subsidiary. WP&L is a subsidiary of IEC. These financial statements should be read in conjunction with the financial statements and the notes thereto included in WP&L's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of (a) the consolidated results of operations for the three months ended March 31, 1999 and 1998, (b) the consolidated financial position at March 31, 1999 and December 31, 1998, and (c) the consolidated statement of cash flows for the three months ended March 31, 1999 and 1998, have been made. Because of the seasonal nature of WP&L's operations, results for the three months ended March 31, 1999 are not necessarily indicative of results that may be expected for the year ending December 31, 1999. Certain prior period amounts have been reclassified on a basis consistent with the 1999 presentation. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IEC is currently doing business as Alliant Energy Corporation and is the result of a three-way merger involving WP&L Holdings, Inc., IES Industries Inc. and Interstate Power Company that was completed in April 1998. The first tier subsidiaries of IEC include: WP&L, IESU, IPC, Resources and Corporate Services. Among various other regulatory constraints, IEC is operating as a registered public utility holding company subject to the limitations imposed by PUHCA. This MD&A includes information relating to IEC, IESU and WP&L (as well as IPC, Resources and Corporate Services). Where appropriate, information relating to a specific entity has been segregated and labeled as such. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report as well as the financial statements, notes and MD&A included in IEC's, IESU's and WP&L's latest Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS Statements contained in this report (including MD&A) that are not of historical fact are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. From time to time, IEC, IESU or WP&L may make other forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of such companies. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, competitive factors, general economic conditions in the relevant service territory, federal and state regulatory or government actions, unanticipated construction and acquisition expenditures, issues related to stranded costs and the recovery thereof, the operations of IEC's nuclear facilities, unanticipated issues or costs associated with achieving Year 2000 compliance, the ability of IEC to successfully integrate its operations and unanticipated costs associated therewith, unanticipated difficulties in achieving expected synergies from the merger, unanticipated costs associated with certain environmental remediation efforts being undertaken by IEC, technological developments, employee workforce factors, including changes in key executives, collective bargaining agreements or work stoppages, political, legal and economic conditions in foreign countries IEC has investments in and changes in the rate of inflation. UTILITY INDUSTRY OUTLOOK A summary of the current regulatory environment is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are several developments relating to such regulatory environment. The IUB has been reviewing all forms of competition in the electric utility industry for several years. A group comprised of the IUB, IEC, MAEC, the rural electric cooperatives, the municipal utilities and Iowans for Choice in Electricity (a diverse group of industrial customers, marketers, such as Enron, and a low income customer representative, among others) endorsed a bill to allow for such competition that was introduced in the Iowa Legislature in March 1999. The bill was opposed by the OCA, which is charged by Iowa law with representation of all consumers generally. While the bill did not pass, it will by operation of Iowa General Assembly rules remain alive in the General Assembly upon adjournment of its 1999 regular session. By operation of House rules, it will be 20 rereferred to the House Commerce Committee and will again be inserted into the legislative process in the Second Regular Session of the 78th General Assembly (2000). In November 1998, IEC and Northern States Power Co. (NSP) announced plans to develop an independent transmission company to provide electric transmission services to the Upper Midwest. The companies are evaluating modifications to the original structure as a result of the recent merger announcement between NSP and New Century Energies Inc. Each of the utilities complies with the provisions of Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 provides that rate-regulated public utilities record certain costs and credits allowed in the rate making process in different periods than for nonregulated entities. These are deferred as regulatory assets or regulatory liabilities and are recognized in the consolidated statements of income at the time they are reflected in rates. If a portion of the utility subsidiaries' operations becomes no longer subject to the provisions of SFAS 71 as a result of competitive restructurings or otherwise, a write-down of related regulatory assets and possibly other charges would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, each utility subsidiary would be required to determine any impairment of other assets and write-down any impaired assets to their fair value. The utility subsidiaries believe they currently meet the requirements of SFAS 71. IEC RESULTS OF OPERATIONS Overview IEC reported net income of $41.7 million, or $0.54 per share (basic and diluted), for the first quarter of 1999 compared with net income of $28.9 million, or $0.38 per share (basic and diluted), for the first quarter of 1998. The 44% increase in earnings resulted from higher electric margins, lower utility operation and maintenance expenses, improved results from IEC's nonregulated operations and income from a weather hedge. In addition, the 1998 results included approximately $10 million of non-recurring merger-related expenses ($0.07 per share). Higher depreciation and interest expenses partially offset the 1999 increase in earnings. The 1999 first quarter utility earnings were approximately $44.8 million compared with $33.2 million ($39.0 million excluding merger-related expenses) for the same period in 1998. The increase in utility earnings resulted primarily from a $5.3 million increase in electric margins (excluding energy efficiency revenues), a $2.6 million decrease in operation and maintenance expenses (excluding merger-related and energy efficiency expenses) and $2.5 million of pre-tax income realized from a weather hedge. Increases of $3.7 million and $1.6 million in depreciation and interest expense, respectively, partially offset these items. The higher electric margins stemmed from separate $15 million annual rate increases implemented at WP&L in July 1998 and early March 1999 to recover higher purchased power and transmission costs and a 4% increase in sales to retail customers. The sales increase resulted from a combination of more normal weather conditions in 1999 as well as continued economic growth within IEC's utility service territory. While the weather conditions in the first quarter of 1999 were milder than normal, they were more favorable to earnings than the same period of 1998. Through the first quarter, the estimated benefit to earnings in 1999 was $0.03 per share compared to 1998. Decreased sales to off-system customers at WP&L partially offset these items. The lower operation and maintenance expenses resulted from decreases in administrative and general expenses (including lower costs in 1999 due to merger-related operating efficiencies). This was partially offset by increased expenses for Year 2000 readiness efforts. 21 IEC's nonregulated operations reported a net loss of $1.9 million in the first quarter of 1999, compared with a net loss of $4.0 million for the same period in 1998. The change in earnings was largely due to improved operating results at Whiting, IEC's Denver-based oil and gas subsidiary. The 1998 results also included an asset impairment charge of $6.7 million at Whiting. However, Whiting's average oil and gas prices were 25% and 16% lower, respectively, in the first quarter of 1999 compared with the same period in 1998. As a result, Whiting experienced a slight loss in the first quarter of 1999. Electric Utility Operations Electric margins and MWH sales for IEC for the three months ended March 31 were as follows:
Revenues and Costs MWHs Sold (in thousands) (in thousands) ------------------------------ ---------------------------- 1999 1998 Change 1999 1998 Change -------------- ------------- --------- ------------- ------------- --------- Residential $ 130,280 $ 127,069 3% 1,810 1,712 6% Commercial 72,023 72,035 - 1,244 1,185 5% Industrial 102,601 106,403 (4%) 3,076 2,999 3% -------------- ------------- ------------- ------------- Total from ultimate customers 304,904 305,507 - 6,130 5,896 4% Sales for resale 36,214 43,032 (16%) 1,345 1,670 (19%) Other 10,220 9,212 11% 41 43 (5%) -------------- ------------- ------------- ------------- Total 351,338 357,751 (2%) 7,516 7,609 (1%) ============= ============= ========= Electric production fuels 61,309 65,702 (7%) Purchased power 52,065 56,147 (7%) -------------- ------------- Margin $ 237,964 $ 235,902 1% ============== ============= =========
Electric margin increased $2.1 million, or 1%, in the first quarter of 1999, compared with the same period in 1998. The increase was primarily due to separate $15 million annual rate increases implemented at WP&L in July 1998 and early March 1999 to recover higher purchased power and transmission costs and a 4% increase in sales to retail customers. The sales increase resulted from a combination of more favorable weather conditions in 1999 as well as continued economic growth within IEC's retail utility service territory. Partially offsetting the increase in electric margin were decreased sales to off-system customers at WP&L and decreased recoveries of concurrent and previously deferred expenditures for Iowa-mandated energy efficiency program costs. Electric revenues included recoveries for energy efficiency program costs of $7.3 million and $12.0 million for the first quarter of 1999 and 1998, respectively, which is in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses). IESU's and IPC's electric tariffs include EAC's that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. 22 Gas Utility Operations Gas margins and Dth sales for IEC for the three months ended March 31 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- Residential $ 82,439 $ 80,293 3% 8% 14,836 13,779 Commercial 39,159 39,198 - 8,559 8,112 6% Industrial 6,767 7,129 (5%) 1,919 1,841 4% Transportation and other 5,319 3,426 55% 14,609 14,790 (1%) ------------- ------------- ----------- ------------ Total 133,684 130,046 3% 39,923 38,522 4% ============ ============= ========= Cost of gas sold 81,343 77,280 5% ------------- ------------- Margin $ 52,341 $ 52,766 (1%) ============= ============= =========
Gas margin decreased $0.4 million, or 1%, in the first quarter of 1999, compared with the same period in 1998, primarily due to reduced revenues from the recovery of concurrent and previously deferred expenditures for Iowa-mandated energy efficiency program costs in accordance with IUB orders (a portion of these recoveries is also amortized to expense in other operation expenses) and gas cost adjustments at IPC. Partially offsetting the decrease was a 4% increase in Dth sales, largely due to colder weather. Gas revenues included recoveries for energy efficiency program costs in Iowa of $6.2 million and $7.1 million for the first quarter of 1999 and 1998, respectively. Refer to "Interest Expense and Other" for a discussion of income IEC realized from settlement of a weather hedge in the first quarter of 1999. IESU's and IPC's gas tariffs include PGA clauses that are designed to currently recover the cost of utility gas sold. Nonregulated and Other Revenues Nonregulated and other revenues for the three months ended March 31 were as follows (in thousands): 1999 1998 ------------- ------------- Environmental and engineering services $16,174 $16,637 Oil and gas production 12,833 17,147 Nonregulated energy 10,175 13,445 Transportation, rents and other 10,065 9,676 Steam 8,262 7,445 Affordable housing 3,072 2,961 Water 1,252 1,175 ------------- ------------- $61,833 $68,486 ============= ============= Oil and gas production revenues declined $4.3 million in the first quarter of 1999, compared with the same period in 1998, primarily due to lower oil and gas prices as well as reduced volumes sold at Whiting. Average oil and gas prices in the first quarter of 1999 declined by 25% and 16%, respectively. In addition, nonregulated energy revenues declined by $3.3 million primarily due to a shift to higher margin, lower volume gas customers. 23 Operating Expenses Other operation expenses for the three months ended March 31 were as follows (in thousands): 1999 1998 -------------- -------------- Utility-IESU / WP&L / IPC $ 87,829 $102,747 Nonregulated and other 42,536 54,605 -------------- -------------- $ 130,365 $157,352 ============== ============== Other operation expenses at the utility subsidiaries decreased $14.9 million in the first quarter of 1999, compared with the same period in 1998, primarily due to $9.7 million of merger-related expenses in the first quarter of 1998, lower administrative and general expenses (including lower costs in 1999 due to merger-related operating efficiencies) and lower energy efficiency expenses. This was partially offset by increased expenses for Year 2000 readiness efforts. Other operation expenses at the nonregulated businesses decreased $12.1 million in the first quarter of 1999, compared with the first quarter in 1998, primarily due to a $6.7 million asset impairment charge in the first quarter of 1998 at Whiting and lower operation expenses in the gas marketing business. Depreciation and amortization expense increased $3.8 million in the first quarter of 1999 compared with the same period last year, primarily as a result of utility property additions. Interest Expense and Other Interest expense increased $2.5 million in the first quarter of 1999, compared with the first quarter in 1998, due to higher utility and nonregulated borrowings outstanding during 1999. Miscellaneous, net income increased $2.9 million in the first quarter of 1999, compared with the same period last year, primarily due to $2.5 million of income realized from settlement of a weather hedge at WP&L for the November 1, 1998, to March 31, 1999, heating season. Income Taxes IEC's income tax expense increased $7.1 million in the first quarter of 1999, compared with the same period last year, primarily due to higher pre-tax income. The effective rate was 36.4% and 36.8% for the first quarter of 1999 and 1998, respectively. IESU RESULTS OF OPERATIONS Overview IESU's earnings available for common stock increased $2.8 million for the first quarter of 1999, compared with the same period in 1998. The increased earnings in 1999 were primarily due to the non-recurrence of $2 million of merger-related expenses in the first quarter of 1998, higher electric margins and a lower effective tax rate. Higher operation and maintenance expenses (excluding merger-related expenses) and increased depreciation and amortization expense partially offset these items. 24 Electric Utility Operations Electric margins and MWH sales for IESU for the three months ended March 31 were as follows:
Revenues and Costs MWHs Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- Residential $ 54,353 $ 54,569 - 693 663 5% Commercial 38,548 37,611 2% 628 583 8% Industrial 37,882 40,239 (6%) 1,182 1,163 2% ------------- ------------- ------------ ------------- Total from ultimate customers 130,783 132,419 (1%) 2,503 2,409 4% Sales for resale 6,353 5,712 11% 341 189 80% Other 2,881 2,518 14% 10 10 - ------------- ------------- ------------ ------------- Total 140,017 140,649 - 2,854 2,608 9% ============ ============= ========= Electric production fuels 22,494 26,795 (16%) Purchased power 13,150 11,049 19% ------------- ------------- Margin $ 104,373 $ 102,805 2% ============= ============= =========
Electric margin increased $1.6 million, or 2%, for the first quarter of 1999, compared with the same period in 1998, primarily due to a 4% increase in sales volumes to retail customers due to economic growth in the service territory and colder weather. Increased purchased power capacity costs partially offset the increase. Sales for resale increased significantly in the first quarter of 1999 as a result of the implementation of a merger-related joint sales agreement during the second quarter of 1998. Off-system sales revenues are passed through IESU's EAC and therefore have no impact on electric margin. IESU's electric tariffs include EAC's that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. Gas Utility Operations Gas margins and Dth sales for IESU for the three months ended March 31 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- Residential $ 39,161 $ 38,002 3% 6,855 6,624 3% Commercial 17,970 17,992 - 3,889 3,876 - Industrial 2,803 3,163 (11%) 873 914 (4%) Transportation and other 1,362 1,238 10% 3,195 3,237 (1%) ------------- ------------- ------------ ------------- Total 61,296 60,395 1% 14,812 14,651 1% ============ ============= ========= Cost of gas sold 37,912 37,657 1% ------------- ------------- Margin $ 23,384 $ 22,738 3% ============= ============= =========
Gas margin increased $0.6 million, or 3%, for the first quarter of 1999, compared with the same period in 1998, primarily due to increased residential sales resulting from colder weather. IESU's gas tariffs include PGA clauses that are designed to currently recover the cost of gas sold. 25 Operating Expenses IESU's other operation expenses increased $0.4 million in the first quarter of 1999, compared with the same period in 1998, largely due to increased Year 2000 readiness efforts and higher employee pension and benefits costs. Merger-related expenses of $1.8 million in the first quarter of 1998 and lower costs associated with merger-related operating efficiencies realized in 1999 virtually offset these items. Interest Expense and Other Miscellaneous, net income increased $1.1 million for the first quarter of 1999, compared with the same period in 1998, primarily due to higher interest income, lower sale of accounts receivable expenses and merger-related expenses incurred in 1998. Income Taxes IESU's income tax expense increased $0.2 million for the first quarter of 1999, compared with the same period in 1998, due to higher taxable income which was largely offset by a decrease in the overall effective tax rate. The effective income tax rates were 41.4% and 46.3% for the first quarter of 1999 and 1998, respectively. The effective income tax rate was lower in 1999, primarily due to a reduction in flow-through depreciation expense and nondeductible merger expenses in 1998. WP&L RESULTS OF OPERATIONS Overview WP&L's earnings available for common stock increased $8.7 million for the first quarter of 1999, compared with the same period in 1998. In addition to a $3.2 million decrease in merger-related expenses, the improvement in earnings in the first quarter of 1999 primarily reflects higher electric margins, lower operation expenses and $2.5 million of pre-tax income realized from settlement of a weather hedge. Partially offsetting these items were $1.9 million and $1.5 million increases in depreciation and amortization expense and interest expense, respectively. Electric Utility Operations Electric margins and MWH sales for WP&L for the three months ended March 31 were as follows:
Revenues and Costs MWHs Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- Residential $ 53,889 $ 49,755 8% 801 758 6% Commercial 27,016 25,604 6% 465 459 1% Industrial 39,599 37,069 7% 1,087 1,041 4% ------------- ------------- ------------ ------------- Total from ultimate customers 120,504 112,428 7% 2,353 2,258 4% Sales for resale 24,929 35,626 (30%) 813 1,415 (43%) Other 4,511 3,256 39% 15 17 (12%) ------------- ------------- ------------ ------------- Total 149,944 151,310 (1%) 3,181 3,690 (14%) ============ ============= ========= Electric production fuels 27,366 28,897 (5%) Purchased power 24,000 28,602 (16%) ------------- ------------- Margin $ 98,578 $ 93,811 5% ============= ============= =========
26 Electric margin increased $4.8 million, or 5%, during the first quarter of 1999, compared with the same period in 1998, primarily due to separate $15 million annual rate increases implemented in July 1998 and early March 1999 to recover higher purchased power and transmission costs. Sales to retail customers increased 4% due to economic strength in the service territory and colder weather compared with the same period in 1998. Lower income from off-system sales, due to increased transmission constraints and implementation of the merger-related joint sales agreement, partially offset these items. Under the joint sales agreement, the margins resulting from IEC's off-system sales are allocated among IESU, IPC and WP&L. Gas Utility Operations Gas margins and Dth sales for WP&L for the three months ended March 31 were as follows:
Revenues and Costs Dekatherms Sold (in thousands) (in thousands) --------------------------- --------------------------- 1999 1998 Change 1999 1998 Change ------------- ------------- --------- ------------ ------------- --------- Residential $ 31,260 $ 31,010 1% 5,857 5,227 12% Commercial 15,100 15,237 (1%) 3,493 3,121 12% Industrial 2,504 2,675 (6%) 659 602 9% Transportation and other 2,930 1,396 110% 4,043 3,829 6% ------------- ------------- ------------ ------------- Total 51,794 50,318 3% 14,052 12,779 10% ============ ============= ========= Cost of gas sold 31,181 30,714 2% ------------- ------------- Margin $ 20,613 $ 19,604 5% ============= ============= =========
Gas margin increased $1.0 million, or 5%, for the first quarter of 1999, compared with the same period in 1998, primarily due to an increase in Dth sales resulting from colder weather and customer growth. Refer to "Interest Expense and Other" for a discussion of income WP&L realized from a weather hedge in the first quarter of 1999. Operating Expenses Other operation expense decreased $7.9 million in the first quarter of 1999, compared to the same period in 1998, primarily due to $3.2 million of merger-related expenses in the first quarter of 1998 and reduced administrative and general expenses in 1999, including lower costs due to merger-related operating efficiencies. Depreciation and amortization expense increased $1.9 million in the first quarter of 1999, compared with the same period in 1998, primarily due to property additions. Interest Expense and Other Interest expense increased $1.5 million in the first quarter of 1999, compared with the same period in 1998, primarily due to higher borrowings outstanding in 1999. The increase in miscellaneous, net income in the first quarter of 1999, compared with the same period in 1998, was due to $2.5 million of pre-tax income realized from settlement of a weather hedge for the November 1, 1998, to March 31, 1999, heating season. Income Taxes Income taxes increased $5.3 million in the first quarter of 1999, compared with the same period in 1998, due to higher pre-tax income. The effective rate for the first quarter of 1999 was 37.1% compared with 36.7% for the same period in 1998. 27 LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities at IEC decreased $12 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by changes in net income, and deferred taxes and investment tax credits. Cash flows used for financing activities decreased $34 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily as a result of the net changes in the amount of debt outstanding. Cash flows used for investing activities increased $35 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the levels of construction and acquisition expenditures. Cash flows generated from operating activities at IESU decreased $14 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by the change in deferred taxes and investment tax credits. Cash flows used for financing activities increased $88 million for the three months ended March 31, 1999, compared with the same period in 1998, due to a reduction in the amount of debt outstanding in 1999 and increased common stock dividends as no dividend payments were made in the last three quarters of 1998 due to merger-related tax considerations. As a result, the dividend payment in the first quarter of 1999 was larger than IESU's historical quarterly payment. Cash flows used for investing activities decreased $3 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the levels of construction expenditures. Cash flows generated from operating activities at WP&L decreased $7 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in working capital, which were partially offset by higher net income. Cash flows used for financing activities decreased $17 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to changes in the amount of short-term borrowings. Cash flows used for investing activities increased $6 million for the three months ended March 31, 1999, compared with the same period in 1998, primarily due to increased construction expenditures. Future Considerations At March 31, 1999, IEC had an investment in the stock of McLeod, a telecommunications company, valued at $431.3 million (based on a March 31, 1999 closing price of $42.00 per share and compared to a cost basis of $29.1 million). Pursuant to the applicable accounting rules, the carrying value of this investment is adjusted to the estimated fair value each quarter based on the closing price at the end of the quarter. The adjustments do not impact net income as the unrealized gains or losses, net of taxes, are recorded directly to the common equity section of the balance sheet and are a component of other comprehensive income. In addition, any such gains or losses are reflected in current earnings only at the time they are realized through a sale. IEC entered into an agreement in November 1998 with McLeod whereby IEC's ability to sell the McLeod stock is subject to various restrictions. In April 1999, IEC announced that it expects to participate as a selling shareholder in a secondary offering of McLeod Class A Common Stock. IEC will sell approximately 640,000 shares of McLeod stock in the offering (at a gross sales price of $55.63 per share). The sale is scheduled to close in May 1999. IEC plans to use the proceeds from the sale to repay outstanding short-term debt at Resources. IEC presently beneficially owns 10.3 million shares of McLeod Class A Common Stock. Under PUHCA, IEC's investments in exempt wholesale generators and foreign utility companies is limited to 50% of IEC's consolidated retained earnings. In addition, there are limitations on the amount of non-utility investments IEC can make under the Wisconsin Utility Holding Company Act (WUHCA) as well. If IEC is unable to obtain relief from the WUHCA provisions, the company may be forced to divest certain assets to stay in compliance. Under terms of comprehensive restructuring legislation passed in New Zealand, IEC will be selling a portion of its current New Zealand utility investments. IEC anticipates that it may realize a gain on such sales. 28 Financing and Capital Structure At March 31, 1999, Resources had $296 million of commercial paper outstanding and backed by its 3-Year Credit Agreement with interest rates ranging from 4.90%-5.25%. Resources intends to continue issuing commercial paper backed by this facility, and no conditions existed at March 31, 1999 that would prevent the issuance of commercial paper or direct borrowings on its bank lines. Accordingly, this debt is classified as long-term. On February 11, 1999, IPC issued $3.25 million of pollution control revenue bonds due February 1, 2010. The proceeds were used to retire $3.25 million of 6.375% pollution control revenue bonds that were due serially 1999-2007. The bonds have a fixed interest rate of 4.05% for the first five years. Thereafter, IPC will have the option to reset the interest rate at one of three variable short-term interest rates or at a new long-term interest rate, based on the then prevailing market conditions, provided the rate does not exceed 12% per annum. On March 23, 1999, IPC issued $7.7 million of pollution control revenue bonds due January 1, 2013. The proceeds were used to refinance $7.7 million of 6.375% pollution control revenue bonds that were due serially 1999-2007. The bonds have a fixed interest rate of 4.20% for the first five years. Thereafter, IPC will have the option to reset the interest rate at one of three variable short-term interest rates or at a new long-term interest rate, based on the then prevailing market conditions, provided the rate does not exceed 12% per annum. On March 1, 1999, IESU retired $50 million of Series Z, 7.6% First Mortgage Bonds due in March 1999. Internally generated funds were used to retire the bonds. Capital Requirements On April 7, 1998, the PSCW approved WPSC's application for replacement of the two steam generators at Kewaunee. The total cost of replacing the steam generators would be approximately $90.7 million, with WP&L's share of the cost being approximately $37.2 million. The replacement work originally planned for the spring of 2000 is now scheduled for the fall of 2001 and will take approximately 60 days. The delay is attributable to the inability of the steam generator manufacturer to meet the spring 2000 delivery schedule. Delays in meeting the delivery schedule did not allow for steam generator replacement to occur prior to the start of the summer weather in 2000. Therefore, the decision was made to store the steam generators after they are received and wait until the next scheduled refueling outage in the fall of 2001. It is anticipated that the delay will not adversely impact the reliability of Kewaunee in the interim. Plans to shutdown the plant for a spring 2000 refueling remain unchanged. Rates and Regulatory Matters In January 1999, WP&L made a filing with the PSCW proposing to begin deferring, on January 1, 1999, all costs associated with the EPA's required NOx emission reductions. In connection with a statewide docket to investigate compliance issues associated with the EPA's NOx emission reductions, on March 30, 1999, the PSCW authorized deferral of all non-labor related costs incurred after March 30, 1999. However, the utilities are not allowed to defer costs of replacement power associated with NOx compliance. WP&L has requested expedited approval to start construction of NOx reduction investments at several generating units operated by WP&L and has requested recovery of all the NOx reduction costs through a surcharge mechanism. WP&L anticipates receiving a final order in this proceeding in late 1999. No assurance can be given as to what relief, if any, will be granted by the PSCW. Refer to the "Other Matters - Environmental" section for a further discussion of the NOx issue. Pursuant to PSCW requirements, WP&L recognizes annual demand side management expense based on: 1) an annual fixed expenditure amount as approved by the PSCW in the ratemaking process, and 2) PSCW approved amortization of any difference in historical demand side management expenditures and associated rate recoveries of such costs. Effective with WP&L's rates implemented April 29, 1997, the annual rate recovery for demand side management expenses (and the associated demand side management expense) was reduced to $6.9 million reflecting annual demand side management expenditures of $14.4 million reduced by a two-year amortization of 29 prior period expenditures which were less than the associated rate recoveries ($7.5 million per year). At the completion of the two-year amortization period, the annual demand side management expense to be recognized by WP&L returned to the $14.4 million level. Given the price freeze WP&L has in effect in Wisconsin, the annual rate recovery of demand side management expense is still $6.9 million. The OCA has requested certain financial information related to the electric utility operations within the state of Iowa for IESU and IPC. IESU and IPC responded to the data requests in a timely manner. It is unknown if additional data requests will be received by either IESU or IPC. While IESU and IPC cannot predict the outcome of this process, such data requests could lead to an effort by the OCA to seek a rate reduction for one or both of IESU and IPC in Iowa. OTHER MATTERS Year 2000 A summary of IEC's Year 2000 program is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are developments relating to the Year 2000 program. Remediation and Testing Year 2000 remediation and testing has been substantially completed for all operational areas of IEC which include generating stations, substations, transmission and distribution substations, natural gas distribution systems, system and distribution operating centers and all key building infrastructure. However, IEC is still dependent upon the timely provision of necessary upgrades and modifications by certain software vendors. As of March 31, 1999, IEC was expecting upgrades from approximately 10 embedded system vendors and 14 information technology vendors. IEC considers the potential impact on the Year 2000 program to be minimal as: 1) the upgrades are for non-mission critical systems or applications, or 2) operational contingency plans have already been developed and deployed. A. Embedded Systems - All testing for assessing Year 2000 compliance has been completed. Remaining work includes minor upgrades on less than 15 miscellaneous systems. B. Information Technology - As of March 31, 1999, approximately 90% of the systems and 80% of the infrastructure components have been remediated and tested. IEC's customer information systems and financial systems make up the majority of the remaining remediation and testing effort. The remediation and testing of the customer information systems was 95% complete at the end of March 1999. All remediation work was completed in early May 1999 and will be operational by May 31, 1999. The financial systems have been remediated with final roll-forward-testing scheduled to be completed by July 15, 1999. Therefore, it is anticipated that IEC will have its information technology remediation and testing efforts 99% complete by July 15, 1999. On July 15, 1999 there will be four remaining non-mission critical systems waiting for vendor supplied software, scheduled for completion by September 1, 1999. Contingency plans for these remaining systems are already in place as well as for all other critical systems. Costs to Address Year 2000 Compliance IEC's historical Year 2000 project expenditures as well as CURRENT ESTIMATES for the remaining costs to be incurred on the project are as follows (incremental costs, in millions): Description Total IESU WP&L Other ----------- ----- ---- ---- ----- Costs incurred from 1/1/98 - 12/31/98 $ 8.7 $4.8 $3.2 $0.7 Costs incurred from 1/1/99 - 3/31/99 $ 5.2 $2.3 $1.9 $1.0 Current estimate of remaining modifications $18.5 $5.4 $8.6 $4.5 In addition, IEC estimates it incurred $3 million in costs for internal labor and associated overheads in 1998 and anticipates expenditures of $6 million in 1999 ($1.6 million was incurred in the first quarter of 1999). The total 30 estimated project cost has decreased from the figures reported in the Form 10-K due to lower than anticipated remediation costs and a reduction in the contingency estimate. In accordance with an order received from the PSCW, WP&L is deferring its Year 2000 project costs, other than internal labor and associated overheads (approximately $4.3 million of the expenditures incurred at WP&L from January 1, 1998 through March 31, 1999 have been deferred). Risks and Contingency Planning IEC continues to work on developing its Year 2000 contingency plan. The planning process includes three components: 1) base contingency planning, 2) emergency preparedness, and 3) electric and gas industry-wide coordination. The base contingency planning phase involves the development of operating procedures to handle the malfunction of a specific device. This work was completed in the first quarter of 1999. The emergency preparedness phase involves the development of operating procedures to handle the malfunction of major business processes. This work started in late 1998 and will continue through the end of 1999. The electric and gas industry-wide coordination is a major focus of IEC's efforts in preparation for industry-wide drills which are being coordinated by the North American Electric Reliability Council (NERC). As part of its contingency planning process, NERC scheduled two nation-wide electric utility industry drills in April 1999 and September 1999. These drills focus on safe and reliable electrical system operations with the partial loss of telecommunications. Results of the April 1999 NERC drill were very positive. All contingency plans worked as anticipated, however, some procedures and manual data forms will be refined to enhance efficiency. In addition to these NERC drills, IEC will be conducting five additional internal drills. These include an already completed March table-top drill, a June 1999 functional drill and an August 1999 full-scale development drill where key employees will test and critique IEC's contingency plans. Two additional internal drills will also be scheduled after the September NERC full-scale drill. IEC also retained an outside third party to assess and evaluate its Year 2000 program and such study did not find any material deficiencies in the program. Summary Based on IEC's current schedule for completion of its Year 2000 tasks, IEC believes its plan is adequate to secure Year 2000 readiness of its critical systems. Nevertheless, achieving Year 2000 readiness is subject to many risks and uncertainties, as described above. If IEC, or third parties, fail to achieve Year 2000 readiness with respect to critical systems and, as such, there are systematic problems, there could be a material adverse effect on IEC's results of operations and financial condition. Market Risk Sensitive Instruments and Positions Whiting is exposed to market risk in the pricing of its oil and gas production. Historically, prices received for oil and gas production have been volatile because of seasonal weather patterns, supply and demand factors, transportation availability and price, and general economic conditions. Worldwide political developments have historically also had an impact on oil prices. In the past, IEC generally has not utilized derivative instruments designed to reduce its exposure to these price fluctuations. However, during the first quarter of 1999, IEC entered into a limited amount of commodity derivative transactions to fix the ultimate sales price for approximately two-thirds of Whiting's anticipated gas production for the remainder of 1999. At March 31, 1999, the estimated fair value of the outstanding agreements would have resulted in a settlement payment by IEC of approximately $1.8 million. WP&L settled the weather insurance agreement it entered into for the November 1, 1998, to March 31, 1999, heating season and recognized income of $2.5 million in the first quarter of 1999 relating to such settlement. At March 31, 1999, IEC had an investment in the stock of McLeod, a telecommunications company, valued at $431.3 million (based on a March 31, 1999 closing price of $42.00 per share and compared to a cost basis of $29.1 million). Pursuant to the applicable accounting rules, the carrying value of this investment is adjusted to the 31 estimated fair value each quarter based on the closing price at the end of the quarter. IEC entered into an agreement in November 1998 with McLeod whereby IEC's ability to sell the McLeod stock is subject to various restrictions. IEC has a 50% interest in an electricity trading joint venture with Cargill. Guarantees of approximately $61 million have been issued of which approximately $12 million were outstanding at March 31, 1999. Under the terms of the joint venture agreement, any payments required under the guarantees would be shared by IEC and Cargill on a 50/50 basis to the extent the joint venture is not able to reimburse the guarantor for payments made under the guarantee. Environmental A summary of IEC's environmental issues is included in the Form 10-K filed by IEC, IESU and WP&L for the year ended December 31, 1998. Set forth below are several developments relating to IEC's environmental issues. In October 1998, the EPA issued a final rule requiring 22 states, including Wisconsin, to modify their SIP's to address the ozone transport issue. The implementation of the rule will likely require WP&L to reduce its NOx emissions at all of its plants to a fleet average of .15 lbs/mmbtu by 2003. WP&L is currently evaluating various options to meet the emission levels. These options include fuel switching, operational modifications and capital investments. Based on existing technology, the preliminary estimates indicate that capital investments will be in the range of $150 to $215 million. Refer to the "Rates and Regulatory Matters" section for a discussion of a filing WP&L made with the PSCW regarding seeking rate recovery of these costs. On February 28, 1998, the EPA issued the final report to Congress on the Study of Hazardous Air Pollutant Emissions from Electric Utility Steam Generating Units regarding hazardous air pollutant emissions from electric utilities (the HAPs report). The HAPs report concluded that mercury emissions from coal fired utilities were a concern. However, the EPA does not believe they have sufficient information regarding mercury emissions from coal fired units. To remedy this lack of information, the EPA required IESU, WP&L, IPC and all other coal fired electric utilities to start collecting information regarding the types and amount of mercury emitted as of January 1, 1999. Although the control of mercury emissions from coal fired plants is uncertain at this time, IEC believes that the capital investments and/or modifications required to control mercury emissions could be significant. Pursuant to an internal review of operations, IPC discovered that Unit No. 6 at its generating facility in Dubuque, Iowa might require a Clean Air Act Acid Rain permit and CEMS. IPC initiated discussions with the regulators and discontinued operation of the unit during resolution of the issues. IPC has resolved the issue by installing a CEMS on the unit and obtaining an Acid Rain permit. Pursuant to its internal review, IPC also identified and disclosed to regulators a potentially similar situation at its Lansing, Iowa generating facility, and will potentially be installing CEMS and applying for Acid Rain permits for these units as well, pending the outcome of regulatory review. IPC may be subject to a penalty for not having installed the CEMS and for not having obtained the permit previously. However, IPC believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operations. Power Supply In July 1998, IEC and Polsky announced an agreement whereby Polsky would build, own and operate a power plant in southeastern Wisconsin capable of producing up to 450 MW of electricity. Under the agreement, IEC will purchase the capacity to meet the electric needs of its utility customers, as outlined by the Wisconsin Reliability Act. During the first quarter of 1999, Polsky changed its name to SkyGen Energy LLC (SkyGen). Recent developments for the 450 MW SkyGen project include an appeal to the EPA Appeals Board on the NOx mitigation. The appeal, if successful, would require selective catalytic reduction to be used for NOx mitigation instead of dry low NOx burners. Accelerated treatment (60 day process) of the appeal is being requested and, if approved, would still allow the facility to meet its in-service date of June 2000. Management currently believes that the EPA will rule in favor of SkyGen. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Quantitative and Qualitative Disclosures About Market Risk are reported under Item 2. MD&A "Other Matters - Market Risk Sensitive Instruments and Positions." PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 17, 1998, MG&E and Citizens Utility Board appealed the decision of the SEC approving the merger, Madison Gas and Electric Company and Citizens Utility Board v. Securities and Exchange Commission. On May 15, 1998, IEC moved to intervene in this appeal and the United States Court of Appeals for the District of Columbia District granted the motion. Briefs were filed with the court and oral arguments were held on January 13, 1999. The court issued its decision on March 16, 1999 upholding the SEC's decision in approving the merger and denying the petition for review. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following Exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are incorporated herein by reference. 3.1* Bylaws of Interstate Energy Corporation, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form 10-K for the year ended December 31, 1998) 3.2* Bylaws of Wisconsin Power and Light Company, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.4 to WP&L's Form 10-K for the year ended December 31, 1998) 3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999 (incorporated by reference to Exhibit 3.6 to IESU's Form 10-K for the year ended December 31, 1998) 4.1* Rights Agreement, dated January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A. (incorporated by reference to Exhibit 4.1 to IEC's Registration Statement on Form 8-A, dated January 20, 1999) 10.1 Restricted Stock Agreement pursuant to the Interstate Energy Corporation Long-Term Equity Incentive Plan 10.2 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and Erroll B. Davis, Jr. 10.3 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M. Walker and B.J. Swan 10.4 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L. Mineck, D.R. Sharp and K.K. Zuhlke 10.5 Employment Agreement by and between Interstate Energy Corporation and Erroll B. Davis, Jr., amended and restated as of March 29, 1999 33 27.1 Financial Data Schedule for Interstate Energy Corporation at and for the period ended March 31, 1999 27.2 Financial Data Schedule for IES Utilities Inc. at and for the period ended March 31, 1999 27.3 Financial Data Schedule for Wisconsin Power and Light Company at and for the period ended March 31, 1999 (b) Reports on Form 8-K: Interstate Energy Corporation filed a Current Report on Form 8-K, dated January 20, 1999, reporting (under Item 5) that on January 20, 1999 the Board of Directors of Interstate Energy Corporation adopted a series of amendments to the Bylaws of Interstate Energy Corporation. Interstate Energy Corporation filed a Current Report on Form 8-K, dated January 20, 1999, reporting (under Item 5) that on January 20, 1999, the Board of Directors of Interstate Energy Corporation declared a dividend of one common share purchase right for each outstanding share of common stock, $.01 par value, of Interstate Energy Corporation. The description and terms of the common share purchase rights are set forth in a Rights Agreement dated January 20, 1999 between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as Rights Agent. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Interstate Energy Corporation, IES Utilities Inc. and Wisconsin Power and Light Company have each duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 17th day of May 1999. INTERSTATE ENERGY CORPORATION Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Thomas M. Walker Financial Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) IES UTILITIES INC. Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Thomas M. Walker Financial Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) WISCONSIN POWER AND LIGHT COMPANY Registrant By: /s/ Thomas M. Walker Executive Vice President and Chief Thomas M. Walker Financial Officer (Principal Financial Officer) By: /s/ John E. Ebright Vice President-Controller John E. Ebright (Principal Accounting Officer) 35 EXHIBIT INDEX (a) Exhibits: The following Exhibits are filed herewith or incorporated herein by reference. Documents indicated by an asterisk (*) are incorporated herein by reference. 3.1* Bylaws of Interstate Energy Corporation, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.2 to IEC's Form 10-K for the year ended December 31, 1998) 3.2* Bylaws of Wisconsin Power and Light Company, effective as of January 20, 1999 (incorporated by reference to Exhibit 3.4 to WP&L's Form 10-K for the year ended December 31, 1998) 3.3* Bylaws of IES Utilities Inc., effective as of January 20, 1999 (incorporated by reference to Exhibit 3.6 to IESU's Form 10-K for the year ended December 31, 1998) 4.1* Rights Agreement, dated January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A. (incorporated by reference to Exhibit 4.1 to IEC's Registration Statement on Form 8-A, dated January 20, 1999) 10.1 Restricted Stock Agreement pursuant to the Interstate Energy Corporation Long-Term Equity Incentive Plan 10.2 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and Erroll B. Davis, Jr. 10.3 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of J.E. Hoffman, W.D. Harvey, E.G. Protsch, P.J. Wegner, T.M. Walker and B.J. Swan 10.4 Key Executive Employment and Severance Agreement, dated March 29, 1999, by and between Interstate Energy Corporation and each of T.L. Aller, D.A. Doyle, E.M. Gleason, D.K. Langer, D.L. Mineck, D.R. Sharp and K.K. Zuhlke 10.5 Employment Agreement by and between Interstate Energy Corporation and Erroll B. Davis, Jr., amended and restated as of March 29, 1999 27.1 Financial Data Schedule for Interstate Energy Corporation at and for the period ended March 31, 1999 27.2 Financial Data Schedule for IES Utilities Inc. at and for the period ended March 31, 1999 27.3 Financial Data Schedule for Wisconsin Power and Light Company at and for the period ended March 31, 1999 EX-10.1 2 RESTRICTED STOCK AGREEMENT Exhibit 10.1 RESTRICTED STOCK AGREEMENT March 29, 1999 TO: In consideration of your election to enter into a new Key Executive Employment and Severance Agreement, the Company is granting you an award of shares of Restricted Stock pursuant to the Interstate Energy Corporation Long-Term Equity Incentive Plan (the "Plan"). This Agreement provides a brief summary of your rights under the Plan. The attached Plan document provides the complete details of all of your rights under the Plan and this Agreement, as well as all of the conditions and limitations affecting such rights. All capitalized terms appearing in this Agreement shall have the meanings defined in the Plan. OVERVIEW OF YOUR AWARD 1. Number of Shares of Restricted Stock: _______ 2. Date of Grant: 3/29/99 3. Period of Restriction: Except as otherwise provided herein, the shares of Restricted Stock may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated until three (3) years after the date of grant (the "Period of Restriction"). 4. Certificate Legend: Each certificate representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the Shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Interstate Energy Corporation Long-Term Equity Incentive Plan, and in a Restricted Stock Agreement. A copy of the Plan and such Restricted Stock Agreement may be obtained from Interstate Energy Corporation." 5. Removal of Restrictions: Shares of Restricted Stock shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 4 removed from the Participant's share certificate. 6. Voting Rights; Dividends and Other Distributions: a. Voting Rights: During the Period of Restriction and prior to any forfeiture of Restricted Stock, the Participant may exercise full voting rights with respect to shares of Restricted Stock. b. Dividend and Other Distributions: During the Period of Restriction and prior to any forfeiture of Restricted Stock, the Participant shall be credited with all regular cash dividends paid with respect to all shares Restricted Stock of the Company while they are so held. Except as provided in the succeeding sentence, all other cash dividends and other distributions paid with respect to shares of Restricted Stock shall be credited to the Participant subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were paid. If any such dividends or distributions are paid in shares of common stock of the Company, then such shares shall be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were paid. Subject to the foregoing, all dividends credited to the Participant shall be paid to the Participant within forty-five (45) days following the full vesting of the shares of Restricted Stock with respect to which such dividends were earned. 7. Termination of Employment: a. Termination of Employment Due to Death, Disability or Retirement: If the Participant's employment terminates by reason of death, Disability or Retirement, then all outstanding shares of Restricted Stock shall vest one hundred percent as of the date of employment termination. The holder of the certificates of Restricted Stock shall be entitled to have the nontransferability legend required under Section 4 removed from the share certificates. b. Termination of Employment without Cause or for Good Reason: If the Participant's employment is terminated by the Company or any Subsidiary without Cause or by the Participant for Good Reason (as defined in Exhibit A attached hereto), then all outstanding shares of Restricted Stock shall vest one hundred percent as of the date of employment termination. The holder of the certificates of Restricted Stock shall be entitled to have the nontransferability legend required under Section 4 removed from the share certificates. c. Termination of Employment for Other Reasons: If the Participant's employment terminates for any reason other than those reasons set forth in Sections 7(a) and 7(b) during the Period of Restriction, then all shares of Restricted Stock still subject to restriction as of the date of employment termination shall be forfeited and returned to the Company. 8. Change in Control: Upon the occurrence of a Change in Control, the Period of Restriction and all restrictions imposed on Restricted Stock shall lapse; provided, however, that the Committee may, in its sole discretion, amend, modify or rescind the -2- provisions of this Section 8 if it determines that the operation of this Section 8 may prevent a transaction in which the Company or any affiliate is a party from being accounted for on a pooling-of-interests basis. 9. Withholding: a. Tax Withholding: The Company shall have the right to deduct or withhold, or require the Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising from, or as a result of, the award of the Restricted Stock or the lapse of restrictions on the Restricted Stock. b. Share Withholding: If the Participant does not make an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to the Restricted Stock awarded hereunder, the Participant may elect to satisfy the Company's withholding requirement upon the lapse of restrictions on Restricted Stock, in whole or in part, by electing to deliver to the Company shares of previously acquired common stock of the Company (including Restricted Stock) having a fair market value on the date the tax is to be determined equal to the minimum statutory total tax required to be withheld as a result of the lapse of the restrictions on such Restricted Stock. Please acknowledge your agreement to participate in the Plan and this Agreement, and to abide by all of the governing terms and provisions, by signing the following representation: Agreement to Participate By signing a copy of this Agreement and returning it to Wendy Portz, I acknowledge that I have read the Plan, and that I fully understand all of my rights under the Plan, as well as all of the terms and conditions which may limit the lapse of restrictions on, or result in the forfeiture of, the Restricted Stock. Without limiting the generality of the preceding sentence, I understand that the lapse of restrictions on, and the forfeiture of, the Restricted Stock is generally conditioned upon my continued employment with the Company. /s/ (Officer) Date (Title) Interstate Energy Corporation By: /s/Erroll B. Davis, Jr. Erroll B. Davis, Jr. President and Chief Executive Officer Exhibit A For purposes of this Agreement, the Participant shall have "Good Reason" for termination of employment in the event of: 1. any reduction in the Participant's base salary or any material reduction in the percentage of base salary available as incentive compensation or bonus opportunity or other benefits, in each case relative to those in effect on the date hereof, or, to the extent more favorable to the Participant, those in effect at any time after the date hereof; 2. the removal of the Participant from, or any failure to reelect or reappoint the Participant to, any of the positions held with the Company or any Subsidiary on the date hereof or any other positions with the Company or any Subsidiary to which the Participant shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint is agreed to by the Participant in writing or relates to the termination by the Company or any Subsidiary of the Participant's employment for Cause or by reason of Disability; or 3. a good faith determination by the Participant that there has been a significant adverse change, without the Participant's written consent, in the Participant's working conditions or status with the Company or any Subsidiary relative to the working conditions or status in effect on the date hereof, or, to the extent more favorable to the Participant, those in effect at any time after the date hereof, including but not limited to (A) a significant change in the nature or scope of the Participant's authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements but excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Company or the applicable Subsidiary remedies promptly after receipt of notice thereof given by the Participant. EX-10.2 3 KEESA EXHIBIT 10.2 KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT, made and entered into as of the 29th day of March, 1999 by and between Interstate Energy Corporation (d/b/a Alliant Energy Corporation), a Wisconsin corporation (hereinafter referred to as the "Company"), and Erroll B. Davis, Jr. (hereinafter referred to as "Executive"). W I T N E S S E T H WHEREAS, the Executive is employed by the Company and/or a subsidiary of the Company (hereinafter referred to collectively as the "Employer") in a key executive capacity and the Executive's services are valuable to the conduct of the business of the Company; WHEREAS, the Company desires to continue to attract and retain dedicated and skilled management employees in a period of industry consolidation, consistent with achieving the best possible value for its shareowners in any change in control of the Company; WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing a potential conflict of interest between the Company's needs for the Executive to remain focused on the Company's business and for the necessary continuity in management prior to and following a change in control, and the Executive's reasonable personal concerns regarding future employment with the Employer and economic protection in the event of loss of employment as a consequence of a change in control; -1- WHEREAS, the Company and the Executive are desirous that any proposal for a change in control or acquisition of the Company will be considered by the Executive objectively and with reference only to the best interests of the Company and its shareowners; WHEREAS, the Executive will be in a better position to consider the Company's best interests if the Executive is afforded reasonable economic security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition; WHEREAS, the Executive possesses intimate knowledge of the business and affairs of the Company and has acquired certain confidential information and data with respect to the Company; and WHEREAS, the Company desires to insure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows: 1. Definitions. (a) Act. For purposes of this Agreement, the term "Act" means the Securities Exchange Act of 1934, as amended. (b) Affiliate and Associate. For purposes of this Agreement, the terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Act. -2- (c) Beneficial Owner. For purposes of this Agreement, a Person shall be deemed to be the "Beneficial Owner" of any securities: (i) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, or (B) securities issuable upon exercise of Rights issued pursuant to the terms of the Company's Rights Agreement, dated as of January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as amended from time to time (or any successor to such Rights Agreement), at any time before the issuance of such securities; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this Subsection 1 (c) as a result of an agreement, arrangement or understanding to vote such security if the agreement, arrangement -3- or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Subsection 1(c) (ii) above) or disposing of any voting securities of the Company. (d) Cause. "Cause" for termination by the Employer of the Executive's employment in connection with a Change in Control of the Company shall, for purposes of this Agreement, be limited to (i) the engaging by the Executive in intentional conduct not taken in good faith which has caused demonstrable and serious financial injury to the Employer, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal) which substantially impairs the Executive's ability to perform his duties or responsibilities; and (iii) continuing willful and unreasonable refusal by the -4- Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent). (e) Change in Control of the Company. A "Change in Control of the Company" shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred: (i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock in the Company ("Excluded Persons")) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on November 18, 1998, constituted the Board and (B) any new director (other than a director whose initial assumption of -5- office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Act) whose appointment or election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on November 18, 1998, or whose appointment, election or nomination for election was previously so approved (collectively the "Continuing Directors"); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareowners of the Company at a meeting of shareowners held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change in Control of the Company, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change in Control of the Company occurred; or -6- (iii) the shareowners of the Company approve a merger, consolidation or share exchange of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or -7- (iv) the shareowners of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control of the Company" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions. (f) Code. For purposes of this Agreement, the term "Code" means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof. (g) Covered Termination. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Covered Termination" means any termination of the Executive's employment during the Employment Period where the Notice of Termination is delivered on or the Termination Date is any date prior to the end of the Employment Period. (h) Employment Period. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Employment Period" means a period commencing on the -8- date of a Change in Control of the Company, and ending at 11:59 p.m. Central Time on the earlier of the third anniversary of such date or the Executive's Normal Retirement Date. (i) Good Reason. For purposes of this Agreement, the Executive shall have "Good Reason" for termination of employment in connection with a Change in Control of the Company in the event of: (i) any breach of this Agreement by the Employer, including specifically any breach by the Employer of the agreements contained in Sections 4, 5, and 6 hereof, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; (ii) any reduction in the Executive's base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits, in each case relative to those most favorable to the Executive in effect at any time during the 180-day period prior to the Change in Control or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period; (iii) the removal of the Executive from, or any failure to reelect or reappoint the Executive to, any of the positions held with the Employer on the date of the Change in Control of the Company or any other positions with the Employer to which the Executive shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to the termination by the Employer of -9- the Executive's employment for Cause or by reason of disability pursuant to Section 12 hereof; (iv) a good faith determination by the Executive that there has been a significant adverse change, without the Executive's written consent, in the Executive's working conditions or status with the Employer relative to the most favorable working conditions or status in effect during the 180-day period prior to the Change in Control of the Company, or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period, including but not limited to (A) a significant change in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements but excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; (v) failure by the Company to obtain the Agreement referred to in Section 17(a) hereof as provided therein; or (vi) any voluntary termination of employment by the Executive where the Notice of Termination is delivered during the 30 days following the first anniversary of the Change in Control of the Company. (j) Normal Retirement Date. For purposes of this Agreement, the term "Normal Retirement Date" means "Normal Retirement Date" as defined in the primary qualified defined benefit pension -10- plan applicable to the Executive, or any successor plan, as in effect on the date of the Change in Control of the Company. (k) Person. For purposes of this Agreement, the term "Person" shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (l) Termination Date. For purposes of this Agreement, except as otherwise provided in Subsection 2(b), Subsection 10(b), and Subsection 17(a) hereof, the term "Termination Date" means (i) if the Executive's employment is terminated by the Executive's death, the date of death; (ii) if the Executive's employment is terminated by reason of voluntary early retirement, as agreed in writing by the Employer and the Executive, the date of such early retirement which is set forth in such written agreement; (iii) if the Executive's employment is terminated for purposes of this Agreement by reason of disability pursuant to Section 12 hereof, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period; (iv) if the Executive's employment is terminated by the Executive voluntarily (other than for Good Reason), the date the Notice of Termination is given; and (v) if the Executive's employment is terminated by the Employer (other than by reason of disability pursuant to Section 12 hereof) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period. Notwithstanding the foregoing, -11- (1) If termination is for Cause pursuant to Subsection 1(d)(iii) of this Agreement and if the Executive has cured the conduct constituting such Cause as described by the Employer in its Notice of Termination within such thirty-day or shorter period, then the Executive's employment hereunder shall continue as if the Employer had not delivered its Notice of Termination. (2) If the Executive shall in good faith give a Notice of Termination for Good Reason and the Employer notifies the Executive that a dispute exists concerning the termination within the fifteen-day period following receipt thereof, then the Executive may elect to continue his or her employment during such dispute and the Termination Date shall be determined under this paragraph. If the Executive so elects and it is thereafter determined that Good Reason did exist, the Termination Date shall be the earliest of (i) the date on which the dispute is finally determined, either (x) by mutual written agreement of the parties or (y) in accordance with Section 22 hereof, (ii) the date of the Executive's death or (iii) one day prior to the end of the Employment Period. If the Executive so elects and it is thereafter determined that Good Reason did not exist, then the employment of the Executive hereunder shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason and there shall be no Termination Date arising out of such Notice. In either case, this Agreement continues, until the Termination Date, if any, as if the Executive had not delivered the Notice of Termination except that, if it is finally determined that Good Reason did exist, the Executive shall in no case be denied the benefits described in Subsection 8(b) and Section 9 hereof (including a Termination -12- Payment) based on events occurring after the Executive delivered his Notice of Termination. (3) Except as provided in Subsection 1(l)(2) above, if the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination within the appropriate period following receipt thereof and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (i) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and the Termination Date shall be the earlier of the date fifteen days after the Notice of Termination is given or one day prior to the end of the Employment Period and (ii) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, disability or Cause. 2. Termination or Cancellation Prior to Change in Control. (a) Subject to Subsection 2(b) hereof, the Employer and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company. Subject to Subsection 2(b) hereof, in the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall be terminated and cancelled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. (b) Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive's employment with the Employer is terminated (other than a termination due to the Executive's -13- death or as a result of the Executive's disability) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in anticipation of a Change in Control of the Company, then for all purposes of this Agreement such termination of employment shall be deemed a "Covered Termination," "Notice of Termination" shall be deemed to have been given, and the "Employment Period" shall be deemed to have begun on the date of such termination which shall be deemed to be the "Termination Date" and the date of the Change of Control of the Company for purposes of this Agreement. 3. Employment Period. If a Change in Control of the Company occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period, and the Executive will remain in the employ of the Employer in accordance with and subject to the terms and provisions of this Agreement. Any termination of the Executive's employment during the Employment Period, whether by the Company or the Employer, shall be deemed a termination by the Company for purposes of this Agreement. 4. Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of the Change in Control of the Company or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the Employer, as such business and affairs now exist and as they may hereafter be conducted. The services which are to be performed by the Executive hereunder are to be rendered in the same metropolitan area in which the Executive was employed at the date -14- of such Change in Control of the Company, or in such other place or places as shall be mutually agreed upon in writing by the Executive and the Employer from time to time. Without the Executive's consent, the Executive shall not be required to be absent from such metropolitan area more than 45 days in any fiscal year of the Company. 5. Compensation. During the Employment Period, the Executive shall be compensated as follows: (a) The Executive shall receive, at reasonable intervals (but not less often than monthly) and in accordance with such standard policies as may be in effect immediately prior to the Change in Control of the Company, an annual base salary in cash equivalent of not less than twelve times the Executive's highest monthly base salary for the twelve-month period immediately preceding the month in which the Change in Control of the Company occurs or, if higher, annual base salary at the rate in effect immediately prior to the Change in Control of the Company (which base salary shall, unless otherwise agreed in writing by the Executive, include the current receipt by the Executive of any amounts which, prior to the Change in Control of the Company, the Executive had elected to defer, whether such compensation is deferred under Section 401(k) of the Code or otherwise), subject to adjustment as hereinafter provided in Section 6 (such salary amount as adjusted upward from time to time is hereafter referred to as the "Annual Base Salary"). (b) The Executive shall receive fringe benefits at least equal in value to the highest value of such benefits provided for the Executive at any time during the 180-day period immediately prior to the Change in Control of the Company or, if more favorable to the Executive, those provided generally at any time during the Employment Period to any executives of the Employer of comparable status and position to the Executive; and shall be reimbursed, at such intervals and in accordance with -15- such standard policies that are most favorable to the Executive that were in effect at any time during the 180-day period immediately prior to the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses. (c) The Executive and/or the Executive's family, as the case may be, shall be included, to the extent eligible thereunder (which eligibility shall not be conditioned on the Executive's salary grade or on any other requirement which excludes persons of comparable status to the Executive unless such exclusion was in effect for such plan or an equivalent plan at any time during the 180-day period immediately prior to the Change in Control of the Company), in any and all plans providing benefits for the Employer's salaried employees in general, including but not limited to group life insurance, hospitalization, medical, dental, profit sharing and stock bonus plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans in which the Executive is included be less than the aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(c) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company and (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate level of benefits under plans of the type referred to in this Subsection 5(c) provided at any time after the Change in Control of the Company to any executive of the Employer of comparable status and position to the Executive. (d) The Executive shall annually be entitled to not less than the amount of paid vacation and not fewer than the highest number of paid holidays to which the Executive was entitled annually at any time during the 180-day period immediately prior to the Change in Control -16- of the Company or such greater amount of paid vacation and number of paid holidays as may be made available annually to other executives of the Employer of comparable status and position to the Executive at any time during the Employment Period. (e) The Executive shall be included in all plans providing additional benefits to executives of the Employer of comparable status and position to the Executive, including but not limited to deferred compensation, split-dollar life insurance, supplemental retirement, stock option, stock appreciation, stock bonus and similar or comparable plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans be less than the highest aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(e) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company; (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate levels of benefits under plans of the type referred to in this Subsection 5(e) provided at any time after the Change in Control of the Company to any executive of the Employer comparable in status and position to the Executive; and (iii) the Employer's obligation to include the Executive in bonus or incentive compensation plans shall be determined by Subsection 5(f) hereof. (f) To assure that the Executive will have an opportunity to earn incentive compensation after a Change in Control of the Company, the Executive shall be included in a bonus plan of the Employer which shall satisfy the standards described below (such plan, the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect to achieving such financial or other goals reasonably related to the business of the Employer as the Employer shall establish (the "Goals"), all of which Goals shall be attainable, prior to the end of the Employment Period, with approximately the same degree of probability as the most attainable goals under the -17- Employer's bonus plan or plans as in effect at any time during the 180-day period immediately prior to the Change in Control of the Company (whether one or more, the "Company Bonus Plan") and in view of the Employer's existing and projected financial and business circumstances applicable at the time. The amount of the bonus (the "Bonus Amount") that the Executive is eligible to earn under the Bonus Plan shall be no less than the amount of the Executive's maximum award provided in such Company Bonus Plan (such bonus amount herein referred to as the "Targeted Bonus"), and in the event the Goals are not achieved such that the entire Targeted Bonus is not payable, the Bonus Plan shall provide for a payment of a Bonus Amount equal to a portion of the Targeted Bonus reasonably related to that portion of the Goals which were achieved. Payment of the Bonus Amount shall not be affected by any circumstance occurring subsequent to the end of the Employment Period, including termination of the Executive's employment. 6. Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Company (or an appropriate committee thereof) will consider and appraise, at least annually, the contributions of the Executive to the Company, and in accordance with the Company's practice prior to the Change in Control of the Company, due consideration shall be given to the upward adjustment of the Executive's Annual Base Salary, at least annually, (i) commensurate with increases generally given to other executives of the Company of comparable status and position to the Executive, and (ii) as the scope of the Company's operations or the Executive's duties expand. 7. Termination For Cause or Without Good Reason. If there is a Covered Termination for Cause or due to the Executive's voluntarily terminating his or her employment other than for Good Reason (any such terminations to be subject to the procedures set forth in -18- Section 13 hereof), then the Executive shall be entitled to receive only Accrued Benefits pursuant to Section 9(a) hereof. 8. Termination Giving Rise to a Termination Payment. (a) If there is a Covered Termination by the Executive for Good Reason, or by the Company other than by reason of (i) death, (ii) disability pursuant to Section 12 hereof, or (iii) Cause (any such terminations to be subject to the procedures set forth in Section 13 hereof), then the Executive shall be entitled to receive, and the Company shall promptly pay, Accrued Benefits and, in lieu of further base salary for periods following the Termination Date, as liquidated damages and additional severance pay and in consideration of the covenant of the Executive set forth in Subsection 14(a) hereof, the Termination Payment pursuant to Subsection 9(b) hereof. (b) If there is a Covered Termination and the Executive is entitled to Accrued Benefits and the Termination Payment, then the Company shall provide to the Executive the following additional benefits: (i) The Executive shall receive, at the expense of the Company, outplacement services, on an individualized basis at a level of service commensurate with the Executive's status with the Company immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive's employment), provided by a nationally recognized executive placement firm selected by the Company; provided that the cost to the Company of such services shall not exceed 10% of the Executive's Annual Base Salary. (ii) Until the earlier of the end of the Employment Period or such time as the Executive has obtained new employment and is covered by benefits which in the aggregate are at least equal in value to the -19- following benefits, the Executive shall continue to be covered, at the expense of the Company, by the same or equivalent life insurance, hospitalization, medical and dental coverage as was required hereunder with respect to the Executive immediately prior to the date the Notice of Termination is given. (iii) The Company shall cause the Executive to be fully and immediately vested in his accrued benefit under any supplemental executive retirement plan of the Employer providing benefits for the Executive (the "SERP") and in any defined contribution retirement plan of the Employer. In addition, the Company shall cause the Executive to be deemed to have satisfied any minimum years of service requirement under the SERP for subsidized early retirement benefits regardless of the Executive's age and service at the Termination Date; provided, however, that SERP benefits will be based on service to date with no additional credit for service or age beyond such Termination Date. (iv) The Company shall cause all restrictions on restricted stock awards made to the Executive to lapse such that the Executive is fully and immediately vested in his or her restricted stock. (v) The Company shall cause all stock options granted to the Executive pursuant to the Company's stock option plan(s) to be fully vested. (vi) The Company shall cause all performance plan awards granted to the Executive pursuant to any long-term incentive plan -20- maintained by the Company to be paid out at target, as if all performance requirements had been satisfied, on a pro rata basis based on the completed portion of each award cycle; provided, however, no payment of plan awards will occur from any award cycle that has been in effect less than six (6) months. (vii) The Company shall reimburse the Executive for up to $15,000 in tax preparation assistance fees for the tax year in which the Termination Payment is made. 9. Payments Upon Termination. (a) Accrued Benefits. For purposes of this Agreement, the Executive's "Accrued Benefits" shall include the following amounts, payable as described herein: (i) all base salary for the time period ending with the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect; (iv) a lump sum payment of the bonus or incentive compensation otherwise payable to the Executive with respect to the year in which termination occurs under all bonus or incentive compensation plan or plans in which the Executive is a participant; and (v) all other payments and benefits to which the Executive (or in the event of the Executive's death, the Executive's surviving spouse or other beneficiary) may be entitled as compensatory fringe benefits or under the terms of the Employment Agreement dated as of March 29, 1999 between the Company and the Executive or any benefit plan of the Employer, excluding severance payments under any Employer severance policy, practice or -21- agreement in effect immediately prior to the Change in Control of the Company. Payment of Accrued Benefits shall be made promptly in accordance with the Company's prevailing practice with respect to Subsections 9(a)(i) and (ii) or, with respect to Subsections 9(a)(iii), (iv) and (v), pursuant to the terms of the benefit plan or practice establishing such benefits. (b) Termination Payment. (i) The Termination Payment shall be an amount equal to (A) the Executive's Annual Base Salary (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given) plus (B) an amount equal to the greater of the Executive's target bonus for the year in which the Termination Date occurs or the bonus the Executive received in the year prior to the Change in Control of the Company (the aggregate amount set forth in (A) and (B) hereof shall hereafter be referred to as "Annual Cash Compensation"), times (C) the number of years or fractional portion thereof remaining in the Employment Period determined as of the Termination Date; provided, however, that such amount shall not be less than the greater of (i) the amount of the Executive's Annual Cash Compensation or (ii) the severance benefits to which the Executive would have been entitled under the Company's severance policies and practices in effect immediately prior to the Change in Control of the Company. The Termination Payment shall be paid to the Executive in cash equivalent ten (10) business days after the Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor, and the Executive shall not be required to -22- mitigate the amount of the Termination Payment by securing other employment or otherwise, nor will such Termination Payment be reduced by reason of the Executive securing other employment or for any other reason. The Termination Payment shall be in lieu of, and acceptance by the Executive of the Termination Payment shall constitute the Executive's release of any rights of Executive to, any other severance payments under any Company severance policy, practice or agreement. The Company shall bear up to $10,000 in the aggregate of fees and expenses of consultants and/or legal or accounting advisors engaged by the Executive to advise the Executive as to matters relating to the computation of benefits due and payable under this Subsection 9(b). (ii) Notwithstanding any other provision of this Agreement, if any portion of any payment under this Agreement, or under any other agreement with or plan of the Employer (in the aggregate "Total Payments"), would constitute an "excess parachute payment," the Company shall pay Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, any interest charges or penalties in respect of the imposition of such excise tax (but not any federal, state or local income tax, or employment tax) on the Total Payments, and any federal, state and local income tax, employment tax, and excise tax upon the payment provided for by this Subsection 9(b)(ii), shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up -23- Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (iii) For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code and such "parachute payments" shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b)(2) of the Code (or any successor provision). Promptly following a Covered Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel ("National Tax Counsel") selected by the Company's independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (i) the amount of the Base Period Income, (ii) the amount and present value of Total Payments, -24- (iii) the amount and present value of any excess parachute payments, and (iv) the amount of any Gross-Up Payment. As used in this Agreement, the term "Base Period Income" means an amount equal to the Executive's "annualized includible compensation for the base period" as defined in Section 280G(d)(1) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel so requests in connection with the opinion required by this Subsection 9(b) of Section 9, the Executive and the Company shall obtain, at the Company's expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. Within five (5) days after the National Tax Counsel's opinion is received by the Company and the Executive, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. -25- (iv) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Total Payments or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in this Section 9, in the manner determined by the National Tax Counsel. (v) The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Subsection 9(b), except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm. 10. Death. (a) Except as provided in Subsection 10(b) hereof, in the event of a Covered Termination due to the Executive's death, the Executive's estate, heirs and beneficiaries shall receive all the Executive's Accrued Benefits through the Termination Date. (b) In the event the Executive dies after a Notice of Termination is given (i) by the Company or (ii) by the Executive for Good Reason, the Executive's estate, heirs and beneficiaries shall be entitled to the benefits described in Subsection 10(a) hereof and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive lived. For purposes of this Subsection 10(b), the Termination Date shall be the earlier of thirty days following the giving of the Notice of Termination, subject to -26- extension pursuant to Subsection 1(l) hereof, or one day prior to the end of the Employment Period. 11. Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the early retirement of the Executive from the Employer, or the Executive shall otherwise give notice that he is voluntarily choosing to retire early from the Employer, the Executive shall receive Accrued Benefits through the Termination Date; provided, that if the Executive's employment is terminated by the Executive for Good Reason or by the Company other than by reason of death, disability or Cause and the Executive also, in connection with such termination, elects voluntary early retirement, the Executive shall also be entitled to receive a Termination Payment pursuant to Subsection 8(a) hereof. 12. Termination for Disability. If, during the Employment Period, as a result of the Executive's disability due to physical or mental illness or injury (regardless of whether such illness or injury is job-related), the Executive shall have been absent from the Executive's duties hereunder on a full-time basis for a period of six consecutive months and, within thirty days after the Company notifies the Executive in writing that it intends to terminate the Executive's employment (which notice shall not constitute the Notice of Termination contemplated below), the Executive shall not have returned to the performance of the Executive's duties hereunder on a full-time basis, the Company may terminate the Executive's employment for purposes of this Agreement pursuant to a Notice of Termination given in accordance with Section 13 hereof. If the Executive's employment is terminated on account of the Executive's disability in accordance with this Section, the Executive shall receive Accrued Benefits in accordance with Subsection 9(a) hereof and shall remain eligible for all benefits provided by any long term disability programs of the Company in effect at the time of such termination. -27- 13. Termination Notice and Procedure. Any Covered Termination by the Company or the Executive (other than a termination of the Executive's employment that is a Covered Termination by virtue of Subsection 2(b) hereof) shall be communicated by a written notice of termination ("Notice of Termination") to the Executive, if such Notice is given by the Company, and to the Company, if such Notice is given by the Executive, all in accordance with the following procedures and those set forth in Section 23 hereof: (a) If such termination is for disability, Cause or Good Reason, the Notice of Termination shall indicate in reasonable detail the facts and circumstances alleged to provide a basis for such termination. (b) Any Notice of Termination by the Company shall have been approved, prior to the giving thereof to the Executive, by a resolution duly adopted by a majority of the directors of the Company (or any successor corporation) then in office. (c) If the Notice is given by the Executive for Good Reason, the Executive may cease performing his duties hereunder on or after the date fifteen days after the delivery of Notice of Termination and shall in any event cease employment on the Termination Date. If the Notice is given by the Company, then the Executive may cease performing his duties hereunder on the date of receipt of the Notice of Termination, subject to the Executive's rights hereunder. (d) The Executive shall have thirty days, or such longer period as the Company may determine to be appropriate, to cure any conduct or act, if curable, alleged to provide grounds for termination of the Executive's employment for Cause under this Agreement pursuant to Subsection 1(d) (iii) hereof. -28- (e) The recipient of any Notice of Termination shall personally deliver or mail in accordance with Section 23 hereof written notice of any dispute relating to such Notice of Termination to the party giving such Notice within fifteen days after receipt thereof; provided, however, that if the Executive's conduct or act alleged to provide grounds for termination by the Company for Cause is curable, then such period shall be thirty days. After the expiration of such period, the contents of the Notice of Termination shall become final and not subject to dispute. 14. Further Obligations of the Executive. (a) Competition. The Executive agrees that, in the event of any Covered Termination where the Executive is entitled to Accrued Benefits and the Termination Payment, the Executive shall not, for a period expiring one year after the Termination Date, without the prior written approval of the Company's Board of Directors, participate in the management of, be employed by or own any business enterprise at a location within the United States that engages in substantial competition with the Company or its subsidiaries, where such enterprise's revenues from any competitive activities amount to 10% or more of such enterprise's net revenues and sales for its most recently completed fiscal year; provided, however, that nothing in this Subsection 14(a) shall prohibit the Executive from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor. (b) Confidentiality. During the Executive's employment by the Company and for a period of five (5) years thereafter, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company (including that of the Employer), except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably -29- necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 15. Expenses and Interest. If, after a Change in Control of the Company, (i) a dispute arises with respect to the enforcement of the Executive's rights under this Agreement or (ii) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, in either case so long as, and to the extent that, the Executive prevails in such proceeding, the Executive shall recover from the Company the reasonable attorneys' fees and necessary costs and disbursements incurred as a result of the dispute, legal or arbitration proceeding as to which the Executive has prevailed ("Expenses"), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Firstar Bank Milwaukee, N.A., Milwaukee, Wisconsin, from time to time at its prime or base lending rate from the date that payments to him or her should have been made under this Agreement. Any dispute as to the reasonableness of the Expenses incurred, or the extent to which the Executive has prevailed, shall be resolved by the presiding officer (arbitrator or judge) in the forum in which the substantive issues are finally resolved. -30- 16. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. Except as provided in Section 15 of this Agreement, all amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever. 17. Successors. (a) If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a "Sale of Business"), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such agreement prior to the effective date of such Sale of Business shall be a breach of this Agreement constituting "Good Reason" hereunder, except that for purposes of implementing the foregoing the date upon which such Sale of Business becomes effective shall be deemed the Termination Date. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, "Company" shall thereafter mean such Person which executes and delivers the agreement provided for in this Section 17 or which otherwise -31- becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his or her discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company and the Company (as so defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Subsection 17(a), this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under Sections 7, 8, 9, 10, 11, 12 and 15 hereof if the Executive had lived shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Employer, as such terms are in effect on the date of the Change in Control of the Company, that expressly govern benefits under such plan in the event of the Executive's death. 18. Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 19. Contents of Agreement; Waiver of Rights; Amendment. Except for the Employment Agreement dated as of March 29, 1999 between the Company and the Executive, this Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede in all respects, and the Executive hereby waives all rights under, any prior or other agreement or understanding -32- between the parties with respect to such subject matter, including, but not limited to the Key Executive Employment and Severance Agreement dated as of June 25, 1994 between the Company and the Executive. This Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive. 20. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of the National Tax Counsel if any question as to the amount or requirement of any such withholding shall arise. 21. Certain Rules of Construction. No party shall be considered as being responsible for the drafting of this Agreement for the purpose of applying any rule construing ambiguities against the drafter or otherwise. No draft of this Agreement shall be taken into account in construing this Agreement. Any provision of this Agreement which requires an agreement in writing shall be deemed to require that the writing in question be signed by the Executive and an authorized representative of the Company. 22. Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Wisconsin. Any dispute arising out of this Agreement shall, at the Executive's election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be -33- Madison, Wisconsin or, at the Executive's election, if the Executive is not then residing or working in the Madison, Wisconsin metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either Madison, Wisconsin or in the judicial district encompassing that city in the United States among the thirty cities having the largest population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive's residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices. 23. Notice. Notices given pursuant to this Agreement shall be in writing and, except as otherwise provided by Subsection 13(d) hereof, shall be deemed given when actually received by the Executive or actually received by the Company's Corporate Secretary or any officer of the Company other than the Executive. If mailed, such notices shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to Interstate Energy Corporation (d/b/a Alliant Energy Corporation), Attention: Corporate Secretary (or President, if the Executive is then Corporate Secretary), 222 West Washington Avenue, P.O. Box 2568, Madison, Wisconsin 53701-2568, or if to the Executive, at the address set forth below the Executive's signature to this Agreement, or to such other address as the party to be notified shall have theretofore given to the other party in writing. 24. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed -34- by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 25. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. INTERSTATE ENERGY CORPORATION By: Its: Attest: Its: EXECUTIVE: /s/Erroll B. Davis, Jr. (SEAL) Address: -35- EX-10.3 4 KEESA Exhibit 10.3 KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT, made and entered into as of the _____ day of ________, ____ by and between Interstate Energy Corporation (d/b/a Alliant Energy Corporation), a Wisconsin corporation (hereinafter referred to as the "Company"), and [Executive Name] (hereinafter referred to as "Executive"). W I T N E S S E T H WHEREAS, the Executive is employed by the Company and/or a subsidiary of the Company (hereinafter referred to collectively as the "Employer") in a key executive capacity and the Executive's services are valuable to the conduct of the business of the Company; WHEREAS, the Company desires to continue to attract and retain dedicated and skilled management employees in a period of industry consolidation, consistent with achieving the best possible value for its shareowners in any change in control of the Company; WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing a potential conflict of interest between the Company's needs for the Executive to remain focused on the Company's business and for the necessary continuity in management prior to and following a change in control, and the Executive's reasonable personal concerns regarding future employment with the Employer and economic protection in the event of loss of employment as a consequence of a change in control; -1- WHEREAS, the Company and the Executive are desirous that any proposal for a change in control or acquisition of the Company will be considered by the Executive objectively and with reference only to the best interests of the Company and its shareowners; WHEREAS, the Executive will be in a better position to consider the Company's best interests if the Executive is afforded reasonable economic security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition; WHEREAS, the Executive possesses intimate knowledge of the business and affairs of the Company and has acquired certain confidential information and data with respect to the Company; and WHEREAS, the Company desires to insure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows: 1. Definitions. (a) Act. For purposes of this Agreement, the term "Act" means the Securities Exchange Act of 1934, as amended. (b) Affiliate and Associate. For purposes of this Agreement, the terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Act. -2- (c) Beneficial Owner. For purposes of this Agreement, a Person shall be deemed to be the "Beneficial Owner" of any securities: (i) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, or (B) securities issuable upon exercise of Rights issued pursuant to the terms of the Company's Rights Agreement, dated as of January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as amended from time to time (or any successor to such Rights Agreement), at any time before the issuance of such securities; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this Subsection 1(c)(ii) as a result of an agreement, -3- arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Subsection 1(c) (ii) above) or disposing of any voting securities of the Company. (d) Cause. "Cause" for termination by the Employer of the Executive's employment in connection with a Change in Control of the Company shall, for purposes of this Agreement, be limited to (i) the engaging by the Executive in intentional conduct not taken in good faith which has caused demonstrable and serious financial injury to the Employer, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal) which substantially impairs the Executive's ability to perform his duties or responsibilities; and (iii) continuing willful and unreasonable refusal by the -4- Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent). (e) Change in Control of the Company. A "Change in Control of the Company" shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred: (i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock in the Company ("Excluded Persons")) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on November 18, 1998, constituted the Board and (B) any new director (other than a director whose initial assumption of -5- office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Act) whose appointment or election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on November 18, 1998, or whose appointment, election or nomination for election was previously so approved (collectively the "Continuing Directors"); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareowners of the Company at a meeting of shareowners held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change in Control of the Company, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change in Control of the Company occurred; or -6- (iii) the shareowners of the Company approve a merger, consolidation or share exchange of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or -7- (iv) the shareowners of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control of the Company" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions. (f) Code. For purposes of this Agreement, the term "Code" means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof. (g) Covered Termination. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Covered Termination" means any termination of the Executive's employment during the Employment Period where the Notice of Termination is delivered on or the Termination Date is any date prior to the end of the Employment Period. (h) Employment Period. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Employment Period" means a period commencing on the -8- date of a Change in Control of the Company, and ending at 11:59 p.m. Central Time on the earlier of the third anniversary of such date or the Executive's Normal Retirement Date. (i) Good Reason. For purposes of this Agreement, the Executive shall have "Good Reason" for termination of employment in connection with a Change in Control of the Company in the event of: (i) any breach of this Agreement by the Employer, including specifically any breach by the Employer of the agreements contained in Sections 4, 5, and 6 hereof, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; (ii) any reduction in the Executive's base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits, in each case relative to those most favorable to the Executive in effect at any time during the 180-day period prior to the Change in Control or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period; (iii) the removal of the Executive from, or any failure to reelect or reappoint the Executive to, any of the positions held with the Employer on the date of the Change in Control of the Company or any other positions with the Employer to which the Executive shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to the termination by the Employer of -9- the Executive's employment for Cause or by reason of disability pursuant to Section 12 hereof; (iv) a good faith determination by the Executive that there has been a significant adverse change, without the Executive's written consent, in the Executive's working conditions or status with the Employer relative to the most favorable working conditions or status in effect during the 180-day period prior to the Change in Control of the Company, or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period, including but not limited to (A) a significant change in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements but excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; or (v) failure by the Company to obtain the Agreement referred to in Section 17(a) hereof as provided therein. (j) Normal Retirement Date. For purposes of this Agreement, the term "Normal Retirement Date" means "Normal Retirement Date" as defined in the primary qualified defined benefit pension plan applicable to the Executive, or any successor plan, as in effect on the date of the Change in Control of the Company. -10- (k) Person. For purposes of this Agreement, the term "Person" shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (l) Termination Date. For purposes of this Agreement, except as otherwise provided in Subsection 2(b), Subsection 10(b), and Subsection 17(a) hereof, the term "Termination Date" means (i) if the Executive's employment is terminated by the Executive's death, the date of death; (ii) if the Executive's employment is terminated by reason of voluntary early retirement, as agreed in writing by the Employer and the Executive, the date of such early retirement which is set forth in such written agreement; (iii) if the Executive's employment is terminated for purposes of this Agreement by reason of disability pursuant to Section 12 hereof, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period; (iv) if the Executive's employment is terminated by the Executive voluntarily (other than for Good Reason), the date the Notice of Termination is given; and (v) if the Executive's employment is terminated by the Employer (other than by reason of disability pursuant to Section 12 hereof) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period. Notwithstanding the foregoing, (1) If termination is for Cause pursuant to Subsection 1(d)(iii) of this Agreement and if the Executive has cured the conduct constituting such Cause as described by the Employer in its Notice of Termination within such thirty-day or shorter period, then the Executive's employment hereunder shall continue as if the Employer had not delivered its Notice of Termination. -11- (2) If the Executive shall in good faith give a Notice of Termination for Good Reason and the Employer notifies the Executive that a dispute exists concerning the termination within the fifteen-day period following receipt thereof, then the Executive may elect to continue his or her employment during such dispute and the Termination Date shall be determined under this paragraph. If the Executive so elects and it is thereafter determined that Good Reason did exist, the Termination Date shall be the earliest of (i) the date on which the dispute is finally determined, either (x) by mutual written agreement of the parties or (y) in accordance with Section 22 hereof, (ii) the date of the Executive's death or (iii) one day prior to the end of the Employment Period. If the Executive so elects and it is thereafter determined that Good Reason did not exist, then the employment of the Executive hereunder shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason and there shall be no Termination Date arising out of such Notice. In either case, this Agreement continues, until the Termination Date, if any, as if the Executive had not delivered the Notice of Termination except that, if it is finally determined that Good Reason did exist, the Executive shall in no case be denied the benefits described in Subsection 8(b) and Section 9 hereof (including a Termination Payment) based on events occurring after the Executive delivered his Notice of Termination. -12- (3) Except as provided in Subsection 1(l)(2), above, if the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination within the appropriate period following receipt thereof and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (i) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and the Termination Date shall be the earlier of the date fifteen days after the Notice of Termination is given or one day prior to the end of the Employment Period and (ii) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, disability or Cause. 2. Termination or Cancellation Prior to Change in Control. (a) Subject to Subsection 2(b) hereof, the Employer and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company. Subject to Subsection 2(b) hereof, in the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall be terminated and cancelled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. (b) Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive's employment with the Employer is terminated (other than a termination due to the Executive's death or as a result of the Executive's disability) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such termination of -13- employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in anticipation of a Change in Control of the Company, then for all purposes of this Agreement such termination of employment shall be deemed a "Covered Termination," "Notice of Termination" shall be deemed to have been given, and the "Employment Period" shall be deemed to have begun on the date of such termination which shall be deemed to be the "Termination Date" and the date of the Change of Control of the Company for purposes of this Agreement. 3. Employment Period. If a Change in Control of the Company occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period, and the Executive will remain in the employ of the Employer in accordance with and subject to the terms and provisions of this Agreement. Any termination of the Executive's employment during the Employment Period, whether by the Company or the Employer, shall be deemed a termination by the Company for purposes of this Agreement. 4. Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of the Change in Control of the Company or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive's best efforts and all of the Executive's business time, attention and skill to the business and affairs of the Employer, as such business and affairs now exist and as they may hereafter be conducted. The services which are to be performed by the Executive hereunder are to be rendered in the same metropolitan area in which the Executive was employed at the date of such Change in Control of the Company, or in such other place or places as shall be mutually agreed upon in writing by the Executive and the Employer from time to time. Without the -14- Executive's consent, the Executive shall not be required to be absent from such metropolitan area more than 45 days in any fiscal year of the Company. 5. Compensation. During the Employment Period, the Executive shall be compensated as follows: (a) The Executive shall receive, at reasonable intervals (but not less often than monthly) and in accordance with such standard policies as may be in effect immediately prior to the Change in Control of the Company, an annual base salary in cash equivalent of not less than twelve times the Executive's highest monthly base salary for the twelve-month period immediately preceding the month in which the Change in Control of the Company occurs or, if higher, annual base salary at the rate in effect immediately prior to the Change in Control of the Company (which base salary shall, unless otherwise agreed in writing by the Executive, include the current receipt by the Executive of any amounts which, prior to the Change in Control of the Company, the Executive had elected to defer, whether such compensation is deferred under Section 401(k) of the Code or otherwise), subject to adjustment as hereinafter provided in Section 6 (such salary amount as adjusted upward from time to time is hereafter referred to as the "Annual Base Salary"). (b) The Executive shall receive fringe benefits at least equal in value to the highest value of such benefits provided for the Executive at any time during the 180-day period immediately prior to the Change in Control of the Company or, if more favorable to the Executive, those provided generally at any time during the Employment Period to any executives of the Employer of comparable status and position to the Executive; and shall be reimbursed, at such intervals and in accordance with such standard policies that are most favorable to the Executive that were in effect at any time during the 180-day period immediately prior to the Change in Control of -15- the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses. (c) The Executive and/or the Executive's family, as the case may be, shall be included, to the extent eligible thereunder (which eligibility shall not be conditioned on the Executive's salary grade or on any other requirement which excludes persons of comparable status to the Executive unless such exclusion was in effect for such plan or an equivalent plan at any time during the 180-day period immediately prior to the Change in Control of the Company), in any and all plans providing benefits for the Employer's salaried employees in general, including but not limited to group life insurance, hospitalization, medical, dental, profit sharing and stock bonus plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans in which the Executive is included be less than the aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(c) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company and (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate level of benefits under plans of the type referred to in this Subsection 5(c) provided at any time after the Change in Control of the Company to any executive of the Employer of comparable status and position to the Executive. (d) The Executive shall annually be entitled to not less than the amount of paid vacation and not fewer than the highest number of paid holidays to which the Executive was entitled annually at any time during the 180-day period immediately prior to the Change in Control of the Company or such greater amount of paid vacation and number of paid holidays as may be -16- made available annually to other executives of the Employer of comparable status and position to the Executive at any time during the Employment Period. (e) The Executive shall be included in all plans providing additional benefits to executives of the Employer of comparable status and position to the Executive, including but not limited to deferred compensation, split-dollar life insurance, supplemental retirement, stock option, stock appreciation, stock bonus and similar or comparable plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans be less than the highest aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(e) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company; (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate levels of benefits under plans of the type referred to in this Subsection 5(e) provided at any time after the Change in Control of the Company to any executive of the Employer comparable in status and position to the Executive; and (iii) the Employer's obligation to include the Executive in bonus or incentive compensation plans shall be determined by Subsection 5(f) hereof. (f) To assure that the Executive will have an opportunity to earn incentive compensation after a Change in Control of the Company, the Executive shall be included in a bonus plan of the Employer which shall satisfy the standards described below (such plan, the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect to achieving such financial or other goals reasonably related to the business of the Employer as the Employer shall establish (the "Goals"), all of which Goals shall be attainable, prior to the end of the Employment Period, with approximately the same degree of probability as the most attainable goals under the Employer's bonus plan or plans as in effect at any time during the 180-day period immediately -17- prior to the Change in Control of the Company (whether one or more, the "Company Bonus Plan") and in view of the Employer's existing and projected financial and business circumstances applicable at the time. The amount of the bonus (the "Bonus Amount") that the Executive is eligible to earn under the Bonus Plan shall be no less than the amount of the Executive's maximum award provided in such Company Bonus Plan (such bonus amount herein referred to as the "Targeted Bonus"), and in the event the Goals are not achieved such that the entire Targeted Bonus is not payable, the Bonus Plan shall provide for a payment of a Bonus Amount equal to a portion of the Targeted Bonus reasonably related to that portion of the Goals which were achieved. Payment of the Bonus Amount shall not be affected by any circumstance occurring subsequent to the end of the Employment Period, including termination of the Executive's employment. 6. Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Company (or an appropriate committee thereof) will consider and appraise, at least annually, the contributions of the Executive to the Company, and in accordance with the Company's practice prior to the Change in Control of the Company, due consideration shall be given to the upward adjustment of the Executive's Annual Base Salary, at least annually, (i) commensurate with increases generally given to other executives of the Company of comparable status and position to the Executive, and (ii) as the scope of the Company's operations or the Executive's duties expand. 7. Termination For Cause or Without Good Reason. If there is a Covered Termination for Cause or due to the Executive's voluntarily terminating his or her employment other than for Good Reason (any such terminations to be subject to the procedures set forth in Section 13 hereof), then the Executive shall be entitled to receive only Accrued Benefits pursuant to Subsection 9(a) hereof. -18- 8. Termination Giving Rise to a Termination Payment. (a) If there is a Covered Termination by the Executive for Good Reason, or by the Company other than by reason of (i) death, (ii) disability pursuant to Section 12 hereof, or (iii) Cause (any such terminations to be subject to the procedures set forth in Section 13 hereof), then the Executive shall be entitled to receive, and the Company shall promptly pay, Accrued Benefits and, in lieu of further base salary for periods following the Termination Date, as liquidated damages and additional severance pay and in consideration of the covenant of the Executive set forth in Subsection 14(a) hereof, the Termination Payment pursuant to Subsection 9(b) hereof. (b) If there is a Covered Termination and the Executive is entitled to Accrued Benefits and the Termination Payment, then the Company shall provide to the Executive the following additional benefits: (i) The Executive shall receive, at the expense of the Company, outplacement services, on an individualized basis at a level of service commensurate with the Executive's status with the Company immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive's employment), provided by a nationally recognized executive placement firm selected by the Company; provided that the cost to the Company of such services shall not exceed 10% of the Executive's Annual Base Salary. (ii) Until the earlier of the end of the Employment Period or such time as the Executive has obtained new employment and is covered by benefits which in the aggregate are at least equal in value to the following benefits, the Executive shall continue to be covered, at the expense of the -19- Company, by the same or equivalent life insurance, hospitalization, medical and dental coverage as was required hereunder with respect to the Executive immediately prior to the date the Notice of Termination is given. (iii) The Company shall cause the Executive to be fully and immediately vested in his accrued benefit under any supplemental executive retirement plan of the Employer providing benefits for the Executive (the "SERP") and in any defined contribution retirement plan of the Employer. In addition, the Company shall cause the Executive to be deemed to have satisfied any minimum years of service requirement under the SERP for subsidized early retirement benefits regardless of the Executive's age and service at the Termination Date; provided, however, that SERP benefits will be based on service to date with no additional credit for service or age beyond such Termination Date. (iv) The Company shall cause all restrictions on restricted stock awards made to the Executive to lapse such that the Executive is fully and immediately vested in his or her restricted stock. (v) The Company shall cause all stock options granted to the Executive pursuant to the Company's stock option plan(s) to be fully vested. (vi) The Company shall cause all performance plan awards granted to the Executive pursuant to any long-term incentive plan maintained by the Company to be paid out at target, as if all performance requirements had been satisfied, on a pro rata basis based on the completed -20- portion of each award cycle; provided, however, no payment of plan awards will occur from any award cycle that has been in effect less than six (6) months. (vii) The Company shall reimburse the Executive for up to $15,000 in tax preparation assistance fees for the tax year in which the Termination Payment is made. 9. Payments Upon Termination. (a) Accrued Benefits. For purposes of this Agreement, the Executive's "Accrued Benefits" shall include the following amounts, payable as described herein: (i) all base salary for the time period ending with the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect; (iv) a lump sum payment of the bonus or incentive compensation otherwise payable to the Executive with respect to the year in which termination occurs under all bonus or incentive compensation plan or plans in which the Executive is a participant; and (v) all other payments and benefits to which the Executive (or in the event of the Executive's death, the Executive's surviving spouse or other beneficiary) may be entitled as compensatory fringe benefits or under the terms of any benefit plan of the Employer, excluding severance payments under any Employer severance policy, practice or agreement in effect immediately prior to the Change in Control of the Company. Payment of Accrued Benefits shall be made promptly in accordance with the Company's prevailing practice -21- with respect to Subsections 9(a)(i) and (ii) or, with respect to Subsections 9(a)(iii), (iv) and (v), pursuant to the terms of the benefit plan or practice establishing such benefits. (b) Termination Payment. (i) The Termination Payment shall be an amount equal to (A) the Executive's Annual Base Salary (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given) plus (B) an amount equal to the greater of the Executive's target bonus for the year in which the Termination Date occurs or the bonus the Executive received in the year prior to the Change in Control of the Company (the aggregate amount set forth in (A) and (B) hereof shall hereafter be referred to as "Annual Cash Compensation"), times (C) the number of years or fractional portion thereof remaining in the Employment Period determined as of the Termination Date; provided, however, that such amount shall not be less than the greater of (i) the amount of the Executive's Annual Cash Compensation or (ii) the severance benefits to which the Executive would have been entitled under the Company's severance policies and practices in effect immediately prior to the Change in Control of the Company. The Termination Payment shall be paid to the Executive in cash equivalent ten (10) business days after the Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor, and the Executive shall not be required to mitigate the amount of the Termination Payment by securing other employment or otherwise, nor will such Termination Payment be reduced by -22- reason of the Executive securing other employment or for any other reason. The Termination Payment shall be in lieu of, and acceptance by the Executive of the Termination Payment shall constitute the Executive's release of any rights of Executive to, any other severance payments under any Company severance policy, practice or agreement. The Company shall bear up to $10,000 in the aggregate of fees and expenses of consultants and/or legal or accounting advisors engaged by the Executive to advise the Executive as to matters relating to the computation of benefits due and payable under this Subsection 9(b). (ii) Notwithstanding any other provision of this Agreement, if any portion of any payment under this Agreement, or under any other agreement with or plan of the Employer (in the aggregate "Total Payments"), would constitute an "excess parachute payment," the Company shall pay Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Code, any interest charges or penalties in respect of the imposition of such excise tax (but not any federal, state or local income tax, or employment tax) on the Total Payments, and any federal, state and local income tax, employment tax, and excise tax upon the payment provided for by this Subsection 9(b)(ii), shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and -23- employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (iii) For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code and such "parachute payments" shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b)(2) of the Code (or any successor provision). Promptly following a Covered Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel ("National Tax Counsel") selected by the Company's independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (i) the amount of the Base Period Income, (ii) the amount and present value of Total Payments, (iii) the amount and present value of any excess parachute payments, and (iv) the amount of any Gross-Up Payment. As used in this Agreement, the -24- term "Base Period Income" means an amount equal to the Executive's "annualized includible compensation for the base period" as defined in Section 280G(d)(1) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel so requests in connection with the opinion required by this Subsection 9(b), the Executive and the Company shall obtain, at the Company's expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. Within five (5) days after the National Tax Counsel's opinion is received by the Company and the Executive, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (iv) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Total Payments or Gross-Up Payment, a change is finally determined to be -25- required in the amount of taxes paid by Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to the Executive after taking into account the provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in this Section 9, in the manner determined by the National Tax Counsel. (v) The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Subsection 9(b), except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm. 10. Death. (a) Except as provided in Subsection 10(b) hereof, in the event of a Covered Termination due to the Executive's death, the Executive's estate, heirs and beneficiaries shall receive all the Executive's Accrued Benefits through the Termination Date. (b) In the event the Executive dies after a Notice of Termination is given (i) by the Company or (ii) by the Executive for Good Reason, the Executive's estate, heirs and beneficiaries shall be entitled to the benefits described in Subsection 10(a) hereof and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive lived. For purposes of this Subsection 10(b), the Termination Date shall be the earlier of thirty days following the giving of the Notice of Termination, subject to extension pursuant to Subsection 1(l) hereof, or one day prior to the end of the Employment Period. -26- 11. Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the early retirement of the Executive from the Employer, or the Executive shall otherwise give notice that he is voluntarily choosing to retire early from the Employer, the Executive shall receive Accrued Benefits through the Termination Date; provided, that if the Executive's employment is terminated by the Executive for Good Reason or by the Company other than by reason of death, disability or Cause and the Executive also, in connection with such termination, elects voluntary early retirement, the Executive shall also be entitled to receive a Termination Payment pursuant to Subsection 8(a) hereof. 12. Termination for Disability. If, during the Employment Period, as a result of the Executive's disability due to physical or mental illness or injury (regardless of whether such illness or injury is job-related), the Executive shall have been absent from the Executive's duties hereunder on a full-time basis for a period of six consecutive months and, within thirty days after the Company notifies the Executive in writing that it intends to terminate the Executive's employment (which notice shall not constitute the Notice of Termination contemplated below), the Executive shall not have returned to the performance of the Executive's duties hereunder on a full-time basis, the Company may terminate the Executive's employment for purposes of this Agreement pursuant to a Notice of Termination given in accordance with Section 13 hereof. If the Executive's employment is terminated on account of the Executive's disability in accordance with this Section, the Executive shall receive Accrued Benefits in accordance with Subsection 9(a) hereof and shall remain eligible for all benefits provided by any long term disability programs of the Company in effect at the time of such termination. 13. Termination Notice and Procedure. Any Covered Termination by the Company or the Executive (other than a termination of the Executive's employment that is a -27- Covered Termination by virtue of Subsection 2(b) hereof) shall be communicated by a written notice of termination ("Notice of Termination") to the Executive, if such Notice is given by the Company, and to the Company, if such Notice is given by the Executive, all in accordance with the following procedures and those set forth in Section 23 hereof: (a) If such termination is for disability, Cause or Good Reason, the Notice of Termination shall indicate in reasonable detail the facts and circumstances alleged to provide a basis for such termination. (b) Any Notice of Termination by the Company shall have been approved, prior to the giving thereof to the Executive, by a resolution duly adopted by a majority of the directors of the Company (or any successor corporation) then in office. (c) If the Notice is given by the Executive for Good Reason, the Executive may cease performing his duties hereunder on or after the date fifteen days after the delivery of Notice of Termination and shall in any event cease employment on the Termination Date. If the Notice is given by the Company, then the Executive may cease performing his duties hereunder on the date of receipt of the Notice of Termination, subject to the Executive's rights hereunder. (d) The Executive shall have thirty days, or such longer period as the Company may determine to be appropriate, to cure any conduct or act, if curable, alleged to provide grounds for termination of the Executive's employment for Cause under this Agreement pursuant to Subsection 1(d) (iii) hereof. (e) The recipient of any Notice of Termination shall personally deliver or mail in accordance with Section 23 hereof written notice of any dispute relating to such Notice of Termination to the party giving such Notice within fifteen days after receipt thereof; provided, -28- however, that if the Executive's conduct or act alleged to provide grounds for termination by the Company for Cause is curable, then such period shall be thirty days. After the expiration of such period, the contents of the Notice of Termination shall become final and not subject to dispute. 14. Further Obligations of the Executive. (a) Competition. The Executive agrees that, in the event of any Covered Termination where the Executive is entitled to Accrued Benefits and the Termination Payment, the Executive shall not, for a period expiring one year after the Termination Date, without the prior written approval of the Company's Board of Directors, participate in the management of, be employed by or own any business enterprise at a location within the United States that engages in substantial competition with the Company or its subsidiaries, where such enterprise's revenues from any competitive activities amount to 10% or more of such enterprise's net revenues and sales for its most recently completed fiscal year; provided, however, that nothing in this Subsection 14(a) shall prohibit the Executive from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor. (b) Confidentiality. During the Executive's employment by the Company and for a period of five (5) years thereafter, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company (including that of the Employer), except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by -29- persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 15. Expenses and Interest. If, after a Change in Control of the Company, (i) a dispute arises with respect to the enforcement of the Executive's rights under this Agreement or (ii) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, in either case so long as, and to the extent that, the Executive prevails in such proceeding, the Executive shall recover from the Company the reasonable attorneys' fees and necessary costs and disbursements incurred as a result of the dispute, legal or arbitration proceeding as to which the Executive has prevailed ("Expenses"), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Firstar Bank Milwaukee, N.A., Milwaukee, Wisconsin, from time to time at its prime or base lending rate from the date that payments to him or her should have been made under this Agreement. Any dispute as to the reasonableness of the Expenses incurred, or the extent to which the Executive has prevailed, shall be resolved by the presiding officer (arbitrator or judge) in the forum in which the substantive issues are finally resolved. 16. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or -30- other right which the Company may have against him or anyone else. Except as provided in Section 15 of this Agreement, all amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever. 17. Successors. (a) If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a "Sale of Business"), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such agreement prior to the effective date of such Sale of Business shall be a breach of this Agreement constituting "Good Reason" hereunder, except that for purposes of implementing the foregoing the date upon which such Sale of Business becomes effective shall be deemed the Termination Date. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, "Company" shall thereafter mean such Person which executes and delivers the agreement provided for in this Section 17 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his or her discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company and the Company (as so -31- defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Subsection 17(a), this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under Sections 7, 8, 9, 10, 11, 12 and 15 hereof if the Executive had lived shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Employer, as such terms are in effect on the date of the Change in Control of the Company, that expressly govern benefits under such plan in the event of the Executive's death. 18. Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 19. Contents of Agreement; Waiver of Rights; Amendment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede in all respects, and the Executive hereby waives all rights under, any prior or other agreement or understanding between the parties with respect to such subject matter, including, but not limited to the [previous Key Executive Employment and Severance Agreement dated as of _______ between Company and the Executive.] This Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive. -32- 20. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of the National Tax Counsel if any question as to the amount or requirement of any such withholding shall arise. 21. Certain Rules of Construction. No party shall be considered as being responsible for the drafting of this Agreement for the purpose of applying any rule construing ambiguities against the drafter or otherwise. No draft of this Agreement shall be taken into account in construing this Agreement. Any provision of this Agreement which requires an agreement in writing shall be deemed to require that the writing in question be signed by the Executive and an authorized representative of the Company. 22. Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Wisconsin. Any dispute arising out of this Agreement shall, at the Executive's election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be Madison, Wisconsin or, at the Executive's election, if the Executive is not then residing or working in the Madison, Wisconsin metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either Madison, Wisconsin or in the judicial district encompassing that city in the United States among the thirty cities having the largest -33- population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive's residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices. 23. Notice. Notices given pursuant to this Agreement shall be in writing and, except as otherwise provided by Subsection 13(d) hereof, shall be deemed given when actually received by the Executive or actually received by the Company's Corporate Secretary or any officer of the Company other than the Executive. If mailed, such notices shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to Interstate Energy Corporation (d/b/a Alliant Energy Corporation), Attention: Corporate Secretary (or President, if the Executive is then Corporate Secretary), 222 West Washington Avenue, P.O. Box 2568, Madison, Wisconsin 53701-2568, or if to the Executive, at the address set forth below the Executive's signature to this Agreement, or to such other address as the party to be notified shall have theretofore given to the other party in writing. 24. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. -34- 25. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. INTERSTATE ENERGY CORPORATION By: Its: Attest: Its: EXECUTIVE: (SEAL) Address: EX-10.4 5 KEESA Exhibit 10.4 KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT, made and entered into as of the ______ day of _________, ____ by and between Interstate Energy Corporation (d/b/a Alliant Energy Corporation), a Wisconsin corporation (hereinafter referred to as the "Company"), and [Executive Name] (hereinafter referred to as "Executive"). W I T N E S S E T H WHEREAS, the Executive is employed by the Company and/or a subsidiary of the Company (hereinafter referred to collectively as the "Employer") in a key executive capacity and the Executive's services are valuable to the conduct of the business of the Company; WHEREAS, the Company desires to continue to attract and retain dedicated and skilled management employees in a period of industry consolidation, consistent with achieving the best possible value for its shareowners in any change in control of the Company; WHEREAS, the Company recognizes that circumstances may arise in which a change in control of the Company occurs, through acquisition or otherwise, thereby causing a potential conflict of interest between the Company's needs for the Executive to remain focused on the Company's business and for the necessary continuity in management prior to and following a change in control, and the Executive's reasonable personal concerns regarding future employment with the Employer and economic protection in the event of loss of employment as a consequence of a change in control; WHEREAS, the Company and the Executive are desirous that any proposal for a change in control or acquisition of the Company will be considered by the Executive objectively and with reference only to the best interests of the Company and its shareowners; WHEREAS, the Executive will be in a better position to consider the Company's best interests if the Executive is afforded reasonable economic security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition; WHEREAS, the Executive possesses intimate knowledge of the business and affairs of the Company and has acquired certain confidential information and data with respect to the Company; and WHEREAS, the Company desires to insure, insofar as possible, that it will continue to have the benefit of the Executive's services and to protect its confidential information and goodwill. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows: 1. Definitions. (a) Act. For purposes of this Agreement, the term "Act" means the Securities Exchange Act of 1934, as amended. (b) Affiliate and Associate. For purposes of this Agreement, the terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Act. -2- (c) Beneficial Owner. For purposes of this Agreement, a Person shall be deemed to be the "Beneficial Owner" of any securities: (i) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (A) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase, or (B) securities issuable upon exercise of Rights issued pursuant to the terms of the Company's Rights Agreement, dated as of January 20, 1999, between Interstate Energy Corporation and Firstar Bank Milwaukee, N.A., as amended from time to time (or any successor to such Rights Agreement), at any time before the issuance of such securities; (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" of (as determined pursuant to Rule l3d-3 of the General Rules and Regulations under the Act), including pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this subparagraph (ii) as a result of an agreement, -3- arrangement or understanding to vote such security if the agreement, arrangement or understanding: (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Act and (B) is not also then reportable on a Schedule l3D under the Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Subsection 1(c) (ii) above) or disposing of any voting securities of the Company. (d) Cause. "Cause" for termination by the Employer of the Executive's employment in connection with a Change in Control of the Company shall, for purposes of this Agreement, be limited to (i) the engaging by the Executive in intentional conduct not taken in good faith which has caused demonstrable and serious financial injury to the Employer, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative; (ii) conviction of a felony (as evidenced by binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion of all rights of appeal) which substantially impairs the Executive's ability to perform his duties or responsibilities; and (iii) continuing willful and unreasonable refusal by the -4- Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent). (e) Change in Control of the Company. A "Change in Control of the Company" shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred: (i) any Person (other than (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under any employee benefit plan of the Company or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities or (D) a corporation owned, directly or indirectly, by the shareowners of the Company in substantially the same proportions as their ownership of stock in the Company ("Excluded Persons")) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: (A) individuals who, on November 18, 1998, constituted the Board and (B) any new director (other than a director whose initial assumption of -5- office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Act) whose appointment or election by the Board or nomination for election by the Company's shareowners was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on November 18, 1998, or whose appointment, election or nomination for election was previously so approved (collectively the "Continuing Directors"); provided, however, that individuals who are appointed to the Board pursuant to or in accordance with the terms of an agreement relating to a merger, consolidation, or share exchange involving the Company (or any direct or indirect subsidiary of the Company) shall not be Continuing Directors for purposes of this Agreement until after such individuals are first nominated for election by a vote of at least two-thirds (2/3) of the then Continuing Directors and are thereafter elected as directors by the shareowners of the Company at a meeting of shareowners held following consummation of such merger, consolidation, or share exchange; and, provided further, that in the event the failure of any such persons appointed to the Board to be Continuing Directors results in a Change in Control of the Company, the subsequent qualification of such persons as Continuing Directors shall not alter the fact that a Change in Control of the Company occurred; or -6- (iii) the shareowners of the Company approve a merger, consolidation or share exchange of the Company with any other corporation or approve the issuance of voting securities of the Company in connection with a merger, consolidation or share exchange of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (A) a merger, consolidation or share exchange which would result in the voting securities of the Company outstanding immediately prior to such merger, consolidation or share exchange continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger, consolidation or share exchange, or (B) a merger, consolidation or share exchange effected to implement a recapitalization of the Company (or similar transaction) in which no Person (other than an Excluded Person) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates after November 18, 1998, pursuant to express authorization by the Board that refers to this exception) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding voting securities; or -7- (iv) the shareowners of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity at least 75% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control of the Company" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to own, directly or indirectly, in the same proportions as their ownership in the Company, an entity that owns all or substantially all of the assets or voting securities of the Company immediately following such transaction or series of transactions. (f) Code. For purposes of this Agreement, the term "Code" means the Internal Revenue Code of 1986, including any amendments thereto or successor tax codes thereof. (g) Covered Termination. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Covered Termination" means any termination of the Executive's employment during the Employment Period where the Notice of Termination is delivered on or the Termination Date is any date prior to the end of the Employment Period. (h) Employment Period. Subject to Subsection 2(b) hereof, for purposes of this Agreement, the term "Employment Period" means a period commencing on the -8- date of a Change in Control of the Company, and ending at 11:59 p.m. Central Time on the earlier of the second anniversary of such date or the Executive's Normal Retirement Date. (i) Good Reason. For purposes of this Agreement, the Executive shall have "Good Reason" for termination of employment in connection with a Change in Control of the Company in the event of: (i) any breach of this Agreement by the Employer, including specifically any breach by the Employer of the agreements contained in Sections 4, 5, and 6 hereof, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; (ii) any reduction in the Executive's base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits, in each case relative to those most favorable to the Executive in effect at any time during the 180-day period prior to the Change in Control or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period; (iii) the removal of the Executive from, or any failure to reelect or reappoint the Executive to, any of the positions held with the Employer on the date of the Change in Control of the Company or any other positions with the Employer to which the Executive shall thereafter be elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to the termination by the Employer of -9- the Executive's employment for Cause or by reason of disability pursuant to Section 12 hereof; (iv) a good faith determination by the Executive that there has been a significant adverse change, without the Executive's written consent, in the Executive's working conditions or status with the Employer relative to the most favorable working conditions or status in effect during the 180-day period prior to the Change in Control of the Company, or, to the extent more favorable to the Executive, those in effect at any time during the Employment Period, including but not limited to (A) a significant change in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or (B) a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements but excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that the Employer remedies promptly after receipt of notice thereof given by the Executive; or (v) failure by the Company to obtain the Agreement referred to in Subsection 17(a) hereof as provided therein. (j) Normal Retirement Date. For purposes of this Agreement, the term "Normal Retirement Date" means "Normal Retirement Date" as defined in the primary qualified defined benefit pension plan applicable to the Executive, or any successor plan, as in effect on the date of the Change in Control of the Company. -10- (k) Person. For purposes of this Agreement, the term "Person" shall mean any individual, firm, partnership, corporation or other entity, including any successor (by merger or otherwise) of such entity, or a group of any of the foregoing acting in concert. (l) Termination Date. For purposes of this Agreement, except as otherwise provided in Subsection 2(b), Subsection 10(b), and Subsection 17(a) hereof, the term "Termination Date" means (i) if the Executive's employment is terminated by the Executive's death, the date of death; (ii) if the Executive's employment is terminated by reason of voluntary early retirement, as agreed in writing by the Employer and the Executive, the date of such early retirement which is set forth in such written agreement; (iii) if the Executive's employment is terminated for purposes of this Agreement by reason of disability pursuant to Section 12 hereof, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period; (iv) if the Executive's employment is terminated by the Executive voluntarily (other than for Good Reason), the date the Notice of Termination is given; and (v) if the Executive's employment is terminated by the Employer (other than by reason of disability pursuant to Section 12 hereof) or by the Executive for Good Reason, the earlier of thirty days after the Notice of Termination is given or one day prior to the end of the Employment Period. Notwithstanding the foregoing, (1) If termination is for Cause pursuant to Subsection 1(d)(iii) of this Agreement and if the Executive has cured the conduct constituting such Cause as described by the Employer in its Notice of Termination within such thirty-day or shorter period, then the Executive's employment hereunder shall continue as if the Employer had not delivered its Notice of Termination. -11- (2) If the Executive shall in good faith give a Notice of Termination for Good Reason and the Employer notifies the Executive that a dispute exists concerning the termination within the fifteen-day period following receipt thereof, then the Executive may elect to continue his or her employment during such dispute and the Termination Date shall be determined under this paragraph. If the Executive so elects and it is thereafter determined that Good Reason did exist, the Termination Date shall be the earliest of (i) the date on which the dispute is finally determined, either (x) by mutual written agreement of the parties or (y) in accordance with Section 22 hereof, (ii) the date of the Executive's death or (iii) one day prior to the end of the Employment Period. If the Executive so elects and it is thereafter determined that Good Reason did not exist, then the employment of the Executive hereunder shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason and there shall be no Termination Date arising out of such Notice. In either case, this Agreement continues, until the Termination Date, if any, as if the Executive had not delivered the Notice of Termination except that, if it is finally determined that Good Reason did exist, the Executive shall in no case be denied the benefits described in Sections 8(b) and 9 hereof (including a Termination Payment) based on events occurring after the Executive delivered his Notice of Termination. -12- (3) If an opinion is required to be delivered pursuant to Subsection 9(b)(ii) hereof and such opinion shall not have been delivered, the Termination Date shall be the earlier of the date on which such opinion is delivered or one day prior to the end of the Employment Period. (4) Except as provided in Subsection 1(l)(2) above, if the party receiving the Notice of Termination notifies the other party that a dispute exists concerning the termination within the appropriate period following receipt thereof and it is finally determined that the reason asserted in such Notice of Termination did not exist, then (1) if such Notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his employment and the Termination Date shall be the earlier of the date fifteen days after the Notice of Termination is given or one day prior to the end of the Employment Period and (2) if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, disability or Cause. 2. Termination or Cancellation Prior to Change in Control. (a) Subject to Subsection 2(b) hereof, the Employer and the Executive shall each retain the right to terminate the employment of the Executive at any time prior to a Change in Control of the Company. Subject to Subsection 2(b) hereof, in the event the Executive's employment is terminated prior to a Change in Control of the Company, this Agreement shall be terminated and cancelled and of no further force and effect, and any and all rights and obligations of the parties hereunder shall cease. -13- (b) Anything in this Agreement to the contrary notwithstanding, if a Change in Control of the Company occurs and if the Executive's employment with the Employer is terminated (other than a termination due to the Executive's death or as a result of the Executive's disability) during the period of 180 days prior to the date on which the Change in Control of the Company occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control of the Company or (ii) otherwise arose in connection with or in anticipation of a Change in Control of the Company, then for all purposes of this Agreement such termination of employment shall be deemed a "Covered Termination," "Notice of Termination" shall be deemed to have been given, and the "Employment Period" shall be deemed to have begun on the date of such termination which shall be deemed to be the "Termination Date" and the date of the Change of Control of the Company for purposes of this Agreement. 3. Employment Period. If a Change in Control of the Company occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period, and the Executive will remain in the employ of the Employer in accordance with and subject to the terms and provisions of this Agreement. Any termination of the Executive's employment during the Employment Period, whether by the Company or the Employer, shall be deemed a termination by the Company for purposes of this Agreement. 4. Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of the Change in Control of the Company or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive's best efforts and all of the Executive's business time, attention and -14- skill to the business and affairs of the Employer, as such business and affairs now exist and as they may hereafter be conducted. The services which are to be performed by the Executive hereunder are to be rendered in the same metropolitan area in which the Executive was employed at the date of such Change in Control of the Company, or in such other place or places as shall be mutually agreed upon in writing by the Executive and the Employer from time to time. Without the Executive's consent, the Executive shall not be required to be absent from such metropolitan area more than 45 days in any fiscal year of the Company. 5. Compensation. During the Employment Period, the Executive shall be compensated as follows: (a) The Executive shall receive, at reasonable intervals (but not less often than monthly) and in accordance with such standard policies as may be in effect immediately prior to the Change in Control of the Company, an annual base salary in cash equivalent of not less than twelve times the Executive's highest monthly base salary for the twelve-month period immediately preceding the month in which the Change in Control of the Company occurs or, if higher, annual base salary at the rate in effect immediately prior to the Change in Control of the Company (which base salary shall, unless otherwise agreed in writing by the Executive, include the current receipt by the Executive of any amounts which, prior to the Change in Control of the Company, the Executive had elected to defer, whether such compensation is deferred under Section 401(k) of the Code or otherwise), subject to adjustment as hereinafter provided in Section 6 (such salary amount as adjusted upward from time to time is hereafter referred to as the "Annual Base Salary"). (b) The Executive shall receive fringe benefits at least equal in value to the highest value of such benefits provided for the Executive at any time during the 180-day period -15- immediately prior to the Change in Control of the Company or, if more favorable to the Executive, those provided generally at any time during the Employment Period to any executives of the Employer of comparable status and position to the Executive; and shall be reimbursed, at such intervals and in accordance with such standard policies that are most favorable to the Executive that were in effect at any time during the 180-day period immediately prior to the Change in Control of the Company, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses. (c) The Executive and/or the Executive's family, as the case may be, shall be included, to the extent eligible thereunder (which eligibility shall not be conditioned on the Executive's salary grade or on any other requirement which excludes persons of comparable status to the Executive unless such exclusion was in effect for such plan or an equivalent plan at any time during the 180-day period immediately prior to the Change in Control of the Company), in any and all plans providing benefits for the Employer's salaried employees in general, including but not limited to group life insurance, hospitalization, medical, dental, profit sharing and stock bonus plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans in which the Executive is included be less than the aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(c) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company and (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate level of benefits under plans of the type referred to in this Subsection 5(c) provided at any time after the Change in Control of the Company to any executive of the Employer of comparable status and position to the Executive. -16- (d) The Executive shall annually be entitled to not less than the amount of paid vacation and not fewer than the highest number of paid holidays to which the Executive was entitled annually at any time during the 180-day period immediately prior to the Change in Control of the Company or such greater amount of paid vacation and number of paid holidays as may be made available annually to other executives of the Employer of comparable status and position to the Executive at any time during the Employment Period. (e) The Executive shall be included in all plans providing additional benefits to executives of the Employer of comparable status and position to the Executive, including but not limited to deferred compensation, split-dollar life insurance, supplemental retirement, stock option, stock appreciation, stock bonus and similar or comparable plans; provided, that, (i) in no event shall the aggregate level of benefits under such plans be less than the highest aggregate level of benefits under plans of the Employer of the type referred to in this Subsection 5(e) in which the Executive was participating at any time during the 180-day period immediately prior to the Change in Control of the Company; (ii) in no event shall the aggregate level of benefits under such plans be less than the aggregate levels of benefits under plans of the type referred to in this Subsection 5(e) provided at any time after the Change in Control of the Company to any executive of the Employer comparable in status and position to the Executive; and (iii) the Employer's obligation to include the Executive in bonus or incentive compensation plans shall be determined by Subsection 5(f) hereof. (f) To assure that the Executive will have an opportunity to earn incentive compensation after a Change in Control of the Company, the Executive shall be included in a bonus plan of the Employer which shall satisfy the standards described below (such plan, the "Bonus Plan"). Bonuses under the Bonus Plan shall be payable with respect to achieving such -17- financial or other goals reasonably related to the business of the Employer as the Employer shall establish (the "Goals"), all of which Goals shall be attainable, prior to the end of the Employment Period, with approximately the same degree of probability as the most attainable goals under the Employer's bonus plan or plans as in effect at any time during the 180-day period immediately prior to the Change in Control of the Company (whether one or more, the "Company Bonus Plan") and in view of the Employer's existing and projected financial and business circumstances applicable at the time. The amount of the bonus (the "Bonus Amount") that the Executive is eligible to earn under the Bonus Plan shall be no less than the amount of the Executive's maximum award provided in such Company Bonus Plan (such bonus amount herein referred to as the "Targeted Bonus"), and in the event the Goals are not achieved such that the entire Targeted Bonus is not payable, the Bonus Plan shall provide for a payment of a Bonus Amount equal to a portion of the Targeted Bonus reasonably related to that portion of the Goals which were achieved. Payment of the Bonus Amount shall not be affected by any circumstance occurring subsequent to the end of the Employment Period, including termination of the Executive's employment. 6. Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Company (or an appropriate committee thereof) will consider and appraise, at least annually, the contributions of the Executive to the Company, and in accordance with the Company's practice prior to the Change in Control of the Company, due consideration shall be given to the upward adjustment of the Executive's Annual Base Salary, at least annually, (i) commensurate with increases generally given to other executives of the Company of comparable status and position to the Executive, and (ii) as the scope of the Company's operations or the Executive's duties expand. -18- 7. Termination For Cause or Without Good Reason. If there is a Covered Termination for Cause or due to the Executive's voluntarily terminating his or her employment other than for Good Reason (any such terminations to be subject to the procedures set forth in Section 13 hereof), then the Executive shall be entitled to receive only Accrued Benefits pursuant to Subsection 9(a) hereof. 8. Termination Giving Rise to a Termination Payment. (a) If there is a Covered Termination by the Executive for Good Reason, or by the Company other than by reason of (i) death, (ii) disability pursuant to Section 12 hereof, or (iii) Cause (any such terminations to be subject to the procedures set forth in Section 13 hereof), then the Executive shall be entitled to receive, and the Company shall promptly pay, Accrued Benefits and, in lieu of further base salary for periods following the Termination Date, as liquidated damages and additional severance pay and in consideration of the covenant of the Executive set forth in Subsection 14(a) hereof, the Termination Payment pursuant to Subsection 9(b) hereof. (b) If there is a Covered Termination and the Executive is entitled to Accrued Benefits and the Termination Payment, then the Company shall provide to the Executive the following additional benefits: (i) The Executive shall receive, at the expense of the Company, outplacement services, on an individualized basis at a level of service commensurate with the Executive's status with the Company immediately prior to the date of the Change in Control of the Company (or, if higher, immediately prior to the termination of the Executive's employment), provided by a nationally recognized executive placement firm selected by the Company; provided that the cost to the Company of such services shall not exceed 10% of the Executive's Annual Base Salary. -19- (ii) Until the earlier of the end of the Employment Period or such time as the Executive has obtained new employment and is covered by benefits which in the aggregate are at least equal in value to the following benefits, the Executive shall continue to be covered, at the expense of the Company, by the same or equivalent life insurance, hospitalization, medical and dental coverage as was required hereunder with respect to the Executive immediately prior to the date the Notice of Termination is given. (iii) The Company shall cause the Executive to be fully and immediately vested in his accrued benefit under any supplemental executive retirement plan of the Employer providing benefits for the Executive (the "SERP") and in any defined contribution retirement plan of the Employer. In addition, the Company shall cause the Executive to be deemed to have satisfied any minimum years of service requirement under the SERP for subsidized early retirement benefits regardless of the Executive's age and service at the Termination Date; provided, however, that SERP benefits will be based on service to date with no additional credit for service or age beyond such Termination Date. (iv) The Company shall cause all restrictions on restricted stock awards made to the Executive to lapse such that the Executive is fully and immediately vested in his or her restricted stock. -20- (v) The Company shall cause all stock options granted to the Executive pursuant to the Company's stock option plan(s) to be fully vested. (vi) The Company shall cause all performance plan awards granted to the Executive pursuant to any long-term incentive plan maintained by the Company to be paid out at target, as if all performance requirements had been satisfied, on a pro rata basis based on the completed portion of each award cycle; provided, however, no payment of plan awards will occur from any award cycle that has been in effect less than six (6) months. 9. Payments Upon Termination. (a) Accrued Benefits. For purposes of this Agreement, the Executive's "Accrued Benefits" shall include the following amounts, payable as described herein: (i) all base salary for the time period ending with the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer for the time period ending with the Termination Date; (iii) any and all other cash earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plan then in effect; (iv) a lump sum payment of the bonus or incentive compensation otherwise payable to the Executive with respect to the year in which termination occurs under all bonus or incentive compensation plan or plans in which the Executive is a participant; and (v) all other payments and benefits to which the Executive (or in the event of the Executive's death, the Executive's surviving spouse or other beneficiary) may be entitled as compensatory fringe benefits or under the terms of any benefit plan -21- of the Employer, excluding severance payments under any Employer severance policy, practice or agreement in effect immediately prior to the Change in Control of the Company. Payment of Accrued Benefits shall be made promptly in accordance with the Company's prevailing practice with respect to Subsections (i) and (ii) or, with respect to Subsections (iii), (iv) and (v), pursuant to the terms of the benefit plan or practice establishing such benefits. (b) Termination Payment. (i) Subject to the limits set forth in Subsection 9(b)(ii) hereof, the Termination Payment shall be an amount equal to (A) the Executive's Annual Base Salary (determined as of the time of the Change in Control of the Company or, if higher, immediately prior to the date the Notice of Termination is given) plus (B) an amount equal to the greater of the Executive's target bonus for the year in which the Termination Date occurs or the bonus the Executive received in the year prior to the Change in Control of the Company (the aggregate amount set forth in (A) and (B) hereof shall hereafter be referred to as "Annual Cash Compensation"), times (C) the number of years or fractional portion thereof remaining in the Employment Period determined as of the Termination Date; provided, however, that such amount shall not be less than the greater of (i) the amount of the Executive's Annual Cash Compensation or (ii) the severance benefits to which the Executive would have been entitled under the Company's severance policies and practices in effect immediately prior to the Change in Control of the Company. The Termination Payment shall be paid to the Executive in cash equivalent ten (10) business days after the -22- Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor, and the Executive shall not be required to mitigate the amount of the Termination Payment by securing other employment or otherwise, nor will such Termination Payment be reduced by reason of the Executive securing other employment or for any other reason. The Termination Payment shall be in lieu of, and acceptance by the Executive of the Termination Payment shall constitute the Executive's release of any rights of Executive to, any other severance payments under any Company severance policy, practice or agreement. The Company shall bear up to $10,000 in the aggregate of fees and expenses of consultants and/or legal or accounting advisors engaged by the Executive to advise the Executive as to matters relating to the computation of benefits due and payable under this Subsection 9(b). (ii) Notwithstanding any other provision of this Agreement, if any portion of the Termination Payment or any other payment under this Agreement, or under any other agreement with or plan of the Employer (in the aggregate, "Total Payments"), would constitute an "excess parachute payment," then the Total Payments to be made to the Executive shall be reduced such that the value of the aggregate Total Payments that the Executive is entitled to receive shall be One Dollar ($1) less than the maximum amount which the Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code (or any successor provision) or which the Company may pay without loss of deduction under -23- Section 280G(a) of the Code (or any successor provision). For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code (or any successor provision), and such "parachute payments" shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b) (2) of the Code (or any successor provision). Within forty days following a Covered Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code (or any successor provision), the Executive and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel ("National Tax Counsel") selected by the Company's independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (A) the amount of the Base Period Income, (B) the amount and present value of Total Payments and (C) the amount and present value of any excess parachute payments determined without regard to the limitations of this Subsection 9(b)(ii). As used in this Subsection 9(b)(ii), the term "Base Period Income" means an amount equal to the Executive's "annualized includable compensation for the base period" as defined in Section 280G(d)(l) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined -24- by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel opinion determines that there would be an excess parachute payment, the Termination Payment hereunder or any other payment or benefit determined by such counsel to be includable in Total Payments shall be reduced or eliminated as specified by the Executive in writing delivered to the Company within thirty days of his receipt of such opinion or, if the Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the bases of calculations set forth in such opinion there will be no excess parachute payment. If such National Tax Counsel so requests in connection with the opinion required by this Section, the Executive and the Company shall obtain, at the Company's expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. (iii) If, notwithstanding the provisions of Subsection (ii) of this Subsection 9(b) it is ultimately determined by a court or pursuant to a -25- final determination by the Internal Revenue Service that any portion of Total Payments is subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or any successor provision), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive after deduction of any Excise Tax and any interest charges or penalties in respect of the imposition of such Excise Tax (but not any federal, state or local income tax) on the Total Payments, and any federal, state and local income tax and Excise Tax upon the payment provided for by this Subsection (iii), shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of the Executive's domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (iv) The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Subsection 9(b), except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm. -26- 10. Death. (a) Except as provided in Section 10(b) hereof, in the event of a Covered Termination due to the Executive's death, the Executive's estate, heirs and beneficiaries shall receive all the Executive's Accrued Benefits through the Termination Date. (b) In the event the Executive dies after a Notice of Termination is given (i) by the Company or (ii) by the Executive for Good Reason, the Executive's estate, heirs and beneficiaries shall be entitled to the benefits described in Subsection 10(a) hereof and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive lived. For purposes of this Subsection 10(b), the Termination Date shall be the earlier of thirty days following the giving of the Notice of Termination, subject to extension pursuant to Subsection 1(l) hereof, or one day prior to the end of the Employment Period. 11. Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the early retirement of the Executive from the Employer, or the Executive shall otherwise give notice that he is voluntarily choosing to retire early from the Employer, the Executive shall receive Accrued Benefits through the Termination Date; provided, that if the Executive's employment is terminated by the Executive for Good Reason or by the Company other than by reason of death, disability or Cause and the Executive also, in connection with such termination, elects voluntary early retirement, the Executive shall also be entitled to receive a Termination Payment pursuant to Subsection 8(a) hereof. 12. Termination for Disability. If, during the Employment Period, as a result of the Executive's disability due to physical or mental illness or injury (regardless of whether such illness or injury is job-related), the Executive shall have been absent from the Executive's duties hereunder on a full-time basis for a period of six consecutive months and, within thirty days after -27- the Company notifies the Executive in writing that it intends to terminate the Executive's employment (which notice shall not constitute the Notice of Termination contemplated below), the Executive shall not have returned to the performance of the Executive's duties hereunder on a full-time basis, the Company may terminate the Executive's employment for purposes of this Agreement pursuant to a Notice of Termination given in accordance with Section 13 hereof. If the Executive's employment is terminated on account of the Executive's disability in accordance with this Section, the Executive shall receive Accrued Benefits in accordance with Subsection 9(a) hereof and shall remain eligible for all benefits provided by any long term disability programs of the Company in effect at the time of such termination. 13. Termination Notice and Procedure. Any Covered Termination by the Company or the Executive (other than a termination of the Executive's employment that is a Covered Termination by virtue of Subsection 2(b) hereof) shall be communicated by a written notice of termination ("Notice of Termination") to the Executive, if such Notice is given by the Company, and to the Company, if such Notice is given by the Executive, all in accordance with the following procedures and those set forth in Section 23 hereof: (a) If such termination is for disability, Cause or Good Reason, the Notice of Termination shall indicate in reasonable detail the facts and circumstances alleged to provide a basis for such termination. (b) Any Notice of Termination by the Company shall have been approved, prior to the giving thereof to the Executive, by a resolution duly adopted by a majority of the directors of the Company (or any successor corporation) then in office. (c) If the Notice is given by the Executive for Good Reason, the Executive may cease performing his duties hereunder on or after the date fifteen days after the -28- delivery of Notice of Termination and shall in any event cease employment on the Termination Date. If the Notice is given by the Company, then the Executive may cease performing his duties hereunder on the date of receipt of the Notice of Termination, subject to the Executive's rights hereunder. (d) The Executive shall have thirty days, or such longer period as the Company may determine to be appropriate, to cure any conduct or act, if curable, alleged to provide grounds for termination of the Executive's employment for Cause under this Agreement pursuant to Subsection 1(d) (iii) hereof. (e) The recipient of any Notice of Termination shall personally deliver or mail in accordance with Section 23 hereof written notice of any dispute relating to such Notice of Termination to the party giving such Notice within fifteen days after receipt thereof; provided, however, that if the Executive's conduct or act alleged to provide grounds for termination by the Company for Cause is curable, then such period shall be thirty days. After the expiration of such period, the contents of the Notice of Termination shall become final and not subject to dispute. 14. Further Obligations of the Executive. (a) Competition. The Executive agrees that, in the event of any Covered Termination where the Executive is entitled to Accrued Benefits and the Termination Payment, the Executive shall not, for a period expiring one year after the Termination Date, without the prior written approval of the Company's Board of Directors, participate in the management of, be employed by or own any business enterprise at a location within the United States that engages in substantial competition with the Company or its subsidiaries, where such enterprise's revenues from any competitive activities amount to 10% or more of such enterprise's net revenues and sales for its most recently completed fiscal year; provided, however, that nothing -29- in this Subsection 14(a) shall prohibit the Executive from owning stock or other securities of a competitor amounting to less than five percent of the outstanding capital stock of such competitor. (b) Confidentiality. During the Executive's employment by the Company and for a period of five (5) years thereafter, the Executive shall hold in confidence and not directly or indirectly disclose or use or copy or make lists of any confidential information or proprietary data of the Company (including that of the Employer), except to the extent authorized in writing by the Board of Directors of the Company or required by any court or administrative agency, other than to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of duties as an executive of the Company. Confidential information shall not include any information known generally to the public or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that of the Company. All records, files, documents and materials, or copies thereof, relating to the business of the Company which the Executive shall prepare, or use, or come into contact with, shall be and remain the sole property of the Company and shall be promptly returned to the Company upon termination of employment with the Company. 15. Expenses and Interest. If, after a Change in Control of the Company, (i) a dispute arises with respect to the enforcement of the Executive's rights under this Agreement or (ii) any legal or arbitration proceeding shall be brought to enforce or interpret any provision contained herein or to recover damages for breach hereof, in either case so long as, and to the extent that, the Executive prevails in such proceeding, the Executive shall recover from the Company the reasonable attorneys' fees and necessary costs and disbursements incurred as a result of the dispute, legal or arbitration proceeding as to which the Executive has prevailed -30- ("Expenses"), and prejudgment interest on any money judgment or arbitration award obtained by the Executive calculated at the rate of interest announced by Firstar Bank Milwaukee, N. A., Milwaukee, Wisconsin, from time to time at its prime or base lending rate from the date that payments to him or her should have been made under this Agreement. Any dispute as to the reasonableness of the Expenses incurred, or the extent to which the Executive has prevailed, shall be resolved by the presiding officer (arbitrator or judge) in the forum in which the substantive issues are finally resolved. 16. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to pay the Executive the amounts and to make the benefit and other arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. Except as provided in Section 15 of this Agreement, all amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final, and the Company will not seek to recover all or any part of such payment from the Executive, or from whomsoever may be entitled thereto, for any reason whatsoever. 17. Successors. (a) If the Company sells, assigns or transfers all or substantially all of its business and assets to any Person or if the Company merges into or consolidates or otherwise combines (where the Company does not survive such combination) with any Person (any such event, a "Sale of Business"), then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to such Person, and the Company shall cause such Person, by written agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform from and after the date of such assignment all -31- of the terms, conditions and provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such agreement prior to the effective date of such Sale of Business shall be a breach of this Agreement constituting "Good Reason" hereunder, except that for purposes of implementing the foregoing the date upon which such Sale of Business becomes effective shall be deemed the Termination Date. In case of such assignment by the Company and of assumption and agreement by such Person, as used in this Agreement, "Company" shall thereafter mean such Person which executes and delivers the agreement provided for in this Section 17 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law, and this Agreement shall inure to the benefit of, and be enforceable by, such Person. The Executive shall, in his or her discretion, be entitled to proceed against any or all of such Persons, any Person which theretofore was such a successor to the Company and the Company (as so defined) in any action to enforce any rights of the Executive hereunder. Except as provided in this Subsection, this Agreement shall not be assignable by the Company. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. (b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive under Sections 7, 8, 9, 10, 11, 12 and 15 hereof if the Executive had lived shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives; provided, however, that the foregoing shall not be construed to modify any terms of any benefit plan of the Employer, as such terms are in effect on the date of the Change in Control of the Company, that expressly govern benefits under such plan in the event of the Executive's death. -32- 18. Severability. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 19. Contents of Agreement; Waiver of Rights; Amendment. This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and shall supersede in all respects, and the Executive hereby waives all rights under, any prior or other agreement or understanding between the parties with respect to such subject matter, including, but not limited to the [previous Key Executive Employment and Severance Agreement dated as of _______ between Company and the Executive.] This Agreement may not be amended or modified at any time except by written instrument executed by the Company and the Executive. 20. Withholding. The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold; provided, that the amount so withheld shall not exceed the minimum amount required to be withheld by law. The Company shall be entitled to rely on an opinion of the National Tax Counsel if any question as to the amount or requirement of any such withholding shall arise. 21. Certain Rules of Construction. No party shall be considered as being responsible for the drafting of this Agreement for the purpose of applying any rule construing ambiguities against the drafter or otherwise. No draft of this Agreement shall be taken into account in construing this Agreement. Any provision of this Agreement which requires an agreement in -33- writing shall be deemed to require that the writing in question be signed by the Executive and an authorized representative of the Company. 22. Governing Law; Resolution of Disputes. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Wisconsin. Any dispute arising out of this Agreement shall, at the Executive's election, be determined by arbitration under the rules of the American Arbitration Association then in effect (in which case both parties shall be bound by the arbitration award) or by litigation. Whether the dispute is to be settled by arbitration or litigation, the venue for the arbitration or litigation shall be Madison, Wisconsin or, at the Executive's election, if the Executive is not then residing or working in the Madison, Wisconsin metropolitan area, in the judicial district encompassing the city in which the Executive resides; provided, that, if the Executive is not then residing in the United States, the election of the Executive with respect to such venue shall be either Madison, Wisconsin or in the judicial district encompassing that city in the United States among the thirty cities having the largest population (as determined by the most recent United States Census data available at the Termination Date) which is closest to the Executive's residence. The parties consent to personal jurisdiction in each trial court in the selected venue having subject matter jurisdiction notwithstanding their residence or situs, and each party irrevocably consents to service of process in the manner provided hereunder for the giving of notices. 23. Notice. Notices given pursuant to this Agreement shall be in writing and, except as otherwise provided by Subsection 13(d) hereof, shall be deemed given when actually received by the Executive or actually received by the Company's Corporate Secretary or any officer of the Company other than the Executive. If mailed, such notices shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to -34- the Company, to Interstate Energy Corporation (d/b/a Alliant Energy Corporation), Attention: Corporate Secretary (or President, if the Executive is then Corporate Secretary), 222 West Washington Avenue, P.O. Box 2568, Madison, Wisconsin 53701-2568, or if to the Executive, at the address set forth below the Executive's signature to this Agreement, or to such other address as the party to be notified shall have theretofore given to the other party in writing. 24. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 25. Headings. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. -35- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. INTERSTATE ENERGY CORPORATION By: _______________________________ Its: __________________________ Attest: __________________________ Its: _____________________ EXECUTIVE: _______________________________(SEAL) Address: ___________________________ ___________________________ EX-10.5 6 EMPLOYMENT AGREEMENT Exhibit 10.5 EMPLOYMENT AGREEMENT THIS AGREEMENT by and between Interstate Energy Corporation, a Wisconsin corporation (the "Company"), and Erroll B. Davis, Jr. (the "Executive"), originally dated as of the 21st day of April, 1998, is amended and restated as of the 29th day of March, 1999. W I T N E S S E T H T H A T WHEREAS, the Company is party to an Agreement and Plan of Merger, as amended (the "Merger Agreement") , dated November 10, 1995, by and among the Company, IES Industries Inc., an Iowa corporation ("IES"), Interstate Power Company, a Delaware corporation ("Interstate Power"), WPLH Acquisition Co., a Wisconsin corporation and a wholly-owned subsidiary of the Company, and Interstate Power Company, a Wisconsin corporation and a wholly-owned subsidiary of Interstate; and WHEREAS, the parties to the Merger Agreement wish to provide for the orderly succession of management of the Company following the Effective Time (as defined in the Merger Agreement); and WHEREAS, the parties to the Merger Agreement further wish to provide for the employment by the Company of the Executive, and the Executive wishes to serve the Company and its subsidiaries, in the capacities and on the terms and conditions set forth in this Agreement, as amended and restated. NOW, THEREFORE, it is hereby agreed as follows: 1. Employment Period. The Company shall employ the Executive, and the Executive shall serve the Company, on the terms and conditions set forth in this Agreement, for an initial period (the "Initial Period") commencing at the Effective Time and ending on the date immediately preceding the fifth anniversary of the Effective Time. This Agreement thereafter will automatically renew for successive terms of one (1) year each, unless either party hereto has given sixty (60) days' advance written notice of its or his intent to allow the term of this Agreement to expire. The term during which the Executive is employed by the Company hereunder (including without limitation the Initial Period) is hereafter referred to as the "Employment Period." Upon the termination of the Employment Period the Executive will have the status of a retired senior executive officer of the Company and shall be entitled to all of the rights, privileges and benefits provided to such retired officers. 2. Position and Duties. (a) During the first two (2) years of the Initial Period, the Executive shall serve as President and Chief Executive Officer of the Company and thereafter, until the end of the Employment Period, the Executive shall serve as Chairman of the Board of Directors, President and Chief Executive Officer of the Company; in each case with such duties and responsibilities as are customarily assigned to such positions, and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board of Directors of the Company (the "Board"). The Executive also shall continue to serve as a member of the Board following the Effective Time, and the Board shall propose the Executive for re-election to the Board throughout the Employment Period. (b) In addition to the responsibilities designated in paragraph (a) of Section 2 above, during the three-year period following the Effective Time, the Executive shall be entitled to serve as the Chief Executive Officer of each entity which during such period is a subsidiary of the Company and the Company shall cause the Executive to be appointed or elected as the Chief Executive Officer of each such subsidiary. In his capacity as the Chief Executive Officer of said subsidiaries, the Executive shall have such duties and responsibilities as are customarily assigned to such position, and such other duties and responsibilities not inconsistent therewith as may from time to time be assigned to him by the Board of Directors of each such subsidiary. During the Employment Period, the Executive also shall serve as a member of the Board of Directors of each of the Company's subsidiaries and the Company shall cause the Executive to be appointed, elected or re-elected as such a director. (c) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote reasonable attention and time during normal business hours to the business and affairs of the Company and its affiliates and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's reasonable best efforts to carry out such responsibilities faithfully and efficiently. It shall not be considered a violation of the foregoing for the Executive to serve on corporate, industry, civic or charitable boards or committees, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company and its affiliates in accordance with this Agreement. (d) The Company's headquarters shall be located in Madison, Wisconsin and the Executive shall reside in the general area of Madison, Wisconsin. During the Employment Period, the Company also will provide the Executive with a furnished apartment in the Cedar Rapids, Iowa area. 3. Compensation. (a) Base Salary. The Executive's compensation during the Employment Period shall be determined by the Board upon the recommendation of the Compensation and Personnel Committee (or other appropriate committee) of the Board, subject to the next sentence and paragraph (b) of Section 3. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary") of not less than his aggregate annual base salary from the Company and its subsidiaries as in effect immediately before the Effective Time. The Annual Base Salary shall be payable in accordance with the Company's regular payroll practice for its senior executives, as in effect from time to time. During the Employment Period, the Annual Base Salary shall be reviewed for possible increase -2- at least annually. Any increase in the Annual Base Salary shall not limit or reduce any other obligation of the Company under this Agreement. The Annual Base Salary shall not be reduced after any such increase, and the term "Annual Base Salary" shall thereafter refer to the Annual Base Salary as so increased. (b) Incentive Compensation. During the Employment Period, the Executive shall continue to participate in short-term incentive compensation plans and long-term incentive compensation plans (the latter to consist of plans offering stock options, restricted stock and other long-term incentive compensation) offered by the Company and its present or future affiliates which shall provide him with the opportunity to earn, on a year-by-year basis, short-term and long-term incentive compensation (the "Incentive Compensation") at least equal to the amounts that he had the opportunity to earn immediately before the Effective Time, and such compensation shall be payable in accordance with standards (i.e., performance criteria, performance levels, etc.) which are no less favorable to the Executive than those applicable with respect to the Incentive Compensation payable to the Executive immediately before the Effective Time. (c) Other Benefits. (i) Retirement Plan; Supplemental Retirement Plan. During the Employment Period, the Executive shall participate in a retirement plan and/or supplemental retirement plan (the "Defined Benefit Arrangement") such that the aggregate value of the retirement benefits that he and his spouse will receive at the end of the Employment Period under all defined benefit plans of the Company and its affiliates (whether qualified or not) will be not less than the benefits he would have received (assuming his employment through the end of the Employment Period) under the Wisconsin Power and Light Company Retirement Plan and the Supplemental Retirement Plan in which the Executive participated, as in effect immediately prior to the Effective Time. (ii) Executive Tenure Compensation Plan. During the Employment Period, the Executive shall continue to participate in the Wisconsin Power and Light Company Executive Tenure Compensation Plan. (iii) Life Insurance. During the Employment Period, the Company shall provide the Executive with life insurance coverage (the "Life Insurance Coverage") providing a death benefit to such beneficiary or beneficiaries as the Executive may designate of not less than three times his Annual Base Salary. (iv) Additional Benefits. In addition, and without limiting the generality of the foregoing, during the Employment Period and thereafter: (A) the Executive shall be entitled to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company and its affiliates to the same extent as other senior executives (or, -3- where applicable, retired senior executives) of the Company, and (B) the Executive and/or the Executive's family, as the case may be, shall be eligible for immediate participation in (and without any limitation for preexisting conditions), and shall receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company and its affiliates, other than severance plans, practices, policies and programs but including, without limitation, medical, prescription, dental, disability, salary continuance, employee life insurance, group life insurance, accidental death and travel accident insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, provided, however, that the Executive's aggregate benefits as a retired senior executive under the plans described in this clause (B) shall not be less than the benefits provided by the Company and its affiliates to its retired senior executive officers as of the date of this Agreement. (d) Perquisites. During the Employment Period, the Executive shall be entitled to receive such perquisites as the Company may establish from time to time which are commensurate with his position and at least comparable to those received by other senior executives at the Company. (e) Expense Reimbursement. The Company shall reimburse the Executive for all reasonable and documented expenses incurred by the Executive in the performance of the Executive's duties under this Agreement. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. The Company shall be entitled to terminate the Executive's employment because of the Executive's Disability during the Employment Period. "Disability" means that (i) the Executive has been unable, for a period of 180 consecutive business days, to perform the Executive's duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and acceptable to the Executive or the Executive's legal representative, has determined that the Executive's incapacity is total and permanent. A termination of the Executive's employment by the Company for Disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), unless the Executive returns to full-time performance of the Executive's duties before the Disability Effective Date. (b) By the Company. (i) The Company may terminate the Executive's employment during the Employment Period for Cause or without Cause. "Cause" means: -4- A. the willful and continued failure of the Executive substantially to perform the Executive's duties under this Agreement (other than as a result of physical or mental illness or injury), after the Board delivers to the Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties; or B. illegal conduct or gross misconduct by the Executive, in either case that is willful and results in material and demonstrable damage to the business or reputation of the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or the advice of counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (ii) A termination of the Executive's employment for Cause shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Special Board Meeting for Cause. The "Special Board Meeting for Cause" means a meeting of the Board called and held specifically for the purpose of considering the Executive's termination for Cause, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Special Board Meeting for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Special Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. (iii) A termination of the Executive's employment without Cause shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination without Cause") of its intention to terminate the Executive's employment without Cause, stating the date, time and place of the Special Board Meeting without Cause. The "Special Board Meeting without Cause" means a -5- meeting of the Board called and held specifically for the purpose of considering the Executive's termination without Cause, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination without Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Special Board Meeting without Cause. The Executive's termination without Cause shall be effective when and if a resolution is duly adopted at the Special Board Meeting without Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that the Executive is terminated without Cause. (c) Good Reason. (i) The Executive may terminate employment for Good Reason or without Good Reason. "Good Reason" means: A. the assignment to the Executive of any duties inconsistent in any respect with paragraphs (a) and (b) of Section 2 of this Agreement, or any other action by the Company that results in a diminution in the Executive's position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive; B. any failure by the Company to comply with any provision of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure that is not taken in bad faith and is remedied by the Company promptly after receipt of notice thereof from the Executive; C. any requirement by the Company that the Executive's services be rendered primarily at a location or locations other than that provided for in paragraph (d) of Section 2 of this Agreement; D. any purported termination of the Executive's employment by the Company for a reason or in a manner not expressly permitted by this Agreement; E. any failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or F. any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. (ii) A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice ("Notice -6- of Termination for Good Reason") of the termination within six months of the event constituting Good Reason, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than thirty (30) days after the notice is given). (iii) A termination of the Executive's employment by the Executive without Good Reason shall be effected by giving the Company written notice of the termination. (d) Date of Termination. The "Date of Termination" means the date of the Executive's death, the Disability Effective Date, the date on which the termination of the Executive's employment by the Company for Cause or without Cause or by the Executive for Good Reason is effective, or the date on which the Executive gives the Company notice of a termination of employment without Good Reason, as the case may be. 5. Obligations of the Company upon Termination. (a) By the Company other than for Cause, Death or Disability; by the Executive for Good Reason. If, during the Employment Period, the Company terminates the Executive's employment, other than for Cause, Death, or Disability, or the Executive terminates employment for Good Reason, the Company shall continue to provide the Executive with the compensation and benefits set forth in paragraphs (a), (b) and (c) of Section 3 as if he had remained employed by the Company pursuant to this Agreement through the end of the Employment Period and then retired (at which time he will be treated as eligible for and will be entitled to receive all retiree welfare benefits and other benefits provided to retired senior executives, as set forth in Section 3(c), with such benefits being calculated for this purpose as though the Executive had retired at age 62 with earnings on an annual basis during the years between the Date of Termination and age 62 equal to the Executive's earnings for the year immediately preceding the Date of Termination); provided, that the Incentive Compensation for the period through the end of the Employment Period shall be equal to the maximum Incentive Compensation that the Executive would have been eligible to earn for such period; provided, further that in lieu of stock options, restricted stock and other stock-based awards, the Executive shall be paid cash equal to the fair market value (without regard to any restrictions) of the stock options, restricted stock and other stock-based awards that would otherwise have been granted; and provided, further that to the extent any benefits described in paragraph (c) of Section 3 cannot be provided pursuant to the plan or program maintained by the Company for its executives, the Company shall provide such benefits outside such plan or program at no additional cost (including without limitation tax cost) to the Executive and his family; and provided, finally, that during any period when the Executive is eligible to receive benefits of the type -7- described in clause (B) of paragraph (c)(iv) of Section 3 under another employer-provided plan, the benefits provided by the Company under this paragraph (a) of Section 5 may be made secondary to those provided under such other plan. In addition to the foregoing, any restricted stock or performance shares or units outstanding on the Date of Termination shall be fully vested as of the Date of Termination and all options outstanding on the Date of Termination shall be fully vested and exercisable and shall remain in effect and exercisable through the end of their respective terms, without regard to the termination of the Executive's employment. The payments and benefits provided pursuant to this paragraph (a) of Section 5 are intended as liquidated damages for a termination of the Executive's employment by the Company other than for Cause or Disability or for the actions of the Company leading to a termination of the Executive's employment by the Executive for Good Reason, and shall be the sole and exclusive remedy therefor. (b) Death and Disability. If the Executive's employment is terminated by reason of the Executive's death or Disability during the Employment Period, the Company shall pay to the Executive or, in the case of the Executive's death, to the Executive's designated beneficiaries (or, if there is no such beneficiary, to the Executive's estate or legal representative), in a lump sum in cash within thirty (30) days after the Date of Termination, the sum of the following amounts (the "Accrued Obligations"): (1) any portion of the Executive's Annual Base Salary through the Date of Termination that has not yet been paid; (2) an amount representing the Incentive Compensation for the period that includes the Date of Termination, computed by assuming that the amount of all such Incentive Compensation would be equal to the maximum amount of such Incentive Compensation that the Executive would have been eligible to earn for such period, and multiplying that amount by a fraction, the numerator of which is the number of days in such period through the Date of Termination, and the denominator of which is the total number of days in the relevant period; (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) that has not yet been paid; and (4) any accrued but unpaid Incentive Compensation and vacation pay. Any deferred compensation (together with any accrued interest or earnings thereon, if any) that has not yet been paid, will be paid in accordance with the terms and conditions applicable to such deferred compensation. (c) By the Company for Cause; By the Executive Other than for Good Reason. If the Executive's employment is terminated by the Company for Cause during the Employment Period, the Company shall pay the Executive the Annual Base Salary through the Date of Termination and the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon), in each case to the extent not yet paid, and the Company shall have no further obligations under this Agreement, except as specified in Section 6 below. If the Executive voluntarily terminates employment during the Employment Period, other than for Good Reason, the Company shall pay the Accrued Obligations to the Executive in a lump sum in cash within thirty (30) days of the Date of Termination, and the Company shall have no further obligations under this Agreement, except as specified in Section 6 below. -8- 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliates for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliates relating to subject matter other than that specifically addressed herein. Vested benefits and other amounts that the Executive is otherwise entitled to receive under the Incentive Compensation program, the Defined Benefit Arrangement, the Life Insurance Coverage, the Executive Tenure Compensation Plan, the Executive's Deferred Compensation Plan(s), or any other plan, policy, practice or program of, or any contract or agreement with, the Company or any of its affiliates on or after the Date of Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 7. Full Settlement. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The amounts payable by the Company under this Agreement shall not be offset or reduced by any amounts otherwise receivable or received by the Executive from any source, except as specifically provided in paragraph (a) of Section 5 with respect to benefits described in clause (B) of paragraph (c)(iv) of Section 3. 8. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies and their respective businesses that the Executive obtains during the Executive's employment by the Company or any of its affiliated companies and that is not public knowledge (other than as a result of the Executive's violation of this Section 8) ("Confidential Information"). The Executive shall not communicate, divulge or disseminate Confidential Information at any time during or after the Executive's employment with the Company, except with the prior written consent of the Company or as otherwise required by law or legal process. In no event shall any asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 9. Total Payments. (a) Notwithstanding any other provision of this Agreement, if any portion of any payment under this Agreement, or under any other agreement with or plan of the Company (in the aggregate "Total Payments"), would constitute an "excess parachute payment," the Company shall pay Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by Executive after deduction of any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), any interest charges or penalties in respect of the imposition of such excise tax (but not any federal, state or local income tax, or employment tax) on the Total Payments, and any federal, state and local income tax, employment tax, and excise tax upon the payment provided for by this paragraph (a) of Section 9, shall be equal to the Total Payments. For purposes -9- of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's domicile for income tax purposes on the date the Gross-Up Payment is made, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. For purposes of this Agreement, the terms "excess parachute payment" and "parachute payments" shall have the meanings assigned to them in Section 280G of the Code and such "parachute payments" shall be valued as provided therein. Present value for purposes of this Agreement shall be calculated in accordance with Section 1274(b)(2) of the Code (or any successor provision). Promptly following the Date of Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company, at the Company's expense, shall obtain the opinion (which need not be unqualified) of nationally recognized tax counsel ("National Tax Counsel") selected by the Company's independent auditors and reasonably acceptable to the Executive (which may be regular outside counsel to the Company), which opinion sets forth (i) the amount of the Base Period Income, (ii) the amount and present value of Total Payments, (iii) the amount and present value of any excess parachute payments, and (iv) the amount of any Gross-Up Payment. As used in this Agreement, the term "Base Period Income" means an amount equal to the Executive's "annualized includible compensation for the base period" as defined in Section 280G(d)(1) of the Code. For purposes of such opinion, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code (or any successor provisions), which determination shall be evidenced in a certificate of such auditors addressed to the Company and the Executive. The opinion of National Tax Counsel shall be addressed to the Company and the Executive and shall be binding upon the Company and the Executive. If such National Tax Counsel so requests in connection with the opinion required by this paragraph (a) of Section 9, the Executive and the Company shall obtain, at the Company's expense, and the National Tax Counsel may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by the Executive solely with respect to its status under Section 280G of the Code and the regulations thereunder. Within five (5) days after the National Tax Counsel's opinion is received by the Company and the Executive, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. (b) In the event that upon any audit by the Internal Revenue Service, or by a state or local taxing authority, of the Total Payments or Gross-Up Payment, a change is finally determined to be required in the amount of taxes paid by the Executive, appropriate adjustments shall be made under this Agreement such that the net amount which is payable to the Executive after taking into account the -10- provisions of Section 4999 of the Code shall reflect the intent of the parties as expressed in paragraph (a) above, in the manner determined by the National Tax Counsel. The Company agrees to bear all costs associated with, and to indemnify and hold harmless, the National Tax Counsel of and from any and all claims, damages, and expenses resulting from or relating to its determinations pursuant to this Section 9, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of such firm. 10. Attorneys' Fees. The Company agrees to pay, as incurred, to the fullest extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome) by the Company, the Executive or others of the validity or enforceability of or liability under, or otherwise involving, any provision of this Agreement, together with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. 11. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of Wisconsin, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified except by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications under this Agreement shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -11- If to the Executive: Erroll B. Davis, Jr. 7829 Noll Valley Road Verona, Wisconsin 53593 If to the Company: Interstate Energy Corporation 222 West Washington Avenue P.O. Box 2568 Madison, Wisconsin 53701-2568 Attention: General Counsel With a copy to: Benjamin F. Garmer, III c/o Foley & Lardner 777 East Wisconsin Avenue Milwaukee, WI 53202-5367 or to such other address as either party furnishes to the other in writing in accordance with this paragraph (b) of Section 12. Notices and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. (d) Notwithstanding any other provisions of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. (e) The Executive's or the Company's failure to insist upon strict compliance with any provisions of, or to assert any right under, this Agreement (including, without limitation, the right of Executive to terminate employment for Good Reason pursuant to paragraph (c) of Section 4 of this Agreement) shall not be deemed to be a waiver of such provision or right or of any other provision of or right under this Agreement. (f) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof, excluding the Key Executive Employment and Severance Agreement between the Executive and the Company dated March 29, 1999, as in effect on the date hereof -12- or as hereafter amended from time to time (the "Severance Agreement"); provided, however, that to the extent that a payment or benefit to be provided under this Agreement is similarly to be provided under the Severance Agreement, the Company agrees to pay or provide to the Executive that payment or benefit which provides the highest value to the Executive, and the Executive agrees, in order to avoid duplication of payments or benefits, that upon the receipt of any such highest value payment or benefit under either this Agreement or the Severance Agreement, as the case may be, he shall have no right to any similar payment or benefit of lesser value under the other agreement. (g) The rights and benefits of the Executive under this Agreement may not be anticipated, assigned, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 13. Effectiveness of Agreement. The effectiveness of the original Agreement was subject to the consummation of the Merger (as defined in the Merger Agreement), which was consummated April 21, 1998. The effectiveness of this amended and restated Agreement is subject to the mutual written agreement of the parties set forth below. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of its Board of Directors, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written. /s/Erroll B. Davis, Jr. Erroll B. Davis, Jr. INTERSTATE ENERGY CORPORATION By______________________________________ Name: Title: -13- EX-27.1 7 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 FINANCIAL STATEMENTS INCLUDED IN INTERSTATE ENERGY CORPORATION'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFRENCE TO SUCH FINANCIAL STATEMENTS. 0000352541 INTERSTATE ENERGY CORPORATION 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 3,069,213 1,202,097 362,599 159,066 278,147 5,071,122 779 913,728 777,716 1,692,223 24,431 89,102 1,545,251 50,027 56,975 64,000 54,084 0 11,499 12,146 1,471,384 5,071,122 546,855 24,872 453,868 453,868 92,987 8,705 101,692 33,400 43,420 1,676 41,744 38,834 90,353 170,152 0.54 0.54 Includes $237,434 of Accumulated Other Comprehensive Income. Income tax expense is not included in Operating Expense in the Consolidated Statements of Income.
EX-27.2 8 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 FINANCIAL STATEMENTS INCLUDED IN IES UTILITIES INC.'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000052485 IES UTILITIES INC. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 1,352,871 107,220 99,120 15,201 133,491 1,707,903 33,427 279,042 245,626 558,095 0 18,320 551,086 9,694 0 0 51,140 0 11,427 12,132 496,009 1,707,903 209,265 10,216 173,092 173,092 36,173 1,706 37,879 13,204 14,459 229 14,230 43,976 42,615 53,086 0 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income. Earnings per share of common stock is not reflected because all common shares are held by Interstate Energy Corporation.
EX-27.3 9 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 FINANCIAL STATEMENTS INCLUDED IN WISCONSIN POWER AND LIGHT COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000107832 WISCONSIN POWER AND LIGHT COMPANY 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 PER-BOOK 1,221,777 165,733 92,550 113,058 74,788 1,667,906 66,183 199,438 305,181 570,802 0 59,963 414,603 51,102 56,975 0 0 0 0 0 514,461 1,667,906 202,990 15,505 156,599 156,599 46,391 5,267 51,658 9,865 26,288 828 25,460 14,588 33,060 83,618 0 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income. Earnings per share of common stock is not reflected because all common shares are held by Interstate Energy Corporation.
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