-----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, DqW1gGrSapuCXj/8SPaJnYNOE/DSsfSciVZfnQZvZzxsIGgPpB1e1CTcHqibdUrf l8Sze05/SScyJjIyxB+W7g== 0001035704-98-000185.txt : 19980317 0001035704-98-000185.hdr.sgml : 19980317 ACCESSION NUMBER: 0001035704-98-000185 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980416 FILED AS OF DATE: 19980316 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: K N ENERGY INC CENTRAL INDEX KEY: 0000054502 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 480290000 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 001-06446 FILM NUMBER: 98566517 BUSINESS ADDRESS: STREET 1: 370 VAN GORDON ST STREET 2: PO BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 BUSINESS PHONE: 3039891740 MAIL ADDRESS: STREET 1: 370 VAN GORDON STREET STREET 2: P O BOX 281304 CITY: LAKEWOOD STATE: CO ZIP: 80228-8304 FORMER COMPANY: FORMER CONFORMED NAME: KN ENERGY INC DATE OF NAME CHANGE: 19920430 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS NEBRASKA NATURAL GAS CO INC DATE OF NAME CHANGE: 19830403 DEF 14A 1 DEFINITIVE PROXY STATEMENT 1 SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 KN Energy, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ No fee required. / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): - -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- (5) Total fee paid: - -------------------------------------------------------------------------------- / / Fee paid previously with preliminary materials. - -------------------------------------------------------------------------------- / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount previously paid: - -------------------------------------------------------------------------------- (2) Form, schedule or registration statement no.: - -------------------------------------------------------------------------------- (3) Filing party: - -------------------------------------------------------------------------------- (4) Date filed: - -------------------------------------------------------------------------------- 2 [K N ENERGY, INC. LOGO] K N Energy, Inc. 370 Van Gordon Street P.O. Box 281304 Lakewood, CO 80228-8304 (303) 989-1740
March 16, 1998 Fellow Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders to be held at The Westin Central Park South located at 112 Central Park South, New York, New York, on Thursday, April 16, 1998, at 10:00 A.M., Eastern Daylight Time. Please read carefully the accompanying Notice of Annual Meeting and Proxy Statement which contain details concerning the business to come before the meeting. You will note that the Board of Directors of the Company recommends a vote: "FOR" an amendment to the Restated Articles of Incorporation of the Company increasing the authorized Common Stock, par value $5.00 per share, of the Company from 50,000,000 shares to 150,000,000 shares; "FOR" the authorization of an additional 1,600,000 shares of Common Stock for issuance under the Company's 1994 Long-Term Incentive Plan; "FOR" the authorization of an additional 1,000,000 shares of Common Stock for issuance under the Company's 1990 Employee Stock Purchase Plan; and "FOR" the reelection of five directors, four directors for terms of three years each and one director for a term of one year. As in the past, in the election of directors, you may vote either for or against all persons nominated by the Board by checking the appropriate box. If you wish to vote for some but not all of the persons nominated, mark the "Exceptions" box and write the name of the nominees for whom you do not wish to vote in the space provided. To be sure that your shares will be voted, whether or not you plan to attend the meeting in person, please complete, sign, date and mail the accompanying Proxy in the enclosed return envelope promptly. If you then do attend the meeting, your Proxy will be returned to you if you wish to vote in person. Very truly yours, /s/ LARRY D. HALL LARRY D. HALL Chairman of the Board 3 K N ENERGY, INC. 370 VAN GORDON STREET P.O. BOX 281304 LAKEWOOD, CO 80228-8304 (303) 989-1740 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders of K N Energy, Inc. will be held at The Westin Central Park South located at 112 Central Park South, New York, New York, on Thursday, April 16, 1998, at 10:00 A.M., Eastern Daylight Time, for the following purposes: 1. To elect five Class II Directors, with four directors to serve terms of three years each and one director to serve a one-year term. 2. To consider and vote upon a proposal to amend the Restated Articles of Incorporation of the Company to increase the authorized Common Stock, par value $5.00 per share, of the Company from 50,000,000 shares to 150,000,000 shares. 3. To consider and vote upon a proposal to increase the number of shares authorized for issuance under the 1994 K N Energy, Inc. Long-Term Incentive Plan. 4. To consider and vote upon a proposal to increase the number of shares authorized for issuance under the 1990 Employee Stock Purchase Plan. 5. To transact such other business as may properly come before the meeting or any adjournment thereof. Accompanying this Notice of Annual Meeting of Shareholders is a form of Proxy, a Proxy Statement, and a copy of the Company's 1997 Annual Report to Shareholders. The 1997 Annual Report to Shareholders is not to be considered part of the proxy soliciting material. Only shareholders of record at the close of business on February 20, 1998, are entitled to vote at the meeting. A complete list of the shareholders entitled to vote at the annual meeting will be available for examination by any shareholder, for purposes germane to the meeting, during ordinary business hours for a period of at least 10 days prior to the meeting at the Company's offices at 370 Van Gordon Street, Lakewood, Colorado 80228. Shareholders who do not intend to be present at the meeting in person are requested to date and sign the enclosed Proxy and mail it in the enclosed envelope which does not require postage if mailed within the United States. IMPORTANT: PLEASE MARK AND DATE THE PROXY AND SIGN EXACTLY AS YOUR NAME OR NAMES APPEAR THEREON. IF STOCK IS HELD JOINTLY, SIGNATURE SHOULD INCLUDE BOTH NAMES. EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS, CUSTODIANS, CORPORATE OFFICERS AND OTHERS SIGNING IN A REPRESENTATIVE CAPACITY SHOULD GIVE THEIR FULL TITLES. MARTHA B. WYRSCH Vice President, General Counsel and Secretary Lakewood, Colorado March 16, 1998 4 K N ENERGY, INC. 370 VAN GORDON STREET, P.O. BOX 281304, LAKEWOOD, CO 80228-8304 (303) 989-1740 March 16, 1998 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of K N Energy, Inc. (the "Company" or "K N") of proxies for use at the Annual Meeting of Shareholders of the Company to be held at 10:00 A.M. Eastern Daylight Time on April 16, 1998, at The Westin Central Park South, 112 Central Park South, New York, New York, and at any adjournment of such meeting. Proxies may be revoked at any time before they are voted. Revocation may be effected in any of the following ways: (i) by instruction to the Secretary reasonably indicating the shareholder's desire to revoke an existing proxy; (ii) by appropriately signing and returning to the Company a proxy with a more recent date than that of the proxy first given; or (iii) by signing and returning a floor ballot at the meeting of shareholders. The Proxy Statement and form of Proxy will be first mailed to the shareholders on or about March 16, 1998. SHARES OUTSTANDING Only shareholders of record at the close of business on February 20, 1998, are entitled to vote at the meeting. On that date the Company had outstanding the following shares of capital stock: 70,000 shares of Class A $5.00 Cumulative Preferred Stock, and 32,140,425 shares of Common Stock. Each share of Preferred and Common Stock has one vote and all shares vote as one class for all matters to come before the meeting. The holders of a majority of the issued and outstanding shares of the Company who are entitled to vote at the meeting must be present at the meeting, in person or represented by proxy, so that a quorum may be present for the transaction of business. If a quorum is present at the meeting, the five nominees for election as directors who receive the greatest number of votes cast for the election of directors at the meeting by the shares present in person or by proxy and entitled to vote shall be elected directors. The affirmative vote of a majority of the outstanding shares entitled to vote at the meeting is required to adopt the proposed amendment to the Restated Articles of Incorporation of the Company. Any other matters submitted to a vote of the shareholders must be approved by the affirmative vote of the holders of a majority of shares present in person or by proxy and entitled to vote on the matter. In the election of directors, abstentions will have no effect on the vote. However, an abstention will have the practical effect of voting against any other matters since it is one less vote for approval. Broker nonvotes will have the effect of voting against the proposed amendment to the Restated Articles of Incorporation and will have no impact on the other matters to come before the meeting since such Broker nonvotes are not considered "shares present" for voting purposes. The By-laws of the Company require that directors be elected by written ballot. As a matter of policy, proxies, ballots, and voting tabulations that identify individual shareholders are kept private by the Company. Such documents are available for examination only by the inspectors of election and certain personnel associated with processing proxy cards and tabulating the vote. The vote of any shareholder is not disclosed except as may be necessary to meet legal requirements. All properly executed proxies delivered pursuant to this solicitation and not revoked will be voted at the meeting in accordance with the directions given. If no specific instructions are given with respect to the matters to be voted upon, the Proxyholders, who are Larry D. Hall and Martha B. Wyrsch, will vote the shares covered by proxies received by them for the election of all five nominees to the Board of Directors, for the 5 proposal to amend the Restated Articles of Incorporation of the Company to increase the authorized Common Stock of the Company from 50,000,000 shares to 150,000,000 shares, for the proposals to increase the authorized shares under the 1994 Long-Term Incentive Plan (the "Incentive Plan") and the 1990 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"), and in accordance with the directors' recommendations on any other matters that may come before the meeting. ELECTION OF DIRECTORS (ITEM 1) The Restated Articles of Incorporation of the Company provide for a Board of Directors of no fewer than nine nor more than fifteen members (exclusive of any advisory director), divided into three classes of as nearly an equal number as possible, the directors in each class being elected for three years. In 1996, the Company's By-laws were amended to provide that any non-employee director of the Company must retire from his position as a director at the annual meeting of shareholders of the Company which next occurs after the director reaches 72 years of age. In 1998, the Company's By-laws were amended to provide a board position for Charles W. Battey for a period of one year, subject to his reelection at this meeting. There are currently fifteen members of the Board of Directors. Messrs. Charles W. Battey, Larry D. Hall, Richard D. Kinder, John F. Riordan and H.A. True, III have been nominated for reelection as Class II directors. Proxies will be voted, unless authority to vote is withheld by the shareholder, for the election of Messrs. Hall, Kinder, Riordan and True to serve until the 2001 Annual Meeting of Shareholders and until the election and qualification of their respective successors, and for the election of Mr. Battey to serve until the 1999 Annual Meeting of Shareholders. If any such nominee shall be unable or shall fail to accept nomination or election by virtue of an unexpected occurrence, proxies may be voted for such other person or persons as shall be determined by the Proxyholders in their discretion. Proxies cannot be voted by the Proxyholders for more than the number of nominees named, which is five persons. Under the terms of the Company's By-laws, Cabot Corporation ("Cabot"), the Company's largest shareholder, has the right to nominate a director for election to the Board of Directors as long as Cabot beneficially owns over 5% of the voting stock of K N. Cabot has indicated to the Company that it does not intend to designate a nominee for a board position at this meeting. Mr. Kinder was elected by the Board of Directors as a Class II Director in January 1998 to fill one of the two vacancies on the Board of Directors, and John F. Riordan, the former President and Chief Executive Officer of MidCon Corp. ("MidCon"), was elected by the Board of Directors in February 1998 as a Class II Director to fill the other vacancy. K N purchased all of the shares of MidCon from Occidental Petroleum Corporation on January 30, 1998. 2 6 The name of each nominee for election as a director at this meeting and of each director whose term of office will continue after the meeting, and each individual's business experience, year first elected as director, beneficial ownership of Company Common Stock, age and relationship to the Company are as follows:
COMPANY YEAR SHARES OTHER FIRST BENEFICIALLY POSITIONS BUSINESS ELECTED OWNED AS OF HELD EXPERIENCE AS FEBRUARY 20, WITH THE DURING PAST NAME DIRECTOR 1998(1)(2) AGE COMPANY(3) 5 YEARS(3) ---- -------- ------------ --- ---------------------- ---------------------- NOMINEE FOR ELECTION FOR TERM OF ONE YEAR EXPIRING IN 1999 (CLASS II)(4) - ------------------------------------------------------------------------------------------------------------ Charles W. Battey(4) 1971 98,919 66 Director; Chairman(5) (1989-1996); and Chief Executive Officer (1989-1994) NOMINEES FOR ELECTION FOR TERM OF THREE YEARS EXPIRING IN 2001 (CLASS II)(6) - ------------------------------------------------------------------------------------------------------------ Larry D. Hall 1984 385,738(7) 55 Chairman(8) (April 1996-Present); President and Chief Executive Officer (1994-Present); President and Chief Operating Officer (1988-1994); Director Richard D. Kinder(9) 1998 3,200 53 Director (January Chairman and Chief 1998-Present); Executive Officer of Kinder Morgan Energy Partners, L.P. (1997 to Present); President and Chief Operating Officer of Enron Corp. (1990 to 1996); Director of Baker Hughes, Inc., Transocean Offshore Inc., USA Waste, Inc. and Kinder Morgan Energy Partners, L.P. John F. Riordan(10) 1998 9,866(10) 62 Vice Chairman Chief Executive (February Officer and President 1998-Present) of MidCon Corp. (1990- January 1998); Director and Executive Vice President of Occidental Petroleum Corporation (1991-January 1998). H.A. True, III 1991 17,600(11) 55 Director Partner, True Companies (energy, agriculture and financing), Casper, Wyoming.
3 7
COMPANY YEAR SHARES OTHER FIRST BENEFICIALLY POSITIONS BUSINESS ELECTED OWNED AS OF HELD EXPERIENCE AS FEBRUARY 20, WITH THE DURING PAST NAME DIRECTOR 1998(1)(2) AGE COMPANY(3) 5 YEARS(3) ---- -------- ------------ --- ---------------------- ---------------------- DIRECTORS WHOSE TERMS EXPIRE IN 2000 (CLASS I) - ------------------------------------------------------------------------------------------------------------ Edward H. Austin, Jr. 1994 269,684(12) 56 Director Principal of Austin, Calvert & Flavin, Inc., an investment advisory firm, San Antonio, Texas. David W. Burkholder 1984 22,161 55 Director President of Will Feed, Inc. (cattle feeding), Willow Island, Nebraska; President of Island Dehy Company, Inc. (alfalfa dehydration), Cozad, Nebraska; and President of Consolidated Blenders, Inc. (alfalfa dehydration), Hastings, Nebraska. David M. Carmichael 1994 245,540 59 Director; Vice Director of Tom Brown, Chairman (July Inc. (1996-Present); 1994-1996)(13) Chairman of the Board and Chief Executive Officer of American Oil and Gas Corporation (1983-1994); President, Chairman of the Board and Chief Executive Officer of American Oil and Gas Corporation (1986-1993). Jordan L. Haines 1983 25,077 70 Director Director of Forest Oil Corporation; Director of Qwest Communications International Inc.
4 8
COMPANY YEAR SHARES OTHER FIRST BENEFICIALLY POSITIONS BUSINESS ELECTED OWNED AS OF HELD EXPERIENCE AS FEBRUARY 20, WITH THE DURING PAST NAME DIRECTOR 1998(1)(2) AGE COMPANY(3) 5 YEARS(3) ---- -------- ------------ --- ---------------------- ---------------------- William J. Hybl 1988 17,712(14) 55 Director Chairman and Chief Executive Officer and Trustee of El Pomar Foundation (charitable foundation), Colorado Springs, Colorado; Vice Chairman and Director of Broadmoor Hotel, Inc., Colorado Springs, Colorado; Director and President of the Garden City Company; Director of USAA, San Antonio, Texas (insurance company); President, United States Olympic Committee (1996-2000); Director of FirstBank Holding Co. of Colorado. DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS III) - ------------------------------------------------------------------------------------------------------------ Stewart A. Bliss 1993 12,450 64 Director Financial Consultant and Senior Business Advisor, Denver, Colorado (1993- Present); Board Member of Colorado State Board of Agriculture (1993-Present); Chief of Staff to Governor of Colorado, Denver, Colorado (1987-1993); Director of MACTEC. Robert H. Chitwood 1990 25,200 67 Director President, R.H. Chitwood Company (oil and gas production, investments and petroleum consulting), Tulsa, Oklahoma. Howard P. Coghlan 1981 26,116 70 Director Senior Partner, Coghlan, Crowson, Fitzpatrick & Westbrook, Attorneys at Law, Longview, Texas.
5 9
COMPANY YEAR SHARES OTHER FIRST BENEFICIALLY POSITIONS BUSINESS ELECTED OWNED AS OF HELD EXPERIENCE AS FEBRUARY 20, WITH THE DURING PAST NAME DIRECTOR 1998(1)(2) AGE COMPANY(3) 5 YEARS(3) ---- -------- ------------ --- ---------------------- ---------------------- Edward Randall, III 1994 262,204(15) 71 Director Private investor; Director of Paine Webber Group, Inc.; Director of Enron Oil & Gas Company. James C. Taylor 1994 103,932(16) 60 Director Owner and Operator, Wytana Livestock Company, Bozeman, Montana; Private investor.
- --------------- (1) No Director owns any Preferred Stock of the Company. No director owns beneficially more than one percent of the outstanding shares of Common Stock of the Company other than Mr. Hall who beneficially owns 1.2% of the outstanding Common Stock. In making the computations required in connection with the preceding statement, with respect to any director who held options to purchase shares of Common Stock exercisable within 60 days of February 20, 1998, it was assumed that such options had been exercised. The following number of shares representing such unexercised options were added to the holdings of each of the following directors: Mr. Austin, 12,000 shares; Mr. Battey, 34,000 shares; Mr. Bliss, 12,000 shares; Mr. Burkholder, 9,000 shares; Mr. Carmichael, 81,000 shares; Mr. Chitwood, 15,750 shares; Mr. Coghlan, 9,000 shares; Mr. Haines, 16,500 shares; Mr. Hall, 241,250 shares; Mr. Hybl, 14,250 shares; Mr. Kinder, 3,000 shares; Mr. Randall, 11,000 shares; Mr. Riordan, 6,666 shares; Mr. Taylor, 11,000 shares; and Mr. True, 12,000 shares. (2) Unless otherwise indicated, the directors have sole voting and investment power over the shares listed above, other than shared rights created under joint tenancy or marital property laws as between the directors and their respective spouses, if any, and unexercised options. (3) All of these persons have held such positions for at least five years unless otherwise indicated. (4) Mr. Battey is being nominated for a one-year term expiring in 1999. (5) Mr. Battey retired as Chairman after the 1996 Annual Meeting, but remains as a K N Director. (6) R. Gordon Shearer, formerly a Class II Director, resigned as a K N Director effective December 12, 1997. (7) Includes 139 shares of Common Stock owned by Mr. Hall's wife, as to which Mr. Hall disclaims beneficial ownership and over which he has neither investment nor voting power. Also includes 88,000 restricted shares that Mr. Hall has the right to vote. Does not include any of the shares attributable to the K N Energy, Inc. Non-Qualified Benefit Plan Trust of which Mr. Hall is a beneficiary. The cumulative number of shares attributable thereto and held by the Trustee thereof as of December 31, 1997 is 4,392 shares. (8) Mr. Hall assumed the position of Chairman of the Board after the 1996 Annual Meeting. (9) Mr. Kinder filled a vacancy when he was elected by the Board of Directors on January 13, 1998. (10) Mr. Riordan filled a vacancy when he was elected by the Board of Directors on February 10, 1998. As of February 10, 1998, Mr. Riordan was granted stock options to purchase 20,000 shares of Common Stock, vesting in one-third increments, with the first third immediately vested, and 3,000 shares of restricted stock vesting in one-third increments beginning in 1999. Mr. Riordan has the right to vote all such 3,000 restricted shares. The stock options were granted at 100% of the fair market value of the Common Stock as of the date of grant. 6 10 (11) Mr. True has sole voting and investment power over 5,450 shares. (12) Includes shares of Common Stock owned by various family members or their estates, over which Mr. Austin either has power of attorney or with respect to which Mr. Austin is executor; family trusts; a family partnership and a hedge fund partnership, for both of which Mr. Austin is general partner. Mr. Austin has sole voting power over 61,635 shares; shared voting power over 77,249 shares; and shared investment power over 118,800 shares. (13) Mr. Carmichael retired as Vice Chairman after the 1996 Annual Meeting, but remains as a K N Director. (14) Includes 400 shares of Common Stock owned by Mr. Hybl's wife, as to which Mr. Hybl disclaims beneficial ownership and over which he has neither investment nor voting power. (15) Includes 181,748 shares of Common Stock owned by various family trusts as to which Mr. Randall disclaims beneficial ownership. Mr. Randall has shared voting and investment power over 64,936 shares and sole voting and investment power over 186,268 shares. (16) Mr. Taylor has sole voting and investment power over 74,882 shares and shared voting and investment power over 18,050 shares. Mr. Edward H. Austin, Jr. is married to the niece of Mr. James C. Taylor. No other family relationships exist between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer. RELATIONSHIP BETWEEN CERTAIN DIRECTORS AND THE COMPANY Mr. Stewart A. Bliss, a Director of the Company, shared office space with and provided business development consulting services to the law firm of Parcel, Mauro & Spaanstra in 1997, which firm was retained by the Company in 1997, and provided in excess of $60,000 in services to the Company. Mr. Bliss is neither a member of, nor counsel to, the above named law firm and did not provide legal services to the Company. On December 30, 1997, Mr. Hall, the Chairman of the Board, Chief Executive Officer and President of the Company, executed a promissory note in favor of the Company in the amount of $120,479 to cover certain tax withholding obligations for employee stock option exercises and the release of restrictions on restricted stock. The promissory note is due to be paid in full on June 15, 1998, and bears interest at a rate of 8.5% per annum. Mr. Howard P. Coghlan, a Director of the Company, is a senior partner at the law firm of Coghlan, Crowson, Fitzpatrick & Westbrook, which provided $3,137 in services to the Company in 1997. 7 11 DIRECTOR AND COMMITTEE MEETINGS The Board of Directors met twelve times during 1997, seven of the meetings being regularly-scheduled and five being special meetings. During 1997, all directors attended at least 96% percent of the aggregate meetings of the Board of Directors and committees thereof on which they served. During 1997, the Audit Committee was composed of Messrs. Burkholder (Chairman, January to April), Battey, Chitwood, Taylor, and Shearer (Chairman, May to December), and it met four times in 1997. The duties of the Audit Committee include recommendation of the independent auditor for selection by the Board of Directors, review of the arrangements and scope of the independent auditor's audit, review of the findings and recommendations of the independent auditor and internal auditors concerning internal accounting procedures and controls, review of professional services rendered by the independent auditor, review of the independence of the auditor in regard to the Company and its management and review of the Company's risk management policies and procedures. The Compensation Committee during 1997 was composed of Messrs. Randall (Chairman, January to April), Austin, Bliss (Chairman, May to December), and Coghlan. It met five times in 1997. The duties of the Compensation Committee are set forth in the "Report of the Compensation Committee on Executive Compensation" which follows. The Executive Committee, composed of Messrs. Hall (Chairman), Haines, Hybl, True, and Carmichael met seven times in 1997. The duties of the Executive Committee consist of oversight and direction of management decisions with respect to the day-to-day operations of K N and its subsidiaries, and nominations for Directors of the Board of the Company. The Executive Committee replaced the Management Committee on April 11, 1996 pursuant to an amendment to the Company's By-laws. The Board of Directors does not presently have a separate Nominating Committee; rather, the Executive Committee serves as the Nominating Committee for the Board. Pursuant to the Company's By-laws, shareholders may nominate candidates for the Board of Directors by notifying the Company at its principal executive offices of the name of such candidate and by furnishing other required information at least forty days before the shareholders' meeting at which such election will be held. See also "Date for Receipt of Shareholder Proposals" on page 33. DIRECTOR COMPENSATION A director (except a current employee) receives a retainer of $20,000 per year, which may be taken in the form of Common Stock or cash, plus a fee of $1,500 per day for each meeting attended. In addition, beginning in 1998 each non-employee director receives 200 shares of Common Stock on the first business day of the calendar year, with the 1998 issuance occurring on February 10, 1998. Members of the Audit, Compensation and Executive Committees also receive a fee of $1,500 per day for each committee meeting attended on a day other than that of a Board meeting. Directors who are full-time employees of the Company receive no additional compensation in their capacity as director. All directors are reimbursed for reasonable travel and other expenses incurred in attending all meetings. Directors who are not also employees or officers may elect to defer until age 65, and/or until retirement from the Board, all or any portion of their compensation pursuant to the Deferred Compensation Plan for Outside Directors or the 1987 Directors' Deferred Fee Plan, which were adopted by the Company effective May 1, 1984, and May 1, 1987, respectively. The Deferred Compensation Plan for Outside Directors was amended in November 1995 and December 1997 to allow Directors to defer their retainer and/or meeting fees in the form of K N Common Stock or cash equivalency. Directors who are not also employees participate in the 1992 Stock Option Plan for Non-Employee Directors ("Directors' Option Plan"), which was amended in 1996. Under the Directors' Option Plan, on the first business day of each calendar year, each Director who is not a salaried employee of the Company is granted an option to purchase up to 3,000 shares of the Company's Common Stock. Options, which vest on the date of grant, may be granted at not less than 100 percent of the fair market value of the Common Stock on the date of grant, but must be at least the par value of the shares subject to the option, and expire 10 years from the date of grant. Options granted pursuant to the Directors' Option Plan are not intended to qualify as 8 12 incentive stock options, but rather are intended to constitute "nonqualified stock options" as defined by Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). The options become exercisable commencing on the date of the grant. On January 2, 1998, options to purchase 3,000 shares each were granted to Messrs. Austin, Battey, Bliss, Burkholder, Carmichael, Chitwood, Coghlan, Haines, Hybl, Randall, Taylor and True at an exercise price of $53.9375 per share, the average sales price of the Common Stock on that date. On January 13, 1998, Mr. Kinder was appointed to the Board of Directors and was granted an option to purchase 3,000 shares at an exercise price of $54.7188, the average sales price of the Common Stock on that date. Non-employee Directors who were elected prior to 1992 received grants under the 1982 Stock Option Plan for Non-Employee Directors (the "1982 Plan"). Grants are no longer being made from the 1982 Plan. Under the terms of the 1982 Plan, each participant was granted options to purchase the number of shares equal to 500 times the number of years or partial years in the term to which he was elected, which were exercisable in one-third increments annually over the succeeding three-year period. At the request of the Company, Mr. David M. Carmichael is a Director of Tom Brown, Inc. The Company pays Mr. Carmichael the annual Tom Brown, Inc. Board of Directors fees. In 1997, those fees totaled $48,000. BOARD RECOMMENDATION The Board of Directors recommends a vote FOR each of the director nominees. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Company's employees are the most important and valued asset it has. Its senior executives are responsible for developing and driving a business strategy for sustained growth and enhanced rates of return that results in maximum value to the shareholders of the Company. Fiscal year 1997 was a unique year for the Company. The Board of Directors and the Company's senior executives targeted as a primary objective the identification and acquisition of a significant business opportunity, and achieved it. The Company's acquisition of MidCon in January 1998 resulted in a combined company with $8.2 billion in assets and $5.2 billion in operating revenues. It is the goal and obligation of the Compensation Committee and the Board of Directors to attract and retain highly qualified people with the skills to manage opportunities and create shareholder value, and the compensation philosophy discussed in this Report is aimed at creating shareholder value by tying the compensation of the senior executives of the Company to increases in that value. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors is presently composed entirely of four independent non-employee directors: Mr. Austin, Mr. Bliss (Chairman), Mr. Coghlan and Mr. Randall. Mr. Coghlan is a senior partner at the law firm of Coghlan, Crowson, Fitzpatrick & Westbrook, which provided $3,137 in services to the Company in 1997. There are no other interlocking relationships among these directors and K N. The Compensation Committee is responsible for setting and administering the policies which govern both annual compensation and long-term compensation of executive officers. Following review and approval by the Compensation Committee, all issues pertaining to executive compensation are submitted to the full Board of Directors for approval. COMPENSATION COMPONENTS AND PHILOSOPHY Annual executive compensation is principally comprised of salary and incentive cash and stock awards. It is the philosophy of the Company that annual compensation of its executive officers and other key employees should be directly and materially tied to corporate operating and financial performance. To achieve this 9 13 objective, annual executive compensation decisions are weighted towards cash incentives payable on the basis of such performance. The Company also believes that long-term executive compensation should be tied to corporate operating and financial performance. Grants of stock options, and, more recently, restricted stock awards, have been the principal component of long-term executive compensation. The Company's executive compensation components are reviewed periodically and are under review in 1998 by outside compensation consultants to ensure that the Company's compensation package operates effectively, remains both reasonable and competitive with the industry, and is comparable to the compensation offered by companies of the size and scope of the new combined company. The Incentive Plan gives the Compensation Committee the flexibility to recommend that the Board grant both non-qualified and incentive stock options, restricted stock awards, stock appreciation rights and other stock-based awards. The Incentive Plan permits the Company to keep pace with changing developments in compensation and benefit programs, making the Company competitive with those companies that offer creative incentives to attract and keep employees. The ability to grant both incentive and non-qualified stock awards enhances the Compensation Committee's ability to meet the Company's objectives of attracting and retaining well-qualified individuals to serve as executive officers and key employees. Section 162(m) of the Code limits the deductibility of certain compensation for the Chief Executive Officer and the additional four highest paid executive officers of the Company to $1 million per year. If certain conditions are met, including the removal of discretion in determining individual rewards, compensation may be excluded from consideration of the $1 million limit. Annual compensation of the Company's individual executive officers has historically been below $1 million. However, principally due to the acquisition of MidCon, it is expected that compensation may exceed this limit. The policy of the Compensation Committee to date is to establish and maintain a compensation program which maximizes the creation of long-term shareholder value by recognizing and rewarding performance which increases the value of the Company. Therefore, the Compensation Committee will continue to base the overall compensation of its senior executives on Company performance that favorably impacts shareholder value rather than limit such compensation due to the impact of Section 162(m). However, the Compensation Committee expects to address this issue again later in 1998 due to the rapid growth of the Company. BASE SALARY Salary decisions are based on achievement of both personal and company-wide performance objectives as well as recommendations for salary ranges developed from data obtained through surveys of comparable companies. The types of performance objectives considered when making salary decisions are the same as those described in the discussion on page 13 under the heading entitled "Executive Incentive Plan". Salary comparisons are prepared periodically by outside compensation consultants, and are done to ensure that Company salaries remain competitive and reasonable in the industry. Such salary comparisons are currently being developed to ensure competitiveness with companies of comparable size and scope. STOCK OPTIONS In 1997, stock options granted under the Incentive Plan comprised part of the Company's major long-term executive benefit. Stock options are granted to meet certain corporate objectives, including to encourage contributions by executive officers to key corporate, operating and financial goals, to show confidence and high expectations that the judgment, initiative and efforts of executive officers will result in the Company's success and to align the interests of executive officers with shareholder interests. Decisions concerning the granting of stock options are directly related to performance-based objectives. In 1997, the Company awarded options to purchase 482,652 shares of Common Stock to a total of 116 employees. 10 14 The following table shows the stock option grants made on August 8, 1997, to the five most highly compensated executive officers of the Company and the portion of those grants which vest in 1998. 1997 STOCK OPTIONS
SHARES UNDERLYING OPTIONS GRANTED SHARES UNDERLYING ON AUGUST 8, PURCHASE OPTIONS WHICH NAME 1997 PRICE WILL VEST IN 1998 ---- --------------- -------------- ----------------- Larry D. Hall..................................... 80,000 $41.8438 16,000 Morton C. Aaronson................................ 20,000 $41.8438 4,000 John N. DiNardo................................... 20,000 $41.8438 4,000 Clyde E. McKenzie................................. 20,000 $41.8438 4,000 H. Rickey Wells................................... 20,000 $41.8438 4,000
The following table shows the stock option grants made during fiscal year 1997 to all employees other than the five most highly compensated executive officers of the Company. 1997 STOCK OPTIONS
SHARES UNDERLYING OPTIONS GRANTED PURCHASE IN 1997 PRICE VESTING SCHEDULE --------------- -------- -------------------- All employees as a group excluding the five most highly compensated executive officers (111 one-third increments persons)....................................... 322,652 varies over three years
Additionally, as part of a special award approved by the Board of Directors on February 10, 1998, in recognition of the extraordinary contributions of the five most highly compensated executive officers in 1997 related to their work on the acquisition of MidCon, the Board granted stock options with an exercise price equal to the public offering price of the Company's Common Stock in the Company's equity offering which was expected to be completed in early March 1998. The stock option grants to each of the five most highly compensated officers were as follows: Mr. Hall 90,000 shares; Mr. Aaronson 60,000 shares; Mr. DiNardo 60,000 shares; Mr. McKenzie 60,000 shares; and Mr. Wells 60,000 shares. The exercise price of each of these options was set at $52.00 per share on March 4, 1998 when the Company's public offering was priced. These awards are not included in the columns reflecting stock ownership because the grants are subject to forfeiture as described in "Proposal to Amend the Incentive Plan" below. RESTRICTED STOCK AWARDS In 1997, restricted stock awards were granted to the five most highly compensated executives under the Incentive Plan as a component of long-term executive compensation. These grants are intended to reward executive officers for their contributions to key corporate operating and financial results, and to align the interests of these officers with the interests of the Company's shareholders. 11 15 The following table shows the restricted stock grants which were made on February 10, 1997 and August 8, 1997, and the portion of those grants with respect to which restrictions will be lifted in 1998. Holders of the restricted stock identified below are entitled to receive dividends on this stock and to exercise all voting rights with respect thereto. 1997 RESTRICTED STOCK
RESTRICTED STOCK RESTRICTED STOCK GRANTED GRANTED ON IN 1997 FOR WHICH ----------------- RESTRICTIONS WILL BE LIFTED NAME 2/10/97 8/8/97 IN 1998 ---- ------- ------ --------------------------- Larry D. Hall....................................... 55,000 15,000 3,000 Morton C. Aaronson.................................. 36,250 3,500 700 John N. DiNardo..................................... 36,250 3,500 700 Clyde E. McKenzie................................... 36,250 3,500 700 H. Rickey Wells..................................... 36,250 3,500 700
In recognition of the special performance of the Company's senior executives in completing the acquisition of MidCon in early 1998 as well as the overall performance of the Company in 1997, and consistent with the Incentive Plan to provide competitive compensation to attract and retain the Company's executive officers, on February 10, 1998, the Board of Directors approved a restricted stock award totaling 24,000 shares of stock for the five most highly compensated officers. The allocation of this award to these officers is as follows: Mr. Hall 10,000 shares, Mr. Aaronson 3,500 shares, Mr. DiNardo 3,500 shares, Mr. McKenzie 3,500 shares, and Mr. Wells 3,500 shares. Similar to the stock option awards approved on February 10, 1998, these restricted stock awards are not included in the columns reflecting stock ownership because the grants were not effective until the Company priced its equity offering, which was completed on March 4, 1998, and they are subject to forfeiture unless the shareholders approve the proposal to amend the Incentive Plan. See "Proposal to Amend the Incentive Plan." The only requirement for lapse of restrictions on the stock awards made in 1997 and 1998 is the continued employment with the Company of the executive on the date the restrictions are set to lapse. The restrictions for the restricted stock granted on February 10, 1998, lapse 20% immediately, and 20% each year on the anniversary date in 1999, 2000, 2001 and 2002. DIRECTORS AND EXECUTIVES DEFERRED COMPENSATION PLAN The Board of Directors adopted the Directors and Executive Officers Deferred Compensation Plan (the "Deferred Compensation Plan") effective January 1, 1998. Under the terms of the Deferred Compensation Plan, directors and executive officers, along with all other key employees who meet certain requirements as highly compensated employees of the Company, are eligible to participate in the plan. The Deferred Compensation Plan permits plan participants the option of deferring for each plan year base annual salary, incentive payments, director's fees, qualifying gains on stock options and restricted stock awards. One benefit of participating in the plan includes the opportunity for executive officers to earn a matching contribution of up to 15% of their annual base salary, based on the Company's annual attainment of performance objectives announced prior to the plan year during which the match will be earned. PROFIT SHARING PLAN Executive officers, along with all other employees who meet certain requirements regarding length of employment and full-time status, are eligible to participate in the Company's Employee Retirement Fund Trust Profit Sharing Plan ("Profit Sharing Plan"). Effective with the 1996 plan year, the profit sharing contribution was revised to relate directly to the attainment by the Company of specific earnings targets which were approved by the Board of Directors. The Profit Sharing Plan distribution opportunities range from 0 percent to 10 percent depending on successful achievement of these specific earnings targets. The Profit Sharing Plan payout for 1997 was 7 percent, reflecting the Company's accomplishments in 1997. 12 16 EXECUTIVE INCENTIVE PLAN The Compensation Committee annually approves an Executive Incentive Plan, which provides the means for determining and paying annual executive cash awards. The Executive Incentive Plan contains detailed criteria for the evaluation of performance by executive officers. Particular emphasis is placed on performance-oriented objectives, financial measures, cost control measures and other measures linked to strategic objectives designed to improve existing performance, development of business growth opportunities, management effectiveness, productivity, safety, cost control, service levels and efficiencies to clearly benefit customers and, thereby, shareholders. Target objectives are set for corporate performance and for division and personal objectives in January of each year. Examples of operating objectives in the 1997 Executive Incentive Plan included: identification and acquisition of a significant business opportunity such as the acquisition of MidCon; acquisition and integration of the Bushton Plant; completion of the Pony Express Pipeline including achievement of full operational capability; and achievement of satisfactory safety goals. Examples of financial goals in the 1996 Executive Incentive Plan included achievement of objectives for net operating income, annual operating income, and for consolidated return on beginning common equity. Fiscal year 1997 was a unique year for the Company, and the 1997 Executive Incentive Plan rewards for the five most highly compensated executives reflect special awards made in recognition of the identification and acquisition of MidCon. Prior to April 15 of each year, the Compensation Committee designates executive participants in the Executive Incentive Plan for that year. Participation in one year does not guarantee participation in following years. Participants are assigned to levels of eligibility, based on their degree of responsibility for corporate-wide results. In 1997, the five most highly compensated executives had bonus opportunities with a target range of 75%. The Compensation Committee has the discretionary authority to exceed this range. The Executive Incentive Plan is designed to keep individuals focused on their specific tasks while working as a team. In all cases, at least 50% of each participant's incentive compensation opportunity is based upon the Company's overall results. Depending upon the individual's position, the mix of corporate and division/ personal performance objectives can range from 50% corporate and 50% division/personal to 90% corporate and 10% division/personal. The mix of corporate and division/personal goals for each of the five most highly compensated executives, and the 1997 payout, is as follows: INCENTIVE COMPENSATION PERFORMANCE CRITERIA
EXECUTIVE CORPORATE GOAL DIVISION/PERSONAL GOAL 1997 PAYOUT --------- -------------- ---------------------- ----------- Larry D. Hall......................... 90% 0%/10% $450,000 Morton C. Aaronson.................... 80% 10%/10% $180,000 John N. DiNardo....................... 80% 10%/10% $210,000 Clyde E. McKenzie..................... 80% 10%/10% $200,000 H. Rickey Wells....................... 80% 10%/10% $210,000
The amount of incentive compensation paid under the Executive Incentive Plan is based upon actual achievements in the combination of corporate-wide, division and personal goals. Each of the five most highly compensated executives exceeded 100% of his corporate-wide, division and personal goals as well as completing the MidCon acquisition, for which special awards were made. Participants in the Executive Incentive Plan may defer a portion of the awards made under this plan. The Company's 1996 financial and operating results also exceeded its 1996 financial and operating objectives and this success is reflected in the individual incentive pay-outs reported in the 1996 portions of the bonus column of the Summary Compensation Table on page 15. 13 17 CHIEF EXECUTIVE OFFICER COMPENSATION As indicated above, the Company's executive compensation program, both annual and long-term, is based in large part upon the Company's business performance. Annual incentive compensation for the Chief Executive Officer under the Executive Incentive Plan depend primarily upon the overall performance of the Company. His long-term compensation from both performance-based and nonperformance-based stock options and restricted stock awards, and his salary level, also depend primarily upon Company performance. The Compensation Committee closely monitors the performance of the Chief Executive Officer, meeting without his presence to evaluate his success in achieving the corporate objectives in each year. As reported above, in 1997, Mr. Hall was awarded stock options to acquire 80,000 shares of the Company's stock and restricted stock of 70,000 shares, pursuant to the performance criteria described above. On February 10, 1998, the Compensation Committee determined that based on the Company's extraordinary achievement of 14.5% growth in corporate diluted earnings per share in 1997, coupled with the successful acquisition of MidCon and the strong 1997 financial and operating results for the Company, Mr. Hall had exceeded all performance objectives for 1997 under the incentive stock option agreement, his restricted stock agreement, and the Executive Incentive Plan and was granted the following awards as a part of his 1997 compensation: options to acquire 90,000 shares, 10,000 shares of restricted stock, the lifting of restrictions on 6,000 shares of formerly restricted stock, and a cash incentive compensation award of $450,000 under the Executive Incentive Plan. The options and restricted stock awarded to Mr. Hall are subject to forfeiture as described in "Proposal to Amend the Incentive Plan" below. The 1996 financial and operating results also exceeded the Company's expectations, and the Chief Executive Officer's cash incentive compensation under the Executive Incentive Plan in 1996 also reflects this achievement. Compensation Committee of the Board of Directors Mr. Edward H. Austin, Jr. Mr. Stewart A. Bliss (Chairman) Mr. Howard P. Coghlan Mr. Edward Randall, III 14 18 EXECUTIVE COMPENSATION The following table sets forth information regarding compensation during the last three fiscal years of the Chief Executive Officer and each of the four other most highly compensated executive officers of the Company (collectively, the "named executive officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ---------------------------- SECURITIES ANNUAL COMPENSATION RESTRICTED UNDERLYING ALL OTHER NAME AND ------------------------------ STOCK OPTIONS COMPENSATION PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) AWARDS($)(2) (#)(3) ($)(4) ------------------ ---- --------- ----------- ------------ ------------- ------------ Larry D. Hall 1997 499,999 450,000 2,662,656(5) 80,000(6) 11,220(7) Chairman/ 1996 434,006 375,000 1,081,875(5) 300,000(6) 16,299(7) President/CEO 1995 362,500 125,000 0 50,000(6) 13,583(7) Morton C. Aaronson 1997 210,000 180,000 1,487,703(9) 20,000(6) 10,280(10) Vice President & 1996 204,000 162,500(8) 761,719(9) 71,000(6) 87,269(10) Chief Marketing 1995(11) N/A N/A N/A N/A N/A Officer John N. DiNardo 1997 188,333 210,000 1,487,703(12) 20,000(6) 10,248(13) Vice President & 1996 159,155 101,250 119,006(12) 33,000(6) 15,457(13) General Manager 1995 125,000 23,000 0 10,000(6) 15,426(13) Clyde E. McKenzie 1997 214,000 200,000 1,487,703(15) 20,000(6) 10,293(16) Vice President & 1996 164,615(14) 112,500 769,688(15) 71,000(6) 50,462(16) Chief Financial 1995(17) N/A N/A N/A N/A N/A Officer H. Rickey Wells 1997 199,999 210,000 1,487,703(18) 20,000(6) 10,248(19) Vice President -- 1996 180,252 112,500 540,938(18) 51,000(6) 15,473(19) Business Operations 1995 122,500 0 0 15,000(6) 23,002(19)
- --------------- (1) The Company has no permanent long-term cash incentive plans. Instead, the Compensation Committee of the Board of Directors reviews the advisability of an executive cash incentive plan on an annual basis as discussed in the "Report of the Compensation Committee on Executive Compensation" contained herein. Amounts earned under such annual cash incentive plans are actually paid in the year following the year in which they were earned; however such amounts are reflected in the table in the year in which such amounts were earned. (2) The amounts disclosed in this column represent the dollar values of the restricted shares of Common Stock granted to the named executive officers in 1997 and 1996. The amounts listed in this column do not reflect the February 10, 1998 restricted stock awards of 24,000 shares to the named executive officers that are described in the last paragraph of the section entitled "Restricted Stock Awards" in the "Report of the Compensation Committee on Executive Compensation." (3) The amounts listed in this column do not reflect the February 10, 1998 stock option awards of 330,000 shares to the named executive officers which are described in the last paragraph of the section entitled "Stock Options" in the "Report of the Compensation Committee on Executive Compensation." (4) 1997 earnings under the All Other Compensation column include an amount earned under the Profit Sharing Plan earned in 1997 but credited under the plan in 1998. Under the provisions of the Company's Profit Sharing Plan (a defined contribution plan) established in 1945, during 1997, the Company contributed 7 percent and for 1996 an amount equal to a maximum of 10 percent of eligible employee compensation (determined by comparing 1997 and 1996 actual results to a predetermined graduated scale of annual operating income goals) to the Profit Sharing Plan; and for 1995 the Company contributed an amount equal to the lesser of 10 percent of the annual eligible compensation of eligible employees, excluding bonuses, or 10 percent of net income as defined by the Profit Sharing Plan. All employees who have completed 1,000 hours of service in a plan year are participants. Amounts allocated 15 19 to an employee's Profit Sharing Plan account vest immediately. Benefits are generally only payable on termination or retirement. Amounts earned under the Profit Sharing Plan are actually credited under the plan in the year following the year in which they were earned. (5) Mr. Hall was awarded 30,000 shares of performance-based restricted stock on August 19, 1996, 55,000 shares of restricted stock on February 10, 1997 and 15,000 shares of restricted stock on August 8, 1997, having a per share market value (based on the grant date average of the high and low prices of the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of December 31, 1997, Mr. Hall owned 94,000 shares of restricted stock, having a market value of $5,037,817, which were still subject to restriction, and with respect to which Mr. Hall receives dividends and may exercise all voting rights. Restrictions on the 1996 restricted stock award of 30,000 shares and the August 8, 1997 restricted stock award of 15,000 shares are eligible for lapsing over a five-year period in equal annual portions. The restrictions on the February 10, 1997 restricted stock award of 55,000 shares are eligible for lapsing over a five-year period, with 40% of such shares eligible for lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001 and 2002, respectively. (6) These options were granted under the Incentive Plan at an exercise price of 100% of the fair market value of the Common Stock as of the date of grant, are exercisable within 10 years from the respective dates of grant, and vest over a three, four or five-year period. See "Stock Options" on page 18 below. (7) Mr. Hall's 1997 earnings under the All Other Compensation column include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see discussion in footnote (4) above). The Company also paid $1,620 in term life and accidental death and dismemberment insurance premiums in 1997 on behalf of Mr. Hall. Mr. Hall's earnings for 1996 under the Profit Sharing Plan were $15,000 and insurance premiums paid on behalf of Mr. Hall for 1996 were $1,299, which amounts are reflected in the 1996 All Other Compensation column. Mr. Hall's 1995 Profit Sharing Plan distribution was $13,471 and insurance premiums paid on behalf of Mr. Hall for 1995 totaled $112. (8) Mr. Aaronson was awarded a signing bonus of $50,000 on January 4, 1996, and received an Executive Incentive Plan payout of $112,500 for the 1996 year. (9) Mr. Aaronson was awarded 7,500 shares of performance-based restricted stock on January 4, 1996, 15,000 shares of performance-based restricted stock on August 19, 1996, 36,250 shares of restricted stock on February 10, 1997 and 3,500 shares of restricted stock on August 8, 1997, having a per share market value (based on the grant date average of the high and low prices of the Common Stock) of $29.4375, $36.0625, $37.00 and $41.8438, respectively. As of December 31, 1997, Mr. Aaronson owned 52,250 shares of restricted stock, having a market value of $2,800,276, which were still subject to restriction, and with respect to which Mr. Aaronson receives dividends and may exercise all voting rights. Restrictions on the 1996 restricted stock awards of 7,500 and 15,000, and the August 8, 1997 restricted stock award of 3,500 shares, are eligible for lapsing in equal annual portions over a three-year and five-year periods, respectively. The restrictions on the February 10, 1997 restricted stock award of 36,250 shares are eligible for lapsing over a five-year period, with 40% of such shares eligible for lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001 and 2002, respectively. (10) Mr. Aaronson's 1997 earnings under the All Other Compensation column include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see discussion in footnote (4) above), and $680 in term life and accidental death and dismemberment insurance premiums paid in 1997 on behalf of Mr. Aaronson. Mr. Aaronson's 1996 Profit Sharing Plan distribution was $15,000 and insurance premiums paid on behalf of Mr. Aaronson for 1996 totaled $655. The All Other Compensation column for 1996 also reflects $71,614 in relocation and moving allowances. (11) Mr. Aaronson was not employed by the Company in 1995. (12) Mr. DiNardo was awarded 3,300 shares of performance-based restricted stock on August 19, 1996, 36,250 shares of restricted stock on February 10, 1997 and 3,500 shares of restricted stock on August 8, 1997, having a per share market value (based on the grant date average of the high and low prices of the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of December 31, 1997, Mr. DiNardo owned 41,950 shares of restricted stock, having a market value of $2,248,260, which were still subject to restriction, and with respect to which Mr. DiNardo receives dividends and may exercise all voting rights. Restrictions on the 1996 restricted stock award of 3,300 shares and the August 8, 1997 restricted stock award of 3,500 shares are eligible for lapsing in equal annual portions over a three-year 16 20 and five-year period, respectively. The restrictions on the February 10, 1997 restricted stock award of 36,250 shares are eligible for lapsing over a five-year period, with 40% of such shares eligible for lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001 and 2002, respectively. (13) Mr. DiNardo's 1997 earnings under the All Other Compensation column include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see discussion in footnote (4) above), and $648 in term life and accidental death and dismemberment insurance premiums paid in 1997 on behalf of Mr. DiNardo. Mr. DiNardo's 1996 Profit Sharing Plan distribution was $15,000 and insurance premiums paid on behalf of Mr. DiNardo for 1996 totaled $457. Mr. DiNardo's 1995 Profit Sharing Plan distribution and insurance premiums paid on behalf of Mr. DiNardo totaled $11,226, and Mr. DiNardo received an automobile allowance of $4,200. (14) Mr. McKenzie's employment by the Company began on March 25, 1996. (15) Mr. McKenzie was awarded 7,500 shares of performance-based restricted stock on March 25, 1996, 15,000 shares of performance-based restricted stock on August 19, 1996, 36,250 shares of restricted stock on February 10, 1997 and 3,500 shares of restricted stock on August 8, 1997, having a per share market value (based on the grant date average of the high and low prices of the Common Stock) of $30.50, $36.0625, $37.00 and $41.8438, respectively. As of December 31, 1997, Mr. McKenzie owned 54,750 shares of restricted stock, having a market value of $2,934,261, which were still subject to restriction, and with respect to which Mr. McKenzie receives dividends, and may exercise all voting rights. Restrictions on the 1996 restricted stock awards of 7,500 and 15,000 shares and the August 8, 1997 restricted stock award of 3,500 shares are eligible for lapsing in equal annual portions over a three-year and five-year periods, respectively. The restrictions on the February 10, 1997 restricted stock award of 36,250 shares are eligible for lapsing over a five-year period, with 40% of such shares eligible for lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001 and 2002, respectively. (16) Mr. McKenzie's 1997 earnings under the All Other Compensation column include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see discussion in footnote (4) above), and $693 in term life and accidental death and dismemberment insurance premiums paid in 1997 on behalf of Mr. McKenzie. Mr. McKenzie's 1996 Profit Sharing Plan distribution was $15,000 and insurance premiums paid on behalf of Mr. McKenzie for 1996 totaled $462. The All Other Compensation column for 1996 also reflects $35,000 in relocation allowance granted to Mr. McKenzie. (17) Mr. McKenzie was not employed by the Company in 1995. (18) Mr. Wells was awarded 15,000 shares of performance-based restricted stock on August 19, 1996, 36,250 shares of restricted stock of February 10, 1997 and 3,500 shares of restricted stock on August 8, 1997, having a per share market value (based on the grant date average of the high and low prices of the Common Stock) of $36.0625, $37.00 and $41.8438, respectively. As of December 31, 1997, Mr. Wells owned 49,750 shares of restricted stock, having a market value of $2,666,292, which were still subject to restriction, and with respect to which Mr. Wells receives dividends and may exercise all voting rights. Restrictions on the 1996 restricted stock award of 15,000 shares and the August 8, 1997 restricted stock award of 3,500 shares are eligible for lapsing in equal annual portions over a three-year and five-year period, respectively. The restrictions on the February 10, 1997 restricted stock award of 36,250 shares are eligible for lapsing over a five-year period, with 40% of such shares eligible for lapsing in 1999 and 20% of such shares eligible for lapsing in 2000, 2001 and 2002, respectively. (19) Mr. Wells' 1997 earnings under the All Other Compensation column include $9,600 earned for 1997 under the Company's Profit Sharing Plan (see discussion in footnote (4) above). The Company also paid $648 in term life and accidental death and dismemberment insurance premiums in 1997 on behalf of Mr. Wells. Mr. Wells' 1996 Profit Sharing Plan distribution was $15,000 and insurance premiums paid on behalf of Mr. Wells for 1996 totaled $473. Mr. Wells' earnings for 1995 included Profit Sharing Plan contributions and insurance premiums paid on behalf of Mr. Wells totaling $11,002 and an automobile allowance of $12,000. 17 21 STOCK OPTIONS Information concerning 1997 grants of options to purchase the Common Stock to the named executive officers follows: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------------------------------ PERCENT POTENTIAL REALIZABLE NUMBER OF OF TOTAL VALUE AT ASSUMED SHARES OPTIONS ANNUAL RATES OF STOCK UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTIONS EMPLOYEES IN EXERCISE OR OPTION TERM(3) GRANTED FISCAL BASE PRICE EXPIRATION ----------------------- NAME (#)(1) YEAR(2) ($/SH) DATE 5%($) 10%($) ---- ---------- ------------ ----------- ---------- ---------- ---------- Larry D. Hall.................. 80,000(4) 16.6% 41.8438 8/8/07 2,105,221 5,335,049 Morton C. Aaronson............. 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762 John N. DiNardo................ 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762 Clyde E. McKenzie.............. 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762 H. Rickey Wells................ 20,000(4) 4.1% 41.8438 8/8/07 526,305 1,333,762
- --------------- (1) Each option granted in 1997 has an exercise price equal to the fair market value of K N's Common Stock on the date of grant and expires ten years from the date of grant, subject to earlier termination in certain events related to termination of employment of the optionee. The exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares or by offset of the underlying shares, subject to certain conditions. Under the terms of the Incentive Plan, the Compensation Committee retains discretion, subject to plan limits, to accelerate exercise dates and otherwise waive or amend any conditions of options granted thereunder. (2) The total number of options granted to Company employees in 1997 was 482,652. (3) The values set forth in this column assume annual rates of stock appreciation of 5% and 10%. The Company has no ability to predict whether such appreciation rates will be achieved, and, therefore, cannot predict whether the potential realizable values set forth in this column realistically indicate the value of the options granted to the named executive officers in 1997. (4) These options vest over five years, subject to automatic acceleration of full exercisability upon a Change of Control of the Company (as defined in the Change of Control Severance Agreement). The following table sets forth information about option exercises in 1997 by the named executive officers and the value of the remaining options held by each such officer at year-end. AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT AT YEAR-END(#) YEAR-END($) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1) ---- --------------- ----------- --------------------- ------------------- Larry D. Hall................. 26,000 611,541 181,250/349,000 4,336,959/6,264,046 Morton C. Aaronson............ 9,290 188,853 22,210/ 64,500 374,261/1,207,924 John N. DiNardo............... 425 10,749 30,950/ 45,000 714,363/ 775,158 Clyde E. McKenzie............. 2,500 99,375 29,000/ 67,000 529,783/1,329,159 H. Rickey Wells............... 1,250 39,792 42,000/ 57,500 1,050,783/ 997,111
18 22 - --------------- (1) Based on the average of the high and low price of the Company's Common Stock on the NYSE Composite Tape on December 31, 1997, which was $53.5938. EXECUTIVE STOCK OWNERSHIP The following table sets forth information about beneficial stock ownership of the named executive officers, as well as all executive officers and directors as a group. EXECUTIVE OFFICER BENEFICIAL STOCK OWNERSHIP
AMOUNT AND NATURE OF COMMON STOCK BENEFICIALLY OWNED AS OF FEBRUARY 20, NAME 1998(1)(2)(3) ---- ------------------------- Larry D. Hall............................................... 385,738(4) Morton C. Aaronson.......................................... 106,889 John N. DiNardo............................................. 88,778 Clyde E. McKenzie........................................... 111,886 H. Rickey Wells............................................. 115,450 All executive officers and directors as a group............. 2,094,530
- --------------- (1) No named executive officer beneficially owns any preferred stock of the Company. No named executive officer beneficially owned more than 1 percent of the Company's outstanding Common Stock other than Mr. Hall, who beneficially owns 1.2% of the outstanding Common Stock. All executive officers and directors as a group owned approximately 6.5% percent of the outstanding Common Stock. Respecting share ownership by directors, see "Election of Directors" on page 2. In making the computations required in connection with the preceding statement, with respect to any executive officer who held options to purchase shares of the Common Stock exercisable within 60 days of February 20, 1998, it was assumed that such options had been exercised. The following number of shares representing such unexercised options were added to the holdings of each of the following executive officers: Mr. Hall, 241,250 shares; Mr. Aaronson, 43,210 shares; Mr. DiNardo, 41,950 shares; Mr. McKenzie, 52,500 shares; and Mr. Wells, 59,000 shares. A total of 778,467 shares representing such unexercised options were added to the holdings of all executive officers and directors as a group. (2) Does not include shares earned in 1997 under the Company's Profit Sharing Plan. Fifty percent of the profit sharing award is required to be invested in the Company's Common Stock. (3) Unless otherwise indicated, the executive officers have sole voting and investment power over the shares listed above, other than shared rights created under joint tenancy or marital property laws as between the Company's executive officers and their respective spouses, if any. (4) Includes 139 shares of Common Stock owned by Mr. Hall's wife, as to which Mr. Hall disclaims beneficial ownership and over which he has neither investment nor voting power. Also includes 88,000 restricted shares that Mr. Hall has the right to vote. Does not include any of the shares attributable to the K N Energy, Inc. Non-Qualified Benefit Plan Trust of which Mr. Hall is a beneficiary. The cumulative number of shares attributable thereto and held by the Trustee thereof as of December 31, 1997 was 4,392 shares. 19 23 PERFORMANCE GRAPH The following Performance Graph compares the performance of the Company's Common Stock to the Standard & Poor's 500 Stock Index and to the Standard & Poor's Natural Gas Index for the Company's last five fiscal years. The graph assumes that the value of the investment in the Company's Common Stock and each index was $100 at December 31, 1992, and that all dividends were reinvested. Total net return to the Company's shareholders in 1997 exceeded 40.9%, as compared to an average return of 32.8% for the Standard & Poor's 500 Stock Index and of 18.3% for the Standard & Poor's Natural Gas Index for the same period. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG K N ENERGY, INC., THE S&P 500 INDEX AND THE S&P NATURAL GAS INDEX
MEASUREMENT PERIOD S & P (FISCAL YEAR COVERED) K N E S & P 500 NATURAL GAS - --------------------- ----- --------- ----------- 1992 100 100 100 1993 142 110 119 1994 137 111 113 1995 174 153 160 1996 242 189 213 1997 341 251 252
PENSION AND SUPPLEMENTAL BENEFITS The Company's employees and officers participate in its Retirement Plan and Trust Agreement for Non-Bargaining Employees (the "Pension Plan"). This is a defined benefit plan which is not based upon a participant's final years' compensation. Annual pension benefits at the normal retirement age of 65 are equal to the total of the yearly accrued annuity credits. Prior to January 1, 1989, the yearly annuity credit equaled 1.1 percent of the first $8,400 of compensation and 2.1 percent of compensation in excess of $8,400. Effective January 1, 1989, the yearly annuity credit equals 1.75 percent of the first $19,200 of compensation and 2.1 percent of compensation in excess of $19,200. For purposes of the Pension Plan, compensation excludes bonuses and commissions, and includes overtime and special duty compensation. Assuming continued employment to age 65 at present salaries, the estimated annual pension benefits of the named executive officers are as follows: Mr. Hall, $97,032, Mr. Aaronson, $92,016, Mr. DiNardo, $64,236, Mr. McKenzie, $55,766, and Mr. Wells, $104,256. These benefits are not subject to any deduction for Social Security benefits or other offset amounts. The Company's Profit Sharing Plan, described on page 12 above, also provides retirement benefits to eligible employees including executive officers. In addition, the Company has supplemental benefit plans which are designed to assure payment to certain employees of benefits that would be provided under the Pension Plan and the Profit Sharing Plan except for the dollar limits on accrued benefits imposed by the Code. 20 24 SEVERANCE AND OTHER AGREEMENTS The Company has entered into severance agreements with certain key employees, including all of its named executive officers, effective on or about October 18, 1996. The agreements provide severance benefits if the officer is involuntarily terminated under certain circumstances within two years following a change in control of the Company. A "change in control" means (i) a change in the majority of the Board of Directors of the Company as a result of any reason other than normal retirement, death or disability; (ii) the sale by the Company of all or substantially all of its assets or the approval by the shareholders of a plan of complete liquidation; (iii) a person or group becoming the beneficial owner of 30% or more of the outstanding voting stock of the Company; or (iv) the approval by the shareholders of a merger or consolidation other than one in which the Company's outstanding voting securities prior thereto constitute more than 50% of the combined voting power of the surviving entity and other than a merger in which no person acquires more than 30% of the Company's then outstanding securities. Such benefits are provided if, within two years following a change in control, the officer is involuntarily terminated (other than for willful misconduct, gross negligence, death, disability or retirement), or the officer terminates his employment because of a "change of duties." A "change of duties" means generally a reduction in compensation, downgrading of position or authority, or the requirement to relocate. Upon such termination, the officer would be entitled to receive in a lump sum an amount, subject to withholding tax and employee benefit premiums or similar adjustments, equal to a multiple of the officer's annual compensation (including base salary and cash incentive bonus) earned at termination, plus payment of the costs for or provision of certain welfare benefits for a specified period after involuntary termination. In addition, all stock options or restricted stock granted to such person and outstanding at the time of involuntary termination become immediately exercisable and all restrictions thereon are removed. The persons who are parties to such agreements are bound by certain noncompetition and confidentiality provisions. The following table summarizes Change of Control Severance Agreement terms for the Company's five most highly compensated officers: CHANGE OF CONTROL SEVERANCE AGREEMENTS
DURATION OF NAME SEVERANCE PAYMENT WELFARE BENEFITS ---- ----------------- ---------------- Larry D. Hall........................................ 3x executive compensation 36 months Morton C. Aaronson................................... 2x executive compensation 24 months John N. DiNardo...................................... 2x executive compensation 24 months Clyde E. McKenzie.................................... 2x executive compensation 24 months H. Rickey Wells...................................... 2x executive compensation 24 months
The Company entered into an Employment Agreement with Morton C. Aaronson effective January 1, 1996 for a two-year period, with renewal options for successive one-year terms. This Employment Agreement was renewed for 1998. The terms of this agreement include: a guaranteed base salary of at least $202,000; provision of benefits customarily provided to the Company's executive management employees; and provision of one year's base salary if the Agreement's term is not renewed in exchange for Mr. Aaronson's compliance with non-competition and confidentiality covenants. The Company entered into an agreement with Mr. Battey obligating him to provide consulting services to the Company for two years following his retirement on April 11, 1996, for compensation of $300,000, payable in four equal semi-annual installments over the term of the agreement which expires in 1998. 21 25 PROPOSAL TO INCREASE THE AUTHORIZED COMMON STOCK (ITEM 2) The K N Board of Directors has proposed and recommends to the K N shareholders that they adopt an amendment to the Company's Restated Articles of Incorporation that would increase the number of authorized shares of Common Stock, par value $5.00 per share, from 50,000,000 shares to 150,000,000 shares. The additional 100,000,000 shares would be a part of the existing class of Common Stock and, if and when issued, would have the same rights and privileges as the shares of Common Stock presently issued and outstanding. As a result of this amendment, the total number of shares of all classes, both Common Stock and Preferred Stock, which the Company shall have authority to issue shall be 152,200,000. As of February 20, 1998, 32,140,425 shares of Common Stock were outstanding and an additional 2,810,393 shares were reserved for issuance under K N's stock option, dividend reinvestment, employee stock purchase and employee benefit plans (the "Plans"). Later in this Proxy Statement, the Company is asking the shareholders to approve an increase in the number of shares available for issuance under both the Company's Incentive Plan and Employee Stock Purchase Plan, for a total of 2,600,000 additional shares. Also, the Company recently borrowed money under a bank facility in order to finance the acquisition of MidCon. In order to refinance some of the money borrowed under the bank facility, the Company completed a public offering in March 1998 selling 11,000,000 shares of Common Stock. After taking into consideration the shares reserved for issuance under the Company's Plans, the proposed increase of the authorized shares under the Company's Incentive Plan and Employee Stock Purchase Plan, and the recent public offering, the Company will have only 1,449,182 shares of Common Stock available for issuance. The K N Board of Directors believes that the proposed increase in the number of authorized shares of Common Stock from 50,000,000 shares to 150,000,000 shares is desirable and prudent so that additional authorized shares of Common Stock are readily available for issuance in connection with possible future financings, corporate mergers and acquisitions, strategic relationships with corporate partners, employee benefit plans and for other general corporate purposes. Increasing the authorized shares of Common Stock will also provide a reserve of shares available for issuance in connection with possible stock splits or stock dividends if the Board of Directors determines it is desirable to facilitate a broader base of shareholders. Currently, K N has no plans, agreements or arrangements in place requiring the issuance of additional shares of Common Stock for these or other purposes, other than possible future issuances pursuant to existing share reservations. However, having shares available for issuance would enable K N to take timely advantage of market conditions and other favorable opportunities for raising new capital without the delay and expense associated with holding special meetings of shareholders as would otherwise be required by law or stock exchange regulations. The ability of the K N Board of Directors to issue additional Common Stock could be considered to have an anti-takeover effect to the extent that the Board could use such shares to dilute the percentage ownership or voting power of a person seeking to obtain control of K N. The K N Board of Directors will be authorized to determine whether, when and on what terms the issuance of shares of Common Stock may be warranted in connection with any of the foregoing purposes. The Restated Articles of Incorporation and By-laws of the Company contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the K N Board of Directors and in the policies formulated by the Board and to discourage an unsolicited takeover of K N if the Board determines that such a takeover is not in the best interests of K N and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire K N or to remove incumbent management even if some (or even a majority) of the shareholders of K N deem such an attempt to be in their best interests. BOARD RECOMMENDATION The K N Board of Directors recommends a vote FOR the proposal to amend the Restated Articles of Incorporation to increase the number of authorized shares of Common Stock of the Company from 50,000,000 shares to 150,000,000 shares. 22 26 PROPOSAL TO AMEND THE INCENTIVE PLAN (ITEM 3) The Incentive Plan became effective when it received shareholder approval at the 1994 Annual Meeting. On April 11, 1996, the shareholders approved an amendment to the Incentive Plan increasing the shares subject to the Incentive Plan from 700,000 shares to 2,200,000 shares. As of December 31, 1997, there were only 106,715 shares left in the Incentive Plan. On February 10, 1998, the Board of Directors voted to amend the Incentive Plan to increase the authorized number of shares of Common Stock issuable thereunder from 2,200,000 shares to 3,800,000 shares. Such amendment will become effective upon the affirmative vote of a majority of shares present in person or by proxy and entitled to vote at the 1998 Annual Meeting. Should the amendment not be approved, the Incentive Plan will remain in full force and effect, although the stock options and restricted stock awarded thereunder in February 1998 will be forfeited as explained below. The purposes of the Incentive Plan are (i) to further the growth and financial success of K N and its subsidiaries by aligning the interest of the Company's shareholders and recipients of awards under the Incentive Plan thereby increasing the proprietary interest of such recipients in the Company's growth and success, and (ii) to increase the flexibility of K N to compensate key employees and to motivate, attract and retain such employees. The Board of Directors believes that the Incentive Plan has fulfilled these purposes to date. As indicated in the "Report to the Compensation Committee on Executive Compensation" herein, during the last four years awards of stock options under the Incentive Plan have comprised the Company's major long-term executive benefit. With the recent acquisition of MidCon, the number of employees of the Company has more than doubled, making the need for an increase in the number of shares available for issuance under the Incentive Plan more critical. In structuring the Incentive Plan, the Board of Directors sought to provide for a variety of awards that could be flexibly administered in order to carry out the purposes of the Incentive Plan, to permit the Company to keep pace with changing developments in compensation programs and to make the Company more competitive with those companies that offer creative incentives to attract and keep employees. The flexibility of the Incentive Plan allows the Company to respond to changing circumstances such as changes in tax laws, accounting rules, securities regulations and other rules regarding benefit plans. The Incentive Plan grants the administrators flexibility in creating the terms and restrictions deemed appropriate for particular awards as facts and circumstances warrant. 23 27 The following table presents certain information with respect to options already granted under the Incentive Plan during the Company's fiscal year ending December 31, 1998 to (i) the named executive officers, (ii) all executive officers as a group, (iii) all non-executive officer directors as a group, and (iv) all non-executive officer employees as a group. In each case, the options have an exercise price of $52.00, the options will expire ten years from the date of grant, and the options vest over three or five year periods. 1998 STOCK OPTION GRANTS
1994 LONG-TERM INCENTIVE PLAN --------------------------------------------- NUMBER OF SHARES UNDERLYING NAME AND POSITION DOLLAR VALUE(1) OPTIONS GRANTED ----------------- --------------- --------------------------- Larry D. Hall.......................................... $ 67,500 90,000 Chairman/President and CEO(2) Morton C. Aaronson..................................... $ 45,000 60,000 Vice President and Chief Marketing Officer(2) John N. DiNardo........................................ $ 45,000 60,000 Vice President and General Manager(2) Clyde E. McKenzie...................................... $ 45,000 60,000 Vice President and Chief Financial Officer(2) H. Rickey Wells........................................ $ 45,000 60,000 Vice President -- Business Operations(2) All Executive Officers as a Group(2)................... $247,500 330,000 All Non-Executive Officer Directors as a Group......... 0 0 All Non-Executive Officer Employees as a Group(2)...... $ 37,875 50,500
- --------------- (1) The current dollar value of these options is unknown and may vary substantially from the amounts shown here. The dollar value listed here is based on the difference between the exercise price ($52.00) and the closing price of the Company's Common Stock on the NYSE Composite Tape on March 10, 1998 ($52.75) multiplied by the number of shares underlying the option(s). This value assumes that all the options are immediately exercisable. However, these options vest and become exercisable in equal annual increments over either a three or five year period. (2) Option grants to this person or group of persons for the remainder of 1998 will be made at the discretion of the Board and are not determinable at this time. Accordingly, this table sets forth information regarding option grants actually made to such person or group of persons on March 4, 1998. 24 28 The following table presents certain information with respect to restricted stock already granted under the Incentive Plan during the Company's fiscal year ending December 31, 1998 to (i) the named executive officers, (ii) all executive officers as a group, (iii) all non-executive officer directors as a group, and (iv) all non-executive officer employees as a group. In each case, the restricted stock awards vest in equal one-third or one-fifth increments over three or five years, respectively. 1998 RESTRICTED STOCK GRANTS
1994 LONG-TERM INCENTIVE PLAN -------------------------------------------- NUMBER OF NAME AND POSITION DOLLAR VALUE(1) RESTRICTED SHARES GRANTED ----------------- --------------- ------------------------- Larry D. Hall........................................... $ 520,000 10,000 Chairman/President and CEO(2) Morton C. Aaronson...................................... $ 182,000 3,500 Vice President and Chief Marketing Officer(2) John N. DiNardo......................................... $ 182,000 3,500 Vice President and General Manager(2) Clyde E. McKenzie....................................... $ 182,000 3,500 Vice President and Chief Financial Officer(2) H. Rickey Wells......................................... $ 182,000 3,500 Vice President -- Business Operations(2) All Executive Officers as a Group(2).................... $1,248,000 24,000 All Non-Executive Officer Directors as a Group.......... 0 0 All Non-Executive Officer Employees as a Group(2)....... $1,565,200 30,100
- --------------- (1) Closing market price on the date of grant, March 4, 1998, multiplied by the number of restricted shares. (2) Restricted stock grants to this person or group of persons for the remainder of 1998 will be made at the discretion of the Board and are not determinable at this time. Accordingly, this table sets forth information regarding restricted stock grants actually made to such person or group of persons on March 4, 1998. If the shareholders do not approve the proposed increase in the number of authorized shares under the Incentive Plan, the stock options and restricted stock awards reflected in the above tables will be forfeited and returned to the Company for cancellation. INCENTIVE PLAN SUMMARY ADMINISTRATION The Incentive Plan provides for administration by the Compensation Committee of the Board of Directors (the "Compensation Committee"). No member of the Compensation Committee can participate in the Incentive Plan. Among the powers granted to the Compensation Committee are the authority to interpret the Incentive Plan, establish rules and regulations for its operation, select employees of the Company and its subsidiaries to receive awards, and determine the form, amount and other terms and conditions of awards. The Compensation Committee also has the power to modify or waive restrictions on awards, to amend awards and to grant extensions and accelerate awards. ELIGIBILITY FOR PARTICIPATION Officers and other key employees of the Company and subsidiary companies (in which the Company owns directly or indirectly more than a 50 percent voting equity interest) are eligible to be selected to 25 29 participate in the Incentive Plan. The selection of participants from eligible persons is within the sole discretion of the Compensation Committee. Directors who are not employees are not eligible to participate in the Incentive Plan. The Company estimates that approximately fifty persons are currently eligible to receive awards under the Incentive Plan. TYPES OF AWARDS The Incentive Plan provides for the grant of any or all of the following types of awards: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) stock awards, including restricted stock; and (4) any other stock-based award established by the Committee with terms consistent with the Incentive Plan's purposes. Any stock option granted in the form of an incentive stock option must satisfy the applicable requirements of Section 422 of the Code. Awards may be granted individually, in combination, or in tandem as determined by the Committee. OPTIONS Options granted under the Incentive Plan may be Incentive Stock Options ("ISOs"), as defined in Section 422 of the Code, or options not qualifying for treatment as ISOs ("Nonstatutory Stock Options" and together with ISOs, referred to as "Options"). The Compensation Committee determines the recipients of Options and the terms of the Options, including the number of shares for which an Option is granted, the term of the Option and the time(s) when the Option can be exercised. Conditions respecting the exercise of an Option may, in the discretion of the Compensation Committee, be contained in the agreement with the participant or in the Compensation Committee's procedures. Each ISO must comply with all the requirements of Section 422 of the Code. The Compensation Committee may in its discretion waive any condition respecting the exercise of any Option and may accelerate the time at which any Option is exercisable. The price per share of Common Stock subject to an Option (the "Option Price") is set by the Compensation Committee. In the case of ISOs, the Option Price shall not be less than the fair market value of Common Stock (generally determined to be the average of the high and low sales price reported in The Wall Street Journal for the New York Stock Exchange -- Composite Transactions) on the date of the grant of the ISOs. The Compensation Committee also determines the manner in which the Option Price of an Option may be paid, which may include the tender of cash or securities or the withholding of Common Stock or cash to be received through grants or any other arrangements satisfactory to the Compensation Committee. The Incentive Plan provides that no ISO shall be exercisable later than 10 years after the date of grant. The Incentive Plan, however, does not restrict the term of a Nonstatutory Stock Option. Options are not transferable except by will or the laws of descent and distribution. STOCK APPRECIATION RIGHTS In the discretion of the Compensation Committee, Stock Appreciation Rights ("SARs") may be granted separately or in tandem with the grant of an Option. An SAR is a grant entitling the participant to receive an amount in cash or shares of Common Stock or a combination thereof, as the Compensation Committee may determine, having a value equal to (or if the Compensation Committee shall determine at the time of grant, less than) the excess of (i) the fair market value on the date of exercise of the shares of Common Stock with respect to which the SAR is exercised over (ii) the fair market value of such shares on the date of the grant (or over the Option Price, if the SAR is granted in tandem with an Option). An SAR granted in tandem with a Nonstatutory Stock Option may be granted either at or after the time of the grant of the Nonstatutory Stock Option. An SAR granted in tandem with an ISO may be granted only at the time of the grant of the ISO. An SAR granted in tandem with an Option terminates and is no longer exercisable upon the termination or exercise of the related Option. Subject to the limitations set forth in the Incentive Plan, SARs shall be subject to such terms and conditions as shall be determined from time to time by the Compensation Committee. The Compensation Committee at any time may accelerate the ex- 26 30 ercisability of any SAR and otherwise waive or amend any conditions with respect to the grant of an SAR. SARs are not transferable except by will or the laws of descent and distribution. RESTRICTED STOCK The Incentive Plan provides that the Compensation Committee will have discretion to make grants of restricted stock. A restricted stock grant entitles the recipient to acquire, at no cost or for a purchase price determined by the Compensation Committee on the date of the grant, shares of Common Stock subject to such restrictions and conditions as the Committee may determine at the time of the grant. Upon (i) the grant of restricted stock (or upon payment of the purchase price for restricted stock if a purchase price is required) and (ii) recording of the issuance of the restricted stock in the stock ledger of the Company, the recipient may have all the rights of a stockholder with respect to the restricted stock, including voting and dividend rights. A grant of restricted stock will be subject to non-transferability restrictions, Company repurchase and forfeiture provisions and such other conditions (including conditions on voting and dividends) as the Compensation Committee shall impose at the time of grant. Shares of restricted stock may not be transferred or otherwise disposed of by a participant except as specifically provided for in the Incentive Plan. Upon the grant of a restricted stock award, the Compensation Committee shall specify the conditions and time periods, if any, under which the restrictions on the shares subject to the grant will lapse. Restrictions may include vesting restrictions based upon matters such as timing, but also could relate to other matters. Subsequent to the lapse of all restrictions on shares of restricted stock, such shares shall cease to be restricted stock and shall be deemed "vested". The Compensation Committee may in its discretion waive any condition or restriction related to a grant of restricted stock or accelerate the date(s) on which a grant of restricted stock vests. In the event of employment termination for a participant, for any reason, prior to shares of restricted stock becoming vested, the Company has the right, in the discretion of the Compensation Committee, to repurchase such shares at their purchase price, or to require forfeiture of such shares if acquired at no cost. OTHER AWARDS In addition to Options, SARs and restricted stock, the Incentive Plan permits the Compensation Committee to grant awards consisting of any other form of stock-based consideration that the Compensation Committee determines is consistent with the purposes of the Incentive Plan. The grant of additional types of awards is subject to the overall limitation on the number of shares of Common Stock (or stock equivalents) that may be granted under the Incentive Plan. Pursuant to such authority, the Compensation Committee could grant awards such as restricted units, phantom stock, performance awards, performance units, limited stock appreciation rights, stock acquisition rights, valuation protection rights, or any other type of stock-based award or combination or derivative of various types of awards. The form and terms of any such additional types of awards, as well as the terms and conditions of the grant of any such awards, will be determined by the Compensation Committee and set forth in the agreements entered into with participants and in the Compensation Committee's procedures. Such grants (including grants of Options, SARs and restricted stock) may be settled at the discretion of the Compensation Committee in cash, shares of Common Stock or any combination thereof. Although the Compensation Committee has not previously granted awards under other Company plans other than stock options and restricted stock, and has no present plans to change from past practice, future circumstances could result in other forms of awards being granted by the Compensation Committee under the Incentive Plan. FEDERAL TAX CONSEQUENCES Under the Code, a participant receiving a Nonstatutory Stock Option ordinarily does not realize taxable income upon the grant of the Option. A participant does, however, realize ordinary income upon the exercise of a Nonstatutory Stock Option to the extent that the fair market value of the Common Stock on the date of exercise exceeds the Option Price. The Company is entitled to a Federal income tax deduction for 27 31 compensation in an amount equal to the ordinary income so realized by the participant, provided that the Company withholds Federal income tax with respect to the amount of such compensation. Upon the subsequent sale of the shares acquired pursuant to a Nonstatutory Stock Option, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant, although there will be no tax consequences for the Company. The grant of an ISO does not result in taxable income to a participant. The exercise of an ISO also does not result in taxable income, provided that the employment requirements specified in the Code are satisfied, although such exercise may give rise to alternative minimum tax liability for the participant. In addition, if the participant does not dispose of the Common Stock acquired upon exercise of an ISO during the statutory holding period, then any gain or loss upon subsequent sale of the Common Stock will be a long-term capital gain or loss, assuming the shares represent a capital asset in the participant's hands. The statutory holding period is the later of two years from the date the Option is granted or one year from the date the Common Stock is transferred to the participant pursuant to the exercise of the Option. If the employment and statutory holding period requirements are satisfied, the Company may not claim any Federal income tax deduction upon either the exercise of the ISO or the subsequent sale of the Common Stock received upon exercise. If these requirements are not satisfied, the amount of ordinary income taxable to the participant is the lesser of (i) the fair market value of the Common Stock on the date of exercise minus the Option Price, and (ii) the amount realized on disposition minus the Option Price. The Company is entitled to a Federal income tax deduction in an amount equal to the ordinary income so realized by the participant. Generally, a recipient does not realize taxable income upon the grant of a SAR but realizes ordinary income upon its exercise in an amount equal to the cash received and/or the fair market value of any Common Stock received. The Company is entitled to a Federal income tax deduction in an amount equal to the ordinary income realized by the participant, provided that the Company withholds Federal income tax with respect to the amount of such compensation. Upon the subsequent sale of shares acquired pursuant to a SAR, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant. In general, a participant receiving restricted stock does not realize taxable income upon the grant of restricted stock. A participant will, however, realize ordinary income when the restricted stock becomes vested to the extent that the fair market value of the Common Stock on that date exceeds the price, if any, paid for the restricted stock or, if no price was paid, to the extent of the fair market value of the Common Stock on that date. However, the participant may elect (within 30 days after the grant of restricted stock) to realize ordinary income on the date of the grant to the extent of the fair market value of the restricted stock (determined without regard to restrictions on transferability and any substantial risk of forfeiture). If such election is made, the participant will not realize ordinary income when the restricted stock becomes vested. In addition, if such an election is made and the restricted stock is subsequently forfeited, the participant is not entitled to a deduction but will be allowed a capital loss equal to the excess of the amount paid, if any, for such shares over the amount realized if any, on such forfeiture. Upon a subsequent sale of vested restricted stock, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant. The Company is entitled to a Federal income tax deduction in an amount equal to the ordinary income realized by the recipient of the restricted stock, provided that the Company withholds Federal income tax with respect to the amount of such compensation. Dividends paid to the participant on restricted stock during the restricted period are ordinary compensation income to the participant and deductible as such by the Company. If the exercisability of an Option or a SAR, or the elimination of restrictions on restricted stock is accelerated, or special cash settlement rights are triggered and exercised, as a result of a Change in Control of the Company, all or a portion of the value of the relevant award at that time may be a "parachute payment" for purposes of determining whether a 20% excise tax (in addition to income tax otherwise owed) is payable by the participant as a result of the receipt of an "excess parachute payment" pursuant to Section 4999 of the Code. The Company will not be entitled to a deduction for that portion of any parachute payment which is subject to the excise tax. 28 32 The Code limits the Company's tax deduction for all compensation paid to an employee in any one year to $1,000,000. The Company's deductions related to grants under the Incentive Plan would be subject to this limitation. BOARD RECOMMENDATION The Board of Directors recommends a vote FOR the proposal to increase by 1,600,000 shares the number of shares authorized for issuance under the Incentive Plan. PROPOSAL TO AMEND THE EMPLOYEE STOCK PURCHASE PLAN (ITEM 4) The Employee Stock Purchase Plan became effective when it received shareholder approval at the 1990 Annual Meeting. As of December 31, 1997, there were only 27,266 shares left in the Employee Stock Purchase Plan. On February 10, 1998, the Board of Directors voted to amend the Employee Stock Purchase Plan to increase the authorized number of shares of Common Stock issuable thereunder from 600,000 shares to 1,600,000 shares. Such amendment will become effective upon the affirmative vote of a majority of shares present or represented by proxy and entitled to vote at the 1998 Annual Meeting. Should the amendment not be approved, the Employee Stock Purchase Plan will remain in full force and effect. The Employee Stock Purchase Plan is intended to qualify under Section 423 of the Code. The purpose of the plan is to encourage and enable eligible employees of the Company and its participating subsidiaries to acquire proprietary interests in the Company through the ownership of Common Stock in order to establish a closer identification of their interests with those of the Company. The plan provides the employees with a direct means of participating in the Company's growth and earnings, which, in turn, will provide motivation for participating employees to remain in the employ of, and to give greater effort on behalf of, the Company. With the recent acquisition of MidCon, the number of employees of the Company has more than doubled, making the need for an increase in the number of shares available for issuance under the plan more critical. EMPLOYEE STOCK PURCHASE PLAN SUMMARY Under the Employee Stock Purchase Plan, the Compensation Committee of the Board of Directors administers the plan. As of the effective date of each offering under the plan, each eligible full-time employee of K N or a participating subsidiary may elect to purchase shares through payroll deductions of up to ten percent of pay during the offering, which will not exceed twelve months. At the end of the offering, the balance in each participant's payroll deduction account (including interest on the balance at the rate chosen by the Compensation Committee) will be used to purchase as many whole shares as the amount will purchase, and the balance remaining will be returned to the participant. The purchase price per share pursuant to the plan shall be 85 percent of the lesser of the market value of the Common Stock on the first or last day of the offering, but in no event shall it be less than the par value of the Common Stock, which is $5.00. The number of shares an employee is allowed to purchase in any one offering is restricted by provisions of the Code, and may be further limited by the Compensation Committee before the beginning of an offering. Any employee who possesses 5 percent or more of the total combined voting power or value of all classes of stock of the Company (including shares that could be purchased pursuant to the plan) is not eligible to participate in the plan. Directors who are not employees of the Company are not eligible to participate in the plan. Shares issued under the plan may be either authorized and unissued shares or treasury shares, or shares purchased on the open market. The plan provides for appropriate adjustments or other action by the Compensation Committee or the Board of Directors to reflect mergers, consolidations, recapitalizations, certain sales of assets, combinations of shares, a change in control of the Company through share ownership or a contested election of directors, changes in corporate structure, stock splits, stock dividends, or certain other significant changes in the Common Stock or in the Company. The Board of Directors may amend the plan, but not in a manner which would change or impair outstanding rights to purchase Common Stock without the participant's consent, and may not modify the requirements as to eligibility for participation, materially 29 33 increase the benefits accruing to participants under the plan, or increase the maximum number of shares which may be purchased by all employees under the plan, without shareholder approval. FEDERAL INCOME TAX CONSEQUENCES An employee who participates in the plan will not realize taxable income at the beginning of an offering or at the purchase of shares pursuant to the plan. If no disposition of the shares is made by the participant within two years after the beginning of the offering and one year after the purchase of the shares (the "required holding period"), then upon disposition of shares after such required holding period or upon death, the participant will realize ordinary income in an amount equal to the lesser of (i) the excess of the fair market value of the shares at the time of disposition or death over the amount paid for the shares or (ii) the excess of the fair market value of the shares on the effective date of the offering over 85 percent of that value. Any additional gain is treated as a capital gain. The Company will not be entitled to any deduction in connection with the purchase of shares pursuant to the plan if the holding period requirements are met. Upon disposition of shares before the end of the required holding period, a participant will have ordinary income in an amount equal to the difference between the purchase price and the fair market value of the stock on the purchase date, and the Company will have a corresponding deduction. The Company has the right to deduct from pay, or require any payments necessary, to enable it to satisfy its withholding obligations. BOARD RECOMMENDATION The Board of Directors recommends a vote FOR the proposal to increase by 1,000,000 shares the number of shares authorized for issuance under the Employee Stock Purchase Plan. 30 34 PRINCIPAL SHAREHOLDERS COMMON STOCK According to information supplied to the Company by the beneficial owners listed below and, where applicable, the books and records of the Company, the following entities each owned beneficially, as indicated on the dates shown, more than five percent of the outstanding shares of the Common Stock of the Company on the dates indicated in parentheses below. No other person is known by the Company to be the beneficial owner of more than five percent of the Common Stock.
NAME AND ADDRESS OF BENEFICIAL OWNER AND DATE AMOUNT AND NATURE OF PERCENT OF INFORMATION PROVIDED BENEFICIAL OWNERSHIP(1) CLASS ------------------------- ----------------------- ---------- Cabot Corporation..................................... 2,990,186(2) 9.30% 75 State Street Boston, Massachusetts 02109-1806 (February 20, 1998) Capital Group Companies, Inc. Capital Research and Management Company............... 2,460,000(3) 7.65% 333 South Hope Street Los Angeles, CA 90071 (February 10, 1998) State Farm Mutual Automobile Insurance Company..................................... 2,099,965(4) 6.53% One State Farm Plaza Bloomington, IL 61701 (January 22, 1998) Jurika & Voyles, Inc.................................. 1,774,764(5) 5.52% 1999 Harrison Street Suite 700 Oakland, CA 94612 (February 6, 1998) Employees Retirement Fund Trust Profit Sharing Plan of K N Energy, Inc................ 1,628,922(6) 5.07% P.O. Box 281304 Lakewood, CO 80228 (February 20, 1998)
- --------------- (1) All amounts listed in this column are for the Company's Common Stock. (2) Cabot acquired 642,232 shares in July 1997 upon the exercise of warrants. Cabot has sole investment and voting power of all 2,990,186 shares. (3) As reported on Capital Group Companies, Inc. and Capital Research and Management Company joint Schedule 13G dated February 10, 1998. Capital Group Companies, Inc. is a parent holding company of a group of investment management companies (including Capital Research and Management Company, a registered investment advisor) and as such has sole voting power over 74,000 shares and sole dispositive power over 2,460,000 shares. (4) As reported on State Farm's Schedule 13G dated January 22, 1998. State Farm reports that it has sole investment and voting power over its shares, and that the shares were acquired solely for investment purposes. (5) As reported on Jurika & Voyles' Schedule 13G dated February 6, 1998. Jurika & Voyles is a registered investment advisor, and as such has shared investment and voting power over all of its shares. (6) The trustees of the Employees Retirement Fund Trust Profit Sharing Plan have sole investment power over such shares and have sole voting power as to shares of Common Stock allocated to participants' accounts as to which such participants do not exercise their power to vote, but are required to vote them in the same proportion as those voted by participants. 31 35 Cabot, the Company's largest shareholder, and the Company were subject to a liability sharing arrangement covering certain contingent liabilities and potential gas contract liabilities. All matters regarding the liability sharing arrangement were settled in 1997, and all final payments have been made. The Company's final liability under the liability sharing arrangement with Cabot was $5.6 million, which was previously recorded. Pursuant to acquisition agreements involving Cabot, Cabot indemnified the Company for certain environmental liabilities. Issues have arisen concerning Cabot's indemnification obligations. The Company and Cabot have agreed to binding arbitration to resolve all issues in dispute. CLASS A PREFERRED STOCK No person is known to be the owner of five percent or more of the 70,000 outstanding shares of Class A $5.00 Preferred Stock of the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers, and any persons holding more than ten percent of the Company's Common Stock to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission and the New York Stock Exchange, and to provide copies of such reports to the Company. To the Company's knowledge, based solely on the Company's review of the copies of such reports received by the Company and written representations of its directors and executive officers, the Company believes that during the year ended December 31, 1997, all Section 16(a) filing requirements applicable to its directors and executive officers were satisfied except for the following: (i) a Form 4 filed on behalf of H. Rickey Wells, Vice President -- Business Operations, was filed one week late for the sale of 1,225 shares of Common Stock on June 23, 1997; and (ii) Edward Randall, III a director of the Company, did not timely disclose the termination of certain trusts for which he acted as the trustee. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP has acted as independent public accountants for the Company continuously since 1940. A representative of Arthur Andersen LLP will be present at the annual meeting and will have the opportunity to make a statement if he desires to do so and will be available to respond to appropriate questions. Arthur Andersen LLP was recommended by the Audit Committee to perform the audit function for 1997, and that recommendation was approved by the Board of Directors. No independent public accountant has yet been recommended to perform the audit function for 1998. The Audit Committee normally makes such a recommendation at the regular Board of Directors' meeting in November. COST AND METHOD OF PROXY SOLICITATION The cost of preparing, assembling and mailing this Proxy Statement, the Notice of Meeting, the enclosed form of Proxy, the Chairman's Letter, and any additional material relating to the meeting which may be furnished to shareholders by the Board of Directors subsequent to the furnishing of this Proxy Statement, has been or is to be borne by the Company. In addition to the solicitation of Proxies by use of the mails, the Company may utilize the services of some of its directors and administrative office personnel (who will receive no compensation therefor in addition to their regular salaries) to solicit Proxies personally, by telephone or facsimile from brokerage houses and other shareholders. The Company will reimburse banks and brokers who hold shares of the Company's stock in their name or custody, or in the name of nominees for others, for their out-of-pocket expenses incurred in forwarding copies of the Proxy materials to those persons for whom they hold such shares. The 32 36 Company has also retained D. F. King & Company, Inc. to aid in the solicitation at an estimated cost of $7,000 plus reasonable out-of-pocket expenses presently estimated at $35,000. DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS Pursuant to Securities and Exchange Commission regulations, any proposal which a shareholder intends to present to the 1999 annual meeting must be received by November 16, 1998, at the Company's principal executive offices in order to be included in the Proxy Statement and the form of Proxy for that meeting. The Company's By-laws establish an advance notice procedure with regard to certain matters to be brought before the Annual Meeting of Shareholders. In general, written notice must be received by the Secretary of the Company at its principal executive offices not less than forty days prior to the meeting and must contain certain specified information concerning the matters to be brought before the meeting as well as the shareholder submitting the proposal. A copy of the applicable provisions of the By-laws may be obtained, without charge, upon request to the Secretary of the Company at the address set forth on page one of this Proxy Statement. The annual shareholders meeting is customarily held in early April. OTHER MATTERS The Board of Directors does not intend to present, and does not have any reason to believe that others will present, any other items of business at the annual meeting. However, if other matters are properly presented for a vote, Proxies will be voted upon such matters in accordance with the judgment of the Proxyholders. By Order of the Board of Directors MARTHA B. WYRSCH Vice President, General Counsel and Secretary 33 37 [FORM OF PROXY CARD] K N ENERGY, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF K N ENERGY, INC. FOR THE ANNUAL MEETING ON APRIL 16, 1998 The undersigned appoints Larry D. Hall and Martha B. Wyrsch, each of them, with full power of substitution in each, the proxies of the undersigned, to represent the undersigned and vote all shares of K N Energy, Inc. Common and Preferred Stock which the undersigned may be entitled to vote at the Annual Meeting of Shareholders to be held on April 16, 1998, and at any adjournment or postponement thereof, as indicated on the reverse side. This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. If no direction is given, this proxy will be voted FOR proposals 1, 2, 3 and 4. (Continued and to be dated and signed on the reverse side.) K N ENERGY, INC. P.O. BOX 11162 NEW YORK, N.Y. 10203-0162 38 [FORM OF PROXY CARD] 1. Election of Class II Directors FOR all nominees |_| WITHHOLD AUTHORITY to vote |_| *EXCEPTIONS|_| listed below for all nominees listed below
Nominees: Charles W. Battey, Larry D. Hall, Richard D. Kinder, John F. Riordan, H.A. True, III (INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the "Exceptions" box and write that nominee's name in the space provided below.) *Exceptions -------------------------------------------------------------------- 2. To approve an amendment to the Restated Articles of Incorporation of the Company to increase the authorized Common Stock, par value $5.00 per share, from 50,000,000 shares to 150,000,000 shares. FOR |_| AGAINST |_| ABSTAIN |_| 3. To approve an increase in the number of shares of K N Energy, Inc. Common Stock authorized for issuance under the 1994 K N Energy, Inc. Long-Term Incentive Plan by 1,600,000 shares. FOR |_| AGAINST |_| ABSTAIN |_| 4. To approve an increase in the number of shares of K N Energy, Inc. Common Stock authorized for issuance under the 1990 Employee Stock Purchase Plan by 1,000,000 shares. FOR |_| AGAINST |_| ABSTAIN |_| Change of Address and or Comments Mark Here |_| The signature on this Proxy should correspond exactly with stockholder's name as printed to the left, in the case of joint tenancies, co-executors, or co-trustees, both should sign. Persons signing as Attorney, Executor, Administrator, Trustee or Guardian should give their full title. Dated: , 1998 ----------------------------------------- ----------------------------------------- Please print name of Stockholder here. ----------------------------------------- Please sign here. VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK. (PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE). -----END PRIVACY-ENHANCED MESSAGE-----