-----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, IT/tUbh/3moDLSIbj9x7uPKXOezOrQjTo4gV60tx+0vjm0c3vZEsEKhvtxgTNKGu PS7LsAwpYSFCs7v3hZ2j6Q== 0000950134-02-010130.txt : 20020814 0000950134-02-010130.hdr.sgml : 20020814 20020814172301 ACCESSION NUMBER: 0000950134-02-010130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OTTER TAIL CORP CENTRAL INDEX KEY: 0000075129 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 410462685 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00368 FILM NUMBER: 02737131 BUSINESS ADDRESS: STREET 1: 215 S CASCADE ST STREET 2: PO BOX 496 CITY: FERGUS FALLS STATE: MN ZIP: 56538-0496 BUSINESS PHONE: 2187398200 MAIL ADDRESS: STREET 1: 215 S CASCADE ST STREET 2: P O BOX 496 CITY: FERGUS FALLS STATE: MN ZIP: 56538-0496 FORMER COMPANY: FORMER CONFORMED NAME: OTTER TAIL POWER CO DATE OF NAME CHANGE: 19920703 10-Q 1 c71393e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2002 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ----------------- Commission file number 0-368 --------------------------------------------------------- OTTER TAIL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0462685 - ------------------------------------ ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 215 South Cascade Street, Box 496, Fergus Falls, Minnesota 56538-0496 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 218-739-8200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: JULY 31, 2002 - 25,324,346 COMMON SHARES ($5 PAR VALUE) OTTER TAIL CORPORATION INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 (Unaudited) 2 & 3 Consolidated Statements of Income - Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) 4 Consolidated Statements of Cash Flows - Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24-25 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 26-27 SIGNATURES 27
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) -ASSETS-
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ (Thousands of dollars) CURRENT ASSETS: Cash and cash equivalents $ 998 $ 11,378 Accounts receivable: Trade - net 77,014 64,215 Other 5,126 5,047 Inventories 42,074 39,301 Deferred income taxes 4,118 4,020 Accrued utility revenues 8,544 11,055 Other 15,967 8,878 ------------ ----------- TOTAL CURRENT ASSETS 153,841 143,894 INVESTMENTS 17,748 18,009 GOODWILL -- NET 57,700 48,221 OTHER INTANGIBLES -- NET 5,756 1,584 OTHER ASSETS 18,468 15,687 DEFERRED DEBITS: Unamortized debt expense and reacquisition premiums 5,446 5,646 Regulatory assets 5,959 5,117 Other 230 1,406 ------------ ----------- TOTAL DEFERRED DEBITS 11,635 12,169 PLANT: Electric plant in service 814,688 810,470 Diversified operations 163,851 145,712 ------------ ----------- TOTAL PLANT 978,539 956,182 Less accumulated depreciation and amortization 457,414 441,863 ------------ ----------- 521,125 514,319 Construction work in progress 50,916 28,658 ------------ ----------- NET PLANT 572,041 542,977 ------------ ----------- TOTAL $ 837,189 $ 782,541 ============ ===========
See accompanying notes to consolidated financial statements. - 2 - OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) -LIABILITIES-
JUNE 30, DECEMBER 31, 2002 2001 ----------- ------------ (Thousands of dollars) CURRENT LIABILITIES Short-term debt $ 20,000 $ - Sinking fund requirements and current maturities 29,439 28,946 Accounts payable 53,450 46,871 Accrued salaries and wages 11,369 17,397 Accrued federal and state income taxes 12,384 1,634 Other accrued taxes 7,539 9,854 Other accrued liabilities 6,740 6,090 ----------- ----------- TOTAL CURRENT LIABILITIES 140,921 110,792 NONCURRENT LIABILITIES 34,195 32,981 DEFERRED CREDITS Accumulated deferred income taxes 86,290 85,591 Accumulated deferred investment tax credit 13,359 13,935 Regulatory liabilities 9,586 9,914 Other 8,145 7,160 ----------- ----------- TOTAL DEFERRED CREDITS 117,380 116,600 CAPITALIZATION Long-term debt, net of sinking fund and current maturities 225,587 227,360 Cumulative preferred shares authorized 1,500,000 shares without par value; outstanding 2002 and 2001 -- 155,000 shares 15,500 15,500 Cumulative preference shares - authorized 1,000,000 shares without par value;outstanding - none - - Common shares, par value $5 per share authorized 50,000,000 shares; outstanding 2002 -- 25,321,860 and 2001 -- 24,653,490 126,609 123,267 Premium on common shares 17,915 1,526 Unearned compensation (2,600) (151) Retained earnings 163,657 156,641 Accumulated other comprehensive loss (1,975) (1,975) ----------- ----------- TOTAL 303,606 279,308 TOTAL CAPITALIZATION 544,693 522,168 ----------- ----------- TOTAL $ 837,189 $ 782,541 =========== ===========
See accompanying notes to consolidated financial statements. -3- OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30 --------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (in thousands, except share and per share amounts) OPERATING REVENUES Electric $ 71,889 $ 69,377 $ 146,290 $ 152,008 Plastics 24,405 18,663 40,280 32,624 Health services 23,633 19,626 44,752 37,526 Manufacturing 35,742 30,287 67,070 58,552 Other business operations 20,903 19,379 35,913 36,276 ----------- ----------- ----------- ----------- Total operating revenues 176,572 157,332 334,305 316,986 OPERATING EXPENSES Production fuel 10,945 9,440 22,462 20,945 Purchased power 23,625 22,177 42,559 48,568 Other electric operation and maintenance expenses 18,583 18,835 38,555 34,400 Cost of goods sold 72,843 64,079 131,979 120,837 Other nonelectric expenses 17,875 14,375 34,395 28,414 Depreciation and amortization 10,506 10,364 20,690 20,538 Property taxes 2,347 2,342 4,882 5,126 ----------- ----------- ----------- ----------- Total operating expenses 156,724 141,612 295,522 278,828 OPERATING INCOME (LOSS) Electric 10,168 10,514 25,461 30,886 Plastics 4,935 (51) 6,827 (1,214) Health services 2,613 1,536 5,050 3,290 Manufacturing 3,075 3,303 4,981 6,328 Other business operations (943) 418 (3,536) (1,132) ----------- ----------- ----------- ----------- Total operating income 19,848 15,720 38,783 38,158 OTHER INCOME AND DEDUCTIONS - NET 358 877 409 1,195 INTEREST CHARGES 4,347 4,088 8,671 8,190 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 15,859 12,509 30,521 31,163 INCOME TAXES 5,272 3,352 9,902 10,006 ----------- ----------- ----------- ----------- NET INCOME 10,587 9,157 20,619 21,157 Preferred dividend requirements 184 469 368 939 ----------- ----------- ----------- ----------- EARNINGS AVAILABLE FOR COMMON SHARES $ 10,403 $ 8,688 $ 20,251 $ 20,218 =========== =========== =========== =========== Basic earnings per common share: $ 0.41 $ 0.35 $ 0.81 $ 0.82 Diluted earnings per common share: $ 0.41 $ 0.35 $ 0.81 $ 0.82 Average number of common shares outstanding - basic 25,117,325 24,585,577 24,892,640 24,581,192 Average number of common shares outstanding - diluted 25,411,877 24,799,089 25,154,599 24,785,042 Dividends per common share $ 0.265 $ 0.260 $ 0.53 $ 0.52
See accompanying notes to consolidated financial statements. -4- OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------------------- 2002 2001 ----------- ----------- (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 20,619 $ 21,157 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,690 20,538 Deferred investment tax credit - net (576) (576) Deferred income taxes (408) (462) Change in deferred debits and other assets (1,838) (5,297) Change in noncurrent liabilities and deferred credits 2,147 1,289 Allowance for equity (other) funds used during construction (1,004) (323) Losses from investments and disposal of noncurrent assets 596 236 Cash provided by (used for) current assets & current liabilities: Change in receivables, materials and supplies (5,360) (916) Change in other current assets (5,623) (970) Change in payables and other current liabilities (3,996) (8,585) Change in interest and income taxes payable 10,407 4,675 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,654 30,766 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (40,162) (23,119) Proceeds from disposal of noncurrent assets 915 497 Acquisitions, net of cash acquired (4,263) - (Purchase) sale of other investments 1,085 (1,160) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (42,425) (23,782) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit 15,515 16,486 Proceeds from employee stock plans 2,241 164 Proceeds from issuance of long-term debt - 5,292 Payments for retirement of long-term debt (7,762) (11,912) Dividends paid (13,603) (13,632) ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (3,609) (3,602) NET CHANGE IN CASH AND CASH EQUIVALENTS (10,380) 3,382 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,378 1,259 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 998 $ 4,641 =========== ===========
See accompanying notes to consolidated financial statements. - 5 - OTTER TAIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Otter Tail Corporation (the Company), in its opinion, has included all adjustments (including normal recurring accruals) necessary for a fair presentation of the consolidated results of operations for the periods presented. The consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the years ended December 31, 2001, 2000, and 1999 included in the Company's 2001 Annual Report to the Securities and Exchange Commission on Form 10-K. Because of seasonal and other factors, the earnings for the three-month and six-month periods ended June 30, 2002, should not be taken as an indication of earnings for all or any part of the balance of the year. Acquisitions On May 1, 2002 the Company acquired 100% of the outstanding stock of Computed Imaging Service, Inc. of Houston, Texas for 158,257 shares of Otter Tail Corporation common stock and approximately $1.2 million in cash. Computed Imaging Service provides computed tomography and magnetic resonance imaging mobile services, interim rental, and sales and service of new, used, and refurbished diagnostic imaging equipment. Computed Imaging Service serves hospitals and other healthcare facilities in the south central United States. The acquisition of Computed Imaging Service allows the Company to expand its existing health services operations into another region of the country. Computed Imaging Service's annual revenues were approximately $5.9 million in 2001. On May 28, 2002 the Company acquired 100% of the outstanding stock of Shore-Masters, Inc. (ShoreMaster), of Fergus Falls, Minnesota for 303,124 shares of Otter Tail Corporation common stock and $2.3 million in cash. ShoreMaster is a leading manufacturer of waterfront equipment ranging from residential-use boatlifts and docks to commercial marina systems. The acquisition of ShoreMaster is expected to provide diversification and growth opportunities for the Company's manufacturing segment. ShoreMaster's annual revenues were approximately $20 million in 2001. Below is a condensed balance sheet disclosing the amount assigned to each major asset and liability category of each of the acquired companies.
Computed Imaging (in thousands) Service, Inc. ShoreMaster -------------- ---------------- ----------- Assets Current Assets $ 1,439 $ 9,489 Plant 3,976 4,615 Goodwill 5,589 3,500 Other Intangible Assets 30 4,461 ---------- ---------- Total Assets $ 11,034 $ 22,065 ========== ========== Liabilities and Equity Current Liabilities $ 3,740 $ 9,642 Long-Term Debt 2,587 2,723 Other Long-Term Liabilities 750 -- Equity 3,957 9,700 ---------- ---------- Total Liabilities and Equity $ 11,034 $ 22,065 ========== ==========
6 Common Shares and Earnings per Share On April 8, 2002 the Company's Board of Directors granted 278,750 stock options to key management employees and 75,800 shares of restricted stock to certain key executives and non-employee directors under the 1999 Stock Incentive Plan. The exercise price of the stock options is equal to the fair market value per share at the date of the grant. The options and restricted stock vest ratably over a four-year period. The options expire ten years after the date of the grant. As of July 31, 2002 a total of 1,370,727 options were outstanding and a total of 100,513 shares of restricted stock had been issued under the Plan. The Company accounts for the Plan under Accounting Principles Board Opinion No. 25. Basic earnings per common share are calculated by dividing earnings available for common shares by the average number of common shares outstanding during the period. Diluted earnings per common share are calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options. Comprehensive Income The only element of comprehensive income for the three and six months ended June 30, 2002 was net income of $10.6 million and $20.6 million, respectively; as compared to $9.2 million and $21.2 million for the three and six months ended June 30, 2001, respectively. Goodwill and Other Intangible Assets- Adoption of Statement of Financial Accounting Standards No. 142 In June 2001 the Financial Accounting Standards Board (FASB) approved the issuance of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These standards, issued in July 2001, established accounting and reporting for business combinations. SFAS No. 141 requires that all business combinations entered into subsequent to June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but tested for impairment on an annual basis. Intangible assets with finite useful lives will be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company adopted SFAS No. 142 on January 1, 2002. The Company determined that as of January 1, 2002 goodwill was not impaired and therefore no write-off was necessary. The impact of not amortizing goodwill would have resulted in an increase in net income for the three months ended June 30, 2001 of $599,000 and $1.2 million for the six months ended June 30, 2001. The following table presents the effects of not amortizing goodwill on reported net income and basic and diluted earnings per share.
Three months ended Six months ended June 30, June 30, --------------------- --------------------- (in thousands, except per share amounts) 2002 2001 2002 2001 --------- -------- --------- --------- Net income: Reported net income $ 10,587 $ 9,157 $ 20,619 $ 21,157 Add back: goodwill amortization, net of tax -- 599 -- 1,194 --------- -------- --------- --------- Adjusted net income $ 10,587 $ 9,756 $ 20,619 $ 22,351 ========= ======== ========= ========= Basic earnings per share: Reported basic earnings per share $ 0.41 $ 0.35 $ 0.81 $0.82 Add back: goodwill amortization, net of tax -- 0.03 -- 0.05 --------- -------- --------- --------- Adjusted basic earnings per share: $ 0.41 $ 0.38 $ 0.81 $0.87 ========= ======== ========= =========
7
Three months ended Six months ended June 30, June 30, --------------------- --------------------- (in thousands, except per share amounts) 2002 2001 2002 2001 --------- -------- --------- --------- Diluted earnings per share: Reported diluted earnings per share $ 0.41 $ 0.35 $ 0.81 $ 0.82 Add back: goodwill amortization, net of tax -- 0.02 -- 0.04 --------- -------- --------- --------- Adjusted diluted earnings per share: $ 0.41 $ 0.37 $ 0.81 $ 0.86 ========= ======== ========= =========
The changes in the carrying amount of goodwill by segment were
Adjustment to Balance goodwill Goodwill Balance December 31, acquired acquired June 30, (in thousands) 2001 in 2001 in 2002 2002 - -------------- ------------ ------------- -------- --------- Plastics $ 19,302 $ 19,302 Health services 13,311 $ 350 $ 5,589 19,250 Manufacturing 1,627 40 3,500 5,167 Other business operations 13,981 -- -- 13,981 --------- ------ -------- --------- Total $ 48,221 $ 390 $ 9,089 $ 57,700 ========= ====== ======== =========
Goodwill recorded during 2002 relating to the acquisitions of Computed Imaging Service, Inc. and ShoreMaster was $5,589,000 and $3,500,000, respectively. The following is a summary of the components of the Company's intangible assets at June 30, 2002 and December 31, 2001.
June 30, 2002 December 31, 2001 --------------------------------- --------------------------------- Gross Net Gross Net carrying Accumulated carrying carrying Accumulated carrying (in thousands) amount amortization amount amount amortization amount - -------------- -------- ------------ -------- -------- ------------ -------- Amortized intangible assets: Covenants not to complete $ 1,819 $ 1,021 $ 798 $ 1,575 $ 933 $ 642 Organization costs 289 139 150 281 118 163 Other intangible assets including contracts 1,790 602 1,188 1,230 451 779 -------- -------- -------- -------- -------- -------- Total $ 3,898 $ 1,762 $ 2,136 $ 3,086 $ 1,502 $ 1,584 ======== ======== ======== ======== ======== ======== Non-amortized intangible assets: Brandname $ 3,620 $ -- $ 3,620 $ -- $ -- $ -- ======== ======== ======== ======== ======== ========
Intangible assets with finite lives are being amortized over average lives that vary from one to 5 years. The amortization expense for these intangible assets was $260,000 for the six months ended June 30, 2002 compared to $164,000 for the six months ended June 30, 2001. The estimated annual amortization expense for these intangible assets for the next five years is $534,000 for 2002; $471,000 for 2003; $457,000 for 2004; $353,000 for 2005; and $204,000 for 2006. Segment Information The Company's business operations consist of five segments based on products and services. Electric includes the electric utility operating in Minnesota, North Dakota, and South Dakota. Plastics consists of businesses involved in the production of PVC pipe in the Upper Midwest and Southwest regions of the United States. Health services include businesses involved in the sale of diagnostic medical equipment, supplies and accessories. In addition these businesses also provide service maintenance, mobile diagnostic imaging, mobile positron emission tomography and nuclear medicine imaging, portable x-ray imaging and rental of diagnostic medical imaging 8 equipment to various medical institutions located in 31 states. Manufacturing consists of businesses involved in the production of waterfront equipment, wind towers, frame-straightening equipment and accessories for the auto repair industry, custom plastic pallets, material and handling trays, and horticultural containers, fabrication of steel products, contract machining, and metal parts stamping and fabrication located in the Upper Midwest and Utah. Other business operations consists of businesses in electrical and telephone construction contracting, transportation, telecommunications, entertainment, energy services, and natural gas marketing, as well as the portion of corporate administrative and general expenses that are not allocated to other segments. The electrical and telephone construction contracting companies and energy services and natural gas marketing business operate primarily in the Upper Midwest. The telecommunications companies operate in central and northeast Minnesota and the transportation company operates in 48 states and 6 Canadian provinces. The Company evaluates the performance of its business segments and allocates resources to them based on earnings contribution and return on total invested capital. Operating Income (Loss)
Three months ended Six months ended June 30, June 30, ----------------------- ---------------------- (in thousands) 2002 2001 2002 2001 --------- --------- --------- --------- Electric $ 10,168 $ 10,514 $ 25,461 $ 30,886 Plastics 4,935 (51) 6,827 (1,214) Health services 2,613 1,536 5,050 3,290 Manufacturing 3,075 3,303 4,981 6,328 Other business operations (943) 418 (3,536) (1,132) --------- --------- --------- --------- Total $ 19,848 $ 15,720 $ 38,783 $ 38,158 ========= ========= ========= =========
Identifiable Assets
June 30, December 31, (in thousands) 2002 2001 ---------- ----------- Electric $ 540,456 $ 523,948 Plastics 53,598 45,649 Health services 59,098 50,560 Manufacturing 101,998 67,033 Other business operations 82,039 95,351 ------ ------ Total $ 837,189 $ 782,541 ======== ========
Substantially all sales and long-lived assets of the Company are within the United States. Financing On May 1, 2002 the Company established a new $50 million line of credit. This line of credit makes available to the Company bank loans for short-term financing for business operations. It bears interest at the rate of LIBOR plus 0.5% and expires on April 30, 2003. The line of credit contains various covenants, including interest-bearing debt to total capitalization and interest charges coverage ratios. The interest rate is subject to adjustment in the event of a change in ratings on the Company's senior unsecured debt, up to LIBOR plus 0.8% if the ratings on the Company's senior unsecured debt fall to BBB+ or below (Standard & Poor's) or Baa1 or below (Moody's). The line of credit also provides for accelerated repayment in the event the Company's senior unsecured debt is rated below BBB- by Standard & Poor's or Baa3 by Moody's. 9 On June 19, 2002 the Company filed with the SEC a Form S-3 shelf registration statement for $200 million of unsecured debt securities. It is expected that a significant portion of the shelf registration will be utilized to refinance existing debt. In addition proceeds received from the sale of the debt securities may be used for other general corporate purposes, including working capital, capital expenditures, the financing of possible acquisitions or stock repurchases. Inventories Inventories consist of the following:
June 30, December 31, (in thousands) 2002 2001 -------------- --------- ------------ Finished goods $ 13,447 $ 12,644 Work in process 1,926 1,732 Raw material, fuel and supplies 26,701 24,925 --------- --------- $ 42,074 $ 39,301 ========= =========
Regulatory Assets and Liabilities As a regulated entity the Company and the electric utility account for the financial effects of regulation in accordance with SFAS No. 71, Accounting for the Effect of Certain Types of Regulation. This statement allows for the recording of a regulatory asset or liability for costs that will be collected or refunded through the ratemaking process in the future. The following table indicates the amount of regulatory assets and liabilities recorded on the Company's consolidated balance sheet:
June 30, December 31, (in thousands) 2002 2001 - -------------- -------- ------------ Regulatory assets: Deferred income taxes $ 5,959 $ 5,117 Long-term debt refinancing costs 3,137 3,353 ------- ------- Total regulatory assets $ 9,096 $ 8,470 ------- ------- Regulatory liabilities: Deferred income taxes $ 9,410 $ 9,735 Gain on sale of division office building 176 179 Gain on long-term debt refinancing 3 6 ------- ------- Total regulatory liabilities $ 9,589 $ 9,920 ------- ------- Net regulatory position $ (493) $(1,450) ======= =======
The regulatory assets and liabilities related to deferred income taxes are the result of the adoption of SFAS No. 109, Accounting for Income Taxes. The remaining regulatory assets and liabilities are being recovered from ratepayers over the next 32 years. If for any reason, the Company's regulated businesses cease to meet the criteria for 10 application of SFAS No. 71 for all or part of their operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an extraordinary item in the period in which the application of SFAS No. 71 ceases. Revenue Recognition Due to the diverse business operations of the Company revenue recognition depends on the product produced or sold. The Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the customer, there has been delivery and acceptance, and the price is fixed and determinable. In cases where significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Provisions for sale returns and warranty costs are recorded at the time of sale based on historical information and current trends. For those operating businesses recognizing revenue when shipped, the operating businesses have no further obligation to provide services related to such product. The shipping terms used in these instances are FOB shipping point. Some of the operating businesses provide services under fixed-price construction contracts. Revenues under these contracts are recognized on a percentage-of-completion basis. The method used to determine the progress of completion is based on the ratio of costs incurred to total estimated costs. The following summarizes costs incurred and billings on uncompleted contracts:
June 30, December 31, (in thousands) 2002 2001 - -------------- ---------- ------------ Costs incurred on uncompleted contracts $ 46,794 $ 27,808 Less billings to date (50,365) (38,808) Plus earnings recognized 8,160 5,672 --------- --------- $ 4,589 $ (5,328) ========= =========
The following costs incurred and billings are included in the Company's consolidated balance sheet:
June 30, December 31, (in thousands) 2002 2001 -------------- -------- ------------ Costs in excess of billings on uncompleted contracts $ 7,960 $ 1,951 Billings in excess of costs on uncompleted contracts (3,371) (7,279) ------- ------- $ 4,589 $(5,328) ======= =======
The percent of revenue recognized under the percentage-of-completion method compared to total consolidated revenues for the six months ended June 30, 2002 was 11% compared with 8.9% for the six months ended June 30, 2001. Shipping and Handling Costs The Company includes revenues received for shipping and handling in operating revenues. Expenses paid for shipping and handling are recorded as part of cost of goods sold. Supplemental Cash Flow Information Changes in operating assets and liabilities are net of acquisitions. "Acquisitions, net of cash acquired" in the Statement of Cash Flows is net of cash acquired and includes debt assumed and immediately repaid in acquisitions. Noncash transactions in 2002 include the acquisition of Computed Imaging Service, Inc for 158,257 shares of Otter Tail Corporation common stock valued at approximately $5.1 million and the acquisition of ShoreMaster for 303,124 shares of Otter Tail Corporation common stock valued at $9.7 million. 11 Certain additional supplemental disclosures of cash flow information are shown below.
Six months ended June 30, ------------------------ (in thousands) 2002 2001 - -------------- -------- -------- Cash paid for interest and income taxes: Interest $ 5,084 $ 6,390 Income taxes $ 403 $ 5,504
Reclassifications Certain prior year amounts have been reclassified to conform to 2002 presentation. Such reclassifications had no impact on net income, shareholders' equity or cash provided by operating activities. New Accounting Standards In July 2001 the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for retirement obligations associated with tangible long-lived assets. This statement is effective for fiscal years beginning after June 15, 2002. Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal constructions under the doctrine of promissory estoppel. Adoption of SFAS No. 143 will change the accounting for decommissioning costs of the utility's generating plants as well as certain other long-lived assets. Currently, decommissioning amounts collected in the utility's rates are reported in accumulated depreciation, which upon adoption of SFAS No. 143 will require a reclassification to a liability. The Company is in the process of evaluating what assets may have associated retirement costs as defined by SFAS No. 143 and has not determined the ultimate impact of adoption at this time. The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets in October 2001. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement develops one accounting model for long-lived assets to be disposed of by sale and also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity in a disposal transaction. The Company adopted the accounting model for impairment or disposal of long-lived assets on January 1, 2002. Adoption of this statement did not have a material effect on the Company's consolidated financial statements. On April 30, 2002 the FASB issued SFAS No. 145, Recession of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 eliminates SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and allows for only those gains or losses on the extinguishment of debt that meet the criteria of extraordinary items to be treated as such in the financial statements. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS No. 145 relating to the recession of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002, the provisions of SFAS No. 145 relating to the amendment of SFAS No. 13 are effective for transactions occurring after May 15, 2002 and all other provisions of SFAS 145 are effective for financial statements issued on or after May 15, 2002. SFAS No. 145 is not expected to have a material effect on the Company's consolidated results of operations, financial position or cash flows. On July 30, 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 replaces Emerging Issue Task Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). 12 SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan as was required by EITF No. 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected to have a material effect on the Company's consolidated results of operations, financial position or cash flows. Subsequent Event Fitch Ratings and Moody's Investors Service lowered the Company's long-term debt ratings one level in July 2002. Both of these actions, which were expected by the Company, reflect anticipated higher business and financial risks related to the Company's non-utility investments. These rating changes did not lead to any required action under rating triggers or increased interest rates on current debt outstanding. Otter Tail Corporation's current ratings are:
Moody's Fitch Investors Standard Ratings Service & Poor's ------- --------- -------- First mortgage bonds AA- A1 A+ Senior unsecured A+ A2 A Preferred stock A Baa1 A- Outlook Stable Negative Stable
The Company's disclosure of these security ratings is not a recommendation to buy, sell or hold its securities. Further downgrades in these credit ratings could adversely affect the Company's ability to borrow and the Company's future borrowing costs would likely increase with resulting reductions in the Company's net income in future periods. On August 1, 2002 the Company retired at maturity its $18.2 million 7.25% Series First Mortgage Bonds. Forward Looking Information - Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the Act), the Company has filed cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those discussed in forward-looking statements made by or on behalf of the Company. When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements, words such as "may", "will", "expect", "anticipate", "continue", "estimate", "project", "believes" or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Act and are included, along with this statement, for purposes of complying with the safe harbor provision of the Act. Factors that might cause such differences include, but are not limited to, the Company's ongoing involvement in diversification efforts, the timing and scope of deregulation and open competition, growth of electric revenues, impact of the investment performance of the utility's pension plan, changes in the economy, governmental and regulatory action, weather conditions, fuel and purchased power costs, environmental issues, resin prices, and other factors discussed under "Factors affecting future earnings" on pages 26-27 of the Company's 2001 Annual Report to Shareholders, which is incorporated by reference in the Company's Form 10-K for the fiscal year ended December 31, 2001. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement or contained in any subsequent filings by the Company with the Securities and Exchange Commission. The Company is not obligated to publicly update or revise any forward-looking statements. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Material Changes in Financial Position The Company estimates that funds internally generated net of forecasted dividend payments, combined with funds on hand at December 31, 2001, will be sufficient to meet scheduled debt retirements and almost completely provide for its estimated 2002-2006 consolidated capital expenditures. Reduced demand for electricity or for the products manufactured or sold by the Company could have an effect on funds internally generated. Additional short-term or long-term financing will be required in the period 2002-2006 in order to complete planned capital expenditures, in the event the Company decides to refund or retire early any of its presently outstanding debt or cumulative preferred shares, to complete acquisitions, or for other corporate purposes. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financing or otherwise, or that if such financing is available, it will be available on terms acceptable to the Company. If adequate funds are not available on acceptable terms, our business, results of operations, and financial condition could be adversely affected. On May 1, 2002 the Company established a new $50 million line of credit that replaced three separate lines of credit. This new line of credit bears interest at the rate of LIBOR plus 0.5% and expires on April 30, 2003. As of June 30, 2002 a balance of $30 million was available under this line of credit. The new line of credit contains a number of covenants that restrict the Company's ability to engage in certain transactions, dispose of certain assets, and create liens on certain assets. In addition, the Company is required to comply with specified financial covenants, including maintaining a debt-to-total capitalization ratio not in excess of 60% and an interest and dividend coverage ratio of at least 1.5 to 1. The Company is currently in compliance with all of the covenants under the line of credit.The interest rate under the line of credit is subject to adjustment in the event of a change in ratings on the Company's senior unsecured debt, up to LIBOR plus 0.8% if the ratings on the Company's senior unsecured debt fall to BBB+ or below (Standard & Poor's) or Baa1 or below (Moody's). The line of credit also provides for accelerated repayment in the event the Company's senior unsecured debt is rated below BBB- by Standard & Poor's or Baa3 by Moody's. On June 19, 2002 the Company filed with the SEC a Form S-3 shelf registration statement for $200 million of unsecured debt securities. It is expected that a significant portion of the shelf registration will be utilized to refinance existing debt. In addition proceeds received from the sale of the debt securities may be used for other general corporate purposes, including working capital, capital expenditures, the financing of possible acquisitions, or stock repurchases. Cash provided by operating activities of $35.7 million for the six months ended June 30, 2002 combined with cash on hand of $11.4 million as of December 31, 2001 allowed the Company to pay dividends and fund a majority of its capital expenditures. Net cash provided by operating activities increased $4.9 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001 primarily as a result of changes in working capital items and other deferred debits. Net cash used in investing activities was $42.4 million for the six months ended June 30, 2002 compared with net cash used in investing activities of $23.8 million for the six months ended June 30, 2001. The majority of this change is due to increased capital expenditures. Capital expenditures increased $17 million between the periods. Capital expenditures increased $6.8 million in the manufacturing segment due to building expansions at the companies that manufacture wind energy towers and perform metal parts stamping and fabrication. Nearly $6.3 million of the increase in capital expenditures occurred in the electric segment reflecting ongoing construction expenditures for a gas-fired combustion turbine peaking plant and a new transmission line in North Dakota.Capital expenditures in the plastics segment increased $3.1 million reflecting the purchase of buildings and land that had previously been leased. 14 Net cash used in financing activities was similar between the periods. On August 1, 2002 the Company retired at maturity its $18.2 million 7.25% Series First Mortgage Bonds. The Company intends to issue senior unsecured debt securities under its shelf registration to refinance the short-term borrowings incurred under its line of credit to retire the 7.25% Series First Mortgage Bonds. The Company's ratio of earnings to fixed charges was 3.8x for the six months ended June 30, 2002 compared to 4.1x for the six months ended June 30, 2001. The decrease was due primarily to a decrease in pretax income from continuing operations between the periods. The decrease was also due to an increase in the level of interest bearing debt outstanding between the periods, which resulted in higher interest charges during the six months ended June 30, 2002. There are no material changes in the Company's contractual obligations on long-term debt, coal contracts, construction program commitments, capacity and energy requirements, and operating leases from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. For more information on contractual obligations and commitments, see Item 7 in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Fitch Ratings and Moody's Investors Services lowered the Company's long-term debt ratings one level in July 2002. Both of these actions, which were expected by the Company, reflect anticipated higher business and financial risks related to the Company's non-utility investments. These rating changes did not lead to any required action under rating triggers or increased interest rates on current debt outstanding. Otter Tail Corporation's current ratings are: Moody's Fitch Investors Standard Ratings Service & Poor's ------------ ------------ ------------ First mortgage bonds AA- A1 A+ Senior unsecured A+ A2 A Preferred stock A Baa1 A- Outlook Stable Negative Stable The Company does not expect changes to these ratings when securities are initially issued under the recently filed shelf registration. The Company's disclosure of these security ratings is not a recommendation to buy, sell or hold its securities. Further downgrades in these credit ratings could adversely affect the Company's ability to borrow and the Company's future borrowing costs would likely increase with resulting reductions in the Company's net income in future periods. 15 Material Changes in Results of Operations Comparison of the Three Months Ended June 30, 2002 and 2001 Consolidated Results of Operations Total operating revenues were $176.6 million for the three months ended June 30, 2002, an increase of $19.3 million (12.2%) from the $157.3 million for the three months ended June 30, 2001. Operating income was $19.8 million for the three months ended June 30, 2002 compared with $15.7 million for the three months ended June 30, 2001. The Company recorded diluted earnings per share of $0.41 for the three months ended June 30, 2002 compared to $0.35 for the three months ended June 30, 2001. The benefit resulting solely from the discontinuance of goodwill amortization is $0.02 per common share during the quarter. Following is a discussion of the results of operations by segment. Electric
Three months ended June 30, (in thousands) 2002 2001 Change - -------------- --------- --------- -------- Operating revenues $ 71,889 $ 69,377 $ 2,512 Production fuel 10,945 9,440 1,505 Purchased power 23,625 22,177 1,448 Other electric operation and maintenance expenses 18,583 18,835 (252) Depreciation and amortization 6,221 6,069 152 Property taxes 2,347 2,342 5 --------- --------- ------- Operating income $ 10,168 $ 10,514 $ (346) ========= ========= =======
The 3.6% increase in electric operating revenues for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 is due to a $2.4 million (110%) increase in other electric operating revenues, a $1 million (2.3%) increase in retail electric revenues and a $931,000 (4.1%) decrease in wholesale power revenues. The increase in other electric operating revenues relates to the construction of a transmission line in North Dakota for another area utility. The increase in retail electric revenue resulted from a 4% increase in retail megawatt-hours (mwh) sold between the periods offset slightly by a 1.6% reduction in revenue per mwh sold. Retail mwh sold increased in the residential, small commercial and farms categories. The unusual weather during the second quarter of 2002 resulted in increases in both heating and cooling degree-days, which contribute to the increase or decrease in usage by residential customers. Heating degree-days in the area served by the electric utility increased 28% and cooling degree-days increased 38.2%. The decrease in wholesale power revenues primarily resulted from a 25.3% decrease in revenue per mwh sold reflecting the soft wholesale power market during the three months ended June 30, 2002 compared with the three months ended June 30, 2001. Wholesale mwh sold increased 28.4% between the periods. The $1.5 million (15.9%) increase in production fuel for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 reflects a 2.7% increase in generation combined with a 14% increase in fuel costs per mwh produced at the electric utility's coal-fired generating plants. The increase in fuel costs per mwh produced reflects the new coal contract at the Big Stone plant that went into effect at the beginning of 2002. 16 The cost of purchased power increased 6.5% for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 due to a 39% increase in mwh purchased offset by a 23.4% decrease in cost per mwh purchased. The increase in mwh purchased reflects the increases in mwh sold for both wholesale and retail energy sales. The lower cost per mwh purchased reflects the softening in the wholesale energy market. Activity in the short-term energy market is subject to change based on a number of factors and it is difficult to predict the quantity of wholesale power sales or prices for wholesale power. Plastics
Three months ended June 30, (in thousands) 2002 2001 Change - --------------- --------- --------- -------- Operating revenues $ 24,405 $ 18,663 $ 5,742 Cost of goods sold 17,701 17,004 697 Operating expenses 1,333 894 439 Depreciation and amortization 436 816 (380) --------- --------- -------- Operating income (loss) $ 4,935 $ (51) $ 4,986 ========= ========= ========
The 30.8% increase in operating revenues for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 is the result of a 29.6% increase in pounds of PVC pipe sold. The average sales price per pound remained constant between the periods. Cost of goods sold increased 4.1% due to increases of $394,000 in other overhead costs, $209,000 in freight expense and $198,000 in labor costs offset by a $145,000 decrease in material costs. The cost per pound of resin, the raw material used to produce PVC pipe decreased 23.3% between periods. Operating expenses increased 49.1% primarily due to a $398,000 increase in administrative and general labor. The 46.5% decrease in depreciation and amortization is due to the accounting change that eliminated the amortization of goodwill beginning in 2002. Since the PVC pipe industry is affected directly by economic cycles it is difficult to predict that the recent increase in pounds of pipe sold will continue. The industry experienced a significant increase in demand during the first half of 2002 compared with the same period last year. Some of the increase in demand is due to customers increasing their inventory levels of PVC pipe. Demand for PVC pipe is expected to decrease once adequate inventory levels are reached. If the gross domestic product continues to be strong for the remainder of 2002 the Company expects that demand for PVC resin and pipe will be in balance and that operating margins will continue to be strong. Health Services
Three months ended June 30, (in thousands) 2002 2001 Change - -------------- --------- --------- -------- Operating revenues $ 23,633 $ 19,626 $ 4,007 Cost of goods sold 16,461 15,086 1,375 Operating expenses 3,496 2,231 1,265 Depreciation and amortization 1,063 773 290 ------ ---- ---- Operating income $ 2,613 $ 1,536 $ 1,077 ====== ====== ======
17 Health services operating revenues for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 increased 20.4% due to added revenues from the acquisitions that occurred during the third quarter of 2001. The number of scans increased 15.5% and the average fee per scan increased 11.5%. Revenue from equipment sales decreased by $1.3 million. The increase in cost of goods sold, operating expenses and depreciation and amortization are primarily due to the 2001 acquisitions. The 70.1% increase in the operating income reflects the operating results from the 2001 acquisitions and an increase in margins on service sales provided. Manufacturing
Three months ended June 30, (in thousands) 2002 2001 Change - -------------- --------- --------- --------- Operating revenues $ 35,742 $ 30,287 $ 5,455 Cost of goods sold 27,132 22,286 4,846 Operating expenses 4,002 3,418 584 Depreciation and amortization 1,533 1,280 253 --------- --------- --------- Operating income $ 3,075 $ 3,303 $ (228) ========= ========= ========
Included in the results for the three months ended June 30, 2002 are two months of operations from Shore-Masters, Inc. (ShoreMaster), which was acquired on May 1, 2002. The 18% increase in operating revenues for the three months ended June 30, 2002 compared with the three months ended June 30, 2001 includes $6.2 million from the acquisition combined with an increase of $2.7 million in revenues from sales of wind towers and steel fabrication offset by a reduction in revenues of $3.4 million from metal parts stamping and fabrication. The 21.7% increase in cost of goods primarily is due to the acquisition combined with increased material cost of $1.5 million related to wind towers and offset by a $2.5 million decrease in material costs related to metal parts stamping. The 17.1% increase in operating expenses was primarily due to the acquisition. All of the companies in this segment, except ShoreMaster, experienced decreases between the quarters in operating income. Operating margins were affected at the metal parts stamping and fabrication plants due to a temporary closing of a major's customer's plant during the quarter due to flooding. A slowdown in the wind energy market--despite the passage of the Production Tax Credit--has negatively affected the wind tower business. This slowdown may be the result of uncertainty with the energy industry in general. Other Business Operations
Three months ended June 30, (in thousands) 2002 2001 Change - -------------- --------- --------- ---------- Operating revenues $ 20,903 $ 19,379 $ 1,524 Cost of goods sold 11,549 9,703 1,846 Operating expenses 9,044 7,832 1,212 Depreciation and amortization 1,253 1,426 (173) --------- --------- ---------- Operating (loss) income $ (943) $ 418 $ (1,361) ========= ========= ==========
Operating income decreased for each of the companies in this segment for the three months ended June 30, 2002 compared with the three months ended June 30, 2001. The 7.9% increase in operating revenues and the 19% increase in cost of goods sold for the three months ended June 30, 2002 compared with the three months ended 18 June 30, 2001 occurred primarily at the construction companies. Due to a reduction in work available, bidding among construction companies has been competitive with very low margins. Operating income decreased at the transportation company due to an 8.1% reduction in miles driven combined with a 2.3% reduction in revenue per mile. The decrease in operating income at the energy services and telecommunication companies was caused by an increase in the provision for doubtful accounts receivable. Operating expenses increased due to a $587,000 increase in unallocated corporate overhead and a $500,000 increase in the provision for doubtful accounts receivable at the energy services and telecommunication companies. The decrease in depreciation and amortization is due to the accounting change that eliminated the amortization of goodwill beginning in 2002. Other Income and Deductions - net, Interest Charges and Income Taxes For the three months ended June 30, 2002 compared with the three months ended June 30, 2001, other income and deductions decreased $519,000 (59.2%) due to lower interest income during 2002, reduction in gains from the sale of fixed assets, and the recording of a Minnesota Conservation Improvement Program incentive during 2001 offset by an increase in the amount of allowance for funds used during construction recorded at the electric utility. The $259,000 (6.3%) increase in interest charges is due to higher long-term debt balances outstanding for the three months ended June 30, 2002 compared with the three months ended June 30, 2001, offset by significantly lower interest rates and lower average balances under the lines of credit between the periods. The $1.9 million (57.3%) increase in income tax expense between the quarters is primarily the result of a 26.8% increase in income before income tax for the three months ended June 30, 2002 compared with the three months ended June 30, 2001. The effective tax rate was 33.2% for the three months ended June 30, 2002 compared to 26.8% for the three months ended June 30, 2001. 19 Comparison of the Six Months Ended June 30, 2002 and 2001 Consolidated Results of Operations The Company recorded basic and diluted earnings per share of $0.81 for the six months ended June 30, 2002 and $0.82 for the six months ended June 30, 2001. Excluding goodwill amortization from the six months ended June 30, 2001, basic earnings per share was $0.87 and diluted earnings per share was $0.86. Total operating revenues were $334.3 million for the six months ended June 30, 2002, an increase of $17.3 million (5.5%) from the $317 million for the six months ended June 30, 2001. Operating income increased $625,000 (1.6%) from $38.2 million for the six months ended June 30, 2001 to $38.8 million for the six months ended June 30, 2002. Following is a discussion of the results of operations by segment. Electric
Six months ended June 30, (in thousands) 2002 2001 Change - -------------- ---------- ---------- ---------- Operating revenues $ 146,290 $ 152,008 $ (5,718) Production fuel 22,462 20,945 1,517 Purchased power 42,559 48,568 (6,009) Other electric operation and maintenance expenses 38,555 34,400 4,155 Depreciation and amortization 12,371 12,083 288 Property taxes 4,882 5,126 (244) ---------- ---------- ---------- Operating income $ 25,461 $ 30,886 $ (5,425) ========== ========== ==========
The 3.8% decrease in electric operating revenues for the six months ended June 30, 2002 compared with the six months ended June 30, 2001 is due to a $9.3 million (19.8%) decrease in revenues from wholesale power pool sales and a $1.6 million (1.6%) decrease in retail revenue offset by a $5.2 million (125%) increase for other electric operating revenues. The decrease in revenues from wholesale power pool sales resulted from a 31% decrease in revenue per mwh sold offset by a 16.2% increase in mwh sold. The decrease in revenue per mwh reflects the soft wholesale power market. Gross margins per mwh sold on wholesale power pool sales decreased 41.9% between the periods. The decrease in retail revenues resulted from a 0.7% decrease in retail mwh sold combined with a 0.9% decrease in revenue per retail mwh sold. Heating degree-days decreased 1.3% during the first six months of 2002 compared to the first six months of 2001. The increase in other electric operating revenues is primarily due to a large transmission line construction project being completed for another area utility. Production fuel expenses increased 7.2% during the six months ended June 30, 2002 compared with the six months ended June 30, 2001 primarily due to a 11.4% increase in fuel costs per mwh produced at the electric utility's coal-fired generating stations. The increase in fuel costs per mwh produced is due to higher costs reflected in the new coal contracts that went into effect at the beginning of 2002. The cost of purchased power decreased 12.4% reflecting a decrease of 23.8% in the cost per mwh purchased offset by a 14.9% increase in mwh purchased. The increase in mwh purchased was to provide for the increase in wholesale energy sales and to meet system demand. Other operation and maintenance expenses for the six months ended June 30, 2002 increased 12.1% over the six 20 months ended June 30, 2001. This increase includes $2.5 million of expenses related to the transmission line construction project for another utility, an increase of $1.2 million in labor and employee benefits costs, and an increase of $1 million in external services, including $353,000 for the overhaul of one of the utility's internal combustion turbines. Plastics
Six months ended June 30, ---------------------------------------- (in thousands) 2002 2001 Change - -------------- --------- --------- --------- Operating revenues $ 40,280 $ 32,624 $ 7,656 Cost of goods sold 30,390 30,437 (47) Operating expenses 2,189 1,767 422 Depreciation and amortization 874 1,634 (760) --------- --------- -------- Operating (loss) income $ 6,827 $ (1,214) $ 8,041 ========= ========= ========
The 23.5% increase in operating revenues for the six months ended June 30, 2002 compared with the six months ended June 30, 2001 reflects a 32.2% increase in pounds of PVC pipe sold offset by a 6.6% decline in the average sales price per pound. The slight decrease in cost of goods sold reflects a $1.1 million decrease in material cost due to a 30% decrease in the cost per pound of resin, the raw material used in the production of PVC pipe, offset by an increase of over $1 million in costs related to the increase in PVC pipe sold, including increases in freight costs of $378,000, labor costs of $239,000, overhead adjustments of $226,000, and shop tools and supplies of $115,000. Operating expenses increased 23.9% primarily due to increases in general and administrative labor costs and selling expenses. The decrease in depreciation and amortization is due to the accounting change that eliminated the amortization of goodwill beginning in 2002. Since the PVC pipe industry is affected directly by economic cycles it is difficult to predict that the recent increase in pounds of pipe sold will continue. The industry experienced a significant increase in demand during the first half of 2002 compared with the same period last year when demand was exceptionally weak. During 2001 PVC resin prices declined holding down sales prices. PVC resin producers have announced a two-cent-per-pound price increase for July and another two-cent increase for September. The PVC pipe industry in general has announced several pipe price increases in response to these resin price increases. Some of the increased demand during 2002 is due to customers increasing their inventory levels of PVC pipe. Demand for PVC pipe is expected to decrease once adequate inventory levels are reached. If the gross domestic product continues to be strong for the remainder of the 2002 the Company expects that demand for PVC resin and pipe will be in balance and that operating margins will continue to be strong. The companies in this segment are highly dependent upon a limited number of third-party vendors for PVC resin. For the six months ended June 30, 2002 and 2001, purchases of raw materials from two vendors totaled 59.8% and 68.6%, respectively, of total resin purchases. The companies in this segment believe their relationships with their key raw material vendors are good. However, the loss of a key supplier or any interruption or delay in the supply of PVC resin could have a significant impact on the plastics segment. 21 Health Services
Six months ended June 30, -------------------------------------- (in thousands) 2002 2001 Change - -------------- --------- --------- ------- Operating revenues $ 44,752 $ 37,526 $ 7,226 Cost of goods sold 31,148 28,195 2,953 Operating expenses 6,547 4,536 2,011 Depreciation and amortization 2,007 1,505 502 --------- --------- -------- Operating income $ 5,050 $ 3,290 $ 1,760 ========= ========= ========
The 19.3% increase in health services operating revenues, 10.5% increase in cost of goods sold, 44.3% increase in operating expenses and the 33.4% increase in depreciation and amortization for the six months ended June 30, 2002 compared with the six months ended June 30, 2001 is primarily due to the acquisitions completed during September 2001. The number of scans performed increased 16.4% and the average fee per scan increased 6.7%. Revenues from equipment sales decreased 12.1%. The increase in cost of goods sold reflects an increase of $1.3 million in equipment repairs and maintenance and a $1.2 million in labor related costs. The increase in operating expenses is due to increased labor related costs and other general and administrative costs. Operating margins improved between the periods due to increases in margins on service sales in the diagnostic equipment imaging business and in the mobile imaging business offset by expenses incurred in the segment's continued investment in fixed-based imaging systems. Manufacturing
Six months ended June 30, -------------------------------------- (in thousands) 2002 2001 Change - -------------- --------- --------- ------- Operating revenues $ 67,070 $ 58,552 $ 8,518 Cost of goods sold 50,920 43,503 7,417 Operating expenses 8,189 6,239 1,950 Depreciation and amortization 2,980 2,482 498 --------- --------- --------- Operating income $ 4,981 $ 6,328 $ (1,347) ========= ========= =========
Increases in the production and sales of wind towers and steel fabrication combined with the May acquisition of ShoreMaster offset by decreased sales volumes of metal part stamping led to the 14.5% increase in manufacturing operating revenues. Cost of goods sold increased 17% which included $3.8 million related to ShoreMaster and increases of $3.8 million in material cost at the wind towers and steel fabrication business offset by a $3.6 million reduction in material costs at the metal parts stamping companies. Increases in labor costs of $1.1 million, other general and administrative costs of $433,000, and selling expenses of $351,000, with much of these increases due to the ShoreMaster acquisition, caused the increase in operating expenses. All of the companies in the segment, except ShoreMaster, experienced decreases in their operating income for the six months ended June 30, 2002 compared with June 30, 2001. The companies in this segment continue to be adversely affected by a slower economy. Operating margins were also affected at the metal parts stamping and fabrication plants due to a temporary closing of a major customer's plant during the month of June due to flooding. A slowdown in the wind energy market--despite the passage of the Production Tax Credit--has affected the wind tower business. This slowdown may be the result of uncertainty with the energy industry in general. 22 Other Business Operations
Six months ended June 30, --------------------------------------------- (in thousands) 2002 2001 Change - -------------- --------- ---------- --------- Operating revenues $ 35,913 $ 36,276 $ (363) Cost of goods sold 19,521 18,702 819 Operating expenses 17,470 15,872 1,598 Depreciation and amortization 2,458 2,834 (376) --------- ---------- --------- Operating loss $ (3,536) $ (1,132) $ (2,404) ========= ========== =========
Operating income decreased at all of the companies in this segment except for the telecommunication company for the three months ended June 30, 2002 compared with the three months ended June 30, 2001. Decreases in operating revenues of $2.2 million from the energy services and transportation subsidiaries were partially offset by increases in revenues of $1.9 million from the construction subsidiaries and telecommunication subsidiary. Both operating revenues and cost of goods sold decreased for the energy services subsidiary as a result of the higher cost of natural gas during 2001. A decrease of 9.5% in miles driven combined with a 3.9% decrease in revenue per mile lead to the decrease in operating revenues at the transportation subsidiary. Operating expenses increased 10.1% due to a $1.1 million increase in unallocated corporate overhead and a $500,000 increase in the provision for doubtful accounts receivable at the energy services and the telecommunication subsidiaries. A 15% decrease in the average cost of diesel fuel per gallon helped to reduce the increase in operating expenses. The decrease in depreciation and amortization is due to the accounting change that eliminated the amortization of goodwill beginning in 2002. Other Income and Deductions - net, Interest Charges, and Income Taxes For the six months ended June 30, 2002 compared with the six months ended June 30, 2001, the $786,000 (65.8%) decrease in other income and deductions is due to lower interest income, reductions in the gains from sale of fixed assets, the recording of a Minnesota Conservation Improvement Program Incentive during 2001, an increase in non-operating miscellaneous expenses and an increase in the amount of allowance for funds used during construction recorded at the electric utility. The $481,000 (5.9%) increase in interest charges is due to higher long-term debt balances outstanding for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, offset by significantly lower interest rates and lower average balances under the line of credit between the periods. Income taxes decreased $104,000 between the quarters. The effective tax rate was 32.4% in the first six months of 2002 compared to 32.1% in the same period last year. Critical Accounting Policies The discussion and analysis of the Company's consolidated financial condition and results of operations are based on consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. Preparation of these consolidated financial statements requires the use of estimates and judgments that affect the reported results. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those that require significant management judgments and business uncertainties and could result in materially different results using different assumptions and conditions. The following accounting policies meet the criteria of a critical accounting policy. 23 Revenue recognition--Due to the diverse business operations of the Company, revenue recognition depends on the product produced and sold. In general, the Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the customer, there has been delivery and acceptance and the price is fixed or determinable. In cases where significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Provisions for sale returns and warranty costs are recorded at the time of the sale based on historical information and current trends. Electric customers' meters are read and bills are rendered on a cycle basis. Revenue is accrued for electricity consumed but not yet billed. Rate schedules applicable to substantially all customers include a cost of energy adjustment clause, under which the rates are adjusted to reflect changes in average cost of fuels and purchased power, and a surcharge for recovery of conservation-related expenses. Revenues on wholesale energy sales are recognized when energy is delivered. The majority of wholesale energy revenue is the result of bilateral agreements with individual counter-parties. Plastics operating revenues are recorded when the product is shipped. Health services operating revenues on major equipment and installation contracts are recorded when the equipment is delivered. Amounts received in advance under customer service contracts are deferred and recognized on a straight-line basis over the contract period. Revenues generated in the mobile imaging operations are recorded on a fee for scan basis. Manufacturing operating revenues are recorded when products are shipped and on a percentage-of-completion basis for construction type contracts. Other business operations operating revenues are recorded when services are rendered or products are shipped. In the case of construction contracts, the percentage-of-completion method is used. The method used to determine the progress of completion is based on the ratio of costs incurred to total estimated costs. Inventory valuation--The majority of the Company's inventory is stated at the lower of cost (first in, first out) or market. Changes in the market conditions could require a write down of inventory values. Use of estimates--The Company uses estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used for such items as depreciable lives, tax provisions, collectability of trade accounts receivable, self insurance programs, environmental liabilities, unbilled electric revenues, unscheduled power exchanges, service contract maintenance costs, percentage-of-completion and actuarially determined benefits costs. As better information becomes available or actual amounts are known, estimates are revised. Operating results can be affected by changes made to prior accounting estimates. The Company's significant accounting policies are more fully described in note 1 of the notes to consolidated financial statements included under Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has limited exposure to market risk associated with interest rates and commodity prices. The Company currently has no exposure to market risk associated with changes in foreign currency exchange rates. The majority of the Company's long-term debt obligations bear interest at a fixed rate. Variable rate long-term debt bears interest at a rate that is reset on a periodic basis reflecting current market conditions. The Company manages its interest rate risk through the issuance of fixed-rate debt with varying maturities, through economic refunding of debt through optional refundings, limiting the amount of variable interest rate debt, and utilization of short-term borrowings to allow flexibility in the timing and placement of long-term debt. As of June 30, 2002, the Company had $16.1 million of long-term debt subject to variable interest rates. Assuming no change in the Company's financial structure, if variable interest rates were to average 1 percent higher (lower) than what the average variable rate was on June 30, 2002, interest expense and pre-tax earnings would change by approximately 24 $161,000. The Company has short-term borrowing arrangements to provide financing for working capital and general corporate purposes. The level of borrowings under these arrangements vary from period to period, depending upon, among other factors, operating needs and capital expenditures. The Company has not used interest rate swaps to manage net exposure to interest rate changes related to the Company's portfolio of borrowings. The Company maintains a ratio of fixed rate debt to total debt within a certain range. It is the Company's policy to enter into interest rate transactions and other financial instruments only to extent considered necessary to meet its stated objectives. The Company does not enter into transactions for speculative or trading purposes. The electric utility's retail portion of fuel and purchased power costs are subject to cost of energy adjustment clauses that mitigate the commodity price risk by allowing a pass through of most of the increase or decrease in energy costs to retail customers. In addition, the electric utility participates in an active wholesale power market providing access to commodity transactions that may serve to mitigate price risk. The Company has in place an energy risk management policy with a goal to manage, through the use of defined risk management practices, price risk and credit risk associated with wholesale power purchases and sales. The Company through its energy services subsidiary markets natural gas to approximately 150 retail customers.A portion of these customers are served under fixed-price contracts. There is price risk associated with these limited number of fixed-price contracts since the corresponding cost of natural gas is not immediately locked in. This price risk is not considered material to the Company. The plastics companies are exposed to market risk related to changes in commodity prices for PVC resins, the raw material used to manufacture PVC pipe. The PVC pipe industry is highly sensitive to commodity raw material pricing volatility. Historically, when resin prices are rising or stable, margins and sales volume have been higher and when resin prices are falling, sales volumes and margins have been lower. Gross margins also decline when the supply of PVC pipe increases faster than demand. Due to the commodity nature of PVC resin and the dynamic supply and demand factors worldwide, it is very difficult to predict gross margin percentages or assume that historical trends will continue. 25 PART II. OTHER INFORMATION Item 2. Change in Securities and Use of Proceeds On May 1, 2002 and June 14, 2002, the Company issued 139,452 shares and 18,805 shares of common stock in connection with the acquisition of Computed Imaging Service, Inc. On May 1, 2002, the Company issued 303,124 shares of common stock in connection with the acquisition of Shore-Masters, Inc. The issuance of these shares did not involve a public offering and therefore was exempt from registration pursuant to section 4(2) of the Securities Act of 1933, as amended. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on April 8, 2002, for the purpose of electing three nominees to the Board of Directors with terms expiring in 2005 and approving the appointment of auditors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to management's solicitations.All nominees for directors as listed in the proxy statement were elected. The names of each other director whose term of office continued after the meeting are as follows: Arvid R. Liebe, John C. MacFarlane, Gary J. Spies, Thomas M. Brown, Maynard D. Helgaas and Robert N. Spolum. The voting results are as follows:
Shares Shares Voted Election of Directors Voted For Withheld Authority --------------------- --------- ------------------ Dennis R. Emmen 20,973,139 327,018 Kenneth L. Nelson 21,067,827 232,330 Nathan I. Partain 21,064,150 236,007
Shares Shares Shares Voted For Voted Against Voted Abstain ---------- ------------- ------------- Approval of Auditors 20,809,054 229,706 261,397
Item 6. Exhibits and Reports on Form 8-K a) Exhibits: 10-A Executive Employment Agreement - John Erickson* 10-B Executive Employment Agreement and amendment no. 1 - Lauris Molbert* 10-C Executive Employment Agreement - Kevin Moug* 10-D Executive Employment Agreement - George Koeck* 10-E Change in Control Severance Agreement - John Erickson* 10-F Change in Control Severance Agreement - Lauris Molbert* 10-G Change in Control Severance Agreement - Kevin Moug* 10-H Change in Control Severance Agreement - George Koeck* 26 10-I Credit Agreement dated as of April 30, 2002 among Otter Tail Corporation, the Banks, as defined therein, and U.S. Bank National Association, as a Bank and as Agent (incorporated by reference to Exhibit 99-A-1 to the Company's Registration Statement on Form S-3, Registration No. 333-90952) 99-A Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, by John D. Erickson, Chief Executive Officer and President, Otter Tail Corporation. 99-B Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, by Kevin G. Moug, Chief Financial Officer and Treasurer, Otter Tail Corporation. *Management contract or compensatory plan or arrangement required to be filed pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K. b) Reports on Form 8-K. A report on Form 8-K was filed on June 20, 2002, reporting that Doug Kjellerup, President of Otter Tail Power Company, a division of Otter Tail Corporation, suffered a stroke on June 12, 2002 and that John Erickson, President and Chief Executive Officer of Otter Tail Corporation, assumed Mr. Kjellerup's duties on an interim basis. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OTTER TAIL CORPORATION By: /s/ Kevin G. Moug ------------------------------------------- Kevin G. Moug Chief Financial Officer and Treasurer (Chief Financial Officer/Authorized Officer) Dated: August 14, 2002 EXHIBIT INDEX
Exhibit Number Description - ------------- ----------- 10-A Executive Employment Agreement - John Erickson* 10-B Executive Employment Agreement and amendment no. 1 - Lauris Molbert* 10-C Executive Employment Agreement - Kevin Moug* 10-D Executive Employment Agreement - George Koeck* 10-E Change in Control Severance Agreement - John Erickson* 10-F Change in Control Severance Agreement - Lauris Molbert* 10-G Change in Control Severance Agreement - Kevin Moug* 10-H Change in Control Severance Agreement - George Koeck* 10-I Credit Agreement dated as of April 30, 2002 among Otter Tail Corporation, the Banks, as defined therein, and U.S. Bank National Association, as a Bank and as Agent (incorporated by reference to Exhibit 99-A-1 to the Company's Registration Statement on Form S-3, Registration No. 333-90952) 99-A Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, by John D. Erickson, Chief Executive Officer and President, Otter Tail Corporation 99-B Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, by Kevin G. Moug, Chief Financial Officer and Treasurer, Otter Tail Corporation.
*Management contract or compensatory plan or arrangement required to be filed pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K. EX-10.A 3 c71393exv10wa.txt EXECUTIVE EMPLOYMENT AGREEMENT-JOHN ERICKSON Exhibit 10-A OTTER TAIL CORPORATION EXECUTIVE EMPLOYMENT AGREEMENT JOHN ERICKSON This Executive Employment Agreement (the "Agreement") is entered into as of this 15th day of February, 2002, by and between Otter Tail Corporation, a Minnesota corporation (the "Corporation") and John Erickson ("You"). The Corporation agrees to employ You and You agree to be employed consistent with the terms of this Agreement as follows: 1. Employment. The Corporation agrees to employ You and You agree to be employed as President consistent with the terms and conditions set forth in this Agreement. 2. Duties. You shall have such duties as are assigned or delegated to You by the Corporation's Board of Directors or its designee. Except as provided for in Section 7 of this Agreement or subsequently agreed upon by You and the Corporation, You agree to devote Your entire business time, attention, skill, and energy exclusively to the business of the Corporation, to use Your best efforts to promote the success of the Corporation's business, and to cooperate fully with the Board of Directors in the advancement of the best interests of the Corporation. 3. Compensation and Benefits. a. Base Pay. You shall be paid an annual salary ("Base Pay") of $272,000, which shall be payable in equal periodic installments according to the Corporation's customary payroll practices, but no less frequently than monthly, and subject to such withholdings and deductions as required by law. Your Base Pay shall be reviewed in April of each year by the Board of Directors, and any change in Base Pay approved by the Board shall become effective April 1 of the year in which it is approved. b. Incentive Compensation. You shall be paid an annual incentive payment based on the Corporation's Management Incentive Plan, or its successor plan, as approved by the Corporation's Board of Directors, and based on the rules of the plan. Your incentive payment shall be paid to You as soon as administratively possible upon approval of the Corporation's financial results after the close of each calendar year. c. Benefits. In addition to the compensation described above and subject to rules of eligibility, You shall be permitted to participate in the benefit plans and long-term incentive plans available to full time executive level employees of the Corporation as they now exist and may from time to time be modified or established by the Corporation. The plan documents shall govern Your participation in any benefit plan. 4. Expenses. The Corporation shall pay Your dues in such professional societies and organizations as are appropriate for Your position, and shall pay on Your behalf (or reimburse You for) reasonable expenses incurred by You on behalf of the Corporation in the performance of the Your duties pursuant to this Agreement, including reasonable expenses incurred by You in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. You shall file such expense reports as are required by the Corporation's policies and federal income tax laws and regulations. 5. Confidentiality of Information. a. You acknowledge that the Corporation possesses and will continue to develop and acquire valuable Confidential Information (as defined below), including information that You may develop or discover as a result of your employment with the Corporation. The value of that Confidential Information depends on it remaining confidential. The Corporation depends on You to maintain the confidentiality, and You accept that position of trust. b. As used in this Agreement, "Confidential Information" means any information (including any formula, pattern, compilation, program, device, method, technique or process) that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and includes information of the Corporation, its customers, suppliers, joint ventures, licensors, distributors and other persons and entities with whom the Corporation does business. c. You shall not disclose or use at any time, either during or after your employment with the Corporation, any Confidential Information except for the exclusive benefit of the Corporation as required by your duties or as the Corporation expressly may consent to in writing. You shall cooperate with the Corporation to implement reasonable measures to maintain the secrecy of, and use your best efforts to prevent the unauthorized disclosure, use or reproduction of all Confidential Information. d. Upon leaving employment with the Corporation for any reason, You shall deliver to the Corporation all tangible, written, graphical, machine readable and other materials (including all copies) in your possession or under your control containing or disclosing Confidential Information. 6. Termination/Severance. Either party may terminate the employment relationship as evidenced by this Agreement at any time and for any reason upon ninety days written notice to the other. a. If You elect to terminate the employment relationship, or if You are terminated by the Company for Cause, You shall receive Base Pay and benefits through the date of termination. Cause means your termination of employment with the Corporation based upon embezzlement or other intentional misconduct which is materially injurious to the Corporation, monetarily or otherwise. b. If the Corporation elects to terminate the employment relationship or if You elect to resign for Good Reason, You shall receive a severance payment equal 2 to one and one-half (1-1/2) times the sum of your present Base Pay plus your most recent annual incentive payment (the "Severance Payment"), in full satisfaction of the Corporation's obligations to You as an employee. The Severance Payment will be paid within fifteen (15) days of the date of termination and shall be subject to payroll taxes and any withholding obligations. Good Reason means the occurrence of any of the following events: (1) a material change in your responsibilities or title which are not of comparable responsibility and status as those held upon execution of this Agreement; (2) a reduction in your Base Pay, or a modification of the Corporation's incentive compensation program or benefits in a manner materially adverse to You; (3) a breach or alteration of any material term of this contract without your consent. c. If You are terminated in connection with a Change in Control, as defined by the Change in Control Severance Agreement entered into by You and the Corporation (the "Severance Agreement"), and You receive payment of the severance benefits under Section 4 of the Severance Agreement, no Severance Payment shall be due to You under this Agreement. 7. Special Considerations. None. 8. Entire Agreement. This Agreement and the Change in Control Severance Agreement represent the entire agreement between You and the Corporation concerning the employment relationship of the parties commencing on February 15, 2002 and following and, thus, supersedes any and all previous written or oral employment agreements or understandings concerning such matter. 9. Disputes. Disputes under this Agreement shall be determined by arbitration consistent with rules of the American Arbitration Association. The costs of Arbitration shall be borne equally between You and the Corporation and You shall bear your own attorney fees; provided, however, if You are the prevailing party in Arbitration, all costs and attorney fees shall be paid by the Corporation. 10. Amendment/Governing Law. This Agreement may only be modified or amended by a writing signed by both parties. This Agreement is made in and shall be governed by the substantive laws of the State of Minnesota. 3 FOR THE CORPORATION: /s/ George A. Koeck 2/15/02 - ------------------------- ----------------------------- Date ACKNOWLEDGED AND ACCEPTED BY: /s/ John Erickson 2-15-02 -------------------------- ------------------------------ Date 4 EX-10.B 4 c71393exv10wb.txt EXECUTIVE EMPLOYMENT AGREEMENT/AMEND. NO.1 MOLBERT Exhibit 10-B OTTER TAIL CORPORATION EXECUTIVE EMPLOYMENT AGREEMENT LAURIS MOLBERT This Executive Employment Agreement (the "Agreement") is entered into as of this 15th day of February, 2002, by and between Otter Tail Corporation, a Minnesota corporation (the "Corporation") and Lauris Molbert ("You"). The Corporation agrees to employ You and You agree to be employed consistent with the terms of this Agreement as follows: 1. Employment. The Corporation agrees to employ You and You agree to be employed as Executive Vice President - Corporate Development; President and Chief Operating Officer - Varistar consistent with the terms and conditions set forth in this Agreement. 2. Duties. You shall have such duties as are assigned or delegated to You by the Corporation's Board of Directors or its designee. Except as provided for in Section 7 of this Agreement or subsequently agreed upon by You and the Corporation, You agree to devote Your entire business time, attention, skill, and energy exclusively to the business of the Corporation, to use Your best efforts to promote the success of the Corporation's business, and to cooperate fully with the Board of Directors in the advancement of the best interests of the Corporation. 3. Compensation and Benefits. a. Base Pay. You shall be paid an annual salary ("Base Pay") of $224,000, which shall be payable in equal periodic installments according to the Corporation's customary payroll practices, but no less frequently than monthly, and subject to such withholdings and deductions as required by law. Your Base Pay shall be reviewed in April of each year by the Board of Directors, and any change in Base Pay approved by the Board shall become effective April 1 of the year in which it is approved. b. Incentive Compensation. You shall be paid an annual incentive payment based on the Corporation's Management Incentive Plan, or its successor plan, as approved by the Corporation's Board of Directors, and based on the rules of the plan. Your incentive payment shall be paid to You as soon as administratively possible upon approval of the Corporation's financial results after the close of each calendar year. c. Benefits. In addition to the compensation described above and subject to rules of eligibility, You shall be permitted to participate in the benefit plans and long-term incentive plans available to full time executive level employees of the Corporation as they now exist and may from time to time be modified or established by the Corporation. The plan documents shall govern Your participation in any benefit plan. 4. Expenses. The Corporation shall pay Your dues in such professional societies and organizations as are appropriate for Your position, and shall pay on Your behalf (or reimburse You for) reasonable expenses incurred by You on behalf of the Corporation in the performance of the Your duties pursuant to this Agreement, including reasonable expenses incurred by You in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. You shall file such expense reports as are required by the Corporation's policies and federal income tax laws and regulations. 5. Confidentiality of Information. a. You acknowledge that the Corporation possesses and will continue to develop and acquire valuable Confidential Information (as defined below), including information that You may develop or discover as a result of your employment with the Corporation. The value of that Confidential Information depends on it remaining confidential. The Corporation depends on You to maintain the confidentiality, and You accept that position of trust. b. As used in this Agreement, "Confidential Information" means any information (including any formula, pattern, compilation, program, device, method, technique or process) that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and includes information of the Corporation, its customers, suppliers, joint ventures, licensors, distributors and other persons and entities with whom the Corporation does business. c. You shall not disclose or use at any time, either during or after your employment with the Corporation, any Confidential Information except for the exclusive benefit of the Corporation as required by your duties or as the Corporation expressly may consent to in writing. You shall cooperate with the Corporation to implement reasonable measures to maintain the secrecy of, and use your best efforts to prevent the unauthorized disclosure, use or reproduction of all Confidential Information. d. Upon leaving employment with the Corporation for any reason, You shall deliver to the Corporation all tangible, written, graphical, machine readable and other materials (including all copies) in your possession or under your control containing or disclosing Confidential Information. 6. Termination/Severance. Either party may terminate the employment relationship as evidenced by this Agreement at any time and for any reason upon ninety days written notice to the other. a. If You elect to terminate the employment relationship, or if You are terminated by the Company for Cause, You shall receive Base Pay and benefits through the date of termination. Cause means your termination of employment with the Corporation based upon embezzlement or other intentional misconduct which is materially injurious to the Corporation, monetarily or otherwise. 2 b. If the Corporation elects to terminate the employment relationship or if You elect to resign for Good Reason, You shall receive a severance payment equal to one and one-half (1-1/2) times the sum of your present Base Pay plus your most recent annual incentive payment (the "Severance Payment"), in full satisfaction of the Corporation's obligations to You as an employee. The Severance Payment will be paid within fifteen (15) days of the date of termination and shall be subject to payroll taxes and any withholding obligations. Good Reason means the occurrence of any of the following events: (1) a material change in your responsibilities or title which are not of comparable responsibility and status as those held upon execution of this Agreement; (2) a reduction in your Base Pay, or a modification of the Corporation's incentive compensation program or benefits in a manner materially adverse to You; (3) a breach or alteration of any material term of this contract without your consent. c. If You are terminated in connection with a Change in Control, as defined by the Change in Control Severance Agreement entered into by You and the Corporation (the "Severance Agreement"), and You receive payment of the severance benefits under Section 4 of the Severance Agreement, no Severance Payment shall be due to You under this Agreement. 7. Special Considerations. Notwithstanding Your obligation under the Agreement to devote Your entire business time exclusively to the business of the Corporation, the Corporation hereby consents to Your certain business and personal activities and interests not related to the Corporation and agrees that You may continue such activities and interests which are described as follows: (i) Your duties and obligations as a director, owner, partner, trustee, officer, and legal counsel of banking, farming, investment and other family interests; and (ii) Your duties and obligations as a director of the following entities: The Nature Conservancy, Fargo/Cass County EDC; Community First Bank of Fargo or Community First Bankshares, Inc. As a part of the consent to the above, the Corporation agrees that You may devote time to such activities during normal working hours and use Your administrative assistant and office resources (such as file storage, office supplies, office equipment) without reimbursement to the Corporation of office expenses (except specific out-of-pocket expenses, such as postage, FedEx fees and the like) or deduction of vacation time. 8. Entire Agreement. This Agreement and the Change in Control Severance Agreement represent the entire agreement between You and the Corporation concerning the employment relationship of the parties commencing on February 15, 2002 and following and, thus, supersedes any and all previous written or oral employment agreements or understandings concerning such matter. 9. Disputes. Disputes under this Agreement shall be determined by arbitration 3 consistent with rules of the American Arbitration Association. The costs of Arbitration shall be borne equally between You and the Corporation and You shall bear your own attorney fees; provided, however, if You are the prevailing party in Arbitration, all costs and attorney fees shall be paid by the Corporation. 10. Amendment/Governing Law. This Agreement may only be modified or amended by a writing signed by both parties. This Agreement is made in and shall be governed by the substantive laws of the State of Minnesota. FOR THE CORPORATION: /s/ John Erickson 3-21-02 - --------------------------- -------------------------------- Date ACKNOWLEDGED AND ACCEPTED BY: /s/ Lauris Molbert 3/21/02 - ---------------------------- -------------------------------- Date 4 OTTER TAIL CORPORATION EXECUTIVE EMPLOYMENT AGREEMENT AMENDMENT NO. 1 LAURIS MOLBERT 1. Effective June 10, 2002, Paragraph 1 of the Executive Employment Agreement dated February 15, 2001, shall be modified to read: 1. Employment. The Corporation agrees to employ You and You agree to be employed as Executive Vice President and Chief Operating Officer consistent with the terms and conditions set forth in this Agreement. 2. This change is made consistent with Paragraph 10 of the Executive Employment Agreement, which otherwise remains in full force and effect. FOR THE CORPORATION: By: /s/ John Erickson 7-15-02 --------------------------------- --------------------------------- John Erickson Date Its: Chief Executive Officer ACKNOWLEDGED AND ACCEPTED BY: /s/ Lauris Molbert 7-15-02 - ------------------------------------- ---------------------------------- Lauris Molbert Date 5 EX-10.C 5 c71393exv10wc.txt EXECUTIVE EMPLOYMENT AGREEMENT-KEVIN MOUG Exhibit 10-C OTTER TAIL CORPORATION EXECUTIVE EMPLOYMENT AGREEMENT KEVIN MOUG This Executive Employment Agreement (the "Agreement") is entered into as of this 15th day of February, 2002, by and between Otter Tail Corporation, a Minnesota corporation (the "Corporation") and Kevin Moug ("You"). The Corporation agrees to employ You and You agree to be employed consistent with the terms of this Agreement as follows: 1. Employment. The Corporation agrees to employ You and You agree to be employed as Chief Financial Officer and Treasurer consistent with the terms and conditions set forth in this Agreement. 2. Duties. You shall have such duties as are assigned or delegated to You by the Corporation's Board of Directors or its designee. Except as provided for in Section 7 of this Agreement or subsequently agreed upon by You and the Corporation, You agree to devote Your entire business time, attention, skill, and energy exclusively to the business of the Corporation, to use Your best efforts to promote the success of the Corporation's business, and to cooperate fully with the Board of Directors in the advancement of the best interests of the Corporation. 3. Compensation and Benefits. a. Base Pay. You shall be paid an annual salary ("Base Pay") of $200,000, which shall be payable in equal periodic installments according to the Corporation's customary payroll practices, but no less frequently than monthly, and subject to such withholdings and deductions as required by law. Your Base Pay shall be reviewed in April of each year by the Board of Directors, and any change in Base Pay approved by the Board shall become effective April 1 of the year in which it is approved. b. Incentive Compensation. You shall be paid an annual incentive payment based on the Corporation's Management Incentive Plan, or its successor plan, as approved by the Corporation's Board of Directors, and based on the rules of the plan. Your incentive payment shall be paid to You as soon as administratively possible upon approval of the Corporation's financial results after the close of each calendar year. c. Benefits. In addition to the compensation described above and subject to rules of eligibility, You shall be permitted to participate in the benefit plans and long-term incentive plans available to full time executive level employees of the Corporation as they now exist and may from time to time be modified or established by the Corporation. The plan documents shall govern Your participation in any benefit plan. 4. Expenses. The Corporation shall pay Your dues in such professional societies and organizations as are appropriate for Your position, and shall pay on Your behalf (or reimburse You for) reasonable expenses incurred by You on behalf of the Corporation in the performance of the Your duties pursuant to this Agreement, including reasonable expenses incurred by You in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. You shall file such expense reports as are required by the Corporation's policies and federal income tax laws and regulations. 5. Confidentiality of Information. a. You acknowledge that the Corporation possesses and will continue to develop and acquire valuable Confidential Information (as defined below), including information that You may develop or discover as a result of your employment with the Corporation. The value of that Confidential Information depends on it remaining confidential. The Corporation depends on You to maintain the confidentiality, and You accept that position of trust. b. As used in this Agreement, "Confidential Information" means any information (including any formula, pattern, compilation, program, device, method, technique or process) that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and includes information of the Corporation, its customers, suppliers, joint ventures, licensors, distributors and other persons and entities with whom the Corporation does business. c. You shall not disclose or use at any time, either during or after your employment with the Corporation, any Confidential Information except for the exclusive benefit of the Corporation as required by your duties or as the Corporation expressly may consent to in writing. You shall cooperate with the Corporation to implement reasonable measures to maintain the secrecy of, and use your best efforts to prevent the unauthorized disclosure, use or reproduction of all Confidential Information. d. Upon leaving employment with the Corporation for any reason, You shall deliver to the Corporation all tangible, written, graphical, machine readable and other materials (including all copies) in your possession or under your control containing or disclosing Confidential Information. 6. Termination/Severance. Either party may terminate the employment relationship as evidenced by this Agreement at any time and for any reason upon ninety days written notice to the other. a. If You elect to terminate the employment relationship, or if You are terminated by the Company for Cause, You shall receive Base Pay and benefits through the date of termination. Cause means your termination of employment with the Corporation based upon embezzlement or other intentional misconduct which is materially injurious to the Corporation, monetarily or otherwise. 2 b. If the Corporation elects to terminate the employment relationship or if You elect to resign for Good Reason, You shall receive a severance payment equal to one and one-half (1-1/2) times the sum of your present Base Pay plus your most recent annual incentive payment (the "Severance Payment"), in full satisfaction of the Corporation's obligations to You as an employee. The Severance Payment will be paid within fifteen (15) days of the date of termination and shall be subject to payroll taxes and any withholding obligations. Good Reason means the occurrence of any of the following events: (1) a material change in your responsibilities or title which are not of comparable responsibility and status as those held upon execution of this Agreement; (2) a reduction in your Base Pay, or a modification of the Corporation's incentive compensation program or benefits in a manner materially adverse to You; (3) a breach or alteration of any material term of this contract without your consent. c. If You are terminated in connection with a Change in Control, as defined by the Change in Control Severance Agreement entered into by You and the Corporation (the "Severance Agreement"), and You receive payment of the severance benefits under Section 4 of the Severance Agreement, no Severance Payment shall be due to You under this Agreement. 7. Special Considerations. None. 8. Entire Agreement. This Agreement and the Change in Control Severance Agreement represent the entire agreement between You and the Corporation concerning the employment relationship of the parties commencing on February 15, 2002 and following and, thus, supersedes any and all previous written or oral employment agreements or understandings concerning such matter. 9. Disputes. Disputes under this Agreement shall be determined by arbitration consistent with rules of the American Arbitration Association. The costs of Arbitration shall be borne equally between You and the Corporation and You shall bear your own attorney fees; provided, however, if You are the prevailing party in Arbitration, all costs and attorney fees shall be paid by the Corporation. 10. Amendment/Governing Law. This Agreement may only be modified or amended by a writing signed by both parties. This Agreement is made in and shall be governed by the substantive laws of the State of Minnesota. 3 FOR THE CORPORATION: /s/ John Erickson 3-22-02 - ----------------------------- -------------------------------- Date ACKNOWLEDGED AND ACCEPTED BY: /s/ Kevin G. Moug 3/22/02 - ----------------------------- -------------------------------- Date 4 EX-10.D 6 c71393exv10wd.txt EXECUTIVE EMPLOYMENT AGREEMENT-GEORGE KOECK Exhibit 10-D OTTER TAIL CORPORATION EXECUTIVE EMPLOYMENT AGREEMENT GEORGE KOECK This Executive Employment Agreement (the "Agreement") is entered into as of this 15th day of February, 2002, by and between Otter Tail Corporation, a Minnesota corporation (the "Corporation") and George Koeck ("You"). The Corporation agrees to employ You and You agree to be employed consistent with the terms of this Agreement as follows: 1. Employment. The Corporation agrees to employ You and You agree to be employed as Corporate Secretary and General Counsel consistent with the terms and conditions set forth in this Agreement. 2. Duties. You shall have such duties as are assigned or delegated to You by the Corporation's Board of Directors or its designee. Except as provided for in Section 7 of this Agreement or subsequently agreed upon by You and the Corporation, You agree to devote Your entire business time, attention, skill, and energy exclusively to the business of the Corporation, to use Your best efforts to promote the success of the Corporation's business, and to cooperate fully with the Board of Directors in the advancement of the best interests of the Corporation. 3. Compensation and Benefits. a. Base Pay. You shall be paid an annual salary ("Base Pay") of $180,000, which shall be payable in equal periodic installments according to the Corporation's customary payroll practices, but no less frequently than monthly, and subject to such withholdings and deductions as required by law. Your Base Pay shall be reviewed in April of each year by the Board of Directors, and any change in Base Pay approved by the Board shall become effective April 1 of the year in which it is approved. b. Incentive Compensation. You shall be paid an annual incentive payment based on the Corporation's Management Incentive Plan, or its successor plan, as approved by the Corporation's Board of Directors, and based on the rules of the plan. Your incentive payment shall be paid to You as soon as administratively possible upon approval of the Corporation's financial results after the close of each calendar year. c. Benefits. In addition to the compensation described above and subject to rules of eligibility, You shall be permitted to participate in the benefit plans and long-term incentive plans available to full time executive level employees of the Corporation as they now exist and may from time to time be modified or established by the Corporation. The plan documents shall govern Your participation in any benefit plan. 4. Expenses. The Corporation shall pay Your dues in such professional societies and organizations as are appropriate for Your position, and shall pay on Your behalf (or reimburse You for) reasonable expenses incurred by You on behalf of the Corporation in the performance of the Your duties pursuant to this Agreement, including reasonable expenses incurred by You in attending conventions, seminars, and other business meetings, in appropriate business entertainment activities, and for promotional expenses. You shall file such expense reports as are required by the Corporation's policies and federal income tax laws and regulations. 5. Confidentiality of Information. a. You acknowledge that the Corporation possesses and will continue to develop and acquire valuable Confidential Information (as defined below), including information that You may develop or discover as a result of your employment with the Corporation. The value of that Confidential Information depends on it remaining confidential. The Corporation depends on You to maintain the confidentiality, and You accept that position of trust. b. As used in this Agreement, "Confidential Information" means any information (including any formula, pattern, compilation, program, device, method, technique or process) that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and includes information of the Corporation, its customers, suppliers, joint ventures, licensors, distributors and other persons and entities with whom the Corporation does business. c. You shall not disclose or use at any time, either during or after your employment with the Corporation, any Confidential Information except for the exclusive benefit of the Corporation as required by your duties or as the Corporation expressly may consent to in writing. You shall cooperate with the Corporation to implement reasonable measures to maintain the secrecy of, and use your best efforts to prevent the unauthorized disclosure, use or reproduction of all Confidential Information. d. Upon leaving employment with the Corporation for any reason, You shall deliver to the Corporation all tangible, written, graphical, machine readable and other materials (including all copies) in your possession or under your control containing or disclosing Confidential Information. 6. Termination/Severance. Either party may terminate the employment relationship as evidenced by this Agreement at any time and for any reason upon ninety days written notice to the other. a. If You elect to terminate the employment relationship, or if You are terminated by the Company for Cause, You shall receive Base Pay and benefits through the date of termination. Cause means your termination of employment with the Corporation based upon embezzlement or other intentional misconduct which is materially injurious to the Corporation, monetarily or otherwise. 2 b. If the Corporation elects to terminate the employment relationship or if You elect to resign for Good Reason, You shall receive a severance payment equal to one and one-half (1-1/2) times the sum of your present Base Pay plus your most recent annual incentive payment (the "Severance Payment"), in full satisfaction of the Corporation's obligations to You as an employee. The Severance Payment will be paid within fifteen (15) days of the date of termination and shall be subject to payroll taxes and any withholding obligations. Good Reason means the occurrence of any of the following events: (1) a material change in your responsibilities or title which are not of comparable responsibility and status as those held upon execution of this Agreement; (2) a reduction in your Base Pay, or a modification of the Corporation's incentive compensation program or benefits in a manner materially adverse to You; (3) a breach or alteration of any material term of this contract without your consent. c. If You are terminated in connection with a Change in Control, as defined by the Change in Control Severance Agreement entered into by You and the Corporation (the "Severance Agreement"), and You receive payment of the severance benefits under Section 4 of the Severance Agreement, no Severance Payment shall be due to You under this Agreement. 7. Special Considerations. None. 8. Entire Agreement. This Agreement and the Change in Control Severance Agreement represent the entire agreement between You and the Corporation concerning the employment relationship of the parties commencing on February 15, 2002 and following and, thus, supersedes any and all previous written or oral employment agreements or understandings concerning such matter. 9. Disputes. Disputes under this Agreement shall be determined by arbitration consistent with rules of the American Arbitration Association. The costs of Arbitration shall be borne equally between You and the Corporation and You shall bear your own attorney fees; provided, however, if You are the prevailing party in Arbitration, all costs and attorney fees shall be paid by the Corporation. 10. Amendment/Governing Law. This Agreement may only be modified or amended by a writing signed by both parties. This Agreement is made in and shall be governed by the substantive laws of the State of Minnesota. 3 FOR THE CORPORATION: /s/ John Erickson 2-15-02 - ---------------------------- -------------------------------- Date ACKNOWLEDGED AND ACCEPTED BY: /s/ George A. Koeck 2/15/02 - ---------------------------- -------------------------------- Date 4 EX-10.E 7 c71393exv10we.txt CHANGE IN CONTROL SEVERANCE AGREEMENT-J. ERICKSON Exhibit 10-E CHANGE IN CONTROL SEVERANCE AGREEMENT This Agreement is made as of the 8th day of April 2002, between Otter Tail Corporation, a Minnesota corporation, with its principal offices at 215 South Cascade Street, P.O. Box 496, Fergus Falls, Minnesota 56538-0496 (the "Corporation ") and John D. Erickson ("Employee"), residing at 1098 Westside Drive, Fergus Falls, MN 56537. W I T N E S S E T H T H A T: WHEREAS, this Agreement is intended to specify the financial arrangements that the Corporation will provide to Employee upon Employee's separation from employment with the Corporation under any of the circumstances described herein; and WHEREAS, this Agreement is entered into by the Corporation in the belief that it is in the best interests of the Corporation and its shareholders to provide stable conditions of employment for Employee notwithstanding the possibility, threat or occurrence of certain types of change in control, thereby enhancing the Corporation's ability to attract and retain highly qualified people. NOW, THEREFORE, to assure the Corporation that it will have the continued dedication of Employee notwithstanding the possibility, threat or occurrence of a bid to take over control of the Corporation, and to induce Employee to remain in the employ of the Corporation, and for other good and valuable consideration, the Corporation and Employee agree as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof as first written above and shall continue through April 1, 2003; provided that commencing on March 31, 2003 and each March 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless 360 days prior to March 31, the Corporation shall have given notice that it does not wish to extend this Agreement, and provided, further, that notwithstanding any such notice by the Corporation not to extend, this Agreement shall continue in effect for a period of 36 months beyond the term provided herein if a Change in Control (as defined in Section 3(i) hereof) shall have occurred during such term. 2. Termination of Employment. (i) Prior to a Change in Control. Employee's rights upon termination of employment prior to a Change in Control (as defined in Section 3(i) hereof) shall be governed by the Corporation 's standard employment termination policy applicable to Employee in effect at the time of termination or the Employee's Employment Agreement. (ii) After a Change in Control. (a) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall not terminate Employee from employment with the Corporation except as provided in this Section 2(ii) or as a result of Employee's Disability (as defined in Section 3(iv) hereof) or death. (b) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall have the right to terminate Employee from employment with the Corporation at any time during the term of this Agreement for Cause (as defined in Section 3(iii) hereof), by written notice to Employee, specifying the particulars of the conduct of Employee forming the basis for such termination. (c) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement: (x) the Corporation shall have the right to terminate Employee's employment without Cause (as defined in Section 3(iii) hereof), at any time; and (y) Employee shall, upon the occurrence of such a termination by the Corporation without Cause, or upon the voluntary termination of Employee's employment by Employee for Good Reason (as defined in Section 3(ii) hereof), be entitled to receive the benefits provided in Section 4 hereof. Employee shall evidence a voluntary termination for Good Reason by written notice to the Corporation given within 60 days after the date of the occurrence of any event that Employee knows or should reasonably have known constitutes Good Reason for voluntary termination. Such notice need only identify Employee and set forth in reasonable detail the facts and circumstances claimed by Employee to constitute Good Reason. Any notice given by Employee pursuant to this Section 2 shall be effective five business days after the date it is given by Employee. 3. Definitions (i) A "Change in Control" shall mean: (a) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor provision thereto, whether or not the Corporation is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation's then outstanding securities; (c) the Continuing Directors (as defined in Section 3(v) hereof) cease to constitute a majority of the Corporation's Board of Directors; provided that such change is the 2 direct or indirect result of a proxy fight and contested election or elections for positions on the Board of Directors; or (d) the majority of the Continuing Directors (as defined in Section 3(v) hereof) determine in their sole and absolute discretion that there has been a change in control of the Corporation. (ii) "Good Reason" shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of Employee's employment by the Corporation for Cause (as defined in Section 3(iii) hereof), for Disability (as defined in Section 3(iv) hereof) or for death: (a) the assignment to Employee of employment responsibilities which are not of comparable responsibility and status as the employment responsibilities held by Employee immediately prior to a Change in Control; (b) a reduction by the Corporation in Employee's base salary as in effect immediately prior to a Change in Control; (c) an amendment or modification of the Corporation 's incentive compensation program (except as may be required by applicable law) which affects the terms or administration of the program in a manner adverse to the interest of Employee as compared to the terms and administration of such program immediately prior to a Change in Control; (d) the Corporation 's requiring Employee to be based anywhere other than within 50 miles of Employee's office location immediately prior to a Change in Control, except for requirements of temporary travel on the Corporation 's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; (e) except to the extent otherwise required by applicable law, the failure by the Corporation to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock incentive plan, bonus plan, life insurance plan, health-and-accident plan, or disability plan in which Employee is participating immediately prior to a Change in Control (or plans providing Employee with substantially similar benefits), the taking of any action by the Corporation which would adversely affect Employee's participation in, or materially reduce Employee's benefits under, any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to such Change in Control, or the failure by the Corporation to provide Employee with the number of paid vacation days to which Employee is entitled immediately prior to such Change in Control in accordance with the Corporation 's vacation policy as then in effect; or (f) the failure by the Corporation to obtain, as specified in Section 6(i) hereof, an assumption of the obligations of the Corporation to perform this Agreement by any successor to the Corporation . 3 (iii) "Cause" shall mean termination by the Corporation of Employee's employment based upon (a) the willful and continued failure by Employee substantially to perform Employee's duties and obligations (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from Employee's termination for Good Reason) or (b) the willful engaging by Employee in misconduct which is materially injurious to the Corporation , monetarily or otherwise. For purposes of this Section 3(iii), no action or failure to act on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that such action or omission was in the best interests of the Corporation. (iv) "Disability" shall mean any physical or mental condition which would qualify Employee for a disability benefit under the Corporation 's long-term disability plan. (v) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Corporation , while such person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (a) was a member of the Board of Directors on the date of this Agreement as first written above or (b) subsequently becomes a member of the Board of Directors, if such person's nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this Section 3(v): "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the shares of Common Stock of the Corporation then outstanding, but shall not include the Corporation , any subsidiary of the Corporation or any employee benefit plan of the Corporation or of any subsidiary of the Corporation or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. 4. Benefits upon Termination under Section 2(ii)(c) (i) Upon the termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be entitled to receive the benefits specified in this Section 4. The amounts due to Employee under subparagraph (a) of this Section 4(i) shall be paid to Employee, at Employee's election as specified in a written notice delivered by Employee to the Corporation on the date of this Agreement and which is attached hereto as Exhibit A and made a part hereof, either (a) in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective or (b) in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. The amounts due to Employee under subparagraphs (b), (c) and (d) of this Section 4(i) shall be paid to Employee not later than one business day prior to the date that the termination of Employee's employment 4 becomes effective. Subject to the provisions of Section 4(ii) hereof, all benefits to Employee pursuant to this Section 4(i) shall be subject to any applicable payroll or other taxes required by law to be withheld. (a) The Corporation shall pay as severance pay to Employee an amount equal to three times the sum of (1) Employee's highest annual rate of salary from the Corporation in effect at any time during the 36 months preceding the date that the termination of Employee's employment became effective and (2) the average of the annual bonus paid or to be paid to Employee in respect of each of the three fiscal years preceding the fiscal year when the termination of Employee's employment became effective. (b) For a period of 36 months following the date that the termination of Employee's employment became effective or until Employee reaches age 65 or dies, whichever is the shorter period, the Corporation shall continue for Employee, at the Corporation 's expense, the health, disability and life insurance coverage in effect for Employee immediately prior to the date that the termination of Employee's employment became effective under the plans provided by the Corporation for its executive personnel generally or, if such coverage cannot by the terms of such plans be provided thereunder, then the Corporation shall provide equivalent insurance coverage for Employee for such period under specially obtained policies of insurance. (c) The Corporation shall pay to Employee (1) any amount earned by Employee as a bonus with respect to the fiscal year of the Corporation preceding the termination of Employee's employment if such bonus has not theretofore been paid to Employee, and (2) an amount representing credit for any vacation earned or accrued by him but not taken. (d) The Corporation shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination of employment (including all fees and expenses, if any, incurred by Employee in seeking to obtain or enforce any right or benefit provided to Employee by this Agreement whether by arbitration or otherwise); and (e) Any and all contracts, agreements or arrangements between the Corporation and Employee prohibiting or restricting Employee from owning, operating, participating in, or providing employment or consulting services to, any business or company competitive with the Corporation at any time or during any period after the date the termination of Employee's employment becomes effective, shall be deemed terminated and of no further force or effect as of the date the termination of Employee's employment becomes effective, to the extent, but only to the extent, such contracts, agreements or arrangements so prohibit or restrict Employee; provided that the foregoing provision shall not constitute a license or right to use any proprietary information of the Corporation and shall in no way affect any such contracts, agreements or arrangements insofar as they relate to nondisclosure and nonuse of proprietary information of the Corporation notwithstanding the fact that such nondisclosure and nonuse may prohibit or restrict Employee in certain competitive activities. (ii) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control of the Corporation or termination of Employee's 5 employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Corporation , with any person whose actions result in a Change in Control of the Corporation or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Corporation or with any person whose actions result in a Change in Control of the Corporation (collectively, the "Total Payments")) would be subject to the excise tax imposed by Section 4999 of the Code or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive from the Corporation an additional cash payment (a "Gross-Up Payment") within thirty business days of such determination in an amount such that after payment by Employee of all taxes (including any interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All determinations required to be made under this Section 4(ii), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Corporation on the date of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and Employee within 15 business days of the date that the termination of Employee's employment becomes effective, or such earlier time as is requested by the Corporation . If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee with an opinion that Employee has substantial authority not to report any Excise Tax on Employee's federal income tax return. Any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were less than the Gross-Up Payments that should have been made by the Corporation ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Employee is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were more than the Gross-Up Payments that should have been made by the Corporation ("Overpayment"), consistent with the calculations required to be made hereunder. Employee agrees to refund to the Corporation the amount of any Overpayment that the Accounting Firm shall determine has occurred hereunder. Any determination by the Accounting firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment or Overpayment, shall be binding upon the Corporation and Employee. (iii) Any payment not made to Employee when due hereunder shall thereafter, until paid in full, bear interest at the rate of interest equal to the reference rate announced from time to 6 time by U.S. Bank National Association, plus two percent, with such interest to be paid to Employee upon demand or monthly in the absence of a demand. (iv) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise. The amount of any payment or benefit provided in this Section 4 shall not be reduced by any compensation earned by Employee as a result of any employment by another employer. 5. Employee's Agreements. Employee agrees that: (i) Without the consent of the Corporation , Employee will not terminate employment with the Corporation without giving 60 days prior notice to the Corporation , and during such 60-day period Employee will assist the Corporation , as and to the extent reasonably requested by the Corporation , in training the successor to Employee's position with the Corporation . The provisions of this Section 5(i) shall not apply to any termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof. (ii) Without the consent of the Corporation or except as may be required by law, Employee will not at any time after termination of his employment with the Corporation disclose to any person, corporation, firm, or other entity, confidential information concerning the Corporation of which Employee has gained knowledge during employment with the Corporation . (iii) In the event that Employee has received any benefits from the Corporation under Section 4 of this Agreement, then, during the period of 36 months following the date that the termination of Employee's employment became effective, Employee, upon request by the Corporation : (a) Will consult with one or more of the executive officers concerning the business and affairs of the Corporation for not to exceed four hours in any month at times and places selected by Employee as being convenient to him, all without compensation other than what is provided for in Section 4 of this Agreement; and (b) Will testify as a witness on behalf of the Corporation in any legal proceedings involving the Corporation which arise out of events or circumstances that occurred or existed prior to the date that the termination of Employee's employment became effective (except for any such proceedings relating to this Agreement), without compensation other than what is provided for in Section 4 of this Agreement, provided that all out-of-pocket expenses incurred by Employee in connection with serving as a witness shall be paid by the Corporation . Employee shall not required to perform Employee's obligations under this Section 5(iii) if and so long as the Corporation is in default with respect to performance of any of its obligations under this Agreement. 7 6. Successors and Binding Agreement. (i) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Corporation in the same amount and on the same terms as Employee would be entitled hereunder if employee terminated employment after a Change in Control for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of Employee's employment becomes effective. As used in this Agreement, "Corporation " shall mean the Corporation and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 6(i) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement is personal to Employee, and Employee may not assign or transfer any part of Employee's rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 7. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the Fergus Falls area, in accordance with the applicable rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 8. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Employee and such officer as may be specifically designated by the Board of Directors of the Corporation. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as first written above (directed to the attention of the Board of Directors and Corporate Secretary in the case of the Corporation). Either party hereto may change its address for purposes of this Section 9 by giving 15 days' prior notice to the other party hereto. 8 10. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall, in all respects, be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity and performance. 13. Effect of Agreement; Entire Agreement. The Corporation and Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to payments and benefits upon termination in certain cases and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided that this Agreement shall not supersede or limit in any way Employee's rights under any benefit plan, program or arrangements in accordance with their terms. 14. ERISA. For purposes of the Employee Retirement Income Security Act of 1974, this Agreement is intended to be a severance pay employee welfare benefit plan, and not an employee pension benefit plan, and shall be construed and administered with that intention. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in its name by a duly authorized director and officer, and Employee has hereunto set his or her hand, all as of the date first written above. OTTER TAIL CORPORATION By /s/ George Koeck ------------------------------------------------ Its Gen. Counsel & Corp. Sec. ------------------------------------------- EMPLOYEE /s/ John D. Erickson -------------------------------------------------- John D. Erickson 9 EXHIBIT A NOTICE The undersigned ("Employee") does hereby notify Otter Tail Corporation (the "Corporation ") pursuant to Section 4(i) of that certain Severance Agreement dated as of the date hereof between the Corporation and Employee (the "Agreement") that Employee has elected to be paid any amounts which become payable under Section 4(i)(a) of the Agreement as follows: (check one) X in a lump sum not later than one business day prior to the date that --- the termination of Employee's employment becomes effective. in 36 equal installments payable monthly, on the last business --- day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. Dated: 4-8-02 ------------------------- /s/ John D. Erickson --------------------------------------- John D. Erickson 10 EX-10.F 8 c71393exv10wf.txt CHANGE IN CONTROL SEVERANCE AGREEMENT-L. MOLBERT Exhibit 10-F CHANGE IN CONTROL SEVERANCE AGREEMENT This Agreement is made as of the 8th day of April 2002 , ----- ------------- between Otter Tail Corporation , a Minnesota corporation, with its principal offices at 215 South Cascade Street, P.O. Box 496, Fergus Falls, Minnesota 56538-0496 (the "Corporation ") and Lauris N. Molbert ("Employee"), residing at 4484 Oakcreek Drive, Fargo, ND 58104. W I T N E S S E T H T H A T: WHEREAS, this Agreement is intended to specify the financial arrangements that the Corporation will provide to Employee upon Employee's separation from employment with the Corporation under any of the circumstances described herein; and WHEREAS, this Agreement is entered into by the Corporation in the belief that it is in the best interests of the Corporation and its shareholders to provide stable conditions of employment for Employee notwithstanding the possibility, threat or occurrence of certain types of change in control, thereby enhancing the Corporation 's ability to attract and retain highly qualified people. NOW, THEREFORE, to assure the Corporation that it will have the continued dedication of Employee notwithstanding the possibility, threat or occurrence of a bid to take over control of the Corporation , and to induce Employee to remain in the employ of the Corporation , and for other good and valuable consideration, the Corporation and Employee agree as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof as first written above and shall continue through April 1, 2003; provided that commencing on March 31, 2003 and each March 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless 360 days prior to March 31, the Corporation shall have given notice that it does not wish to extend this Agreement, and provided, further, that notwithstanding any such notice by the Corporation not to extend, this Agreement shall continue in effect for a period of 36 months beyond the term provided herein if a Change in Control (as defined in Section 3(i) hereof) shall have occurred during such term. 2. Termination of Employment. (i) Prior to a Change in Control. Employee's rights upon termination of employment prior to a Change in Control (as defined in Section 3(i) hereof) shall be governed by the Corporation 's standard employment termination policy applicable to Employee in effect at the time of termination or the Employee's Employment Agreement. (ii) After a Change in Control. (a) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall not terminate Employee from employment with the Corporation except as provided in this Section 2(ii) or as a result of Employee's Disability (as defined in Section 3(iv) hereof) or death. (b) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall have the right to terminate Employee from employment with the Corporation at any time during the term of this Agreement for Cause (as defined in Section 3(iii) hereof), by written notice to Employee, specifying the particulars of the conduct of Employee forming the basis for such termination. (c) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement: (x) the Corporation shall have the right to terminate Employee's employment without Cause (as defined in Section 3(iii) hereof), at any time; and (y) Employee shall, upon the occurrence of such a termination by the Corporation without Cause, or upon the voluntary termination of Employee's employment by Employee for Good Reason (as defined in Section 3(ii) hereof), be entitled to receive the benefits provided in Section 4 hereof. Employee shall evidence a voluntary termination for Good Reason by written notice to the Corporation given within 60 days after the date of the occurrence of any event that Employee knows or should reasonably have known constitutes Good Reason for voluntary termination. Such notice need only identify Employee and set forth in reasonable detail the facts and circumstances claimed by Employee to constitute Good Reason. Any notice given by Employee pursuant to this Section 2 shall be effective five business days after the date it is given by Employee. 3. Definitions (i) A "Change in Control" shall mean: (a) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor provision thereto, whether or not the Corporation is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation 's then outstanding securities; (c) the Continuing Directors (as defined in Section 3(v) hereof) cease to constitute a majority of the Corporation 's Board of Directors; provided that such change is the 2 direct or indirect result of a proxy fight and contested election or elections for positions on the Board of Directors; or (d) the majority of the Continuing Directors (as defined in Section 3(v) hereof) determine in their sole and absolute discretion that there has been a change in control of the Corporation. (ii) "Good Reason" shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of Employee's employment by the Corporation for Cause (as defined in Section 3(iii) hereof), for Disability (as defined in Section 3(iv) hereof) or for death: (a) the assignment to Employee of employment responsibilities which are not of comparable responsibility and status as the employment responsibilities held by Employee immediately prior to a Change in Control; (b) a reduction by the Corporation in Employee's base salary as in effect immediately prior to a Change in Control; (c) an amendment or modification of the Corporation's incentive compensation program (except as may be required by applicable law) which affects the terms or administration of the program in a manner adverse to the interest of Employee as compared to the terms and administration of such program immediately prior to a Change in Control; (d) the Corporation's requiring Employee to be based anywhere other than within 50 miles of Employee's office location immediately prior to a Change in Control, except for requirements of temporary travel on the Corporation's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; (e) except to the extent otherwise required by applicable law, the failure by the Corporation to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock incentive plan, bonus plan, life insurance plan, health-and-accident plan, or disability plan in which Employee is participating immediately prior to a Change in Control (or plans providing Employee with substantially similar benefits), the taking of any action by the Corporation which would adversely affect Employee's participation in, or materially reduce Employee's benefits under, any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to such Change in Control, or the failure by the Corporation to provide Employee with the number of paid vacation days to which Employee is entitled immediately prior to such Change in Control in accordance with the Corporation's vacation policy as then in effect; or (f) the failure by the Corporation to obtain, as specified in Section 6(i) hereof, an assumption of the obligations of the Corporation to perform this Agreement by any successor to the Corporation. 3 (iii) "Cause" shall mean termination by the Corporation of Employee's employment based upon (a) the willful and continued failure by Employee substantially to perform Employee's duties and obligations (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from Employee's termination for Good Reason) or (b) the willful engaging by Employee in misconduct which is materially injurious to the Corporation, monetarily or otherwise. For purposes of this Section 3(iii), no action or failure to act on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that such action or omission was in the best interests of the Corporation. (iv) "Disability" shall mean any physical or mental condition which would qualify Employee for a disability benefit under the Corporation's long-term disability plan. (v) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Corporation, while such person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (a) was a member of the Board of Directors on the date of this Agreement as first written above or (b) subsequently becomes a member of the Board of Directors, if such person's nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this Section 3(v): "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the shares of Common Stock of the Corporation then outstanding, but shall not include the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation or of any subsidiary of the Corporation or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. 4. Benefits upon Termination under Section 2(ii)(c) (i) Upon the termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be entitled to receive the benefits specified in this Section 4. The amounts due to Employee under subparagraph (a) of this Section 4(i) shall be paid to Employee, at Employee's election as specified in a written notice delivered by Employee to the Corporation on the date of this Agreement and which is attached hereto as Exhibit A and made a part hereof, either (a) in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective or (b) in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. The amounts due to Employee under subparagraphs (b), (c) and (d) of this Section 4(i) shall be paid to Employee not later than one business day prior to the date that the termination of Employee's employment 4 becomes effective. Subject to the provisions of Section 4(ii) hereof, all benefits to Employee pursuant to this Section 4(i) shall be subject to any applicable payroll or other taxes required by law to be withheld. (a) The Corporation shall pay as severance pay to Employee an amount equal to three times the sum of (1) Employee's highest annual rate of salary from the Corporation in effect at any time during the 36 months preceding the date that the termination of Employee's employment became effective and (2) the average of the annual bonus paid or to be paid to Employee in respect of each of the three fiscal years preceding the fiscal year when the termination of Employee's employment became effective. (b) For a period of 36 months following the date that the termination of Employee's employment became effective or until Employee reaches age 65 or dies, whichever is the shorter period, the Corporation shall continue for Employee, at the Corporation 's expense, the health, disability and life insurance coverage in effect for Employee immediately prior to the date that the termination of Employee's employment became effective under the plans provided by the Corporation for its executive personnel generally or, if such coverage cannot by the terms of such plans be provided thereunder, then the Corporation shall provide equivalent insurance coverage for Employee for such period under specially obtained policies of insurance. (c) The Corporation shall pay to Employee (1) any amount earned by Employee as a bonus with respect to the fiscal year of the Corporation preceding the termination of Employee's employment if such bonus has not theretofore been paid to Employee, and (2) an amount representing credit for any vacation earned or accrued by him but not taken. (d) The Corporation shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination of employment (including all fees and expenses, if any, incurred by Employee in seeking to obtain or enforce any right or benefit provided to Employee by this Agreement whether by arbitration or otherwise); and (e) Any and all contracts, agreements or arrangements between the Corporation and Employee prohibiting or restricting Employee from owning, operating, participating in, or providing employment or consulting services to, any business or company competitive with the Corporation at any time or during any period after the date the termination of Employee's employment becomes effective, shall be deemed terminated and of no further force or effect as of the date the termination of Employee's employment becomes effective, to the extent, but only to the extent, such contracts, agreements or arrangements so prohibit or restrict Employee; provided that the foregoing provision shall not constitute a license or right to use any proprietary information of the Corporation and shall in no way affect any such contracts, agreements or arrangements insofar as they relate to nondisclosure and nonuse of proprietary information of the Corporation notwithstanding the fact that such nondisclosure and nonuse may prohibit or restrict Employee in certain competitive activities. (ii) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control of the Corporation or termination of Employee's 5 employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Corporation, with any person whose actions result in a Change in Control of the Corporation or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Corporation or with any person whose actions result in a Change in Control of the Corporation (collectively, the "Total Payments")) would be subject to the excise tax imposed by Section 4999 of the Code or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive from the Corporation an additional cash payment (a "Gross-Up Payment") within thirty business days of such determination in an amount such that after payment by Employee of all taxes (including any interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All determinations required to be made under this Section 4(ii), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Corporation on the date of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and Employee within 15 business days of the date that the termination of Employee's employment becomes effective, or such earlier time as is requested by the Corporation. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee with an opinion that Employee has substantial authority not to report any Excise Tax on Employee's federal income tax return. Any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were less than the Gross-Up Payments that should have been made by the Corporation ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Employee is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were more than the Gross-Up Payments that should have been made by the Corporation ("Overpayment"), consistent with the calculations required to be made hereunder. Employee agrees to refund to the Corporation the amount of any Overpayment that the Accounting Firm shall determine has occurred hereunder. Any determination by the Accounting firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment or Overpayment, shall be binding upon the Corporation and Employee. (iii) Any payment not made to Employee when due hereunder shall thereafter, until paid in full, bear interest at the rate of interest equal to the reference rate announced from time to 6 time by U.S. Bank National Association, plus two percent, with such interest to be paid to Employee upon demand or monthly in the absence of a demand. (iv) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise. The amount of any payment or benefit provided in this Section 4 shall not be reduced by any compensation earned by Employee as a result of any employment by another employer. 5. Employee's Agreements. Employee agrees that: (i) Without the consent of the Corporation, Employee will not terminate employment with the Corporation without giving 60 days prior notice to the Corporation, and during such 60-day period Employee will assist the Corporation, as and to the extent reasonably requested by the Corporation, in training the successor to Employee's position with the Corporation. The provisions of this Section 5(i) shall not apply to any termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof. (ii) Without the consent of the Corporation or except as may be required by law, Employee will not at any time after termination of his employment with the Corporation disclose to any person, corporation, firm, or other entity, confidential information concerning the Corporation of which Employee has gained knowledge during employment with the Corporation. (iii) In the event that Employee has received any benefits from the Corporation under Section 4 of this Agreement, then, during the period of 36 months following the date that the termination of Employee's employment became effective, Employee, upon request by the Corporation: (a) Will consult with one or more of the executive officers concerning the business and affairs of the Corporation for not to exceed four hours in any month at times and places selected by Employee as being convenient to him, all without compensation other than what is provided for in Section 4 of this Agreement; and (b) Will testify as a witness on behalf of the Corporation in any legal proceedings involving the Corporation which arise out of events or circumstances that occurred or existed prior to the date that the termination of Employee's employment became effective (except for any such proceedings relating to this Agreement), without compensation other than what is provided for in Section 4 of this Agreement, provided that all out-of-pocket expenses incurred by Employee in connection with serving as a witness shall be paid by the Corporation. Employee shall not required to perform Employee's obligations under this Section 5(iii) if and so long as the Corporation is in default with respect to performance of any of its obligations under this Agreement. 7 6. Successors and Binding Agreement. (i) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Corporation in the same amount and on the same terms as Employee would be entitled hereunder if employee terminated employment after a Change in Control for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of Employee's employment becomes effective. As used in this Agreement, "Corporation" shall mean the Corporation and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 6(i) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement is personal to Employee, and Employee may not assign or transfer any part of Employee's rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 7. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the Fergus Falls area, in accordance with the applicable rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 8. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Employee and such officer as may be specifically designated by the Board of Directors of the Corporation. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as first written above (directed to the attention of the Board of Directors and Corporate Secretary in the case of the Corporation). Either party hereto may change its address for purposes of this Section 9 by giving 15 days' prior notice to the other party hereto. 8 10. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall, in all respects, be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity and performance. 13. Effect of Agreement; Entire Agreement. The Corporation and Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to payments and benefits upon termination in certain cases and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided that this Agreement shall not supersede or limit in any way Employee's rights under any benefit plan, program or arrangements in accordance with their terms. 14. ERISA. For purposes of the Employee Retirement Income Security Act of 1974, this Agreement is intended to be a severance pay employee welfare benefit plan, and not an employee pension benefit plan, and shall be construed and administered with that intention. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in its name by a duly authorized director and officer, and Employee has hereunto set his or her hand, all as of the date first written above. OTTER TAIL CORPORATION By /s/ John Erickson ------------------------------------- Its President & CEO -------------------------------- EMPLOYEE /s/ Lauris N. Molbert --------------------------------------- Lauris N. Molbert 9 EXHIBIT A NOTICE The undersigned ("Employee") does hereby notify Otter Tail Corporation (the "Corporation") pursuant to Section 4(i) of that certain Severance Agreement dated as of the date hereof between the Corporation and Employee (the "Agreement") that Employee has elected to be paid any amounts which become payable under Section 4(i)(a) of the Agreement as follows: (check one) ___X___ in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective. ______ in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. Dated: 4/8/02 ------------------------- /s/ Lauris N. Molbert --------------------------------------- Lauris N. Molbert 10 EX-10.G 9 c71393exv10wg.txt CHANGE IN CONTROL SEVERANCE AGREEMENT-K. MOUG Exhibit 10-G CHANGE IN CONTROL SEVERANCE AGREEMENT This Agreement is made as of the 8th day of April 2002, between Otter Tail Corporation , a Minnesota corporation, with its principal offices at 215 South Cascade Street, P.O. Box 496, Fergus Falls, Minnesota 56538-0496 (the "Corporation") and Kevin G. Moug ("Employee"), residing at 715 Hackberry Drive, Fargo, ND 58104. W I T N E S S E T H T H A T: WHEREAS, this Agreement is intended to specify the financial arrangements that the Corporation will provide to Employee upon Employee's separation from employment with the Corporation under any of the circumstances described herein; and WHEREAS, this Agreement is entered into by the Corporation in the belief that it is in the best interests of the Corporation and its shareholders to provide stable conditions of employment for Employee notwithstanding the possibility, threat or occurrence of certain types of change in control, thereby enhancing the Corporation's ability to attract and retain highly qualified people. NOW, THEREFORE, to assure the Corporation that it will have the continued dedication of Employee notwithstanding the possibility, threat or occurrence of a bid to take over control of the Corporation, and to induce Employee to remain in the employ of the Corporation, and for other good and valuable consideration, the Corporation and Employee agree as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof as first written above and shall continue through April 1, 2003; provided that commencing on March 31, 2003 and each March 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless 360 days prior to March 31, the Corporation shall have given notice that it does not wish to extend this Agreement, and provided, further, that notwithstanding any such notice by the Corporation not to extend, this Agreement shall continue in effect for a period of 36 months beyond the term provided herein if a Change in Control (as defined in Section 3(i) hereof) shall have occurred during such term. 2. Termination of Employment. (i) Prior to a Change in Control. Employee's rights upon termination of employment prior to a Change in Control (as defined in Section 3(i) hereof) shall be governed by the Corporation's standard employment termination policy applicable to Employee in effect at the time of termination or the Employee's Employment Agreement. (ii) After a Change in Control. (a) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall not terminate Employee from employment with the Corporation except as provided in this Section 2(ii) or as a result of Employee's Disability (as defined in Section 3(iv) hereof) or death. (b) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall have the right to terminate Employee from employment with the Corporation at any time during the term of this Agreement for Cause (as defined in Section 3(iii) hereof), by written notice to Employee, specifying the particulars of the conduct of Employee forming the basis for such termination. (c) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement: (x) the Corporation shall have the right to terminate Employee's employment without Cause (as defined in Section 3(iii) hereof), at any time; and (y) Employee shall, upon the occurrence of such a termination by the Corporation without Cause, or upon the voluntary termination of Employee's employment by Employee for Good Reason (as defined in Section 3(ii) hereof), be entitled to receive the benefits provided in Section 4 hereof. Employee shall evidence a voluntary termination for Good Reason by written notice to the Corporation given within 60 days after the date of the occurrence of any event that Employee knows or should reasonably have known constitutes Good Reason for voluntary termination. Such notice need only identify Employee and set forth in reasonable detail the facts and circumstances claimed by Employee to constitute Good Reason. Any notice given by Employee pursuant to this Section 2 shall be effective five business days after the date it is given by Employee. 3. Definitions (i) A "Change in Control" shall mean: (a) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor provision thereto, whether or not the Corporation is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation 's then outstanding securities; (c) the Continuing Directors (as defined in Section 3(v) hereof) cease to constitute a majority of the Corporation 's Board of Directors; provided that such change is the 2 direct or indirect result of a proxy fight and contested election or elections for positions on the Board of Directors; or (d) the majority of the Continuing Directors (as defined in Section 3(v) hereof) determine in their sole and absolute discretion that there has been a change in control of the Corporation. (ii) "Good Reason" shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of Employee's employment by the Corporation for Cause (as defined in Section 3(iii) hereof), for Disability (as defined in Section 3(iv) hereof) or for death: (a) the assignment to Employee of employment responsibilities which are not of comparable responsibility and status as the employment responsibilities held by Employee immediately prior to a Change in Control; (b) a reduction by the Corporation in Employee's base salary as in effect immediately prior to a Change in Control; (c) an amendment or modification of the Corporation's incentive compensation program (except as may be required by applicable law) which affects the terms or administration of the program in a manner adverse to the interest of Employee as compared to the terms and administration of such program immediately prior to a Change in Control; (d) the Corporation's requiring Employee to be based anywhere other than within 50 miles of Employee's office location immediately prior to a Change in Control, except for requirements of temporary travel on the Corporation's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; (e) except to the extent otherwise required by applicable law, the failure by the Corporation to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock incentive plan, bonus plan, life insurance plan, health-and-accident plan, or disability plan in which Employee is participating immediately prior to a Change in Control (or plans providing Employee with substantially similar benefits), the taking of any action by the Corporation which would adversely affect Employee's participation in, or materially reduce Employee's benefits under, any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to such Change in Control, or the failure by the Corporation to provide Employee with the number of paid vacation days to which Employee is entitled immediately prior to such Change in Control in accordance with the Corporation's vacation policy as then in effect; or (f) the failure by the Corporation to obtain, as specified in Section 6(i) hereof, an assumption of the obligations of the Corporation to perform this Agreement by any successor to the Corporation. 3 (iii) "Cause" shall mean termination by the Corporation of Employee's employment based upon (a) the willful and continued failure by Employee substantially to perform Employee's duties and obligations (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from Employee's termination for Good Reason) or (b) the willful engaging by Employee in misconduct which is materially injurious to the Corporation, monetarily or otherwise. For purposes of this Section 3(iii), no action or failure to act on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that such action or omission was in the best interests of the Corporation. (iv) "Disability" shall mean any physical or mental condition which would qualify Employee for a disability benefit under the Corporation's long-term disability plan. (v) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Corporation, while such person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (a) was a member of the Board of Directors on the date of this Agreement as first written above or (b) subsequently becomes a member of the Board of Directors, if such person's nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this Section 3(v): "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the shares of Common Stock of the Corporation then outstanding, but shall not include the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation or of any subsidiary of the Corporation or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. 4. Benefits upon Termination under Section 2(ii)(c) (i) Upon the termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be entitled to receive the benefits specified in this Section 4. The amounts due to Employee under subparagraph (a) of this Section 4(i) shall be paid to Employee, at Employee's election as specified in a written notice delivered by Employee to the Corporation on the date of this Agreement and which is attached hereto as Exhibit A and made a part hereof, either (a) in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective or (b) in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. The amounts due to Employee under subparagraphs (b), (c) and (d) of this Section 4(i) shall be paid to Employee not later than one business day prior to the date that the termination of Employee's employment 4 becomes effective. Subject to the provisions of Section 4(ii) hereof, all benefits to Employee pursuant to this Section 4(i) shall be subject to any applicable payroll or other taxes required by law to be withheld. (a) The Corporation shall pay as severance pay to Employee an amount equal to three times the sum of (1) Employee's highest annual rate of salary from the Corporation in effect at any time during the 36 months preceding the date that the termination of Employee's employment became effective and (2) the average of the annual bonus paid or to be paid to Employee in respect of each of the three fiscal years preceding the fiscal year when the termination of Employee's employment became effective. (b) For a period of 36 months following the date that the termination of Employee's employment became effective or until Employee reaches age 65 or dies, whichever is the shorter period, the Corporation shall continue for Employee, at the Corporation 's expense, the health, disability and life insurance coverage in effect for Employee immediately prior to the date that the termination of Employee's employment became effective under the plans provided by the Corporation for its executive personnel generally or, if such coverage cannot by the terms of such plans be provided thereunder, then the Corporation shall provide equivalent insurance coverage for Employee for such period under specially obtained policies of insurance. (c) The Corporation shall pay to Employee (1) any amount earned by Employee as a bonus with respect to the fiscal year of the Corporation preceding the termination of Employee's employment if such bonus has not theretofore been paid to Employee, and (2) an amount representing credit for any vacation earned or accrued by him but not taken. (d) The Corporation shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination of employment (including all fees and expenses, if any, incurred by Employee in seeking to obtain or enforce any right or benefit provided to Employee by this Agreement whether by arbitration or otherwise); and (e) Any and all contracts, agreements or arrangements between the Corporation and Employee prohibiting or restricting Employee from owning, operating, participating in, or providing employment or consulting services to, any business or company competitive with the Corporation at any time or during any period after the date the termination of Employee's employment becomes effective, shall be deemed terminated and of no further force or effect as of the date the termination of Employee's employment becomes effective, to the extent, but only to the extent, such contracts, agreements or arrangements so prohibit or restrict Employee; provided that the foregoing provision shall not constitute a license or right to use any proprietary information of the Corporation and shall in no way affect any such contracts, agreements or arrangements insofar as they relate to nondisclosure and nonuse of proprietary information of the Corporation notwithstanding the fact that such nondisclosure and nonuse may prohibit or restrict Employee in certain competitive activities. (ii) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control of the Corporation or termination of Employee's 5 employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Corporation, with any person whose actions result in a Change in Control of the Corporation or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Corporation or with any person whose actions result in a Change in Control of the Corporation (collectively, the "Total Payments")) would be subject to the excise tax imposed by Section 4999 of the Code or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive from the Corporation an additional cash payment (a "Gross-Up Payment") within thirty business days of such determination in an amount such that after payment by Employee of all taxes (including any interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All determinations required to be made under this Section 4(ii), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Corporation on the date of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and Employee within 15 business days of the date that the termination of Employee's employment becomes effective, or such earlier time as is requested by the Corporation. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee with an opinion that Employee has substantial authority not to report any Excise Tax on Employee's federal income tax return. Any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were less than the Gross-Up Payments that should have been made by the Corporation ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Employee is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were more than the Gross-Up Payments that should have been made by the Corporation ("Overpayment"), consistent with the calculations required to be made hereunder. Employee agrees to refund to the Corporation the amount of any Overpayment that the Accounting Firm shall determine has occurred hereunder. Any determination by the Accounting firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment or Overpayment, shall be binding upon the Corporation and Employee. (iii) Any payment not made to Employee when due hereunder shall thereafter, until paid in full, bear interest at the rate of interest equal to the reference rate announced from time to 6 time by U.S. Bank National Association, plus two percent, with such interest to be paid to Employee upon demand or monthly in the absence of a demand. (iv) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise. The amount of any payment or benefit provided in this Section 4 shall not be reduced by any compensation earned by Employee as a result of any employment by another employer. 5. Employee's Agreements. Employee agrees that: (i) Without the consent of the Corporation, Employee will not terminate employment with the Corporation without giving 60 days prior notice to the Corporation, and during such 60-day period Employee will assist the Corporation, as and to the extent reasonably requested by the Corporation, in training the successor to Employee's position with the Corporation. The provisions of this Section 5(i) shall not apply to any termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof. (ii) Without the consent of the Corporation or except as may be required by law, Employee will not at any time after termination of his employment with the Corporation disclose to any person, corporation, firm, or other entity, confidential information concerning the Corporation of which Employee has gained knowledge during employment with the Corporation. (iii) In the event that Employee has received any benefits from the Corporation under Section 4 of this Agreement, then, during the period of 36 months following the date that the termination of Employee's employment became effective, Employee, upon request by the Corporation: (a) Will consult with one or more of the executive officers concerning the business and affairs of the Corporation for not to exceed four hours in any month at times and places selected by Employee as being convenient to him, all without compensation other than what is provided for in Section 4 of this Agreement; and (b) Will testify as a witness on behalf of the Corporation in any legal proceedings involving the Corporation which arise out of events or circumstances that occurred or existed prior to the date that the termination of Employee's employment became effective (except for any such proceedings relating to this Agreement), without compensation other than what is provided for in Section 4 of this Agreement, provided that all out-of-pocket expenses incurred by Employee in connection with serving as a witness shall be paid by the Corporation. Employee shall not required to perform Employee's obligations under this Section 5(iii) if and so long as the Corporation is in default with respect to performance of any of its obligations under this Agreement. 7 6. Successors and Binding Agreement. (i) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Corporation in the same amount and on the same terms as Employee would be entitled hereunder if employee terminated employment after a Change in Control for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of Employee's employment becomes effective. As used in this Agreement, "Corporation" shall mean the Corporation and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 6(i) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement is personal to Employee, and Employee may not assign or transfer any part of Employee's rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 7. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the Fergus Falls area, in accordance with the applicable rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 8. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Employee and such officer as may be specifically designated by the Board of Directors of the Corporation. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as first written above (directed to the attention of the Board of Directors and Corporate Secretary in the case of the Corporation). Either party hereto may change its address for purposes of this Section 9 by giving 15 days' prior notice to the other party hereto. 8 10. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall, in all respects, be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity and performance. 13. Effect of Agreement; Entire Agreement. The Corporation and Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to payments and benefits upon termination in certain cases and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided that this Agreement shall not supersede or limit in any way Employee's rights under any benefit plan, program or arrangements in accordance with their terms. 14. ERISA. For purposes of the Employee Retirement Income Security Act of 1974, this Agreement is intended to be a severance pay employee welfare benefit plan, and not an employee pension benefit plan, and shall be construed and administered with that intention. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in its name by a duly authorized director and officer, and Employee has hereunto set his or her hand, all as of the date first written above. OTTER TAIL CORPORATION By /s/ John Erickson ------------------------------------- Its President -------------------------------- EMPLOYEE /s/ Kevin G. Moug --------------------------------------- Kevin G. Moug 9 EXHIBIT A NOTICE The undersigned ("Employee") does hereby notify Otter Tail Corporation (the "Corporation") pursuant to Section 4(i) of that certain Severance Agreement dated as of the date hereof between the Corporation and Employee (the "Agreement") that Employee has elected to be paid any amounts which become payable under Section 4(i)(a) of the Agreement as follows: (check one) ___X__ in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective. ______ in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. Dated: April 8, 2002 ------------------------- /s/ Kevin G. Moug --------------------------------------- Kevin G. Moug 10 EX-10.H 10 c71393exv10wh.txt CHANGE IN CONTROL SEVERANCE AGREEMENT-G. KOECK Exhibit 10-H CHANGE IN CONTROL SEVERANCE AGREEMENT This Agreement is made as of the 8th day of April 2002, between Otter Tail Corporation, a Minnesota corporation, with its principal offices at 215 South Cascade Street, P.O. Box 496, Fergus Falls, Minnesota 56538-0496 (the "Corporation") and George A. Koeck ("Employee"), residing at 1755 Ninth Street South, Fargo, ND 58104. W I T N E S S E T H T H A T: WHEREAS, this Agreement is intended to specify the financial arrangements that the Corporation will provide to Employee upon Employee's separation from employment with the Corporation under any of the circumstances described herein; and WHEREAS, this Agreement is entered into by the Corporation in the belief that it is in the best interests of the Corporation and its shareholders to provide stable conditions of employment for Employee notwithstanding the possibility, threat or occurrence of certain types of change in control, thereby enhancing the Corporation's ability to attract and retain highly qualified people. NOW, THEREFORE, to assure the Corporation that it will have the continued dedication of Employee notwithstanding the possibility, threat or occurrence of a bid to take over control of the Corporation, and to induce Employee to remain in the employ of the Corporation, and for other good and valuable consideration, the Corporation and Employee agree as follows: 1. Term of Agreement. The term of this Agreement shall commence on the date hereof as first written above and shall continue through April 1, 2003; provided that commencing on March 31, 2003 and each March 31 thereafter, the term of this Agreement shall automatically be extended for one additional year unless 360 days prior to March 31, the Corporation shall have given notice that it does not wish to extend this Agreement, and provided, further, that notwithstanding any such notice by the Corporation not to extend, this Agreement shall continue in effect for a period of 36 months beyond the term provided herein if a Change in Control (as defined in Section 3(i) hereof) shall have occurred during such term. 2. Termination of Employment. (i) Prior to a Change in Control. Employee's rights upon termination of employment prior to a Change in Control (as defined in Section 3(i) hereof) shall be governed by the Corporation's standard employment termination policy applicable to Employee in effect at the time of termination or the Employee's Employment Agreement. (ii) After a Change in Control. (a) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall not terminate Employee from employment with the Corporation except as provided in this Section 2(ii) or as a result of Employee's Disability (as defined in Section 3(iv) hereof) or death. (b) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement, the Corporation shall have the right to terminate Employee from employment with the Corporation at any time during the term of this Agreement for Cause (as defined in Section 3(iii) hereof), by written notice to Employee, specifying the particulars of the conduct of Employee forming the basis for such termination. (c) From and after the date of a Change in Control (as defined in Section 3(i) hereof) during the term of this Agreement: (x) the Corporation shall have the right to terminate Employee's employment without Cause (as defined in Section 3(iii) hereof), at any time; and (y) Employee shall, upon the occurrence of such a termination by the Corporation without Cause, or upon the voluntary termination of Employee's employment by Employee for Good Reason (as defined in Section 3(ii) hereof), be entitled to receive the benefits provided in Section 4 hereof. Employee shall evidence a voluntary termination for Good Reason by written notice to the Corporation given within 60 days after the date of the occurrence of any event that Employee knows or should reasonably have known constitutes Good Reason for voluntary termination. Such notice need only identify Employee and set forth in reasonable detail the facts and circumstances claimed by Employee to constitute Good Reason. Any notice given by Employee pursuant to this Section 2 shall be effective five business days after the date it is given by Employee. 3. Definitions (i) A "Change in Control" shall mean: (a) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor provision thereto, whether or not the Corporation is then subject to such reporting requirement; (b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation 's then outstanding securities; (c) the Continuing Directors (as defined in Section 3(v) hereof) cease to constitute a majority of the Corporation's Board of Directors; provided that such change is the 2 direct or indirect result of a proxy fight and contested election or elections for positions on the Board of Directors; or (d) the majority of the Continuing Directors (as defined in Section 3(v) hereof) determine in their sole and absolute discretion that there has been a change in control of the Corporation. (ii) "Good Reason" shall mean the occurrence of any of the following events, except for the occurrence of such an event in connection with the termination or reassignment of Employee's employment by the Corporation for Cause (as defined in Section 3(iii) hereof), for Disability (as defined in Section 3(iv) hereof) or for death: (a) the assignment to Employee of employment responsibilities which are not of comparable responsibility and status as the employment responsibilities held by Employee immediately prior to a Change in Control; (b) a reduction by the Corporation in Employee's base salary as in effect immediately prior to a Change in Control; (c) an amendment or modification of the Corporation 's incentive compensation program (except as may be required by applicable law) which affects the terms or administration of the program in a manner adverse to the interest of Employee as compared to the terms and administration of such program immediately prior to a Change in Control; (d) the Corporation's requiring Employee to be based anywhere other than within 50 miles of Employee's office location immediately prior to a Change in Control, except for requirements of temporary travel on the Corporation's business to an extent substantially consistent with Employee's business travel obligations immediately prior to a Change in Control; (e) except to the extent otherwise required by applicable law, the failure by the Corporation to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock incentive plan, bonus plan, life insurance plan, health-and-accident plan, or disability plan in which Employee is participating immediately prior to a Change in Control (or plans providing Employee with substantially similar benefits), the taking of any action by the Corporation which would adversely affect Employee's participation in, or materially reduce Employee's benefits under, any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to such Change in Control, or the failure by the Corporation to provide Employee with the number of paid vacation days to which Employee is entitled immediately prior to such Change in Control in accordance with the Corporation's vacation policy as then in effect; or (f) the failure by the Corporation to obtain, as specified in Section 6(i) hereof, an assumption of the obligations of the Corporation to perform this Agreement by any successor to the Corporation. 3 (iii) "Cause" shall mean termination by the Corporation of Employee's employment based upon (a) the willful and continued failure by Employee substantially to perform Employee's duties and obligations (other than any such failure resulting from Employee's incapacity due to physical or mental illness or any such actual or anticipated failure resulting from Employee's termination for Good Reason) or (b) the willful engaging by Employee in misconduct which is materially injurious to the Corporation, monetarily or otherwise. For purposes of this Section 3(iii), no action or failure to act on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee in bad faith and without reasonable belief that such action or omission was in the best interests of the Corporation. (iv) "Disability" shall mean any physical or mental condition which would qualify Employee for a disability benefit under the Corporation 's long-term disability plan. (v) "Continuing Director" shall mean any person who is a member of the Board of Directors of the Corporation, while such person is a member of the Board of Directors, who is not an Acquiring Person (as hereinafter defined) or an Affiliate or Associate (as hereinafter defined) of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who (a) was a member of the Board of Directors on the date of this Agreement as first written above or (b) subsequently becomes a member of the Board of Directors, if such person's nomination for election or initial election to the Board of Directors is recommended or approved by a majority of the Continuing Directors. For purposes of this Section 3(v): "Acquiring Person" shall mean any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who or which, together with all Affiliates and Associates of such person, is the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the shares of Common Stock of the Corporation then outstanding, but shall not include the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation or of any subsidiary of the Corporation or any entity holding shares of Common Stock organized, appointed or established for, or pursuant to the terms of, any such plan; and "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. 4. Benefits upon Termination under Section 2(ii)(c) (i) Upon the termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof, Employee shall be entitled to receive the benefits specified in this Section 4. The amounts due to Employee under subparagraph (a) of this Section 4(i) shall be paid to Employee, at Employee's election as specified in a written notice delivered by Employee to the Corporation on the date of this Agreement and which is attached hereto as Exhibit A and made a part hereof, either (a) in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective or (b) in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. The amounts due to Employee under subparagraphs (b), (c) and (d) of this Section 4(i) shall be paid to Employee not later than one business day prior to the date that the termination of Employee's employment 4 becomes effective. Subject to the provisions of Section 4(ii) hereof, all benefits to Employee pursuant to this Section 4(i) shall be subject to any applicable payroll or other taxes required by law to be withheld. (a) The Corporation shall pay as severance pay to Employee an amount equal to three times the sum of (1) Employee's highest annual rate of salary from the Corporation in effect at any time during the 36 months preceding the date that the termination of Employee's employment became effective and (2) the average of the annual bonus paid or to be paid to Employee in respect of each of the three fiscal years preceding the fiscal year when the termination of Employee's employment became effective. (b) For a period of 36 months following the date that the termination of Employee's employment became effective or until Employee reaches age 65 or dies, whichever is the shorter period, the Corporation shall continue for Employee, at the Corporation's expense, the health, disability and life insurance coverage in effect for Employee immediately prior to the date that the termination of Employee's employment became effective under the plans provided by the Corporation for its executive personnel generally or, if such coverage cannot by the terms of such plans be provided thereunder, then the Corporation shall provide equivalent insurance coverage for Employee for such period under specially obtained policies of insurance. (c) The Corporation shall pay to Employee (1) any amount earned by Employee as a bonus with respect to the fiscal year of the Corporation preceding the termination of Employee's employment if such bonus has not theretofore been paid to Employee, and (2) an amount representing credit for any vacation earned or accrued by him but not taken. (d) The Corporation shall also pay to Employee all legal fees and expenses incurred by Employee as a result of such termination of employment (including all fees and expenses, if any, incurred by Employee in seeking to obtain or enforce any right or benefit provided to Employee by this Agreement whether by arbitration or otherwise); and (e) Any and all contracts, agreements or arrangements between the Corporation and Employee prohibiting or restricting Employee from owning, operating, participating in, or providing employment or consulting services to, any business or company competitive with the Corporation at any time or during any period after the date the termination of Employee's employment becomes effective, shall be deemed terminated and of no further force or effect as of the date the termination of Employee's employment becomes effective, to the extent, but only to the extent, such contracts, agreements or arrangements so prohibit or restrict Employee; provided that the foregoing provision shall not constitute a license or right to use any proprietary information of the Corporation and shall in no way affect any such contracts, agreements or arrangements insofar as they relate to nondisclosure and nonuse of proprietary information of the Corporation notwithstanding the fact that such nondisclosure and nonuse may prohibit or restrict Employee in certain competitive activities. (ii) In the event that any payment or benefit received or to be received by Employee in connection with a Change in Control of the Corporation or termination of Employee's 5 employment (whether payable pursuant to the terms of this Agreement or any other plan, contract, agreement or arrangement with the Corporation, with any person whose actions result in a Change in Control of the Corporation or with any person constituting a member of an "affiliated group" as defined in Section 280G(d)(5) of the Internal Revenue Code of 1986, as amended (the "Code"), with the Corporation or with any person whose actions result in a Change in Control of the Corporation (collectively, the "Total Payments")) would be subject to the excise tax imposed by Section 4999 of the Code or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the "Excise Tax"), then Employee shall be entitled to receive from the Corporation an additional cash payment (a "Gross-Up Payment") within thirty business days of such determination in an amount such that after payment by Employee of all taxes (including any interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All determinations required to be made under this Section 4(ii), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by the independent accounting firm retained by the Corporation on the date of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Corporation and Employee within 15 business days of the date that the termination of Employee's employment becomes effective, or such earlier time as is requested by the Corporation. If the Accounting Firm determines that no Excise Tax is payable by Employee, it shall furnish Employee with an opinion that Employee has substantial authority not to report any Excise Tax on Employee's federal income tax return. Any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were less than the Gross-Up Payments that should have been made by the Corporation ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that Employee is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Corporation were more than the Gross-Up Payments that should have been made by the Corporation ("Overpayment"), consistent with the calculations required to be made hereunder. Employee agrees to refund to the Corporation the amount of any Overpayment that the Accounting Firm shall determine has occurred hereunder. Any determination by the Accounting firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment or Overpayment, shall be binding upon the Corporation and Employee. (iii) Any payment not made to Employee when due hereunder shall thereafter, until paid in full, bear interest at the rate of interest equal to the reference rate announced from time to 6 time by U.S. Bank National Association, plus two percent, with such interest to be paid to Employee upon demand or monthly in the absence of a demand. (iv) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise. The amount of any payment or benefit provided in this Section 4 shall not be reduced by any compensation earned by Employee as a result of any employment by another employer. 5. Employee's Agreements. Employee agrees that: (i) Without the consent of the Corporation, Employee will not terminate employment with the Corporation without giving 60 days prior notice to the Corporation, and during such 60-day period Employee will assist the Corporation, as and to the extent reasonably requested by the Corporation, in training the successor to Employee's position with the Corporation. The provisions of this Section 5(i) shall not apply to any termination (voluntary or involuntary) of the employment of Employee pursuant to Section 2(ii)(c) hereof. (ii) Without the consent of the Corporation or except as may be required by law, Employee will not at any time after termination of his employment with the Corporation disclose to any person, corporation, firm, or other entity, confidential information concerning the Corporation of which Employee has gained knowledge during employment with the Corporation. (iii) In the event that Employee has received any benefits from the Corporation under Section 4 of this Agreement, then, during the period of 36 months following the date that the termination of Employee's employment became effective, Employee, upon request by the Corporation: (a) Will consult with one or more of the executive officers concerning the business and affairs of the Corporation for not to exceed four hours in any month at times and places selected by Employee as being convenient to him, all without compensation other than what is provided for in Section 4 of this Agreement; and (b) Will testify as a witness on behalf of the Corporation in any legal proceedings involving the Corporation which arise out of events or circumstances that occurred or existed prior to the date that the termination of Employee's employment became effective (except for any such proceedings relating to this Agreement), without compensation other than what is provided for in Section 4 of this Agreement, provided that all out-of-pocket expenses incurred by Employee in connection with serving as a witness shall be paid by the Corporation. Employee shall not required to perform Employee's obligations under this Section 5(iii) if and so long as the Corporation is in default with respect to performance of any of its obligations under this Agreement. 7 6. Successors and Binding Agreement. (i) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation), by agreement in form and substance satisfactory to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from the Corporation in the same amount and on the same terms as Employee would be entitled hereunder if employee terminated employment after a Change in Control for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date that the termination of Employee's employment becomes effective. As used in this Agreement, "Corporation" shall mean the Corporation and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 6(i) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (ii) This Agreement is personal to Employee, and Employee may not assign or transfer any part of Employee's rights or duties hereunder, or any compensation due to him hereunder, to any other person. Notwithstanding the foregoing, this Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. 7. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in the Fergus Falls area, in accordance with the applicable rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 8. Modification; Waiver. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by Employee and such officer as may be specifically designated by the Board of Directors of the Corporation. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. Notice. All notices, requests, demands, and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any notice of termination of employment and any notice of an intention to arbitrate) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party, as first written above (directed to the attention of the Board of Directors and Corporate Secretary in the case of the Corporation). Either party hereto may change its address for purposes of this Section 9 by giving 15 days' prior notice to the other party hereto. 8 10. Severability. If any term or provision of this Agreement or the application hereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 11. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. Governing Law. This Agreement has been executed and delivered in the State of Minnesota and shall, in all respects, be governed by, and construed and enforced in accordance with, the laws of the State of Minnesota, including all matters of construction, validity and performance. 13. Effect of Agreement; Entire Agreement. The Corporation and Employee understand and agree that this Agreement is intended to reflect their agreement only with respect to payments and benefits upon termination in certain cases and is not intended to create any obligation on the part of either party to continue employment. This Agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof; provided that this Agreement shall not supersede or limit in any way Employee's rights under any benefit plan, program or arrangements in accordance with their terms. 14. ERISA. For purposes of the Employee Retirement Income Security Act of 1974, this Agreement is intended to be a severance pay employee welfare benefit plan, and not an employee pension benefit plan, and shall be construed and administered with that intention. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed in its name by a duly authorized director and officer, and Employee has hereunto set his or her hand, all as of the date first written above. OTTER TAIL CORPORATION By /s/ John Erickson ------------------------------------- Its President -------------------------------- EMPLOYEE /s/ George A. Koeck --------------------------------------- George A. Koeck 9 EXHIBIT A NOTICE The undersigned ("Employee") does hereby notify Otter Tail Corporation (the "Corporation") pursuant to Section 4(i) of that certain Severance Agreement dated as of the date hereof between the Corporation and Employee (the "Agreement") that Employee has elected to be paid any amounts which become payable under Section 4(i)(a) of the Agreement as follows: check one) _______ in a lump sum not later than one business day prior to the date that the termination of Employee's employment becomes effective. ___X___ in 36 equal installments payable monthly, on the last business day of the month, for 36 consecutive months following the date that the termination of Employee's employment becomes effective. Dated: April 8, 2002 ---------------------------------- /s/ George A. Koeck -------------------------------------- George A. Koeck 10 EX-99.A 11 c71393exv99wa.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99-A CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Otter Tail Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John D. Erickson, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John D. Erickson ---------------------------------------- John D. Erickson Chief Executive Officer and President August 14, 2002 EX-99.B 12 c71393exv99wb.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99-B CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Otter Tail Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin G. Moug, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kevin G. Moug ---------------------------------------- Kevin G. Moug Chief Executive Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----