SJW CORP.
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Notice of Annual Meeting of Shareholders
April 29, 2003
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To The Shareholders:
The annual meeting of the shareholders of SJW Corp. (the "Corporation")
will be held on Tuesday, April 29, 2003 at 10 o'clock in the morning at the
offices of the Corporation, 374 West Santa Clara Street, San Jose, California
95113, for the following purposes:
1. To elect a Board of Directors of the Corporation to serve for the
ensuing year;
2. To consider and act upon a proposal to ratify the selection of KPMG
LLP as independent auditors of the Corporation for 2003;
3. To consider and act upon a proposal to amend the Long-Term Incentive
Plan; and
4. To transact such other business as may properly come before the
meeting or any adjournment of the meeting.
The Board of Directors' nominees for directors are set forth in the
enclosed proxy statement.
The close of business on Monday, March 17, 2003 has been fixed as the
record date for the determination of shareholders entitled to vote at the
annual meeting. The Corporation's Annual Report (including financial
statements) for the year ended December 31, 2002 is being distributed along
with the Proxy Statement.
If you are unable to be present, please mark, date and sign the enclosed
proxy card and return it in the enclosed envelope.
BY ORDER OF THE
BOARD OF DIRECTORS
ROBERT A. LOEHR, Secretary
San Jose, California
March 17, 2003
2003 Proxy Statement
SJW CORP.
Purpose of a Proxy
The shares of stock you own in SJW Corp. (the "Corporation") entitle you
to vote on certain matters important to the Corporation. When shareholders are
unable to attend the annual meeting in person, they may vote by the proxy
process. A proxy is, in effect, a special power of attorney to vote your shares
in your absence. This Proxy Statement explains the process. The separate proxy
card contains a ballot for your use and signature. Only shareholders who are
owners of stock on the record books of the Corporation at the close of business
on March 17, 2003 are entitled to vote either in person or by proxy.
Solicitation of Your Proxy
The enclosed proxy is solicited from you on behalf of the Board of
Directors of the Corporation for use at the annual meeting of shareholders. The
annual meeting is to be held on April 29, 2003 at 10 o'clock in the morning at
the offices of the Corporation, 374 West Santa Clara Street, San Jose,
California 95113. Your proxy will also be valid and remain in effect for any
adjournments or postponements of the 2003 annual meeting, should there be any.
The Board of Directors asks for your proxy for the following purposes:
1. To elect a Board of Directors of the Corporation to serve for the
ensuing year;
2. To ratify the selection of KPMG LLP as independent auditors of the
Corporation for 2003;
3. To consider and act upon a proposal to amend the Long-Term Incentive
Plan; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
This proxy statement and accompanying proxy card were mailed on or about
March 17, 2003 to all shareholders entitled to vote.
You Can Revoke Your Proxy
Any shareholder giving a proxy has the power to revoke the proxy at any
time before it is voted. You may revoke your proxy by attending the meeting and
voting in person. You may also revoke your proxy by filing a written revocation
with the Corporation or by presenting at the meeting a properly signed proxy
bearing a later date.
Voting Procedures for the Annual Meeting
As of the close of business on March 17, 2003 the Corporation had
3,045,147 common shares of issued and outstanding voting securities. Each
common share is entitled to 1 vote.
Every shareholder, or his or her proxy or the persons named in the
enclosed proxy card, may cumulate his or her votes and give one candidate a
number of
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votes equal to the number of directors to be elected. Alternately, he or she
may distribute his or her votes on the same principle among as many candidates
as he or she thinks fit. No shareholder or proxy, however, shall be entitled to
cumulate votes unless (1) such candidate(s) has been placed in nomination prior
to the voting and (2) the shareholder has given notice at the meeting prior to
any voting that the shareholder intends to cumulate the shareholder's votes. If
any one shareholder has given such notice, all shareholders may cumulate their
votes for candidates in nomination. The Board of Directors seeks, by your
proxy, the discretionary authority to cumulate votes in the event that any
shareholder invokes cumulative voting. The ten nominees receiving the highest
number of votes will be elected directors.
Quorums and Votes Required
A majority of the Corporation's common shares, whether present in person
or represented by proxy, shall constitute a quorum for purposes of the annual
meeting. Abstentions and broker non-votes are each included in the number of
shares present for quorum purposes.
The ten director nominees receiving the highest number of affirmative
votes will be elected. The ratification of the selection of independent
auditors (Item 2 on the Proxy Card) and the amendment to the Long-Term
Incentive Plan (Item 3 on the Proxy Card) require the affirmative vote of a
majority of the shares present in person or represented by proxy and voting at
the annual meeting, provided that the affirmative vote must equal at least a
majority of the votes required to constitute a quorum. Abstentions, which may
be specified on all proposals other than the election of directors, and broker
non-votes are counted as entitled to vote and accordingly will have the same
effect as negative votes.
The shares represented by proxies will be voted in accordance with the
directions given by the shareholders on the proxy. All shares represented by
duly executed proxies will be voted "FOR" the election as directors of each of
the nominees named below unless the proxy is marked to indicate that such
authority is withheld. Though not anticipated, in the event any nominee should
be unavailable to serve as a director, it is the intention of the persons named
on the enclosed proxy to vote "FOR" the election of such other person or
persons as the Board of Directors may designate as a nominee.
With respect to the ratification of the selection of the independent
auditors and the amendment to the Long-Term Incentive Plan, all shares
represented by duly executed proxies will be voted "FOR" the proposals if no
choice is indicated on the proxy. The Board of Directors of the Corporation
respectfully solicits your proxy. The Corporation will bear the entire cost of
preparing, assembling, printing and mailing this proxy statement and the
enclosed proxy card. The solicitation of proxies will be made by regular or
commercial mail and may also be made by telephone, telegraph, facsimile or
personally by directors, officers and regular employees of the Corporation who
will receive no extra compensation for such services. If you would like a copy
of the Annual Report on Form 10-K for the year ended December 31, 2002 as filed
with the Securities and Exchange Commission, we will send you one without
charge. Please contact Mr. Robert Loehr at 408-279-7961 or write to Investor
Relations, SJW Corp., 374 W. Santa Clara Street, San Jose, CA 95113.
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ELECTION OF DIRECTORS
(Item 1 on Proxy Card)
At the annual meeting ten (10) directors, constituting the entire Board,
are to be elected. They are each to hold office until the next annual meeting
of the Corporation's shareholders and until a successor for such director is
elected and qualified, or until the death, resignation or removal of such
director.
A brief biography of each nominee, including the nominee's business
experience during the past 5 years, is set forth below. All nominees are
currently directors of the Corporation and have been so for at least 5 years,
with the exception of Mr. Frederick Ulrich who was elected in July 2001 and Mr.
Douglas King, who was appointed to the Board in January 2003. All nominees are
also directors of San Jose Water Company, the Corporation's wholly-owned public
utility water corporation subsidiary, and of SJW Land Company, the
Corporation's wholly-owned real estate development company subsidiary. It is
the Corporation's intention to appoint all persons elected as directors of the
Corporation at the annual meeting to be the directors of San Jose Water Company
and SJW Land Company for a concurrent term.
In the unanticipated event that a nominee is unable or declines to serve
as a director at the time of the annual meeting, proxies will be voted for any
nominee named by the present Board of Directors to fill the vacancy. As of the
date of this Proxy Statement, the Corporation is not aware of any nominee who
is unable or will decline to serve as a director.
The Board of Directors respectfully asks for your vote for the following
individuals:
Mark L. Cali, Attorney at Law, with the firm Clark, Cali and Negranti, LLP
since December 1996. He was with the firm Bledsoe, Cathcart, Diestel,
Livingston & Pedersen from October 1994 through November 1996. Mr. Cali, age
37, is a member of the Executive Compensation and Nominating & Governance
Committees. He has served as a director of SJW Corp., San Jose Water Company
and SJW Land Company since 1992.
J. Philip DiNapoli, Attorney at Law, former Chairman of Comerica
California Inc. (California bank holding company). He serves as a director of
Comerica, Inc. (bank holding company) and Comerica Bank-California (bank
holding company). He served as Chairman of Citation Insurance Company (Workers
Compensation specialty carrier) until November 20, 1996. He is also the owner
of DiNapoli Development Company (real estate development company). Mr.
DiNapoli, age 63, is a member of the Audit and Nominating & Governance
Committees. He has served as a director of SJW Corp., San Jose Water Company
and SJW Land Company since 1989.
Drew Gibson, Principal of Gibson Speno, LLC (real estate development and
investment company) and Director of Preferred Community Management, Inc. (real
estate management company). He is also a director of Celluphone, Inc. (Los
Angeles based cellular agent), and a former director of Comerica
Bank-California. Mr. Gibson, age 60, is Chairman of SJW Corp., San Jose Water
Company, and SJW Land Company. He has been a member of the Audit, Executive,
Executive Compensation and Nominating & Governance Committees and has served as
a director of SJW Corp., San Jose Water Company and SJW Land Company since
1986.
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Douglas King, retired Audit Partner of Ernst & Young, LLP. Mr. King began
his career at Ernst & Young in Tulsa, Oklahoma in 1970. During his career he
was the audit partner on large, complex public registrants and managed Ernst &
Young's San Francisco office. Mr. King, age 61, is a Certified Public
Accountant with a Masters Degree in Business Administration from the University
of Arkansas. He was appointed a director of SJW Corp., San Jose Water Company
and SJW Land Company in January 2003. If elected to a full term, it is expected
the Board will ask him to serve as Chairman of the Audit Committee.
Ronald R. James, President Emeritus of the San Jose Chamber of Commerce
(business promotion organization), formerly President and Chief Executive
Officer of the Chamber. Mr. James, age 74, is a member of the Audit and
Executive Compensation Committees and has served as a director of San Jose
Water Company since 1974, and of SJW Corp. and SJW Land Company since 1985.
George E. Moss, Vice Chairman of the Board of Roscoe Moss Manufacturing
Company (manufacturer of steel water pipe and well casing). Mr. Moss was
formerly President of the Roscoe Moss Company (holding company). Mr. Moss, age
71, is a member of the Executive, Executive Compensation and Nominating &
Governance Committees. He has served as a director of San Jose Water Company
since 1984, and of SJW Corp. and SJW Land Company since 1985.
Roscoe Moss, Jr., Chairman of the Board of Roscoe Moss Manufacturing
Company (manufacturer of steel water pipe and well casing). Mr. Moss was
formerly Chairman of the Board of Roscoe Moss Company (holding company). Mr.
Moss, age 73, has served as a director of San Jose Water Company since 1980,
and of SJW Corp. and SJW Land Company since 1985.
W. Richard Roth, President and Chief Executive Officer of the Corporation.
He serves on the Executive Committee. Prior to becoming Chief Executive Officer
in 1999, he was President from October 1996, Vice President from April 1992
until October 1996 and Chief Financial Officer and Treasurer of the Corporation
from January 1990 until October 1996. He has been President of San Jose Water
Company since October 1994 and Chief Executive Officer since October 1996. Mr.
Roth, age 50, has served as a director of SJW Corp., San Jose Water Company and
SJW Land Company since 1994.
Charles J. Toeniskoetter, Chairman and CEO of Toeniskoetter & Breeding
Inc., Construction and Toeniskoetter & Breeding Inc., Development (a real
estate development company). He also serves as a director of Redwood Trust,
Inc. (real estate investment trust) and Heritage Commerce Corp. (bank holding
Company). Mr. Toeniskoetter, age 58, serves as a member of the Audit Committee
and Nominating & Governance Committees. He has served as a director of SJW
Corp., San Jose Water Company and SJW Land Company since 1991.
Frederick R. Ulrich, retired. Mr. Ulrich graduated from West Point and the
Harvard Business School. From 1972 to 1982 he was a member of the corporate
finance departments of Morgan Stanley & Co. and Warburg Paribas Becker. From
1982 through 2001 Mr. Ulrich was a consultant to corporations regarding mergers
and acquisitions and as an equity investor in leveraged buyouts. In those
pursuits his firms completed approximately $700 million in leveraged
acquisitions and raised over $1 billion for
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acquisitions. Mr. Ulrich, age 59, has been a director of numerous companies
including Ames Company, Pinnacle Automation, The Holophane Company, Data
Documents and Paul Sebastian, Inc. Mr. Ulrich has served on the Audit Committee
and has served as a director of SJW Corp., San Jose Water Company and SJW Land
Company since 2001.
Nominees Roscoe Moss, Jr. and George Moss are brothers. With that
exception, no nominee has any family relationship with any other nominee or
with any executive officer. Other than Mr. Roth, whose employment relationships
with San Jose Water Company and SJW Land Company are described above, no
nominee is or has been employed in his principal occupation or employment
during the past 5 years by the Corporation or its subsidiaries.
RATIFICATION OF APPROVAL OF INDEPENDENT AUDITORS
(Item 2 on Proxy Card)
The Audit Committee of the Board of Directors has recommended the services
of KPMG LLP as independent auditors for the Corporation in the year 2003. The
Board of Directors recommends a vote "FOR" the adoption of the proposal to
ratify the selection of KPMG LLP, certified public accountants, to audit the
accounts of the Corporation for the year 2003.
Representatives of KPMG LLP are expected to be present at the annual
meeting. They have been offered the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions.
AMENDMENT OF LONG-TERM INCENTIVE PLAN
(Item 3 on Proxy Card)
General
The shareholders are being asked to approve amendments to the
Corporation's Long-Term Incentive Plan (the "Incentive Plan") which, if
approved, will (i) allow non-employee directors to receive awards under the
Incentive Plan, (ii) authorize the Plan Administrator to grant stock
appreciation rights to Incentive Plan participants, either as stand-alone
awards or in tandem with other awards granted under the Incentive Plan, (iii)
list the performance criteria that the Plan Administrator may specify as
conditions to payments under performance shares, (iv) limit the Plan
Administrator's ability to amend an outstanding stock option to lower the
exercise price or cancel such option for the purpose of reissuing at a lower
price without shareholder approval and (v) provide that the annual 100,000
share limit on awards to a single individual will not apply to awards of
restricted stock, performance shares or stock bonuses that are not intended to
quailify for the "performance-based compensation" exemption from the $1 million
deduction limit of Section 162(m) of the Internal Revenue Code.
Upon approval, the amended Incentive Plan will allow the Corporation to
provide non-employee directors, in addition to key employees, the opportunity
to acquire a meaningful equity interest in the Corporation as an incentive for
them to remain in
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service with the Corporation. The Board believes that such equity incentives
are a significant factor in the Corporation's ability to attract and retain
Board members who are essential to the Corporation's long-term growth and
financial success. Subject to approval of this amendment, the Board intends to
implement two new programs for the benefit of the non-employee directors, each
of which are described in greater detail below. These new programs are intended
to replace participation in the Corporation's Director's Pension Plan for all
new directors who are elected at or after the 2003 annual meeting, and for
those existing directors who elect out of the current Director's Pension Plan.
The Board also believes that stock appreciation rights may be a desirable
form of incentive compensation in certain future circumstances.
In addition, the Incentive Plan has been amended by the Board, not subject
to shareholder approval, (i) to remove provisions which provide for the
automatic acceleration of vesting of awards upon a change in control of the
Corporation, (ii) to authorize the Plan Administrator to determine, generally
at the time of grant, how a change in control or termination of employment or
service will effect each award, and (iii) to make certain other clarifying
amendments to the Incentive Plan.
The following is a summary of the principal features of the Incentive
Plan, including the most recent and proposed amendments. The summary, however,
does not purport to be a complete description of all the provisions of the
Incentive Plan. Any shareholder of the Corporation who wishes at any time to
obtain a copy of the actual Incentive Plan document may do so upon written
request to the Corporation's Secretary at the Corporation's principal executive
offices in San Jose.
Plan Adoption
The Incentive Plan was adopted by the Board on March 6, 2002 and approved
by the shareholders at the annual meeting held on April 18, 2002.
Description of Incentive Plan
Types of Awards
The following types of awards are available under the Incentive Plan: (i)
stock options, (ii) dividend units, (iii) performance shares, (iv) rights to
acquire restricted stock, (v) stock bonuses and (vi) stock appreciation rights.
The principal features of each type of award are described below.
Share Reserve
A total of 300,000 shares of our common stock were reserved for issuance
over the ten-year term of the Incentive Plan at the time of the Incentive
Plan's approval in March 2002. As of December 31, 2002, (i) no options to
purchase shares were outstanding and no options had been exercised, (ii) no
dividend units were outstanding, (iii) no performance shares were outstanding,
(iv) no rights to acquire restricted stock were outstanding, (v) no stock
bonuses were awarded and (vi) no stock appreciation rights were outstanding.
No individual may receive awards covering an aggregate of more than one
hundred thousand (100,000) shares in any calendar year. However, under the
proposed
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amendment, such limit will not apply to rights to acquire restricted stock,
performance shares or stock bonuses which are not intended to qualify as
"performance-based compensation" that is exempt from the $1 million deduction
limit of Section 162(m) of the Internal Revenue Code.
Administration
The Executive Compensation Committee of the Board has exclusive authority
to administer the Incentive Plan with respect to all eligible individuals.
However, the Board may at any time replace the Executive Compensation Committee
with another committee. The term "Plan Administrator" will mean the Executive
Compensation Committee or any other committee appointed by the Board to replace
the Executive Compensation Committee to the extent each such entity is acting
within the scope of its administrative jurisdiction under the Incentive Plan.
The Executive Compensation Committee also has the exclusive authority to select
the non-employee directors, executive officers and other highly compensated
employees who may participate in the Incentive Plan.
Eligibility
Employees (including officers) and, if this proposal is approved by
shareholders, non-employee directors of the Corporation and its affiliates
(whether now existing or subsequently established) are eligible to participate
in the Incentive Plan.
Stock Options
Grants
The Plan Administrator has complete discretion to determine which eligible
individuals are to receive option grants, the time or times when those grants
are to be made, the number of shares subject to each such grant, the status of
any granted option as either an incentive stock option or a non-statutory
option under the federal tax laws, the vesting schedule (if any) to be in
effect for the option grant and the maximum term for which any granted option
is to remain outstanding.
Price and Exercisability
Each granted option will have an exercise price per share not less than
100% of the fair market value per share of common stock on the option grant
date, and no granted option will have a term in excess of 10 years. The shares
subject to each option will generally become exercisable for fully-vested
shares in a series of installments over a specified period of service measured
from the grant date.
The exercise price may be paid in cash or in shares of the Corporation's
common stock. Outstanding options may also be exercised through a same-day sale
program through a procedure approved by the Plan Administrator pursuant to
which a brokerage firm is to effect an immediate sale of the shares purchased
under the option and pay over to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the exercise price
for the purchased shares plus all applicable withholding taxes.
No optionee has any shareholder rights with respect to the option shares
until such optionee has exercised the option and paid the exercise price for
the purchased shares.
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Options will generally not be assignable or transferable other than by will,
the laws of inheritance or designation of a beneficiary, and, during the
optionee's lifetime, the option may be exercised only by such optionee.
Termination of Service
The Plan Administrator shall determine on a grant-by-grant basis the
extent to which an option will remain outstanding following cessation of
employment or service. Generally, it is anticipated that an optionee will have
a period of ninety days following termination or the remaining term of the
option (whichever is shorter) to exercise his or her outstanding options for
any shares in which the optionee is vested at that time, except in the case of
certain circumstances approved by the Plan Administrator such as termination
due to death, disability, or retirement, which may result in the option vesting
on an accelerated basis and an optionee or his or her beneficiary having an
extended time period to exercise the option. If employment is terminated for
cause, the option will immediately terminate.
Dividend Units
The Plan Administrator has complete discretion to determine which eligible
individuals will receive dividend units under the Incentive Plan and whether
the dividend units will be granted alone or in tandem with options, performance
shares, rights to acquire restricted stock or stock bonuses. The amount payable
to a participant with respect to a dividend unit will equal the aggregate
dividends payable on a share of common stock during the term of the dividend
unit. The Plan Administrator has complete discretion to determine the term of a
dividend unit.
Dividend units may be paid immediately or may be deferred and may be
payable either in cash or in the form of shares of common stock, as specified
by the Plan Administrator. If dividend units are to be paid in the form of
common stock, the number of shares into which cash dividend amounts are
converted shall be based on the fair market value of one share of common stock
on the date of conversion, a prior date or an average of such fair market value
over some period of time, as the Plan Administrator shall specify.
Performance Shares
The Plan Administrator has complete discretion to determine which eligible
individuals will receive performance shares under the Incentive Plan. At the
time of grant, the Plan Administrator will determine the number of performance
shares covered by the award, the performance period and the performance goal or
goals to be achieved. At the end of the performance period, the Plan
Administrator will determine the level of performance versus the goal and the
portion of the performance shares (if any) which will be payable to the
participant.
Under the proposed amendment, performance goals might include operating
profits (including EBITDA), net profits, earnings per share, profit returns and
margins, revenues, shareholder return and/or value (including economic value
added or shareholder value added), stock price and working capital. Performance
criteria may be measured solely on a corporate, subsidiary or business unit
basis, or a combination
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thereof. Further, performance criteria may reflect absolute entity performance
or a relative comparison of entity performance to the performance of a peer
group of entities or other external measure of the selected performance
criteria. Profit, earnings and revenues used for any performance criteria
measurements shall exclude gains or losses on operating asset sales or
dispositions, asset write-downs, litigation or claim judgments or settlements,
accruals for historic environmental obligations, effect of changes in tax law
or rate on deferred tax liabilities, accruals for reorganization and
restructuring programs, uninsured catastrophic property losses, the cumulative
effect of changes in accounting principles, and any extraordinary non-recurring
items as described in Accounting Principles Board Opinion No. 30 and/or in
management's discussion and analysis of financial performance appearing in the
Corporation's Annual Report on Form 10-K or annual report to shareholders for
the applicable year.
Before the proposed amendment of the Incentive Plan, the alternative
performance criteria were limited to earnings per share, total shareholder
return or return on capital employed. The purpose of the proposed amendment is
to provide future flexibility for the Board to specify performance criteria for
determining the payment of performance shares, so that such payments may be tax
deductible under IRC Section 162(m).
The Plan Administrator has complete discretion to determine whether awards
will be paid in cash, common stock, or a combination of cash and common stock.
Rights to Acquire Restricted Stock
The Plan Administrator has complete discretion to determine which eligible
individuals will receive rights to acquire restricted stock. Rights to acquire
restricted stock may be granted at no investment cost to the recipient or at a
price per share not less than the amount required to ensure compliance with
applicable state laws. Rights to acquire restricted stock may also be granted
pursuant to awards which entitle the recipients to receive those shares upon
the Corporation's attainment of designated performance goals (such as earnings
per share, total shareholder return or return on capital employed) or
completion of a specified service period. The Plan Administrator will have
complete discretion to determine which eligible individuals are to receive such
rights to acquire restricted stock, the time or times when such awards are to
be made, the number of shares subject to each such award and the vesting
schedule (if any) to be in effect for the right to acquire restricted stock.
The shares awarded under a right to acquire restricted stock may be fully
and immediately vested at the time of the award or may vest upon the
recipient's completion of a designated service period or upon the Corporation's
attainment of pre-established performance goals. Outstanding shares covered by
a right to acquire restricted stock which are subject to performance goals will
automatically terminate, and no shares of common stock will actually be issued
in satisfaction of those awards, if the performance goals established for such
awards are not attained. The Plan Administrator, however, has the discretionary
authority to issue shares of common stock in satisfaction of one or more
outstanding rights to acquire restricted stock as to which the designated
performance goals are not attained.
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Stock Bonuses
The Plan Administrator has complete discretion to determine which eligible
individuals will receive stock bonuses. The Plan Administrator may grant stock
bonuses in consideration for past services. The Plan Administrator may also
grant stock bonuses which entitle the recipients to receive the shares of
common stock covered by the bonus upon the attainment of designated performance
goals (such as earnings per share, total shareholder return or return on
capital employed) or completion of a specified service period. The Plan
Administrator has complete discretion to determine which eligible individuals
are to receive stock bonuses, the time or times when awards are to be made, the
number of shares covered by each stock bonus and the vesting schedule (if any)
to be in effect for the stock bonus.
The shares awarded under a stock bonus may be fully and immediately vested
upon issuance or may vest upon the recipient's completion of a designated
service period or upon the Corporation's attainment of pre-established
performance goals. However, no shares awarded under a stock bonus that are
subject to vesting shall be issued until such shares are vested and/or such
performance goals are obtained. The Plan Administrator, however, will have the
discretionary authority to issue shares of common stock in satisfaction of one
or more outstanding stock bonuses as to which the designated performance goals
are not attained.
Stock Appreciation Rights
Under the Incentive Plan as proposed to be amended, the Plan Administrator
has complete discretion to determine which eligible individuals will receive
stock appreciation rights under the Incentive Plan. Stock appreciation rights
may be granted in tandem with other awards under the Incentive Plan or as
stand-alone awards. Tandem stock appreciation rights provide recipients with
the right to surrender their tandem award for an appreciation distribution from
the Corporation equal in amount to the excess of (a) the fair market value of
the vested shares of common stock subject to the surrendered award over (b) the
aggregate exercise price payable for those shares. Such appreciation
distribution may, at the discretion of the Plan Administrator, be made in cash
or in shares of common stock. Stand-alone stock appreciation rights will
entitle recipients to a distribution from the Corporation in an amount payable
in cash or stock equal to the excess of (a) the fair market value of the common
stock paid upon the exercise of the stock appreciation right over (b) the
exercise price payable for such stock appreciation right.
General Plan Provisions
Valuation
For all valuation purposes under the Incentive Plan, the fair market value
per share of common stock is deemed equal to the closing selling price per
share on that date, as reported on the American Stock Exchange. On December 31,
2002, the closing selling price of the Corporation's common stock was $78.05
per share.
Vesting Acceleration
Under the Incentive Plan as proposed to be amended, the Plan Administrator
may determine the effect that any change in beneficial ownership of stock, sale
of stock or
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assets, merger, combination, spin-off, reorganization or other corporate
transaction, or liquidation of the Corporation will have upon the term,
exercisability and/or vesting of outstanding awards. The effect may include
acceleration in whole or in part of vesting and/or exercisability of awards
upon the occurrence of such an event or upon certain terminations of service
within a specified period following such an event.
It is anticipated that initial stock option grants will include provisions
for acceleration of vesting either upon a change in control, as defined in the
grants, or upon involuntary termination without cause or voluntary termination
for good reason (as defined in the awards) that occurs in anticipation of or
within 24 months following a change in control.
The acceleration of vesting in the event of a change in the ownership or
control of the Corporation is intended to provide employees with an incentive
to remain in employment during periods when there is potential for a change in
control of the Corporation and to consider transactions that might otherwise
result in the termination of their employment. Under certain circumstances,
acceleration of vesting may have the effect of discouraging a merger proposal,
a takeover attempt or other efforts to gain control of the Corporation.
Changes in Capitalization
In the event any change is made to the number of outstanding shares of
common stock by reason of any stock dividend, stock split, or other subdivision
or combination of shares, appropriate adjustments will be made to (i) the
maximum number and/or class of securities issuable under the Incentive Plan,
(ii) the number and/or class of securities for which any one person may be
granted awards under the Incentive Plan per calendar year, and/or (iii) the
number or class of securities and exercise price (if applicable) for which
awards are outstanding under the Incentive Plan. Such adjustments will be
designed to preclude any dilution or enlargement of benefits under the
Incentive Plan or the outstanding awards thereunder.
Special Tax Withholding
The Plan Administrator may provide one or more holders of options or
unvested restricted stock awards or stock bonuses under the Incentive Plan with
the right to have the Corporation withhold a portion of the shares otherwise
issuable to such individuals in satisfaction of the withholding taxes to which
such individuals may become subject in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of common
stock in payment of such withholding tax liability.
Amendment and Termination
The Board may amend or terminate the Incentive Plan at any time, subject
to any shareholder approval requirement pursuant to applicable laws and
regulations, and the Plan Administrator may amend outstanding awards at any
time. However, no such amendment or termination may impair a participant's
rights under an outstanding award without his or her written consent.
Additionally, in order to conform to current corporate governance standards,
the proposed amendment of the Incentive Plan would provide that no outstanding
award may be amended to lower the exercise price or may
11
be canceled for the purpose of reissuing at a lower price without shareholder
approval. Unless sooner terminated by the Board, the Incentive Plan will
terminate on April 17, 2012.
Federal Income Tax Consequences
Option Grants
Options granted under the Incentive Plan may be either incentive stock
options, which satisfy the requirements of Section 422 of the Internal Revenue
Code, or non-statutory options which are not intended to meet such
requirements. The federal income tax treatment for the two types of options
differs as follows:
Incentive Options. The optionee recognizes no taxable income at the time
of the option grant, and no taxable income is generally recognized at the time
the option is exercised. The optionee will, however, recognize taxable income
in the year in which the purchased shares are sold or otherwise made the
subject of a disposition. For federal tax purposes, dispositions are divided
into two categories: (i) qualifying and (ii) disqualifying. A qualifying
disposition occurs if the sale or other disposition of the shares is made more
than two years after the date the option is granted for those shares and more
than one year after the date the option is exercised for those shares. If the
sale or disposition occurs before these periods are satisfied, then a
disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for those shares. If there is a disqualifying
disposition of the shares, then the excess of (i) the fair market value of the
shares on the exercise date over (ii) the exercise price paid for those shares
will be taxable as ordinary income to the optionee. Any additional gain or loss
recognized upon the disposition will be taxable as a capital gain or loss.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Corporation will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the excess of (i) the
fair market value of such shares on the option exercise date over (ii) the
exercise price paid for the shares. In no other instance will the Corporation
be allowed a deduction with respect to the optionee's disposition of the
purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Corporation in the event of the
optionee's termination of service prior to vesting in those shares, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, when the
12
Corporation's repurchase right lapses, an amount equal to the excess of (i) the
fair market value of the shares on the date those shares vest over (ii) the
exercise price paid for such shares. The optionee may, however, elect under
Section 83(b) of the Internal Revenue Code to include as ordinary income in the
year of exercise of the option an amount equal to the excess of (i) the fair
market value of the purchased shares on the exercise date over (ii) the
exercise price paid for those shares. If the Section 83(b) election is made,
the optionee will not recognize any additional income if and when the
repurchase right lapses.
The Corporation will be entitled to an income tax deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for
the taxable year of the Corporation in which such ordinary income is recognized
by the optionee.
Rights to Acquire Restricted Stock and Stock Bonuses
The tax principles applicable to rights to acquire restricted stock and
stock bonuses under the Incentive Plan will be substantially the same as those
summarized above for the exercise of non-statutory option grants.
Dividend Units and Performance Shares
A participant will not be deemed to have received any income subject to
federal income tax at the time of grant of dividend units or performance
shares, nor will the Corporation or its affiliate be entitled to a deduction at
that time. When dividend units and performance shares are settled and
distributed, the participant will be deemed to have received an amount of
ordinary income equal to the amount of cash and/or the fair market value of the
shares received. The Corporation (and/or its affiliates as applicable) will be
allowed a deduction in an amount equal to the ordinary income that the
participant is deemed to have received.
Stock Appreciation Rights
A participant who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Corporation will be entitled to an income tax deduction equal
to the appreciation distribution for the taxable year in which the ordinary
income is recognized by the participant.
Deductibility of Executive Compensation
The Corporation anticipates that compensation deemed paid by it in
connection with stock options granted under the Incentive Plan will qualify as
performance-based compensation for purposes of Code Section 162(m), in which
case it would not have to be taken into account for purposes of the $1 million
annual limitation on the deductibility of the compensation paid to certain
executive officers of the Corporation.
Accounting
Under Statement of Financial Accounting Standards No. 123 (FAS 123), the
Corporation may elect to account for stock based compensation for financial
accounting
13
purposes under either the fair value based method set forth therein or the
intrinsic value based method set forth in APB Opinion No. 25. Under the fair
value based method, compensation expense is measured at the grant date based on
the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value based method,
compensation expense is the excess, if any, of the quoted market price of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock. The Corporation has not yet determined which method
of accounting it will elect.
Under APB Opinion No. 25, stock options and other awards granted to
employees and non-employee directors under the Incentive Plan will not result
in any compensation expense if the exercise price or investment amount paid for
the award is at least 100% of fair market value of the underlying stock on the
date of grant and they are not issued in tandem with stock appreciation rights
or certain other awards. If the Corporation elects to account for options and
other awards under APB 25, then under FAS 123 the Corporation would be required
to disclose in footnotes to the Corporation's financial statements, the fair
value of those awards and the pro-forma impact those options and awards would
have upon the Corporation's reported earnings were the fair value of those
options and awards at the time of grant treated as a compensation expense.
Under the APB 25, rights to acquire stock under the Incentive Plan at
investment prices less than the fair market value of the shares on the grant
date would result in a compensation expense equal to the excess of such fair
market value over the exercise or issue price. The expense would be recognized
over the period that the option shares or issued shares are to vest. Option
grants and other awards which vest or are payable based solely on the
achievement of certain performance goals and stock appreciation rights would
result in a compensation expense which would be adjusted each reporting period
based on the then fair market value of the stock until vesting occurs.
Under the fair value method of FAS 123, the fair value of any stock option
or other stock award (regardless of the exercise or investment consideration)
is generally treated as a compensaion expense which is recognized over the
service period, which is generally the vesting period.
Companies that adopt the intrinsic value based method of APB 25 may later
elect to switch to the fair value based method of FAS 123, but not vice versa.
On December 31, 2002, FASB issued a final standard, Statement No. 148, which
provided a transition alternative for companies that voluntarily elect to
switch to the fair value method of expense recognition. Additionally, on
November 7, 2002, the International Accounting Standards Board (IASB) issued a
proposal which would require companies using IASB standards to recognize,
starting in 2004, the value of options as of the date of grant using a formula
designed to estimate their fair value. FASB recently stated it will undertake a
project to address whether to require that the cost of stock options be treated
as an expense under a fair value method and that it expects to publish an
exposure draft later in 2003 with the goal of issuing an accounting standard in
2004.
14
Amended Plan Benefits
No awards have been granted to date to non-employee members of the Board
under the Incentive Plan on the basis of the amendment that is the subject of
this Proposal 3. However, the Board has approved the following two programs
which will become effective if the amendment is approved.
Director's Retainer Deferral Program
Each non-employee member of the Board may elect to defer either 50% or
100% of his or her annual Board retainer fee in the form of a deferred
restricted stock award. Such deferral election will be irrevocable and shall be
made by each non-employee member of the Board prior to the start of the year in
which such annual Board retainer fee is to be earned. The number of shares in
each deferred stock award will be calculated based on the amount of the annual
Board retainer fees for the Corporation and its affiliates (currently, $27,000)
that is deferred, divided by the fair market value of the Corporation's common
stock on the last business day of the year prior to the year for which such
annual retainer is earned. These restricted stock awards will generally be made
on the first business day of the year, but will vest in monthly installments,
as the retainer fee would have been otherwise earned. To the extent vested, the
deferred stock awards will be paid upon a participant's termination of Board
service in the form of shares of common stock, either as a single lump
distribution or annual installments, as elected by the participant. For 2003,
deferral elections will be limited to that portion of the 2003 retainer fee
attributable to services after June 30, 2003 and the deferred stock award
attributable to such election will be made on July 1, 2003.
Dividend units (or dividend equivalent rights ("DERs")) will be granted
with respect to the shares subject to each non-employee director's deferred
stock award until the date that such deferred stock award is distributed. DERs
will entitle the non-employee director to a number of shares of common stock
determined as follows: each time a dividend is paid on the Corporation's common
stock, the non-employee director will be credited with a dollar amount equal to
the dividend paid per share multiplied by the number of shares subject to the
deferred stock award. As of the first business day in January of each year, the
accumulated cash DER amounts so credited to the non-employee director in the
immediately preceding year will be converted into additional shares of deferred
stock equal to (i) the cash so credited for the preceding year divided by (ii)
the average of the fair market value of the common stock on each of the dates
in the immediately preceding year on which dividends were paid. The additional
shares of common stock that are credited based on such DERs will vest in the
same manner as the deferred stock awards to which they are attributable and
will also be paid out upon a participant's termination of board service, in
either a single lump sum or up to annual installments, as elected by the
participant.
Director's Annual Grant Program
Each non-employee member of the Board who commences board service on or
after the annual meeting in April 2003 will be granted an on-going annual
deferred stock award on the third day following each annual meeting of the
Corporation's shareholders. These deferred stock awards will be made annually
for the first ten years
15
of Board service and will be equivalent in value to the annual Board retainer
fees for the Corporation and its affiliates each year, based on the fair market
value of common stock on the date of grant. Such annual deferred stock awards
will be paid upon a participant's termination from Board service, in either a
single lump sum distribution or up to ten annual installments, as elected by
the director.
DERs will also be granted with respect to the shares subject to each
non-employee director's annual deferred stock award until the date that such
annual deferred stock award is distributed. These will operate in the same
general manner as the DERs described under the Director's Retainer Deferral
Program.
In addition, each current non-employee member of the Board who had
previously participated in the Director's Pension Plan may irrevocably elect to
participate in the Director's Annual Grant Program, in which case (i) his or
her existing Director Pension Plan benefits will be converted, on the third day
after the annual meeting held in April 2003, into the right to receive deferred
stock of comparable value based on the fair market value of common stock on
such date and (ii) such director will thereafter receive annual grants for that
number of years of future service equal to ten (10) less the number of years of
service rendered as a non-employee director before the 2003 annual meeting.
The Plan Administrator may change the proposed non-employee director
programs described above and/or add other new programs under the terms of the
Incentive Plan, as amended.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2002 with
respect to the shares of the Corporation's common stock that may be issued
under the Corporation's existing equity compensation plan.
A B C
---------------------------- --------------------- -------------------------------
Number of Securities Remaining
Available for Future Issuance
Number or Securities to be Weighted Average Under Equity Compensation
Issued Upon Exercise of Exercise Price of Plans (Excluding Securities)
Plan Category Outstanding Options Outstanding Options Reflected in Column A
------------------------------- ---------------------------- --------------------- -------------------------------
Equity Compensation Plans 0 N/A 300,000
Approved by Shareholders (1)
Equity Compensation Plans Not 0 N/A 0
Approved by Shareholders (2)
Total
------------
(1) Consists solely of the Incentive Plan.
(2) The Corporation does not have any outstanding equity compensation plans
which are not approved by shareholders.
Vote Required
The affirmative vote of the holders of a majority of the outstanding
voting shares of the Corporation's common stock and preferred stock, if any,
voting together as a single class, is required to approve the amendment of the
Incentive Plan.
If shareholder approval of this Proposal 3 is not obtained, then the
proposed amendment will not be implemented and (i) non-employee directors will
not be eligible
16
for awards under the Incentive Plan, (ii) no stock appreciation rights may be
awarded under the Incentive Plan and (iii) the performance criteria that may
apply to performance shares shall be limited to those available before such
amendment, (iv) the Plan Administrator could amend an outstanding stock option
to lower the exercise price or cancel such option for the purpose of reissuing
at a lower price without shareholder approval and (v) the annual 100,000 share
limit on awards to a single individual would continue to apply to awards of
restricted stock, performance shares or stock bonuses which are not intended to
qualify for the "performance-based compensation" exemption from the $1 million
deduction limit of Section 162(m) of the Internal Revenue Code. The Incentive
Plan would, however, continue in effect, and awards may continue to be made
under the Incentive Plan, without regard to the amendment proposed herein.
Recommendation of Board of Directors
The Board of Directors recommends a vote IN FAVOR of the implementation of
the Incentive Plan.
AUTHORITY TO VOTE IN THE DISCRETION OF THE PROXY HOLDERS
(Item 4 on Proxy Card)
The Board of Directors is not aware of any matters to come before the
meeting other than as set forth herein. If any other matters are properly
brought before the annual meeting, the persons named in the enclosed form of
proxy will have discretionary authority to vote all proxies with respect
thereto in accordance with their judgment. Whether or not you intend to be
present at the meeting, you are urged to complete, sign and return your proxy
card promptly.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
executive officers and directors of the Corporation, and persons who own more
than ten percent of a registered class of the Corporation's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC") and the American Stock Exchange. Officers,
directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Corporation with copies of all Section 16(a) forms
they file.
Based solely on its review of the copies of such reports received by it,
and written representations from certain reporting persons that no other
reports were required during 2002, the Corporation believes that during 2002
all officers, directors and greater than ten percent beneficial owners were in
compliance with all Section 16(a) filing requirements.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 2002, certain
information concerning ownership of shares of SJW Corp. common stock by each
director of the Corporation, each of the Chief Executive Officer and the four
most highly compensated
17
executive officers of SJW Corp. and its subsidiaries for the year ended
December 31, 2002, and all directors and executive officers of SJW Corp. and
its subsidiaries as a group and beneficial owners of 5% or more of the common
stock of SJW Corp. Unless otherwise indicated, the beneficial ownership
consists of sole voting and investment power with respect to the shares
indicated, except to the extent that spouses share authority under applicable
law. The information below with respect to beneficial ownership is based upon
reports furnished by the officers and directors.
Name Shares Beneficially Owned Percent of Class
-------------------------------------------------------------------------- --------------------------- -----------------
Directors:
Mark L. Cali ............................................................. 4,321 *
J. Philip DiNapoli ....................................................... 600 *
Drew Gibson .............................................................. 1,000 *
Douglas King ............................................................. 0 --
Ronald R. James .......................................................... 200 *
George E. Moss (1)(2) .................................................... 479,812 15.8%
Roscoe Moss, Jr. (2) ..................................................... 402,978 13.2%
W. R. Roth, President & CEO .............................................. 6,350 *
Charles J. Toeniskoetter ................................................. 300 *
Frederick R. Ulrich ...................................................... 0 --
Officers:
A. Yip, Chief Financial Officer .......................................... 250 *
G. J. Belhumeur, Vice President .......................................... 918 *
R. S. Yoo, Vice President ................................................ 0 --
R. J. Pardini, Vice President ............................................ 0 --
All directors and executive officers as a group (19 individuals) ......... 898,091 29.5%
Beneficial owners of 5% or more:
Mario Gabelli (3) ........................................................ 262,500 8.6%
Gabelli Asset Management, Inc.
One Corporate Center
Rye, New York, 10580-1435
------------
* Represents less than one percent of the outstanding SJW Corp. common stock.
(1) Includes 119,139 shares held by the John Kimberly Moss Trust for which Mr.
George Moss is trustee or co-trustee.
(2) The address for George Moss and Roscoe Moss, Jr. is 4360 Worth Street, Los
Angeles, CA 90063.
(3) In Amendment No. 3 to Schedule 13(d) filed with the SEC on October 23, 2001
(the "Amendment No. 3") Mario Gabelli is deemed the beneficial owner of
262,500 shares of SJW Corp. common stock owned by Gabelli Funds, LLC, GAMCO
Investors, Inc., Gabelli Associates Fund, Gabelli Foundation, Inc, and
Gabelli Advisers, Inc. The foregoing owners of SJW Corp. common stock have
the sole power to vote and direct the disposition of shares, except as set
forth in Item 5(b) of the Amendment No. 3.
Compensation of Directors
The Corporation, San Jose Water Company and SJW Land Company pay their
non-employee directors annual retainers of $6,000, $16,000 and $5,000,
respectively. In addition, all non-employee directors of the Corporation and
San Jose Water Company are paid $1,000 for each Board or committee meeting
attended, and SJW Land Company directors are paid $500 for each Board meeting
attended.
Effective July 2002, the meeting fees for the Chairman of the Board of SJW
Corp., San Jose Water Company and SJW Land Company were increased to $5,000,
$5,000 and
18
$2,500, respectively, for each Board meeting attended. In addition, effective
July 2002 the meeting fee for the Chairman of the Corporation's Audit Committee
was increased to $3,000 for each Audit Committee meeting attended.
Upon ceasing to serve as a director of the Corporation, San Jose Water
Company or SJW Land Company, as the case may be, non-employee directors or
their estates are currently entitled to receive from the respective
corporations a retirement benefit equal to the then annual retainer paid to its
directors. This benefit is scheduled to be paid to each non-employee director
for the number of years the director served on the board up to a maximum of 10
years. In July 2002, the Committee sought and received additional guidance from
an outside compensation and benefit consultant. The consultant recommended and
the Committee and Board have approved an amendment to the Long-Term Incentive
Plan. The amendment would allow directors as well as officers to participate in
equity ownership programs in lieu of annual retainers and retirement programs.
Approval of the amendment to the Long-Term Incentive Program by the
Corporation's shareholders will be requested at the annual meeting scheduled
for April 29, 2003. The details of the proposal can be found separately in the
proxy statement as Proposal Number 3.
Committees of the Board
At the beginning of 2002, the Corporation's Board of Directors maintained
a standing Executive Committee, an Executive Compensation Committee and an
Audit Committee. During 2002, the Corporation established a Nominating &
Governance Committee and undertook a process to establish and review the
policies and practices of each of its standing committees.
The Audit Committee performs the functions set forth in its Charter, a
copy of which was first published in the Corporation's 2001 Proxy Statement.
During 2002, the Charter was revised and a copy of the revised Charter is
attached as Appendix A. Each member of the Audit Committee is independent as
defined in Section 121(a) of the AMEX listing standards.
In 2002, the United States Congress passed extensive corporate governance
legislation known as the Sarbanes-Oxley Act of 2002. Based on its current
understanding of the Act, the Board believes that each member of the Audit
Committee satisfies the independence standards set forth in its Charter. In
addition, the Board expects to name director Douglas King to act as Audit
Committee Chairman in 2003. The Board believes that Mr. King meets the
additional financial expertise standards for Audit Committee Chairman set forth
in Exchange Act Section 10A(m)3, as those standards are now understood.
The Executive Compensation Committee reviews and recommends to the Board
compensation levels for the directors and officers of the Corporation and its
subsidiaries, and administration of all employee benefit plans of the
Corporation and its subsidiaries. During 2002, the Board developed and adopted
a Charter for the Committee.
In 2002, the Board established the Nominating & Governance Committee and
adopted its Charter. The Nominating & Governance Committee develops governance
principles for the Corporation, Board performance evaluation criteria, Board
member
19
qualifications and proposes to the full Board nominees for election as
directors. The Board adopted a statement of Corporate Governance Policies for
the Corporation and its subsidiaries, along with a restated Code of Ethical
Business Conduct for the San Jose Water Company.
During 2002, there were 4 regular and 3 special meetings of the Board of
Directors, 4 meetings of the Audit Committee, 4 meetings of the Nominating &
Governance Committee, 5 meetings of the Executive Compensation Committee and 1
meeting of the Executive Committee.
Annual Report of the Audit Committee
In connection with the audited financial statements for the period ending
December 31, 2002, the Audit Committee (1) reviewed and discussed the audited
financial statements with management, (2) reviewed and discussed with the
independent auditors the matters required by Statement on Auditing Standards
No. 61 and (3) received, reviewed and discussed the written disclosures and the
letter from the independent accountants required by Independence Standards
Board Standard No. 1. Based upon these reviews and discussions, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Annual Report on Form 10-K for the fiscal year
ending December 31, 2002, filed with the Securities and Exchange Commission.
The Committee has addressed notification requirements mandated by the
Sarbanes-Oxley Act of 2002. Shareholders and employees may communicate concerns
regarding questionable accounting or auditing matters confidentially and, if
desired, anonymously with the Committee by addressing such concerns or
complaints to the Audit Committee in care of the Corporate Counsel at San Jose
Water Company, 374 W. Santa Clara Street, San Jose, CA 95113.
Audit Committee
Ronald R. James, Chairperson
J. Philip DiNapoli
Drew Gibson
Charles Toeniskoetter
Frederick R. Ulrich
Dated: March 3, 2003
20
Annual Report of the Executive Compensation Committee
As members of the Executive Compensation Committee it is our duty to
establish the compensation policies for executive officers of the Corporation
and its subsidiaries and to review, typically on an annual basis, the
compensation levels of such officers. Where the Committee deems it appropriate,
the Committee seeks advice or approval from the full Board.
In making decisions regarding executive compensation, the Committee
customarily takes into account how the compensation compares to compensation
paid by other similarly situated companies, individual performance, tenure,
internal comparability and, within the constraints imposed upon San Jose Water
Company by the regulatory process, the long-term total return to shareholders
of the Corporation. Similarly situated companies used for compensation
comparability purposes include some but not all of the companies that are
included in the Water Utility Index referenced for shareholder return
comparison under the "Five Year Performance Graph". The Committee used peer
company information as only one factor in its decision and has not targeted
compensation to fall within any particular percentile ranking among peer
companies. A goal in this process is to attract, develop and retain high
quality senior management through competitive compensation.
The Corporation's ability to adjust compensation levels for executive
officers was limited by the terms of a merger agreement begun in 1999 and not
terminated until 2001. In 2002, the Committee established salaries for
executive officers based upon the above factors and the attainment of financial
and operating performance goals in 2001.
In 2002 the direct compensation of executive officers, including the CEO,
consisted solely of a fixed salary and did not include any bonus opportunity or
other form of short-term or long-term incentive or performance compensation.
The Corporation's peer companies generally do pay short-term and long-term
incentive or performance compensation in addition to salary. As a result, the
direct compensation payable to the Corporation's executive officers, including
the CEO, was less than the median direct compensation paid similarly situated
executives of peer companies.
In the latter half of 2002 the Committee retained an outside consultant to
make recommendations regarding the compensation arrangements for the CEO and
officers of SJW Corp. and its affiliates. The consultant has recommended
changes to various compensation programs. Those recommendations include, but
are not limited to, introducing short-term and long-term incentive
compensation, generally through the implementation of an annual incentive bonus
program and stock option and other equity plans under the Long-Term Incentive
Plan approved by the Corporation's shareholders in 2002. The Committee has not
completed its consideration of those recommendations, but expects to do so in
the near future.
21
Under Section 162(m) of the Internal Revenue Code, the Corporation is
generally not allowed a federal income tax deduction for compensation, other
than certain performance based compensation, paid to the Chief Executive
Officer and the four other highest paid executive officers to the extent that
such compensation exceeds $1 million per officer in any one year. The
Corporation's proposed Long-Term Incentive Plan is structured so that
compensation deemed paid to an executive officer in connection with the
exercise of a stock option should qualify as performance-based compensation
that is not subject to the $1 million limitation. Other awards made under that
Plan may or may not so qualify depending on how they are structured. In
authorizing the type and levels of other compensation payable to executive
officers, the Committee considers, as one factor, the deductibility of that
compensation, but may deem it appropriate to authorize compensation that is not
deductible by reason of Section 162(m) or other provisions of the Internal
Revenue Code.
Executive Compensation Committee
George E. Moss, Chairman
Mark Cali
Drew Gibson
Ronald R. James
Dated: March 3, 2003
22
Executive Compensation
The following table contains certain summary information regarding the
cash compensation paid by the Corporation and its subsidiaries for each of the
Corporations' last three completed fiscal years to the Chief Executive Officer
and to the four other highest paid executive officers whose total annual salary
and bonus exceeded $100,000.
Summary Compensation Table
Name and Principal All Other
Position Year Salary Bonus Compensation
----------------------- ------ ----------- -------------------- -----------------
W. R. Roth 2002 $500,000 $24,692 (2)
President and CEO 2001 $489,230 $1,250,000 (1) $19,800 (2)
of SJW Corp., 2000 $395,000 $17,800 (2)
San Jose Water Company
and SJW Land Company
G. J. Belhumeur 2002 $251,635 $ 8,030 (3)
Vice President 2001 $182,308 $ 170,500 (1) $ 6,719 (3)
San Jose Water 2000 $170,500 $ 6,800 (3)
Company
A. Yip 2002 $251,077 $ 8,000 (3)
CFO and Vice 2001 $177,900 $ 160,500 (1) $ 6,666 (3)
President 2000 $159,450 $ 6,378 (3)
San Jose Water Company
R. S. Yoo 2002 $237,192 $ 7,980 (3)
Vice President 2001 $172,307 $ 160,500 (1) $ 6,800 (3)
San Jose Water 2000 $160,500 $ 6,420 (3)
Company
R.J. Pardini 2002 $223,865 $ 8,000 (3)
Vice President 2001 $172,808 $ 160,500 (1) $ 6,400 (3)
San Jose Water 2000 $160,500 $ 6,131 (3)
Company
------------
(1) Represents one-time payment of retention bonus in 2001 in connection with
the continued service and efforts of executives toward consummation of an
agreement of merger. The merger was mutually terminated after 17 months in
the absence of regulatory approval. Had it been consummated, the merger
would have resulted in the termination of the majority of the
Corporation's executive officers.
(2) Includes director meeting fees along with contributions paid by the San
Jose Water Company under its Salary Deferral Plan of $6,800 in 2000 and
2001, and $7,692 in 2002.
(3) Represents matching contributions paid by the San Jose Water Company under
its Salary Deferral Plan.
23
The foregoing table does not include benefits provided under San Jose
Water Company's Retirement Plan (the "Retirement Plan"), Supplemental Executive
Retirement Plan (SERP), or Executive Severance Plan.
The amounts contributed to the Retirement Plan by San Jose Water Company
to fund retirement benefits with respect to any individual employee cannot be
readily ascertained. The following table sets forth combined estimated annual
retirement benefits, payable as a straight life annuity, assuming retirement at
age 65 using the minimum benefit formula, as described in the Retirement Plan,
and the retirement benefits provided by the SERP:
Pension Plan Table
Years of Service
---------------------------------------------------------------
Remuneration 15 Years 20 Years 25 Years 30 Years 35 Years
--------------------- ---------- ---------- ---------- ---------- -----------
$175,000 ............ $ 57,750 $ 77,000 $ 91,000 $105,000 $105,000
$200,000 ............ $ 66,000 $ 88,000 $104,000 $120,000 $120,000
$225,000 ............ $ 74,250 $ 99,000 $117,000 $135,000 $135,000
$250,000 ............ $ 82,500 $110,000 $130,000 $150,000 $150,000
$275,000 ............ $ 90,750 $121,000 $143,000 $165,000 $165,000
$300,000 ............ $ 99,000 $132,000 $156,000 $180,000 $180,000
$400,000(1) ......... $220,000 $220,000 $220,000 $240,000 $240,000
$500,000(1) ......... $275,000 $275,000 $275,000 $300,000 $300,000
$600,000(1) ......... $330,000 $330,000 $330,000 $360,000 $360,000
Note (1) describes the annual benefit payable to Mr. Roth only beginning
at the later of age 55 or retirement. Mr. Roth alone is entitled to a
Retirement Benefit at the later of his attainment of fifty-five (55) years of
age or his actual retirement in an amount equal to the greater of (i) the
benefit to which he would otherwise be entitled under the SERP or (ii)
fifty-five percent (55%) of the final average compensation less benefits
payable to him from the Retirement Plan. The number of years of credited
service and the highest single year of covered compensation as of December 31,
2002 are for Mr. Roth, 13 years, $500,000; Mr. Belhumeur, 32 years, $352,808;
Ms. Yip, 16 years, $338,400; Mr. Yoo, 17 years, $332,807 and Mr. Pardini, 15
years, $333,308.
Termination of Employment and Change in Control Arrangements
Under the SJW Corp. Executive Severance Plan and the SERP (collectively,
"Plans"), a change in control shall affect any officer of SJW Corp., San Jose
Water Company or SJW Land Company who has been elected as such by the Board of
Directors of such company and is serving as such upon a change in control. In
the event of a change in control under the Plans, if such officers' employment
is terminated within two years of such change in control by the employer for
any reason other than good cause (as defined in such Plans) or by such officers
for good reason or, with respect to Mr. Roth, any voluntary termination by Mr.
Roth during the sixty (60) day period beginning on the one year anniversary of
a change in control, such officers (i) will be entitled, among other things, to
benefits consisting of three years' annual base salary and (ii) shall be deemed
to be three (3) years of age older at the time of retirement and be given three
(3) additional Years of Service (as defined in the SERP) for consideration
24
of Retirement Benefits (as defined in the SERP). Additionally, in the case of
Mr. Roth, Mr. Roth will also be entitled to a minimum Retirement Benefit. Under
the Executive Severance Plan, such officers and their eligible dependents would
also be entitled to continued medical, dental, vision and life insurance
coverage pursuant to COBRA for up to three years.
If any payment made in connection with the termination of the employment
would be subject to excise tax under Section 4999 of the Code (the "Excise
Tax"), then the aggregate present value measured at the date of the payments
and benefits to which the officer is entitled shall be limited as specified in
the Executive Severance Plan (except in the case of Mr. Roth for whom if any
payment made in connection with benefits under the Executive Severance Plan is
subject to Excise Tax or constitutes an excess parachute payment under Section
280G of the Code, then such payment will be grossed up to ensure that Mr. Roth
does not incur any out-of-pocket cost with respect to such Excise Tax or that
Mr. Roth receives the same net after-tax benefit he would have received if such
Section 280G had not been applicable).
Long-Term Incentive Plan Benefits
As of December 31, 2002, no awards had been made to officers or employees
under the Long-Term Incentive Plan, which was first approved by the
shareholders in April, 2002. It is contemplated that if the Plan is amended,
the Board will implement equity compensation for both officers and directors
during calendar year 2003.
Compensation Committee Interlocks and Insider Participation
No member of the Executive Compensation Committee was at any time during
the 2002 fiscal year or at any other time an officer or employee of the
Corporation or any of its subsidiaries. No executive officer of the Corporation
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of the
Corporation's Board of Directors or Executive Compensation Committee. Drew
Gibson, Ronald R. James, Mark Cali and George E. Moss were the non-employee
directors who served on the Executive Compensation Committee during fiscal year
2002.
Certain Relationships and Related Transactions
The Corporation had no reportable relationships or transactions for
calendar year 2002.
Fees Billed to the Corporation by KPMG LLP During Fiscal Year Ended
December 31, 2002
Audit Fees: The aggregate fees billed by KPMG LLP for professional
services rendered for the audit of the Corporation's annual financial
statements during the fiscal year ended December 31, 2002 and the reviews of
the financial statements included in the Corporation's quarterly reports on
Form 10-Q for the year ended December 31, 2002 totaled $180,000.
25
Financial Information Systems Design and Implementation Fees: The
Corporation did not engage KPMG LLP to provide advice to the Corporation
regarding financial information systems design and implementation during fiscal
year ended December 31, 2002.
All Other Fees: The aggregate fees billed by KPMG LLP during the fiscal
year ended December 31, 2002 for professional services rendered to the
Corporation other than as stated under the above captions were $45,000 incurred
for pension and other audit services and $82,000 for tax related matters.
The Audit Committee has considered and concluded that the provision of
services described in the preceding paragraph is compatible with maintaining
the independence of KPMG LLP.
Five-Year Performance Graph
The following performance graph compares the changes in the cumulative
shareholder return on the Corporation's common shares with the cumulative total
return on the Water Utility Index and the S&P 500 Index during the last five
years ended December 31, 2002. The comparison assumes $100 was invested on
January 1, 1997 in the Corporation's common shares and in each of the foregoing
indices and assumes reinvestment of dividends.
[GRAPHIC OMITTED]
[The following table was depicted as a line graph in the printed material.]
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
SJW 101 214 185 160 152
Water Utility Index 128 176 164 202 200
S&P500 129 156 142 125 97
The Water Utility Index is the 14 water company Water Utility Index
prepared by Edward D. Jones & Co.
The preceding Report of the Executive Compensation Committee and the Audit
Committee, and the preceding SJW Corp. Stock Performance Chart shall not be
deemed incorporated by reference into any previous filings under the Securities
Act of 1933, as amended, or the Exchange Act of 1934, as amended, that might
incorporate future filings, including this Proxy Statement, in whole or in
part, nor are such Report or Chart to be incorporated by reference into any
future filings.
26
Shareholder Proposals
Shareholder proposals intended to be presented at next year's annual
meeting of shareholders must comply with all applicable requirements of SEC
Rule 14a-8 and be received by the Corporation by November 18, 2003 for
inclusion in the Corporation's proxy materials relating to that meeting. In
addition, the proxy solicited by the Board of Directors for the 2004 annual
meeting of shareholders will confer discretionary authority to vote on any
proposal presented to the shareholders at the meeting for which the Company did
not have notice on or prior to February 1, 2004.
Telephone and Internet Voting
Shareholders with shares registered directly with Corporation's transfer
agent EquiServe Trust Company, N.A. ("EquiServe") may vote telephonically by
calling 1-877-PRX-VOTE (1-877-779-8683) and following the instructions on the
Proxy Card, or may vote via the Internet at http://www.eproxyvote.com/sjw by
following the instructions on the Proxy Card.
A number of brokerage firms and banks offer telephone and Internet voting
options. These programs may differ from the program provided by EquiServe for
shares registered in the name of the shareholder. Check the information
forwarded by your bank, broker or other holder of record to see which options
are available to you.
The telephone and Internet voting procedures are designed to authenticate
the identities of shareholders, to allow shareholders to give their voting
instructions and to confirm that the instructions of shareholders have been
recorded properly. SJW Corp. has been advised by counsel that the telephone and
Internet voting procedures that have been made available through EquiServe are
consistent with the requirements of applicable law. Shareholders voting via the
Internet through EquiServe should understand that there may be costs associated
with electronic access, such as usage charges from telephone companies and
Internet access providers, that any such costs must be borne by the
shareholder.
By Order of the Board of Directors
Robert A. Loehr, Corporate Secretary
San Jose, California
March 17, 2003
27
Appendix A
SJW CORP.
AUDIT COMMITTEE CHARTER
I. PURPOSE
The primary function of the Audit Committee shall be to assist the Board
of Directors in fulfilling its oversight responsibilities of: (i) the integrity
of the financial reports and other financial information provided by the
Corporation to any governmental body or the public; (ii) the Corporation's
compliance with legal and regulatory requirements, (iii) the Corporation's
systems of internal controls regarding finance, accounting, legal compliance
and ethics that management and the Board have established; (iv) the independent
accountants' qualifications and independence, and (v) the quality of
Corporation's accounting and financial reporting processes generally, including
the performance of the Corporation's finance department and the independent
accountants. Consistent with this function, the Audit Committee should
encourage continuous improvement of, and should foster adherence to, the
Corporation's policies, procedures and practices at all levels. In addition,
the Audit Committee shall oversee preparation of the report that the rules of
the Securities and Exchange Commission require to be included in the
Corporation's annual proxy statement.
In carrying out its functions hereunder, the Audit Committee's shall also:
1. Serve as an independent and objective party to monitor the
Corporation's financial department process and internal control system.
2. Review and appraise not just the acceptability but the quality of the
Corporation's financial reports and the quality of the audit efforts of the
Corporation's independent accountants.
3. Provide an open avenue of communication among the independent
accountants, financial and senior management and the Board of Directors.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be independent directors as defined
in the listing standards of the American Stock Exchange (or other principal
market on which the securities of the Corporation are traded), and free from
any relationship that, in the opinion of the Board, would interfere with the
exercise of his or her independent judgment as a member of the Committee.
All members of the Committee shall have a working familiarity with basic
finance and accounting practices and be able to read and understand financial
statements, and at least one member of the Committee shall have accounting or
related financial expertise. Committee members may enhance their familiarity
with finance and
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accounting by participating in educational programs conducted by the
Corporation or an outside consultant. The members of the Committee shall be
elected by the Board at the annual organizational meeting of the Board and
shall continue in office until their successors shall be duly elected and
qualified. Unless a Chair is elected by the full Board, the members of the
Committee may designate a Chair by majority vote of the full Committee
membership.
III. MEETINGS
The Committee shall meet at least four (4) times annually, or more
frequently as circumstances dictate. As part of its job to foster open
communication, the Committee should meet at least annually with management and
the independent accountants in separate executive sessions to discuss any
matters that the Committee or each of these groups believe should be discussed
privately. In addition, the Committee or at least its Chair should confer with
the independent accountants and management quarterly to review the
Corporation's financials consistent with Section IV.4. below.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
(a) Documents/Reports Review
1. Review and update this Charter at least annually as conditions
dictate, and at least annually assess the performance of the Audit
Committee.
2. Review the organization's annual financial statements which are
intended for submission to any governmental body or for dissemination to
the public, including any certification, report, opinion, or review of such
financial statements rendered by the independent accountants.
3. Review with management any internal control issues or concerns and
recommendations if necessary.
4. Review earnings press releases as well as financial information and
earnings guidance provided to analysts and rating agencies, and review with
management and the independent accountants the financial statements to be
incorporated in Forms 10-Q and 10-K prior to the filing with the SEC of
such reports. The Chair of the Committee may represent the entire Committee
for purposes of all or any part of this review. Disclosures under the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in SEC reports will be provided to members of the Audit
Committee for review and comment prior to filing.
(b) Independent Accountants
1. On an annual basis, the Committee shall obtain a formal written
statement from the independent accountants delineating all relationships
between the accountants and the Corporation consistent with Independence
Standards Board Standard No. 1, or successor standards established for
auditor independence, and review and discuss with the accountants all
significant relationships the accountants have with the Corporation which
may affect the accountants' independence.
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2. Oversee the performance of the independent accountants, exercise
sole authority to approve the selection or termination of the independent
accountants subject to any shareholder ratification, and exercise sole
authority to approve the appropriate audit fees and other terms of
engagement of the independent accountants for the purpose of rendering and
issuing the audit report. The Audit Committee shall approve in advance any
audit and permitted non-audit services provided by the independent
accountants. The Audit Committee may delegate to one or more of its members
who are independent directors the authority to grant pre-approval of
permitted services under such policies as may be fixed by the Audit
Committee, but the decision of any member to whom authority is so delegated
shall be presented to the full Audit Committee at the next scheduled
meeting. The Audit Committee shall also establish policies governing the
Corporation's hiring of employees or former employees of the independent
accountants.
3. Obtain and review at least annually a report from the independent
accountants describing their internal quality-control procedures and review
at least annually the qualifications and performance of the lead partner of
the independent accountants engaged on the Corporation's account.
(c) Financial Reporting Processes
1. In consultation with the independent accountants, review the
integrity of the organization's financial reporting processes, both
internal and external.
2. Review the accounting principles, policies and practices followed by
the Corporation in accounting for and reporting its financial results of
operations and consider the independent accountants' judgments about the
quality and appropriateness of the Corporation's accounting principles as
applied in its financial reporting. The Committee shall consider and
approve, if appropriate, any major changes to the Corporation's auditing
and accounting principles and practices as suggested by the independent
accountants and management.
3. Review the Corporation's quarterly unaudited and annual audited
financial statements independently with management and the independent
accountants for fullness and accuracy, and discuss with the independent
accountants the matters required to be discussed by Auditing Standard No.
61, or any successor standard, including (a) the quality as well as
acceptability of the accounting principles applied in the financial
statements, (b) new or changed accounting policies, significant estimates,
judgments, uncertainties or unusual transactions, (c) accounting policies
relating to significant financial statement items, and (d) such other
matters as shall be reported to the Audit Committee by the independent
accountants pursuant to Section 204 of the Sarbanes-Oxley Act of 2002.
(d) Process Improvement
1. Direct the establishment of regular and separate systems of
reporting, to the Audit Committee by management, personnel responsible for
the internal financial control function and the independent accountants,
including separate meetings, as determined by the Audit Committee,
regarding any significant judgments made in management's preparation of the
financial statements and the view of each as to appropriateness of such
judgments.
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2. Following completion of the annual audit, review the Corporation's
internal and disclosure control processes; review any management or
internal control letter submitted by the independent accountants; and meet
separately with management and the independent accountants to discuss any
significant difficulties encountered during the course of the audit,
including any restrictions on the scope of work or access to required
information.
3. Review any significant disagreement among management and the
independent accountants in connection with the preparation of the financial
statements. The Audit Committee shall also inquire of the independent
accountants any communication between the audit team and the firm's
national office regarding auditing or accounting issues presented by the
engagement.
4. Review with the independent accountants and management the extent to
which changes or improvements in financial or accounting practices, as
approved by the Audit Committee, have been implemented. This review should
be conducted at an appropriate time subsequent to implementation of changes
or improvements, as decided by the Committee.
(e) Ethical and Legal Compliance
1. Recommend to the full Board, and review and update periodically as
appropriate, a Code of Ethical Business Conduct and a separate ethics code
to be signed by all financial executives and review with management the
system established to enforce those codes.
2. Determine that management has the proper review system in place to
ensure that Corporation's financial statements, reports and other financial
information disseminated to governmental organizations and the public to
satisfy legal requirements.
3. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Corporation regarding accounting, internal
accounting controls or auditing matters, and (b) the confidential,
anonymous submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters.
4. Discuss with management the Corporation's policies with respect to
risk assessment and risk management, and review legal and regulatory
compliance matters including corporate securities trading policies.
5. Review, with the organization's counsel, any legal matter that could
have a significant impact on the organization's financial statements.
6. Review and approve any related party transactions.(1)
7. Perform any other activities consistent with this Charter, the
Corporation's By-laws and governing laws as the Committee or the Board
deems necessary or appropriate.
In carrying out its duties hereunder, the Audit Committee shall have the
authority to consult with and engage independent legal, accounting and other
advisers, at the expense of the Corporation, as it determines is necessary to
carry out its functions.
------------
(1) The term "related party transaction" should be read consistent with SEC
Regulation S-K, Section 404(a).
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V. ADOPTION AND AMENDMENT
This amended Charter for the Audit Committee of SJW Corp. is approved and
adopted by the Board of Directors effective October 23, 2002. It may be amended
by a majority vote of the Board of Directors at any regular or special meeting
of the Board. Copies of this charter, and all amendments thereto, are to be
distributed by the Chair to the members of the Board once a year, and to new
members of the Committee on the date of their appointment or election.
Dated:
--------------------------------- -----------------------------------
Chairman, Audit Committee of the
Board of Directors, SJW Corp.
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Appendix B
SJW CORP.
LONG-TERM INCENTIVE PLAN
Adopted by the Board of Directors: March 6, 2002
Approved by the Shareholders: April 18, 2002
Amended: March 3, 2003
Termination Date: April 17, 2012
I. PURPOSE
The objectives of the Long-Term Incentive Plan (the "Plan") are to promote
the success of SJW Corp. (the "Company") and its Affiliates by linking
incentive opportunities to the performance of the Company and its Affiliates in
meeting shareholder and customer goals, supporting the planning and goal
setting process, and offering compensation opportunities that will assist the
Company and its Affiliates in recruiting and retaining top executives and
directors from both within and outside of the water utility industries.
II. DEFINITIONS
1. "Affiliate" means a member of a controlled group of corporations of
which the Company is a member or any corporation, or unincorporated trade or
business in which the Company has an ownership interest of at least 25% of the
equity value of the entity and which the Board has designated as an Affiliate
for purposes of the Plan.
For purposes hereof, a "controlled group of corporations" shall mean a
controlled group of corporations as defined in Section 1563(a) of the Code
determined without regard to Sections 1563(a)(4) and (e)(3)(c) of the Code.
2. "Award" means the grant of an Incentive Stock Option, Nonstatutory
Stock Option, Dividend Unit, Performance Share, right to acquire Restricted
Stock, stock bonus or Stock Appreciation Right pursuant to the Plan.
3. "Board" means the Board of Directors of the Company.
4. "Chief Executive Officer" means the chief executive officer of the
Company.
5. "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
6. "Committee" means a committee appointed by the Board to administer the
Plan as provided in Section III.
7. "Common Stock" means the common stock of the Company.
8. "Company" means SJW Corp., a California corporation, its successors and
assigns.
9. "Disability" means the permanent and total disability of an individual
as determined pursuant to Section 22(e)(3) of the Code.
10. "Dividend Unit" means a right to receive, in accordance with the
provisions of the Plan, a payment equal to the dividends that are paid on a
share of Common Stock for a stated period of time.
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11. "Employee" means any individual who is employed by the Company or an
Affiliate.
12. "Exchange Act" means the Securities Exchange Act of 1934, as amended.
13. "Fair Market Value" means the value of the Common Stock on the
American Stock Exchange as of the close of the trading day.
14. "Fiscal Year" means the calendar year.
15. "Incentive Stock Option" means any Option granted pursuant to the
provisions of the Plan that is intended to be and is specifically designated as
an "incentive stock option" within the meaning of Section 422 of the Code.
16. "Non-Employee Board Member" means any member of the Board who is not
also an Employee of the Company or an Affiliate.
17. "Nonstatutory Stock Option" means any Option granted pursuant to the
provisions of the Plan that is not intended to qualify as an "incentive stock
option" under Section 422 of the Code.
18. "Option" means an Incentive Stock Option or Nonstatutory Stock Option
granted pursuant to Section VI of the Plan. "Option Agreement" means the
agreement between the Company and the Optionee that contains the terms and
conditions pertaining to an Option.
19. "Optionee" means an Employee or Non-Employee Board Member who has
received a grant of an Option pursuant to the provisions of the Plan.
20. "Participant" means an Employee, or Non-Employee Board Member,
selected by the Committee to participate in the Plan.
21. "Performance Share" means a share of Common Stock awarded to a
Participant pursuant to the provisions of Section VI of the Plan.
22. "Plan" means this Long-Term Incentive Plan.
23. "Plan Year" means the calendar year.
24. "Restricted Stock" means shares of Common Stock granted pursuant to
Section VI of the Plan.
25. "Restricted Stock Award" means an Award granted pursuant to the
provisions of Section VI of the Plan.
26. "Restricted Stock Agreement" means the agreement between the Company
and the recipient of Restricted Stock that contains the terms, conditions and
restrictions pertaining to such Restricted Stock.
27. "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
28. "San Jose Water Company" means the San Jose Water Company, a
California corporation and a wholly-owned subsidiary of the Company.
29. "Service" means the provision of services to the Company or any
Affiliate by a person as an Employee or to the Company as a Non-Employee Board
Member.
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30. "Stock Appreciation Right" means a stock appreciation right granted to
a Participant pursuant to the provisions of Section VI of the Plan.
31. "Ten Percent Shareholder" means a person who owns, or is deemed to own
pursuant to Section 424(d) of the Code, stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or of any of its Affiliates.
III. ADMINISTRATION
The Plan shall be administered by the Committee, subject to such
requirements for review and approval by the Board, as the Board may establish.
In all areas not specifically reserved by the Board for its review and
approval, decisions of the Committee concerning the Plan shall be binding on
the Company and all Participants. At the discretion of the Board, the Committee
may consist of not less than a sufficient number of "non-employee directors" so
as to, qualify the Committee to administer the Plan as contemplated by Rule
16b-3. The Board may, from time to time, remove members from, or add members
to, the Committee. The Board shall fill vacancies on the Committee, however
caused. The Board shall appoint one of the members of the Committee as
Chairman. The term "non-employee director" shall be interpreted pursuant to
Rule 16b-3. The Compensation Committee of the Board shall serve as the
Committee. The Board may at any time replace the Compensation Committee with
another Committee. In the event that the Compensation Committee shall cease to
satisfy the requirements of Rule 16b-3, the Board may, in its discretion,
appoint another Committee that shall satisfy such requirements. The Board may
appoint a subcommittee of the Board consisting of each Committee member who is
an "outside director" for purposes of Section 162(m) of the Code to administer
Awards under the Plan for the Chief Executive Officer and the four (4) most
highly compensated officers of the Company (other than the Chief Executive
Officer). If fewer than two (2) Committee members qualify as "outside
directors," the Board may appoint one (1) or more other members to such
subcommittee who do qualify as "outside directors" so that it consists of at
least two (2) members who qualify as "outside directors" for purposes of
Section 162(m) of the Code.
The Committee shall have the power and authority to adopt, amend, and
rescind administrative guidelines, rules and regulations pertaining to the
Plan, to set the terms and conditions of Awards and to interpret and rule on
any questions pertaining to any provision of the Plan.
IV. ELIGIBILITY AND LIMITATIONS ON AWARDS TO INDIVIDUALS
Officers of the Company and its Affiliates, other key Employees and
Non-Employee Board Members shall be eligible for Awards granted under the terms
of the Plan. The fact that an individual receives one Award under the Plan does
not confer on such individual the right to receive additional Awards under the
Plan. Neither the Plan nor any Award granted pursuant to the Plan shall be
deemed to confer upon any Participant any right to continue as an Employee or
Non-Employee Board Member. The Company and its Affiliates reserve the right to
terminate the employment of any Employee at any time and for any reason or for
no reason, subject to the terms of a written employment agreement executed by
both parties thereto.
B-3
No Participant shall receive Awards covering an aggregate of more than one
hundred thousand (100,000) shares of Common Stock in any calendar year;
however, such limit will not include rights to acquire Restricted Stock,
Performance Shares or stock bonuses which are not intended to qualify as
"performance-based compensation" under Section 162(m) of the Code.
V. INCENTIVE AWARDS
The Committee shall designate those key Employees and Non-Employee Board
Members who shall become Participants and shall designate the award level for
each Plan Participant.
The Committee shall designate the manner in which each Participant's Award
shall be allocated among Options, Dividend Units, Performance Shares, rights to
acquire Restricted Stock, stock bonuses and Stock Appreciation Rights and the
specific terms of the Participant's Award not specified under the Plan.
The Committee may condition the grant of Awards under the Plan upon the
attainment of specified performance goals such as earnings per share, total
shareholder return or return on capital employed, and may grant Awards in
consideration of foregoing other Awards or items of compensation.
VI. TYPES OF AWARDS
The following types of Awards may be granted under the terms of the Plan:
Options (including Incentive Stock Options and Nonstatutory Stock Options),
Performance Shares, Dividend Units, rights to acquire Restricted Stock, stock
bonuses and Stock Appreciation Rights. The Committee, in its sole discretion,
shall determine the types of Awards that shall be granted to each Participant
under the Plan.
Options, Dividend Units, Performance Shares, rights to acquire Restricted
Stock, stock bonuses and Stock Appreciation Rights granted to a Participant
shall be communicated to the Participant at the time of grant. The actual
number of Performance Shares earned shall be communicated to the Participant as
soon as practicable after the end of a performance period.
Subject to the provisions of the Plan, the Committee shall determine the
key Employees and Non-Employee Board Members to whom, and the time or times at
which, Awards shall be granted or awarded, the number of shares subject to each
Award, the applicable vesting schedule for each Award, the Dividend Units or
Performance Shares to be subject to each Award, the duration of each Award, the
time or times within which Options or Stock Appreciation Rights may be
exercised, the performance targets required to earn Performance Shares, the
duration of the Dividend Units, and the other terms and conditions of Awards,
pursuant to the terms of the Plan. The provisions and conditions of Awards need
not be the same with respect to each Participant or with respect to each Award.
Options. The Committee may grant Incentive Stock Options or Nonstatutory
Stock Options to a Participant; provided that Incentive Stock Options may be
granted only to Employees. The terms of Options granted pursuant to the Plan
shall be set forth in an Option Agreement. Options granted pursuant to the Plan
shall be subject to the
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following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the express provisions of the Plan or with
applicable law, as the Committee in its sole discretion shall deem desirable.
(a) The price per share of an Incentive Stock Option or of a
Nonstatutory Stock Option shall not be less than the Fair Market Value of
the Common Stock on the date of the grant. The price per share of an
Incentive Stock Option granted to a Ten Percent Shareholder shall not be
less than one hundred ten percent (110%) of the Fair Market Value of the
Common Stock on the date of grant.
(b) Options may be exercised with cash, stock, or a combination of cash
and stock, provided that if shares acquired pursuant to the exercise of an
Option are used, such shares shall be held by the Participant for a period
of at least six (6) months (or such longer or shorter period of time
required to avoid a charge to earnings for financial accounting purposes)
before their tender to exercise additional Option shares. In accordance
with the rules and procedures established by the Committee for this
purpose, the Option may also be exercised through a "cashless exercise"
procedure approved by the Committee, that affords Participants the
opportunity to sell immediately some or all of the shares underlying the
exercised portion of the Option in order to generate sufficient cash to pay
the Option exercise price and/or to satisfy withholding tax obligations
related to the Option exercise.
(c) No Option shall be for a term of more than ten (10) years from the
date of the grant. No Incentive Stock Option granted to a Ten Percent
shareholder shall be for a term of more than five (5) years from the date
of grant.
(d) No Option shall be transferable other than by will or by the laws
of descent and distribution and during the lifetime of the Optionee, an
Option shall be exercisable only by the Optionee and shall not be
assignable or transferable. Notwithstanding the foregoing, the Optionee may
designate one or more persons as the beneficiary or beneficiaries of his or
her outstanding Option, and that Option shall, in accordance with such
designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding such Option. Such
beneficiary or beneficiaries shall take the transferred Option subject to
all the terms and conditions of the applicable Option Agreement evidencing
each such transferred option, including (without limitation) the limited
time period during which the option may be exercised following the
Optionee's death.
Dividend Units. The Committee may grant Dividend Units to a Participant in
the Plan. Dividend Units may be granted alone or in tandem with specified
Awards for a duration to be specified by the Committee at the time of grant.
(a) A Dividend Unit is the right to receive payments equal to the
aggregate dividends payable on a share of Common Stock during the term of
the Dividend Unit.
(b) Dividend Units may be paid immediately or may be deferred and may
be payable either in cash or in the form of shares of Common Stock, as
specified by the Committee.
(c) If Dividend Units are to be paid in the form of Common Stock, the
number of shares into which cash dividend amounts are converted shall be
based on the Fair
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Market Value of one share of Common Stock on the date of conversion, a
prior date or an average of the Fair Market Value over some period of time,
as the Committee shall specify.
Performance Shares. The Committee may grant Performance Shares to
Participants in the Plan.
(a) At the time of the grant, the Committee shall determine:
(1) the performance period;
(2) the performance criteria which the Committee may use are:
operating profits (including EBITDA), net profits, earnings per share,
profit returns and margins, revenues, shareholder return and/or value
(including economic value added or shareholder value added), stock
price and working capital. Performance criteria may be measured solely
on a corporate, subsidiary or business unit basis, or a combination
thereof. Further, performance criteria may reflect absolute entity
performance or a relative comparison of entity performance to the
performance of a peer group of entities or other external measure of
the selected performance criteria. Profit, earnings and revenues used
for any performance criteria measurements shall exclude gains or losses
on operating asset sales or dispositions, asset write-downs, litigation
or claim judgments or settlements, accruals for historic environmental
obligations, effect of changes in tax law or rate on deferred tax
liabilities, accruals for reorganization and restructuring programs,
uninsured catastrophic property losses, the cumulative effect of
changes in accounting principles, and any extraordinary non-recurring
items as described in Accounting Principles Board Opinion No. 30 and/or
in management's discussion and analysis of financial performance
appearing in the Company's Annual Report on Form 10-K or annual report
to shareholders for the applicable year.
(b) At the end of the performance period, the Committee shall determine
the level of performance versus the goal, and the portion of the
Performance Shares, if any, which shall be payable to the Participants.
(c) Shares earned shall be paid as soon as practicable following the
end of the performance period.
(d) Awards may be paid in cash or Common Stock, or any combination of
or Common Stock in the sole discretion of the Committee.
Rights to Acquire Restricted Stock. Each Restricted Stock Agreement shall
be in the form and shall contain such terms and conditions as the Committee
shall deem appropriate. Agreements may change from time to time, and the terms
and conditions of separate Restricted Stock Agreement need not be identical.
Subject to the provisions of the Plan, the Committee shall have complete
authority in its sole discretion to determine the persons to whom, and the time
or times at which, grants of Restricted Stock shall be made, the number of
shares of Restricted Stock to be awarded, the price (if any) to be paid by the
recipient of the Restricted Stock, the time or times within which such Awards
may be subject to forfeiture, and all other terms and conditions of the Awards.
The Committee may condition the grant of a Restricted Stock Award upon
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the performance of Service, specified performance goals (such as earnings per
share, total shareholder return or return on capital employed) or other such
factors that the Committee may determine, in its sole discretion. Each
Restricted Stock Agreement shall include (through incorporation by reference in
the Restricted Stock Agreement of the provisions of the Plan or otherwise) the
substance of each of the following provisions.
(a) The purchase price (if any) of Restricted Stock Awards shall be not
less than the amount required to be received by the Company in order to
assure compliance with applicable state laws.
(b) The purchase price (if any) of Restricted Stock shall be paid
either in cash at the time of purchase or in any form of legal
consideration including Services, that may be acceptable to the Committee.
(c) Shares of Restricted Stock awarded under a Restricted Stock
Agreement may, but need not, be subject to a vesting schedule to be
determined by the Committee. Unless the Committee determines otherwise, no
shares of Restricted Stock subject to a vesting schedule (or subject to
performance goals) shall be issued under the Plan until such shares are
vested and/or such performance goals have been met.
(d) In the event a Participant's Service with the Company or an
Affiliate terminates, the Company may repurchase or otherwise reacquire any
or all of the shares of Restricted Stock held by the Participant which have
not vested as of the date of termination under the terms of the Restricted
Stock Agreement.
(e) Rights to acquire shares of Restricted Stock and Restricted Stock
issued thereunder shall be transferable by the Participant only upon such
terms and conditions as set forth in the Restricted Stock Agreement, as the
Committee shall determine in its discretion, so long as Common Stock
awarded under the Restricted Stock Agreement remains subject to the terms
of the Restricted Stock Agreement.
Stock Bonus Awards. Each stock bonus agreement shall be in such form and
shall contain such terms and be subject to such conditions as the Committee
shall deem appropriate. The Committee may condition the grant of a stock bonus
upon the performance of specified performance goals (such as earnings per
share, total shareholder return or return on capital employed) or other such
factors as the Committee may determine, in its sole discretion. The terms and
conditions of stock bonus agreements may change from time to time, and the
terms and conditions of separate stock bonus agreements need not be identical,
but each stock bonus agreement shall include (through incorporation hereof by
reference in the agreement or otherwise) the substance of each of the following
provisions:
(a) Consideration. A stock bonus may be awarded in consideration for
past services actually rendered to the Company or an Affiliate for its
benefit.
(b) Vesting. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to a vesting schedule to be
determined by the Committee. No shares awarded under a stock bonus which
are subject to a vesting schedule (or subject to performance goals) shall
be issued under the Plan until such shares are vested and/or such
performance goals have been met.
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(c) Termination of Service. In the event a Participant's Service with
the Company or an Affiliate terminates, the Company may reacquire any or
all of the shares of Common Stock granted to the Participant pursuant to
the stock bonus agreement which have not yet vested as of the date of the
termination of Service under the terms of the stock bonus agreement.
(d) Transferability. Rights to acquire shares of Common Stock under the
stock bonus agreement shall be transferable by the Participant only upon
such terms and conditions as are set forth in the stock bonus agreement, as
the Board shall determine in its discretion, as long as Common Stock
awarded under the stock bonus agreement remains subject to the terms of the
stock bonus agreement.
(e) Stock Appreciation Rights. Stock Appreciation Rights may be granted
alone or in tandem with other specified Awards. The terms of Stock
Appreciation Rights granted pursuant to the Plan shall be set forth in a
Stock Appreciation Rights Agreement or in an agreement governing a
specified Award, if such Stock Appreciation Rights are granted in tandem
with another Award. Stock Appreciation Rights granted pursuant to the Plan
shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the express
provisions of the Plan, or applicable law, as the Committee in its sole
discretion shall deem desirable.
(1) A Stock Appreciation Right entitles the Participant to receive a
payment in cash or shares of Common Stock equal to the appreciation, if
any, of one share of Common Stock of the Company between the grant date
of such Stock Appreciation Right and the date of exercise of the Stock
Appreciation Right. For these purposes, appreciation is defined as the
difference between (a) the Fair Market Value of a share of Common Stock
of the Company on the date of exercise of the Stock Appreciation Right
and (b) the exercise price per Stock Appreciation Right (or
accompanying Award).
(2) A Stock Appreciation Right shall become exercisable during such
times and subject to such conditions as shall be determined by the
Committee, in its sole discretion; provided, however, that a Stock
Appreciation Right shall expire no later than ten (10) years from the
date of grant and must be exercised, if at all, on or before such date.
VII. SHARES RESERVED
The total number of shares of Common Stock that may be issued or
transferred under the Plan pursuant to Awards may not exceed three hundred
thousand (300,000) shares, subject to adjustment as described in Section IX
below.
If any Award shall for any reason expire or otherwise terminate, in whole
or in part, without having been exercised in full or without the issuance of
the full number of shares subject to the Award, the shares of Common Stock not
issued under such Award shall revert to and again become available for issuance
under the Plan, provided, however, that shares underlying a Stock Appreciation
Right that is paid in cash shall not be available for subsequent issuance under
the Plan.
Common Stock may be issued from authorized but unissued shares or out of
shares held in the Company's treasury, or both.
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VIII. MISCELLANEOUS
Incentive Stock Option $100,000 Limitation. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first
time by an Optionee in any calendar year (under all plans of the Company and
its parent and subsidiary corporations as defined in Section 424 of the Code)
exceeds one hundred thousand dollars ($100,000), the Options or any portion
thereof which exceed such limit (according to the order in which they were
granted) shall be treated as Nonstatutory Stock Options.
Withholding. To the extent required by applicable federal, state, local or
foreign law, the recipient of any payment or distribution under the Plan shall
make arrangements satisfactory to the Company for the satisfaction of any tax
withholding obligations that may arise by reason of such payment or
distribution. The Company shall not be required to make such payment or
distribution until such obligations are satisfied. The Company shall have the
right to withhold from any compensation paid to the Participant.
In its sole discretion, the Committee may permit or require a Participant
to satisfy all or part of the Participant's tax withholding obligations
incident to an Award by having the Company withhold a portion of the shares
that would be otherwise issued to the Participant. Such shares shall be valued
at their Fair Market Value on the date when taxes otherwise would be withheld
in cash. The payment of withholding taxes by surrendering shares to the
Company, if permitted by the Committee, shall be subject to such restrictions
as the Committee may impose, including any restrictions required by the rules
of the Securities and Exchange Commission.
IX. ADJUSTMENTS UPON CHANGES IN STOCK
In the event of a stock split, stock dividend, or other subdivision or
combination of the Common Stock, the number of shares of Common Stock
authorized under the Plan and the share limitations on Awards to individuals
shall be adjusted proportionately. Similarly, in any event aforementioned,
there will be a proportionate adjustment in the number and exercise price of
shares of Common Stock subject to unexercised Options, Performance Shares,
Dividend Units, rights to acquire Restricted Stock, stock bonuses and Stock
Appreciation Rights.
The Committee may determine and set forth in each Award, either at the
time of grant or by amendment thereafter, the effect, if any, that any change
in beneficial ownership of stock, sale of stock or assets, merger, combination,
spin-off, reorganization or other corporate transaction, or liquidation of the
Company will have upon the term, exercisability and/or vesting of outstanding
Awards. The effect may include acceleration in whole or in part of vesting
and/or exercisability of Awards upon the occurrence of such an event or upon
certain terminations of Service within a specified period following such an
event. The grant of Awards under this Plan will in no way affect the right of
the issuer of Common Stock to adjust, reclassify, reorganize, or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate, sell or transfer all or any part of its business or assets.
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X. AMENDMENT OF THE PLAN AND AWARDS
The Board may, at any time and from time to time, amend the Plan. However,
no amendment shall be effective unless approved by the shareholders of the
Company to the extent shareholder approval is necessary to satisfy the
requirements of Section 422 of the Code. The Board may, in it sole discretion,
submit any other amendments to the Plan for shareholder approval, including,
but not limited to, amendments to the Plan intended to satisfy the requirements
of Section 162(m) of the Code and regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
Rights under any Award granted before amendment of the Plan shall not be
impaired by any amendment of the Plan unless the Participant holding such Award
consents in writing to such amendment.
The Committee may amend outstanding Awards, in its sole discretion;
provided that except as permitted under Section IX(a), (i) no outstanding Award
may be amended to lower the exercise price or may be canceled for the purpose
of reissuing such Award to a Participant at a lower exercise price without the
approval of the Company's shareholders and (ii) no such amendment shall impair
the rights of the holder thereof unless he or she consents in writing to such
amendment.
XI. TERMINATION OR SUSPENSION OF THE PLAN
The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on the day before the tenth (10th)
anniversary of the date the Plan is adopted by the Board or approved by the
shareholders of the Company, whichever is earlier. No Awards may be granted
under the Plan when the Plan is suspended or after the Plan is terminated.
XII. EFFECTIVE DATE OF PLAN
The Plan became effective on March 6, 2002 and was approved by the
shareholders on April 18, 2002.
XIII. CHOICE OF LAW
The law of the State of California shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
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