UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to [Section] 240.14a-12
RELIANT RESOURCES, INC.
(Name of each Registrant as Specified in its Charter)
-----------------
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Proxy Statement
and
Notice of 2003 Annual Meeting
Table of Contents
Notice of Annual Meeting of Stockholders.................................................. ii
Proxy Statement........................................................................... 1
Questions and Answers About the Meeting and Voting........................................ 1
PROPOSAL 1: Election of Director......................................................... 4
PROPOSAL 2: Ratification of Appointment of Independent Accountants....................... 4
PROPOSAL 3: Adoption of Amendment to Reliant Resources, Inc. Employee Stock Purchase Plan 5
Information About Our Board of Directors.................................................. 6
Board of Directors Organization and Committees............................................ 7
Stock Ownership........................................................................... 8
Principal Stockholders.................................................................... 9
Section 16(a) Beneficial Ownership Reporting Compliance................................... 9
Stock Price Performance Graph............................................................. 10
Report of the Compensation Committee...................................................... 11
Certain Relationships and Related Transactions............................................ 13
Executive Compensation Tables............................................................. 15
Employment Contracts and Severance/Change of Control Agreements........................... 17
Additional Benefits and Other Arrangements................................................ 18
Equity Compensation Plan Information...................................................... 20
Report of the Audit Committee............................................................. 21
Principal Accounting Firm Fees............................................................ 22
Summary of the Reliant Resources, Inc. Employee Stock Purchase Plan....................... 23
Inclusion of Stockholder Proposals in Proxy Materials for 2003 Annual Meeting............. 25
Advance Notice Required for Proposals and Director Nominations............................ 25
Householding.............................................................................. 25
Communicating with Us..................................................................... 25
General Information....................................................................... 26
Annual Report to Stockholders............................................................. 26
Appendix A--Reliant Resources, Inc. Audit Committee Charter............................... A-1
i
[Logo]
Notice of Annual Meeting of Stockholders
Dear Stockholder:
You are cordially invited to attend the Reliant Resources, Inc. 2003 annual
meeting of stockholders. The meeting will be held in the auditorium at 1111
Louisiana Street, Houston, Texas, at 9:00 a.m. central time, on Wednesday, June
4, 2003. At the meeting, stockholders will be asked to:
1. elect one director to our board of directors;
2. ratify the appointment of Deloitte & Touche LLP as our independent
accountants for 2003;
3. consider and vote upon a proposal to amend certain terms of the Reliant
Resources, Inc. Employee Stock Purchase Plan; and
4. conduct other business if properly raised.
Stockholders of record at the close of business on April 7, 2003 are
entitled to vote. Each share entitles the holder to one vote. You may vote by
attending the meeting or by proxy by completing the enclosed proxy card, voting
on the Internet or voting by telephone. For specific voting information, please
see "Questions and Answers about the Meeting and Voting" on page 1. Even if you
plan to attend the meeting, please sign, date and return the enclosed proxy
card or use telephone or Internet voting. This proxy statement, proxy card and
voting instructions, along with our 2002 annual report to stockholders, are
being distributed on or about May 5, 2003.
Sincerely,
/s/ Michael L. Jines
Michael L. Jines
Senior Vice President and
General Counsel
ii
RELIANT RESOURCES, INC.
1111 Louisiana Street
Houston, Texas 77002
(713) 497-3000
Proxy Statement
Questions and Answers About the Meeting and Voting
1. What is a proxy?
It is your legal designation of another person to vote the stock you own.
That other person is called a proxy. If you designate someone as your proxy in
a written document, that document also is called a proxy or a proxy card.
2. Who are the designated proxies?
Three of our directors have been designated as proxies for the 2003 annual
meeting. These three directors are Laree E. Perez, William L. Transier and E.
William Barnett.
3. What is a proxy statement?
It is a document that SEC regulations require us to give you when we ask you
to sign a proxy card designating Laree E. Perez, William L. Transier and E.
William Barnett, each as proxies to vote on your behalf.
4. What is the difference between a stockholder of record and a stockholder
who holds stock in street name?
If your shares are registered in your name, you are a stockholder of record.
If your shares are in the name of your broker or bank, your shares are held in
street name.
5. How do you get an admission card to attend the meeting?
If you are a stockholder of record, your admission card is attached to your
proxy card. You will need to bring it with you to the meeting. If you own
shares in street name, you will need to bring your most recent brokerage
statement and a photo ID with you to the meeting.
6. What different methods can you use to vote?
. By Written Proxy: All stockholders can vote by written proxy card.
. By Internet: You may vote by proxy on the Internet by going to the
website www.proxyvote.com and following the voting instructions on the
enclosed proxy. You will need your 12-digit Control Number located on
your proxy card to vote electronically.
. By Telephone: You may vote by proxy using any touch-tone telephone to
transmit your voting instructions as described on the enclosed proxy by
calling (800) 690-6903. You will need your 12-digit Control Number
located on your proxy card to vote using the telephone.
. In Person: All stockholders may vote in person at the meeting (if you
own shares in street name, you will need legal proxy to vote in person at
the meeting).
1
7. What is the record date and what does it mean?
The record date for the 2003 annual meeting is April 7, 2003. The record
date was established by our board of directors in accordance with Delaware
corporate law. Owners of record of our common stock at the close of business on
the record date are entitled to:
. receive notice of the meeting; and
. vote at the meeting and any adjournments or postponements of the meeting.
8. How can you revoke your proxy?
You can revoke your proxy prior to the completion of voting at the meeting
by:
. giving written notice to our corporate secretary at the address listed on
page 1;
. delivering a later-dated proxy; or
. voting in person at the meeting.
9. Are votes confidential?
We will continue our long-standing practice of holding the votes of all
stockholders in confidence from directors, officers and employees, except:
. as necessary to meet applicable legal requirements and to assert or
defend claims for or against us;
. in case of a contested proxy solicitation;
. if a stockholder makes a written comment on the proxy card or otherwise
communicates their vote to management; or
. to allow the independent inspectors of election to certify the results of
the vote.
10. Who counts the votes?
We have retained an independent tabulator to receive and tabulate the
proxies and an independent inspector of election to certify the results.
11. What are your voting choices when voting for the director nominee, and what
vote is needed to elect a director?
In the vote on the election of the Class I director nominee, Joel V. Staff,
to serve until the 2006 annual meeting, you may:
. vote in favor of the nominee; or
. withhold your vote as to the nominee.
The Class I director will be elected by a plurality vote.
Our board of directors recommends a vote "FOR" the nominee.
12. What are your voting choices when voting on the ratification of the
appointment of Deloitte & Touche LLP as independent auditors, and what vote
is needed to ratify their appointment?
In the vote on the ratification of the appointment of Deloitte & Touche LLP
as our independent auditors, you may:
. vote in favor of the ratification;
2
. vote against the ratification; or
. abstain from voting on the ratification.
The proposal to ratify the appointment of Deloitte & Touche LLP as our
independent auditors will require approval by the holders of a majority of the
shares entitled to vote on, and voted for or against, such proposal.
Our board of directors recommends a vote "FOR" this proposal.
13. What are your voting choices when voting on the adoption of an amendment to
Reliant Resources, Inc. Employee Stock Purchase Plan, or ESPP, and what
vote is needed to adopt the amendment to the plan?
In the vote on the approval of an amendment to the ESPP, you may:
. vote in favor of the amendment;
. vote against the amendment; or
. abstain from voting on the amendment.
The proposal to approve the amendment to the ESPP will require approval by
the holders of a majority of the shares entitled to vote on, and voted for or
against, such proposal.
Our board of directors recommends a vote "FOR" this proposal.
14. What if you do not specify a choice for a matter when returning your proxy?
You should specify your choice for each matter on the enclosed proxy. If no
specific instructions are given, proxies which are signed and returned will be
voted FOR the election of the Class I director nominee, FOR the proposal to
ratify the appointment of Deloitte & Touche LLP, and FOR the proposal to amend
the ESPP.
15. What percentage of shares of common stock must be represented at the
meeting?
In order to conduct the annual meeting, a majority of the shares entitled to
vote must be present in person or by proxy. This is referred to as a "quorum."
If you submit a properly executed proxy card, you will be considered part of
the quorum. Treasury stock, which are shares of common stock owned by Reliant
Resources, are not voted and do not count for this purpose.
16. How are abstentions and broker non-votes counted?
Abstentions and broker non-votes will be counted as present for purposes of
determining a quorum. A broker non-vote occurs when a nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner. Directors shall be
elected by a plurality of the votes cast in the election of directors. Under
Delaware corporate law, in tabulating the vote on the election of the Class I
director, abstentions and broker non-votes will be disregarded and will have no
effect in the outcome of the vote. In tabulating the vote on the ratification
of Deloitte & Touche as our independent accountants and the vote on the
approval of the amendment to the ESPP, abstentions and broker non-votes will be
disregarded and will have no effect on the outcome of the votes.
3
PROPOSAL 1: Election of Director
Our board of directors is divided into three classes having staggered terms.
Until his resignation in April 2003, R. Steve Letbetter was our chairman and
chief executive officer and was designated as a Class I director along with
Joel V. Staff. Following Mr. Letbetter's resignation, Mr. Staff assumed Mr.
Letbetter's duties and is now our acting chairman and chief executive officer.
The initial term of office of our remaining Class I director, Mr. Staff,
expires at our 2003 annual meeting, the initial term of office of the Class II
directors, Laree E. Perez and William L. Transier, will expire at our 2004
annual meeting and the initial term of office of the Class III directors, E.
William Barnett and Donald J. Breeding, will expire at our 2005 annual meeting.
Following their initial terms, each class of directors will serve for a term of
three years and until their successors are elected and qualified.
Our board of directors has nominated its current Class I director, Mr.
Staff, for reelection to our board of directors as a Class I director. We have
no reason to believe that Mr. Staff will be unavailable for election; however,
if he becomes unavailable for election, our board of directors can name a
substitute nominee and proxies will be voted for the substitute nominee
pursuant to discretionary authority, unless withheld.
Our board of directors recommends a vote FOR the Class I director nominee.
--------------------------------------------------------------------------------
PROPOSAL 2: Ratification of Appointment of Independent Accountants
Our audit committee periodically reviews our choice of independent auditors
and considers the benefits and detriments of changing independent audit firms.
We do not have a policy that sets a term limit for our independent accountants.
In part due to the new requirements of the Sarbanes-Oxley Act of 2002, and
other current and future regulations, we expect that our audit and
audit-related expenses will increase for 2003 over the 2002 amounts, as
described on page 22. The knowledge, expertise and efficiencies developed over
time by Deloitte & Touche LLP with regard to us would not likely be duplicated
by a new firm for a number of years. Similar commitments of time and expense
would be involved in any related changes in the providers of non-audit services
as described under principal accounting firm fees on page 22. The audit
committee has considered these and other matters in its selection process.
Our board of directors, upon the recommendation of the audit committee, has
appointed Deloitte & Touche LLP as independent accountants to conduct our
annual audit for the year 2003. Deloitte & Touche LLP has served as our
independent accountants since our incorporation in 2000. Ratification requires
the affirmative vote of the holders of a majority of the shares entitled to
vote on, and voted for or against, the matter. If the appointment is not
ratified by our stockholders, our board of directors may reconsider the
appointment.
Representatives of Deloitte & Touche LLP will be present at the annual
meeting and will have an opportunity to make a statement if they wish. They
will be available to respond to appropriate questions from stockholders at the
meeting.
Our board of directors recommends a vote FOR the ratification of the
appointment of Deloitte & Touche LLP as independent accountants.
4
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PROPOSAL 3: Adoption of Amendment to Reliant Resources, Inc. Employee Stock
Purchase Plan ("ESPP")
We are asking for your approval of an amendment to the ESPP. The amendment
would increase the number of shares authorized for issuance under the plan from
3 million shares to 18 million shares. Our board of directors believes that the
amendment to the ESPP is important in securing for Reliant Resources and its
stockholders the benefits arising from ownership of common stock by its
employees. The amendment makes no additional material changes to the ESPP. For
a summary of the ESPP, see "Summary of the Reliant Resources, Inc. Employee
Stock Purchase Plan" on page 23.
Stockholder approval for the amendment is being sought so that the ESPP will
continue to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986. In January 2003, our board of directors
adopted the amendment and directed that the amendment be submitted to the
stockholders for approval at the 2003 annual meeting. The amendment will be
approved, if a quorum is present, upon the affirmative vote of the holders of a
majority of the shares entitled to vote on, and voted for or against, the
matter.
Our board of directors recommends a vote FOR the approval of the amendment
to the ESPP.
5
Information About Our Board of Directors
--------------------------------------------------------------------------------
Nominee for Class I Director--Term Expiring 2006
--------------------------------------------------------------------------------
Joel V. Staff Director since October 2002
Age 59
Mr. Staff has served as our chairman and chief executive officer since April
2003. Until May 2002, he was with National-Oilwell, Inc., where he served as
chairman, president and chief executive officer from July 1993 until May 2001.
Previously, Mr. Staff spent 17 years with Baker Hughes, Inc. where he held
various financial and general management positions, including senior vice
president of the parent company and president of both the drilling and
production groups. Mr. Staff serves on the board of directors of
National-Oilwell, Inc. where he is a member of its executive committee and
Ensco International, Incorporated, where he is a member of its audit committee.
He is chairman of the board of directors of T-3 Energy Services, Inc., where he
also serves as chairman of T-3 Energy Services' compensation and nominating
committee and as a member of its audit committee.
--------------------------------------------------------------------------------
Incumbent Class II Directors--Term Expiring 2004
--------------------------------------------------------------------------------
Laree E. Perez Director since April 2002
Age 49
Ms. Perez is an independent financial consultant in Albuquerque, New Mexico
with the Medallion Company. From February 1996 until September 2002, she was
Vice President of Loomis, Sayles & Company, L.P. Ms. Perez was co-founder,
president and chief executive officer of Medallion Investment Company, Inc.
from November 1991 until it was acquired by Loomis Sayles in 1996.
William L. Transier Director since December 2002
Age 48
Mr. Transier has served as executive vice president and chief financial officer
of Ocean Energy, Inc. since March 1999. From September 1998 to March 1999, he
served as executive vice president and chief financial officer of Seagull
Energy Corporation. From May 1996 to September 1998, he served as senior vice
president and chief financial officer of Seagull Energy Corporation. Mr.
Transier is also a director of Cal Dive International, Inc.
--------------------------------------------------------------------------------
Incumbent Class III Directors--Term Expiring 2005
--------------------------------------------------------------------------------
E. William Barnett Director since October 2002
Age 70
Mr. Barnett is a retired partner and currently senior counsel with Baker
Botts LLP. He began practicing law with Baker Botts in 1958 and served as
managing partner from 1984 through the end of 1997. He serves on the board of
directors of numerous educational, health care and community organizations
including chairman of the board of trustees of Rice University and life trustee
of The University of Texas Law School Foundation.
Donald J. Breeding Director since October 2002
Age 68
Mr. Breeding has been president and chief executive officer of Airline
Management, LLC, engaged in aviation and airline consulting, since 1997. From
1992 to 1997, he was president and chief executive officer of Continental
Micronesia, a majority-owned subsidiary of Continental Airlines. From 1988 to
1992, he was senior vice president of operations for Continental Airlines with
responsibility for all flying operations activities of the company and
responsibility for Continental Express. Mr. Breeding serves as a member of the
board of directors of Pinnacle Airlines, Inc. and Miami Air International.
6
Board of Directors Organization and Committees
Our board of directors directs the management of the business and affairs of
Reliant Resources. Our board of directors appoints committees to help carry out
its duties. In 2002, our board of directors met 16 times and the committees met
a total of 24 times. Each director attended more than 75% of the meetings of
our board of directors and the committees on which he or she served. Our board
of directors has the following committees: the audit committee, the
compensation committee and the nominating & governance committee. Each of these
committees is composed entirely of non-employee directors.
The following table describes the members of each of the committees as of
December 31, 2002, its primary responsibilities and the number of meetings held
during 2002:
Members Responsibilities Meetings Held
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AUDIT . oversees the quality and integrity of our financial statements; 22
. oversees our compliance with legal and regulatory
Laree E. Perez (Chairman) requirements;
Joel V. Staff* . oversees our independent auditor's qualifications and
William L. Transier independence;
. oversees the performance of our internal audit function and
*In connection with his appointment as our independent auditors;
chairman and chief executive officer in . selects the firm of independent public accountants to audit
April 2003, Mr. Staff resigned from the our financial statements and those of our subsidiaries;
audit committee, and Mr. Breeding was . reviews and approves the plan and scope of the independent
appointed to the audit committee. public accountants' audit and non-audit services and related
fees; and
. performs such other functions as our board of directors may
assign to the audit committee from time to time.
The audit committee's report is on page 21 and its charter is
attached as Appendix A.
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COMPENSATION . reviews, evaluates, and approves our agreements, plans, 2
policies and programs to compensate our officers and
Joel V. Staff (Chairman)* directors;
E. William Barnett . produces a report on executive compensation each year to be
William L. Transier included in the proxy statement for our annual meeting;
. discharges the responsibilities of our board of directors
*In connection with his appointment as our relating to compensation of our officers and directors; and
chairman and chief executive officer in . performs such other functions as our board of directors may
April 2003, Mr. Staff resigned from the assign to the compensation committee from time to time.
compensation committee. The compensation committee's report on executive compensation
begins on page 11.
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NOMINATING & GOVERNANCE . assists our board of directors by identifying individuals -- *
qualified to become board of directors members and to
E. William Barnett (Chairman) recommend that our board of directors select the director * The nominating
Donald J. Breeding nominees for election at the annual meetings of stockholders & governance
Laree E. Perez or for appointment to fill vacancies; committee was
. recommends director nominees for each committee of our formed in
board of directors; January 2003.
. advises our board of directors about appropriate composition
of our board of directors and its committees;
. advises our board of directors about and recommends to our
board of directors appropriate corporate governance practices
and assists our board of directors in implementing those
practices;
. leads the annual review of the performance of our board of
directors and its committees; and
. performs such other functions as our board of directors may
assign to the nominating & governance committee from time
to time.
-----------------------------------------------------------------------------------------------------------------------------------
7
Compensation of Directors
Our employees received no additional compensation for serving as directors.
During the first quarter of 2003, the compensation plan for each incumbent
non-employee director which consists of an annual retainer of $45,000, a fee of
$2,000 for each board of directors and committee meeting attended and an annual
grant of 2,500 restricted shares of our common stock and 5,000 stock options
was approved. Also, in March 2003, each incumbent non-employee director
received a one-time initial stock grant of 5,000 shares of restricted stock.
Those who serve on a committee, other than audit, also receive an additional
$5,000 committee retainer. Those who serve on the audit committee receive a
$10,000 committee retainer. New non-employee directors will also receive 5,000
restricted shares upon initial election to our board of directors. Directors
may defer all or part of their annual retainer fees and meeting fees under
Reliant Resources' deferred compensation plan. Also, directors may elect to
receive their fees in restricted stock rather than cash and receive a 25% match
in restricted stock. The restricted stock would vest at the end of a director's
elected term and would be paid to the director upon leaving the board of
directors.
Stock Ownership
The following table sets forth information regarding beneficial ownership of
our common stock by each current director and nominee, our named executive
officers, and our directors, nominee and named executive officers as a group,
all as of March 27, 2003:
Percent
Name and Address Amount and Nature of of
of Beneficial Owner/(1)/ Beneficial Ownership/(2)/ Class
----------------------- ------------------------ -------
E. William Barnett............................... 7,615/(3)/ *
Donald J. Breeding............................... 7,879/(3)/ *
Robert W. Harvey................................. 994,080/(4)(5)/ *
Mark M. Jacobs................................... 443,522/(5)/ *
Hugh Rice Kelly.................................. 775,696/(4)(6)/ *
R. Steve Letbetter............................... 3,768,306/(4)(5)(7)/ 1.3%
Stephen W. Naeve................................. 1,255,342/(4)(5)/ *
Laree E. Perez................................... 9,865/(3)/ *
Joel V. Staff.................................... 9,678/(3)/ *
William L. Transier.............................. 7,500/(3)/ *
All of the above officers and directors and other
executive officers as a group (11 persons)..... 7,298,666/(4)(5)/ 2.4%
--------
* Indicates that such director's or officer's ownership does not exceed 1% of
our outstanding common stock.
(1) The address of each beneficial owner is c/o Reliant Resources, Inc., 1111
Louisiana Street, Houston, Texas 77002.
(2) Includes shares owned directly or through the Reliant Resources, Inc.
Savings Plan.
(3) Includes 7,500 shares of restricted stock awarded in March 2003 under the
terms of our director compensation plan over which directors have no voting
or investment power until such shares vest upon the earlier or retirement
or at such time as he/she does not stand for reelection to the board of
directors.
(4) Includes shares covered by Reliant Resources' stock options and other
rights to acquire stock that are exercisable within 60 days, as follows:
Mr. Harvey, 625,970 shares; Mr. Kelly, 578,629 shares; Mr. Letbetter,
2,884,922; shares; Mr. Naeve, 675,365 shares; and the group, 4,764,886
shares.
(5) Includes shares held under the terms of compensation plans over which
executive officers have no voting or investment power until vesting in
accordance with the terms of the plans as follows: Mr. Harvey, 358,667
shares; Mr. Jacobs, 442,976 shares; Mr. Letbetter, 601,890 shares; Mr.
Naeve, 396,667 shares; and the group, 1,800,200 shares.
(6) Upon Mr. Kelly's retirement, 221,501 options became fully vested in
accordance with the terms of his severance agreement.
(7) Upon Mr. Letbetter's resignation, 1,250,001 options became fully vested in
accordance with the terms of his severance agreement.
8
Principal Stockholders
Set forth in the table below is information about persons we know to be the
beneficial owners of more than five percent of the issued and outstanding
common stock based solely on our review of the Schedule 13G Statement of
Beneficial Ownership filed by such person as of the date of such filing:
Percent
Name and Address Amount and Nature of of
of Beneficial Owner Beneficial Ownership Class
------------------- -------------------- -------
David A. Tepper.......................... 16,755,600/(1)/ 5.7%
c/o Appaloosa Partners Inc.,
26 Main Street, First Floor,
Chatham, NJ 07928
BKF Capital Group, Inc................... 23,330,506/(2)/ 8.0%
One Rockefeller Plaza
New York, NY 10020
Barrow, Hanley, Mewhinney & Strauss, Inc. 21,757,526 7.5%
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, TX 75204-2429
The Mutuelles AXA Group.................. 16,090,150/(3)/ 5.5%
370, rue Saint Aonore
75001 Paris, France
--------
(1) Includes 4,000,000 shares owned directly by Mr. Tepper and 12,755,600
shares owned by entities controlled by Mr. Tepper.
(2) Includes shares owned by a wholly-owned subsidiary of BKF Capital Group,
Inc., John A. Levin & Co., Inc.
(3) Includes shares owned by a subsidiary of The Mutuelles AXA group, Alliance
Capital Management L.P.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers, and holders of more than 10% of Reliant Resources' common
stock to file with the SEC initial reports of ownership and reports of changes
in ownership of Reliant Resources' common stock. We believe that during the
fiscal year ended December 31, 2002, our officers and directors complied with
these filing requirements.
9
Stock Price Performance Graph
The following graph shows the quarterly change in the cumulative total
stockholder return on our common stock since our initial public offering in May
2001, as well as the S&P 500 Index, and a group of our peer companies comprised
of Calpine Corp., Dominion Resources, Inc., Duke Energy Corp., Dynegy, Inc., El
Paso Corp., Exelon Corp., Mirant Corp., TXU Corp., The Williams Companies, Inc.
and us for the same period. Reliant Resources common stock trades on the New
York Stock Exchange under the symbol "RRI."
Comparison of Cumulative Total Return
Among Reliant Resources, Inc., S&P 500 Index and Peer Group
Companies from May 1, 2001 through December 31, 2002/ (1)(2)/
[CHART]
RELIANT RESOURCES INC S & P 500 INDEX PEER GROUP
May 2001 100.00 100.00 100.00
Jun 2001 82.33 96.90 85.38
Sep 2001 54.00 82.68 69.98
Dec 2001 55.03 91.52 69.00
Mar 2002 56.37 91.77 70.31
Jun 2002 29.17 79.47 50.09
Sep 2002 5.83 65.74 33.26
Dec 2002 10.67 71.29 31.90
INDEXED RETURNS/(1)(2)/
Quarter Ending
Base
Period
May June September December March June September December
Company/Index 2001 2001 2001 2001 2002 2002 2002 2002
----------------- ------ ------ --------- -------- ------ ------ --------- --------
Reliant Resources $100 $82.33 $54.00 $55.03 $56.37 $29.17 $ 5.83 $10.67
S&P 500 Index.... 100 96.90 82.68 91.52 91.77 79.47 65.74 71.29
Peer Group....... 100 85.38 69.98 69.01 70.31 50.09 33.26 31.90
--------
(1) Assumes that the value of the investment in the Reliant Resources common
stock and each index was $100 on May 1, 2001.
(2) Historical stock price performance is not necessarily indicative of future
price performance.
10
Report of the Compensation Committee
Compensation Policy
Reliant Resources' executive compensation policy is to have compensation
programs that:
. strengthen the relationship between pay and performance;
. attract, retain and encourage the development of highly qualified and
experienced executives;
. strengthen the relationship between executives and stockholder interests
by emphasizing equity compensation;
. promote overall corporate performance; and
. provide compensation that is competitive with the external market and
equitable among other executives within the organization.
Reliant Resources retains an independent consulting firm each year to review
the executive compensation practices of integrated energy and other industrial
companies considered comparable to Reliant Resources in terms of size, type of
business, and compensation philosophy. The companies included in the
compensation review are not identical to the companies referred to in the stock
performance graph on page 10 because the compensation committee believes that
Reliant Resources' most direct competitors for executive talent are not limited
to the companies included in the stock performance graph. The compensation
committee considers the compensation data obtained from the comparable
companies in establishing ranges for total compensation for Reliant Resources'
executive officers, as well as the mix of compensation elements, primarily base
salary and annual and long-term incentives. In establishing individual
compensation targets, the compensation committee considers level and nature of
responsibility, experience and its own subjective assessment of performance. In
making these determinations, the compensation committee also takes into account
the chief executive officer's evaluations of performance of other executive
officers. The compensation committee generally considers that the objectives of
Reliant Resources' compensation policy are best served when total compensation
for its executives is targeted near the 50th percentile of the market
represented by the companies included in the compensation review. The plan is
designed to pay near the 75th percentile when performance is superior.
Stock ownership guidelines, applicable to all of the officers, are
established for Reliant Resources common stock ownership with a value of five
times base salary for the chief executive officer, three times base salary for
the chief operating officer, chief financial officer and executive vice
presidents, and two times base salary for other officers.
The compensation committee periodically evaluates Reliant Resources'
executive compensation programs in light of Section 162(m) of the Internal
Revenue Code. This Code Section generally disallows the deductibility of
compensation in excess of $1 million for certain executive officers, but
excludes from the limitation certain qualifying performance-based compensation.
While the compensation committee structures its compensation programs in a
manner that maximizes tax deductibility, it recognizes that there may be
situations in which the best interests of stockholders are served by
administering some elements of compensation such that they occasionally may not
meet the requirements for exclusion under Code Section 162(m). The Reliant
Resources, Inc. 2002 Long-term Incentive Plan and the Reliant Resources, Inc.
2002 Annual Incentive Compensation Plan for Executive Officers have been
approved by our stockholders so as to maintain deductibility of payments under
those plans.
Components of Compensation
The key elements of Reliant Resources' executive compensation program are
base salary, annual incentive awards and long-term incentive awards. The
compensation committee evaluates each element of compensation
11
separately and in relation to the other elements of an executive's total
compensation package. The percentage of an executive's compensation that is
variable or performance-based generally increases with higher levels of total
compensation. The result is that the majority of the executive officers'
compensation is considered at risk. The ultimate value of this at risk
compensation is determined based on the performance of Reliant Resources' and
its common stock price performance.
Base Salaries. The compensation committee's determinations concerning each
executive officer's base salary are based on the compensation committee's
analysis of salary levels for executive officer positions in the competitive
market, and its subjective evaluation of and management's evaluation of each
executive officer's individual performance and level of responsibility. Mr.
Letbetter's performance was evaluated solely by the compensation committee.
Reliant Resources generally targets base salaries to the median of the
competitive market.
Annual Incentive Compensation. Annual bonuses are paid pursuant to Reliant
Resources' annual incentive compensation plan, which provides for cash bonuses
based on achievement over the course of the year of performance objectives
approved by the compensation committee at the commencement of the year. Target
annual incentives established at the beginning of the year 2002 for Reliant
Resources' executive officers ranged from 45% to 130% of base salary. Depending
on the performance objectives achieved each year, performance-based payouts can
vary from 0% to 200% of the targeted amount. The performance goals for 2002
were based entirely on adjusted earnings per share for the executive officers,
including Mr. Letbetter. The earnings per share performance measure for 2002
was not attained; therefore, the named officers did not receive an award. One
executive officer did receive a nominal special annual bonus.
Long-term Incentive Plan. Reliant Resources generally utilizes an approach
to long-term incentives that involves stock options and full-value equity
awards. For 2002, Reliant Resources used two incentive vehicles, stock options
and performance shares. Under that approach, officers received awards of
performance shares based on performance goals measurable over a three year
performance cycle. Payout levels for performance shares are calculated by
determining the percentage of achievement and can range from 0% to 150% of
target. For the performance period beginning in 2002, performance goals are
based on Reliant Resources' total shareholder return compared to the companies
included in the stock performance graph.
In addition to the performance shares, annual grants of stock options under
Reliant Resources' long-term incentive plan are made at an option price not
less then the fair market value of the common stock on the date of grant. This
design is intended to focus executive officers on the creation of the
shareholder value over the long term and encourage equity ownership in Reliant
Resources. Information concerning option grants in the year 2002, including
grant date present values, is shown in the table of option grants in last
fiscal year on page 17.
Reliant Resources executives who participated in the CenterPoint Energy,
Inc., formerly Reliant Energy, Incorporated ("CenterPoint") performance shares
plan for the performance period ending on December 31, 2001 received shares of
CenterPoint common stock based on performance objectives set at the time of the
award.
Chief Executive Officer Compensation
Reliant Resources' outside compensation consultants prepared an independent
report on our chief executive officer's compensation, which took into
consideration Reliant Resources' size and complexity, and the markets in which
it competes for talent. In evaluating Mr. Letbetter's total compensation, the
compensation committee considered his contributions to the overall results of
Reliant Resources through his leadership and individual performance. The
compensation committee believes that Mr. Letbetter's compensation package was
intended to focus his attention on creating substantial improvements in
shareholder value. During 2001, the compensation committee set Mr. Letbetter's
base salary at $1,000,000, which the compensation committee believed positioned
his base salary at approximately the median of the competitive market. His
salary has not been increased since that time. His annual incentive target was
set at 130% of base salary. His 2002 long-term incentive awards were made
12
based on a number of shares consistent with the awards granted in 2001. The
2001 award was determined by using the present value approach to valuing stock
options. The compensation committee believed that if the stock price
appreciated at above market levels, the value of his long term incentive
awards, when combined with his annual cash compensation, would have positioned
Mr. Letbetter's total direct compensation near the 50th percentile of the
competitive market, when targeted incentive plan performance expectations were
met. If superior performance had been achieved, his compensation would be have
been closer to the 75th percentile.
The decisions regarding executive officer compensation for 2002 were made by
a previous compensation committee; therefore, the following individuals did not
approve the long-term grants made at that time. They have since reviewed the
base pay, short-term incentive targets and methodology for long-term grants for
2003.
Joel V. Staff, Chairman*
E. William Barnett
William L. Transier
* Mr. Staff resigned from the compensation committee in April 2003 in
connection with his appointment as our chairman and chief executive officer.
Certain Relationships and Related Transactions
Agreements With CenterPoint
Prior to the distribution in September 2002, CenterPoint owned approximately
83% of our outstanding shares of common stock. As a result of the distribution,
CenterPoint distributed all shares of our common stock it held to its
stockholders and ceased to be an owner of more than 5% of our outstanding
common stock.
Master Separation Agreement. Shortly before our initial public offering, or
IPO, we entered into a master separation agreement with CenterPoint. The
agreement provided for the separation of our assets and businesses from those
of CenterPoint. It also contains agreements governing the relationship between
CenterPoint and us after our IPO, and in some cases after the distribution of
all shares of our common stock held by CenterPoint to its stockholders, or the
distribution, and specifies the related ancillary agreements that we have
signed with CenterPoint, some of which are described in further detail below.
The agreement provides for cross-indemnities intended to place sole
financial responsibility on us and our subsidiaries for all liabilities (except
for certain possible tax liabilities) associated with the current and
historical businesses and operations we conduct after giving effect to the
separation, regardless of the time those liabilities arise, and to place sole
financial responsibility for liabilities associated with CenterPoint's other
businesses with CenterPoint and its other subsidiaries. Each party has also
agreed to assume and be responsible for some specified liabilities associated
with activities and operations of the other party and its subsidiaries to the
extent performed for or on behalf of the other party's current or historical
business.
The agreement also requires us to indemnify CenterPoint for any untrue
statement of a material fact, or omission of a material fact necessary to make
any statement not misleading, in the registration statement or prospectus that
we filed with the SEC in connection with our IPO.
Texas Genco Option. In connection with the separation of our businesses
from those of CenterPoint, CenterPoint granted us an option to purchase all of
the shares of capital stock owned by CenterPoint in January 2004 of Texas Genco
Holdings, Inc., or Texas Genco, which holds the Texas generating assets of
CenterPoint's electric utility division.
Service Agreements. We have entered into agreements with CenterPoint under
which CenterPoint provides us, on an interim basis, various corporate support
services, information technology services and other previously
13
shared services such as corporate security, facilities management, accounts
receivable, accounts payable, remittance processing and payroll, office support
services and purchasing and logistics. The charges we pay CenterPoint for these
services are generally intended to allow CenterPoint to recover its fully
allocated costs of providing the services, plus out-of-pocket costs and
expenses. In addition, pursuant to lease agreements, CenterPoint will lease us
office space in its headquarters building and various other locations in
Houston, Texas for various terms.
Payment to CenterPoint. To the extent that our price to beat for electric
service to residential and small commercial customers in CenterPoint's Houston
service territory during 2002 and 2003 exceeds the market price of electricity,
we may be required to make a significant payment to CenterPoint in 2004. As of
December 31, 2002, our estimate for the payment related to residential
customers is between $160 million and $190 million, with a most probable
estimate of $175 million.
Guarantee of Certain Benefit Payments. We have guaranteed, in the event
CenterPoint becomes insolvent, certain non-qualified benefits of CenterPoint's
and its subsidiaries' existing retirees at the distribution totaling
approximately $58 million.
Transportation Agreement. Prior to our IPO, Reliant Energy Services, Inc.
(our wholly-owned trading subsidiary) entered into an agreement whereby a
subsidiary of CenterPoint agreed to reimburse Reliant Energy Services, Inc. for
any transportation payments made under a transportation agreement with ANR
Pipeline Company and for the refund of $41 million due to ANR Pipeline Company,
an unaffiliated company.
Generating Capacity Auction Line of Credit. On October 1, 2002, our retail
energy segment, through a subsidiary, entered into a master power purchasing
contract with Texas Genco covering, among other things, our purchase of
capacity and/or energy from Texas Genco's generating facilities. In connection
with the March 2003 refinancing, this contract has been amended to grant Texas
Genco a security interest in the accounts receivable and related assets of
certain retail energy segment subsidiaries, the priority of which is subject to
certain permitted prior financing arrangements, and the junior liens granted to
the lenders under the March 2003 refinancing. In addition, many of the covenant
restrictions contained in the contract were removed in the amendment.
Various Other Agreements. In connection with the separation of our
businesses from those of CenterPoint, we have entered into other agreements
providing for, among other things, mutual indemnities and releases with respect
to our respective businesses and operations, matters relating to corporate
governance, matters relating to responsibility for employee compensation and
benefits, and the allocation of tax liabilities. In addition, we and
CenterPoint have entered into various agreements relating to ongoing commercial
arrangements including, among other things, the leasing of optical fiber and
related maintenance activities, gas purchasing and agency matters, and
subcontracting energy services under existing contracts.
For more information concerning certain relationships and related
transactions between us and CenterPoint, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Related Party
Transactions--Agreements with CenterPoint" in our Form 10-K/A for the year
ended December 31, 2002.
Additional Related Transactions
The law firm of Baker Botts LLP provides legal services to the company. E.
William Barnett is employed as senior counsel at Baker Botts LLP. Fees paid by
Reliant Resources to Baker Botts LLP did not exceed five percent of such law
firm's gross revenues for its last fiscal year.
The law firm of Skadden, Arps, Slate, Meagher & Flom LLP provides legal
services to the company. The brother of Stephen W. Naeve is a partner at
Skadden, Arps, Slate, Meagher & Flom LLP. Fees paid by Reliant Resources to
Skadden, Arps, Slate, Meagher & Flom LLP did not exceed five percent of such
law firm's gross revenues for its last fiscal year.
In connection with Robert W. Harvey's initial employment, he was loaned
$250,000 which loan was assumed by us. This loan bears interest at a rate of 8%
and principal and interest are to be forgiven in annual installments through
May 2004 so long as Mr. Harvey remains employed by us or one of our
subsidiaries as of each relevant anniversary of his employment date. The amount
of loan forgiveness for 2002 was $54,907.
14
Executive Compensation Tables
These tables show the compensation of the chief executive officer and the
four other most highly compensated executive officers. Reported compensation
for 2000 was paid by CenterPoint.
Summary Compensation Table
for Years Ending December 31, 2000, 2001 and 2002
Annual Compensation Long-Term Compensation
-------------------------------------- ---------------------------------
Securities
Restricted Underlying
Other Annual Stock Option LTIP
Name and Principal Position Year Salary/(1)/ Bonus/(1)/ Compensation/(2)/ Award/(3)/ Awards/(4)/ Payouts/(5)/
--------------------------- ---- ---------- ---------- ---------------- ---------- ---------- -----------
R. Steve Letbetter/(7)/....... 2002 $1,000,000 -- $44,919 -- 700,000 $379,079
Former Chairman and 2001 983,750 $1,739,270 2,514 $1,690,000 850,000 812,479
Chief Executive Officer 2000 913,750 2,101,620 393 -- 400,000 213,166
Stephen W. Naeve.............. 2002 596,875 -- 141 -- 340,000 228,309
President and 2001 568,750 773,500 88 901,345 420,000 334,560
Chief Operating Officer 2000 537,500 752,500 81 -- 175,000 102,489
Robert W. Harvey/(8)/......... 2002 575,000 -- 2,701 -- 340,000 237,314
Executive Vice President & 2001 568,750 773,500 2,720 901,345 420,000 --
President - Retail Business 2000 537,500 752,500 613 -- 175,000 --
Hugh Rice Kelly/(9)/.......... 2002 446,250 -- 3,427 -- 130,000 139,803
Former Senior Vice President, 2001 431,250 322,575 3,311 -- 160,000 382,360
General Counsel and Corporate
Secretary 2000 412,500 408,375 1,135 -- 80,000 134,970
Mark M. Jacobs/(10)/.......... 2002 202,865 -- -- 959,629 318,667 --
Executive Vice President and
Chief Financial Officer
All Other
Name and Principal Position Compensation/(6)/
--------------------------- ----------------
R. Steve Letbetter/(7)/....... $208,690
Former Chairman and 315,542
Chief Executive Officer 121,472
Stephen W. Naeve.............. 107,241
President and 120,259
Chief Operating Officer 81,290
Robert W. Harvey/(8)/......... 154,321
Executive Vice President & 166,573
President - Retail Business 123,014
Hugh Rice Kelly/(9)/.......... 104,186
Former Senior Vice President, 108,861
General Counsel and Corporate
Secretary 84,291
Mark M. Jacobs/(10)/.......... 11,870
Executive Vice President and
Chief Financial Officer
--------
(1) The amounts shown include salary and bonus earned as well as earned but
deferred compensation.
(2) The amounts shown include tax gross-ups paid to compensate for tax
consequences of imputed income under the executive life insurance plan and
the discount for any shares of our stock purchased under our employee stock
purchase plan. Mr. Letbetter's amount also includes preferential interest
paid on the deferred compensation, that he elected to receive in 2002, in
excess of 120% of the applicable federal long-term rate.
(3) On July 29, 2002, Mr. Jacobs was granted an award of 205,488 shares of our
restricted stock, which vest in equal installments on the first, second and
third anniversaries of the date of grant. The amount shown is based on the
closing price of the underlying shares on that date. On May 4, 2001, the
following awards of our restricted stock were granted: Mr. Letbetter,
50,000 shares; Mr. Naeve, 26,667 shares and Mr. Harvey, 26,667 shares. The
amounts shown are based on the closing prices of those shares on May 4,
2001. The aggregate value of restricted stock awards held as of December
31, 2002, based on closing sales prices of the underlying shares on that
date, was $160,000 for Mr. Letbetter, $85,334 for Mr. Naeve, $85,334 for
Mr. Harvey and $657,562 for Mr. Jacobs. In the event dividends are paid on
the underlying common stock, dividend equivalents accrue on the restricted
stock.
(4) Securities underlying options are shares of our common stock, except for
grants in 2000, which are shares of common stock of CenterPoint.
(5) Amounts shown represent the dollar value of CenterPoint common stock paid
out in that year based on the achievement of performance goals for the
cycle ending in the prior year plus dividend equivalent accruals during the
performance period.
(6) Amounts for 2002 include (i) matching and profit sharing contributions to
the savings plan and the savings restoration component of our deferral plan
as follows: Mr. Letbetter, $193,449; Mr. Naeve, $97,627; Mr. Harvey,
$96,095; Mr. Kelly, $55,518; and Mr. Jacobs, $11,870; (ii) the term portion
of the premiums paid under split-dollar life insurance policies purchased
in connection with our executive life insurance plan, as follows: Mr.
Letbetter, $817; Mr. Naeve, $219; Mr. Harvey, $1,104; and Mr. Kelly,
$2,232; (iii) accrued interest on deferred compensation that exceeds 120%
of the applicable federal long-term rate, as follows: Mr. Letbetter,
$14,424; Mr. Naeve, $9,395; Mr. Harvey, $2,215; and Mr. Kelly, $46,436.
Additionally, amount shown for Mr. Harvey for 2002 includes $54,907 in loan
forgiveness discussed in footnote 8 below.
(7) Mr. Letbetter resigned as our chairman and chief executive officer in April
2003.
(8) In connection with Mr. Harvey's initial employment, we loaned him $250,000.
The loan bears interest at a rate of 8% and principal and interest are to
be forgiven in annual installments through May 2004 so long as Mr. Harvey
remains employed by us or one of our subsidiaries as of each relevant
anniversary of his employment date. The amount of loan forgiveness for 2002
was $54,907 which amount is included in the "All Other Compensation" column.
(9) Mr. Kelly retired as our senior vice president, general counsel and
corporate secretary in May 2003.
(10) Mr. Jacobs was not employed by us prior to July 2002.
15
Option Grants in Last Fiscal Year
Exercise
Number of % of or Base
Securities 2002 Purchase
Underlying Employee Price Grant Date
Options Option Per Expiration Present
Granted/(1)/ Grants Share Date Value/(2)/
----------- -------- -------- ---------- ----------
R. Steve Letbetter/(3)/ 700,000 9.80% $10.90 02/29/2012 $3,563,000
Stephen W. Naeve....... 340,000 4.76% 10.90 02/29/2012 1,730,600
Robert W. Harvey....... 340,000 4.76% 10.90 02/29/2012 1,730,600
Hugh Rice Kelly/(4)/... 130,000 1.82% 10.90 02/29/2012 661,700
Mark M. Jacobs......... 318,667 4.46% 4.79 07/28/2012 713,814
--------
(1) Option grants vest in one-third increments per year generally from the date
of grant (so long as the officer remains an employee of Reliant Resources).
All options would immediately vest upon a change in control as defined in
our long-term incentive plan. A "change in control" generally is deemed to
have occurred if (i) any person or group becomes the direct or indirect
beneficial owner of 30% or more of our outstanding voting securities,
unless the acquisition is directly from us and approved by our board of
directors; (ii) our initial directors and individuals approved by a
majority of the initial directors (or their approved successors) cease to
constitute a majority of our board of directors; (iii) a merger,
consolidation or acquisition involving us is carried out, unless more than
70% of the surviving company's outstanding voting securities is owned by
our former stockholders in substantially the same proportion as before the
transaction, any consideration paid by us (including the amount of any
long-term debt assumed by the surviving company) does not exceed 50% of the
fair market value of our outstanding voting securities immediately prior to
the transaction, no person or group becomes the beneficial owner of 30% of
more of the surviving company's voting securities as a result of the
transaction, and a majority of the directors of the surviving company were
our directors immediately prior to the transaction; or (iv) we transfer 70%
or more of our assets to another corporation that is not wholly-owned by
us, unless after the transfer more than 70% of the largest acquiring
company's outstanding voting securities is owned by our former stockholders
and a majority of the directors of the largest acquiring company were our
directors immediately prior to the transaction.
(2) Grant date value is based on the Black-Scholes option pricing model
assuming a five-year term, volatility of 46.99%, no annual dividend and a
risk-free interest rate of 4.43%. Actual gains, if any, will be dependent
on future performance of the common stock.
(3) Mr. Letbetter resigned as our chairman and chief executive officer in April
2003.
(4) Mr. Kelly retired as our senior vice president, general counsel and
corporate secretary in May 2003.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Unexercised Value of Unexercised In-the
Shares Acquired Value Options at December 31, Money Options at
Name on Exercise (#) Realized 2002 December 31, 2002 ($) (1)
---- --------------- -------- ------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
R. Steve Letbetter(2) -- $-- 823,354 1,371,814 $-- $--
Stephen W. Naeve..... -- -- 377,482 666,002 -- --
Robert W. Harvey..... -- -- 326,635 666,002 -- --
Hugh Rice Kelly(3)... -- -- 209,720 257,696 -- --
Mark M. Jacobs....... -- -- -- 318,667 -- --
--------
(1) Based on the average of the high and low sales prices of our common stock
on the New York Stock Exchange for December 31, 2002.
(2) Mr. Letbetter resigned as our chairman and chief executive officer in April
2003.
(3) Mr. Kelly retired as our senior vice president, general counsel and
corporate secretary in May 2003.
16
Long-Term Incentive Plan - Awards in Last Fiscal Year/(1)/
Estimated Future Payouts
Under Non-Stock
Price-Based Plans/(2)/
---------------------------------------
Below
Performance Threshold Threshold Target Maximum
Number Period Until Number Number Number Number
Name of Shares Payout of Shares of Shares of Shares of Shares
----------------------- --------- ------------ --------- --------- --------- ---------
R. Steve Letbetter/(3)/ 125,000 2002-2004 0 62,500 125,000 187,500
Stephen W. Naeve....... 60,000 2002-2004 0 30,000 60,000 90,000
Robert W. Harvey....... 60,000 2002-2004 0 30,000 60,000 90,000
Hugh Rice Kelly/(3)/... 23,800 2002-2004 0 11,900 23,800 35,700
Mark M. Jacobs......... 25,488 2002-2004 0 12,744 25,488 38,232
--------
(1) The payout of these awards can vary depending on Reliant Resources' total
stockholder return ("TSR") measured against its peer group competitors. A
performance modifier provides the incentive to maximize TSR relative to the
competitor peer group by modifying the payout value so that awards may
range from 0% to 150% of the target number of shares awarded. If a change
in control occurs prior to the end of the performance period, the
participant's right to receive shares will be settled with a cash payment
to the participant equal to the product of (i) the fair market value per
share of common stock on the date immediately preceding the date on which
the change of control occurs and (ii) 150% of the target number of shares.
(2) The table does not reflect dividend equivalent accruals, if any, during the
performance period.
(3) Mr. Letbetter resigned as our chairman and chief executive officer in April
2003, and Mr. Kelly retired as senior vice president, general counsel and
corporate secretary in May 2003. The plan allows for a partial award of the
target number of shares based on the relationship between the days the
participant was active during the cycle to the total number of days in the
three-year performance cycle.
Employment Contracts and Severance/Change of Control Agreements
Our officers, with the exception of Mr. Jacobs and Mr. Harvey, entered into
severance agreements with us in January 2003. These agreements provide, in
general, for the payment of certain severance benefits in the event of an
involuntary termination of employment by us without cause or by the executive
during the three year period following a change in control of Reliant
Resources, Inc., as defined in the our long-term incentive plan (as described
in footnote 1 of the option grants in last fiscal year table on page 17) for
good reason (collectively, a "covered termination"). Under the agreements,
named officers who experience a covered termination are entitled to three times
the sum of his or her annual salary and target bonus. Other officers that
experience a covered termination are entitled to a lump-sum severance payment
ranging from one times to two times the sum of his or her annual salary and
target annual bonus depending on his or her classification and compensation.
In addition, each officer is entitled to a pro rata portion of their current
year bonus paid out at target, medical and life insurance for 18 months, or in
the case of a change in control, three years, at the rate for active employees,
outplacement services based upon his or her classification and compensation,
legal fees paid by us, and continued access to financial planning services for
the greater of the remainder of the calendar year or 60 days. An additional
payment will be made to an executive to compensate for any excess parachute
excise tax which may be imposed in connection with severance payments made in
connection with a change in control.
The agreements include a non-compete agreement between the executives and
us, which is not applicable following a covered termination that occurs
following a change in control. An executive's other benefits and awards on
termination of employment will be treated in accordance with the terms of the
applicable plan document. The term of the severance agreements is three years,
with a one year automatic renewal thereafter.
17
Generally, for purposes of the severance agreements, good reason is defined as
a reduction in remuneration, or relocation of more than 50 miles, and for
certain officers, good reason also includes a substantial reduction in
authority and responsibility.
In connection with his resignation in April 2003, Mr. Letbetter entered into
an amendment to his severance agreement, pursuant to which he will receive
severance payments equaling $6.9 million and a pro rata bonus with respect to
our 2003 fiscal year of $747,946. In addition, Mr. Letbetter's medical
insurance continues at active employee rates until age 65, his financial
planning service are available up to a maximum cost of $25,000 and he is
eligible for outplacement assistance up to a maximum cost of $100,000. Mr.
Letbetter may also elect to purchase from us the split-dollar life insurance
policy at the greater of the cash surrender value of the policy or the total
premiums paid by us with respect to the policy. In addition, under the amended
severance agreement Mr. Letbetter has entered into a consulting agreement with
us for a minimum of 12 months under which he will be paid monthly installments
of $83,333, with any services provided above the normal annual hour commitment
paid at $500 per hour, and in April 2004, he will vest in 551,890 shares of
restricted stock previously awarded to him, provided he does not breach the
non-compete provision in his amended severance agreement during that period.
His benefit under our 1985 deferred compensation plan will be paid to him in 15
annual installments of $49,152. Mr. Letbetter will be provided office space,
parking and support for a three year period, continued home security monitoring
until age 65, a transfer of the club membership previously provided to him and
continued coverage under our directors' and officers' insurance. In addition,
Mr. Letbetter's unvested options became immediately exercisable upon his
resignation.
Mr. Kelly's retirement will be treated as a covered termination under his
severance agreement, pursuant to which he will receive a severance payment
equal to three times his salary and target bonus, approximately $2.3 million,
and a pro rata bonus with respect to our 2003 fiscal year of $96,164,
outplacement services, financial planning, extended medical and life insurance
coverage, which are the same benefits provided to similarly situated executives.
We entered into an employment agreement with Mr. Jacobs in July 2002, which
was subsequently amended, which sets forth his compensation and duties and
provides the applicable consequences upon any termination of his employment.
Under the terms of his agreement, which has a term that expires on July 31,
2005, Mr. Jacobs is entitled to receive a base salary paid at the rate of at
least $39,583.33 per month, an annual incentive bonus target equal to 100% of
his annual base salary and a retention bonus of $650,000 if he remains employed
by us through the end of the term, along with grants of options, performance
units and restricted stock. Mr. Jacobs will also be entitled to a supplemental
bonus at the end of the current term of his agreement if, at such time, the
aggregate value of his initial option and restricted stock awards does not
equal or exceed $1,850,000. Under the agreement, Mr. Jacobs is generally
provided with the same severance terms and benefits as the terms and benefits
described above with respect to the other named executive officer's severance
agreements.
We also expect to enter into an employment agreement with Mr. Harvey,
pursuant to which we will provide for the terms and conditions of his
employment, including ongoing compensation and severance benefits upon
termination of employment. Additionally, under the terms of his employment, we
are obligated to provide Mr. Harvey $481,000 in nonqualified retirement
benefits if he remains employed with us until May 31, 2003.
18
Additional Benefits and Other Arrangements
We maintain an executive benefits plan that provides certain salary
continuation, disability and death benefits to certain of our key officers and
certain key officers of our subsidiaries. Mr. Letbetter, Mr. Naeve and Mr.
Kelly participate in this plan pursuant to individual agreements that generally
provide for (i) a salary continuation benefit of 100% of the officer's current
salary for 12 months after death during active employment and then 50% of
salary for nine years or until the deceased officer would have attained age 65,
if later, and (ii) if the officer retires after attainment of age 65, an annual
postretirement death benefit of 50% of the officer's preretirement annual
salary payable for six years. Coverage under this plan has not been provided to
any officer after July 1, 1996. If the executive ceases to be employed by us
for any reason prior to age 65, they forfeit all benefits under this plan. As a
result of their resignation and retirement in April 2003 and May 2003,
respectively, both Messrs. Letbetter and Kelly forfeited their benefits.
We have an executive life insurance plan providing endorsement split-dollar
life insurance in the form of a death benefit for certain officers. Effective
January 1, 2002, this plan was frozen and will not have any new participants.
The death benefit coverage for each covered officer varies. Mr. Letbetter and
Mr. Naeve have second-to-die coverage that is based on the amount of premium
that could have provided single-life coverage equal to four times salary at the
time of purchase for Mr. Letbetter and two times salary at the time of purchase
for Mr. Naeve. Mr. Harvey and Mr. Kelly have single-life coverage equal to two
times current salary. The plan also provides that we may make payments to the
covered individuals to compensate for tax consequences of imputed income that
they must recognize for federal income tax purposes based on the term portion
of the annual premiums. If a covered executive retires at age 65 or at an
earlier age under circumstances approved by our board of directors, rights
under the plan vest so that coverage is continued based on the same death
benefit in effect at the time of retirement. Upon death, we will receive the
balance of the insurance proceeds payable in excess of the specified death
benefit, which is expected to be at least sufficient to cover our cumulative
outlays to pay premiums and the after-tax cost to us of the tax reimbursement
payments. There is no arrangement or understanding under which any covered
individual will receive or be allocated any interest in any cash surrender
value under the policy.
18.1
Since 1985, CenterPoint has had in effect deferred compensation plans that
permit eligible participants to elect each year to defer a percentage of that
year's salary (prior to December 1993, up to 25% or 40%, depending on age, and
beginning in December 1993, up to 100%) and up to 100% of that year's annual
bonus. In connection with the business separation of us and CenterPoint,
effective in 2001, we have assumed the liabilities relating to our employees
(including the named executive officers) under the CenterPoint deferred
compensation plans, as well as CenterPoint's nonqualified savings and benefit
restoration plans. As of April 30, 2003, the balance in such plans was
$14,574,577 for Mr. Letbetter, $2,813,038 for Mr. Naeve, $352,173 for Mr.
Harvey and $5,822,103 for Mr. Kelly. We will provide these benefits under
mirror plans or our deferral plan described below. In general, employees who
attain the age of 60 during employment and participate in the mirror deferred
compensation plans may elect to have their deferred compensation amounts repaid
in (i) fifteen equal annual installments commencing at the later of age 65 or
termination of employment or (ii) a lump-sum distribution following termination
of employment. Interest generally accrues on deferrals made in 1989 and
subsequent years at a rate equal to the average Moody's Long-Term Corporate
Bond Index plus 2%, determined annually until termination when the rate is
fixed at the greater of the rate in effect at age 64 or at age 65. Fixed rates
of 19% to 24% were established for deferrals made in 1985 through 1988, as a
result of higher prevailing rates and other factors. Current accruals of the
above-market portion of the interest on deferred compensation amounts are
included in the "All Other Compensation" column of the summary compensation
table on page 15.
Since January 1, 2002, we have had a deferral plan under which directors and
eligible non-union employees (including the named executive officers) may defer
up to 80% of salary and 100% of bonus compensation. Deferred amounts are deemed
invested in the plan's investment alternatives in accordance with the
participants' elections. Our obligations to pay benefits under the deferral
plan are general unsecured obligations and are generally funded by us through a
"rabbi trust." Our employees who are former employees of CenterPoint (including
the named executive officers) may also transfer to the deferral plan accrued
benefits under some nonqualified benefit plans. In addition, savings
restoration plan benefits for all our participants are provided by the our
deferral plan.
We maintain a trust agreement with an independent trustee establishing a
"rabbi trust" for the purpose of funding benefits payable to participants under
our deferred compensation plans, executive incentive compensation plans,
benefit restoration plan and savings restoration plan, also referred to as the
"designated plans." The trust is a grantor trust, irrevocable except in the
event of an unfavorable ruling by the Internal Revenue Service as to the tax
status of the trust or certain changes in tax law. The trust is funded for
current benefit liabilities and we make regular contributions to the trust. The
assets of the grantor trust are required to be held separate and apart from the
other funds of us and our subsidiaries, but remain subject to claims of general
creditors under applicable state and federal law.
19
Equity Compensation Plan Information
The following table provides information with respect to compensation plans
(including individual compensation arrangements) under which our equity
securities are authorized for issuance to employees or non-employee directors,
as of December 31, 2002:
(c)
Number of securities
(a) remaining available for
Number of securities to be (b) future issuance under equity
issued upon exercise of Weighted average exercise price of compensation plans
outstanding options, warrants outstanding options, warrants and (excluding securities reflected
Plan category and rights rights/(1)/ in column(a))
------------------------- ----------------------------- ---------------------------------- -------------------------------
Equity compensation plans
approved by security
holders /(2)/........... 18,052,481/(3)/ $17.61 17,862,839/(4)/
Equity compensation plans
not approved by security
holders /(5)/........... 3,674,985/(6)/ 10.84 -- /(7)/
---------- ------ ----------
Total.................... 21,727,466 $16.46 17,862,839
========== ====== ==========
--------
(1) Does not include the value of performance shares or restricted stock, which
are subject to the terms and conditions of outstanding awards and do not
have an exercise price.
(2) Consists of four plans: the Long-Term Incentive Plan of Reliant Resources,
Inc. (2001 LTIP), the Reliant Resources, Inc. 2002 Long-Term Incentive Plan
(2002 LTIP), the Reliant Resources, Inc. Transition Stock Plan (Transition
Plan) and the ESPP. No future grants may be made under the 2001 LTIP and
the Transition Plan.
(3) Consists of 16,546,867 options, 420,082 shares of restricted stock and
1,085,532 performance shares at an assumed maximum level of performance.
Performance share payouts are dependent upon an application of a
performance multiplier (from 0 to 1.5) determined based on our total
stockholder return relative to a peer competition group over a three-year
period.
(4) Includes 16,907,613 and 955,226 shares issuable under the 2002 LTIP and the
ESPP, respectively.
(5) Consists of the Reliant Resources, Inc. 2002 Stock Plan (2002 Stock Plan)
which was adopted by our board of directors and did not require stockholder
approval. Under the 2002 Stock Plan, awards are granted to employees other
than our executive officers or directors. Awards for our executive officers
and directors are granted from the stockholder approved 2002 LTIP. The
provisions of both the 2002 Stock Plan and the 2002 LTIP allow for equity
awards to be granted as stock options, restricted stock, stock appreciation
rights, and performance awards. The 2002 Stock Plan is administered by the
compensation committee. The compensation committee may delegate to our
officers certain of its duties, powers and authority. Payment of awards may
be made in the form of cash, stock or combinations thereof. Awards are not
transferable or assignable except (i) by law, will or the laws of descent
and distribution, (ii) pursuant to a qualified domestic relations order as
defined by Code or Title I of the Employee Retirement Security Act, or the
rules thereunder, or (iii) with the approval of the compensation committee.
(6) Consists of 3,339,800 options and 335,185 shares of restricted stock
granted under the 2002 Stock Plan.
(7) The number of shares available for issuance is established by the board
annually. Under the 2002 Stock Plan approved by our board of directors,
6,000,000 shares are authorized for issuance effective January 1, 2003.
20
Report of the Audit Committee
The audit committee of our board of directors is composed of independent
directors as required by the listing standards of the New York Stock Exchange.
The audit committee operates pursuant to a written charter adopted by our board
of directors.
The audit committee is responsible for overseeing our financial reporting
process on behalf of our board of directors. Our management has the primary
responsibility for the preparation of our financial statements. Our independent
auditors are responsible for performing an audit of our financial statements
and expressing an opinion as to the conformity of such financial statements
with accounting principles generally accepted in the United States.
The audit committee has reviewed and discussed our audited financial
statements as of and for the year ended December 31, 2002 with management and
the independent auditors. The audit committee has discussed with the
independent auditors the matters required to be discussed under auditing
standards generally accepted in the United States, including those matters set
forth in Statement on Auditing Standards No. 61, as amended (Communication with
audit committees). The independent auditors have provided to the audit
committee the written disclosures and the letter required by Independence
Standards Board Standard No. 1 (Independence Discussions with audit
committees), as currently in effect, and the audit committee has discussed with
the auditors their independence from Reliant Resources. The audit committee has
also considered whether the independent auditors' provision of information
technology and other non-audit services to us is compatible with maintaining
the auditors' independence. The audit committee has concluded that the
independent auditors are independent from us and our management.
Based on the reports and discussions described above, the audit committee
has recommended to our board of directors that our audited financial statements
be included in Amendment No. 1 to the Annual Report on Form 10-K/A for the year
ended December 31, 2002 for filing with the SEC.
Laree E. Perez, Chairman
Joel V. Staff*
William L. Transier
* In April 2003, Mr. Staff resigned from the audit committee in connection with
his appointment as our chairman and chief executive officer and Mr. Breeding
was appointed to the audit committee.
21
Principal Accounting Firm Fees
The following table shows the fees that we paid or accrued for the audit and
other services provided by Deloitte & Touche LLP, the member firms of Deloitte
Touche Tohmatsu, and their respective affiliates, which includes Deloitte
Consulting (collectively, "Deloitte & Touche") for fiscal years ended December
31, 2002 and 2001:
2002 2001
----------- -----------
Audit Fees........ $ 5,346,560 $ 3,544,460
Audit-Related Fees 674,473 1,249,263
Tax Fees.......... 404,030 128,504
All Other Fees.... 3,922,399 23,950,622
----------- -----------
Total.......... $10,347,462 $28,872,849
=========== ===========
Audit Fees. This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-Q Quarterly
Reports and services that are normally provided by the independent auditors in
connection with statutory and regulatory filings or engagements for those
fiscal years. This category also includes advice on audit and accounting
matters that arose during, or as a result of, the audit or the review of
interim financial statements, statutory audits required by non-U.S.
jurisdictions, expanded audit procedures related to restatements of prior
periods and the preparation of an annual "management letter" on internal
control matters.
Audit-Related Fees. This category consists of assurance and related
services by Deloitte & Touche that are reasonably related to the performance of
the audit or review of our financial statements and are not reported above
under "Audit Fees." The services for the fees disclosed under this category
include benefit plan audits, subsidiary audits, consultation with respect to
certain registration statement reviews, and consultation with respect to
accounting processes.
Tax Fees. This category consists of professional services rendered by
Deloitte & Touche for tax compliance and tax advice. The services for the fees
disclosed under this category include tax return preparation and technical tax
advice.
All Other Fees. This category consists of fees for system design and
implementation projects related to our retail operations, business insurance
claims consulting and other miscellaneous items. These fees include
approximately $761,541 and $5,611,155 of financial information systems design
and implementation fees for 2002 and 2001, respectively. In addition to the
service fees presented above, we purchased software and hardware from Deloitte
& Touche affiliates in 2002 and 2001. The purchases totaled $5,253,586 and
$17,556,531 for 2002 and 2001, respectively.
22
Summary of the Reliant Resources, Inc. Employee Stock Purchase Plan
The following is a summary of the principal features of the ESPP.
Purpose. The purpose of the ESPP is to provide our employees and the
employees of our designated subsidiaries with the opportunity to purchase our
common stock and, therefore, to have an additional incentive to contribute to
our prosperity.
Administration. The ESPP is administered by our benefits committee. Subject
to the terms of the ESPP, the benefits committee has the power to make, amend
and repeal rules and regulations for the interpretation and administration of
the ESPP. The decisions of the benefits committee are final and binding upon
all parties.
Shares Subject to the ESPP. There were 3,000,000 shares of our common stock
reserved for issuance under the ESPP at the time the ESPP was established
effective January 1, 2001, subject to adjustment as described below. The
proposed amendment would increase the shares of our common stock reserved for
issuance under the ESPP to 18,000,000.
Eligibility. In general, any of our employees or employees of a designated
subsidiary are eligible to participate in the ESPP during a purchase period.
Employees are not eligible to participate if:
. upon enrollment they would own or hold options or rights to acquire an
aggregate of 5% or more of the total combined voting power of all
outstanding shares of all classes of our equity securities or the equity
securities any subsidiary;
. they are prohibited by laws and regulations of the jurisdiction of their
residence or employment from participating in the Plan as determined by
the benefits committee; or
. they are subject to a collective bargaining agreement if their exclusion
is the result of good faith bargaining regarding the provision of
benefits to such employees.
A "purchase period" is a period of approximately six months that begins on
the first trading day of each July or January. An "enrollment date" is the
first day of each purchase period. Eligible employees become participants in
the ESPP by electronically or telephonically enrolling with us within the time
prescribed by the benefits committee prior to an enrollment date. As of April
28, 2002, approximately 4,611 employees, including all executive officers,
would have been eligible to participate in the ESPP.
Plan Participation. Each participant is granted a right to purchase shares
of our common stock on his or her enrollment date. A participant in the ESPP
may make contributions through payroll deductions from one percent to 15
percent of his or her eligible compensation each pay period. Participants may
increase or decrease their contribution rates twice each purchase period
according to rules established by the benefits committee. Stock purchase rights
may not accrue at a rate that exceeds $25,000 in fair market value of the
common stock per calendar year. The participant's contributions are used to
purchase shares of our common stock at the end of each purchase period. The
right to purchase shares of our common stock is exercised automatically on the
last trading day of each purchase period ("purchase date") to the extent of the
payroll deductions accumulated during the purchase period.
Purchase Price; Shares Purchased. The purchase price per share is equal to
85% of the fair market value of the common stock on the enrollment date or the
purchase date, whichever is less. The number of whole shares of our common
stock a participant purchases in each purchase period is determined by dividing
the total amount of payroll deductions during the purchase period by the
purchase price. Any cash equal to less than the price of a whole share is used
to purchase fractional shares.
23
Termination of Employment. Termination of a participant's employment for
any reason, including death, immediately cancels his or her participation in
the ESPP. In that event, the payroll deductions credited to the participant's
account will be refunded to him or her, in the case of death, to his or her
estate or personal representative.
Changes in Stock; Adjustments. In the event that our common stock is
changed by reason of any stock split, stock dividend, recapitalization,
combination or other similar change in our capital structure, appropriate
action will be taken by the benefits committee to adjust any or all of:
. the number and type of shares subject to the ESPP;
. the number and type of shares subject to outstanding stock purchase
rights; and
. the purchase price.
In the event of a corporate change, unless the successor corporation assumes
or substitutes new stock purchase rights:
. the purchase date for the outstanding stock purchase rights will be
accelerated to a new purchase date prior to the effective date of the
corporate change; and
. on the effective date, any unexercised stock purchase rights will expire
and we will promptly refund the unused amount of each participant's
payroll deductions.
Amendment and Termination of the Plan. Our board of directors may terminate
the ESPP at any time with respect to common stock that is not subject to stock
purchase rights. Our board of directors may amend the ESPP at any time,
provided that no change may be made in any outstanding stock purchase right
that would materially impair that right without the consent of the participant.
If not sooner terminated, the ESPP will automatically terminate when all of the
shares of common stock reserved for issuance have been sold.
Withdrawal. Generally, a participant may withdraw from the ESPP during a
purchase period at any time prior to the fifteenth business day before a
purchase date.
U.S. Federal Income Tax Treatment. The following summarizes the effect of
current U.S. federal income tax upon the participant and us with respect to
shares purchased under the ESPP. It does not purport to be complete, and does
not discuss the tax consequences arising in the context of a participant's
death or the income tax laws of any municipality, state or foreign country in
which the participant's income or gain may be taxable.
The ESPP, and the right of participants to make purchases thereunder, are
intended to qualify under the provisions of Sections 421 and 423 of the
Internal Revenue Code. Under these provisions, no income will be taxable to a
participant until the shares purchased under the ESPP are sold or otherwise
disposed of. Upon sale or other disposition of the shares, the participant will
generally be subject to tax and the amount of the tax will depend on the
holding period. If the shares are sold or disposed of more than two years from
the first day of the applicable purchase period and more than one year from the
date of transfer of the shares to the participant, then the participant
generally will recognize ordinary income measured as the lesser of:
. the excess of the fair market value of the shares at the time of sale
over the purchase price, or
. 15% of the fair market value of the shares as of the enrollment date.
Any additional gain should be treated as long-term capital gain. If the
shares are disposed of within the two-year and one-year periods referred to
above, the participant will recognize ordinary income generally measured as the
difference between the fair market value of the shares on the purchase date
over the purchase price. Any additional gain or loss on the sale will be
long-term or short-term capital gain or loss, depending on the holding period.
Reliant Resources is not entitled to a deduction for amounts taxed as ordinary
income or capital gain to a participant except to the extent ordinary income is
recognized by participants upon a disposition of shares prior to the expiration
of the holding period.
24
Inclusion of Stockholder Proposals in Proxy Materials for 2003 Annual Meeting
Rule 14a-8 under the Securities Exchange Act of 1934 addresses when a
company must include a stockholder's proposal in its proxy statement and
identify the proposal in its form of proxy when the company holds an annual or
special meeting of stockholders. In general, under Rule 14a-8 a proposal for a
regularly scheduled annual meeting must be received at the company's principal
executive offices not less than 120 calendar days before the date of the
company's proxy statement released to stockholders in connection with the
previous year's annual meeting or, if the company did not hold an annual
meeting the previous year, or if the date of the annual meeting has been
changed by more than 30 days from the date of the previous year's annual
meeting, a reasonable time before the company begins to print and mail its
proxy materials. For a special meeting, the deadline is a reasonable time
before the company begins to print and mail its proxy materials. In addition to
complying with the applicable deadline, stockholder proposals must also be
otherwise eligible for inclusion.
We expect to hold our 2004 annual meeting on or about May 7, 2004, which is
a change of not more than 30 days from this year's annual meeting. As a result,
any stockholder who intends to present a proposal at the 2004 annual meeting
and who requests inclusion of the proposal in our 2004 proxy statement and form
of proxy in accordance with applicable SEC rules should file the proposal with
us by January 5, 2004.
Advance Notice Required for Proposals and Director Nominations
Our bylaws require advance notice of proposals by stockholders to be
presented for action at an annual meeting. In the case of the 2004 annual
meeting, the required notice must be received by our corporate secretary
between December 6, 2003 and March 6, 2004. Our bylaws require that the
proposal must constitute a proper subject to be brought before the meeting and
that the notice must contain prescribed information, including a description of
the proposal and the reasons for bringing it before the meeting, proof of the
proponent's status as a stockholder and the number of shares held and a
description of all arrangements and understandings between the proponent and
anyone else in connection with the proposal as well as other procedural
requirements. A copy of our bylaws describing the requirements for notice of
stockholder proposals may be obtained by writing our corporate secretary.
Our bylaws provide that a stockholder may nominate a director for election
if the stockholder sends a notice to our corporate secretary identifying any
other person making such nomination with the stockholder and providing proof of
stockholder status. This notice must be received at our principal executive
offices between December 6, 2003 and March 6, 2004. The stockholder must also
provide the information about the nominee that would be required to be
disclosed in the proxy statement. We are not required to include any
stockholder-proposed nominee in the proxy statement. A copy of our bylaws
describing the requirements for nomination of director candidates by
stockholders may be obtained by writing our corporate secretary.
Householding
We will promptly deliver, upon oral or written request, a separate copy of
the proxy statement to any stockholder residing at an address to which only one
copy was mailed. Requests for additional copies should be directed to investor
relations, by phone (713) 497-7000 or by contacting investor relations via our
website which can be reached via a link located at the following web address:
www.reliant.com/corporate.
Communicating with Us
From time to time, we receive calls from stockholders asking how they can
communicate with us. The following communication options are available.
25
If you would like to receive information about us, you may use one of the
following methods:
. Our main Internet site, located at www.reliant.com, contains product and
marketing data as well as job listings. A link to our investor relations
site can be found at www.reliant.com/corporate. Our investor relations
site contains company press releases, earnings releases, financial
information and stock quotes, as well as links to our SEC filings.
. You may read and copy the proxy statement at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
further information about the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330. Our filings are also available
to the public on the SEC's Internet site located at http://www.sec.gov.
. To have information such as our latest quarterly earnings release, Form
10-K, Form 10-Q or annual report mailed to you, please contact investor
relations at (713) 497-7000 or by contacting investor relations via our
website which can be reached via a link located at the following web
address: www.reliant.com/corporate.
General Information
We began mailing this proxy statement and the accompanying proxy card to
stockholders on May 5, 2003. The proxy statement and proxy card are being
furnished at the direction of our board of directors. We will pay all
solicitation costs, including the fee of Morrow & Co., who will help us solicit
proxies for $5,000, plus expenses. We will reimburse brokerage firms, nominees,
fiduciaries, custodians, and other agents for their expenses in distributing
proxy material to the beneficial owners of our common stock. In addition,
certain of our directors, officers, and employees may solicit proxies by
telephone and personal contact.
Our board of directors does not intend to bring any other matters before the
meeting and has not been informed that any other matters are to be properly
presented to the meeting by others. If other business is properly raised, your
proxy card authorizes the people named as proxies to vote as they think best,
unless authority to do so is withheld by you in the proxy card.
Annual Report to Stockholders
Our annual report to stockholders, which contains our consolidated financial
statements for the year ended December 31, 2002, accompanies the proxy material
being mailed to all stockholders. The annual report is not a part of the proxy
solicitation material.
By order of our board of directors,
/s/ Joel V. Staff
Joel V. Staff
Chairman and Chief Executive Officer
May 5, 2003
26
APPENDIX A
RELIANT RESOURCES, INC.
AUDIT COMMITTEE CHARTER
The board of directors of Reliant Resources, Inc. (the "Company") has
established the Audit Committee of the board of directors.
I. Purposes
The purposes of the Audit Committee are:
1. To oversee the quality and integrity of the financial statements;
2. To oversee the Company's compliance with legal and regulatory requirements;
3. To oversee the independent auditor's qualifications and independence;
4. To oversee the performance of the Company's internal audit function and
independent auditors; and
5. To perform such other duties as are directed by the board of directors.
The Audit Committee shall prepare annually a report meeting the requirements
of any applicable regulations of the SEC to be included in the Company's proxy
statement relating to its annual meeting of shareholders.
II. Membership
The Audit Committee shall be comprised of three or more Directors, as
determined by the board of directors. The members of the Audit Committee shall
be elected by the board of directors annually and shall serve until their
successors shall be duly elected and qualified. Each member shall be
"independent" as defined from time to time by the listing standards of the New
York Stock Exchange (the "NYSE") and by applicable regulations of the
Securities and Exchange Commission (the "SEC") and shall meet any other
applicable independence requirements of the NYSE and SEC. No member shall serve
on an audit committee of more than two other public companies unless the board
of directors determines that such simultaneous service would not impair the
ability of such director to effectively serve on the Audit Committee.
Each member shall be (or shall become within a reasonable time after
appointment) financially literate. Members of the Audit Committee may enhance
their familiarity with finance and accounting principals by participating in
educational programs that the Company or an outside consultant conducts.
Notwithstanding the foregoing membership requirements, no action of the
Audit Committee shall be invalid by reason of any such requirement not being
met at the time such action is taken.
III. Meetings and Structure
The Audit Committee shall meet at least four times per year to review the
financial information of the Company, consistent with its duties and
responsibilities, and as many additional times as the members deem necessary.
The Audit Committee should meet periodically with management (including not
less than annually with each of the Chief Executive Officer and the Chief
Financial Officer, meeting separately), the Company's Director of Internal
Auditing, and the independent public accountants in separate executive sessions
to discuss any matters that the Committee or each of these groups believe
should be discussed privately.
The board of directors shall appoint one member of the Audit Committee as
chairperson. He or she shall be responsible for leadership of the committee,
including preparing the agenda, presiding over the meetings, making
A-1
committee assignments and reporting to the board of directors. The chairperson
will also maintain regular liaison with the Chief Executive Officer, the Chief
Financial Officer, the lead audit partner of the Company's independent public
accountants and the Company's Director of Internal Auditing.
IV. Authority and Responsibilities
The Audit Committee shall have the sole authority and responsibility with
respect to the selection, engagement, compensation, oversight, evaluation and,
where appropriate, dismissal of the Company's independent public accountants.
The independent public accountants are accountable to the Audit Committee.
The Audit Committee shall have the authority to take all actions it deems
advisable to fulfill its responsibilities and duties. The Audit Committee shall
have the authority to retain special legal counsel, accounting experts, or
other consultants to advise the Audit Committee, which may be the same as or
different from the Company's primary legal counsel, accounting experts and
other consultants. The Audit Committee may require any officer or employee of
the Company or any of its subsidiaries, the Company's outside legal counsel,
and the Company's external auditors to meet with the Audit Committee or any
member of the Audit Committee.
The Audit Committee shall be responsible for the resolution of any
disagreements between the independent public auditors and management regarding
the Company's financial reporting.
The Audit Committee shall have the following duties and responsibilities:
Independent Accountants
1. Annually select and engage the Company's independent public accountants
retained to audit the financial statements of the Company, with such
selection to be submitted to the shareholders for ratification.
2. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant.
3. Review and approve the plan and scope of the independent public
accountants' audits, non-audit services and related fees.
4. Ensure the rotation of the audit partners as required by law.
5. Set clear hiring policies for employees or former employees of the
Company's independent public accountants.
6. Periodically obtain and review a report from the independent public
accountants regarding all relationships between the independent public
accountants and the Company that may impact the independent public
accountants' objectivity and independence, and discuss such report with
the independent public accountants. The Audit Committee shall also
recommend any appropriate action to the board of directors in response
to the written report necessary to satisfy itself of the independence
and objectivity of the independent public accountants.
Review
7. Review and approve the appointment, termination or replacement by
management of a Director of Internal Auditing or, at the discretion of
the board of directors, select and contract with outside auditors to
perform the function of an internal audit department.
Direct the scope of the duties of the Director of Internal Auditing or
any outside auditors serving as internal auditors, who shall report
directly to the Audit Committee.
A-2
Periodically meet and review with the Director of Internal Auditing the
regular internal reports to management prepared by the internal auditing
department and the progress of activities and any findings of major
significance stemming from internal audits.
In connection with any significant judgments made in management's
preparation of the financial statements, establish regular procedures of
reporting to the Audit Committee as to appropriateness of such judgments
by the Chief Financial Officer, the Chief Accounting Officer, the
Director of Internal Auditing and/or any other officer of the Company
that the Audit Committee deems appropriate.
8. Review with management and the independent public accountants the
Company's quarterly or annual financial information prior to the filing
of the Company's Quarterly Reports on Form 10-Q and Annual Reports on
Form 10-K, as the case may be, or prior to the release of earnings.
Discuss with financial management the Company's earnings releases,
including the use of "pro forma" or "adjusted" non-GAAP information, as
well as financial information and earnings guidance, if any.
Review and discuss with management and the independent public
accountants the disclosures made in management's discussion and analysis
of financial condition and results of operations in any of the Company's
reports on Form 10-Q and Form 10-K.
Establish regular and separate procedures of reporting to the Audit
Committee by each of the Chief Financial Officer and the independent
public accountants regarding any significant judgments made in
management's preparation of the financial statements and the view of
each as to appropriateness of such judgments.
9. Upon completion of any annual audit, meet separately with the
independent public accountants and management and review the Company's
financial statements and related notes, the results of their audit, any
report or opinion rendered in connection therewith, any significant
difficulties encountered during the course of the audit, including any
restrictions on the scope of work or access to required information, any
significant disagreements with management concerning accounting or
disclosure matters and any significant adjustment proposed by the
independent public accountants.
Regularly review with the Company's independent public accountants any
audit problems or difficulties and management's response.
Review and consider with the independent public accountants and
management the matters required to be discussed by Statement of Auditing
Standards No. 61. These discussions shall include consideration of the
quality of the Company's accounting principles as applied in its
financial reporting, including review of estimates, reserves and
accruals, review of judgmental areas, review of audit adjustments
whether or not recorded and such other inquiries as may be appropriate.
Based on the foregoing review, make its recommendation to the board of
directors as to the inclusion of the Company's audited financial
statements in the Company's annual report on Form 10-K.
10. Review any disclosures provided by the Chief Executive Officer or the
Chief Financial Officer to the Audit Committee regarding significant
deficiencies in the design or operation of internal controls which could
adversely affect the Company's ability to record, process, summarize,
and report financial data.
11. Review and discuss any internal control report prepared by management
for inclusion in the Form 10-K.
12. Review with management and the independent public accountants any
significant transactions that are not a normal part of the Company's
operations and changes, if any, in the Company's accounting principles
or their application.
13. At least annually, obtain and review a report by the independent public
accountants describing the firm's internal quality-control procedures;
any material issues raised by the most recent internal
A-3
quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits carried
out by the firm, and any steps taken to deal with any such issues.
Financial Reporting Processes
14. Periodically discuss separately with management, the independent public
accountants and the internal auditors the adequacy and integrity of the
Company's accounting policies and procedures and internal accounting
controls, the completeness and accuracy of the Company's financial
disclosure and the extent to which major recommendations made by the
independent public accountants or the internal auditors have been
implemented or resolved.
15. Review and discuss any reports from the independent public accountants
on:
. all critical accounting policies and practices used;
. all material alternative accounting treatments of financial
information within GAAP that have been discussed with management,
including the ramifications of the use of such alternative treatments
and disclosures and the treatment preferred by the independent public
accountants; and
. other material written communications between the independent public
accountants and management.
16. Consider and approve, if appropriate, major changes to the Company's
auditing and accounting principles and practices as suggested by the
independent public accountants, management, or the internal auditing
department.
Review with the independent public accountants, the internal auditing
department and management the extent to which such changes have been
implemented. This review should be conducted at an appropriate time
subsequent to implementation of changes, as the Audit Committee decides.
Process Improvement
17. Conduct annual evaluations with the board of directors regarding the
performance of the Audit Committee.
18. Discuss with management and the Director of Internal Auditing policies
with respect to risk assessment and risk management.
19. Regularly apprise the board of directors, through minutes and special
presentations as necessary, of significant developments in the course of
performing these duties.
Ethical and Legal Compliance
20. Establish procedures for the receipt, retention and treatment of
complaints received regarding accounting, internal accounting controls,
auditing matters and the confidential, anonymous submissions by
employees of concerns regarding questionable accounting or auditing
matters.
Review any disclosures provided by the Chief Executive Officer or the
Chief Financial Officer to the Audit Committee regarding any fraud,
including that which involves management or other employees who have a
significant role in the Company's internal controls.
Investigate at its discretion any matter brought to its attention by,
without limitation by enumeration, reviewing the books, records and
facilities of the Company and interviewing Company officers or employees.
A-4
21. Review management's monitoring of the Company's compliance programs and
evaluate whether management has review systems in place that are
designed to ensure that the Company's financial statements, reports and
other financial information disseminated to governmental organizations
and the public satisfy legal requirements.
22. Review with the Company's in-house or outside legal counsel any legal
matter that could have a significant effect on the Company's financial
statements, including the status of pending litigation, taxation matters
and other areas of oversight to the legal and compliance area as may be
appropriate.
General
23. Perform any other activities consistent with this Charter, the Company's
Certificate of Incorporation and Bylaws, the rules of the NYSE
applicable to its listed companies, and governing law as the Audit
Committee or the board of directors deems necessary or appropriate.
V. Review of Committee Charter
At least annually, the Audit Committee shall review and reassess the
adequacy of this Charter. The Audit Committee shall report the results of the
review to the board of directors and, if necessary, make recommendations to the
board of directors to amend this Charter. This Charter shall be construed in
accordance with the Company's Corporate Governance Guidelines.
VI. Limitations
While the Audit Committee has the responsibilities and powers set forth in
this Charter and management and the independent public accountants for the
Company are accountable to the Audit Committee, it is not the duty of the Audit
Committee to plan or conduct audits or to determine that the Company's
financial statements are complete and accurate and are in accordance with
generally accepted accounting principles. This is the responsibility of the
independent public accountants and management, respectively.
A-5
[RELIANT RESOURCES LOGO]
ADMISSION TICKET
RELIANT RESOURCES, INC.
2003 ANNUAL MEETING OF STOCKHOLDERS
Wednesday, June 4, 2003
9:00 a.m. Central Daylight Time
Auditorium
1111 Louisiana Street
Houston, Texas
This admission ticket admits only the named stockholder.
Note: If you plan on attending the Annual Meeting in person, please bring, in
addition to this Admission Ticket, a proper form of identification. The use of
video or still photography at the Annual Meeting is not permitted. For the
safety of attendees, all bags, packages and briefcases are subject to
inspection. Your compliance is appreciated.
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RELIANT RESOURCES, INC.
Proxy Common Stock
This proxy is solicited on behalf of the board of directors
The undersigned hereby appoints Laree E. Perez, E. William Barnett, and William
L. Transier, and each of them, as proxies, with full power of substitution, to
vote as designated, all shares of common stock held by the undersigned at the
annual meeting of stockholders of Reliant Resources, Inc. to be held June 4,
2003, at 9 a.m. (CDT) in the auditorium, 1111 Louisiana Street, Houston, Texas,
or any adjournments thereof, and with discretionary authority to vote on all
other matters that may properly come before the meeting (unless such
discretionary authority is withheld).
If shares are issued to or held for your account under any employee savings
plan, then by signing this proxy you hereby direct the trustee of such plan to
vote your shares in such plan in your name in accordance with the instructions
given herein, including the matters shown on the reverse side and any other
matters which may come before the meeting (unless such discretionary authority
is withheld).
If you wish to vote in accordance with the recommendations of the board of
directors, you may just sign and date on the reverse side and mail in the
postage-paid envelope provided. Specific choices may be made on the reverse
side. In the absence of instructions to the contrary, the shares represented
will be voted in accordance with the board of director's recommendation.
Note: Please sign exactly as name(s) appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title.
address changes/comments:
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---------------------------------------------------------------
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(If you noted any address changes/comments above,
please mark corresponding box on the reverse side)
[RELIANT RESOURCES LOGO]
VOTE AT INTERNET - www.proxyvote.com
-----------------
Use the internet to transmit your voting
instructions and for electronic delivery
of information up until 11:59 P.M. Eastern
Time the day before the cut-off date or
meeting date. Have your proxy card in hand
when you access the web site. You will be
prompted to enter your 12-digit Control
Number which is located below to obtain your
records and to create an electronic voting
instruction form.
VOTE BY PHONE - 1-800-690-6803
Use any touch-tone telephone to transmit your
voting instructions up until 11:59 P.M.
Eastern Time the day before the cut-off date
or meeting date. Have your proxy card in hand
when you call. You will be prompted to enter
your 12-digit Control Number which is located
below then follow the simple instructions the
Vote Voice provides you.
VOTE BY MAIL
Mark, sign, and date your proxy card and return
it in the postage-paid envelope we have provided
or return it to Reliant Resources, Inc., c/o ADP,
51 Mercedes Way, Edgewood, NY 11717.
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
RELIANT KEEP THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
RELIANT RESOURCES, INC.
RELIANT RESOURCES, INC.
2003 Annual Meeting of Stockholders
The nominees for director is Joel V. Staff. Your board of directors recommends
that you vote FOR the nominee for director, FOR ratification of the appointment
of Deloitte & Touche LLP as independent accountants and FOR the approval of the
amendment to the Reliant Resources, Inc. Employee Stock Purchase Plan.
For Withheld Abstain
1. Election of nominee for director.
[ ] [ ] [ ]
Joel V. Staff
Vote on Proposals
For Withheld Abstain
2. Ratification of the Appointment of [ ] [ ] [ ]
Deloitte & Touche LLP as independent
accountants for 2003.
3. Approval of the amendment to the Reliant [ ] [ ] [ ]
Resources, Inc. Employee Stock Purchase
Plan.
4. To withhold granting of discretionary [ ] [ ] [ ]
authority to vote on all other matters
that may properly come before the
Annual Meeting.
For address changes and/or comments, please check
this box and write them on the back where indicated [ ]
Please indicate if you plan to attend this meeting [ ] [ ]
YES NO
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Signature (PLEASE SIGN WITHIN BOX Date
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Signature (Joint Owners) Date