SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
NATCO GROUP, INC.
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(Name of Registrant as Specified in Its Charter)
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(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)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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(Natco Group Logo)
NATCO GROUP INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 22, 2003
To the Stockholders of NATCO Group Inc.:
The 2003 Annual Meeting of Stockholders of NATCO Group Inc., a Delaware
corporation, will be held at the Sheraton Houston Brookhollow Hotel, 3000 North
Loop West, Houston, Texas on the 22nd day of May 2003 at 10:00 a.m., local time
for the following purposes:
(1) To elect three Class II members to the Board of Directors;
(2) To ratify the appointment of KPMG LLP as independent accountants
for the year ending December 31, 2003; and
(3) To transact such other business as may properly come before the
annual meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on April 18, 2003 as
the record date for determining stockholders entitled to notice of, and to vote
at, the annual meeting and any adjournments thereof. Stockholders who execute
proxies solicited by the Board of Directors of the company retain the right to
revoke them at any time; unless so revoked, the shares of common stock
represented by these proxies will be voted at the annual meeting in accordance
with the directions given therein. If a stockholder does not specify a choice on
such stockholder's proxy, the proxy will be voted FOR the nominees for director
named in the attached proxy statement and FOR the ratification of the
appointment of the independent certified public accountants named in such proxy
statement. The list of stockholders of the company may be examined at NATCO's
principal executive offices beginning on May 12, 2003 or at the annual meeting.
Further information regarding the annual meeting is set forth in the
attached proxy statement.
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. HOWEVER, WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN
AND MAIL PROMPTLY THE ENCLOSED PROXY IN THE ENCLOSED POSTPAID ENVELOPE. THE
PROXY IS REVOCABLE AND WILL NOT BE USED IF YOU ARE PRESENT AT THE ANNUAL MEETING
AND PREFER TO VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors,
/s/ Katherine P. Ellis
Katherine P. Ellis,
Senior Vice President, General Counsel
and Secretary
April 22, 2003
(Natco Group Logo)
NATCO GROUP INC.
2950 N. LOOP WEST, 7TH FLOOR
HOUSTON, TEXAS 77092
PROXY STATEMENT
for the
2003 ANNUAL MEETING OF STOCKHOLDERS
The following information is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of NATCO Group Inc. to be voted
at the annual meeting of stockholders of the company, which will be held at the
Sheraton Houston Brookhollow Hotel, 3000 North Loop West, Houston, Texas on the
22nd day of May 2003, at 10:00 a.m. local time, for the following purposes:
1. To elect three Class II members to the Board of Directors;
2. To ratify the appointment of KPMG LLP as independent accountants
for the year ended December 31, 2003;
3. To consider and act upon all other business as may properly come
before the meeting or any adjournment thereof.
You may revoke your proxy at any time before it is exercised by: (1)
sending a written statement revoking your proxy to the Secretary of the company
at the address above; (2) submitting a properly signed proxy with a later date;
or (3) voting in person at the annual meeting. If you return your signed proxy
to us before the annual meeting, we will vote your shares as you direct. If you
do not specify on your proxy card how you want to vote your shares, we will vote
them "FOR" the election of all nominees for director as set forth under
"Proposal 1: Election of Directors," and "FOR" the ratification of the
appointment of KPMG LLP as independent accountants as set forth under "Proposal
2: Ratification of Appointment of Auditors." If any other business is brought
before the meeting, any unspecified proxies will be voted in accordance with the
judgment of the persons voting those shares.
The cost of soliciting proxies under this proxy statement will be paid by
the company. In addition to the use of the mails, proxies may be solicited by
our directors, officers and employees without additional compensation, by
personal interview, telephone, telegram or other means of electronic
communication. Arrangements also may be made with brokerage firms and other
custodians, dealers, banks and trustees, or their nominees who hold the voting
securities of record, for sending proxy materials to beneficial owners. Upon
request, the company will reimburse the brokers, custodians, dealers, banks,
trustees or their nominees for their reasonable out-of-pocket expenses. In
addition, we have retained Mellon Investor Services LLC to assist in the
solicitation of proxies, whose fee is estimated to be $4,500.
NATCO Group Inc.'s 2002 Annual Report to Stockholders, including our Annual
Report on Form 10-K for the year ended December 31, 2002, is being mailed with
this proxy statement to all stockholders entitled to vote at the annual meeting.
This report does not constitute a part of the proxy soliciting material.
This proxy statement and the enclosed form of proxy are being mailed to
stockholders beginning on or about April 25, 2003.
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has established April 18, 2003 as the record date
for stockholders who are entitled to notice of, and to vote at, the annual
meeting and any adjournments or postponements of the annual meeting. On April
18, 2003, there were 15,803,797 shares of our common stock, par value $.01 per
share, and
15,000 shares of Series B Convertible Preferred Stock, par value $.01 per share,
issued and outstanding, which constituted the only outstanding voting securities
of NATCO. Each share of common stock is entitled to one vote. Each share of
Series B Convertible Preferred Stock is entitled to a number of votes equal to
the number of shares of common stock into which the Series B Convertible
Preferred Stock would convert if converted on the record date. If converted on
the record date, the Series B Convertible Preferred Stock would convert to an
aggregate of 1,921,845 shares of common stock, which equates to 128.123 votes
per preferred share. The holders of shares of Series B Convertible Preferred
Stock and holders of common stock shall vote together as one class on all
matters being submitted to a vote of NATCO's stockholders at the annual meeting.
In addition, pursuant to the restated certificate of incorporation of
NATCO, as amended, so long as more than 50% of the Series B Convertible
Preferred Stock remains outstanding, the holders of the Series B Convertible
Preferred Stock have the right, voting separately as a class with one vote per
share, to elect or appoint one director at any annual or special meeting of
stockholders or pursuant to written consent. On March 25, 2003, the holders of
the Series B Convertible Preferred Stock acting by written consent elected Mr.
Thomas R. Bates, Jr. to serve as a director of the company pursuant to this
right. Accordingly, the holders of the Series B Convertible Preferred Shares
will not elect a director at the annual meeting. Mr. Bates will continue to
serve as a director at the pleasure of the holders of Series B Convertible
Preferred Stock for so long as this right continues. Following certain defaults
related to the payment of dividends on or the redemption price for the Series B
Convertible Preferred Stock, the holders of the Series B Convertible Preferred
Stock will be entitled to elect a second director, also voting separately as a
class with one vote per share.
The presence, in person or by proxy, of the holders of a majority of all
the outstanding shares of stock entitled to vote at the meeting is necessary to
constitute a quorum at the annual meeting or any adjournment or postponement of
the annual meeting. Abstentions and broker non-votes will be counted in
determining whether or not there is a quorum at the annual meeting.
REQUIRED VOTES
A plurality of the voting power of the shares present in person or
represented by proxy and entitled to vote at the annual meeting is required for
the election of directors. Accordingly, the three nominees for election as
directors at the annual meeting who receive the greatest number of votes cast
for election by the holders of record on April 18, 2003 shall be duly elected
directors upon completion of the vote tabulation at the annual meeting. The
affirmative vote of a majority of the voting power of the shares present in
person or represented by proxy and entitled to vote at the annual meeting is
required for the ratification of the selection of our independent auditors. An
automated system that our transfer agent administers will tabulate the votes.
Brokers who hold shares in street name for customers are required to vote shares
in accordance with instructions received from the beneficial owners. Brokers are
permitted to vote on discretionary items if they have not received instructions
from the beneficial owners, but they are not permitted to vote (a "broker non-
vote") on non-discretionary items absent instructions from the beneficial owner.
Both abstentions and broker non-votes will not have any effect on the outcome of
voting on director elections. For purposes of voting on the ratification of the
selection of auditors, abstentions will be included in the number of shares
voting and will have the effect of a vote against the proposal, and broker
non-votes will not be included in the number of shares voting and therefore will
have no effect on the outcome of the voting.
A proxy in the accompanying form that is properly signed and returned will
be voted at the annual meeting in accordance with the instructions on the proxy.
Any properly executed proxy on which no contrary instructions have been
indicated about a proposal will be voted as follows with respect to the
applicable proposal: "FOR" the election of the three persons named in this proxy
statement as the Board of Directors' nominees for election to the Board of
Directors; "FOR" the ratification of the selection of KPMG LLP as our auditors;
and in accordance with the discretion of the holders of the proxy with respect
to any other business that properly comes before the stockholders at the annual
meeting. The Board of Directors knows of no matters, other than those previously
stated, to be presented for consideration at the annual meeting. The persons
named in the accompanying proxy may also, in their discretion, vote the proxy to
adjourn the annual meeting from time to time.
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STOCKHOLDER LIST
A copy of the list of stockholders entitled to vote at the annual meeting
will be available for inspection by qualified stockholders for proper purposes
at our principal executive offices (2950 N. Loop West, Suite 700, Houston, Texas
77092) during normal business hours beginning on May 12, 2003 and at the annual
meeting.
PROPOSAL 1: ELECTION OF DIRECTORS
Our amended and restated bylaws, as amended, provide that the Board of
Directors will be composed of eight members. The board has seven members serving
in three classes who are elected by holders of our voting stock, with two
members in Class I, three members in Class II and two members in Class III.
Directors in each class are elected for terms of three years, so that the term
of one class of directors expires at each annual meeting of stockholders. In
addition, the holders of the Series B Convertible Preferred Stock, voting as a
separate class, are entitled to elect one director at an annual or special
meeting of stockholders or by written consent. On March 25, 2003, the holders of
the Series B Convertible Preferred Stock, acting by written consent, elected Mr.
Thomas R. Bates, Jr. to serve as a director pursuant to their right.
Accordingly, the holders of the Series B Convertible Preferred Stock will not
separately elect a director at the annual meeting. Mr. Bates shall continue in
office until a successor has been elected by the holders of the Series B
Convertible Preferred Stock or until less than 50% of such series remains
outstanding.
NOMINEES
Three directors are to be elected at the annual meeting. The Board of
Directors has nominated Mr. Keith K. Allan, Mr. Howard I. Bull and Mr. George K.
Hickox, Jr., to fill the three expiring Class II positions on the Board of
Directors, to hold office for three-year terms expiring at the annual meeting of
stockholders in 2006, until their respective successors have been duly elected
and qualified, or until their earlier resignation or removal. The enclosed proxy
(unless otherwise directed, revoked or suspended) will be voted "FOR" the
election of the three nominees for Class II director.
Although we know of no reason why any of the nominees might be unable or
refuse to accept nomination or election, if any nominee should be unable to
serve as a director, the shares represented by proxies will be voted for the
election of a substitute nominated by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE DIRECTOR
NOMINEES.
Set forth below are the names of, and certain information with respect to,
our executive officers and directors, including the three nominees for election
to the Class II positions on the Board of Directors.
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EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION(S) COMMITTEE(S)
---- --- ----------- ------------
Nathaniel A. Gregory........... 54 Chairman of the Board and Chief Executive (Chairman)
Executive Officer (Class III
-- term expiring in 2004)
Patrick M. McCarthy............ 58 Director and President (Class I Executive
-- term expiring in 2005)
Keith K. Allan(1).............. 63 Director (Class II -- term Audit (Chairman)
expiring in 2003)
Thomas R. Bates, Jr.(2)........ 53 Director
Howard I. Bull(1).............. 62 Director (Class II -- term Governance,
expiring in 2003) Nominating and
Compensation
("GN&C")
John U. Clarke................. 50 Director (Class I -- term Audit, GN&C
expiring in 2005) (Chairman)
George K. Hickox, Jr.(1)....... 44 Director (Class II -- term Audit
expiring in 2003)
Herbert S. Winokur, Jr. ....... 59 Director (Class III -- term GN&C; Executive
expiring in 2004)
James Crittall................. 59 President -- NATCO Canada
Robert A. Curcio............... 46 Senior Vice President --
Technology and Product
Development
Byron J. Eiermann.............. 55 Senior Vice President --
Southeast Asia
Katherine P. Ellis............. 42 Senior Vice President, General
Counsel and Secretary
Ryan S. Liles.................. 48 Vice President, Controller and
Principal Accounting Officer
Peter G. Michaluk.............. 48 Senior Vice President --
Europe, Africa and
Middle East; Managing
Director -- Axsia
Richard D. Peters.............. 43 Senior Vice President and
Director -- Gas Membrane
Systems
C. Frank Smith................. 51 Executive Vice President
David R. Volz, Jr. ............ 49 President -- TEST
Joseph H. Wilson............... 50 Senior Vice President -- Marketing
---------------
(1) Nominee for election at the annual meeting.
(2) Appointed by the holders of the Series B Convertible Preferred Stock on
March 25, 2003.
Nathaniel A. Gregory. Chairman of the Board and Chief Executive Officer
since April 1993. Prior to joining NATCO, Mr. Gregory held a number of positions
in the engineering and construction industry and in investment banking.
Patrick M. McCarthy. Director since February 1998 and President since
December 1997. Mr. McCarthy served as Executive Vice President of NATCO, with
marketing and operations responsibilities, from November 1996 to December 1997
and as Senior Vice President -- Marketing from June 1994 to November 1996. Prior
to joining us in June 1994, Mr. McCarthy was Vice President -- Worldwide Oil and
Gas at ABB Lummus Crest, an engineering and construction company.
Keith K. Allan. Chairman of the Audit Committee and Director since
February 1998. Mr. Allan was a director of NATCO (U.K.) Ltd. from October 1996
to January 1998. From February 1993 to August 1996,
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he was Technical Director in the North Sea for Shell U.K. Exploration and
Production. From 1965 to February 1993, he served in a number of positions for
Royal Dutch/Shell Group.
Thomas R. Bates, Jr. Director since March 2003 and Managing Director of
Lime Rock Partners, Houston, Texas, a partnership that invests in growth capital
equity for oilfield service companies, since October 2001. Mr. Bates previously
served as Senior Vice President, then President, of the Discovery Group of Baker
Hughes, Inc. (June 1998 to January 2000), as CEO and President of Weatherford
Enterra, Inc. (June 1997 to May 1998) and as President of the Anadrill Division
of Schlumberger Ltd. (March 1992 to May 1997). Mr. Bates currently serves as the
chairman and a member of the executive committee of Rotary Steerable Tools
(BVI), Inc. (a manufacturer of drilling tools), chairman and a member of the
compensation committee of vMonitor, Inc. (a provider of web-based technology for
remote monitoring of assets in the oil and gas industry) and a director of New
Patriot Drilling.
Howard I. Bull. Director since February 1998. From April 1994 until his
retirement in June 1997, Mr. Bull was President, Chief Executive Officer and a
director of Dal-Tile International, Inc., a manufacturer and distributor of
ceramic tile. From May 1992 to February 1993, Mr. Bull was President of the Air
Conditioning Group of York International Corporation, a producer of heating, air
conditioning and refrigeration systems and equipment, and was President of its
Applied Systems Division from November 1990 to May 1992. From February 1979 to
November 1990, Mr. Bull was employed by Baker Hughes, Inc. as president of five
oilfield operating companies and president of Baker Hughes Drilling Equipment
Group.
John U. Clarke. Director since February 2000 and Chairman of the GN&C
Committee since December 2002. Mr. Clarke has been President of Concept Capital
Group, a financial and strategic advisory firm originally founded by Mr. Clarke
in 1995 since May 2001. Immediately prior to reestablishing the firm, Mr. Clarke
was a Managing Director of SCF Partners, a private equity investment firm. From
1999 to June 2000, Mr. Clarke was Executive Vice President of Dynegy, Inc. where
he was also an Advisory Director and member of the Office of the Chairman. Mr.
Clarke joined Dynegy in April 1997 as Senior Vice President and Chief Financial
Officer. Prior to joining Dynegy, Mr. Clarke was a managing director of Simmons
& Company International. From 1995 to 1997, he served as president of Concept
Capital Group. Mr. Clarke was Executive Vice President and Chief Financial and
Administrative Officer with Cabot Oil and Gas from 1993 to 1995. He was with
Transco Energy from 1981 to 1993, last serving as Senior Vice President and
Chief Financial Officer. Mr. Clarke is a member of the Board of Directors of
Harvest Natural Resources, a publicly traded international oil and gas company.
He is also a member of the Board of Directors of FuelQuest.com, a market service
provider to petroleum marketers, and an Advisory Director of Pilko and
Associates, a management consulting firm specializing in environmental health
and safety issues.
George K. Hickox, Jr. Director since November 1998. Mr. Hickox has served
as Chairman and Chief Executive Officer of The Wiser Oil Company, an independent
oil and gas exploration and production company, since May 2000, and as a general
partner of Heller Hickox & Co., a partnership specializing in energy
investments, since September 1991. Mr. Hickox also served as a director of
Cynara prior to its acquisition by NATCO in November 1998. He presently serves
as an officer and director of several privately held companies.
Herbert S. Winokur, Jr. Director since 1989. Mr. Winokur is Chairman and
Chief Executive Officer of Capricorn Holdings, Inc.,(a private investment
company), and Managing General Partner of Capricorn Investors, L.P., Capricorn
Investors II, L.P. and Capricorn Investors III, L.P., private investment
partnerships concentrating on investments in restructure situations, organized
by Mr. Winokur in 1987, 1994 and 1999, respectively. He is also a Managing
Member of Capricorn Holdings, LLC and Capricorn Holdings III, LLC (which are
General Partners of Capricorn Investors II, L.P. and Capricorn Investors III,
L.P., respectively). Prior to his current appointment, Mr. Winokur was Senior
Executive Vice President and director of Penn Central Corporation. Mr. Winokur
is also a director of Mrs. Fields' Famous Brands, Inc. (parent corporation of
various premium snack food entities), CCC Information Services Group, Inc. (a
technology supplier to the auto claims and collision repair industries) and
Holland Series Fund, Inc. (a mutual fund).
James F. Crittall. President of NATCO Canada since November 1996. Mr.
Crittall served as Vice President of Technical Operations for NATCO Canada from
December 1992 to October 1996. Mr. Crittall
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joined National Tank Company in 1971 and has served in several managerial
positions, including Manager of Engineering and Sales and Manager of Engineering
for NATCO Canada, Ltd.
Robert A. Curcio. Senior Vice President -- Technology and Product
Development since May 1998. Mr. Curcio spent 20 years at Exxon Corporation and
its affiliates in marketing, engineering and manufacturing management. Mr.
Curcio served as Global Markets Director -- Heavy Duty Diesel Additives of Exxon
Chemical's PARAMINS division from February 1996 to May 1998, Global Markets
Manager -- Specialty and Niche Additives of PARAMINS from January 1995 to
February 1996 and PARAMINS Product Manager -- Large Engine Additives from July
1992 to January 1995.
Byron J. Eiermann. Senior Vice President -- Southeast Asia since February
2001. From July 1994 to January 2001, Mr. Eiermann has served as Vice President
and Managing Director of various subsidiaries of NATCO. He joined us in February
1994 as Vice President of Worldwide Sales and Marketing. From January 1983 to
February 1994, Mr. Eiermann held various managerial positions with J. Ray
McDermott, Inc.
Katherine P. Ellis. Senior Vice President, General Counsel and Secretary
since March 2003. Ms. Ellis held various counsel positions for Nabors Industries
from December 1996 to December 2002, serving most recently as General Counsel.
From 1987 to 1996 she was associated with the law firm of Baker & Botts LLP in
Houston, Texas.
Ryan S. Liles. Vice President and Controller since April 2000. Mr. Liles
was Controller of Dailey International Inc., an oilfield services company, from
October 1994 to April 2000. He served as an Assistant Controller at USPCI, a
hazardous waste disposal company, from November 1989 to October 1994.
Peter G. Michaluk. Senior Vice President -- Europe, Africa and Middle East
since March 2001. Since 1994, Mr. Michaluk served as Managing Director of Axsia.
He joined Axsia in 1978 as a process engineer and held various technical and
managerial positions of increasing responsibility prior to assuming his current
position.
Richard D. Peters. Senior Vice President and Director -- Gas Membrane
Systems since September 2002, Senior Vice President -- Americas from March 2001
to August 2002, and Senior Vice President -- Engineering from July 2000 to March
2001. From November 1997 to July 2000, he served as President of Cynara. Mr.
Peters served as Chief Financial Officer of Cynara from June 1996 to October
1997 and as Project Manager and Accounting Coordinator of Cynara from February
1991 to May 1996.
C. Frank Smith. Executive Vice President -- NATCO Group Inc. since January
2002. Mr. Smith was President of NATCO's U.S. operations from January 1998 until
January 2002, and served as Senior Vice President -- Sales and Service from
September 1993 to December 1997 and as the Northern Region Director of Sales and
Service Centers from April 1992 to September 1993.
David R. Volz, Jr. President of TEST since its acquisition in June 1997.
Mr. Volz joined TEST in 1976 as a Technical Specialist and held a number of
positions of increasing responsibility prior to serving as President.
Joseph H. Wilson. Senior Vice President -- Marketing since April 1999.
Prior to joining us, Mr. Wilson served as Strategic Accounts Manager of Baker
Hughes Inc., with responsibilities for strategic business development, from
January 1999 to April 1999. From January 1997 to January 1999, Mr. Wilson served
as Gulf Coast Region Manager of Baker Hughes INTEQ's fluids, directional
drilling and MWD business. From January 1994 to January 1997, Mr. Wilson was
Director of Sales and Systems Marketing for all of INTEQ. Prior to January 1994,
Mr. Wilson held a number of positions in sales, operations and marketing with
Baker Hughes INTEQ, Baker Sand Control and BJ Services, each an oilfield service
company.
6
COMMITTEES AND BOARD MEETINGS
The Board of Directors currently has three committees: the Executive
Committee, the Audit Committee and the Governance, Nominating and Compensation
("GN&C") Committee.
The Executive Committee consists of Mr. Gregory (Chairman), Mr. McCarthy
and Mr. Winokur. The committee was formed to exercise the powers of the board
during intervals between board meetings, to the extent permitted by law. The
Executive Committee did not meet in 2002.
Our Audit Committee consists of Mr. Allan, Mr. Clarke and Mr. Hickox, each
of whom is a non-employee director. The Audit Committee, which is chaired by Mr.
Allan, meets separately with representatives of our independent auditors and
with representatives of senior management in performing its functions. The Audit
Committee reviews the general scope of audit coverages, the fees charged by the
independent auditors, matters relating to internal control systems and other
matters related to accounting and reporting functions.
The GN&C Committee members are Mr. Bull, Mr. Clarke (Chairman) and Mr.
Winokur, each a non-employee director. The GN&C Committee's role is to assist
the Board of Directors in fulfilling its oversight responsibilities with respect
to governance, nomination of directors and executive compensation. In fulfilling
its nominating role, the committee assists the board in identifying individuals
qualified to become board members and in determining the composition of the
board of directors and its committees. On matters related to evaluation and
re-nomination of directors who are also members of the GN&C Committee, such
members abstain from the committee's deliberations and recommendations. In
fulfilling its compensation role, the committee assists the Board in assuring
that our senior executives are compensated effectively, in a manner consistent
with the stated compensation strategy of the company, internal equity
considerations, competitive practice and the requirements of applicable law,
regulations and rules of applicable regulatory bodies.
In 2001 and prior years, performance evaluation of incumbent Directors and
recommendations for the Board nominations were the responsibility of the
Executive and Nominating Committee, whose members were Mr. Gregory, Mr. McCarthy
and Mr. Winokur. In February 2002, the Board of Directors transferred
responsibility for performance evaluations of incumbent Directors and
recommendations for Board nominees to the Compensation Committee, renamed it the
Compensation and Nominating Committee and appointed Mr. Clarke as a member of
the committee, joining Mr. Winokur and Mr. Bull. Mr. Winokur served as the
Chairman of that committee until December 2002, when the Board of Directors
renamed it the Governance, Nominating and Compensation Committee, and elected
Mr. Clarke as its Chairman. At this time, the GN&C Committee was assigned
overall responsibility for corporate governance policies and procedures and
monitoring compliance with the Sarbanes-Oxley Act of 2002 in regards to those
policies and procedures. With respect to governance matters, the GN&C
Committee's role is evolving, and will continue to do so as the laws, rules and
regulations related to corporate governance standards change.
During 2002, the entire Board of Directors held six meetings, the Audit
Committee held nine meetings and the GN&C Committee held four meetings. Each of
the directors attended at least 75% of the board meetings and the committees of
the Board on which they served.
AUDIT COMMITTEE REPORT
The Audit Committee operates under a charter that was adopted by the Board
of Directors on May 2, 2000 and was included in our 2000 proxy statement. During
its nine meetings in 2002, the Audit Committee met nine times with the company's
financial management and eight times with our independent certified
7
public accountants, KPMG LLP, as part of its role in providing oversight to the
financial reporting process and internal control structure. KPMG LLP met with
the Audit Committee, without NATCO management representatives present, to
discuss the results of their examinations and quality of reporting.
The Audit Committee reviewed and discussed with management our audited
financial statements for the year ended December 31, 2002. In addition, the
Audit Committee discussed with KPMG LLP matters required by Statement on
Auditing Standards No. 61.
The Audit Committee also received and reviewed the written disclosures and
the letter from KPMG LLP required by Independence Standards Board Standard No. 1
and discussed with KPMG LLP their independence. The Audit Committee also
reviewed and discussed with our management and with KPMG LLP such other matters
and received such assurances from these parties that they deemed appropriate.
Based on the foregoing review and discussions, the Audit Committee
recommended to our Board of Directors the inclusion of our audited financial
statements in the Annual Report on Form 10-K for the year ended December 31,
2002 filed with the Securities and Exchange Commission.
The Audit Committee also considered whether the provision of the non-audit
services listed below is compatible with maintaining the independence of KPMG
LLP. The Audit Committee determined that such services were compatible with KPMG
LLP's independence.
Audit Fees. The audit fees paid by the company to KPMG LLP for the years
ended December 31, 2002 and 2001 totaled $433,945 and $396,206, respectively.
Financial Information Systems Design and Implementation Fees. KPMG LLP did
not provide such services to us for the years ended December 31, 2002 and 2001.
All Other Fees. All other fees paid to KPMG LLP for the years ended
December 31, 2002 and 2001 for services other than those disclosed above totaled
$56,273 and $365,924, respectively, including fees for non-audit services of
$30,523 and $300,674, respectively, and audit-related services of $25,750 and
$65,250, respectively. Non-audit services consisted of tax compliance and
consulting services, as well as certain due diligence in 2001 pertaining to an
acquisition. Audit-related services consisted of the audit of the financial
statements of an employee benefit plan and review of registration statements.
The Audit Committee:
Keith K. Allan (Chairman)
John U. Clarke
George K. Hickox, Jr.
GOVERNANCE, NOMINATING AND COMPENSATION COMMITTEE REPORT
The GN&C Committee of the Board of Directors is responsible for developing
executive compensation policies that support NATCO's strategic business
objectives and values. The GN&C Committee has oversight responsibility in
establishing compensation levels for executive officers, setting guidelines for
company-wide compensation and employee benefit policies, and administering our
bonus plans and stock option plans. Our objectives in compensation for executive
officers and key employees are to attract and retain talented and experienced
people who will contribute to the long-term success of NATCO, to inspire
executive officers to work as a team to pursue our goals, and to align executive
officers' interest to those of NATCO, by providing for bonuses tied to company
performance, and to stockholders, by providing stock options as a portion of
compensation. The GN&C Committee monitors general industry conditions, changes
in regulations and tax laws, and other developments that may, from time to time,
require modification of the executive compensation program to ensure the program
is properly structured to achieve its objectives.
In making compensation determinations, the GN&C Committee evaluates a
number of factors at the end of each year, including NATCO's performance
relative to our annual objectives, our performance relative to changes in the
industry and each executive officer's contribution to our performance during the
year. The GN&C Committee does not apply any particular formula or assign any
particular weight to any factors it
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considers in determining an executive's compensation. Instead, the committee
considers all of these factors together and makes a subjective determination
with respect to executive compensation. The annual base salary, bonus and stock
option awards paid or awarded to our chief executive officer and our other four
most highly compensated executive officers (the "Named Executive Officers") are
set forth in summary form in the Summary Compensation Table included in the
proxy statement of which this report forms a part.
Salaries. Executive officer salaries are based on a subjective evaluation
considering peer company data, the executive's responsibilities, performance and
length of time in the position, internal equities among positions and general
economic conditions. Overall compensation is intended to be at or modestly above
the median level of compensation for peer companies with which we compete for
employees. To determine salary levels paid within the industry, the GN&C
Committee reviews various industry surveys and proxy information of our
competitors and consults with independent compensation consulting firms from
time to time. The GN&C Committee reviews executive salaries at least annually,
and makes appropriate adjustments.
Benefits. Our benefit plans are intended to be at or modestly above the
median level of benefits for peer companies with which we compete for employees.
NATCO maintains a defined contribution pension plan (the 401(k) Savings Plan)
covering substantially all non-union hourly and salaried employees who have
completed three months of service. Employee contributions of up to 3% of each
covered employee's compensation are matched 100% by the company, with an
additional 2% of covered employee's compensation matched at 50%. In addition, we
may make discretionary contributions from time to time as profit sharing
contributions. The GN&C Committee reviews and approves all discretionary
matches. No discretionary match was provided for the year ended December 31,
2002.
Bonus Awards. Bonus awards are linked to the achievement of company-wide
and individual performance goals and are designed to put a significant portion
of total compensation at risk. Under the bonus plan, a bonus target is
established for each executive officer and key employee based on a subjective
evaluation considering peer company data and the executive officer or key
employee's level of responsibility and ability to impact our success. In 2002,
the individual bonus targets for executive officers ranged from 25% to 75% of
salary. After a year-end review, the GN&C Committee determines the amount of the
annual incentive payment, if any, that will be awarded to an executive officer
based on the GN&C Committee's subjective evaluation of the extent to which
company-wide and individual performance goals are achieved and general economic
and industry conditions.
Stock Options. We make stock option awards under the Stock Incentive Plan
to align the interests of executive officers and key employees with those of
stockholders. Options vest over multiple years at the fair market value of the
common stock on the date of grant. Therefore, these options will have no value
unless the company's stock appreciates in value. The GN&C Committee makes awards
based on a subjective evaluation considering peer company data and the executive
officer's or key employee's ability to impact our success. Consideration is also
given to amounts, timing and vesting status of previous awards to each executive
officer or key employee, total options outstanding and available under the plan,
and the level and volatility of our share price and the amount of appreciation
realized by the stockholders over comparable periods. Other than as part of the
initial compensation package for new key employees, the GN&C Committee did not
make any stock option awards with respect to 2002.
Compensation of the Chief Executive Officer. The Chief Executive Officer's
compensation primarily consists of base salary, annual incentive and long-term
incentives. The GN&C Committee establishes the Chief Executive Officer's pay
levels and incentives in the same manner as for other executive officers
described above. NATCO entered into a new, three-year employment agreement with
Mr. Gregory in December 2002, replacing his prior employment agreement with the
company. Pursuant to the prior agreement, Mr. Gregory's annual base salary for
the year ended December 31, 2002 was $400,000. Mr. Gregory's target bonus was
75% in 2002, of which the GN&C Committee awarded him $225,000. No stock options
were granted to Mr. Gregory in 2002. Options granted to Mr. Gregory in 2001 and
2000 represented 81,750 shares and 50,000 shares of common stock, respectively.
Severance; Change of Control Agreements. At the end of 2002, the GN&C
Committee undertook a review of our various severance policies and employment
arrangements with our executive officers, with the
9
assistance of an independent compensation consulting firm. Based on this
analysis, the GN&C Committee authorized NATCO to enter into employment
agreements with the Chief Executive Officer and President containing the
recommended severance provisions, and authorized NATCO to enter into change in
control agreements with its other executive officers.
Other Matters. In 2001 and prior years, performance evaluations of
incumbent directors and recommendations for Board nominations were the
responsibility of the Executive and Nominating Committee, consisting of Mr.
Gregory, Mr. McCarthy and Mr. Winokur. In February 2002, the Board appointed Mr.
Clarke to the Compensation Committee, renamed the committee the Compensation and
Nominating Committee, and transferred to it responsibility for performance
evaluations of incumbent Directors and recommendations for Board nominees. In
December 2002, this committee was renamed the Governance, Nominating and
Compensation Committee, incorporating overall responsibility for corporate
governance policies and procedures and compliance with the provisions of the
Sarbanes-Oxley Act of 2002, in regards to those policies and procedures.
The Governance, Nominating and Compensation Committee:
John U. Clarke (Chairman)
Howard I. Bull
Herbert S. Winokur, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the Governance, Nominating and Compensation Committee
consisted of Mr. Bull, Mr. Clarke and Mr. Winokur, each a non-management
director. There were no GN&C Committee interlock relationships or insider
participation in compensation arrangements for the year ended December 31, 2002.
See "Certain Relationships and Related Transactions" for information
regarding certain transactions between the company and Mr. Winokur.
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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 18, 2003 by (i) each person known by
us to be the beneficial owner of more than 5% of our common stock, (ii) each
director, (iii) each of the Named Executive Officers (as defined in "Executive
Compensation" below), and (iv) all directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting and dispositive power
over the shares indicated as owned by such person.
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER(1) ADDRESS OWNED OWNED
------------------- ------- ------------ ------------
Bricoleur Capital Management, LLC(2)............ 12230 El Camino Real,
Suite 1000
San Diego, California 92130 881,400 5.6%
Capricorn Investors II, LP(3)................... 30 East Elm Street
Greenwich, Connecticut 06830 3,095,557 19.6%
Lime Rock Partners II, LP(4).................... 518 Riverside Avenue
Westport, Connecticut 06880 2,170,645 12.1%
Royce & Associates(2)........................... 1414 Avenue of the Americas
New York, New York 10019 1,190,900 7.5%
Wellington Management Company, LLP(2)(5)........ 75 State Street
Boston, Massachusetts 02109 969,700 6.1%
Nathaniel A. Gregory(6)......................... 2950 N. Loop West, Suite 700
Houston, Texas 77092 4,401,129 27.3%
Patrick M. McCarthy............................. 2950 N. Loop West, Suite 700
Houston, Texas 77092 234,951 1.5%
Byron J. Eiermann............................... 2950 N. Loop West, Suite 700
Houston, Texas 77092 33,297 *
C. Frank Smith.................................. 2950 N. Loop West, Suite 700
Houston, Texas 77092 70,803 *
Keith K. Allan.................................. 2950 N. Loop West, Suite 700
Houston, Texas 77092 13,334 *
Thomas R. Bates, Jr.(7)......................... 10375 Richmond Ave., Suite 225,
Houston, Texas 77042 2,170,645 12.1%
Howard I. Bull.................................. 2950 N. Loop West, Suite 700
Houston, Texas 77092 13,334 *
John U. Clarke.................................. 2950 N. Loop West, Suite 700
Houston, Texas 77092 17,735 *
George K. Hickox, Jr. .......................... 2950 N. Loop West, Suite 700
Houston, Texas 77092 216,352 1.4%
Herbert S. Winokur, Jr.(3)...................... 30 East Elm Street
Greenwich, Connecticut 06830 4,957,936 31.4%
All Directors and Executive Officers as a Group
(17 persons).................................. 7,204,129 43.4%
---------------
* Indicates beneficial ownership of less than one percent of outstanding
common stock
(1) Shares are considered "beneficially owned," for purposes of this table, if
the person directly or indirectly has sole or shared voting and investment
power with respect to such shares, and/or if a person has the right to
acquire shares within 60 days of April 18, 2003, the date of record for the
annual meeting. Shares that are indicated as beneficially owned in the table
above which meet this 60-day criteria include: (1) Capricorn II, 8,536; (2)
Lime Rock Partners II, LP, 2,170,645; (3) Mr. Gregory, 284,801; (4) Mr.
McCarthy, 90,117; (5) Mr. Smith, 61,659; (6) Mr. Eiermann, 18,463; (7) Mr.
Allan, 13,334; (8) Mr. Bull, 13,334; (9) Mr. Clarke, 7,735; (10) Mr. Hickox,
6,667; and (11) all Directors and executive officers as a group, 792,609.
(2) As reported in a Schedule 13G filed with the Securities and Exchange
Commission.
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(3) Of the shares indicated as being beneficially owned by Mr. Winokur,
3,095,557 of the shares are owned directly by Capricorn Investors II, LP. Mr
Winokur is the Manager of Capricorn Holdings LLC, which in turn serves as
the general partner of Capricorn Investors II, L.P. As such Mr. Winokur may
be deemed to have dispositive voting power over the shares owned by
Capricorn Investors II, L.P. Of the remaining 1,862,379 shares, Mr. Winokur
has sole voting and sole dispositive power with respect to 1,362,379 of such
shares. The remaining 500,000 shares are held in a trust established by Mr.
Winokur. Mr. Winokur, as trustee of the trust, has sole dispositive power
over such shares. Mrs. Deanne Winokur, who is Mr. Winokur's wife, is a
Special Trustee of the trust and, in that capacity, has sole voting power
over the shares.
(4) Lime Rock Partners II, LP holds 15,000 shares of our Series B Convertible
Preferred Stock, representing 100% of the issued and outstanding shares of
such series, which would be convertible to 1,921,845 shares of our common
stock if converted at April 18, 2003. In addition, Lime Rock Partners II, LP
holds immediately exercisable warrants to purchase 248,800 shares of our
common stock.
(5) Wellington Management Company, LLP, in its capacity as investment adviser to
its clients holding shares of NATCO common stock, has shared voting power
with respect to 372,400 of the 969,700 shares it beneficially owns and
shares investment power with respect to all of such shares.
(6) Of the shares indicated as being beneficially owned by Mr. Gregory,
3,095,557 of such shares are owned directly by Capricorn Investors II, L.P.
Mr. Gregory is a member of Capricorn Holdings LLC, which serves as general
partner in Capricorn Investors II, L.P. Mr. Gregory disclaims beneficial
ownership of such shares exceeding his pecuniary interest.
(7) All of the shares indicated as being beneficially owned by Mr. Bates are
owned directly by Lime Rock Partners II, LP. Mr. Bates has an economic
interest in such shares through the general partner of Lime Rock Partners
II, LP, and is a member of a six-member investment committee that advises
the persons who have voting and investment power with respect to the shares
owned by Lime Rock. Mr. Bates disclaims beneficial ownership of the shares
owned by Lime Rock Partners II, LP.
DIRECTOR AND EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who are our employees do not receive a retainer or fees for
service on the Board or any of its committees. We pay non-employee directors for
their services. Directors who are non-employees receive a quarterly fee of
$9,000 and a fee of $500 for attendance at each meeting of the Board. In
addition, pursuant to the 1998 Director Stock Option Plan, each non-employee
Director who is re-elected as a Director after completing at least one year of
service as a Director will receive, on the date of re-election, a stock option
to purchase 2,667 shares of common stock at the market price on the date of
grant. Some non-employee directors also have been awarded initial stock options
to purchase 6,667 shares of common stock at a price of $8.81 per share.
Directors are reimbursed for reasonable out-of-pocket expenses related to the
performance of their duties as directors. During 2002, Mr. Clarke undertook an
extensive review of the corporate governance of NATCO and provided the Board of
Directors a report on governance and the implications to NATCO of the
implementation of the Sarbanes-Oxley Act of 2002. After reviewing the matter
with outside counsel, the Board of Directors established the chairperson's fee
for the newly formed GN&C Committee at $18,000 through the 2003 annual meeting
of stockholders in recognition of the substantial time requirements necessary
for us to conform our corporate governance practice to newly-established
requirements.
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EXECUTIVE OFFICER COMPENSATION
The following table presents information concerning compensation paid to
the Chief Executive Officer and the four other most highly compensated executive
officers of NATCO during the years ended December 31, 2002, 2001 and 2000 (the
"Named Executive Officers"):
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OTHER($) OPTIONS(#) COMPENSATION
--------------------------- ----------- -------- ---------- -------- ------------ ------------
Nathaniel A. Gregory.......... 2002 $400,000 $ 216,523 $ 78,875(2) $ -- $ 8,966(3)
Chairman and Chief Executive 2001 394,231 191,842 71,299(2) 81,750 11,778(4)
Officer 2000 350,007 1,398,751(1) 74,079(2) 50,000 9,228(5)
Patrick M. McCarthy........... 2002 275,000 135,179 -- -- 10,511(3)
Director and President 2001 277,177 137,030 -- 56,300 9,432(4)
2000 270,207 102,987 -- -- 7,651(5)
Byron J. Eiermann............. 2002 175,203 74,801 110,637(6) -- 7,553(3)
Senior Vice President -- 2001 166,860 75,269 120,641(6) 48,850 10,356(4)
Southeast Asia 2000 154,970 50,145 1,788 -- 7,090(5)
C. Frank Smith................ 2002 220,000 84,229 2,783 -- 6,207(3)
Executive Vice President 2001 200,000 83,532 -- 48,300 11,220(4)
2000 184,375 62,526 -- 15,000 7,041(5)
J. Michael Mayer.............. 2002 189,300 73,661 6,000 -- 7,242(3)
Senior Vice President and 2001 183,077 67,517 -- 52,100 10,410(4)
Chief Financial Officer(7) 2000 176,731 26,400 -- -- 6,932(5)
---------------
(1) Includes a bonus of approximately $1,248,000 paid in connection with the
completion of our initial public offering.
(2) Includes costs paid by us for lodging in Houston and the tax gross-up of
related costs of $41,347 and $37,529 for 2002, respectively, $37,040 and
$34,259 for 2001, respectively, and $40,336 and $33,743 for 2000,
respectively.
(3) Represents (i) matching contributions made by us in 2002 under our 401(k)
Savings Plan of $8,000 for Mr. Gregory, $9,350 for Mr. McCarthy, $7,205 for
Mr. Eiermann, $5,738 for Mr. Smith and $6,992 for Mr. Mayer and (ii) life
insurance premiums of $966, $1,161, $348, $469 and $250 for Messrs. Gregory,
McCarthy, Eiermann, Smith and Mayer, respectively.
(4) Represents (i) matching contributions made by us in 2001 under our 401(k)
Savings Plan of $10,950 for Mr. Gregory, $8,400 for Mr. McCarthy, $10,033
for Mr. Eiermann, $10,950 for Mr. Smith, and $10,185 for Mr. Mayer and (ii)
life insurance premiums of $828, $1,032, $323, $270 and $225 for Messrs.
Gregory, McCarthy, Eiermann, Smith and Mayer, respectively.
(5) Represents (i) matching contributions made by us in 2000 under our 401(k)
Savings Plan of $8,400 for Mr. Gregory and $6,800 for Messrs. McCarthy,
Eiermann, Smith and Mayer and (ii) life insurance premiums of $828, $851,
$290, $241 and $132 for Messrs. Gregory, McCarthy, Eiermann, Smith and
Mayer, respectively.
(6) Includes costs paid by us for expatriat salary, including taxable
adjustments and foreign allowances of $106,560 and 4,077 for 2002,
respectively, and $117,963 and $2,678 for 2001, respectively.
(7) Mr. Mayer, Senior Vice President and Chief Financial Officer, resigned his
position on March 21, 2003.
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OPTION GRANTS, AGGREGATED OPTION EXERCISES IN 2002
AND FISCAL YEAR-END OPTION VALUES
We did not grant any options or stock appreciation rights with respect to
any of our securities to any of the Named Executive Officers during 2002.
Furthermore, none of the Named Executive Officers exercised any NATCO stock
options during 2002.
The following table presents information concerning unexercised stock
options held by the Named Executive Officers as of December 31, 2002.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------------- ----------- -------------
Nathaniel A. Gregory.............. 259,801 86,312 $205,454 $318
Patrick M. McCarthy............... 68,242 54,725 -- 188
Byron J. Eiermann................. 12,213 36,637 -- 239
C. Frank Smith.................... 52,909 43,725 41,668 283
J. Michael Mayer.................. 63,026 55,741 -- 271
---------------
(1) Represents the value of option grants that were in-the-money at December 31,
2002, calculated as the market value of the underlying shares of our common
stock at December 31, 2002 ($6.28 per share) minus the exercise price for
the option grant.
EQUITY COMPENSATION PLANS
Equity compensation plan information has been included under Item 12 in our
Annual Report on Form 10-K as of December 31, 2002, filed with the Securities
and Exchange Commission on March 21, 2003, and is incorporated in this proxy
statement by reference.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Under the terms of an employment agreement in effect prior to 1999, we
loaned our Chief Executive Officer $1.2 million in July 1999 to purchase 136,832
shares of common stock. During February 2000, after we completed the initial
public offering of our Class A common stock, also pursuant to the terms of that
employment agreement, we paid this executive officer a bonus equal to the
principal and interest accrued under this note arrangement and recorded
compensation expense of $1.3 million. The officer used the proceeds of this
settlement, net of tax, to repay the company approximately $665,000. In
addition, on October 27, 2000, our Board of Directors agreed to provide a full
recourse loan to this executive officer to facilitate the exercise of certain
outstanding stock options. The amount of the loan was equal to the cost to
exercise the options plus any personal tax burdens that resulted from the
exercise. The maturity of these loans was July 31, 2003, and interest accrued at
rates ranging from 6% to 7.8% per annum. As of June 30, 2002, the outstanding
principal and interest on these notes receivable totaled $3.4 million. Effective
July 1, 2002, the notes were reviewed by our board and amended to extend the
maturity dates to July 31, 2004, and to require interest to be calculated at an
annual rate based on the London Inter-Bank Offered Rate ("LIBOR") plus 300 basis
points, adjusted quarterly, applied to the notes balances as of June 30, 2002,
including previously accrued interest. As of December 31, 2002, the outstanding
principal and interest due from this officer under these notes was $3.5 million.
These loans, which were made on a full recourse basis in prior periods to
facilitate direct ownership in our common stock, are currently subject to and in
compliance with provisions of the Sarbanes-Oxley Act of 2002.
As previously agreed in 2001, we loaned our President $216,000 on April 15,
2002, under a full-recourse note arrangement which accrues interest at 6% per
annum and matured on July 31, 2003. The funds were used to pay the exercise cost
and personal tax burdens associated with the stock options exercised during
2001. Effective July 1, 2002, the note was amended to extend the maturity date
to July 31, 2004, and to require
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interest to be calculated at an annual rate based on LIBOR plus 300 basis
points, adjusted quarterly, applied to the note balance as of June 30, 2002,
including previously accrued interest. As of December 31, 2002, the outstanding
principal and interest on the note was approximately $223,000. This loan, which
was made on a full recourse basis to facilitate direct ownership in our common
stock, is currently subject to and in compliance with provisions of the
Sarbanes-Oxley Act of 2002.
We pay Capricorn Management G.P., an affiliate company of Capricorn
Holdings, Inc., for administrative services, which include office space and
parking in Connecticut for our Chief Executive Officer, reception, telephone,
computer services and other normal office support relating to that space. Mr.
Herbert S. Winokur, Jr., one of our directors, is the Chairman and Chief
Executive Officer of Capricorn Holdings, Inc., and the Managing Partner of
Capricorn Holdings LLC, which is the general partner of Capricorn Investors II,
L.P., a private investment partnership, and directly or indirectly controls
approximately 31% of our outstanding common stock. In addition, our Chief
Executive Officer, Mr. Gregory, is a non-salaried member of Capricorn Holdings
LLC. Capricorn Investors II, LP controls approximately 20% of our common stock.
Fees paid to Capricorn Management for these administrative services totaled
$115,000, $85,000 and $75,000 for the years ended December 31, 2002, 2001 and
2000, respectively, with the increases in 2002 and 2001 primarily attributable
to an upward adjustment in Capricorn Management's underlying lease for office
space. The Audit Committee of our Board of Directors has responsibility for
reviewing and approving this arrangement.
We recorded revenues of $65,705 for the year ended December 31, 2002,
related to equipment sold to the Wiser Oil Company. One of our Directors, Mr.
George K. Hickox, Jr., is the Chief Executive Officer of the Wiser Oil Company.
These sales constituted less than one percent of NATCO's consolidated gross
revenues. NATCO purchased no equipment from the Wiser Oil Company during 2002.
EMPLOYMENT, TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Gregory serves as our Chairman and Chief Executive Officer under an
employment agreement entered into in December 2002, which replaced his prior
employment agreement. The current agreement is for a term of three years unless
sooner terminated by Mr. Gregory or by us in accordance with its terms. The
agreement automatically extends for additional one-year periods unless we notify
Mr. Gregory 90 days prior to the termination date of the agreement that we do
not wish to renew the agreement. Under his agreement, Mr. Gregory is entitled to
receive an annual salary (currently $436,000), an annual bonus with a target
award of 75% of Mr. Gregory's base salary based on our financial performance and
certain other criteria as are determined annually by our Board of Directors, and
such additional bonus payments as the Board may determine in its sole
discretion. He is also entitled to participate in our fringe benefit and
insurance plans and to reimbursement of certain costs and expenses.
If, prior to a change in control, we terminate Mr. Gregory's employment for
any reason other than cause, or Mr. Gregory terminates his employment for good
reason, Mr. Gregory will be entitled to severance pay in accordance with any
severance plan or policy that we may then have in effect and any bonus
compensation earned to that point under the bonus plan. If, during the 36-month
period following a change in control, Mr. Gregory terminates his employment
agreement for good reason or we terminate Mr. Gregory, other than for cause, Mr.
Gregory will be entitled to salary and accrued vacation through the date of
termination, annual bonus earned through the date of termination, three times
his base salary and target bonus at the time of notice of termination or of a
change in control, whichever is greater; continuation of health, dental and life
insurance benefit for a period of three years following the date of termination;
and all deferred bonus compensation under the bonus plan.
Mr. McCarthy serves as our President under an employment agreement entered
into in December 2002. The terms of Mr. McCarthy's employment agreement are
substantially similar to those of Mr. Gregory under his employment agreement,
except that, under Mr. McCarthy's agreement, he is entitled to receive an annual
salary (currently $300,000), an annual bonus with a target award of sixty
percent of Mr. McCarthy's base salary, based on our financial performance and
certain other criteria which are determined annually by our Board of Directors,
and such additional bonus payments as the Board may determine in its sole
discretion. If,
15
during the 36-month period following a change in control, Mr. McCarthy
terminates his employment agreement for a good reason or we terminate Mr.
McCarthy other than for cause, Mr. McCarthy will be entitled to the same
payment, benefits and treatment of his stock options as described above for Mr.
Gregory, except that the payment for his base salary shall be two times his base
salary at the time of notice of termination or change in control, whichever is
greater.
In December 2002, we entered into Senior Management Change in Control
Agreements with our executive officers, including the other three named
executive officers, one of whom has since resigned from the company. These
agreements are for an initial term of three years, but renew for successive
one-year periods unless terminated earlier as provided in the agreement. If,
during the 24-month period following a change in control, the executives
employment is terminated by us other than for cause, or by the executive for
good reason, we are obligated to pay the executive's salary and accrued vacation
through the date of termination, annual bonus earned through the date of
termination, an amount equal to the product of two times the executive's base
salary at the time of termination or of notice of a change in control, whichever
is greater, continuation of health, dental and life insurance benefits for a
period of two years following the date of termination. These payments are in
lieu of any other severance to which the executive may be entitled under other
severance arrangements of the company, and are in addition to any stock options
of the executive.
In addition, all unvested stock options held by any executive subject to an
employment or change in control agreement described above shall immediately vest
on the date of a change in control and the period for exercising certain of such
options may be extended. Also, for purposes of the above-referenced employment
and change in control agreements, the extent that any benefit, payment or
distribution by the company under the agreement would be subject to the excise
tax imposed by Section 4999 of the U.S. internal revenue code, then such amount
will be reduced to the extent necessary to avoid the imposition of the excise
tax.
Compensation policies in the event of a change in control are reviewed
regularly to ensure that the policies reflect terms and conditions consistent
with those adopted by comparable companies and that are in our best interests.
The Board of Directors or the GN&C Committee may change such policies as the
facts and circumstances dictate.
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PERFORMANCE GRAPH
The following performance graph compares the total stockholder return on
our common stock, assuming a $100 investment on the date of inception, to the
total return on the Standard & Poor's 500 Stock Index and Philadelphia OSX
Index, an index of oil and gas related companies which represents an industry
composite of our peer group, for the period beginning January 28, 2000 (the date
of our initial public offering) through March 31, 2003.
(PERFORMANCE GRAPH)
-----------------------------------------------------------------------------------------------
Amount Projected Market Values
Invested -------------------------------------------
1/28/00 12/29/00 12/31/01 12/31/02 3/31/03
-----------------------------------------------------------------------------------------------
S&P 500 $100 $ 94 $ 82 $ 63 $ 61
OSX 100 149 104 103 101
NATCO 100 83 70 63 57
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF AUDITORS
Pursuant to the recommendation of the Audit Committee, the Board of
Directors appointed KPMG LLP, independent public accountants, to audit our
consolidated financial statements for the year ending December 31, 2003. KPMG
LLP has audited our consolidated financial statements since 1989. We are advised
that no member of KPMG LLP has any direct or material indirect financial
interest in NATCO or, during the past three years, has had any connection with
us in the capacity of promoter, underwriter, voting trustee, director, officer
or employee.
Ratification of this appointment shall be effective upon receiving the
affirmative vote of the holders of a majority of the voting stock present or
represented by proxy and entitled to vote at the annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THIS
APPOINTMENT.
In the event the appointment is not ratified, the Board of Directors will
consider the appointment of other independent auditors. Representatives of KPMG
LLP are expected to be present at the annual meeting and
17
will be offered the opportunity to make a statement if they desire to do so. The
representatives of KPMG LLP also will be available to answer questions and
discuss matters pertaining to the Report of Independent Auditors contained in
the audited financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and directors, and persons who own more than 10% of our common stock,
to file certain beneficial ownership reports with the Securities and Exchange
Commission. Based solely on our review of copies of such reports received by us
and representations from certain reporting persons, we believe that during 2002,
all of our directors, executive officers and beneficial owners of more than 10%
of our common stock complied with all applicable Section 16(a) filing
requirements applicable to them, except as disclosed in this paragraph. During
2002, one filing related to the automatic conversion of Mr. Hickox's Class B
common stock to Class A common stock (changing the form of ownership from
derivative to non-derivative, but not the number of shares previously reported)
was submitted on an untimely basis.
OTHER BUSINESS
We have no knowledge of any business to be presented for consideration at
the meeting other than that described above. If any other business should
properly come before the annual meeting or any adjournments thereof, it is
intended that the shares represented by proxies will be voted in accordance with
the judgment of the persons named in the proxies.
COPIES OF NATCO GROUP INC.'S 2002 ANNUAL REPORT TO STOCKHOLDERS, INCLUDING
ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, ARE AVAILABLE AND WILL BE FURNISHED
PROMPTLY, WITHOUT CHARGE, ON WRITTEN OR ORAL REQUEST BY STOCKHOLDERS, VIA
FIRST-CLASS MAIL WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST. MAIL
REQUESTS TO INVESTOR RELATIONS DEPARTMENT, NATCO GROUP INC., 2950 N. LOOP WEST,
7TH FLOOR, HOUSTON, TEXAS 77092, OR TELEPHONE AT 713-683-9292.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2004 annual
meeting of stockholders must be received by us at our principal executive office
by December 23, 2003, in order for such proposals to be included in our proxy
statement and form of proxy for such meeting. Stockholders submitting such
proposals are requested to address them to the Secretary, NATCO Group Inc., 2950
North Loop West, Suite 700, Houston, Texas 77092.
18
In addition, our bylaws provide that only such business as is properly
brought before the 2004 annual meeting of stockholders will be conducted. For
business to be properly brought before the meeting or nominations of persons for
election to the Board of Directors to be properly made at the annual meeting by
a stockholder, notice must be received by the Secretary at our principal
executive offices not later than the close of business on the 40th day prior to
the annual meeting. The notice to us must also provide certain information set
forth in the bylaws. A copy of the bylaws may be obtained upon written request
to the Secretary.
ALL STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ NATHANIEL A. GREGORY
NATHANIEL A. GREGORY,
Chairman of the Board and
Chief Executive Officer
April 22, 2003
19
PROXY
NATCO GROUP INC.
2950 NORTH LOOP WEST, SUITE 700
HOUSTON, TX 77092
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Katherine P. Ellis and Patrick M. McCarthy, and
each of them, with full power of substitution to vote the shares of NATCO GROUP
Inc. Common Stock which the undersigned may be entitled to vote, and with all
power the undersigned would possess, if personally present at the annual meeting
of stockholders of NATCO GROUP Inc. to be held at the Sheraton Houston
Brookhollow Hotel, 3000 North Loop West, Houston, Texas on the 22nd day of May
2003, at 10:00 a.m. local time, and any adjournment thereof.
PLEASE MARK THIS PROXY AS INDICTED ON THE REVERSE SIDE TO VOTE ON ANY ITEM. IF
YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTOR'S RECOMMENDATIONS,
PLEASE SIGN THE REVERSE SIDE, NO BOXES NEED TO BE CHECKED.
(TO BE DATED AND SIGNED ON REVERSE SIDE)
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ADDRESS CHANGE/COMMENTS (MARK THE CORRESPONDING BOX ON THE REVERSE SIDE)
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o FOLD AND DETACH HERE o
Please
Mark Here [ ]
For Address
Change or
Comments
SEE REVERSE SIDE
1. Proposal to elect three (3) Class II members of the Board of Directors to hold office for three-year terms expiring at the
annual meeting of the stockholders in 2006, or until their respective successors have been duly elected and qualified.
FOR ALL NOMINEES WITHHOLD
LISTED TO THE RIGHT AUTHORITY Nominees: 01 Keith K. Allan, 02 Howard I. Bull, 03 George K. Hickox, Jr.
(EXCEPT AS MARKED TO VOTE FOR ALL NOMINEE(S) (INSTRUCTIONS: To withhold authority to vote for any individual nominee,
TO THE CONTRARY) LISTED TO THE RIGHT write that nominee's name in the space provided below.)
[ ] [ ] ------------------------------------------------------------------------
2. To ratify the Board of Director's appointment of 3. In their discretion, the proxies are authorized to vote upon such other
KPMG LLP, as independent accountants for the business as may properly come before this meeting.
year ending December 31, 2003.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Dated:
-------------------------------, 2003
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Signature
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Signature
(Please sign exactly and as fully as your name
appears on your stock certificate. If shares
are held jointly, each stockholder should sign.
When signing as attorney, executive,
administrator, trustee or guardian, please give
full title to such.)
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o FOLD AND DETACH HERE o