SCHEDULE 14A
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PEABODY ENERGY CORPORATION
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[COMPANY NAME]
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(PEABODY LOGO)
March 29, 2002
Dear Stockholder:
You are cordially invited to attend the 2002 Annual Meeting of Stockholders
of Peabody Energy Corporation, which will be held on Friday, May 3, 2002, at
10:00 A.M., local time, at the Ritz-Carlton Hotel, 100 Carondelet Plaza,
Clayton, Missouri 63105.
During this meeting, stockholders will vote on the election of three Class
I Directors for three-year terms. The accompanying Notice of Annual Meeting of
Stockholders and Proxy Statement contain complete details on this proposal and
other matters. We also will be reporting on Peabody Energy's operations and
responding to stockholder questions. If you have questions that you would like
to raise at the meeting, we encourage you to submit written questions in advance
(by mail or e-mail) to the Corporate Secretary. This will help us respond to
your questions during the meeting. If you would like to e-mail your questions,
please send them to stockholder.questions@peabodyenergy.com.
Your participation in the affairs of Peabody Energy is important,
regardless of the number of shares you hold. To insure your representation at
the Annual Meeting, we encourage you to vote over the telephone or Internet or
to complete and return the enclosed proxy card as soon as possible. If you
attend the Annual Meeting, you may then revoke your proxy and vote in person if
you so desire.
Thank you for your continued support of Peabody Energy. We look forward to
seeing you on May 3.
Very truly yours,
/s/ IRL F. ENGELHARDT
IRL F. ENGELHARDT
Chairman & Chief Executive Officer
PEABODY ENERGY CORPORATION
701 MARKET STREET
ST. LOUIS, MISSOURI 63101-1826
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Peabody Energy Corporation (the "Company") will hold its Annual Meeting of
Stockholders at the Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri,
on Friday, May 3, 2002, at 10:00 A.M., local time, to:
- Elect three Class I Directors for three-year terms; and
- Transact any other business that may properly come before the Annual
Meeting.
The Board of Directors has fixed the close of business on March 15, 2002,
as the record date for determining stockholders who will be entitled to receive
notice of and vote at the Annual Meeting or any adjournment. If you own shares
of Peabody Energy Corporation Common Stock as of that record date, you can vote
those shares by completing and mailing the enclosed proxy card or by attending
the Annual Meeting and voting in person. Stockholders of record also may submit
their proxies electronically or by telephone as follows:
- By visiting the website at HTTP://WWW.EPROXYVOTE.COM/BTU and following
the voting instructions provided; or
- By calling 1-877-PRX-VOTE (1-877-779-8683) in the United States, Canada
or Puerto Rico on a touch-tone phone and following the recorded
instructions.
An admittance card or other proof of ownership is required to attend the
Annual Meeting. Please retain the top portion of your proxy card for this
purpose. Also, please indicate your intention to attend the Annual Meeting by
checking the appropriate box on the proxy card, or, if voting by the Internet or
by telephone, when prompted. If your shares are held by a bank or broker, you
will need to ask them for an admission card in the form of a confirmation of
beneficial ownership. If you do not receive a confirmation of beneficial
ownership or other admittance card from your bank or broker, you must bring
proof of share ownership (such as a copy of your brokerage statement) to the
Annual Meeting.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, PLEASE CAST YOUR VOTE BY TELEPHONE OR THE INTERNET, OR COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENVELOPE PROVIDED. IF YOU
ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON, IF YOU SO
CHOOSE.
/s/ FREDRICK D. PALMER
FREDRICK D. PALMER
Executive Vice President --
Legal and External Affairs
and Secretary
March 29, 2002
TABLE OF CONTENTS
PAGE NO.
--------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING... 1
ELECTION OF DIRECTORS (PROXY ITEM NO. 1).................... 4
Class I Director Nominees -- Terms Expiring in 2005....... 4
Class II Directors -- Terms Expiring in 2003.............. 4
Class III Directors -- Terms Expiring in 2004............. 5
INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES..... 6
Compensation Committee.................................... 6
Executive Committee....................................... 6
Audit Committee........................................... 7
Report of the Audit Committee............................. 7
Appointment of Independent Auditors and Fees.............. 8
Compensation of Directors................................. 8
OWNERSHIP OF COMPANY SECURITIES............................. 9
Beneficial Owners of More Than Five Percent, Directors and
Management............................................. 9
Section 16(a) Beneficial Ownership Reporting Compliance... 10
EXECUTIVE COMPENSATION...................................... 10
Summary Compensation Table................................ 10
Option Grants in Nine-Month Period Ended December 31,
2001................................................... 11
Aggregated Option Exercises in Nine-Month Period Ended
December 31, 2001 and December 31, 2001 Option
Values................................................. 12
Long-Term Incentive Plans -- Awards in Nine-Month Period
Ended December 31, 2001................................ 12
Pension Benefits.......................................... 12
Employment Agreements..................................... 13
Report of the Compensation Committee...................... 14
Compensation Committee Interlocks and Insider
Participation.......................................... 17
RELATED PARTY TRANSACTIONS.................................. 17
Transactions With Affiliates of Lehman Brothers........... 17
Transactions With Management.............................. 18
STOCK PERFORMANCE GRAPH..................................... 19
ADDITIONAL INFORMATION...................................... 19
Information About Stockholder Proposals................... 19
Costs of Solicitation..................................... 20
OTHER BUSINESS.............................................. 20
EXHIBIT A -- AUDIT COMMITTEE CHARTER........................ 21
i
PEABODY ENERGY CORPORATION
PROXY STATEMENT
FOR THE
2002 ANNUAL MEETING OF STOCKHOLDERS
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Q: WHY DID I RECEIVE THIS PROXY STATEMENT?
A: Because you are a stockholder of Peabody Energy Corporation as of the record
date and are entitled to vote at the 2002 Annual Meeting of Stockholders,
the Board of Directors is soliciting your proxy to vote at the meeting.
This Proxy Statement summarizes the information you need to know to vote at
the Annual Meeting. This Proxy Statement and proxy card were first mailed to
stockholders on or about March 29, 2002.
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote on the following item:
- Election of three Class I Directors for terms of three years, including
Roger H. Goodspeed, Felix P. Herlihy and James R. Schlesinger, PhD.
Q: WHAT ARE THE VOTING RECOMMENDATIONS OF THE BOARD OF DIRECTORS?
A: THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE CLASS I DIRECTOR
NOMINEES.
Q: WILL ANY OTHER MATTERS BE VOTED ON?
A: We are not aware of any other matters that will be brought before the
stockholders for a vote at the Annual Meeting. If any other matter is
properly brought before the meeting, your signed or voted proxy gives
authority to Irl F. Engelhardt, Richard M. Whiting and Fredrick D. Palmer to
vote on such matters in their discretion.
Q: WHO IS ENTITLED TO VOTE?
A: Stockholders of record as of the close of business on March 15, 2002 are
entitled to vote at the Annual Meeting. Each share of Common Stock is
entitled to one vote. As of March 15, 2002, there were 52,020,274 shares of
Common Stock outstanding.
Q: HOW DO I VOTE?
A: If you are a stockholder of record or hold stock through the Peabody Holding
Company, Inc. Employee Retirement Account (or other 401(k) plans sponsored
by the Company or its subsidiaries), you may vote using any of the following
methods:
- Via the Internet, by going to the website http://eproxyvote.com/btu and
following the instructions for Internet voting on your proxy card;
- If you reside in the United States, Canada or Puerto Rico, by dialing
1-877-PRX-VOTE (1-877-779-8683) and following the instructions for
telephone voting on your proxy card;
- By completing and mailing your proxy card; or
- By casting your vote in person at the Annual Meeting.
If you return your signed proxy card or vote by Internet or telephone, your
shares will be voted as you indicate. If you return your proxy card but do
not indicate your voting preferences, the proxies will vote your shares FOR
the election of the Class I Director nominees named in this Proxy Statement.
1
If your shares are held in a brokerage account in your broker's name (also
known as "street name"), you should follow the voting directions provided by
your broker or nominee. You may complete and mail a voting instruction card
to your broker or nominee or, if your broker allows, submit voting
instructions by Internet or telephone. If you provide specific voting
instructions by mail, telephone or Internet, your broker or nominee will
vote your shares as you have directed. Please note that shares in the
Peabody Energy Corporation Employee Stock Purchase Plan are held in street
name by A. G. Edwards, the plan administrator.
Ballots will be passed out during the Annual Meeting to anyone who wants to
vote in person at the meeting. If you hold your shares in street name, you
must request a confirmation of beneficial ownership from your broker to vote
in person at the meeting.
Q: CAN I CHANGE MY VOTE?
A: Yes. If you are a stockholder of record, you can change your vote or revoke
your proxy any time before the Annual Meeting by:
- Submitting a valid, later-dated proxy;
- Notifying the Company's Secretary in writing that you have revoked your
proxy; or
- Completing a written ballot at the Annual Meeting.
Q: IS MY VOTE CONFIDENTIAL?
A: Yes. All proxies, ballots and vote tabulations that identify how individual
stockholders voted will be kept confidential and not be disclosed to the
Company's directors, officers or employees, except in limited circumstances,
including (i) when disclosure is mandated by law; (ii) during any contested
solicitation of proxies; or (iii) when written comments by a stockholder
appear on a proxy card or other voting material.
Q: WHAT WILL HAPPEN IF I DO NOT VOTE MY SHARES?
A: If your shares are held in street name, your broker may vote your shares on
those proposals where it has discretion to vote. Brokers and banks are
allowed to vote shares held on behalf of beneficial owners who do not
provide voting instructions at least ten days before the Annual Meeting,
provided such votes relate to matters deemed "routine" by the New York Stock
Exchange. The proposal specified in the Notice of Annual Meeting and this
Proxy Statement is considered "routine" under New York Stock Exchange rules.
On non-routine matters, brokers and other nominees cannot vote without
instructions from the beneficial owner, resulting in so-called "broker
non-votes." Broker non-votes have no effect on the outcome of any matters
specified in the Notice of Annual Meeting of Stockholders and this Proxy
Statement.
Q: HOW WILL MY COMPANY STOCK IN THE PEABODY HOLDING COMPANY, INC. EMPLOYEE
RETIREMENT ACCOUNT OR OTHER 401(K) PLANS SPONSORED BY THE COMPANY OR ITS
SUBSIDIARIES BE VOTED?
A: The plan trustee, Vanguard Fiduciary Trust Company, will vote your shares in
accordance with your instructions if you send in a completed proxy card or
vote by telephone or the Internet. The plan trustee will vote allocated
shares of Company Common Stock for which it has not received direction, as
well as shares not allocated to individual participant accounts, in the same
proportion as directed shares are voted.
Q: HOW MANY SHARES MUST BE PRESENT TO HOLD THE ANNUAL MEETING?
A: Holders of a majority of the shares of outstanding Common Stock as of the
record date must be represented in person or by proxy at the Annual Meeting
in order to conduct business. This is called a quorum. If you vote, your
shares will be part of the quorum. Abstentions, "withhold" votes and broker
non-votes also will be counted in determining whether a quorum exists, but
will not be counted as votes cast.
2
Q: WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSAL?
A: In the election of directors, the three nominees receiving the highest
number of "FOR" votes will be elected.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It means that your shares are held in more than one account at the transfer
agent and/or with banks or brokers. Please vote all of your shares.
Q: WHO CAN ATTEND THE ANNUAL MEETING?
A: All Peabody Energy Corporation stockholders as of the close of business on
March 15, 2002 may attend the Annual Meeting.
Q: WHAT DO I NEED TO DO TO ATTEND THE ANNUAL MEETING?
A: If you are a stockholder of record or a participant in the Peabody Holding
Company, Inc. Employee Retirement Account (or other 401(k) plans sponsored
by the Company or its subsidiaries), your admission card is attached to your
proxy card or voting instruction form. You will need to bring this admission
card with you to the Annual Meeting.
If you own shares in street name, you will need to ask your bank or broker
for an admission card in the form of a confirmation of beneficial ownership.
You will need to bring a confirmation of beneficial ownership with you to
vote at the Annual Meeting. If you do not receive your confirmation of
beneficial ownership in time, bring your most recent brokerage statement
with you to the Annual Meeting. We can use that to verify your ownership of
Common Stock and admit you to the meeting; however, you will not be able to
vote your shares at the meeting without a confirmation of beneficial
ownership.
Q: WHERE CAN I FIND THE VOTING RESULTS OF THE ANNUAL MEETING?
A: We plan to announce preliminary voting results at the Annual Meeting and to
publish final results in our Quarterly Report on SEC Form 10-Q for the
Quarter Ended June 30, 2002.
3
ELECTION OF DIRECTORS (PROXY ITEM NO. 1)
In accordance with the terms of the Company's certificate of incorporation,
the Board of Directors is divided into three classes, with each class serving a
staggered three-year term. At this Annual Meeting, the terms of current Class I
Directors will expire. The terms of Class II Directors and Class III Directors
will expire at the Annual Meetings to be held in 2003 and 2004, respectively.
The Board of Directors has nominated the following individuals for election
as Class I Directors with terms expiring in 2005: Roger H. Goodspeed, Felix P.
Herlihy and James R. Schlesinger, PhD. Each of the nominees is currently serving
as a director of the Company. All nominees have consented to serve for the new
term. Should any one or more of the nominees become unavailable for election,
your proxy authorizes us to vote for such other persons, if any, as the Board of
Directors may recommend.
CLASS I DIRECTOR NOMINEES -- TERMS EXPIRING IN 2005
ROGER H. GOODSPEED, age 51, has been a director of the Company since 1998.
He is also a Managing Director of Lehman Brothers Inc., an investment banking
firm. He joined Lehman Brothers in 1974 and attained his current position as
Managing Director in 1984. In 1994, Mr. Goodspeed became Chairman of Citizens
Lehman Power, an electric power marketing joint venture 50% owned by Lehman
Brothers, and continued in that role until the joint venture was sold to The
Energy Group in 1997 and changed its name to Citizens Power LLC. Mr. Goodspeed
served on the Board of Directors of Citizens Power LLC from 1997 until 2000 when
it was sold to Edison Mission Energy.
FELIX P. HERLIHY, age 42, has been a director of the Company since July
2001. He is also a Managing Director of Lehman Brothers Inc., an investment
banking firm, and a principal of the firm's Merchant Banking Group. He joined
Lehman Brothers in 1986 and attained his current position as Managing Director
in 1999.
JAMES R. SCHLESINGER, PhD, age 73, has been a director of the Company since
December 2001. He is Chairman of the Board of Trustees of MITRE Corporation, a
not-for-profit corporation that provides systems engineering, research and
development and information technology support to the government, a position he
has held since 1985. Dr. Schlesinger also serves as Senior Advisor and
Consultant to Lehman Brothers Inc., a role he has held since 1980, and as
Counselor to the Center for Strategic and International Studies. Dr. Schlesinger
has served as U.S. Secretary of Energy (1977 to 1979), Chairman of the U.S.
Atomic Energy Commission (1971 to 1973), Director of the Central Intelligence
Agency (1973) and U.S. Secretary of Defense (1973 to 1975). Other past positions
include Assistant Director of the Office of Management and Budget, Director of
Strategic Studies at the Rand Corporation, Associate Professor of Economics at
the University of Virginia and consultant to the Federal Reserve Board of
Governors. Dr. Schlesinger is also a director of Seven Seas Petroleum Inc.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE
CLASS I DIRECTOR NOMINEES NAMED ABOVE.
CLASS II DIRECTORS -- TERMS EXPIRING IN 2003
WILLIAM E. JAMES, age 56, has been a director of the Company since July
2001. Since July 2000, Mr. James has been Founding Partner of RockPort Capital
Partners LLC, a venture fund specializing in the energy and environmental
technology sectors. He is also Chairman of RockPort Group, an international oil
trading and banking company. Prior to joining RockPort, Mr. James co-founded and
served as Chairman and Chief Executive Officer of Citizens Power LLC, the
nation's first power marketer. He also co-founded the non-profit Citizens Energy
Corporation and served as the Chairman and Chief Executive Officer of Citizens
Corporation, its for-profit subsidiary, from 1987 to 1996.
HENRY E. LENTZ, age 57, has been a director of the Company since 1998. He
is also a Managing Director of Lehman Brothers Inc., an investment banking firm,
and a principal of the firm's Merchant Banking Group. Mr. Lentz joined Lehman
Brothers in 1971 and became a Managing Director in 1976. He left the firm in
1988 to become Vice Chairman of Wasserstein Perella Group, Inc. In 1993, he
returned to Lehman
4
Brothers as a Managing Director and, prior to joining the Merchant Banking
Group, served as head of the firm's worldwide energy practice. Mr. Lentz is also
a director of Rowan Companies, Inc. and Consort Holdings plc.
BLANCHE M. TOUHILL, PhD, age 70, has been a director of the Company since
December 2001. She is also Chancellor and Professor of History and Education at
the University of Missouri -- St. Louis, a position she has held since 1991.
Prior to her appointment as Chancellor, Dr. Touhill held the positions of Vice
Chancellor for Academic Affairs and Interim Chancellor at the University of
Missouri -- St. Louis. Dr. Touhill also has served on the Board of Directors of
Trans World Airlines. She holds bachelor's and doctoral degrees in history and a
master's degree in geography from St. Louis University.
RICHARD M. WHITING, age 47, has been a director of the Company since 1998.
He is also President and Chief Operating Officer of the Company, a position he
has held since 1998. Previously, Mr. Whiting served as President of Peabody
COALSALES Company from 1992 to 1998. He joined a predecessor of the Company in
1976 and has held a number of operations, sales and engineering positions both
at the corporate offices and at field locations. Mr. Whiting is currently
Chairman of the Bituminous Coal Operators' Association, Chairman of the National
Mining Association's Safety and Health Committee and a member of the National
Coal Council.
CLASS III DIRECTORS -- TERMS EXPIRING IN 2004
BERNARD J. DUROC-DANNER, PhD, age 48, has been a director of the Company
since July 2001. He is Chairman, President and Chief Executive Officer of
Weatherford International, Inc., one of the world's largest oilfield services
companies, a position he has held since 1998. From 1991 to 1998, Dr.
Duroc-Danner served as President and Chief Executive Officer of EVI, Inc., an
oilfield service and equipment provider that merged with Weatherford Enterra,
Inc. in 1998. Previously, Dr. Duroc-Danner held positions at Arthur D. Little
and Mobil Oil, Inc. He is also Chairman of the Board and a director of Grant
Prideco, Inc., and he serves as a director of Parker Drilling Company, Cal-Dive
International, Inc., Dresser, Inc. and Universal Compression Holdings, Inc.
IRL F. ENGELHARDT, age 55, has been a director of the Company since 1998.
He is Chairman and Chief Executive Officer of the Company, a position he has
held since 1998. He served as Chief Executive Officer of a predecessor of the
Company from 1990 to 1998. He also served as Chairman of a predecessor of the
Company from 1993 to 1998 and as President from 1990 to 1995. Since joining a
predecessor of the Company in 1979, he has held various officer level positions
in the executive, sales, business development and administrative areas,
including serving as Chairman of Peabody Resources Ltd. (Australia) and Chairman
of Citizens Power LLC. Mr. Engelhardt also served as Co-Chief Executive Officer
and executive director of The Energy Group from February 1997 to May 1998,
Chairman of Cornerstone Construction & Materials, Inc. from September 1994 to
May 1995 and Chairman of Suburban Propane Company from May 1995 to February
1996. He also served as a director and Group Vice President of Hanson Industries
from 1995 to 1996. Mr. Engelhardt is Co-Chairman of the Coal Utilization
Research Council, Co-Chairman of the Coal Based Generators Stakeholders Group
and past Chairman of the National Mining Association and the Coal Industry
Advisory Board of the International Energy Agency. He is also a director of U.S.
Bank, N.A.
WILLIAM C. RUSNACK, age 57, has been a director of the Company since
January 2002. From 1998 to February 2002, he was President and Chief Executive
Officer of Premcor Inc., one of the largest independent oil refiners in the
United States. Prior to joining Premcor, Mr. Rusnack was President of ARCO
Products Company, the refining and marketing division of Atlantic Richfield
Company. During a 31-year career at ARCO, he was also President of ARCO
Transportation Company and Vice President of Corporate Planning. He is also a
director of Sempra Energy.
ALAN H. WASHKOWITZ, age 61, has been a director of the Company since 1998.
He is also a Managing Director of Lehman Brothers Inc. and head of the firm's
Merchant Banking Group, responsible for oversight of Lehman Brothers Merchant
Banking Partners II L.P. Mr. Washkowitz joined Kuhn Loeb & Co. in 1968 and
became a general partner of Lehman Brothers in 1978 when it acquired Kuhn Loeb &
Co. Prior to joining the Merchant Banking Group, he headed Lehman Brothers'
Financial Restructuring Group. He is also a director of CP Kelco ApS, L-3
Communications Corporation and K&F Industries, Inc.
5
INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors met six times in 2001. The Board also has appointed
three standing committees from among its members to assist it in carrying out
its obligations. In 2001, each director attended 75% or more of the aggregate
number of meetings of the Board and the committees on which he or she served
that were held during his or her tenure as director. A description of each
committee and its current membership follows:
COMPENSATION COMMITTEE
Members: Henry E. Lentz, Blanche M. Touhill, PhD and Alan H. Washkowitz
The Compensation Committee met one time during 2001. The primary
responsibilities of the Compensation Committee are as follows:
- To review key employee compensation policies, plans and programs;
- To monitor performance and compensation of the Company's
employee-directors, officers and other key employees;
- To prepare recommendations and periodic reports to the Board of Directors
concerning these matters; and
- To administer the Company's annual and long-term incentive programs.
The Compensation Committee is comprised solely of directors who are not
employed by the Company. A separate Report of the Compensation Committee on
Executive Compensation is set forth at pages 14 through 17 of this Proxy
Statement.
EXECUTIVE COMMITTEE
Members: Irl F. Engelhardt (Chairman), Henry E. Lentz and Alan H.
Washkowitz
The Executive Committee met two times during 2001. When the Board of
Directors is not in session, the Executive Committee will have all of the power
and authority as delegated by the Board of Directors, except with respect to:
- Amending the Company's certificate of incorporation and bylaws;
- Adopting an agreement of merger or consolidation;
- Recommending to stockholders the sale, lease or exchange of all or
substantially all of the Company's property and assets;
- Recommending to stockholders a dissolution of the Company or revocation
of any dissolution;
- Declaring a dividend; and
- Issuing stock.
6
AUDIT COMMITTEE
Members: William C. Rusnack (Chairman), Bernard J. Duroc-Danner, PhD, and
James R. Schlesinger, PhD
The Audit Committee met five times during 2001. The primary
responsibilities of the Audit Committee are as follows:
- To recommend the firm of independent external auditors for appointment by
the Board of Directors;
- To meet with the Company's financial management, internal audit
management and independent external auditors to review matters relating
to the Company's internal accounting controls, internal audit program,
accounting practices and procedures, the scope and procedures of the
outside audit, the independence of the external auditors and other
matters relating to the Company's financial condition;
- To review the Company's annual report to stockholders, proxy materials,
quarterly report on Form 10-Q and annual report on Form 10-K for filing
with the Securities and Exchange Commission; and
- To report to the Board of Directors periodically any recommendations the
Audit Committee may have with respect to the foregoing matters.
The Audit Committee is comprised solely of independent directors, as
required by New York Stock Exchange rules, and operates under a written charter
that has been adopted by the entire Board of Directors. A copy of the Audit
Committee charter is attached as Exhibit A to this Proxy Statement.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has reviewed and discussed the Company's audited
financial statements for the nine-month period ended December 31, 2001 with
management and Ernst & Young LLP, the Company's independent external auditor.
Management is responsible for the Company's internal controls, financial
reporting processes and financial statements, while Ernst & Young is responsible
for expressing an opinion on the Company's financial statements in accordance
with generally accepted accounting principles.
The Audit Committee reviewed with Ernst & Young the overall scope and plans
for their audit of the Company's financial statements. The Audit Committee also
discussed with Ernst & Young matters relating to the quality and acceptability
of the Company's accounting principles, as applied in its financial reporting
processes, as required by Statement of Auditing Standards (SAS) No. 61 and SAS
No. 90. In addition, the Audit Committee reviewed and discussed with Ernst &
Young the auditor's independence from management and the Company, as well as the
matters included in written disclosures received from Ernst & Young as required
by Independence Standards Board Standard No. 1, Independence Discussions with
Audit Committees. As part of its review, the Audit Committee reviewed fees paid
to Ernst & Young and considered whether Ernst & Young's performance of non-audit
services for the Company was compatible with the auditor's independence. During
the nine-month period ended December 31, 2001, Ernst & Young performed internal
audit services in addition to expressing an opinion on the Company's financial
statements. The Audit Committee recently decided that the internal audits and
external audits would be performed by separate firms as soon as practicable.
7
Based on the reviews and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the nine months ended
December 31, 2001 for filing with the Securities and Exchange Commission.
MEMBERS OF THE AUDIT COMMITTEE:
WILLIAM C. RUSNACK, CHAIRMAN
BERNARD J. DUROC-DANNER, PhD
JAMES R. SCHLESINGER, PhD
APPOINTMENT OF INDEPENDENT AUDITORS AND FEES
Ernst & Young LLP served as the Company's independent auditors for the nine
months ended December 31, 2001 and has been appointed to serve in that capacity
again for fiscal 2002. The Board of Directors anticipates that representatives
of Ernst & Young will be present at the Annual Meeting to respond to appropriate
questions and to make a statement if they so desire.
The following fees were paid to Ernst & Young for services rendered during
the nine months ended December 31, 2001:
- Audit Fees: $529,000 for services rendered for the audit of the
Company's financial statements and reviews of SEC Forms 10-Q and 10-K.
- Financial Information Systems Design and Implementation Fees: No fees
were paid for services rendered in connection with the design or
implementation of hardware or software systems that aggregate source data
underlying the financial statements or generate information that is
significant to the financial statements taken as a whole.
- All Other Fees: $1,189,000 for audit related services including
financial due diligence procedures associated with registration
statements and mergers and acquisitions, internal audit services,
litigation support services, and audits of benefit plans; $996,000 for
other services including tax compliance and consulting services and
health care advisory services.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company or Lehman Brothers receive no
additional pay for serving as directors. Each director who is not an employee of
the Company or Lehman Brothers (a "non-employee director") is paid an annual
cash retainer of $30,000. Committee chairpersons receive an additional $3,500
annual cash retainer. Each non-employee director also receives a fee of $1,500
for each day that he or she attends Board and/or committee meetings. The Company
pays the travel and accommodation expenses of directors to attend meetings and
other corporate functions.
Non-employee directors receive options to purchase 1,000 shares of Company
Common Stock and a grant of restricted stock valued at $50,000 when they are
first elected to the Board of Directors. Non-employee directors also receive
annual stock option grants valued at $25,000 (based on Black-Scholes
methodology). The shares subject to the restricted stock awards vest after three
years if the recipient continues to serve on the Board of Directors. All
non-employee director stock options are granted at an exercise price equal to
the fair market value of the Company's Common Stock on the date of grant. These
options vest in one-third increments over three years and expire ten years after
grant. In the event of a change of control of the Company, any previously
unvested options will vest and all restrictions related to the restricted stock
awards will lapse.
8
OWNERSHIP OF COMPANY SECURITIES
The following table sets forth information as of March 1, 2002 with respect
to persons or entities who are known to beneficially own more than 5% of the
Company's outstanding Common Stock, each director, each executive officer named
in the Summary Compensation Table on page 10 of this Proxy Statement, and all
directors and executive officers as a group.
BENEFICIAL OWNERS OF MORE THAN FIVE PERCENT,
DIRECTORS AND MANAGEMENT
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1)(2) CLASS(3)
------------------------------------ ----------------- ----------
Lehman Brothers Merchant Banking Partners II L.P. and
affiliates................................................ 29,399,994 56.5%
c/o Lehman Brothers Holdings Inc.
745 Seventh Avenue, 25th Floor
New York, New York 10019
Co-Investment Partners, L.P. ............................... 2,693,400 5.2
c/o Lexington Partners Inc.
660 Madison Avenue, 23rd Floor
New York, New York 10021
Bernard J. Duroc-Danner..................................... 1,880 *
Irl F. Engelhardt........................................... 640,455 1.2
Roger H. Goodspeed(4)....................................... -- *
Felix P. Herlihy(4)......................................... -- *
William E. James............................................ 65,780 *
Henry E. Lentz(4)........................................... -- *
Richard A. Navarre.......................................... 195,497 *
William C. Rusnack.......................................... 1,908 *
James R. Schlesinger........................................ 1,912 *
Blanche M. Touhill.......................................... 1,912 *
Paul H. Vining.............................................. 221,995 *
Roger B. Walcott, Jr. ...................................... 226,569 *
Alan H. Washkowitz(4)....................................... -- *
Richard M. Whiting.......................................... 226,115 *
All directors and executive officers as a group (17
people)................................................... 1,900,162 3.6
---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and sole investment control with respect to all
shares beneficially owned.
(2) Includes shares issuable pursuant to stock options exercisable within 60
days after March 1, 2002, as follows: Mr. Engelhardt, 379,276; Mr. Navarre,
120,848; Mr. Vining, 133,685; Mr. Walcott, 139,141; Mr. Whiting, 139,141;
Mr. James, 46,900; and all directors and executive officers as a group,
1,161,847.
(3) Asterisk (*) indicates that the applicable person owns less than one percent
of the outstanding shares.
(4) Messrs. Goodspeed, Herlihy, Lentz and Washkowitz are Managing Directors of
Lehman Brothers, Inc. Mr. Washkowitz is the head of Lehman Brothers Merchant
Banking and Messrs. Lentz and Herlihy are principals of Lehman Brothers
Merchant Banking. Messrs. Goodspeed, Herlihy, Lentz and Washkowitz disclaim
beneficial ownership of the shares held or controlled by these entities or
their affiliates.
9
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's executive officers and directors and persons beneficially
holding more than ten percent of the Company's Common Stock are required under
the Securities Exchange Act of 1934 to file reports of ownership and changes in
ownership of Company Common Stock with the Securities and Exchange Commission
and the New York Stock Exchange. To the best of the Company's knowledge, based
solely on its review of the copies of such reports furnished to the Company
during the period commencing with the Company's initial public offering on May
21, 2001 and ending December 31, 2001, all such required reports were timely
filed.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid
to the Chief Executive Officer and the four other most highly compensated
executive officers of the Company for their service to the Company during the
nine-month period ended December 31, 2001 and the fiscal years ended March 31,
2001, March 31, 2000, and March 31, 1999. Effective December 31, 2001, the
Company changed its fiscal year-end from March 31 to December 31.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
FISCAL ------------------- STOCK UNDERLYING LTIP ALL OTHER
PERIOD SALARY BONUS AWARDS OPTIONS PAYMENTS COMPENSATION
NAME AND PRINCIPAL POSITION ENDED(1)(2) ($) ($)(3) (#)(4)(5) (#)(6) ($)(7) ($)(8)
--------------------------- ----------- ------- --------- ---------- ---------- -------- ------------
Irl F. Engelhardt........... 12/31/01 543,750 1,270,895 -- 38,839 -- 63,227
Chairman, Chief Executive 3/31/01 700,000 1,050,000 -- 64,019 -- 56,434
Officer and Director 3/31/00 700,000 875,000 -- -- -- 51,525
3/31/99 681,264 700,000 216,495 699,797 441,240 23,998
Richard M. Whiting.......... 12/31/01 318,750 412,590 -- 15,179 -- 35,628
President, Chief Operating 3/31/01 400,000 600,000 -- 22,696 -- 31,630
Officer and Director 3/31/00 400,000 500,000 -- -- -- 28,662
3/31/99 385,834 400,000 72,164 251,759 168,051 12,238
Roger B. Walcott, Jr........ 12/31/01 300,000 490,720 -- 14,286 -- 32,465
Executive Vice
President -- 3/31/01 350,000 525,000 -- 22,696 -- 27,530
Corporate Development 3/31/00 350,000 437,500 72,164 -- -- 24,955
3/31/99 291,667 350,000 -- 251,759 -- 8,374
Richard A. Navarre.......... 12/31/01 225,000 451,520 -- 10,714 -- 23,720
Executive Vice President 3/31/01 250,000 406,250 -- 55,084 -- 19,615
and Chief Financial
Officer 3/31/00 233,750 343,750 -- -- -- 17,203
3/31/99 220,000 220,000 54,124 188,863 45,030 6,824
Paul H. Vining.............. 12/31/01 225,000 390,256 -- 10,714 -- 24,834
Executive Vice
President -- 3/31/01 262,500 517,624 36,971 148,698 -- 20,820
Sales and Trading 3/31/00 208,120 293,540 9,936 76,861 -- 15,536
3/31/99 190,000 172,765 7,217 49,000 -- 5,962
---------------
(1) Due to a change in the Company's fiscal year-end, amounts shown for the
period ended December 31, 2001 relate to the nine-month fiscal period ended
December 31, 2001.
10
(2) Amounts shown for the fiscal year ended March 31, 1999 include compensation
paid by a predecessor company for the period April 1, 1998 through May 18,
1998.
(3) Amounts for the nine months ended December 31, 2001 include special bonuses
paid with respect to the Company's initial public offering and prorated
annual incentive bonuses paid for the nine-month period.
(4) Represents number of shares of Common Stock granted to executives during the
periods shown, after reflecting the 1.4-for-one split in 2001. In addition,
shares purchased by Mr. Walcott during the fiscal year ended March 31, 1999
were converted to granted shares during the fiscal year ended March 31,
2000.
(5) As of December 31, 2001, the values of the shares reported in this column
were as follows: Mr. Engelhardt, $6,102,994; Mr. Whiting, $2,034,303; Mr.
Walcott, $2,034,303; Mr. Navarre, $1,525,756; and Mr. Vining, $1,525,756.
Dividends are paid on these shares on an ongoing basis at the same rate as
paid to all holders of Common Stock.
(6) Represents number of shares of Common Stock underlying options.
(7) Represents certain long-term incentive payments earned during the fiscal
year that relate to a predecessor company's compensation plans.
(8) Represents annual matching contributions and performance contributions to
qualified and non-qualified savings and investment plans and group term life
insurance.
The following table sets forth information concerning the grant of stock
options to each of the Company's executive officers listed on the Summary
Compensation Table above during the nine months ended December 31, 2001. The
exercise price for all options granted is equal to the fair market value of the
Company's Common Stock on the date of grant.
OPTION GRANTS IN NINE-MONTH PERIOD ENDED DECEMBER 31, 2001
INDIVIDUAL GRANTS
-------------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES EXERCISE OR --------------------------------------
GRANTED IN FISCAL BASE PRICE EXPIRATION
NAME (#)(1) PERIOD ($/SHARE) DATE 5%($) 10%($)
---- ---------- ---------- ----------- ------------ --------- -----------
Irl F. Engelhardt............. 38,839 6.4% 28.00 5/21/11 683,918 1,733,182
Richard M. Whiting............ 15,179 2.5% 28.00 5/21/11 267,288 677,360
Roger B. Walcott, Jr.......... 14,286 2.4% 28.00 5/21/11 251,563 637,510
Richard A. Navarre............ 10,714 1.8% 28.00 5/21/11 188,663 478,110
Paul H. Vining................ 10,714 1.8% 28.00 5/21/11 188,663 478,110
---------------
(1) Other material terms of these options are described under the caption "Stock
Options" in the Report of the Compensation Committee on page 15 of this
Proxy Statement.
11
The following table sets forth the number and value of securities
underlying unexercised options held by each of the Company's executive officers
listed on the Summary Compensation Table above as of December 31, 2001. None of
the Company's executive officers exercised any options during the nine months
ended December 31, 2001.
AGGREGATED OPTION EXERCISES IN NINE-MONTH PERIOD ENDED
DECEMBER 31, 2001 AND DECEMBER 31, 2001 OPTION VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AS OF DECEMBER 31, 2001 AS OF DECEMBER 31, 2001
----------------------------------- -----------------------------------
NAME EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
---- -------------- ---------------- -------------- ----------------
Irl F. Engelhardt.............. 379,276 423,379 5,271,936 5,352,485
Richard M Whiting.............. 139,141 150,493 1,934,060 1,883,749
Roger B. Walcott, Jr........... 139,141 149,600 1,934,060 1,883,579
Richard A. Navarre............. 120,848 133,812 1,679,787 1,713,098
Paul H. Vining................. 133,685 151,589 1,858,222 1,960,198
---------------
(1) Values are calculated based on the closing price of Peabody Energy
Corporation Common Stock on December 31, 2001 (i.e., $28.19 per share) less
the applicable exercise price.
The following table sets forth information concerning the grant of
performance units to each of the Company's executive officers listed on the
Summary Compensation Table above during the nine months ended December 31, 2001.
The performance period with respect to such awards is May 21, 2001 through
December 31, 2003.
LONG-TERM INCENTIVE PLANS
AWARDS IN NINE-MONTH PERIOD ENDED DECEMBER 31, 2001
NUMBER OF SHARES, UNITS PERFORMANCE OR OTHER PERIOD
NAME OR OTHER RIGHTS(#)(1) UNTIL MATURATION OR PAYOUT
---- ----------------------- ---------------------------
Irl F. Engelhardt................................ 16,627 5/21/01 - 12/31/03
Richard M. Whiting............................... 6,498 5/21/01 - 12/31/03
Roger B. Walcott, Jr............................. 6,116 5/21/01 - 12/31/03
Richard A. Navarre............................... 4,587 5/21/01 - 12/31/03
Paul H. Vining................................... 4,587 5/21/01 - 12/31/03
---------------
(1) Other material terms of these performance units are described under the
caption "Performance Units" in the Report of the Compensation Committee on
page 16 of this Proxy Statement.
PENSION BENEFITS
The Company's Salaried Employees Retirement Plan, or pension plan, is a
"defined benefit" plan. The pension plan provides a monthly annuity to salaried
employees when they retire. A salaried employee must have at least five years of
service to be vested in the pension plan. A full benefit is available to a
retiree at age 62. A retiree can begin receiving a benefit as early as age 55;
however, a 4% reduction factor applies for each year a retiree receives a
benefit prior to age 62.
An individual's retirement benefit under the pension plan is equal to the
sum of (1) 1.112% of the highest average monthly earnings over 60 consecutive
months up to the "covered compensation limit" multiplied by the employee's years
of service, not to exceed 35 years, and (2) 1.5% of the average monthly earnings
over 60 consecutive months over the "covered compensation limit" multiplied by
the employee's years of service, not to exceed 35 years.
12
The Company announced in February 1999 that the pension plan would be
phased out beginning January 1, 2001. Certain transition benefits were
introduced based on the age and service of the employee at December 31, 2000:
(1) employees age 50 or older will continue to accrue service at 100%; (2)
employees between the ages of 45 and 49 or under age 45 with 20 years or more of
service will accrue service at the rate of 50% for each year of service worked
after December 31, 2000; and (3) employees under age 45 with less than 20 years
of service will have their pension benefits frozen. In all cases, final average
earnings for retirement purposes will be capped at December 31, 2000 levels.
The estimated annual pension benefits payable upon retirement at age 62,
the normal retirement age, for the Chief Executive Officer and the other named
executive officers are as follows:
Irl F. Engelhardt........................................... $490,008
Richard M. Whiting.......................................... 264,786
Roger B. Walcott, Jr. ...................................... 24,663
Richard A. Navarre.......................................... 37,993
Paul H. Vining.............................................. 61,170
The Company has one supplemental defined benefit retirement plan that
provides retirement benefits to executives whose pay exceeds legislative limits
for qualified defined benefit plans.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the named
executive officers and with certain other key executives. The Chief Executive
Officer's employment agreement provides for a three-year term that extends
day-to-day so that there is at all times a remaining term of three years. Other
executives' employment agreements have either one-year or two-year terms which
extend day-to-day so that there is at all times a remaining term of one or two
years, respectively. Following a termination without cause or resignation for
good reason, the Chief Executive Officer is entitled to a lump sum payment equal
to three years' base salary and three times the higher of (1) his target annual
bonus or (2) the average of the actual annual bonuses paid to him in the three
prior years. The Chief Executive Officer is also entitled to a one-time prorated
bonus for the year of termination (based on the Company's actual performance
multiplied by a fraction, the numerator of which is the number of business days
the Chief Executive Officer was employed during the year of termination, and the
denominator of which is the total number of business days during that year),
payable when bonuses, if any, are paid to other executives. The Chief Executive
Officer will also receive qualified and nonqualified pension, life insurance,
medical and other benefits for three years. The other key executives are
entitled to the following benefits, payable in equal installments over one or
two years: (1) one or two times base salary and (2) one or two times the higher
of (A) the target annual bonus or (B) the average of the actual annual bonuses
paid in the three prior years. In addition, the other executives are entitled to
(1) a one-time prorated bonus for the year of termination (based on the
Company's actual performance multiplied by a fraction, the numerator of which is
the number of business days the executive officer was employed during the year
of termination, and the denominator of which is the total number of business
days during that year), payable when bonuses, if any, are paid to the Company's
other executives, and (2) qualified and nonqualified pension, life insurance,
medical and other benefits for the one or two-year period, as applicable,
following termination. However, the Company is not obligated to provide any
benefits under tax qualified plans that are not permitted by the terms of each
plan or by applicable law or that could jeopardize the plan's tax status.
Continuing benefit coverage will terminate to the extent an executive (including
the Chief Executive Officer) is offered or obtains comparable coverage from any
other employer. The employment agreements provide for confidentiality during and
following employment, and include a noncompetition and nonsolicitation agreement
that is effective during and for one year following employment. If an executive
(including the Chief Executive Officer) breaches any of his or her
confidentiality, noncompetition or nonsolicitation agreements, the executive
will forfeit any unpaid amounts or benefits. To the extent that excise taxes are
incurred by an executive (including the Chief Executive Officer) as a result of
"excess parachute payments," as defined by
13
IRS regulations, the Company will pay additional amounts up to $10 million, in
the aggregate, so that executives would be in the same financial condition as if
the excise taxes were not incurred.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee is comprised entirely of non-employee directors
and has the responsibility for reviewing and approving changes to the Company's
executive compensation policies and programs. The Compensation Committee also
approves all compensation payments to the Chief Executive Officer and the other
named executive officers, including annual and long-term incentive awards.
COMPENSATION PHILOSOPHY
The fundamental objective of the Company's executive compensation program
is to attract, retain and motivate key executives to enhance long-term
profitability and stockholder value.
The Company's compensation program is based on the following policies and
objectives:
- Programs will have a clear link to stockholder value.
- Programs will be designed to support achievement of the Company's
business objectives.
- Total compensation opportunities will be established at levels which are
competitive with marketplace practices and other pertinent criteria,
taking into account such factors as executive performance, level of
experience and retention value.
- Variable incentive pay will constitute a significant portion of each
executive's compensation.
- Incentive pay will be designed to:
- Reflect company-wide, business unit and individual performance,
based on each individual's position and level; and
- Incorporate "absolute" (internal) and "relative" (external)
performance measures.
- Programs will be communicated so that participants understand how their
decisions affect business results and their compensation.
With these policies and objectives in mind, the Compensation Committee has
designed a pay structure for the named executive officers that incorporates
three key components: base salary, annual incentive payments, and long-term
incentive compensation consisting of stock options and performance units.
COMPENSATION PROGRAM COMPETITIVENESS STUDY
Prior to the Company's initial public offering in May 2001, the
Compensation Committee commissioned an in-depth compensation analysis conducted
by an independent third party to determine whether the Company's executive
compensation programs were consistent with those of other publicly held
companies of similar size and in a similar industry. The Compensation Committee
will continue to periodically review the Company's executive compensation
programs to ensure that such programs remain competitive and continue to meet
their objectives.
ANNUAL BASE SALARY
Based upon the above-referenced study, the Compensation Committee
established the base salaries of the Company's executive officers to ensure
competitiveness in the marketplace. The Compensation Committee will continue to
review the base salaries of the named executive officers to ensure salaries
continue to reflect marketplace practices and take into account performance,
experience and retention value.
14
ANNUAL INCENTIVE PLAN
The Company's annual incentive compensation plan provides opportunities for
key executives to earn annual cash incentive payments tied to the successful
achievement of pre-established objectives.
All annual incentive plan participants are assigned threshold, target and
maximum incentive percentages. If performance does not meet the threshold level,
no incentive is earned. At threshold levels, the incentive that can be earned
generally equals 50% of the target incentive. The target incentive represents
the level of compensation that is considered to be required to stay competitive
with the desired pay position in the market. Target incentive payments generally
are received for achieving budgeted financial goals and meeting personal
performance goals. Maximum incentive payments generally are received when both
budgeted financial and personal performance goals are significantly exceeded. A
participant's annual incentive opportunity is based upon his or her level of
participation in the incentive plan. The incentive opportunity increases based
upon an executive's potential to affect operations or profitability.
Awards for corporate employees, including the Chief Executive Officer, are
based on achievement of corporate and individual performance goals. Awards to
operating employees are based on achievement of a combination of corporate,
business unit (including safety) and individual performance goals. Achievement
of corporate performance is determined by comparing the Company's actual
performance against objective and subjective performance measures, which are
established by the Compensation Committee at the beginning of each calendar
year. In 2001, these performance measures for the named executive officers and
their relative weightings were as follows:
- 60% -- earnings before interest, taxes, depreciation, and amortization
(EBITDA);
- 20% -- return on invested capital (ROIC); and
- 20% -- individual performance.
All award payments to the named executive officers are subject to the
review and approval of the Compensation Committee.
2001 INCENTIVE PAYMENTS
For the nine months ended December 31, 2001, the Company awarded annual
incentive payments to the Chief Executive Officer and the other four named
executive officers, as reflected in the bonus column of the summary compensation
table. Other eligible executives were paid under the same annual incentive plan.
Annual incentive payouts for 2001 were based on the Company's achievement of
114% of its EBITDA target and 136% of its ROIC target. These cash awards are
intended to link executive performance, annual performance measures and
long-term stockholder value.
LONG-TERM INCENTIVES
The Compensation Committee has determined that a long-term incentive
opportunity will be made available to each of the Company's named executive
officers through annual awards of stock options and performance units. The
targeted value of these awards generally is split equally between stock options
and performance units and ranges from 100 to 150% of base salary for each of the
named executive officers. The Compensation Committee intends that these
long-term incentive opportunities be competitive and based on actual Company
performance.
Stock Options
The Company's stock option program is a long-term plan designed to create a
direct link between executive compensation and increased stockholder value. The
targeted value of annual option awards to the named executive officers is
generally 50% of base salary for senior executives and 75% of base salary for
the Chief Executive Officer as described above, but awards can deviate from
these guidelines at the discretion of the Compensation Committee. The Company
uses a Black-Scholes valuation model to establish the value of its stock option
grants. The grants are currently made in the form of nonqualified stock options.
15
All stock options are granted at an exercise price equal to the closing
price of the Company's Common Stock on the date of grant. Stock options
generally vest in one-third increments over a period of three years; however,
options will immediately vest upon a change of control of the Company or upon an
employee's death, disability or a recapitalization event. Options expire ten
years from the date of grant.
Performance Units
Certain key executives are eligible to receive long-term incentive awards
in the form of performance units. Performance units awarded in 2001 will be
payable in cash, if earned. For units awarded in 2001, the value of the
performance units is tied to the relative performance of the Company's Common
Stock. The percentage of the performance units earned is based on the Company's
total stockholder return (TSR) over a period beginning with the initial public
offering and ending December 31, 2003 relative to both an industry comparator
group (the Industry Peer Group) and the S&P Industrial Index. TSR measures
cumulative stock price appreciation plus dividends. The Industry Peer Group
generally is perceived to be subject to similar market conditions and investor
reactions as the Company. For this reason, the Industry Peer Group is weighted
at 75% while the S&P Industrial Index is weighted at 25%.
Performance payout formulas are as follows:
- Threshold payouts (equal to 50% of the value of the performance units)
begin for TSR performance at the 40th percentile of the Industry Peer
Group or the 35th percentile of the S&P Industrial Index.
- Target payouts (equal to 100% of the value of the performance units) are
based on performance at the 55th percentile of the Industry Peer Group
and 50th percentile of the S&P Industrial Index.
- Maximum payouts (equal to 200% of the value of the performance units)
are based on performance at the 80th percentile of the Industry Peer
Group and the 75th percentile of the S&P Industrial Index.
- No payments will be made if TSR is negative and performance is below the
50th percentile of the Industry Peer Group. Also, the maximum payout
cannot exceed 150% of the value of the performance units if TSR is
negative and performance is above the 50th percentile of the Industry
Peer Group.
Performance units are issued at a price that equals the average closing
price of the Company's Common Stock during the four weeks of trading immediately
following the date of grant. TSR for the Company at the end of the cycle is
based on the average closing price during the last four weeks of trading in the
performance cycle. Units vest over, and are payable subject to the achievement
of performance goals at the conclusion of, the measurement period. Upon a change
of control of the Company, a recapitalization event or the executive's death,
disability, retirement or termination without cause, payments by the Company
will be paid in proportion to the number of vested performance units.
OTHER PLANS
The Company maintains a Deferred Compensation Plan pursuant to which
certain executives can defer base, annual incentive and any cash-based long-term
incentive compensation. The Company also maintains a defined contribution
retirement plan, a defined benefit retirement plan (although the plan is being
phased out) and other benefit plans for its employees. Executives participate in
these plans on the same terms as other eligible employees, subject to any legal
limits on the amount that may be contributed by or paid to executives under the
plans. In addition, the Company maintains one excess defined benefit retirement
plan and one excess defined contribution plan that provides retirement benefits
to executives whose pay exceeds legislative limits for qualified defined benefit
plans.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. Engelhardt's base salary is $725,000. A review of competitive market
data conducted in March 2001 supports the competitiveness of this salary.
16
For the nine months ended December 31, 2001, Mr. Engelhardt's maximum
incentive opportunity under the Company's annual incentive compensation plan was
175% of his base salary (prorated for the nine-month period ended December 31,
2001 in recognition of the shortened fiscal year) or $951,563. The maximum
incentive opportunity for the other named executive officers was 150% of their
base salary (prorated for the nine-month period ended December 31, 2001 in
recognition of the shortened fiscal year). Based on Company and individual
performance for the nine months ended December 31, 2001, as described above, Mr.
Engelhardt was awarded a bonus payout equal to 169% of his nine-month base
salary, or $920,895. In addition, Mr. Engelhardt received a bonus equal to
$350,000 for the successful completion of the Company's initial public offering
in May, 2001.
During the nine months ended December 31, 2001, Mr. Engelhardt also
received long-term incentive awards consisting of stock options and performance
units. These awards were made in accordance with the Compensation Committee's
long-term incentive guidelines described above. The specific terms of such
awards are outlined in this report under the captions "Long-Term Incentives,"
"Stock Options" and "Performance Units," and in the Proxy Statement compensation
tables.
MEMBERS OF THE COMPENSATION COMMITTEE:
HENRY E. LENTZ
BLANCHE M. TOUHILL, PhD
ALAN H. WASHKOWITZ
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's last fiscal year, Messrs. Lentz and Washkowitz and Dr.
Touhill served as members of the Compensation Committee. None of these committee
members is employed by the Company. Messrs. Lentz and Washkowitz are employed by
Lehman Brothers, which owns a controlling interest in the Company. During the
last fiscal year, Lehman Brothers engaged in certain transactions with the
Company as described under the caption "Related Party Transactions" below.
RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH AFFILIATES OF LEHMAN BROTHERS
As of March 1, 2002, Lehman Brothers Merchant Banking Partners II L.P. and
its affiliates (collectively, the "Lehman Brothers Merchant Banking Fund") owned
56.5% of the Company's outstanding Common Stock. Messrs. Goodspeed, Herlihy,
Lentz and Washkowitz, each being one of the Company's directors, are investors
in the Lehman Brothers Merchant Banking Fund and employees of Lehman Brothers.
Lehman Brothers has been retained to serve as financial advisor in
connection with the Company's efforts to develop mine-mouth electric generating
facilities in Kentucky and certain other locations. During the nine months ended
December 31, 2001, Lehman Brothers received $0.5 million plus reimbursement of
expenses for services rendered in connection with these projects.
Lehman Brothers served as the dealer manager in connection with the
Company's tender offer for $80 million principal amount of each of the Company's
senior notes and senior subordinated notes. Lehman Brothers received a fee of
$0.4 million, plus reimbursement of expenses, for those services.
Lehman Commercial Paper Inc. is a participant in the Company's senior
credit facility, which was amended during the last fiscal year. Lehman
Commercial Paper Inc. received $0.06 million of the $1.4 million credit facility
amendment fee.
17
Lehman Brothers served as the lead underwriter in connection with the
initial public offering of Company Common Stock, which was completed in May
2001. Lehman Brothers received customary fees, plus reimbursement of expenses,
for those services.
TRANSACTIONS WITH MANAGEMENT
During the fiscal years ended March 31, 1999, 2000 and 2001, some of the
Company's executive officers and 18 other employees purchased or were granted
shares of Class B Common Stock under the 1998 Stock Purchase and Option Plan for
Key Employees. All such Class B shares subsequently converted into Company
Common Stock on a one-for-one basis at the time of the Company's initial public
offering. In connection with these purchases and grants, the Company, affiliates
of Lehman Brothers Holdings and the executives who received Class B Common Stock
entered into stockholder agreements providing for certain rights relating to the
registration of their shares in connection with certain sales of Company capital
stock by affiliates of Lehman Brothers Holdings. The stockholders agreements
provide the investors with the right to register and sell their unregistered
stock in the event the Company conducts certain types of registered offerings.
In conjunction with the purchases and grants of Class B Common Stock, the
executive officers and employees executed term notes. The term notes related to
the grants are due on May 19, 2003 and the term notes executed for purchases
were due on February 1, 2006. Subsequently, the term notes executed for
purchases were replaced with term notes related to the grants. All of the term
notes bear interest at an applicable U.S. federal rate used by the Internal
Revenue Service for loans to employees. The maturity of the promissory notes
will accelerate upon the occurrence of certain events, including six months
following any termination of employment or disposition of the stock.
The following table sets forth certain information regarding the term notes
for the Company's executive officers with aggregate indebtedness in excess of
$60,000.
LARGEST AGGREGATE
INDEBTEDNESS DURING
NINE-MONTH OUTSTANDING
PERIOD ENDED INDEBTEDNESS AT
DECEMBER 31, DECEMBER 31,
NAME 2001($) 2001($)
---- ------------------- ---------------
Irl F. Engelhardt........................................... 675,394 675,394
Richard M. Whiting.......................................... 225,123 225,123
Roger B. Walcott, Jr. ..................................... 224,358 224,358
Richard A. Navarre.......................................... 189,498 189,498
Paul H. Vining.............................................. 218,855 --
Jeffery L. Klinger.......................................... 133,226 133,226
Sharon D. Fiehler........................................... 133,223 133,223
18
STOCK PERFORMANCE GRAPH
The following performance graph compares the cumulative total return to
stockholders on the Company's Common Stock with the cumulative total return of
two indices: (1) Standard & Poor's MidCap 400 Index, and (2) a peer group
comprised of Arch Coal, Inc., Massey Energy Company, Consol Energy, Inc. and
Westmoreland Coal Co. The graph assumes that the value of the investment in
Company Common Stock and each index was $100 at May 21, 2001, the date of the
Company's initial public offering. The graph also assumes that all dividends
were reinvested and that investments were held through December 31, 2001.
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON MAY 21, 2001
WITH DIVIDENDS REINVESTED
-------------------------------------------------------------------------------------------------
21-MAY-01 JUN-01 SEP-01 DEC-01
-------------------------------------------------------------------------------------------------
Peabody Energy Corporation $100 $117 $86 $101
-------------------------------------------------------------------------------------------------
S&P MidCap 400 Index $100 $ 95 $79 $ 94
-------------------------------------------------------------------------------------------------
Custom Composite Index (4 stocks) $100 $ 67 $50 $ 65
-------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
INFORMATION ABOUT STOCKHOLDER PROPOSALS
If you wish to submit a proposal for inclusion in next year's Proxy
Statement and proxy, we must receive the proposal on or before November 29,
2002. Any proposals should be submitted in writing to: Corporate Secretary,
Peabody Energy Corporation, 701 Market Street, St. Louis, Missouri 63101.
Under the Company's bylaws, if you wish to nominate a director or bring
other business before the stockholders at the 2003 Annual Meeting without having
your proposal included in next year's Proxy Statement:
- You must notify the Corporate Secretary in writing between February 2,
2003 and February 22, 2003; and
- Your notice must contain the specific information required by the
Company's bylaws.
You can obtain a copy of the Company's bylaws without charge by writing to
the Corporate Secretary at the address shown above.
19
COSTS OF SOLICITATION
The Company is paying the cost of preparing, printing and mailing these
proxy materials. The Company has engaged Georgeson Shareholder Communications
Inc. to assist in distributing proxy materials and in performing other proxy
solicitation services for a fee of $4,000 plus their out-of-pocket expenses.
Proxies may be solicited personally or by telephone by regular employees of the
Company without additional compensation as well as by employees of Georgeson.
The Company will reimburse banks, brokerage firms and others for their
reasonable expenses in forwarding proxy materials to beneficial owners and
obtaining their voting instructions.
OTHER BUSINESS
The Board of Directors is not aware of any matters requiring stockholder
action to be presented at the Annual Meeting other than those stated in the
Notice of Annual Meeting. Should other matters be properly introduced at the
Annual Meeting, those persons named in the enclosed proxy will have
discretionary authority to act on such matters and will vote the proxy in
accordance with their best judgment.
THE COMPANY WILL PROVIDE TO ANY STOCKHOLDER, WITHOUT CHARGE AND UPON
WRITTEN REQUEST, A COPY (WITHOUT EXHIBITS UNLESS OTHERWISE REQUESTED) OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION FOR THE NINE MONTHS ENDED DECEMBER 31, 2001. ANY SUCH REQUEST SHOULD
BE DIRECTED TO PEABODY ENERGY CORPORATION, INVESTOR RELATIONS, 701 MARKET
STREET, ST. LOUIS, MISSOURI 63101-1826.
By Order of the Board of Directors,
/s/ FREDRICK D. PALMER
FREDRICK D. PALMER
Executive Vice President --
Legal and External Affairs
and Secretary
20
EXHIBIT A
PEABODY ENERGY CORPORATION
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the audit committee. The committee
shall review and reassess the charter at least annually and obtain the approval
of the board of directors. The committee shall be appointed by the board of
directors and shall comprise at least three directors, each of whom are
independent of management. Members of the committee shall be considered
independent if they have no relationship that may interfere with the exercise of
their independence from management and the Company. All committee members shall
be financially literate, or shall become financially literate within a
reasonable period of time after appointment to the committee, and at least one
member shall have accounting or related financial management expertise.
STATEMENT OF POLICY
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the internal audit function, the
annual independent audit of the Company's financial statements, and the legal
compliance and ethics programs as established by management and the board. In so
doing, it is the responsibility of the committee to maintain free and open
communication between the committee, independent outside auditors, the internal
auditors and management of the Company. In discharging its oversight role, the
committee is empowered to investigate any matter brought to its attention with
full access to all books, records, facilities, and personnel of the Company and
the power to retain outside counsel, or other experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the audit committee is to oversee the
Company's financial reporting process on behalf of the board and report the
results of their activities to the board. Management is responsible for
preparing the Company's financial statements, and the independent outside
auditors are responsible for auditing those financial statements. The committee
in carrying out its responsibilities believes its policies and procedures should
remain flexible, in order to best react to changing conditions and
circumstances. The committee should take the appropriate actions to set the
overall corporate "tone" for quality financial reporting, sound business risk
practices, and ethical behavior.
The following shall be the principal recurring processes of the audit
committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the committee may supplement them
as appropriate.
- The committee shall have a clear understanding with management and the
independent outside auditors that the independent outside auditors are
ultimately accountable to the board and the audit committee, as
representatives of the Company's shareholders. The committee shall have
the ultimate authority and responsibility to evaluate and, where
appropriate, replace the independent outside auditors. The committee
shall discuss with the auditors their independence from management and
the Company and the matters included in the written disclosures required
by the Independence Standards Board. Annually, the committee shall review
and recommend the firm of independent outside auditors to the board for
selection.
- The committee shall discuss with the internal auditors and the
independent outside auditors the overall scope and plans for their
respective audits including the adequacy of staffing and compensation.
Also, the committee shall discuss with management, the internal auditors,
and the independent outside
21
auditors the adequacy and effectiveness of the accounting and financial
controls, including the Company's system to monitor and manage business
risk, and legal and ethical compliance programs. Further, the committee
shall meet separately with the internal auditors and the independent
outside auditors, with and without management present, to discuss the
results of their examinations.
- The committee shall review the interim financial statements with
management and the independent outside auditors prior to the filing of
the Company's Quarterly Report on Form 10-Q. Also, the committee shall
discuss the results of the quarterly review and any other matters
required to be communicated to the committee by the independent outside
auditors under generally accepted auditing standards. The chair of the
committee may represent the entire committee for the purpose of this
review.
- The committee shall review with management and the independent outside
auditors the financial statements to be included in the Company's Annual
Report on Form 10-K (or the annual report to shareholders if distributed
prior to the filing of Form 10-K), including their judgment about the
quality, not just acceptability, of accounting principles, the
reasonableness of significant judgments, and the clarity of the
disclosures in the financial statements. Also, the committee shall
discuss the results of the annual audit and any other matters required to
be communicated to the committee by the independent outside auditors
under generally accepted auditing standards.
22
PEABODY ENERGY
CORPORATION ADMISSION CARD
ANNUAL MEETING OF STOCKHOLDERS
Friday, May 3, 2002, 10:00 A.M.
Ritz-Carlton Hotel 100
Carondelet Plaza Clayton,
Missouri 63105
IF YOU PLAN TO ATTEND THE 2002 ANNUAL MEETING OF STOCKHOLDERS OF PEABODY ENERGY
CORPORATION, PLEASE DETACH THIS FORM AND BRING IT WITH YOU TO THE MEETING. This
card will provide evidence of your ownership and enable you to attend the
meeting. Attendance will be limited to those persons who owned Peabody Energy
Corporation Common Stock as of March 15, 2002, the record date for the Annual
Meeting.
When you arrive at the Annual Meeting site, please fill in your complete name in
the space provided below and submit this card to one of the attendants at the
registration desk.
IF YOU DO NOT BRING THIS ADMISSION CARD AND YOUR SHARES ARE REGISTERED IN YOUR
OWN NAME, YOU WILL NEED TO PRESENT A PHOTO I.D. AT THE REGISTRATION DESK. IF
YOUR SHARES ARE REGISTERED IN THE NAME OF YOUR BANK OR BROKER, YOU WILL BE
REQUIRED TO SUBMIT OTHER SATISFACTORY EVIDENCE OF OWNERSHIP (SUCH AS A RECENT
ACCOUNT STATEMENT OR A CONFIRMATION OF BENEFICIAL OWNERSHIP FROM YOUR BROKER)
AND A PHOTO I.D. BEFORE BEING ADMITTED TO THE MEETING.
STOCKHOLDER NAME:
------------------------------
DETACH HERE ZPBD12
PROXY
PEABODY ENERGY CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 3, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Messrs. Irl F. Engelhardt,
Richard M. Whiting and Fredrick D. Palmer, or any of them, with power of
substitution to each, proxies to represent the undersigned and to vote, as
designated on the reverse side of this form, all shares of Common Stock which
the undersigned would be entitled to vote at the Annual Meeting of Stockholders
of Peabody Energy Corporation (Peabody) to be held on May 3, 2002 at the
Ritz-Carlton Hotel, 100 Carondelet Plaza, Clayton, Missouri 63105 at 10:00 A.M.,
and at any adjournments thereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER INDICATED
BY THE STOCKHOLDER. IN THE ABSENCE OF SUCH INDICATION, SUCH SHARES WILL BE VOTED
FOR THE ELECTION OF DIRECTORS IN ITEM 1. THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED IN THE DISCRETION OF SAID PROXIES WITH RESPECT TO SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENTS THEREOF.
If the undersigned is a participant in the Peabody Holding Company, Inc.
Employee Retirement Account or other 401(k) plans sponsored by Peabody or its
subsidiaries, this proxy card also provides voting instructions to the trustee
of such plans to vote at the Annual Meeting, and any adjournments thereof, as
specified on the reverse side hereof. If the undersigned is a participant in one
of these plans and fails to provide voting instructions, the trustee will vote
the undersigned's plan account shares (and any shares not allocated to
individual participant accounts) in proportion to the votes cast by other
participants in that plan.
----------- -----------
SEE REVERSE IMPORTANT - THIS PROXY MUST BE SIGNED AND SEE REVERSE
SIDE DATED ON THE REVERSE SIDE. SIDE
----------- -----------
PEABODY ENERGY
CORPORATION
C/O EQUISERVE
P.O. BOX 43068
PROVIDENCE, RI 02940
----------------------------- -----------------------------
VOTE BY TELEPHONE VOTE BY INTERNET
----------------------------- -----------------------------
It's fast, convenient, and immediate! It's fast, convenient, and your vote is
immediately Call Toll-Free on a Touch-Tone Phone confirmed and posted.
1-877-PRX-VOTE (1-877-779-8683).
FOLLOW THESE FOUR EASY STEPS: FOLLOW THESE FOUR EASY STEPS:
1. READ THE ACCOMPANYING PROXY STATEMENT AND 1. READ THE ACCOMPANYING PROXY STATEMENT
AND PROXY CARD. PROXY CARD.
2. CALL THE TOLL-FREE NUMBER 2. GO TO THE WEBSITE
1-877-PRX-VOTE (1-877-779-8683). HTTP://WWW.EPROXYVOTE.COM/BTU
3. ENTER YOUR VOTER CONTROL NUMBER LOCATED ON 3. ENTER YOUR VOTER CONTROL NUMBER
LOCATED ON YOUR PROXY CARD ABOVE YOUR NAME. YOUR PROXY CARD ABOVE YOUR NAME.
4. FOLLOW THE RECORDED INSTRUCTIONS. 4. FOLLOW THE INSTRUCTIONS PROVIDED.
YOUR VOTE IS IMPORTANT! YOUR VOTE IS IMPORTANT!
Call 1-877-PRX-VOTE anytime! Go to HTTP://WWW.EPROXYVOTE.COM/BTU anytime!
DO NOT RETURN YOUR PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR INTERNET
DETACH HERE ZPBD11
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE.
A VOTE FOR EACH OF THE NOMINEES LISTED IN ITEM 1 IS RECOMMENDED BY THE BOARD OF
DIRECTORS. 1. Election of Directors.
The undersigned hereby GRANTS authority to elect the following
NOMINEES: (01) Roger H. Goodspeed, (02) Felix P. Herlihy and
(03) James R. Schlesinger, PhD
FOR
FROM ALL [ ] [ ] WITHHELD ALL
NOMINEES NOMINEES
[ ] For all nominees except as noted above
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]
NOTE: Please sign exactly as name appears hereon. For joint accounts, each joint
owner should sign. When signing as attorney, executor, administrator, trustee or
guardian, please sign your full title.
Signature: Date: Signature: Date:
--------------- ------- ---------------- --------