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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] 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
The Williams Companies, Inc.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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number, or the Form or Schedule and the date of its filing.
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
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CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
(WILLIAMS LOGO)
STEVEN J. MALCOLM
CHAIRMAN OF THE BOARD
To the Stockholders of The Williams Companies, Inc.:
You are cordially invited to attend the 2003 Annual Meeting of Stockholders
of The Williams Companies, Inc. to be held on Thursday, May 15, 2003, in the
Williams Resource Center, One Williams Center, Tulsa, Oklahoma, commencing at 11
a.m., local time. We look forward to greeting personally as many of our
stockholders as possible at the Annual Meeting.
The Notice of the Annual Meeting and Proxy Statement accompanying this
letter provide information concerning matters to be considered and acted upon at
the Annual Meeting. A report on the operations of Williams will be presented at
the Annual Meeting, followed by a question-and-answer and discussion period.
We know that most of our stockholders are unable to attend the Annual
Meeting in person. Williams solicits proxies so that each stockholder has an
opportunity to vote on all matters that are scheduled to come before the Annual
Meeting. Whether or not you plan to attend, you can be sure your shares are
represented by promptly voting and submitting your proxy by phone, by Internet
or by completing, signing, dating and returning your Proxy Form in the enclosed
postage-paid envelope. Regardless of the number of shares you own, your vote is
important.
Thank you for your continued interest in Williams.
Very truly yours,
-S- STEVEN J. MALCOLM
Steven J. Malcolm
Enclosures
March 28, 2003
TABLE OF CONTENTS
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS....................
PROXY STATEMENT............................................. 2
PROPOSAL 1. ELECTION OF DIRECTORS........................... 3
GENERAL INFORMATION......................................... 5
EXECUTIVE COMPENSATION AND OTHER INFORMATION................ 8
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION..... 14
STOCKHOLDER RETURN PERFORMANCE PRESENTATION................. 18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 21
REPORT OF THE AUDIT COMMITTEE............................... 23
PROPOSAL 2. RATIFICATION OF APPOINTMENT OF INDEPENDENT
AUDITOR................................................... 23
PROPOSAL 3. AMENDMENT OF THE WILLIAMS COMPANIES, INC. 2002
INCENTIVE PLAN............................................ 24
STOCKHOLDER PROPOSALS FOR 2003
PROPOSAL 4. STOCKHOLDER PROPOSAL ON AUDIT SERVICES........ 29
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
OF 1934................................................... 31
STOCKHOLDER PROPOSALS FOR 2004.............................. 31
GENERAL..................................................... 31
EXHIBIT A................................................... A-1
EXHIBIT B................................................... B-1
THE WILLIAMS COMPANIES, INC.
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 2003
11:00 A.M. CENTRAL TIME
---------------------
To the Stockholders of
The Williams Companies, Inc.
NOTICE IS HEREBY GIVEN that the 2003 Annual Meeting of Stockholders of The
Williams Companies, Inc. will be held in the Williams Resource Center, One
Williams Center, Tulsa, Oklahoma, on Thursday, May 15, 2003, at 11 a.m., local
time, for the following purposes:
1. To elect three directors of Williams;
2. To ratify the appointment of Ernst & Young LLP as our independent
auditor for 2003;
3. To amend The Williams Companies, Inc. 2002 Incentive Plan; and
4. To transact such other business, including a stockholder proposal,
as may properly come before the Annual Meeting or any adjournment thereof.
EVEN IF YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING, PLEASE PROMPTLY
VOTE IN ONE OF THE FOLLOWING WAYS SO THAT YOUR SHARES OF COMMON STOCK MAY BE
REPRESENTED AND VOTED AT THE ANNUAL MEETING:
1. CALL THE TOLL-FREE TELEPHONE NUMBER shown on the proxy card;
2. VOTE VIA THE INTERNET on the website shown on the proxy card; or
3. MARK, SIGN, DATE AND RETURN the enclosed proxy card in the
postage-paid envelope.
The Board of Directors has fixed the close of business on March 21, 2003,
as the record date for the Annual Meeting, and only holders of common stock of
record at such time will be entitled to vote at the Annual Meeting or any
adjournment thereof.
By Order of the Board of Directors
-s- BRIAN K. SHORE
Brian K. Shore
Secretary
Tulsa, Oklahoma
March 28, 2003
THE WILLIAMS COMPANIES, INC.
ONE WILLIAMS CENTER
TULSA, OKLAHOMA 74172
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 2003
This Proxy Statement is furnished by The Williams Companies, Inc.
("Williams" or the "Company") in connection with the solicitation of proxies by
the Board of Directors of Williams to be used at the 2003 Annual Meeting of
Stockholders to be held at the time and place and for the purposes set forth in
the foregoing Notice of Annual Meeting of Stockholders, and at any and all
adjournments of the Annual Meeting. The term "Williams" also includes
subsidiaries where the context requires.
SOLICITATION AND REVOCATION OF PROXIES AND VOTING
Execution and return of the enclosed proxy will not affect a stockholder's
right to attend the Annual Meeting and to vote in person. A stockholder giving a
proxy has the power to revoke it at any time before it is exercised. A
stockholder may revoke the proxy prior to its exercise by delivering written
notice of revocation to the Secretary of Williams, by executing a later dated
proxy or by attending the Annual Meeting and voting in person. Properly executed
proxies in the accompanying form, received in due time and not previously
revoked, will be voted at the Annual Meeting or any adjournment thereof as
specified therein by the person giving the proxy, but, if no specification is
made, the shares represented by proxy will be voted as recommended by the Board
of Directors.
Williams will pay the expenses of this proxy solicitation including the
cost of preparing and mailing the Proxy Statement and proxy card. Such expenses
may also include the charges and expenses of banks, brokerage firms and other
custodians, nominees or fiduciaries for forwarding proxies and proxy material to
beneficial owners of Williams' common stock. Williams expects to solicit proxies
primarily by mail, but directors, officers, employees and agents of Williams may
also solicit proxies in person or by telephone or by other electronic means. In
addition, Williams has retained Morrow & Co., Inc. to assist in the solicitation
of proxies for which Williams will pay an estimated $10,500 in fees, plus
expenses and disbursements. This Proxy Statement and accompanying proxy card
were first mailed to stockholders on or about April 9, 2003.
The presence, in person or by proxy, of a majority of the outstanding
shares of common stock entitled to vote at the Annual Meeting shall constitute a
quorum for the transaction of business. If a quorum is present, proposals to be
voted on at the Annual Meeting, other than the election of directors which
requires a plurality of the votes cast, will be decided by a majority of the
votes cast by the stockholders entitled to vote thereon, present in person or
represented by proxy, unless the proposal relates to matters on which more than
a majority vote is required under Williams' Restated Certificate of
Incorporation, as amended, its by-laws, the laws of the state of Delaware under
whose laws Williams is incorporated or other applicable law.
A stockholder may, with respect to the election of directors: (i) vote for
the election of all nominees named herein; (ii) withhold authority to vote for
all such nominees; or (iii) vote for the election of all such nominees other
than any nominees with respect to whom the vote is specifically withheld by
indicating in the space provided on the proxy. A stockholder may, with respect
to each other matter to be voted upon: (i) vote for the matter; (ii) vote
against the matter; or (iii) abstain from voting on the matter.
Votes withheld from a nominee for election as a director or votes on other
matters that reflect abstentions or broker non-votes (i.e., shares as to which
the record owner has not received instructions from the beneficial owner of the
shares on a matter as to which, under the applicable rules of the New York Stock
Exchange, the record owner does not have authority to vote without such
instruction) will be treated as present at the Annual Meeting for the purpose of
determining a quorum but will not be counted as votes cast. Accordingly,
2
abstentions will be counted in tabulating the votes cast and, therefore, will
have the same effect as a vote against the appointment of the auditor and
approval of the amendment to the 2002 Incentive Plan. Broker non-votes will not
be counted in tabulating the votes cast.
As a matter of policy, proxies and voting tabulations that identify
individual stockholders are kept confidential. Such documents are made available
only to those who process the proxy cards, tabulate the vote and serve as
inspectors of election, none of whom are Williams employees, and certain
employees of Williams responsible for the Annual Meeting. The vote of any
stockholder is not disclosed except as may be necessary to meet legal
requirements.
Only holders of Williams' common stock of record at the close of business
on March 21, 2003, will be entitled to receive notice of and to vote at the
Annual Meeting. Williams had 517,654,346 shares of common stock outstanding on
the record date and each share is entitled to one vote.
PROPOSAL 1
ELECTION OF DIRECTORS
Williams' Restated Certificate of Incorporation, as amended, provides for
three classes of directors of as nearly equal size as possible and further
provides that the total number of directors shall be determined by resolution
adopted by the affirmative vote of a majority of the Board of Directors, except
that the total number of directors may not be less than five nor more than 17.
The term of each class of directors is normally three years, and the term of one
class expires each year in rotation.
Three individuals, all of whom are currently directors of Williams have
been nominated for election for three-year terms as directors at the Annual
Meeting. Seven directors will continue in office to serve pursuant to their
prior elections. Mr. James C. Lewis has elected not to stand for reelection. Mr.
Gordon R. Parker will be leaving the Board of Directors as of the date of the
Annual Meeting. In accordance with the recommendation of the Nominating &
Governance Committee, the Board of Directors proposes that the following
nominees be elected: Messrs. William E. Green, W. R. Howell and George A. Lorch.
The persons named as proxies in the accompanying proxy, who have been
designated by the Board of Directors, intend to vote, unless otherwise
instructed in such proxy, for the election of Messrs. William E. Green, W. R.
Howell and George A. Lorch. Should any nominee named herein become unable for
any reason to stand for election as a director of Williams, the persons named in
the proxy will vote for the election of such other person or persons as the
Nominating & Governance Committee may recommend and the Board of Directors may
propose to replace such nominee or, if none, the Nominating & Governance
Committee will recommend that the size of the Board be reduced. Williams knows
of no reason why any of the nominees will be unavailable or unable to serve.
The names of the nominees and the directors whose terms of office will
continue after the 2003 Annual Meeting, their principal occupations during the
past five years, other directorships held and certain other information are set
forth below.
STANDING FOR ELECTION
CLASS II
TERMS EXPIRE MAY 2006
WILLIAM E. GREEN, AGE 66
Director since 1998. Mr. Green is founder of William Green & Associates, a
Palo Alto, California law firm and has been with the firm since 1974. He also
serves as Vice President, General Counsel, and Secretary of Information Network
Radio, Inc.
3
W. R. HOWELL, AGE 67
Director since 1997. Mr. Howell is Chairman Emeritus of J. C. Penney
Company, Inc., a major retailer. He was Chairman of the Board and Chief
Executive Officer of J. C. Penney from 1983 to 1996. He is a director of Exxon
Mobil Corporation, Pfizer, Inc., Deutsche Bank Trust Corporation, Halliburton
Company, Viseon, Inc. and American Electric Power Company, Inc.
GEORGE A. LORCH, AGE 61
Director since 2001. Mr. Lorch is Chairman Emeritus of Armstrong Holdings,
Inc. From 1996 through April 2000, he served as Chairman of the Board and Chief
Executive Officer of Armstrong World Industries, Inc. He served as Chairman of
the Board and Chief Executive Officer of Armstrong Holdings, Inc. from May to
August of 2000. Mr. Lorch also serves on the boards of Pfizer and Household
International, Inc. Armstrong World Industries, Inc. filed for voluntary
reorganization under Chapter 11 of the United States Bankruptcy Code and filed a
Plan of Reorganization in November, 2002.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
DIRECTORS NAMED IN PROPOSAL 1.
DIRECTORS CONTINUING IN OFFICE
CLASS I
TERMS EXPIRE MAY 2005
HUGH M. CHAPMAN, AGE 70
Director since 1999. Mr. Chapman is a retired Chairman of the Board of
Nations Bank South, a commercial bank holding company, where he served from 1992
through June 1997. He also serves as a director of West Point Stevens.
FRANK T. MACINNIS, AGE 56
Director since 1998. Mr. MacInnis is Chairman of the Board and Chief
Executive Officer of EMCOR Group, Inc., one of the world's largest electrical
and mechanical construction and facilities management groups, and has been since
1994. Mr. MacInnis is also Chairman of the Board and Chief Executive Officer of
ComNet Communications, Inc. He is also a director of Geneva Steel Holdings
Corporation, ITT Industries, Inc. and the Greater New York Chapter of the March
of Dimes.
STEVEN J. MALCOLM, AGE 54
Director since 2001. Mr. Malcolm was elected Chief Executive Officer of
Williams in January 2002 and Chairman of the Board in May 2002. He was elected
President and Chief Operating Officer of Williams in September 2001. Prior to
that, he was an Executive Vice President of Williams since May 2001, President
and Chief Executive Officer of Williams Energy Services, LLC, a subsidiary of
Williams, since December 1998 and the Senior Vice President and General Manager
of Williams Field Services Company, a subsidiary of Williams, since November
1994.
JANICE D. STONEY, AGE 62
Director since 1999. Ms. Stoney retired as Executive Vice President of U S
WEST Communications, Inc. in 1992. She also serves on the board of directors of
Whirlpool Corporation and Bridges Investment Fund.
4
CLASS III
TERMS EXPIRE MAY 2004
THOMAS H. CRUIKSHANK, AGE 71
Director since 1990. Mr. Cruikshank was Chairman of the Board and Chief
Executive Officer of Halliburton Company, a diversified oil field services,
engineering, and construction company, until his retirement in 1996. He was an
executive of Halliburton for more than five years. Mr. Cruikshank is also a
director of Lehman Brothers Holdings, Inc.
CHARLES M. LILLIS, AGE 61
Director since 2000. Mr. Lillis is a co-founder and principal of LoneTree
Partners, a private equity investing group headquartered in Denver, Colorado.
Mr. Lillis served as the Chairman of the Board and Chief Executive Officer of
MediaOne Group, Inc. from its inception in 1995 through the acquisition of
MediaOne by AT&T Corp., which was completed in 2000. Mr. Lillis is a director of
SUPERVALU Inc. and Agilera, Inc.
JOSEPH H. WILLIAMS, AGE 69
Director since 1969. He was Chairman of the Board of Williams prior to his
retirement in 1994. He was an executive of Williams for more than five years.
GENERAL INFORMATION
COMMITTEES, MEETINGS AND DIRECTOR COMPENSATION
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of Williams. However, the
Board is not involved in the day-to-day operations of Williams. The Board is
kept informed of Williams' business through discussions with the Chief Executive
Officer and other officers, by reviewing analyses and reports provided to it on
a regular basis and by participating in Board and Committee meetings.
The Board of Directors has appointed the chair of the Compensation
Committee to serve as the Presiding Director for meetings of the independent,
non-management directors. Beginning in 2003, the independent, non-management
directors will be meeting without the Chief Executive Officer present twice each
year and will have the opportunity to meet at the beginning of each regularly
scheduled meeting of the Board of Directors.
The Board of Directors held 36 meetings during 2002. No director attended
less than 75 percent of the Board and Committee meetings. The Board has
established standing committees to consider designated matters. The committees
of the Board are Executive, Audit, Nominating & Governance, Finance and
Compensation. In accordance with the by-laws of Williams, the Board of Directors
annually elects from its members the members and the chairman of each committee.
The following is a description of each of the committees and committee
membership as of February 28, 2003.
5
BOARD COMMITTEE MEMBERSHIP
NOMINATING
AND
EXECUTIVE AUDIT COMPENSATION GOVERNANCE FINANCE
COMMITTEE COMMITTEE COMMITTEE COMMITTEE COMMITTEE
--------- --------- ------------ ---------- ---------
Hugh M. Chapman............... X -- X
Thomas H. Cruikshank.......... X X
William E. Green.............. X X
W. R. Howell.................. X -- X
James C. Lewis................ X X
Charles M. Lillis............. X X --
George A. Lorch............... X X X
Frank T. MacInnis............. X X
Steven J. Malcolm............. --
Gordon R. Parker.............. X --
Janice D. Stoney.............. X X X
Joseph H. Williams............ X X
---------------
-- = Chairperson
X = Committee Member
Executive Committee
The Executive Committee is authorized to act for the Board of Directors in
the management of the business and affairs of Williams, except as such authority
may be limited from time to time by the laws of the state of Delaware. The
Executive Committee did not meet in 2002.
Audit Committee
Williams' Audit Committee is composed entirely of non-management directors.
Information regarding the functions performed by the Audit Committee is set
forth in the "Report of the Audit Committee" included in this Proxy Statement.
The Audit Committee is governed by a written charter approved by the Board of
Directors. The Audit Committee met eleven times in 2002.
Nominating & Governance Committee
The Nominating & Governance Committee, which was formerly called the
Nominating Committee, is comprised of independent, non-management
directors. NOMINATING: The Nominating & Governance Committee is responsible for
identifying and recommending candidates to fill vacancies on the Board as such
vacancies occur, as well as the slate of nominees for election as directors by
the stockholders at each Annual Meeting of Stockholders. Additionally, the
Nominating & Governance Committee recommends to the Board the individual to be
the Chairman of the Board and Chief Executive Officer. Qualifications considered
by the Nominating & Governance Committee for director candidates include an
attained position of leadership in the candidate's field of endeavor, business
and financial experience, demonstrated exercise of sound business judgment,
expertise relevant to Williams' lines of business and the ability to serve the
interests of all stockholders. The Nominating & Governance Committee will
consider director candidates submitted to it by other directors, employees and
stockholders. As a requisite to consideration, each recommendation must be
accompanied by biographical material on the proposed candidate, as well as any
indication that the proposed candidate would be willing to serve as a director
if elected. Recommendations with supporting material may be sent to the
attention of the Secretary of Williams. GOVERNANCE: The Nominating & Governance
Committee reviews and reports to the Board on a periodic basis regarding matters
of corporate governance. The Nominating & Governance Committee is responsible
for reviewing annually whether each non-management director is independent as
defined by the New York Stock Exchange and otherwise qualified in accordance
with applicable law or regulation. The Nominating & Governance Committee also
reviews any
6
changes to a director's primary activity and all Board committee charters for
effective corporate governance. The Nominating & Governance Committee evaluates
annually the performance of the Nominating & Governance Committee and the Board
as a whole. The Code of Business Conduct and Ethics of Williams are reviewed for
compliance annually and changes recommended to the Board as necessary. The
Nominating & Governance committee met six times in 2002.
Finance Committee
The Finance Committee of the Board of Directors is comprised of members of
the Board of Directors, who are independent, non-management directors as defined
by the New York Stock Exchange and otherwise qualified in accordance with
applicable law or regulation. The Finance Committee has the primary
responsibility of ensuring appropriate alignment between the financing
strategies of Williams and the business units' operating plans and acquisitions
or other investment opportunities, as well as reporting to the full Board, as
appropriate, that the key elements of the Williams' balance sheet are of a
structure and cost that allows the business units' operating plans and
investment opportunities to be executed on a steady and sustainable basis. The
Finance Committee met two times in 2002.
Compensation Committee
The Compensation Committee of the Board of Directors serves to motivate
Williams' executives towards the achievement of business objectives and to align
such employees' focus with the long-term interest of stockholders. The
Compensation Committee's purpose is primarily to direct the design and
implementation of strategic programs that ensure the attraction, retention and
appropriate reward of the executives. Generally, the Compensation Committee's
role is to approve and oversee the establishment and administration of these
programs. See the "Compensation Committee Report on Executive Compensation"
elsewhere herein. During 2002, the Compensation Committee met six times.
COMPENSATION OF DIRECTORS
Management directors receive no additional compensation for service on the
Board of Directors or Committees of the Board. Non-management directors receive
an annual retainer of $20,000 in cash and shares of Williams' common stock
valued at $20,000 on the grant date. The Chairmen of the Nominating & Governance
and Finance Committees receive an annual retainer of $5,000 and the Chairmen of
the Audit and Compensation Committees receive an annual retainer of $10,000.
Nominating & Governance, Finance and Compensation Committee members receive an
annual retainer of $4,000 for serving on these Committees, while members of the
Audit Committee receive an annual retainer of $8,000. In addition, all
non-management directors receive $1,250 for each Board and Committee meeting
attended.
Under The Williams Companies, Inc. 2002 Incentive Plan, a non-management
director may elect to receive all or any part of cash fees in the form of
Williams' common stock or Williams' deferred stock. Deferred stock may be
deferred to any subsequent year or until such individual ceases to be a
director. Dividend equivalents are paid on deferred stock and may be received in
cash or reinvested in additional deferred shares. Three directors elected to
defer fees under this plan in 2002.
Under The Williams Companies, Inc. 2002 Incentive Plan, all non-management
directors receive an annual stock option grant of 6,000 shares of Williams'
common stock. The options are exercisable on the date of grant and remain
exercisable for ten years so long as the director remains in his or her
position. The exercise price is equal to the fair market value of the stock on
the date of grant as defined by the plan.
Additionally, all directors are reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the Board or any Committee or
otherwise by reason of their being a director.
7
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation for the three fiscal years ended December 31, 2002 of Williams'
Chief Executive Officer, former Chief Executive Officer and each of the four
other most highly-compensated executive officers of the Company and one
additional individual for whom disclosure would have been provided but for the
fact that the individual was not serving as an executive officer of Williams as
of the end of the fiscal year ending December 31, 2002.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION(1)
------------------------------ ------------------------------------
NUMBER OF
BONUS RESTRICTED SECURITIES
NAME AND (YR. STOCK AWARDS UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY EARNED)(2) (YR. EARNED)(3)(4) OPTIONS GRANTED COMPENSATION(5)
------------------ ---- ---------- ---------- ------------------ --------------- ---------------
Steven J. Malcolm....................... 2002 $ 871,154 $ -0- $ -0- 675,000(7) $ 12,965
Chairman, President and 2001 512,000 636,272 3,012,100(6) 174,938 11,218
Chief Executive Officer 2000 380,000 351,081 700,024(6) 65,356 11,308
Keith E. Bailey......................... 2002 507,692 -0- -0- -0- 4,520,215(9)
Former Chairman and Chief 2001 1,171,154 1,859,208 -0- 217,853 11,218
Executive Officer 2000 950,000 -0- 1,224,911(8) 108,926 11,466
William E. Hobbs........................ 2002 400,000 50,000 -0- 305,000(7) 12,965
Senior Vice President, 2001 336,538 387,787 4,000,003(10) 107,141 11,218
Energy Marketing and Trading 2000 246,923 237,752 2,000,009(10) 25,053 11,308
Michael P. Johnson...................... 2002 375,923 67,000 -0- 269,000(7) 12,965
Senior Vice President, 2001 357,692 -0- 1,963,434(11) 54,463 9,406
Strategic Services and Administration 2000 315,000 -0- 257,600(11) 43,571 11,308
Jack D. McCarthy........................ 2002 510,115 -0- -0- 92,000 1,009,965(13)
Former Senior Vice President 2001 485,346 474,791 1,620,400(12) 76,248 11,218
and Chief Financial Officer 2000 440,000 349,888 -0- 54,463 11,466
Phillip D. Wright....................... 2002 388,269 85,000 -0- 295,000(7) 8,965
Senior Vice President and 2001 271,864 203,388 884,160(14) 27,303 8,037
Chief Restructuring Officer 2000 225,000 157,141 500,002(14) 20,424 7,908
William G. von Glahn(15)................ 2002 464,346 500,000 -0- 75,000 1,288,553(17)
Former Senior Vice President 2001 440,654 454,700 1,620,400(16) 54,463 11,218
and General Counsel 2000 390,000 335,225 -0- 43,571 11,466
---------------
(1) Williams' restricted and deferred shares and stock options granted prior to
the April 23, 2001 spin-off of Williams Communications Group, Inc. were
adjusted as a result of the spin-off using a factor of 1.089263 per share.
Shares reported reflect this adjustment.
(2) Excludes incentive program awards required or elected to be converted to
deferred stock that are included in the Restricted Stock Awards column.
(3) Amounts reported in this column include the dollar value of Williams'
deferred and restricted stock awards under the terms of the Williams' 2002
Incentive Plan, Williams' 1996 Stock Plan, Williams' Stock Plan for
Nonofficer Employees and phantom units of deferred limited interest in
Williams Energy Partners L.P. ("WEG") under the terms of the Williams
Energy Partners Long-Term Incentive Plan as of the date such awards were
granted.
(4) The total number of Williams' deferred shares held and the aggregate
closing market value at December 31, 2002, were as follows: Mr. Malcolm,
83,565 shares valued at $225,626; Mr. Hobbs, 173,484 shares valued at
$468,407; Mr. Johnson, 89,517 shares valued at $241,696; Mr. McCarthy,
96,642 shares valued at $260,933; Mr. Wright, 13,510 shares valued at
$36,477; and Mr. von Glahn, 83,571 shares valued at $225,642. The total
number of phantom units of deferred limited interest in WEG held and the
aggregate closing market value at December 31, 2002, were as follows:
8
Mr. Malcolm, 6,358 phantom units valued at $206,317 and Mr. Wright, 15,800
phantom units valued at $512,710. Aggregate market value was calculated
using $2.70 per share, the closing price of Williams' common stock, and
$32.45 per unit, the closing price of WEG common units, reported in the
table entitled "New York Stock Exchange Composite Transactions" contained
in The Wall Street Journal for December 31, 2002. Dividend equivalents are
paid on Williams' deferred stock at the same time and at the same rate as
dividends paid to stockholders generally; distribution equivalents are paid
on vested phantom units of deferred limited interest in WEG.
(5) Includes contributions made by the Company to the Investment Plus Plan, a
defined contribution plan subject to the Employee Retirement Income
Security Act of 1974, on behalf of each of the named executive officers.
(6) Represents Williams' deferred stock award of 60,000 shares valued at
$2,613,000 using the closing stock price ($43.55) on the grant date April
2, 2001 awarded for retention purposes; WEG initial public offering ("IPO")
deferred unit award of 13,000 units of limited interest in WEG valued at
$399,100 using the closing WEG unit price ($30.70) on grant date April 19,
2001; and Williams' deferred stock award for retention purposes, 16,717
shares valued at $700,024 using the closing Williams stock price ($41.8750)
on the grant date July 21, 2000. The 13,000 WEG units were granted with a
vesting date of the earlier of February 9, 2004, or when certain
performance targets were met. Those targets were met in 2002, resulting in
6,500 units being vested on February 14, 2002, and the remaining 6,500
being vested on November 15, 2002.
(7) Represents options granted in both February 2002 and November 2002. The
November 2002 grant was an acceleration of the 2003 grant.
(8) Represents Williams' restricted stock award of 30,386 shares valued at
$1,224,911 using the 52-week average stock price for the week ending
December 30, 2000 ($40.3130) awarded in 2001 as 2000 incentive
compensation. The award vested on April 5, 2002.
(9) Represents Williams' contributions to the Investment Plus plan on behalf of
Mr. Bailey valued at $12,965 and payments from the Retirement Agreement
including payments totaling $2,400,000, a payment of $2,000,000 in lieu of
a 2002 stock option grant and a payment of $107,250 awarded under the
annual incentive compensation program.
(10) Represents Williams' deferred stock award of 119,443 shares valued at
$4,000,003 using the 52-week average stock price for the week ending
December 31, 2001 ($33.4888) awarded in 2002 for 2001 incentive
compensation and 49,612 shares valued at $2,000,009 using the 52-week
average stock price for the week ending December 31, 2000 ($40.3130)
awarded in 2001 for 2000 incentive compensation. The 119,443 deferred stock
award will vest twenty percent each February 22nd beginning February 22,
2003 and ending February 22, 2007.
(11) Represents Williams' deferred stock award of 21,045 shares valued at
$343,034 using the closing stock price on February 22, 2002 ($16.30)
awarded in 2002 as 2001 incentive compensation (this represents the amount
of the total award of $349,914 net of required taxes); 40,000 shares, for
retention purposes, valued at $1,620,400 using the closing stock price
($40.51) on the grant date May 17, 2001; and 6,390 shares valued at
$257,600 using the 52-week average stock price for the week ending December
30, 2000 ($40.3130) awarded in 2001 as 2000 incentive compensation (this
represents the amount of the total award of $264,002 net of required
taxes). The deferred stock awards of 21,045 shares and 6,390 shares were
vested immediately upon grant.
(12) Represents Williams' deferred stock award for retention purposes, 40,000
shares valued at $1,620,400 using the closing Williams stock price ($40.51)
on the grant date May 17, 2001.
(13) Represents Williams' contributions to the Investment Plus Plan on behalf of
Mr. McCarthy valued at $12,965; retirement payments totaling $847,000 and a
payment of $150,000 for execution of an agreement to provide consulting
services after retirement as discussed in the Certain Relationships and
Related Transactions section included herein.
(14) Represents WEG IPO deferred unit award of 13,000 units of limited interest
in WEG valued at $399,100 using the closing WEG unit price ($30.70) on
grant date April 19, 2001; WEG annual
9
deferred unit award of 15,800 units of limited interest in WEG valued at
$485,060 using the closing WEG unit price ($30.70) on grant date April 19,
2001; and Williams' deferred stock award of 12,403 shares valued at
$500,002 using the 52-week average stock price for the week ending December
31, 2000 ($40.3130) awarded in 2001 as 2000 incentive compensation. The
13,000 WEG units were granted with a vesting date of the earlier of
February 9, 2004, or when certain performance targets were met. Those
targets were met in 2002, resulting in 6,500 units being vested on February
14, 2002, and the remaining 6,500 being vested on November 15, 2002. The
15,800 WEG units were granted with a vesting date of February 9, 2004. At
the end of the vesting period, the number of units awarded under this grant
will be determined based on an assessment of whether certain performance
criteria have been met. The number of units could range from zero to two
times the number of units granted.
(15) Mr. von Glahn resigned as Senior Vice President and General Counsel of the
Company on December 15, 2002.
(16) Represents Williams' deferred stock award for retention purposes, 40,000
shares valued at $1,620,400 using the closing Williams stock price ($40.51)
on the grant date May 17, 2001. These shares will continue to vest until
the applicable vesting date provided Mr. von Glahn continues to perform all
of his obligations under the consulting agreement. The consulting agreement
is discussed in the Certain Relationships and Related Transactions section
included herein.
(17) Represents Williams' contributions to the Investment Plus Plan on behalf of
Mr. von Glahn valued at $12,965; retirement payments totaling $1,025,588
and a payment of $250,000 for execution of an agreement to provide
consulting services after retirement as discussed in the Certain
Relationships and Related Transactions section included herein.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information concerning Williams' common stock
that may be issued upon the exercise of options, warrants and rights under all
of Williams' existing equity compensation plans as of December 31, 2002,
including The Williams Companies, Inc. 2002 Incentive Plan, The Williams
Companies, Inc. 2001 Stock Plan, The Williams Companies, Inc. Stock Plan for
Non-Officer Employees, The Williams Companies, Inc. 1996 Stock Plan, The
Williams International Stock Plan, The Williams Companies, Inc. 1996 Stock Plan
for Non-Employee Directors, The Williams Companies, Inc. 1988 Stock Option Plan
for Non-Employee Directors, The Williams Companies, Inc. 1990 Stock Plan and The
Williams Communications Stock Plan.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS THE 1ST COLUMN OF THIS TABLE)
------------- ----------------------- -------------------- -----------------------------------
Equity Compensation plans
approved by security
holders.................... 20,263,350 $12.95 14,772,410
Equity Compensation plans not
approved by security
holders.................... 18,564,598 $27.39 0
---------- ------ ----------
Total........................ 38,827,948 $19.85 14,772,410
10
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information concerning the grant of
Williams' stock options during the last fiscal year to the named executive
officers:
INDIVIDUAL GRANTS(1)
--------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
DATE OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED GRANTED FISCAL YEAR (PER SHARE) DATE VALUE(2)
---- -------- ---------- --------------- ----------- ---------- ----------
Steven J. Malcolm........ 02/11/02 200,000 1.29% $15.86 02/11/12 $1,494,000
11/27/02 475,000 3.06% 2.58 11/27/12 703,000
------- ---- ----------
675,000 4.35% 2,197,000
Keith E. Bailey.......... 0 0% 0
William E. Hobbs......... 02/11/02 130,000 0.84% 15.86 02/11/12 971,100
11/27/02 175,000 1.13% 2.58 11/27/12 259,000
------- ---- ----------
305,000 1.97% 1,230,100
Michael P. Johnson....... 02/11/02 69,000 0.44% 15.86 02/11/12 515,430
11/27/02 200,000 1.29% 2.58 11/27/12 296,000
------- ---- ----------
269,000 1.73% 811,430
Jack D. McCarthy......... 02/11/02 92,000 0.59% 15.86 12/31/07(3) 575,000
Phillip D. Wright........ 02/11/02 70,000 0.45% 15.86 02/11/12 522,900
11/27/02 225,000 1.45% 2.58 11/27/12 333,000
------- ---- ----------
295,000 1.90% 855,900
William G. von Glahn..... 02/11/02 75,000 0.48% 15.86 01/02/08(3) 468,750
---------------
(1) Options granted on February 11, 2002 were granted from Williams' 1996 Stock
Plan. Options granted on November 27, 2002 were granted from Williams' 2002
Incentive Plan and were an acceleration of the 2003 annual stock option
grant. Both grants are subject to accelerated vesting provisions as
discussed in the Compensation Committee Report on Executive Compensation
included herein.
(2) The grant date present value is determined using the Black-Scholes option
pricing model and is based on assumptions about future stock price
volatility, risk-free rate of return and dividend yield over the life of the
options and that the exercise date will be at the end of the contractual
term. The following weighted average values were determined based on the
above grants. The weighted average volatility of the expected market price
of Williams' common stock is 43.1 percent. The weighted average risk-free
rate of return is 4.85 percent. The model assumes a dividend yield of one
percent and an exercise date at the end of the contractual term in 2012
except at noted in footnote (3). The model does not take into account that
the stock options are subject to vesting restrictions and that executives
cannot sell their options. The actual value, if any, that may be realized by
an executive will depend on the market price of the Williams' common stock
on the date of exercise. The dollar amounts shown are not intended to
forecast possible future appreciation in the Williams' stock price.
(3) Option will expire five-years after retirement date.
11
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides certain information on stock option exercises
of Williams' stock in 2002 by the named executive officers and the value of such
officers' unexercised options at December 31, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Steven J. Malcolm......... 0 $ 0 285,904 791,624 $0 $57,000
Keith E. Bailey........... 0 0 381,243 0 0 0
William E. Hobbs.......... 0 0 105,606 376,427 0 21,000
Michael P. Johnson........ 0 0 78,338 305,308 0 24,000
Jack D. McCarthy.......... 0 0 266,282 0 0 0
Phillip D. Wright......... 614 10,337 268,947 313,201 0 27,000
William G. von Glahn...... 0 0 165,755 111,308 0 0
---------------
(1) Based on the closing price of Williams' common stock reported in the table
entitled "New York Stock Exchange Composite Transactions" contained in The
Wall Street Journal for December 31, 2002 ($2.70 per share), less the
exercise price. The values shown reflect the value of options accumulated
over periods of up to ten years. Such values had not been realized at that
date and may not be realized. In the event the options are exercised, their
value will depend on the market price of Williams' common stock on the date
of exercise.
RETIREMENT PLAN
Williams' pension plan is a noncontributory, tax-qualified defined benefit
plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA").
The pension plan generally includes salaried employees of Williams who have
completed one year of service. Named executive officers of Williams participate
in the pension plan on the same terms as other full-time employees.
Effective April 1, 1998, Williams converted its pension plan from a final
average pay plan to a cash balance pension plan. Each participant's accrued
benefit as of that date was converted to a beginning account balance. Account
balances are credited with an annual Williams' contribution and quarterly
interest allocations. Each year, Williams credits an employee's pension account
with an amount equal to the sum of a percentage of eligible pay and a percentage
of eligible pay greater than the Social Security wage base. According to the
plan, eligible pay is the sum of salary and certain bonuses. Interest is
credited to account balances quarterly at a rate determined annually in
accordance with the terms of the plan. The percentage credited is based upon the
employee's age according to the following table:
PERCENTAGE OF PERCENT OF ELIGIBLE PAY GREATER
AGE ALL ELIGIBLE PAY THAN THE SOCIAL SECURITY WAGE BASE
--- ---------------- ----------------------------------
Less than 30................. 4.5% + 1%
30-39........................ 6% + 2%
40-49........................ 8% + 3%
50 or over................... 10% + 5%
For employees, including the named executive officers, who were active
employees and plan participants on March 31, 1998, and April 1, 1998, the
percentage of all eligible pay is increased by an amount equal to 0.3 percent
multiplied by the participant's total years of benefit service prior to March
31, 1998.
12
The normal retirement benefit is a monthly annuity based on a participant's
account balance as of benefit commencement. Normal retirement age is 65. Early
retirement may commence as early as age 55. At retirement, employees are
entitled to receive a single-life annuity or one of several optional forms of
payment having an equivalent actuarial value to the single-life annuity.
Participants who were age 50 or older as of March 31, 1998, were
grandfathered under a transitional provision that gives them the greater of the
benefit payable under the cash balance formula or the final average pay formula
based on all years of service and compensation. Messrs. Bailey, McCarthy and von
Glahn retired under this grandfather provision. Each has taken distribution of
their pension benefits and is due no further benefits under the plan.
The Internal Revenue Code of 1986, as amended, currently limits the pension
benefits that can be paid from a tax-qualified defined benefit plan, such as the
pension plan, to highly compensated individuals. These limits prevent such
individuals from receiving the full pension benefit based on the same formula as
is applicable to other employees. As a result, Williams has adopted an unfunded
supplemental retirement plan to provide a supplemental retirement benefit equal
to the amount of such reduction to eligible executives, including the named
executive officers, whose benefit payable under the pension plan is reduced by
Internal Revenue Code limitations. Messrs. Bailey, McCarthy and von Glahn have
taken distribution of their benefits under this plan and are due no further
benefits under the plan.
Total estimated annual retirement benefits payable at normal retirement age
under the cash balance formula from both the tax qualified pension plan and the
supplemental retirement plan are as follows:
ESTIMATED ANNUAL BENEFITS PAYABLE
NAME OF INDIVIDUAL AT NORMAL RETIREMENT AGE
------------------ ---------------------------------
Steven J. Malcolm.............................. $338,038
William E. Hobbs............................... $274,996
Michael P. Johnson............................. $ 91,958
Phillip D. Wright.............................. $214,494
EMPLOYMENT AGREEMENTS, CHANGE IN CONTROL AGREEMENTS AND EXECUTIVE SEVERANCE
PROGRAM
None of Williams' executive officers have employment agreements. However,
Williams provides change in control severance benefits for the named executive
officers and other select executives through the change in control program.
Severance benefits for executives other than the named executive officers are
provided through the executive severance program.
The change in control program provides severance benefits if, within two
years following a change in control of Williams, an individual's employment is
terminated (i) involuntarily other than for cause, death, disability, or the
sale of a business, or (ii) voluntarily for good reason. The severance benefit
is based on the executive's level of responsibility, years of service and annual
base salary. The benefits for the named executive officers include:
- A lump sum payment in an amount equal to three times the officer's then
current annual base salary and annual incentive award target;
- Continuation of health and welfare benefits at active employee rates for
eighteen (18) months;
- Calculation of pension plan benefits including supplemental retirement
plan benefits with an additional three years of service and three years
to age for retirement purposes;
- Reimbursement of legal fees and expenses incurred in enforcement of the
change in control program; and
- A gross-up payment sufficient to compensate for the amount of any excise
tax imposed by Internal Revenue Code Section 4999, and for any taxes
imposed on such additional payment.
13
Amounts payable under the change in control program are in lieu of any
severance payment or similar benefit that may otherwise be payable under any
other severance plan or program.
The executive severance program provides severance benefits if an executive
is terminated involuntarily other than for cause, disability, or the sale of a
business. The benefits for Williams' executives, other than the named executive
officers, include:
- Severance pay equal to one month of the employee's then current monthly
base salary for each full, completed year of service, with a minimum of
six months and a maximum of twelve months, payable in bi-weekly payments;
- Six months of outplacement services; and
- Continuation of health and welfare benefits at active employee rates for
the covered severance period.
In addition, the Compensation Committee approved enhanced severance
benefits, which are available through July 31, 2003.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The purpose of this report is to summarize the philosophical principles,
specific program objectives and other factors considered by the Compensation
Committee with respect to executive compensation reported for the executive
officers. References to executive officers includes the named executive officers
unless otherwise indicated.
COMMITTEE RESPONSIBILITIES
The Compensation Committee of the Board of Directors serves to motivate
Williams' executives towards the achievement of business objectives and to align
such employees' focus with the long-term interest of stockholders. The
Compensation Committee's purpose is primarily to direct the design and
implementation of strategic programs that ensure the attraction, retention and
appropriate reward of the executives. Generally, the Compensation Committee's
role is to approve and oversee the establishment and administration of these
programs. Following are the specific recurring activities of the Compensation
Committee in carrying out its responsibilities:
- Review and approve the executive compensation philosophy, policies and
programs that support Williams' overall business strategy;
- Review and authorize the Chairman of the Compensation Committee to make
recommendations to the Board with respect to incentive-compensation plans
and equity-based plans;
- Review and approve the corporate goals and objectives relevant to the
Chairman, Chief Executive Officer and other executives' compensation;
- Evaluate each executive officer's performance relative to established
corporate goals and objectives;
- Set executive officers' compensation levels;
- Approve all equity based compensation for Section 16 employees;
- Approve salary increase budget for executives other than the executive
officers;
- Review and approve all performance-based plans providing executive
compensation programs, including the establishment of performance targets
and approval of actual awards;
- Delegate responsibility for oversight and responsibility for general
employee benefit matters under ERISA to the Benefits Committee while
retaining responsibility for employee benefits matters that are deemed to
be material under the laws of the state of Delaware. Reserve the right to
veto future appointments to the Benefits Committee; and
14
- Review all material developments in and changes to general employee
benefits matters or employee benefits plans sponsored by Williams.
COMPENSATION PHILOSOPHY
Williams' executive compensation programs are designed to align the
interests of their executives with those of its stockholders. The Compensation
Committee has adopted a framework of principles for the programs, which are
designed to:
- Attract the best talent to Williams;
- Retain the leadership and skills necessary for achieving long-term
stockholder value;
- Motivate individuals to perform at their highest levels;
- Reward superior performance and outstanding achievement;
- Encourage executives to achieve strong financial and operational
performance;
- Link the interest of executives with stockholders by maintaining a
portion of the executive's total compensation at risk; and
- Reinforce executive support of Williams' business objectives and core
values.
COMPENSATION METHODOLOGY
Williams strives to provide a total compensation package that is
competitive and performance based to attract and retain the superior talent
needed to achieve strong business performance and build long-term stockholder
value. To assist in benchmarking the competitiveness of its compensation
programs, Williams participates in compensation surveys and uses survey data
provided by independent compensation consultants with respect to base salary,
annual incentive awards and long-term incentives.
COMPONENTS OF COMPENSATION
Base Salary. Base salary is designed to compensate executives for their
level of responsibility, experience, sustained individual performance and
contribution to Williams. Each year, the Compensation Committee reviews base
salary relative to the range of pay in the competitive labor market for each
executive officer and adjusts salaries, if necessary, based on an evaluation of
individual performance. Executives may defer up to 50 percent of their base
salary for an elective period in the form of vested deferred stock.
Annual Incentive Award. Annual incentive awards are intended to provide
Williams' executives with a direct financial interest in the performance and
profitability of Williams and to reward individual performance and contribution
to core values. Annual incentive awards for the executive officers are issued
under the 2002 Incentive Plan and satisfy the requirements for "performance
based" compensation as defined in Section 162(m) of the Internal Revenue Code.
Incentive criteria are established by the Compensation Committee in the
first quarter of each year and include achievement of certain organizational
performance goals as well as individual performance criteria. The Compensation
Committee establishes target and stretch performance levels. Participants could
receive up to a maximum of 200 percent of their annual incentive award targets
at the stretch performance level.
Organizational performance represents 67 percent of the award and is
measured by comparing actual business results to the established performance
goals and by comparing stock performance to stockholder return of the S&P 500
Stock Index and the S&P Utilities Index. The Compensation Committee retains the
discretion to adjust reported performance to allow for extraordinary,
nonrecurring factors. Individual performance represents 33 percent of the award
and is measured by a performance management process that compares individual
results to set objectives. The Compensation Committee funds the award pool for
the plan year at 0 to 200 percent of the target level for organizational and
individual performance objectives.
15
Executives may defer up to 100 percent of their annual cash incentive award
for an elective period in the form of vested deferred stock.
Long-Term Incentives. Long-term incentives are intended to enable Williams
to attract, retain and reward executives and to motivate such employees to align
their interests with the interests of Williams' stockholders through stock
ownership. The 2002 Incentive Plan permits the Compensation Committee to grant
stock incentives to eligible employees in a variety of forms. The Compensation
Committee primarily uses stock options. Deferred stock and restricted stock are
used occasionally.
Stock options have value for an employee only if Williams' stock price
increases above the individual's option exercise price and the individual
remains employed by Williams for the period required to exercise the stock
options. In addition, stock options directly link a portion of the individual's
compensation to stockholders' interests by providing an incentive to maximize
stockholder value.
The Compensation Committee establishes stock option award targets for each
executive officer based on competitive market data. The actual stock option
award is set based on individual performance, as measured by the performance
management process previously mentioned. The 2002 stock option awards granted in
February 2002 are subject to a three-year graded (one-third per year) vesting
schedule. However, these awards are eligible for an accelerated vesting
provision, which allows for options to vest immediately if the average stock
price reaches a target level approved by the Compensation Committee on the grant
date for five out of ten consecutive business days. The 2003 stock option awards
granted in late 2002 were subject to a three-year cliff vesting schedule.
However, these awards are also eligible for an accelerated vesting provision,
which allows for options to vest immediately if established targets to reduce
Selling, General and Administrative expenses are met as of December 31, 2003.
The Compensation Committee also awards deferred and restricted stock on an
individual and selective basis. During the deferral period, the participant
receives dividend equivalents on the shares of deferred stock, but the
participant cannot sell or otherwise dispose of the stock until the applicable
deferral period lapses. The value of the deferred and restricted stock is at
risk during the deferral period since the value is tied to the stock price.
CHIEF EXECUTIVE OFFICER COMPENSATION
The full Board meets in executive session each year to review the Chief
Executive Officer's ("CEO") performance. The session, which is led by the
Chairman of the Compensation Committee, is conducted without the CEO present.
The results of this performance review are shared with the CEO and are used by
the Compensation Committee in establishing a total compensation package for the
CEO that is competitive and performance based in order to retain the leadership
skills necessary to achieve strong business performance and build long-term
stockholder value. The CEO participates in the same programs and receives
compensation based upon the same criteria as other executive officers. However,
the CEO's compensation reflects the greater policy- and decision-making
authority that the CEO holds and the higher level of responsibility he has with
respect to the strategic direction of Williams and its financial operating
results.
The 2002 compensation components for Mr. Malcolm, the CEO, are as follows:
Base Salary. In January 2002, Mr. Malcolm was elected CEO. At that time,
the Compensation Committee reviewed Mr. Malcolm's base salary relative to the
range of pay in the competitive labor market and adjusted his salary from
$650,000 to $900,000.
Annual Incentive Award. In the first quarter of 2002, the Compensation
Committee established criteria for Mr. Malcolm's and other executives' annual
incentive awards and set Mr. Malcolm's incentive award target at 100 percent of
his base salary. Two-thirds of the incentive potential is based on
organizational performance, and one-third is based on individual performance.
Measures for the organizational performance portion, or two-thirds of the
potential, were not met, and therefore no incentive was granted based on this
criteria. Mr. Malcolm declined to have the Compensation Committee consider
granting him a discretionary annual incentive award based on his individual
performance, or the remaining one-third of his incentive target.
16
Long-Term Incentives. In January 2002 and November 2002, the Compensation
Committee approved stock option awards for Mr. Malcolm of 200,000 and 475,000
shares, respectively. The January grant was awarded for the 2002 performance
year, while the November grant was awarded for the 2003 performance year.
Base salary, annual incentive awards and long-term incentives for Mr.
Malcolm and the other named executive officers are shown on the Summary
Compensation Table.
INTERNAL REVENUE SERVICE LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE
COMPENSATION
Section 162(m) of the Internal Revenue Code generally limits deductions by
publicly held corporations for federal income tax purposes to $1 million of
compensation paid to each of the executive officers listed in the Summary
Compensation Table unless such excess compensation is "performance based" as
defined in Section 162(m). In order for compensation to qualify as "performance
based," among other requirements, the performance goals must be (a) approved by
stockholders and (b) set (and in the case of options, the options must be
granted) by a compensation committee consisting solely of two or more outside
directors (as defined in Section 162(m)). Since stockholders approved the 2002
Incentive Plan, the Compensation Committee generally intends to grant awards
under this plan consistent with the terms of Section 162(m) and the
performance-based exception, so that such awards will not be subject to the $1
million limit. The Compensation Committee will review from time to time in the
future the potential impact of Section 162(m) on the deductibility of executive
compensation. However, the Compensation Committee intends to maintain the
flexibility to take actions that it considers to be in the best interests of
Williams and its stockholders, which may be based on tax deductibility as well
as other considerations.
This report has been furnished by the members of the Compensation Committee
of the Board of Directors:
W.R. Howell, Chairman
Thomas H. Cruikshank
William E. Green
James C. Lewis
Janice D. Stoney
17
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing Williams' cumulative total
stockholder return on its common stock (assuming reinvestment of dividends) with
the cumulative total return of the S&P 500 Stock Index, the S&P Multi-Utilities
Index and the S&P Utilities Index for the period of five fiscal years commencing
January 1, 1998. Standard & Poor's has discontinued the publication of a natural
gas index. In prior proxy statements Williams included the S&P Natural Gas Index
in its Stockholder Return Performance Presentation. The S&P Multi-Utilities
Index is the closest comparison to the S&P Natural Gas Index which includes AES
(AES), Calpine (CPN), Duke Energy (DUK), Dynegy (DYN), El Paso (EP), Mirant
(MIR) and Williams (WMB). Data for the S&P Multi-Utilities Index is only
available from August 31, 1999. Therefore, the graph assumes an investment of
$100 at the beginning of the period except for S&P Multi-Utilities Index which
assumes an investment of $100 at August 31, 1999.
(PERFORMANCE GRAPH)
-----------------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
-----------------------------------------------------------------------------------------------------------------------
WMB 100.0 111.9 111.6 148.0 105.3 11.7
S&P 500 Index 100.0 128.6 155.6 141.5 124.7 97.1
S&P 500 Multi-Utilities
Index 100.0 94.4 162.9 36.1 11.4
S&P 500 Utilities Index 100.0 114.8 104.3 163.9 114.0 79.8
18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of common stock of
Williams and the percentage represented by such number of each person who is
known to Williams to own beneficially five percent or more of Williams' common
stock. Williams obtained certain information in the table from filings made with
the Securities and Exchange Commission.
NUMBER OF
SHARES OF PERCENT
NAME AND ADDRESS COMMON STOCK OF CLASS
---------------- ------------ --------
Capital Research and Management Company(1).................. 30,254,050 5.8%
333 South Hope Street
Los Angeles, California 90071
---------------
(1) A filing with the Securities and Exchange Commission on February 13, 2003,
indicates that Capital Research and Management Company, an investment
adviser under Section 203 of the Investment Advisors Act of 1940, is deemed
to be the beneficial owner of 30,254,050 shares of Williams' common stock as
a result of acting as investment advisor to various investment companies
registered under Section 8 of the Investment Company Act of 1940.
The following table sets forth, as of February 28, 2003, the number of
shares of Williams' common stock beneficially owned by each of its directors,
each of the executive officers named in the Summary Compensation Table, and by
all directors and nominees and executive officers as a group.
SHARES OF COMMON SHARES UNDERLYING
STOCK OWNED OPTIONS
DIRECTLY OR EXERCISABLE WITHIN PERCENT
NAME OF INDIVIDUAL OR GROUP INDIRECTLY(1)(2) 60 DAYS(3) TOTAL OF CLASS
--------------------------- ------------------- ------------------ --------- --------
Keith E. Bailey................... 1,705,977(4)(5) 381,243 2,087,220 *
Hugh M. Chapman................... 38,391 32,893 71,284 *
Thomas H. Cruikshank.............. 27,295 69,935 97,230 *
William E. Green.................. 6,279 39,429 45,708 *
William E. Hobbs.................. 175,547 177,987 353,534 *
W. R. Howell...................... 38,389 43,786 82,175 *
Michael P. Johnson................ 98,803 119,492 218,295 *
James C. Lewis.................... 90,664(6) 40,882 131,546 *
Charles M. Lillis................. 4,708 28,536 33,244 *
George A. Lorch................... 33,294 25,631 58,925 *
Frank T. MacInnis................. 35,844 37,977 73,821 *
Steven J. Malcolm................. 228,247 399,772 628,019 *
Jack D. McCarthy.................. 261,845 266,282 528,127 *
Gordon R. Parker.................. 77,946 50,324 128,270 *
Janice D. Stoney.................. 6,564 32,893 39,457 *
William G. von Glahn.............. 212,720 277,063 489,783 *
Joseph H. Williams................ 559,985(4) 61,224 621,209 *
Phillip D. Wright................. 62,489 295,548 358,037 *
All directors and executive
officers as a group (25
persons)........................ 3,906,906 3,069,238 6,976,144 1.3%
---------------
* Less than 1 percent.
(1) Includes shares held under the terms of incentive and investment plans as
follows: Mr. Hobbs, 158,276, including 8,683 over which he has sole voting
and investment power; Mr. Johnson, 97,681, including 8,164 over which he has
sole voting and investment power; Mr. Malcolm, 199,393, including 40,828
over which he has sole voting and investment power; Mr. McCarthy, 85,538,
including, 32,467 over which he has sole voting and investment power; Mr.
von Glahn, 60,808, including 17,237 over which he has sole voting and
investment power; and Mr. Wright, 27,915, including 14,405 over which he has
sole voting and investment power.
19
(2) Includes shares held under the terms of compensation plans over which
directors have no voting or investment power as follows: Thomas H.
Cruikshank, 7,796; William E. Green, 2,667; W. R. Howell, 34,628; James C.
Lewis, 4,215; Charles M. Lillis, 2,708; George A. Lorch, 31,794 and Janice
D. Stoney, 2,123.
(3) The Securities and Exchange Commission deems a person to have beneficial
ownership of all shares that that person has the right to acquire within 60
days. The shares indicated represent stock options granted under Williams'
stock option plans. Shares subject to option cannot be voted.
(4) Includes shares held in trust as follows: Mr. Bailey, 27,800 and Mr.
Williams, 24,600 shares. Each individual has voting and investment power
over such shares.
(5) Includes 1,740 shares held by Mr. Bailey's spouse, over which he has no
voting, investment or disposition rights. Mr. Bailey disclaims beneficial
ownership of these shares.
(6) Includes 18,188 shares held by Mr. Lewis' spouse over which he has no
voting, investment or disposition rights. Mr. Lewis disclaims beneficial
ownership of these shares.
No director or officer of Williams owns beneficially any securities of
Williams' subsidiaries other than shares in WEG as shown in the next table.
The following table sets forth, as of February 28, 2003, the number of
common units of WEG, a majority owned subsidiary of Williams, beneficially owned
by each of its directors, each of the executive officers named in the Summary
Compensation Table, and by all directors and nominees and executive officers as
a group.
SHARES
SHARES OF UNDERLYING
CLASS A COMMON OPTIONS
UNITS OWNED EXERCISABLE PERCENT
DIRECTLY OR WITHIN OF
NAME OF INDIVIDUAL OR GROUP INDIRECTLY(1)(2) 60 DAYS TOTAL CLASS
--------------------------- ------------------- ----------- ------ -------
Keith E. Bailey.......................... 3,540(2) 0 3,540 *
Hugh M. Chapman.......................... 0 0 0 *
Thomas H. Cruikshank..................... 0 0 0 *
William E. Green......................... 0 0 0 *
William E. Hobbs......................... 0 0 0 *
W. R. Howell............................. 0 0 0 *
Michael P. Johnson....................... 0 0 0 *
James C. Lewis........................... 500 0 500 *
Charles M. Lillis........................ 0 0 0 *
George A. Lorch.......................... 0 0 0 *
Frank T. MacInnis........................ 0 0 0 *
Jack D. McCarthy......................... 0 0 0 *
Steven J. Malcolm........................ 10,893 0 10,893 *
Gordon R. Parker......................... 0 0 0 *
Janice D. Stoney......................... 0 0 0 *
William G. von Glahn..................... 0 0 0 *
Joseph H. Williams....................... 0 0 0 *
Phillip D. Wright........................ 24,121 0 24,121 *
All directors and executive officers as a
group (25 persons)..................... 39,354 0 39,354 *
---------------
* Less than 1 percent.
(1) Includes 15,800 shares held by Mr. Wright under the terms of the Williams
Energy Partners Long-Term Incentive Plan.
(2) Includes 400 shares held in trust by Mr. Bailey, over which he has voting
and investment power.
20
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK OPTION LOAN PROGRAM
Prior to November 14, 2001, the stock option loan programs for the 1996
Stock Plan, 1990 Stock Plan, 1988 Stock Option Plan for Non-Employee Directors
and 1985 Stock Option Plan allowed Williams to loan money to participants to
exercise stock options using stock certificates as collateral. Effective
November 14, 2001, Williams no longer issues new loans under the stock option
loan programs. Current loan holders were offered a one-time opportunity in
January 2002 to refinance outstanding loans at a market rate of interest
commensurate with the borrower's credit standing. The refinancing was in the
form of a full recourse note, interest payable annually in cash, and loan
maturity of no later than December 31, 2005. The loan will remain in force until
maturity in the event of the employee's termination. Williams continues to hold
the collateral shares and can review the borrower's financial position at any
time. The variable rate of interest on the loans of participants who elected new
terms was determined at the signing of the promissory note and is based on 1.75
percent plus the current three-month London Interbank Offered Rate (LIBOR). The
rate is subject to change every three months beginning with the first
three-month anniversary of the promissory note.
If a current loan holder did not elect to refinance, the current loans
remain outstanding under the current terms with no refinancing at maturity.
Under the original terms of the loan, the interest rate is based on the minimum
applicable federal rates required to avoid imputed income, interest payments are
due annually, the principal is due at the end of either a three-or five-year
loan term, and if the participant leaves Williams during the loan period, they
are required to pay the loan balance and any accrued interest within 30 days of
termination.
The following table sets forth the outstanding loans of certain directors
and executive officers of Williams.
LARGEST AMOUNT
INTEREST AMOUNT DUE OUTSTANDING
NAME RATE IN 2002 02/28/03
---- -------- ----------- -----------
Keith E. Bailey................................. 3.452%(1) $23,743,179 $23,004,027
Gary R. Belitz.................................. 3.182%(2) 1,311,409 1,268,756
Jack D. McCarthy................................ 3.182%(2) 5,262,489 4,920,190
William G. von Glahn............................ 2,886,296 0(3)
Thomas H. Cruikshank............................ 60,642 0
---------------
(1) The terms were modified effective February 1, 2002. The interest rate
reflects the November 2002 LIBOR interest rate of 1.702 percent, plus 1.75
percent.
(2) The terms were modified effective March 1, 2002. The interest rate reflects
the December 2002 LIBOR interest rate of 1.432 percent, plus 1.75 percent.
(3) William G. von Glahn, former Senior Vice President and General Counsel of
Williams, paid his loan in full upon his January 2003 retirement.
CONSULTING AGREEMENTS
On August 7, 2002, Williams entered into a consulting agreement with
William G. von Glahn, then Senior Vice President and General Counsel, whereby
Mr. von Glahn agreed to provide consulting services to Williams from January 2,
2003, the beginning date of his separation from Williams, through December 31,
2005. Pursuant to the terms of the consulting agreement, Mr. von Glahn is not
required to provide more than 120 hours of services in any calendar month. Mr.
von Glahn was paid $250,000 upon execution of the consulting agreement and is
paid $350 per hour for consulting services plus reimbursement for reasonable
travel, lodging and other appropriate expenses incurred in the course or on
account of rendering consulting services.
On December 31, 2002, Williams entered into a consulting agreement with
Jack D. McCarthy, then Senior Vice President and Chief Financial Officer,
whereby Mr. McCarthy agreed to provide consulting
21
services to Williams from January 1, 2003, the beginning date of his separation
from Williams, through August 31, 2004. Pursuant to the terms of the consulting
agreement, Mr. McCarthy is not required to provide more than 120 hours of
services in any calendar month. Mr. McCarthy was paid $150,000 upon execution of
the consulting agreement and is paid $350 per hour for consulting services plus
reimbursement for reasonable travel, lodging and other appropriate expenses
incurred in the course or on account of rendering consulting services. Mr.
McCarthy is to be paid for a minimum of 50 hours of consulting services each
month until Williams has paid Mr. McCarthy for a minimum of 1,000 hours.
Thereafter, there is no monthly minimum payment.
OTHER RELATED TRANSACTIONS
In December 2000, Williams loaned Jack D. McCarthy, Former Senior Vice
President and Chief Financial Officer of Williams, $275,199 at 5.87 percent
interest for a five-year term. The amount outstanding as of February 28, 2003
was $277,810 and the largest amount that was due in 2002 was $291,353.
The spouse of one of the executive officers of Williams is employed by a
firm that Williams utilizes for advertising services. The Williams officer does
not participate in any decisions regarding the use of the advertising firm.
Mr. Thomas H. Cruikshank, a director of Williams, is also a member of the
board of directors of Lehman Brothers Holdings, Inc. ("Lehman"). In
third-quarter 2002, Williams Production Company ("RMT"), a wholly owned
subsidiary of Williams entered into a $900 million short-term Credit Agreement
dated July 31, 2002, with certain lenders, including a subsidiary of Lehman.
Interest accrued for 2002 related to the RMT note was $154.1 million of interest
expense, including amortization of deferred set-up fees. As of December 31,
2002, the amount payable related to the RMT note and related interest was
approximately $1 billion. In addition, Williams paid $39.6 million and $27
million to Lehman in 2002 and 2001, respectively, primarily for underwriting
fees related to debt and equity issuances as well as strategic advisory and
restructuring success fees.
Mr. W. R. Howell, a director of Williams, is also a member of the board of
directors of American Electric Power Company, Inc. ("AEP"). Williams' Energy
Marking & Trading segment engaged in forward and physical power and gas trading
activities with AEP. Net revenues from AEP were $133.9 million in 2002. At
December 31, 2002, amounts due from and due to AEP were $96.4 million and $331.3
million, respectively.
Mr. W. R. Howell is also a member of the board of directors of Exxon Mobil
Corporation ("Exxon Mobil"). Transactions with Exxon Mobil result primarily from
the purchase and sale of crude oil, refined products and natural gas liquids in
support of crude oil, refined products and natural gas liquids trading
activities and strategies as well as revenues generated from gathering and
processing activities. Aggregate revenues, including those reported on a net
basis, from this customer were $217.6 million, $38.9 million and $10.2 million
in 2002, 2001 and 2000, respectively, while aggregate purchases from this
customer were $15.6 million, $6.4 million and $69.9 million in 2002, 2001 and
2000, respectively. Amounts due from Exxon Mobil were $22.1 million and $8.3
million as of December 31, 2002 and 2001, respectively. Amounts due to Exxon
Mobil were $66.9 million and $140.3 million as of December 31, 2002 and 2001,
respectively.
22
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees Williams' financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. All of the members of the Audit Committee are independent
under the rules of the New York Stock Exchange and the Audit Committee operates
under a written charter adopted by the Board of Directors, a copy of which is
filed with this proxy statement as Exhibit A. In fulfilling its oversight
responsibilities, the Audit Committee reviewed the audited financial statements
in the Annual Report with management including a discussion of the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the financial
statements.
The Audit Committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of Williams' accounting
principles and such other matters as are required to be discussed with the Audit
Committee under generally accepted auditing standards. The Audit Committee has
discussed with the independent auditors the auditors' independence from
management and Williams and considered the compatibility of the provisions of
nonaudit services by the independent auditors with the auditors' independence.
The Committee discussed with the independent auditors matters required to be
discussed by Statement on Auditing Standards No. 61 (Communications with Audit
Committees). Williams' independent auditors also provided to the Audit Committee
the written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees).
The Audit Committee discussed with Williams' internal auditors and
independent auditors the overall scope and plans for their respective audits.
The Audit Committee meets with the internal auditors and independent auditors,
with and without management present, to discuss the results of their
examinations, their evaluations of Williams' internal controls and the overall
quality of Williams' financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K for the year ended December 31, 2002, for filing with the Securities and
Exchange Commission ("SEC"). The Audit Committee and the Board have also
recommended, subject to stockholder approval, the selection of Williams'
independent auditors.
This report has been furnished by the members of the Audit Committee of the
Board of Directors.
Hugh M. Chapman, Chairman
Thomas H. Cruikshank
William E. Green
George A. Lorch
Frank T. MacInnis
Janice D. Stoney
March 5, 2003
The Audit Committee Report in this Proxy Statement shall not be deemed
filed or incorporated by reference into any other filing by Williams under the
Securities Act of 1933 or the Securities Exchange Act of 1934 except to the
extent that Williams specifically incorporates this information by reference.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITOR
Upon the recommendation of the Audit Committee, the Board of Directors has
appointed, subject to stockholder approval, the firm of Ernst & Young LLP as the
independent auditors to audit the financial statements of Williams for calendar
year 2003. The firm of Ernst & Young LLP has served Williams in this capacity
for many years. A representative of Ernst & Young LLP will be present at the
Annual Meeting and
23
will be available to respond to appropriate questions. Although the audit firm
has indicated that no statement will be made, an opportunity for a statement
will be provided.
Audit Fees. Fees for the last annual audit were $5.7 million and all other
fees were $8.8 million, including fees for audit related services of $4.3
million and nonaudit services of $4.5 million. Audit related services generally
include fees for statutory audits, business acquisitions and other transactions,
accounting consultations, and Securities and Exchange Commission registration
statements.
Financial Information Systems Design and Implementation Fees. There were
no fees paid to Ernst & Young LLP for financial information systems design and
implementation in 2002.
THE BOARD OF DIRECTORS OF WILLIAMS RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF ERNST & YOUNG LLP AS AUDITORS FOR 2003.
PROPOSAL 3
AMENDMENT OF THE WILLIAMS COMPANIES, INC. 2002 INCENTIVE PLAN
The Board of Directors has determined that it would be in Williams' best
interests and the best interests of its stockholders to implement a stock option
exchange program. In the last year, Williams has undergone considerable change
in its business environment and its leadership, including appointments of a new
Chief Executive Officer and General Counsel, retirement of its Chief Financial
Officer and reductions in the rest of its employee base of approximately 21%.
Williams believes that the proposed exchange program is critical to provide
positive motivation and retention incentive for its remaining employees while
also maintaining alignment of the interests of Williams' employees with the
interests of its stockholders. Under this exchange program, eligible employees
will be given a one-time opportunity to exchange certain outstanding options for
a proportionately lesser number of options at a lower exercise price, as more
fully described below.
Since The Williams Companies, Inc. 2002 Incentive Plan, under which
Williams intends to issue options pursuant to the exchange program, does not
currently allow Williams to implement the exchange program, Williams is asking
its stockholders to approve an amendment to the 2002 Incentive Plan to allow for
the exchange program on a one-time basis. Williams is also asking its
stockholders to approve an amendment to the 2002 Incentive Plan to make
available for grant under the 2002 Incentive Plan up to an additional 2,500,000
shares underlying outstanding options that are cancelled, terminated, or
otherwise not settled in shares under any of Williams' stock plans. Such
additional number will not exceed 2,500,000.
Some key features of the exchange program, which are described more fully
below, include:
- Employees eligible to participate in the exchange program include all
current employees of Williams and its affiliates. Williams' executive
officers, non-management directors and non-U.S. citizen employees working
outside of the U.S. are not eligible to participate;
- Each option eligible for exchange must have an exercise price greater
than or equal to $10.00 per share and have a remaining term of at least
two years from the cancellation date of each surrendered option;
- The number of replacement options to be granted to eligible employees
will be determined using an exchange ratio that is calculated such that
the value of each surrendered option approximates the value of each
replacement option, which Williams will compute prior to the commencement
of the exchange program;
- Each replacement option will have a term equal to the remaining term of
each surrendered option it replaces;
- Each replacement option will vest the later of one year from the grant
date of the replacement option or the original vesting date of each
surrendered option, however, vesting may be accelerated in the event of
death, disability and retirement;
24
- Each replacement option will be granted no earlier than six months and
one day after the cancellation date of each surrendered option; and
- The exercise price of each replacement option will be the closing price
of Williams' common stock on the grant date.
BACKGROUND
Williams considers stock options to be a critical component of employee
compensation. They are intended to attract, retain, reward and motivate
employees to align their interests with the interests of Williams' stockholders
through stock ownership. Recent adverse economic conditions, however, have had a
negative impact on Williams' liquidity and financial condition. Consequently,
the price of Williams' common stock has significantly declined since January
2001, eliminating the incentive and retention value of the vast majority of
outstanding options held by employees. As of the filing of this proxy statement,
over 73% of Williams' outstanding options had an exercise price significantly
higher than the fair market price of Williams' common stock.
Williams believes that the proposed exchange program is critical to provide
positive motivation and retention incentive for its remaining employees while
also maintaining alignment of the interests of Williams' employees with the
interests of its stockholders. Additional losses in Williams' employee base
would have a detrimental effect on Williams' business and financial results.
Losses may result in remaining employees seeking alternative employment with
Williams' competitors or other companies, where they could secure stock options
with exercise prices equal to the fair market value of the new employer's stock
price on the date of grant. Williams believes that the exchange program will
assist in preventing employee attrition by providing it with a fresh start to
motivate and reward its employees for their role in achieving operational and
financial goals and increasing stockholder value. By giving its remaining
employees the opportunity to exchange their options for options with exercise
prices aligned with the current fair market price of Williams' common stock, the
exchange program aligns employees' financial link to its stockholders and
increases the retention value of options.
Additionally, Williams seeks to manage ongoing share dilution from
outstanding options and shares reserved for future grants. Under all possible
exchange ratio scenarios, the exchange program would reduce the number of shares
underlying outstanding options, thereby likely increasing the number of shares
reserved for future grants for an additional year, which would have the effect
of delaying Williams' expected need to request approval from stockholders for
additional reserve shares. The actual decrease in the number of shares
underlying outstanding options and increase in the number of shares reserved for
future grants will depend on a variety of factors, including the level of
participation in the exchange program, the final exchange ratios and any
forfeitures or new grants under Williams' existing option plans.
STRUCTURE AND IMPLEMENTATION OF THE EXCHANGE PROGRAM
Williams has structured the exchange program to be a "value-for-value"
exchange, meaning the aggregate value of each option surrendered is expected to
approximate the aggregate value of each replacement option granted in exchange
for each surrendered option. Williams has further structured the exchange
program as a "six-and-one" exchange, meaning the exchange program cannot
commence until at least six months and one day have elapsed since Williams' last
option grant to eligible employees, and each replacement option granted pursuant
to the exchange program will not be granted until at least six months and one
day after the cancellation date of each option surrendered pursuant to the
exchange program. With such a structure, Williams will not recognize
compensation charges from the exchange program. Williams is aware that
accounting standards for expensing stock options may change, and it is
monitoring these standards for any changes. If there are changes to these
standards, Williams may decide not to commence the exchange program.
If Williams' stockholders approve the exchange program at Williams' 2003
Annual Meeting of Stockholders, Williams intends to commence the exchange offer
by filing applicable documents with the Securities and Exchange Commission and
distributing certain of those documents to eligible employees.
25
However, Williams will have the authority, in its sole discretion, to determine
whether and when the exchange program will commence, and to postpone the
exchange program for any reason. Furthermore, Williams will have the authority
to cancel the exchange program after commencement, but before cancellation of
each surrendered option, upon the occurrence of certain events. These events
will be disclosed in the exchange program offering materials filed with the
Securities and Exchange Commission and distributed to eligible employees.
Eligible employees will have the right, but not the obligation, to accept the
offer by surrendering their eligible options prior to the expiration date of the
exchange program. All surrendered options will be cancelled one day after the
expiration of the exchange program and replacement options will be granted at
least six months and one day later.
The table below sets forth the earliest relevant dates with respect to the
exchange program based upon the "six-and-one" exchange structure. Williams can
give no assurance that these dates will be the actual dates of the exchange
program or that it will commence the exchange program at all. If the exchange
program has not commenced by September 1, 2003, it will not be implemented.
DATE EVENT
---- -----
May 28, 2003............................. Earliest commencement date of the
exchange program
June 25, 2003............................ Earliest expiration date of the exchange
program
June 26, 2003............................ Earliest cancellation date of the
surrendered options
December 27, 2003........................ Earliest grant date of the replacement
options
TERMS OF THE EXCHANGE PROGRAM
Employee Eligibility
All of Williams' employees and the employees of its affiliates will be
eligible to participate in the exchange program, except that none of Williams'
(i) executive officers, (ii) non-management directors, (iii) non-U.S. citizen
employees working outside of the U.S. or (iv) former employees or retirees, will
be eligible to participate in the exchange program. As of the filing of this
proxy statement, Williams had approximately 5,165 employees eligible to
participate in the exchange program.
Furthermore, the individual must be employed by Williams or its affiliates
on the expiration date of the exchange program and each eligible employee who
surrenders options in the exchange program must be continuously employed by
Williams or its affiliates through the grant date of the replacement options to
receive any replacement options.
Options Eligible For Exchange
Options eligible for exchange must meet the following criteria:
- Each option must have been granted to an eligible employee prior to
November 27, 2002 under any of (i) The Williams Companies, Inc. 1990
Stock Plan, (ii) The Williams Companies, Inc. Stock Plan for Non-Officer
Employees, (iii) The Williams Companies, Inc. 1996 Stock Plan, (iv) The
Williams Companies, Inc. International Stock Plan, (v) The Williams
Companies, Inc. 2001 Stock Plan and (vi) The Williams Companies, Inc.
2002 Incentive Plan, and be outstanding as of the expiration date of the
exchange program;
- Each option must have an exercise price greater than or equal to $10.00
per share; and
- Each option must have a remaining term of at least two years from the
cancellation date.
As of the filing of this proxy statement, there were outstanding options to
purchase approximately 37,968,502 shares of Williams' common stock, of which
options to purchase 14,796,746 meet these criteria.
26
Exchange Ratios
The exchange ratios for the exchange program, which determine how many
options an eligible employee must surrender in order to receive one replacement
option, are based on the Black-Scholes option valuation model, a recognized and
accepted method of determining the value of an option.
The exchange ratios will vary depending on the average of the closing stock
price for the 20 business days ending on a date prior to the commencement of the
exchange offer ("Offer Commencement Date Price"), which date will be determined
by Williams. Because the Offer Commencement Date Price cannot be determined
until such date, Williams can only calculate the exchange ratios at this time
using estimated stock prices. The table below illustrates the exchange ratios
that will apply at different Offer Commencement Date Prices.
EXCHANGE RATIOS FOR OFFER COMMENCEMENT DATE PRICES
ORIGINAL GRANT DATE $3.00/SHARE $4.00/SHARE $5.00/SHARE $6.00/SHARE $7.00/SHARE
------------------- ----------- ----------- ----------- ----------- -----------
1995.......................... 12:1 6:1 3.75:1 2.5:1 2:1
1996.......................... 12.5:1 7:1 4.75:1 3.5:1 2.5:1
1997-2000..................... 13:1 8:1 5.75:1 4.5:1 3.75:1
2001.......................... 7:1 5:1 3.75:1 3.25:1 2.75:1
2002.......................... 2.5:1 2:1 1.75:1 1.5:1 1.5:1
If the Offer Commencement Date Price is something other than the stock
prices shown in the above table, including if the Offer Commencement Date Price
is below $3.00 per share or above $7.00 per share, the exchange ratios will be
adjusted appropriately using the same valuation methodology used to determine
the ratios shown above. The exchange program will not commence if the Offer
Commencement Date Price exceeds $10.00.
Each of these ratios is set based on creating a "value-for-value" exchange.
In addition to Williams' internal resources, Williams has relied on Mercer Human
Resource Consulting, a nationally recognized independent compensation-consulting
firm, in determining the appropriate exchange ratios.
Exercise Price of Replacement Options
Each replacement option granted under the exchange program will have an
exercise price equal to the closing price of Williams' common stock on the grant
date, as reported by the New York Stock Exchange.
Term of Replacement Options
Each replacement option will have a term equal to the remaining term of
each surrendered option it replaces, determined as of the cancellation date of
each surrendered option.
Vesting of Replacement Options
Each replacement option will vest the later of one year from the grant date
of the replacement option or the original vesting date of the surrendered
option, however, vesting may be accelerated in the event of death, disability
and retirement.
Other Terms and Conditions
All of the other terms and conditions of the replacement options will be
determined by the Compensation Committee and governed by the 2002 Incentive
Plan.
27
U.S. Federal Income Tax Consequences
Williams expects the exchange of surrendered options for replacement
options will be treated as a non-taxable exchange and no income for U.S. federal
income tax purposes should be recognized by its employees upon the grant of the
replacement options.
Effect on Stockholders
Because the decision whether to participate in the exchange program is
completely voluntary, Williams is unable to predict how many eligible employees
will participate in or how many options will be surrendered pursuant to the
exchange program. Consequently, Williams is unable to predict the impact the
exchange program will have on its stockholders. Because each replacement option
will have a lower exercise price, it will be more likely that option holders
will exercise their options. As additional shares of Williams' common stock are
issued upon such option exercises, existing stockholders will be proportionately
diluted.
The following table indicates the maximum number of surrendered options
that would be cancelled and the maximum number of replacement options that would
be granted based on the estimated Offer Commencement Date Prices used to
determine the exchange ratios, assuming all eligible employees elect to
participate in the exchange program. The actual number of replacement options to
be granted will depend upon the actual Offer Commencement Date Price.
MAXIMUM MAXIMUM NUMBER OF SHARES UNDERLYING
NUMBER OF REPLACEMENT OPTIONS TO BE GRANTED
CANCELLED ---------------------------------------------------------
OPTIONS $3.00 $4.00 $5.00 $6.00 $7.00
---------- --------- --------- --------- --------- ---------
All eligible employees as
a group................. 14,796,746 2,168,560 3,084,131 3,978,159 4,885,575 5,605,084
AMENDMENT TO 2002 INCENTIVE PLAN
Williams' 2002 Incentive Plan does not currently permit Williams to
implement the exchange program. Consequently, Williams is seeking stockholder
approval to amend the 2002 Incentive Plan to allow for the exchange program for
the reasons previously described. Williams is also seeking stockholder approval
to amend the 2002 Incentive Plan to make available for grant under the 2002
Incentive Plan up to an additional 2,500,000 shares underlying outstanding
options that are cancelled, terminated, or otherwise not settled in shares under
any of Williams' stock plans. Such additional number will not exceed 2,500,000.
The proposed amendments to the 2002 Incentive Plan are set forth as Exhibit B to
this proxy.
VOTE REQUIRED
A majority of the votes cast on the proposal by stockholders is required to
approve the proposal to amend The Williams Companies, Inc. 2002 Incentive Plan
to allow for a stock option exchange program on a one-time basis and to make
available up to an additional 2,500,000 shares underlying outstanding options
that are cancelled, terminated, or otherwise not settled in shares under any of
Williams' stock plans. Such additional number will not exceed 2,500,000.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE AMENDMENTS
TO THE WILLIAMS COMPANIES, INC. 2002 INCENTIVE PLAN TO ALLOW FOR A STOCK OPTION
EXCHANGE PROGRAM ON A ONE-TIME BASIS AND TO MAKE AVAILABLE UP TO AN ADDITIONAL
2,500,000 SHARES UNDERLYING OUTSTANDING OPTIONS THAT ARE CANCELLED, TERMINATED,
OR OTHERWISE NOT SETTLED IN SHARES UNDER ANY OF WILLIAMS' STOCK PLANS.
28
STOCKHOLDER PROPOSALS FOR 2003
PROPOSAL 4
STOCKHOLDER APPROVAL ON AUDIT SERVICES
Management has been advised that the Sheet Metal Workers' National Pension
Fund ("Fund"), 601 North Fairfax Street, Suite 500, Alexandria, VA 22314-2075,
intends to submit the following proposal at the meeting:
RESOLVED, that the shareholders of The Williams Companies, Inc. ("Company")
request that the Board of Directors adopt a policy stating that the public
accounting firm retained by our Company to provide audit services, or any
affiliated company, should not also be retained to provide any management
consulting services to our Company.
STATEMENT OF SUPPORT: The role of independent auditors in ensuring the
integrity of the financial statements of public corporations is fundamentally
important to the efficient and effective operation of the financial markets. The
U.S. Securities and Exchange Commission recently stated:
Independent auditors have an important public trust. Investors must be able
to rely on issuers' financial statements. It is the auditor's opinion that
furnishes investors with critical assurance that the financial statements have
been subjected to a rigorous examination by an objective, impartial, and skilled
professional, and that investors, therefore, can rely on them. If investors do
not believe that an auditor is independent of a company, they will derive little
confidence from the auditor's opinion and will be far less likely to invest in
that public company's securities. Final Rule: Revision of the Commission's
Auditor Independence Requirements, Release No. 33-7919, Feb. 5, 2001.
We believe that today investors seriously question whether auditors are
independent of the company and corporate management that retain them. A major
reason for this skepticism, we believe, is that management of once admired
companies such as Enron, Tyco, and WorldCom have misled investors and their
auditors have either been complicit or simply inept. Over the last year hundreds
of billions of dollars in market value have vanished as investors have lost
confidence in the integrity of our markets. A key reason for this lack of
confidence is the distrust investors have in companies' financial statements.
The U.S. Congress has attempted to respond to this crisis of confidence
through passage of the Sarbanes-Oxley Act of 2002 (the "Sarbanes Act"). The
Sarbanes Act prohibits a company's auditors from performing a wide range of
defined non-audit services. These prohibitions, in turn, track the defined
non-audit services in Rule 2-01(c)(4) of the SEC's Final Rule: Revision of the
Commission's Auditor Independence Requirements, Release No. 33-7919, Feb. 5,
2001.
However, the Sarbanes Act fails to prohibit auditors from providing
management consulting services, which we believe represents a significant
loophole. While the Act does require that the audit committee of the board
preapprove these non-audit services, we do not believe that is enough. We
believe that management consulting represents a significant source of potential
revenue to auditors and poses serious conflict of interest issues. For this
reason, we think the better course is for companies not to engage their auditors
to perform any management consulting services.
Many companies, including ours, either continue to engage their auditors to
provide management consulting or provide inadequate disclosure in their proxy
statements to ascertain whether they continue to engage their auditors for
management consulting services. We urge your support for this resolution asking
the board to cease engaging auditors for management consulting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THIS PROPOSAL because
the adoption of this proposal is neither necessary nor in the best interests of
Williams or its stockholders. Williams' Board of Directors and management
recognize the important role that auditor independence plays in ensuring the
integrity of Williams' financial statements and protecting its investors'
interests. The proposal is unnecessary, however, for several reasons.
29
First, Williams' independent auditors, Ernst & Young LLP severed its ties
with its management consulting business by selling its management consulting
division to Cap Gemini S.A. in May 2000. Thus, while the term "management
consulting" encompasses a variety of non-audit and audit-related services,
Williams' independent auditors no longer provide to audit clients or others what
is typically understood to constitute core "management consulting" services such
as large information systems consulting.
The Sarbanes-Oxley Act has significantly altered the relationship between
auditors and their audit clients in ways which will substantially strengthen
auditor independence. The Act prohibits auditors from providing to their audit
clients many services which constitute management consulting services, including
financial information systems design and implementation, internal audit
outsourcing services, management functions and human resource functions. The Act
also prohibits auditors from providing bookkeeping services, appraisal or
valuation services, actuarial services, broker, dealer or investment banking
services and legal and expert services (such as appearing in tax court on behalf
of an audit client). The Public Company Accounting Oversight Board also has the
authority to ban other types of services not prohibited by the Sarbanes-Oxley
Act or SEC rules. The SEC has provided only a limited exception to this
prohibition which would allow auditors to provide some of the non-audit services
listed above if it is reasonable to assume that such services will not be part
of the audit. Thus, Williams will already be prohibited from obtaining all but a
narrow range of non-audit services from its independent auditors.
The Sarbanes-Oxley Act also imposes new, substantive requirements on public
companies that will require all services, both audit and non-audit services that
are not otherwise prohibited, to be pre-approved by an audit committee composed
entirely of independent directors. In making pre-approval determinations, audit
committees are required to carefully analyze a proposed service in view of the
principles that the independent auditor should not (1) audit its own work; (2)
function as a part of the company's management or as an employee of the company;
(3) act as an advocate of the company; (4) be placed in a position that creates
mutual or conflicting interests between the auditor and the company; or (5)
promote the company's stock or other financial interests. For Williams,
management and the Board are keenly aware of the need to exercise the utmost
care in engaging Williams' auditors to perform any permitted non-audit services.
Williams' Audit Committee operates according to a written charter in accordance
with New York Stock Exchange rules and adheres to a practice of reviewing in
advance all proposed audit and non-audit services to ensure that auditor
independence is maintained and safeguarded.
Under the Sarbanes-Oxley Act, the authority of Williams' Audit Committee to
safeguard auditor independence will be enhanced beyond the current level.
Williams' Audit Committee will be "directly responsible" for the appointment,
compensation, retention and oversight of Williams' independent auditors, and the
independent auditors must report directly to the Audit Committee, not
management. The Audit Committee will also be vested with the authority to engage
independent legal counsel and financial advisors and is required to establish
"whistleblower" and complaint procedures for receiving and addressing auditing
complaints. Williams' Audit Committee will also be required to have a member
meeting the SEC's detailed definition of an "audit committee financial expert."
The New York Stock Exchange has also proposed substantive and, in some cases,
more exacting rules relating to audit committees and auditor services, including
the listing requirement that all members of the audit committee meet a
definition of "independence" that is more stringent than the one under the
Sarbanes-Oxley Act.
Moreover, the Board believes that, under certain circumstances, it is
appropriate and in the best interest of Williams and its stockholders to hire
its independent auditors to perform non-audit services that may constitute
management consulting services. Frequently, for instance, non-audit services are
so integrally related to the audit that retaining the auditor to provide those
services results in significant cost savings to Williams and higher quality
advice. In fact, both the U.S. Congress and the SEC have recognized the value of
a company obtaining certain non-audit services from its outside auditors by
requiring audit committee pre-approval of such permitted non-audit services, in
lieu of adopting a blanket prohibition on all non-audit services, as some
commentators had proposed. Discretion in determining the best allocation of
tasks among accounting (and other) firms is an essential component of the
ability of the Audit Committee to discharge its responsibilities to Williams and
its stockholders. As such, the Board of Directors believes that the retention of
this discretion by the Audit Committee, which is in accordance with the
statutory framework envisioned by
30
the Sarbanes-Oxley Act and SEC rules, is entirely consistent with Williams'
ability to monitor and ensure the independence of its auditors.
Finally, Williams seeks stockholder ratification of the selection of its
independent auditors each year. The SEC's recently-adopted rules also require
additional disclosure of fees paid to the independent auditor for each of the
two most recent years for (1) audit services, (2) audit-related services, (3)
tax services and (4) other services. Thus, stockholders are able to make an
informed decision about whether to ratify the independent auditor recommended by
the Audit Committee. In light of the protective measures currently in place and
those additional measures mandated by the Sarbanes-Oxley Act, the Board believes
that there is little benefit to limiting the Audit Committee's power to retain
the firms it chooses to provide audit and permitted non-audit services. The
Board does not believe that the best way to ensure auditor independence is
through a proposal that would impose a blanket prohibition against Williams'
auditor from providing non-audit services that are considered to constitute
management consulting services. The Board believes that, if adopted, the
proposal would impede the Board's ability to exercise its business judgment and
could be detrimental to Williams and its stockholders. Accordingly, the Board of
Directors unanimously recommends that you vote "AGAINST" this proposal, and your
proxy will be so voted if the proposal is presented at the Annual Meeting,
unless you specify otherwise. The affirmative vote of holders of a majority of
shares present in person or by proxy at the Annual Meeting and entitled to vote
on this matter is necessary to approve this stockholder proposal.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Williams'
directors, executive officers, and persons who beneficially own more than ten
percent of Williams' stock to file certain reports with the SEC and the New York
Stock Exchange concerning their beneficial ownership of Williams' equity
securities. The SEC regulations also require that a copy of all such Section
16(a) forms filed must be furnished to Williams by the executive officers,
directors, and greater than 10 percent stockholders. Based on a review of the
copies of such forms and amendments thereto received by Williams with respect to
2002, Williams is not aware of any late filings.
STOCKHOLDER PROPOSALS FOR 2004
In order for a stockholder proposal to be considered for inclusion in
Williams' 2004 Proxy Statement, such proposal must be received by Williams no
later than November 21, 2003. The proposal should be addressed to the Secretary,
The Williams Companies, Inc., One Williams Center, Suite 4100 Tulsa, Oklahoma
74172. Upon receipt of any such proposal, Williams will determine whether or not
to include such proposal in the 2004 Proxy Statement in accordance with
applicable law. It is suggested that such proposals be sent by certified mail,
return receipt requested. Under Williams' By-laws, any other stockholder
proposal that is to be included in Williams' 2004 Proxy Statement under Rule
14a-8 must be received by Williams' Secretary no later than 90 days nor more
than 120 days prior to the date of the anniversary date of the 2003 Annual
Meeting, and shall contain such information as required under Williams' By-laws.
Unless Williams announces a different date, the 2003 Annual Meeting will be held
on May 15, 2003. In the event that the 2004 Annual Meeting is called for a date
that is not within 30 days before or after the anniversary date of the 2003
Annual Meeting, in order for a stockholder proposal to be timely it must be
received not later than the close of business on the 10th day following the day
on which notice of the date of the 2004 Annual Meeting was mailed or public
disclosure of the date of the 2004 Annual Meeting was made, whichever first
occurs.
GENERAL
Williams knows of no matters to be presented at the meeting other than
those included in the Notice. Should any other matter requiring a vote of
stockholders arise, including a question of adjourning the meeting, the persons
named in the accompanying proxy will vote thereon according to their best
judgment in what they consider the best interests of Williams. The enclosed
proxy confers discretionary authority to take action with respect to any
additional matters that may come before the meeting.
31
It is important that your stock be represented at the meeting regardless of
the number of shares you hold. Whether or not you plan to attend, please vote,
either by internet, phone or by signing, dating and returning the enclosed proxy
promptly. For your convenience, a return envelope is enclosed requiring no
additional postage if mailed within the United States.
By Order of the Board of Directors
-s- BRIAN K. SHORE
Brian K. Shore
Secretary
Tulsa, Oklahoma
March 28, 2003
32
EXHIBIT A
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
OF THE WILLIAMS COMPANIES, INC.
1. Purpose. The Audit Committee's purpose is to provide assistance to the
Board of Directors of the Company (the "Board") in fulfilling its legal and
fiduciary obligations with respect to matters involving the accounting,
auditing, financial reporting, and internal control functions of the Company and
its subsidiaries. In addition, the Audit Committee's purpose includes (a)
assisting the Board's oversight of (i) the integrity of the Company's financial
statements, (ii) the Company's compliance with legal and regulatory
requirements, (iii) the independent auditor's qualifications and independence,
and (iv) the performance of the Company's internal audit function and
independent auditors; and (b) preparing the report of the Audit Committee that
the Securities and Exchange Commission (the "SEC") rules require to be included
in the Company's annual Proxy Statement.
2. Composition. The Audit Committee shall be comprised of three or more
directors as determined by the Board. The members of the Audit Committee,
including its Chairman, will meet the independence, experience and other
requirements of the New York Stock Exchange and all other applicable rules,
regulations and statutes. At least one of the members must be a financial expert
as defined by applicable rules, regulations and statutes. A member of the Audit
Committee may not simultaneously serve on the audit committee of more than three
public companies unless such service is approved by the Board upon its
determination, based on the recommendation of the Nominating and Governance
Committee, that such simultaneous service would not impair the ability of such
member to effectively serve on the Company's Audit Committee. The Chairman of
the Audit Committee shall be designated by the Board and must have accounting or
related financial management expertise. A member of the Audit Committee who
holds 20 percent or more of the Company's stock (or is a general partner,
controlling shareholder or officer of such holder) may not be Chairman of the
Audit Committee or a voting member of the Audit Committee. A member of the Audit
Committee may not, other than in his or her capacity as a member of the Audit
Committee, the Board of Directors, or any other Board committee, accept any
consulting, advisory, or other compensatory fee from the Company, or be an
affiliated person of the Company or any subsidiary thereof.
3. Meetings. The Audit Committee shall meet with such frequency and at
such intervals as it shall determine is necessary to carry out its duties and
responsibilities. The Audit Committee, in its discretion, may ask members of
management or others to attend its meetings (or portions thereof) and to provide
pertinent information as necessary. The Audit Committee shall maintain minutes
of its meetings and records relating to those meetings and provide regular
reports of its activities to the Board.
4. Duties and Responsibilities. In carrying out its duties and
responsibilities, the Audit Committee's policies and procedures should remain
flexible, so that it may be in a position to best react or respond to changing
circumstances or conditions. The following should be considered within the
authority of the Audit Committee:
(a) The sole authority to hire, subject to shareholder ratification,
and fire, and the responsibility to compensate and directly oversee the
work of, the firm of independent public accountants with respect to the
audit of the books and accounts of the Company and its subsidiaries for
each fiscal year and to approve the engagement fees in connection
therewith.
(b) The sole authority to approve in advance all audit and legally
permitted non-audit services to be provided by any independent public
accountants; provided, however, that pre-approval of non-audit services
will not be required if:
(1) the aggregate amount of fees for all such non-audit services
provided to the Company constitutes not more than five percent of the
total amount of revenues paid by the Company to its auditor during the
fiscal year in which the non-audit services are provided;
A-1
(2) such services were not recognized by the Company at the time of
the engagement to be non-audit services; and
(3) such services are promptly brought to the attention of the
Audit Committee and approved prior to the completion of the audit by the
Audit Committee or by one or more members of the Audit Committee who are
members of the Board of Directors of the Company to whom authority to
grant such approvals has been delegated by the Audit Committee.
(c) The sole authority to delegate to one or more designated members
of the Audit Committee who are independent directors of the Board of
Directors of the Company, the authority to grant pre-approvals of audit and
non-audit services as described in Section (b) above.
(d) At least annually, to obtain and review a report by the
independent auditor describing: the firm's internal quality-control
procedures; any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits carried out
by the firm and any steps taken to deal with any such issues; and all
relationships between the independent auditor and the Company.
(e) At least annually, to evaluate the independent auditor's
qualifications, performance and independence, which evaluation shall
include the review and evaluation of the lead partner of the independent
auditor and a review of the report referred to in (b) above. In making its
evaluation, the Audit Committee shall take into account the opinions of
management and the Company's internal auditors. The Audit Committee shall
further ensure the rotation of the lead audit partner every five years. The
Audit Committee shall decide as to whether the Company is obtaining
high-quality audits and whether rotation of the auditor would be helpful.
The Audit Committee shall present its conclusions with respect to the
independent auditor to the full Board.
(f) To discuss the annual audited financial statements and quarterly
financial statements with management and the independent auditor, including
the Company's disclosures under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(g) To instruct the Company's independent auditors that they are to
directly report to the Audit Committee.
(h) To discuss earnings press releases, as well as financial
information and earnings guidance provided to analysts and rating agencies.
(i) To engage and compensate independent counsel and other advisers,
as the Audit Committee determines necessary to carry out its duties.
(j) To discuss policies with respect to risk assessment and risk
management and to discuss the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures.
(k) To meet separately, at least quarterly, with management, with
internal auditors and with independent auditors.
(l) To review with the independent auditor any audit problems or
difficulties and management's response, including, but not limited to, any
restrictions on the scope of the independent auditor's activities or on
access to requested information (and any significant disagreements with
management), any accounting adjustments that were noted or proposed by the
auditor but were passed as immaterial or otherwise, any communications
between the audit team and the audit firm's national office respecting
auditing or accounting issues presented by the engagement, and any
"management" or "internal control" letter issued, or proposed to be issued,
by the audit firm to the Company. The review shall also include discussion
of the responsibilities, budget and staffing of the Company's internal
audit function.
(m) To review and approve, if appropriate, the internal audit charter
and any changes thereto.
A-2
(n) To ensure the independence of the chief internal auditing
executive and to concur in the selection, retention and dismissal of the
chief internal auditing executive.
(o) To review the adequacy and effectiveness of the Company's
accounting and internal control policies and procedures through inquiry and
discussions with the Company's independent auditors, internal auditors and
management of the Company and approve the internal control policies and any
amendments thereto.
(p) To establish procedures for (i) the receipt, retention, treatment,
processing and resolution of complaints received by the Company regarding
accounting, internal accounting controls or auditing matters, and (ii) the
confidential, anonymous submission by employees of the Company of concerns
regarding questionable accounting or auditing matters.
(q) To set hiring policies for employees or former employees of the
independent auditors all in accordance with applicable legal restrictions.
(r) Meet annually with the general counsel, and outside counsel when
appropriate, to review legal and regulatory matters, including any matters
that may have a material impact on the financial statements of the Company.
(s) To report regularly to the Board any issues that arise with
respect to the quality or integrity of the Company's financial statements,
the Company's compliance with legal or regulatory requirements, the
performance and independence of the Company's independent auditors or the
performance of the internal audit function.
(t) Direct preparation of and approve the Audit Committee Report
required by the rules of the SEC to be included in the Company's annual
proxy statement.
(u) Annually evaluate the performance of the Audit Committee and
report the results of the Audit Committee performance evaluation to the
Board.
(v) Review and assess annually the adequacy of the Audit Committee's
charter.
(w) Obtain from the Company's independent auditors any information
required to be provided pursuant to Section 10A of the Securities Exchange
Act of 1934.
(x) Perform such additional activities and consider such other matters
within the scope of its responsibilities as the Audit Committee or the
Board deems necessary or appropriate.
* * *
While the Audit Committee has the duties and responsibilities set forth in this
charter, the Audit Committee is not responsible for planning or conducting the
audit or for determining whether the Company's financial statements are complete
and accurate and are in accordance with generally accepted accounting
principles. Similarly, it is not the responsibility of the Audit Committee to
resolve disagreements, if any, between management and the independent auditors
or to ensure that the Company complies with all laws and regulations.
A-3
EXHIBIT B
SPECIAL AMENDMENT TO
THE WILLIAMS COMPANIES, INC. 2002 INCENTIVE PLAN
I.
A new Section 1.4 is added to the Plan, subject to approval by the Company's
stockholders, to read as follows:
1.4 2003 Exchange Program. Notwithstanding any contrary provision in the
Plan, the Board shall have the authority to authorize a one-time option exchange
program ("Exchange Program") to be implemented by the Board or its delegate,
pursuant to which employees of the Company or an Affiliate who hold certain
options to purchase common stock (the "Eligible Options") shall be offered the
opportunity to elect to cancel such Eligible Options, whether or not the
Eligible Options were granted under the Plan, in exchange for the grant by the
Compensation Committee of replacement options under the Plan ("Replacement
Options") to purchase the number of shares of common stock determined in
accordance with the exchange ratio tables below (the "Exchange Ratio Tables").
Eligible Options shall be those with an exercise price equal to or in excess of
$10.00 per share and a remaining term of at least two years on the date of
cancellation of such Eligible Options under the Exchange Program.
The exchange ratios set forth in the Exchange Ratio Table will vary
depending on the average of the closing price of the common stock for the 20
business days ending ("Offer Commencement Date Price") on a date prior to the
commencement of the Exchange Program, which date shall be determined by the
Company. Because the Offer Commencement Date Price cannot be determined until
such date, the Company can only calculate the exchange ratios prior to such date
using estimated stock prices. The table below illustrates the exchange ratios
that will apply at different Offer Commencement Date Prices.
EXCHANGE RATIOS FOR OFFER COMMENCEMENT DATE PRICES
ORIGINAL GRANT DATE $3.00/SHARE $4.00/SHARE $5.00/SHARE $6.00/SHARE $7.00/SHARE
------------------- ----------- ----------- ----------- ----------- -----------
1995.......................... 12:1 6:1 3.75:1 2.5:1 2:1
1996.......................... 12.5:1 7:1 4.75:1 3.5:1 2.5:1
1997-2000..................... 13:1 8:1 5.75:1 4.5:1 3.75:1
2001.......................... 7:1 5:1 3.75:1 3.25:1 2.75:1
2002.......................... 2.5:1 2:1 1.75:1 1.5:1 1.5:1
If the Offer Commencement Date Price is something other than the current
stock prices shown in the above table, including if the Offer Commencement Date
Price is below $3.00 per share or above $7.00 per share, the exchange ratios
will be adjusted appropriately using the same valuation methodology used to
determine the ratios shown above. The Exchange Program will be cancelled if the
Offer Commencement Date Price exceeds $10.00.
Replacement Options shall be granted no less than six months and one day
following the cancellation of the Eligible Options, at a price equal to the Fair
Market Value of the common stock on the date of grant of the Replacement
Options. Each Replacement Option shall have a term equal to the remaining term
of the corresponding cancelled Eligible Option, determined on the date of
cancellation of such Eligible Option pursuant to the Exchange Program.
Each Replacement Option will vest the later of one year from the date of
grant of the Replacement Option or the date the Eligible Option it replaces
would have vested if not tendered for exchange; provided, however, that the
Award Agreement for the Replacement Option may provide for accelerated vesting
in the event the Grantee's employment is terminated by death, Disability, or
retirement (as defined in the Company's pension plan).
To participate in the Exchange Offer Program, an employee must surrender
all of the Eligible Options granted to him or her prior to November 27, 2002
(other than those which have already been exercised). The
B-1
following individuals shall not participate in the Exchange Program: executive
officers of the Company, members of the Board, former employees or retirees, and
non-U.S. citizens employed outside the United States. Furthermore, persons who
participated in the Exchange Program but are not, at the time the Replacement
Options are granted, employed by the Company or an Affiliate, shall not receive
any Replacement Options.
All other terms and conditions of the Exchange Offer shall be determined in
the sole discretion of the Board or the Compensation Committee.
II.
Section 4.1 is amended subject to approval by the Company's stockholders, by
adding the following immediately following the first sentence thereof:
In addition, (a) the number of Returned Shares under any of The
Williams Companies, Inc. stock plans shall be reserved for delivery under
the Plan, and (b) the number of shares underlying options cancelled
pursuant to the Exchange Program described in Section 1.4, whether or not
such options were granted under the Plan, shall be reserved for delivery
under the Plan; provided that the additional number of shares so reserved
shall not exceed two million five hundred thousand (2,500,000).
III.
Except as amended herein, the Plan shall remain in full force and effect.
B-2
THE WILLIAMS COMPANIES, INC.
C/O EQUISERVE TRUST COMPANY N.A.
P.O. BOX 8057
EDISON, NJ 08818-8057
VOTER CONTROL NUMBER
YOUR VOTE IS IMPORTANT. PLEASE VOTE IMMEDIATELY.
VOTE-BY-INTERNET (GRAPHIC) OR VOTE-BY-TELEPHONE (GRAPHIC)
1. LOG ON TO THE INTERNET AND GO TO 1. CALL TOLL-FREE
http://www.eproxyvote.com/wmb 1-877-PRX-VOTE (1-877-779-8683)
2. ENTER YOUR VOTER CONTROL NUMBER LISTED 2. ENTER YOUR VOTER CONTROL NUMBER
ABOVE AND FOLLOW THE EASY STEPS OUTLINED LISTED ABOVE AND FOLLOW THE EASY
ON THE SECURED WEBSITE. RECORDED INSTRUCTIONS.
IF YOU VOTE OVER THE INTERNET OR BY TELEPHONE, PLEASE DO NOT MAIL YOUR CARD.
DETACH HERE if you are returning your proxy card by mail
------------------------------------------------------------------------------------------------------------------
1296
Please mark
[X] votes as in
this example.
This proxy, when properly executed, will be FOR AGAINST ABSTAIN
voted in the manner directed herein. IF NO DIRECTION 2. Ratification of Appointment of [ ] [ ] [ ]
IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND Independent Auditor.
2 AND AGAINST PROPOSAL 3.
3. Amendment of the Williams Companies, [ ] [ ] [ ]
-------------------------------------------------------- Inc. 2002 Incentive Plan.
THE WILLIAMS COMPANIES, INC.
-------------------------------------------------------- 4. Stockholder Proposal on [ ] [ ] [ ]
Audit Services.
1. Election of Directors. (01) William E. Green In their discretion of one or more of said proxies upon any
(02) W.R. Howell other business as may properly come before the Annual
(03) George A. Lorch Meeting or any adjournments thereof.
FOR WITHHELD The signer hereby revokes all proxies therefore given
by the signer to vote at said Annual Meeting or any
[ ] [ ] adjournments thereof.
[ ] ---------------------------------------- For address changes and/or comments, please check this box and
For all nominees except as written above write them on the back where indicated.
Note: Please sign exactly as name appears hereon. Joint owners
should each sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such.
Signature: Date: Signature: Date:
----------------------- ----------- ---------------------------- --------------
(WILLIAMS LOGO)
PROXY SERVICES EQUISERVE P.O. BOX 8057 EDISON, NEW JERSEY 08818-8057
VOTE BY PHONE 1-877-779-8683
Use any touch-tone telephone to transmit your voting instructions. Have your
proxy card in hand when you call. You will be prompted to enter your Control
Number and then follow the simple instructions the Vote Voice provides to you.
VOTE BY INTERNET WWW.EPROXYVOTE.COM/WMB
Use the Internet to transmit your voting instructions and for electronic
delivery of information. Have your proxy card in hand when you access the web
site. You will be prompted to enter your Control Number to obtain your records
and create an electronic voting instruction form.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we've provided or return to The Williams Companies, Inc., c/o EquiServe Trust
Company, NA, P.O. Box 8057, Edison, New Jersey 08818-8057.
DETACH HERE
--------------------------------------------------------------------------------
PROXY
PROXY
THE WILLIAMS COMPANIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF WILLIAMS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 15, 2003.
The undersigned stockholder of The Williams Companies, Inc. ("Williams") hereby
appoints STEVEN J. MALCOLM, GARY R. BELITZ and JAMES J. BENDER, jointly and
severally with full power of substitution, as proxies to represent and to vote
all of the shares of Williams' Common Stock the undersigned is entitled to vote
at the Annual Meeting of Stockholders of Williams to be held on the 15th day of
May, 2003, and at any and all adjournments thereof on all matters coming before
said meeting.
Election of Directors, Nominees:
(01) William E. Green, (02) W.R. Howell and (03) George A. Lorch
To participants in The Williams Investment Plus Plan, Mid-South PACE Savings and
Retirement Plan, WES Savings Plan for Hourly Employees, WCG Investment Plan,
Platinum Equity 401(k) Plan, Platinum Equity Union 401(k) Plan, and WEC Inc.
Employee Savings Plan:
This proxy/voting instruction card constitutes your voting instructions to the
Trustee(s) of one or more of the Plans listed above. Non-voted shares will be
voted in the same proportion on each issue as the Trustees votes those shares
for which it receives voting instructions from Participants.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE
REVERSE SIDE. BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE
WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
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(If you have written in the above space, please mark the corresponding box on
the reverse side of this card.)