Employment Agreement with Michael J. Covey

Amendment to Employment Agreement with Michael J. Covey

Severance Program for Executive Employees 

 

 

 

EMPLOYMENT AGREEMENT

BETWEEN

MICHAEL J. COVEY

AND

POTLATCH CORPORATION

 

 

 


EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this 6th day of February, 2006, by and among Potlatch Corporation, a Delaware corporation (the “Company”), and Michael J. Covey (“Executive”), to be effective as of the Effective Date, as defined in Section 1.

BACKGROUND

The Company desires to retain Executive as the President and Chief Executive Officer of the Company from and after the Effective Date, in accordance with the terms of this Agreement. Executive is willing to serve as such in accordance with the terms and conditions of this Agreement.

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Effective Date. The effective date of this Agreement (the “Effective Date”) is February 6, 2006.

2. Employment and Directorship.

(a) Employment. Executive is hereby employed on the Effective Date and will become the President and Chief Executive Officer of the Company on February 6, 2006. In his capacity as President and Chief Executive Officer of the Company, Executive shall have the duties, responsibilities and authority commensurate with such positions as shall be assigned to him by the Board of Directors of the Company, which shall be consistent with the duties, responsibilities and authority of persons holding such positions in a public company engaged in similar lines of business to that engaged in by the Company and its subsidiaries from time to time. In his capacity as President and Chief Executive Officer of the Company, Executive will report directly to the Board of Directors.

(b) Directorship. Executive has been elected as of the Start Date to serve as a member of the Board of Directors of the Company in Class II with a term of office ending at the Annual Meeting of stockholders in 2007. The Company will recommend to the Nominating and Corporate Governance Committee of the Board of Directors and to the full Board of Directors that Executive be nominated to serve as a member of the Board of Directors at each Annual Meeting of stockholders at which Class II directors are elected during the Employment Period. Executive’s service as a member of the Board of Directors will be subject to any required stockholder approval.

3. Employment Period. Unless earlier terminated herein in accordance with Section 7 hereof, Executive’s employment shall be for a three-year term (the “Employment Period”), beginning on January 1, 2006. Executive shall commence his active duties as President and Chief Executive Officer on February 6, 2006 (the “Start Date”). After the Employment Period has ended, Executive’s status shall be that of an “at-will” employee. However, if Employee is


terminated after the Employment Period has ended, he will be covered under the Potlatch Corporation Severance Program for Executive Employees, as such program may be amended from time to time. During 2006, the Company will review the Severance Plan for Executive Employees and make such changes as may be appropriate to conform it to relevant competitive practices.

4. Extent of Service. During the Employment Period following the Start Date, and excluding any periods of vacation, holiday and sick leave to which Executive is entitled, Executive agrees to devote his reasonable full-time business time, attention, skill and efforts exclusively to the faithful performance of his duties hereunder. It shall not be a violation of this Agreement for Executive to (i) devote reasonable time to charitable, community, industry or professional activities, (ii) serve on corporate, civic, educational or charitable boards or committees, and/or (iii) manage personal business interests and investments, and so long as such activities do not materially interfere with the performance of Executive’s responsibilities under this Agreement; provided, however, that Executive shall not accept a position as a member of the board of directors of any for-profit corporation without the prior consent of the Board.

5. Compensation and Benefits.

(a) Base Salary. During the Employment Period following the Start Date, the Company will pay to Executive base salary at the rate of U.S. $625,000 per year (“Base Salary”), less normal withholdings, payable in equal semimonthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The Executive Compensation and Personnel Policies Committee of the Board of Directors of the Company shall review Executive’s Base Salary annually and, subject to approval of the Board of Directors of the Company, may increase (but not decrease) Executive’s Base Salary from year to year. Such adjusted salary then shall become Executive’s Base Salary for purposes of this Agreement. The annual review of Executive’s salary by the Board shall consider, among other things, Executive’s own performance and the Company’s performance.

(b) Incentive, Savings and Retirement Plans. During the Employment Period following the Start Date, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs available to other senior executive officers of the Company (“Peer Executives”), and on a basis no less favorable than such Peer Executives. Without limiting the foregoing, the following shall apply:

(i) Annual Bonus Opportunity. During the Employment Period, Executive shall be entitled to participate in the Potlatch Corporation Management Performance Award Plan (the “MPAP”), or any other executive bonus plan then in effect, pursuant to which he shall have an opportunity to receive an annual cash bonus based upon the achievement of performance goals established in advance from year to year by the Executive Compensation and Personnel Policies Committee (such bonus earned at the stated “target” level of achievement being referred to herein as the “Target Bonus”). Executive’s Target Bonus will equal 65% of his actual Base Salary earned in such year, with a maximum award of 200% of the Target Bonus. Notwithstanding the foregoing, the Executive Compensation and Personnel Policies Committee may further adjust Executive’s award by a multiplier ranging from 0 to 1.4 based upon Executive’s individual performance. Executive’s final annual bonus (“Annual Bonus”) will be

 

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determined after applying the individual performance multiplier to the corporate performance bonus amount. The parties acknowledge that under the MPAP formula the target bonus is based on the number of days of employment. Since the Start Date would result in a pro-rata award, to offset this effect Executive’s adjusted individual performance modifier will be adjusted so that Executive’s 2006 Target Bonus is $406,250 (65% of $625,000).

(ii) Value Replacement Awards. In order to replace the value of certain earned incentives that would have been available to Executive from his former employer the Company shall provide to Executive the following replacement benefits:

(A) a one time value replacement bonus in the amount of $425,000 in cash, payable on the Start Date;

(B) 24,401 restricted stock units, granted on the Start Date (the “Initial RSU Award”), which award shall vest 20% on each of the first and second anniversaries of the Start Date, and 60% on the third anniversary of the Start Date. During such vesting period, an amount equal to the dividends that would have been received if the Initial RSU Award had been made in the form of restricted stock, if any, will be converted into additional restricted stock units based on the closing price of the Company’s common stock on the New York Stock Exchange on the dividend payment date. Such additional RSUs shall vest pursuant to the vesting schedule applicable to the Initial RSU Award. As a result of the Company’s conversion to a Real Estate Investment Trust (“REIT”), the restricted stock units granted to Executive have been treated in the same manner as similar awards held by Peer Executives, in accordance with the applicable requirements of the Potlatch Corporation 2005 Stock Incentive Plan; and

(C) a performance share award for the January 1, 2005 – December 31, 2007 performance cycle, consisting of 15,528 performance shares, pursuant to the Company’s Performance Share Program. The performance shares shall vest based on the Company’s percentile rank with respect to shareholder return versus thirty-two peer group companies (the “Peer Group”), as described in Exhibit I to this Agreement. Upon completion of the performance cycle, Executive’s award shall range from a minimum of zero shares to a maximum of two times the target number of shares. Awards shall be paid in shares of Company common stock as soon as practicable following the completion of the performance cycle. Except as provided in Section 8(b) herein, any unvested performance shares shall be immediately forfeited upon Executive’s termination of employment for any reason. As a result of the Company’s conversion to a REIT, the performance shares granted to Executive have been treated in the same manner as similar awards held by Peer Executives, in accordance with the applicable requirements of the Potlatch Corporation 2005 Stock Incentive Plan.

(iii) Annual Long-Term Incentive Awards. During the Employment Period, Executive shall be eligible for grants, under the Company’s long-term incentive plan or plans, of long-term incentive awards having terms and determined in the same manner as awards to other Peer Executives, unless Executive consents to a different type of award or different terms of such award than are applicable to other Peer Executives. Executive’s 2006 LTI Award opportunity shall consist of 20,800 performance shares granted under the Company’s Performance Share Program. Performance share payouts shall be based on the Company’s relative total shareholder return versus the Peer Group for the period of January 1, 2006 to

 

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December 31, 2008. Upon completion of the performance cycle, Executive’s award shall range from a minimum of zero shares to a maximum of two times the target number of shares. Awards shall be paid in shares of Company common stock, as soon as practicable following the completion of the performance cycle. As a result of the Company’s conversion to a REIT, the performance shares granted to Executive have been treated in the same manner as similar awards held by Peer Executives, in accordance with the applicable requirements of the Potlatch Corporation 2005 Stock Incentive Plan. Except as provided in Section 8(b) herein, unvested performance shares shall be immediately forfeited upon Executive’s termination of employment for any reason.

Except as described above with respect to fiscal year 2006, the Executive Compensation and Personnel Policies Committee of the Company shall have the discretion to adopt different long-term incentive vehicles for future awards.

(iv) Retirement Benefits. Executive shall be eligible to participate in the Company’s Salaried Retirement Plan and Supplemental Retirement Plan. In order to replace the value of pension benefits that would have been available to Executive under his former employer’s Supplemental Benefits Plan had he remained employed until age 55, the Company shall provide to Executive a “minimum benefit,” if he retires at or after age 55 as described below:

(A) The minimum benefit provided by the Company shall be $26,800 per month, offset by the accumulated pretax value of benefits paid/payable from Executive’s former employer’s Supplemental Benefits Plan and the Company’s Salaried Retirement and Supplemental Retirement Plan. Exhibit II attached hereto compares the retirement benefits under Executive’s former employer’s retirement plans and the Company’s retirement plans.

(B) Executive’s benefit shall be payable in the form of a joint and 50% survivor annuity if Executive is married at the time of benefit commencement (with actuarial reduction for joint and survivor), or as a single life annuity if Executive is unmarried at the time of benefit commencement. To the extent required to comply with, or to avoid the payment of penalties under, Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), as determined by the Company’s outside counsel, the benefit payments shall not begin until six months following Executive’s “separation of service.” The sum of the delayed payments shall be paid in a single sum after six months, with monthly payments commencing thereafter.

(C) In the event that the benefits under the Company’s retirement plans plus the value of the Executive’s former employer’s Supplemental Benefits Plan benefits exceed the value of the minimum benefit, the minimum benefit shall be zero. The comparison of benefit values shall be calculated using the IRS specified mortality and interest rates for computing minimum lump sum payouts from qualified retirement plans for the calendar year of termination of employment, determined as of November of the prior year.

(D) The provisions of this Section 5(b)(iv) shall survive the termination of this Agreement.

 

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(c) Welfare Benefit Plans. During the Employment Period following the Start Date, Executive and Executive’s eligible dependents shall be eligible for participation in, and shall receive all benefits under, the welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent available to other Peer Executives and on a basis no less favorable than such Peer Executives. In addition, the Company shall reimburse Executive for the cost of purchasing continued health insurance coverage for himself and his eligible dependents under COBRA for the period after he ceased to be eligible as an employee for health coverage provided by his former employer to the date he becomes eligible as an employee for health coverage under the Company’s plans and programs.

(d) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by Executive in accordance with the policies, practices and procedures of the Company to the extent available to other Peer Executives.

(e) Fringe Benefits. During the Employment Period following the Start Date, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company available to other Peer Executives.

(f) Vacation. During the Employment Period following the Start Date, Executive will be entitled to such period of paid vacation as may be provided under any plans, practices, programs and policies of the Company available to other Peer Executives.

(g) Relocation Assistance. The Company shall provide relocation assistance for Executive’s move to the Spokane, Washington area in accordance with the plans, practices, programs and policies of the Company available to other Peer Executives. In addition, the Company shall reimburse Executive for his costs incurred in connection with temporary living expenses and return trips home to the Atlanta, GA area for the lesser of six (6) months or until Executive’s family is relocated to the Spokane, Washington area.

(h) Stock Ownership Guidelines. Executive acknowledges and agrees to comply with the Company’s stock ownership guidelines for the Chief Executive Officer position, as the same may be amended from time to time. Such guidelines require Executive to acquire, within five years of assuming the CEO position, 75,000 shares of Company common stock of the Company. Pursuant to the Potlatch Corporation Officer Stock Ownership Guidelines, it is expected that Executive’s stock ownership shall equal 20% of the guideline at the first anniversary of the Start Date and the differential increase will equal at least 20% of the guideline each year thereafter until the guideline is met. If the differential increase is not achieved each year, or the guideline number of shares is not maintained, 50% of Executive’s award under the MPAP shall be provided in shares of Company common stock. The following shares are counted in the stock ownership guideline: (i) shares owned outright, (ii) shares acquired and held in the Salaried Employees’ Savings Plan, (iii) Stock Incentive Plan shares acquired through stock option exercises, performance share awards paid, and vested restricted shares or restricted stock units, and (iv) shares acquired through the MPAP, including awards deferred in stock units.

 

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(i) Inventions, Trade Secrets and Confidentiality Agreement; Non-Compete. Executive acknowledges and agrees to comply with the Company’s standard Inventions, Trade Secrets and Confidentiality Agreement, as the same may be amended from time to time. In consideration of the compensation and benefits being paid by the Company to Executive hereunder, Executive further agrees that, during (a) the time Executive is employed under this Agreement and (b) a time period, if any, in which Executive receives payments and/or other benefits from the Company pursuant to Sections 8(a) or 8(b) of this Agreement, Executive will not, without prior written consent of the Company, directly or indirectly seek or obtain employment as Chief Executive Officer of a real estate investment trust whose principal holdings are timber properties (a timber REIT).

(j) Non-Solicitation of Employees. In consideration of the compensation and benefits being paid by the Company to Executive hereunder, Executive hereby agrees that, during (a) the time Executive is employed under this Agreement and (b) a time period, if any, in which Executive receives payments and/or other benefits from the Company pursuant to Sections 8(a) or 8(b) of this Agreement, Executive will not solicit for employment, offer, or cause to be offered employment, either on a full time, part-time or consulting basis, to any person who was employed by Employer or its affiliates on the date Employee’s employment terminated and with whom Employee had regular contact with during the course of his employment by Employer, unless Employee shall have received the prior written consent of Employer.

6. Change of Control. For the purposes of this Agreement, a “Change of Control” shall mean the occurrence of any of the following events:

(a) Upon consummation of a reorganization, merger or consolidation involving the Company (a “Business Combination”), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of Common Stock (the “Outstanding Common Stock”) and the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Voting Securities”) immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company either directly or through one or more subsidiaries), (B) no Person (as defined in Section 6(c) below) (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) sponsored or maintained by the Company or such other corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership is based on the beneficial ownership, directly or indirectly, of Outstanding Common Stock or Outstanding Voting Securities immediately prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board at the time of the

 

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execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(b) On the date that individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors, an actual or threatened solicitation of proxies or consents or any other actual or threatened action by, or on behalf of any Person other than the Board; or

(c) Upon the acquisition after the Effective Date by any individual, entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then Outstanding Common Stock or (B) the combined voting power of the Outstanding Voting Securities; provided, however, that the following acquisitions shall not be deemed to be covered by this Section 6(c): (x) any acquisition of any acquisition of Outstanding Common Stock or Outstanding Voting Securities by the Company, (y) any acquisition of Outstanding Common Stock or Outstanding Voting Securities by any employee benefit plan (or related trust) sponsored or maintained by the Company or (z) any acquisition of Outstanding Common Stock or Outstanding Voting Securities by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 6(a); or

(d) Upon the consummation of the sale of all or substantially all of the assets of the Company or approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

7. Termination of Employment.

(a) Death or Retirement. Executive’s employment shall terminate automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement, “Retirement” shall mean normal retirement as defined in the Company’s then-current retirement plan, or if there is no such retirement plan, “Retirement” shall mean voluntary termination after age 65 with ten years of service.

(b) Disability. If the Company determines in good faith that the Disability (as defined below) of Executive has occurred during the Employment Period, it may give to Executive written notice of its intention to terminate Executive’s employment. In such event, Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such written notice by Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance

 

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of Executive’s duties. For purposes of this Agreement, “Disability” shall have the meaning set forth in Code section 409A(a)(2)(C). If no such long-term disability plan or policy is maintained, “Disability” shall mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months.

(c) Termination by the Company. The Company may terminate Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” shall mean:

(i) the engaging by Executive in unfair competition with the Company or any a subsidiary;

(ii) Executive’s inducement of any customer of the Company or a subsidiary to breach any contract with the Company or such subsidiary;

(iii) Executive’s unauthorized disclosure of any of the secrets or confidential information of the Company or a subsidiary;

(iv) commission of an act of embezzlement, fraud or theft with respect to the property of the Company or a subsidiary;

(v) the engaging by Executive in conduct which is not in good faith and which directly results in material loss, damage or injury to the business, reputation or employees of the Company or a subsidiary; or

(vi) Executive’s conviction of or entering of a plea of nolo contendere to a felony.

The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of the Company (excluding Executive, if Executive is a member of the Board), finding that, in the good faith opinion of such Board, Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. Such finding shall be effective to terminate Executive’s employment for Cause only if Executive was provided reasonable notice of the proposed action and was given an opportunity, together with counsel, to be heard by the Board.

(d) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” shall mean, without the written consent of Executive:

(i) the assignment to Executive of any duties inconsistent in material respect with Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the Start Date, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities or as a result of which Executive no longer has a position substantially equivalent to Executive’s

 

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position as of the Start Date, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive;

(ii) a reduction by the Company in Executive’s Base Salary and/or Target Bonus as in effect on the Effective Date or as the same may be increased from time to time other than in connection with an across-the-board reduction applicable to all Peer Executives;

(iii) the Company’s requiring Executive to be based at any office or location other than in Spokane and its immediate suburbs;

(iv) the material breach by the Company of any provision of this Agreement.

Good Reason shall not include Executive’s death or Disability; provided that Executive’s mental or physical incapacity following the occurrence of an event described in clause (i) – (iv) above shall not affect Executive’s ability to terminate for Good Reason. Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. Any good faith determination of Good Reason made by Executive shall be conclusive, but the Company shall have an opportunity to cure any claimed event of Good Reason within 30 days of notice from Executive and the Board’s good faith determination of cure with respect to clause (i) or (iv) above shall be binding. The Company shall notify Executive of the timely cure of any claimed event of Good Reason and the manner in which such cure was effected, and any Notice of Termination delivered by Executive based on such claimed Good Reason shall be deemed withdrawn and shall not be effective to terminate the Agreement.

(e) Notice of Termination. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 16(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated and (iii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.

(f) Date of Termination. “Date of Termination” means (i) if Executive’s employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or a date within 30 days after receipt of the Notice of Termination, as specified in such notice, (ii) if Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination or a date within 60 days after receipt of the

 

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Notice of Termination, as specified in such notice, (iii) if Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the Disability Effective Date, as the case may be, and (iv) if Executive’s employment is terminated by Executive without Good Reason, the Date of Termination shall be no fewer than 60 days following the Company’s receipt of the Notice of Termination.

8. Obligations of the Company upon Termination.

(a) Prior to a Change in Control; Termination by Executive for Good Reason; Termination by the Company Other Than for Cause or Disability. If, during the Employment Period and prior to a Change in Control, the Company shall terminate Executive’s employment other than for Cause or Disability, or Executive shall terminate employment for Good Reason within a period of 90 days after the occurrence of the event giving rise to Good Reason and the Company has failed to cure such Good Reason as provided in Section 7(d) of this Agreement, then and, with respect to the payments and benefits described in clauses (i)(B) and (ii) below, only if Executive executes a release in substantially the form of Exhibit III hereto (the “Release”):

(i) the Company shall pay to Executive the following amounts after Executive executes the Release:

(A) the sum of (1) Executive’s Base Salary through the Date of Termination to the extent not theretofore paid and (2) any accrued vacation pay to the extent not theretofore paid shall be paid in a lump sum in cash within 30 days after the Date of Termination, or if later, within ten days after Executive executes the Release; and

(B) the product of (x) Executive’s Annual Bonus that would have been payable with respect to the fiscal year in which the Date of Termination occurs (determined at the end of such year based on actual performance results through the end of such year; provided that such Annual Bonus shall not be adjusted downward for individual performance) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 (the sum of the amounts described in subsections (A) and (B) shall be hereinafter referred to as the “Accrued Obligations”) shall be paid as soon as reasonably practicable after the bonus determination for the applicable year is made; and

(C) the amount equal to l/24th of Executive’s Base Salary and Target Bonus in effect as of the Date of Termination shall be paid on a semimonthly basis in accordance with the Company’s usual payroll practices for 24 months following the Date of Termination; provided, however, that to the extent required to comply with, or to avoid the payment of penalties under, Section 409A of the Code, as determined by the Company’s outside counsel, such payments shall not begin until six months following Executive’s “separation of service.” The sum of the delayed payments shall be paid in a single sum after six months, with payments semimonthly by commencing thereafter;

(ii) for two years after Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, or policy, the Company

 

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shall continue benefits to Executive and/or Executive’s eligible dependents at least equal to those which would have been provided to them in accordance with the Company’s health plans if Executive’s employment had not been terminated or, if more favorable to Executive, as in effect generally at any time thereafter with respect to other Peer Executives and their eligible dependents, provided, however, that if Executive becomes re-employed with another employer and is eligible to receive medical under another employer provided plan, the health benefit coverage described herein shall cease. Executive’s eligibility to purchase continued health insurance coverage under COBRA shall run concurrently with the period for which the Company is providing coverage under this subsection. To the extent required to comply with, or to avoid the payment of penalties under, Section 409A of the Code, as determined by the Company’s outside counsel, Executive will pay the entire cost of such benefits for the first six months after the Date of Termination and the Company will reimburse the Executive for the Company’s share of such costs on the six-month anniversary of the Executive’s “separation from service” as defined in Section 409A of the Code; and

(iii) notwithstanding the provisions of the applicable option agreement, all of Executive’s vested but unexercised options to acquire Company common stock as of the Date of Termination shall remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) a date which is three months following the Date of Termination; and

(iv) the Initial RSU Award will become immediately vested as of the Date of Termination; and

(v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

To the extent required to comply with, or to avoid the payment of penalties under, Section 409A, as determined by the Company’s outside counsel, one or more payments under this Section 8 shall be delayed to the six month anniversary of the date of Executive’s “separation from service,” within the meaning of Section 409A of the Code.

(b) In Connection with a Change in Control: Termination by Executive for Good Reason; Termination by the Company Other Than for Cause or Disability. If a Change in Control occurs during the Employment Period and, in connection with such Change in Control, the Company shall terminate Executive’s employment other than for Cause or Disability, or Executive shall terminate employment for Good Reason within a period of 90 days after the occurrence of the event giving rise to Good Reason, then and, with respect to the payments and benefits described in clauses (i)(B) and (ii) below, only if Executive executes a release in substantially the form of the Release:

(i) the Company shall pay to Executive the following amounts after Executive executes the Release:

(A) the Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days after the Date of Termination; provided, however, that the Accrued Obligation described in Section 8(a)(i)(B) of this Agreement shall be determined with respect to the then-current Target Bonus or, if greater, the actual performance results through the end of the fiscal quarter ending on or immediately prior to the Change in Control, which amount shall not be adjusted downward for individual performance; and

 

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(B) the amount equal to l/36th of Executive’s Base Salary and Target Bonus in effect as of the Date of Termination shall be paid on a semimonthly basis in accordance with the Company’s usual payroll practices for 36 months following the Date of Termination; provided, however, that to the extent required to comply with, or to avoid the payment of penalties under, Section 409A of the Code, as determined by the Company’s outside counsel, such payments shall not begin until six months following Executive’s “separation of service.” The sum of the delayed payments shall be paid in a single sum after six months, with semimonthly payments commencing thereafter;

(ii) for three years after Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, or policy, the Company shall continue benefits to Executive and/or Executive’s eligible dependents at least equal to those which would have been provided to them in accordance with the Company’s health plans if Executive’s employment had not been terminated or, if more favorable to Executive, as in effect generally at any time thereafter with respect to other Peer Executives and their eligible dependents, provided, however, that if Executive becomes re-employed with another employer and is eligible to receive health benefits under another employer provided plan, the health benefits described herein shall cease. Executive’s eligibility to purchase continued health insurance coverage under COBRA shall run concurrently with the period for which the Company is providing coverage under this subsection. To the extent required to comply with, or to avoid the payment of penalties under, Section 409A, as determined by the Company’s outside counsel, Executive will pay the entire cost of such benefits for the first six months after the Date of Termination and the Company will reimburse the Executive for the Company’s share of such costs on the six-month anniversary of the Executive’s “separation from service” as defined in Section 409A of the Code; and

(iii) any options to acquire Company common stock granted to Executive at least six (6) months prior to the effective date of the Change in Control shall become immediately vested and exercisable as of the Date of Termination; and

(iv) notwithstanding the provisions of the applicable option agreement, all of Executive’s vested but unexercised options to acquire Company common stock as of the Date of Termination shall remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) three months after the Date of Termination; and

(v) the Initial RSU Award will become immediately vested as of the Date of Termination; and

 

12


(vi) Executive shall receive a pro-rata portion of his performance share awards, based on the number of months completed in the performance cycle at the Date of Termination and actual results for the performance period; and

(vii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive his Other Benefits.

To the extent required to comply with, or to avoid the payment of penalties under, Section 409A, as determined by the Company’s outside counsel, one or more payments under this Section 8 shall be delayed to the six month anniversary of the date of Executive’s “separation from service,” within the meaning of Section 409A of the Code.

(c) Death, Disability or Retirement. If Executive’s employment is terminated by reason of his death, Disability or Retirement during the Employment Period, this Agreement shall terminate without further obligations to Executive or his estate, beneficiaries or legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive or his estate, beneficiary or legal representative, as applicable, in a lump sum in cash within 30 days of the Date of Termination; provided, however, that the Accrued Obligation described in Section 8(a)(i)(B) of this Agreement shall be paid as soon as reasonably practicable after the bonus determination for the applicable year is made. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 8(c) shall include, without limitation, and Executive or his estate, beneficiaries or legal representatives, as applicable, shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death, disability or retirement, if any, as are applicable to Executive or his family on the Date of Termination.

(d) Cause or Voluntary Termination without Good Reason.

(i) Cause. If Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. The Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days after the Date of Termination; provided, however, that the Accrued Obligation described in Section 8(a)(i)(B) of this Agreement shall be paid as soon as reasonably practicable after the bonus determination for the applicable year is made.

(ii) Without Good Reason. If Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits, and all of Executive’s vested but unexercised options to acquire Company common stock as of the Date of Termination shall remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) three months after the Date of Termination. The Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days after the Date of Termination; provided, however, that the Accrued Obligation described in Section 8(a)(i)(B) of this Agreement shall be paid as soon as reasonably practicable after the bonus determination for the applicable year is made.

 

13


(e) Resignations. Termination of Executive’s employment for any reason whatsoever shall constitute Executive’s resignation from the Board of Directors of the Company and resignation as an officer of the Company, its subsidiaries and affiliates.

9. Certain Additional Payments by the Company.

(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that Executive is entitled to a Gross-Up Payment, but that the Payments would not exceed the safe harbor amount of 2.99 times Executive’s “base amount,” as defined in Code section 280G(b)(3), by $100,000 or more, then no Gross-Up Payment shall be made to Executive and the Payments, in the aggregate, shall be reduced to an amount such that the receipt of Payments would not give rise to any Excise Tax. In that event, Executive shall direct which Payments are to be modified or reduced (the “Reduced Amount”).

(b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by such certified public accounting firm reasonably acceptable to the Company as may be designated by Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and Executive thereafter is required to make a payment of any

 

14


Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive.

(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall:

(i) give the Company any information reasonably requested by the Company relating to such claim,

(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith in order effectively to contest such claim, and

(iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such

 

15


contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

10. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive’s continuing or future participation in any employee benefit plan, program, policy or practice provided by the Company and for which Executive may qualify, except as specifically provided herein. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any employee benefit plan, policy, practice or program of the Company, its subsidiaries or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program except as explicitly modified by this Agreement.

11. Full Settlement; No Obligation to Mitigate. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and, except as explicitly provided herein, such amounts shall not be reduced whether or not Executive obtains other employment.

12. Costs of Enforcement. In any action taken in good faith relating to the enforcement of this Agreement or any provision herein, Executive shall be entitled to reimbursement for any and all reasonable costs and expenses incurred by him in enforcing or establishing his rights thereunder, including, without limitation, reasonable attorneys’ fees, whether suit be brought or not, and whether or not incurred in arbitration, trial, bankruptcy or appellate proceedings, but only if and to the extent Executive is successful in asserting such rights. Executive shall also be entitled to be paid all reasonable legal fees and expenses, if any, incurred in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit hereunder.

 

16


13. Arbitration.

(a) Mutual Agreement to Arbitrate. Except for those claims identified below, any controversy or claim by either party hereto against the other or any of their officers, directors, employees or agents arising from, out of or relating to this Agreement, the breach thereof, or the employment or termination thereof which would give rise to a claim under federal, state or local law (including but not limited to claims based in tort or contract, claims for discrimination under state or federal law, and/or claims for violation of any federal, state or local law, statute or regulation) (“Claims”) shall be determined by final and binding arbitration in Spokane, Washington, before and in accordance with the rules of the American Arbitration Association for resolution of employment disputes by a neutral arbitrator selected in accordance with the rules of such Association. The arbitrator will have all of the powers a judge would have in dealing with any question or dispute that may arise before, during and after the arbitration, including, but not limited to, the power to award any type of legal or equitable relief that would be available in a court of competent jurisdiction under the applicable law or statute. The decision of the arbitrator shall be enforceable by any court having proper jurisdiction.

(b) Claims Not Covered. Claims for benefits under the workers’ compensation, unemployment insurance and state disability insurance laws, are not covered by this Section 13. Additionally, claims for temporary restraining orders or preliminary injunctions (“temporary equitable relief”) in cases in which such temporary equitable relief would be otherwise authorized by law are not covered by this Section 13. In such cases where temporary equitable relief is sought, the trial on the merits of the action will occur in front of, and will be decided by, the arbitrator, who will have the same ability to order legal or equitable remedies as could a court of general jurisdiction. Nothing in this Agreement precludes the Employee from filing a charge or from participating in an administrative investigation of a charge before any appropriate government agency. However, Employee acknowledges that he understands that he cannot obtain any monetary relief or recovery from such a proceeding.

(c) Costs. Employer agrees to bear the costs of the arbitrator’s fee and all other costs related to the arbitration, assuming that such costs are not expenses that Employee would be required to bear if he were bringing the action in a court of law. Employee and Employer shall each bear their own attorney’s fees incurred in connection with the arbitration, and the arbitrator will not have authority to award attorney’s fees unless a statute at issue in the dispute or other appropriate law authorizes an award of attorney’s fees, in which case the arbitrator shall have the authority to make an award of attorney’s fees as permitted by the applicable statute or law.

(d) Knowing and Voluntary Agreement; Complete Agreement. Employee understands and acknowledges that he has specifically requested inclusion of this arbitration provision in this Agreement and has been advised to consult with an attorney of his own choosing before signing this Agreement, and that he has had an opportunity to do so.

EMPLOYEE FURTHER UNDERSTANDS AND AGREES THAT HE HAS READ THIS EMPLOYMENT & ARBITRATION AGREEMENT CAREFULLY. BY SIGNING IT, EMPLOYEE IS EXPRESSLY WAIVING ANY AND ALL RIGHTS TO A TRIAL OR

 

17


HEARING BEFORE A COURT OR JURY OF ANY AND ALL DISPUTES AND CLAIMS SUBJECT TO ARBITRATION UNDER THIS AGREEMENT WHICH HE MAY NOW OR IN THE FUTURE HAVE.

14. Representations and Warranties. Executive hereby represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any covenant not to compete with any person or entity, and Executive’s execution of this Agreement and performance of his obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

15. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive’s legal representatives.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any Surviving Corporation resulting from a Reorganization, Sale or Acquisition (if other than the Company) to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no Reorganization, Sale or Acquisition had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

16. Miscellaneous.

(a) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof

 

18


and, from and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including without limitation, the Prior Agreement.

(e) Governing Law. Except as provided below and except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Washington shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

(f) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:

 

To Company:

 

Potlatch Corporation, Inc.

601 West Riverside Avenue

Suite 1100

Spokane, WA 99201

Attention: Secretary

To Executive:

 

Michael J. Covey

Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement.

(h) Construction. Each party and his or its counsel have reviewed this Agreement and have been provided the opportunity to revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as a whole, and according to its fair meaning, and not strictly for or against either party.

(i) Withholding. The Company may withhold from any payment that it is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law.

 

19


IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the date first above written.

 

POTLATCH CORPORATION

By:

 

/s/ William T. Weyerhaeuser

 

Dr. William T. Weyerhaeuser

Vice Chairman of the Board

 

EXECUTIVE:

/s/ Michael J. Covey

Michael J. Covey

 

20


EXHIBIT I

Vesting of Performance Shares for 2005-2007 Performance Cycle

RESOLUTION

PERFORMANCE SHARE MEASURE AND SCHEDULE

December 1, 2004

RESOLVED, that the Performance Measure, Performance Schedule and universe of comparator companies for use in the Addendum to the Performance Share Agreement in connection with a grant of Performance Shares to employees for the January 1, 2005 through December 31, 2007 Performance Period, in the form presented to this meeting, is approved.


2000 STOCK INCENTIVE PLAN

ADDENDUM TO PERFORMANCE SHARE AGREEMENT

Performance Period:

January 1, 2005 through December 31, 2007

Performance Measure:

The performance measure is a comparison of the percentile ranking of Potlatch Corporation’s total shareholder return (TSR), which includes stock price appreciation plus dividends paid during the performance period, to the TSR performance of selected peer group of forest products industry companies listed on Exhibit 1 hereto.

Performance Schedule:

The performance schedule below shows the percentage of the target grant that will be awarded at the end of the performance period depending upon the actual TSR percentile ranking achieved by Potlatch during the performance period:

 

TSR Rank

  

Percentile Rank

 

Percent of Target Paid

1st

  

Top

 

200%

2nd

  

97th

 

200%

3rd

  

94th

 

190%

4th

  

91st

 

183%

5th

  

88th

 

175%

6th

  

84th

 

168%

7th

  

81st

 

160%

8th

  

78th

 

153%

9th

  

75th

 

145%

10th

  

72nd

 

138%

11th

  

69th

 

130%

12th

  

66th

 

123%

13th

  

63rd

 

115%

14th

  

59th

 

108%

14th

  

56th

 

100%

16th

  

53rd

 

89%

17th

  

50th

 

79%

18th

  

47th

 

68%

19th

  

44th

 

57%

20th

  

41st

 

46%

21st

  

38th

 

36%

22nd

  

34th

 

25%

23rd

  

31st

 

0


The percent of the target grant awarded for achieved TSR percentiles between the levels shown above is determined by interpolation. The exact number of performance shares awarded to the Employee after multiplication by the appropriate factor (or determined by interpolation) plus dividend equivalents accrued during the performance period will be rounded to the nearest whole number of shares.


Performance Share Measure

Forest Products Industry Peer Group

Company Name

 

 

1.

Abitibi-Consolidated, Inc.

 

 

2.

Bowater

 

 

3.

Canfor Corporation

 

 

4.

Caraustar Industries, Inc.

 

 

5.

Cascades, Inc.

 

 

6.

Chesapeake

 

 

7.

Deltic Timber Corporation

 

 

8.

Doman Industries Limited

 

 

9.

Domtar, Inc.

 

 

10.

Georgia-Pacific

 

 

11.

Glatfelter

 

 

12.

International Forest Products Limited

 

 

13.

International Paper

 

 

14.

Kimberly-Clark

 

 

15.

Longview Fibre

 

 

16.

Louisiana-Pacific

 

 

17.

MeadWestvaco

 

 

18.

Nexfor, Inc.

 

 

19.

Norske Skog Canada Limited

 

 

20.

Packaging Corp of America

 

 

21.

Packaging Dynamics Corporation

 

 

22.

Plum Creek

 

 

23.

Pope & Talbot

 

 

24.

Rayonier

 

 

25.

Rock-Tenn Company

 

 

26.

Smurfit-Stone

 

 

27.

Sonoco Products Company

 

 

28.

Taiga Forest Products

 

 

29.

Tembec, Inc.

 

 

30.

Temple Inland

 

 

31.

Universal Forest Products

 

 

32.

West Fraser Timber Company

 

 

33.

Weyerhaeuser

If two of the listed companies merge during the applicable performance period, their combined TSR will be used for ranking purposes. If any listed company goes out of business or otherwise ceases to exist as an independent company during the applicable performance period, it will not be taken into consideration in determining TSR ranking for that performance period.


RESOLUTION

PERFORMANCE SHARE MEASURE AND SCHEDULE

December 1, 2005

RESOLVED, that the Performance Measure, Performance Schedule and universe of comparator companies for use in the Addendum to the Performance Share Agreement in connection with a grant of Performance Shares to employees for the January 1, 2006 through December 31, 2008 Performance Period, in the form presented to this meeting, is approved.


2000 STOCK INCENTIVE PLAN

ADDENDUM TO PERFORMANCE SHARE AGREEMENT

Performance Period:

January 1, 2006 through December 31, 2008

Performance Measure:

The performance measure is a comparison of the percentile ranking of Potlatch Corporation’s total shareholder return (TSR), which includes stock price appreciation plus dividends paid during the performance period, to the TSR performance of the selected peer group of forest products industry companies listed on Exhibit 1 hereto.

Performance Schedule:

The performance schedule below shows the percentage of the target grant that will be awarded at the end of the performance period depending upon the actual TSR percentile ranking achieved by Potlatch during the performance period:

 

TSR Rank

  

Percentile Rank

 

Percent of Target Paid

1st

  

Top

 

200%

2nd

  

97th

 

200%

3rd

  

94th

 

190%

4th

  

90th

 

183%

5th

  

87th

 

175%

6th

  

84th

 

168%

7th

  

81st

 

160%

8th

  

78th

 

153%

9th

  

74th

 

145%

10th

  

71st

 

138%

11th

  

68th

 

130%

12th

  

65th

 

123%

13th

  

61st

 

115%

14th

  

58th

 

108%

15th

  

55th

 

100%

16th

  

52nd

 

89%

17th

  

48th

 

79%

18th

  

45th

 

68%

19th

  

42nd

 

57%

20th

  

39th

 

46%

21st

  

36th

 

36%

22nd

  

32nd

 

25%

23rd

  

29th

 

0


The percent of the target grant awarded for achieved TSR percentiles between the levels shown above is determined by interpolation. The exact number of performance shares awarded to the Employee after multiplication by the appropriate factor (or determined by interpolation) plus dividend equivalents accrued during the performance period will be rounded to the nearest whole number of shares.


Performance Share Measure

Forest Products Industry Peer Group

Company Name

 

 

1.

Abitibi-Consolidated, Inc.

 

 

2.

Bowater

 

 

3.

Canfor Corporation

 

 

4.

Caraustar Industries, Inc.

 

 

5.

Cascades, Inc.

 

 

6.

Chesapeake

 

 

7.

Deltic Timber Corporation

 

 

8.

Western Forest Products Inc. (formerly Doman Industries Limited)

 

 

9.

Domtar, Inc.

 

 

10.

Glatfelter

 

 

11.

International Forest Products Limited

 

 

12.

International Paper

 

 

13.

Kimberly-Clark

 

 

14.

Longview Fibre

 

 

15.

Louisiana-Pacific

 

 

16.

MeadWestvaco

 

 

17.

Norbord, Inc. (formerly Nexfor, Inc.)

 

 

18.

Catalyst Paper Corporation (formerly Norske Skog Canada Limited)

 

 

19.

Packaging Corp of America

 

 

20.

Packaging Dynamics Corporation

 

 

21.

Plum Creek

 

 

22.

Pope & Talbot

 

 

23.

Rayonier

 

 

24.

Rock-Tenn Company

 

 

25.

Smurfit-Stone

 

 

26.

Sonoco Products Company

 

 

27.

Taiga Forest Products

 

 

28.

Tembec, Inc.

 

 

29.

Temple Inland

 

 

30.

Universal Forest Products

 

 

31.

West Fraser Timber Company

 

 

32.

Weyerhaeuser

If two of the listed companies merge during the applicable performance period, their combined TSR will be used for ranking purposes. If any listed company goes out of business or otherwise ceases to exist as an independent company during the applicable performance period, it will not be taken into consideration in determining TSR ranking for that performance period.


EXHIBIT II

Comparison of Retirement Benefits

 

End of Year

 

Projected
Plum Creek
Monthly
Benefit

 

Lump Sum
Value at 6% of
Projected Plum
Creek Benefit

 

Lump Sum Value
at 6% of Potlatch
Benefit Plus Lump
Sum Value of Plum
Creek Benefit(2)

 

Total Additional
Value Payable
by Potlatch at
Termination

2006

 

$

21,770

 

$

1,042,118

 

$

1,093,456

 

$

0

2007

 

$

22,658

 

$

1,151,722

 

$

1,234,849

 

$

0

2008

 

$

23,547

 

$

1,271,295

 

$

1,394,465

 

$

0

2009

 

$

24,435

 

$

1,401,127

 

$

1,574,586

 

$

0

2010

 

$

25,324

 

$

1,542,991

 

$

1,777,739

 

$

0

2011

 

$

26,213

 

$

1,697,263

 

$

2,020,732

 

$

0

2012

 

$

26,818

 

$

4,226,448

 

$

2,296,762

 

$

1,929,686

2013

 

$

26,818

 

$

4,161,818

 

$

2,607,377

 

$

1,554,441

2014

 

$

26,818

 

$

4,094,774

 

$

2,951,852

 

$

1,142,923

2015

 

$

26,818

 

$

4,025,585

 

$

3,344,086

 

$

681,499

2016

 

$

26,818

 

$

3,954,250

 

$

3,776,119

 

$

178,131

2017

 

$

26,818

 

$

3,881,038

 

$

4,249,463

 

$

0

 

(1)

Based on the following assumptions: (i) 4% future salary growth, (ii) annual bonus equal to target at Potlatch and Plum Creek, and (iii) conversions to/from annuity form to lump sum are at 6%, 1994 GATT mortality.

 

(2)

This column includes the estimated lump sum value of your current Plum Creek benefit that will be paid to you upon separation of service.


EXHIBIT III

Form of Separation and Release Agreement

GENERAL RELEASE

This General Release (“Release”) is executed and delivered by MICHAEL J. COVEY (“Employee”) to and for the benefit of POTLATCH CORPORATION, a Delaware corporation, and any parent, subsidiary or affiliated corporation or related entity of Potlatch Corporation (collectively, “Company”).

In consideration of certain payments and benefits which Employee will receive following termination of employment pursuant to the terms of the Employment Agreement entered into as February 6, 2006, between the Employee and the Company (the “Agreement”), the sufficiency of which Employee hereby acknowledges, Employee hereby agrees not to sue and fully, finally, completely and generally releases, absolves and discharges Company, its predecessors, successors, subsidiaries, parents, related companies and business concerns, affiliates, partners, trustees, directors, officers, agents, attorneys, servants, representatives and employees, past and present, and each of them (hereinafter collectively referred to as “Releasees”) from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, grievances, arbitrations, unfair labor practice charges, wages, vacation payments, severance payments, obligations, commissions, overtime payments, workers compensation claims, debts, profit sharing or bonus claims, expenses, damages, judgments, orders and/or liabilities of whatever kind or nature in law, equity or otherwise, whether known or unknown to Employee which Employee now owns or holds or has at any time owned or held as against Releasees, or any of them through the date Employee executes this Release (“Claims”), including specifically but not exclusively and without limiting the generality of the foregoing, any and all Claims arising out of or in any way connected to Employee’s employment with or separation of employment from Company including any Claims based on contract, tort, wrongful discharge, fraud, breach of fiduciary duty, attorneys’ fees and costs, discrimination in employment, any and all acts or omissions in contravention of any federal or state laws or statutes (including, but not limited to, federal or state securities laws, any deceptive trades practices act or any similar act in any other state and the Racketeer Influenced and Corrupt Organizations Act), and any right to recovery based on state or federal age, sex, pregnancy, race, color, national origin, marital status, religion, veteran status, disability, sexual orientation, medical condition, union affiliation or other anti-discrimination laws, including, without limitation, Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the National Labor Relations Act, the California Fair Employment and Housing Act, and any similar act in effect in any jurisdiction applicable to Employee or the Company, all as amended, whether such claim be based upon an action filed by Employee or by a governmental agency.

Notwithstanding the foregoing, nothing herein shall release (i) the Company of its severance and post-termination obligations to Employee under the Agreement, (ii) any other contractual obligations of the Company or any of the other Released Parties to Executive contained in one or more written agreement with Employee, subject to the terms and conditions of such agreements, (iii) any rights or claims that Employee may have in his capacity as a shareholder of the Company, or (iv) any vested rights that Employee may have under the


Company’s benefit plans, subject to the terms and conditions of such plans. Nothing in this Agreement releases, waives or otherwise affects Employee’s rights pertaining to advancement and/or indemnification pursuant to applicable law and the Company’s Certificate of Incorporation and Bylaws, or Employee’s reimbursement under any applicable directors and officers liability insurance policy, subject to the terms and conditions thereof.

Employee acknowledges and agrees that neither anything in this Release nor the offer, execution, delivery, or acceptance thereof shall be construed as an admission by Company of any kind, and this Release shall not be admissible as evidence in any proceeding except to enforce this Release.

It is the intention of Employee in executing this instrument that it shall be effective as a bar to each and every claim, demand, grievance and cause of action hereinabove specified. In furtherance of this intention, Employee hereby expressly consents that this Release shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified, and elects to assume all risks for claims that now exist in Employee’s favor, known or unknown, that are released under this Release. Employee acknowledges Employee may hereafter discover facts different from, or in addition to, those Employee now knows or believes to be true with respect to the claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, wages, obligations, debts, expenses, damages, judgments, orders and liabilities herein released, and agrees the release herein shall be and remain in effect in all respects as a complete and general release as to all matters released herein, notwithstanding any such different or additional facts.

If any provision of this Release or application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Release which can be given effect without the invalid provision or application. To this end, the provisions of this Release are severable.

Employee represents and warrants that Employee has not heretofore assigned or transferred or purported to assign or transfer to any person, firm or corporation any claim, demand, right, damage, liability, debt, account, action, cause of action, or any other matter herein released.

Employee represents that he is not aware of any claims other than the claims that are released by this instrument. Employee agrees to waive any rights he may have under any statute or common law principle which prevents the waiver of claims which the waiving individual does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the other party.

NOTICE TO EMPLOYEE

The law requires that Employee be advised and Company hereby advises Employee in writing to consult with an attorney and discuss this Release before executing it. Employee acknowledges Company has provided to Employee at least twenty-one (21) calendar days


(forty- five (45) calendar days, in the case of a group termination) within which to review and consider this Release before signing it.

Should Employee decide not to use the full twenty-one (21) or forty-five (45) days, as applicable, then Employee knowingly and voluntarily waives any claims that Employee was not in fact given that period of time or did not use the entire twenty-one (21) or forty-five (45) days to consult an attorney and/or consider this Release. Employee acknowledges that Employee may revoke this Release for up to seven (7) calendar days following Employee’s execution of this Release and that it shall not become effective or enforceable until such revocation period has expired. Employee further acknowledges and agrees that such revocation must be in writing and delivered to Company in accordance with the terms of the Agreement and must be received by Company as so addressed not later than midnight on the seventh (7th) day following Employee’s execution of this Release. If Employee so revokes this Release, the Release shall not be effective or enforceable and Employee will not receive the monies and benefits described above. If Employee does not revoke this Release in the time frame specified above, the Release shall become effective at 12:00:01 A.M. on the eighth (8th) day after it is signed by Employee.

In the case of a group termination, the law requires that Employee be provided a detailed list of the job titles and ages of all employees who were terminated in the group termination and the ages of all employees of the Company in the same job classification or organizational unit who were not terminated. Employee acknowledges that Employee has been provided with this information.

PLEASE READ CAREFULLY. THIS AGREEMENT CONTAINS A GENERAL

RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

I have read and understood the foregoing General Release, have been advised to and have had the opportunity to discuss it with anyone I desire, including an attorney of my own choice, and I accept and agree to its terms, acknowledge receipt of a copy of the same and the sufficiency of the monies and benefits described above, and hereby execute this Release voluntarily and with full understanding of its consequences.

 

Dated:

 

February 6, 2006

 

 

/s/ Michael J. Covey

 

 

 

MICHAEL J. COVEY


Appendix B

AMENDMENT THREE

to the

Employment Agreement dated February 6, 2006

by and between

Potlatch Corporation and Michael J. Covey

The Employment Agreement dated February 6, 2006 (the “Agreement”) by and between Potlatch Corporation (“Potlatch”) and Michael J. Covey (“Executive”) is hereby amended, effective as of the date provided below:

WHEREAS, Executive is presently the President and Chief Executive Officer of Potlatch; and

WHEREAS, the term of the Agreement ends on February 6, 2009, but the Agreement provides that Section 5(iv) governing certain retirement benefits survives the term of the Agreement; and

WHEREAS, the benefits provided in Section 5(iv) of the Agreement is subject to section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), as such benefits are non-qualified deferred compensation; and

WHEREAS, Section 409A requires that payments of non-qualified deferred compensation are governed by a written document and made in a manner compliant with the terms of Section 409A, otherwise applicable penalties will apply; and

WHEREAS, Potlatch wishes to fully vest Executive in his Potlatch Forest Products Corporation Salaried Employees’ Supplemental Benefits Plan II, or successor plan, but not his minimum benefit provided in Section 5(iv)) of the Agreement prior to this amendment, on his first day of employment.

NOW THEREFORE, the parties hereto agree as follows:

1. Section 5(iv) of the Agreement is hereby deleted in its entirety and replaced by the following:

(iv) Retirement Benefits. Executive shall be eligible to participate in the Potlatch Forest Products Corporation Salaried Employees’ Supplemental Benefits Plan II, or successor plan (the “Plan”), and be fully vested in the Plan, on the first day of employment with the Company. In order to replace the value of pension benefits that would have been available to Executive under his former employer’s supplemental pension plan had he remained employed until age 55, the Company shall provide to Executive a minimum benefit (the “Minimum Benefit”), provided that Executive Separates from Service (as defined in the Plan) at or after attaining age 55, as described below:


(a) The positive amount equal to $26,800 minus the Total Monthly Pension Benefits, as defined below and as set forth in column 7 of Appendix A (the “Difference”), shall be paid to Executive as provided herein.

(i) The “Total Monthly Pension Benefits” shall be the sum of the monthly vested benefit under the Company’s Plan and qualified pension plan, as described in Section 4(a)(i)(B) of the Plan (the “Company Pension Benefits”), plus the monthly benefit under his former employer’s supplemental pension plan and qualified pension plan that would have been provided to Executive, taking into consideration his termination date with his former employer (the “Former Company Pension Benefits”); provided that the Company Pension Benefits and the Former Company Pension Benefits shall be calculated as the actuarial equivalent of a single life annuity.

(b) The payment of the Difference as a monthly single life annuity shall be converted at the Beginning Date, as defined in the Plan, into the actuarial equivalent form that Executive has validly elected to receive his Retirement Plan Supplemental Benefit under the Plan, which amount shall be paid at the same time and in the same form as his Retirement Plan Supplemental Benefit.

(c) In the event that the Difference is zero or less, then no additional benefits shall be paid to Executive under the Plan.

Notwithstanding the foregoing, if there is a Change of Control, as defined in the Plan, then Executive shall immediately vest in his Minimum Benefit and he shall receive his Minimum Benefit upon his Separation from Service without regard to attainment of age 55.

IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate on October 21, 2008.

 

POTLATCH CORPORATION

/s/ William T. Weyerhaeuser

Dr. William T. Weyerhaeuser

Vice Chair, Board of Directors of Potlatch Corporation

 

EXECUTIVE

/s/ Michael J. Covey

Michael J. Covey

President and Chief Executive Officer

Potlatch Corporation

 

2


Appendix C

Addendum A

Amendment and Restatement of the

Additional Benefits Provided to Michael J. Covey

Except as provided in this amendment and restatement to Addendum A, all of the terms and conditions of the Potlatch Forest Products Corporation Salaried Employees’ Supplemental Benefits Plan II, or successor plan (the “Plan”), shall apply to any benefit payable under the Plan to Michael J. Covey. Potlatch Corporation (“Potlatch”) provided to Mr. Covey a minimum pension benefit guaranteed in his Employment Agreement dated February 6, 2006, as amended (the “Agreement”), which term ends on February 6, 2009, if he retires at or after age 55. The Agreement provides that Potlatch is obligated to continue to honor the retirement benefits set forth in Section 5(b)(iv) of the Agreement described below after the term of the Agreement ends. In addition, the amendment to the Agreement provides that Mr. Covey is fully vested in his Plan benefits, but not the minimum pension benefit provided in Section 5(b)(iv) of his Agreement, as of his first day of employment, which is consistent with the vesting of benefits provided to other Potlatch executives; provided, however, in the event of a Change in Control, as defined in the Plan, he will be vested in the minimum pension benefit immediately. This amended and restated Addendum A describes the benefits that will be provided to Mr. Covey under the Plan.

Michael J. Covey shall be fully vested in the Potlatch Forest Products Corporation Salaried Employees’ Supplemental Benefits Plan II, or successor plan (the “Plan”), on the first day of employment with Potlatch. Furthermore, if Mr. Covey Separates from Service, as defined in the Plan, at or after age 55, will receive benefits under the Plan, as follows:

(a) The positive amount equal to $26,800 minus the Total Monthly Pension Benefits, as defined below and as set forth in column 7 of Appendix A (the “Difference”), shall be paid to Mr. Covey as provided herein.

(i) The “Total Monthly Pension Benefits” shall be the sum of the monthly vested benefit under the Company’s Plan and qualified pension plan as described in Section 4(a)(i)(B) of the Plan (the “Company Pension Benefits”), plus the monthly benefit under Mr. Covey’s former employer’s supplemental pension plan and qualified pension plan that would have been provided to Executive, taking into consideration his termination date with his former employer (the “Former Company Pension Benefits”); provided that the Company Pension Benefits and the Former Company Pension Benefits shall be calculated as the actuarial equivalent of a single life annuity.

(b) The payment of the Difference as a monthly single life annuity shall be converted at the Beginning Date, as defined in the Plan, into the actuarial equivalent form that Executive has validly elected to receive his Retirement Plan Supplemental Benefit under the Plan, which amount shall be paid at the same time and in the same form as his Retirement Plan Supplemental Benefit.


(c) In the event that the Difference is zero or less, then no additional benefits shall be paid to Mr. Covey hereunder.

Notwithstanding the foregoing, if there is a Change of Control, as defined in the Plan, then Mr. Covey shall immediately vest in his Minimum Benefit and he shall receive his Minimum Benefit upon his Separation from Service without regard to attainment of age 55.

 

2


Appendix D

 

Estimated Potlatch Pension Benefit for Mr. Covey

Estimate of additional minimum benefit per employment agreement

  

Exhibit 2

 

Date of
Termination

  

Age

  

(1)
Estimated
Additional Benefit
Lump Sum Per
Employ Agree Table
Paid Immediately

  

(2)

Annuity/Lump Sum
Conversion Factor
1994 GAR/GATT 6.0%
Paid Immediately

  

(3) = (1)/(2)
Estimated
Additional Benefit
Monthly Annuity per
Employ Agree Table
Paid Immediately

  

(4)

Projected
Total Potlatch
Monthly Benefit
Paid Immediately

  

(5)

Estimated Prior
Plum Creek
Monthly Benefit
Paid Immediately

  

(6) = (5) + (4)

Projected
Total
Monthly Benefit
Paid Immediately

  

(7) = $26,800 - (6)
(not less than $0)

Additional Benefit
to Reach $26,800
Paid Immediately

  

(8) = (7) - (2)

Additional Benefit
Revised Lump Sum
Estimate
Paid Immediately

  

(9) = (8) - (1)

Change Versus
Lump Sum per
Employ Agree Table
Paid Immediately

11/30/2008

  

51

  

$

N/A

  

N/A

  

$

N/A

  

$

N/A

  

$

N/A

  

$

N/A

  

$

N/A

  

$

N/A

  

$

N/A

11/30/2009

  

52

  

 

N/A

  

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

11/30/2010

  

53

  

 

N/A

  

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

11/30/2011

  

54

  

 

N/A

  

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

  

 

N/A

11/30/2012

  

55

  

 

1,929,686

  

157,791,638

  

 

12,228.33

  

 

6,976.11

  

 

7,827.14

  

 

14,803.25

  

 

11,996.75

  

 

1,892,987

  

 

(36,699)

11/30/2013

  

56

  

 

1,554,441

  

155,383,481

  

 

10,003.90

  

 

9,052.31

  

 

8,230.08

  

 

17,282.39

  

 

9,517.61

  

 

1,478,879

  

 

(75,562)

11/30/2014

  

57

  

 

1,142,923

  

152,888,907

  

 

7,475.51

  

 

11,299.11

  

 

8,660.94

  

 

19,960.05

  

 

6,839.05

  

 

1,045,752

  

 

(97,171)

11/30/2015

  

58

  

 

681,499

  

150,314,822

  

 

4,533.81

  

 

13,958.11

  

 

9,121.67

  

 

23,079.78

  

 

3,720.22

  

 

559,204

  

 

(122,295)

11/30/2016

  

59

  

 

178,131

  

147,665,427

  

 

1,206.31

  

 

16,997.93

  

 

9,614.96

  

 

26,612.89

  

 

187.11

  

 

27,629

  

 

(150,502)

11/30/2017

  

60

  

  

144,939,452

  

  

 

20,452.37

  

 

10,143.13

  

 

30,595.50

  

  

  

Estimates assume 4.00% annual salary increases and constant target bonus of 70%

Estimates assume IRS salaried qualified plan compensation limit increases $5,000 per year

Amounts shown represent Single Life Annuity form of payment

 

 

 

 

October 24, 2008

CONFIDENTIAL

Michael J. Covey

Dear Mike,

As you know, the term of your employment agreement with Potlatch Corporation (“Potlatch”) dated February 6, 2006, which is attached as Appendix A to this letter (the “Agreement”), will end on February 6, 2009, at which time you will be an at-will employee of Potlatch. The retirement benefits provided to you in the Agreement will continue past the term of the Agreement. The Agreement provides for a minimum retirement benefit of $26,800 per month, which will be offset by pension benefits paid under the Potlatch pension plan, supplemental pension plan and your former employer’s pension plan and supplemental pension plan.

It has been brought to our attention that the provision in the Agreement governing your retirement benefit is not in compliance with certain tax laws. If that provision is not amended to be in compliance with the applicable tax laws, your retirement benefits to be provided in both the Agreement and the Potlatch supplemental pension plan will be subject to penalties, including immediate inclusion of the accrued benefits in income, a 20% Federal penalty tax and interest penalties. In order to effectuate similar benefits and avoid the tax penalties, the Compensation Committee is advised to revise the Agreement and Addendum A to the Potlatch Forest Products Corporation Salaried Employees’ Supplemental Benefits Plan II (the “Plan”). The amendment to the Agreement is attached as Appendix B to this letter, the amendment and restatement of Addendum A to the Plan is attached as Appendix C, and Appendix A to the amendment to the Agreement is attached as Appendix D.

In addition, the amendment of the Agreement provides for full vesting in your regular Plan benefits, but not the minimum retirement benefit described above, as of the first day of your employment, which is consistent with the vesting of benefits provided to other Potlatch

Potlatch Corporation

 

601 West First Avenue    Suite 1600 - Spokane, WA 99201

  

WWW.POTLATCHCORP.COM


executives. However, your minimum retirement benefit shall vest upon a Change on Control, as defined in the Plan, irrespective of your age at retirement.

Please review the amendment to the Agreement and Addendum A to the Plan and contact Jane Crane at 509 835-1541 if you have any questions. If you approve the amendment to the Agreement, please sign it where indicated and remit the amendment with your original signature to Jane Crane at 601 W. First Avenue, Suite 1600, Spokane, WA 99201.

 

Sincerely,

/s/ William T. Weyerhaeuser

Dr. William T. Weyerhaeuser

Vice Chair, Board of Directors of Potlatch Corporation

Potlatch Corporation

 

601 West First Avenue    Suite 1600 - Spokane, WA 99201

  

WWW.POTLATCHCORP.COM


Appendix A

 

 

 

 

 

EX-10.3 4 dex103.htm POTLATCH CORPORATION SEVERANCE PROGRAM FOR EXECUTIVE EMPLOYEES

Exhibit 10.3

POTLATCH CORPORATION

SEVERANCE PROGRAM FOR EXECUTIVE EMPLOYEES

(Effective December 5, 2008)


TABLE OF CONTENTS

 

 

  

 

  

Page

SECTION 1.

  

ADOPTION AND PURPOSE OF PROGRAM

  

2

SECTION 2.

  

DEFINITIONS

  

2

SECTION 3.

  

ELIGIBILITY AND DETERMINATION OF VESTING SERVICE

  

7

SECTION 4.

  

SEVERANCE BENEFITS

  

7

SECTION 5.

  

CONDITIONS FOR PAYMENT OF SEVERANCE BENEFITS

  

11

SECTION 6.

  

TIME AND FORM OF BENEFIT

  

14

SECTION 7.

  

EFFECT OF DEATH OF EMPLOYEE

  

14

SECTION 8.

  

AMENDMENT AND TERMINATION

  

15

SECTION 9.

  

CLAIMS PROCEDURE

  

15

SECTION 10.

  

REVIEW PROCEDURE

  

16

SECTION 11.

  

RESOLUTION OF DISPUTES INVOLVING SECTION 5

  

17

SECTION 12.

  

BASIS OF PAYMENTS TO AND FROM PROGRAM

  

18

SECTION 13.

  

NO EMPLOYMENT RIGHTS

  

18

SECTION 14.

  

NON-ALIENATION OF BENEFITS

  

18

SECTION 15.

  

SUCCESSORS AND ASSIGNS

  

18

SECTION 16.

  

NOTICES

  

18

 

i


POTLATCH CORPORATION

SEVERANCE PROGRAM FOR EXECUTIVE EMPLOYEES

Effective December 5, 2008

 

SECTION

1. ADOPTION AND PURPOSE OF PROGRAM.

The Potlatch Corporation Severance Program for Executive Employees (the “Program”) was adopted effective December 5, 2008, by Potlatch Corporation (the “Corporation”) to provide a program of severance payments to certain employees of the Corporation, and their designated subsidiaries. The Program is an employee welfare benefit plan within the meaning of section 3(1) of ERISA and section 2510.3-1 of the regulations issued thereunder. The plan administrator of the Program for purposes of ERISA is the Corporation.

 

SECTION

2. DEFINITIONS.

(a) “Affiliate” means any other entity which would be treated as a single employer with the Corporation under Section 414(b) or (c) of the Code, provided that in applying such Sections and in accordance with the rules of Treasury Regulations Section 1.409A-1(h)(3), the language “at least 50 percent” shall be used instead of “at least 80 percent.”

(b) “Appeals Committee” means the appeals committee described in Section 10.

(c) “Base Compensation” means an Eligible Employee’s base rate of pay as in effect at the time the Eligible Employee Separates from Service, or, if greater, the rate in effect at the time the material change described in Section 5(a)(iv) occurs or the time a Change of Control described in Section 5(b) occurs, if applicable. An Eligible Employee’s base rate of pay shall be determined without reduction for (i) any Deferred Contributions made by the Eligible Employee pursuant to the Salaried 401(k) Plan or (ii) any contributions made by the Eligible Employee pursuant to the Potlatch Custom Benefits Plan.

(d) “Board” means the Board of Directors of Potlatch Corporation.

(e) “Change of Control” means

(i) Upon consummation of a merger or consolidation involving the Corporation (a “Business Combination”), in each case, unless, following such Business Combination,

(A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock of the Corporation (the “Outstanding Common Stock”) and the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the “Outstanding Voting Securities”) immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation or other entity resulting from such Business Combination

 

2


(including, without limitation, a corporation or other entity which as a result of such transaction owns the Corporation either directly or through one or more subsidiaries),

(B) no individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act)) (a “Person”) (excluding any corporation or other entity resulting from such Business Combination or any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its subsidiaries or such other corporation or other entity resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock or common equity of the corporation or other entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation or other entity except to the extent that such ownership is based on the beneficial ownership, directly or indirectly, of Outstanding Common Stock or Outstanding Voting Securities immediately prior to the Business Combination, and

(C) at least a majority of the members of the board of directors or similar governing body of the corporation or other entity resulting from such Business Combination were members of the Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(ii) On the date that individuals who, as of 11:59 p.m. (Pacific) on the date of the Distribution, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual who becomes a member of the Board on or subsequent to the day immediately following the date of the Distribution whose election, or nomination for election by the Corporation’s stockholders, was approved by a vote of at least a majority of the members of the Board then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for purposes of this proviso, any such individual whose appointment to the Board occurs as a result of an actual or threatened election contest with respect to the election or removal of a member or members of the Board, an actual or threatened solicitation of proxies or consents or any other actual or threatened action by, or on behalf of, any Person other than the Incumbent Board; or

(iii) Upon the acquisition on or after the date of the Distribution by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either

(A) the then Outstanding Common Stock, or

(B) the combined voting power of the Outstanding Voting Securities;

provided, however, that the following acquisitions shall not be deemed to be covered by this paragraph (iii):

(I) any acquisition of Outstanding Common Stock or Outstanding Voting Securities by the Corporation,

 

3


(II) any acquisition of Outstanding Common Stock or Outstanding Voting Securities by any employee benefit plan (or related trust) sponsored or maintained by the Corporation, or

(III) any acquisition of Outstanding Common Stock or Outstanding Voting Securities by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 2(e)(i); or

(iv) Upon the consummation of the sale, lease or exchange of all or substantially all of the assets of the Corporation; or

(v) Upon the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation.

(f) “COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

(g) “Code” means the Internal Revenue Code of 1986, as amended.

(h) “Committee” means the Executive Compensation and Personnel Policies Committee of the Board of Directors of the Corporation.

(i) “Corporation” means Potlatch Corporation.

(j) “Distribution” means the distribution by the Corporation to its stockholders of all of the outstanding shares of the common stock of Clearwater Paper Corporation then owned by the Corporation, pursuant to the Separation and Distribution Agreement between the Corporation and Clearwater Paper Corporation.

(k) “Eligible Employee” means a Principal Officer of a Participating Company or other employee of a Participating Company who participates in the Program.

(l) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

(m) “Identification Date” means each December 31.

(n) “Incentive Plan” means the Potlatch Corporation Management Performance Award Plan II, the Potlatch Corporation Annual Incentive Plan or any successor plan.

(o) “Key Employee” means an Eligible Employee who, on an Identification Date, is:

(i) An officer of the Corporation or an Affiliate having annual compensation greater than the compensation limit in Section 416(i)(1)(A)(i) of the Code, provided that no more than fifty officers of the Corporation and its Affiliates shall be determined to be Key Employees as of any Identification Date;

(ii) A five percent owner of the Corporation; or

 

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(iii) A one percent owner of the Corporation having annual compensation from the Corporation and its Affiliates of more than $150,000.

If an Eligible Employee is identified as a Key Employee on an Identification Date, then such Eligible Employee shall be considered a Key Employee for purposes of the Plan during the period beginning on the first April 1 following the Identification Date and ending on the next March 31.

(p) “Misconduct” means that the Eligible Employee

(i) Has been convicted of any felony or crime involving fraud, dishonesty or moral turpitude;

(ii) Has engaged in unfair competition with a Participating Company or any successor to a Participating Company;

(iii) Has induced any customer of a Participating Company or any successor to a Participating Company to breach any contract with a Participating Company or any successor to a Participating Company;

(iv) Has made any unauthorized disclosure of any of the secrets or confidential information of a Participating Company or any successor to a Participating Company;

(v) Has committed an act of embezzlement, fraud or theft with respect to the property of a Participating Company or any successor to a Participating Company; or

(vi) Has engaged in conduct, including any intentional, material violation of any contractual or statutory duty that is not corrected following thirty (30) days written notice, which is not in good faith and which directly results in material loss, damage or injury to the business, reputation or employees of a Participating Company or any successor to a Participating Company.

(q) “Normal Retirement Date” means “normal retirement date” as determined under the Retirement Plan.

(r) “Participating Company” means the Corporation and its subsidiaries designated by the Committee to participate in the Program.

(s) “Present Value” means the present value calculated using the assumed discount rate applied in projecting the Corporation’s pension benefit obligations for financial reporting purposes and the RP 2000 mortality table.

(t) “Principal Officers” means the president and chief executive officer, chief financial officer, secretary, treasurer and controller and any elected vice-president of a Participating Company.

(u) “Program” means the Potlatch Corporation Severance Program for Executive Employees.

 

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(v) “Reduction in Authority or Responsibility” means

(i) The assignment to the Eligible Employee of any duties that are materially inconsistent in any respect with the Eligible Employee’s position (which may include status, offices, titles and reporting requirements), authority, duties, or responsibilities as in effect immediately prior to such assignment, or

(ii) Any other action by a Participating Company or any successor to a Participating Company which results in a material diminution in such position, authority, duties, or responsibilities, excluding for this purpose (i) an isolated, insubstantial, and inadvertent action taken in good faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Eligible Employee, or (ii) any temporary Reduction in Authority or Responsibility while the Eligible Employee is absent from active service on any approved disability, or other approved leave of absence.

By way of example, a reduction under this definition shall include, but not be limited to:

(A) The removal of any material division, business or operating unit, or other business organization from the direct managerial responsibilities of the Eligible Employee, or material reduction in the size or scope of responsibility or operating budget of any division, business, operating unit, or other business organization for which the Eligible Employee has direct managerial responsibility; or

(B) A reduction in the Eligible Employee’s authority to legally bind a Participating Company or any successor to a Participating Company without first obtaining any additional authority or approval.

(w) “Retirement Plan” means the Potlatch Salaried Retirement Plan as in effect from time to time.

(x) “Salaried 401(k) Plan” means the Potlatch Salaried 401(k) Plan as in effect from time to time.

(y) “Separation from Service” means termination of an Eligible Employee’s service as an Eligible Employee consistent with Section 409A of the Code and the regulations promulgated thereunder. For purposes of the Plan, “Separation from Service” generally means termination of an Eligible Employee’s employment as a common-law employee of the Corporation and each Affiliate of the Corporation. A Separation from Service will not be deemed to have occurred if an Eligible Employee continues to provide services to the Corporation or an Affiliate in a capacity other than as an employee and if the former employee is providing a level of bona fide services that is fifty percent (50%) or more of the average level of services rendered, during the immediately preceding thirty-six (36) months of employment with the Corporation or Affiliate; provided, however, that a Separation from Service will be deemed to have occurred if it is reasonably anticipated that an Eligible Employee’s service with the Corporation and its Affiliates will terminate after a certain date or the level of bona fide services that the Eligible Employee will perform after such date (whether as an employee or another capacity) will permanently reduce to a rate that is less than twenty percent (20%) of the bona fide level of services rendered, on average, during the immediately preceding thirty-six (36) months (or if

 

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employed by the Corporation and its Affiliates less than thirty-six (36) months, such lesser period). However, the employment relationship is treated as continuing intact while the individual is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual’s right to reemployment with the service recipient is provided either by statute or by contract. If the period of leave exceeds six months and the individual’s right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period.

(z) “Supplemental Plans” means the Potlatch Corporation Salaried Employees’ Supplemental Benefit Plan and Potlatch Corporation Salaried Supplemental Benefit Plan II and any successor plan.

(aa) “Year of Vesting Service” means a year of vesting service as determined under the Retirement Plan.

 

SECTION

3. ELIGIBILITY AND DETERMINATION OF VESTING SERVICE.

All Principal Officers and appointed vice presidents of the Participating Companies and such other employees of the Participating Companies who are designated by the Committee to participate in the Program shall be eligible to participate in the Program. As a condition to participation in the Program, each Eligible Employee shall agree in writing to become bound by its terms, including, without limitation, the provisions of Section 11.

 

SECTION

4. SEVERANCE BENEFITS.

(a) Basic Severance Benefits. Upon the occurrence of any of the events specified in Section 5(a), an Eligible Employee shall receive (in lieu of any other severance benefit payable under any other plan or program now or hereafter maintained by a Participating Company) Basic Severance Benefits under the Program as follows:

(i) A cash benefit equal to three (3) weeks of the Eligible Employee’s Base Compensation for each full Year of Vesting Service completed by such Eligible Employee;

(ii) The Eligible Employee’s unused and accrued vacation pay, if any, determined as of the date when the Eligible Employee Separates from Service under the terms of the Participating Company’s officer vacation policy as in effect when the applicable event specified in Section 5(a) occurs (which, in the case of Separation from Service pursuant to Section 5(a)(iv), shall be the date of the material change rather than the date the Eligible Employee Separates from Service);

(iii) Eligibility for an “Award” under the Incentive Plan for the “Award Year” in which he or she Separates from Service, determined under all the terms and conditions of the Incentive Plan; and

(iv) Continued coverage as an employee during a period of weeks equal to three (3) times the number of full Years of Vesting Service completed by the Eligible Employee, under the following employee benefit plans of the Corporation:

 

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(A) Medical coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service;

(B) Dental coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service; and

(C) Basic life insurance coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service.

Notwithstanding any of the foregoing provisions of this Section 4(a)(iv):

(1) Any such continued coverage shall terminate when the Eligible Employee becomes eligible for coverage by the life insurance, medical or dental plan of another employer.

(2) In the event that after an Eligible Employee’s Separation from Service with a Participating Company he or she is otherwise entitled to continued coverage under the Corporation’s basic life insurance, medical and dental plans pursuant to any employee benefit plan or program of the Corporation (other than this Program), the total benefits paid for by the Participating Companies during the period described above shall not exceed the benefits to which the Eligible Employee is entitled under this Section 4(a)(iv).

(3) For purposes of this Section 4(a)(iv), the Corporation’s basic life insurance plan shall not include any other type of life insurance coverage provided through or by the Corporation to or on behalf of its employees.

(4) During the period of such continued coverage, the Eligible Employee shall not be eligible to participate in the Corporation’s disability income plan or as an employee in the Retirement Plan, the Salaried 401(k) Plan, any qualified or nonqualified stock incentive or phantom stock plan of the Corporation or any employee benefit plan or program now or hereafter maintained by any Participating Company other than those plans listed in Section 4(a)(iv)(A)-(C).

Notwithstanding the foregoing provisions of this subsection (a), the sum of the amounts payable under (i) above shall be not less than six (6) months of the Eligible Employee’s Base Compensation nor greater than one (1) year of the Eligible Employee’s Base Compensation and the period of continued coverage described in (iv) above shall be not less than six (6) months nor more than one (1) year from the Eligible Employee’s Separation from Service. The Committee may, in its discretion, increase the benefit payable to any Eligible Employee without regard to the foregoing limitation.

(b) Change of Control Benefits. Upon the occurrence of any of the events specified in Section 5(b), an Eligible Employee shall receive (in lieu of any severance benefit payable under Section 4(a) or any other severance benefit payable under any other plan or program now or hereafter maintained by a Participating Company) Change of Control Benefits under the Program as follows:

 

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(i) Within ten (10) business days following the effective date an Eligible Employee Separates from Service, a lump sum cash benefit equal to the Eligible Employees’ annual Base Compensation plus his or her annual Base Compensation multiplied by his or her standard bonus percentage (as determined pursuant to the Incentive Plan), determined as of the date of the Change of Control or the effective date the Eligible Employee Separates from Service, whichever produces the larger amount, multiplied by the appropriate factor from the following table:

 

Eligible Employee

  

Pay Multiple Factor

Chief Executive Officer

  

3.00

Other Eligible Employees

  

2.50

Notwithstanding the foregoing, if the Eligible Employee Separates from Service on or after the date thirty (30) months prior to the Eligible Employee’s Normal Retirement Date, the applicable factor shall be a fraction, the numerator of which is the number of full months between the date the Eligible Employee Separates from Service and such Normal Retirement Date and the denominator of which is twelve (12). An Eligible Employee described in the preceding sentence shall be entitled to an additional benefit equal to the difference between the benefit payable to the Eligible Employee, if any, under the Retirement Plan and the Retirement Plan Supplemental Benefit provisions of the Supplemental Plans, and such benefits that would have been payable, if any, under the Retirement Plan and Supplemental Plans if the Eligible Employee had remained an Eligible Employee and continued to earn his or her Base Compensation until his or her Normal Retirement Date; provided, however, that the Present Value of such additional benefit shall not exceed the difference between the lump sum benefit determined under the preceding sentence and the lump sum benefit determined using the otherwise applicable factor from the table above. Such additional benefit shall be paid at the same time and in the same form as any benefit payable to the Eligible Employee under the Potlatch Corporation Salaried Supplemental Benefit Plan II or, if no benefit is payable to the Eligible Employee under the such plan, the Present Value of such additional benefit shall be paid in a lump sum at the same time as the Eligible Employee’s Change of Control Benefits are paid;

(ii) A lump sum cash benefit equal to the Eligible Employee’s unused and accrued vacation pay, if any, under the terms of the Participating Company’s officer vacation policy. For this purpose, (A) an Eligible Employee’s Base Compensation and the terms of the officer vacation policy shall be determined as of the date when the Eligible Employee Separates from Service or as of the date of the Change of Control, whichever produces the larger amount and (B) accrued vacation pay shall be paid notwithstanding any minimum service requirement of the Participating Company’s officer vacation policy;

(iii) Eligibility for an “Award” for the “Award Year” in which he or she Separates from Service under the Incentive Plan determined under all the terms and conditions of such plan but based on the Eligible Employee’s target or standard bonus determined pursuant to such plan; provided, however, that such benefit shall not be payable with respect to any Award Year for which the Eligible Employee receives a payment pursuant to any similar change of control provision in the Incentive Plan;

 

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(iv) COBRA premium payments during the number of years equal to the applicable factor determined under (b)(i) above, subject to all of the conditions and limitations described in Section 4(a)(iv)(1) through (4) above (determined without regard to the last paragraph of Section 4(a)) under the following employee benefit plans of the Corporation;

(A) Provided that the Eligible Employee timely elects continued coverage under COBRA, medical coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service;

(B) Provided that the Eligible Employee timely elects continued coverage under COBRA, dental coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service; and

(C) Basic life insurance coverage in the amount, if any, that the Eligible Employee had in effect on the day preceding the date of his or her Separation from Service;

(v) In the case of an Eligible Employee who has less than two (2) Years of Vesting Service on the date he or she Separates from Service, a lump sum cash benefit equal to (A) the value of that portion of the Eligible Employee’s accounts in the Salaried 401(k) Plan attributable to “Company Contributions” under such plan made on the Eligible Employee’s behalf in a “Plan Year” which are unvested, plus (B) the unvested portion, if any, of the Eligible Employee’s “401(k) Plan Supplemental Benefit” account under the Supplemental Plans. The value of those portions of the Eligible Employee’s “Company Stock Account” and the “401(k) Plan Supplemental Benefit” accounts referred to in the preceding sentence shall be determined as of the date the Eligible Employee Separates from Service with the Participating Companies; and

(vi) A lump sum cash benefit equal to the Present Value of the Eligible Employee’s “Normal Retirement Benefit” and “Retirement Plan Supplemental Benefit” determined under the Retirement Plan and the Supplemental Plans, respectively, if the Eligible Employee was not entitled to a “Vested Benefit” under the Retirement Plan as of the date the Eligible Employee Separates from Service with the Participating Companies.

(c) Payment of Excise Taxes. If any payment or benefit to or for the benefit of the Eligible Employee in connection with a Change of Control is deemed an “excess parachute payment” as defined in Section 280G of the Code subject to the excise tax imposed by Section 4999 of the Code, then in the event it shall be determined that any payment or distribution by a Participating Company to or for the benefit of the Eligible Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Program or otherwise, but determined without regard to any additional payments required under this Section 4(c) (a “Payment”)) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Eligible Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Eligible Employee shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Eligible Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax

 

10


imposed upon the Gross-Up Payment, the Eligible Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 4(c), if it shall be determined that the Eligible Employee is entitled to a Gross-Up Payment, but that the Payments would not exceed the safe harbor amount of 2.99 times the Eligible Employee’s “base amount,” as defined in Code section 280G(b)(3), by $100,000 or more for the Chief Executive Officer and by $50,000 for other Eligible Employees, then no Gross-Up Payment shall be made to the Eligible Employee and the Payments, in the aggregate, shall be reduced to an amount such that the receipt of Payments would not give rise to any Excise Tax. In that event, the reduced amount payable (the “Reduced Amount”) shall be determined by reducing or modifying payments in a manner and order of priority that provides the Eligible Employee with the largest net after-tax value; provided that payments of equal after-tax present value shall be reduced or modified in the reverse order of payment. For purposes of this Section 4(c), the Eligible Employee shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year. The amount of the payment to the Eligible Employee shall be estimated by a third-party service provider selected by the Corporation as of the date of the event specified in Section 5(a) or, if earlier, as of the date of the Change of Control as determined pursuant to Section 5(b). Within thirty (30) business days following the effective date of an Eligible Employee’s Separation from Service, the estimated amount due the Eligible Employee pursuant to this Section 4(c) shall he paid to the Eligible Employee. In the event that the amount of the estimated payment is less than the amount actually due to the Eligible Employee under this Section 4(c), the amount of any such shortfall shall be paid to the Eligible Employee within ten (10) business days after the existence of the shortfall is discovered.

(d) No Duty to Mitigate; Offset. The Eligible Employee shall not be required to mitigate the amount of any payments provided under Section 4(b) and 4(c), nor shall any payment or benefit provided for in Section 4(b) and 4(c) be offset by any compensation earned by the Eligible Employee as the result of employment by another employer or by retirement benefits. Notwithstanding the foregoing, the Committee in its discretion may reduce any payments provided under Section 4(a), 4(b) and 4(c) (to an amount not less than zero) by any payment(s) that an Eligible Employee has or will receive pursuant to an arrangement or agreement with a Participating Company that provides for severance payment(s), including related tax payment(s), to which such Eligible Employee may be entitled in the event of termination of employment.

 

SECTION

5. CONDITIONS FOR PAYMENT OF SEVERANCE BENEFITS.

(a) Payment Of Basic Severance Benefits. Subject to the provisions of Section 5(c), an Eligible Employee will be eligible for the benefits specified in Section 4(a) upon the occurrence of any of the following events (except that an Eligible Employee who has satisfied the conditions of Section 5(b) will be eligible for the benefits specified in Section 4(b) rather than the benefits specified in Section 4(a)):

(i) The Eligible Employee’s involuntary termination of employment that constitutes a Separation from Service by a Participating Company or by the Eligible Employee’s Separation from Service at the request of the Company for any reason other than Misconduct, subject to the limitations of Section 5(c)(ii); provided, however, that if the Separation from

 

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Service is due to death or because the Eligible Employee is disabled (as defined in section 409A(a)(2)(C) of the Code), the Eligible Employee shall not be eligible for any severance benefits under the Program; or

(ii) Termination of the Eligible Employee’s employer’s status as a Participating Company due to the sale to a third party or a spin-off of a designated subsidiary, subject to the limitations of Section 5(c)(ii) and provided that such transaction is a change in the ownership or effective control of the Corporation or a change in the ownership of a substantial portion of the assets of the Corporation as defined in the regulations promulgated under Section 409A of the Code; or

(iii) The Participating Company requires the Eligible Employee to relocate his or her principal place of work and the new principal place of work is fifty (50) or more miles further from the Eligible Employee’s primary residence than was his or her former principal place of work, and the Eligible Employee elects to Separate from Service rather than to relocate; or

(iv) The Eligible Employee Separates from Service with a Participating Company within twenty-four (24) months following:

(A) A material Reduction in Authority or Responsibility of the Eligible Employee. Whether a Reduction in Authority or Responsibility of the Eligible Employee is material shall be determined in accordance with the criteria set forth in Section 2(v) in the definition of Reduction in Authority or Responsibility; provided, however, that (I) a change in the Eligible Employee’s reporting relationship to another executive who is within the same reporting level, (II) a reduction in the Eligible Employee’s business unit budget or a reduction in the Eligible Employee’s business unit headcount or number of direct reports, or (III) a Reduction in Authority or Responsibility resulting from the transactions contemplated by the Separation and Distribution Agreement to be entered into by and between the Corporation and Clearwater Paper Corporation in connection with the spin-off of Clearwater Paper Corporation, by themselves, shall not constitute a material Reduction in Authority or Responsibility, or

(B) Any reduction in the Eligible Employee’s Base Compensation, standard bonus opportunity or long-term incentive opportunity or a fifteen percent (15%) or greater reduction in the Eligible Employee’s aggregate benefits or perquisites as compared to those of all other employees similarly situated, unless in each case the reduction is applicable to all salaried employees or all other employees similarly situated; provided, however, that this Section 5(a)(iv) shall apply to the Separation from Service of an Eligible Employee only if the Eligible Employee or the Participating Company has notified the other party in writing within three (3) months following the occurrence of any such change that the party giving notice considers such change to be a material change encompassed by this Section 5(a)(iv). If the party receiving such notice does not agree that the change in question is a material change encompassed by this Section 5(a)(iv), it shall give written notice thereof to the party first giving notice hereunder within thirty (30) days after receiving notice and the matter shall be immediately referred to the Appeals Committee; provided, however, that, within thirty (30) days after receiving written notice that the other party does not agree that the change in question is covered by this Section 5(a)(iv), the Eligible Employee may request that the matter be submitted

 

12


directly to arbitration as provided in Section 11. If necessary, the twenty-four (24) month period specified above shall be extended to a date not later than thirty (30) days following (I) the announcement of the decision of the Appeals Committee or, if the matter is referred to arbitration within thirty (30) days following the announcement of the Appeals Committee’s decision, the announcement of the award of the arbitrator, or (II) if the matter is referred directly to arbitration, the announcement of the award of the arbitrator. The Participating Company or the Eligible Employee may each give the notice described in this Section 5(a)(iv) only once while this Program is in effect. If one party has given notice and the twenty-four (24) month period specified above has commenced running, the other party may not give notice hereunder with respect to a change occurring during such twenty-four (24) month period. If an Eligible Employee gives notice pursuant to this Section 5(a)(iv) and the Corporation thereafter in good faith makes an adjustment in the Eligible Employee’s compensation, benefits, assigned job or duties, responsibilities, privileges or perquisites, the Eligible Employee and the Corporation may mutually agree in writing that the notice shall be null and void.

Notwithstanding the foregoing, no benefits shall be available under the Program (i) if the Eligible Employee Separates from Service with a Participating Company because he or she is eligible for or receiving long-term or permanent disability benefits under the Corporation’s disability income plan as in effect on the date of onset of disability or (ii) if the Eligible Employee satisfies all of the following conditions:

(1) He or she Separates from Service on or after his or her Normal Retirement Date;

(2) For the two-year period immediately before retirement, he or she qualified as an Eligible Employee; and

(3) He or she is entitled to benefits under the Retirement Plan, Salaried 401(k) Plan and Supplemental Plans which, when converted to a straight life annuity (and excluding any portion of the benefit under the Salaried 401(k) Plan which represents contributions by the Eligible Employee), equals, in the aggregate, at least $44,000.

(b) Payment Of Change Of Control Benefits. An Eligible Employee will be eligible for the benefits specified in Section 4(b) if, within two (2) years following a Change of Control, the Eligible Employee Separates from Service under the conditions described in Section 5 (a)(i), (ii) or (iii) or a material change described in Section 5(a)(iv) occurs and the Eligible Employee thereafter Separates from Service under the conditions described in Section 5(a)(iv); provided, that the Eligible Employee was employed by a Participating Company on the date preceding the Change of Control.

(c) Limitations On Eligibility For Benefits.

(i) If an Eligible Employee is assigned from one to another Participating Corporation, he or she shall not be considered to have Separated from Service under the provisions of the Program.

(ii) The provisions of Section 5(a)(i) and 5(a)(ii) to the contrary notwithstanding, no benefit will be payable hereunder due to an Eligible Employee’s Separation

 

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from Service because of the sale to a third party or spin-off of a division (or other operating assets) of a Participating Company or to termination of the Eligible Employee’s employer’s status as a Participating Company upon the sale to a third party or spin-off of a designated subsidiary where such sale or spin-off is a change in the ownership or effective control of the Corporation or a change in the ownership of a substantial portion of the assets of the Corporation as defined in the regulations promulgated under Section 409A of the Code, if (A) (I) the Eligible Employee is employed by the purchaser of such division, assets, or subsidiary or such other spun-off entity or (II) such purchaser or spun-off entity is contractually obligated to offer the Eligible Employee the same or a better job and (B) such purchaser or spun-off entity is contractually obligated to maintain a plan which in all material respects is equivalent to the Program, providing for continuing coverage of the Eligible Employee for two (2) years following the sale or spin-off of such division, assets or subsidiary.

 

SECTION

6. TIME AND FORM OF BENEFIT.

(a) Time of Benefit. Except as provided in Sections 4(b) and 6(b), distributions made to Eligible Employees will commence on the first payroll pay date following the Eligible Employee’s Separation from Service.

(b) Notwithstanding any other provision of the Program, a distribution made to Eligible Employee who is identified as a Key Employee at the time of his or her Separation from Service will be delayed for a minimum of six months if the Eligible Employee’s distribution is triggered by his or her Separation from Service. Any payment that otherwise would have been made except for the application of this Section 6(a) during such six-month period will be made in one lump sum payment not later than the last day of the second month following the month that is six months from the date the Eligible Employee Separates from Service. The determination of which Eligible Employees are Key Employees will be made by the Corporation in its sole discretion in accordance with this Section 6(a) and Sections 416(i) and 409A of the Code and the regulations promulgated thereunder.

(c) Form of Benefit. The benefits described in Section 4(a)(i) shall be paid in monthly installments over a period not to exceed twelve (12) months from the date the Eligible Employee Separates from Service pursuant to Section 4, as determined by the Corporation. The benefit described in Section 4(a)(ii) shall be paid in a lump sum. The benefits described in Sections 4(b)(i), (ii), (v) and (vi) shall be paid in a lump sum.

 

SECTION

7. EFFECT OF DEATH OF EMPLOYEE.

Should an Eligible Employee die after Separation from Service but while participating in the Program and prior to the payment of the entire benefit due hereunder, the balance of the benefit payable under the Program shall be paid in a lump sum to the estate of the Eligible Employee. Continued medical and dental coverage as provided in Section 4(a)(iv) and Section 4(b)(iv), as applicable, shall be available to the Eligible Employee’s surviving spouse only if and to the extent that such coverage would have been available to such surviving spouse if the Eligible Employee had died as an active salaried employee of a Participating Company. Such coverage shall be determined under the terms of the applicable plan as in effect on the earlier of

 

14


(ithe date the Eligible Employee Separated from Service or (ii) the date of the Change of Control or the material change described in Section 5(a)(iv), if applicable.

 

SECTION

8. AMENDMENT AND TERMINATION.

The Committee reserves the right to amend or terminate the Program at any time and to increase or decrease the amount of any benefit provided under the Program; provided, however, that as to any individual who has qualified as an Eligible Employee and has become entitled to any Change of Control Benefit under Section 4(b), the Program cannot be terminated or amended to reduce any benefit provided under Section 4(b) or make any condition pertaining to qualification for the Change of Control Benefit under Section 4(b) materially more restrictive. Once an individual has qualified as an Eligible Employee, the Program may not be amended to cause such individual to cease to qualify as an Eligible Employee for purposes of determining that individual’s eligibility for the Change of Control Benefit under Section 4(b). Notwithstanding any other provision of the Program, following a Change of Control this Section 8 may not be amended for a period of three (3) years.

Notwithstanding the foregoing, the Vice President, Human Resources of the Corporation shall have the power and authority to amend the Plan with respect to any amendment that (i) does not materially increase the cost of the Plan to the Company or (ii) is required to comply with new or changed legal requirements applicable to the Plan, including, but not limited to, section 409A of the Code.

 

SECTION

9. CLAIMS PROCEDURE.

(a) Claims. All applications for benefits and all inquiries concerning claims under the program shall be submitted to the Corporation addressed as follows: “Potlatch Corporation, Plan Administrator under the Potlatch Corporation Severance Program for Executive Employees, 601 W. First Avenue, Suite 1600, Spokane, Washington 99201.”

(b) Denial Of Claims. In the event that any application for benefits under the Program is denied in whole or in part, the Corporation shall notify the applicant in writing of such denial and shall advise the applicant of the right to a review thereof. Such written notice shall set forth, in a manner calculated to be understood by the applicant, specific reasons for such denial, specific references to the provisions of the Program on which such denial is based, a description of any information or material necessary for the applicant to perfect his or her application, an explanation of why such material is necessary and an explanation of the Program’s review procedure and the time limits applicable to such procedures, including a statement of the applicant’s right to bring a civil action under section 502(a) of ERISA following a denial on review of the claim, as described in Section 10. Such written notice shall be given to the applicant within ninety (90) days after the Corporation receives the application, unless special circumstances require an extension of time up to an additional ninety (90) days for processing the application. If such an extension of time for processing is required, written notice of the extension shall be furnished to the applicant prior to the termination of the initial ninety (90) day period. This notice of extension shall indicate the special circumstances requiring the extension of time and the date by which the Corporation expects to render its decision on the application for benefits.

 

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SECTION

10. REVIEW PROCEDURE.

(a) Appointment Of Appeals Committee. The Corporation shall appoint a Appeals Committee which shall consist of three (3) or more individuals who may (but need not) be employees of the Corporation; provided, however, that at all times following a Change of Control the Appeals Committee shall consist of at least three current (as of the effective date of the Change of Control) or former Corporation officers and directors. The Appeals Committee shall be the named fiduciary which shall have authority to act with respect to appeals from denials of benefits under the Program.

(b) Right To Appeal. Any person whose application for benefits is denied (or is deemed denied) in whole or in part (or such person’s authorized representative) may appeal the denial by submitting to the Appeals Committee a written request for review of the application within sixty (60) days after receiving written notice from the Corporation of the denial. The Corporation shall give the applicant (or the applicant’s representative) an opportunity to review pertinent documents in preparing such request for review.

(c) Form Of Request For Review. The request for review must be in writing and shall be addressed as follows: “Appeals Committee under the Potlatch Corporation Severance Program for Executive Employees, 601 W. First Avenue, Suite 1600, Spokane, Washington 99201.” The request for review shall set forth all of the grounds upon which it is based, all facts in support thereof, and any other matters which the applicant deems pertinent. The Appeals Committee may require the applicant to submit such additional facts, documents or other material as the Appeals Committee may deem necessary or appropriate in making its review.

(d) Time For Appeals Committee Action. The Appeals Committee shall act upon each request for review within sixty (60) days after receipt thereof unless special circumstances require an extension of time of up to an additional sixty (60) days for processing the request for review. If such an extension of time for review is required, written notice of the extension shall be furnished to the applicant prior to the end of the initial sixty (60) day period.

(e) Appeals Committee Decision. Within the time prescribed in Section 10(d), the Appeals Committee shall give written notice of its decision to the applicant and to the Corporation. In the event the Appeals Committee confirms the denial of the application for benefits in whole or in part, such notice shall set forth, in a manner calculated to be understood by the applicant, the specific reasons for such denial, specific references to the provisions of the Program on which the decision was based, a statement that the applicant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his or her claim, and a statement of the applicant’s right to bring a civil action under section 502(a) of ERISA. In the event that the Appeals Committee determines that the application for benefits should not have been denied in whole or in part, the Corporation shall take appropriate remedial action as soon as reasonably practicable after receiving notice of the Appeals Committee’s decision.

(f) Section 5(a)(iv) Dispute. In the event that a dispute involving the application or interpretation of Section 5(a)(iv) is referred to the Appeals Committee as provided therein, the

 

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Appeals Committee shall treat such dispute as an appeal from the denial of a claim for benefits under this Program that is subject to all of the terms and conditions of this Section 10.

(g) Rules And .Procedures. The Appeals Committee shall establish such rules and procedures, consistent with the Program and with ERISA, as it may deem necessary or appropriate in carrying out its responsibilities under this Section 10. The Appeals Committee may require an applicant who wishes to submit additional information in connection with an appeal from the denial of benefits in whole or in part to do so at the applicant’s own expense.

(h) Exhaustion of Remedies. No legal action for benefits under the Program may be brought until the claimant (i) has submitted a written application for benefits in accordance with the procedures described in Section 9, (ii) has been notified by the Corporation that the application is denied, (iii) has filed a written request for review of the application in accordance with the appeal procedures described in Section 10, and (iv) has been notified that the Appeals Committee has denied the appeal. Notwithstanding the foregoing, if the Corporation or the Appeals Committee does not respond to an Eligible Employee’s claim or appeal within the relevant time limits specified in Sections 9 and 10, the Eligible Employee may bring legal action for benefits under the Program pursuant to section 502(a) of ERISA.

 

SECTION

11. RESOLUTION OF DISPUTES INVOLVING SECTION 5.

(a) Arbitration Of Section 5 Dispute. Any dispute, controversy or question arising under Section 5 which is not resolved by the decision of the Appeals Committee (or which the Eligible Employee requests be submitted directly to arbitration as provided herein) shall be referred for decision by an arbitrator selected by the parties. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such an Arbitrator within thirty (30) days after either party has given the other party written notice of its desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for the appointment of an arbitrator or, if such Association is not then in existence or does not desire to act in the matter, either party may apply to the Presiding Judge of the Superior Court of the City and County of Spokane, State of Washington, for the appointment of an arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is authorized to make such appointment pursuant to the Program. The arbitration shall take place at the location mutually agreed to by the parties or, if the parties are unable to agree upon the location, at the location designated by the Arbitrator. The compensation and expenses of the Arbitrator shall be borne by the Corporation, unless the Arbitrator determines that an Eligible Employee acted willfully and maliciously in connection with his or her claim for benefits under the Program, in which case the Arbitrator shall direct the Eligible Employee to pay all or a portion of the compensation and expenses of the Arbitrator.

(b) Arbitration Exclusive Remedy. Arbitration shall be the exclusive remedy for the settlement of disputes involving the application or interpretation of Section 5. The decision of the Arbitrator shall be final, conclusive and binding on all interested persons and no action at law or inequity involving the application or interpretation of Section 5 shall be instituted other than to enforce the award of the Arbitrator.

 

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SECTION

12. BASIS OF PAYMENTS TO AND FROM PROGRAM.

All benefits under the Program shall be paid by the Corporation. The Program shall be unfunded and benefits hereunder shall be paid only from the general assets of the Corporation. Nothing contained in the Program shall be deemed to create a trust of any kind for the benefit of Eligible Employees, or create any fiduciary relationship between the Corporation and the Eligible Employees with respect to any assets of the Corporation. The Corporation is under no obligation to fund the benefits provided herein prior to payment, although it may do so if it chooses. Any assets which the Corporation chooses to use for advance funding shall not cause the Program to be a funded plan within the meaning of ERISA.

SECTION 13. NO EMPLOYMENT RIGHTS.

Nothing in the Program shall be deemed to give any individual the right to remain in the employ of a Participating Company or a subsidiary or to limit in any way the right of a Participating Company or a subsidiary to terminate an individual’s employment, which right is hereby reserved.

 

SECTION

14. NON-ALIENATION OF BENEFITS.

No benefit payable under the Program shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void.

 

SECTION

15. SUCCESSORS AND ASSIGNS.

The Program shall be binding on the Corporation, its successors and assigns, and any parent corporation of the Corporation’s successors or assigns. Notwithstanding that the Program may be binding upon a successor or assign by operation of law, the Corporation shall require any successor or assign to expressly assume and agree to be bound by the Program in the same manner and to the same extent that the Corporation would be if no succession or assignment had taken place.

 

SECTION

16. NOTICES.

All notices pertaining to the Program shall be in writing and shall be deemed given if delivered by hand or mailed with postage prepaid and addressed, in the case of the Corporation to the address set forth in Section 9(a), attention of its Corporate Secretary, and the case of the Eligible Employee to his or her last known address as reflected in the records of the Corporation.

 

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