(4) | In 2002, we discontinued thevarious benefit level and compensation limits. We do not do this. In 2002, we discontinued our Supplemental Retirement Benefit Plan for Mr. Harnett and Mr. Skoch, and in 2004 for Mr. Grampa, in exchange for amounts paid in settlement of our obligation as of that date. As a result, the future retirement benefits provided by us to these executives are limited to the amounts provided by the qualified pension plan. But also unlike those other employers, we do not accrue a liability on our financial records for any obligation to provide any supplemental retirement promises. Nevertheless, to keep competitive in the employment marketplace, the Committee annually reviews our financial position and the actuarial value of any benefits the executives would have accrued, if not for the limits on the qualified plan, and has in its discretion granted special cash awards each year since 2002. More details on these special cash awards are provided below in “Executive Compensation Elements.”Severance Payments The compensation package of each named executive officer also provides for special payments and accelerated vesting of other compensation opportunities upon termination of employment or in specified circumstances significant reduction of duties or in working conditions. If the executive resigns or his employment is otherwise terminated (other than for cause) at any time up to one month after the anniversary of a change in control, he will receive three-year severance benefits, as described below under “Other Potential Post-employment Payments.” The executive also will receive these severance benefits if the Board determines that his duties have been significantly reduced or that other changes have occurred negatively affecting his employment conditions within that same time period. The executive also receives these benefits if any such employment change occurs during discussions with any third party that results in a change in control. Aside from a change in control, as part of a new agreement approved by the Board in 2006, each named executive officer also is provided two-year severance benefits in the event of the executive’s involuntary termination of employment by us, other than for cause or gross misconduct, or if he resigns as a result of a reduction in his salary or incentive pay opportunity, provided that such a reduction in salary or incentive pay opportunity is not part of a general reduction in compensation opportunity for all officers. This agreement was
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adopted at a time of transition to a new CEO. The objective was to help secure the continued employment of each named executive officer through and beyond this time of change. The Committee believes these agreements are an important part of the total executive compensation mix, because they protect our interest in the continuity and stability of the executive group. The Committee also believes that the changeincontrol agreements reduce the executives’ interest in working against a potential change in control and help to keep them focused on minimizing interruptions in business operations by reducing any concerns they may have of being terminated prematurely and without cause during any ownership transition. In exchange, each executive agrees not to compete while employed or for two years after an involuntary termination of employment; not to solicit any employees, agents, or consultants to terminate their relationship with us; and to protect our confidential information. Each executive also assigns to us any intellectual property rights to any discoveries, inventions or improvements made while employed by us or within one year after his employment terminates. The executives will be entitled to receive either the three-year severance benefits following a change in control or the two-year severance benefits upon an involuntary termination of employment. Another new agreement feature, for a change in control only, was the adoption by the Board in February 2007 of a “gross up” provision for the “parachute tax” under the Internal Revenue Code section 280G. The “parachute tax” applies to separation compensation beyond a determined cap as defined under 280G. In calculating the cap, averageW-2 compensation for the prior five years is used. Due to the fact that the CEO is new to his role and the cap would be determined by his compensation in a lesser capacity, and since the Company has been in a turnaround situation for the past five years, it was decided that a “gross up” feature was appropriate. However, based upon this logic, the Board also adopted the “gross up” feature so that it would automatically end in five years. Setting Goals and Performance Measures Specifically, the Committee has designed our compensation program primarily to reward efforts of the executives that result in improved financial success for us and secondarily to reward personal and team accomplishments and contributions to that success. Within the incentive pay structure and beyond the median base salary, both developed with the advice of the compensation consultant, the Committee sets goals for threshold, target and maximum performance that will be rewarded, both annually and over three-year performance periods. As part of its implementation of our overallpay-for-performance philosophy, the Committee has sought to offer incentives related to our performance compared with peer group companies and compared with our performance for the preceding year. At the same time, the Committee also has taken into account the increased need for motivation and retention of senior management. The challenging and controversial regulatory issues and legal disputes we have been facing and the resulting volatile business environment they create make setting and assessing what may be considered reasonable performance goals difficult. Individual and Brush goals are usually set annually in February after consideration of several factors. The Committee reviews our performance for the preceding year, as well as the business environment in general. The Committee also considers management reports of our performance, operations and business opportunities and discusses the strategic needs and direction of Brush with the Chief Executive Officer and the other named executive officers. Equipped with appropriate information and the advice of the independent compensation consultant regarding the practices of comparable companies and the effectiveness of the current incentive plans, the Committee determines objective threshold, target and maximum performance levels for each executive. Threshold performance usually is set at the point at which improvement over the prior year’s results begins. Building from that, the Committee sets performance targets that are estimated to be competitive in the market for the coming year and designed to meet shareholders’ expectations for our financial performance. Beyond that, the Committee sets levels at and beyond which the executives will receive maximum rewards for the measurement period. Rewards earned are determined in a linear measurement from threshold performance at which rewards first may be paid to target performance at which the value of the rewards is set so as to
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contribute to a median or 50th percentile total compensation level. From there, in a linear measurement, performance measures from target to maximum performance and maximum rewards for the executives are set. These goals have been focused on annual and cumulative operating profit and management of working capital levels for the past few years. The Committee believes these goals are the key factors for our success at this time. Although the Committee makes its best effort in setting these goals for the next year and three-year periods, the volatile nature of the uncontrollable external forces affecting our business environments, such as metal markets and certain regulatory and legal matters associated with our business, make it difficult to assess the probability of achieving those goals from one year to the next. In addition to our financial goals for both annual and long-term incentives, the Committee sets individual, job-specific goals for each of the named executive officers. These goals are intended to focus the individual executive on tasks important to our success that must be accomplished to some degree in the next year. The accomplishment of these goals is a measurable, objective result. The value of the reward for accomplishing the goal is determined in the discretion of the Committee, subject to Board review. The Committee’s determination is based on the quality of the accomplishment of the task and the value of the task, as accomplished, to Brush. The 2006 individual goals for the named executive officers included: improved shareholder value, profitably increasing the size of the company, improving succession planning and organizational development, increasing our Asia business base and improving corporate wide systems. Reported financial results considered final and conclusive for determining eligibility for an incentive payout are based on the financial statements audited by our independent registered public accounting firm. Executive Compensation Elements To meet our objectives and reward executives for demonstrating the desired actions and behaviors, we compensate our executive officers through: | | | | • | Base salary; | | | • | Management Performance Compensation Plan payments; | | | • | Long-term Incentive Plans payments; | | | • | Stock-based Compensation Grants; | | | • | Pension Benefits; | | | • | Discretionary monetary awards or bonuses; | | | • | Savings and Investment Plan contributions; | | | • | Executive Deferred Compensation Plan II contributions; | | | • | Health and welfare benefits, such as medical expense reimbursement, health and life insurances, executive physicals, and disability benefits; and | | | • | Perquisites, such as club dues and financial planning services. |
The following is an explanation of the reasons each pay element is included in the total compensation package of an executive; the intended value, targeted competitive level, and targeted portion of total compensation for each pay element; the reasons behind that targeted value, competitive level, and proportion of total pay; and the interaction, if any, of each pay element with the other pay elements. Base Salary Effective December 30, 2006, the Committee increased base salary for 2007 from $500,000 to $655,000 for Mr. Hipple, as Chairman, President and Chief Executive Officer, from $289,800 to $330,000 for Mr. Grampa, as Senior Vice President Finance and Chief Financial Officer, and from $289,800 to $315,000 for Mr. Skoch, as Senior Vice President, Administration, to approximate base salary at the median (50th percentile) for similar positions at the companies in the published survey data used. In addition, after considering relevant
20
data from those same surveys, as well as Mr. Hipple’s promotion in May 2006 to Chief Executive Officer with two additional reports; taking on the additional role of Chairman of the Board also in May 2006; past experience; current job performance and progress; and immediate engagement in the position; the Committee increased his base salary to approximate the median for chief executive officers similarly situated in the surveyed companies. Base salary directly affects the determination of life and disability benefits, which are set as a multiple of base pay, and is taken into account in the pension benefit formulas and is the base for deferral and matching contribution calculations for retirement benefits. Base salary is also used as the basis for calculating annual incentive awards, as described below, and in calculating payments that may be paid upon a change in control, as described below in “Other Potential Post-employment Payments.” Management Performance Compensation Plan Annually, we establish performance goals for the Management Performance Compensation Plan for the following year. These goals are generally aggressive. As mentioned above, these goals have not always been met, resulting in no awards being paid out in those years. The Committee set both objective quantifiable goals and subjective goals for 2006. Objective goals are based solely on financial measures and payouts are calculated as a percentage of base salary, which varies by executive. The target payouts as a percentage of base pay for 2006 were 49% for Mr. Hipple, 40% for Mr. Grampa, and 40% for Mr. Skoch. Results were weighted 85% on achieving targeted levels of operating profit for the entire Company and 15% on reductions in working capital. Payouts for 2006 were at 200% of target, based on operating profit and 163% of target for working capital reductions achieved, for a combined payout of 194%. The 2006 maximum (200%) operating profit goal was pre-established at $34.2 million, which was an improvement of 75% over the operating profit of $19.5 million in 2005. The actual operating profit achieved was $43.8 million, 125% over the operating profit in 2005. The targeted (100%) average weighted working capital, as a percentage of sales, was 37.2% of sales, which was a reduction of 0.3% below that of 2005. The actual average weighted working capital was 36.8% of sales, which was 0.4% better than the targeted level. Awards for subjective goals are payable only if threshold financial performance was achieved. Once the threshold financial performance for Brush is achieved, attainment of subjective goals may result in awards equal to up to 14% of base salary and vary relative to the responsibilities of the executive involved and the performance focus desired for the year. For example, goals for the named executive officers might include profitably increasing the size of the company, improving corporate systems and processes, organizational development, growing new markets, etc. Whether and to what level these goals are met and what reward should be assigned to these goals is determined in the discretion of the Committee. For 2006, all the named executive officers achieved a maximum individual award of 14% by decision of the Committee. These annual awards are considered part of the compensation taken into account in the pension benefit formulas and are the base for deferral and matching contribution calculations for other retirement benefits. They also may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments,” but generally are not designed to affect the value of any other compensation elements of the named executive officers. Long-term Incentive Plans Each year, we establish a three-year performance plan to promote the long-term goals of our business operating units and the cooperation of those units toward achieving the overall Brush goals. The rewards for achieving results under these overlapping LTIPs vary by each three-year period and by named executive officer. For each executive, however, the LTIP award is designed to provide one-half of the long-term incentive opportunity for target performance for the measuring period. The other half of the long-term
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incentive opportunity is intended to come from stock-based grants, discussed below under “Stock-based Compensation Grants.” In 2004, the Committee established a three-year cash LTIP with management objectives based on cumulative operating profit with a performance period from January 1, 2004 through December 31, 2006. As a one-time retention feature, the Committee set separategrowth-in-operating-profit targets for two and three years. The targets reached at the end of the second year, December 31, 2005, provided a two-thirds award for the LTIP period that would be “banked” but paid only at the conclusion of the three-year performance period and only if employment continues through the performance period, excepting disability, death or retirement. Improvement in results during 2006 was designed to trigger an increase in the overall LTIP payout to be made in early 2007 and that increase is included as 2006 compensation in the Summary Compensation Table. The cumulative three-year operating profit target (100%) for the2004-2006 LTIP was pre-established at $65 million. The actual cumulative operating profit, as adjusted for certain non-recurring costs, as approved by the Committee, for the2004-2006 time period was $94.1 million which resulted in a payout of 141.6%. The maximum for any LTIP payout is 150% of target. In 2005, the Committee established an overlapping three-year LTIP using performance shares under our 1995 Stock Incentive Plan with management objectives based on cumulative operating profit with a performance period from January 1, 2005 through December 31, 2007. Payments under this LTIP will be made based solely upon performance results for the full three-year LTIP period, with no “banking” of amounts for interim results. Payouts will be determined for performance measured through 2007, payable in early 2008. In 2006, the Committee established another overlapping three-year LTIP using both performance restricted shares and performance shares under our 2006 Stock Incentive Plan, which we refer to as the 2006 Plan, with management objectives based on cumulative operating profit for the period from January 1, 2006 through December 31, 2008. Payments under this LTIP will be made based solely upon performance results for the full three-year LTIP period, with no “banking” of amounts for interim results. Payouts will be determined for performance measured through 2008, payable in early 2009. The Committee designed the award so that, once target level performance is attained and the performance restricted shares are earned, results above the targeted level will be rewarded with cash earned from performance shares. The intended result is that the cash realized on above-target performance may be used to help pay income taxes associated with the performance restricted shares earned. In this way, the Committee has provided the opportunity for more of the shares earned to be retained by the executives, after taxes are paid on the total incentive awards earned. In 2007, the Committee established another overlapping three-year LTIP using both performance restricted shares and performance shares under our 2006 Plan, with management objectives based on cumulative operating profit for the period from January 1, 2007 through December 31, 2009. Payouts will be payable in early 2010. The Committee designed the award so that, once target level performance is attained and the performance restricted shares are earned, results above the targeted level will be rewarded with performance shares. A pre-established cumulative operating profit threshold must be met before any payout is attained. However, should the cumulative operating profit threshold not be met, and Brush’s stock performance during the three-year performance period is in the top quartile compared to the Russell 2000, then a payout can be made, but only at the threshold (25% of target) level. At target levels of performance, the Committee designed these awards to provide approximately 35% to 40% of total compensation for each executive officer for the year in which the performance period ends. These amounts are taxable when paid and may be part of the compensation taken into account in the pension benefit formulas and used as the base for deferral and matching contribution calculations for other retirement benefits. Generally, they are not included in compensation for purposes of determining any other benefit amount, except that they may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments.”
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Stock-based Compensation Grants The 2006 Plan was approved by the shareholders and implemented in 2006 to replace the 1995 Stock Incentive Plan. To provide the greatest planning flexibility, grants under the 2006 Stock Incentive Plan may take various forms. As with the 1995 Stock Incentive Plan, restricted share grants and stock appreciation right grants under the 2006 Plan generally will be made in February each year and will be used to provide one-half of the named executive officers’ total long-term opportunity. As noted above, the other half of the long-term award opportunity value is provided through performance-based grants under the LTIPs, pursuant to the 2006 Plan. For 2006, grants of stock appreciation rights were the only grants made pursuant to the 2006 Plan in addition to those provided under the2006-2008 LTIP. For 2007, 25% of the overall long-term opportunity will be grants of stock appreciation rights, and the other 25% will be restricted stock shares. These shares will vest in 2009 after three years of service, with the added requirement that the net after tax shares be held by the named executive officers while they are employed for an additional seven years, before the shares may be sold or transferred. Said differently, the total long-term opportunity for each officer is comprised of 50% LTIP (performance restricted shares and performance shares), 25% Stock Appreciation Rights and 25% Restricted Shares, and all these components are pursuant to the 2006 Plan. Grants pursuant to the 2006 Plan are part of the variable compensation that is an essential element of the total compensation package of the named executive officers. The Committee intends the grants to serve as incentives to the executives both to increase the value of our stock and to remain in our service. The number of stock-based grants currently held by each executive is not always taken into consideration in making new grants to that executive. The relative values of base salary and total compensation among comparable companies in the survey data used, as discussed above, are the greater determining factors in setting the long-term incentive amounts, along with consideration of the experience and responsibilities of the executive. Generally, restricted shares and stock appreciation rights are not included in compensation for purposes of determining any other benefit amount, except that they may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other PotentialPost-employment Payments.” Pension Benefits The primary vehicle for providing retirement compensation to all employees is the Brush Engineered Materials Inc. Pension Plan, which we refer to as the qualified pension plan and is a defined benefit plan. All the named executive officers participate in the qualified pension plan as part of their competitive total compensation package. Before June 1, 2005, the benefit formula was 50% of final average earnings over highest 5 consecutive years minus 50% of annual Social Security benefit, the result prorated for service less than 35 years. Effective as of May 31, 2005, we froze the benefit under the prior formula for the named executive officers. Beginning June 1, 2005, the qualified pension plan formula was reduced for all participants including Messrs. Hipple, Grampa and Skoch to 1% of each year’s compensation, as defined in the qualified pension plan. The retirement benefit for these individuals will be equal to the sum of that accrued as of May 31, 2005 and that accrued under the new formula for service after May 31, 2005. However, because the amount of compensation that may be included in the formula for calculating pension benefits and the amount of benefit that may be accumulated in the qualified pension plan are limited by the Internal Revenue Code, the named executive officers will not receive a benefit from the qualified pension plan equal to 1% of their total pay. The limitation of the qualified pension plan benefit may be taken into account by the Committee in exercising its discretion on the determination of any amounts intended to supplement retirement income for the named executive officers, such as the discretionary monetary awards granted for 2006. The benefit
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accumulated under the qualified pension plan does not affect any other element of compensation for the named executives, except to the extent it is included in the calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments.” Discretionary monetary awards and bonuses As mentioned above, the named executive officers will not receive a full benefit from the pension plan because the amount of compensation that may be taken into account and the amount of benefit that may be accumulated in the qualified pension plan is limited by the Internal Revenue Code. Yet, unlike comparable employers, we do not provide a contractual supplemental retirement benefit to our named executive officers. At its December 4, 2006 meeting, the Committee exercised its discretion to authorize special awards in lieu of a supplemental retirement benefit plan for Mr. Hipple in the amount of $163,750, for Mr. Grampa in the amount of $61,882 and for Mr. Skoch in the amount of $88,625, all paid on January 5, 2007. The amounts of these payments were derived by making assumptions regarding future anticipated earnings and actuarially calculating a present value benefit equivalent to what would have been accrued if we had in effect a plan similar to the Supplemental Retirement Benefit Plan that was terminated in 2004. The Committee added an additional five years of service to the calculation as part of Mr. Hipple’s overall compensation package. These payments may be taken into account in calculating future supplemental retirement amounts, if any are awarded. They also may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments,” but generally are not intended to affect the amounts of any other compensation element for the named executive officers. The Committee otherwise generally does not, and did not for 2006, make any other discretionary awards or bonuses and no obligation exists for future special awards of any type. However, the Committee considers that such awards may be useful to maintain competitive total compensation structure in the case of extraordinary events or to reward extraordinary performance beyond the events anticipated in goals set under the Management Performance Compensation Plan and the Long-term Incentive Plans. Savings and Investment Plan Another vehicle for providing retirement compensation to all employees is the Brush Engineered Materials Inc. Savings and Investment Plan, which we refer to as the 401(k) plan and which is a defined contribution plan. All the named executive officers participate in this plan as part of their competitive total compensation package. The 401(k) plan offers the executives and all other employees the opportunity to defer income. In addition, we make a matching contribution to each employee equal to 50% of the first 6% of compensation deferred by the employee. However, the compensation that may be used in applying any deferral election or matching contribution percentage is limited by rules in the Internal Revenue Code. In 2006, that limit was $220,000. This compensation element is tax-deferred and is not intended to affect the value of any other compensation element, but the amount of contributions that may be made under the 401(k) plan may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments.” Key Employee Share Option Plan (KESOP) We established the KESOP in 1998 to provide executives with an opportunity to defer a portion of their compensation in the form of options to purchase mutual funds invested in companies other than Brush. Due to the enactment in 2004 of Section 409A of the Internal Revenue Code, which provides new tax rules for deferred compensation plans, the KESOP was frozen effective December 31, 2004. Accordingly, there have
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been and will be no new deferrals or contributions to the KESOP after that date and no new participants will enter the plan. We maintain the account balances as part of the executives’ past compensation to be paid in the future in accordance with the terms of the plan, but these accounts are not considered a currently active part of the total compensation package of any named executive officer. Executive Deferred Compensation Plan II (EDCP II) In 2004, the Committee established the EDCP II to replace the KESOP. The EDCP II provides an opportunity for the named executive officers to defer a portion of their compensation. The EDCP II also provides a nonelective deferred compensation credit to the executive’s account from us in an amount equal to 3% of the executive’s annual compensation above the qualified plan limit. The limit for 2006 was $220,000, as determined under the Internal Revenue Code. The Committee considers this contribution part of a competitive total compensation package and intends it to be a replacement for the loss of any 401(k) plan matching contribution that otherwise would have been attributable to the excess compensation over the required limit. Earnings are credited to each executive’s account based on that executive’s choice of investment options from a list provided by the Committee. This compensation element is tax-deferred and is not intended to affect the value of any other compensation element. Health and Welfare Benefits As part of their competitive total pay package, the executives participate in the group life, health, and disability programs provided all of our other salaried employees. No other special health or welfare benefits are provided for the named executive officers while they are actively employed, nor are any promised for after their employment terminates. Almost all of the value of these benefits is not taxable and does not affect the value of any other elements of compensation for the named executive officers, but they may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments.” Perquisites Named executive officers are provided only a few additional benefits, compared to those provided by other employers. We pay for financial planning services, to a maximum of $5,000 each year, to relieve the executives of the time-consuming burden and distraction of assessing and planning their finances and of managing the related tax planning and reporting requirements. In addition, we pay for annual dues for various club memberships for the named executive officers. In 2006 the Committee approved certain one-time initiation fees to Mr. Hipple as part of his CEO compensation package. Club memberships are subject to Committee review and approval as those capable of best serving our interests. The Committee believes that such memberships provide the named executive officers with important contacts within the business and local community and provide a controlled and positive place for business entertainment needs. These benefits are included in taxable income, and do not affect the determination of retirement benefits. They are not expected to affect the value of any other elements of compensation for the named executive officers, except to the extent they may affect calculation of payments that may be paid upon a change in control or other potential severance payments, as described below in “Other Potential Post-employment Payments.” Stock-based Compensation Grant Procedures The Committee generally awards grants of stock-based compensation in the first quarter each year, usually in February. Exceptions to this would be grants made upon shareholder approval of a new stock-based
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plan or grants as part of a total compensation package to support the hiring or promotion of a key executive officer, such as the promotion of Mr. Hipple to Chairman and Chief Executive Officer in 2006. Among these grants, stock options and stock appreciation rights are granted only to our top twelve executives, who include the named executive officers and whose contributions and skills are considered critical to our long-term success. The Compensation Committee is solely responsible for the grant of stock-based awards. In February of 2007 the Committee adopted the following Stock Award Administrative Procedure Guidelines related to the various forms of stock award grants approved by the Committee. Stock Award Administrative Procedure Guidelines | | | | 1. | All stock option grant exercise prices, stock appreciation rights or the price used for a grant of performance-related common shares shall be approved by the Senior Vice President, Administration and Vice President, Treasurer and Secretary. |
| | | | • | The date of grant and pricing shall be in accordance with the underlying stock plan | | | • | The fair market value price shall be the closing price as quoted in the Wall Street Journal or if the Wall Street Journal is not available on Yahoo! for the date the fair value is determined | | | • | If a particular stock plan provides for a method of pricing other than the closing stock price then such other method must be used in accordance with that plan | | | • | The Board resolution for a particular grant shall cite the plan, date and source of pricing data |
| | | | 2. | The list of recommended options, Stock Appreciation Rights, Restricted Shares, Performance Restricted Shares and Performance Shares to be awarded by individual for approval shall be submitted through the Senior Vice President, Administration. |
| | | | • | The Senior Vice President, Administration shall present the list to the Committee for approval | | | • | The Senior Vice President, Administration shall make such changes to the list as discussed and approved by the Board and will provide the final list to the Secretary of the Company for filing as an Exhibit to the minutes of the meeting | | | • | The Treasurer shall prepare the form of agreements for each individual with an award | | | • | The Treasurer shall reconcile the agreements to the Board Exhibit prior to distribution |
3. The Secretary shall maintain a permanent record of the above for each series of awards. COMPENSATION COMMITTEE REPORT We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in our Annual Report onForm 10-K for the year ended December 31, 2006. The foregoing report has been furnished by the Compensation Committee of the Board of Directors. N. Mohan Reddy (Chairman)
Albert C. Bersticker
William P. Madar
John Sherwin, Jr. Notwithstanding anything to the contrary as set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that incorporate future filings, including this proxy statement, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into any such filings other than our Annual Report onForm 10-K for the fiscal year ended December 31, 2006.
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2006 SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation of our Chief Executive Officer and our other executives named below during the fiscal year ended December 31, 2006 (the “Named Executive Officers”): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension
| | | | | | | | | | | | | | | | | | | | | | | | | | Non-Equity
| | | Value and
| | | | | | | | | | | | | | | | | | | | | | | | | | Incentive
| | | Non-qualified
| | | | | | | | | | | | | | | | | | | | Stock
| | | Option
| | | Plan
| | | Deferred
| | | All Other
| | | | | | | | | | | Salary(1)
| | | Bonus(2)
| | | Awards(3)
| | | Awards(4)
| | | Compensation
| | | Compensation
| | | Compensation
| | | Total
| | Name and Principal Position | | Year | | | ($) | | | ($) | | | ($) | | | ($) | | | ($)(5) | | | Earnings ($)(6) | | | ($)(7) | | | ($) | | | | | Gordon D. Harnett | | | 2006 | | | | 287,856 | | | | 907,436 | | | | 225,383 | | | | 0 | | | | 397,933 | | | | 131,974 | | | | 969,060 | | | | 2,919,642 | | | Former Chairman and Chief Executive Officer* | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Richard J. Hipple | | | 2006 | | | | 448,615 | | | | 163,750 | | | | 386,633 | | | | 101,442 | | | | 702,187 | | | | 14,547 | | | | 225,396 | | | | 2,042,570 | | | Chairman, President and Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | John D. Grampa | | | 2006 | | | | 289,419 | | | | 61,882 | | | | 186,266 | | | | 36,369 | | | | 369,836 | | | | 18,614 | | | | 260,006 | | | | 1,222,392 | | | Sr. Vice President Finance and Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Daniel A. Skoch | | | 2006 | | | | 289,419 | | | | 88,625 | | | | 187,170 | | | | 36,369 | | | | 377,623 | | | | 23,970 | | | | 288,122 | | | | 1,291,298 | | | Sr. Vice President, Administration | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | * | | Mr. Harnett retired from the company on June 2, 2006. | | | (1) | | For each of the named executives above, deferred compensation included in “Salary” is as follows: |
| | | | | | | | | 401(k) | | | | | Mr. Harnett | | $ | 15,000 | | | Mr. Hipple | | | 13,465 | | | Mr. Grampa | | | 13,200 | | | Mr. Skoch | | | 15,000 | |
| | | | (2) | | In 2002, we discontinued our Supplemental Retirement Benefit Plan for the above-named executives in exchange for amounts paid in settlement of our obligation.obligations. In 2005, in lieu of a supplemental plan and in order to retain a competitive position in2006 the marketplace, theCompensation Committee exercised its discretion to authorize special awards in lieu of a specialsupplemental plan. Mr. Harnett’s award included underin the Special Awardamount of $907,436 is comprised of $597,425 awarded in February 2006 and $310,011 awarded in May 2006 as a final payment. | | | (3) | | This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the Bonus categoryfair value of Performance Restricted Shares (PRS), Performance Shares (PS) and Restricted Stock Units (RSU) granted in 2006 as well as prior fiscal years, in accordance with FAS 123(R). Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For RSUs, the fair value was calculated using the average of the high and low of our common stock prices on the date of grant. For the PRS and the PS, the fair value is calculated using the closing price of our common stock on the date of grant. For additional information, refer to Note K of the consolidated financial statements in theForm 10-K for 2005the year ended December 31, 2006, as filed with the SEC. See the Grants of Plan-based Awards table for Mr. Harnettinformation on awards made in 2006. These amounts reflect the Company’s accounting expense for these awards, and do not correspond to the actual value that will be recognized by the named executives officers. | | | (4) | | This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the fair value of $597,425, Mr. Skoch $79,544the Stock Appreciation Rights (SARs) granted to each of the named executive officers in 2006 in accordance with FAS 123(R). Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions with respect to the 2006 grants, refer to Note K of the |
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| | | | | consolidated financial statements in theForm 10-K for the year ended December 31, 2006, as filed with the SEC. See the Grants of Plan-based Awards table for information on SARs granted in 2006. These amounts reflect our accounting expense for these awards and Mr. Grampa $38,311. See Compensation Committee Report on Executive Compensation on page 15 underdo not correspond to the category of “Special Award.”actual value that will be recognized by the named executive officer. | | | | (5) | | These amounts represent the payments in March 2007 for the Management Performance Compensation Plan (MPC) and the 2004 - 2006 cash LTIP as follows: |
| | | | | | | | | | | | | | | | | 2006
| | | 2004 – 2006
| | | | | | | | MPC | | | LTIP | | | Total | | | | | Mr. Harnett | | $ | 267,883 | | | $ | 130,050 | | | $ | 397,933 | | | Mr. Hipple | | | 542,975 | | | | 159,212 | | | | 702,187 | | | Mr. Grampa | | | 266,012 | | | | 103,824 | | | | 369,836 | | | Mr. Skoch | | | 266,012 | | | | 111,611 | | | | 377,623 | |
The amounts reflected above under the 2004 - 2006 LTIP do not include amounts that were banked as of December 31, 2005, which are included in the “All Other Compensation” column. For further discussion see the CD&A. | | | | (6) | | Amounts in this column represent the change in pension value for the year 2006 and earnings in excess of 120% of the applicable federal rate in effect during 2006 for the Kesop and EDCP II Plans discussed in detail on pages 31-33 of this proxy statement. | | | (7) | | For all the named executive officers, “All Other Compensation” for 2006 includes the Company match to the 401(k) plan, reimbursement of club dues, and a Company contribution to the EDCP II. For Mr. Hipple, club dues were $111,497, which includes $97,869 for one-time initiation fees for a membership benefit extended to him when he became Chairman and CEO in May 2006. In addition, “All Other Compensation” for Mr. Harnett includes $41,979 for three and one half weeks of vacation that was not taken at the time he retired on June 2, 2006 and also includes financial planning fees paid for Messrs. Harnett, Hipple and Skoch. Also included in “All Other Compensation” are amounts which relate to the “banked” amounts paid pursuant to the2004-2006 LTIP. For each of the executive officers, amounts were banked as of December 31, 2005 based on achieving pre-established financial objectives for cumulative operating profit during 2004 and 2005. These amounts are $903,825 for Mr. Harnett; $95,602 for Mr. Hipple; $247,200 for Mr. Grampa and $265,740 for Mr. Skoch. The amount paid for the year 2006 under this plan is included in the column entitled “Non-Equity Incentive Plan Compensation.” |
Executive Employment Arrangements None of the named executive officers has an employment agreement. However, each named executive officer has a Severance Agreement that provides the executive with three-year severance benefits upon termination or significant change in the duties of the executive as a result of a change in control as defined in the agreement, and two-year severance benefits in the event of certain involuntary terminations. Discussion of the payouts provided for under various termination situations is set forth in the section “Other Potential Post-Employment Payments” below. Base Salary and Bonuses The Compensation Committee annually reviews and adjusts base pay, in keeping with the overall objectives, pay philosophy and relative position with comparable companies, all as discussed in more detail in the CD&A. Bonus compensation in 2006 was comprised of performance-based amounts paid under the MPC and the additional discretionary amounts paid in lieu of supplemental retirement benefits. For 2006, base salaries (including amounts deferred to the 401(k) plan) as a percentage of total compensation shown in the Summary Compensation table, were 44.36% for Mr. Harnett, 32.10% for Mr. Hipple; 30.94% for Mr. Grampa; and 31.39% for Mr. Skoch. In summary, except for Mr. Harnett, who
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retired in June of 2006, the sum of each executive’s base salary and bonus was a little less than one-third of total compensation for the year. Stock Awards Stock-based grants under the LTIP and 2006 Stock Incentive Plan were made as SARs, PRS, and PS. Descriptions of these types of grants and the reason for these types of grants are in the CD&A. Grants of RSs, PRS, and PS, the FAS 123(R) expense for which is disclosed in the Summary Compensation Table, were made in 2004, 2005, and 2006. The RSs vest after three years from the date of grant and the PRS and PS vest after three years subject to the achievement of specified performance criteria. 2006 GRANTS OF PLAN-BASED AWARDS We currently are utilizing three plans that award executives opportunities to earn cash or stock compensation. The MPC provides cash compensation for annual performance. The 2006 Stock Incentive Plan provides equity-based compensation for service and performance for periods of more than one year. The LTIP annually provides a series of cash or performance share compensation opportunities, each of which are for performance for periods of three years. The following table sets forth information concerning annual incentive cash awards, grants of SARs, PS and PRS to the Named Executive Officers during the fiscal year ended December 31, 2006 as well as estimated future payouts under those incentive plans. See CD&A for further discussion of these incentive plans and these types of grants and the reason for these types of grants on page 23. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | All
| | | | | | | | | Grant
| | | | | | | | | | | | | | | | | | | | | | | | | | All Other
| | | Other
| | | | | | | | | Date
| | | | | | | | | | | | | | | | | | | | | | | | | | Stock
| | | Option
| | | Exercise
| | | | | | Fair
| | | | | | | | | | | | | | | | | | | | | | | | | | Awards:
| | | Awards:
| | | or
| | | Closing
| | | Value
| | | | | | | | Estimated Future Payouts
| | | Estimated Future Payouts
| | | Number
| | | Number of
| | | Base
| | | price
| | | of Stock
| | | | | | | | Under Non-Equity Incentive
| | | Under Equity Incentive
| | | of Shares
| | | Securities
| | | Price of
| | | of BW on
| | | and
| | | | | | | | Plan Awards | | | Plan Awards(1) | | | of Stock
| | | Underlying
| | | Option
| | | Date of
| | | Option
| | | | | Grant
| | | Threshold
| | | Target
| | | Maximum
| | | Threshold
| | | Target
| | | Maximum
| | | or
| | | Options (#)
| | | Awards
| | | Grant
| | | Awards($)
| | Name | | Date | | | ($) | | | ($) | | | ($) | | | (#) | | | (#) | | | (#) | | | Units (#) | | | (2) | | | ($/Sh)(3) | | | ($/Sh) | | | (4) | | | | | Gordon D. Harnett | | | 3/7/2006 | | | | 0 | | | | 137,800 | | | | 275,600 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Richard J. Hipple | | | 3/7/2006 | | | | 0 | | | | 278,300 | | | | 556,600 | | | | 7,280 | | | | 29,121 | | | | 43,681 | | | | — | | | | — | | | | — | | | | — | | | | 754,388 | | | | | | 5/2/2006 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 38,700 | | | | 24.03 | | | | 24.42 | | | | 458,208 | | | John D. Grampa | | | 3/7/2006 | | | | 0 | | | | 136,253 | | | | 272,506 | | | | 2,532 | | | | 10,127 | | | | 15,190 | | | | — | | | | — | | | | — | | | | — | | | | 262,348 | | | | | | 5/2/2006 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14,000 | | | | 24.03 | | | | 24.42 | | | | 165,760 | | | Daniel A. Skoch | | | 3/7/2006 | | | | 0 | | | | 136,253 | | | | 272,506 | | | | 2,532 | | | | 10,127 | | | | 15,190 | | | | — | | | | — | | | | — | | | | — | | | | 262,348 | | | | | | 5/2/2006 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14,000 | | | | 24.03 | | | | 24.42 | | | | 165,760 | |
| | | | (1) | | Under the 2006 - 2008 LTIP, Performance Restricted Shares and Performance Shares were granted. The Performance Shares will be paid in cash if defined management objectives have been attained at a level between the target and maximum levels of achievement. | | | (2) | | This column shows the SARs that were granted in 2006. These SARs become fully exercisable and vest 100% after three years. | | | (3) | | This column shows the exercise price for the SARs granted on May 2, 2006 to the named executives. The exercise price was derived from the average of our high and low common stock prices on the date of grant. |
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| | | | (4) | | These numbers represent the full fair market value of the grants made in 2006 to each named executive officer. They are calculated in the same manner our financial statement expense for those grants is calculated under FAS 123(R). That expense value will be spread over the vesting period of the grant, if time-based, or over the expected life of the grant, if performance based. A brief explanation of how the rules of FAS 123(R) were applied in calculating this value can be found in Note K of the consolidated financial statements in theForm 10-K for the year ended December 31, 2006, as filed with the SEC. |
2006 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Option Awards | | | Stock Awards | | | | | | | | | | | Equity
| | | | | | | | | | | | | | | Equity
| | | Equity
| | | | | | | | | | | Incentive
| | | | | | | | | | | | | | | Incentive
| | | Incentive
| | | | | | | | | | | Plan
| | | | | | | | | | | | | | | Plan
| | | Plan Awards:
| | | | | | | | | | | Awards:
| | | | | | | | | | | | | | | Awards:
| | | Market or
| | | | | Number of
| | | Number of
| | | Number of
| | | | | | | | | Number of
| | | Market Value
| | | Number of
| | | Payout Value of
| | | | | Securities
| | | Securities
| | | Securities
| | | | | | | | | Shares or
| | | of Shares
| | | Unearned
| | | Unearned Shares,
| | | | | Underlying
| | | Underlying
| | | Underlying
| | | Option
| | | | | | Units of
| | | or Units
| | | Shares, Units
| | | Units or Other
| | | | | Unexercised
| | | Unexercised
| | | Unexercised
| | | Exercise
| | | Option
| | | Stock That
| | | of Stock That
| | | or Other Rights
| | | Rights That
| | | | | Options (#)
| | | Options (#)
| | | Unearned
| | | Price
| | | Expiration
| | | Have Not
| | | Have Not
| | | That Have Not
| | | Have Not
| | Name | | Exercisable | | | Unexercisable | | | Options (#) | | | ($) | | | Date | | | Vested (#)(2) | | | Vested ($)(3) | | | Vested (#)(4) | | | Vested ($)(3) | | | | | Gordon D. Harnett | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Richard J. Hipple | | | 3,500 | | | | — | | | | | | | | 12.15 | | | | 2/5/2012 | | | | | | | | | | | | | | | | | | | | | | 6,400 | | | | 1,600 | | | | | | | | 5.55 | | | | 2/11/2013 | | | | | | | | | | | | | | | | | | | | | | 9,000 | | | | — | | | | | | | | 17.075 | | | | 2/3/2014 | | | | | | | | | | | | | | | | | | | | | | 10,000 | | | | — | | | | | | | | 17.68 | | | | 2/8/2015 | | | | | | | | | | | | | | | | | | | | | | 8,000 | | | | — | | | | | | | | 14.10 | | | | 4/29/2015 | | | | | | | | | | | | | | | | | | | | | | | | | | 38,700(1 | ) | | | | | | | 24.03 | | | | 5/2/2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 43,681 | | | | 1,475,107 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 36,900 | | | | 40,300 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | John D. Grampa | | | 3,000 | | | | — | | | | | | | | 16.0625 | | | | 12/1/2008 | | | | | | | | | | | | | | | | | | | | | | 6,000 | | | | — | | | | | | | | 14.69 | | | | 2/2/2009 | | | | | | | | | | | | | | | | | | | | | | 8,000 | | | | — | | | | | | | | 15.97 | | | | 2/1/2010 | | | | | | | | | | | | | | | | | | | | | | 10,000 | | | | — | | | | | | | | 22.43 | | | | 2/6/2011 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 12.15 | | | | 2/5/2012 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 17.075 | | | | 2/3/2014 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 17.68 | | | | 2/8/2015 | | | | | | | | | | | | | | | | | | | | | | | | | | 14,000(1 | ) | | | | | | | 24.03 | | | | 5/2/2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,000 | | | | 67,540 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,190 | | | | 512,966 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 72,000 | | | | 14,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Daniel A. Skoch | | | 7,500 | | | | — | | | | | | | | 26.72 | | | | 5/5/2008 | | | | | | | | | | | | | | | | | | | | | | 10,000 | | | | — | | | | | | | | 15.97 | | | | 2/1/2010 | | | | | | | | | | | | | | | | | | | | | | 12,000 | | | | — | | | | | | | | 22.43 | | | | 2/6/2011 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 12.15 | | | | 2/5/2012 | | | | | | | | | | | | | | | | | | | | | | 5,000 | | | | — | | | | | | | | 5.55 | | | | 2/11/2013 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 17.075 | | | | 2/3/2014 | | | | | | | | | | | | | | | | | | | | | | 15,000 | | | | — | | | | | | | | 17.68 | | | | 2/8/2015 | | | | | | | | | | | | | | | | | | | | | | | | | | 14,000(1 | ) | | | | | | | 24.03 | | | | 5/2/2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,000 | | | | 67,540 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,190 | | | | 512,966 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 79,500 | | | | 14,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (1) | | These numbers represent the Stock Appreciation Rights that were granted in 2006. These SARs vest 100% after three years. |
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| | | | (2) | | 2,000 shares of special restricted stock were awarded to Mr. Grampa on February 2, 2004 and 2,000 shares were awarded to Mr. Skoch on December 7, 2004. Shares are subject to forfeiture if these executives are not continuously employed in their current capacities for a three-year period from the date of grant. | | | (6) (3) | Payout | Amounts in 2004 was a cash award based on a two-year performance period measured by improvementthese columns were calculated using the December 29, 2006 Brush Engineered Materials Inc. Common Stock closing price of $33.77 times the number of shares in the corporation’s operating profit from January 1, 2003 through December 31, 2004. See Compensation Committee Report on Executive Compensation on page 15 under the category of “Long-Term Incentives.”preceding column. | | | (7) (4) | In accordance with | These awards represent the transition rules under Internal Revenue Code Section 409A, options to purchase property other than Brush Engineered Materials’ securitiesPerformance Restricted Shares and Performance Shares that did not become exercisable prior to 2005were granted under the Brush Engineered Materials Inc. Key Employee Share Option Plan (the “KESOP”)2006 - 2008 LTIP. |
2006 OPTION EXERCISES AND STOCK VESTED | | | | | | | | | | | | | Option Awards | | | | | Number of
| | | | | | | | Shares Acquired
| | | Value Realized
| | Name | | on Exercise (#) | | | on Exercise ($) | | | | | Gordon D. Harnett(1) | | | 332,500 | | | $ | 3,063,065 | | | Richard J. Hipple | | | — | | | | — | | | John D. Grampa(2) | | | 15,000 | | | | 276,834 | | | Daniel A. Skoch(3) | | | 28,500 | | | | 297,320 | |
The columns under the heading entitled “Stock Awards” to this table have been omitted because no awards were reportable thereunder. | | | | (1) | | Mr. Harnett exercised these stock options on eight separate dates starting May 3, 2006 and corresponding deferralsending on October 26, 2006. The stock options exercised represent everything that Mr. Harnett had outstanding when he retired on June 2, 2006. Exercise prices of these stock options ranged from $5.55 to $26.72. These sales were implemented by Mr. Harnett under a prearranged trading plan pursuant toRule 10b5-1 under the KESOP were cancelled. Each participant who had such KESOP options and deferrals cancelled received payment in the amount of the cancelled deferrals. The amounts received are as follows: Mr. Harnett $23,018 and Mr. Skoch $10,154.Securities Exchange Act. | | | (8) (2) | Except as noted in (2) | Mr. Grampa exercised 2,100 stock options on May 3, 2006 and (7), amounts in All Other Compensation consist of Company matching contributions to the Brush Engineered Materials Inc. Savings and Investment Plan.12,900 stock options on May 4, 2006. |
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OPTION EXERCISES IN LAST FISCAL YEAR
The following table provides information about stock options exercised by the executive officers who are included in the Summary Compensation Table and the value of each officer’s unexercised options at December 31, 2005:
| | | | | | | | | | | | | | | | | | (3) | | Number of | | | | Number of Securities | | Value of Unexercised | | | Shares | | | | Underlying Unexercised | | In-the-Money Options | | | Acquired | | Value | | Options at December 31, 2005 | | at December 31, 2005, | Name | | Mr. Skoch exercised the above stock options on Exercise | | Realized | | Exercisable/Unexercisable | | Exercisable/Unexercisable | | | | | | | | | | Gordon D. Harnett | | | — | | | | — | | | | 332,500/0 | | | $ | 470,995/0 | | Richard J. Hipple | | | — | | | | — | | | | 34,600/3,900 | | | $ | 74,580/35,745 | | John D. Grampa | | | — | | | | — | | | | 87,000/0 | | | $ | 218,760/0 | | Daniel A. Skoch | | | — | | | | — | | | | 108,000/0 | | | $ | 222,995/0 | May 1, 2006. |
OPTION GRANTS IN LAST FISCAL YEAR2006 NONQUALIFIED DEFERRED COMPENSATION
We maintain two nonqualified arrangements for executives, the Key Employee Share Option Plan (“KESOP”) and the Executive Deferred Compensation Plan II (“EDCP II”). A primary purpose of each is to provide benefits in the event a participant’s compensation exceeds the amount of compensation that may be taken into account for deferring income and matching contributions under the Brush Engineered Materials Inc. Savings and Investment Plan (“401(k) plan”). Key Employee Share Option Plan The following table provides information aboutKESOP was established in 1998 to provide executives with options to purchase property other than our common stock option grants during 2005(in this case, options to purchase certain mutual fund shares as further described below), which options replace a portion of the executive’s compensation. The options cover property with an initial value equal to the executive officers who are included in the Summary Compensation Table. There was one grantamount of options to Messrs. Harnett, Grampa and Skoch and there were two grants to Mr. Hipple during 2005. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individual Grants | | Potential Realizable | | | | | | | | Value at Assumed | | | | Number of | | % of Total | | | | Annual Rates of Stock | | | | Securities | | Options | | Exercise | | | | Price Appreciation for | | | | Underlying | | Granted to | | or Base | | | | Option Term | | | | Options | | Employees in | | Price | | Expiration | | | | Name | | Granted | | Fiscal Year | | ($/Sh) | | Date | | 5% ($) | | 10% ($) | | | | | | | | | | | | | | | | Gordon D. Harnett | | | 55,000 | | | | 34.77 | | | $ | 17.68 | | | | 2/8/2015 | | | $ | 611,537 | | | $ | 1,549,755 | | | Richard J. Hipple | | | 10,000 | | | | 6.32 | | | $ | 17.68 | | | | 2/8/2015 | | | $ | 111,189 | | | $ | 281,774 | | | | | | 8,000 | | | | 5.06 | | | $ | 14.10 | | | | 4/29/2015 | | | $ | 70,939 | | | $ | 179,774 | | | John D. Grampa | | | 15,000 | | | | 9.48 | | | $ | 17.68 | | | | 2/8/2015 | | | $ | 166,783 | | | $ | 422,661 | | | Daniel A. Skoch | | | 15,000 | | | | 9.48 | | | $ | 17.68 | | | | 2/8/2015 | | | $ | 166,783 | | | $ | 422,661 | |
LONG-TERM INCENTIVE PLANS — AWARDS IN LAST FISCAL YEAR
No performance restricted shares or performance shares were awarded during 2005 pursuant to the 1995 Stock Incentive Plan, as amended.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides certain aggregated information relating to our equity compensation plans (including individual compensation plans, if any) as of December 31, 2005:
| | | | | | | | | | | | | | | | | | | | | Number of Securities | | | | | | Weighted-Average | | Remaining Available for | | | | Number of Securities to be | | Exercise | | Future Issuance Under | | | | Issued Upon Exercise of | | Price of Outstanding | | Equity Compensation Plans | | | | Outstanding Options, | | Options, Warrants and | | (Excluding Securities | | | | Warrants and Rights | | Rights | | Reflected in Column (a)) | | Plan Category | | (a) | | (b) | | (c) | | | | | | | | | | Equity Compensation Plans Approved by Security Holders | | | 1,508,260 | | | $ | 16.24 | | | | 95,460 | | | Equity compensation Plans Not Approved by Security Holders | | | 0 | | | | 0 | | | | 0 | | | | | | | | | | | | | | | | | Total | | | 1,508,260 | | | $ | 16.24 | | | | 95,460 | | | | | | | | | | | | | | | |
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board of Directors is composed of all the independent, non-employee directors of the Board. The Committee is responsible for developing and making policy recommendations to the Boardthey replace, divided by 75%, with respect to our executive compensation. In addition, the Committee, pursuant to authority delegated by the Board, determines on an annual basis the compensation to be paid to the Chief Executive Officer, elected executive officers and certain other senior management positions.
The Committee has the sole authority to retain and terminate compensation consultants to assist in the evaluation of executive compensation and the sole authority to approve the fees and other retention terms of such compensation consultants. In 2004, the Committee retained the services of a compensation consultant who conducted a thorough executive total compensation analysis. The analysis included a market survey of base salary, annual performance compensation, and long-term incentives and the recommendations were acted upon in 2005.
Compensation Philosophy — Pay for Performance
The Committee’s compensation philosophy is to recognize superior results with superior monetary rewards. Where results are below expectations, pay will directly reflect the less-than-targeted performance. The Committee seeks to maintain a balance between cash and stock compensation, and provide a significant portion of total compensation at risk tied to annual and long-term financial performance of our Company as well as the creation of shareholder value.
Total Compensation Strategy
The executive compensation strategy is to attract and retain qualified executives and to provide appropriate incentives to achieve the long-term success of the Company and to enhance shareholder value over the long term. We employ a total compensation strategy, taking into consideration base pay, annual performance compensation and long-term incentives. Base salary is generally established at competitive levels, and greater weight is put on the performance-driven portions of the compensation package.
As part of the total compensation strategy, the Committee has given consideration to the increased retention and motivational issues caused by the challenging and controversial regulatory issues and legal disputes we have faced.
Base Salary
Base salaries are established by the Committee based on an executive’s job responsibilities, level of experience, individual performance and contribution to the business. As noted above, in 2004, the Committee’s compensation consultant conducted a market survey of comparative companies selected on the basis of similar size as well as companies in the metals industry and general manufacturing. Although the comparative companies may be included within those in the proxy statement performance graph, all the performance graph index companies were not surveyed because of their large number and many of them are not comparable to us. Based on the survey information, the Committee targeted the median (50th percentile) for purposes of base salary, and in 2005 certain key employees were granted salary increases consistent with the survey. The Chief Executive Officer, whose salary was above the median market level in the survey, received no increase to his annual base salary in 2005.
Annual Performance Compensation
A Management Performance Compensation Plan provides for annual, single-sum cash payments that are based on achieving preestablished financial objectives and qualitative performance factors. Qualitative factors include performance against certain strategic measures that reflect individual contributions for the year.
An annual performance compensation target opportunity is established for each executive by the Committee based on job responsibilities, level of experience, overall business performance and individual contribution to the business, as well as analysis of competitive industry practice, i.e., the aforementioned Committee compensation consultant analysis. The Chief Executive Officer is measured primarily on a preestablished financial objective and to a limited extent on qualitative performance factors. In 2005, the Chief Executive Officer was not awarded any annual performance compensation since the preestablished financial objective (growth in operating profit) was not achieved.
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Long-term Incentives
Long-term Incentive Plans.In 2004, the Committee established a three-year cash incentive plan with management objectives based on financial measures (cumulative operating profit) with a performance period from January 1, 2004 through December 31, 2006. The incentive opportunity varies according to the level of a participant’s organizational responsibility. The Chief Executive Officer can attain 150% of his base pay as in effect on January 1, 2004, for achieving the targeted objective, and 225% for exceeding the maximum objective. The other participants have a lesser opportunity ranging from 40% to 100% at target and 60% to 150% at maximum. As a one-time retention feature, the Committee set separate growth-in-operating-profit targets for two and three years. The targets reached at the end of the second year, December 31, 2005, would provide a two-thirds award which would be “banked” but paid only at the conclusion of the three-year performance period and only if employment continues through the performance period, excepting disability, death or retirement. The Chief Executive Officer earned a “banked” award of $903,825 for performance through 2005, which is not payable until early 2007 at the conclusion of the three year performance period. Other participants had various “banked” awards dependent upon the two-year performance of their business.
In 2005, the Committee established an overlapping three-year incentive plan using performance shares (as defined under the Corporation’s 1995 Stock Incentive Plan) with management objectives based on financial measures (cumulative operating profit) with a performance period from January 1, 2005 through December 31, 2007. The incentive opportunity varies according to the level of a participant’s organizational responsibility. The Chief Executive Officer was granted 35,277 performance shares, which was equivalent to 100% of his base salary as in effect on January 1, 2005. These shares can be earned for achieving the targeted objective, and 52,915 performance shares, equivalent to 150% of base salary, can be earned for exceeding the maximum objective. Other participants have a lesser opportunity ranging from 10% to 60% of base salary at target and 15% to 90% of base salary at maximum.
Stock Options.Stock options are typically granted annually to executives and other selected employees whose contributions and skills are important in the long-term success of the Company. The options are granted with the exercise price equal to the difference between that amount and the amount of compensation replaced (in other words, 25% of the fair market value of the option property). Thus, the executive may receive the increase or decrease in market value of the entire amount of the property covered by the option, including the exercise price. Due to the American Jobs Creation Act of 2004 which added section 409A to the Internal Revenue Code (the “Code”), the KESOP was frozen effective December 31, 2004. Moreover, options for purchase of property that did not become exercisable prior to 2005 under the KESOP and corresponding elections under the KESOP were cancelled. Each participant who had such KESOP options and elections cancelled received payment in the amount of the cancelled deferrals. Eligibility to participate and the property (consisting of shares of mutual funds) subject to the KESOP options were determined by the Compensation Committee of the Board. Mutual fund selection was intended to be the same or similar to that offered under the 401(k) plan, but was not required. Executives
31
were permitted to select among those mutual funds to determine those covered by the options obtained by them as a result of their compensation elections, but generally were not permitted to change that selection once made. Although the KESOP was frozen as noted above, options that became exercisable prior to January 1, 2005 and which have not as yet been exercised remain on the books for some executives. The KESOP balance of each executive is equal to the most recent closing price of the Company’smutual funds under the options accumulated by the executive as of the end of the year. To obtain the portion of this balance based on any particular option, however, the executive must pay the 25% exercise price set when the option was granted. In addition to potential gains through changes in the market value for the underlying mutual funds, the executive may accumulate value whenever any dividends or other cash distributions are made relative to those mutual funds. Starting with dividends for the year ending December 31, 2004, the value of any such dividends or distributions is credited to the executive’s EDCP II account (see discussion below of the EDCP II) as part of the compensation deferred under that program. Unless the amount of mutual funds available under an option is adjusted as a result of a stock onsplit, merger, divestiture, consolidation or other corporate transaction or unless other property is substituted for the daymutual fund shares originally subject to the option, an option becomes exercisable 184 days after the grant of the option and remains exercisable at any time after that date until the earlier of the fifteenth anniversary of the grant vest over a periodor the third anniversary of up to four years and expire after ten years. In 2005, a totalthe executive’s termination of 13 selected employees were awarded options. The overallemployment. If any adjustment in the number of mutual fund shares or any substitution of new property occurs, the exercise period will be interrupted for 184 days and the deadline to exercise will be extended by 184 days, but not more than 5 years beyond the original exercise deadline. Any option shares granted was 0.82% of total shares outstanding.not exercised by the deadline may not be exercised after that.
The Committee establishedKESOP is unfunded. The options obligation for each executive is maintained in a rangebook reserve account. We are under no obligation to set aside funds specifically designated to satisfy this obligation or to invest in any of potentialthe optioned mutual funds selected by the executive. However, we maintain a trust, as part of the general assets of the Company, intended to hold property for use in meeting this obligation, unless we become insolvent. In that case, the assets in the trust would be available to satisfy our creditors just as any other general assets of the Company, before the option awardsproperty would be delivered. In other words, each executive participating in the KESOP is an unsecured general creditor of the Company with respect to the value of the property optioned as his KESOP benefits. When an option is exercised, the executive pays the applicable exercise price to the Company and we deliver to the executive the underlying property, which may have been obtained and held as general assets of the Company before the option was exercised. The value of the underlying property delivered, less the exercise price paid, is treated as taxable income to the executive and he must pay the Company for any income taxes or other payroll taxes required to be withheld by the Company on that income. We may take an income tax deduction for the Chief Executive Officervalue of the property delivered, reduced by the exercise price paid. No executive may transfer or sell his KESOP options during his life, except for a transfer, for no pay and the other executive officers. The specific number of stock options granted to an executive was determinedonly as approved by the Committee, based uponto a member of the individual’s levelexecutive’s immediate family, to a trust for the benefit of responsibility, recommendationssuch a family member or to a partnership consisting only of such family members as partners. Upon an executive’s death, his KESOP options will pass to his beneficiaries or estate, but they must be exercised before the earlier of the original deadline or the first anniversary of his death. No other transfers or withdrawals are permitted under the KESOP. The latest exercise deadline for any existing KESOP options is June 30, 2019. As noted earlier, options may expire earlier, within three years of the executive’s termination of employment. Executive Deferred Compensation Plan II The EDCP II provides executives an opportunity to make deferral elections generally not permitted under the 401(k) plan. Code section 401(a)(17) limits the amount of compensation that may be taken into account for deferrals under the 401(k) plan. For 2006, that limit was $220,000. Each executive may elect each year to
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defer all or any portion of the sum of his Long-term Incentive Plan and Management Performance Compensation Plan payouts payable during that year, plus the portion of his base salary for that year that is in excess of the compensation limit under Code section 401(a)(17). In addition, we provide a non-elective deferral currently equal to three percent (3%) of his total compensation in excess of the Code section 401(a)(17) limit (his “Excess Compensation”) designed to replace the employer matching contribution not permitted under the 401(k) plan because of the Code section 401(a)(17) compensation limit. Credits in amounts equal to the value of any dividends or other cash distributions payable from mutual funds optioned to the executive under the KESOP (see discussion of the KESOP above) are also added to the executive’s EDCP II account balance starting with dividends for the year 2004. The compensation deferrals credited to each executive are credited with earnings at a rate equal to the return on hypothetical investments selected by management, andthe executive from a subjective judgmentlist of mutual funds identified by the Compensation Committee of the Board. Investment selection is intended to be the same or similar to that offered under the 401(k) plan, but this is not required. The executive’s contributioninvestment selection is used only to determine earnings credits on the compensation deferrals under the EDCP II. We are not obligated to invest any funds in the mutual funds selected by the executive. Earnings returns will change from year to year. The EDCP II is unfunded. Deferred compensation credits and related earnings credits for each executive are maintained in a book reserve account. We are under no obligation to set aside funds specifically designated to pay these deferred income amounts. However, we maintain a trust, as part of the general assets of the Company, intended to pay these deferred income amounts, unless we become insolvent. In that case, the assets in the trust would be available to satisfy creditors of the Company, just as any other general assets of the Company, before the deferred income amounts would be paid. In other words, each executive participating in the EDCP II is an unsecured general creditor of the Company with respect to the performancepayment of his EDCP II benefits. Upon termination of employment for any reason other than death, distribution from the EDCP II will be made as a lump sum or installments over three or five years, as elected by the executive when the deferral election was initially made. If no distribution election was made, the benefit will be paid in a lump sum. If the executive dies before his full EDCP II account is distributed, any remaining balance credited to that account will be paid to his beneficiary in a single lump sum. Distribution will be made or begin 60 days following the executive’s termination of employment (or as soon as practicable after that date), except that in the case of certain specified executives section 409A of the Company. Code requires that payment not be made earlier than six (6) months after he separates from service for any reason other than death. Distribution or withdrawal for any other reason is not permitted under the EDCP II.
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2006 NONQUALIFIED DEFERRED COMPENSATION TABLE The numberNonqualified Deferred Compensation Table shows deferrals to the EDCP II by Brush Engineered Materials on behalf of options currently heldeach named executive officer for 2006, earnings credited to his EDCP II account and KESOP account for 2006, any distributions made from his EDCP II account during 2006, and the aggregate balance of his EDCP II credits and KESOP credits as of December 31, 2006. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Executive
| | | Registrant
| | | Aggregate
| | | Aggregate
| | | Aggregate
| | | | | | | Contributions in
| | | Contributions in
| | | Earnings
| | | Withdrawals/
| | | Balance
| | | | | | | Last FY
| | | Last FY
| | | in Last FY
| | | Distributions
| | | at Last FYE
| | Name | | | | ($)(1) | | | ($)(2) | | | ($)(3) | | | ($) | | | ($)(4) | | | | | Gordon D. Harnett(5) | | KESOP | | | 0 | | | | 0 | | | | 184,662 | | | | 0 | | | | 1,029,242 | | | | | EDCP II | | | 0 | | | | 2,036 | | | | 82,267 | | | | 0 | | | | 310,961 | | | Richard J. Hipple | | KESOP | | | 0 | | | | 0 | | | | 2,427 | | | | 0 | | | | 14,424 | | | | | EDCP II | | | 0 | | | | 6,697 | | | | 3,546 | | | | 0 | | | | 22,007 | | | John D. Grampa | | KESOP | | | 0 | | | | 0 | | | | 136 | | | | 0 | | | | 1,438 | | | | | EDCP II | | | 0 | | | | 2,083 | | | | 2,188 | | | | 0 | | | | 20,036 | | | Daniel A. Skoch | | KESOP | | | 0 | | | | 0 | | | | 6,745 | | | | 0 | | | | 36,801 | | | | | EDCP II | | | 0 | | | | 2,083 | | | | 4,426 | | | | 0 | | | | 24,386 | |
For years before 2006, amounts deferred under either plan by each executive waswere not taken into consideration. In 2005,reported separately from his reported compensation and no above-market earnings were realized or reported, but Company contributions to the Committee grantedplans were included in All Other Compensation in the Chief Executive Officer a stock option covering 55,000 shares of our common stock.Summary Compensation Table. | | | | (1) | | There were no executive contributions credited to either plan in 2006. | | | (2) | | Amounts in this column are also included in the All Other Compensation column of the Summary Compensation Table. | | | (3) | | These earnings include dividends paid in 2005 for the KESOP, which were transferred to the EDCP II in the amounts as follows: Mr. Harnett $43,269; Mr. Hipple $685; Mr. Grampa $2; and Mr. Skoch $878. | | | (4) | | The Aggregate Balance as of Last FYE for the KESOP for each of the executive officers listed above represents the net amount due the participant upon exercise (i.e., net of the 25% option price due back to the Company). | | | (5) | | Mr. Harnett retired from the Company effective June 2, 2006. |
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Special Award2006 PENSION BENEFITS
In 2002 we discontinued our Supplemental Retirement Benefit Plan for the Chief Executive Officer as well as a few other participants in exchange for amounts paid in settlement of the Company’s obligation. As a result, their retirement benefit is limited to the amount provided by the qualified pension plan. | | | | | | | | | | | | | | | | | | | | | Number of
| | | Present
| | | Payments
| | | | | | | Years Credited
| | | Value of
| | | During Last
| | | | | | | Service
| | | Accumulated
| | | Fiscal Year
| | Name | | Plan Name | | (#) | | | Benefit ($) | | | ($) | | | | | Gordon D. Harnett | | Brush Engineered Materials Inc. Pension Plan | | �� | 15 | | | | 386,033 | | | | 0 | | | Richard J. Hipple | | Brush Engineered Materials Inc. Pension Plan | | | 5 | | | | 70,940 | | | | 0 | | | John D. Grampa | | Brush Engineered Materials Inc. Pension Plan | | | 8 | | | | 152,422 | | | | 0 | | | Daniel A. Skoch | | Brush Engineered Materials Inc. Pension Plan | | | 23 | | | | 415,517 | | | | 0 | |
In 2005, in lieu of a supplemental plan and in order to retain a competitive position in the marketplace, the Committee exercised its discretion to authorize special awards to the Chief Executive Officer and the other former participants. The Chief Executive Officer was awarded $597,425. Although we are not obligated under any supplemental plan or otherwise to make such an award, the Committee determined to authorize payment of an actuarially derived amount based upon the objective of providing a present value benefit equivalent to what would have been accrued under the former supplemental plan taking into account prior amounts paid. It is anticipated that the Committee may exercise its discretion to make similar awards in future years, as appropriate to our circumstances. Assumptions: Additional considerations in so structuring the “special award” are as follows: | | | | | • | the calculation used for estimating an equivalent to the pension plan uses the same benefit formula as for any other salaried employee and included only income above the statutory compensation limit, taking into account in the case of the Chief Executive Officer all prior service for which credit would |
15
| | | | | have been recognized under the former supplemental plan. Prior service for the Chief Executive Officer consists of service with the Company and 14 years of service with his former employer as agreed upon at his time of hire by the Company;Measurement Date: 12/31/2006 | | | | | • | the payment is fully taxable as ordinary income to the recipient;Interest Rate for Present Value: 6.125% | | | | | • | no part of the special award is for deferred compensation;Mortality (Pre Commencement): None | | | | | • | there are no guarantees on the assumed rate of returns to the individual once the special award has been paid;Mortality (Post Commencement):RP-2000 Mortality Table (separate male and female rates) | | | | | • | the Company no longer accrues a future benefit on its balance sheet as it had under its prior Supplemental Retirement Plan.Withdrawal and disability rates: None |
Deferred Compensation
In 2004, the Committee established “Executive Deferred Compensation Plan II”, which provides an opportunity for deferral of compensation as well as nonelective deferred compensation in an amount equal to 3 percent of annual excess compensation (above the qualified plan limit) for lost defined contribution plan match opportunity. The Chief Executive Officer received $54,310 as nonelective deferred compensation in 2005.
Deductibility of Compensation in Excess of $1 Million a Year
Section 162(m) of the U.S. Internal Revenue Code of 1986 limits deductibility of compensation in excess of $1 million paid to our Chief Executive Officer and to each of the other four highest-paid executive officers. However, some “performance-based” compensation is specifically exempt from the deduction limit. While the Committee generally takes into consideration the deductibility of its executive officers’ compensation, the Committee retains the flexibility to make payments or awards whether or not such payments or awards qualify for tax deductibility under Section 162(m).
The foregoing report has been furnished by the Organization and Compensation Committee of the Board of Directors.
| | | | | John Sherwin, Jr. (Chairman)
Albert C. Bersticker
Joseph P. Keithley | • | Retirement rates: None prior to Age 65, except age 64 for Mr. Skoch | | | | William B. Lawrence
William P. Madar
William G. Pryor• | Normal Retirement Age: Age 65, except age 64 for Mr. Skoch as explained in the narrative below | | | | N. Mohan Reddy, Ph.D.
William R. Robertson |
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CUMULATIVE SHAREHOLDER RETURN AND PERFORMANCE PRESENTATION
The following graph sets forth the cumulative shareholder return on our common stock as compared to the cumulative total return of the S&P Small-cap 600 Index and the Russell 2000 Index. Brush Engineered Materials is a component company of the S&P Small-cap 600 Index and the Russell 2000 Index.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2000 | | 2001 | | 2002 | | 2003 | | 2004 | | 2005 | | | | | | | | | | | | | | | | Brush Engineered Materials | | $ | 100 | | | $ | 73 | | | $ | 28 | | | $ | 79 | | | $ | 95 | | | $ | 82 | | | S&P Small-cap 600 | | $ | 100 | | | $ | 107 | | | $ | 91 | | | $ | 126 | | | $ | 155 | | | $ | 167 | | | Russell 2000 | | $ | 100 | | | $ | 102 | | | $ | 81 | | | $ | 120 | | | $ | 142 | | | $ | 148 | |
| • | Accumulated benefit is calculated based on credited service and pay as of 12/31/2006 | (1) | Assumes that the value | • | All results shown are estimates only; actual benefits will be based on data, pay and service at time of our common stock and each index was $100 on December 31, 2000 and that all applicable dividends were reinvested.retirement |
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PENSION AND RETIREMENT BENEFITS
The Brush Engineered Materials Inc. Pension Plan (“qualified pension plan”) is a defined benefit plan under which Messrs. Harnett, Hipple, Grampa and Skoch are currently accruing benefits. Mr. Harnett retired from the Company effective June 2, 2006. Effective as of the close of business on May 31, 2005, the benefit under the prior formula for Messrs. Harnett, Hipple, Grampa and Skoch (50% of final average earnings over the highest five5 consecutive years minus 50% of annual Social Security benefit, the result pro-ratedprorated for service less than 35 years) was frozen. The frozen annual benefits as of May 31, 2005, payable beginning at age 65 as a single life annuity, for Messrs. Harnett, Hipple, Grampa and Skoch are $36,612,$36,651, $9,855, $17,252 and $54,856, respectively. Credited service for pension benefit purposes as of May 31, 2005 for Messrs. Harnett, Hipple, Grampa and Skoch is 14, 3, 6 and 21, respectively. Beginning June 1, 2005, the qualified pension plan formula was changed for Messrs. Harnett, Hipple, Grampa and Skoch to 1% of each year’s earnings. The retirement benefit for these individuals will be equal to the sum of that accrued as of May 31, 2005 and that accrued under the new formula for service after May 31, 2005. The followingPension Benefits table shows for Messrs. Harnett, Hipple, Grampa and Skoch the estimatednumber of years of credited service, present value of accumulated benefit and payments during the last fiscal year under the qualified pension plan. We do not sponsor any other qualified or nonqualified defined benefit plan that provides benefits to Messrs. Harnett, Hipple, Grampa and Skoch. The “Present Value of Accumulated Benefit” is the lump-sum value as of December 31, 2006 of the annual pension benefitsbenefit that was earned as of December 31, 2006 that would be payable under the qualified pension plan for Messrs. Harnett, Hipple, Grampa and Skoch for service on and after June 1, 2005.life beginning at their normal retirement age. The Internal Revenue Code limits benefitsnormal retirement age is defined as age 65 in the qualified pension plan. Certain assumptions were used
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to determine the lump-sum value and to determine the annual pension that is payable beginning at normal retirement age. Those assumptions are described immediately following the Pension Benefits table. If the participant terminates employment before completing 10 years of service, the annuity may not commence prior to age 65. If the participant terminates employment after completing 10 years of service, the annuity may commence as early as age 55 and is reduced 6.67% per year between ages 60 and 65 and 3.33% per year between ages 55 and 60 based on the participant’s age at commencement, if the benefit commences prior to normal retirement age. An unreduced benefit is available commencing at age 62 for those participants who terminate after age 55 with at least 30 years of service. At year end 2006, Mr. Skoch had attained early retirement age, Messrs. Hipple and Grampa had not attained early retirement age, and Mr. Harnett had retired effective June 2, 2006, but had not yet commenced receiving his benefit. Mr. Skoch is the only named executive who may become eligible to commence his benefit on an unreduced basis prior to age 65. Assuming continued uninterrupted employment with the Company, Mr. Skoch would reach 30 years of service at the end of the month in which he attains age 64. Benefits provided under the qualified pension plan to thatare based on compensation not in excess of $210,000 in 2005 andup to a compensation limit under the Code (which was $220,000 in 2006. The amounts shown are those which would be2006). In addition, benefits provided under the qualified pension plan may not exceed a benefit limit under the Code (which was $175,000 payable as a single life annuity beginning at normal retirement age in 2006). Compensation is generally equal to the total amount that is included in income (such as regular base salary, incentive compensation under any form of incentive compensation plan, sales commissions and performance restricted shares of stock at the time these shares are includable in the participant’s gross income for retirement at age 65 based on various periodsFederal income tax purposes), plus salary reduction amounts under sections 125 and 401(k) of service: AGE 65 RETIREMENT BENEFIT
| | | | | | | | | | | | | | | | | | | | | | | Years of Service from June 1, 2005 to Age 65 | | | | | | | | Annual Pay | | | | 5 Years | | 10 Years | | 15 Years | | | | | | | | | | | | $ | 210,000 | | | | | $ | 10,500 | | | $ | 21,000 | | | $ | 31,500 | | | | 220,000 | | | | | | 11,000 | | | | 22,000 | | | | 33,000 | |
the Code. The annual salary and bonus for the current year for Messrs. Harnett, Hipple, Grampa and Skoch is indicated in the Summary Compensation Table. Each year’s compensation covered byfor the qualified pension plan is regular base salary, sales commissions andlimited by the compensation limits under the Code. Generally, a participant’s years of credited service are based on the years an employee participates in the qualified pension plan. However, in certain performance compensation. The compensation covered by thiscases, credit for service prior to participation in the qualified pension plan is granted. Such cases include employment with the same as the amounts shownCompany in a position that is not eligible for participation in the salaryqualified pension plan and bonus columnsservice with a predecessor employer. The years of credited service for Messrs. Harnett, Hipple and Grampa are based only on their service while eligible for participation in the Summary Compensation Table on page 12. qualified pension plan. The benefityears of credited service for executives and allMr. Skoch include service for the period June 29, 1983 - December 1, 1985 during which time he was covered under The S.K. Wellman Corp. Retirement Plan for Salaried Employees. All S.K. Wellman Corp. salaried employees who have not attained age 58had transferred to Brush Wellman Inc. as salaried employees prior to May 4, 1986 and completedwere still employed after May 4, 1986, receive credited service under the qualified pension plan equal to their credited service under The S.K. Wellman Corp. Retirement Plan for Salaried Employees at least 20 yearsthe time of service astheir transfer. Mr. Skoch received a lump-sum payment during January 1987 in lieu of the benefit he had accrued for the period June 29, 1983 - December 1, 20051985 under The S.K. Wellman Corp. Retirement Plan for Salaried Employees. Mr. Skoch’s accrued benefit under the qualified pension plan has been reduced as a result of the above noted change in formula. The following table comparesoffset for the benefit for an executivewhich he received this lump-sum payment. Lump sums are available under the two scenariosqualified pension plan only for the portion of having been covered during his entire periodthe participant’s benefit that was accrued prior to July 1, 1992. Messrs. Harnett and Skoch are eligible to elect to receive the portion of employmenttheir benefit that was accrued prior to July 1, 1992 as a lump sum with Brush Engineered Materialsthe remaining portion of their benefit payable in the form of an annuity with monthly benefit payments. Messrs. Hipple and Grampa are eligible only to have their benefits payable in the form of an annuity with monthly benefit payments. The qualified pension plan was designed to provide tax-qualified pension benefits for most of our employees. Benefits under the formula in effect before and after June 1, 2005:qualified pension plan are funded by an irrevocable tax-exempt trust. An executive’s benefits under the qualified pension plan are payable from the assets held by the tax-exempt trust. AGE 65 RETIREMENT BENEFIT
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| | | | | | | | | | | | | | | | | | Years of Service at Age 65 | | Annual Pay | | | | at Age 65 | | 10 Years | | 20 Years | | 30 Years | | | | | | | | | | $210,000 | | | | | | | | | | | | | | | Prior Formula(1) | | $ | 26,676 | | | $ | 53,352 | | | $ | 80,028 | | | | New Formula | | | 21,000 | | | | 42,000 | | | | 63,000 | | | $220,000 | | | | | | | | | | | | | | | Prior Formula(1) | | $ | 28,105 | | | $ | 56,209 | | | $ | 84,314 | | | | New Formula | | | 22,000 | | | | 44,000 | | | | 66,000 | |
| | (1) | Amounts shown assume an annual Social Security benefit of $23,268. |
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EMPLOYMENT AGREEMENTSOTHER POTENTIAL POST-EMPLOYMENT PAYMENTS
We have The Company has entered into severance agreements with various senior executives, including Messrs. Harnett, Hipple, Grampa and Skochthe named executive officers to help ensure the continuity and stability of our senior management. If a “changeThe other incentive arrangements maintained by the Company also provide for payments to be made to the named executive officers upon certain terminations of control” of the company as defined in theseemployment. Severance Agreements Basic Severance Benefits. The severance agreements provide that if the executive’s employment is terminated by usthe Company or one of its affiliates except for cause or gross misconduct, or if he resigns as a result of a reduction in his salary or incentive pay opportunity, severance benefits will apply. Severance benefits include rights to: | | | | • | a lump-sum payment of two times salary and incentive compensation; | | | • | a lump-sum payment of two times any special award paid in lieu of benefits under the Company’s former Supplemental Retirement Benefit Plan for the year in which termination occurs; | | | • | the continuation of retiree medical and life insurance benefits for two years; | | | • | a lump-sum payment of two times the benefit under the Company’s Executive Deferred Compensation Plan II for the year in which termination occurs; | | | • | a lump-sum payment equal to the sum of the present value of any bonus he would have received under any long-term incentive plan; | | | • | any retirement benefits he would have earned under the Company’s qualified retirement plans during the next two years; and | | | • | reasonable fees for outplacement services, up to $20,000 maximum. |
In addition, all equity incentive awards vest, and all stock options become fully exercisable, if the severance benefits are applicable. Change in Control Severance Benefits. In the event of a “change in control” of the Company, as defined in these agreements, and if the executive’s employment is terminated by the Company or one of its affiliates except for cause, or he resigns within one month after the first anniversary of the change, or the nature and scope of his duties worsens or certain other adverse changes occur and the Board of Directors so decides then(referred to in the Table below as “Good Reason Termination”), the executives are entitled to receive similar severance benefits will apply. For Messrs. Harnett, Hipple, Grampa and Skoch, if applicable, at the time ofbased on a change of control, severance benefits include rights to a lump sum payment of three times salary; incentive compensation; cash in lieu of benefits under our Supplemental Retirement Benefit Plan; any special awards; the continuation of retiree medical and life insurance benefits for three years; and a lump sum payment equal to the sum of the present value of any bonus he would have received under any long-term incentive plan (assuming attainment of the plan target rate), any retirement benefits he would have earned during the next three years andthree-year period, plus the cash value of certain other benefits. Forbenefits (such as club dues and financial counseling) (collectively, the four named executive officers above, all equity incentive awards also vest, and all stock options become fully exercisable, if the severance benefits are applicable.“Change in Control Benefits”). A termination or demotion following the commencement of discussions with a third party which ultimately resultresults in a change in control will also activate the Change in Control Benefits. On February 8, 2007, the severance benefits. Payments and benefitsagreements were updated to include a tax gross up provision that will apply for five years under Section 280G of the Code. Payment of the Change in Control Benefits under the severance agreements are subject to the tax gross up for the first five years and thereafter are subject to a reduction in order to avoid the application of the excise tax on “excess parachute payments” under the Internal Revenue Code, but only if the reduction would increase the net after-tax amount received by the executive. In addition, the Company must secure payment of the Change in Control Benefits under the severance agreements through a trust that is to be funded upon the change in control, and amounts due but not timely paid earn interest at the prime rate plus 4%. The Company must pay attorneys’ fees and expenses incurred by an executive in enforcing his right to Change in Control Benefits under his severance agreement. Nonsolicitation and Noncompetition Provisions.Under thesethe severance agreements, each executive agrees not to compete with us during employment or for one year thereafter; not to solicit any of our employees, agents or consultants to terminate their relationship with us; andus, to protect our confidential business information.information and not to compete with the Company during employment or for a period of (i) two years following termination of the executive’s employment by the Company or one of its affiliates except for cause or gross misconduct, or if he resigns as a result of a reduction in his salary or incentive pay
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opportunity or (ii) one year following a termination of employment for any other reason. Each executive also assigns to us any intellectual property rights he may otherwise have to any discoveries, inventions or improvements made while in our employ or within one year thereafter. Amounts Payable Under Severance Agreements. The following table sets forth the amounts payable under the severance agreements. Note that this table does not include any benefits payable to the named executive officers under the retirement plan(s) of the Company or any subsidiary (see page 35), or any payout to the named executive officers under the Company’s Executive Deferred Compensation Plan II (see page 34). Additional information about the amounts payable to the named executive officers in the event of retirement, death or permanent disability is presented separately after the table. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Richard J. Hipple | | | John D. Grampa | | | Daniel A. Skoch | | | | | | | | Involuntary
| | | | | | Involuntary
| | | | | | Involuntary
| | | | | | | | or Good
| | | | | | or Good
| | | | | | or Good
| | | | | | | | Reason
| | | | | | Reason
| | | | | | Reason
| | | | | Involuntary
| | | Termination
| | | Involuntary
| | | Termination
| | | Involuntary
| | | Termination
| | | | | Not For
| | | After a
| | | Not For
| | | After a
| | | Not For
| | | After a
| | Benefits/Payments
| | Cause
| | | Change in
| | | Cause
| | | Change in
| | | Cause
| | | Change in
| | Upon Termination | | Termination | | | Control | | | Termination | | | Control | | | Termination | | | Control | | | | | Base Salary/Annual Bonus | | $ | 2,030,600 | | | $ | 3,045,900 | | | $ | 1,082,600 | | | $ | 1,623,900 | | | $ | 1,082,600 | | | $ | 1,623,900 | | | LTIP Bonus | | | 1,231,024 | | | | 1,231,024 | | | | 945,315 | | | | 945,315 | | | | 970,215 | | | | 970,215 | | | Welfare Benefits | | | 52,800 | | | | 79,200 | | | | 52,800 | | | | 79,200 | | | | 52,800 | | | | 79,200 | | | Additional Benefits Under Retirement Plans | | | 30,929 | | | | 46,393 | | | | 39,871 | | | | 59,806 | | | | 36,302 | | | | 54,453 | | | SRBP Replacement Benefits | | | 270,000 | | | | 405,000 | | | | 76,622 | | | | 114,933 | | | | 159,088 | | | | 238,632 | | | Nonelective Contribution Credit Under Executive Deferred Compensation Plan II | | | 13,394 | | | | 20,091 | | | | 4,166 | | | | 6,249 | | | | 4,166 | | | | 6,249 | | | Perquisites | | | 20,000 | | | | 71,000 | | | | 20,000 | | | | 35,000 | | | | 20,000 | | | | 65,000 | | | Pro-Rata Annual MPC Bonus | | | N/A | | | | 515,300 | | | | N/A | | | | 251,500 | | | | N/A | | | | 251,500 | | | Stock Options/SARs — Accelerated Vesting | | | 422,090 | | | | 422,090 | | | | 136,360 | | | | 136,360 | | | | 136,360 | | | | 136,360 | | | Restricted Stock — Accelerated Vesting | | | 0 | | | | 0 | | | | 67,540 | | | | 67,540 | | | | 67,540 | | | | 67,540 | | | 280G Tax Gross-Up Payment(1) | | | N/A | | | | 2,999,012 | | | | N/A | | | | 1,565,620 | | | | N/A | | | | 1,612,007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | $ | 4,070,837 | | | $ | 8,835,010 | | | $ | 2,425,274 | | | $ | 4,885,423 | | | $ | 2,529,071 | | | $ | 5,105,056 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (1) | | On February 8, 2007, the Board of Directors approved new forms of severance agreements. The new forms were updated to include a tax gross-up provision that will apply for five years from the date of the agreement under Section 280G of the Internal Revenue Code. The amounts shown in the table reflect amounts that would have been payable in the event the gross up had been in effect on December 29, 2006. |
BENEFITS PAYABLE UPON RETIREMENT, DEATH OR DISABILITY UNDER INCENTIVE PLANS Annual and Long-term Cash Incentive Plans Management Performance Compensation Plan (MPC). The named executive officers are participants in the Company’s MPC, which provides for annual, single-sum cash payments that are based on achieving preestablished financial objectives and qualitative performance factors. Generally, an executive must be employed on the last day of the plan year in order to receive an award under the MPC. However, if an executive retires under a retirement plan of the Company or any subsidiary during a plan year, the executive will receive an award pro-rated to the beginning of the month following the executive’s retirement date. Long-term Incentive Plan (LTIP). The Company established a three-year cash incentive plan with management objectives based on financial measures (cumulative operating profit) with a performance period from January 1 through December 31. Each of the named executive officers participates in the LTIP. Generally, an executive must be employed on the last day of the performance period in order to receive an
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award. If an executive retires under a retirement plan of the Company or any subsidiary during the performance period, the executive will receive a pro-rated award at the end of the applicable performance period based on the time employed during the performance period. In addition, an executive will receive full payment of the award for the entire performance period at target level if he should die or become permanently disabled during the performance period. Assuming a termination of employment due to death or permanent disability on December 29, 2006, the amounts payable under the LTIP would have been $400,279, $568,083 and $586,623 for Messrs. Hipple, Grampa and Skoch, respectively. 2006 Stock Incentive Plan In March 2006, the Company adopted the Brush Engineered Materials must secure itsInc. 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan authorizes the Compensation Committee to provide equity-based compensation in the form of performance restricted shares, performance shares, performance units, restricted shares, option rights, stock appreciation rights and restricted stock units for the purpose of providing incentives and rewards for superior performance. Performance Shares. Each of the named executive officers have received grants of Performance Restricted Shares and Performance Shares under the severance2006 Plan. The award agreements throughprovide that all Performance Restricted Shares will immediately vest if the executive dies or becomes permanently disabled while employed by the Company or any subsidiary during the applicable performance period. Assuming a trust which istermination of employment due to death or permanent disability on December 29, 2006, the value of accelerated vesting of the Performance Restricted Shares would have been $983,416, $341,989 and $341,989 for Messrs. Hipple, Grampa and Skoch, respectively. In addition, if the executive retires, a pro-rata portion of the Performance Restricted Shares will vest at the end of the applicable performance period, provided that management objectives have been attained. Assuming a termination of employment due to retirement on December 29, 2006, the value of pro-rata accelerated vesting of the Performance Restricted Shares would have been $245,854, $85,497 and $85,497 for Messrs. Hipple, Grampa and Skoch, respectively. Stock Options and Stock Appreciation Rights. Each of the named executive officers has received grants of stock optionsand/or stock appreciation rights (the “Awards”) under the 2006 Plan. The Award agreements generally provide that Awards terminate 190 days after termination of employment. However, the Award agreements also provide that all Awards will immediately vest if the executive dies while employed by the Company or any subsidiary or retires under a retirement plan of the Company or any subsidiary. At the discretion of the Committee, all Awards will immediately vest upon a termination of the executive’s employment under circumstances determined by the Board to be funded uponfor the change in control, and amounts due but not timely paid earn interest at the prime rate plus 4%. We must pay attorneys’ fees and expenses incurred by an executive in enforcing his rights under his severance agreement. The severance agreements may have the effect of inhibiting a change in controlconvenience of the Company. Assuming a termination of employment due to death, retirement or upon a termination of employment described in the preceding sentence on December 29, 2006, the value of any accelerated vesting of the Awards would have been $376,938, $136,360 and $136,360 for Messrs. Hipple, Grampa and Skoch, respectively. RELATED PARTY TRANSACTIONS In 2002 we entered into life insurance agreements with six employees, including two of the named executive officers, Messrs. Harnett and Skoch, and purchased life insurance policies pursuant to those agreements. These agreements, and the policies, which are owned by the employees, remain outstanding, and the portions of the premiums we paid are treated as loans to the employees, secured by the insurance policies, for financial purposes. The agreements require the employees to maintain the policies’ cash surrender values in amounts at least equal to the outstanding loan balances. The outstanding balances,Mr. Harnett’s loan in the principal amount of $260,000, which havehad not changed since the inception of the program, are $260,004 forwas repaid in full after his retirement in 2006. Mr. Harnett and $39,951 for Mr. Skoch. The employees pay a market rate of interestSkoch’s principal balance, which has not changed since inception, is $39,951. Interest on the loans is based on the applicable federal rate. The rate, which is currently 5.2%5.3%. Mr. Harnett paid the Company $5,720 in interest, which accrued during 2006 prior to repayment of his loan, and Mr. Skoch paid $1,748 in interest for the year. We recognize that transactions between us and any of our directors or executive officers can present potential or actual conflicts of interest and create the appearance that our decisions are based on
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considerations other than the best interests of our shareholders. Pursuant to its charter, the Governance and Organization Committee considers and makes recommendations to the Board with regard to possible conflicts of interest of Board members or management. The Board then makes a determination as to whether to approve the transaction. AUDIT COMMITTEE REPORT The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process including the Company’s systems of internal controls. In fulfilling its oversight responsibilities, the Committee reviewed the audited financial statements in the Annual Reportannual report with management, and discussed the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. 19
The Committee reviewed with the independent registered public accounting firm, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Committee under generally accepted auditing standards. In addition, the Committee has discussed with the independent registered public accounting firm the auditors’ independence from management and the Company, including the matters in the written disclosures required by the Independence Standards Board, and considered the compatibility of nonaudit services with the auditors’ independence. The Committee discussed with the Company’s internal and independent auditors the overall scope and plans for the respective audits. The Committee meets with the internal and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Committee held six meetings during 2005.2006. In reliance on these reviews and discussions, the Committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in the Annual Report onForm 10-K for the year ended December 31, 20052006 for filing with the Securities and Exchange Commission. In February 2006,March 2007, a revised charter for the Audit Committee was adopted and is attached as Appendix A to this proxy statement. Under the new charter, shareholder approval will be required for retention or termination of the independent registered public accounting firm.available on our website at www.beminc.com. | | | William R. Robertson (Chairman) | | William B. Lawrence | | N. Mohan Reddy, Ph.D. | | John Sherwin, Jr. |
William R. Robertson (Chairman) Joseph P. Keithley William B. Lawrence William G. Pryor
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20
2. APPROVAL OF BRUSH ENGINEERED MATERIALS INC. 2006 STOCK INCENTIVE PLAN
General
On March 7, 2006, upon recommendation by the Organization and Compensation Committee, the Board of Directors of Brush Engineered Materials unanimously approved and adopted, subject to the approval of Brush Engineered Materials’ shareholders at the 2006 annual meeting, the Brush Engineered Materials Inc. 2006 Stock Incentive Plan (the “2006 Plan”). The 2006 Plan affords the Organization and Compensation Committee the ability to design compensatory awards that are responsive to Brush Engineered Materials’ needs and includes authorization for a variety of awards designed to advance the interests and long-term success of Brush Engineered Materials by encouraging stock ownership among officers, other salaried employees and consultants of Brush Engineered Materials.
The 2006 Plan replaces the Brush Engineered Materials Inc. 1995 Stock Incentive Plan (as amended and restated as of March 3, 1998), as amended (“1995 Plan”), which terminated on May 2, 2005. If the 2006 Plan is approved by shareholders, the 1979 Stock Option Plan, the 1984 Stock Option Plan and the 1989 Stock Plan (together, the “Old Option Plans”) will be terminated. Assuming the 2006 Plan and the proposed new Director Plan (See proposal 3) are approved by shareholders at the 2006 annual meeting, the sum of the number of common shares reserved for awards outstanding under the Old Option Plans and the 1995 Plan, and the number of shares available for future awards under the 2006 Plan (total “overhang”) will be approximately 14.9%.
On March 7, 2006, the Organization and Compensation Committee of the Board granted 121,722 performance restricted shares and 60,861 performance shares that are contingent upon shareholder approval of the 2006 Plan. These shares are the intended method of payment for the Company’s 2006 through 2008 Long-Term Incentive Plan (“LTIP”). Vesting of these shares will occur only if pre-established financial targets (cumulative growth in operating profit over three years) are achieved. There are approximately 36 participants in the LTIP. See New Plan Benefits Table (page 31) for additional information.
The following is a summary of the principal provisions of the 2006 Plan, a copy of which is set forth as Appendix B to this proxy statement.
Plan Highlights
The 2006 Plan authorizes the Organization and Compensation Committee to provide equity-based compensation in the form of performance restricted shares, performance shares, performance units, restricted shares, option rights, stock appreciation rights (“SARs”) and restricted stock units for the purpose of providing our officers, salaried employees and consultants incentives and rewards for superior performance. Some of the key features of the 2006 Plan that reflect our commitment to effective management of incentive compensation are set forth below and are described more fully under the heading “Summary of the 2006 Plan” and in the 2006 Plan.
| | | | • | Plan Limits.Total awards under the 2006 Plan are limited to 1,250,000 common shares without par value of Brush Engineered Materials. No more than 850,000 may be issued in the form of awards other than stock options or SARs (after taking into account forfeitures, expirations and cancellations). The aggregate number of restricted stock units or other awards under the 2006 Plan that specify Management Objectives (as described below), performance restricted shares or performance shares that may be granted to any one participant in a calendar year is limited to 50,000. No participant will receive performance units in any calendar year having a value in excess of $1,000,000. The 2006 Plan also limits the aggregate number of stock options and SARs that may be granted to any one participant in a calendar year to 100,000. | | | • | No Liberal Recycling Provisions.The 2006 Plan provides that, except for awards settled in cash, only common shares covered by awards that expire or are forfeited will again be available for issuance under the 2006 Plan. The following shares will not be added back to the aggregate plan limit: (1) common shares tendered in payment of the option price; (2) common shares withheld by Brush |
21
| | | | | Engineered Materials to satisfy the tax withholding obligation; and (3) common shares that are repurchased by Brush Engineered Materials with option right proceeds. Further, all common shares covered by a SAR, to the extent that it is exercised and settled in shares, whether or not all shares covered by the award are actually issued to the participant upon exercise of the right, shall be considered issued or transferred pursuant to the 2006 Plan. | | | • | Minimum Vesting Periods.The 2006 Plan provides for the following minimum vesting periods, which may be subject to acceleration in the event of the retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event, that: |
| | | | • | Restricted shares and restricted stock units may not become unrestricted by the passage of time before the third anniversary of the date of grant; | | | • | Restricted stock units that vest upon the achievement of Management Objectives cannot vest sooner than one year from the date of grant; and | | | • | The period of time within which Management Objectives (as described below) relating to performance restricted shares, performance shares and performance units must be achieved will be a minimum of one year. |
| | | | • | No Repricing.Brush Engineered Materials has never repriced underwater stock options, and option repricing is prohibited without shareholder approval under the 2006 Plan. | | | • | Other Features. |
| | | | • | The 2006 Plan also provides that no stock options or SARs will be granted with an exercise or base price less than the fair market value of Brush Engineered Materials’ common shares on the date of grant. | | | • | The 2006 Plan is designed to allow awards made under the 2006 Plan to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. |
Summary of the 2006 Plan
Shares Subject to the 2006 Plan. Subject to adjustment as provided in the 2006 Plan, the number of common shares that may be issued or transferred
| | | | • | upon the exercise of option rights or SARs; | | | • | as restricted performance shares or restricted shares and released from substantial risk of forfeiture thereof; | | | • | in payment of restricted stock units; | | | • | in payment of performance shares or performance units that have been earned, or; | | | • | in payment of dividend equivalents paid with respect to awards made under the 2006 Plan |
will not exceed in the aggregate 1,250,000 common shares, plus any shares relating to awards that expire or are forfeited or are cancelled under the 2006 Plan. These shares may be shares of original issuance or treasury shares or a combination of the foregoing.
Shares covered by an award granted under the 2006 Plan shall not be counted as used unless and until they are actually issued and delivered to a participant. Without limiting the generality of the foregoing, upon payment in cash of the benefit provided by any award granted under the 2006 Plan, any shares that were covered by that award will be available for issue or transfer under the 2006 Plan. Notwithstanding anything to the contrary:
| | | | • | shares tendered in payment of the exercise price of an option right shall not be added to the aggregate plan limit described above; |
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| | | | • | shares withheld by Brush Engineered Materials to satisfy the tax withholding obligation shall not be added to the aggregate plan limit described above; | | | • | shares that are repurchased by Brush Engineered Materials with option right proceeds shall not be added to the aggregate plan limit described above; and | | | • | all shares covered by a SAR, to the extent that it is exercised and settled in shares, whether or not all shares covered by the award are actually issued to the participant upon exercise of the right, shall be considered issued or transferred pursuant to the 2006 Plan. |
The aggregate number of common shares actually issued or transferred by Brush Engineered Materials upon the exercise of incentive stock options (sometimes referred to as “ISOs”) will not exceed 1,250,000 of the common shares reserved for purposes of the 2006 Plan. The number of common shares issued as performance restricted shares, restricted shares, performance shares, performance units or restricted stock units (taking into account any forfeitures, expirations and cancellations) will not, during the life of the 2006 Plan, in the aggregate, exceed 850,000 of the common shares reserved for purposes of the 2006 Plan.
No participant will be granted restricted stock units or other awards contemplated by the 2006 Plan that specify management objectives or performance shares, in the aggregate, of more than 50,000 during any calendar year. In no event shall any participant in any calendar year receive an award of performance units having an aggregate maximum value as of their respective dates of grant in excess of $1,000,000. No participant will be granted option rights or SARs, in the aggregate, for more than 100,000 common shares during any calendar year.
Up to 5% of the total maximum number of common shares available under the 2006 Plan may be used for awards thereunder that do not comply with the three-year or one-year requirements applicable to such award as described below. All the share limits discussed above are subject to certain adjustments as provided in the 2006 Plan.
Eligibility. Officers, other salaried employees and consultants of Brush Engineered Materials and its subsidiaries or any person who has agreed to commence serving in any of those capacities within 90 days of the date of grant may be selected by the Organization and Compensation Committee to receive benefits under the 2006 Plan. Any person who provides services to Brush Engineered Materials or a subsidiary that are equivalent to those typically provided by an employee is also eligible. The Organization and Compensation Committee determines which persons will receive awards and the number of shares subject to such awards. All salaried employees are eligible to participate. However, the current number who are likely to be selected to participate is 37.
Performance Restricted Shares. An award of performance restricted shares involves the immediate transfer by Brush Engineered Materials to a participant of ownership of a specific number of common shares in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other ownership rights in such shares. The transfer may be made without additional consideration from the participant.
The Organization and Compensation Committee must specify Management Objectives (as discussed below) which, if achieved, will result in termination or early termination of the restrictions applicable to such shares. The Organization and Compensation Committee must also specify in respect of the specified Management Objectives, a minimum acceptable level of achievement and must set forth a formula for determining the number of performance restricted shares on which restrictions will terminate if performance is at or above the minimum level, but below full achievement of the specified Management Objectives.
Performance restricted shares must be subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Internal Revenue Code for a period of at least one year to be determined by the Organization and Compensation Committee on the date of the grant. To enforce these forfeiture provisions, the transferability of performance restricted shares will be prohibited or restricted in a manner and to the extent prescribed by the Organization and Compensation Committee for the period during which the forfeiture provisions are to continue. The Organization and Compensation Committee may provide for a shorter period
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during which the forfeiture provisions are to apply in the event of retirement, death or disability or a change in control of Brush Engineered Materials or other similar transaction or event.
Performance Shares and Performance Units. A performance share is the equivalent of one common share and a performance unit is the equivalent of the market value of one common share on the date of grant. The participant will be given one or more Management Objectives to meet within a specified performance period. The specified performance period will be a period of time not less than one year, but may be subject to earlier termination in the event of retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event. If, by the end of the performance period, the participant has achieved the specified Management Objectives, the participant will be deemed to have fully earned the performance shares or performance units. If the participant has not fully achieved the Management Objectives, but has attained or exceeded the predetermined level or levels of acceptable achievement, the participant will be deemed to have partly earned the performance shares or performance units in accordance with a predetermined formula.
To the extent earned, the performance shares or performance units will be paid to the participant at the time and in the manner determined by the Organization and Compensation Committee. Any grant may specify that the amount payable with respect thereto may be paid by Brush Engineered Materials in cash, common shares or any combination thereof and may either grant to the participant or retain in the Organization and Compensation Committee the right to elect among those alternatives. The grant may provide for the payment of dividend equivalents thereon in cash or in common shares on a current, deferred or contingent basis.
Restricted Shares. A grant of restricted shares constitutes the immediate transfer by Brush Engineered Materials to a participant of ownership of a specific number of common shares in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other ownership rights in such shares. Such grant or sale may be made without additional consideration or in consideration of a payment by the participant that is less than current market value of the common shares.
As are performance restricted shares (as described above), restricted shares must be subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Internal Revenue Code for at least three years, as the Organization and Compensation Committee may determine at the date of grant. The Organization and Compensation Committee may provide for a shorter period during which the forfeiture provisions are to apply in the event of retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event.
Option Rights. Option rights may be granted that entitle the optionee to purchase a specified number of common shares at a price equal to or greater than market value per share on the date of grant. The closing market price of a common share as reported on the New York Stock Exchange on March 7, 2006 was $17.27 per share. The option price is payable
| | | | • | in cash; | | | • | by the transfer to Brush Engineered Materials of nonforfeitable, unrestricted common shares owned by the optionee having a value at the time of exercise equal to the option price; | | | • | by such other method as may be approved by the Organization and Compensation Committee; or | | | • | any combination of the foregoing. |
Payment of the option price of any nonqualified option may also be made in whole or in part in the form of restricted shares or other common shares that are subject to risk of forfeiture or restriction on transfer. When paid for with such consideration, unless otherwise determined by the Organization and Compensation Committee on or after the date of the grant, whenever common shares received by the optionee upon the exercise of the nonqualified option is subject to the same risks of forfeiture or restrictions on transfer as applied to the consideration surrendered by the optionee. However, such risks of forfeiture and restriction on transfer shall apply only to the same number of common shares received by the optionee as applied to the forfeitable or restricted common shares surrendered by the optionee.
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The Organization and Compensation Committee has the authority to specify at the time option rights are granted that the common shares will not be accepted in payment of the option price until they have been owned by the optionee for a specified period. However, the 2006 Plan does not require any such holding period and would permit immediate sequential exchanges of common shares at the time of exercise of option rights. To the extent permitted by law, any grant of an option right may provide for deferred payment of the option price from the proceeds of sale through a broker of some or all of the common shares to which the exercise relates.
Option rights granted under the 2006 Plan may be option rights that are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code or Option Rights that are not intended to so qualify or combinations thereof.
No option right may be exercisable more than ten years from the date of grant. Each grant will specify the period of continuous service with Brush Engineered Materials or any subsidiary that is necessary before the option rights will become exercisable. A grant of option rights may provide for the earlier vesting of such option rights in the event of retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event. Successive grants may be made to the same optionee whether or not option rights previously granted remain unexercised. Any grant of option rights may specify Management Objectives (as described below) that must be achieved as a condition to exercising such rights.
The Organization and Compensation Committee may, at the date of grant of any option rights (other than ISO), provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis, either in cash or in additional common shares.
The Organization and Compensation Committee reserves the discretion at or after the date of grant to provide for (1) the payment of a cash bonus at the time of exercise; (2) the availability of a loan at exercise; and (3) the right to tender in satisfaction of the option price nonforfeitable, unrestricted common shares, which are already owned by the optionee and have a value at the time of exercise that is equal to the option price. Additionally, the Organization and Compensation Committee may substitute, without receiving the participant’s permission, SARs paid only in common shares (or SARs paid in common shares or cash at the Organization and Compensation Committee’s discretion) for outstanding options on substantially the same terms.
SARs. A SAR is a right, exercisable by surrender of the related option right (if granted in tandem with option rights) or by itself (if granted as a free-standing SAR), to receive from Brush Engineered Materials an amount not exceeding 100% of the spread between the base price (or option price if a tandem SAR) and the value of a Common Share on the date of exercise. Any grant may specify that the amount payable on exercise of a SAR may be paid by Brush Engineered Materials in cash, in common shares, or in any combination thereof, and may either grant to the participant or retain in the Organization and Compensation Committee the right to elect among those alternatives. Any SAR grant may specify that the amount payable on exercise may not exceed a maximum specified by the Organization and Compensation Committee at the time of grant.
Any grant may specify waiting periods before exercise and permissible exercise dates and periods. Any grant of a SAR may specify that such SAR be exercised only in the event of, or earlier in the event of, retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event. Any grant of SARs may specify Management Objectives that must be achieved as a condition to exercise such rights. Any SAR grant may provide for the payment to the participant of dividend equivalents thereon in cash or common shares on a current, deferred or contingent basis.
Tandem SARs may be exercised only at a time when the related option right is exercisable and the spread is positive, and require that the related option right be surrendered for cancellation. Free-standing SARs must have a base price that is equal to or greater than the fair market value of a common share on the date of grant. Successive grants of free-standing SARs may be made to the same participant regardless of whether any free-standing SARs remain unexercised. Free-standing SARs must specify the period or periods of continuous employment of the participant by Brush Engineered Materials or any subsidiary that are
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necessary before the free-standing SAR or installments thereof become exercisable, and any grant may provide for the earlier exercise of such rights in the event of retirement, death or disability of the participant or a change in control of Brush Engineered Materials or similar transaction or event. No free-standing SAR may be exercised more than ten years from the date of grant.
Restricted Stock Units. A grant of restricted stock units constitutes an agreement by Brush Engineered Materials to deliver common shares or cash to the participant in the future in consideration of the performance of services, but subject to the fulfillment of such conditions (including Management Objectives) during the restriction period as the Organization and Compensation Committee may specify. Awards of restricted stock units may be made without additional consideration or in consideration of a payment by such participant that is less than the market value per share at the date of grant. During the restriction period, the participant has no right to transfer any rights under his or her award and no right to vote such restricted stock units. However, the Organization and Compensation Committee may, at the date of grant, authorize the payment of dividend equivalents on such restricted stock units on either a current or deferred or contingent basis, either in cash or in additional common shares. Each grant or sale will specify the time and manner of payment of restricted stock units that have been earned. Any grant or sale may specify that the amount payable with respect thereto may be paid by Brush Engineered Materials in cash, in common shares or in any combination thereof and may either grant to the participant or retain in the Organization and Compensation Committee the right to elect among those alternatives.
Restricted stock units must be subject to a restriction period of at least three years if such restriction period lapses only by the passage of time, as determined by the Organization and Compensation Committee at the date of grant, except that the Organization and Compensation Committee may provide for a shorter restriction period in the event of retirement, death or disability of the participant or a change of control of Brush Engineered Materials or similar transaction or event. Any grant of restricted stock units may specify Management Objectives which, if achieved, will result in termination or early termination of the restriction period applicable to such shares. If the grant of restricted stock units provides that Management Objectives must be achieved to result in a lapse of the restriction period, the restriction period cannot lapse sooner than one year from the date of grant, but may be subject to earlier lapse in the event of retirement, death or disability of the participant or change of control of Brush Engineered Materials or similar transaction or event. Any such grant may also specify in respect of such specified Management Objectives, a minimum acceptable level of achievement and may set forth a formula for determining the number of shares of restricted stock units on which the restriction period will terminate if performance is at or above the minimum level, but below full achievement of the specified Management Objectives.
Evidence of Award. All awards granted under the 2006 Plan must be evidenced by an “evidence of award” containing such terms and provisions, consistent with the 2006 Plan, as the Organization and Compensation Committee may approve. An evidence of award may be an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Organization and Compensation Committee which sets forth the terms and conditions of the award granted. An evidence of award may be in any electronic medium, may be limited to a notation on the books and records of Brush Engineered Materials and, with the approval of the Organization and Compensation Committee, need not be signed by a representative of Brush Engineered Materials or a participant.
Management Objectives. The 2006 Plan requires that the Organization and Compensation Committee establish “Management Objectives” for purposes of granting performance restricted shares, performance shares and performance units. When so determined by the Organization and Compensation Committee, option rights, SARs, restricted stock units or dividend credits may also specify Management Objectives. Management Objectives may be described in terms of either company-wide objectives or objectives that are related to the performance of the individual participant or subsidiary, division, department, region or function within Brush Engineered Materials or a subsidiary in which the participant is employed. The Management Objectives may be made related to the performance of other companies. Management Objectives applicable to any award to a participant who is, or is determined by the Organization and Compensation Committee likely to become, a
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“covered employee” within the meaning of Section 162(m) of the Internal Revenue Code, will be limited to specified levels of or growth in:
| | | | • | Profits(e.g., operating income, EBIT, EBT, net income, earnings per share, residual or economic earnings — these profitability metrics could be measured before special items and/or subject to GAAP definition); | | | • | Cash Flow(e.g., EBITDA, operating cash flow, total cash flow, free cash flow, residual cash flow or cash flow return on investment); | | | • | Returns(e.g., profits or cash flow returns on: assets, invested capital, net capital employed, and equity); | | | • | Working Capital(e.g., working capital divided by sales, days’ sales outstanding, days’ sales inventory, and days’ sales in payables, or any combination thereof); | | | • | Profit Margins(e.g., profits divided by revenues, gross margins and material margins divided by revenues, and variable margin divided by sales); | | | • | Liquidity Measures(e.g., debt-to-capital, debt-to-EBITDA, total debt ratio, EBITDA multiple); | | | • | Sales Growth, Cost Initiative and Stock Price Metrics(e.g., revenues, revenue growth, new product sales growth, growth in value added sales, stock price appreciation, total return to shareholders, sales and administrative costs divided by sales, sales per employee); and | | | • | Strategic Initiative Key Deliverable Metricsconsisting of one or more of the following: product development, strategic partnering, research and development, market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, increase in yield and productivity and goals relating to acquisitions or divestitures of subsidiaries, affiliates and joint ventures. |
If the Organization and Compensation Committee determines that a change in the business, operations, corporate structure or capital structure of Brush Engineered Materials, or the manner in which it conducts its business, or other events or circumstances render the Management Objectives unsuitable, the Organization and Compensation Committee may in its discretion modify such Management Objectives or the level or levels of achievement, in whole or in part, as the Organization and Compensation Committee deems appropriate and equitable, except in the case of a “covered employee” where such action would result in the loss of the otherwise available exemption under Section 162(m) of the Internal Revenue Code. In such case, the Organization and Compensation Committee may not make any modification of the Management Objectives or acceptable level or levels of achievement with respect to such “covered employee.”
Administration. The 2006 Plan is to be administered by the Organization and Compensation Committee. The Organization and Compensation Committee is authorized to interpret the 2006 Plan and related agreements and other documents. To the extent permitted by Ohio law, the Organization and Compensation Committee may, from time to time, delegate to one or more officers of Brush Engineered Materials the authority of the Organization and Compensation Committee to grant and determine the terms and conditions of awards granted under the 2006 Plan. However, such delegation will not be permitted with respect to awards to any executive officer or any person subject to Section 162(m) of the Code.
Detrimental Activity. Any grant may provide that if a participant, either during employment by Brush Engineered Materials or a subsidiary or within a specified period after termination of employment, engages in any “detrimental activity” (as defined by the Organization and Compensation Committee in the evidence of award), the participant shall forfeit any awards granted under the 2006 Plan then held by the participant or return to Brush Engineered Materials, in exchange for payment by Brush Engineered Materials of any amount actually paid for the common shares by the participant, all common shares that the participant has not disposed of that were offered pursuant to the 2006 Plan within a specified period prior to the date of the commencement of the detrimental activity. With respect to any common shares acquired under the 2006 Plan
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that the participant has disposed of, if so provided in the evidence of award for such grant, the participant will pay to Brush Engineered Materials in cash the difference between (1) any amount actually paid therefor by the participant pursuant to the 2006 Plan and (2) the market value per share of the common shares on the date they were acquired.
Transferability. Except as described below, no option right, SAR or other derivative security granted under the 2006 Plan is transferable by a participant except, upon death, by will or the laws of descent and distribution. Except as otherwise determined by the Organization and Compensation Committee, option rights and SARs are exercisable during the participant’s lifetime only by him or her or by his or her guardian or legal representative.
The Organization and Compensation Committee may specify at the date of grant that part or all of the common shares that are (1) to be issued or transferred by Brush Engineered Materials upon exercise of option rights or SARs, upon termination of the restriction period applicable to restricted stock units or upon payment under any grant of performance shares or performance units or (2) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in the 2006 Plan with respect to performance restricted shares and restricted shares, will be subject to further restrictions on transfer.
The Organization and Compensation Committee may determine that option rights (other than incentive stock options) and SARs may be transferable by a participant, without payment of consideration therefor by the transferee, only to any one or more members of the participant’s immediate family; provided, however, that (1) no such transfer shall be effective unless reasonable prior notice thereof is delivered to Brush Engineered Materials and such transfer is thereafter effected in accordance with any terms and conditions that shall have been made applicable thereto by the Brush Engineered Materials or the Organization and Compensation Committee and (2) any such transferee shall be subject to the same terms and conditions hereunder as the participant. For the purposes of the 2006 Plan, the term “immediate family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the participant’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the participant) control the management of assets, and any other entity in which these persons (or the participant) own more than fifty percent of the voting interests.
Withholding Taxes. To the extent that Brush Engineered Materials is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a participant or other person under the 2006 Plan, and the amounts available to Brush Engineered Materials for such withholding are insufficient, it will be a condition to the receipt of such payment or the realization of such benefit that the participant or such other person make arrangements satisfactory to Brush Engineered Materials for payment of the balance of such taxes required to be withheld, which arrangements (in the discretion of the Organization and Compensation Committee) may include relinquishment of a portion of such benefit. In no event may the market value per common share to be withheld and/or delivered to satisfy applicable withholding taxes in connection with the verified records, exceed the minimum amount of taxes required to be withheld.
Compliance with Section 409A of the Internal Revenue Code. The American Jobs Creation Act of 2004, enacted on October 22, 2004, revised the federal income tax law applicable to certain types of awards that may be granted under the 2006 Plan. To the extent applicable, it is intended that the 2006 Plan and any grants made under the 2006 Plan comply with the provisions of Section 409A of the Internal Revenue Code. The 2006 Plan and any grants made under the 2006 Plan will be administered in a manner consistent with this intent, and any provision of the 2006 Plan that would cause the 2006 Plan or any grant made under the 2006 Plan to fail to satisfy Section 409A shall have no force and effect until amended to comply with Section 409A (which amendment may be retroactive to the extent permitted by Section 409A and may be made by Brush Engineered Materials without the consent of the participants). Any reference to Section 409A will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.
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Effective Date.The 2006 Plan will be effective on the date immediately following the date the 2006 Plan is approved by shareholders.
Amendments.The Organization and Compensation Committee may amend the 2006 Plan from time to time without further approval by shareholders. However, if an amendment (1) would materially increase the benefits accruing to participants under the 2006 Plan; (2) would materially increase the number of securities which may be issued under the 2006 Plan; (3) would materially modify the requirements for participation in the 2006 Plan; or (4) must otherwise be approved by the shareholders in order to comply with applicable law or the rules and regulations of the New York Stock Exchange, the amendment will be subject to shareholder approval and will not be effective unless and until such approval is obtained. In addition, the Organization and Compensation Committee will not, without further approval of the shareholders, authorize the amendment to any outstanding option right to reduce the option price, or cancel any option right and replace it with an award having a lower option price.
If permitted by Section 409A of the Internal Revenue Code and except in the case of a “covered employee” where such action would result in the loss of an otherwise available exemption under Section 162(m) of the Code, in case of a termination of employment by reason of death, disability or normal or early retirement, or in the case of unforeseeable emergency or other special circumstances, of a participant who holds an option right or SAR not immediately exercisable in full, or any performance restricted shares of restricted shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any restricted stock units as to which the restriction period has not been completed, or any performance shares or performance units which have not been fully earned, or who holds common shares subject to any other transfer restriction imposed pursuant to the 2006 Plan, the Organization and Compensation Committee may, in its sole discretion, accelerate the time at which such option right, SAR or other award may be exercised or the time at which such substantial risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such restriction period will end or the time at which such performance shares or performance units will be deemed to have been fully earned or the time when such transfer restriction will terminate or may waive any other limitation or requirement under any such award.
Subject to the prohibition on option repricing described above, the Organization and Compensation Committee may amend the terms of any award theretofore granted under the 2006 Plan prospectively or retroactively, except in the case of a “covered employee” where such action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Internal Revenue Code. In such case, the Organization and Compensation Committee will not make any modification of the Management Objectives or the level or levels of achievement with respect to such covered employee. Subject to adjustments (as described above), no such amendment shall impair the rights of any participant without his or her consent. The Organization and Compensation Committee may, in its discretion, terminate the 2006 Plan at any time. Termination of the 2006 Plan will not affect the rights of participants or their successors under any awards outstanding hereunder and not exercised in full on the date of termination.
Term of the 2006 Plan. No grant will be made under the 2006 Plan more than 10 years after the date on which the 2006 Plan is first approved by shareholders, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of the 2006 Plan.
Federal Income Tax Consequences
The following is a brief summary of some of the federal income tax consequences of certain transactions under the 2006 Plan based on federal income tax laws in effect on January 1, 2006. This summary is not intended to be complete and does not describe state or local tax consequences.
| | | Tax Consequences to Participants |
Performance Restricted Shares. A recipient of performance restricted shares generally will be subject to tax at ordinary income rates on the fair market value of the performance restricted shares reduced by any amount paid by the recipient at such time as the shares are no longer subject to a risk of forfeiture or restrictions on transfer for purposes of Section 83 of the Internal Revenue Code (“Restrictions”). However, a
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recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of the shares (determined without regard to the Restrictions) over any purchase price paid for the shares. If a Section 83(b) election has not been made, any dividends received with respect to performance restricted shares that are subject at that time to a risk of forfeiture or restrictions on transfer generally will be treated as compensation that is taxable as ordinary income to the recipient.
Performance Shares and Performance Units. No income generally will be recognized upon the grant of performance shares or performance units. Upon payment in respect of the earn-out of performance shares or performance units, the recipient generally will be required to include as taxable ordinary income in the year of receipt an amount equal to the amount of cash received and the fair market value of any unrestricted common shares received.
Restricted Shares. The recipient of restricted shares generally will be subject to tax at ordinary income rates on the fair market value of the restricted stock (reduced by any amount paid by the participant for such restricted stock) at such time as the shares are no longer subject to Restrictions. However, a recipient who so elects under Section 83(b) of the Internal Revenue Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of such shares (determined without regard to the Restrictions) over the purchase price, if any, of such restricted stock. If a Section 83(b) election has not been made, any dividends received with respect to restricted stock that is subject to the Restrictions generally will be treated as compensation that is taxable as ordinary income to the participant.
Nonqualified Option Rights. In general,
| | | | • | no income will be recognized by an optionee at the time a non-qualified option right is granted; | | | • | at the time of exercise of a non-qualified option right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares, if unrestricted, on the date of exercise; and | | | • | at the time of sale of shares acquired pursuant to the exercise of a non-qualified option right, appreciation (or depreciation) in value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held. |
Incentive Option Rights. No income generally will be recognized by an optionee upon the grant or exercise of an ISO. The exercise of an ISO, however, may result in alternative minimum tax liability. If common shares are issued to the optionee pursuant to the exercise of an ISO, and if no disqualifying disposition of such shares is made by such optionee within two years after the date of grant or within one year after the transfer of such shares to the optionee, then upon sale of such shares, any amount realized in excess of the option price will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss.
If common shares acquired upon the exercise of an ISO are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of such shares at the time of exercise (or, if less, the amount realized on the disposition of such shares if a sale or exchange) over the option price paid for such shares. Any further gain (or loss) realized by the participant generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period.
SARs. No income will be recognized by a participant in connection with the grant of a tandem SAR or a free-standing SAR. When the SAR is exercised, the participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash received and the fair market value of any unrestricted common shares received on the exercise.
Restricted Stock Units. No income generally will be recognized upon the award of restricted stock units. Any subsequent transfer of unrestricted shares of common stock or cash in satisfaction of such award
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will generally result in the recipient recognizing ordinary income at the time of transfer, in an amount equal to the aggregate amount of cash and the fair market value of the unrestricted shares of common stock received over the amount paid, if any, by the participant.
| | | Tax Consequences to Brush Engineered Materials or Subsidiary |
To the extent that a participant recognizes ordinary income in the circumstances described above, Brush Engineered Materials or the subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code and is not disallowed by the $1 million limitation on certain executive compensation under Section 162(m) of the Internal Revenue Code.
VOTE REQUIRED
A favorable vote of the majority of votes cast on the matter is necessary for approval of the 2006 Plan.
The Board of Directors of Brush Engineered Materials unanimously recommends a vote FOR Proposal 2 to approve the 2006 Plan.
NEW PLAN BENEFITS
2006 Stock Incentive Plan
| | | | | | | | | | | | | | | | | | | | | | Performance | | | | | | Restricted Shares | | Performance Shares(3) | | | | | | | | Name and Position | | Shares(2) | | Value ($) | | Shares(2) | | Value ($) | | | | | | | | | | | | Gordon D. Harnett | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | Chairman of the Board, President and | | | | | | | | | | | | | | | | | | | Chief Executive Officer(1) | | | | | | | | | | | | | | | | | | Richard J. Hipple | | | 29,121 | | | $ | 500,000 | | | | 14,560 | | | $ | 250,000 | | | | President and | | | | | | | | | | | | | | | | | | | Chief Operation Officer | | | | | | | | | | | | | | | | | | John D. Grampa | | | 10,127 | | | $ | 173,880 | | | | 5,063 | | | $ | 86,940 | | | | Vice President Finance and | | | | | | | | | | | | | | | | | | | Chief Financial Officer | | | | | | | | | | | | | | | | | | Daniel A. Skoch | | | 10,127 | | | $ | 173,880 | | | | 5,063 | | | $ | 86,940 | | | | Senior Vice President | | | | | | | | | | | | | | | | | | | Administration | | | | | | | | | | | | | | | | | | Executive Officer Group | | | 49,375 | | | $ | 847,760 | | | | 24,686 | | | $ | 423,880 | | | Non-Executive Director Group | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Non-Executive Officer Employee Group | | | 72,347 | | | $ | 1,242,203 | | | | 36,174 | | | $ | 621,102 | |
| | (1) | Mr. Harnett will retire effective at the annual meeting of shareholders on May 2, 2006. | | (2) | The dollar values shown are based on the average of the high and low stock price on February 7, 2006. | | (3) | Each Performance Share is the equivalent of one common share, which will be paid out in cash. |
These awards are subject to shareholder approval of the 2006 Plan.
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3. APPROVAL OF BRUSH ENGINEERED MATERIALS INC.
2006 NON-EMPLOYEE DIRECTOR EQUITY PLAN
General
On March 7, 2006, upon recommendation by the Governance Committee, the Board of Directors of Brush Engineered Materials unanimously approved and adopted, subject to the approval of Brush Engineered Materials’ shareholders at the 2006 annual meeting, the Brush Engineered Materials Inc. 2006 Non-employee Director Equity Plan (the “Director Plan”). The Director Plan aligns the interests of non-employee directors more closely with the interests of Brush Engineered Materials’ other shareholders and provides financial incentives and rewards that will help attract and retain the most qualified non-employee directors. The Director Plan replaces the 1997 Stock Incentive Plan for Non-Employee Directors (As Amended and Restated as of May 1, 2001), as further amended, and the 2005 Deferred Compensation Plan for Non-employee Directors (the “2005 Director Plan”).
The following is a summary of the principal provisions of the Director Plan, a copy of which is set forth as Appendix C to this proxy statement.
Summary of the Plan
Shares Subject to the Plan. The shares that may be issued or credited to accounts pursuant to the Director Plan will be 150,000 common shares, subject to adjustment in accordance with the Plan.
Eligibility. Each member of the Board of Directors who is not an employee of Brush Engineered Materials will be eligible to receive awards and common shares under the Director Plan. The current number of Directors who are eligible is eight.
Compensation in General. The amount of the director retainer fee, any director fees that may be payable for attendance at meetings of the Board of Directors and/or committees thereof and any other compensation paid to directors (collectively, “Director Compensation”) will be determined from time to time in accordance with the Code of Regulations of Brush Engineered Materials and applicable law.
Equity Awards in General.The Governance Committee may grant stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, other stock awards and deferred stock units to participants under the Director Plan. Each award granted under the Director Plan will be subject to such terms and conditions as shall be established by the Governance Committee, and the Governance Committee will determine the number of common shares underlying each award.
Stock Options. The exercise price of each option will be determined by the Governance Committee, but will not be less than 100% of the fair market value of a common share on the date the option is granted. Each option will expire and will be exercisable at such time and subject to such terms and conditions as the Governance Committee shall determine, provided that no option will be exercisable later than the tenth anniversary of its grant. In no event will the Governance Committee cancel any outstanding stock option for the purpose of reissuing the stock option to the participant at a lower exercise price or reduce the exercise price of an outstanding stock option. The closing market price of a common share as reported on the New York Stock Exchange on March 7, 2006 was $17.27 per share.
SARs. SARs may be granted in tandem with a stock option granted under the Director Plan or on a free-standing basis. The grant price of a tandem SAR will be equal to the exercise price of the related option and the grant price of a free-standing SAR will be at least equal to 100% of the fair market value of a common share on the date of its grant. A SAR may be exercised upon such terms and conditions and for such term as the Governance Committee in its sole discretion determines, provided that the term will not exceed the option term in the case of a tandem SAR or ten years in the case of a free-standing SAR. Payment for an SAR may be made in cash or stock, as determined by the Governance Committee.
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Restricted Stock and Restricted Stock Units. Restricted stock and restricted stock units may be subject to such restrictions and conditions as the Governance Committee determines and all restrictions will expire at such times as the Governance Committee specifies.
Stock Awards. The Governance Committee may award to participants, on a quarterly or other basis, a specified number of common shares or a number of common shares equal to a dollar value as determined by the Governance Committee from time to time.
Deferred Stock Units. Each participant may elect to have restricted stock units or other stock awards under the Director Plan paid in the form of deferred stock units upon vesting or payment of such award, which deferred stock units will be credited to a bookkeeping account in the name of the participant in accordance with the Director Plan.
Formula Awards. Unless otherwise determined by the Governance Committee, the following awards will be made automatically:
| | | | (1) | On the business day following the day a participant is first elected or appointed to the Board of Directors, such participant will be granted Common Shares equal to $100,000 divided by the fair market value of a Common Share on the day the participant is elected or appointed to the Board; and | | | (2) | On the business day following the annual meeting of shareholders beginning with the 2006 annual meeting, each participant will be granted the number of restricted stock units equal to $45,000 divided by the fair market value of a common share on the day of the annual meeting. Such restricted stock units will be paid-out in common shares at the end of a one-year restriction period unless the participant elects to be paid in deferred stock units. Pro-rata payment will be made in the event a participant terminates service prior to the end of the one-year restriction period. |
Further Elections. Any participant may elect to have all or any portion of the cash portion of his or her Director Compensation paid in common shares and may further elect to have all or any portion of any Director Compensation that the participant has elected to receive in common shares and any awards granted as Director Compensation paid in the form of deferred stock units, which will be credited to the participant’s account. For the portion of a participant’s cash Director Compensation that he or she elects to receive in common shares, the number of common shares to be issued will equal the cash amount that would have been paid divided by the fair market value of one common share on the first business day immediately preceding the date on which such cash amount would have been paid. Awards that are so deferred pursuant to the Director Plan will be credited to the deferred stock units account on a one for one basis.
An election under the Director Plan must be made in writing and delivered to Brush Engineered Materials prior to the first day of the calendar year for which the Director Compensation would be earned. Special rules apply to the 2006 grant of $45,000 worth of restricted stock units and in the year a new director joins the Board.
Deferral. If a participant elects to receive deferred stock units, there will be credited to the participant’s account as of the day such Director Compensation would have been paid, the number of deferred stock units which is equal to the number of common shares that would otherwise have been delivered to the participant on such date. The deferred stock units credited to the participant’s account (plus any additional shares credited as described above) will represent the number of common shares that Brush Engineered Materials will issue to the participant at the end of the deferral period. Unless otherwise provided under the Director Plan or any award granted under the Director Plan, all deferred stock units awarded under the Director Plan will vest 100% upon the award of such deferred stock units.
The deferred stock units will be subject to a deferral period beginning on the date of crediting to the participant’s account and ending upon termination of service as a director or such other period as the participant may have elected. The period of deferral will be for a minimum period of one year, except in the case where the participant elects a deferral period determined by reference to his or her termination of service as a director. The participant may elect payment in a lump sum or payment in equal installments over five or
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ten years. If the participant does not specify a time for payment, the participant will receive payment upon termination of service as a director and if no method of payment is specified by the participant, he or she will receive payment in a lump sum. Elections with respect to time and method of payment must be made at the same time as the election to defer. A participant may change the period of deferral by filing a subsequent election with Brush Engineered Materials at least twelve months before the date of the previously elected payment date, and the newly elected payment date (or payment commencement date) must be at least five years after the previously elected payment date (or the previously elected payment commencement date). However, such modification will not be effective unless the participant remains a director for at least twelve months after the date on which such modification was made. During the deferral period, the participant will have no right to transfer any rights under his or her deferred stock units and will have no other rights of ownership therein.
A participant’s account will be credited as of the last day of each calendar quarter with that number of additional deferred stock units equal to the amount of cash dividends paid by Brush Engineered Materials during such quarter on the number of common shares equivalent to the number of deferred stock units in the participant’s account from time to time during such quarter divided by the fair market value of one common share on the day immediately preceding the last business day of such calendar quarter. Such dividend equivalents, which will likewise be credited with dividend equivalents, will be deferred until the end of the deferral period for the deferred stock units with respect to which the dividend equivalents were credited.
Notwithstanding the foregoing,
| | | | • | if, upon the participant’s termination of service as a director, the value of the participant’s account is less than $10,000, the amount of such participant’s account will be immediately paid to the participant in cash or common shares; | | | • | if a change in control of Brush Engineered Materials occurs, the amount of each participant’s account will immediately be paid to the participant in full; and | | | • | in the event of an unforeseeable emergency, as defined in Section 409A of the Internal Revenue Code of 1986, that is caused by an event beyond the control of the participant and that would result in severe financial hardship to the individual if acceleration were not permitted, the Governance Committee will accelerate the payment to the participant of the participant’s account, but only up to the amount necessary to meet the emergency. |
Delivery of Shares. Brush Engineered Materials will make delivery of certificates representing the common shares which a participant is entitled to receive 60 days following the participant’s right to receive such common shares.
Administration. The Director Plan is to be administered by the Governance Committee. The Governance Committee is authorized to interpret the Director Plan and related agreements and other documents.
Transferability. Except as described below, no option right, SAR or other derivative security granted under the Director Plan is transferable by a participant except, upon death, by will or the laws of descent and distribution. Except as otherwise determined by the Governance Committee, option rights and SARs are exercisable during the participant’s lifetime only by him or her or by his or her guardian or legal representative.
The Governance Committee may specify at the date of grant that part or all of the common shares that are (1) to be issued or transferred by Brush Engineered Materials upon exercise of option rights or SARs, upon termination of the restriction period applicable to restricted stock units or (2) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in the Director Plan with respect to restricted shares, will be subject to further restrictions on transfer.
The Governance Committee may determine that option rights and SARs may be transferable by a participant, without payment of consideration therefor by the transferee, only to any one or more members of the participant’s immediate family; provided, however, that (1) no such transfer shall be effective unless
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reasonable prior notice thereof is delivered to Brush Materials Engineered and such transfer is thereafter effected in accordance with any terms and conditions that shall have been made applicable thereto by Brush Engineered Materials or the Governance Committee and (2) any such transferee shall be subject to the same terms and conditions hereunder as the participant. For the purposes of the Director Plan, the term “immediate family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the participant’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the participant) control the management of assets, and any other entity in which these persons (or the participant) own more than fifty percent of the voting interests.
Compliance with Section 409A of the Internal Revenue Code. The American Jobs Creation Act of 2004, enacted on October 22, 2004, revised the federal income tax law applicable to certain types of awards that may be granted under the Director Plan. To the extent applicable, it is intended that the Director Plan and any grants made under the Director Plan comply with the provisions of Section 409A of the Internal Revenue Code. The Director Plan and any grants made under the Director Plan will be administered in a manner consistent with this intent, and any provision of the Director Plan that would cause the Director Plan or any grant made under the Director Plan to fail to satisfy Section 409A shall have no force and effect until amended to comply with Section 409A (which amendment may be retroactive to the extent permitted by Section 409A and may be made by Brush Engineered Materials without the consent of the participants). Any reference to Section 409A will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.
Effective Date.The Director Plan will be effective on the date immediately following the date the Director Plan is approved by shareholders. Special rules apply to any account balances held by a participant under the 2005 Director Plan in the form of deferred shares.
Termination or Amendment of the Director Plan. The Governance Committee may at any time and from time to time terminate, amend or suspend the Director Plan;provided, however, that the Governance Committee may not materially alter the Director Plan without shareholder approval, including by increasing the benefits accrued to participants under the Director Plan; increasing the number of securities which may be issued under the Director Plan; modifying the requirements for participation in the Director Plan; or by including a provision allowing the Board or the Governance Committee to lapse or waive restrictions at its discretion. An amendment or the termination of the Director Plan will not adversely affect the right of a participant to receive common shares issuable or cash payable at the effective date of the amendment or termination.
Term of the Director Plan. No grant will be made under the Director Plan more than 10 years after the date on which the Director Plan is first approved by shareholders, but all grants made on or prior to such date will continue in effect thereafter subject to the terms thereof and of the Director Plan.
Federal Income Tax Consequences
The following is a brief summary of some of the federal income tax consequences of certain transactions under the Director Plan based on federal income tax laws in effect on January 1, 2006. This summary is not intended to be complete and does not describe state or local tax consequences.
| | | Tax Consequences to Participants |
Nonqualified Option Rights. In general,
| | | | • | no income will be recognized by an optionee at the time a non-qualified option right is granted; | | | • | at the time of exercise of a non-qualified option right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares and the fair market value of the shares, if unrestricted, on the date of exercise; and |
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| | | | • | at the time of sale of shares acquired pursuant to the exercise of a non-qualified option right, appreciation (or depreciation) in value of the shares after the date of exercise will be treated as either short-term or long-term capital gain (or loss) depending on how long the shares have been held. |
SARs. No income will be recognized by a participant in connection with the grant of a tandem SAR or a free-standing SAR. When the SAR is exercised, the participant normally will be required to include as taxable ordinary income in the year of exercise an amount equal to the amount of cash received and the fair market value of any unrestricted common shares received on the exercise.
Restricted Stock.The recipient of restricted stock generally will be subject to tax at ordinary income rates on the fair market value of the restricted stock (reduced by any amount paid by the participant for such restricted stock) at such time as the shares are no longer subject to Restrictions. However, a recipient who so elects under Section 83(b) of the Internal Revenue Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of such shares (determined without regard to the Restrictions) over the purchase price, if any, of such restricted stock. If a Section 83(b) election has not been made, any dividends received with respect to restricted stock that is subject to the Restrictions generally will be treated as compensation that is taxable as ordinary income to the participant.
Restricted Stock Units. No income generally will be recognized upon the award of restricted stock units. Any subsequent transfer of unrestricted common shares or cash in satisfaction of such award will generally result in the recipient recognizing ordinary income at the time of transfer, in an amount equal to the aggregate amount of cash and the fair market value of the unrestricted shares of common stock received over the amount paid, if any, by the participant.
The recipient of a stock award generally will be subject to tax at ordinary income rates on the fair market value of the stock award (reduced by any amount paid by the participant for such stock) at the time of grant.
The recipient of the deferred stock units will generally be subject to tax at ordinary income rates on the fair market value of the common shares received in satisfaction of the deferred stock units at the time of distribution.
| | | Tax Consequences to Brush Engineered Materials or Subsidiary |
To the extent that a participant recognizes ordinary income in the circumstances described above, Brush Engineered Materials or the subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness and is an ordinary and necessary business expense.
VOTE REQUIRED
A favorable vote of the majority of votes cast on the matter is necessary for approval of the Director Plan.
The Board of Directors of Brush Engineered Materials unanimously recommends a vote FOR Proposal 3 to approve the Director Plan.
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NEW PLAN BENEFITS
Non-employee Director Equity Plan
| | | | | | | | | | | | | | Restricted Stock | | | | Units | | | | | | Name and Position | | Number | | Value ($) | | | | | | | | Gordon D. Harnett | | | 0 | | | | 0 | | | | Chairman of the Board, President | | | | | | | | | | | and Chief Executive Officer | | | | | | | | | | Richard J. Hipple | | | 0 | | | | 0 | | | | President and Chief | | | | | | | | | | | Operation Officer | | | | | | | | | | John D. Grampa | | | 0 | | | | 0 | | | | Vice President Finance and | | | | | | | | | | | Chief Financial Officer | | | | | | | | | | Daniel A. Skoch | | | 0 | | | | 0 | | | | Senior Vice President | | | | | | | | | | | Administration | | | | | | | | | | Executive Officer Group | | | 0 | | | | 0 | | | Non-Executive Director Group* | | | 20,967 | | | | 360,000 | | | Non-Executive Officer Employee Group | | | 0 | | | | 0 | |
| | * | This reflects the annual grant for 2006 of $45,000 worth of restricted stock units for each of the eight non-employee directors. The number of restricted stock units assumes a price of $17.17; i.e., the average of the high and low stock price on March 7, 2006. |
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4. APPOINTMENT2. RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed Ernst & Young LLP as the independent registered public accounting firm for fiscal 20062007 and presents this selection to the shareholders for ratification. Ernst & Young LLP will audit our consolidated financial statements for fiscal 20062007 and perform other permissible, pre-approved services. Representatives of Ernst & Young LLP are expected to be present at the 2006 Annual Meeting.2007 annual meeting. These representatives will have the opportunity to make a statement if they desire to do so and will respond to appropriate questions. | | | Preapproval Policy for External Auditing Services |
Preapproval Policy for External Auditing Services The Audit Committee has established a policy regarding pre-approval of all audit and non-audit services expected to be performed by our independent registered public accounting firm, including the scope of and estimated fees for such services. Our independent registered public accounting firm, after consultation with management, will submit a budget, based on guidelines set forth in the policy, for the Audit Committee’s approval for its annual audit and associated quarterly reviews and procedures. Management, after consultation with our independent registered public accounting firm, will submit a budget, based on guidelines set forth in the policy, for the Audit Committee’s approval for audit related, tax and other services to be provided by our independent registered public accounting firm for the upcoming fiscal year. The policy prohibits our independent registered public accounting firm from providing certain services described in the policy as prohibited services. The Audit Committee approved all of the estimated fees described below under the heading “External Audit Fees.” | | | | | | | | | | | | | 2005 | | 2004 | | | | | | | | Audit Fees | | $ | 1,509,500 | | | $ | 1,256,400 | | | Audit-Related Fees | | | 183,500 | | | | 89,550 | | | Tax Fees | | | 231,500 | | | | 103,200 | | | All Other Fees | | | 0 | | | | 0 | | | | | | | | | | | | | Total | | $ | 1,924,500 | | | $ | 1,449,150 | | | | | | | | | | | |
Audit Fees | | | | | | | | | | | | | 2006 | | | 2005 | | | | | Audit Fees | | $ | 1,659,700 | | | $ | 1,509,500 | | | Audit-related Fees | | | 145,100 | | | | 183,500 | | | Tax Fees | | | 150,000 | | | | 231,500 | | | All Other Fees | | | 0 | | | | 0 | | | | | | | | | | | | | Total | | $ | 1,954,800 | | | $ | 1,924,500 | | | | | | | | | | | |
Audit Fees Audit fees consist of fees billed for professional services rendered for the integrated audit of our consolidated financial statements and on management’s assessment and effectiveness of internal control over financial reporting and review of the interim consolidated financial statements included in quarterly reports and audits in connection with statutory requirements. Audit-RelatedAudit-related Fees
Audit-related services principally include the audit of financial statements of our employee benefit plans and accounting assistance and advisorydue diligence services related to the Sarbanes-Oxley Act of 2002.for recent acquisitions. Tax Fees Tax fees include corporate tax compliance, tax advice and tax planning. All Other Fees We had no fees included in “All Other Fees” during 2006 or 2005. The Board of Directors of Brush Engineered Materials unanimously recommends a vote FOR Proposal 42 to ratify and appoint the role of Ernst & Young LLP as independent registered public accounting firm for the year 2006.2007.
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SHAREHOLDER PROPOSALS We must receive by November 28, 2006,17, 2007, any proposal of a shareholder intended to be presented at the 20072008 annual meeting of Brush Engineered Materials’ shareholders and to be included in our proxy, notice of meeting and proxy statement related to the 20072008 annual meeting pursuant toRule 14a-8 under the Securities and Exchange Act of 1934. These proposals should be submitted by certified mail, return receipt requested. Proposals of shareholders submitted outside the processes ofRule 14a-8 under the Exchange Act in connection with the 20072008 annual meeting must be received by us on or before the date determined in accordance with our code of regulations or they will be considered untimely underRule 14a-4(c) of the Exchange Act. Under our code of regulations, proposals generally must be received by us no fewer than 60 and no more than 90 days before an annual meeting. However, if the date of a meeting is more than ten days from the anniversary of the previous year’s meeting and we do not give notice of the meeting at least 75 days in advance, proposals must be received within ten days from the date of our notice. Our proxy related to the 20072008 annual meeting of Brush Engineered Materials’ shareholders will give discretionary authority to the proxy holders to vote with respect to all proposals submitted outside the processes ofRule 14a-8 received by us after the date determined in accordance with our code of regulations. OTHER MATTERS We do not know of any matters to be brought before the meeting except as indicated in the notice. However, if any other matters properly come before the meeting for action of which we did not have notice prior to March 1, 2006,2007, or that applicable laws otherwise permit proxies to vote on a discretionary basis, it is intended that the person authorized under solicited proxies may vote or act thereon in accordance with his own judgment. | | | By order of the Board of Directors,
Brush Engineered Materials Inc.
Michael C. Hasychak | | Secretary |
By order of the Board of Directors,
Brush Engineered Materials Inc.
Michael C. Hasychak Secretary Cleveland, Ohio March 16, 20062007
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APPENDIX A
BRUSH ENGINEERED MATERIALS INC.
AUDIT COMMITTEE CHARTER
(as adopted by the Board of Directors on February 7, 2006)
Purposes
This Charter governs the operations of the Audit Committee of the Board of Brush Engineered Materials Inc. The Audit Committee has been created by the Board to (a) assist the Board in fulfilling the Board’s oversight responsibilities to the shareholders, potential shareholders and other constituencies with respect to (i) the integrity of the Company’s financial statements, (ii) the Company’s financial reporting process and compliance with ethics policies and legal and other regulatory requirements, (iii) the independent auditors’ qualifications and independence, (iv) the Company’s systems of internal accounting and financial controls and (v) the performance of the independent auditors and of the Company’s internal audit function; and (b) prepare the Audit Committee’s report, made pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”), to be included in the Company’s annual proxy statement (the “Audit Committee Report”).
Composition of the Audit Committee
Number. The Audit Committee is appointed by the Board and is comprised of at least three members.
Qualifications. Each Audit Committee member is to have all of the following qualifications:
| | | | 1) Each Audit Committee member must meet the independence criteria of (a) the rules of the New York Stock Exchange, Inc., as such requirements are interpreted by the Board in its business judgment and (b) Section 301 of the Sarbanes-Oxley Act of 2002 and any rules promulgated thereunder by the Securities and Exchange Commission (“SEC”). | | | THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE VOTED “FOR” THE PROPOSALS. | | THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. |
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for Address
Change or
Comments | | o | | PLEASE SEE REVERSE SIDE |
| | | | | | | | | 2) Each Audit Committee member must be financially literate or become financially literate within a reasonable period | | | FOR | | WITHHELD | | | | | | | FOR ALL | | 1. | | Election of time after his or her appointment to the Audit Committee. Additionally, at least one member of the Audit Committee is to have accounting or related financial management expertise sufficient to meet the criteria of a financial expert within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002 and any rules promulgated thereunder by the SEC. The Board shall determine, in its business judgment, whether a member is financially literate and whether at least one member has the requisite accounting or financial expertise and meets the financial expert criteria. The designation or identification of a person as an “audit committee financial expert” shall not (a) impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and Board in the absence of such designation or identification, or (b) affect the duties, obligations or liability of any other member of the Audit Committee or Board.
following Directors: | | o | | o | | | Nominees: | | | | | | | 3) Each Audit Committee member is to receive as compensation from the Company only those forms of compensation as are not prohibited by Section 301 of the Sarbanes-Oxley Act of 2002 and the rules and listing requirements promulgated thereunder by the SEC and the NYSE. Permitted compensation includes (a) director’s fees (which includes all forms of compensation paid to directors of the Company for service as a director or member of a Board Committee) and/or (b) fixed amounts of compensation under a retirement plan (including pension payments or other deferred compensation) for prior service with the Company provided that such compensation is not contingent in any way on continued service. | | 01 Joseph P. Keithley | | | | | | | 4) If an Audit Committee member simultaneously serves on the audit committee of more than three companies that are required to file reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, (including the Company), the Board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the Audit Committee. The Company will be required to disclose any such determination in its annual proxy statement. |
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Appointment. The Board will appoint the members and the Chairman of the Audit Committee based on nominations made by the Company’s Governance Committee. Audit Committee members serve at the pleasure of the Board and for such term or terms as the Board may determine.
Responsibilities and Duties of the Audit Committee
The Audit Committee is responsible to oversee the Company’s financial reporting process on behalf of the Board. Management is responsible for the preparation, presentation, and integrity of the Company’s financial statements and for the appropriateness of the accounting and reporting policies that are used by the Company. The independent auditors are responsible for auditing the Company’s financial statements and for reviewing the Company’s interim financial statements.
In performing its responsibilities, the Audit Committee shall:
| 02 William R. Robertson | | | 1) Retain the Independent Auditors: The Audit Committee has the sole authority to (a) retain and terminate the Company’s independent auditors, subject to shareholder approval, (b) approve all audit engagement fees, terms and services, and (c) approve any non-audit engagements with the Company’s independent auditors. The Audit Committee is to exercise this authority in a manner consistent with Sections 201, 202 and 301 of the Sarbanes-Oxley Act of 2002 and the rules and listing standards promulgated thereunder by the SEC and NYSE. The Audit Committee may delegate the authority to grant any pre-approvals required by such sections to one or more members of the Audit Committee as it designates, subject to the delegated member or members reporting any such pre-approvals to the Audit Committee at its next scheduled meeting. | | | | | 2) Review and discuss the Auditors’ Quality Control: The Audit Committee is to, at least annually, obtain and review and discuss a report by the independent auditors describing (a) the audit firm’s internal quality control procedures, (b) any material issues raised by the most recent internal quality control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and (c) any steps taken to deal with any such issues. | | 03 John Sherwin, Jr. | | | 3) Review and discuss the Independence of the Auditors: In connection with the retention of the Company’s independent auditors, the Audit Committee is to at least annually review and discuss the information provided by management and the auditors relating to the independence of the audit firm, including, among other things, information related to the non-audit services provided and expected to be provided by the auditors. The Audit Committee is responsible for (a) ensuring that the independent auditors submit at least annually to the Audit Committee a formal written statement delineating all relationships between the auditors and the Company, (b) actively engaging in a dialogue with the auditors with respect to any disclosed relationship or services that may impact the objectivity and independence of the auditors and (c) taking appropriate action in response to the auditors’ report to satisfy itself of the auditors’ independence. In connection with the Audit Committee’s evaluation of the auditors’ independence, the Audit Committee is to also review and evaluate the lead partner of the independent auditors and take such steps as may be required by law with respect to the regular rotation of the lead audit partner and the reviewing audit partner of the independent auditors, and consider whether or not there should be rotation of the independent audit firm itself. | | | | 4) Set Hiring Policies: The Audit Committee is to set clear hiring policies for employees or former employees of the independent auditors, which include the restrictions set forth in Section 206 of the Sarbanes-Oxley Act of 2002. | | | 5) Review and Discuss the Audit Plan: The Audit Committee is to review and discuss with the independent auditors the plans for, and the scope of, the annual audit and other examinations, including the adequacy of staffing and compensation. | | | 6) Review and Discuss Conduct of the Audit: The Audit Committee is to review and discuss with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, as well as any audit problems or difficulties and |
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| | | management’s response, including (a) any restriction on audit scope or on access to requested information, (b) any disagreements with management and (c) significant issues discussed with the independent auditors’ national office. The Audit Committee is to decide all unresolved disagreements between management and the independent auditors regarding financial reporting. | | | 7) Review and Discuss Financial Statements and Disclosures: The Audit Committee is to review and discuss with appropriate officers of the Company and the independent auditors the annual audited and quarterly financial statements of the Company, including (a) the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and (b) the disclosures regarding internal controls and other matters required to be reported to the Audit Committee by Section 302 and 404 of the Sarbanes-Oxley Act of 2002 and any rules promulgated thereunder by the SEC. | | | 8) Review and Discuss the Content of Financial Press Releases: The Audit Committee is to review and discuss the content of all financial press releases (including any use of “pro forma” or “adjusted” non-GAAP information), as well as financial information and earnings guidance provided to analysts and rating agencies (which review may occur after issuance and may be done generally as a review of the types of information to be disclosed and the form of presentation to be made). | | | 9) Review and Discuss Internal Audit Plans: The Audit Committee is to review and discuss with the Director of Internal Auditing and appropriate members of the staff of the internal auditing department the plans for and the scope of their ongoing audit activities, including adequacy of staffing and compensation. The Audit Committee is to review and approve management’s appointment, termination or replacement of the Chief Internal Auditor. | | | 10) Review and Discuss Internal Audit Reports: The Audit Committee is to review and discuss with the Chief Internal Auditor and appropriate members of the staff of the internal auditing department the annual report of the audit activities, examinations and results thereof of the internal auditing department. | | | 11) Review and Discuss the Systems of Internal Accounting Controls: The Audit Committee is to review and discuss with the independent auditors, the Chief Internal Auditor, the General Counsel, as appropriate, and, if and to the extent deemed appropriate by the Audit Committee, members of their respective staffs the adequacy of the Company’s internal accounting controls, the Company’s financial, auditing and accounting organizations and personnel, and the Company’s policies and compliance procedures with respect to business practices which shall include the disclosures regarding internal controls and matters required to be reported to the Audit Committee by Section 302 and 404 of the Sarbanes-Oxley Act of 2002 and any rules promulgated thereunder by the SEC. | | | 12) Review and Discuss the Audit Results: The Audit Committee is to review and discuss with the independent auditors (a) the report of their annual audit, or proposed report of their annual audit, (b) the accompanying management letter, if any, (c) the reports of their reviews of the Company’s interim financial statements conducted in accordance with Statement on Auditing Standards No. 71, and (d) the reports of the results of such other examinations outside of the course of the independent auditors’ normal audit procedures that the independent auditors may from time to time undertake. The foregoing is to include the reports required by Section 204 of the Sarbanes-Oxley Act of 2002 and the rules and listing standards promulgated thereunder by the SEC and NYSE, and, as appropriate, (a) a review of major issues regarding (i) accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles and (ii) the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies, (b) a review of analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements and (c) a review of the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company. |
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| | | 13) Obtain Assurances under Section 10A(b) of the Exchange Act: The Audit Committee is to obtain assurance from the independent auditors that in the course of conducting the audit there have been no acts detected or that have otherwise come to the attention of the audit firm that require disclosure to the Audit Committee under Section 10A(b) of the Exchange Act. | | | 14) Discuss Risk Management Policies: The Audit Committee is to discuss policies with respect to risk assessment and risk management to assess and manage the Company’s exposure to risk. The Audit Committee should discuss the Company’s major financial risk exposures and the steps management has taken to monitor and control these exposures. The Audit Committee should periodically review the Company’s contingency plans for protection of vital information and business conduct in the event of an operations interruption. | | | 15) Obtain Reports Regarding Conformity With the Company’s Code of Conduct Policy: The Audit Committee is to periodically obtain reports from management and the Company’s Chief Internal Auditor that the Company and its subsidiary/foreign affiliated entities are in conformity with the Company’s Code of Conduct Policy. The Audit Committee should advise the Board with respect to the Company’s policies and procedures regarding compliance with the Company’s Code of Conduct Policy. | | | 16) Obtain Reports Regarding Conformity With Legal Requirements: The Audit Committee is to periodically obtain reports from management and the Company’s Chief Internal Auditor that the Company and its subsidiary/foreign affiliated entities are in conformity with applicable legal requirements. Similar information should be obtained from the Company’s independent auditors, as appropriate, based on known events and/or issues. The Audit Committee should advise the Board with respect to the Company’s policies and procedures regarding compliance with applicable laws and regulations. | | | 17) Establish Procedures for Complaints Regarding Financial Statements or Accounting Policies: The Audit Committee is to establish procedures for (a) the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters as required by Section 301 of the Sarbanes-Oxley Act of 2002 and the rules and listing standards promulgated thereunder by the SEC and NYSE. The Audit Committee is to discuss with management and the independent auditor any correspondence with regulators or governmental agencies regarding complaints or concerns of the Company’s financial statements, accounting policies or business practices. | | | 18) Discuss With General Counsel Matters Regarding Financial Statements or Compliance Policies: Annually, and to the extent deemed required, the Audit Committee should discuss with the Company’s General Counsel legal matters that may have a material impact on the financial statements or the Company’s compliance policies. The Audit Committee is to receive reports from the Company’s counsel of evidence of any material violation of securities laws or breaches of fiduciary duties. | | | 19) Review and Discuss Other Matters: The Audit Committee should review and discuss such other matters that relate to the accounting, auditing and financial reporting practices and procedures of the Company as the Audit Committee may, in its own discretion, deem desirable in connection with the review functions described above. | | | 20) Make Board Reports: The Audit Committee should report its activities regularly to the Board in such manner and at such times as the Audit Committee and the Board deem appropriate, but in no event less than once a year. This report is to include the Audit Committee’s conclusions with respect to its evaluation of the independent auditors. | | | 21) Maintain Flexibility: The Audit Committee, in carrying out its responsibilities, policies and procedures should remain flexible, in order to best react to changing conditions and circumstances. The Audit Committee should take appropriate actions to set the overall corporate “tone” for quality financial reporting, sound business risk practices, and ethical behavior. |
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Meetings of the Audit Committee
The Audit Committee should meet in person or telephonically at least quarterly, or more frequently as it may determine necessary, to comply with its responsibilities as set forth herein. The Chair of the Audit Committee is, in consultation with the other members of the Audit Committee, the Company’s independent auditors and the appropriate officers of the Company, responsible for calling meetings of the Audit Committee, approve and/or establish agendas therefor and supervising the conduct thereof. The Audit Committee may also take any action permitted hereunder by unanimous written consent.
The Audit Committee may request any officer or employee of the Company or the Company’s outside legal counsel or independent auditors to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. The Audit Committee should meet with the Company’s management, the internal auditors and the independent auditors periodically in separate private sessions to discuss any matter that the Audit Committee, management, the independent auditors or such other persons believe should be discussed privately.
Resources and Authority of the Audit Committee
The Audit Committee is to have the resources and authority appropriate to discharge its responsibilities and carry out its duties as required by law, including the authority to engage outside auditors for special audits, reviews and other procedures and to engage independent counsel and other advisors, experts or consultants. The Audit Committee may also, to the extent it deems necessary or appropriate, meet with the Company’s investment bankers or financial analysts who follow the Company.
Audit Committee Report
The Audit Committee will prepare, with the assistance of management, the independent auditors and outside legal counsel, the Audit Committee Report.
Annual Review of Charter
The Audit Committee will conduct and review with the Board annually an evaluation of this Charter and recommend any changes to the Board. The Audit Committee may conduct this charter evaluation in such manner as the Audit Committee, in its business judgment, deems appropriate.
Annual Performance Evaluation
The Audit Committee will conduct and review with the Board annually an evaluation of the Audit Committee’s performance with respect to the requirements of this Charter. The Audit Committee may conduct this performance evaluation in such manner as the Audit Committee, in its business judgment, deems appropriate.
Consistent with the New York Stock Exchange listing requirements, this Charter will be included on the Company’s website and will be made available upon request sent to the Company’s Secretary. This Charter will also be periodically published in the proxy statement relating to the Company’s annual meeting of shareholders.
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APPENDIX B
BRUSH ENGINEERED MATERIALS INC.
2006 STOCK INCENTIVE PLAN
TABLE OF CONTENTS
| | | | | | | | | | | | | | | Page | | FOR | | AGAINST | | ABSTAIN | | 1. | | | Purpose | | | B-1 | | | 2. | | | Definitions | | | B-1 | | | 3. | | | Shares Subject to this Plan | | | B-4 | | | 4. | | | Performance Restricted Shares | | | B-5 | | | 5. | | | Performance Shares and Performance Units | | | B-5 | | | 6. | | | Restricted Shares | | | B-6 | | | 7. | | | Option Rights | | | B-7 | | | 8. | | | Appreciation Rights | | | B-8 | | | 9. | | | Restricted Stock Units | | | B-9 | | | 10. | | | Administration of the Plan | | | B-10 | | | 11. | | | Adjustments | | | B-10 | | | 12. | | | Detrimental Activity | | | B-11 | | | 13. | | | Participation by Employees of Designated Subsidiaries | | | B-11 | | | 14. | | | Non-U.S. Employees | | | B-11 | | | 15. | | | Transferability | | | B-12 | | | 16. | | | Withholding Taxes | | | B-12 | | | 17. | | | Compliance with Section 409A of the Code | | | B-12 | | | 18. | | | Effective Date | | | B-13 | | | 19. | | | Amendments | | | B-13 | | | 20. | | | Termination of the Plan | | | B-14 | | | 21. | | | Governing Law | | | B-14 | | | 22. | | | Miscellaneous Provisions | | | B-14 | |
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BRUSH ENGINEERED MATERIALS INC.
2006 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this Plan is to attract and retain officers, other key employees and consultants of Brush Engineered Materials Inc. (the “Corporation”) and its Subsidiaries and to provide such persons with incentives and rewards for superior performance and to promote equity participation by the officers, key employees and consultants of the Corporation, and thereby reinforcing a mutuality of interest with other shareholders, and permitting officers, key employees and consultants to share in the Corporation’s growth.
2. Definitions. As used in this Plan,
“Appreciation Right” means a right granted pursuant to Section 8 of this Plan, including a Free-standing Appreciation Right and a Tandem Appreciation Right.
“Base Price” means the price to be used as the basis for determining the Spread upon the exercise of a Free-standing Appreciation Right.
“Board” means the Board of Directors of the Corporation.
A“Change in Control” of the Corporation shall have the meaning determined by the Committee from time to time.
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
“Committee” means the committee described in Section 10(a) of this Plan.
“Common Shares” means (i) Common Shares without par value of the Corporation and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 11 of this Plan.
“Covered Employee” means a Participant who is, or is determined by the Committee to be likely to become, a “covered employee” within the meaning of Section 162(m) of the Code (or any successor provision).
“Date of Grant” means the date specified by the Committee on which a grant of Performance Restricted Shares, Performance Shares or Performance Units, Option Rights, Appreciation Rights or a grant or sale of Restricted Shares or Restricted Stock Units shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto.
“Designated Subsidiary” means a subsidiary that is (i) not a corporation or (ii) a corporation in which at the time the Corporation owns or controls, directly or indirectly, less than 80 percent of the total combined voting power represented by all classes of stock issued by such corporation.
“Evidence of Award” means an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Committee which sets forth the terms and conditions of the award granted. An Evidence of Award may be in any electronic medium, may be limited to a notation on the books and records of the Corporation and, with the approval of the Committee, need not be signed by a representative of the Corporation or a Participant.
“Free-standing Appreciation Right”means an Appreciation Right granted pursuant to Section 8 of this Plan that is not granted in tandem with an Option Right.
“Incentive Stock Option” means an Option Right that is intended to qualify as an “incentive stock option” under Section 422 of the Code or any successor provision thereto.
“Management Objectives” means the measurable performance objective or objectives established pursuant to this Plan for Participants who have received grants of Performance Restricted Shares, Performance Shares or Performance Units or, when so determined by the Committee, Option Rights, Appreciation Rights, Restricted Stock Units or dividend credits. Management Objectives may be described in terms of Corporation-
wide objectives or objectives that are related to the performance of the individual Participant or of the Subsidiary, division, department, region or function within the Corporation or Subsidiary in which the Participant is employed. The Management Objectives may be relative to the performance of other companies. The Management Objectives applicable to any award to a Participant who is, or is determined by the Committee to be likely, to become, a Covered Employee shall be limited to specified levels of or growth in one or more of the following criteria:
| | | (i) Profits(e.g., operating income, EBIT, EBT, net income, earnings per share, residual or economic earnings — these profitability metrics could be measured before special items and/or subject to GAAP definition); | | | (ii) Cash Flow(e.g., EBITDA, operating cash flow, total cash flow, free cash flow, residual cash flow or cash flow return on investment); | | | (iii) Returns(e.g., profits or cash flow returns on: assets, invested capital, net capital employed, and equity); | | | (iv) Working Capital(e.g., working capital divided by sales, days’ sales outstanding, days’ sales inventory, and days’ sales in payables, or any combination thereof); | | | (v) Profit Margins(e.g., profits divided by revenues, gross margins and material margins divided by revenues, and variable margin divided by sales); | | | (vi) Liquidity Measures(e.g.,debt-to-capital,debt-to-EBITDA, total debt ratio, EBITDA multiple); | | | (vii) Sales Growth, Cost Initiative and Stock Price Metrics(e.g., revenues, revenue growth, new product sales growth, growth in value added sales, stock price appreciation, total return to shareholders, sales and administrative costs divided by sales, sales per employee); and | | | (viii) Strategic Initiative Key Deliverable Metricsconsisting of one or more of the following: product development, strategic partnering, research and development, market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, increase in yield and productivity and goals relating to acquisitions or divestitures of subsidiaries, affiliates and joint ventures. |
If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Corporation, or the manner in which it conducts its business, or other events or circumstances render the Management Objectives unsuitable, the Committee may in its discretion modify such Management Objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable, except in the case of a Covered Employee where such action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Code. In such case, the Committee will not make any modification of the Management Objectives or minimum acceptable level of achievement with respect to such Covered Employee.
“Market Value per Share” means, as of any particular date, the fair market value of the Common Shares as determined by the Committee.
“Nonqualified Option” means an Option Right that is not intended to, qualify as a Tax-qualified Option.
“Optionee” means the person so designated in an Evidence of Award evidencing an outstanding Option Right.
“Option Price” means the purchase price payable upon the exercise of an Option Right.
“Option Right” means the right to purchase Common Shares from the Corporation upon the exercise of a Nonqualified Option or a Tax-qualified Option granted pursuant to Section 7 of this Plan.
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“Participant” means a person who is selected by the Committee to receive benefits under this Plan and (i) is at that time an officer, including without limitation an officer who may also be a member of the Board, or other salaried employee or consultant of the Corporation or a Subsidiary or (ii) has agreed to commence serving in any of such capacities, within 90 days of the Date of Grant. The term “Participant” shall also include any person who provides services to the Corporation or a Subsidiary that are equivalent to those typically provided by an employee.
“Performance Period” means, in respect of a Performance Share or Performance Unit, a period of time established pursuant to Section 5 of this Plan within, which, the Management Objective relating thereto is to be achieved.
“Performance Restricted Shares” means Common Shares granted pursuant to Section 4 of this Plan as to which neither substantial risk of forfeiture nor the restrictions on transfer referred to in such Section 4 has expired.
“Performance Share” means a bookkeeping entry that records the equivalent of one Common Share and is awarded pursuant to Section 5 of this Plan.
“Performance Unit” means a bookkeeping entry that records a unit equivalent to the Market Value per Share of one Common Share on the Date of Grant and is awarded pursuant to Section 5 of this Plan.
“Plan” means the Brush Engineered Materials Inc. 2006 Stock Incentive Plan, as may be amended from time to time.
“Restricted Shares” means Common Shares granted or sold pursuant to Section 6 of this Plan as to which neither the substantial risk of forfeiture nor the restrictions on transfer referred to in such Section 6 has expired. Restricted Shares are not subject to Management Objectives specified by the Committee.
“Restriction Period” means the period of time during which Restricted Stock Units are subject to restrictions under Section 9 of this Plan.
“Restricted Stock Units” means an award pursuant to Section 9 of this Plan of the right to receive Common Shares at the end of a specified Restriction Period.
“Spread” means, in the case of a Free-standing Appreciation Right, the amount by which the Market Value per Share on the date when any such right is exercised exceeds the Base Price specified in such right or, in the case of a Tandem Appreciation Right, the amount by which the Market Value per Share on the date when any such right is exercised exceeds the Option Price specified in the related Option Right.
“Subsidiary” means a corporation, company or other entity (i) at least 50 percent of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but at least 50 percent of whose ownership interest representing the right generally to make decisions for such other entity is, now or hereafter, owned or controlled, directly or indirectly, by the Corporation except that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, “Subsidiary” means any corporation in which at the time the Corporation owns or controls, directly or indirectly, at least 50 percent of the total combined voting power represented by all classes of stock issued by such corporation.
“Tandem Appreciation Right” means an Appreciation Right granted pursuant to Section 8 of this Plan that is granted in tandem with an Option Right.
“Tax-qualified Option” means an Option Right that is intended to qualify under particular provisions of the Code, including without limitation an Incentive Stock Option.
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3. Shares Subject to this Plan.
| | | (a) Maximum Shares Available Under Plan. |
| | | (i) Subject to adjustment as provided in Section 11 of this Plan, the number of Common Shares that may be issued or transferred (A) upon the exercise of Option Rights or Appreciation Rights, (B) as Restricted Shares or Performance Restricted Shares and released from substantial risks of forfeiture thereof, (C) in payment of Restricted Stock Units, (D) in payment of Performance Shares or Performance Units that have been earned, or (E) in payment of dividend equivalents paid with respect to awards made under this Plan will not exceed in the aggregate 1,250,000 Common Shares, plus any Common Shares relating to awards that expire or are forfeited or are cancelled under this Plan. Such shares may be shares of original issuance or treasury shares or a combination of the foregoing. | | | (ii) Common Shares covered by an award granted under this Plan shall not be counted as used unless and until they are actually issued and delivered to a Participant. Without limiting the generality of the foregoing, upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award will be available for issue or transfer hereunder. Notwithstanding anything to the contrary contained herein: (A) Common Shares tendered in payment of the Option Price of a Option Right shall not be added to the aggregate plan limit described above; (B) Common Shares withheld by the Corporation to satisfy the tax withholding obligation shall not be added to the aggregate plan limit described above; (C) Common Shares that are repurchased by the Corporation with Option Right proceeds shall not be added to the aggregate plan limit described above; and (D) all Common Shares covered by an Appreciation Right, to the extent that it is exercised and settled in Common Shares, whether or not all Common Shares covered by the award are actually issued to the Participant upon exercise of the right, shall be considered issued or transferred pursuant to this Plan. |
| | | (b) Life-of-Plan Limits. Notwithstanding anything in this Section 3, or elsewhere in this Plan, to the contrary and subject to adjustment pursuant to Section 10 of this Plan: |
| | | (i) The aggregate number of Common Shares actually issued or transferred by the Corporation upon the exercise of Incentive Stock Options shall not exceed 1,250,000. | | | (ii) The aggregate number of Common Shares issued as or in payment of, as the case may be, Performance Restricted Shares, Performance Shares, Performance Units, Restricted Shares (and released from substantial risk of forfeiture) or Restricted Stock Units shall not in the aggregate exceed 850,000. |
| | | (c) Individual Participant Limits. Notwithstanding anything in this Section 3, or elsewhere in this Plan, to the contrary and subject to adjustment pursuant to Section 10 of this Plan: |
| | | (i) No Participant shall be granted, Restricted Stock Units that specify Management Objectives, Performance Restricted Shares, Performance Shares, in the aggregate, for more than 50,000 Common Shares during any calendar year. | | | (ii) Notwithstanding any other provision of this Plan to the contrary, in no event shall any Participant in any calendar year receive an award of Performance Units having an aggregate maximum value as of their respective Dates of Grant in excess of $1,000,000. | | | (iii) No Participant shall be granted Option Rights or Appreciation Rights, in the aggregate, for more than 100,000 Common Shares during any calendar year. |
| | | (d) Exclusion from Certain Restrictions. Notwithstanding anything in this Plan to the contrary, up to 5% of the maximum number of Common Shares provided for in Section 3(a)(i) above may be used for awards granted under Sections 4 through 10 of this Plan that do not comply with the three-year requirements set forth in Sections 6(c) and 9(c) of this Plan and the one-year requirements of Sections 4(b), 5(b) and 9(b) of this Plan. |
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4. Performance Restricted Shares. The Committee may from time to time and upon such terms and conditions as it may determine, authorize grants to Participants of Performance Restricted Shares. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Each grant shall constitute an immediate transfer of the ownership of Common Shares to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. | | | (b) Any grant of Performance Restricted Shares shall specify Management Objectives which, if achieved, will result in termination or early termination of the restrictions applicable to such Shares and each grant shall specify in respect of the specified Management Objectives, a minimum acceptable level of achievement and shall set forth a formula for determining the number of Performance Restricted Shares on which restrictions will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified Management Objectives;provided, however,that no such termination shall occur less than one year after the Date of Grant, except in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. | | | (c) Each grant may be made without payment of additional consideration from the Participant. | | | (d) Each grant shall provide that the Performance Restricted Shares covered thereby shall be subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code for a period to be determined by the Committee on the Date of Grant, and any grant may provide for the earlier termination of such period in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or other similar transaction or event. | | | (e) Each grant shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Performance Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Date of Grant. Such restrictions may include without limitation rights of repurchase or first refusal in the Corporation or provisions subjecting the Performance Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. | | | (f) Any grant may require that any or all dividends or other, distributions paid on the Performance Restricted Shares during the period of such restrictions be automatically sequestered. Such distribution may be reinvested on an immediate or deferred basis in additional Common Shares, which may be subject to the same restrictions as the underlying award or such other restrictions as the Committee may determine. | | | (g) Each grant of Performance Restricted Shares shall be evidenced by an Evidence of Award, which shall contain such terms and provisions as the Committee may determine consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Performance Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to the Performance Restricted Shares, shall be held in custody by the Corporation until all restrictions thereon lapse. |
5. Performance Shares and Performance Units. The Committee may also authorize grants of Performance Shares and Performance Units that shall become payable to the Participant upon the achievement of specified Management Objectives during the Performance Period. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Each grant shall specify the number of Performance Shares or Performance Units to which it pertains, which may be subject to adjustment to reflect changes in compensation or other factors,provided, however, that no such adjustment will be made in the case of a Covered Employee where such |
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| | | action would result in the loss of the otherwise available exemption of the award under Section 162(m) of the Code. | | | (b) The Performance Period with respect to each Performance Share or Performance Unit will be such period of time (not less than one year), commencing with the Date of Grant as shall be determined by the Committee on the Date of Grant and may be subject to earlier termination or other modification in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. | | | (c) Each grant shall specify the Management Objectives that are to be achieved by the Participant and each grant shall specify in respect of the specified Management Objectives a minimum acceptable level of achievement below which no payment will be made and shall set forth a formula for determining the amount of any payment to be made if performance is at or above the minimum acceptable level, but falls short of full achievement of the specified Management Objective. The grant of Performance Shares or Performance Units shall specify that, before the Performance Shares or Performance Units will be earned and paid, the Committee must certify that the Management Objectives have been satisfied. | | | (d) Each grant shall specify the time and manner of payment of Performance Shares or Performance Units that shall have been earned, and any grant may specify that any such amount may be paid by the Corporation in cash, Common Shares or any combination thereof and may either grant to the Participant or reserve to the Committee the right to elect among those alternatives. | | | (e) Any grant of Performance Shares may specify that the amount payable with respect thereto may not exceed a maximum specified by the Committee at the Date of Grant. Any grant of Performance Units may specify that the amount payable or the number of Common Shares issued with respect thereto may not exceed maximums specified by the Committee at the Date of Grant. | | | (f) The Committee may at the Date of Grant of Performance Shares, provide for the payment of dividend equivalents to the holder thereof on either a current, deferred or contingent basis, either in cash or in additional Common Shares. | | | (g) Each grant of Performance Shares or Performance Units shall be evidenced by an Evidence of Award, which shall contain such terms and provisions as the Committee may determine consistent with this Plan. |
6. Restricted Shares. The Committee may also authorize the grant or sale to Participants of Restricted Shares. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Each grant shall, constitute an immediate transfer of the ownership of Common Shares to the Participant in consideration of the performance of services entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. | | | (b) Each grant or sale may be made without payment of additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant. | | | (c) Each grant or sale shall provide that the Restricted Shares covered thereby shall be subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code for a period of at least three years to be determined by the Committee on the Date of Grant, and any grant may provide for the earlier termination of such period in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. | | | (d) Each grant or sale shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Date of Grant. Such restrictions may include, without limitation, rights of repurchase or first refusal in the Corporation or provisions |
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| | | subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. | | | (e) Any grant or sale may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered. Such distribution may be reinvested on an immediate or deferred basis in additional, Common Shares, which may be subject to the same restrictions as the underlying award or such other restrictions as the Committee may determine. | | | (f) Each grant of Restricted Shares shall be evidenced by an Evidence of Award, which shall contain such terms and provisions as the Committee may determine consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to the Restricted Shares, shall be held in custody by the Corporation until all restrictions thereon lapse. |
7. Option Rights. The Committee may from time to time authorize grants to Participants of options to purchase Common Shares. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Each grant of Option Rights shall specify the number of Common Shares to which it pertains. | | | (b) Each grant shall specify an Option Price per Common Share, which shall be equal to or greater than the Market Value per Share on the Date of Grant. | | | (c) Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Corporation, (ii) nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee and having a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Committee may deem appropriate, including without limitation any form of consideration authorized under Section 7(d) below, on such basis as the Committee may determine in accordance with this Plan and (iv) any combination of the foregoing. | | | (d) Any grant of a Nonqualified Option may provide that payment of the Option Price may also be made in whole or in part in the form of Restricted Shares or other Common Shares that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Committee on or after the Date of Grant, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 7(d), the Common Shares received by the Optionee upon the exercise of the Nonqualified Option shall be subject to the same, risks of forfeiture or restrictions on transfer as those that applied, to the consideration surrendered by the Optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall, apply only to the same number of Common Shares received by the Optionee as applied to the forfeitable or restricted Common Shares surrendered by the Optionee. | | | (e) To the extent permitted by law, any grant may provide for deferred payment of the Option Price from the proceeds of sale through a broker of some or, all of the Common Shares to which the exercise relates. | | | (f) Successive grants may be made to the same Optionee regardless of whether any Option Rights previously granted to the Optionee remain unexercised. | | | (g) Each grant shall specify the period or periods of continuous employment of the Optionee by the Corporation or any Subsidiary that are necessary before the Option Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Option Rights in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. |
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| | | (h) Any grant of Option Rights may specify Management Objectives which, if achieved, will result in exercisability of such rights. | | | (i) Option Rights granted under this Plan may be (i) options that are intended to qualify under particular provisions of the Code, including without limitation Incentive Stock Options, (ii) options that are not intended to so qualify or (iii) combinations of the foregoing. Incentive Stock Options may be granted only to Participants who, on the date of the grant, are officers or other key employees of the Corporation or any Subsidiary who must meet the definition of “employees” under Section 3401(c) of the Code. | | | (j) The Committee may at the Date of Grant of any Option Rights (other than Incentive Stock Options), provide for the payment of dividend equivalents to the Optionee on either a current or deferred or contingent basis, either in cash or in additional Common Shares. | | | (k) The exercise of an Option Right will result in the cancellation on a share-for-share basis of any Tandem Appreciation Right authorized under Section 8 of this Plan. | | | (l) No Option Right granted pursuant to this Section 7 may be exercised more than 10 years from the Date of Grant. Subject to this limit, the Committee may cause Option Rights to continue to be exercisable after termination of employment of the Participant under circumstances specified by the Committee. | | | (m) The Committee reserves the discretion after the Date of Grant to provide for (i) the payment of a cash bonus at the time of exercise; (ii) the availability of a loan at exercise; or (iii) the right to tender in satisfaction of the Option Price nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee and have a value at the time of exercise that is equal to the exercise price. | | | (n) The Committee may substitute, without receiving Participant permission, Appreciation Rights payable only in Common Shares (or Appreciation Rights payable in cash, Common Shares, or in any combination thereof as elected by the Committee) for outstanding Options;provided, however,that the terms of the substituted Appreciation Rights are substantially the same as the terms for the Options and the difference between the Market Value per Share of the underlying Common Shares and the Base Price of the Appreciation Rights is equivalent to the difference between the Market Value Share of the underlying Common Shares and the Option Price of the Options. If, in the opinion of the Corporation’s auditors, this provision creates adverse accounting consequences for the Corporation, it shall be considered null and void. | | | (o) Each grant of Option Rights shall be evidenced by an Evidence of Award, which shall contain such terms and provisions as the Committee may determine consistent with this Plan. |
8. Appreciation Rights. The Committee may also authorize grants to Participants of Appreciation Rights. An Appreciation Right shall be a right of the Participant to receive from the Corporation an amount, which shall be determined by the Committee and shall be expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of such right. An Appreciation Right awarded in relation to an Incentive Stock Option must be granted concurrently with such Incentive Stock Option. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Any grant may specify that the amount payable upon the exercise of an Appreciation Right may be paid by the Corporation in cash, Common Shares or any combination thereof and may either grant to the Participant or reserve to the Committee the right to elect among those alternatives. | | | (b) Any grant may specify that the amount payable upon the exercise of an Appreciation Right shall not exceed a maximum specified by the Committee on the Date of Grant. | | | (c) Any grant may specify (i) a waiting period or periods before Appreciation Rights shall become exercisable and (ii) permissible dates or periods on or during which Appreciation Rights shall be exercisable. |
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| | | (d) Any grant may specify that an Appreciation Right may be exercised only in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. | | | (e) Any grant of Appreciation Rights may specify Management Objectives that must be achieved as a condition of the exercise of such rights. | | | (f) Any grant may provide for the payment to the Participant of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis. | | | (g) Each grant shall be evidenced by an Evidence of Award, which shall describe the subject Appreciation Rights, identify any related Option Rights, state that the Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Committee may determine consistent with this Plan. | | | (h) Regarding Tandem Appreciation Rights only: Each grant shall provide that a Tandem Appreciation Right may be exercised only (i) at a time when the related Option Right (or any similar right granted under any other plan of the Corporation) is also exercisable and the Spread is positive and (ii) by surrender of the related Option Right (or such other right) for cancellation. | | | (i) Regarding Free-standing Appreciation Rights only: |
| | | (i) Each grant shall specify in respect of each Free-standing Appreciation Right a Base Price per Common Share, which shall be equal to or greater than the Market Value per Share on the Date of Grant; | | | (ii) Successive grants may be made to the same Participant regardless of whether any Free-standing Appreciation Rights previously granted to such Participant remain unexercised; | | | (iii) Each grant shall specify the period or periods of continuous employment of the Participant by the Corporation or any Subsidiary that are necessary before the Free-standing Appreciation Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event; and | | | (iv) No Free-standing Appreciation Right granted under this Plan may be exercised more than 10 years from the Date of Grant. |
9. Restricted Stock Units. The Committee may also authorize grants or sales of Restricted Stock Units to Participants. Each such grant may utilize any or all of the authorizations, and will be subject to all of the requirements contained in the following provisions:
| | | (a) Each grant or sale shall constitute the agreement by the Corporation to deliver Common Shares or cash to the Participant in the future in consideration of the performance of services, subject to the fulfillment during the Restriction Period of such conditions (which may include the achievement of Management Objectives) as the Committee may specify. | | | (b) If a grant of Restricted Stock Units specifies that the Restriction Period will terminate upon the achievement of Management Objectives, such Restriction Period may not terminate sooner than one year from the Date of Grant. Each grant may specify in respect of such Management Objectives a minimum acceptable level of achievement and may set forth a formula for determining the number of Restricted Stock Units which restriction will terminate if performance is at or above the minimum level, but falls short of full achievement of the specified Management Objectives. | | | (c) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Market Value per Share on the Date of Grant. | | | (d) If the Restriction Period lapses only by the passage of time, each grant or sale shall provide that the Restricted Stock Units covered thereby shall be subject to a Restriction Period of at least three |
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| | | years, which shall be fixed by the Committee on the Date of Grant, and any grant or sale may provide for the earlier termination of such period in the event of retirement, death or disability of the Participant or a Change in Control of the Corporation or similar transaction or event. | | | (e) During the Restriction Period, the Participant shall not have any right to transfer any rights under the subject award, shall not have any rights of ownership in the Restricted Stock Units and shall not have any right to vote such shares, but the Committee may on or after the Date of Grant authorize the payment of dividend equivalents on such Restricted Stock Units in cash or in additional Common Shares on a current, deferred or contingent basis. | | | (f) Each grant or sale will specify the time and manner of payment of Restricted Stock Units that have been earned. Any grant or sale may specify that the amount payable with respect thereto may be paid by the Corporation in cash, in Common Shares or in any combination thereof and may either grant to the Participant or retain in the Committee the right to elect among those alternatives. | | | (g) Each grant or sale shall be evidenced by an Evidence of Award, which shall contain such terms and provisions as the Committee may determine consistent with this Plan. |
10. Administration of the Plan.
| | | (a) This Plan shall be administered by the Organization and Compensation Committee of the Board. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. | | | (b) The interpretation and construction by the Committee of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, Restricted Shares, Performance Restricted Shares, Performance Shares or Performance Units, Appreciation Rights or Restricted Stock Units and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable for any such action taken or determination made in good faith. | | | (c) The Committee may delegate to the appropriate officer or officers of the Corporation or any Subsidiary, part or all of its authority with respect to the administration of awards made by the Committee to individuals who are not officers or directors of the Corporation within the meaning of the Securities Exchange Act of 1934. | | | (d) To the extent permitted by Ohio law, the Committee may, from time to time, delegate to one or more officers of the Corporation the authority of the Committee to grant and determine the terms and conditions of awards granted under this Plan. In no event shall any such delegation of authority be permitted with respect to awards to any executive officer or any person subject to Section 162(m) of the Code. |
11. Adjustments. The Committee may make or provide for such adjustments in the (a) number of Common Shares covered by outstanding Option Rights, Appreciation Rights, Restricted Stock Units and Performance Shares and Performance Units granted hereunder, (b) prices per share applicable to such Option Rights and Appreciation Rights, and (c) kind of shares (including shares of another issuer) covered thereby, as the Committee in its sole discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Participants that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Corporation, (y) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities or (z) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding awards under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Committee may on or after the Date of Grant provide in the agreement evidencing any award under this Plan
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that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Committee may provide that the holder will automatically be entitled to receive such an equivalent award. The committee may also make or provide for such adjustments in the numbers and kind of shares specified in Section 3 of this 2006 Plan as the Committee in its sole discretion, exercised in good faith, may determine is appropriate to reflect any transaction or event described in this Section 11; provided, however, that any such adjustment to the number specified in Section 3(b)(i) will be made only if and to the extent that such adjustment would not cause any option intended to qualify as an Incentive Stock Option to fail so to qualify. This Section 11 shall not be construed to permit the re-pricing of any Option Rights in the absence of any of the circumstances described above in contravention of Section 19(b) hereof.
12. Detrimental Activity. Any Evidence of Award may provide that if a Participant, either during employment by the Corporation or a Subsidiary or within a specified period after termination of such employment, shall engage in any Detrimental Activity (as defined by the Committee in the Evidence of Award), and the Board shall so find, forthwith upon notice of such finding, the Participant shall:
| | | (a) Forfeit any award granted under this Plan then held by the Participant; | | | (b) Return to the Corporation, in exchange for payment by the Corporation of any amount actually paid therefor by the Participant, all Common Shares that the Participant has not disposed of that were offered pursuant to this Plan within a specified period prior to the date of the commencement of such Detrimental Activity; and | | | (c) With respect to any Common Shares so acquired that the Participant has disposed of, pay to the Corporation in cash the difference between: |
| | | (i) Any amount actually paid therefor by the Participant pursuant to this Plan, and | | | (ii) The Market Value per Share of the Common Shares on the date of such acquisition. |
To the extent that such amounts are not paid to the Corporation, the Corporation may set off the amounts so payable to it against any amounts that may be owing from time to time by the Corporation or a Subsidiary to the Participant, whether as wages, deferred compensation or vacation pay or in the form of any other benefit or for any other reason.
13. Participation by Employees of Designated Subsidiaries. As a condition to the effectiveness of any grant or award to be made hereunder to a Participant who is an employee of a Designated Subsidiary, whether or not such Participant is also employed by the Corporation or another Subsidiary, the Board may require such Designated Subsidiary to agree to transfer to such employee (when, as and if provided for under this Plan, and any applicable Agreement entered into with any such employee pursuant to this Plan) the Common Shares that would otherwise be delivered by the Corporation, upon receipt by such Designated Subsidiary of any consideration then otherwise payable by such Participant to the Corporation. Any such award shall be evidenced by an agreement between the Participant and the Designated Subsidiary, in lieu of the Corporation, on terms consistent with this Plan and approved by the Board and such Designated Subsidiary. All such Common Shares so delivered by or to a Designated Subsidiary shall be treated as if they had been delivered by or to the Corporation for purposes of Section 3 of this Plan, and all references to the Corporation in this Plan shall be deemed to refer to such Designated Subsidiary, except for purposes of the definition of “Board” and except in other cases where the context otherwise requires.
14. Non-U.S. Employees. In order to facilitate the making of any grant or combination of grants under this Plan, the Committee may provide for such special terms for awards to Participants who are foreign nationals or who are employed by the Corporation or any Subsidiary or Designated Subsidiary outside of the United States of America or who provide services to the Corporation under an agreement with a foreign nation or agency, as the Committee may consider necessary or appropriate to accommodate differences in local law; tax policy or custom. Moreover, the Committee may approve such supplements to or amendments, restatements or alternative versions of this Plan (including, without limitation, sub-plans) as it may consider necessary or appropriate for such purposes, without thereby affecting the terms of this Plan as in effect for
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any other purpose, and the Secretary or other appropriate officer of the Corporation may certify any such document as having been approved and adopted in the same manner as this Plan. No such special terms, supplements, amendments or restatements, however, shall include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the shareholders of the Corporation.
15. Transferability. (a) Except as provided in Section 15(c) below, no Option Right or Appreciation Right or other derivative security granted under this Plan may be transferred by a Participant except by will or the laws of descent and distribution. Except as otherwise determined by the Committee, Option Rights and Appreciation Rights granted under this Plan may not be exercised during a Participant’s lifetime except by the Participant or, in the event of the Participant’s legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision.
(b) The Committee may specify at the Date of Grant, that all or any part of the Common Shares that are (i) to be issued or transferred by the Corporation upon the exercise of Option Rights or Appreciation Rights, or in payment of Performance Shares or Performance Unit or upon the termination of the Restriction Period applicable to Restricted Stock Units, or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Sections 46 and 6 of this Plan, shall be subject to further restrictions upon transfer.
(c) The Committee may determine that Option Rights (other than Incentive Stock Options) and Appreciation Rights may be transferable by a Participant, without payment of consideration therefor by the transferee, only to any one or more members of the Participant’s immediate family; provided, however, that (i) no such transfer shall be effective unless reasonable prior notice thereof is delivered to the Corporation and such transfer is thereafter effected in accordance with any terms and conditions that shall have been made applicable thereto by the Corporation or the Committee and (ii) any such transferee shall be subject to the same terms and conditions hereunder as the Participant. For the purposes of this Section 15(c), the term “immediate family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,mother-in-law,father-in-law,son-in-law,daughter-in-law,brother-in-law, orsister-in-law, including adoptive relationships, any person sharing the Participant’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than fifty percent of the voting interests.
16. Withholding Taxes. To the extent that the Corporation is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available the Corporation for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. At the discretion of the Committee, any such arrangements may without limitation include relinquishment of a portion of any such payment or benefit. Participants shall also make such arrangements as the Corporation may require for the payment of any withholding tax obligation that may arise in connection with the disposition of Common Shares acquired upon the exercise of Option Rights. In no event shall the Market Value per Share of the Common Shares to be withheld and/or delivered pursuant to this Section to satisfy applicable withholding taxes in connection with the benefit exceed the minimum amount of taxes required to be withheld.
17. Compliance with Section 409A of the Code.
| | | (a) To the extent applicable, it is intended that this Plan and any grants made hereunder comply with the provisions of Section 409A of the Code. This Plan and any grants made hereunder shall be administrated in a manner consistent with this intent, and any provision that would cause this Plan or any grant made hereunder to fail to satisfy Section 409A of the Code shall have no force and effect until amended to comply with Section 409A of the Code (which amendment may be retroactive to the extent permitted by Section 409A of the Code and may be made by the Corporation without the consent of Participants). Any reference in this Plan to Section 409A of the Code will also include any proposed, |
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| | | temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service. | | | (b) In order to determine for purposes of Section 409A of the Code whether a Participant is employed by a member of the Corporation’s controlled group of corporations under Section 414(b) of the Code (or by a member of a group of trades or businesses under common control with the Corporation under Section 414(c) of the Code) and, therefore, whether the shares of Common Stock that are or have been purchased by or awarded under this 2006 Plan to the Participant are shares of “service recipient” stock within the meaning of Section 409A of the Code: |
| | | (i) In applying Code Section 1563(a)(1), (2) and (3) for purposes of determining the Corporation’s controlled group under Section 414(b) of the Code, the language “at least 50 percent” is to be used instead of “at least 80 percent” each place it appears in Code Section 1563(a)(1), (2) and (3), and | | | (ii) In applying Treasury Regulation Section 1.414(c)-2 for purposes of determining trades or businesses under common control with the Corporation for purposes of Section 414(c) of the Code, the language “at least 50 percent” is to be used instead of “at least 80 percent” each place it appears in Treasury Regulation Section 1.414(c)-2. |
18. Effective Date. This Plan will be effective as of May 2, 2006, the date the Plan is approved by shareholders.
19. Amendments.
| | | (a) The Committee may at any time and from time to time amend this Plan in whole or in part;provided, however, that if an amendment to this Plan (i) would materially increase the benefits accruing to participants under this Plan, (ii) would materially increase the number of securities which may be issued under this Plan, (iii) would materially modify the requirements for participation in this Plan or (iv) must otherwise be approved by the shareholders of the Corporation in order to comply with applicable law or the rules of the New York Stock Exchange or, if the Common Shares are not traded on the New York Stock Exchange, the principal national securities exchange upon which the Common Shares are traded or quoted, then, such amendment will be subject to shareholder approval and will not be effective unless and until such approval has been obtained. | | | (b) The Committee shall not, without the further approval of the shareholders of the Corporation, authorize the amendment of any outstanding Option Right to reduce the Option Price. Furthermore, no Option Right will be cancelled and replaced with awards having a lower Option Price without further approval of the shareholders of the Corporation. This Section 19(b) is intended to prohibit the repricing of “underwater” Option Rights and shall not be construed to prohibit the adjustments provided for in Section 11 of this Plan. | | | (c) If permitted by Section 409A of the Code and except in the case of a Covered Employee where such action would result in the loss of an otherwise available exemption under Section 162(m) of the Code, in case of termination of employment by reason of death, disability or normal or early retirement, or in the case of unforeseeable emergency or other special circumstances, of a Participant who holds an Option Right or Appreciation Right not immediately exercisable in full, or any Performance Restricted Shares, Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, or any Restricted Stock Units as to which the Restriction Period has not been completed, or any Performance Shares or Performance Units which have not been fully earned, or who holds Common Shares subject to any transfer restriction imposed pursuant to Section 15 of this Plan, the Committee may, in its sole discretion, accelerate the time at which such Option Right or Appreciation Right may be exercised or the time at which such substantial risk of forfeiture or prohibition or restriction on transfer will lapse or the time when such Restriction Period will end or the time at which such Performance Shares or Performance Units will be deemed to have been fully earned or the time when such transfer restriction will terminate or may waive any other limitation or requirement under any such award. |
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| | | (d) Subject to Section 19(b) hereof, the Committee may amend the terms of any award theretofore granted under this Plan prospectively or retroactively and except in the case of a Covered Employee where such action would result in the loss of an otherwise available exemption under Section 162(m) of the Code, but subject to Section 11 above, no such amendment shall impair the rights of any Participant without his or her consent. The Committee may, in its discretion, terminate this Plan at any time. Termination of this Plan will not affect the rights of Participants or their successors under any awards outstanding hereunder and not exercised in full on the date of termination. |
20. Termination of the Plan. No further awards shall be granted under this Plan after the passage of 10 years from the date on which this Plan was first approved by the shareholders of the Corporation.
21. Governing Law. The Plan and all grants and awards and actions taken thereunder shall be governed by and construed in accordance with the internal substantive laws of the State of Ohio.
22. Miscellaneous Provisions.
| | | (a) The Corporation shall not be required to issue any fractional Common Shares pursuant to this Plan. The Committee may provide for the elimination of fractions or for the settlement of fractions in cash. | | | (b) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Corporation or any Subsidiary, nor shall it interfere in any way with any right the Corporation or any Subsidiary would otherwise have to terminate such Participant’s employment or other service at any time. | | | (c) To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as a Tax-qualified Option from qualifying as such, that provision shall be null and void with respect to such Option Right. Such provision, however, will remain in effect for other Option Rights and there will be no further effect on any provision of this Plan. | | | (d) No award under this Plan may be exercised by the holder thereof if such exercise, and the receipt of cash or stock thereunder, would be, in the opinion of counsel selected by the Committee, contrary to law or the regulations of any duly constituted authority having jurisdiction over this Plan. | | | (e) Leave of absence approved by a duly constituted officer of the Corporation or any of its Subsidiaries shall not be considered interruption or termination of service of any employee for any purposes of this Plan or awards granted hereunder, except that no awards may be granted to an employee while he or she is on a leave of absence. | | | (f) No Participant shall have any rights as a shareholder with respect to any shares subject to awards granted to him or her under this Plan prior to the date as of which he or she is actually recorded as the holder of such shares upon the stock records of the Corporation. | | | (g) The Committee may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Corporation or a Subsidiary to the Participant. | | | (h) If any provision of this Plan is or becomes invalid, illegal or unenforceable in any jurisdiction, or would disqualify this Plan or any award under any law deemed applicable by the Board, such provision shall be construed or deemed amended or limited in scope to conform to applicable laws or, in the discretion of the Board, it shall be stricken and the remainder of this Plan shall remain in full force and effect. |
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APPENDIX C
BRUSH ENGINEERED MATERIALS INC.
2006 Non-employee Director Equity Plan
1. Purposes. The purpose of this 2006 Non-employee Director Equity Plan (the “Director Plan”) is to provide ownership in the Common Shares of Brush Engineered Materials Inc. (the “Company”) to members of the Board of Directors (the “Board”) who are not employees in order to align their interests more closely with the interests of the Company’s other shareholders and to provide financial incentives and rewards that will help attract and retain the most qualified non-employee directors. This Plan replaces the Company’s 1997 Stock Incentive Plan for Non-employee Directors (As amended and restated as of May 1, 2001), as further amended by Amendment No. 1 (the “1997 Director Plan”) and the 2005 Deferred Compensation Plan forNon-employee Directors (the “2005 Director Plan”).
2. Administration.
| | | (a) This Plan will be administered by the Governance Committee of the Board (the “Committee”), which will have full power and authority, subject to the provisions of this Plan, to supervise administration and to interpret the provisions of this Plan and to authorize and supervise any grant of any award, any issuance or payment of Common Shares and any crediting or payment of Deferred Stock Units (as defined in Section 6 below). No Participant (as defined in Section 3 below) in this Director Plan will participate in the making of any decision with respect to any question relating to grants made or Common Shares issued under this Plan to that Participant only. | | | (b) The interpretation and construction by the Committee of any provision of this Plan or any agreement, notification or document evidencing the grant of Awards and any determination by the Committee pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Committee shall be liable for any such action taken or determination made in good faith. |
3. Eligibility. Each member of the Board who is not an employee of the Company will be eligible to receive awards and Common Shares in accordance with this Plan (each, a “Participant”), provided that shares remain available for issuance hereunder in accordance with Section 4.
4. Shares Subject to this Plan. The shares that may be issued or credited to accounts pursuant to Section 6 of this Plan will be 150,000 Common Shares, subject to adjustment in accordance with Section 11 of this Plan.
5. Compensation in General. The amount of the director retainer fee, any director fees that may be payable for attendance at meetings of the Board and/or committees thereof and any other compensation paid to the directors for services as a director (collectively, the “Director Compensation”) will be determined from time to time in accordance with the Company’s Code of Regulations and applicable law.
6. Equity Awards.
| | | (a) The Committee may grant to Participants under this Director Plan the following types of awards (each, an “Award”): stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, other stock awards and deferred stock units, as described herein. | | | (b) Each Award granted under this Plan will be subject to such terms and conditions as shall be established by the Committee, and the Committee will determine the number of Common Shares underlying each Award. Notwithstanding the foregoing: |
| | | (i) Stock Options. The exercise price of each option will be determined by the Committee but will not be less than 100% of the Fair Market Value of a Common Share on the date the option is granted. Each option will expire and will be exercisable at such time and subject to such terms and conditions as the Committee shall determine, provided that no option will be exercisable later than |
| | | the tenth anniversary of its grant. In no event will the Committee cancel any outstanding stock option for the purpose of reissuing the stock option to the Participant at a lower exercise price or reduce the exercise price of an outstanding stock option. | | | (ii) SARs. SARs may be granted in tandem with a stock option granted under this Director Plan or on a free-standing basis. The grant price of a tandem SAR will be equal to the exercise price of the related option and the grant price of a free-standing SAR will be at least equal to 100% of the Fair Market Value of a Common Share on the date of its grant. A SAR may be exercised upon such terms and conditions and for such term as the Committee in its sole discretion determines, provided that the term will not exceed the option term in the case of a tandem SAR or ten years in the case of a free-standing SAR. Payment for an SAR may be made in cash or stock, as determined by the Committee. | | | (iii) Restricted Stock and Restricted Stock Units. Restricted stock and restricted stock units may be subject to such restrictions and conditions as the Committee determines and all restrictions will expire at such times as the Committee shall specify. | | | (iv) Stock Awards. The Committee may award to Participants, on a quarterly or other basis, a specified number of Common Shares or a number of Common Shares equal to a dollar value as determined by the Committee from time to time. | | | (v) Deferred Stock Units. Each Participant may elect to have restricted stock units or other stock awards under this Director Plan paid in the form of deferred stock units (“Deferred Stock Units”) upon vesting or payment of such Award, which Deferred Stock Units will be credited to a book-keeping account in the name of the Participant in accordance with this Director Plan. |
| | | (c) Unless otherwise determined by the Committee, the following Awards shall be made automatically: |
| | | (i) On the business day following the day a Participant is first elected or appointed to the Board, such Participant shall be granted Common Shares equal to $100,000 divided by the Fair Market Value of a Common Share on the day the Participant is elected or appointed to the Board, which shall be unrestricted except as may otherwise be required by law. | | | (ii) On the business day following the annual meeting of shareholders beginning with the 2006 annual meeting, each Participant shall be granted the number of restricted stock units equal to $45,000 divided by the Fair Market Value of a Common Share on the day of the annual meeting. Such restricted stock units shall be paid-out in Common Shares at the end of a one-year restriction period unless the Participant elects to be paid in Deferred Stock Units. Notwithstanding the foregoing, if a Participant incurs a termination of service before the end of such one-year restriction period, such Participant shall be entitled to receive a pro-rata payment of Common Shares based on the number of full months of service since the date of grant. Such pro-rata payments, if any, that were deferred pursuant to elections made under Sections 7 and 8 shall remain subject to such elections. |
7. Further Elections.
| | | (a) Any Participant may elect to have all or any portion of the cash portion of his or her Director Compensation paid in Common Shares and may further elect to have all or any portion of any Director Compensation that the Participant has elected to receive in Common Shares and any Awards granted as Director Compensation paid in the form of Deferred Stock Units, which will be credited to the Participant’s account. For the portion of a Participant’s cash Director Compensation that he or she elects to receive in Common Shares, the number of Common Shares to be issued will equal the cash amount that would have been paid divided by the Fair Market Value of one Common Share on the first business day immediately preceding the date on which such cash amount would have been paid. Awards that are deferred pursuant to this Section 7(a) will be credited to the Deferred Stock Units account on a one for one basis. |
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| | | (b) An election pursuant Sections 6(b)(v) and/or 7(a) must be made in writing and delivered to the Company prior to the first day of the calendar year for which the Director Compensation would be earned; provided that elections with respect to awards made under Section 6(c)(ii) on the first business day following the 2006 annual shareholders’ meeting must be made prior to the date of such meeting. To elect to defer Director Compensation earned during the first calendar year in which a director becomes eligible to participate in this Director Plan, the new director must make an election pursuant to Section 6(b)(v) and/or 7(a) within 30 days after becoming eligible to participate in this Director Plan and such election shall be effective only with regard to Director Compensation earned subsequent to the filing of the election. All elections to defer Director Compensation under the 2005 Director Plan that were made prior to the start of the 2006 calendar year shall be treated as elections to defer Director Compensation under this Director Plan for the 2006 calendar year. | | | (c) If a director does not file an election form by the specified date, he or she will receive any Director Compensation for the year that is payable in Common Shares on a current basis and will be deemed to have elected to receive the remainder of the Director Compensation in cash. |
8. Deferral.
| | | (a) If a Participant elects to receive Deferred Stock Units, there will be credited to the Participant’s account as of the day such Director Compensation would have been paid, the number of Deferred Stock Units which is equal to the number of Common Shares that would otherwise have been delivered to the Participant pursuant to Section 6 and/or Section 7(a) on such date. The Deferred Stock Units credited to the Participant’s account (plus any additional shares credited pursuant to Section 8(c) below) will represent the number of Common Shares that the Company will issue to the Participant at the end of the deferral period. Unless otherwise provided herein or pursuant to the terms of any Award hereunder, all Deferred Stock Units awarded under this Director Plan will vest 100% upon the award of such Deferred Stock Units. | | | (b) The Deferred Stock Units will be subject to a deferral period beginning on the date of crediting to the Participant’s account and ending upon termination of service as a director or such other period as the Participant may have elected. The period of deferral will be for a minimum period of one year, except in the case where the Participant elects a deferral period determined by reference to his or her termination of service as a director. The Participant may elect payment in a lump sum or payment in equal installments over five or ten years. Elections with respect to the time and method (i.e., lump sum or installments) of payment must be made at the same time as the participant’s election to defer as described in Section 7(b). If the Participant does not specify a time for payment, the Participant will receive payment upon termination of service as a director and if no method of payment is specified by the Participant, he or she will receive payment in a lump sum. A Participant may change the time and method of payment he or she previously elected (or was deemed to elect) by filing a subsequent election with the Company at least twelve months before the date of the previously elected payment date or commencement date, and the newly elected payment date (or payment commencement date) must be at least five years after the previously elected payment date (or the previously elected payment commencement date);provided, however,that such modification will not be effective unless the Participant remains a Director for at least twelve months after the date on which such modification was made. During the deferral period, the Participant will have no right to transfer any rights under his or her Deferred Stock Units and will have no other rights of ownership therein. | | | (c) A Participant’s account will be credited as of the last day of each calendar quarter with that number of additional Deferred Stock Units equal to the amount of cash dividends paid by the Company during such quarter on the number of Common Shares equivalent to the number of Deferred Stock Units in the Participant’s account from time to time during such quarter divided by the Fair Market Value of one Common Share on the day immediately preceding the last business day of such calendar quarter. Such dividend equivalents, which will likewise be credited with dividend equivalents, will be deferred until the end of the deferral period for the Deferred Stock Units with respect to which the dividend equivalents were credited. |
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| | | (d) Notwithstanding the foregoing provisions, (i) if, upon the Participant’s termination of service as a director, the value of the Participant’s account is less than $10,000 the amount of such Participant’s account will be immediately paid to the Participant in cash or Common Shares, (ii) if a Change in Control (as defined in Section 9(c) below) of the Company occurs, the amount of each Participant’s account will immediately be paid to the Participant in full and (iii) in the event of an unforeseeable emergency, as defined under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), that is caused by an event beyond the control of the Participant and that would result in severe financial hardship to the individual if acceleration were not permitted, the Committee will accelerate the payment to the Participant of the Participant’s account, but only up to the amount necessary to meet the emergency. | | | (e) To the extent a Participant is entitled to a lump sum payment following a Change in Control under Section 8(d) above and such Change in Control does not constitute a “change in the ownership or effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A(a)(2)(A)(v) of the Code, then notwithstanding Section 8(d), payment will be made, to the extent necessary to comply with the provisions of Section 409A of the Code, to the Participant on the earliest of (i) the Participant’s termination of service with the Company (determined in accordance with Section 409A); (ii) the date payment otherwise would have been made in the absence of Section 8(d) (provided such date is a permissible distribution date under Section 409A), or (iii) the Participant’s death. |
9. Definitions, etc.
| | | (a) For purposes of this Director Plan, Common Shares means (i) Common Shares without par value of the Company and (ii) any security into which Common Shares may be converted by reason of any transaction or even of the type referred to in Section 11 of this Director Plan. | | | (b) For purposes of this Director Plan, the Fair Market Value means, as of any particular date, the fair market value of the Common Shares as determined by the Committee. | | | (c) For purposes of this Director Plan, Change in Control of the Company shall have the meaning determined by the Committee from time to time. | | | (d) Notwithstanding anything to the contrary contained in this Director Plan, it is a condition to the issuance of Common Shares or Deferred Stock Units that the transaction be registered under applicable securities laws and no Participant will be able to receive Common Shares or Deferred Stock Units in payment of all or part of his or her Director Compensation unless and until such registration has been effected. | | | (e) For purposes of this Director Plan, “termination of service” means a separation from service as defined under Section 409A of the Code. |
10. Delivery of Shares. The Company will make delivery of certificates representing the Common Shares which a Participant is entitled to receive 60 days following the Participant’s right to receive such Common Shares.
11. Adjustments. In the event that, after the Effective Date of this Director Plan (as defined in Section 16), the number of outstanding Common Shares is increased or decreased or such shares are exchanged for a different number or kind of shares or other securities by reason of a stock dividend, stock split, recapitalization, reclassification, combination of shares or other change in the capital structure of the Company or by reason of a merger, consolidation, spin off, split off, spin out, split up, reorganization, partial or complete liquidation or other distribution of assets, issuance of rights or warrants to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing, adjustments will be made by the Board in the number and kind of shares or other securities that are underlying Awards and/or credited to accounts hereunder (and in the exercise price or other price of shares subject to outstanding Awards) and that may be issued under this Director Plan as it deems to be appropriate. Moreover, in the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for any or
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all outstanding Awards under this Director Plan such alternative consideration (if any) as it, in good faith may determine to be equitable in the circumstances and may require in connection therewith the surrender of all Awards so replaced.
12. Termination or Amendment of this Director Plan. To the extent permitted under 409A of the Code, the Committee may at any time and from time to time terminate, amend or suspend this Director Plan;provided, however,that the Committee may not materially alter this Director Plan without shareholder approval, including by increasing the benefits accrued to Participants under this Director Plan; increasing the number of securities which may be issued under this Director Plan; modifying the requirements for participation in this Director Plan; or by including a provision allowing the Board or the Committee to lapse or waive restrictions at its discretion. An amendment or the termination of this Director Plan will not adversely affect the right of a Participant to receive Common Shares issuable or cash payable at the effective date of the amendment or termination. No grant will be made under this Director Plan more than 10 years after the date of which it is first approved by shareholders, but all grants made on or prior to such date will continue in effect thereunder subject to the terms thereof and of this Director Plan.
13. Transferability.
| | | (a) Except as provided in Section 13(c) below, no option right or SAR or other derivative security granted under this Director Plan may be transferred by a Participant except by will or the laws of descent and distribution. Except as otherwise determined by the Committee, option rights and SARs granted under this Director Plan may not be exercised during a Participant’s lifetime except by the Participant or, in the event of the Participant’s legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. | | | (b) The Committee may specify at the date of grant, that all or any part of the Common Shares that are (i) to be issued or transferred by the Company upon the exercise of option rights or upon the termination of the restriction period applicable to restricted stock units, or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer applicable to restricted stock, shall be subject to further restrictions upon transfer. | | | (c) The Committee may determine that option rights and SARs may be transferable by a Participant, without payment of consideration therefor by the transferee, only to any one or more members of the Participant’s immediate family; provided, however, that (i) no such transfer shall be effective unless reasonable prior notice thereof is delivered to the Corporation and such transfer is thereafter effected in accordance with any terms and conditions that shall have been made applicable thereto by the Company or the Committee and (ii) any such transferee shall be subject to the same terms and conditions hereunder as the Participant. For the purposes of this Section 16(c), the term “immediate family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling,mother-in-law,father-in-law,son-in-law,daughter-in-law,brother-in-law, orsister-in-law, including adoptive relationships, any person sharing the Participant’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than fifty percent of the voting interests. |
14. Miscellaneous.
| | | (a) To the extent that the application of any formula described in this Director Plan does not result in a whole number of Common Shares, the result will be rounded upwards to the next whole number. | | | (b) The adoption and maintenance of this Director Plan will not be deemed to be a contract between the Company and the Participant to retain his or her position as a director of the Company. |
15. Compliance with Section 409A of the Code. To the extent applicable, it is intended that this Director Plan comply with the provisions of Section 409A of the Code. This Director Plan will be administered in a manner consistent with this intent, and any provision that would cause this Director Plan to fail to satisfy Section 409A of the Code will have no force and effect until amended to comply with
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Section 409A (which amendment may be retroactive to the extent permitted by Section 409A of the Code and may be made by the Company without the consent of the Participants in this Director Plan). Any reference to Section 409A of the Code will include any proposed, temporary or final regulations or any other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.
16. Effective Date of this Director Plan. This Director Plan will be effective immediately on May 2, 2006, the date of its approval by the shareholders of the Company (the “Effective Date”). On the Effective Date, any account balances held by a Participant under the 2005 Director Plan in the form of Deferred Shares shall be treated as Deferred Stock Units, which shall be payable under this Director Plan, but without any change in the time or method of payment provided for in the 2005 Director Plan or any election currently in effect thereunder.
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BRUSH ENGINEERED MATERIALS INC.
Solicited on Behalf of the Board of Directors
The undersigned appoints Gordon D. Harnett, or if he is unable or unwilling to act, then Michael C. Hasychak, with full power of substitution, to vote and act for and in the name of the undersigned as fully as the undersigned could vote and act if personally present at the annual meeting of shareholders of Brush Engineered Materials Inc. to be held on May 2, 2006 and at any adjournment or postponement thereof:
| | | The Board of Directors recommends a vote “FOR” all nominees in Proposal 1 and “FOR” Proposals 2, 3 and 4. |
The shares represented by this proxy will be voted as directed or, if directions are not indicated, will be voted “FOR” the election of directors in Proposal 1 and “FOR” Proposals 2, 3 and 4. In their discretion, the proxies are authorized to vote upon such other business that may properly come before the annual meeting of shareholders.
| | | (Comments/Change of Address) | |
| | |
| | |
| | |
| | | | (If you have written in the above space, please mark the corresponding box on the reverse side.) |
................................................................................................................................................................ ...................................................
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL
BRUSH ENGINEERED MATERIALS INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.  | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For | | Withhold | | For All | | | | | | | | | | | All | | All | | Except | | | | | For | Against | | Abstain | | 1. Election of the following Directors:
Richard J. Hipple
William B. Lawrence
William P. Madar | | | o | | | | o | | | | o | | | | | 2. Approve adoption of the Brush Engineered Materials Inc. 2006 Stock Incentive Plan. | o | | o | | | | o | | | The Board of Directors unanimously recommends a vote FOR ALL the above nominees.
| | | | | | | | | | Comments/ Change of Address | | o | | 3. Approve adoption of the Brush Engineered Materials Inc. 2006 Non- employee Director Equity Plan. | o | | o | | | | o | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Nominee Exception | | | | | | | | | | | | | | | | 4. ConfirmingRatifying the appointment of Ernst & Young as independent registered public accounting firm of the Company. | | o | | o | | o | | The Board of Directors recommends a vote FOR the above proposal. | | o |
The Board of Directors unanimously recommends a
vote FOR ALL the above nominees. Withheld for the nominees you list below: (Write that
nominee’s name in the space provided below.)
| | | | Date: ___________________________________ , 2006 | | | | |
| | | Signature | | | | |
| | | |
SignatureSignatureDate NOTE: Please sign exactly as the name appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please add your title as such. 5 FOLD AND DETACH HERE5
| | Signature | | | | |
BRUSH ENGINEERED MATERIALS INC. | | Title | | | | | NOTE: Please sign exactly | Solicited on Behalf of the Board of Directors | | | The undersigned appoints Richard J. Hipple or if he is unable or unwilling to act, then Michael C. Hasychak, with full power of substitution, to vote and act for and in the name of the undersigned as fully as the name appears hereon. When signing as attorney, executor, administrator, trusteeundersigned could vote and act if personally present at the annual meeting of shareholders of Brush Engineered Materials Inc. to be held on May 1, 2007 and at any adjournment or guardian, please add your title as such. |
........................................................................................................................................................................................................................................................................
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL
CONFIDENTIAL VOTING INSTRUCTIONS
To Fidelity Management Trust Company, Trustee Under the Brush Engineered Materials Inc.
PAYSOP
Pursuant to section 6.8 of the Brush Engineered Materials Inc. Savings and Investment Plan, the undersigned, as a participant in the Plan, hereby directs the Trustee to vote (in person or by proxy) all shares of Common Stock of Brush Engineered Materials Inc. credited to the undersigned’s PAYSOP Contribution Account under the Plan on the record date for the annual meeting of shareholders of Brush Engineered Materials Inc. to be held on May 2, 2006 and at any adjournment or postponement thereof, on the following matters as checked below.
| | | The Board of Directors recommends a vote “FOR” all nominees in Proposal 1 and “FOR” Proposals 2, 3 and 4.Proposal 2. |
This confidential voting instructions card will be seen only by authorized personnel of the Trustee. The shares represented by this card will be voted as directed, or if directions are not indicated but this card is executed and returned, will be voted “FOR” the election of directors in Proposal 1 and “FOR” Proposals 2, 3 and 4. In their discretion, the proxies are authorized to vote upon such other business that may properly come before the annual meeting of shareholders.
| | | (Comments/Change of Address) | |
| | |
| | |
| | |
| | | | | | | (If you have writtenThe shares represented by this proxy will be voted as directed or, if directions are not indicated, will be voted “FOR” the election of directors in Proposal 1 and "FOR" Proposal 2. In their discretion, the above space, please markproxies are authorized to vote upon such other business that may properly come before the annual meeting of shareholders or any adjournment or postponement thereof. | | | | (Continued and to be marked, dated and signed, on the other side) | |
| | | | | | | | | Address Change/Comments (Mark the corresponding box on the reverse side.)side) | |
................................................................................................................................................................ ...................................................
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL
BRUSH ENGINEERED MATERIALS INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For | | Withhold | | For All | | | | | | | | | | | All | | All | | Except | | | | | For | Against | | Abstain | | 1. Election of the following Directors:
Richard J. Hipple
William B. Lawrence
William P. Madar | | | o | | | | o | | | | o | | | | | 2. Approve adoption of the Brush Engineered Materials Inc. 2006 Stock Incentive Plan. | o | | o | | | | o | | | The Board of Directors unanimously recommends a vote FOR ALL the above nominees.
| | | | | | | | | | Comments/ Change of Address | | o | | 3. Approve adoption of the Brush Engineered Materials Inc. 2006 Non- employee Director Equity Plan. | o | | o | | | | o | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Nominee Exception | | | | | | | | | | | | | | | | 4. Confirming the appointment of Ernst & Young as independent registered public accounting firm of the Company. | o | | o | | | | o | | |
| | | Date: ___________________________________ , 2006 | | |
| | Signature | | |
| | Signature | | |
| | Title | | | NOTE: Please sign exactly as the name appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please add your title as such. |
........................................................................................................................................................................................................................................................................
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL
CONFIDENTIAL VOTING INSTRUCTIONS
To Fidelity Management Trust Company, Trustee Under the Brush Engineered Materials Inc.
Savings and Investment Plan.
Pursuant to section 6.8 of the Brush Engineered Materials Inc. Savings and Investment Plan, the undersigned, as a participant in the Plan, hereby directs the Trustee to vote (in person or by proxy) all shares of Common Stock of Brush Engineered Materials Inc. credited to the undersigned’s account (other than shares credited under the PAYSOP Contribution Account) under the Plan on the record date for the annual meeting of shareholders of Brush Engineered Materials Inc. to be held on May 2, 2006 and at any adjournment or postponement thereof, on the following matters as checked below.
| | | The Board of Directors recommends a vote “FOR” all nominees in Proposal 1 and “FOR” Proposals 2, 3 and 4. |
This confidential voting instructions card will be seen only by authorized personnel of the Trustee. The shares represented by this card will be voted as directed, or if directions are not indicated but this card is executed and returned, will be voted “FOR” the election of directors in Proposal 1 and “FOR” Proposals 2, 3 and 4. In their discretion, the proxies are authorized to vote upon such other business that may properly come before the annual meeting of shareholders.
| | | (Comments/Change of Address) | |
| | |
| | |
| | |
| | | | (If you have written in the above space, please mark the corresponding box on the reverse side.) |
................................................................................................................................................................ ...................................................
FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL
BRUSH ENGINEERED MATERIALS INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For | | Withhold | | For All | | | | | | | | | | | All | | All | | Except | | | | | For | Against | | Abstain | | 1. Election of the following Directors:
Richard J. Hipple
William B. Lawrence
William P. Madar | | | o | | | | o | | | | o | | | | | 2. Approve adoption of the Brush Engineered Materials Inc. 2006 Stock Incentive Plan. | o | | o | | | | o | | | The Board of Directors unanimously recommends a vote FOR ALL the above nominees.
| | | | | | | | | | Comments/ Change of Address | | o | | 3. Approve adoption of the Brush Engineered Materials Inc. 2006 Non- employee Director Equity Plan. | o | | o | | | | o | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Nominee Exception | | | | | | | | | | | | | | | | 4. Confirming the appointment of Ernst & Young as independent registered public accounting firm of the Company. | o | | o | | | | o | | |
| | | Date: ___________________________________ , 2006 | | |
| | Signature | | |
| | Signature | | |
| | Title | | | NOTE: Please sign exactly as the name appears hereon. When signing as attorney, executor, administrator, trustee or guardian, please add your title as such. |
........................................................................................................................................................................................................................................................................
5FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY BY MAIL5 PRINT AUTHORIZATION To commence printing on this proxy card please sign, date and fax this card to:732-802-0260 SIGNATURE:DATE: o Mark this box if you would like the Proxy Card EDGARized:o ASCIIo EDGAR II (HTML) (THIS BOXED AREA DOES NOT PRINT) Registered Quantity |
