Ferro DEF 14A 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Filed by a Party other than the Registrant o
Check the appropriate box:
(Name of Registrant as Specified In Its Charter)
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March 16, 2007
I cordially invite you to attend the 2007 Annual Meeting of Shareholders of Ferro Corporation, which will be held on Friday, April 27, 2007. The meeting will be held at the Intercontinental Hotel and Conference Center located at 9801 Carnegie Avenue in Cleveland, Ohio, and will begin at 10:00 a.m. (Cleveland time). (Complimentary valet parking will be provided.)
At the 2007 Annual Meeting, shareholders will vote on the election of three Directors. The following Proxy Statement contains information about the Directors standing for election, the Directors who will continue in office after the Annual Meeting, a description of our corporate governance practices and other relevant information about our Company and the Annual Meeting.
Regardless of the number of shares you own, your participation is important. I urge you to vote as soon as possible by telephone, the Internet or mail, even if you plan to attend the meeting. You may revoke your proxy at any time before the meeting regardless of your voting method. If you choose, you may also vote your shares personally at the meeting. In any case, your vote is important.
I look forward to seeing you at the Annual Meeting.
Very truly yours,
James F. Kirsch
Chairman, President and
Chief Executive Officer
Who is soliciting my proxy with this Proxy Statement?
The Board of Directors of Ferro is soliciting your proxy in connection with our Annual Meeting of Shareholders.
Where and when will the meeting be held?
This years meeting will be held on Friday, April 27, 2007, at the Intercontinental Hotel and Conference Center, located at 9801 Carnegie Avenue in Cleveland, Ohio. The meeting will begin at 10:00 a.m. (Cleveland time). Complimentary valet parking will be provided.
What will be voted on at the meeting?
At the meeting, shareholders will vote on the election of three Directors for terms ending in 2010.
What if I wish to attend the meeting?
If you wish to attend the meeting, you should so indicate on the enclosed attendance response card and return the card to Ferro. This will assist us with meeting preparations and enable us to expedite your admission to the meeting.
Who is entitled to vote at the meeting?
The record date for this meeting is March 2, 2007. On that date, we had 43,319,878 Common Shares (which have a par value of $1.00 per share) and 357,133 shares of Series A ESOP Convertible Preferred Stock (which have no par value) outstanding. Each of these shares will be entitled to one vote at the meeting. (The Common Shares and Series A ESOP Convertible Preferred Stock will vote together as a single class.)
How do I vote?
You may cast your votes in person at the meeting or by any one of the following ways:
By Telephone: You may call the toll-free number (1888-693-8683) printed on your proxy card. Follow the simple instructions and use the personalized control number printed on your proxy card to vote your shares. You will be able to confirm that your vote has been properly recorded. Telephone voting is available 24 hours a day. If you vote by telephone, you do not need to return your proxy card.
Over the Internet: You may visit the website (www.cesvote.com) printed on your proxy card. Follow the simple instructions and use the personalized control number printed on your proxy card to vote your shares. You will be able to confirm that your vote has been properly recorded. Internet voting is available 24 hours a day. If you vote over the Internet, you do not need to return your proxy card.
By Mail: You may mark, sign and date the enclosed proxy card and return it in the enclosed postage-paid envelope.
What if I change my mind before the meeting?
If you change your mind, you may revoke your proxy by giving us notice, either in writing before the meeting or at the meeting itself. (If you do revoke your proxy during the meeting, it will not, of course, affect any vote that has already been taken.)
This document is the Notice of Meeting and the Proxy Statement of the Board of Directors of Ferro Corporation in connection with the Annual Meeting of Shareholders to be held on Friday, April 27, 2007, 10:00 a.m. (Cleveland time).
ELECTION OF DIRECTORS
At the Annual Meeting, shareholders will consider the election of three Directors for terms ending in 2010. Our Board has ten Directors divided into three classes with each class having a minimum of three directors. The Directors in each class are elected for terms of three years so that the term of office of one class of Directors expires at each Annual Meeting. The following pages contain information about our Directors (both the nominees for re-election and the Directors whose terms will not expire at this meeting).
Nominees for Election at this Annual Meeting
The current terms of office of Michael H. Bulkin, Michael F. Mee, and Perry W. Premdas will expire on the day of this Annual Meeting (as soon as they or their successors are elected). (Alberto Weisser, whose term of office expires at this Annual Meeting, has advised the Board that he will not stand for re-election.) The Board has nominated each of these incumbents for re-election at this Annual Meeting. Following is information * about these three Directors:
Mr. Bulkin is a private investor. In 1965, he joined McKinsey & Company, Inc. (an international management consulting firm). He became a principal in 1970 and was elected a director in 1976. While serving with McKinsey & Company, Mr. Bulkin held several leadership positions including Managing Director of various offices, Chairman of the Partner Evaluation and Compensation Committee and member of the Shareholders Committee, Executive Committee, Strategy Development Committee, Professional Personnel Committee and Partner Election Committee. Mr. Bulkin retired from McKinsey & Company in 1993.
Mr. Bulkin also serves as a director of Bunge Limited (a global food and agribusiness company operating in the farm-to-consumer food chain).
At the time of his retirement in March 2001, Mr. Mee served as Executive Vice President and Chief Financial Officer of Bristol-Myers Squibb Company, a pharmaceutical and related health care products company.
Mr. Mee joined Bristol-Myers Squibb in 1994 as its Chief Financial Officer and later assumed additional responsibility for Corporate Development and Global Business Services. In 1999, he was made Executive Vice President and became a member of the Office of the Chairman in 2000.
Before joining Bristol-Myers Squibb, Mr. Mee was involved in the reorganization of Wang Laboratories as Chairman of the Board and earlier as Executive Vice President and Chief Financial Officer of the company. Prior to joining Wang Laboratories in 1990, Mr. Mee had positions of increasing responsibility with Norton Company, Monsanto Company and Chrysler Corporation. Mr. Mee also serves as a director of Lincoln National Corporation (an insurance and financial services company).
Mr. Premdas joined Ferros Board on February 23, 2007. From 1999 to 2004, Mr. Premdas served as the Chief Financial Officer and a member of the Board of Management of Celanese AG, a worldwide leader in chemical products, acetate fiber, technical polymers and performance products headquartered in Germany. From 1976 to 1998, Mr. Premdas held management and financial positions of increasing responsibility with Celanese Corporation and Hoechst AG, including chief financial officer roles at Hoechst Celanese Corporation and Centeon LLC.
Mr. Premdas is also a director of Compass Minerals International, Inc. (a salt and specialty fertilizer company).
Mr. Alberto Weisser, whose term of office ends with this Annual Meeting, has advised the Board that he does not intend to stand for re-election. As a consequence, the Board intends to reduce the number of Directors from ten to nine when Mr. Weissers term expires. (Mr. Weissers biography is on page 7 below.)
Messrs. Bulkin, Mee and Premdas have agreed to stand for re-election. While we have no reason to believe that any of these nominees will be unable or unwilling to serve at the time of the Annual Meeting, in the unlikely event any of them does not stand for re-election, the shares represented by proxy at the Annual Meeting may be voted for the election of a substitute nominee named by the Board or there will be a vacancy available to be filled by the Board.
The three nominees who receive the greatest number of votes cast for the election of Directors at the 2007 Annual Meeting by the shares present, in person or by proxy, and entitled to vote, will be elected Directors.
The Board recommends that you vote FOR the election of Messrs. Bulkin, Mee and Premdas. Unless you instruct otherwise on your proxy card or by telephone or Internet voting instructions, your proxy will be voted in accordance with the Boards recommendation.
If the election of Directors is by cumulative voting (see page 36 below), however, the persons appointed by your proxy intend to cumulate the votes represented by the proxies they receive and distribute such votes in accordance with their best judgment.
Directors Continuing in Office
The following are the Directors who will continue in office after the Annual Meeting:
Ms. Crayton is a Managing Director with Alvarez and Marsal, a professional services firm. Ms. Crayton joined the firm in January 2006. Prior to that, Ms. Crayton was President and Chief Executive Officer of PhyServ, LLC, a health care billing, collections, receivables and information company.
Ms. Crayton was appointed Senior Vice President and General Manager of the Medical/Surgical and Psychiatry Management Centers of University Hospitals of Cleveland in 1988. From 1990 to 1994, she served as Executive Vice President and Chief Operating Officer of The University of Chicago Hospitals. In 1994, she was appointed President of Caremark Clinical Management Services, a division of Caremark Rx, Inc. In 1995, Ms. Crayton was named President of Caremark Physician Services, a division of Caremark, Inc., which provides physician practice management services. Between 1997 and 1999, Ms. Crayton was President and Chief Executive Officer of Sedona Health Care Group, Inc. In 1999, she became President and Chief Executive Officer of PhyServ LLC and retired from that position on June 1, 2001, when the company was sold.
Ms. Crayton also serves as a director of NCCI Holdings, Inc. (a workers compensation database management firm).
Dr. Hwang has over 25 years of experience in the chemical coating, materials and electronics industries through her management and/or ownership of businesses. Since 1994, she has served as the President of H-Technologies Group, encompassing international business, worldwide manufacturing services, intellectual property management and joint ventures. Dr. Hwang was also the Chief Executive Officer of International Electronic Materials Corporation, a manufacturing company she founded, which was later acquired. Prior to establishing these companies, Dr. Hwang held various senior executive positions with Lockheed Martin Corp., SCM Corp., and The Sherwin-Williams Company.
Dr. Hwang holds a Ph.D. in engineering and two M.S. degrees in liquid crystals and chemistry. She has served as National President of the Surface Mount Technology Association and in other global leadership positions and is a worldwide speaker and author of more than 300 publications and several internationally used textbooks on leading technologies and global market thrusts. Dr. Hwang has been elected to the National Academy of Engineering and is a board member of Second Bancorp, Inc. (a bank holding company), Singapore Asahi Chemical Industries, Pte. Ltd. (a Singapore chemical company) and Case Western Reserve University.
Mr. Kirsch was elected Chairman of Ferros Board of Directors on December 14, 2006. He was appointed Chief Executive Officer and a Director following the unexpected death of Hector R. Ortino, the Companys Chairman and Chief Executive Officer, in November 2005. Mr. Kirsch joined Ferro in October 2004 as its President and Chief Operating Officer.
Prior to joining Ferro, Mr. Kirsch served as President of Premix Inc. and Quantum Composites, Inc., manufacturers of thermoset molding compounds, parts and sub-assemblies for the automotive, aerospace, electrical and HVAC industries. Prior to that, from 2002 through 2004, he served as President of Quantum Composites. From 2000 through 2002, he served as President and director of Ballard Generation Systems and Vice President for Ballard Power Systems in Burnaby, British Columbia, Canada.
Mr. Kirsch started his career with The Dow Chemical Company, where he spent 19 years and held various positions of increasing responsibility, including global business director of Propylene Oxide and Derivatives and Global Vice President of Electrochemicals.
Before the sale of TRW Inc. to Northrop Grumman in December 2002 and his retirement from TRW in February 2003, Mr. Lawrence served as TRWs Executive Vice President, General Counsel & Secretary. TRW was a provider of advanced technology products and services for the global automotive, aerospace and information systems markets.
Mr. Lawrence first joined TRW in 1976 as counsel specializing in securities and finance. He held positions of increasing responsibility within the TRW law department until his appointment as TRWs Executive Vice President of Planning, Development and Government Affairs in 1989 and a member of TRWs Management Committee. In 1997, Mr. Lawrence was named to the additional position of Executive Vice President, General Counsel & Secretary.
Mr. Lawrence also serves as a director of Brush Engineered Materials Inc. (a manufacturer of high-performance engineered materials).
Mr. Sharp serves as a consultant to various private equity groups.
In 2001, Mr. Sharp retired as President of North American Tire for The Goodyear Tire & Rubber Company, a tire, engineered rubber products and chemicals manufacturer.
Mr. Sharp began his career with Goodyear in 1964. Following various assignments in the United States and abroad, he was named Director of European Tire Production in 1984. He was appointed Vice President of Tire Manufacturing in 1987 and later Executive Vice President of Product Supply in 1991. In 1992, he became President and General Manager of Goodyears European Regional Operations. He was elected President of Goodyear Global Support Operations in 1996. Mr. Sharp is also a director of Jiangsu Xingda Tyre Cord Co. Ltd. (a Chinese tire component supplier) and a director of 2020 ChinaCap Acquirco, Inc. (a special purpose acquisition company).
Mr. Sullivan retired as Executive Vice President of Parker Hannifin Corporation, a producer of motion and control components for commercial, industrial and aerospace markets, on December 31, 2003. Mr. Sullivan began his career with Parker in 1960. He became Group Vice President in 1972, President of the Fluid Connectors Group in 1976, Corporate Vice President in 1978, President of the Fluidpower Group in 1979 and President of the Industrial Sector in 1980. He became an Executive Vice President of Parker in 1981.
Mr. Weisser is Chairman and Chief Executive Officer of Bunge Limited, a global food and agribusiness company operating in the farm-to-consumer food chain.
Mr. Weisser joined Bunge as Chief Financial Officer in July 1993. In 1999, he was appointed Chief Executive Officer and then Chairman later that year. He has served as a member of the Bunge Board of Directors since May 1997. Before joining Bunge, Mr. Weisser served in various finance-related positions for the BASF Group for 15 years in Germany, the United States, Mexico and Brazil.
Mr. Weisser is also a member of Rabobanks North American Agribusiness Advisory Board and serves on the Board of Directors of International Paper Company.
As noted on page 3 above, Mr. Weisser has advised the Board that he does not intend to stand for re-election. As a consequence, the Board intends to reduce the number of Directors from ten to nine when Mr. Weissers term expires.
Board Meetings and Attendance
During 2006, the Board of Directors met nine times. During 2006, each Director attended at least 75% of the total number of meetings of the Board and the committees on which he or she served, except for Mr. Weisser who attended 19 of the 30 meetings of the Board and Audit and Finance Committees. Although we do not have a formal policy with respect to Director attendance at the Annual Meeting of Shareholders, the Directors are encouraged to attend. All of our Directors attended the 2006 Annual Meeting held in November 2006, except one Director who was unable to attend due to a prior commitment.
In 2006, Directors (other than Mr. Kirsch who is an employee of the Company) were paid an annual retainer of $30,000 and an attendance fee of $1,500 per day for meetings of the Board and $1,000 for committee meetings. In addition, in 2006, the Company granted each Director (other than Mr. Kirsch) an option to purchase 7,000 Common Shares under the 2003 Long-Term Incentive Plan. From January 1 through November 3, 2006, the Chairs of the Audit Committee and the Governance, Nomination & Compensation Committee were paid an additional quarterly fee of $5,000 ($20,000 per annum) each and the Chairs of the Finance and Technology Strategy Committees were paid an additional quarterly fee of $1,000 ($4,000 per annum) each. From November 3 to December 31, 2006, the Chairs of the Compensation, Finance, and Governance & Nomination Committees were paid an additional quarterly fee of $2,500 ($10,000) each. (The quarterly fee of the Audit Committee Chair remained unchanged.) Director fees and other compensation for 2006 may be summarized as follows:
Directors Compensation Table
Effective January 1, 2007, Directors (other than Directors who are employees of the Company) will receive a quarterly retainer of $16,250 ($65,000 per annum) and 3,800 deferred stock units each year. The deferred stock units will be paid out in an equal number of shares of Company stock after a one-year holding period (unless deferred by the Director). The non-employee Directors will no longer receive a fee for attending meetings unless the total number of meetings a Director attends in a given year exceeds 24, in which case the Director would be paid $1,500 for each meeting in excess of 24. In addition, the Chair of the Audit Committee will continue to be paid a quarterly retainer of $5,000
($20,000 per annum) and the Chairs of the Compensation, Finance, and Governance & Nomination Committees will continue to be paid a quarterly retainer of $2,500 ($10,000 per annum) each. Beginning in 2007, non-employee Directors will no longer receive stock options.
Directors may defer their fees and common stock issuable upon settlement of the deferred stock units into a Ferro Common Stock account. Amounts so deferred are invested in Ferro Common Stock and dividends on those shares are reinvested in additional Ferro Common Stock. Ferro distributes the shares credited to a Directors deferred account after he or she ceases to be a Director.
Ferros Board has long followed, both formally and informally, corporate governance principles designed to assure that the Board, through its membership, composition, and committee structure, is able to provide informed, competent and independent oversight of the Company. Below is a description of the corporate governance measures in place to assure that objective is met. Further information about the Companys governance may be found at our website: www.ferro.com.
Corporate Governance Principles
The Board has adopted Corporate Governance Principles. These Corporate Governance Principles, which may be found on our website (www.ferro.com), are intended to assure that Ferros Director qualifications, Committee structure and overall Board processes provide good corporate governance and independent oversight of the Companys management.
The Board has also adopted formal Guidelines for Determining Director Independence, which is also available on our website (www.ferro.com). The purpose of these Guidelines is to assist the Board in its evaluation of and determination as to the independence of members of the Board. The Guidelines meet or exceed in all respects the standards set forth in section 303A of the New York Stock Exchange listing standards, and the Board has determined that all Directors, other than Mr. Kirsch, qualify as independent under such standards.
From January 1 to November 2, 2006, the Board of Directors had four committees, i.e., an Audit Committee, a Finance Committee, a Governance, Nominating & Compensation Committee, and a Technology Strategy Committee. Effective November 3, 2006, the Board of Directors divided the Governance, Nomination & Compensation Committee into two separate committees, the Governance & Nomination Committee and the Compensation Committee, and disbanded its Technology Strategy Committee so that critical strategic technology discussions could be elevated to the Board level.
The four committees that operated through November 2, 2006 and the two new committees that were created effective November 3, 2006 are described below.
Board Committees Through November 2, 2006
The four committees of the Board of Directors from January 1 through November 2, 2006, were as follows:
o Audit Committee
The Audit Committee assists the Board with oversight of the integrity of Ferros financial statements, Ferros compliance with legal and regulatory requirements relating to its financial reports (including the annual Audit Committee report as required by the Securities Exchange Act of 1934), Ferros external independent auditors qualifications, independence, and performance, the performance of Ferros internal audit and risk management functions, compliance with Ferros legal and ethical policies and Ferros accounting practices and systems of internal controls. The Audit Committee is not, however, responsible for conducting audits, preparing financial statements, or the accuracy of any financial statements or filings, all of which remain the responsibility of management and the independent auditors. The Committees charter may be found on our website (www.ferro.com).
The members of the Audit Committee in 2006 were Dr. Hwang and Messrs. Lawrence, Sharp, Sullivan and Weisser. Mr. Premdas joined the Committee upon his election as a Director on February 23, 2007. Mr. Lawrence served as the Chair until he was succeeded by Mr. Sharp on November 3, 2006. Each member of the Audit Committee is independent as required under section 301 of the Sarbanes-Oxley Act of 2002, as well as under the standards contained in section 303A of the New York Stock Exchange listing standards. The Board has determined, in its best judgment, that more than one
member of the Audit Committee has the accounting and related financial management experience and expertise to qualify as an audit committee financial expert as defined in section 407 of the Sarbanes-Oxley Act and the Securities and Exchange Commissions rules under that statute. In 2006, however, the Board designated Alberto Weisser as the Audit Committees named financial expert. The Board expects to name Mr. Premdas as the Audit Committees financial expert when Mr. Weisser steps down as a Director at this Annual Meeting. (Mr. Weissers biography is on page 7 above and Mr. Premdas biography is on page 2 above.) Each member of the Audit Committee has the requisite financial literacy required under section 303A of the New York Stock Exchange listing standards to serve on the Audit Committee.
The Audit Committee met 16 times in 2006. The Audit Committees report is on page 33 below.
o Finance Committee
The Finance Committee has oversight responsibilities with respect to reviewing the Companys capital structure, worldwide capital needs, major capital allocations, financial position and related financial covenants and recommending to the Board financial programs and plans for implementing such programs. This Committees charter may also be found on our website (www.ferro.com).
The Finance Committee met seven times in 2006. Ms. Crayton and Messrs. Mee, Sharp and Weisser were the members of the Finance Committee in 2006, with Mr. Mee serving as the Chair. Mr. Premdas joined the Committee upon his election as a Director on February 23, 2007. All members of this Committee meet the independence standards contained in section 303A of the New York Stock Exchanges listing standards and the Companys Guidelines for Determining Director Independence.
o Governance, Nomination & Compensation Committee
The Governance, Nomination & Compensation Committee was responsible for recommending to the Board corporate governance principles, overseeing adherence to the corporate governance principles adopted by the Board, recommending to the Board criteria and qualifications for new Board members, recommending to the Board nominees for appointment or election as Directors, recommending to the Board the composition of committees and the chairs of each, recommending policies for compensation of Directors, and setting the compensation of executive officers, including Ferros Chief Executive Officer. The Committees charter may be found on our website (www.ferro.com).
In its role as the nominating body for the Board, the policies of and functions performed by the Committee until November 3, 2006, are described below under Governance & Nomination Committee.
Messrs. Bulkin, Lawrence, Mee and Sharp were the members of the Governance, Nomination & Compensation Committee, with Mr. Bulkin serving as the Chair. All members of this Committee meet the independence standards contained in section 303A of the New York Stock Exchanges listing standards and the Companys Guidelines for Determining Director Independence.
The Governance, Nomination & Compensation Committee met six times in 2006.
o Technology Strategy Committee
Until November 3, 2006, the Technology Strategy Committee was responsible for considering new business initiatives presented by management in the electronics, pharmaceuticals and other high technology sectors and for evaluating and recommending strategies for developing and adding to the technologies involved in those initiatives. The matters are now considered by the full Board of Directors.
Ms. Crayton, Dr. Hwang, Mr. Bulkin, and Mr. Sullivan were members of the Technology Strategy Committee, with Ms. Crayton serving as the Chair. All members of this Committee met the independence standards contained in section 303A of the New York Stock Exchanges listing standards and the Companys Guidelines for Determining Director Independence. This Committee met once in 2006.
New Board Committees Effective November 3, 2006
The two new committees formed from the splitting of the Governance, Nomination & Compensation Committee, effective November 3, 2006, are the Compensation Committee and the Governance & Nomination Committee.
o Compensation Committee
The Compensation Committee is responsible for recommending policies for compensation of Directors and setting the compensation of the Senior Management Committee, which is comprised of the Companys executive officers. (See page 14 of the Companys 2006 Annual Report on Form 10-K.) The Committee also oversees the various compensation and benefit plans and policies of the Company generally. The Committees charter may be found on our website (www.ferro.com).
The Committee has retained Towers Perrin, a nationally-recognized executive compensation consulting firm, to provide support to the Committee and management. Towers Perrin assists with the design of pay plans and reviewing the effectiveness and competitiveness of the Companys compensation programs. Towers Perrin also provides the Committee and management with market data on the compensation programs of peer companies. The Chief Executive Officer and Vice President, Human Resources make recommendations regarding compensation of the Senior Management Committee (other than for the Chief Executive Officer) based on the competitive market data, internal pay equity, responsibilities and performance. The Committee makes all final determinations regarding executive compensation, including salary, bonus targets, equity awards and related performance goals. From time to time, the Committee delegates to the Chief Executive Officer and Vice President, Human Resources authority to carry out certain administrative duties regarding the compensation programs, including grants of equity awards to non-executive employees and new hires. For more information on how executive compensation decisions are made, see the Executive Compensation Discussion & Analysis section beginning on page 14 below.
Messrs. Bulkin, Lawrence, Mee, and Sharp are the members of the Compensation Committee, with Mr. Bulkin serving as the Chair. All members of this Committee meet the independence standards contained in section 303A of the New York Stock Exchanges listing standards and the Companys Guidelines for Determining Director Independence.
The newly-formed Compensation Committee met once in 2006. The Compensation Committees report is on page 19 below.
o Governance & Nomination Committee
The Governance & Nomination Committee is responsible for recommending to the Board corporate governance principles, overseeing adherence to the corporate governance principles adopted by the Board, recommending to the Board criteria and qualifications for new Board members, recommending to the Board nominees for appointment or election as Directors and recommending to the Board the composition and chairs of each committee. The Committees charter may be found on our website (www.ferro.com).
In its role as the nominating body for the Board, the Committee reviews the credentials of potential Director candidates (including potential candidates recommended by shareholders), conducts interviews and makes formal recommendations to the Board for the annual and any interim election of Directors. In making its recommendations, the Committee considers a variety of factors, including skills, independence, background, experience, diversity and compatibility with existing Board members. Other than the foregoing, there are no stated minimum criteria for Director nominees, and the Committee may also consider such other factors as it deems appropriate in the best interests of Ferro and its shareholders.
The Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. If any Board member does not wish to continue in service or if the Committee or the Board decides not to nominate a member for re-election, then the Committee identifies the desired skills and experience in light of the criteria outlined above. The Committee then establishes a pool of potential Director candidates from recommendations from the Board, senior management and
shareholders. The Committee may also retain a third party search firm to assist in the identification of Director candidates. Mr. Premdas was recommended to the Committee by a non-management Director as part of a search conducted by an executive search firm.
The Committee will consider candidates for Director who are recommended by shareholders. Shareholder recommendations should be submitted in writing to: Secretary, Ferro Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147 USA. The recommendation letter should include the shareholders own name, address and the number of shares owned and the candidates name, age, business address, residence address and principal occupation, as well as the number of shares the candidate owns. The letter should provide all of the information that would need to be disclosed in the solicitation of proxies for the election of directors under Federal securities laws. Finally, the shareholder should also submit the recommended candidates written consent to be elected and commitment to serve if elected. Ferro may also require a candidate to furnish additional information regarding his or her eligibility and qualifications.
Ms. Crayton, Dr. Hwang, and Messrs. Lawrence and Sullivan are the members of the Governance & Nomination Committee, with Mr. Lawrence serving as the Chair. All members of this Committee meet the independence standards contained in section 303A of the New York Stock Exchanges listing standards and the Companys Guidelines for Determining Director Independence.
The newly-formed Governance & Nomination Committee met three times in 2006.
Other Corporate Governance Measures
Ferros non-management Directors, all of whom are independent, meet at regularly scheduled executive sessions at least once each year. These meetings are chaired by a lead Director selected from among the committee Chairs on a rotating basis. (Mr. Bulkin, the Chair of the Compensation Committee, currently serves as the lead Director.) Neither the Chief Executive Officer nor any other member of management attends these meetings. Following each executive session, the non-management Directors invite the Chief Executive Officer to join their meeting and share with him, at their discretion, any observations, comments or concerns they may have.
The independent Directors have access to Ferro management as they deem necessary or appropriate. In addition, the Chairs of the Audit Committee, Governance & Nomination Committee and Compensation Committee (formerly the Governance, Nomination & Compensation Committee), meet periodically with members of senior management.
Finally, Ferro has adopted a series of policies dealing with business conduct and ethics. These policies apply to all Ferro Directors, officers and employees. A summary of these policies may be found on Ferros website (www.ferro.com) and the full text of the policies is available in print, free of charge, by writing to: Secretary, Ferro Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147 USA. Under the Audit Committees charter, the Committee is charged with the responsibility to assure that all exceptions to and waivers of the Companys ethical and internal control policies are properly disclosed, documented and approved by the Committee and that no employee is disciplined, punished or otherwise disadvantaged as a consequence of reporting in good faith violations of the Companys policies. Exceptions, waivers and amendments of those policies may be made, if at all, only by the Committee and, in the event any such exceptions, waivers or amendments are granted, a description of the change or event will be posted on Ferros website within four business days. Finally, further to assure compliance, Ferro maintains a hotline that allows employees throughout the world to report confidentially any detected violations of these legal and ethical conduct policies consistent with local legal requirements and subject to local legal limitations.
Any shareholder or other interested party who wishes to communicate directly and confidentially with the lead Director or the independent Directors as a group may contact the independent Directors at the following website: www.ferrodirectors.com. The independent Directors will handle such communications confidentially.
EXECUTIVE COMPENSATION DISCUSSION & ANALYSIS
Set forth below is a description of the process by which the Company, through its Compensation Committee, sets the compensation of its Chief Executive Officer and other members of the Senior Management Committee for 2006. (The Senior Management Committee is comprised of the Companys executive officers. See page 14 of the Companys 2006 Annual Report on Form 10-K.)
Our Compensation Philosophy and Objectives
The primary objectives of the Companys executive compensation program are:
Compensation Committee Oversight
The Compensation Committee of the Board is responsible for establishing, implementing and monitoring adherence with the Companys compensation philosophy for the Chief Executive Officer and the other members of the Senior Management Committee. The Compensation Committee sets the compensation of the Companys executive officers, recommends to the Board compensation for the Directors and the Chairs and members of Board Committees, and oversees compensation and benefit plans and policies of the Company generally.
In carrying out its oversight responsibilities, the Compensation Committee is supported by external executive compensation consultants and management. The nature of this support is summarized below:
Role of External Compensation Consultants. The Compensation Committee has retained Towers Perrin, a nationally-recognized executive compensation consulting firm, to provide expertise to management and the Committee on the design of appropriate pay plans, analysis of the effectiveness of existing plans, and the competitiveness of base salary, annual incentive levels, and long-term incentive awards with the competitive market.
In fulfilling this role, Towers Perrin provides the Committee with competitive market data from a variety of sources. This market data includes information from the proxies of Ferros 14 peer companies, from 17 specialty chemical companies in the S&P index, and from 730 Mid Cap companies with revenues roughly comparable to Ferros (currently, $1.1 billion to $3.3 billion). The Ferro peer companies that Towers Perrin analyzed for 2006 included the following:
Towers Perrin also provides market data to the Chief Executive Officer and Vice President, Human Resources with respect to each of the Senior Management Committee positions. This information is considered by the Chief Executive Officer along with internal equity, scope of responsibilities, and performance, in making pay recommendations to the Committee for the Senior Management Committee. The Compensation Committee approves all pay decisions related to Senior Management Committee members.
Role of Management. Management of the Company supports the Compensation Committee in its assessment of executive compensation, implements decisions made by the Committee, and ensures that the Companys compensation plans are administered in accordance with the provisions of the plans. The Companys Vice President, Human Resources and Director Compensation provide Towers Perrin with information concerning executives responsibilities, compensation, benefits, executive allowances, and Company financial data and business goals as necessary for them to complete their work for the Committee. The Chief Executive Officer and Vice President, Human Resources participate in an advisory capacity in the Compensation Committees annual compensation revenue in February each year and provide the Committee with data and analyses as requested by the Committee. The Committee makes its decisions with respect to the Chief Executive Officer in executive session.
Our Current Compensation Program
Our current compensation program includes a base salary, an annual incentive, long-term incentives, retirement benefits, supplemental contributions to the Companys defined contribution program, and an executive allowance. We also make available to our executives the opportunity to participate in a deferred compensation plan. Finally, the Company provides its executives with protection against fundamental changes in the Companys ownership and control through change-in-control agreements. The elements of our compensation program are discussed below.
Base Salary. An executives base salary is cash compensation that is based on internal equity and external competitive market data comparison. This portion of compensation is not at risk and is paid to the executive regardless of the performance of the Company in a particular year. The amount of base salary is reviewed on an annual basis and adjusted if warranted to reflect scope of responsibilities, individual performance and external market conditions. The Company targets base salary at the 50th percentile of the market, but considers other factors, including individual performance and experience, internal equity, scope and influence of the position, in setting an individuals base salary and overall compensation level.
Annual Incentives. The Companys Annual Incentive Plan (the AIP) provides an executive an opportunity to earn additional cash compensation based upon the achievement of pre-determined financial goals for the fiscal year. Target incentive opportunities, performance metrics and performance goals are established by the Compensation Committee and communicated to participants at the beginning of each year. These AIP goals are directly linked to the financial goals in the operating plan approved by the Board of Directors. AIP payments may be adjusted upward or downward by as much as 20% to reflect individual performance in a given year.
Long-Term Incentives. In November 2006, the Companys shareholders approved the 2006 Long-Term Incentive Plan (the 2006 LTIP). The 2006 LTIP replaces the earlier 2003 Long-Term Incentive Compensation Plan (the 2003 LTIP). (The 2003 LTIP and the 2006 LTIP are referred to as the LTIP below.) The terms of the two plans are substantially the same. Grants in 2006 were made under the 2003 LTIP and future grants will be made under the 2006 LTIP.
The LTIP is a critical component of the compensation program. It is designed to promote Ferros long-term financial interests and growth by attracting, retaining and motivating high quality key employees and Directors and aligning their interests with those of our shareholders. The Plan is administered by the Compensation Committee. The Committee selects the employees and Directors who will participate in the program, approves the types and number of awards to be made to each participant, and approves the terms, conditions and limitations applicable to each award. The Compensation Committee delegates authority to the Chief Executive Officer within pre-established limitations to make awards to newly-hired employees who are not executive officers during the course of the year.
The LTIP allows the Company to award six different types of long-term incentives, i.e., stock options, stock appreciation rights, restricted shares, performance shares, other common stock based awards (such as phantom common stock units and deferred common stock or units), and dividend equivalent rights. In 2006, the Compensation Committee authorized two types of LTIP awards stock options and performance shares. The basic terms of those awards are described below:
The Compensation Committee generally makes all LTIP awards at its meeting on a pre-determined date in February. The value of any awards, including stock option strike price, is determined by the closing price of Ferro Common Stock on the New York Stock Exchange on the date the Compensation Committee approves the grants. From time to time during the year, the Compensation Committee may award shares to a new hire or, under unusual circumstances, to a current employee. In such case, the value of the grant is based on the closing price of the Ferro Common Stock on the NYSE on the date the award is granted, which in the case of new hires is the first date he or she is employed. The Compensation Committee delegates to the Chief Executive Officer the authority to grant stock options and performance shares within a pre-determined allocation to new hires (other than executive officers) during the course of the year.
Retirement Benefits. In previous years, the Company offered its employees a defined benefit plan that provided employees annuity payments in retirement according to pre-determined formulas. Effective March 31, 2006, we froze our principal defined benefit plan (including the companion non-qualified supplemental defined benefit plan for executives) for purposes of future accruals. These plans had previously been frozen as to new entrants since July 1, 2003.* Consequently, going forward the primary retirement benefit that will be provided to executive officers will be in the form of a defined contribution plan (including a companion non-qualified supplemental defined contribution plan for executive officers).
Executive Allowance and Other Benefits. During 2006, the Company adopted an annual executive allowance for the Chief Executive Officer and other Senior Management Committee members
in lieu of providing benefits such as personal use of the Company aircraft, financial planning, tax preparation, and club memberships. The executive allowance is paid in cash in April of each year. The amount of the allowance is set by the Compensation Committee and targeted at providing sufficient funds to pay for the discontinued executive benefits. For 2006, this amount was $35,000 for the Chief Executive Officer and $7,500 for other Senior Management Committee members. Finally, our executives are entitled to four weeks of vacation per year.
Non-Qualified Plans. During 2006, Senior Management Committee members were eligible to participate in the Executive Employee Deferred Compensation Plan and the Supplemental Executive Defined Contribution Plan. Under the Executive Employee Deferred Compensation Plan, participants may elect to defer a percentage of their annual salary, as well as their annual bonus and/or performance share payout, to be paid at a certain time specified by the participant and consistent with the terms of the plan. The Supplemental Executive Defined Contribution Plan provides participants with contributions that would have been made to their 401(k) and basic pension accounts under the Ferro Corporation Savings and Stock Ownership Plan, were it not for the IRS limits.
Change-in-Control Agreements. For many years, the Board has recognized that, as is the case with many publicly-held corporations, there is always a possibility of a fundamental change in the Companys ownership and control through a change in control. Any such threatened or actual change in control would create uncertainties and raise questions that could result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. In light of these facts, the Board determined that appropriate steps needed be taken to reinforce and encourage the continued attention and dedication of members of the Companys management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control. Consequently, the Company has entered into change in control agreements with each of the executive officers. For a discussion of payments to executive officers as a result of a change in control, see discussion under Termination and Change in Control Payments on page 27 below.
Executive Compensation Process in 2006
In early 2006, the Compensation Committee concluded a comprehensive review of the Companys compensation programs and target market pay positions with advice from its independent compensation consultant and recommendations from the newly-appointed Chief Executive Officer. As a result of this review, changes were made to the long-term incentive target grant philosophy, moving from a prior target grant opportunity set at the 75th percentile of the competitive market for commensurate performance to a target opportunity set at the 50th percentile of the competitive market. In addition, the mix of long-term incentive compensation was modified from 70% stock options and 30% performance shares to 50% stock options and 50% performance shares. Goals for the performance share grants awarded in connection with the 2006-2008 performance period were modified to use corporate level metrics of cumulative earnings per share and revenues over the performance period for all participants, simplifying the plan and increasing the linkage between corporate performance and payouts.
In addition, the Compensation Committee modified the annual incentive plans to focus the efforts of the management team on the achievement of the most critical financial results for the year, and to increase the linkage of payouts to achievement of the budgeted financial results. The prior Corporate Incentive Plan (CIP) and Management Incentive Plan (MIP) were replaced by the new AIP (described on page 15 above). Goals for the 2006 AIP were corporate operating income and business unit operating profit. Threshold performance, the level required for any payout to be achieved, was increased to 90% of the budgeted performance levels. The maximum payout would be earned at performance of 120% of budget or better.
At its February 16, 2006, meeting, the Committee reviewed current levels of pay for the Senior Management Committee and the Chief Executive Officers recommendations for increases. The Committee approved salary increases of 3.3% and 8.3%, respectively, for Mr. Bays and Mr. Murry reflecting market movement and scope of responsibilities. These compensation changes were made retroactive to January 1, 2006.
Mr. Kirschs base salary rate was set at $600,000 at the time of his appointment as Chief Executive Officer in December of 2005. Consequently, his salary rate was not changed at the beginning of 2006. However, in July 2006 the Committee conducted a mid-year review of Mr. Kirschs performance and base salary. As a result of that review, the Committee increased Mr. Kirschs base salary to $650,000 effective July 1, 2006.
Also at its February meeting, the Committee made long-term incentive grants to the Chief Executive Officer and Senior Management Committee at levels approximating the 50th percentile of market based on data provided by Towers Perrin, split (in value) evenly between stock options and performance shares. Accordingly, Mr. Kirsch was awarded 140,000 stock options and 48,500 performance shares for the 2006-2008 performance period. Mr. Gannon was awarded 38,500 stock options and 13,400 performance shares. Mr. Bays and Mr. Murry were each awarded 22,750 stock options and 8,000 performance shares. The Committee also approved grants of 62,750 stock options (which included a hire-on grant of 40,000 stock options) and 8,000 performance shares to Mr. Russell effective upon the commencement of his employment with Ferro on April 24, 2006.
The goals for the 2006-2008 performance shares were cumulative earnings per share weighted at 70% and cumulative sales revenues for the company weighted at 30%.
At its July 6, 2006 meeting, the Compensation Committee considered the importance of retaining the new senior management team over the next several years in order to achieve the necessary improvements in financial performance. At that time, the Compensation Committee made a special grant of performance shares for the 2006-2008 period to the Chief Executive Officer and key members of the Senior Management Committee as a performance-based approach for motivating retention and performance over this critical period. Mr. Kirsch received 35,000 performance shares and Messrs. Bays, Murry and Russell each received 15,000 performance shares.
On March 1, 2007, the Committee reviewed the Companys performance compared to goals for the AIP. Corporate operating income exceeded budget with a performance score of 148.2%. As a result, the Committee approved incentive payments of $722,475 for Mr. Kirsch, $206,739 for Mr. Bays, and $270,465 for Mr. Gannon. Mr. Murrys performance score for Inorganic Specialties was 164.5%, resulting in an approved incentive payment of $267,313 and Mr. Russells performance score for the Electronic Material Systems was 219.5%, resulting in an approved incentive payment of $205,057 under the AIP. (Mr. Russell will also receive an additional special incentive payment of $100,000 in accordance with an agreement when he was hired.) These amounts were based solely on the achievement of financial performance goals with no adjustment made for personal performance. These amounts will be paid to the executives in April of 2007.
Finally, the Compensation Committee reviewed the executive benefits provided to the Chief Executive Officer and other members of the Senior Management Committee. The Compensation Committee eliminated personal use of the Company aircraft as a Company-provided benefit for the Chief Executive Officer. In addition, to increase transparency and simplify reporting, an annual executive allowance was put into effect on April 1, 2006, replacing Company payment of business club membership dues, financial counseling, and tax preparation for the Chief Executive Officer and Senior Management Committee members. Vacation allowance for the Senior Management Committee was set at four weeks per year. Company-provided leased cars were eliminated as an executive benefit for new Senior Management Committee hires, and a phase-out plan was approved for the Chief Executive Officer and other Senior Management Committee members that will be completed no later than December 31, 2007.
Stock Ownership Guidelines
Ferro has had stock ownership guidelines for its Directors and executive officers since 1998. The current guidelines, approved by the Compensation Committee on February 6, 2007, require the Chief Executive Officer and other Senior Management Committee members to achieve target levels ownership of 150,000 shares and 30,000 shares, respectively, within a five-year period. For non-executive Directors, the stock ownership guideline is 10,000 shares.
Shares deemed to be owned by each executive and Director include shares owned outright with no restrictions, restricted stock grants, shares owned in Ferros Stock Savings and Ownership
Plan, shares deemed to be invested in Ferro Common Stock through the Companys deferred compensation and supplemental defined contribution plans, 20% of vested options that are in-the-money by more than 30% percent, and shares represented by deferred stock units granted to non-executive Directors.
Due to the trading blackouts associated with the recent financial restatement, the time period for achieving this guideline for the current executives covered by the guideline was extended until December 31, 2011.
Section 162(m) Limitation
Section 162(m) of the Internal Revenue Code generally provides that certain compensation in excess of $1.0 million per year paid to a companys chief executive officer and any of its four highest paid executive officers is not deductible by a company unless the compensation qualifies for an exception. Section 162(m) provides an exception for performance-based compensation if certain procedural requirements, including shareholder approval of the material terms of the performance goals, are satisfied. The 2003 LTIP contains the provisions necessary to qualify the Plan under the section 162(m) exception and preserve the tax deductibility to the Company of compensation paid to executives under these plans in the future.
Compensation Committee Interlocks and Insider Participation
During 2006, no officer or employee of Ferro served as a member of the Governance, Nomination & Compensation Committee or the Compensation Committee. Also, during 2006, there were no interlocking relationships (as described in Item 407(e)(4) of SEC Regulation S-K) between members of the Governance, Nomination & Compensation Committee or the Compensation Committee and Ferro.
2006 EXECUTIVE COMPENSATION
The following table shows the elements of compensation paid or earned during 2006 to each person serving as the Chief Executive Officer, the Chief Financial Officer and the other three highest paid executive officers as of December 31, 2006:
Summary Compensation Table
The Company entered into an employment agreement with Mr. Kirsch on October 18, 2004, in connection with his appointment as President and Chief Operating Officer. Mr. Kirsch was named President and Chief Executive Officer on November 30, 2005, following Mr. Hector R. Ortinos untimely death and was elected Chairman of Ferros Board of Directors on December 14, 2006. The employment agreement has an initial term ending December 31, 2007 and is renewable for one-year periods thereafter. Mr. Kirschs base salary for 2006 was $600,000 from January through June, and increased to $650,000 on July 1, 2006. His target bonus was 75% of his base salary. Mr. Kirsch is also eligible for awards under the Companys 2006 LTIP, including awards of stock options and performance shares, as and to the extent determined by the Compensation Committee of the Board, and to participate in other benefit plans generally available to senior management.
Grants of Plan-Based Awards
The following table sets forth information regarding 2006 awards under the Companys Annual Incentive Plan (AIP) and under the 2003 LTIP, i.e., awards of Performance Shares (PS) and Stock Options to each of the executives named in the Summary Compensation Table:
Grants of Plan-Based Awards
Outstanding Equity Awards, Option Exercises and Vesting of Stock Awards
The following table sets forth information with respect to each of the executives named in the Summary Compensation Table regarding vested and unvested options and stock awards held as of December 31, 2006:
Outstanding Equity Awards
The following table sets forth for each of the executives named in the Summary Compensation Table the exercises of stock options and vesting of stock awards under the Companys 2003 LTIP during the fiscal year ended December 31, 2006:
Option Exercises and Stock Vested
The following table sets forth the accumulated benefits under the Ferro Corporation Retirement Plan (the Qualified Plan) and the Ferro Corporation Supplemental Executive Defined Benefit Plan (formerly known as the Ferro Corporation Nonqualified Retirement Plan) (the Non-Qualified Plan) (collectively, the Retirement Program) for each of the executives named in the Summary Compensation Table:
Under the Retirement Program, an eligible participant who retires at age 65 with at least 30 years of service will receive a monthly benefit equal to 50% of the monthly average of the participants highest five consecutive calendar years of compensation (which includes base salary and certain incentive payouts), reduced for 50% of the monthly primary social security benefits. Benefits are subject to reduction for service of less than 30 years and for commencement prior to age 60 for elected officers. Service in excess of 30 years is not taken into account for accrual of retirement benefits. Benefits are payable in a life annuity form with 120 monthly payments guaranteed, unless the benefits under the Non-Qualified Plan are commuted and paid in a single sum. Furthermore, the benefits payable under the Non-Qualified Plan to an eligible participant are conditioned upon the execution of, and compliance with, a non-competition, non-solicitation, non-disparagement and confidentiality agreement.
Effective April 1, 2006, the Companys U.S. defined benefit pension program for salaried and certain hourly employees was changed. Under the program changes announced February 15, 2006, benefits accrued for active employees who were participating in the Retirement Program were frozen as of March 31, 2006. (This freeze did not affect the benefits of current retirees, former employees or employees hired on or after July 1, 2003.) From April 1, 2006, the affected employees joined salaried and certain hourly employees in the United States who were hired on or after July 1, 2003 in receiving an additional contribution each year from the Company to an existing defined contribution plan or plans.
Messrs. Kirsch, Murry, and Russell, who were hired after June 30, 2003, are not eligible for participation in the Retirement Program. Only Mr. Gannon and Mr. Bays had benefit accruals under these plans during 2006 because they were hired before July 1, 2003. When Mr. Gannons employment terminated on January 2, 2007, he was not vested in a benefit under either plan because he did not have the required five years of credited vesting service. Consequently, he is not eligible for Retirement Program benefits. Due to Mr. Gannons not being eligible for Retirement Program benefits and the cost of calculations that would have to be made by the Companys actuaries, no amount is listed for him. Consequently, only Mr. Bays pension benefit accrual under the plans appears in this table. See the Change in Pension Value and Non-Qualified Deferred Compensation Earnings column of the Summary Compensation Table on page 20 above for information regarding the change in value of Mr. Bays benefits under the Retirement Program during 2006.
Non-Qualified Deferred Compensation
The following table sets forth information regarding non-qualified deferred compensation plans for 2006 with respect to each of the executives named in the Summary Compensation Table:
Non-Qualified Deferred Compensation
The non-qualified deferred compensation plans in this table consist of the Ferro Corporation Executive Employee Deferred Compensation Plan (Deferred Compensation Plan) and the Ferro Corporation Supplemental Executive Defined Contribution Plan (Supplemental Plan). Under the Deferred Compensation Plan, participants have a percentage of their annual salary, as well as certain incentive payouts, deferred to a date specified by the participant consistent with the terms of the Deferred Compensation Plan. The amounts that were deferred in 2006 are listed in the Executive Contributions column in this table. There are no Company Contributions under the Executive Deferred Compensation Plan. Under the Deferred Compensation Plan, among the executive officers listed in this table, only Mr. Bays has an account balance.
Under the Supplemental Plan, participants may receive a supplemental matching contribution and/or a supplemental basic pension contribution. These are contributions that would have been made to the account of a participant in the Ferro Corporation Savings and Stock Ownership Plan (a 401(k) and employee stock ownership plan) but for the application of Internal Revenue Code limits. The supplemental basic pension contribution in 2006 applied to participants who were hired on or after July 1, 2003, the date as of which new participation in Ferros Retirement Program ceased (Mr. Kirsch and Mr. Murry in this table), using eligible compensation for all of 2006. The supplemental basic pension contribution relating to 2006 also applied to participants in Ferros Retirement Program (Mr. Gannon and Mr. Bays in this table), but only taking into account eligible compensation during the year after benefit accruals in the Retirement Program were frozen on March 31, 2006 (eligible compensation from April 1, 2006 through December 31, 2006). Mr. Russell was not eligible for participation in the Supplemental Plan in 2006 because he was hired mid-year. He will be eligible for participation beginning in 2007. There are no employee contributions under the Supplemental Plan.
See footnote 6 to the Summary Compensation Table on page 21 above for a description of how interest is calculated under the Deferred Compensation Plan. Under the Supplemental Plan, Company contributions are deemed invested in Ferro Common Stock for the named executive officers, and earnings include deemed dividends, gains and losses. No Ferro Common Stock is held by the Supplemental Plan.
Termination and Change in Control Payments
The Company is party to an employment agreement with Mr. Kirsch, which was entered into on October 18, 2004. The agreement is terminable upon death, disability, for cause or upon voluntary termination. If Mr. Kirschs employment were to end on account of a Termination Without Cause (as such term is defined in his employment agreement), the Company would be obligated (1) to pay Mr. Kirsch a lump sum severance payment equal to two times his full years compensation (base salary plus targeted annual bonus), (2) to provide him continued participation in Ferros employee benefit programs
for up to 24 months, (3) to provide him outplacement services, and (4) to reimburse him for legal fees he incurs as a result of his termination of employment. If Mr. Kirschs employment had terminated without cause on December 31, 2006, he would have been entitled to cash compensation of $2,275,000, continuation of group health benefits with an estimated value of $21,000, and outplacement with an estimated value of $15,000. The Company would have also paid any legal fees Mr. Kirsch would have incurred in connection with his termination.
The Companys payment and benefit continuation obligations would cease if Mr. Kirsch were to breach any of his agreements contained in the Companys standard employee confidentiality agreement or if Mr. Kirsch were to decline to sign and return, or revoke, a release agreement containing the standard noncompetition, nonsolicitation, nondisparagement, and confidentiality commitments the Company ordinarily requires of executives who receive additional benefits or payments on termination of employment.
If Mr. Kirschs employment were terminated under the Change of Control Agreement (defined below), then the terms of the Change of Control Agreement, and not the employment agreement, will govern.
The Company is also a party to change in control agreements (the Change in Control Agreements) with Messrs. Bays, Murry, and Russell. (Ferro was also a party to a Change in Control Agreement with Mr. Gannon until his departure from the Company on January 2, 2007.) The purpose of these agreements is to reinforce and encourage each officers continued attention and dedication to his or her assigned duties without distraction in the face of solicitations by other employers and the potentially disturbing circumstances arising from the possibility of a change in control of Ferro. Under the respective Change in Control Agreements, if there were a change in control of the Company and the executives employment were terminated, the Company would be obligated (1) to pay to such executive a lump sum severance payment equal to two times the executives full years compensation (base salary plus targeted annual bonus) and (2) to provide the executive with certain other benefits listed below. These agreements limit the executives right to compete against Ferro after the termination of employment. The Change in Control Agreements are not employment agreements.
If there were a change in control and the executives employment had been terminated as of December 29, 2006 (the last business day of the fiscal year), the estimated value of the payments for each of the executives named in the Summary Compensation Table would be as follows:
Estimated Change-in-Control Payments
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Dismissal of Previous Independent Registered Public Accountants
On May 12, 2006, the Audit Committee dismissed KPMG LLP, which had served as Ferros auditors for the fiscal year ended December 31, 2004, and prior years, as the Companys independent registered public accountants. The audit reports of KPMG on the consolidated financial statements of Ferro and its subsidiaries as of and for the years ended December 31, 2004 and December 31, 2003 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the report for year ended December 31, 2004, stated that Ferro had restated its fiscal 2003 consolidated financial statements and stated that certain liquidity uncertainties facing Ferro raised substantial doubt about its ability to continue as a going concern.
Disagreements with Former Auditors. The only disagreements that KPMG communicated to the Audit Committee during the 2003 and 2004 fiscal years or the period from December 31, 2004 to May 12, 2006 involved the Audit Committees internal investigation of irregular accounting entries as follows:
In early July 2004, as a result of issues discovered by management during the performance of certain of the Companys internal control procedures in connection with the preparation of the Companys second quarter 2004 financial statements, the Company commenced an internal investigation into certain potentially inappropriate accounting entries made in the Companys domestic Polymer Additives business unit.
Following an initial investigation, management reached the preliminary conclusion that inappropriate accounting in the Companys Polymer Additives business unit both overstated the units historical performance and undermined the reliability of the units forecasting process. On July 23, 2004, the Company issued a press release announcing that the Companys Polymer Additives business units performance in the second quarter fell short of expectations and that the Companys Audit Committee had engaged independent legal counsel (Jones Day) and an independent public accounting firm (Ernst & Young LLP) to conduct an investigation under its auspices.
On September 15, 2004, the Company announced it would be restating certain previously-filed information and reported that the independent investigation conducted under the auspices of the Audit Committee had generally confirmed managements preliminary conclusions reported in the Companys July 23, 2004, press release. The September 15 release reported that the investigative team had concluded that all of the potentially irregular accounting entries were made at the Polymer Additives business unit and were made without senior managements knowledge or involvement. The release also reported that the investigative team concluded that substantially all of the irregular accounting entries were made by a subordinate divisional employee who had since left the Company.
At a meeting of the Audit Committee on September 23, 2004, KPMG expressed its concern about several emails reviewed during the initial phase of the investigation and expressed its desire to have more work done to determine whether those emails raised additional concerns. In response to KPMGs expressed concerns, the Audit Committee directed Jones Day and Ernst & Young to conduct further investigation through additional email searches, interviews of participants in the questioned email exchanges and any other person who might have relevant knowledge, and other documents as they deemed appropriate.
On October 25, 2004, the Audit Committee met by teleconference and received the report of Jones Day and Ernst & Young concerning the expanded email review requested by KPMG. The investigators reported to the Audit Committee that they had not found illegal acts or an intent to commit fraud, but found some evidence of immaterial mistakes in the timing of recording expenses as required by generally accepted accounting principles. These findings were reported to KPMG and, on November 19, 2004, the Audit Committee concluded that the additional work done by Jones Day and Ernst & Young indicated no evidence of fraud and no reasonable need to expand the investigation.
KPMG had expressed disagreement with the investigators findings and the Audit Committee invited KPMG to provide a written list of any recommendations it might have and the rationale therefore.
Following the November 19, 2004, meeting, Jones Day and Ernst & Young had discussions with KPMG concerning what additional investigatory work would be needed to address KPMGs concerns. In addition, at about the same time the investigators learned that the former subordinate division employee who was responsible for the irregular accounting entries at the Companys Polymer Additives Division was willing, for the first time, to be interviewed. In that interview, the former employee confirmed the irregular entries that the investigators had reported earlier and the fact that he had made those entries without any knowledge or involvement of senior management. The employee also raised some suspicions of irregular accounting entries in another smaller business unit.
In late December 2004, following discussions with the investigation team, the Chair of the Audit Committee and the Companys now-deceased Chief Executive Officer met by teleconference with KPMG. At that meeting, the Audit Committee Chair advised KPMG that the Audit Committee was willing, as requested by KPMG, to go forward with further investigation procedures to determine whether there was a pervasive pattern of intentional, inappropriate spreading of expenses, emphasized that independent investigators needed to exercise discretion and make independent judgments, and emphasized the need to complete the investigation expeditiously.
On January 18, 2005, in a press release the Company reported KPMG had requested Jones Day and Ernst & Young to perform additional procedures, including the review of certain electronic files. In addition, the release disclosed that the former subordinate division employee had been interviewed and had confirmed the irregular entries that the investigators had reported earlier and the fact that he had made the entries without any knowledge or involvement of senior management and of the suspicions he had raised about the other business unit (which were also to be reviewed by the investigation team).
Jones Day and Ernst & Young delivered their third phase investigation report to the Audit Committee on March 9, 2005. In that report, the investigators concluded:
On March 15 and April 4, 2005, following delivery of the Jones Day/Ernst & Young report on the additional procedures, KPMG advised the Audit Committee that it was dissatisfied with the conclusions of Jones Day and Ernst & Young and that it regarded the investigation as inadequate for its purposes. KPMG indicated that further investigation would be necessary to constitute a predicate for an audit report and further that such further investigation should be undertaken by a new investigative team.
After further deliberations by the Audit Committee during April 2005, on April 21, 2005, the Company announced that Jones Day and Ernst & Young had completed the additional procedures requested by KPMG and reported the investigators findings. The release also noted that investigators had again confirmed their earlier conclusions that substantially all of the irregular entries had been made by the former subordinate divisional employee and that the entries were made without any knowledge or involvement of senior management.
The April 21, 2005, press release also reported that, despite the findings and conclusions of the investigation, KPMG had advised the Audit Committee that KPMG was unable to conclude at that time that the investigation was adequate for its purposes, that KPMG believed further investigation was necessary to constitute a predicate for its audit of the Companys financial statements, and that KPMG had proposed that such investigative work should be undertaken by a new investigation team.
The Companys Audit Committee had evaluated both KPMGs position and the Jones Day/Ernst & Young reports relating to the issues raised by KPMG. On the basis of that evaluation, the Company reported that the Audit Committee believed it could rely in good faith on the judgments and conclusions of the independent investigators, that additional investigation was neither necessary nor justified, and that the only additional work that was necessary was routine audit examinations that fell outside the province of the investigation team.
While the Audit Committee continued to believe its reliance on the judgments and conclusions of the investigative team was justified, the April 21, 2005, press release disclosed that the Audit Committee had responded to KPMGs expressed concerns in such a way that KPMG would be able to complete its audit of the Companys financial statements. To that end, the Audit Committee engaged a second independent investigative team, consisting of independent legal counsel (Venable LLP) and independent forensic accountants (Navigant Consulting).
In an October 31, 2005, press release, the Company reported that the Venable/Navigant team had completed its investigation. Venable and Navigant reported to the Audit Committee that, although they found evidence of Ferro accounting personnel spreading expenses and some other misapplications of generally accepted accounting principles to achieve internal forecasts, they did not find that this was done with the intent to affect reported earnings in a way that misleads the investing public. The investigators also indicated that, while they found a lax tone with respect to GAAP compliance among certain former members of the Companys finance organization, they were comfortable that the then-current senior management of the Company, including the chief executive officer and chief financial officer, set a positive tone with respect to accounting practices. Consequently, the Venable/Navigant team concluded that it found no pervasive pattern or practice of engaging in fraudulent earnings management, that is, the misapplication of generally accepted accounting principles with the intent to affect reported earnings in a way that misleads the investing public.
The Company has authorized KPMG to respond fully to the inquiries of the successor independent registered public accounting firm concerning the subject matter of the disagreements discussed in the preceding paragraphs.
Reportable Events. In managements assessment of internal controls as of December 31, 2004, included under Item 9A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2004, management identified the following material weaknesses of internal control over financial reporting: (i) inadequately trained and insufficient numbers of accounting personnel coupled with insufficient accounting policies and procedures; (ii) non-adherence to policies and procedures associated with the financial statement reporting process; (iii) failure to consistently reconcile and perform timely reviews of accounting reconciliations, data files and journal entries; (iv) failure to properly identify and ensure receipt of agreements for review by accounting personnel; and (v) failure to consistently review the calculations and accounting for amounts due to employees under various compensation plans, and concluded that the Companys internal control over financial reporting was not effective as of December 31, 2004. KPMGs report under Item 9A included KPMGs opinion that managements assessment was fairly stated in all material respects and that, because of the effect of the material weaknesses identified by management described above, the Company had not maintained effective internal control over financial reporting as of December 31, 2004.
During the course of the Venable/Navigant investigation, on October 26, 2005, KPMG requested that senior Company financial personnel review entries that had been made during the period being restated by one former and one current member of the Companys finance function so as to be able to provide KPMG with management representations concerning those entries.
The report of KPMG on the consolidated financial statements of the Company for the years ended December 31, 2003 and December 31, 2004 included in the Form 10-K for the fiscal year ended December 31, 2004 stated, as described above, that the Company restated its fiscal 2003 consolidated financial statements. Representatives of KPMG are not expected to attend the Annual Meeting.
Appointment of Independent Registered Public Accountants
The Audit Committee has sole responsibility for appointing the Companys independent registered public accountants. On May 18, 2006, the Company announced that its Audit Committee had appointed a new independent registered public accounting firm to conduct the 2005 audit, subject only to completion of the new firms customary client acceptance procedures. On June 5, 2006, the Company announced that those procedures had been completed and that Deloitte & Touche LLP had been engaged as the Companys new independent registered public accountants.
During the 2003 and 2004 fiscal years or the period from December 31, 2004 to the date of this proxy statement, Ferro did not consult with Deloitte & Touche LLP regarding any matter requiring disclosure under Item 304(a)(2) of Regulation S-K.
Deloitte & Touche LLP is expected to continue as Ferros auditors for the year 2007. In accordance with its responsibilities under its charter and the New York Stock Exchange listing standards, the Audit Committee will assess periodically the advisability of rotating audit firms for audits in future years.
Representatives of Deloitte & Touche LLP will attend the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.
The Audit Committee has sole responsibility, in consultation with management, for approving the terms and fees for the engagement of the independent registered public accounting firm for audits of Ferros financial statements. In addition, the Audit Committee has sole responsibility for determining whether and under what circumstances Ferros independent registered public accounting firm may be engaged to perform audit-related services and must pre-approve any non-audit related services performed by the independent registered public accounting firm. Under no circumstance is our independent registered public accounting firm permitted to perform services of the nature described in Section 201 of the Sarbanes-Oxley Act.
Since May 6, 2003, all of the services provided by the Companys independent registered public accounting firm have been approved in accordance with the pre-approval procedures described above.
For the years ended December 31, 2006, and December 31, 2005, Deloitte & Touche LLP billed the Company fees as follows:
Fees noted in All Other Services in 2006 represent subscription fees for access to accounting research databases.
The Audit Committee has reviewed all non-audit services described above and has concluded that the provision of these non-audit services is compatible with maintaining Deloitte & Touche LLP s independence.
(The Audit Committee approved this report on February 27, 2007. On February 23, 2007, Mr. Premdas had become a Director of the Company, and subject to formal confirmation of his independence under the Companys Guidelines for Determining Director Independence, a member of the Audit Committee. In advance of the February 27, 2007 Audit Committee meeting, Mr. Premdas advised the Chair of the Audit Committee that he would not be voting on approval of the 2006 Form 10-K because he did not feel he had had sufficient time or information to formulate an informed view on the Companys financial statements.)
Stock Ownership by Directors, Executive Officers and Employees
Ferro encourages share ownership by its Directors and executive officers and has ownership guidelines based on base compensation or fees and position within the Company. The information below shows beneficial ownership of Ferro Common Shares by (i) each Director, (ii) each executive officer named in the Summary Compensation Table on page 20 above, and (iii) all Directors and executive officers as a group. Except as otherwise noted, each person has sole voting and investment power as to his or her shares. (The information set forth below is as of March 2, 2007.)
As a group, current Directors and officers have beneficial ownership of 2.51% of Ferros outstanding Common Shares. This percentage includes shares that would be issued if the Directors and officers exercised all stock options vested within 60 days after the record date for the Annual Meeting. None of our current Directors or executive officers own any of the outstanding shares of Series A ESOP Convertible Preferred Stock.
Stock Ownership by Other Major Shareholders
The following table sets forth information about each person known by us to be the beneficial owner of more than 5% of Ferros outstanding Common Shares or shares convertible into Common Shares.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and Directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, Directors and greater than ten percent shareholders are required by Securities and Exchange Commission regulation to furnish Ferro with copies of all Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports furnished to us, during the fiscal year ended December 31, 2006 or with respect to such fiscal year, all Section 16(a) filing requirements were met.
SHAREHOLDER PROPOSALS FOR
THE 2008 ANNUAL MEETING
Any shareholder who intends to present a proposal at the 2008 Annual Meeting and who wishes to have the proposal included in Ferros proxy statement and form of proxy for that meeting must deliver the proposal to the Company at our headquarters at 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147, not later than November 16, 2007.
Any shareholder who intends to present a proposal at the 2008 Annual Meeting other than for inclusion in Ferros proxy statement and form of proxy must deliver the proposal to Ferro at our headquarters at 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147, no later than January 31, 2008, or such proposal will be untimely. Ferro reserves the right to exercise discretionary voting authority on the proposal if a shareholder has failed to submit the proposal by January 31, 2008.
Under the Ohio General Corporation Law, if a shareholder desires cumulative voting for election of the Directors, then the shareholder must provide written notice to the President, a Vice President or the Secretary of Ferro at least 48 hours before the meeting. Upon announcement of this notice at the meeting, each shareholder will have cumulative voting rights. Cumulative voting means that each shareholder is entitled to that number of votes equal to the number of shares that he or she owns multiplied by the number of Directors to be elected. Each shareholder may cast all of his or her votes for a single nominee or may distribute his or her votes among as many nominees as he or she sees fit. As indicated on page 3 above, if the election of Directors is by cumulative voting, the persons appointed by the accompanying proxy intend to cumulate the votes represented by the proxies they receive and distribute such votes in accordance with their best judgment in order to elect three nominees for Directors. Those nominees receiving the largest number of votes for the Director positions to be filled will be elected to those positions.
Abstentions and broker non-votes will be deemed to be present for the purpose of determining a quorum for the meeting, but will be deemed not voting on the issues or matters as to which the abstention and non-votes are applicable.
Ferro will bear the cost of preparing and mailing this statement, with the accompanying proxy and other instruments. Ferro will also pay the standard charges and expenses of brokerage houses, or other nominees or fiduciaries, for forwarding such instruments to and obtaining proxies from security holders and beneficiaries for whose account they hold registered title to Ferro shares. In addition to using the mail, Directors, officers and other employees of Ferro, acting on its behalf, may also solicit proxies, and Morrow & Co., New York, New York, has been retained, at an estimated cost of $7,500 plus expenses, to aid in the solicitation of proxies from brokers, institutional holders and individuals who own a large number of shares. Proxies may be solicited personally, or by telephone. This Proxy Statement and the accompanying proxy will be sent to shareholders by mail on or about March 21, 2007.
Only the business set forth above in this notice of meeting will be acted upon at the Annual Meeting of Shareholders.
March 16, 2007
Vote by Telephone
Have your instruction card available when you call Toll-Free 1-888-693-8683 using a touch-tone phone and follow the simple instructions to record your vote.
Vote by Internet
Have your instruction card available when you access the website www.cesvote.com and follow the simple instructions to record your vote.
Vote by Mail
Please mark, sign and date your instruction card and return it in the postage-paid envelope provided or return it to: National City Bank, P.O. Box 535300, Pittsburgh PA 15253-5300.
Your telephone or Internet vote must be received by 6:00 a.m. Eastern Daylight Time
on April 25, 2007 to be counted in the final tabulation.
If you vote by telephone or over the Internet, do not mail your instruction card.
SEE REVERSE SIDE FOR VOTING INSTRUCTIONS
If you vote by mail, the instruction card below must be signed and dated.
ê Please fold and detach card at perforation before mailing. ê
The undersigned, a participant in the Ferro Corporation Savings and Stock Ownership Plan and/or the Ferro Corporation Bargaining Unit 401(k) Plan (the Plan), hereby instructs the Trustee under the Plan, to vote the shares of Company stock allocated to his or her Plan account at the 2007 Annual Meeting of Ferro Corporation, and at any adjournment thereof, in accordance with the instructions on this card, as follows:
1. ELECTION OF DIRECTORS
Nominees for terms expiring in 2010:
As a participant in the Ferro Corporation Savings and Stock Ownership Plan and/or the Ferro Corporation Bargaining Unit 401(k) Plan (the Plan), you have the right to instruct JPMorgan Chase Bank, as Trustee, to vote the shares allocated to your Plan account. You also have the ability, acting as a Named Fiduciary under the Plan, to instruct JPMorgan Chase Bank to vote a pro rata portion of the shares of Company stock (based on the ratio of the amount of Company stock in your Plan account to the total amount of Company stock in the Plan for which instructions are received) allocated to other participants Plan accounts for which the Trustee does not receive voting instructions.
To direct the Trustee to vote the shares of Company stock allocated to your Plan account by mail, please sign this voting instruction card on the reverse side. To direct the Trustee to vote the shares of Company stock allocated to your Plan account by telephone or the Internet, please follow the instructions on the reverse side and use the number by the arrow printed in Box A.
To direct the Trustee to vote the uninstructed shares of Company stock in the Plan by mail, please sign this voting instruction card below. To direct the Trustee to vote the uninstructed shares of Company stock allocated to the Plan accounts of other participants by telephone or the Internet, please follow the instructions on the reverse side and use the number by the arrow printed in Box B.
If you vote by telephone or the Internet, please do not send your voting instruction card by mail.
ê Please fold and detach card at perforation before mailing. ê
The undersigned, a participant, acting as a Named Fiduciary under the Ferro Corporation Savings and Stock Ownership Plan and/or the Ferro Corporation Bargaining Unit 401(k) Plan (the Plan), hereby instructs the Trustee under the Plan to vote the shares subject to this instruction at the 2007 Annual Meeting of Ferro Corporation, and at any adjournment thereof, in accordance with the instructions on this card, as follows:
Vote by Telephone
Have your proxy card available when you call Toll-Free 1-888-693-8683 using a touch-tone phone and follow the simple instructions to record your vote.
Vote by Internet
Have your proxy card available when you access the website www.cesvote.com and follow the simple instructions to record your vote.
Vote by Mail
Please mark, sign and date your proxy card and return it in the postage-paid envelope provided or return it to: National City Bank, P.O. Box 535300, Pittsburgh PA 15253-5300.
Vote 24 hours a day, 7 days a week!
Your telephone or Internet vote must be received by 6:00 a.m. Eastern Daylight Time
on April 27, 2007 to be counted in the final tabulation.
If you vote by telephone or over the Internet, do not mail your proxy card.
If you vote by mail, the proxy card below must be signed and dated.
ê Please fold and detach card at perforation before mailing. ê
This proxy is solicited on behalf of the Board of Directors for the Annual Meeting of Shareholders on April 27, 2007
The undersigned shareholder of Ferro Corporation hereby appoints James C. Bays, Sallie B. Bailey and Suzanne K. Hanselman, and each of them, the proxies of the undersigned, with full power of substitution to vote the shares of the undersigned at the 2007 Annual Meeting of Shareholders of the Corporation and any adjournment thereof upon the proposals on the reverse side.
YOUR VOTE IS IMPORTANT
If you do not vote by telephone or Internet, please sign and date this proxy card and return it promptly in the enclosed postage-paid envelope to National City Bank, P.O. Box 535300, Pittsburgh, PA 15253, so your shares are represented at the Annual Meeting. If you vote by telephone or Internet, it is not necessary to return this proxy card.
ê Please fold and detach card at perforation before mailing. ê
Please indicate how you wish your shares to be voted. Unless otherwise indicated, the proxies will vote FOR proposal 1.
THE BOARD OF DIRECTORS RECOMMEND VOTES BE CAST FOR PROPOSAL 1.
IMPORTANT THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE