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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SCHNITZER STEEL INDUSTRIES, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: Set forth the amount on which
the filing fee is calculated and state how it was determined.
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[_] Fee paid previously with preliminary materials
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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SCHNITZER STEEL INDUSTRIES, INC.
December 29, 2004
Dear Shareholder:
You are invited to attend the Annual Meeting of Shareholders of your Company,
which will be held on Monday, January 31, 2005 at 8 A.M., local time, at the
Multnomah Athletic Club, 1849 SW Salmon Street, Portland, Oregon 97205.
The formal notice of the meeting and the proxy statement appear on the following
pages and describe the matters to be acted upon. Time will be provided during
the meeting for discussion and you will have an opportunity to ask questions
about your Company.
Whether or not you plan to attend the meeting in person, it is important that
your shares be represented and voted. After reading the enclosed notice of the
meeting and proxy statement, please sign, date and return the enclosed proxy at
your earliest convenience. Return of the signed and dated proxy card will not
prevent you from voting in person at the meeting should you later decide to do
so.
Sincerely,
/s/ Robert W. Philip
Robert W. Philip
Chairman, President and Chief Executive Officer
SCHNITZER STEEL INDUSTRIES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 31, 2005
The Annual Meeting of Shareholders of Schnitzer Steel Industries, Inc. (the
Company) will be held at the Multnomah Athletic Club, 1849 SW Salmon Street,
Portland, Oregon 97205 on Monday, January 31, 2005 at 8 A.M., local time, for
the following purposes:
(1) To elect ten directors each to serve until the next Annual Meeting of
Shareholders and until a successor has been elected and qualified;
(2) To approve the proposed Executive Annual Bonus Plan; and
(3) To transact such other business as may properly be brought before the
meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on November 29, 2004 are
entitled to notice of and to vote at the meeting or any adjournments thereof.
Please sign and date the enclosed proxy and return it promptly in the enclosed
reply envelope. If you are able to attend the meeting, you may, if you wish,
revoke the proxy and vote personally on all matters brought before the meeting.
By Order of the Board of Directors,
/s/ Ilene Dobrow Davidson
Ilene Dobrow Davidson
Secretary
Portland, Oregon
December 29, 2004
SCHNITZER STEEL INDUSTRIES, INC.
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Schnitzer Steel Industries, Inc., an Oregon
corporation (the Company), to be voted at the Annual Meeting of Shareholders to
be held at the time and place and for the purposes set forth in the accompanying
Notice of Annual Meeting.
All proxies in the enclosed form that are properly executed and received by the
Company prior to or at the Annual Meeting and not revoked will be voted at the
Annual Meeting or any adjournments thereof in accordance with the instructions
thereon. Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of the Company, at or before the taking of the vote at
the Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a subsequent proxy relating to the same shares and
delivering it to the Secretary of the Company before the Annual Meeting, or
(iii) attending the Annual Meeting and voting in person (although attendance at
the Annual Meeting will not in and of itself constitute a revocation of a
proxy). Any written notice revoking a proxy should be sent to Schnitzer Steel
Industries, Inc., P.O. Box 10047, Portland, Oregon 97296-0047, Attention: Ilene
Dobrow Davidson, Secretary, or hand-delivered to the Secretary at or before the
taking of the vote at the Annual Meeting.
The mailing address of the principal executive offices of the Company is P.O.
Box 10047, Portland, Oregon 97296-0047. This Proxy Statement and the
accompanying Notice of Annual Meeting and Proxy Card are first being mailed to
shareholders on or about December 29, 2004.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The record date for determination of shareholders entitled to receive notice of
and to vote at the Annual Meeting is November 29, 2004. At the close of business
on November 29, 2004, 22,409,611 shares of Class A Common Stock (Class A), par
value $1.00 per share, and 8,012,366 shares of Class B Common Stock (Class B),
par value $1.00 per share, of the Company (collectively, the Common Stock) were
outstanding and entitled to vote at the Annual Meeting. Each share of Class A
Common Stock is entitled to one vote and each share of Class B Common Stock is
entitled to ten votes with respect to each matter to be voted on at the Annual
Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, as of August 31, 2004 (unless otherwise noted in
the footnotes to the table), by (i) persons known to the Company to be the
beneficial owner of more than 5% of either class of the Company's Common Stock,
(ii) each of the Company's directors and nominees for director, (iii) each
executive officer of the Company named in the Summary Compensation Table, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise noted in the footnotes to the table, the persons named in the table
have sole voting and investment power with respect to all outstanding shares of
Common Stock shown as beneficially owned by them. Except as noted below, the
address of each shareholder in the table is Schnitzer Steel Industries, Inc.,
P.O. Box 10047, Portland, Oregon 97296-0047.
1
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Name of Beneficial Owner or Class A Shares Class B Shares
Number of Persons in Group Beneficially Owned (1) Beneficially Owned (1)
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Number Percent Number Percent
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Schnitzer Steel Industries, Inc. Voting Trust
(the Schnitzer Trust) 7,374,671 88.8%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Marilyn S. Easly (2) 660,382 8.0%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Carol S. Lewis (2) 19,500 * 577,049 6.9%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Scott Lewis 116,145 *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
MANUEL SCHNITZER FAMILY GROUP,
Carol S. Lewis, Trustee (3) 1,615,633 19.5%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Dori Schnitzer (2) 847,419 10.2%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Susan Schnitzer (2) 663,057 8.0%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Jean S. Reynolds (2) 61,300 * 533,973 6.4%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
MORRIS SCHNITZER FAMILY GROUP,
Dori Schnitzer, Trustee (3) 1,811,175 21.8%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Gilbert and Thelma S. Schnitzer (2) 882,222 10.6%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Kenneth M. and Deborah S. Novack (2) 311,031 3.7%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Gary Schnitzer and Sandra Wilder (2) 18,072 (4) * 1,920 *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
GILBERT SCHNITZER FAMILY GROUP,
Gary Schnitzer, Trustee (3) 1,251,826 15.1%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Lois T. Schnitzer (2) 4,230 * 620,482 7.5%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Robert W. and Rita S. Philip (2) 302,477 (5) 1.4% 454,541 5.5%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
LEONARD SCHNITZER FAMILY GROUP,
Rita S. Philip, Trustee (3) 2,696,037 32.5%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Royce & Associates LLC (9) 3,129,800 (6) 14.2%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Batterymarch Financial Management, Inc. (10) 1,102,899 (6) 5.0%
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Robert S. Ball 15,000 *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
William A. Furman 10,500 *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Ralph R. Shaw 12,000 *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Barry A. Rosen 11,612 (7) *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Kurt C. Zetzsche 12,553 (8) *
----------------------------------------------------- ----------------- ----------- ----------------- -----------
Jay Robinovitz
----------------------------------------------------- ----------------- ----------- ----------------- -----------
All directors and executive officers as a group
(15 persons) (2) 590,084 (11) 2.6% 2,725,933 32.8%
=================================================================================================================
2
* Less than 1%
(1) Includes, in all cases, shares held by either spouse, either directly or as
trustee or custodian. For purposes of this table, Class A shares
beneficially owned do not include Class A shares issuable upon conversion
of Class B shares.
(2) Except as described below, Class B shares owned by these shareholders are
subject to the Schnitzer Trust and represented by voting trust certificates
beneficially owned by the shareholders. Class B shares beneficially owned
that are not subject to the Schnitzer Trust are as follows:
Marilyn S. Easly 63,645
Carol S. Lewis 90,000
Dori Schnitzer 112,500
Susan Schnitzer 112,500
Jean S. Reynolds 75,000
(3) Class B shares shown in the table as owned by a family group represent the
total number of shares subject to the Schnitzer Trust owned by members of
the family group. The trustee for each family group has certain voting
powers with respect to the family group's shares as described below under
"Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell Agreement."
(4) Includes 14,172 shares subject to options exercisable prior to October 30,
2004.
(5) Consists of 302,477 shares subject to options exercisable prior to October
30, 2004.
(6) Beneficial ownership as of November 21, 2004 as reported by the investment
manager on Form 13F. Data was obtained from information published by the
NASDAQ Stock Market, Inc.
(7) Includes 11,267 shares subject to options exercisable prior to October 30,
2004.
(8) Includes 12,253 shares subject to options exercisable prior to October 30,
2004.
(9) Royce & Associates, LLC, 1414 Avenue of the Americas, 9th Floor, New York,
NY 10019-2578
(10) Batterymarch Financial Management, Inc., 200 Clarendon Street, 49th Floor,
Boston, MA 02116-5016
(11) Includes 351,094 shares subject to options exercisable prior to October 30,
2004.
SCHNITZER STEEL INDUSTRIES, INC. VOTING TRUST AND BUY-SELL AGREEMENT
VOTING TRUST PROVISIONS. Pursuant to the terms of the Schnitzer Steel
Industries, Inc. 2001 Restated Voting Trust and Buy-Sell Agreement dated March
26, 2001 (the Schnitzer Trust Agreement), the beneficial owners of over 80% of
the outstanding shares of Class B Common Stock have made their shares subject to
the terms of the Schnitzer Steel Industries, Inc. Voting Trust (the Schnitzer
Trust). The Schnitzer Trust is divided into four separate groups, one for each
branch of the Schnitzer family. Carol S. Lewis, Dori Schnitzer, Gary Schnitzer,
and Rita S. Philip are the four trustees of the Schnitzer Trust and each is also
the separate trustee for his or her separate family group. Pursuant to the
Schnitzer Trust Agreement, the trustees as a group have the power to vote the
shares subject to the Schnitzer Trust and, in determining how the trust shares
will be voted, each trustee separately has the number of votes equal to the
number of shares held in trust for his or her family group. Any action by the
trustees requires the approval of the trustees with votes equal to at least
52.5% of the total number of shares subject to the Schnitzer Trust. Before
voting with respect to the following actions, each trustee is required to obtain
the approval of holders of a majority of the voting trust certificates held by
his or her family group: (a) any merger or consolidation of the Company with any
other corporation, (b) the sale of all or substantially all the Company's assets
or any other sale of assets requiring approval of the Company's shareholders,
(c) any reorganization of the Company requiring approval of the Company's
shareholders, (d) any partial liquidation or dissolution requiring approval of
the Company's shareholders, and (e) dissolution of the Company. The Schnitzer
Trust will terminate on March 26, 2011 unless terminated prior thereto by
agreement of the holders of trust certificates representing two-thirds of the
shares held in trust for each family group.
PROVISIONS RESTRICTING TRANSFER. The trustees are prohibited from selling or
encumbering any shares held in the Schnitzer Trust. The Schnitzer Trust
Agreement contains transfer restrictions binding on both holders of voting trust
certificates and holders of shares of Class B Common Stock distributed from the
Schnitzer Trust, unless such restrictions are waived by the trustees. The
Schnitzer Trust Agreement prohibits shareholders who are subject thereto from
selling or otherwise transferring their voting trust certificates or their
shares of Class B Common Stock except to other persons in their family group or
to entities controlled by such persons. Such transfers are also restricted by
the Company's Restated Articles of Incorporation. A holder of voting trust
certificates is permitted to sell or make a charitable gift of the shares of
Class B Common Stock represented by his or her certificates by first directing
the trustees
3
to convert the shares into Class A Common Stock, which will then be distributed
to the holder free from restrictions under the agreement. Similarly, a holder of
Class B Common Stock subject to the transfer restrictions is permitted to sell
or make a charitable gift of the holder's Class B Common Stock by first
converting the shares into Class A Common Stock, which will then be free from
restrictions under the agreement. However, before causing any shares to be
converted for sale, a holder must offer the shares (or the voting trust
certificates representing the shares) to the other voting trust certificate
holders who may purchase the shares at the current market price for the Class A
Common Stock or exchange shares of Class A Common Stock owned by them for the
Class B Common Stock proposed to be converted.
ELECTION OF DIRECTORS
Ten directors are to be elected at the Annual Meeting, each to hold office until
the next Annual Meeting and until his or her successor has been duly elected and
qualified. Proxies received from shareholders, unless directed otherwise, will
be voted FOR the election of the following nominees: Robert S. Ball, William A.
Furman, Carol S. Lewis, Scott Lewis, Kenneth M. Novack, Robert W. Philip, Jean
S. Reynolds, Dori Schnitzer, Gary Schnitzer, and Ralph R. Shaw. If any nominee
is unable to stand for election, the persons named in the proxy will vote the
same for a substitute nominee. All of the nominees are currently directors of
the Company. The Company is not aware that any nominee is or will be unable to
stand for reelection. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Abstentions and broker non-votes will have
no effect on the results of the vote.
Set forth below is the name, age, position with the Company, present principal
occupation or employment and five-year employment history of each of the
nominees for director of the Company.
Name and Year
First Became Director Business Experience Age
--------------------- ------------------- ---
Robert S. Ball Director of the Company since September 1993. 63
1993 Since 1982, he has been a partner in the
Portland, Oregon law firm of Ball Janik LLP.
William A. Furman Director of the Company since September 1993. 59
1993 Mr. Furman serves as chairman of the
Company's Nominating and Corporate Governance
Committee. Since 1981, he has been President,
Chief Executive Officer and a director of The
Greenbrier Companies of Portland, Oregon, a
publicly held company with subsidiaries,
including Gunderson, Inc., engaged in
manufacturing, marketing and leasing of
railcars and other equipment.
Carol S. Lewis Director of the Company since December 1987. 67
1987 She is the former proprietor of Virginia
Jacobs, which had three linen and home
accessories stores.
Scott Lewis Director of the Company since 1998. Mr. Lewis 45
1998 is currently a principal in and an
environmental design consultant with
Brightworks Northwest LLC. He was the former
Chief Executive Officer of Help1.com, a
business development executive with
Conversational Computing Corporation,
President of Sora Corporation, and an
information technology consultant. Mr. Lewis
is the son of Carol S. Lewis.
4
Name and Year
First Became Director Business Experience Age
--------------------- ------------------- ---
Kenneth M. Novack President since 1991 and Chief Executive 58
1991 Officer of Schnitzer Investment Corp. (SIC)
since January 2002 He became Chairman of the
Board of SIC in 2004. Mr. Novack was Chairman
of the Board for Lasco Shipping Co. He was an
Executive Vice President of the Company from
1991 until 2003. Mr. Novack is married to a
first cousin of Carol S. Lewis.
Robert W. Philip President of the Company since March 1991, 57
1991 Chief Executive Officer since January 2002
and Chairman since January 2004. Mr. Philip
is married to a first cousin of Carol S.
Lewis.
Jean S. Reynolds Director of the Company since September 1993. 55
1993 She was previously a marketing and efficiency
consultant. Ms. Reynolds is a first cousin of
Carol S. Lewis.
Dori Schnitzer Secretary of the Company from June 1987 until 51
1991 June 2000 and became a director in March
1991. From May 1991 until June 2000, she was
the Executive Vice President of Lasco
Shipping Co., a subsidiary of Schnitzer
Investment Corp. Ms. Schnitzer is a first
cousin of Carol S. Lewis.
Gary Schnitzer Executive Vice President in charge of the 62
1993 Company's California metals recycling
operations since 1980 and a director since
September 1993. Mr. Schnitzer is a first
cousin of Carol S. Lewis.
Ralph R. Shaw Director of the Company since September 1993. 66
1993 Mr. Shaw serves as Chairman of the Company's
Compensation Committee and Audit Committee.
Mr. Shaw is President of Shaw Management,
Inc., a financial services and venture
capital firm.
BOARD OF DIRECTORS INDEPENDENCE, COMMITTEES AND NOMINATIONS
The Board of Directors has determined that Robert Ball, William Furman and Ralph
Shaw are "independent directors" as defined in Nasdaq rules, and has not
determined that any other director qualifies as an independent director.
Although the Nasdaq rules generally require Nasdaq-listed companies to have a
board of directors comprised of a majority of independent directors, a
"controlled company" is exempt from this requirement. The Schnitzer family
members who are parties to the Schnitzer Trust are a group of shareholders who
collectively hold more than 50% of the voting power of the Company and,
accordingly, the Company is an exempt controlled company. The independent
directors hold regularly scheduled meetings at which only independent directors
are present.
The Company's Board of Directors has a Compensation Committee, an Audit
Committee and a Nominating and Corporate Governance Committee. Robert Ball,
William Furman, and Ralph Shaw, the three directors who have been determined to
be independent directors, are the three members of all three of these
committees. The Board of Directors has also determined that each of these
directors meets all additional independence and financial literacy requirements
for Audit Committee membership under Nasdaq rules, and has determined that Mr.
Shaw is an "audit committee financial expert" as defined in regulations adopted
by the Securities and Exchange Commission.
5
The principal functions of the Audit Committee are to oversee the accounting and
financial reporting processes of the Company and the audits of its financial
statements, to appoint, compensate, retain and oversee the independent auditors,
to review and approve all audit and non-audit services performed by the
independent auditors, and to discuss the results of the audit with the
independent auditors. The Board of Directors has adopted a written charter for
the Audit Committee, a copy of which is attached as Exhibit A to this proxy
statement.
The Compensation Committee administers the Company's 1993 Stock Incentive Plan
and makes recommendations to the Board of Directors regarding compensation for
executive officers of the Company.
The Nominating and Corporate Governance Committee identifies, selects and
recommends individuals qualified to become Board members, and develops and
recommends corporate governance guidelines. The Nominating and Corporate
Governance Committee has a written charter, a copy of which is posted on the
Company's website at www.schnitzersteel.com. The charter provides that for so
long as the Schnitzer Trust holds shares with a majority of the votes in the
election of directors, the Committee will recommend for nomination as directors
all Schnitzer family representatives requested by the trustees of the Schnitzer
Trust. The Committee will otherwise identify potential director candidates
through a variety of means, including recommendations from members of the
Committee or the Board, suggestions from Company management, and shareholder
recommendations. The Committee also may, in its discretion, engage director
search firms to identify candidates. Shareholders may recommend director
candidates for consideration by the Nominating and Corporate Governance
Committee by submitting a written recommendation to the committee, c/o Ilene
Dobrow Davidson, Secretary, Schnitzer Steel Industries, Inc., P.O. Box 10047,
Portland, Oregon 97296-0047. The recommendation should include the candidate's
name, age, qualifications (including principal occupation and employment
history), and written consent to be named as a nominee in the Company's proxy
statement and to serve as a director, if elected. In assessing potential
candidates, the Committee considers the composition of the Board as a whole and
the character, background and professional experience of each potential
candidate. In its evaluation of potential candidates, the Committee considers
the following factors: qualification as an "independent director;" character,
integrity and mature judgment; accomplishments and reputation in the business
community; knowledge of the Company's industry or other industries relevant to
the Company's business; specific skills such as financial expertise needed by
the Board; inquisitive and objective perspective; commitment and ability to
devote time and effort to Board responsibilities; and diversity of viewpoints
and experience. In considering recommendations regarding the re-nomination of
incumbent directors, the Committee also takes into account the performance of
such persons as directors, including the number of meetings attended and the
level and quality of participation, as well as the value of continuity and
knowledge of the Company gained through Board service. The Nominating and
Corporate Governance Committee meets to discuss and consider the qualifications
of each potential new director candidate, whether recommended by shareholders or
identified by other means, and determines by majority vote whether to recommend
such candidate to the Board of Directors. The final decision to either elect a
candidate to fill a vacancy between Annual Meetings or include a candidate on
the slate of nominees proposed at an Annual Meeting is made by the Board of
Directors.
Shareholders desiring to communicate directly with the Board of Directors, or
with any individual director, may do so in writing addressed to the intended
recipient or recipients, c/o Ilene Dobrow Davidson, Secretary, Schnitzer Steel
Industries, Inc., P.O. Box 10047, Portland, Oregon 97296-0047. All such
communications will be reviewed and forwarded to the designated recipient or
recipients in a timely manner.
During fiscal 2004, the Board of Directors held 5 meetings, the Audit Committee
held 12 meetings and the Compensation Committee held 6 meetings. Each director
attended at least 75% of the aggregate number of meetings of the Board and of
committees of the Board on which they served. The Company encourages all
directors to attend each annual meeting of shareholders, and nine out of ten
directors attended the 2004 Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE
NOMINEES NAMED IN THIS PROXY STATEMENT.
6
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning compensation
paid or accrued by the Company to or on behalf of the Company's Chief Executive
Officer and each of the four other most highly compensated executive officers of
the Company in fiscal 2004 (hereinafter referred to as the Named Executive
Officers):
===========================================================================================================
Long-Term
Annual Compensation Compensation
------------------------------------ ---------------
Awards
Securities All Other
Name and Fiscal Underlying Compensa-
Principal Position Year Salary Bonus Other Options (2) tion (3)
-------------------------------- -------- ------------ --------------- ------- --------------- -----------
Robert W. Philip (1) 2004 $575,000 $ 1,138,214 $10,000
-------- ------------ --------------- ------- --------------- -----------
Chairman, President and 2003 $554,808 $ 836,219 195,000 $10,000
-------- ------------ --------------- ------- --------------- -----------
Chief Executive Officer 2002 $453,300 $ 456,919 $9,500
-------------------------------- -------- ------------ --------------- ------- --------------- -----------
Gary Schnitzer (1) 2004 $335,563 $ 323,616 $10,000
-------- ------------ --------------- ------- --------------- -----------
Executive Vice President 2003 $314,532 $ 226,261 100,650 $10,000
-------- ------------ --------------- ------- --------------- -----------
2002 $302,959 $ 160,568 $9,500
-------------------------------- -------- ------------ --------------- ------- --------------- -----------
Kurt C. Zetzsche 2004 $281,150 $ 294,952 $20,000
-------- ------------ --------------- ------- --------------- -----------
President, Cascade Steel 2003 $281,663 $ 164,792 87,036 $20,000
-------- ------------ --------------- ------- --------------- -----------
Rolling Mills, Inc. 2002 $269,871 $19,000
-------------------------------- -------- ------------ --------------- ------- --------------- -----------
Barry A. Rosen (1) 2004 $348,468 $ 307,496 $10,000
-------- ------------ --------------- ------- --------------- -----------
Vice President, Finance and 2003 $261,572 $ 197,314 80,169 $10,000
-------- ------------ --------------- ------- --------------- -----------
Chief Financial Officer 2002 $251,462 $ 129,438 $9,500
-------------------------------- -------- ------------ --------------- ------- --------------- -----------
Jay Robinovitz 2004 $219,265 $ 151,292 $10,000
-------- ------------ --------------- ------- --------------- -----------
Vice President 2003 $176,761 $ 83,977 10,500 $8,838
-------- ------------ --------------- ------- --------------- -----------
2002 $138,335 $ 52,936 19,125 $6,917
==========================================================================================================
(1) The amounts in the table do not include the amounts of salary and bonus
separately paid by other Schnitzer Group companies to these officers
through a reimbursement arrangement under the Shared Services Agreement. In
fiscal 2004, Barry Rosen's responsibilities to the other Schnitzer Group
companies were assumed by a newly appointed chief financial officer of
those companies. Thus, in fiscal 2004, Mr. Rosen dedicated more time to the
Company and the Company began paying for the portion of his salary
previously paid for by the other companies.
(2) Options awarded have been adjusted to reflect the two-for-one stock split
on August 14, 2003 and the three-for-two stock split on March 25, 2004.
(3) For fiscal years 2004, 2003, and 2002, All Other Compensation consists
entirely of Company contributions to the Company's Supplemental Retirement
Plan and Salary Deferral Retirement Plan.
7
STOCK OPTION GRANTS IN LAST FISCAL YEAR
In past years, the Company has typically granted options to Named Executive
Officers in the month of June. During 2004, options to the Named Executive
Officers were not granted until October, thereby falling in fiscal 2005. The
following table provides information regarding stock options for Class A Common
Stock granted to the Named Executive Officers in October 2004.
================================================================================================================
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
Number of Potential Realizable Value at
Securities Percent of Assumed Annual Rates of
Underlying Total Options Stock Price Appreciation
Options Granted to for Option Term (2)
Granted Employees in Exercise Price Expiration -----------------------------
Name (1) Fiscal Year(3) Per Share Date 5% 10%
--------------------- ------------- ---------------- ---------------- ------------ -------------- --------------
Robert W. Philip 67,500 (3) -- $ 28.41 10/18/14 $1,206,016 $3,056,280
--------------------- ------------- ---------------- ---------------- ------------ -------------- --------------
Gary Schnitzer 25,000 (3) -- $ 28.41 10/18/14 $ 446,672 $1,131,956
--------------------- ------------- ---------------- ---------------- ------------ -------------- --------------
Kurt C. Zetzsche -- (4) -- -- -- -- --
--------------------- ------------- ---------------- ---------------- ------------ -------------- --------------
Barry Rosen -- (4) -- -- -- -- --
--------------------- ------------- ---------------- ---------------- ------------ -------------- --------------
Jay Robinovitz 10,000 (3) -- $ 28.41 10/18/14 $ 178,669 $ 452,782
================================================================================================================
(1) Each option was granted on the date 10 years prior to the expiration date
shown in the table. Options become exercisable for 20% per year over the
five-year period starting on June 1, 2004.
(2) In accordance with rules of the Securities and Exchange Commission, these
amounts are the hypothetical gains or "option spreads" that would exist for
the respective options based on assumed rates of annual compound stock
price appreciation of 5% and 10% from the date the options were granted
over the full option term.
(3) The Compensation Committee normally makes option grants to Company
executives in June of each fiscal year. However, grants made to the
indicated executives in 2004 were not made until the first quarter of
fiscal 2005. These grants will be reflected in the fiscal 2005 Summary
Compensation Table and will again be reflected in the fiscal 2005 Stock
Option Grants table.
(4) Mr. Zetzsche retired from the Company in November 2004 and Mr. Rosen will
retire in June 2005. As such, no options were granted to these Named
Executive Officers in October 2004.
8
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of August 31, 2004 regarding equity
compensation plans approved by the shareholders and equity compensation plans
that were not approved by the shareholders.
=========================================================================================================
(c)
(a) (b) Number of securities
Number of securities to Weighted average remaining available
be issued upon exercise exercise price of for future issuance
of outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
-------------------------------- ------------------------- --------------------- ------------------------
Equity compensation plans
approved by security holders(1) 1,115,149 $ 8.80 3,128,841
-------------------------------- ------------------------- --------------------- ------------------------
Equity compensation plans not
approved by security holders -- -- --
-------------------------------- ------------------------- --------------------- ------------------------
Total 1,115,149 $ 8.80 3,128,841
=========================================================================================================
(1) Consists entirely of shares of Class A Common Stock authorized for issuance
under the Company's 1993 Stock Incentive Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides certain information concerning exercises of stock
options during the fiscal year ended August 31, 2004 by each of the Named
Executive Officers as well as the number and value of unexercised options held
by such persons at August 31, 2004.
================================================================================================================
Value of Unexercised
Number of Unexercised Options in the Money Options
at Fiscal Year-End at Fiscal Year-End (1)
Shares Acquired Value ----------------------------- -----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------------- ----------------- ------------ ------------- --------------- ------------- ---------------
Robert W. Philip 228,400 $4,628,115 275,477 180,300 $5,747,776 $3,738,030
--------------------- ----------------- ------------ ------------- --------------- ------------- ---------------
Gary Schnitzer 222,123 $4,323,233 -- 93,636 -- $1,948,576
--------------------- ----------------- ------------ ------------- --------------- ------------- ---------------
Kurt C. Zetzsche 51,468 $1,371,944 -- 81,429 -- $1,695,701
--------------------- ----------------- ------------ ------------- --------------- ------------- ---------------
Barry A. Rosen (2) 50,243 $1,208,122 39,630 75,079 $ 834,351 $1,563,198
--------------------- ----------------- ------------ ------------- --------------- ------------- ---------------
Jay Robinovitz 34,800 $ 777,428 -- 23,475 -- $ 465,548
================================================================================================================
(1) Aggregate value of shares covered by in the money options at August 31,
2004, less the aggregate exercise price of such options.
(2) Mr. Rosen transferred certain options to his former spouse during the year
ended August 31, 2003. The information shown in this table for Mr. Rosen
includes the following related to the former spouse: 39,630 exercisable but
unexercised options at fiscal year-end and $834,351 in value of unexercised
in the money exercisable options at fiscal year-end.
9
DEFINED BENEFIT RETIREMENT PLANS
PENSION RETIREMENT PLAN. The Company's Pension Retirement Plan (the Plan) is a
defined benefit plan qualified under Section 401(a) of the Internal Revenue Code
of 1986 (the Code). All employees (except certain union and on-call employees)
of the Company and certain other Schnitzer Group companies are eligible to
participate in the Plan after meeting certain service requirements. Generally,
pension benefits become fully vested after five years of service and are paid in
monthly installments beginning when the employee retires at age 65. Annual
benefits equal 2% of qualifying compensation for each Plan year of service after
August 31, 1986. Upon their retirement, assuming retirement at age 60 (except
age 65 for Gary Schnitzer) and no increase in annual compensation from current
levels, Robert W. Philip, Gary Schnitzer, Barry A. Rosen and Jay Robinovitz
would receive annual benefits for life of $61,000, $70,000, $57,000 and $62,000,
respectively.
SUPPLEMENTAL EXECUTIVE RETIREMENT BONUS PLAN. The Supplemental Executive
Retirement Bonus Plan (the Supplemental Plan) was adopted to provide a
competitive level of retirement income for key executives selected by the Board
of Directors. The Supplemental Plan establishes an annual target benefit for
each participant based on continuous years of service (up to a maximum of 25
years) and the average of the participant's five highest consecutive calendar
years of compensation, with certain limitations on bonuses to be included, with
the target benefit subject to an inflation-adjusted limit equal to $217,715 in
2004. The target benefit is reduced by 100% of primary social security benefits
and the Company-paid portion of all benefits payable under the Company's
qualified retirement plans to determine the actual benefit payable under the
Supplemental Plan. The actual benefit shall be paid as a straight life annuity
or in other actuarially equivalent forms. Benefits are payable under the plan
only to participants who terminate employment after age 55 with 10 credited
years of service or after age 60. The following table shows the estimated annual
target benefits under the Supplemental Plan, before the reductions based on
social security and Company-paid retirement benefits, for executives who retire
at age 60 (the normal retirement age under the Supplemental Plan) with various
levels of pay and service, based on the 2004 value for the inflation-adjusted
cap.
=============================================================================
Highest Consecutive Credited Years of Service
Five-Year Average --------------------------------------------------
Qualifying Compensation 10 15 20 25
----------------------- ----------- ------------ ------------ ------------
$200,000 $52,000 $78,000 $104,000 $130,000
----------------------- ----------- ------------ ------------ ------------
$250,000 $65,000 $97,500 $130,000 $162,500
----------------------- ----------- ------------ ------------ ------------
$300,000 $78,000 $117,000 $156,000 $195,000
----------------------- ----------- ------------ ------------ ------------
$350,000 $87,086 $130,629 $174,172 $217,715
----------------------- ----------- ------------ ------------ ------------
$400,000 $87,086 $130,629 $174,172 $217,715
=============================================================================
As of December 31, 2003, Robert W. Philip, Gary Schnitzer and Barry A. Rosen
had, 33, 40 and 23 years of service, respectively, and highest consecutive
five-year average qualifying compensation of $807,000, $382,000 and $399,000,
respectively. The retirement benefits in the above table do not include benefits
payable to Mr. Schnitzer, Mr. Philip and Mr. Rosen under the supplemental
executive retirement plan of Schnitzer Investment Corp. in recognition of
services provided to other Schnitzer Group companies.
EMPLOYMENT AGREEMENTS
In fiscal 2004, Barry A. Rosen advised the Company of his intention to retire as
of August 31, 2004. To induce Mr. Rosen to remain as Chief Financial Officer of
the Company for a transition period, the Company entered into an Employment
Agreement with Mr. Rosen in August 2004. Under this agreement, Mr. Rosen agreed
to continue as the Company's Chief Financial Officer at least through June 2,
2005, and for up to an additional three months thereafter if requested by the
Company. Mr. Rosen will receive his base salary during the remainder of his
employment, but will not participate in the Company's EVA Bonus Plan for fiscal
2005 and did not receive a stock option grant along with other officers in
October 2004. In lieu of receiving the balance of his EVA bonus bank after his
retirement and after giving effect to fiscal 2005 EVA results as provided in the
EVA Bonus Plan, the agreement provided for the
10
payout of his $299,220 EVA bonus bank on November 30, 2004. The agreement also
provided for the payment to Mr. Rosen of a $280,000 retention bonus on November
30, 2004. If Mr. Rosen remains employed through June 2, 2005, or if his
employment is terminated by the Company without cause before that date, all of
his unvested stock options will accelerate and become fully exercisable.
DIRECTOR COMPENSATION
Directors who are not employees of Schnitzer Group companies receive an annual
fee of $20,000 plus $1,200 for attending each Board meeting or committee meeting
held other than on the same day as a Board meeting and are reimbursed for
expenses incurred attending Board and committee meetings. Committee chairs
receive an annual retainer of $3,500. In 2004, the directors began participation
in the Company's 1993 Stock Incentive Plan. Each non-employee director was
granted an option for 4,500 shares, with an exercise price of $27.96 per share,
in August 2004. These options will vest 20% annually over five years and have a
term of ten years. The Company intends to make similar annual stock option
grants in the future. The option exercise price will be based upon the closing
price of the Company's Class A shares on the date of grant. Directors may also
elect to receive annual compensation in stock options in lieu of cash
compensation based on the Black-Scholes option pricing model as a basis for
exchange.
CERTAIN TRANSACTIONS
The Company is part of the Schnitzer Group of companies, all of which are
controlled by members of the Schnitzer family. Other companies in the group
include: Schnitzer Investment Corp. (SIC), engaged in the real estate business;
Liberty Shipping Group LLC (LSGLLC) and its manager LSGGP LLC (LSGGP), engaged
in the ocean shipping business; and Island Equipment Company, Inc. (IECO),
engaged in various businesses in Guam and other South Pacific islands.
The Company leases certain properties used in its business from SIC. These
properties and certain lease terms are set forth in the following table:
==============================================================================
EXPIRATION
PROPERTY ANNUAL RENT OF LEASES
--------------------------------------------------- ------------- ------------
Corporate Headquarters $ 385,000 2014
--------------------------------------------------- ------------- ------------
Metals Recycling Operations:
Portland facility and marine terminal 1,834,000 2063
--------------------------------------------------- ------------- ------------
Total $2,219,000
==============================================================================
The lease for the Portland metals recycling operation (the "Portland Metals
Recycling Lease") was signed in 1988. In accordance with the amended lease
terms, the rent payable under the lease was adjusted on September 1, 2003 to
$1,834,000 per year and is scheduled to adjust every five years thereafter. The
adjustment made on September 1, 2003 was based on an analysis of market rates
performed by independent experts and consultations with independent counsel and
was approved by the Company's independent directors. In 2018 and every fifteen
years thereafter, adjustments to appraised fair market rent for the leased
property will likewise be made, but only if such adjustment results in an
increase in rent. Intervening rate adjustments will be based on the average of
the percentage increases or decreases in two inflation indexes over the five
years prior to the applicable adjustment date.
The Company provides management and administrative services to, and in some
cases receives services from, SIC, LSGLLC, LSGGP, and IECO pursuant to a Second
Amended Shared Services Agreement, as amended as of September 1, 1994. The
agreement provides that all service providing employees, except executive
officers, are charged out at rates based on the actual hourly compensation
expense to the Company for such employees (including fringe benefits and
bonuses) plus an hourly charge for reimbursement of space costs associated with
such employees, all increased by 15% as a margin for additional overhead and to
cover capital employed. The Company independently determines the salaries to pay
its executive officers, and the other companies reimburse the Company fully for
salaries and related benefits the other companies decide to pay, plus the hourly
space charge and the 15% margin. Under the agreement, the Company independently
determines the amount of bonus to pay to each of its employees, and the other
companies
11
reimburse the Company fully for any bonuses the other companies decide to pay.
The agreement also provides for the monthly payment by these related parties to
the Company of amounts intended to reimburse the Company for their proportionate
use of the Company's telephone and computer systems. Net charges by the Company
to the related parties under the agreement in fiscal 2004 totaled $0.6 million.
Pursuant to a policy adopted by the Board of Directors, all transactions with
other Schnitzer Group companies require the approval of a majority of the
independent directors or must be within guidelines previously established by
them.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the Committee) is composed
of three outside directors. The Committee is responsible for developing and
making recommendations to the Board with respect to the Company's compensation
policies and the levels of compensation to be paid to executive officers. In
addition, the Committee has sole responsibility for the administration of, and
the grant of stock options and other awards under, the Company's 1993 Stock
Incentive Plan, as amended.
The objectives of the Company's executive compensation program are to attract
and retain highly qualified executives, and to motivate them to maximize
shareholder returns by achieving both short-term and long-term strategic Company
goals. The three basic components of the executive compensation program are base
salary, annual bonus dependent on corporate financial performance and stock
option grants.
BASE SALARY
The Company's salary revisions generally become effective in June of each year.
For purposes of determining the executive officers' salaries effective June
2004, the Committee considered the improvement in the Company's results in
relation to the Company's peers, the metals recycling and steel industries in
general, economic conditions and executive performance.
ANNUAL BONUSES
During fiscal 2001, the Company adopted the Schnitzer Steel Industries, Inc.
Economic Value Added Bonus Plan (the Plan). The Plan provides for cash awards
based on Company performance measured by Economic Value Added (EVA(R)). EVA is a
measure of adjusted operating profit after deductions for income taxes and the
estimated weighted average cost of the Company's debt and equity capital. The
EVA bonus plan is based on three key concepts: 1) an individual's target bonus,
2) a bonus multiple based on the calculated variance from expected EVA, which is
based upon the prior year's actual EVA plus a pre-determined improvement factor
and 3) an individual's bonus bank. Target bonuses are stated as a percentage of
the annual salary for each executive officer. The target bonuses for the
executive officers were developed in part from recommendations of the
consultants engaged to assist the Company in implementing the Plan. The expected
EVA improvement from year to year is a fixed amount that is adjusted only when
significant changes in the Company's capital structure or business occur or
during periodic plan recalibrations. The executive officers' bonus declarations
under the Plan will be greater than their stated target bonuses if the Company's
EVA exceeds the predetermined EVA, i.e., the prior year's EVA plus the expected
EVA improvement. Likewise, bonus declarations will be lower than the target, and
can be negative, if the Company's EVA results are less than the expected EVA.
Positive bonus declarations are limited to 300% of target, and negative bonus
declarations are limited to 100% of target, except that these limits do not
apply to executives of the Company's steel manufacturing subsidiary. Under the
Plan, bonus declarations for individuals are credited to their bonus banks. The
bonus actually paid to an individual for a fiscal year is equal to the amount of
the bonus bank balance, up to the target bonus for that fiscal year, plus
one-third of the bonus bank balance in excess of the target bonus. If the bonus
bank balance is negative, up to 50% of any positive bonus declaration is applied
to reduce the negative balance, with the remainder of the positive bonus
declaration being paid currently. Bonuses may be based on the performance of
specified EVA centers and/or the consolidated EVA results of the Company. The
EVA centers represent various geographic areas or divisions within the Company.
While the EVA bonuses for certain executive officers are based solely on the
consolidated EVA results of the Company, other officers' bonuses are based
partially on the results of the EVA center for which they have primary
responsibility and partially on the consolidated EVA results of the Company.
12
The Committee believes that EVA provides the best operating performance measure
of shareholder returns in excess of the cost of capital.
The bonus amounts paid to the Chief Executive Officer and the other Named
Executive Officers under the Plan for fiscal 2004 are shown in the Summary
Compensation Table.
STOCK OPTIONS
The stock option program is the Company's principal long-term incentive plan for
executive officers. The objectives of the stock option program are to align
executive and shareholder long-term interests by creating a strong and direct
link between executive compensation and shareholder return, and to create
incentives for executives to remain with the Company for the long term. Options
are awarded with an exercise price equal to the market price of Class A Common
Stock on the date of grant and typically have a term of 10 years.
The Committee has implemented an annual option grant program. Annual awards to
the top five executive officers are normally made based on grant guidelines
expressed as a percentage of salary. Option grants to executives related to
fiscal 2004 performance did not occur until October 2004 and therefore fell in
fiscal 2005.
Section 162(m) of the Internal Revenue Code of 1986 limits to $1,000,000 per
person the amount that the Company may deduct for compensation paid to any of
its most highly compensated officers in any year. In the past, the levels of
salary and bonus paid by the Company have not exceeded this limit. In 2003 and
2004, due to the Company's exceptional financial performance, the salary and
bonus paid to Mr. Philip exceeded $1,000,000. To address future deductibility of
bonus compensation under Section 162(m), the Board of Directors has adopted, and
submitted to the shareholders for approval, the Executive Annual Bonus Plan. See
"Approval of Executive Annual Bonus Plan." Under IRS regulations, the $1,000,000
cap on deductibility will not apply to compensation received through the
exercise of a nonqualified stock option that meets certain requirements. This
option exercise compensation is equal to the excess of the market price at the
time of exercise over the option price and, unless limited by Section 162(m), is
generally deductible by the Company. It is the Company's current policy
generally to grant options that meet the requirements of the IRS regulations.
13
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Philip was paid a base salary of $575,000 in fiscal 2004, reflecting an
increase of approximately 4% over fiscal 2003. When setting the base salary, the
Committee took into account the following:
o Comparison of base salaries, perquisites and incentives for Chief Executive
Officers of peer companies,
o The Company's improving financial performance,
o The assessment by the Committee of Mr. Philip's individual performance and
contributions, and
o Current economic conditions.
The Committee believes that Mr. Philip's annual base salary falls within the
competitive range of salaries for similar positions at similar companies.
Mr. Philip's participation in the EVA-based bonus plan for the last fiscal year
was tied to the Company's achievement of pre-established EVA target levels. The
Company's fiscal 2004 EVA performance was significantly higher than the
pre-established target resulting in a payout of $1,138,214.
COMPENSATION COMMITTEE
Ralph R. Shaw, Chair
Robert S. Ball
William A. Furman
REPORT OF THE AUDIT COMMITTEE
The Audit Committee has:
- Reviewed and discussed the audited financial statements with
management.
- Discussed with the independent auditors the matters required to be
communicated by SAS 61.
- Received the written disclosures and the letter from the Company's
independent auditors required by Independence Standards Board Standard
No. 1, and has discussed with the independent auditors the auditors'
independence.
- Based on the review and discussions above, recommended to the Board of
Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-K for the last fiscal year for
filing with the Securities and Exchange Commission.
AUDIT COMMITTEE
Ralph R. Shaw, Chair
Robert S. Ball
William A. Furman
14
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total shareholder
return on the Company's Common Stock with the cumulative total return of the
Standard & Poor's 500 Stock Index and the Standard & Poor's Iron and Steel
Industry Group Index for the period commencing on August 31, 1999 and ending on
August 31, 2004. The graph assumes that $100 was invested in the Company's
Common Stock and each index on August 31, 1999, and that all dividends were
reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
----------------------------------------------------------------------------------------------
8/31/99 8/31/00 8/31/01 8/31/02 8/31/03 8/31/04
---------------------------------- --------- --------- --------- --------- --------- ---------
Schnitzer Steel Industries, Inc. 100.00 84.10 74.73 110.56 292.50 498.32
---------------------------------- --------- --------- --------- --------- --------- ---------
Standard & Poors 500 Index 100.00 116.32 87.95 72.12 80.83 90.09
---------------------------------- --------- --------- --------- --------- --------- ---------
Standard & Poors Steel Index 100.00 70.10 82.72 75.24 79.70 135.96
----------------------------------------------------------------------------------------------
APPROVAL OF EXECUTIVE ANNUAL BONUS PLAN
Section 162(m) of the Internal Revenue Code of 1986 limits to $1,000,000 per
person the amount that the Company may deduct for compensation paid to any of
its five most highly compensated officers in any year. Section 162(m), however,
exempts from this deductibility limit compensation that qualifies as
"performance-based compensation" as defined in regulations. In the past, the
levels of salary and bonus paid by the Company have not exceeded the $1,000,000
limit. In 2003 and 2004, due to the Company's exceptional financial performance,
the salary and bonus paid to the Company's Chief Executive Officer exceeded
$1,000,000, and the excess was not deductible.
To address the issue of deductibility of executive compensation, the Board of
Directors has adopted the Executive Annual Bonus Plan (the "Plan") and submitted
the Plan to the shareholders for approval. The purpose of the Plan is to enable
the Company to qualify annual bonuses it pays as "performance-based
compensation" that will be fully deductible by the Company notwithstanding the
$1,000,000 limit of Section 162(m). The Plan does not replace the Company's
existing Economic Value Added Bonus Plan (the "EVA Plan"), but instead is
intended to be a shareholder-approved vehicle under which bonuses paid to Plan
participants pursuant to the specific terms of the EVA Plan or other future
bonus programs may qualify as fully deductible "performance-based compensation."
The following summary of the Plan is qualified in its entirety by reference to
the terms of the Plan, a copy of which is attached as Exhibit B to this proxy
statement.
15
DESCRIPTION OF THE PLAN
ADMINISTRATION. The establishment of performance goals and related bonus
opportunities under the Plan and all other decisions regarding the
administration of the Plan will be made by the Compensation Committee of the
Board of Directors (the "Committee"), which shall be comprised solely of two or
more "outside directors" as that term is defined in regulations under Section
162(m).
PLAN PARTICIPANTS. Initially, the sole participant in the Plan will be the
Company's Chief Executive Officer (the "CEO"), as he is the only Company
employee whose total salary and bonus has exceeded, or even approached,
$1,000,000. The Committee may designate any other executive officer of the
Company as a Plan participant for any fiscal year at the time of establishment
of performance goals for that year. The Company currently has six executive
officers, including the CEO. Executive officers and other employees who are not
Plan participants will continue to be eligible to receive annual bonuses under
the EVA Plan or other arrangements, but those bonuses will not qualify as
"performance-based compensation" under Section 162(m).
PERFORMANCE GOALS AND BONUS OPPORTUNITIES. To make an award under the Plan, the
Committee shall, no later than 90 days after the beginning of a fiscal year of
the Company, establish for each participant the performance goals for the year
and the amount, or the formula for determining the amount, of cash bonus to be
paid or accrued for the participant based on achievement of the performance
goals for the year. The performance goals shall be one or more targeted levels
of performance of the Company or any subsidiary, division or other unit of the
Company with respect to one or more of the following objective measures:
economic value added (adjusted operating income after taxes less a capital
charge), earnings, earnings per share, stock price increase, total shareholder
return (stock price increase plus dividends), return on equity, return on
assets, return on capital, revenues, gross margin, operating income,
inventories, inventory turns, cash flows or any of the foregoing before the
effect of acquisitions, divestitures, accounting changes, and restructuring and
special charges (determined according to criteria established by the Committee).
CERTIFICATION OF BONUSES. Following the conclusion of any fiscal year, prior to
the payment of any cash bonuses under the Plan with respect to that year, the
Committee shall certify in writing the attainment of the performance goals for
the year and the calculation of the bonus amounts. No bonus shall be paid or
accrued if the related performance goal is not met.
MAXIMUM BONUS. The maximum cash bonus that may be paid or accrued for any
participant with respect to performance of the Company in any fiscal year shall
be $2,500,000.
AMENDMENT AND TERMINATION. The Plan may be amended or terminated by the Board of
Directors at any time except to the extent that an amendment requires
shareholder approval to maintain the qualification of Plan awards as
performance-based compensation. Unless reapproved by the shareholders, the Plan
will terminate at the first meeting of shareholders of the Company in 2010.
EVA PLAN AND PREVIOUSLY ESTABLISHED PERFORMANCE GOALS
Since 2001, the EVA Plan has been the Company's annual bonus program for
executive officers and other management employees. Economic value added ("EVA")
is a measure of adjusted operating profit after deductions for income taxes and
the estimated weighted average cost of the Company's debt and equity capital.
Under the EVA Plan, a target bonus declaration stated as a percentage of annual
salary is established for each executive officer each year. Based on the
Company's EVA performance for the year, a bonus declaration is calculated which
for most executives may range from up to 300% of target to as low as negative
100% of target. The bonus declaration is then credited to the executive's bonus
bank under the EVA Plan, with the actual bonus payment for the year being paid
from the bonus bank in an amount up to 100% of the target bonus plus one-third
of any remaining balance of the bonus bank. The balance, if any, in the bonus
bank is carried forward to the next year.
As described above, the sole initial participant in the Plan is Robert W.
Philip, the Company's CEO. EVA performance targets and a target bonus
declaration have been established for Mr. Philip for fiscal 2005. In addition,
after payment of his fiscal 2004 bonus, Mr. Philip had $1,135,701 in his bonus
bank as a result of bonus declarations in 2004 and prior years. The Company has
not determined whether the bonus declarations for Mr. Philip in 2005
16
and prior years have been established and administered in a manner that will
permit those amounts to qualify as fully deductible "performance-based
compensation." However, shareholder approval of the Plan is intended to enable
the Company to fully deduct amounts subsequently paid to Mr. Philip from his
existing bonus bank and fiscal 2005 bonus declaration to the fullest extent
those amounts otherwise meet the requirements for qualification as
"performance-based compensation." If the shareholders do not approve the Plan,
these amounts will not be paid.
EVA performance targets and target bonus declarations have also been established
for the Company's other executive officers for fiscal 2005. The actual amounts
to be paid under those awards cannot be determined at this time, as such amounts
are dependent upon the Company's performance for the current fiscal year. The
following table shows the bonus declaration and actual bonus payment for fiscal
2004 for each Named Executive Officer and for all current executive officers as
a group:
================================================================================
FY 2004 FY 2004
NAME AND POSITION EVA BONUS DECLARATION EVA BONUS PAID
--------------------------------------- ----------------------- ----------------
Robert W. Philip
Chairman, Chief Executive
Officer and President $1,711,092 $1,138,214
--------------------------------------- ----------------------- ----------------
Gary Schnitzer
Executive Vice President 507,216 323,616
--------------------------------------- ----------------------- ----------------
Kurt C. Zetzsche
President, Cascade Steel
Rolling Mills, Inc. 555,271 294,952
--------------------------------------- ----------------------- ----------------
Barry A. Rosen
Vice President, Finance and
Chief Financial Officer 473,660 307,496
--------------------------------------- ----------------------- ----------------
Jay Robinovitz
Vice President 231,785 151,292
--------------------------------------- ----------------------- ----------------
Current executive officers
as a group (Six persons) 3,394,518 2,206,072
================================================================================
VOTE REQUIRED TO APPROVE THE PLAN
Holders of Class A Common Stock and Class B Common Stock will vote together as a
single class on the proposed Plan. The Plan will be approved if the votes cast
in favor of the Plan exceed the votes cast against the Plan. Accordingly,
abstentions and broker non-votes will have no effect on the results of the vote.
The proxies will be voted for or against the Plan or as an abstention in
accordance with the instructions specified on the proxy form. If no instructions
are given, proxies will be voted in favor of the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE PROPOSED PLAN.
17
INDEPENDENT AUDITORS
The Audit Committee has selected PricewaterhouseCoopers LLP as independent
auditors for the Company for the fiscal year ending August 31, 2005. A
representative of PricewaterhouseCoopers LLP is expected to be present at the
annual meeting. Such representative will have the opportunity to make a
statement if he desires to do so and will be available to respond to appropriate
questions.
Aggregate fees billed by the Company's principal accountants,
PricewaterhouseCoopers LLP, for audit services related to the most recent two
fiscal years, and for other professional services billed in the most recent two
fiscal years, were as follows:
Fiscal 2004 Fiscal 2003
----------- -----------
Audit Fees (1) $ 352,200 $ 297,250
Audit-Related Fees (2) 68,906 52,671
Tax Fees (3) 148,550 71,679
All Other Fees 16,400 --
--------- ---------
Total $ 586,056 $ 421,600
========= =========
(1) Comprised of the audit of the Company's annual financial statements and
reviews of the Company's quarterly financial statements, as well as
consents related to and reviews of other documents filed with the
Securities and Exchange Commission.
(2) Comprised of acquisition due diligence and consultations regarding
internal controls and financial accounting and reporting, including
services related to the Company's compliance with the Sarbanes-Oxley Act
of 2002.
(3) Comprised of services for tax compliance, tax return preparation, tax
advice and tax planning.
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
by the Company's independent accountants must be approved in advance by the
Audit Committee to assure that such services do not impair the accountants'
independence from the Company. Accordingly, the Audit Committee has adopted an
Audit and Non-Audit Services Pre-Approval Policy (the "Policy") which sets forth
the procedures and the conditions pursuant to which services to be performed by
the independent accountants are to be pre-approved. Pursuant to the Policy,
certain services described in detail in the Policy may be pre-approved on an
annual basis together with pre-approved maximum fee levels for such services.
The services eligible for annual pre-approval consist of services that would be
included under the categories of Audit Fees, Audit-Related Fees and Tax Fees in
the above table as well as services for limited review of actuarial reports and
calculations. If not pre-approved on an annual basis, proposed services must
otherwise be separately approved prior to being performed by the independent
accountants. In addition, any services that receive annual pre-approval but
exceed the pre-approved maximum fee level also will require separate approval by
the Audit Committee prior to being performed. The Audit Committee may delegate
authority to pre-approve audit and non-audit services to any member of the Audit
Committee, but may not delegate such authority to management.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during fiscal 2004 all of
its officers, directors and 10% shareholders complied with all applicable
Section 16(a) filing requirements, except that the following individuals filed
the indicated number of late reports and total number of late transactions:
Kenneth and Deborah Novack - two late reports with three late transactions; Dori
Schnitzer - one late report with thirteen late transactions; Laura Freidman -
one late report with one late transaction; Gilbert Schnitzer - two late reports
with three late transactions; Danielle Nye - one late report with one late
transaction; David Easly - one late report with
18
one late transaction; Robert and Rita Philip - two late reports with six late
transactions; Gayle Romain - two late reports with two late transactions.
SHAREHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
Any proposal by a shareholder of the Company to be considered for inclusion in
proxy materials for the Company's 2006 Annual Meeting of Shareholders must be
received in proper form by the Company at its principal office no later than
August 31, 2005.
DISCRETIONARY AUTHORITY
Although the Notice of Annual Meeting of Shareholders provides for transaction
of any other business that properly comes before the meeting, the Board of
Directors has no knowledge of any matters to be presented at the meeting other
than the matters described in this Proxy Statement. The enclosed proxy, however,
gives discretionary authority to the proxy holders to vote in accordance with
their judgment if any other matters are presented.
For the 2006 Annual Meeting of Shareholders, unless notice of a shareholder
proposal to be raised at the meeting without inclusion in the Company's proxy
materials is received by the Company at its principal office prior to November
14, 2005, proxy voting on that proposal at the Annual Meeting will be subject to
the discretionary voting authority of the Company's designated proxy holders. If
timely notice is received by the Company, the designated proxy holders may still
have discretionary voting authority over the proposal depending upon compliance
by the Company and the proponents with certain requirements set forth in rules
of the Securities and Exchange Commission.
GENERAL
The cost of preparing, printing and mailing this Proxy Statement and of the
solicitation of proxies by the Company will be borne by the Company.
Solicitation will be made by mail and, in addition, may be made by directors,
officers and employees of the Company personally, or by telephone or telegram.
The Company will request brokers, custodians, nominees and other like parties to
forward copies of proxy materials to beneficial owners of stock and will
reimburse such parties for their reasonable and customary charges or expenses in
this connection.
THE COMPANY WILL PROVIDE TO ANY PERSON WHOSE PROXY IS SOLICITED BY THIS PROXY
STATEMENT, WITHOUT CHARGE, UPON WRITTEN REQUEST TO ITS CORPORATE SECRETARY, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
AUGUST 31, 2004.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, SHAREHOLDERS WHO
DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO EXECUTE AND RETURN
THE ENCLOSED PROXY IN THE REPLY ENVELOPE PROVIDED.
By Order of the Board of Directors,
/s/ Ilene Dobrow Davidson
Secretary
December 29, 2004
19
EXHIBIT A
SCHNITZER STEEL INDUSTRIES, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
1. Overall Purpose
The primary purpose of the Audit Committee (the "Committee") is to oversee
the accounting and financial reporting processes of the Company and the
audits of the financial statements of the Company, appoint the Company's
independent accountants, and to otherwise assist the Board of Directors
(the "Board") in achieving its oversight responsibilities in the following
areas:
o Overseeing that management has maintained the reliability and
integrity of the accounting policies and financial reporting and
disclosure practices of the Company;
o Overseeing that management has established and maintained processes to
ensure that an adequate system of internal control is functioning
within the Company;
2. Composition
The Committee shall be comprised of three or more directors as determined
by the Board, each of whom shall be an independent director, and free from
any relationship that, in the opinion of the Board, would interfere with
the exercise of his or her independent judgment as a member of the
Committee. The directors' independence shall further be determined in
accordance with NASDAQ's independent director listing standards. All
directors who are members of the Audit Committee must be able to read and
understand fundamental financial statements. At least one member of the
Committee must have past employment experience in finance or accounting,
requisite professional certification in accounting, or any other comparable
experience or background which results in the individual's financial
sophistication, including a current or past position as a chief executive
officer, chief financial officer or other senior officer with financial
oversight responsibilities.
The members of the Committee shall be elected by the Board at the annual
meeting of the Board and shall serve until their successors shall be duly
elected and qualified. Unless a Chair is elected by the full Board, the
members of the committee may designate a Chair by majority vote of the full
Committee membership.
3. Meetings
The Committee shall meet at least four times annually, or more frequently
as circumstances dictate. As part of its job to foster open communication,
the Committee should meet at least annually with management, the internal
audit director and the independent accountants in separate executive
sessions to discuss any matters that the Committee or each of these groups
believes should be discussed privately. In addition, the Committee or at
least its Chair should meet (telephonically or in person) with the
independent accountants and management quarterly to review the Company's
financials.
4. Activities
In fulfilling its overall purpose, the Committee shall schedule and carry
out the following activities as designated or required. The broad areas of
activities include:
o General
o Reporting
o Independent Accountants
o Internal Audit
20
------------------------------------------------------------------------------------------------------------
Timing
--------------------------------------------------------------- --------------------------------------------
All As
Activities Meetings Required Quarterly Annually
--------------------------------------------------------------- ---------- ---------- ----------- ----------
Area: GENERAL
1. Determine that each Committee member is independent and X
free from any relationships that would interfere with
the exercise of his or her judgment as a member of the
Committee. Definition of independence excludes
directors who have any relationship with the Company
that precludes a finding of independence under NASDAQ
rules.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
2. Determine that all members of the Committee are able to X
read and understand fundamental financial statements
and that at least one member of the Committee has past
employment experience in finance or accounting,
requisite professional certification in accounting, or
any other comparable experience or background which
results in the individual's financial sophistication,
including a current or past position as a chief
executive officer, chief financial officer or other
senior officer with financial oversight
responsibilities. Determine whether this last member
also meets the definition of "audit committee financial
expert" contained in SEC Regulation S-K, Item 401(h).
--------------------------------------------------------------- ---------- ---------- ----------- ----------
3. Review and update this Charter periodically, at least X
annually, as conditions dictate. Full Board approval is
required for adoption as well as significant changes to
the Charter.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
4. Submit the minutes of all meetings of the Committee to, X
or discuss the matters discussed at each meeting with
the full Board.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
5. The Committee shall have the power to conduct or X
authorize investigations into any matters within the
Committee's scope of responsibilities. The Committee X
shall have authority to engage independent legal,
accounting and other advisers, as it determines
necessary to carry out its duties. The Company will pay
all compensation of such advisers approved by the
Committee as well as all other ordinary administrative
expenses of the Committee that are necessary or
appropriate to carry out its duties.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
6. Establish and maintain procedures for: X
o the receipt, retention and treatment of complaints
received by the issuer regarding accounting, internal
accounting controls or auditing matters, and
o the confidential, anonymous submission by employees
of the issuer of concerns regarding questionable
accounting or auditing matters.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
7. Review and approve all related party transactions X
proposed to be entered into by the Company. For this
purpose, the term "related party transaction" shall
refer to any transaction required to be disclosed
pursuant to SEC Regulation S-K, Item 404.
------------------------------------------------------------------------------------------------------------
21
------------------------------------------------------------------------------------------------------------
Timing
--------------------------------------------------------------- --------------------------------------------
All As
Activities Meetings Required Quarterly Annually
--------------------------------------------------------------- ---------- ---------- ----------- ----------
Area: REPORTING
1. Review the Company's annual financial statements, X
including any report rendered by the Company's
independent public accountants (the "IPA").
--------------------------------------------------------------- ---------- ---------- ----------- ----------
2. Review with management and the Company's IPA the X
applicability and impact of any new pronouncements
issued by FASB or other applicable regulatory agencies.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
3. Publish the written Charter in the annual Proxy X
Statement as and when required by SEC rules.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
4. Prepare a report to shareholders for inclusion in the X
annual Proxy Statement. In addition to listing the
names of each Committee member and X indication whether
its members are independent, the report should state
that the Committee has:
o Adopted a written charter for the Committee;
o Reviewed the financial statements with management;
o Discussed with the IPA the matters required to be
discussed by Statement on Auditing Standards No. 61;
o Received from the IPA disclosures regarding their
independence required by Independence Standards
Board Standard No. 1 and discussed with the IPA
their independence;
o Based on the review and discussions noted above,
the Committee recommended to the Board that the
audited financial statements be included in the
Company's Annual Report on Form 10-K for the last
filing year with the SEC.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
5. Meet with (telephonic or in person) financial X
management following the completion of the IPA's SAS
#71 interim financial review and prior to the Form
10-Q filing/release of earnings.
------------------------------------------------------------------------------------------------------------
22
------------------------------------------------------------------------------------------------------------
Timing
--------------------------------------------------------------- --------------------------------------------
All As
Activities Meetings Required Quarterly Annually
--------------------------------------------------------------- ---------- ---------- ----------- ----------
Area: INDEPENDENT ACCOUNTANTS
1. Be directly responsible for the appointment, X
compensation, retention and oversight of the IPA
engaged for the audit of the Company's annual financial
statements and related services. The IPA shall report
directly to the Committee. The Committee shall resolve
any disagreements between the IPA and management
regarding financial reporting.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
2. Pre-approve all audit services and permissible X
non-audit services to be performed by the IPA for the
Company, including the fees and other terms of all such
engagements. Alternatively, the Committee may establish
pre-approval policies and procedures in accordance with
applicable SEC rules.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
3. Review with the IPA the scope of their examinations of X
the books and records of the Company and its
subsidiaries and direct the special attention of the
IPA to specific matters or areas deemed by the
Committee or the internal auditors to be of special
significance; authorize them to perform such
supplemental reviews or audits as the Committee may
deem desirable.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
4. On an annual basis, receive a formal written statement X
from the IPA as to all significant relationships the
IPA has with the corporation to determine the IPA's
independence. Discuss any disclosed relationships or
services that may impact the IPA's independence. It is
the Committee's responsibility to oversee the
independence of the IPA.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
5. Review with management and the IPA their qualitative X
judgments about the appropriateness, not just the
acceptability, of accounting principles and financial
disclosure practices used or proposed and,
particularly, about the degree of aggressiveness or
conservatism of its accounting principles and
underlying estimates.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
6. Review with management and the IPA at the completion of X
their audit:
o The existence of any fraud or illegal acts that the
IPA may have become X aware of;
o Any significant deficiencies in the design or
operation of internal controls noted during the
audit;
o Selection of and changes in significant accounting
policies or their application;
o Process used by management in making significant
accounting judgments or estimates;
o Significant audit adjustments;
o Review by the IPA of other information in the
audited financial statements;
o Disagreements with management;
o Consultation, if any, with other auditors on
significant accounting matters;
o Serious difficulties encountered during the audit.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
7. Consider recommendations from the IPA regarding X
internal controls, information technology controls and
security and other matters relating to the Company and
its subsidiaries and reviewing the correction of
controls or processes deemed in need of improvement.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
8. Provide sufficient opportunity for the IPA to meet with X
the members of the Committee without members of
management present. Among the items to be discussed in
these meetings are the IPA's evaluation of the
Company's financial, accounting, and auditing
personnel, and the cooperation that the IPA received
during the course of the audit.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
9. Meet with IPA quarterly to review the Company's X X
financials and at least annually a private session
should occur to discuss other matters.
------------------------------------------------------------------------------------------------------------
23
------------------------------------------------------------------------------------------------------------
Timing
--------------------------------------------------------------- --------------------------------------------
All As
Activities Meetings Required Quarterly Annually
--------------------------------------------------------------- ---------- ---------- ----------- ----------
Area: INTERNAL AUDIT
1. Review and approve the selection and compensation of X
the Director of Internal Audit (Director). It should be
clear to the Director that the ultimate accountability
is to the Board and the Committee as representatives of
the shareholders.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
2. Review the Internal Audit Charter and amend as needed. X
--------------------------------------------------------------- ---------- ---------- ----------- ----------
3. Review the annual risk assessment to determine and X
approve the annual X internal audit plan. This would
include special attention to specific matters or areas
deemed appropriate by the Committee or the IPA to be of
special significance; authorize them to perform such
supplemental reviews or audits as the Committee may
deem desirable.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
4. Review status of the annual audit plan to ascertain X
progress against the plan, changes made to the plan or
other circumstances that have altered the audit plan.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
5. Review resources available to the Director to enable X
internal audit to execute the adopted plan. Make
appropriate inquiries of management and the Director to
determine whether there is scope or budgetary
limitations that impede the ability of Internal Audit
to execute its responsibilities.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
6. Review internal audit reports issued. Consider X
recommendations regarding X internal controls,
information technology controls, security, process
improvements and other matters relating to the Company
and its subsidiaries and reviewing the correction of
controls or processes deemed in need of improvement.
Support implementation of all recommendations by the
businesses.
--------------------------------------------------------------- ---------- ---------- ----------- ----------
7. Provide sufficient opportunity for the internal X
auditors to meet with the members of the Committee
without members of management present. Among the items
to be discussed in these meetings are the evaluation of
the Company's financial, accounting, and auditing
personnel, and the cooperation that the Director
received during the course of their audits.
------------------------------------------------------------------------------------------------------------
24
EXHIBIT B
SCHNITZER STEEL INDUSTRIES, INC.
EXECUTIVE ANNUAL BONUS PLAN
1. Purpose. Schnitzer Steel Industries, Inc. (the "Company") hereby
establishes the Schnitzer Steel Industries, Inc. Executive Annual Bonus Plan
(the "Plan") with the intent of qualifying compensation paid under the Plan as
"performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986 ("Section 162(m)") and the regulations promulgated
thereunder. The Plan shall be interpreted in a manner consistent with the
foregoing intent.
2. Administration. The Plan shall be administered by the Compensation
Committee (the "Committee") of the Board of Directors of the Company, which
shall be comprised solely of two or more "outside directors" as defined in
regulations promulgated under Section 162(m). The Committee may adopt guidelines
to implement and administer the Plan.
3. Plan Participants. The participants in the Plan (the "Participants")
shall be the Chief Executive Officer (the "CEO") of the Company and such other
executive officers of the Company as may be designated in writing by the
Committee at the time of the establishment of Performance Goals for any fiscal
year. Other executives and employees of the Company may receive bonuses on terms
similar to the terms of bonuses paid to Participants under the Plan, but those
bonuses shall not be covered by the Plan and, therefore, shall not qualify as
performance-based compensation under Section 162(m).
4. Performance Goals.
(a) To make an award under the Plan, the Committee shall, no later than 90
days after the beginning of a fiscal year of the Company, establish in writing
the objectives ("Performance Goals") that must be satisfied by the Company or
any subsidiary, division or other unit of the Company ("Business Unit") during
such year as a condition to the payment or accrual of a cash bonus for each
Participant based on performance in that year. The Committee shall also
establish (i) the amounts, or the formula for determining the amounts, of cash
bonuses to be paid or accrued based on achievement of the Performance Goals, and
(ii) the timing of payment and any other conditions to payment of such amounts.
In establishing any Performance Goals, the Committee may, in its sole
discretion, reserve the right to reduce the resulting cash bonuses prior to
payment on such terms as determined by the Committee.
(b) The Performance Goals for each fiscal year shall be one or more
targeted levels of performance with respect to one or more of the following
objective measures with respect to the Company or any Business Unit: economic
value added (adjusted operating income after taxes less a capital charge),
earnings, earnings per share, stock price increase, total shareholder return
(stock price increase plus dividends), return on equity, return on assets,
return on capital, revenues, gross margin, operating income, inventories,
inventory turns, cash flows or any of the foregoing before the effect of
acquisitions, divestitures, accounting changes, and restructuring and special
charges (determined according to criteria established by the Committee).
5. Computation of Bonus. Following the conclusion of any fiscal year, prior
to the payment of any cash bonuses under the Plan with respect to that year, the
Committee shall certify in writing the attainment of the Performance Goals for
the year and the calculation of the bonus amounts. No bonus shall be paid or
accrued if the related Performance Goal is not met.
6. Maximum Bonus. The maximum cash bonus that may be paid or accrued for
any Participant with respect to performance of the Company in any fiscal year
shall be $2,500,000.
7. Effect of Plan on Previously Established Performance Goals. The Plan
shall be submitted for approval by the Company's shareholders at the Annual
Meeting of Shareholders held in 2005. If the Plan is approved by the
shareholders at that meeting, the Plan shall apply to cash bonuses paid to the
CEO after the date of that meeting as a result of achievement of Performance
Goals previously established for fiscal 2005 and prior years, provided that the
establishment and administration of those bonuses was and is otherwise in
accordance with the
25
terms of the Plan and the regulations under Section 162(m). If the Plan is not
approved by the shareholders at that meeting, then any unpaid bonuses resulting
from previously established Performance Goals shall not be paid.
8. Amendment and Termination of Plan. The Board may at any time amend or
terminate the Plan, except that no amendment will be effective without approval
by the Company's shareholders if such approval is necessary to qualify amounts
payable hereunder as performance-based compensation under Section 162(m). Unless
it is re-approved by the shareholders, the Plan shall terminate on the date of
the first shareholder meeting that occurs in the fifth year after the year of
initial approval. No termination of the Plan shall affect Performance Goals and
related awards established by the Committee prior to such termination.
9. No Right of Continued Employment. Nothing in the Plan or any award
pursuant to the Plan shall confer upon any person any right to be continued in
the employment of the Company or any subsidiary.
10. Governing Law. The Plan shall be construed in accordance with and
governed by the laws of the State of Oregon.
26