UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(RULE 14a-101)

 

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934 (Amendment No.     )

 

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o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

A. Schulman, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

Notice is hereby given that the Annual Meeting of Stockholders of A. Schulman, Inc. (the “Corporation”) will be held at The Hilton Inn West, 3180 West Market Street, Akron, Ohio, on Thursday, January 10, 2008 at 10:00 A.M., local time, for the purpose of considering and acting upon the following matters, all of which are more completely set forth in the accompanying Proxy Statement:

 

 

Stockholders of record at the close of business on November 27, 2007 are entitled to notice of and to vote at the Annual Meeting and any adjournments thereof.

 

By order of the Board of Directors

 

Gary J. Elek

  Secretary

 

Akron, Ohio

December 19, 2007

 

 

 

IMPORTANT NOTICE REGARDING DELIVERY OF SECURITY HOLDER DOCUMENTS

 

The Securities and Exchange Commission permits companies to send a single set of annual disclosure documents to any household at which two or more stockholders reside, unless contrary instructions have been received, but only if the Corporation provides advance notice and follows certain procedures. In such cases, such stockholders continue to receive a separate notice of the meeting and proxy card. This “householding” process reduces the volume of duplicate information and reduces printing and mailing expenses. A. Schulman, Inc. (the “Corporation”) has not instituted householding for stockholders of record; however, a limited number of brokerage firms may have instituted householding for beneficial owners of the Corporation’s shares of common stock held through such brokerage firms. If your family has multiple accounts holding shares of common stock of the Corporation, you already may have received householding notification from your broker. Please contact your broker directly if you have any questions or require additional copies of the annual disclosure documents. The broker will arrange for delivery of a separate copy of this Proxy Statement or the Corporation’s Annual Report promptly upon your written or oral request. You may decide at any time to revoke your decision to household, and thereby receive multiple copies.

 

3550 West Market Street
Akron, Ohio 44333

 

 

PROXY STATEMENT

 

December 19, 2007

 

The accompanying proxy is solicited by the Board of Directors of A. Schulman, Inc. (the “Corporation”) for use at the 2007 Annual Meeting of Stockholders to be held on January 10, 2008, at 10:00 A.M., local time, and any adjournments thereof (the “2007 Annual Meeting”).

 

Stockholders of record at the close of business on November 27, 2007 (the record date) will be entitled to vote at the 2007 Annual Meeting. On that date, the Corporation had issued and outstanding 27,954,541 shares of common stock, $1.00 par value (the “Common Stock”). Each such share is entitled to one vote on all matters properly coming before the 2007 Annual Meeting. At least 13,977,271 shares of Common Stock of the Corporation must be represented at the meeting in person or by proxy in order to constitute a quorum for the transaction of business.

 

This Proxy Statement and the accompanying form of proxy were first mailed to stockholders on or about December 19, 2007.

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

In accordance with the provisions of the Corporation’s By-Laws, as amended (the “By-Laws”), and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), the Board of Directors has fixed the number of Directors at twelve. The Directors of the Corporation are currently divided into three classes, and the By-Laws require that, to the extent possible, there be the same number of Directors in each class. In compliance with the By-Laws, there are currently four Directors in each class. The Directors elected at the 2007 Annual Meeting will be elected to serve for three-year terms expiring in 2010 and until their respective successors are duly elected and qualified.

 

Unless a stockholder requests that voting of that stockholder’s proxy be withheld for any one or more of the nominees for Director in accordance with the instructions set forth on the WHITE Proxy Card, it is presently intended that shares represented by proxies in the enclosed form will be voted for the election as Directors of the four Class III nominees named in the table on the following page. All of the members of the Nominating and Corporate Governance Committee have recommended, and the Board of Directors has approved, the nomination of these nominees. Mr. Silverman was recommended to the Nominating and Corporate Governance Committee by the Barington Group pursuant to its rights under the 2007 Agreement. See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS for more information on the Barington Group and the 2007 Agreement.

 

On October 3, 2007, the Corporation received notice from Starboard Value and Opportunity Master Fund Ltd., a Cayman Islands exempted company, of its intent to nominate each of Jeffrey Solomon, Mark Mitchell, Michael Caporale, Jr. and Lee Meyer for election to the Board of Directors of the Corporation at the 2007 Annual Meeting.

 

This year, the Corporation is offering registered stockholders the opportunity to vote their shares electronically through the Internet or by telephone. Instead of submitting your vote by mail on the enclosed WHITE Proxy Card, you may vote by telephone or “online” via the Internet by following the procedures described on your WHITE

Proxy Card. In order to vote online or via telephone, please have the enclosed WHITE Proxy Card in hand, and call the number or go to the website listed on the WHITE Proxy Card and follow the instructions. The telephone and Internet voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their voting instructions and to confirm that stockholders’ instructions have been recorded properly. Stockholders voting through the Internet should understand that they may bear certain costs associated with Internet access, such as usage charges from Internet access providers and telephone companies. If you hold your shares in “street-name” through a broker, you may also be able to vote by telephone or online by following the instructions in the materials delivered to you.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THESE NOMINEES.

 

All nominees have consented to being named in this Proxy Statement and to serve if elected. Should any nominee subsequently decline or be unable to accept such nomination to serve as a Director, an event that the Board of Directors does not now expect, the persons voting the shares represented by proxies solicited hereby may vote such shares for a reduced number of nominees. The election of the Director nominees requires the favorable vote of a plurality of all votes cast by the holders of the Common Stock at a meeting at which a quorum is present. Broker non-votes and proxies marked “Withhold Authority” will not be counted toward the election of Directors or toward the election of individual nominees specified in the form of proxy and, thus, will have no effect other than that they will be counted for establishing a quorum.

 

The following information concerning each nominee and each Director continuing in office is based in part on information received from the respective nominees and Directors and in part from the Corporation’s records.

 

 

 

 

Mr. Haines is a director of FirstMerit Corporation and Ameron International Corporation. Mr. Karman is a director of RPM International, Inc. Mr. Marlen is a director of Ameron International Corporation and Parsons Corporation. Mr. Novak is a director of BorgWarner Inc. and FirstEnergy Corp. Mr. Yasinsky is a director of CMS Energy Corporation and Consumers Energy Co. Mr. Mitarotonda is a director of The Pep Boys — Manny, Moe & Jack and Griffon Corporation. Mr. Birney is a director of Tronox, Inc. Mr. McManus is a director of American Home Mortgage Investment Corp., Novavax, Inc. and Misonix, Inc. Mr. Silverman is a director of C&D Technologies, Inc.

 

In August of 2002, Uniroyal Technical Corporation (“UTC”), of which Mr. Curd was Chairman, Chief Executive Officer and a director, filed for reorganization under Chapter 11 of the Bankruptcy Code (11 U.S.C. 1101 et seq.). In October 2003, Mr. Curd purchased the assets of Uniroyal Engineered Products from UTC through a Section 363 sale process at which time Mr. Curd resigned his positions with UTC and became Chairman and Chief Executive Officer of the acquiring company, Uniroyal Engineered Products, LLC.

 

Attendance at Meetings

 

The Board of Directors held 11 meetings during the year ended August 31, 2007. All incumbent Directors attended at least 75% of the total of all meetings of the Board of Directors and any committees thereof on which such Director served during the year. In accordance with the Corporation’s Corporate Governance Guidelines for the Board of Directors, Directors are expected to attend all meetings of the Board of Directors (although it is understood that, on occasion, a Director may not be able to attend a meeting). Directors are encouraged to attend the Annual Meeting of Stockholders. All of the members of the Board of Directors attended the Annual Meeting of Stockholders held on December 7, 2006.

 

CORPORATE GOVERNANCE

 

The Board of Directors has long followed, both formally and informally, corporate governance principles designed to assure that the Board, through its membership, composition and committee structure, is able to provide informed, competent and independent oversight of the Corporation.

 

Corporate Governance Guidelines

 

The Board of Directors has adopted the Corporation’s Corporate Governance Guidelines. These Corporate Governance Guidelines, which are available on the Corporation’s website at www.aschulman.com, are intended to assure that the Director qualifications, Committee structure and overall Board processes provide good corporate governance and independent oversight of the Corporation’s management.

 

Director Independence

 

Under the corporate governance listing standards of The Nasdaq Stock Market LLC (sometimes referred to as “NASDAQ”) and the Corporate Governance Guidelines, a majority of the members of the Board of Directors must satisfy NASDAQ’s criteria for “independence.” The Board has determined that the Directors and Nominees named below, which are all Directors other than Mr. Haines, are independent under applicable NASDAQ standards for the fiscal year ending August 31, 2007.

 

 

As of December 17, 2007, Mr. Gingo is no longer an independent director as a result of his appointment, effective January 1, 2008, as the Corporation’s President and Chief Executive Officer.

 

Board Committees

 

The Board of Directors has established the following standing Committees: Executive Committee, Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee.

Executive Committee

 

The Executive Committee is authorized to act on behalf of the Board of Directors on all corporate actions for which applicable law does not require participation by the full Board of Directors. In practice, the Executive Committee acts in place of the full Board of Directors only when emergency issues or scheduling make it difficult or impracticable to assemble the full Board of Directors. All actions taken by the Executive Committee must be reported at the next Board meeting. The Executive Committee held no formal meetings during the year ended August 31, 2007.

 

Audit Committee

 

The Audit Committee operates under a written charter that reflects the corporate governance reforms embodied by the Securities and Exchange Commission (the “SEC”) and the rules and listing standards of NASDAQ. The Audit Committee consists of Messrs. Novak (Chair), Holland, Karman, Marlen, Mitarotonda, and Yasinsky. The primary purpose of the Audit Committee is to assist the Board in fulfilling its responsibility to oversee the accounting and financial reporting process of the Corporation, including the quality and integrity of the Corporation’s financial statements and other financial information provided by the Corporation to any governmental or regulatory body, the public or other users thereof; the Corporation’s compliance with legal and regulatory requirements; the qualifications, independence and performance of, and the Corporation’s relationship with, its independent registered public accounting firm; the performance of the Corporation’s systems of internal accounting and financial controls; the performance of the Corporation’s systems of internal auditing; and the annual independent audit of the Corporation’s financial statements and effectiveness of its internal control over financial reporting. The functions performed by the Audit Committee include (i) reviewing the financial statements with management and the independent registered public accounting firm before publication; (ii) reviewing with management and the independent registered public accounting firm significant financial reporting issues and judgments made in connection with the preparation of the Corporation’s financial statements; (iii) reviewing with the Chief Executive Officer and the Chief Financial Officer any issues pertaining to the certifications required to accompany the filing of the Corporation’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, and any other information required to be disclosed in connection therewith; (iv) overseeing the Corporation’s internal accounting and financial controls; (v) reviewing legal matters that may have a material impact on the Corporation’s financial statements or the Corporation’s compliance policies; (vi) establishing procedures for the proper handling of complaints concerning accounting or auditing matters; (vii) considering the compatibility of the independent registered public accounting firm non-audit services with the independent registered public accounting firm’s independence; (viii) reviewing and approving in advance the annual audit plan and scope of work of the independent registered public accounting firm and reviewing with the independent registered public accounting firm any audit-related concerns and management’s response; (ix) being directly responsible for the appointment, compensation, retention and oversight of the Corporation’s independent registered public accounting firm; (x) pre-approving all auditing services and permitted non-audit services to be performed for the Corporation by the independent registered public accounting firm; and (xi) reviewing all transactions that are required to be reported under item 404(a) of Regulation S-K. Additionally, the Audit Committee oversees the Corporation’s program to comply with Section 404 of Sarbanes-Oxley, which requires the Corporation to establish, maintain and assess adequate internal control structures and procedures for financial reporting.

 

NASDAQ rules require each member of the Audit Committee to be able to read and understand financial statements. The Corporation believes that each member of the Audit Committee as constituted satisfies this requirement. Members of the Committee rely, without independent verification, on the information provided to them and on the representations made by management and the Corporation’s independent registered public accounting firm, although each member of the Audit Committee has the authority to engage and determine funding for independent advisors as deemed necessary. Furthermore, the Audit Committee’s considerations and discussions do not assure that the audit of the Corporation’s financial statements has been carried out in accordance with the standards of the Public Company Accounting Oversight Board (United States), that the financial statements are presented in accordance with the accounting principles generally accepted in the United States or that the Corporation’s independent registered public accounting firm is in fact “independent.” A more complete description of these and other Audit Committee functions is contained in the Audit Committee’s Charter, a copy of which is available on the Corporation’s website at www.aschulman.com.

The Audit Committee held a total of 6 meetings during the year ended August 31, 2007. The Audit Committee reviewed with PricewaterhouseCoopers LLP and the Corporation’s management the Corporation’s interim financial results prior to the filing of each of the Corporation’s Quarterly Reports on Form 10-Q. The Board has determined that each of the members of the Audit Committee is independent as defined under Rule 4200(a)(15) and Rule 4350(d) of the NASDAQ listing standards. The Board has also determined that the Chair of the Audit Committee, Ernest J. Novak, is an “audit committee financial expert” as defined in regulations adopted by the SEC.

 

Compensation Committee

 

The primary purpose of the Compensation Committee is to supervise and, to the extent consistent with the Corporate Governance Guidelines, exercise the powers of the Board of Directors with respect to overseeing the use of corporate assets in compensating executive officers. The Compensation Committee consists of Messrs. Holland (Chair), Birney, Gingo, Karman, McManus and Novak and Dr. Peggy Miller. The Compensation Committee has overall responsibility for executive succession planning (except for the Chief Executive Officer, which is the responsibility of the Nominating and Corporate Governance Committee), management development and approving and evaluating the incentive compensation plans, policies and programs of the Corporation. As set forth in the Compensation Committee’s charter, the functions to be performed by the Compensation Committee include (i) setting the salary and other compensation of the Chief Executive Officer and the other executive officers of the Corporation; (ii) reviewing incentive compensation pools for the Corporation prior to the annual determination of individual cash and equity based incentive awards; (iii) approving all employment or change-in-control severance agreements, annuity contracts and benefit or perquisite plans or programs (other than broad-based employee plans or programs) proposed for executive officers and certain managers; (iv) periodically reviewing the Corporation’s compensation programs and policies to align them with the Corporation’s annual and long-term goals and the interests of the stockholders; and (v) administering, implementing and interpreting the Corporation’s long term incentive plans, including stock option, restricted stock, stock appreciation right, performance incentive, and similar plans and arrangements. A more complete description of these and other Compensation Committee functions is contained in the Compensation Committee’s charter, which is available on the Corporation’s website at www.aschulman.com and the Compensation Discussion and Analysis beginning on page 13 of this Proxy Statement.

 

The Compensation Committee held 6 meetings during the fiscal year ended August 31, 2007. The Board has determined that each of the members of the Compensation Committee is independent as defined under Rule 4200(a)(15) of the NASDAQ listing standards.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee is, or has been, an employee or officer of the Corporation. There are no interlocking relationships between the Corporation and other entities that might affect the determination of the compensation of the Corporation’s executive officers.

 

Nominating and Corporate Governance Committee

 

The primary purpose of the Nominating and Corporate Governance Committee is to identify individuals qualified to become Directors, recommend to the Board the candidates for election by stockholders or appointment by the Board to fill a vacancy, recommend to the Board the composition and Chairs of Board committees, develop and recommend to the Board guidelines for effective corporate governance, and lead an annual review of the performance of the Board and each of its committees. The Nominating and Corporate Governance Committee consists of Dr. Peggy Miller (Chair) and Messrs. Curd, Gingo, Holland, Marlen and Yasinsky. A more complete description of these and other Nominating and Corporate Governance Committee functions is contained in the Nominating and Corporate Governance Committee’s charter, which is available on the Corporation’s website at www.aschulman.com.

 

In its role as the nominating body for the Board, the Nominating and Corporate Governance Committee reviews the credentials of potential Director candidates (including potential candidates recommended by stockholders), conducts interviews and makes formal recommendations to the Board for the annual election or interim appointment of Directors. In making its recommendations, the Committee considers a variety of factors, including

whether the individuals have demonstrated achievements in business, education or public service. In addition, the Committee considers whether candidates for Director possess the requisite intelligence, education and experience to make a significant contribution to the membership of the Board of Directors, and bring a range of skills, diverse perspectives and backgrounds to the deliberations of the Board of Directors. The Board of Directors Candidate Guidelines are attached to the Corporation’s Corporate Governance Guidelines, a copy of which is available on the Corporation’s website at www.aschulman.com. The Committee also considers whether the candidates possess the highest ethical standards and a strong sense of professionalism, are prepared to serve the interests of all the stockholders and are able to make themselves available to the Board of Directors in the fulfillment of their duties. For those Director candidates who are also employees of the Corporation, the Committee considers members of the executive management of the Corporation who have or are in the position to have a broad base of information about the Corporation and its business. The Committee has in the past engaged a professional search firm (to which it paid a fee) to assist in identifying and evaluating potential nominees, and may do so again in the future.

 

The Nominating and Corporate Governance Committee will consider recommendations for nomination to stand for election as directors those persons who are recommended to it in writing by any stockholder in accordance with the procedures for Stockholders to Recommend Candidates for Directors (which are available on the Corporation’s website at www.aschulman.com). Any stockholder wishing to recommend an individual to be considered by the Committee as a nominee for election as a Director should send a signed letter of recommendation to the following address: A. Schulman, Inc., 3550 West Market Street, Akron, Ohio 44333, Attention: Chair of the Nominating and Corporate Governance Committee, c/o Corporate Secretary. Recommendation letters must state the reasons for the recommendation and contain the full name and address of each proposed nominee as well as a brief biographical history setting forth past and present directorships, employments, occupations and civic activities. Any such recommendation should be accompanied by a written statement from the proposed nominee consenting to be named as a candidate and, if nominated and elected, consenting to serve as a Director. The Corporation may also require a candidate to furnish additional information regarding his or her eligibility and qualifications. The Nominating and Corporate Governance Committee does not intend to evaluate candidates proposed by stockholders differently than it evaluates candidates that are suggested by Board members, executive officers or other sources.

 

The Nominating and Corporate Governance Committee held 3 meetings during the fiscal year ended August 31, 2007. The Board has determined that each of the members of the Nominating and Corporate Governance Committee is independent as defined under Rule 4200(a)(15) of the NASDAQ listing standards.

 

Code of Conduct

 

The Board of Directors has adopted a Code of Conduct, available on the Corporation’s website at www.aschulman.com, applicable to the Corporation’s employees, officers and directors. To further assure compliance, the Corporation maintains a worldwide hotline that allows employees to report confidentially any suspected violation of its Code of Conduct. The Corporation intends to satisfy the disclosure requirements regarding an amendment to or a waiver from a provision of its code of ethics that applies to the Corporation’s executive officers by posting such information on its website at www.aschulman.com.

 

Executive Sessions

 

Executive sessions of non-management Directors (consisting of all Directors other than Mr. Haines) are regularly held after each meeting of the Board of Directors, including meetings during the fiscal year ended August 31, 2007.

 

Stockholder Communications with the Board of Directors

 

Stockholders may send communications to the Board of Directors by mail or courier delivery addressed as follows: A. Schulman, Inc., c/o Corporate Secretary, 3550 West Market Street, Akron, Ohio 44333. In general, the Corporate Secretary will forward all such communications to the Chair of the Nominating and Corporate Governance Committee. The Committee Chair in turn determines whether the communication should be forwarded to other members of the Board and, if so, forwards them accordingly. However, for communications addressed to a particular member of the Board or the Chair of a particular Board Committee, the Corporate Secretary forwards those communications directly to the Board member so addressed.

 

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

 

The following table sets forth information as of November 27, 2007 (except as otherwise indicated by footnote) in respect of beneficial ownership of shares of Common Stock by each Director and Nominee, by each Named Executive Officer, by all Directors and executive officers as a group, and by each person known to the Corporation to own five percent or more of its Common Stock. Unless otherwise indicated, each beneficial owner has sole power to vote and dispose of the number of shares set forth in the table:

 

 

 

 

 

Equity Compensation Plan Information

 

The Corporation’s 2006 Incentive Plan authorizes the Corporation to issue stock to its employees (including Named Executive Officers) and non-employee directors in exchange for consideration in the form of goods or services. The 2006 Incentive Plan authorizes the Corporation to issue up to 3,472,686 of its shares to participants. Awards are also outstanding under the Corporation’s 1992 Non-Employee Directors’ Stock Option Plan and 2002 Equity Incentive Plan (collectively with the 2006 Incentive Plan, the “Equity Plans”). Information, as of August 31, 2007, on outstanding awards under all of the Corporation’s Equity Plans, and information on awards available for grant under the 2006 Incentive Plan is set forth in the table below:

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following Compensation Discussion and Analysis describes the Compensation Committee’s executive compensation philosophy, objectives and programs, and explains the basis on which fiscal year 2007 compensation determinations were made by the Compensation Committee in respect of the executive officers who are identified in the Summary Compensation Table (“Named Executive Officers”). For purposes of this discussion, references to “we,” “our” and “us” refer to the Corporation.

 

Compensation Committee Governance

 

The compensation program for our executive officers is overseen by the Compensation Committee of the Board of Directors. Compensation Committee members are appointed by the Board and meet the independence and other requirements of NASDAQ rules and other applicable laws and regulations. As described on page 7 of this Proxy Statement, the duties of the Compensation Committee include, among other things, determining the base salary levels and bonuses for our Named Executive Officers, approving the design and awards of all other elements of our executive compensation program, evaluating the performance of our Named Executive Officers, executive officer succession planning and addressing other matters related to executive compensation.

 

The members of the Compensation Committee and the Committee’s specific functions are described on page 7 of this Proxy Statement. The Compensation Committee Charter is posted on our website at www.aschulman.com. The Compensation Committee meets as necessary to enable it to fulfill its responsibilities. The Chair of the Compensation Committee is responsible for the leadership of the Committee, presiding over Committee meetings, making Committee assignments, reporting the Committee’s actions to our Board of Directors from time to time and, with the assistance of management, setting the agenda for Committee meetings.

 

Compensation Philosophy and Objectives

 

In determining the amount and composition of executive compensation, the Compensation Committee’s goal is to provide a compensation package that will enable us to (1) attract and retain talented executives, (2) reward outstanding individual and corporate performance and (3) link the interests of our executive officers to the interests of our stockholders with the ultimate goal of improving stockholder value. The Compensation Committee’s overall pay strategy is to provide a median market opportunity for our executive officers at their targeted compensation level. The Compensation Committee provides alignment with stockholders through the use of performance-based, at-risk compensation pay. Retention is provided through the use of a balanced pay mix and equity vehicles. In order to emphasize pay that is dependent on performance and more aligned with stockholders, we have adopted a pay strategy as follows:

 

 

In determining actual compensation levels for our Named Executive Officers, the Compensation Committee considers all elements of the compensation program in total and also evaluates whether the individual elements of the program target compensation levels at rates that are reflective of current market practices. The Compensation Committee believes that offering performance-based, market-comparable pay opportunities for our Named Executive Officers, bearing in mind the relative performance and size of the Corporation, allows us to maintain a stable, successful management team.

The Compensation Committee has full discretion to adjust our compensation program, or any element of the compensation program, at any time. It has been the practice of the Compensation Committee to discuss its compensation determinations with respect to the Chief Executive Officer (“CEO”) with the full Board of Directors and to have the full Board of Directors (other than the CEO) approve such decisions. At times, however, the Board of Directors may, adjust certain elements of the compensation program. For example, on the recommendation of the Compensation Committee, the full Board of Directors determined that 100% of the CEO’s equity award for the 2007 fiscal year would have market performance-based vesting (as compared to 50% market performance based vesting and 50% time-based vesting for all other executive officers). In making this decision, the Board determined that a grant of 100% performance-based awards to the CEO would provide for greater focus on the Corporation’s performance.

 

Compensation Consultant

 

As permitted by the Compensation Committee Charter, the Committee, in consultation with management, retained Mercer, Inc. (“Mercer”) as its outside compensation consultant to assist in the evaluation of compensation levels and program design for the Named Executive Officers during the 2007 fiscal year. Mercer was specifically engaged to provide the Compensation Committee with market trend information, data and recommendations to assist the Committee in making informed decisions, staying abreast of changing market practices and balancing external forces with our compensation philosophy and objectives.

 

The Compensation Committee, considering recommendations from management, determined the scope of work to be performed by the outside compensation consultant. At the direction of the Compensation Committee, Mercer worked with management to gather data used in preparing an executive compensation program analysis for review by the Compensation Committee. The Compensation Committee has the sole authority to retain and terminate the outside compensation consultant.

 

Compensation Committee Delegation

 

Pursuant to the Compensation Committee Charter, the Committee may delegate its authority to subcommittees or to the Chair of the Compensation Committee when it deems such delegation to be appropriate and in our best interests. No such delegations were made in the last fiscal year.

 

Setting Executive Compensation

 

At its first regularly scheduled meeting of each fiscal year (typically in October), the Compensation Committee (1) evaluates the performance of the CEO for the prior fiscal year, (2) reviews the CEO’s evaluation of the performance of the other Named Executive Officers for the prior fiscal year, (3) determines whether our Named Executive Officers will receive bonuses for the prior fiscal year based on the individual goals and corporate performance targets established therefor and (4) establishes the components and levels of Named Executive Officer compensation (including the performance criteria for annual performance bonuses) for the current fiscal year. In the course of its deliberations, the Compensation Committee from time to time solicits the recommendations of our CEO and our other executive officers on various matters relating to executive compensation. However, the Compensation Committee makes all final determinations regarding the compensation program for the Named Executive Officers and, with respect to the CEO, seeks ratification of its decisions by the full Board of Directors.

 

To assist the Compensation Committee in making compensation decisions, competitive market data was provided periodically during the 2007 fiscal year by the outside compensation consultant. The data provided compared our executive compensation practices to those of a specific group of comparison companies and compensation surveys. The peer group used for compensation comparison purposes is generally comprised of specialty chemical companies, including both similarly-sized companies and other chemical and plastics manufacturers recognized as our broader competitors. The Compensation Committee believes that this group represents an appropriate comparator set for establishing competitive market compensation levels and performance comparisons due to its similarities in industry and general size.

The Compensation Committee reviews and approves the selection of companies used for compensation comparison purposes on an annual basis. In fiscal year 2007, the peer group consisted of the following 22 companies (the “Peer Group”):

 

 

The compensation survey used for the compensation comparisons consists of U.S.-based manufacturing companies of a comparable size to the Corporation. Our officers are benchmarked against a market pay composite level that consists of a 50% weighting on the peer group and 50% on the compensation surveys.

 

The Compensation Committee analyzes the market composite compensation data to ensure that the executive compensation program as a whole, and the principal components of the program, are competitive and consistent with the form and levels of compensation paid by our competitors. The Compensation Committee’s general approach is to target a pay opportunity at the median of the peer group, with additional considerations applied as needed by the Compensation Committee. Such considerations could include competitive pressures, recognition of specific achievements, or other pertinent items.

 

After reviewing executive officer pay in October 2006, the Compensation Committee determined that the current total direct compensation (base salary plus target bonus opportunity and long-term incentive grant values) was under the market median for the CEO, Chief Financial Officer, and Chief Operating Officer North America. In order to bring their pay levels more in line with our pay strategy, the Compensation Committee provided the compensation outlined in the Summary Compensation Table and long-term incentive grants as outlined in the Grant of Plan-Based Awards table.

 

Components of Executive Compensation

 

The key components of our executive compensation program, each of which is addressed separately below, are:

 

 

In determining an executive officer’s total compensation package, the Compensation Committee considers each of these key components individually and in the aggregate. The Compensation Committee does not have a pre-established policy or target for the allocation between cash and non-cash compensation or short-term and long-term compensation. Instead, the Compensation Committee annually reviews the Peer Group data provided by its independent compensation consultant and the current facts and circumstances relating to the Corporation and our executive officers to determine an appropriate mix of compensation for the Named Executive Officers that furthers our compensation philosophy and objectives.

 

Base Salaries

 

Base salaries are intended to reward executive officers based upon their roles with the Corporation and for their performance in those roles. The Compensation Committee reviews and approves each Named Executive Officer’s base salary annually. Base salaries for executive officers initially are determined by evaluating the officers’ respective levels of responsibility, prior experience and breadth of knowledge and by taking into consideration internal equity issues and external pay practices. Determination of adjustments to base salaries are driven primarily

by competitive positioning and our profitability. Where corporate profitability has not justified raises, the Compensation Committee has, in the past, frozen the base salaries of its executive officers. Taking these considerations into account, in October 2006, the Compensation Committee awarded base salary increases as follows:

 

 

In fiscal 2006, base salaries for all of our Named Executive Officers were below the Peer Group median. The pay increases for fiscal 2007 moved the officers’ base salary compensation generally within the targeted 40th to 50th percentile of market, consistent with our overall pay philosophy. Individual performance did not effect the size of the raises granted to the Named Executive Officers.

 

Annual Bonuses

 

Our annual bonus program promotes our pay-for-performance philosophy by providing our Named Executive Officers with direct financial incentives in the form of annual cash bonuses based on our financial performance as well as individual performance. Annual bonus opportunities allow us to communicate specific goals that are of primary importance during the coming year and motivate executive officers to achieve these goals. The annual bonus program is designed to reward our Named Executive Officers based on achievement of individual goals and performance targets that the Compensation Committee believes align the interests of our Named Executive Officers with the interests of our stockholders.

 

Under the annual bonus program, the Compensation Committee establishes the award formulas and the performance goals to be measured to determine the amount of the cash performance bonus that may be earned by each Named Executive Officer for that year, including the maximum cash bonus each will be eligible to receive. The achievement of these performance goals is unknown at the time they are established by the Compensation Committee. For fiscal year 2007, the Compensation Committee selected (1) net income from operations (excluding one-time or extraordinary items), (2) cash flows from operations and (3) return on invested capital as the corporate performance goals.

 

In October 2006, the Compensation Committee established a total target bonus award for each Named Executive Officer for fiscal year 2007 performance. The total target award for each Named Executive Officer was set at a level that was approximately equal to the average award provided to executives holding similar positions in the Peer Group. The bonus awards were measured by reference to threshold, target and maximum percentages of salary for each Named Executive Officer and are disclosed in the Grant of Plan Based Awards table.

 

Under our fiscal year 2007 bonus plan, one-half of the total target award potential for each Named Executive Officer was based on our financial performance, measured by levels of net income, cash flows from operations and return on invested capital. For Mr. Haines and Mr. DeSantis, the corporate financial performance portion of the bonus was based on our consolidated worldwide operations. For each of the other Named Executive Officers, the corporate financial performance portion of the bonus was based on our North American segment’s performance.

These measures of financial performance were selected by the Compensation Committee in order to focus the Named Executive Officers on the key drivers of stockholder value. Because net income correlates strongly with the Corporation’s stock price, it was given relatively greater weight (20% of the total award) as compared to cash flows from operations and return on invested capital (15% of total award). The Compensation Committee believes that its targets are not unreasonably difficult to achieve but that they cannot be reached without successful management performance.

 

For 2007, cash flow from operations was the only performance target that was achieved. For North American operations, the maximum level of cash flow from operations was achieved, thereby entitling executive officers to a bonus of approximately 23% of their total target bonus. Cash flow from operations on a consolidated worldwide basis reached the threshold level, entitling the Chief Executive Officer and the Chief Financial Officer to an award of approximately 7.5% of their target bonus.

 

The remaining one-half of the total target award potential was based upon the individual performance of each Named Executive Officer, as measured against various personal goals established by the Compensation Committee for the Chief Executive Officer and by the Chief Executive Officer (and approved by the Compensation Committee) for all other Named Executive Officers.

 

The Compensation Committee believes that having a mix of objective and subjective goals provides the Chief Executive Officer with the flexibility to effectively manage his direct reports, especially in circumstances where strictly objective performance targets may be achieved (or missed) early in the fiscal year. The payments to our Named Executive Officers for fiscal year 2007 are reported in the Summary Compensation Table in the Non-Equity Incentive Plan Compensation Column.

 

For fiscal year 2007, the Compensation Committee set four individual performance goals for the CEO. The goals were (1) to launch the Invision product line by implementing manufacturing plants and to further commercialize and market Invision products in North America and internationally, (2) to improve profitability in North America by reducing inventory and the manufacturing cost per unit produced, (3) to reduce supply chain and logistics expenses and (4) to undertake various operational, strategic planning and acquisition related tasks in Europe and Asia. The Compensation Committee reviewed in detail with the CEO the extent to which he had satisfied each of the four performance goals identified above. After reviewing the Corporation’s performance and the CEO’s contributions to achieving these goals, the Compensation Committee determined that approximately 85% of the goals were achieved and awarded a bonus accordingly. The CEO recommended to the Compensation Committee, and the Compensation Committee approved, that all other Named Executive Officers receive a full bonus for achieving their personal goals during 2007.

 

The personal goals for the remaining Named Executive Officers are determined by the CEO (for Messrs. DeSantis and Rhodes) and the Vice President — North American Operations (for Messrs. Andres and Myles) and are, in each case, approved by the Compensation Committees. In general, the personal goals focus on the implementation of primary Corporate strategies for the fiscal year (such as the North American restructuring and the launch of Invision) but may also include particular or general objectives for the executive officer’s areas of responsibility. The Compensation Committee reviews the CEO’s subjective evaluation of whether each personal goal has been achieved and the Named Executive Officer’s contributions to achieving these goals. The Corporation expects that most of the personal goals will be achieved each year.

 

Long-Term Incentives

 

As part of our executive compensation program, the Compensation Committee has generally made annual grants of long-term stock-based incentive awards to our Named Executive Officers (and other members of management), including stock options and restricted stock. Long-term incentives are used by the Compensation Committee to (1) balance the short-term focus of base salaries and the annual bonus program by tying equity-based rewards to performance achieved over multi-year periods, (2) ensure that each executive officer’s total compensation package includes an at-risk component of pay and (3) align executive officers’ incentives with stockholders. When making our annual equity-based awards to our Named Executive Officers, the Compensation Committee considers, but does not exclusively rely on any one of, the following: (1) our financial performance in the prior fiscal

year, (2) historical award data, (3) compensation practices at comparison companies and (4) the officers’ respective individual performance, prior experience and levels of responsibility with, and contributions to, the Corporation.

 

Prior to December 7, 2006, long-term incentives were granted to executive officers under our 2002 Equity Incentive Plan. At our 2006 annual stockholder meeting, the stockholders approved our 2006 Incentive Plan, shares available for grant under the 2002 Equity Incentive Plan were added to the 2006 Incentive Plan and the 2002 Equity Incentive Plan was terminated. Following its approval by the stockholders, the 2006 Incentive Plan became the vehicle under which long-term incentives may be granted to employees (including our Named Executive Officers) and our non-employee directors. The 2006 Incentive Plan is intended to foster and promote our long-term financial success and to increase stockholder value by (1) providing participants with an opportunity to acquire and maintain an ownership interest in the Corporation and (2) enabling us to attract and retain the services of outstanding executive officers. The Compensation Committee believes that stockholder interests are best served if compensation paid to the persons providing us with leadership depends, in significant part, on the profitable growth of our business.

 

Under the 2006 Incentive Plan, the Compensation Committee has the authority to grant a variety of long-term incentive awards, including stock options (both nonqualified and incentive), restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units, cash-based awards, dividend equivalents and performance-based awards. The Compensation Committee believes that the wide range of awards available under the 2006 Incentive Plan provides flexibility in tailoring the long-term incentives component of executive compensation in a way that enhances our success. During fiscal year 2007, the Compensation Committee relied on a combination of restricted stock awards, performance shares awards and restricted stock units awards, each of which is discussed below. Because of the long-term vesting or performance requirements of each of these types of awards, the Compensation Committee believes that such awards enhance our ability to maintain a stable executive team which is focused on our long-term success. The Compensation Committee further believes that each of these types of awards effectively ties each Named Executive Officer’s compensation to long-term stockholder returns, thereby providing the Named Executive Officers with an immediate link to stockholder interests as well as our long-term performance.

 

Restricted Stock

 

On April 11, 2007, the Compensation Committee awarded shares of restricted stock to the Named Executive Officers pursuant to the 2006 Incentive Plan in the amounts set forth in the Grants of Plan-Based Awards table on page 26 of this Proxy Statement. The shares of restricted stock awarded to Mr. Haines will vest (subject to forfeiture) based upon our total stockholder returns measured as of April 11, 2010. Specifically, if the market value of our common stock relative to the Peer Group on such date is (1) below the 25th percentile, all of Mr. Haines’ shares will be forfeited, (2) between the 25th and 50th percentile, one-half of Mr. Haines’ shares will be forfeited or (3) at or above the 50th percentile, none of Mr. Haines’ shares will be forfeited. With respect to the shares of restricted stock awarded to the other Named Executive Officers, one-half of each officer’s shares will vest based upon our total stockholder returns measured as of April 11, 2010, on the same basis and subject to the same risk of forfeiture as is applicable to Mr. Haines’ award. The remaining one-half of each officer’s shares will vest over time, subject to continued employment with us, at the rate of 33% on each of the first three anniversaries of the date of grant. During the restriction period, the Named Executive Officers may exercise full voting rights associated with their shares of restricted stock. In addition, we will hold dividends paid with respect to their shares of restricted stock until the restrictions on the underlying restricted stock have lapsed. The Board of Directors, upon the recommendation of the Compensation Committee, determined that all grants to Mr. Haines would have performance vesting requirements in order to provide for greater focus on the Corporation’s performance.

 

Performance Shares

 

In connection with the grant of restricted stock to each of the Named Executive Officers, the Compensation Committee also awarded performance shares to each of the Named Executive Officers pursuant to the 2006 Incentive Plan in the following amounts: Mr. Haines — 37,500 shares (or 50% of his restricted stock award), Mr. DeSantis — 4,500 shares, Mr. Rhodes — 4,500 shares, Mr. Andres — 3,250 shares and Mr. Myles — 0 shares (or 25% of each of their respective restricted stock awards). Performance shares give the recipient the right to

receive a specified number of shares of our common stock only if certain terms and conditions are met as of the end of the performance period. The performance shares granted to each of the Named Executive Officers will vest on April 11, 2010 only if the fair market value of our common stock relative to the Peer Group on such date is at or above the 75% percentile. During the performance period, the Named Executive Officers do not have voting or dividend rights with respect to the shares of common stock underlying the performance shares.

 

Restricted Stock Units

 

On April 11, 2007, the Compensation Committee awarded 15,000 restricted stock units to Mr. Haines pursuant to the 2006 Incentive Plan. The restricted stock units will be settled for cash in an amount equal to the fair market value of a share of our common stock on the applicable vesting date multiplied by the number of restricted stock units to be settled. Mr. Haines’ restricted stock units will vest over time, subject to continued employment with us, at the rate of 33% on each of the first three anniversaries of the date of grant. During the restriction period, Mr. Haines will have no voting rights with respect to the shares of common stock underlying the restricted stock units but dividends paid on such underlying shares will accrue and be paid to Mr. Haines at the time the restricted stock unit is settled. These restricted stock units were awarded to Mr. Haines because, during the 2006 fiscal year, we did not have a sufficient number of shares available under the 2002 Equity Incentive Plan to award Mr. Haines a grant of restricted stock. After the approval of the 2006 Incentive Plan, the Compensation Committee determined during the 2007 fiscal year that it would be appropriate to make a grant to Mr. Haines of restricted stock units in an amount equal to that which he would have otherwise received the prior year. Other equity awards granted during the 2006 fiscal year did not have performance vesting characteristics and the Compensation Committee determined that this one-time award should not have any performance vesting.

 

Timing of Grants

 

The Compensation Committee generally determines equity grants at a meeting that immediately precedes our release of earnings results from the most recently completed quarter. Since the information in these earnings releases has not yet been incorporated into the market price of our shares of common stock, the Compensation Committee has historically set the grant date as the third business day after the release of the earnings information. While this introduces some level of variability in our cost incurred in making the award and the value of the award to the Named Executive Officer, the Compensation Committee believes that this practice helps to insure that information in its possession when determining the grants is reflected in the market price of the stock. For future grants, the Compensation Committee expects to make the grant date the fifth business day after the release of earnings information in order to provide management with enough time to communicate and administer the awards throughout the Corporation. The Compensation Committee believes that it is important to have a uniform grant date for executive officers and other Corporation employees, and that the cost of delaying the grant date by 5 business days is minimal since the awards are expected to consist solely of restricted stock and not stock options.

 

Retirement and Other Benefits

 

The retirement and benefits program component of our Named Executive Officer compensation program includes (1) payment of certain perquisites and other personal benefits, (2) participation in a qualified profit sharing plan, (3) participation in a non-qualified profit sharing plan and, in the case of Mr. Haines, (4) a supplemental executive retirement plan and (5) a deferred compensation agreement. We also maintain defined benefit pension plans and other post-retirement benefit plans, primarily health care and life insurance, that are available to all of our employees, including our Named Executive Officers, on a non-discriminatory basis. The objectives of our retirement and benefits programs are (1) to provide the Named Executive Officers with reasonable and competitive levels of protection against contingencies, including retirement, death and disability, which could interrupt their employment with and income received from us and (2) reward the Named Executive Officers for continued service with us.

 

Periodically, the Compensation Committee reviews with its outside consultant how each element of our retirement and benefits program functions to achieve the Compensation Committee’s goals. At the discretion of the Compensation Committee, these programs may be modified, supplemented or removed. In general, the Compensation Committee looks at competitive market practices and the costs of each of these programs, and weighs that

cost against the stated objectives for maintaining retirement and other benefits. The components of the fiscal year 2007 retirement and benefits program for the Named Executive Officers are discussed individually below.

 

Perquisites and Personal Benefits

 

We provide our Named Executive Officers with limited perquisites and personal benefits that the Compensation Committee believes are reasonable and consistent with our executive compensation philosophy and objectives and competitive market practices. Certain perquisites are used to encourage Named Executive Officers to take particular actions (such financial tax planning and consulting) which the Compensation Committee has determined to be beneficial to the Corporation. In addition, the Corporation also pays for country club memberships for certain of its Named Executive Officers because the Compensation Committee believes that these memberships provide excellent opportunities for customer entertainment. No personal use of country clubs is reimbursed or paid for by the Corporation.

 

The Corporation has owned a fishing camp in Canada since 1952. It is the policy of the Compensation Committee that the fish camp may be used solely for business purposes and no officer, employee or director of the Corporation is permitted to use or has used the fishing camp for personal reasons. The Corporation also leases an airplane. The airplane may only be used for business-related travel and no officer, employee or director is permitted to use or has used the airplane for personal travel.

 

Qualified Retirement Plan

 

We have a qualified Retirement Plan (the “Retirement Plan”) pursuant to which the Board of Directors, in its discretion, may authorize the payment of contributions to our Retirement Plan Trust to be allocated among participants. The maximum annual amount that may be allocated to a participant under the Retirement Plan generally is limited to the lesser of (1) $40,000 or (2) 100% of the participant’s compensation. Participation in the Retirement Plan is available to all of our U.S. salaried employees (and participating subsidiaries) who are employed as of the last day of the Retirement Plan year. Benefits under the Retirement Plan vest in accordance with a specified formula that provides for partial vesting starting after three years of employment with us and full vesting after seven years of employment with us. The assets of the Retirement Plan Trust are invested and each participant’s account reflects the aggregate investment performance of the Trust assets. The amounts contributed by us to the Retirement Plan accounts for the Named Executive Officers for the fiscal 2007 year are reported in the Summary Compensation Table.

 

Non-Qualified Retirement Plan

 

We also maintain a non-qualified Retirement Plan (the “Non-Qualified Plan”) pursuant to which the Compensation Committee may accrue certain amounts for the benefit of plan participants in order to provide such participants with benefits not available to them under the Retirement Plan due to certain compensation limitations. Benefits under the Non-Qualified Plan vest and become non-forfeitable in accordance with a specified formula that provides for partial vesting starting after three years of employment with us and full vesting after seven years of employment with us. In addition, upon a Change in Control (as defined therein), participants’ benefits under the Non-Qualified Plan become fully vested and non-forfeitable. Moreover, if a participant’s employment is terminated for any reason within two years of the occurrence of a Change in Control, payment of such participant’s vested account balance shall be made in a lump sum payment within five days of such termination. Amounts accrued by us under the Non-Qualified Plan for the benefit of each participant reflect the investment performance that would have been realized had a corresponding amount been invested for the benefit of such participant during such year in the Retirement Plan. The amounts accrued (excluding the assumed investment based performance earnings thereon) by us pursuant to the Non-Qualified Plan for the benefit of the Named Executive Officers for fiscal year 2007 are disclosed in the Summary Compensation Table. This plan was originated and maintained in order to provide benefits to Named Executed Officers who are not able to fully participate in the Retirement Plan. The Compensation Committee believes that maintaining this plan keeps our retirement package competitive within our Peer Group.

Supplemental Executive Retirement Plan

 

Our Supplemental Executive Retirement Benefits Plan (the “SERP”), which the Compensation Committee administers, provides retirement benefits to executive officers named as participants by resolution of the Board of Directors. Mr. Haines is currently the only Named Executive Officer participating in the SERP. Under the SERP, a participant will earn a pension benefit that is equal to 30% of the participant’s final average plan compensation, plus an additional one percent for each year of service up to a maximum of thirty such years. Thus, a participant who retires with 30 or more years of service will receive an annual benefit equal to 60% of the participant’s final average plan compensation. The pension benefits payable to a participant under the SERP are reduced by the actuarial value of certain other plan and deferred compensation that is payable to the participant. The SERP was originally adopted in 2004 after a change in tax laws reduced the benefits that the Corporation would otherwise have provided to certain of its executive officers. As a matter of fairness to its executive officers, and to remain competitive with other companies that were adopting plans like the SERP at the time, the Compensation Committee determined that SERP was appropriate to restore benefits to its executive officers.

 

As of August 31, 2007, the final average plan compensation of Mr. Haines under the SERP was $882,267. Mr. Haines has earned the maximum of 30 years of service for purposes of the SERP and would therefore be entitled to an annual benefit of $529,360 upon retirement. After accounting for the various applicable offsets, Mr. Haines would be entitled to an annual SERP benefit of $139,082. Additional information on the SERP is available on page 30 of this Proxy Statement.

 

Deferred Compensation Agreement

 

We also have a deferred compensation agreement with Mr. Haines, effective as of March 1991, which provides for the payment of monthly cash benefits to Mr. Haines for ten years following his retirement, disability or death in the annual amount of $100,000. We are not required to make or continue to make such payments to Mr. Haines in the event that he is terminated for Cause (as defined therein) or breaches the non-competition covenant set forth in the agreement. However, in the event that Mr. Haines’ employment is terminated within two years of a Change in Control (as defined therein), (1) the payment of benefits under the agreement shall be accelerated and paid to Mr. Haines in a lump sum within five days of such termination and (2) the non-competition covenants set forth in the agreement and in Mr. Haines’ employment agreement shall no longer be applicable. In connection with this agreement, we own and are the beneficiary of a life insurance policy upon the life of Mr. Haines in the amount of $1,000,000.

 

Employment Agreements and Change-In-Control Arrangements

 

The Compensation Committee carefully considers the use and conditions of employment agreements. The Compensation Committee recognizes that entering into employment agreements containing severance and change-in-control arrangements is often necessary to attract prospective executives who forego significant compensation and opportunities at the companies they are leaving or who face relocation expenses in order to accept employment with us. Generally, executives are not willing to accept such risks and costs without protection in the event that their employment with us is terminated due to unanticipated changes, including a change in control. The Compensation Committee believes that our current employment agreements serve to protect stockholder interests by assuring that we will have the continued dedication, undivided loyalty and objective advice from key executives in the event of a proposed transaction, or the threat of a transaction, which could result in a change in control. All of our employment agreements, however, only provide payments to an employee if his or her employment is terminated as a result of (or within a specified period after) a change in control, a so-called “double trigger.” The Compensation Committee does not believe that employees should receive additional compensation merely as a result of a change in control and believes that our employment agreements provide our Named Executive Officers with adequate protection to insure that change in control offers can be evaluated on the best interest of the stockholders without fear that a transaction could cost a Named Executive Officer his or her job without compensation. The Compensation Committee, recognizes, however, that these employment agreements may tend to discourage a takeover attempt as a change in control could trigger increased compensation expense.

Other Change in Control Arrangements

 

Under the terms of our 2006 Incentive Plan, unless specified otherwise in the associated award agreement or in a separate change in control agreement, (1) all of a participant’s awards will be fully vested and exercisable upon a Business Combination or Change in Control (each as defined therein) and (2) all performance objectives will be deemed to have been met as of the date of the Business Combination or Change in Control. Except with respect to Mr. Haines (for whom we will provide a gross-up), if we conclude that any payment or benefit due to a Named Executive Officer would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), then we will consider (i) the feasibility of offering substitute awards that would not constitute “parachute payments” under Section 280G of the Code and that would not generate penalties under Section 409A of the Code; and (ii) to the extent that a substitution is not feasible or that the payments and benefits due to the Participant still would be subject to the excise tax imposed by Section 4999 of the Code, we will reduce the payments and benefits due to a participant to the greatest amount that would not generate an excise tax under Section 409A of the Code.

 

Pursuant to the terms of our 2002 Equity Incentive Plan, upon the occurrence of a Change in Control (as defined therein), unless we determine otherwise in a participant’s award agreement, (1) all stock options shall become immediately vested and exercisable, (2) any restrictions imposed on restricted stock or restricted stock units shall lapse, (3) the vesting of all awards denominated in shares of common stock shall be accelerated and be paid out within thirty days following the Change in Control, (4) awards denominated in cash shall be paid to participants in cash within thirty days following the Change in Control and (5) all awards shall become noncancellable (i.e., such awards cannot be cancelled without the participant receiving appropriate compensation as determined by the Compensation Committee).

 

Tax and Accounting Considerations

 

As a general matter, the Compensation Committee considers the various tax and accounting implications of the different compensation vehicles that are employed, and the Compensation Committee seeks to structure executive compensation in a tax efficient manner.

 

Deductibility of Executive Compensation

 

Section 162(m) of the Code prohibits us from taking a federal income tax deduction for compensation paid in excess of $1.0 million in any taxable year to our Named Executive Officers, unless certain conditions are met. Exceptions are made for qualified performance-based compensation, among other things. As part of its role, the Compensation Committee annually considers the deductibility of executive compensation under Section 162(m) in structuring our executive compensation program. The Compensation Committee believes, however, that compensation and benefits decisions should be primarily driven by the needs of our business, rather than by tax considerations. Accordingly, the Compensation Committee may choose to award compensation that does not meet the requirements of Section 162(m) where, in its judgment, such payments are necessary to achieve its compensation philosophy and objectives. Because our North American operations are not currently profitable, the inability to deduct compensation in excess of $1.0 million does not have any effect on our current year earnings. Any such non-deductible amounts of compensation would, however, reduce the amount of tax-losses on the Corporation’s balance sheet that may be applied against taxable income in future years.

 

Nonqualified Deferred Compensation

 

Section 409A of the Code, which took effect on January 1, 2005, imposes certain restrictions on amounts deferred under nonqualified deferred compensation plans and a 20% excise tax on amounts that are subject to, but do not comply with, Section 409A. Section 409A includes a broad definition of nonqualified deferred compensation plans, which may extend to various plans and arrangements that we maintain. On April 10, 2007, the Treasury Department and the Internal Revenue Service (the “IRS”) issued final regulations relating to the treatment of nonqualified deferred compensation plans under Section 409A. The Board of Directors and the Compensation Committee intend to administer our plans and arrangements to avoid or minimize the effect of Section 409A and, if

necessary, amend the plans and arrangements to comply with the final regulations issued under Section 409A on or before December 31, 2008 (or a later date specified by the IRS).

 

Statement of Financial Accounting Standards No. 123(R)

 

When determining amounts of long-term incentive grants to the Named Executive Officers and other employees, the Compensation Committee examines the accounting cost associated with the grants. Under Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, grants of stock options, restricted stock, restricted stock units and other share-based payments result in an accounting charge.

 

Stock Ownership Guidelines

 

In 2006, the Compensation Committee adopted stock ownership guidelines for our Named Executive Officers. These guidelines require that, within a five year period from the date of its adoption, the Chief Executive Officer will maintain share ownership in value equal to approximately five times his base salary, while each other Named Executive Officer is expected to hold shares in value equal to approximately three times his base salary. As has been stated previously, the Compensation Committee bases a large part of its compensation philosophy on aligning the interests of our Named Executive Officers and our stockholders. Such efforts could be undermined in the event that Named Executive Officers sold all or a large part of their awards at vesting. In determining compliance with these guidelines, the Compensation Committee considers the beneficial ownership of our Named Executive Officers as required to be reported in a proxy statement.

 

Compensation of Directors

 

The Compensation Committee is also responsible for determining compensation for our non-employee Directors. The compensation is structured in order to attract and retain high quality individuals to serve on the Board of Directors, to compensate such individuals for their time and energy expended in providing us their expertise and, in part, to provide Directors with compensation that is tied to the performance of our common stock. The Compensation Committee has adopted guidelines requiring each Director to maintain share ownership in value equal to approximately five times his or her base retainer on and after the fifth year of service on the Board of Directors. In reviewing each Director’s share ownership, the Compensation Committee considers the beneficial ownership of the Directors as required to be reported in a proxy statement. Mr. Haines, who is currently the only employee Director, does not receive additional compensation for service on our Board of Directors but does receive additional compensation for service on the board of one of our subsidiaries. Those additional fees are reflected in the Summary Compensation Table.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the foregoing Compensation Discussion and Analysis be included in this Proxy Statement.

 

Respectfully submitted,

 

Compensation Committee

 

Willard R. Holland, Chair
David G. Birney
Joseph M. Gingo
James A. Karman
Michael A. McManus, Jr.
Dr. Peggy Miller
Ernest J. Novak, Jr.

 

COMPENSATION TABLES

 

Summary Compensation Table

 

The table below provides information regarding the compensation of the Chief Executive Officer, Chief Financial Officer and the other three most highly compensated executive officers of A. Schulman, Inc. at August 31, 2007 (collectively, the “Named Executive Officers”).

 

 

 

 

 

Grants of Plan-Based Awards

 

 

 

 

Base Salaries

 

In fiscal 2006, base salaries for all of the Corporation’s Named Executive Officers was below the Peer Group median. As disclosed in the Compensation Discussion & Analysis on page 13 of this Proxy Statement, the Corporation increased the officers’ base salary compensation to generally within the targeted 40th to 50th percentile of market,

 

Annual Bonuses

 

Under the annual bonus program, the Compensation Committee establishes the award formulas and the performance goals to be measured to determine the amount of the cash performance bonus that may be earned by each Named Executive Officer for that year, including the maximum cash bonus each will be eligible to receive. The bonuses that each Named Executive Officers could have earned are set forth in the Grants of Plan Based Awards table and the bonuses actually paid are set forth in the Summary Compensation Table in the Non-Equity Incentive Plan Compensation column.

 

Under the fiscal year 2007 bonus plan, one-half of the total target award potential for each Named Executive Officer was determined based on our financial performance, measured by levels of net income, cash flows from operations and return on invested capital. For Mr. Haines and Mr. DeSantis, the corporate financial performance portion of the bonus was based upon our consolidated worldwide operations. For each of the other Named Executive

Officers, the corporate financial performance portion of the bonus was based on our North American segment’s performance. The targeted level of performance is based upon the Corporation’s internal budget such that if performance is achieved at the targeted levels, the Corporation should achieve its earnings per share goal. The Corporation believes that its targets are not unreasonably difficult to achieve but that they cannot be reached without successful management performance.

 

For 2007, cash flow from operations was the only performance target that was achieved. For North American operations, cash flow from operations achieved the maximum level, thereby entitling executive officers to a bonus of approximately 23% of their total target bonus. Cash flow from operations on a consolidated worldwide basis reached the threshold level, entitling the Chief Executive Officer and the Chief Financial Officer to an award of approximately 7.5% of their target bonus.

 

The remaining one-half of the total target award potential was based upon the individual performance of each Named Executive Officer, as measured against various personal goals established by the Compensation Committee for the Chief Executive Officer and by the Chief Executive Officer (and approved by the Compensation Committee) for all other Named Executive Officers.

 

For fiscal year 2007, the Compensation Committee set four individual performance goals for the Chief Executive Officer. The goals were (1) to launch the Invision product line by implementing manufacturing plants and to further commercialize and market Invision products in North America and internationally, (2) to improve profitability in North America by reducing inventory and the manufacturing cost per unit produced, (3) to reduce supply chain and logistics expenses and (4) to undertake various operational, strategic planning and acquisition related tasks in Europe and Asia. The Compensation Committee reviewed in detail with the Chief Executive Officer the extent to which he had satisfied each of the four performance goals identified above. After reviewing the Corporation’s performance and the Chief Executive Officer’s contributions to achieving these goals, the Compensation Committee determined that approximately 85% of the goals were achieved and awarded a bonus accordingly. The Chief Executive Officer recommended to the Compensation Committee, and the Compensation Committee approved, that all other Named Executive Officers receive a full bonus for achieving their personal goals during 2007.

 

The personal goals for the remaining Named Executive Officers are determined by the Chief Executive Officer (for Messrs. DeSantis and Rhodes) and the Vice President — North American Operations (for Messrs. Andres and Myles) and are in each case approved by the Compensation Committees. In general, the personal goals focus on the implementation of primary Corporate strategies for the fiscal year (such as the North American restructuring and the launch of Invision) but also may include a variety of particular areas of focus for each Named Executive Officer. The Compensation Commitee expects that most of the personal goals will be achieved each year.

 

Restricted Stock Grants

 

On April 11, 2007, the Compensation Committee awarded shares of restricted stock to the Named Executive Officers pursuant to the 2006 Incentive Plan in the amounts set forth in columns (g) and (i) in the Grants of Plan-Based Awards table above. The shares of restricted stock awarded to Mr. Haines will vest (subject to forfeiture) based upon total stockholder returns measured as of April 11, 2010. Specifically, if the market value of the Corporation’s common stock relative to the Peer Group on such date is (1) below the 25th percentile, all of Mr. Haines’ shares will be forfeited, (2) between the 25th and 50th percentile, one-half of Mr. Haines’ shares will be forfeited (resulting in the earning of the number of shares set forth in column (f)) or (3) at or above the 50th percentile, none of Mr. Haines’ shares will be forfeited (resulting in the earning of the number of share set forth in column (g)). With respect to the shares of restricted stock awarded to the other Named Executive Officers, the shares reported in column (g) will vest based upon the Corporation’s total stockholder return measured as of April 11, 2010, on the same basis and subject to the same risk of forfeiture as are applicable to Mr. Haines’ award. The shares reported in column (i) will vest over time, subject to continued employment with the Corporation, at the rate of 33% on each of the first three anniversaries of the date of grant. During the restriction period, the Named Executive Officers may exercise full voting rights associated with their shares of restricted stock. In addition, dividends paid with respect to their shares of restricted stock will be held by the Corporation until the restrictions on the underlying restricted stock have lapsed, subject to the same risk of forfeiture.

Performance Shares

 

In connection with the grant of restricted stock to each of the Named Executive Officers, the Compensation Committee also awarded performance shares to each of the Named Executive Officers pursuant to the 2006 Incentive Plan in the following amounts: Mr. Haines — 37,500 shares (or 50% of his restricted stock award), Mr. DeSantis — 4,500 shares, Mr. Rhodes — 4,500 shares, Mr. Andres — 3,250 shares and Mr. Myles — 0 shares (or 25% of each of their respective restricted stock awards). Performance shares give the recipient the right to receive a specified number of shares of the Corporation’s common stock only if certain terms and conditions are met as of the end of the performance period. The performance shares granted to each of the Named Executive Officers will vest on April 11, 2010, only if the fair market value of the Corporation’s common stock relative to the Peer Group on such date is at or above the 75% percentile (resulting in the earning of the aggregate number of shares set forth in column (h)). The number of shares reported in column (h) represents the total number of shares, including the restricted shares and the performance shares, that a Named Executive Officer would earn. During the performance period, the Named Executive Officers do not have voting or dividend rights with respect to the shares of common stock underlying the performance shares.

 

Restricted Stock Units

 

The Compensation Committee also awarded 15,000 restricted stock units to Mr. Haines in fiscal year 2007 pursuant to the 2006 Incentive Plan. The restricted stock units will be settled for cash in an amount equal to the fair market value of a share of the Corporation’s common stock on the applicable vesting date multiplied by the number of restricted stock units to be settled. Mr. Haines’ restricted stock units will vest over time, subject to continued employment with the Corporation, at the rate of 33% on each of the first three anniversaries of the date of grant. During the restriction period, Mr. Haines will have no voting rights with respect to the shares of common stock underlying the restricted stock units but dividends paid on such underlying shares will accrue and be paid to Mr. Haines at the time the restricted stock units are settled.

Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

 

Option Exercises and Stock Vested

 

 

 

 

Pension Benefits Table

 

 

 

 

Supplemental Executive Retirement Plan

 

The Corporation’s Supplemental Executive Retirement Benefits Plan (the “SERP”), which the Compensation Committee administers, provides retirement benefits to executive officers named as participants by resolution of the

Board of Directors. Mr. Haines is currently the only Named Executive Officer participating in the SERP. Under the SERP, a participant will earn a pension benefit that is equal to 30% of the participant’s final average plan compensation, plus an additional one percent for each year of service up to a maximum of thirty such years. Thus, a participant who retires with 30 or more years of service will receive an annual benefit equal to 60% of the participant’s final average plan compensation. The pension benefits payable to a participant under the SERP are reduced by the actuarial value of certain other plan and deferred compensation that is payable to the participant.

 

The following table shows estimated annual benefits payable to SERP participants upon retirement at age 65.

 

 

For purposes of determining pension benefits payable under the SERP, final average plan compensation is the participant’s average annual compensation for the highest 36-month period in the participant’s last 60 months of employment, and takes into account the participant’s base salary and cash bonuses. The pension benefits payable under the SERP are reduced by the actuarial equivalent of (1) the participant’s primary social security benefits, (2) benefits payable to the participant under the Retirement Plan and the Non-Qualified Plan and, (3) with respect to Mr. Haines, benefits payable under his deferred compensation agreement without regard to any forfeiture of or other loss of benefits that may occur under such agreement on account of a termination for cause or any other reason.

 

SERP benefits are payable as a monthly pension equal to the participant’s accrued benefits under the SERP, generally beginning at age 65 or after the participant’s retirement, if later. If a participant retires at or after age 55, or becomes totally and permanently disabled, and is credited with at least ten years of eligible service, the Board of Directors by resolution may grant the participant payment of pension benefits before age 65 in an actuarially reduced amount. In general, SERP pension payments are payable to the participant as a life annuity under which a monthly pension is payable to the participant up until such participant’s death. Participants may elect to receive SERP pension payments in various optional forms that are the actuarial equivalent of the participant’s life annuity. However, the election of a lump sum payment or installment payments may only be made with the approval of the Board of Directors.

 

As of August 31, 2007, the final average plan compensation of Mr. Haines under the SERP was $882,267. Mr. Haines has been credited with the maximum of 30 years of service under the SERP and would therefore be entitled to an annual benefit of $529,360 upon retirement. After accounting for the various applicable offsets, Mr. Haines would be entitled to an annual SERP benefit of $139,082 upon retirement.

Non-qualified Deferred Compensation Table

 

 

 

 

Employment Agreements

 

The Corporation has employment agreements with Messrs. Haines, DeSantis, Rhodes and Andres and certain other senior personnel. The employment agreements of Messrs. Haines, DeSantis, Rhodes and Andres have initial three-year terms. Such agreements are automatically extended at the end of each month for one additional month, unless prior notice of termination is given by either party to constitute at all times a three-year agreement; provided, however, that no such monthly extension shall occur after the last day of the calendar month in which the Named Executive Officer turns 62.

 

The employment agreements provide that, in the event employment is terminated following a merger, consolidation, liquidation or other change in control event (each, a “Change in Control”) for any reason, except for termination by the Corporation for Cause, termination by reason of death or Disability or termination by the employee without Good Reason (as such terms are defined therein), the employee shall be paid a lump sum amount equal to three times the sum of (1) the higher of his annual base salary payable immediately prior to the event causing the termination or the Change in Control, plus (2) an amount equal to the higher of his annual bonus earned in the fiscal year preceding the date of termination or the average annual bonus earned by him in the three fiscal years immediately preceding the Change in Control. In addition, the employee will be paid a lump sum amount equal to the sum of (1) any unpaid annual incentive compensation previously awarded to the employee for any completed fiscal year preceding the termination, the payment of which was contingent only upon continued employment to a subsequent date, and (2) a pro rata portion of his deemed annual bonus for the fiscal year in which the termination occurred, as calculated in accordance with the agreement. The employee will also continue to receive certain insurance benefits (reduced to the extent comparable benefits are actually provided without cost to the employee by another source after termination) for a period of 36 months following the date of termination. Mr. Haines’ employment agreement also provides that, during the one-month period beginning with the first day of the month immediately following the first anniversary of a Change in Control, Mr. Haines may terminate his employment for any reason and still be entitled to the Change-in-Control payments described above.

 

If the Corporation terminates an employee’s employment without Cause prior to the expiration of the term of the employment agreement and prior to a Change in Control, the employee shall receive his salary for the remaining term of his employment agreement, plus a bonus each year for the remaining term of his agreement in an amount

equal to 50% of his average annual bonus during the most recent five calendar years of employment. If the employee is terminated by reason of death, the Corporation shall pay a lump sum amount equal to 60% of the employee’s salary for 24 months to a designated beneficiary.

 

The amounts described above payable under Mr. Haines’ employment agreement shall be “grossed up” to cover certain taxes payable by him on certain of the amounts paid to him in respect of a Change in Control. Notwithstanding the foregoing, in respect of the employment agreements of Messrs. DeSantis, Rhodes and Andres, the Corporation is not obligated to make any payment or benefit that is in excess of the maximum amount that the Corporation can deduct for federal income tax purposes.

 

In consideration for the benefits payable under their respective employment agreements, each of Messrs. Haines, DeSantis, Rhodes and Andres agreed to be bound by perpetual confidentiality and non-disclosure covenants as well as non-competition and non-solicitation restrictions for one year (three years in the case of Mr. Haines) following their respective termination of employment.

 

On August 31, 2007 (the “Retirement Date”), Mr. Myles, the Corporation’s former Vice President Research and Development, retired from the Corporation. In connection with Mr. Myles’ retirement, the Corporation entered into a Separation Agreement and a Consulting Agreement with Mr. Myles, dated as of the Retirement Date and September 1, 2007, respectively (collectively, the “Agreements”). The Agreements were filed as Exhibit 99.1 and Exhibit 99.2 to the Corporation’s Current Report on Form 8-K filed with the SEC on September 6, 2007. The Corporation subsequently filed an amendment to the Current Report on Form 8-K/A with the SEC on September 14, 2007, which disclosed certain benefits received by Mr. Myles upon his separation from the Corporation, as further described in Exhibit 99.1, Summary of Benefits Upon Separation (“Summary of Benefits”), to the Form 8-K/A. The summary of the Agreements and the Summary of Benefits below is qualified in its entirety by reference to the complete text of the Agreements and the Summary of Benefits.

 

Pursuant to the Separation Agreement, Mr. Myles remains eligible to participate in certain retirement benefits under certain retirement benefit plans and the Corporation’s fiscal year 2007 bonus plan. In addition, Mr. Myles may not (i) solicit, employ, entice or interfere with any employee of the Corporation or any other entity that is related to the Corporation through common ownership (an “Affiliate”) or (ii) engage, participate in, aid or finance any enterprise that competes with the Corporation or an Affiliate. Pursuant to the Summary of Benefits, Mr. Myles and his dependants are eligible to participate in the Corporation’s retiree medical program until he is 65 years of age, at which time Medicare becomes the primary program and the Corporation’s program becomes secondary. The Summary of Benefits confirms that Mr. Myles is eligible to receive any allocation from the Retirement Plan prior to the Retirement Date. In addition, after the Retirement Date, all of Mr. Myles’ stock options are considered vested and exercisable for a period of two years in accordance with those stock option agreements.

 

According to the Consulting Agreement, Mr. Myles will receive a monthly consulting fee of $15,750 for one year ending on August 31, 2008, in exchange for rendering consulting services to the Corporation. Mr. Myles’ consulting services consist of, among other things, supporting (i) the Corporation’s research and development while it searches for a research and development manager and (ii) special projects as designated by the Corporation’s Engineered Compounds General Manager.

Potential Payments upon Termination or Change-in-Control

 

The Named Executive Officers have employment agreements which contain severance and change-in-control arrangements with benefits that vary depending upon the nature of their separation from service. The table below represents amounts that would be payable or benefits owed to each of the Named Executive Officers as of August 31, 2007, upon termination of their employment as a result of the scenarios indicated in each column. The amounts were calculated assuming the termination occurred on August 31, 2007. Mr. Myles retired as of August 31, 2007; therefore a termination analysis is not included for him.