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[ENGELHARD Logo Omitted] 101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
BARRY W. PERRY
Chairman and
Chief Executive Officer
April 4, 2005
Dear Shareholder:
You are cordially invited to attend the 2005 Annual Meeting of
Shareholders, which will be held at 10:00 a.m., Eastern Daylight Savings Time,
on Thursday, May 5, 2005, at the Sheraton at Woodbridge Place, 515 Route 1
South, Iselin, NJ 08830-3010.
The enclosed Notice and Proxy Statement contain information about matters
to be considered at the Annual Meeting, at which the business and operations of
Engelhard will also be reviewed. Discussions at our Annual Meeting have
generally been interesting and useful, and we hope that you will be able to
attend. If you plan to attend, please check the box provided on the proxy card
and an admission ticket will be sent to you. Only shareholders and their proxies
will be permitted to attend the Annual Meeting.
Whether or not you plan to attend, we urge you to complete, sign and return
the enclosed proxy card or to vote over the Internet or by telephone, so that
your shares will be represented and voted at the Annual Meeting.
Sincerely yours,
/s/
-----------------
ENGELHARD CORPORATION
101 WOOD AVENUE
ISELIN, NEW JERSEY 08830
----------------------
NOTICE OF THE 2005 ANNUAL MEETING OF SHAREHOLDERS
----------------------
To our Shareholders: April 4, 2005
The Annual Meeting of Shareholders of Engelhard Corporation, a Delaware
corporation, will be held on Thursday, May 5, 2005 at 10:00 a.m., Eastern
Daylight Savings Time, at the Sheraton at Woodbridge Place, 515 Route 1 South,
Iselin, NJ 08830-3010, for the following purposes:
(1) To elect two Directors;
(2) To ratify the appointment of Ernst & Young LLP as our independent
registered public accounting firm, and;
(3) To transact such other business as may properly come before the
meeting.
The record date for the determination of the shareholders entitled to vote
at the meeting or at any adjournment thereof is close of business on March 15,
2005.
A list of shareholders entitled to vote at the Annual Meeting will be open
to the examination of any shareholder, for any purpose germane to the meeting,
at our offices located at 101 Wood Avenue, Iselin, New Jersey, during ordinary
business hours for ten days prior to the meeting, and at the meeting.
By Order of the Board of Directors
Arthur A. Dornbusch, II
VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
SHAREHOLDERS ARE URGED TO MARK, SIGN AND RETURN PROMPTLY
THE ACCOMPANYING PROXY IN THE ENCLOSED RETURN ENVELOPE OR TO VOTE
OVER THE INTERNET OR BY TELEPHONE
ENGELHARD CORPORATION
101 WOOD AVENUE
ISELIN, NEW JERSEY 08830
----------------------
PROXY STATEMENT FOR THE 2005
ANNUAL MEETING OF SHAREHOLDERS
----------------------
ABOUT THE MEETING
WHY AM I RECEIVING THESE MATERIALS?
The Board of Directors of Engelhard Corporation (sometimes referred to as
"Engelhard" or "we" or "our") is providing these proxy materials for you in
connection with our Annual Meeting of Shareholders, which will take place on
Thursday, May 5, 2005. You are invited to attend the Annual Meeting and are
requested to vote on the proposals described in this proxy statement.
WHO IS ENTITLED TO VOTE?
Holders of Common Stock as of the close of business on March 15, 2005 will
be entitled to vote. On such date there were outstanding and entitled to vote
121,964,460 shares of Common Stock of Engelhard, each of which is entitled to
one vote with respect to each matter to be voted on at the Meeting.
WHAT CONSTITUTES A QUORUM?
The presence at the Annual Meeting in person or by proxy of the holders of
a majority of the outstanding shares of Common Stock entitled to vote shall
constitute a quorum for the transaction of business. Proxies marked as
abstaining on any matter to be acted upon by shareholders will be treated as
present at the meeting for purposes of determining a quorum. If you hold your
shares in "street name" through a broker or other nominee, shares represented by
"broker non-votes" will be counted in determining whether there is a quorum.
HOW DO I VOTE?
If you complete and properly sign the accompanying proxy card and return it
to Engelhard, it will be voted as you direct. If you are a registered
shareholder and attend the meeting, you may deliver your completed proxy card in
person. "Street name" shareholders who wish to vote at the meeting will need to
obtain a proxy form from the institution that holds their shares.
If you are a record holder of Common Stock (that is, if you hold Common
Stock in your own name in Engelhard's stock records maintained by our transfer
agent, Mellon Investor Services LLC), you may vote through the Internet or by
using a toll-free telephone number by following the instructions included with
your proxy card. If you are not a record holder of Common Stock (that is,
1
if you hold Common Stock in "street name" through a broker or other nominee),
you may vote your shares by following the instructions included with your proxy
card. Please be aware that if you vote over the Internet, you may incur costs
such as telephone and Internet access charges for which you will be responsible.
The Internet and telephone voting facilities for shareholders of record will
close at 11:59 p.m. Eastern Daylight Savings Time on May 4, 2005.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD OR AFTER I VOTE ELECTRONICALLY
OR BY TELEPHONE?
Yes. After you have submitted a traditional proxy card, you may change your
vote at any time before the proxy is exercised by submitting either a notice of
revocation or a duly executed proxy bearing a later date. If you previously
submitted your proxy through the Internet or by telephone, you may revoke that
proxy simply by voting again prior to the time at which such facilities close,
by following the same procedures used in casting your prior vote; in that event
the later submitted vote will be recorded and the earlier vote revoked.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons named as
proxy holders on the proxy card will vote in accordance with the recommendations
of the Board of Directors. The Board's recommendation is set forth together with
the description of each item in this proxy statement. In summary, the Board
recommends a vote:
o for election of the nominated slate of Directors (see page 5); and
o for ratification of the appointment of Ernst & Young LLP as our
independent registered public accounting firm (see page 32).
With respect to any other matter that properly comes before the meeting,
the proxy holders will vote as recommended by the Board of Directors or, if no
recommendation is given, in their own discretion.
WHAT VOTE IS REQUIRED TO APPROVE EACH ITEM?
Each item to be voted on at the Annual Meeting requires the affirmative
vote of the holders of a majority of the votes cast with respect to such item. A
properly executed proxy marked "ABSTAIN" and a broker non-vote with respect to
any such matter will not be treated as a vote cast, although it will be counted
for purposes of determining whether there is a quorum.
WHO WILL BEAR THE EXPENSE OF SOLICITING PROXIES?
The cost of soliciting proxies in the form enclosed will be borne by
Engelhard. In addition to the solicitation by mail, proxies may be solicited
personally or by telephone, by our employees. We have also engaged D.F. King &
Co., Inc., 77 Water Street, New York, New York 10005, to assist in such
solicitation at an estimated fee of $14,000 plus disbursements. Engelhard may
reimburse brokers holding Common Stock in their names or in the names of their
nominees for their expenses in sending proxy material to the beneficial owners
of such Common Stock.
2
INFORMATION AS TO CERTAIN SHAREHOLDERS
WHO ARE THE LARGEST OWNERS OF ENGELHARD'S COMMON STOCK?
Set forth below is certain information with respect to the only
shareholders known to us who owned beneficially more than five percent (5%) of
our voting securities as of March 1, 2005.
AMOUNT AND
NATURE
OF BENEFICIAL PERCENT OF
OWNERSHIP CLASS
------------- ----------
Wellington Management Company, LLP (1)(2) .................. 15,083,985 12.33%
75 State Street
Boston, Massachusetts 02109
Dodge & Cox (3) ............................................ 13,134,532 10.70%
555 California Street
40th Floor
San Francisco, California 94104
Citigroup Inc. (4) ......................................... 12,875,344 10.50%
399 Park Avenue
New York, New York 10043
AMVESCAP PLC (5) ........................................... 10,591,510 8.66%
11 Devonshire Square
London EC2M 4YR
England
Vanguard Windsor Funds-Vanguard Windsor Fund (2)(6) ........ 8,925,400 7.30%
100 Vanguard Boulevard
Malvern, Pennsylvania 19355
State Street Bank and Trust Company, Trustee (7) ........... 6,271,691 5.10%
225 Franklin Street
Boston, Massachusetts 02110
------------------
(1) As reported by Wellington Management Company, LLP on an amendment to its
Schedule 13G filed with the Securities and Exchange Commission ("SEC") on
February 14, 2005. The Schedule 13G reports that Wellington Management
Company, LLP shares dispositive power with respect to all of the reported
shares, and shares voting power with respect to 5,739,485 of such shares.
(2) Wellington Management Company, LLP reports that, as an investment adviser,
it shares beneficial ownership with one of its clients, Vanguard Windsor
Funds. Consequently, the same shares may be shown as beneficially owned by
Wellington Management Company, LLP and Vanguard Windsor Funds.
(3) As reported by Dodge & Cox on an amendment to its Schedule 13G filed with
the SEC on February 10, 2005. The Schedule 13G reports that Dodge & Cox has
sole dispositive power
3
with respect to all of the reported shares, has sole voting power with
respect to 12,134,532 of such shares and shares voting power with respect
to 243,900 of such shares.
(4) As reported by Citigroup Inc. and its wholly-owned subsidiaries Citigroup
Global Markets Inc., Citigroup Financial Products Inc. and Citigroup Global
Markets Holdings Inc. on an amendment to its Schedule 13G filed with the
SEC on February 11, 2005. The Schedule 13G reports that Citigroup Inc. and
its wholly-owned subsidiaries Citigroup Global Markets Inc., Citigroup
Financial Products Inc. and Citigroup Global Markets Holdings Inc. have
shared beneficial ownership of the reported shares.
(5) As reported by AMVESCAP PLC on Schedule 13G filed with the SEC on February
15, 2005. The Schedule 13G reports that AMVESCAP PLC and its subsidiaries
AIM Advisors, Inc., AIM Funds Management, Inc., AIM Private Asset
Management, Inc., INVESCO Asset Management Ireland Limited, INVESCO Asset
Management Limited, AIM Funds Management, Inc., AIM Capital Management,
Inc., INVESCO Institutional (N.A.), Inc., and Stein Roe Investment Counsel,
Inc. hold the reported shares as follows: AIM Advisors, Inc., 1,450,800,
AIM Funds Management, Inc. 8,120,800, AIM Private Asset Management, Inc.
735,373, INVESCO Asset Management Ireland Limited 91,800, INVESCO Asset
Management Limited 300, AIM Funds Management, Inc. 17,000, AIM Capital
Management, Inc. 132,600, INVESCO Institutional (N.A.), Inc. 40,337, Stein
Roe Investment Counsel, Inc. 2,500.
(6) As reported by Vanguard Windsor Funds-Vanguard Windsor Fund on an amendment
to its Schedule 13G filed with the SEC on February 11, 2005.
(7) As reported by State Street Bank and Trust Company, Trustee, on a Schedule
13G filed with the SEC on February 15, 2005.
4
1. ELECTION OF DIRECTORS
Our Board of Directors consists of three classes, Class I, Class II and
Class III, each class serving for a full three-year term. Mr. Perry and Mr.
Watson are nominees for election as Class III Directors at the Annual Meeting.
If elected, they will serve until 2008. The Class I Directors will be considered
for reelection at our 2006 Annual Meeting. The Class II Directors will be
considered for reelection at our 2007 Annual Meeting. Norma T. Pace, a Class III
Director, will not stand for re-election to the Board of Directors after the
expiration of her term of office in May 2005 and the Board of Directors will
reduce the number of seats on the Board from seven to six and will reduce the
number of Class III Directors from three to two.
Directors will be elected by the affirmative vote of a majority of the
votes cast at the Meeting.
The persons named as proxies in the accompanying proxy intend to vote,
unless you instruct otherwise in your proxy, "FOR" the election of Mr. Perry and
Mr. Watson as Class III Directors.
INFORMATION WITH RESPECT TO NOMINEES AND
DIRECTORS WHOSE TERMS CONTINUE
The following table sets forth the name and age of each nominee and
Director whose term continues, all other positions and offices, if any, now held
with Engelhard and principal occupation during the last five years.
5
NOMINEES FOR REELECTION AT THIS MEETING,
AGES, PRINCIPAL BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, BOARD MEMBERSHIPS (CLASS III)
----------------------------------------------
BARRY W. PERRY
Age 58. Mr. Perry has been a director of Engelhard since 1997. He has been
the Chairman and Chief Executive Officer of Engelhard since January 2001.
From prior to 2000 until 2001, he was the President and Chief Operating
Officer of Engelhard. Mr. Perry is also a director of Arrow Electronics,
Inc. and Cookson Group plc.
DOUGLAS G. WATSON
Age 60. Mr. Watson has been a director of Engelhard since 1991. He has been
the Chief Executive Officer of Pittencrieff Glen Associates, a leadership
and management-consulting firm, since prior to 2000. From July 2000 to
September 2001, he was the President and Chief Executive Officer of ValiGen
N.V., a biotechnology company. He is also a director of Dendreon
Corporation, InforMedix, Inc. and Genta Inc. and Chairman of OraSure
Technologies, Inc.
6
DIRECTORS WITH TERMS EXPIRING MAY 2006,
AGES, PRINCIPAL BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, BOARD MEMBERSHIPS (CLASS I)
--------------------------------------------
MARION H. ANTONINI
Age 74. Mr. Antonini has been a director of Engelhard since 1985. He has been
a Principal of Kohlberg & Co., a private merchant banking firm, since prior
to 2000 and has served as a director and an executive for many companies in
which Kohlberg & Co. held an interest. One of these, Printing Arts America,
a private commercial printing company, filed a Chapter 11 bankruptcy
petition in October 2001, within two years of Mr. Antonini's resignation as
its President. He is also a director of Scientific-Atlanta, Inc. and
Redaelli Tecna S.p.A.
HENRY R. SLACK
Age 55. Mr. Slac k has been a director of Engelhard since 1981, resigned May
21, 1999, and was re-elected to the Board of Directors as a Class I
director on June 3, 1999. He has been the Chairman of Terra Industries
Inc., a global nitrogen-based fertilizer company, since April 2001. From
prior to 2000 to August 2002, he was Chairman of Task (USA) Inc., a private
investment company. He is also a director of African Gold Plc.
7
DIRECTORS WITH TERMS EXPIRING MAY 2007,
AGES, PRINCIPAL BUSINESS EXPERIENCE DURING THE
PAST FIVE YEARS, BOARD MEMBERSHIPS (CLASS II)
---------------------------------------------
DAVID L. BURNER
Age 65. Mr. Burner has been a director of Engelhard since October 2003. He was
the Chairman and Chief Executive Officer of Goodrich Corporation, an
aerospace systems and services company, from prior to 2000 until his
retirement in October 2003. He is also a director of Progress Energy, Inc.,
Milacron, Inc., Lance, Inc. and Briggs & Stratton Corporation.
JAMES V. NAPIER
Age 68. Mr. Napier has been a director of Engelhard since 1986. He was the
Chairman of Scientific-Atlanta, Inc., a communications manufacturing
company, from prior to 2000 until his retirement in November 2000. He is
also a director of Scientific-Atlanta, Inc., Intelligent Systems
Corporation, Vulcan Materials Company, McKesson Corporation and Wabtec
Corporation.
8
SHARE OWNERSHIP OF DIRECTORS AND OFFICERS
HOW MUCH COMMON STOCK DO ENGELHARD'S DIRECTORS AND EXECUTIVE OFFICERS OWN?
Set forth in the following table is the beneficial ownership of Common
Stock as of March 1, 2005 for all nominees, Directors, each of the Executive
Officers listed on the Summary Compensation Table and all Directors and
Executive Officers as a group.
NAME SHARES PERCENT
---- ------ -------
Marion H. Antonini .................................... 113,895(1)(2)(3)(4)(5) *
David L. Burner ....................................... 8,883(1)(2)(5) *
Arthur A. Dornbusch, II ............................... 733,745(6)(7) *
John C. Hess .......................................... 308,566(6)(7) *
James V. Napier ....................................... 67,208(1)(2)(3)(5) *
Norma T. Pace ......................................... 70,623(1)(2)(5) *
Barry W. Perry ........................................ 1,723,578(2)(6)(7) 1.38
Alan J. Shaw .......................................... 39,735(6)(7) *
Henry R. Slack ........................................ 27,137(1)(2)(4)(5) *
Michael A. Sperduto ................................... 278,323(6)(7) *
Douglas G. Watson ..................................... 85,403(1)(2)(3)(5) *
All Directors and Executive Officers as a group ....... 3,630,618(1)(2)(3)(4)(5)(6)(7) 2.90
* Represents beneficial ownership of less than 1%.
---------------
(1) Includes 22,500 shares of Common Stock subject to options granted to each
of Messrs. Antonini, Napier and Watson, and Mrs. Pace, 10,500 shares of
Common Stock subject to options granted to Mr. Slack and 750 shares of
Common Stock subject to options granted to Mr. Burner under our Directors
Stock Option Plan, which options may be exercised within 60 days from March
1, 2005.
(2) Includes 22,397, 540, 17,571, 3,289, 9,819 and 20,716 non-voting deferred
stock units earned by Messrs. Antonini, Burner, Napier, Slack, Watson and
Mrs. Pace under the Deferred Stock Plan for Non-employee Directors. Each
deferred stock unit will be converted into a share of Common Stock upon
termination of service. Also includes 21,470 non-voting restricted stock
units for Mr. Perry. See the description of Mr. Perry's restricted stock
units on page 26.
(3) Includes 55,403, 16,614 and 16,882 non-voting deferred stock units held by
Messrs. Antonini, Napier and Watson under the Deferred Compensation Plan
for Directors of Engelhard. Each deferred stock unit will be converted into
a share of Common Stock at a future date based on the prior written request
of each respective Director as prescribed by the plan.
(4) Includes 1,000 and 3,225 shares as to which Messrs. Antonini and Slack,
respectively, disclaim beneficial ownership.
(5) Includes 7,593 shares of voting, but unvested, Common Stock for each of
Messrs. Antonini, Burner, Napier, Slack, Watson, and Mrs. Pace granted
under the Stock Bonus Plan for Non-employee Directors.
9
(6) Includes 560,779, 270,831, 1,530,128, 15,681, 231,622 and 2,853,164 shares
of Common Stock subject to options granted to Messrs. Dornbusch, Hess,
Perry, Shaw, Sperduto and all Directors and Executive Officers as a group,
respectively, under our Stock Option Plan of 1991 (the "Stock Option
Plan"), the Directors Stock Option Plan and the 2002 Long Term Incentive
Plan, which options may be exercised within 60 days from March 1, 2005.
(7) Includes 16,091, 10,638, 74,613, 8,372, 15,310 and 134,282 shares of
voting, but unvested, restricted Common Stock held by Messrs. Dornbusch,
Hess, Perry, Shaw, Sperduto and all Directors and Executive Officers as a
group, respectively.
CORPORATE GOVERNANCE
HOW OFTEN DID THE BOARD OF DIRECTORS MEET DURING 2004?
Our Board of Directors held a total of seven meetings during 2004. During
2004, all of our Directors attended more than 90% of the meetings of the Board
and meetings of committees of the Board on which they served.
Engelhard's Corporate Governance Guidelines provide that directors are
expected to attend the annual meeting of shareholders. All then members of
Engelhard's Board of Directors attended the Annual Meeting of Shareholders in
2004.
WHAT COMMITTEES DOES THE BOARD OF DIRECTORS HAVE?
Initially in 2004, the standing committees of the Board of Directors
included an Audit Committee, a Compensation Committee and a Stock Option/Stock
Bonus Committee. Effective February 12, 2004, the Board of Directors revised its
committee structure. Among the standing committees of the Board of Directors are
the Audit Committee, the Compensation Committee and the Nominating and
Governance Committee. Copies of the charters for these committees, as well as
Engelhard's Corporate Governance Guidelines, Engelhard's Policies of Business
Conduct and Senior Financial Officer Ethics Code, are available under the
Corporate Governance portion of the Investor Relations section of our website at
WWW.ENGELHARD.COM and without charge in print to any shareholder who requests
them from our Corporate Secretary. The Board of Directors also has a Pension and
Employee Benefit Committee and an Executive Committee.
AUDIT COMMITTEE
The members of the Audit Committee are Mr. Watson (Chairman), Mr. Burner
and Mr. Napier. The Audit Committee assists the Board of Directors' oversight of
(a) the integrity of Engelhard's financial statements, (b) the independent
auditor's qualifications and independence, (c) the performance of Engelhard's
internal audit function and independent auditors and (d) Engelhard's compliance
with legal and regulatory requirements. The Audit Committee has the sole
authority to appoint and terminate Engelhard's independent auditors. The Board
of Directors has determined that all three members of the Audit Committee are
audit committee financial experts as described in Item 401(h) of Regulation S-K.
In addition, the Board of Directors has determined that each of the members of
the Audit Committee is "independent" as defined by the New York Stock Exchange
10
("NYSE") Listing Standards and the rules of the SEC applicable to audit
committee members. The Audit Committee meets the definition of an audit
committee as set forth in Section 3(a)(58)(A) of the Securities Exchange Act of
1934. See "Report of Audit Committee" on page 30 for more information. The Audit
Committee held 12 meetings during 2004 and conducted a review and
self-assessment in 2005. Mr. Burner currently serves on three other audit
committees, in addition to Engelhard's. The Board of Directors has determined
that such service would not impair Mr. Burner's ability to effectively serve on
Engelhard's Audit Committee, and has approved such service pursuant to our
Corporate Governance Guidelines.
COMPENSATION COMMITTEE
The members of the Compensation Committee are Messrs. Antonini (Chairman)
and Slack and Mrs. Pace. The Compensation Committee assists the Board of
Directors by taking direct responsibility for (a) reviewing and approving
corporate goals and objectives relevant to the Chief Executive Officer's
compensation, evaluating the Chief Executive Officer's compensation in light of
these goals and objectives and, either as a committee or together with the other
independent directors (as directed by the Board), determining and approving the
Chief Executive Officer's compensation level based on this evaluation, (b)
reviewing and approving compensation for executives (other than the Chief
Executive Officer) and reviewing and making recommendations to the Board with
respect to incentive compensation and equity-based plans, and (c) producing an
annual report on executive compensation for inclusion in the Company's proxy
statement in accordance with applicable laws, rules and regulations. The Board
of Directors has determined that each member of the Compensation Committee is
"independent" as defined by the NYSE Listing Standards. The Compensation
Committee (and its predecessor) held seven meetings during 2004 and conducted a
review and self-assessment in 2005. See "Compensation Committee Report on
Executive Compensation" on page 24 for more information.
NOMINATING AND GOVERNANCE COMMITTEE
The members of the Nominating and Governance Committee are Messrs. Antonini
(Chairman) and Watson. The Nominating and Governance Committee is primarily
responsible for (a) identifying individuals qualified to become Board members
and recommending to the Board the director nominees for the next annual meeting
of shareholders or to be appointed by the Board to fill an existing or newly
created vacancy on the Board, (b) overseeing the evaluation of the Board and
management and (c) developing and recommending to the Board the Corporate
Governance Guidelines applicable to the Company. The Board of Directors has
determined that each member of the Nominating and Governance Committee is
"independent" as defined by the NYSE Listing Standards and our Director
Independence Standards. The Nominating and Governance Committee was formed in
February 2004, held one meeting in 2004 and conducted a review and
self-assessment in 2005.
The Nominating and Governance Committee selects each nominee based on the
nominee's skills, achievements and experience. As set forth in Engelhard's
Corporate Governance
11
Guidelines, the following criteria will be considered in selecting candidates
for the Board: independence, wisdom, integrity, an understanding and general
acceptance of Engelhard's corporate policy, valid business or professional
knowledge and experience that can bear on Engelhard's and the Board of
Directors' challenges and deliberations, a proven record of accomplishment with
excellent organizations, an inquiring mind, a willingness to speak one's mind,
an ability to challenge and stimulate management, future orientation, a
willingness to commit time and energy, diversity, and international/global
experience.
When seeking candidates for Director, the Nominating and Governance
Committee may solicit suggestions from incumbent Directors, management,
shareholders or others. After conducting an initial evaluation of a candidate,
the Nominating and Governance Committee may also ask the candidate to meet with
management. If the Committee believes a candidate would be a valuable addition
to the Board, it will recommend to the full Board that candidate's election. The
Nominating and Governance Committee has the authority under its charter to
retain a search firm. The Company has engaged an executive recruitment firm,
reporting to the Nominating and Governance Committee, to identify and conduct
preliminary evaluations of potential nominees.
Engelhard's Corporate Governance Guidelines provide that the Governance and
Nominating Committee will consider proposals for nominees for Director by
shareholders, which are made in writing to Corporate Secretary, Engelhard
Corporation, 101 Wood Avenue, Iselin, New Jersey 08830. In order to nominate a
director at the Annual Meeting, Engelhard's By-Laws require that a shareholder
follow the procedures set forth in Article II, Section 7 of Engelhard's By-Laws.
In order to recommend a nominee for a director position, a shareholder must be a
shareholder of record at the time it gives notice of recommendation and must be
entitled to vote for the election of directors at the meeting at which such
nominee will be considered. Shareholder recommendations must be made pursuant to
written notice delivered to the Secretary at the principal executive offices of
Engelhard (i) in the case of a nomination for election at an annual meeting, not
less than 60 days prior to the first anniversary of the date of Engelhard's
notice of annual meeting for the preceding year's annual meeting; and (ii) in
the case of a special meeting at which directors are to be elected, not later
than the close of business on the later of the 90th day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the meeting and of the nominees proposed by the Board to be
elected at the special meeting. In the event that the date of the annual meeting
is changed by more than 30 days from the anniversary date of the preceding
year's annual meeting, the shareholder notice described above will be deemed
timely if it is received not later than the close of business on the later of
the 90th day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made.
The shareholder notice must set forth the following:
o As to each person the shareholder proposes to nominate for election as a
director, all information relating to such person that would be required
to be disclosed in solicitation of proxies for the election of such
nominees as Directors pursuant to Regulation 14A under
12
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such
person's written consent of the nominee to serve as a director if elected, and
o As to the nominating shareholder and the beneficial owner, if any, on
whose behalf the nomination is made, such shareholder's and beneficial
owner's, name and address as they appear on Engelhard's books, the class
and number of shares of Engelhard's common stock which are owned
beneficially and of record by such shareholder and such beneficial
owner, and whether either such shareholder or such beneficial owner
intends to deliver a proxy statement and form of proxy to shareholder.
In addition to complying with the foregoing procedures, any shareholder
nominating a director must also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder.
HOW DOES THE COMPANY MAKE INDEPENDENCE DETERMINATIONS FOR DIRECTORS?
Under the Company's Corporate Governance Guidelines, a majority of the
Board must be comprised of directors who are independent under the Corporate
Governance Standards of the New York Stock Exchange. To be deemed "independent,"
the Board must determine, after due deliberation, that the director has no
material relationship with the Company other than as a director. In making such
determination, the Board adheres to all of the specific tests for independence
included in the New York Stock Exchange listing standards and considers all
other facts and circumstances it deems necessary or advisable and the standards
of director independence established by the Company. During the course of a
year, directors are expected to inform the Board of any material changes in
their circumstances or relationships that may impact their designation by the
Board as independent.
The basis for a Board's determination that a relationship is not material
must be disclosed in the Company's annual proxy statement. In this regard,
pursuant to the Corporate Governance Standards of the New York Stock Exchange,
the Board adopted the Director Independence Standards to assist it in making
determinations of independence. A copy of the Director Independence Standards
used to determine is attached as Appendix B to this Proxy Statement. Any
determination of independence for a director who does not meet these standards
must be specifically explained.
HOW CAN I COMMUNICATE WITH BOARD MEMBERS?
Except as otherwise designated, the Chairman of the Nominating and
Governance Committee will serve as the presiding Director of regularly scheduled
meetings of the Non-Management Directors. Engelhard's Corporate Governance
Guidelines provide that shareholders of Engelhard and other interested parties
may communicate with one or more of the Non-Management Directors by mail in care
of General Counsel, 101 Wood Avenue, Iselin, New Jersey 08830. Such
communications should specify the intended recipient or recipients. All such
communications, other than unsolicited commercial solicitations or
communications, will be forwarded to any specific addressee and any other
appropriate Director or Directors for review. Unsolicited commercial materials
will be available to any Non-Management Director who wishes to review it.
13
HOW ARE DIRECTORS COMPENSATED?
Directors who are not our employees each receive a retainer at the annual
rate of $50,000. In addition, Non-employee Directors receive a $1,500 fee for
each Board meeting attended. Non-employee Directors also receive a $1,500 fee
for each committee meeting attended; a $5,000 annual retainer for each committee
on which they serve; and the chairman of the audit and compensation committee
receives an additional $10,000 annual retainer, whereas the chairman of each
other committee receives an additional $7,500 annual retainer. Directors who are
employed by us do not receive any Directors' fees or retainers.
Pursuant to our Deferred Stock Plan for Non-Employee Directors (the
"Deferred Stock Plan"), each Non-employee Director is credited with deferred
stock units, each of which evidences the right to receive a share of Common
Stock of Engelhard upon the Director's termination of service. Deferred stock
units were credited to the accounts of the Non-employee Directors annually on
each May 31 with an amount of deferred stock units calculated by dividing an
amount equal to 40% of the annual retainer payable to such Non-employee Director
then in effect by the average daily closing price per share of Common Stock of
Engelhard for the 20 trading days ending two days prior to such date. For years
beginning with 2003, the date deferred stock units will be credited to accounts
of Non-employee Directors has been changed to the record date for payment of
dividends on shares of Common Stock of Engelhard occurring in the last month of
the second calendar quarter of each year, and deferred stock units will be
credited only to Non-employee Directors serving on the May 31 immediately
preceding the crediting date. When a regular cash dividend is paid on the Common
Stock, the dividend equivalent on deferred stock units is reinvested in
additional deferred stock units. The entire balance of a Non-employee Director's
account under the Deferred Stock Plan will be paid to the Non-employee Director,
in either a lump sum or installments at the election of such Non-employee
Director, in shares of our Common Stock upon the Non-employee Director's
termination of service. If a "change in control" occurs and the Non-employee
Director ceases to be a Director or the Deferred Stock Plan is terminated,
shares equal to the entire balance of the account will be distributed within 30
days.
Pursuant to our Stock Bonus Plan for Non-Employee Directors (the "Directors
Stock Bonus Plan"), each person who becomes a Non-employee Director prior to
June 30, 2006 shall be awarded 7,593 shares of our Common Stock effective as of
such person's election to our Board of Directors. Such shares will tentatively
vest in equal increments over a ten-year period. Directors are entitled to
receive cash dividends on and to vote shares which are the subject of an award
prior to their distribution or forfeiture. Upon termination of the Director's
service as a Non-employee Director, the Director (or, in the event of his or her
death, his or her beneficiary) shall be entitled, in the discretion of the
committee formed to administer the Directors Stock Bonus Plan, to receive the
shares awarded to such Director which have tentatively vested up to the date of
such termination of service. Shares may be received prior to such date if there
has been a "change in control." If receipt of shares is accelerated due to a
change in control, an additional payment will be made to compensate for the loss
of the tax deferral.
14
Pursuant to our Directors Stock Option Plan, each Non-employee Director in
office on the date of the regular meeting of the Board in December of each year
will automatically be granted an option to purchase 3,000 shares of Common Stock
with an exercise price equal to the fair market value of such shares at the date
of grant. Each option becomes exercisable in four equal installments, commencing
on the first anniversary of the date of grant and annually thereafter. Each
option terminates on the tenth anniversary of the date of grant. Each option
held by a director which was granted more than one year before his or her
termination of service as a director shall become fully exercisable upon
termination if such termination is a result of disability, death or retirement
after attaining age 65; options may become exercisable prior to such date if
there has been an "acquisition of a control interest."
Pursuant to our Deferred Compensation Plan for Directors, Non-employee
Directors may elect to defer payment of all or a designated portion of their
compensation for services as a Director into a cash or stock account. Under our
Deferred Compensation Plan for Directors, deferred amounts will be paid at time
of a "change in control" if the participant has made an advance election to that
effect. In the event distribution of deferred amounts is so accelerated, an
additional payment will be made in order to compensate for the loss of tax
deferral resulting from the accelerated payment.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our Executive
Officers and Directors and persons who own more than 10% of a registered class
of Engelhard's equity securities to file initial reports of ownership and
changes in ownership with the SEC and the NYSE. Such Executive Officers,
Directors and shareholders are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file. Based solely on a review of the
copies of such forms furnished to us and written representations from our
Executive Officers and Directors, all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis for
2004.
CERTAIN TRANSACTIONS
Citibank, N.A., a subsidiary of Citigroup Inc., which reports beneficial
ownership of more than 5% of our Common Stock, participated with other lenders
in lines of credit available to Engelhard under revolving credit facilities.
Citibank's total commitment was $39,000,000, none of which was drawn in 2004. In
2004, Citibank received an initial fee of $6,000 and annual facility fees of
approximately $35,500 for these facilities. We use subsidiaries of Citigroup, as
well as other firms, to provide cash management services to Engelhard. Fees to
subsidiaries of Citigroup for these services aggregated less than $30,000 in
2004.
Subsidiaries of Citigroup and other firms, engage in foreign exchange and
commodities transactions with Engelhard in the ordinary course of business. All
of these transactions are negotiated at arms-length as principals in competitive
markets. During 2004, foreign exchange transactions with subsidiaries of
Citigroup aggregated approximately $57,000,000. In addition,
15
during 2004, Engelhard provided services in precious metals financing
transactions in which subsidiaries of Citigroup received funds from third
parties. Engelhard received approximately $159,945 in fees from subsidiaries of
Citigroup in connection with these transactions.
Vanguard Group, an affiliate of Vanguard Windsor Funds, which reports
beneficial ownership of more than 5% of our Common Stock, received $121,260 for
administering 401(k) plans for our employees during 2004.
State Street Bank and Trust Company, which reports beneficial ownership of
more than 5% of our Common Stock, provides asset management services for our
domestic pension plans. Plan assets under management are $51,721,370 at December
31, 2004 and fees paid by our pension plan trust totaled $27,635 for the year
ended December 31, 2004.
16
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the compensation paid by us for services
rendered in all capacities during each of the last three fiscal years to our
Chief Executive Officer and our other four most highly compensated Executive
Officers.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS (1)
---------------------------------------------- --------------------------
OTHER ANNUAL RESTRICTED ALL OTHER
COMPENSATION STOCK COMPENSATION
YEAR SALARY ($) BONUS ($) ($) AWARDS ($) (2) OPTIONS (#) ($) (1)(3)
---- ---------- ---------- ------------ -------------- ----------- ------------
Barry W. Perry .......... 2004 1,100,000 1,760,000 214,466(5) 465,067 258,688 679,691(7)
Director, Chairman 2003 1,000,000 2,014,900(4) 145,768(5) 1,000,288 238,388 375,398
and Chief Executive 2002 900,000 1,100,000 143,316(5) 326,403 293,352 355,040
Officer
Michael A. Sperduto ..... 2004 333,773 330,000 -- 169,198 67,852 31,339
Vice President, 2003 307,625 243,400 -- 143,434 61,168 29,581
Chief Financial Officer 2002 267,500 200,000 -- 127,755 79,628 27,977
Arthur A. Dornbusch, II 2004 333,456 265,000 13,771(6) 142,657 60,172 576,558(7)
Vice President, 2003 325,323 218,100 12,092(6) 135,209 57,460 100,607
General Counsel 2002 315,848 190,000 10,443(6) 127,755 83,520 95,150
and Secretary
John C. Hess ............ 2004 272,255 215,000 -- 101,941 38,660 113,128(7)
Vice President, 2003 261,783 167,400 -- 91,486 36,208 54,658
Human Resources 2002 249,318 144,000 -- 82,017 49,884 51,693
Alan J. Shaw ............ 2004 234,600 127,363 -- 50,970 18,072 --
Controller 2003 230,000 101,400 -- 52,092 18,724 --
2002 213,225 289,792 -- 35,789 -- --
----------------
(1) Our Key Employees Stock Bonus Plan, our Stock Option Plan, our Restricted
Cash Incentive Compensation Plan, our 2002 Long Term Incentive Plan and our
2003 Share Performance Incentive Plan provide for acceleration of vesting
in the event of a "change in control." For information on what constitutes
a "change in control," see "Employment Contracts, Termination of Employment
and Change in Control Arrangements" on page 21.
(2) As of December 31, 2004, Messrs. Perry, Sperduto, Dornbusch, Hess and Shaw
held 97,062, 13,870, 18,319, 11,456 and 11,854 unvested shares,
respectively, of stock and stock units, which were awarded pursuant to our
Key Employees Stock Bonus Plan and 2002 Long Term Incentive Plan having a
market value of $2,976,892, $425,393, $561,844, $351,356 and $363,562,
respectively. These amounts do not include the grants of restricted stock
which were made in 2005 for services rendered during 2004. Restricted stock
awards of Engelhard's Common Stock granted under the Key Employees Stock
Bonus Plan and the restricted stock units granted under the 2002 Long Term
Incentive Plan vest in five equal annual installments commencing in the
year following the grant (or in the case of the January 2002 award of
29,300 shares to Mr. Perry, such award vests entirely on the fifth
anniversary of the date of grant). Vesting will be accelerated upon the
occurrence of a "change in control." We pay dividends on restricted stock
and credit dividend equivalents on restricted stock units, if and to the
extent paid on Common Stock generally, but pay no dividends on stock
options. For information on what constitutes a "change in control," see
"Employment Contracts, Termination of Employment and Change in Control
Arrangements" on page 21.
(3) Amounts for 2003 and 2002 represents payouts pursuant to restricted cash
awards made in 2000 under the Restricted Cash Incentive Compensation Plan.
Amounts for 2004 include payments to Messrs. Perry, Sperduto, Dornbusch and
Hess of $397,707, $31,339, $106,585 and $57,906, respectively, pursuant to
the Restricted Cash Incentive Compensation Plan.
(4) Includes $750,000 awarded under the 2003 Share Performance Incentive Plan.
Under this plan, Mr. Perry was entitled to a formula-based cash award if
Engelhard's average closing stock price from January 1, 2003 through
December
17
31, 2003 exceeded $28 and the average return on Engelhard's Common Stock
during that period exceeded the average return on the S&P All Chemicals
Index, or, if greater, an award of $750,000 if Engelhard's average closing
stock price for the last twenty trading days of 2003 exceeded 115% of the
average closing price for the same period in 2002. The average closing
price condition was met, and Mr. Perry's award has been credited to a
deferred compensation account, and will vest in three equal annual
installments beginning on the first anniversary of the date of grant. The
amount of any vested bonus, together with interest credited thereon, will
generally be payable upon termination of Mr. Perry's employment. Vesting
will accelerate upon a termination of Mr. Perry's employment due to
disability, retirement or death, and the award will continue to vest if Mr.
Perry's employment is terminated by Engelhard not for cause. This award is
not included in computation of Mr. Perry's pension benefits.
(5) Includes $100,000 for financial and tax planning, legal services and life
insurance in 2004. Also includes $25,000 for life insurance in 2003 and
2002 and $47,068 for supplemental disability insurance coverage in each of
2004, 2003 and 2002.
(6) Represents interest accrued during 2004, 2003 and 2002 in excess of 120% of
the applicable federal interest rate with respect to salary deferrals.
(7) In light of the expiration of certain options held by Messrs. Perry,
Dornbusch and Hess during a company-mandated blackout period in 2004, the
Board authorized cash awards to Messrs. Perry, Dornbusch and Hess, of
$281,984, $469,973, and $55,222, respectively, which represented the
economic value of the expired options as of the expiration date of the
options. These amounts are included in the "All Other Compensation" amount
reflected in the Summary Compensation Table.
The following table sets forth information concerning individual grants of
stock options made under the 2002 Long Term Incentive Plan in December 2004 and
February 2005 for services rendered during 2004 by each of the named Executive
Officers.
OPTION GRANTS FOR SERVICES RENDERED DURING 2004
GRANT DATE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------------------------------------- ------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES FOR EXERCISE OR GRANT DATE
OPTIONS SERVICES RENDERED BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED (#) (1) DURING 2004 ($/SH) DATE ($) (2)
--------------------------- --------------- ----------------- ----------- ---------- -------------
Barry W. Perry ............ 185,808 16% 28.95 12/9/2014 1,843,215
72,880 6% 30.09 2/3/2015 760,867
Michael A. Sperduto ....... 41,348 4% 28.95 12/9/2014 410,172
26,504 2% 30.09 2/3/2015 276,702
Arthur A. Dornbusch, II ... 37,820 3% 28.95 12/9/2014 375,174
22,352 2% 30.09 2/3/2015 233,355
John C. Hess .............. 22,692 2% 28.95 12/9/2014 225,105
15,968 1% 30.09 2/3/2015 166,706
Alan J. Shaw .............. 10,088 1% 28.95 12/9/2014 100,073
7,984 1% 30.09 2/3/2015 83,353
--------------
(1) Options have a ten-year term and vest in four equal annual installments
beginning on the first anniversary of the date of grant. Vesting will be
accelerated upon the occurrence of a "change in control." For information
as to what constitutes a "change in control," see "Employment Contracts,
Termination of Employment and Change in Control Arrangements" on page 21.
18
(2) The Black-Scholes option pricing model was chosen to estimate the grant
date present value of the options set forth in this table. Our use of this
model should not be construed as an endorsement of its accuracy at valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price.
The real value of the options in this table depends upon the actual changes
in the market price of the Common Stock during the applicable period. The
model assumes:
(a) an option term of 6.75 years, which represents anticipated exercise
trends for the named Executive Officers;
(b) interest rates of 3.85% and 3.94% for December 2004 and February 2005,
respectively, that represent the current yield curves as of the grant
dates;
(c) an average volatility of approximately 32.30% calculated using average
weekly stock prices for the 6.75 years prior to the grant date; and
(d) dividend yields of 1.52% and 1.46% for December 2004 and February 2005,
respectively (the dividend yields on the applicable grant dates).
The following table sets forth information concerning each exercise of
stock options during 2004 by each of the named Executive Officers and the value
of unexercised options at December 31, 2004.
AGGREGATE OPTION EXERCISES IN 2004 AND VALUES AT DECEMBER 31, 2004
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 2004 (#) DECEMBER 31, 2004 ($)
EXERCISE REALIZED ------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------- ----------- -------- ----------- ------------- ----------- --------------
Barry W. Perry ............. -- -- 1,450,590 693,769 14,315,568 2,532,075
Michael A. Sperduto ........ -- -- 208,723 161,404 1,940,352 661,280
Arthur A. Dornbusch, II .... -- -- 546,117 168,691 5,764,937 730,167
John C. Hess ............... -- -- 259,709 103,506 2,757,440 445,626
Alan J. Shaw ............... -- -- 13,517 26,295 134,894 40,058
19
PENSION PLANS
The following table shows estimated annual pension benefits payable to a
covered participant at normal retirement age under our qualified defined benefit
pension plan, as well as the non-qualified supplemental retirement program. This
non-qualified plan provides benefits that would otherwise be denied participants
by reason of certain Internal Revenue Code limitations on qualified plan
benefits and provides enhanced benefits for certain named key executives,
including the individuals named in the Summary Compensation Table, based on
remuneration that is covered under the plans and years of service with Engelhard
and its subsidiaries.
PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------------------------
FINAL AVERAGE PAY 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
---------------------------- ---------- ---------- ---------- ---------- ----------
$ 400,000 ............... $ 133,008 $ 181,008 $ 229,008 $ 277,008 $ 277,008
600,000 ............... 205,008 277,008 349,008 421,008 421,008
800,000 ............... 277,008 373,008 469,008 565,008 565,008
1,000,000 ............... 349,008 469,008 589,008 709,008 709,008
1,200,000 ............... 421,008 565,008 709,008 853,008 853,008
1,400,000 ............... 493,008 661,008 829,008 997,008 997,008
1,600,000 ............... 565,008 757,008 949,008 1,141,008 1,141,008
1,800,000 ............... 637,008 853,008 1,069,008 1,285,008 1,285,008
2,000,000 ............... 709,008 949,008 1,189,008 1,429,008 1,429,008
2,200,000 ............... 781,008 1,045,008 1,309,008 1,573,008 1,573,008
2,400,000 ............... 853,008 1,141,008 1,429,008 1,717,008 1,717,008
2,600,000 ............... 925,008 1,237,008 1,549,008 1,861,008 1,861,008
2,800,000 ............... 997,008 1,333,008 1,669,008 2,005,008 2,005,008
3,000,000 ............... 1,069,008 1,429,008 1,789,008 2,149,008 2,149,008
3,200,000 ............... 1,141,008 1,525,008 1,909,008 2,293,008 2,293,008
3,400,000 ............... 1,213,008 1,621,008 2,029,008 2,437,008 2,437,008
3,600,000 ............... 1,285,008 1,717,008 2,149,008 2,581,008 2,581,008
A participant's remuneration covered by our pension plans is his or her
average monthly earnings, consisting of base salary and regular cash bonuses, if
any (as reported in the Summary Compensation Table), for the highest 60
consecutive calendar months out of the 120 completed calendar months next
preceding termination of employment. With respect to each of the individuals
named in the Summary Compensation Table on page 17, credited years of service
under the plans as of December 31, 2004 are as follows: Mr. Perry, 16 years; Mr.
Sperduto, 21 years; Mr. Dornbusch, 28 years; Mr. Hess, 20 years; and Mr. Shaw,
23 years. Benefits shown are computed as a straight line single life annuity
beginning at age 65 and the benefits listed in the Pension Plan Table are not
subject to any deduction for Social Security or other offset amounts.
20
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL ARRANGEMENTS
Engelhard entered into an employment agreement with Mr. Perry dated as of
August 2, 2001. The initial term of the agreement was extended until December
31, 2003. Mr. Perry's employment agreement is automatically extended for
successive periods so that the remaining term shall always be twelve months,
unless notice of intention not to extend shall have been given in writing twelve
months prior to the expiration of any extended term. The agreement will
terminate no later than December 31, 2011. The agreement provides for an annual
salary of not less than $750,000 for calendar year 2001, $900,000 for calendar
year 2002 and $1,000,000 for calendar year 2003, with increases thereafter to be
determined by the Compensation Committee of the Board of Directors. In addition,
the employment agreement provides for participation in Engelhard's annual
incentive program with target award amounts (not less than one-third of which
shall be in the form of a cash bonus) of 75% of the annual salary for 2001, 100%
of the annual salary for 2002, and 125% of the annual salary for 2003 and
thereafter. The agreement (and similar arrangements established by the
Compensation Committee) also provided for a formula-based grant of additional
equity awards for 2001, 2002, 2003 and 2004 if Engelhard's average closing stock
price and the total return on Engelhard's Common Stock met designated targets.
Mr. Perry received awards under these arrangements for 2001 and 2003. Mr. Perry
also received an additional five years of credited service under our
supplemental retirement program, is entitled to participate in the benefit plans
of Engelhard and is entitled to certain other perquisites.
In the event Engelhard terminates Mr. Perry's employment other than for
cause (as defined in the agreement) or in the event Mr. Perry terminates his
employment for good reason (as defined in the agreement), the employment
agreement provides that Mr. Perry will receive an amount equal to two times the
lesser of (i) 4.5 times his then current annual base salary or (ii) the average
for the three calendar years preceding such calculation of the sum of Mr.
Perry's annual base salary, annual bonus and the grant date cash value of equity
based awards. Amounts payable pursuant to this termination provision will be
reduced by certain severance amounts paid to Mr. Perry under the Change in
Control Agreements described below. Upon any such termination, Mr. Perry will
also be entitled to continued benefits for two years following such termination.
Pursuant to our Change in Control Agreements, we will provide severance
benefits in the event of a termination of an Executive (as defined), except a
termination:
(1) because of death,
(2) because of "Disability,"
(3) by Engelhard for "Cause," or
(4) by the Executive other than for "Good Reason,"
within the period beginning on the date of a "Potential Change in Control" (as
such terms are defined in the Change in Control Agreement) or "change in
control" (as defined below) and ending
21
on the third anniversary of the date on which a "change in control" occurs. The
severance benefits include:
(1) the payment of salary to the Executive through the date of termination
of employment together with salary in lieu of vacation accrued;
(2) an amount equal to a pro-rated incentive pool award under our
Incentive Compensation Plan, determined as set forth in the Agreement;
(3) an amount equal to two times the sum of the highest annual salary and
incentive pool award in effect during any of the preceding 36 months,
determined as set forth in the Agreement;
(4) continued coverage under our life, disability, health, dental and
other employee welfare benefit plans for up to two years;
(5) continued participation and benefit accruals under our Supplemental
Retirement Program for two years following the date of termination;
and
(6) an amount sufficient, after taxes, to reimburse the Executive for any
excise tax under Section 4999 of the Internal Revenue Code of 1986, as
amended.
Each of Messrs. Perry, Sperduto, Dornbusch and Hess is defined as an
Executive.
For purposes of our Change in Control Agreements, a "change in control" is
triggered if one of the following occurs:
(1) twenty-five percent or more of our outstanding securities entitled to
vote in the election of directors shall be beneficially owned,
directly or indirectly, by any person or group of persons, other than
the groups presently owning the same, or
(2) a majority of our Board of Directors ceases to consist of the existing
membership or successors approved by the existing membership or their
similar successors, or
(3) shareholders approve a reorganization or merger with respect to which
the persons who were the beneficial owners of our outstanding voting
securities immediately prior thereto do not, following the
reorganization or merger, beneficially own more than 60% of the
outstanding voting securities of the corporation resulting from the
reorganization or merger in substantially the same proportions as
their ownership of our voting securities immediately prior thereto, or
(4) shareholder approval of either:
(a) a complete liquidation or dissolution of Engelhard or
(b) a sale or other disposition of all or substantially all of the
assets of Engelhard, other than to a corporation, with respect to
which following such sale or other disposition, more than 60% of
Engelhard's outstanding securities entitled to vote generally in
the
22
election of directors are thereafter beneficially owned, in
substantially the same proportions, by all or substantially all
of the individuals and entities who were the beneficial owners of
such securities prior to such sale or other disposition.
Our Key Employees Stock Bonus Plan, our Stock Option Plans and our 2002
Long Term Incentive Plan, in which all of the Executive Officers participate,
provide for the acceleration of vesting of awards granted in the event of a
"change in control" as defined above, except that a "change in control" is
triggered by twenty percent, rather than twenty-five percent, beneficial
ownership of Engelhard's outstanding securities entitled to vote in the election
of directors, directly or indirectly, by any person or group of persons, other
than the groups presently owning the same. If vesting of awards under the Key
Employees Stock Bonus Plan is accelerated, an additional payment will be made to
compensate for the loss of tax deferral.
Unless a contrary advance election is made, amounts deferred under our
Deferred Compensation Plan for Key Employees will be paid in a lump sum upon a
"change in control" (a "change in control" for this purpose will occur if either
(1) or (2) in the above definition of "change in control" occurs). If payments
are so accelerated, an additional payment will be made in order to compensate
for the loss of tax deferral. Under our Directors and Executives Deferred
Compensation Plans, which provided for elective deferrals of compensation earned
for years from 1986 through 1993, deferred amounts will be paid at the time of
an "acquisition of a control interest" if the participant has made an advance
election to that effect. In the event distribution of deferred amounts is so
accelerated, an additional payment will be made in order to compensate for the
loss of tax deferral resulting from the accelerated payment. In addition,
certain supplemental retirement benefits under our Supplemental Retirement
Program will vest upon a "change in control" (defined as described above in the
case of the Change in Control Agreements).
23
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Under the overall direction of the Compensation Committee of the Board of
Directors and in accordance with our Stock Option Plans and Long Term Incentive
Plan approved by our shareholders, we have developed and implemented
compensation programs designed to:
o Attract and retain key employees who can build and continue to grow a
successful company;
o Provide incentive to achieve high levels of company, business, and
individual performance; and
o Maintain and enhance alignment of employee and shareholder interests.
The Compensation Committee is composed entirely of Non-employee Directors
individually noted as signatories to this report.
The Compensation Committee is responsible for overseeing the development
and for review and approval of:
o Overall compensation policy;
o Salaries for the Chief Executive Officer and for approximately 18 other
senior managers worldwide;
o Aggregate cash incentive awards for Engelhard and specific individual
cash awards under the annual plan for the Chief Executive Officer and
approximately 18 other senior managers worldwide;
o Plan design and policies related to senior management and employee
awards of options and restricted stock; and
o Individual grants under the Stock Option Plans, Stock Bonus Plan and
awards under the 2002 Long Term Incentive Plan to the Chief Executive
Officer and other senior employees worldwide.
In exercising those responsibilities and in determining the compensation in
particular of Mr. Perry and in general of other senior managers individually
reviewed, the Committees examine and set:
1. BASE SALARY
The Compensation Committee reviews salaries annually against industry
practices as determined by a number of professional outside consultants who
conduct annual surveys. Our current competitive target is to pay at or above the
median for positions of comparable level. This target is being achieved on
average for the professional, technical, and managerial salaried work force.
Salary structures are set each year based on our target and its actual
competitive position. A market analysis was done on the existing salary
structure and it was determined that no major structure adjustments were
necessary. Likewise, merit budgets are established based on a competitive
target, actual competitive position, and our desire to
24
recognize and reward individual contribution. For international employees and
non-exempt salaried employees in the United States, structure adjustments and
merit budgets are determined based on local market conditions.
Individual merit adjustments are based upon the managers' quantitative
and qualitative evaluation of individual performance, including feedback from
customers served, against business objectives such as earnings, return on
capital, free cash flow, market share, new customers, and development of new
commercial products. Performance is also considered in the context of
expectations for behavior and the individuals' positions in their respective
salary-ranges.
Mr. Perry's salary was increased 2.7% for 2005 in accordance with
competitive practice. Base salary continues to be less than one-fourth of total
compensation for Mr. Perry and generally less than one-half of total
compensation for other senior management. This reflects our emphasis on
non-fixed compensation, which varies with Engelhard performance, and on other
equity vehicles which are closely aligned with shareholder interests.
2. ANNUAL CASH AND LONG TERM EQUITY INCENTIVE COMPENSATION
Our Management Incentive Plan integrates incentive compensation
vehicles (including cash bonus award, restricted stock and stock options) to
link total compensation for the participant with both competitive practice and
the performance of Engelhard and/or the applicable business unit and the
individual. The plan facilitates clarity of performance expectations and
encourages the identification and commitment to exceptional results. Overall
incentive pools are established for cash, restricted stock, and stock options.
The pools are determined by a formula based on competitive total compensation
for comparable performance; desired compensation mix among cash, restricted
stock and options; and on the actual performance of Engelhard and its business
units against specific predetermined levels of earnings targets. A threshold
level is established below which incentives will not normally be paid.
Management, under the direction of the Committee, may adjust these pools up or
down based on the economic climate or other special circumstances. Individual
awards are determined based on performance against specific objectives within
the limits of the pools.
The value of awards made for services in 2004 under Engelhard's
Management Incentive Plan increased by 17% from 2003. As provided under this
plan, the level of the pool generated for Engelhard overall and each business
group depends upon that group's actual performance against targets established
at the beginning of 2004. Once each group's pool was established, individual
performance based awards were made as described below. In assessing the
appropriate level of compensation for Mr. Perry, the Compensation Committee
retained an independent compensation consultant, which was charged with
reviewing both competitive practice and the Company's performance against
applicable comparator companies to ensure that Mr. Perry's compensation was
properly aligned with shareholders' interests and to further ensure that his
compensation was aligned with performance. As part of this process the Company's
performance against a peer group of companies was assessed; among the
25
measures reviewed were one and three year results for operating margin, return
on invested capital, total shareholder return, and return on average assets. In
the aggregate these measures indicate that the Company's performance was at or
about the 75th percentile when reviewed against the equivalent performance of
the peer group. (Such review was supplemental to, and supportive of, other
similar studies conducted at the Committee's direction during 2004.)
a. ANNUAL CASH INCENTIVE PROGRAM
This program is designed to provide focus on expected annual
results and recognition of accomplishment for the year.
For 2004, actual cash payments determined under the Management
Incentive Plan, including the cash incentive payments to all Executive
Officers, were 92% of the competitively defined pool as factored for
performance.
For the year 2004, Mr. Perry received a cash incentive award of
$1,760,000, compared with $2,014,900 for 2003. The 2003 amount
includes $750,000 awarded under the 2003 Share Performance Incentive
Plan, a formula-based plan that credits awards to a deferred
compensation account and vests in three equal annual installments
beginning on the first anniversary of the date of grant. See Note 4 to
the Summary Compensation Table contained in "Executive Compensation
and Other Information" on page 17. Mr. Perry was eligible for a
similar award under the 2004 Share Performance Incentive Plan;
however, share performance was not sufficient to generate an actual
award. Total cash compensation paid to eligible participants reflects
competitive practice for results achieved and is projected to be
around the 75th percentile of competitive practice for those employees
in businesses whose achievement of targeted results and whose
individual performance warrants such compensation.
b. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
Providing for vesting of shares in equal amounts over a period of
five years, the Key Employees Stock Bonus Plan is designed to align
key employee and shareholder long-term interests by providing
designated employees an equity interest in Engelhard. Eligible
employees are reviewed annually for award grants determined in the
manner previously described.
The total equity value awarded under the Management Incentive
Plan to Executive Officers and other participants for 2004 was 92% of
the plan generated pool. The Committee determines the amount of the
equity pool for the year, which is then converted to a combination of
restricted stock and stock options. Approximately one-third of the
value of this equity pool, using present value methodologies, awarded
for 2004 was in the form of restricted stock.
For the year 2004, Mr. Perry received a restricted stock award of
15,420 shares under the Key Employees Stock Bonus Plan. For 2003, Mr.
Perry received a restricted stock award
26
of 13,190 shares under the Key Employees Stock Bonus Plan. In
addition, an award of 21,470 restricted stock units was granted to Mr.
Perry for 2003 under the 2002 Long-Term Incentive Plan. These
restricted stock units vest ratably over five years with conversion to
shares on payout, earn dividend equivalents that accrue interest and
are generally comparable in economic benefit to the Company's
traditional restricted stock awards, except that these restricted
stock units do not vest on retirement absent a determination by the
Board. The award of these restricted stock units reflected the
Committee's determination, based on the specific report of a
nationally recognized compensation consulting firm as well as
additional supporting data, that Mr. Perry's annual compensation was
below the target level in relation to CEO compensation at peer
organizations, and that the award of additional restricted stock units
to Mr. Perry provided an effective means to address the differential
while incentivizing both performance and retention.
In accordance with the terms of his employment agreement, Mr.
Perry was also awarded special restricted stock awards for 2001 of
29,300 shares that do not vest until the fifth anniversary of the
award, when they vest entirely. See "Employment Contracts, Termination
of Employment and Change in Control Arrangements" on page 21.
c. STOCK OPTIONS
Our Stock Option Plans have been designed to link employee
compensation growth directly to growth in share price. In conjunction
with restricted stock, options are the major driver of senior
management compensation aligning their reward with shareholder
interests. As noted above, approximately two-thirds of the
compensation value of the equity pool was paid in the form of stock
options.
In addition, senior managers worldwide including all the
Executive Officers are reviewed for annual stock option grants
determined under the Management Incentive Plan in the manner
previously described. Options vest in equal increments over four years
and normally have a ten-year life. Options granted for 2004 under the
Management Incentive Plan were 92% of the pool generated.
For the year 2004, Mr. Perry received 258,688 stock option awards
under the Management Incentive Plan. He received 238,388 stock options
for 2003.
In light of the expiration of certain options held by employees
during a company-mandated blackout period in 2004, the Committee
authorized cash awards to those employees in an aggregate amount of
$1,109,135, which represented the economic value of the expired
options as of the expiration date of the options.
The Committee directs the purchase of compensation survey information from
several independent professional consultants in order to renew the base, annual
cash incentive, and total compensation of Mr. Perry and other individual senior
managers and employee groups. The Committee is generally satisfied that relevant
competitive data and achievements of Engelhard indicate the compensation design
supported the objectives of attracting and retaining key talent,
27
providing incentives for superior performance, and aligning employee and
shareholder interests. Nevertheless, the Committee has reevaluated the
compensation program design as part of their ongoing process of oversight on
such matters and adopted the Incentive Compensation Plan for Key Employees,
which replaces the Management Incentive Plan beginning with 2005. The new plan
responds to the Committee's desires to add additional performance measures. The
new plan integrates incentive compensation vehicles (including cash bonus award,
restricted stock, stock options and long-term performance units) to link total
compensation for the participant with the performance of Engelhard and/or the
applicable business unit and the individual. Restricted stock, stock option and
long term performance unit awards are granted under shareholder approved long
term incentive plans. The plan facilitates clarity of performance expectations
and encourages the identification and commitment to exceptional results.
Overall incentive pools are established consisting of cash, restricted
stock and stock options. The level of the pool generated for Engelhard overall
and each business group depends upon that group's actual performance against
targets established at the beginning of each year (which, for executive
officers, is based on Engelhard's earnings per share). The pools are determined
by a formula based on the base salary of each eligible employee in the pool
(including specific designations for Mr. Perry), the actual performance of
Engelhard and/or its business units against specific predetermined levels of
earnings targets. A threshold level is established for each pool below which
incentives will not normally be paid to that pool. Engelhard's Compensation
Committee may adjust these pools up or down in its sole discretion. Once each
group's pool is established, individual performance based awards are made based
on the individual's performance and the performance of the group. In addition,
through awards of long term performance units, eligible plan participants will
have the opportunity to earn additional cash compensation contingent upon the
attainment of cumulative three-year weighted performance objectives. The initial
grant is based upon a percentage of base salary, which varies depending on band
level.
Section 162(m) of the Internal Revenue Code generally limits the deductible
amount of annual compensation paid to certain individual executive officers
(i.e., the chief executive officer and the four other most highly compensated
executive officers of Engelhard) to no more than $1 million each. The Committee
is aware of this limitation and will continue to consider tax consequences as
well as other relevant factors in connection with compensation decisions.
COMPENSATION COMMITTEE
Marion H. Antonini Norma T. Pace Henry R. Slack
28
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(a)
AMONG ENGELHARD CORPORATION, S&P 500 INDEX
AND ALL S&P CHEMICALS(b)
[Table below represents line chart in the printed piece]
DECEMBER 31,
-------------------------------------------------------
1999 2000 2001 2002 2003 2004
------- ------- ------- ------- ------- -------
Engelhard Corporation .......... 100.00 110.51 152.50 125.04 170.26 176.91
S&P 500 Index .................. 100.00 90.90 80.09 62.39 80.29 89.03
All S&P Chemicals .............. 100.00 87.40 89.38 85.91 108.14 130.60
-------------------
(a) Assumes $100 invested on December 31, 1999 in each referenced group with
reinvestment of dividends.
(b) The All S&P Chemicals index includes all 43 companies (including Engelhard)
in all chemical subindices from the S&P 1500.
29
REPORT OF AUDIT COMMITTEE
GENERAL
The primary purpose of the Audit Committee is to assist the Board of
Directors' oversight of (a) the integrity of Engelhard's financial statements,
(b) the independent auditor's qualifications and independence, (c) the
performance of Engelhard's internal audit function and independent auditors and
(d) Engelhard's compliance with legal and regulatory requirements. The Audit
Committee has the sole authority to appoint and terminate Engelhard's
independent auditors. The Audit Committee is composed of all independent
directors and operates under a written charter adopted and approved by the Board
of Directors, attached as Appendix A to this Proxy Statement. During the fiscal
year 2004, the Audit Committee held 12 meetings.
It is not the responsibility of the Audit Committee to plan or conduct
audits, determine that Engelhard's financial statements are in all material
respects complete and accurate in accordance with generally accepted accounting
principles, or to certify Engelhard's financial statements. This is the
responsibility of management and the independent auditors. It is also not the
responsibility of the Audit Committee to guarantee the independent auditor's
report or to assure compliance with laws and regulations and Engelhard's
Policies of Business Conduct.
Based on the Audit Committee's review of the audited financial statements
as of and for the fiscal year ended December 31, 2004 and its discussions with
management regarding such audited financial statements, its receipt of written
disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (INDEPENDENCE DISCUSSIONS WITH AUDIT
COMMITTEES), its discussions with the independent auditors regarding such
auditor's independence, the matters required to be discussed by the Statement on
Auditing Standards 61 (COMMUNICATION WITH AUDIT COMMITTEES) and other matters
the Audit Committee deemed relevant and appropriate, the Audit Committee
recommended to the Board of Directors that the audited financial statements as
of and for the fiscal year ended December 31, 2004 be included in Engelhard's
Annual Report on Form 10-K for such fiscal year.
AUDIT COMMITTEE
Douglas G. Watson David L. Burner James V. Napier
The foregoing Audit Committee Report shall not be incorporated by reference into
any of Engelhard's prior or future filings with the SEC, except as otherwise
explicitly specified by Engelhard in any such filing.
30
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP ("E&Y") expects to have a representative at the meeting
who will have the opportunity to make a statement and who will be available to
answer appropriate questions.
FEES BILLED TO ENGELHARD BY E&Y DURING EACH OF THE FISCAL YEARS ENDED DECEMBER
31, 2004 AND DECEMBER 31, 2003
AUDIT FEES
The aggregate audit fees billed to Engelhard by E&Y, which consists
principally of services rendered in connection with the audit of Engelhard's
financial statements included in Engelhard's Annual Report on Form 10-K for
Fiscal Year 2004, the review of Engelhard's financial statements included in
Engelhard's Quarterly Reports on Form 10-Q during the fiscal year ended December
31, 2004 and statutory audits in non-U.S. locations, totaled $5,199,000 as
compared to $3,092,000 for the fiscal year ended December 31, 2003.
AUDIT-RELATED FEES
The aggregate fees billed to Engelhard by E&Y during each of the fiscal
years ended December 31, 2004 and December 31, 2003 for audit-related services
totaled $400,000 and $439,000, respectively. Audit-related fees consist
principally of fees for audits of financial statements of certain employee
benefit plans and audits of government research programs.
TAX FEES
The aggregate fees billed to Engelhard by E&Y during each of the fiscal
years ended December 31, 2004 and December 31, 2003 for tax services totaled
$762,000 and $3,170,000, respectively. Tax fees consist of tax planning and tax
compliance services.
OTHER FEES
No other fees were incurred or billed to Engelhard by E&Y during each of
the fiscal years ended December 31, 2004 and December 31, 2003, other than those
described above.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee considered and concluded that the provision of
non-audit services by E&Y is compatible with maintaining auditor independence.
Audit fees are reviewed and explicitly approved by the Audit Committee on
an annual basis. Engelhard's Audit Committee has established detailed policies
and procedures for the pre-approval of audit, audit-related, tax and other
services. These procedures include review and approval of the nature of
permissible services in 31 specific service categories. The Audit Committee has
pre-approved fees within nine service categories. Additionally, and
notwithstanding any pre-approval, any individual service for $100,000 or more
requires explicit review and approval of the Audit Committee before the auditor
is engaged. The Chairman has authority to approve engagements within permitted
service categories on an interim basis, subject to review at the next Audit
Committee meeting.
31
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors is required by law and
applicable New York Stock Exchange rules to be directly responsible for the
appointment, compensation and retention of the Company's independent registered
public accounting firm. The Audit Committee has appointed E&Y as the independent
registered public accounting firm for the year ending December 31, 2005. While
stockholder ratification is not required by the Company's By-laws or otherwise,
the Board of Directors is submitting the selection of E&Y to the stockholders
for ratification as part of good corporate governance practices. If the
stockholders fail to ratify the selection, the Audit Committee may, but is not
required to, reconsider whether to retain E&Y. Even if the selection is
ratified, the Audit Committee in its discretion may direct the appointment of
different independent registered public accounting firms at any time during the
year if it determines that such a change would be in the best interest of the
Company and its stockholders.
The Board of Directors recommends a vote FOR the proposal to ratify the
selection of E&Y as the company's independent registered public accounting firm
to audit the Company's consolidated financial statements for the year ending
December 31, 2005. The persons designated as proxies will vote FOR the
ratification of E&Y as the Company's independent registered public accounting
firm, unless otherwise directed.
32
FUTURE SHAREHOLDER PROPOSALS
HOW DO I MAKE A PROPOSAL FOR THE 2006 ANNUAL MEETING?
The deadline for you to submit a proposal pursuant to Rule 14a-8 of the
Exchange Act for inclusion in our proxy statement and form of proxy for the 2006
Annual Meeting of Shareholders (the "2006 Annual Meeting") is November 30, 2005.
Any shareholder proposal submitted outside of the processes of Rule 14a-8 of the
Exchange Act must be received by us after December 30, 2005 and before January
29, 2006. If received by us after January 29, 2006, then our proxy for the 2006
Annual Meeting may confer discretionary authority to vote on such matter without
any discussion of such matter in the proxy statement for the 2006 Annual
Meeting.
HOUSEHOLDING
The SEC has adopted amendments to its rules regarding delivery of proxy
statements and annual reports to stockholders sharing the same address. We may
now satisfy these delivery rules by delivering a single proxy statement and
annual report to an address shared by two or more of our stockholders. This
delivery method is referred to as "householding" and can result in significant
cost savings for us. In order to take advantage of this opportunity, we have
delivered only one proxy statement and annual report to multiple stockholders
who share an address, unless we received contrary instructions from the impacted
stockholders prior to the mailing date. We undertake to deliver promptly, upon
written or oral request, a separate copy of the proxy statement or annual
report, as requested, to any stockholder at the shared address to which a single
copy of those documents was delivered. If you prefer to receive separate copies
of a proxy statement or annual report, either now or in the future, send your
request in writing to us at the following address: Investor Relations
Department, Engelhard Corporation, 101 Wood Avenue, Iselin New Jersey 08830.
If you are currently a shareholder sharing an address with another
shareholder and wish to have your future proxy statements and annual reports
householded (i.e., receive only one copy of each document for your household)
please contact us at the above address.
ELECTRONIC DELIVERY OF PROXY MATERIALS
As an alternative to receiving printed copies of these materials in future
years, we are pleased to offer shareholders the opportunity to receive proxy
mailings electronically. Electronic delivery saves us money by reducing printing
and mailing costs. It will also make it convenient for you to receive your proxy
materials and to vote your shares online. To request electronic delivery, please
vote via the Internet at www.eproxy.com/ec and, when prompted, enroll to receive
or access proxy materials electronically in future years. You may discontinue
electronic delivery at any time.
33
ELECTRONIC PROXY VOTING
Registered shareholders can vote their shares via (1) a toll-free telephone
call from the U.S. and Canada; (2) the Internet; or (3) by mailing their signed
proxy card. The telephone and Internet voting procedures are designed to
authenticate shareholder's identities, to allow shareholders to vote their
shares and to confirm that their instructions have been properly recorded.
Specific instructions to be followed by any registered shareholder interested in
voting via telephone or the Internet are set forth on the enclosed proxy card.
OTHER MATTERS
At the date of this proxy statement, the Board of Directors has no
knowledge of any business other than that described herein which will be
presented for consideration at the meeting. In the event any other business is
presented at the meeting, the persons named in the enclosed proxy will vote such
proxy thereon in accordance with their judgment in the best interests of
Engelhard.
By Order of the Board of Directors
ARTHUR A. DORNBUSCH, II
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
April 4, 2005
34
APPENDIX A
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ENGELHARD CORPORATION
AUDIT COMMITTEE CHARTER
I. AUDIT COMMITTEE PURPOSE
The Audit Committee (the "Committee"), in its capacity as a committee of
the Board, shall assist the Board in overseeing:
-- the integrity of the Company's financial statements,
-- the compliance by the Company with all applicable laws, regulations
and corporate policies,
-- the independent auditor's qualifications and independence, and
-- the performance of the Company's internal audit function and
independent auditor.
The Audit Committee shall prepare an audit committee report as required by
the SEC to be included in the Company's proxy statement.
While the Committee has the responsibilities and powers set forth in this
Charter, it is not the responsibility or duty of the Committee to plan or
conduct audits, to guarantee the auditor's report, to certify the Company's
financial statements or to determine that the Company's financial
statements are complete and accurate and are in accordance with generally
accepted accounting principles or applicable rules and regulations. It is
also not the responsibility of the Committee to ensure compliance with laws
and regulations or with the Company's Policies of Business Conduct. These
are the responsibilities of management and the independent auditor, as
appropriate.
II. AUDIT COMMITTEE AUTHORITY
The Committee has the sole authority to, and shall directly, appoint,
retain, evaluate and terminate the Company's independent auditor, which
shall report directly to the Committee. The Committee shall be directly
responsible for determining the compensation (including as to fees and
terms) and oversight of the work of the Company's independent auditor
(including resolution of disagreements between management and the
independent auditor regarding financial reporting). The Committee shall
have the sole authority to, and shall pre-approve all auditing services and
permitted non-audit services performed for the Company by the independent
auditor, subject to applicable laws, rules and regulations. The Committee
has the authority, without Board approval, to retain, at the Company's
expense, independent or outside legal, accounting, or other advisors of its
choice as it deems necessary or appropriate in the performance of its
duties. The Company shall provide appropriate funding,
A-1
as determined by the Committee, for payment of compensation to such
advisors employed by the Committee, to any registered public accounting
firm engaged for the purpose of preparing or issuing an audit report or
performing other audit, review or attest services for the Company and for
ordinary administrative expenses of the Committee that are necessary or
appropriate in carrying out its duties.
The Committee may request any officer or employee of the Company or the
Company's counsel or independent auditor to attend any meeting of the
Committee or to meet with any members of, or consultants to, the Committee.
The Committee may delegate authority to an individual member of the
Committee or to subcommittees to the extent permitted by applicable laws,
rules and regulations, including those of the New York Stock Exchange.
III. AUDIT COMMITTEE MEMBERSHIP AND MEETINGS
The Committee shall be comprised of three or more independent directors
appointed annually by the Board. Each member shall comply with and satisfy
requirements of the New York Stock Exchange and all other applicable laws,
rules and regulations and may be removed by the Board of Directors in its
discretion. If a Committee Chairman is not designated or present, the
members of the Committee may designate a Chairman by majority vote of the
Committee membership present at the meeting.
All members of the Committee shall be financially literate, as such
qualification is interpreted by the Board in its business judgement, or
must become financially literate within a reasonable time after his or her
appointment to the Committee. In addition, at least one member of the
Committee shall have accounting or related financial management expertise,
as determined by the Board in its business judgment.
The Committee shall meet at stated times four times per year, or more
frequently as circumstances dictate. Meetings of the Committee shall be
called by the Chairman of the Committee or the Chief Executive Officer of
the Company. All meetings of the Committee shall be held pursuant to the
Bylaws of the Company with regard to notice and waiver thereof, and written
minutes of each meeting shall be duly filed in the Company's records.
Reports of meetings of the Committee shall be made to the Board at its
regularly scheduled meeting following the Committee meeting accompanied by
any recommendations to the Board approved by the Committee.
Periodically, the Committee shall meet with management, the director or
senior representative of internal audit and the independent auditor in
separate sessions to discuss any matters that the Committee or any of the
aforementioned believes should be discussed.
A-2
IV. AUDIT COMMITTEE RESPONSIBILITIES AND DUTIES
The Committee shall:
A. GENERAL
1. Meet to review and discuss with management and the independent
auditor the annual audited financial statements, including
reviewing the specific disclosures made in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," and any related certifications required to be made
by any officer of the Company, and recommend to the Board
whether the audited financial statements should be included in
the Company's Form 10-K.
2. Meet to review and discuss with management and the independent
auditor the Company's quarterly financial statements, including
reviewing the specific disclosures made in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," and any related certifications to be made by any
officer of the Company, including the results of the independent
auditor's reviews of the quarterly financial statements.
3. Review the Company's disclosure controls and procedures and the
certifications required to be made by any officer of the Company
in each of the Company's quarterly reports on Form 10-Q and the
Company's annual report on Form 10-K.
4. Discuss with management the Company's earnings press releases,
including the type and presentation of information to be
included therein, as well as financial information and earnings
guidance provided to analysts and rating agencies. The
Committee's responsibility to discuss earnings releases as well
as to review any financial information and earnings guidance may
be done generally (i.e., discussion of the types of information
to be disclosed and the type of presentation to be made). The
Committee need not discuss in advance each earnings release or
each instance in which the Company may provide earnings
guidance.
5. Prepare a report to shareholders to be included in the Company's
annual proxy statement in accordance with applicable laws, rules
and regulations.
6. Discuss with management and the independent auditor major issues
regarding accounting principles and financial statement
presentations, including any significant changes in the
Company's selection or application of accounting principles, and
major issues as to the adequacy of the Company's internal
controls and any special audit steps adopted in light of
material control deficiencies.
7. Review with management and/or the independent auditor, and
discuss as necessary, all significant financial reporting issues
and judgments made in connection with the preparation of the
financial statements, including analyses of the effects of
alternative GAAP methods on the financial statements.
A-3
8. Discuss with management and the independent auditor the effect
of regulatory and accounting initiatives, as well as off-balance
sheet structures, on the Company's financial statements.
9. Discuss with management the Company's major financial risk
exposures and the steps management has taken to monitor and
control such exposures, including the Company's risk assessment
and risk management policies.
10. Review and assess any legal, regulatory and environmental
matters that may have a material impact on the Company's
financial statements.
11. Review the adequacy of internal controls and the activities of
the Company's internal audit department, including the proposed
annual audit plan, periodic reports on the status of the plan,
assessments of the Company's risk management processes and
system of internal control, and summaries of any significant
issues raised during the performance of internal audits.
12. Review and assess compliance with all applicable rules and
regulations of the SEC and the New York Stock Exchange
specifically applicable to the composition and responsibilities
of the Audit Committee.
13. Review annually the Company's Policies of Business Conduct,
which prohibits unethical or illegal activities by the Company's
directors, officers and employees, as well as review the actions
taken to monitor compliance with the Code.
14. Recommend to the Board any waivers for directors or executive
officers proposed to be granted, and review any material waivers
for non-executive officers or employees granted by the General
Counsel, pursuant to the Company's Policies of Business Conduct.
B. INDEPENDENT AUDITORS
The Committee shall:
1. Set clear policies for the Company's hiring of employees or
former employees of the independent auditor who were engaged on
the Company's account.
2. Review and evaluate the experience and qualifications of the
lead (or coordinating) partner of the independent auditor.
3. Obtain and review a report from the independent auditor at least
annually describing (a) the auditor's internal quality-control
procedures, (b) any material issues raised by the most recent
quality-control review, or peer review, of the firm, or by any
inquiry or investigation by governmental or professional
authorities within the preceding five years, respecting one or
more independent audits carried out by the firm and any steps
taken to deal with any such issues, and (c) in order to assess
the auditor's independence, all relationships between the
independent auditor and the Company.
A-4
Evaluate the qualifications, performance and independence of the
independent auditor, taking into account the foregoing report,
the services provided by the independent auditor and the
opinions of management and the internal auditor. In addition to
ensuring the regular rotation of the lead audit partner as
required by law, the Committee should further consider whether,
in order to ensure continuing auditor independence, there should
be regular rotation of the audit firm itself. The Committee
shall present it conclusions to the full Board.
4. Discuss with the independent auditor any matters required to be
discussed in accordance with SAS 61 relating to the conduct of
the audit. In particular, discuss:
(a) the adoption of, proposal of, or changes to, the Company's
significant auditing and accounting principles and practices
as suggested by the independent auditor, internal auditors
or management;
(b) any management or internal control letter provided, or
proposed to be provided, by the independent auditor and the
Company's response to that letter; and
(c) any difficulties encountered in the course of the audit
work, including any restrictions on the scope of activities
or access to requested information, and any significant
disagreements with management.
5. Review with the independent auditor and financial management of
the Company the scope and staffing of the proposed audit for the
current year and, at the conclusion thereof, review such audit
including any comments or recommendations of the independent
auditor.
6. Review with the independent auditor any audit problems or
difficulties and management's response.
7. Receive, and take any required or appropriate action in relation
to, all reports and other communications which the independent
auditor is required to make to the Audit Committee, including
timely reports concerning:
(a) all critical accounting policies and practices to be used;
(b) all alternative treatments of financial information within
generally accepted accounting principles that have been
discussed with management officials of the Company,
ramifications of the use of such alternative disclosures and
treatments, and the treatment preferred by the independent
auditor; and
(c) other material written communications between the
independent auditor and the management of the Company, such
as any management letter or schedule of unadjusted
differences.
8. Discuss with the independent auditors their judgments about the
quality, not just the acceptability, of the Company's accounting
principles as applied in its financial reporting.
A-5
9. Obtain assurance from the independent auditor that the Company
is in compliance with the provisions of Section 10A of the
Securities Exchange Act of 1934, as amended.
C. OTHER AUDIT COMMITTEE RESPONSIBILITIES
The Committee shall:
1. Review and reassess the adequacy of this Charter and the
Committee's own performance annually or more often as conditions
dictate, and recommend proposed changes to the Board.
2. Review the appointment, performance and replacement of the
senior internal auditing executive and the performance of the
internal audit group.
3. Establish procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting,
internal accounting controls or auditing matters, as well as for
confidential, anonymous submission by Company employees of
concerns regarding questionable accounting or auditing matters.
4. Perform any other activities consistent with this Charter, the
Company's By-laws and as the Committee or the Board deems
necessary or appropriate.
A-10
APPENDIX B
----------
ENGELHARD CORPORATION
DIRECTOR INDEPENDENCE STANDARDS
The Board of Directors of Engelhard Corporation (the "Company") has adopted the
following standards to assist it in making determinations of independence in
accordance with the NYSE Corporate Governance rules.
EMPLOYMENT RELATIONSHIPS
A director will be deemed to be independent unless, within the preceding three
years:
o such director
o is or was an employee of the Company or any of the Company's
subsidiaries, other than an interim Chairman or Chief Executive
Officer or other executive officer;
o is a current partner of the Company's internal or external auditor;
o is a current employee of the Company's internal or external auditor;
or
o was (but is no longer) a partner or employee of the Company's
internal or external auditor who personally worked on the Company's
audit within that time.
o any immediate family member of such director
o is or was an executive officer of the Company or any of the
Company's subsidiaries;
o is a current partner of the Company's internal or external auditor;
o is a current employee of the Company's internal or external auditor
who participates in the firm's audit, assurance or tax compliance
(but not tax planning) practice; or
o was (but is no longer) a partner or employee of the Company's
internal or external auditor who personally worked on the Company's
audit within that time.
COMPENSATION RELATIONSHIPS
A director will be deemed to be independent unless, within the preceding three
years:
o such director has received during any twelve-month period more than
$100,000 in direct compensation from the Company or any of its
subsidiaries other than: (i) director and committee fees; (ii)
pension or other forms of deferred compensation for prior service;
provided, however, that such compensation is not contingent in any
way on continued service; and (iii) compensation received for former
service as an interim Chairman or Chief Executive Officer or other
executive officer; or
B-1
o an immediate family member of such director has received during any
twelve-month period more than $100,000 in direct compensation from
the Company or any of its subsidiaries as a director or executive
officer other than: (i) director and committee fees and (ii) pension
or other forms of deferred compensation for prior service; provided,
however, that such compensation is not contingent in any way on
continued service.
COMMERCIAL RELATIONSHIPS
A director will be deemed to be independent unless:
o such director is a current employee of another company that has made
payments to, or received payments from, the Company or any of its
subsidiaries for property or services in an amount which, in any of
the last three fiscal years, exceeds the greater of $1 million or 2%
of such other company's consolidated gross revenues; or
o an immediate family member of such director is a current executive
officer of another company that has made payments to, or received
payments from, the Company or any of its subsidiaries for property
or services in an amount which, in any of the last three fiscal
years, exceeds the greater of $1 million or 2% of such other
company's consolidated gross revenues.
CHARITABLE RELATIONSHIPS
A director will be deemed to be independent unless such director is an executive
officer of a tax-exempt organization that, within the preceding three years,
received contributions from the Company or any of its subsidiaries in an amount
which, in any single fiscal year, exceeded the greater of $1 million or 2% of
such tax-exempt organization's consolidated gross revenues; unless the Board
determines such relationships not to be material or otherwise consistent with a
Director's independence.
INTERLOCKING DIRECTORATES
A director will be deemed to be independent unless, within the preceding three
years:
o such director is or was employed as an executive officer of another
company where any of the Company's or its subsidiaries' present
executive officers at the same time serves or served on that
company's compensation committee; or
o an immediate family member of such director is or was employed as an
executive officer of another company where any of the Company's or
its subsidiaries' present executives at the same time serves or
served on that company's compensation committee.
B-2
OTHER RELATIONSHIPS
For relationships not specifically mentioned above, the determination of whether
a director has a material relationship with the Company (either directly or as a
partner, shareholder or officer of an organization that has a relationship with
the Company), and therefore would not be independent, will be made by the Board
of Directors after taking into account all relevant facts and circumstances. For
purposes of these standards, a director who is solely a director and/or a
non-controlling shareholder of another company that has a relationship with the
Company will not be considered to have a material relationship based solely on
such relationship that would impair such director's independence.
For purposes of the standards set forth above, "immediate family member" means
any of such director's spouse, parents, children, siblings, mothers and
fathers-in-law, sons and daughters-in-law and brothers and sisters-in-law (other
than those who are no longer family members as a result of legal separation or
divorce, or those who have died or become incapacitated) and anyone (other than
a domestic employee) who shares such director's home. For purposes of the
standards set forth above, "executive officer" means the Company's president,
principal financial officer, principal accounting officer (or, if there is no
such accounting officer, the controller), any vice-president of the Company in
charge of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy-making
function, or any other person who performs similar policy-making functions for
the Company. Officers of the Company's subsidiaries shall be deemed officers of
the Company if they perform such policy-making functions for the Company.
These standards shall be interpreted in a manner consistent with the New York
Stock Exchange Corporate Governance Rules.
B-3
[ENGELHARD Logo Omitted]
NOTICE OF
ANNUAL MEETING
OF
SHAREHOLDERS
AND PROXY
STATEMENT
May 5, 2005
ENGELHARD CORPORATION
PROXY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE ANNUAL MEETING OF SHAREHOLDERS-MAY 5, 2005
The undersigned hereby constitutes and appoints Barry W. Perry and Arthur
A. Dornbusch, II, and each of them, his true and lawful agents and proxies with
full power of substitution in each, to represent the undersigned at the Annual
Meeting of Shareholders of ENGELHARD CORPORATION to be held at the Sheraton at
Woodbridge Place, 515 Route 1 South, Iselin, NJ 08830-3010 on Thursday, May 5,
2005 at 10:00 a.m. Eastern Daylight Savings Time and at any adjournments
thereof, on all matters coming before said meeting.
The shares represented by this proxy will be voted as instructed by you and
in the discretion of the proxies on all other matters. If not otherwise
specified, shares will be voted in accordance with the recommendation of the
Board of Directors. This proxy, if properly executed and delivered, will revoke
all prior proxies related to the shares.
________________________________________________________________________________
ADDRESS CHANGE/COMMENTS (MARK THE CORRESPONDING BOX ON THE REVERSE SIDE)
________________________________________________________________________________
________________________________________________________________________________
--------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
Dear Shareholder(s)
Enclosed you will find material relating to the Company's 2005 Annual
Meeting of Shareholders. The notice of the Annual Meeting and proxy statement
describe the formal business to be transacted at the meeting, as summarized on
the attached proxy card.
Whether or not you expect to attend the Annual Meeting, please complete the
reverse side of the attached proxy card and return promptly in the accompanying
envelope, which requires no postage if mailed in the United States. Please
remember that your vote is important to us.
ENGELHARD CORPORATION
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE Please
MANNER DIRECTED HEREIN BY THE UNDERSIGNED Mark Here [ ]
SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY for Address
WILL BE VOTED FOR PROPOSALS 1 AND 2. Change
or Comments
SEE REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1.
FOR WITHHELD
1. Election of Directors; [ ] [ ]
01 Barry W. Perry
02 Douglas G. Watson
(To withhold vote for any individual nominee write that name below.)
______________________________________
FOR AGAINST ABSTAIN
2. Ratification of the appointment of Ernst & [ ] [ ] [ ]
Young LLP as independent registered public
accounting firm.
3. In their discretion, upon other matters
as they properly may come before the meeting.
Choose MLINK(SM) for fast, easy and secure 24/7 online access to your future
proxy materials, investment plan statements, tax documents and more. Simply log
on to INVESTOR SERVICEDIRECT(R) at www.melloninvestor.com/isd where step-by-step
instructions will prompt you through enrollment.
I PLAN TO ATTEND [ ]
THE MEETING
SIGNATURE ____________________ SIGNATURE_____________________ DATE______________
PLEASE MARK, SIGN AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE. EXECUTORS,
ADMINISTRATORS, TRUSTEES, ETC. SHOULD GIVE FULL TITLE AS SUCH. IF THE SIGNER IS
A CORPORATION, PLEASE SIGN FULL CORPORATE NAME BY DULY AUTHORIZED OFFICER.
--------------------------------------------------------------------------------
^ FOLD AND DETACH HERE ^
VOTE BY INTERNET OR TELEPHONE OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
INTERNET AND TELEPHONE VOTING IS AVAILABLE THROUGH 11:59 PM
EASTERN DAYLIGHT TIME THE DAY PRIOR TO ANNUAL MEETING DAY.
YOUR INTERNET OR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR
SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY
CARD.
----------------------------- -------------------- --------------------
INTERNET TELEPHONE MAIL
http://www.proxyvoting.com/ec 1-866-540-5760 Use Mark, sign and
Use the internet to any touch-tone date your proxy card
vote your proxy. OR telephone to vote OR and return it in the
Have your proxy card your proxy. Have enclosed
in hand when you your proxy card in postage-paid
access the web site. hand when you call. envelope.
----------------------------- -------------------- --------------------
IF YOU VOTE YOUR PROXY BY INTERNET OR BY TELEPHONE, YOU DO NOT NEED TO MAIL BACK
YOUR PROXY CARD.
YOU CAN VIEW THE ANNUAL REPORT AND PROXY STATEMENT ON THE INTERNET AT
http://www.proxyvoting.com/ec