SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-12
ESCO TECHNOLOGIES INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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[ESCO TECHNOLOGIES LOGO]
NOTICE OF THE ANNUAL MEETING OF
THE STOCKHOLDERS OF
ESCO TECHNOLOGIES INC.
St. Louis, Missouri
December 18, 2002
TO THE STOCKHOLDERS OF
ESCO TECHNOLOGIES INC.:
The Annual Meeting of the Stockholders of ESCO Technologies Inc. will be
held at the Hilton St. Louis Frontenac Hotel, 1335 South Lindbergh Blvd., St.
Louis County, Missouri 63131 on Thursday, February 6, 2003, commencing at 10:00
A.M. CST, at which meeting only holders of record of the Company's common stock
at the close of business on November 29, 2002 will be entitled to vote, for the
following purposes:
1. To elect three directors; and
2. To transact such other and further business, if any, as lawfully may be
brought before the meeting.
ESCO TECHNOLOGIES INC
BY /s/ D J Moore
Chairman
/s/ Alyson S. Barclay
Secretary
EVEN THOUGH YOU MAY PLAN TO ATTEND THE MEETING IN PERSON, PLEASE EXECUTE
THE ENCLOSED FORM OF PROXY AND MAIL IT PROMPTLY. A RETURN ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR YOUR
CONVENIENCE.
ESCO TECHNOLOGIES INC.
8888 LADUE ROAD, ST. LOUIS, MISSOURI 63124
PROXY STATEMENT
FOR THE ANNUAL MEETING OF THE STOCKHOLDERS TO BE HELD FEBRUARY 6, 2003
This proxy statement is furnished to the holders of all of the issued and
outstanding shares of common stock (the "Common Shares") of ESCO Technologies
Inc. (the "Company") in connection with the solicitation of proxies for use in
connection with the Annual Meeting of the Stockholders to be held February 6,
2003, and all adjournments thereof, for the purposes set forth in the
accompanying Notice of the Annual Meeting of the Stockholders. Such holders are
hereinafter referred to as the "Stockholders". The Company is first mailing this
proxy statement and the enclosed form of proxy to Stockholders on or about
December 18, 2002.
Whether or not you expect to be present in person at the meeting, you are
requested to fill in, sign, date and return the enclosed form of proxy. If you
attend the meeting, you may of course vote by ballot. If you do not attend the
meeting, the Common Shares can be voted only when represented by a properly
executed proxy. In this case you have several choices:
- You may vote on each proposal when returning the enclosed proxy form, in
which case the Common Shares will be voted in accordance with your
choices.
- You may, when appropriate, indicate a preference to abstain on any
proposal, which will have the effect described in "VOTING" on page 19.
- You may return a properly executed proxy form without indicating your
preferences, in which case the proxies will vote the Common Shares FOR
election of the directors nominated by the Board of Directors and in
their discretion on such other business as may properly come before the
meeting.
Any person giving such proxy has the right to revoke it at any time before
it is voted by giving written notice of revocation to the Secretary of the
Company, by duly executing and delivering a proxy bearing a later date, or by
attending the Annual Meeting and casting a contrary vote in person.
The close of business on November 29, 2002 was fixed as the record date for
the determination of the Stockholders entitled to vote at the Annual Meeting of
the Stockholders. As of the record date, 12,543,937 Common Shares were
outstanding and entitled to be voted at such meeting. The Stockholders will be
entitled to cast one vote for each Common Share held of record on the record
date.
A copy of the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 2002 accompanies this proxy statement.
The solicitation of this proxy is made by the Board of Directors of the
Company. The solicitation will be by mail, and the expense thereof will be paid
by the Company. Proxies may also be solicited by telephone or telefax by
directors, officers or regular employees of the Company.
I. ELECTION OF DIRECTORS
NOMINEES AND CONTINUING DIRECTORS
The Company's Bylaws provide that the number of directors shall not be less
than three nor greater than ten, and shall be determined from time to time by
majority vote of the Board of Directors. In accordance with the Bylaws, the
Board of Directors has fixed the number of directors at nine. The Board is
divided into three classes, with the terms of office of each class ending in
successive years. Three directors of the Company are to be elected for terms
expiring at the Annual Meeting in 2006, or until their respective successors
have been elected and have qualified. Certain information with respect to the
nominees for election as directors proposed by the Company and the other
directors whose terms of office as directors will continue after the Annual
Meeting is set forth below. Should any one or more of the nominees be unable or
unwilling to serve (which is
2
not expected), the proxies (except proxies marked to the contrary) will be voted
for such other person or persons as the Board of Directors of the Company may
recommend. Proxies cannot be voted for more than three nominees.
NAME, AGE, PRINCIPAL OCCUPATION OR SERVED AS
POSITION, OTHER DIRECTORSHIPS DIRECTOR SINCE
---------------------------------- --------------
TO BE ELECTED FOR TERMS ENDING IN 2006
C.J. Kretschmer, 46......................................... 2002
President and Chief Operating Officer of the Company
J.M. McConnell, 61.......................................... 1996
Former President and Chief Executive Officer, Instron
Corporation, manufacturer of scientific instruments
Director of WTC Corp.
D.C. Trauscht, 69........................................... 1991
Chairman, BW Capital Corporation, private investment
company
Director of Global Motorsport Group Inc., OMI Corporation,
Integrated Electrical Services, Inc.
TO CONTINUE IN OFFICE UNTIL 2005
W.S. Antle III, 58.......................................... 1994
Former Chairman, President and Chief Executive Officer of
Oak Industries, Inc., manufacturer of engineered
products for the telecommunications industry
Director of John H. Harland Company
L.W. Solley, 60............................................. 1999
Former Chairman and Chief Executive Officer, Fisher
Controls International, Inc., manufacturer of valves
and regulators
Former Executive Vice President, Emerson Electric Co.,
manufacturer of electrical and other products
J.D. Woods, 71.............................................. 2001
Former Chairman, President and Chief Executive Officer,
Baker Hughes Incorporated, supplier of oilfield
equipment and services
Director of Varco International Inc., OMI Corporation,
United States Enrichment Corporation, Foster Wheeler
Ltd., Integrated Electrical Services, Inc.
TO CONTINUE IN OFFICE UNTIL 2004
D.J. Moore, 64(1)........................................... 1990
Chairman of the Company
V.L. Richey, Jr., 45........................................ 2002
Chief Executive Officer of the Company
J.M. Stolze, 59............................................. 1999
Executive Vice President and Chief Financial Officer, MEMC
Electronic Materials, Inc., manufacturer of silicon
wafers
-------------------------
(1) Pursuant to the Management Transition Agreement described on page 16, Mr.
Moore will retire as an officer and director of the Company on April 17,
2003.
Each of the nominees and continuing directors has had the same position
with the same employer as stated in the preceding table during the past five
years, except as follows:
From August 1997 until October 1999, Mr. Kretschmer was Vice President of
the Company. He was Vice President and Chief Financial Officer from October 1999
until February 2001, and Senior Vice President and Chief Financial Officer from
February 2001 to February 2002. Mr. Kretschmer was Executive Vice President and
Chief Financial Officer from February 2002 to October 2002. Since the latter
date, he has been President and Chief Operating Officer of the Company.
3
From April 1990 until September 2001, Mr. McConnell was President and Chief
Executive Officer of Instron Corporation.
From May 1995 until January 2000, Mr. Antle was Chairman, President and
Chief Executive Officer of Oak Industries, Inc.
From October 1992 until August 2001, Mr. Moore was Chairman, President and
Chief Executive Officer of the Company. He was Chairman and Chief Executive
Officer from August 2001 to October 2002. Since October 2002, he has been
Chairman of the Company.
From February 1997 until March 1998, Mr. Richey was Vice President of
Systems & Electronics Inc. (then a subsidiary of the Company). From March 1998
until October 2000, he was Vice President of the Company, and was Senior Vice
President and Group Executive from October 2000 to August 2001. Mr. Richey was
President and Chief Operating Officer from August 2001 to October 2002. Since
the latter date, he has been Chief Executive Officer of the Company.
BOARD OF DIRECTORS AND COMMITTEES
There were six meetings of the Board of Directors during fiscal year 2002.
All of the incumbent directors attended at least 75% of the meetings of the
Board and committees on which they served. Directors who are employees of the
Company do not receive any compensation for service as directors. Each
non-employee director is currently paid a cash retainer of $5,000 per fiscal
quarter and a fee of $900 plus expenses for attendance at each Board meeting. In
addition, each non-employee director receives a retainer of 325 Common Shares
per fiscal quarter. Each Board committee chairman is currently paid an annual
retainer of $2,000, and each committee member is paid $800 plus expenses for
attendance at each committee meeting. Under the Company's extended compensation
plan for non-employee directors who began Board service prior to April 2001,
each such director who has served as a non-employee director for at least five
years or whose tenure as a director expires pursuant to the Company's Bylaws
restriction regarding maximum age for election will, after the later of
termination of services as a director or reaching age 65, receive for life a
percentage of the fiscal year 2001 annual cash retainer for directors. Such
percentage is a minimum of 50% and increases to 60% for six years' service, 70%
for seven years' service, 80% for eight years' service, 90% for nine years'
service and 100% for ten or more years' service. In the event of death of a
retired director who is eligible under this plan, 50% of the benefit will be
paid to the surviving spouse for life. If the eligible director so elects, the
actuarial equivalent of the benefit may be received in a single lump sum.
Directors may elect to defer receipt of all of the cash portion and/or all
of the stock portion of the quarterly retainer. If elected, the deferred amounts
are credited to the director's deferred compensation account in stock
equivalents. Deferred amounts will be distributed in Common Shares or cash at
such future dates as specified by the director unless distribution is
accelerated in certain circumstances, including a change in control of the
Company. The stock portion which has been deferred may only be distributed in
Common Shares.
The members of the Board of Directors are appointed to various committees.
The standing committees of the Board are: the Executive Committee, the Audit and
Finance Committee, and the Human Resources and Ethics Committee. The Board at
this time does not have a standing nominating committee.
The Executive Committee's function is to exercise the full authority of the
Board of Directors between Board meetings, except that the Executive Committee
may not take certain specified actions which the Board of Directors has reserved
for action by the whole Board. The Committee held no meetings in fiscal year
2002. Mr. Moore (Chairman), Mr. Antle and Mr. Trauscht are the members of the
Committee.
The Audit and Finance Committee's functions generally are to oversee and
monitor the Company's financial reporting process; review the Company's reports
to Stockholders with management and the independent auditors and receive certain
assurances from management; appoint the firm of independent auditors to perform
the annual audit; annually evaluate the qualifications and prior performance of
the independent auditors; review the scope of the auditors' work and approve
their annual audit fees and their other non-audit service fees for individual
projects in excess of $50,000; review the Company's internal
4
controls with the independent auditors and the internal audit executive; and
review with the independent auditors any problems they may have encountered
during the annual audit. The Committee met four times in fiscal year 2002. Mr.
Antle (Chairman), Mr. McConnell and Mr. Stolze are the members of the Committee.
The Human Resources and Ethics Committee's functions generally are to
review and approve various compensation and benefit plans; oversee the Company's
Code of Business Ethics and Conduct and the Ethics Program; approve the
long-term incentive compensation plans; determine when service by an officer or
director is eligible for indemnification; and oversee the Charitable
Contributions Program. The Committee met six times in fiscal year 2002. Mr.
Trauscht (Chairman), Mr. Solley and Mr. Woods are the members of the Committee.
REPORT OF THE AUDIT AND FINANCE COMMITTEE
The Audit and Finance Committee (the "Committee") oversees and monitors the
Company's financial reporting process on behalf of the Board of Directors. The
Committee is composed of three independent directors (as defined by the New York
Stock Exchange's listing standards), and operates under a written charter
adopted by the Board of Directors (Exhibit A to this Proxy Statement).
Management has the primary responsibility for the financial statements and the
reporting process, including the Company's systems of internal control. In
fulfilling its oversight responsibilities, the Committee reviewed and discussed
the audited financial statements to be included in the Annual Report on Form
10-K with management, including a discussion of the quality and the
acceptability of the Company's financial reporting practices.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with accounting principles generally accepted in the United States of
America, their judgments as to the quality and the acceptability of the
Company's financial reporting and such other matters as are required to be
discussed with the Committee under auditing standards generally accepted in the
United States of America. In addition, the Committee discussed with the
independent auditors, the auditors' independence from management and the
Company, including the impact of non-audit-related services provided to the
Company and the matters in the auditors' written disclosures and the letter
required by Standard No. 1 of the Independence Standards Board. The Committee
also discussed with the independent auditors the matters required to be
discussed by Statements on Auditing Standards No. 61.
The Committee also discussed with the Company's internal audit executive
and independent auditors the overall scope and plans for their respective
audits. The Committee meets periodically with the internal audit executive and
independent auditors, with and without management present, to discuss the
results of the examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors that the audited financial statements be
included in the Annual Report on Form 10-K for the fiscal year ended September
30, 2002 for filing with the Securities and Exchange Commission. The Committee
also evaluated and reappointed the Company's independent auditors for fiscal
2003.
The Audit and Finance Committee
W.S. Antle III, Chairman
J.M. McConnell
J.M. Stolze
5
EXECUTIVE COMPENSATION
REPORT OF THE HUMAN RESOURCES AND ETHICS COMMITTEE
ON EXECUTIVE COMPENSATION
INTRODUCTION
The following report is provided by the Human Resources and Ethics
Committee of the Board of Directors. The Committee supervises the Company's
Executive Compensation Program (the "Program") and is directly responsible for
compensation actions affecting the executive officers and other senior
executives of the Company. The Committee consists entirely of non-employee
directors.
EXECUTIVE COMPENSATION PHILOSOPHY
The Program is designed and administered to relate executive compensation
to four basic objectives:
- Competitive Position: The Program is designed to pay competitive
compensation so the Company can attract and retain highly qualified
executives. To assist it in determining competitive compensation
practices, the Committee frequently utilizes information about
compensation levels of peer companies and other industrial companies of
similar size, including information provided by qualified independent
consultants. When compensation significantly varies from competitive
levels, the Committee makes appropriate adjustments over time through the
annual compensation planning process.
- Company Performance: The Program is designed to reflect overall Company
performance, with appropriate consideration of conditions that exist in
the industries in which it engages. In determining compensation levels
and compensation changes, the Committee considers the Company's overall
performance in meeting both short-term and long-term objectives, and
considers achievement of operating objectives in areas such as sales,
earnings, entered orders and cash management, as well as progress toward
long-term strategic objectives.
- Stockholder Return: The Program has been designed to establish a direct
link between the interests of the Company's executives and its
Stockholders. This is accomplished by allocating a substantial portion of
senior management compensation to stock-based programs tied directly to
Stockholder return.
- Individual Performance: In addition to the above factors, the Committee
considers the executive's individual performance and contributions to the
Company's results in determining appropriate compensation levels.
THE EXECUTIVE COMPENSATION PROGRAM
To achieve the above objectives, the Program consists of three basic
elements:
- Base Salary: The base salary of each executive is reviewed annually and
set by the Committee generally at the beginning of each fiscal year.
Salary changes reflect overall Company performance, pay competitiveness
and the individual's performance. The targeted percentage of cash
compensation represented by base salary varies based on the level of the
position, with a target of approximately 60% for the Chief Executive
Officer, approximately 65% for the President and Chief Operating Officer
and the Vice President and Chief Financial Officer, and approximately 70%
for the Vice President, Secretary and General Counsel.
- Annual Incentive Cash Compensation: A substantial portion of each
executive's annual cash compensation is tied to Company performance
through the Company's Performance Compensation Plan, an annual incentive
cash compensation program. The Committee determines the annual
performance compensation payment for each executive after the end of each
fiscal year on the basis of a combination of objective targets and
subjective evaluations of Company performance, considering market
conditions and industry circumstances, in key areas such as earnings per
share, shareholder
6
value, economic profit, growth and other factors. The demonstrated
individual performance of the executive as measured against strategic
management objectives is also considered in the determination of the
performance compensation payment. The types and relative importance of
specific financial and other business objectives vary among the Company's
executives depending upon their position and the particular function(s)
for which they are responsible.
- Long-Term Incentive Compensation: To align the interests of the Company's
management directly with those of Stockholders, a substantial portion of
senior executive total compensation is provided by stock-based, long-term
compensation plans. To place emphasis on Stockholder return, the Company
has implemented stock option, performance share and restricted stock
programs. Awards and payments to executive officers under these programs
are included in the accompanying tables.
The Company's stock option programs provide for the award of incentive
stock options, non-qualified stock options, and stock appreciation rights
("SARs"). No SARs have been awarded to date. All options granted to date, when
first issued, have been awarded at an exercise price equal to the fair market
value of the stock on the date of the award. Accordingly, the executive is
rewarded only if the market price of the Company's stock appreciates. Since
options vest over time, the Company periodically grants new options to provide
continuing incentives for future performance. The size of previous grants and
the number of options held are considered by the Committee, but are not entirely
determinative of future grants. Like base pay, the grants are set with regard to
competitive considerations, and each executive's actual grant is based upon
individual performance and the executive's potential for future contributions.
The Company's performance share program, in the past, has provided for the
earning of shares if the Company achieved specified performance objectives
established at the time of the award, and vesting was contingent on continued
employment for a specified period. All performance share awards made in the past
directly encouraged Stockholder value creation by providing for earning of
shares if the Company achieved specific stock price targets.
In fiscal year 2001, the performance share program was replaced by a
performance-accelerated restricted stock program under which shares are earned
upon the achievement of specific stock price targets. Vesting is contingent on
continued employment for a specified period after the shares are earned, subject
generally to limitations on the number of shares that can vest in the first, or
first and second, fiscal years after the award. However, awards not earned by
stock performance will nevertheless vest and be distributed at the end of the
employment period established for the award, provided the recipient continues in
the employment of the Company.
Under the Company's other restricted stock program, the vesting of awards
is contingent on continued employment for a specified period.
These stock-based programs provide for Stockholder value creation, as this
component of the compensation system is designed to retain senior executives and
motivate them to improve the market value of the stock over a number of years.
FISCAL YEAR 2002 EXECUTIVE OFFICER COMPENSATION
Fiscal year 2002 base salaries for the executive officers, which are shown
in the Summary Compensation Table on page 10, were set at the beginning of
fiscal year 2002. The salaries were set based on a subjective evaluation of
fiscal year 2001 performance and salary levels compared to the Company's
filtration/fluid flow comparison group and a group of broader industrial
companies of similar size, consistent with the methodology described below.
In determining fiscal year 2002 compensation and Performance Compensation
Plan targets for the executive officers, the Committee considered the
competitiveness of cash compensation levels compared to the two comparison
groups described above. The Committee utilized information in an executive
compensation report from a nationally recognized, independent compensation
consulting firm. The report compared the Company's compensation practices to the
two comparison groups and reviewed surveys of employee positions comparable to
those of the Company's executive officers. The report indicated that at the
start of fiscal year
7
2002 target total cash compensation of the Company's Chief Executive Officer,
including both base salary and the annual incentive compensation, was at the
median level for chief executive officers of the comparison companies, and
target total cash compensation of the Company's other executive officers was
below the median level for comparable senior officers of the comparison
companies. The total 2002 compensation of the Company's Chief Executive Officer,
including base salary, annual incentive cash compensation and long-term
incentive compensation, was slightly above the filtration/fluid flow comparison
group median but below the median of the broader industrial group survey. The
other executive officers' total compensation was generally below the median
total compensation for the comparable senior officers of the comparison
companies. The Committee also considered the Company's operating performance and
progress made on strategic initiatives. The overall strong operating performance
of the Company in fiscal 2002 resulted from growth in, and focus on, the
Company's expanded commercial business.
The Company disclosed its fiscal 2002 and fiscal 2001 financial results on
a "reported" and on an "operational" basis. The "reported" amounts are prepared
in accordance with accounting principles generally accepted in the United States
of America, and are presented in the Company's Consolidated Statements of
Operations. The fiscal 2002 "operational" amounts exclude an after-tax charge of
$0.4 million, or $0.04 per share, resulting from the Management Transition
Agreement between the Company and Mr. Moore. The fiscal 2001 "operational"
amounts exclude the favorable impact of a non-recurring income tax adjustment of
$12.7 million, or $0.99 per share, and exclude after-tax goodwill amortization
expense of $2.6 million, or $0.20 per share. "Operational" results represent net
earnings and earnings per share on an ongoing operating basis. The Committee
believes the Company's financial results on an "operational" basis provide it a
more meaningful basis for evaluating and comparing the fiscal 2002 performance
with the prior year.
In fiscal 2002, the Company reported sales of $367.5 million, an increase
of $22.6 million, or 6.6%, over fiscal 2001 sales of $344.9 million. Fiscal 2002
net earnings on an "operational" basis were $22.2 million, or $1.71 per share,
compared with fiscal 2001 net earnings on an "operational" basis of $20.0
million, or $1.56 per share. Operational net earnings increased 11% year over
year. Reported net earnings were $21.8 million, or $1.67 per share, compared
with $30.1 million, or $2.35 per share, for fiscal 2002 and fiscal 2001,
respectively.
After the close of the fiscal year, based on the evaluation of the above
factors, the Committee approved a Performance Compensation Plan payment for
fiscal 2002 of $400,000 for the Chief Executive Officer. The fiscal 2002 total
cash compensation of the Company's other executive officers is detailed in the
Summary Compensation Table on page 10.
The Committee believes that stock ownership by key executives provides a
valuable and important incentive for their continued best efforts and diligence,
and provides for the continuing alignment of their interests with those of the
Stockholders. To facilitate these objectives, in fiscal 2002 the Committee
awarded the executive officers (other than the Chief Executive Officer), as a
group, options totaling 92,000 shares under the 1999 Stock Option Plan and 2001
Stock Incentive Plan. In fiscal 2002, the Chief Executive Officer received a
stock option award under the 1994 Stock Option Plan totaling 60,000 shares,
which vests on February 1, 2003, with an exercise period of up to five years
from his date of retirement, and an award of 40,000 shares of restricted stock
under the 2001 Stock Incentive Plan, which vests on April 1, 2003. The Committee
considered these awards warranted by Mr. Moore's commitment to the transition of
leadership of the Company, and his ongoing contributions to the success of the
Company, and determined that the awards served the Company's long-term
interests.
In accordance with the Company's executive compensation philosophy, in
fiscal 2002 a portion of the compensation of the executive officers (other than
the Chief Executive Officer) was provided through performance-accelerated
restricted stock awards under the 2001 Stock Incentive Plan. These awards
established higher share price targets than previous awards, and further aligned
the interests of the executive officers with those of the Stockholders on a
long-term basis. In fiscal 2002, Messrs. Richey and Kretschmer each received an
additional award to recognize significant increases in management
responsibility. These shares are earned based on the achievement of specified
stock price target levels over a period of up to five years, but the award
increments do not vest unless the recipient has continued employment service
through March 31 of the year following the end of the fiscal year in which
earned. However, awards not so earned by
8
stock performance will nevertheless vest and be distributed at the end of the
five year employment service period. The foregoing awards are shown in the
Summary Compensation Table.
As a result of the achievement during fiscal year 2001 of share price
targets established for the performance-accelerated restricted stock awards made
under the 2001 Stock Incentive Plan, the Chief Executive Officer and the other
executive officers earned the first one-third of their awards, and payout of
such earned awards was made in fiscal 2002. The Chief Executive Officer received
a payout equivalent to 21,333 shares, and the other executive officers, as a
group, received a payout equivalent to 19,000 shares. As a result of the
achievement in fiscal 2002 of the share price targets established for these
awards, the Chief Executive Officer and the other executive officers earned the
second one-third of their awards, which will vest and be distributed upon
continued service through March 31, 2003.
The executive officers have employment agreements with the Company as
described on page 16, and are also covered by a Severance Plan which is
described on page 15.
Section 162(m) of the Internal Revenue Code denies a federal income tax
deduction for compensation in excess of $1 million paid to any of the Company's
highest paid executive officers unless the compensation qualifies for a
performance-based exception. The 1999 Stock Option Plan was generally designed
to permit awards that satisfy the performance-based exception of section 162(m).
The 2001 Stock Incentive Plan also was generally designed to permit awards that
satisfy that exception; however, this Plan also permits awards that may not
satisfy such exception. In fiscal 2002, a portion of the compensation awarded to
Mr. Moore may have exceeded the deductibility limit under section 162(m). See
the Summary Compensation Table. The Company does not expect compensation levels
of its executive officers to exceed the section 162(m) limit in the foreseeable
future.
SUMMARY
The Committee believes the Company's compensation program has been designed
and managed by the Committee to directly link the compensation of the Company's
executives to Company performance, individual performance and Stockholder
return. The level of total direct compensation paid to the Company's Chief
Executive Officer in fiscal 2002 is slightly above the median competitive level
for similar companies in the filtration/fluid flow comparison group, but is
below the median competitive level for the similar size, broader industrial
companies. This is consistent with the Company's above average performance
relative to its filtration/fluid flow comparison group. The total direct
compensation for the Company's other executive officers is generally below
market median as determined by this comparison group, and is commensurate with
their executive officer tenure. The Committee will continue to address these
compensation levels over time, consistent with Company and individual
performance, and will continue to emphasize performance and stock-based
compensation that links management and Stockholder interests.
The Human Resources and
Ethics Committee
D.C. Trauscht, Chairman
L.W. Solley
J.D. Woods
9
SUMMARY COMPENSATION TABLE
The following table contains certain information concerning compensation
for each of the last three fiscal years of the Company's Chief Executive Officer
and its other three executive officers serving at September 30, 2002, for all
services rendered in all capacities to the Company and its subsidiaries. Mr. G.
E. Muenster was elected Vice President and Chief Financial Officer effective
October 1, 2002, and will therefore be included as an executive officer in the
proxy statement for the 2004 Annual Meeting.
LONG TERM-COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ------------------------- --------
($) (#)
($) RESTRICTED SECURITIES ($)
NAME AND FISCAL ($) ($) OTHER ANNUAL STOCK UNDERLYING LTIP
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1) OPTIONS PAYOUTS
------------------ ------ ------ ----- ------------ ---------- ---------- -------
D.J. Moore.................. 2002 $485,000 $400,000 $25,039 $1,212,400(3) 60,000 $ 0
Chairman and 2001 460,000 426,870 82,621(4) 2,125,600(5) 0 0
Chief Executive Officer 2000 440,000 421,173 28,706 0 0 662,298(6)
V.L. Richey, Jr. ........... 2002 180,000 125,000 81,722(7) 574,038(8) 44,000 0
President and Chief 2001 145,000 90,545 43,598(4) 715,675(9) 9,000 0
Operating Officer 2000 120,000 74,418 34,939(10) 0 15,000 159,546(6)
C.J. Kretschmer............. 2002 170,000 110,000 15,968 426,277(11) 33,500 0
Executive Vice President and 2001 160,000 96,670 37,696(4) 715,675(12) 9,000 0
Chief Financial Officer 2000 140,000 86,700 12,609 0 15,000 168,595(6)
A.S. Barclay................ 2002 134,000 70,110 32,533(13) 232,078(14) 14,500 0
Vice President, Secretary 2001 125,000 69,750 49,339(4) 598,300(15) 8,000 0
and General Counsel 2000 105,000 65,475 46,234(10) 0 15,000 135,469(6)
($)
ALL OTHER
NAME AND COMPEN-
PRINCIPAL POSITION SATION(2)
------------------ ---------
D.J. Moore.................. $553
Chairman and 493
Chief Executive Officer 437
V.L. Richey, Jr. ........... 0
President and Chief 0
Operating Officer 0
C.J. Kretschmer............. 0
Executive Vice President and 0
Chief Financial Officer 0
A.S. Barclay................ 0
Vice President, Secretary 0
and General Counsel 0
-------------------------
(1) Restricted shares shown in this table are either restricted shares or
performance-accelerated restricted shares that, to the extent not already
vested, will vest and be distributed if the recipient continues in the
employment of the Company through the employment service period established
for the award. Performance-accelerated restricted shares will vest earlier
upon achievement of specified stock price targets established for the award
and continued employment of the recipient through March 31 of the year
following the end of the fiscal year in which the target is achieved,
subject generally to limitations on the number of shares that can vest in
the first, or first and second, fiscal years after the award. Each target
level is based on the average stock price over a period of thirty
consecutive trading days. See, however, footnote number 5. All awards
provide for acceleration of vesting in the event of a change in control of
the Company. Awards of performance-accelerated restricted shares in fiscal
year 2001 were reported in the Company's proxy statement for its 2002
Annual meeting of Stockholders (the "2002 Proxy Statement") under
"Long-Term Incentive Plans -- Awards in Last Fiscal Year," and certain
information concerning these awards was reported in the "LTIP Payouts"
column in the Summary Compensation Table of the 2002 Proxy Statement.
Dividends, if any, will not be paid prior to the vesting and distribution
of the shares.
(2) Represents the dollar value of the benefit of premiums paid for a
split-dollar life insurance policy.
(3) Represents fair market value of $30.31 per share, which was the price at
the time of award, for 40,000 restricted shares awarded. These shares will
vest and be distributed if Mr. Moore continues in the employment of the
Company through the vesting date, April 1, 2003. At September 30, 2002, Mr.
Moore held a total of 80,000 restricted shares and 42,667
performance-accelerated restricted shares which had not yet vested and been
distributed, with an aggregate value of $3,962,144 based on fair market
value of $32.30 per share.
(4) Includes reimbursement for interest costs on personal loans for the
purchase of Common Shares under the Executive Stock Purchase Plan. These
loans are between the named officer, as an individual, and a third party
lending institution. The Company is not a guarantor of these loans, nor
does the Company have any responsibilities regarding their repayment. The
amounts of these reimbursements were $27,000 for Mr. Moore, and $18,000
each for Mr. Richey, Mr. Kretschmer and Ms. Barclay. Effective January 15,
2003, the Company will cease to reimburse the executive officers for the
interest costs on
10
these loans. The current loans will be liquidated by the executive
officers, and the Company will not arrange for, or make any payments to the
executive officers in respect of, any future loans.
(5) Includes $688,800 which represents fair market value of $17.22 per share,
which was the price at the time of award, for 40,000 restricted shares
awarded. Also includes $1,436,800 which represents fair market value of
$22.45 per share, which was the price at the time of award, for 64,000
performance-accelerated restricted shares awarded. On April 1, 2002, a
payout equivalent to 21,333 of these shares was made. The vesting of the
remaining 82,667 of these shares was accelerated by the Management
Transition Agreement between the Company and Mr. Moore, and such shares
will vest and be distributed if Mr. Moore continues in the employment of
the Company through the accelerated vesting date, April 1, 2003.
(6) Amounts shown were earned in fiscal year 2000 pursuant to the 1997
Performance Share Plan and were paid out on April 2, 2001. Valuation is
based on the closing market prices of the stock on the dates the award
increments were earned.
(7) Includes $44,851 for club expenses.
(8) Represents fair market value of $25.34 per share, which was the price at
the time of award, for 8,000 performance-accelerated restricted shares
awarded and of $34.81 per share, which was the price at the time of award,
for 10,667 such shares. On March 31, 2003 and March 31, 2004, 2,667 shares
and 2,666 shares, respectively, will vest and be distributed if the
recipient continues in the employment of the Company. On September 30, 2006
and September 30, 2007, 2,667 shares and 10,667 shares, respectively, will
vest and be distributed if the recipient continues in the employment of the
Company. At September 30, 2002, Mr. Richey held a total of 42,667
performance-accelerated restricted shares which had not yet vested and been
distributed, with an aggregate value of $1,378,144 based on fair market
value of $32.30 per share.
(9) Represents fair market value of $22.45 per share, which was the price at
the time of award, for 20,000 performance-accelerated restricted shares
awarded and of $25.00 per share, which was the price at the time of award,
for 10,667 such shares. On April 1, 2002, a payout equivalent to 6,667 of
these shares was made. On each of March 31, 2003 and March 31, 2004, 8,000
of these shares will vest and be distributed if the recipient continues in
the employment of the Company. On September 30, 2006 the remaining 8,000 of
these shares will vest and be distributed if the recipient continues in the
employment of the Company.
(10) Includes reimbursement of $16,500 for interest costs on personal loans for
the purchase of Common Shares under the Executive Stock Purchase Plan.
These loans are between the named officer, as an individual, and a third
party lending institution. The Company is not a guarantor of these loans,
nor does the Company have any responsibilities regarding their repayment.
Effective January 15, 2003, the Company will cease to reimburse the
executive officers for the interest costs on these loans. The current loans
will be liquidated by the executive officers, and the Company will not
arrange for, or make any payments to the executive officers in respect of,
any future loans.
(11) Represents fair market value of $25.34 per share, which was the price at
the time of award, for 4,000 performance-accelerated restricted shares and
of $34.81 per share, which was the price at the time of award, for 9,334
such shares. On March 31, 2003 and March 31, 2004, 1,334 shares and 1,333
shares, respectively, will vest and be distributed if the recipient
continues in the employment of the Company. On September 30, 2006 and
September 30, 2007, 1,333 shares and 9,334 shares, respectively, will vest
and be distributed if the recipient continues in the employment of the
Company. At September 30, 2002, Mr. Kretschmer held a total of 37,334
performance-accelerated restricted shares which had not yet vested and been
distributed, with an aggregate value of $1,205,888 based on fair market
value of $32.30 per share.
(12) Represents fair market value of $22.45 per share, which was the price at
the time of award, for 20,000 performance-accelerated restricted shares and
of $25.00 per share, which was the price at the time of award, for 10,667
such shares. On April 1, 2002, a payout equivalent to 6,667 of these shares
was made. On each of March 31, 2003 and March 31, 2004, 8,000 of these
shares will vest and be distributed if the
11
recipient continues in the employment of the Company. On September 30,
2006, the remaining 8,000 of these shares will vest and be distributed if
the recipient continues in the employment of the Company.
(13) Includes reimbursement of $6,043 for car expenses, $5,966 for club
expenses, and $8,723 for interest costs on personal loans for the purchase
of Common Shares under the Executive Stock Purchase Plan. These loans are
between the named officer, as an individual, and a third party lending
institution. The Company is not a guarantor of these loans, nor does the
Company have any responsibilities regarding their repayment. Effective
January 15, 2003, the Company will cease to reimburse the executive
officers for the interest costs on these loans. The current loans will be
liquidated by the executive officers, and the Company will not arrange for,
or make any payments to the executive officers in respect of, any future
loans.
(14) Represents fair market value of $34.81 per share, which was the price at
the time of award, for 6,667 performance-accelerated restricted shares. On
September 30, 2007, these shares will vest and be distributed if the
recipient continues in the employment of the Company. At September 30,
2002, Ms. Barclay held a total of 26,666 performance-accelerated restricted
shares which had not yet vested and been distributed, with an aggregate
value of $861,312 based on fair market value of $32.30 per share.
(15) Represents fair market value of $22.45 per share, which was the price at
the time of award, for 17,000 performance-accelerated restricted shares and
of $25.00 per share, which was the price at the time of award, for 8,666
such shares. On April 1, 2002, a payout equivalent to 5,667 of these shares
was made. On March 31, 2003 and March 31, 2004, 6,667 shares and 6,666
shares, respectively, will vest and be distributed if the recipient
continues in the employment of the Company. On September 30, 2006, the
remaining 6,666 of these shares will vest and be distributed if the
recipient continues in the employment of the Company.
The Company's stock option, restricted stock award and performance share
award agreements and Supplemental Executive Retirement Plan applicable to the
named executive officers generally provide for acceleration of vesting and, in
certain cases, payout, of awards and retirement benefits under such agreements
and Plan in the event of a change in control of the Company, as defined in such
agreements and Plan, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------
(#) % OF TOTAL
NUMBER OPTIONS
OF GRANTED
SECURITIES TO ($) GRANT
UNDERLYING EMPLOYEES ($/SHARE) DATE
OPTIONS IN FISCAL EXERCISE EXPIRATION PRESENT
NAME GRANTED YEAR PRICE DATE VALUE(1)
---- ---------- ---------- --------- ---------- ----------
D.J. Moore.............................. 60,000(2) 13.71 $31.335 04/16/08 $919,962
V.L. Richey, Jr......................... 14,000 25.275 10/17/11 173,145
30,000 29.035 08/05/12 426,219
------ --------
44,000(3) 10.06 599,364
C.J. Kretschmer......................... 11,000 25.275 10/17/11 136,042
22,500 29.035 08/05/12 319,664
------ --------
33,500(3) 7.66 455,706
A.S. Barclay............................ 8,000 25.275 10/17/11 98,940
6,500 29.035 08/05/12 92,347
------ --------
14,500(3) 3.31 191,287
---------------
(1) Estimated present value based on the Black-Scholes option pricing model, a
mathematical formula used to value options traded on stock exchanges. The
following assumptions were used in applying the model
12
to calculate the values: expected future stock price annual volatility rate
of 31.21%; risk-free rate of return of 3.593% for the option term; annual
dividend yield of 0%; and a ten-year option term. No adjustments have been
made for non-transferability or risk of forfeiture. The actual value of the
options will depend on the market price of the shares on the date the
options are exercised, and may vary significantly from the theoretical
values estimated by the Black-Scholes model.
(2) This stock option grant is non-transferable, has an exercise price equal to
100% of the fair market value on the date of grant, and becomes fully
exercisable on February 1, 2003. In the event of a change in control of the
Company, 100% of the options granted immediately vest.
(3) These stock option grants are non-transferrable, and have an exercise price
equal to 100% of the fair market value on the date of grant. The options are
exercisable as follows: one-third of the options granted may be exercised on
or after one year from the date of grant, an additional one-third on or
after two years from the date of grant, and the final one-third on or after
three years from the date of grant. In the event of a change in control of
the Company, 100% of the options granted may be immediately exercised.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides certain information concerning stock option
exercises during fiscal year 2002 by each of the named executive officers and
the value of their unexercised options at September 30, 2002.
(#) ($)
SECURITIES VALUE OF
UNDERLYING UNEXERCISED,
UNEXERCISED IN-THE-MONEY
(#) OPTIONS AT OPTIONS AT
SHARES ($) 9/30/02 9/30/02(2)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- -------------
D.J. Moore........................ 55,116 $1,449,357 0 / 78,000 $ 0 /$436,657
V.L. Richey, Jr. ................. 0 0 40,225 / 61,000 800,502 / 512,564
C.J. Kretschmer................... 0 0 41,648 / 48,500 942,532 / 425,339
A.S. Barclay...................... 653 17,391 23,597 / 27,168 499,477 / 308,477
-------------------------
(1) Based on the difference between the average of the high and low market
prices on the date of exercise and the option price.
(2) Based on the difference between the average of the high and low market
prices on September 30, 2002 and the option price.
RETIREMENT PLAN
At the time of the 1990 spin-off of the Company by Emerson Electric Co.
("Emerson"), the Company established a Retirement Plan (the "Retirement Plan")
in which the Company's executive officers as well as other covered employees
participate. Prior to the 1990 spin-off, the executive officers participated in
one of the pension plans of Emerson or its subsidiaries. The Retirement Plan is
substantially identical to the Emerson Retirement Plan at the time of the 1990
spin-off (the "Emerson Retirement Plan"). Under the Retirement Plan, a
participant will be credited with his service under the Emerson Retirement Plan,
but his benefit accrued under the Retirement Plan will be offset by his benefit
accrued under the Emerson Retirement Plan as of September 30, 1990. Benefits
under the Retirement Plan may be reduced under certain maximum provisions of the
Internal Revenue Code. In 1993, the Company adopted a Supplemental Executive
Retirement Plan (the "SERP") which provides that where any such reductions
occur, the Company will pay a retirement supplement to certain executives,
including the executive officers. The SERP will maintain total retirement
benefits at the formula level of the Retirement Plan.
13
PENSION PLAN TABLE
ANNUAL RETIREMENT BENEFIT AT AGE 65 AFTER
--------------------------------------------------------------------
AVERAGE 10 15 20 25 30 35
ANNUAL YEARS OF YEARS OF YEARS OF YEARS OF YEARS OF YEARS OF
COMPENSATION SERVICE SERVICE SERVICE SERVICE SERVICE SERVICE
------------ -------- -------- -------- -------- -------- --------
$ 150,000 ...................... $ 20,528 $ 30,792 $ 41,056 $ 51,320 $ 61,583 $ 71,847
250,000 ...................... 35,528 53,292 71,056 88,820 106,583 124,347
350,000 ...................... 50,528 75,792 101,056 126,320 151,583 176,847
450,000 ...................... 65,528 98,292 131,056 163,820 196,583 229,347
550,000 ...................... 80,528 120,792 161,056 201,320 241,583 281,847
650,000 ...................... 95,528 143,292 191,056 238,820 286,583 334,347
750,000 ...................... 110,528 165,792 221,056 276,320 331,583 386,847
850,000 ...................... 125,528 188,292 251,056 313,820 376,583 439,347
950,000 ...................... 140,528 210,792 281,056 351,320 421,583 491,847
1,050,000 ...................... 155,528 233,292 311,056 388,820 466,583 544,347
1,150,000 ...................... 170,528 255,792 341,056 426,320 511,583 596,847
These plans provide for fixed retirement benefits based on the
participant's credited years of service, five-year average compensation (the
highest average annual cash compensation during any five consecutive years), and
applicable Social Security covered compensation. The dollar amounts listed for
salary and bonus in the Summary Compensation Table are substantially the same as
the compensation covered by these plans. The foregoing table shows the combined
annual benefits that will be payable from these plans on the basis of a single
life annuity with five years certain.
Under current law, the benefit amounts will not be subject to any deduction
for Social Security or other offset amounts. The credited years of service
covered by these plans for each of the persons named in the Summary Compensation
Table were as follows as of October 1, 2002: Mr. Moore, 18.5; Mr. Richey, 17;
Mr. Kretschmer, 25; and Ms. Barclay, 15. Payment of the specified retirement
benefits is contingent upon continuation of the plans in their present form
until the employee retires.
14
PERFORMANCE GRAPH
The following graph presents a comparison of the cumulative total
shareholder return on the Common Shares as measured against the Standard &
Poor's 500 Stock Index (the "Index") and a peer group (the "2002 Peer Group").
The Company is not a component of the Index or the 2002 Peer Group. The
measurement period begins on September 30, 1997 and measures at each September
30 thereafter. These figures assume that all dividends paid over the measurement
period were reinvested, and the starting value of each index and the investments
in the Common Shares were $100 at the close of trading on September 30, 1997.
[PERFORMANCE GRAPH]
9/97 9/98 9/99 9/00 9/01 9/02
ESCO Technologies
Inc. .................. 100 58.16 63.12 98.58 141.28 183.26
S&P 500.................. 100 109.05 139.37 157.88 115.85 92.12
2002 Peer Group.......... 100 72.06 91.09 91.89 101.92 91.02
The 2002 Peer Group is comprised of Calgon Carbon Corporation, Clacor Inc.,
Cuno Inc., Donaldson, Inc., Ionics Inc., Lydall Inc., Millipore Corp., Osmonics
Inc. and Pall Corporation. The companies composing the 2002 Peer Group are the
same companies which composed the "2001 Peer Group" used in the proxy statement
for the 2002 Annual Meeting of Stockholders.
SEVERANCE PLAN
The Company has established a Severance Plan (the "Plan") covering the
executive officers. Under the Plan, following an occurrence of a Change of
Control (as defined), each executive officer will be entitled to be employed by
the Company for a three-year period with respect to Mr. Moore, and for a
two-year period with respect to Messrs. V.L. Richey, Jr. and C.J. Kretschmer and
Ms. A.S. Barclay, during which: (i) he or she will be paid a minimum base salary
equal to his or her base salary prior to the Change of Control, and a minimum
annual bonus based on the average of his or her bonuses during the last five
preceding fiscal years, disregarding the highest and lowest such years, and (ii)
he or she will continue to receive the employee benefits to which he or she was
entitled prior to the Change of Control. During this employment period, if the
executive officer's employment is terminated by the Company other than for cause
or disability, or the executive officer terminates his or her employment
following certain actions by the Company, he or she will be
15
entitled to receive, among other things: (i) three times in the case of Mr.
Moore, and two times in the case of Messrs. Richey and Kretschmer and Ms.
Barclay, his or her minimum annual base salary and minimum annual bonus, (ii)
the lump sum value of a supplemental retirement benefit equal to the difference
between (a) his or her benefits under the Retirement Plan and SERP by the
addition of three years in the case of Mr. Moore, and two years in the case of
Messrs. Richey and Kretschmer and Ms. Barclay of credited service and (b) the
amounts actually payable under such plans, and (iii) the continuation of his or
her employee benefits for three years in the case of Mr. Moore and two years in
the case of Messrs. Richey and Kretschmer and Ms. Barclay. The Company may amend
the Plan, but no amendment adverse to the rights of the executive officers will
be effective unless notice thereof has been given by the Company to the affected
executive officers at least one year prior to the occurrence of a Change of
Control.
MANAGEMENT TRANSITION AGREEMENT AND EMPLOYMENT AGREEMENTS
As the result of Mr. Moore's notice to the Company of his desire to retire
from his positions as an officer and director prior to the end of the Company's
2003 fiscal year, and to ensure a successful transition of the Company's
leadership, the Company and Mr. Moore entered into a Management Transition
Agreement ("MTA") dated August 5, 2002. The MTA terminated the employment
agreement between the Company and Mr. Moore described in the following
paragraph, effective September 30, 2002, and provided that Mr. Moore would
resign as Chief Executive Officer effective October 1, 2002, but would continue
to serve as Chairman until his retirement date, April 17, 2003 ("Retirement
Date"). From October 1, 2002 until the Retirement Date, Mr. Moore will receive a
pro rata base salary at an annual rate of $485,000. On the Retirement Date, he
will receive a pro rata bonus at an annual rate of $325,000. Additionally, the
vesting and distribution of his fiscal 2001 restricted stock award, totaling
40,000 shares, was accelerated to April 1, 2003, as was the vesting and payout
of 21,333 performance-accelerated restricted shares which were earned on October
1, 2002 and which represent the final one-third of the award made to Mr. Moore
under the 2001 Stock Incentive Plan. Incidental benefits customarily paid to
senior executives may be paid to Mr. Moore between October 1, 2002 and the
Retirement Date, but shall not in the aggregate exceed $75,000. Also, the
Company and Mr. Moore agreed to enter into a consulting agreement whereby Mr.
Moore will provide services to the Company for a one-year term following the
Retirement Date, for a total fee of $300,000.
The Company entered into employment agreements effective on or about
November 1, 1999 with Messrs. Moore, Richey and Kretschmer and Ms. Barclay, the
then-current executive officers. As stated above, the employment agreement with
Mr. Moore was terminated effective September 30, 2002. The employment agreements
had a term of four years for Mr. Moore and were amended to extend until November
2, 2004 for the other executive officers. The agreements provide for a base
salary of not less than their fiscal year 1999 base salary, as increased in
accordance with the Company's compensation policy, and an annual bonus in
accordance with the Performance Compensation Plan. These executives are also
entitled to participate in any stock options, restricted stock awards,
performance shares and other compensation as the Company's Human Resources and
Ethics Committee shall determine. They are also entitled to participate in all
employee benefit programs of the Company applicable to senior executives, and
the Company will continue to provide certain perquisites.
The Company has the right to terminate the employment of the executive
officers at any time upon thirty days notice for cause or without cause, and
these executives have the right to resign at any time upon thirty days notice.
If an executive's employment is terminated by the Company other than for cause,
or if an executive terminates his employment following certain actions by the
Company, the executive will be entitled to receive certain benefits. In the case
of Mr. Moore, he would have received: (i) for three years, the continuation of
his then-current base salary and bonus (bonus calculated using the average
annual percentage of base salary under the Performance Compensation Plan for the
past five consecutive fiscal years, excluding the highest and lowest
percentage), (ii) the lump sum value of a supplemental retirement benefit equal
to the difference between (a) his benefits under the Retirement Plan and SERP by
the addition of three years of credited service and age and (b) the amounts
actually payable under such plans, (iii) immediate vesting of outstanding stock
options and restricted stock awards, and immediate vesting and payout of awards
outstanding under the performance share plan, and (iv) continuation of certain
employee benefits and
16
perquisites for the period of base salary continuation. In the case of such a
termination, the other executive officers will receive: (i) for one year, the
continuation of his or her then-current base salary and bonus (bonus calculated
by using no less than the annual percentage of base salary under the Performance
Compensation Plan for the last fiscal year), (ii) immediate vesting of
outstanding stock options and immediate vesting and payout of shares earned
under the performance share plan, and (iii) continuation of certain employee
benefits and perquisites for the period of base salary continuation. If an
executive's employment is terminated in connection with a Change of Control, or
in the case of Mr. Moore, if he had terminated his employment based on a Change
of Control, the executive will not receive the foregoing benefits, and will
receive instead the benefits payable under the Company's Severance Plan.
All of the aforementioned agreements prohibit the executives from
disclosing confidential information or trade secrets concerning the Company, and
for a specific period from soliciting employees of the Company and from
soliciting customers or distributors of the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
number of Common Shares beneficially owned by the directors and executive
officers of the Company as of November 1, 2002. Except as otherwise noted, each
person has sole voting and investment power as to his or her shares.
NUMBER OF
COMMON SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)(2)
------------------------ ------------------------
W.S. Antle III........................................... 10,276(3)
A.S. Barclay............................................. 60,501
C.J. Kretschmer.......................................... 96,990
J.M. McConnell........................................... 7,677
D.J. Moore............................................... 315,298(4)
V.L. Richey, Jr. ........................................ 89,426
L.W. Solley.............................................. 4,300
J.M. Stolze.............................................. 4,100(5)
D.C. Trauscht............................................ 11,100
J.D. Woods............................................... 3,383
All directors and executive officers as a group (10
persons)............................................... 603,051
-------------------------
(1) The percentage of total outstanding Common Shares beneficially owned by any
individual does not exceed 1%, except in the case of Mr. Moore who
beneficially owns 2.5%. The percentage beneficially owned by all directors
and executive officers as a group is 4.8%.
(2) Includes the following Common Shares covered by employee stock options which
the individual has the right to acquire within 60 days after November 1,
2002: Ms. Barclay 36,264; Mr. Kretschmer 57,314; Mr. Moore 18,000; Mr.
Richey 58,891, and all directors and executive officers as a group, 170,469.
(3) Includes 2,480 stock equivalents credited to Mr. Antle's deferred
compensation account under the Compensation Plan for Non-Employee Directors.
(4) Includes 80,000 Common Shares which are non-transferable and subject to
certain vesting requirements.
(5) Includes 1,300 stock equivalents credited to Mr. Stolze's deferred
compensation account under the Compensation Plan for Non-Employee Directors.
17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to each
person known by the Company to beneficially own more than five percent of the
outstanding Common Shares:
NUMBER OF PERCENT
NAME AND ADDRESS OF COMMON SHARES OF OUTSTANDING
BENEFICIAL OWNER BENEFICIALLY OWNED COMMON SHARES
------------------- ------------------ --------------
Dimensional Fund Advisors Inc............................... 991,300(1) 7.9%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Liberty Wanger Asset Management, L.P........................ 898,000(2) 7.2%
227 West Monroe, Suite 3000
Chicago, IL 60606
Franklin Resources, Inc..................................... 697,690(3) 5.6%
and certain other parties
One Franklin Parkway
San Mateo, CA 94403
-------------------------
(1) Based on information provided by Dimensional Fund Advisors Inc.
("Dimensional"), an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940 which furnishes investment advice to four
investment companies registered under the Investment Company Act of 1940,
and serves as investment manager to certain other investment vehicles,
including commingled group trusts. (These investment companies and
investment vehicles are the "Portfolios"). In its role as investment advisor
and investment manager, Dimensional possessed both investment and voting
power over the 991,300 shares as of September 30, 2002. The Portfolios own
all such shares, and Dimensional disclaims beneficial ownership of all such
shares.
(2) Based on information provided by Liberty Wanger Asset Management, L.P.
("LWAM"), an investment advisor to the following accounts which may be
deemed to be the beneficial owners of the shares: Liberty Acorn Fund,
750,000 shares; Oregon State Treasury, 50,000 shares; Acorn USA, 49,000
shares; and Wanger US Smaller Companies, 49,000 shares. LWAM holds shared
voting power and investment power as to the 898,000 shares.
(3) Based on information contained in Schedule 13G (Amendment No. 6) under the
Securities Exchange Act of 1934, dated February 1, 2002, filed by Franklin
Resources, Inc. ("FRI") and certain other parties, indicating beneficial
ownership by investment companies or other managed accounts whose investment
advisers are direct and indirect subsidiaries of FRI. Charles B. Johnson and
Rupert H. Johnson, Jr. each owns in excess of 10% of the outstanding common
stock of FRI, and may each be deemed to be the beneficial owner of the
697,690 shares. Franklin Advisory Services, LLC ("FAS") is the investment
advisor for such shares, and may be deemed to be the beneficial owner of,
and has sole voting power and sole investment power as to, 697,600 shares.
Fiduciary Trust Company International, a subsidiary of FRI, has sole voting
power and sole investment power as to 90 shares. Each of the foregoing
persons and entities disclaims any economic interest in or beneficial
ownership of the 697,690 shares. The address of FAS is One Parker Plaza,
Sixteenth Floor, Fort Lee, NJ 07024.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own beneficially more than ten
percent of any class of equity security of the Company to file with the
Securities and Exchange Commission initial reports of such ownership and reports
of changes in such ownership. Officers, directors and such beneficial owners are
required by Securities and Exchange Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely on review of the copies of such reports furnished to the Company
and written representations that no other reports were required, during the
fiscal year ended September 30, 2002, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent beneficial
18
owners were complied with, except that due to an oversight G.E. Muenster was
late in filing one Form 3, one Form 4 involving two transactions, and two Form
5s involving three transactions and four transactions, respectively.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF THE
THREE NOMINEES FOR DIRECTORS.
II. VOTING
The affirmative vote of the holders of a majority of the shares entitled to
vote which are present in person or represented by proxy at the 2003 Annual
Meeting is required to elect directors and to act on any other matters properly
brought before the meeting. Shares represented by proxies which are marked
"withhold authority" with respect to the election of any one or more nominees
for election as directors and proxies which are marked to deny discretionary
authority on other matters will be counted for the purpose of determining the
number of shares represented by proxy at the meeting. Such proxies will thus
have the same effect as if the shares represented thereby were voted against
such nominee or nominees and against such other matters, respectively. Shares
not voted on one or more but less than all such matters on proxies returned by
brokers will be treated as not represented at the meeting as to such matter or
matters.
The Company knows of no other matters to come before the meeting. If any
other matters properly come before the meeting, the proxies solicited hereby
will be voted on such matters in accordance with the judgment of the persons
voting such proxies.
III. INDEPENDENT AUDITORS
KPMG LLP was the Company's independent auditors for the fiscal year ended
September 30, 2002, and the Audit and Finance Committee has selected them as
independent auditors for the year ending September 30, 2003. A representative of
KPMG LLP is expected to be present at the meeting with the opportunity to make a
statement and respond to appropriate questions from Stockholders.
The following fees were paid to KPMG LLP for services rendered in fiscal
2002:
Audit Fees........................................... $431,000
Financial Information Systems Design and
Implementation Fees................................ 0
All Other Fees....................................... 215,000
--------
Total KPMG LLP Fees................................ $646,000
Audit fees primarily represent amounts to be paid for the audit of the
Company's annual financial statements, reviews of SEC Forms 10-Q and 10-K and
statutory audit requirements at certain non-United States locations.
All Other Fees include amounts paid for non-financial statement services,
such as tax services, financial due diligence assistance and audits of benefit
plans.
In the process of the appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending September 30, 2003, the Audit and Finance
Committee has determined that the non-audit services provided by KPMG LLP are
compatible with maintaining the independence of KPMG LLP.
IV. STOCKHOLDER PROPOSALS
Proposals of Stockholders intended to be presented at the 2004 Annual
Meeting must be received by the Company by August 10, 2003 for inclusion in the
Company's proxy statement and form of proxy relating to that meeting. Upon
receipt of any such proposal, the Company will determine whether or not to
include such proposal in the proxy statement and form of proxy in accordance
with regulations governing the solicitation of proxies.
19
In order for a Stockholder to nominate a candidate for director, under the
Company's Articles of Incorporation, timely notice of the nomination must be
given to the Company in advance of the meeting. Ordinarily, such notice must be
given not less than 60 nor more than 90 days before the meeting (but if the
Company gives less than 50 days notice or prior public disclosure of the date of
the meeting, then the Stockholder must give such notice within ten days after
notice of the meeting is mailed or other public disclosure of the meeting is
made, whichever occurs first). The Stockholder filing the notice of nomination
must describe various matters regarding the nominee, including such information
as name, address, occupation and shares held.
In order for a Stockholder to bring other business before a Stockholder
meeting, timely notice must be given to the Company within the time limits
described above. Such notice must include a description of the proposed
business, the reasons therefor and other specified matters. The Board may reject
any such proposals that are not made in accordance with these procedures or that
are not a proper subject for Stockholder action in accordance with the
provisions of applicable law. These requirements are separate from and in
addition to the requirements a Stockholder must meet to have a proposal included
in the Company's proxy statement. The foregoing time limits also apply in
determining whether notice is timely for purposes of rules adopted by the
Securities and Exchange Commission relating to the exercise of discretionary
voting authority.
In each case, the notice must be given to the Secretary of the Company,
whose address is 8888 Ladue Road, Suite 200, St. Louis, Missouri 63124-2056. Any
Stockholder desiring a copy of the Company's Articles of Incorporation or Bylaws
will be furnished one without charge upon written request to the Secretary.
20
EXHIBIT A
ESCO TECHNOLOGIES INC.
AUDIT AND FINANCE COMMITTEE CHARTER
(REVISED NOVEMBER 2002)
The Board of Directors of ESCO TECHNOLOGIES INC. (the "Company") hereby
adopts this charter to govern the composition of its Audit and Finance Committee
(the "Committee") and the scope of the Committee's duties and responsibilities,
and to set forth specific actions the Board of Directors expects the Committee
to undertake to fulfill those duties and responsibilities.
I. Statement of Purpose
The Committee will assist the Board of Directors in overseeing and
monitoring the Company's financial reporting process. The duties of the
Committee are ones of oversight and supervision. It is not the duty of the
Committee to plan or conduct audits or to determine that the Company's financial
statements are complete and accurate and are in accordance with generally
accepted accounting principles. Similarly, it is not the duty of the Committee
to conduct investigations or to assure compliance with laws and regulations or
the Company's compliance program. The Board of Directors recognizes that the
Committee will rely on the advice and information it receives from the Company's
management and its internal and outside auditors. The Board does, however,
expect the Committee to exercise independent judgment in assessing the quality
of the Company's financial reporting process and its internal controls. In doing
so, the Board expects that the Committee will maintain free and open
communication with the other directors, the Company's independent and internal
auditors and the financial management of the Company.
II. Composition of the Audit and Finance Committee
The Committee shall be comprised of at least three members of the Board of
Directors, with the number of members to be determined from time to time by the
Board. The members shall be designated by the Board of Directors, and each of
them shall be independent of management, as that term is defined by
sec.303.01(B)(3) of the New York Stock Exchange Rules, and free from any
relationship that, in the opinion of the Board, would interfere with the
exercise of independent judgment.
Each member of the Committee shall have experience or education in business
or financial matters sufficient to provide him or her with a working familiarity
with basic finance and accounting matters. In addition, the Audit and Finance
Committee shall include at least one person with financial management or
accounting expertise.
Unless the Board has previously designated the Chair, the members of the
Committee may designate a Chair by majority vote.
III. Meetings
The Committee shall meet at least four times annually, or more frequently
if circumstances dictate. One of these meetings shall include separate executive
sessions with the Company's independent auditors and the "outsourced" Internal
Audit Executive or in certain circumstances the Company's Internal Audit
Executive. Unless circumstances dictate otherwise, the meetings should occur
quarterly in conjunction with a review of the Company's quarterly financial
results.
IV. Duties and Responsibilities of the Audit and Finance Committee
The duties and responsibilities of the Committee shall include the
following:
1. Receive the written disclosures and letter from the Company's
independent auditors required by Independence Standards Board Standard No.
1, Independence Discussions with Audit Committees, and discuss with the
auditors any issues required to be discussed regarding their independence.
2. Annually evaluate the qualifications and prior performance of the
Company's current independent auditors. Based on the representations
regarding independence and the results of such evaluation, retain or
terminate the independent auditors. If the current independent auditors are
not retained, the Committee shall select and retain new independent
auditors.
21
3. Meet with the independent auditors and financial management of the
Company in advance of the annual audit to review its proposed scope, the
proposed scope of the quarterly reviews, and the procedures to be followed
in conducting the audit and the reviews.
4. Approve the compensation of the independent auditors for all
individual projects with professional fees in excess of $50,000. In
addition, the Committee will review compliance with the requirements of the
new SEC Rules on Auditor Independence, including all applicable proxy
disclosure requirements.
5. Review with the independent auditors any problems or difficulties
the auditors may have encountered during the annual audit, including any
restrictions placed on the scope of the audit, difficulties obtaining
required information, significant areas of disagreement with management,
areas where the planned scope of the audit was changed because of concerns
or difficulties, significant audit adjustments, and any other matters
required to be discussed by Statement of Auditing Standards No. 61.
6. Review the Company's Annual Report on Form 10-K and the financial
statements contained therein with the Company's financial management and
independent auditors. Discuss any significant financial judgments made in
connection with the preparation of the Company's financial statements.
Receive assurances from financial management that the financial statements
proposed to be included in the Company's Annual Report contain no material
misstatements, and receive assurances from the independent auditors that,
in the course of their audit, they learned of no material misstatement. If
deemed appropriate, after consideration of the reviews and assurances,
recommend to the Board of Directors that they be included in the Annual
Report on Form 10-K.
7. Review the Company's Quarterly Reports on Form 10-Q and the
financial statements contained therein with the Company's financial
management. Receive assurances from the Company's financial management that
the financial statements included in the Company's reports do not contain
any material misstatements, and receive assurances that the auditors
learned of no material misstatements in the course of their review of such
financial statements.
8. Discuss at least annually with the Company's independent auditors
the adequacy and effectiveness of the Company's internal controls. Review
the management letter issued by the independent auditors and management's
response thereto. Periodically assess action management has taken or
progress it has made in addressing issues raised by the independent
auditors.
9. Approve the annual plan and associated resource allocation of the
outsourced internal audit function.
10. Discuss at least annually with the internal audit executive the
effectiveness of the Company's internal accounting controls, as well as any
significant letters or reports to management issued by the internal
auditors, and management's responses thereto.
11. Discuss at least annually with the Company's General Counsel the
effectiveness of the Company's legal, regulatory, and Corporate Governance
compliance programs, any legal matters that may have a material impact on
the Company's financial statements and any material reports or inquiries
received from regulators or government agencies.
12. Recommend to the Board of Directors that the Committee be
authorized to commence and oversee any investigation deemed appropriate
into any matters within the Committee's scope of responsibility, with the
power to retain independent counsel, accountants and other advisors and
experts to assist the Committee if deemed appropriate.
13. Prepare the disclosure required by the rules of the Securities
and Exchange Commission to be included in the Company's annual proxy
statement.
14. Review this charter on an annual basis and make recommendations
to the Board of Directors concerning any changes deemed appropriate.
15. Report actions of the Committee to the Board of Directors with
such recommendations as the Committee deems appropriate.
22
[ESCO TECHNOLOGIES LOGO]
---
PLEASE MARK VOTES REVOCABLE PROXY |
[X] AS IN THIS EXAMPLE ESCO TECHNOLOGIES INC.
WITH- FOR ALL
FOR HOLD EXCEPT
1. ELECTION OF DIRECTORS of all [ ] [ ] [ ]
[ESCO TECHNOLOGIES LOGO] nominees listed (except as
marked to the contrary below):
C.J. KRETSCHMER, J.M. MCCONNELL, D.C. TRAUSCHT
The undersigned, as holder of record of the Common
Stock of ESCO TECHNOLOGIES INC. (the "Company"), does
hereby appoint V.L. Richey, Jr., C.J. Kretschmer and
A.S. Barclay, or any of them, the true and lawful
attorneys in fact, agents and proxies of the undersigned INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
to represent the undersigned at the Annual Meeting of NOMINEE, MARK "FOR ALL EXCEPT" AND WRITE THAT NOMINEE'S NAME IN
Stockholders of the Company, to be held on February 6, THE SPACE PROVIDED BELOW.
2003, commencing at 10:00 A.M., St. Louis time, at the
Hilton St. Louis Frontenac Hotel, 1335 S. Lindbergh Blvd.,
St. Louis County, Missouri 63131 and at any and all ------------------------------------------------------------------
adjournments of such meeting, and to vote all the shares
of Common Stock of the Company standing on the register of
the Company's stock transfer agent in the name of the
undersigned as follows, and in their discretion on such MANAGEMENT RECOMMENDS A VOTE FOR THE ABOVE PROPOSAL.
other business as may properly come before the meeting:
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The undersigned hereby acknowledges receipt of the Notice of
the Annual Meeting and accompanying Proxy Statement dated
December 18, 2002.
The proxies will vote your Common Stock in the manner directed
herein by the undersigned Stockholder.
------------------ IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
Please be sure to date and sign Date
this Proxy in the box below.
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Please sign exactly as your name appears on this form. When
signing as an attorney, executor, administrator, trustee or
guardian, please give full title as such. If signing on behalf of
a corporation, please sign in full corporate name by President or
other authorized officer. If signing on behalf of a partnership,
--Stockholder sign above---Co-holder (if any) sign above-- please sign in partnership name by authorized person.
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/\ DETACH ABOVE FORM, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED. /\
ESCO TECHNOLOGIES INC.
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PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY FORM TODAY
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December 18, 2002
Dear Stockholder:
The Annual Meeting of Stockholders of ESCO Technologies Inc. will be held at the Hilton St. Louis Frontenac Hotel, 1335 S.
Lindbergh Blvd., St. Louis County, Missouri 63131 at 10:00 A.M. on Thursday, February 6, 2003.
It is important that your shares are represented at this meeting. Whether or not you plan to attend the meeting, please review
the enclosed proxy materials, complete the attached proxy form above, and return it promptly in the envelope provided.
Thank you.
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE
ENVELOPE PROVIDED.
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