UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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STRATTEC SECURITY CORPORATION

(Name of Registrant as Specified in Its Charter)

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STRATTEC SECURITY CORPORATION
3333 WEST GOOD HOPE ROAD
MILWAUKEE, WISCONSIN 53209

 

Notice of Annual Meeting of Shareholders

To Be Held On October 5, 2010

 

The Annual Meeting of Shareholders of STRATTEC SECURITY CORPORATION, a Wisconsin corporation (the “Corporation” or “STRATTEC”), will be held at the Radisson Hotel, 7065 North Port Washington Road, Milwaukee, Wisconsin 53217, on Tuesday, October 5, 2010, at 8:00 a.m. local time, for the following purposes:

 

1. To elect one director to serve for a three-year term.

 

2. To consider and act on a proposal to amend and restate the STRATTEC SECURITY CORPORATION Stock Incentive Plan.

 

3. To take action with respect to any other matters that may be properly brought before the meeting and that might be considered by the shareholders of a Wisconsin corporation at their Annual Meeting.

 

By order of the Board of Directors

 

PATRICK J. HANSEN,

Secretary

 

Milwaukee, Wisconsin

September 1, 2010

 

 

 

 

 

TABLE OF CONTENTS

 

 

STRATTEC SECURITY CORPORATION
3333 WEST GOOD HOPE ROAD
MILWAUKEE, WISCONSIN 53209

 

Proxy Statement for the 2010 Annual Meeting of Shareholders

To Be Held on October 5, 2010

 

Important Notice Regarding the Availability of Proxy Materials for the

2010 Annual Meeting of Shareholders to be held on October 5, 2010:

This Proxy Statement and the Accompanying Annual Report

are Available at www.strattec.com

 

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of STRATTEC SECURITY CORPORATION of proxies, in the accompanying form, to be used at the Annual Meeting of Shareholders of STRATTEC to be held at the Radisson Hotel, 7065 North Port Washington Road, Milwaukee, Wisconsin 53217, on Tuesday, October 5, 2010, at 8:00 a.m., local time, and any adjournments thereof. Only shareholders of record at the close of business on August 17, 2010 will be entitled to notice of and to vote at the meeting. There will be no presentation regarding our operations at the Annual Meeting of Shareholders. The only matters to be discussed are the matters set forth in the Proxy Statement for the 2010 Annual Meeting of Shareholders and such other matters as are properly raised at the Annual Meeting.

 

Our principal executive offices are located at 3333 West Good Hope Road, Milwaukee, Wisconsin 53209. It is expected that this Proxy Statement and the form of Proxy will be mailed to shareholders on or about September 1, 2010.

 

The shares represented by each valid proxy received in time will be voted at the meeting and, if a choice is specified in the proxy, it will be voted in accordance with that specification. If no instructions are specified in a signed proxy returned to STRATTEC, the shares represented thereby will be voted in FAVOR of the election of the director listed in the enclosed proxy card and in

FAVOR of the proposal to amend and restate the STRATTEC SECURITY CORPORATION Stock Incentive Plan (the “Stock Incentive Plan”). If any other matters are properly presented at the Annual Meeting, including, among other things, consideration of a motion to adjourn the meeting to another time or place, the individuals named as proxies and acting thereunder will have the authority to vote on those matters according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. If the Annual Meeting is adjourned or postponed, a proxy will remain valid and may be voted at the adjourned or postponed meeting. As of the date of printing of this Proxy Statement, we do not know of any other matters that are to be presented at the Annual Meeting other than the election of the director and the approval of the amended and restated Stock Incentive Plan.

 

Shareholders may revoke proxies at any time to the extent they have not been exercised. Attendance at the Annual Meeting will not automatically revoke a proxy, but a shareholder attending the Annual Meeting may request a ballot and vote in person, thereby revoking a prior granted proxy. The cost of solicitation of proxies will be borne by STRATTEC. Solicitation will be made primarily by use of the mail; however, some solicitation may be made by our employees, without additional compensation therefor, by telephone, by facsimile, by email or in person.

 

Only shareholders of record at the close of business on August 17, 2010 will be entitled to notice of and to vote at the Annual Meeting. On the record date, we had outstanding 3,322,074 shares of our common stock, $0.01 par value per share (the “Common Stock”), entitled to one vote per share.

 

A majority of the votes entitled to be cast at the Annual Meeting, represented either in person or by proxy, shall constitute a quorum with respect to the meeting. Approval of each matter specified in the notice of the meeting, other than the election of the nominee director, requires the number of votes cast at the Annual Meeting in favor of approval to exceed the votes cast against approval. Approval of the election of the nominee director requires a plurality of the shares represented at the meeting. This means that the nominee with the most votes will be elected. Abstentions and broker nonvotes (i.e., shares held by brokers in street name, voting on certain matters due to discretionary authority or instructions from the beneficial owners but not voting on other matters due to lack of authority to vote on such matters without instructions from the beneficial owner) will count toward the quorum requirement but will not count toward the determination of whether such matters are approved or the director is elected. The Inspector of Election appointed by our Board of Directors will count the votes and ballots.

 

It is intended that shares represented by proxies in the enclosed form will be voted for the election of the nominee in the following table to serve as a director. Our Board of Directors is divided into three classes, with the term of office of each class ending in successive years. One director is to be elected at the Annual Meeting to serve for a term of three years expiring in 2013 and four directors will continue to serve for the terms designated in the schedule shown below. As indicated below, the individual nominated by our Board of Directors is an incumbent director. We anticipate that the nominee listed in this Proxy Statement will be a candidate when the election is held. However, if for any reason the nominee is not a candidate at that time, proxies will be voted for any substitute nominee designated by STRATTEC (except where a proxy withholds authority with respect to the election of directors).

 

The following table provides information as of the date of this proxy statement about the nominee for election to our Board of Directors at the Annual Meeting and about each of our incumbent directors who are continuing as directors of STRATTEC after the Annual Meeting. The information presented includes information each nominee or director has given us about his age, his principal occupation and business experience for the past five years, and the names of other publicly-held companies of which he currently serves as a director or has served as a director during the past five years. The Nominating and Corporate Governance Committee regularly evaluates the mix of experience, qualifications, attributes and skills of our directors using a matrix of areas that the Committee considers important for our business. In addition to the information presented below regarding the nominee’s specific experience, qualifications, attributes and skills that led our Nominating and Corporate Governance Committee to the conclusion that the nominee should serve as a director, our Nominating and Corporate Governance Committee also considered the qualifications and criteria described below under “Corporate Governance Matters — Director Nominations” with the objective of creating a complementary mix of directors.

 

Board of Directors Recommendation

 

The Board of Directors recommends that shareholders vote in FAVOR of the election of Frank J. Krejci as a director of STRATTEC.

 

Our Board of Directors held five meetings in fiscal 2010, and all of our nominee and incumbent directors attended 100% of the meetings of our Board of Directors and the committees thereof on which they served.

Executive sessions or meetings of outside (non-management) directors without management present are held regularly for a general discussion of relevant subjects. In fiscal 2010, the outside directors met in executive session four times.

 

The committees of our Board of Directors consist of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. The chart below identifies the members of each of these committees as of the date of this Proxy Statement, along with the number of meetings held by each committee during fiscal 2010:

 

 

 

 

Frank J. Krejci was a member of each of our committees during fiscal 2010 until December 9, 2009, at which point Mr. Krejci resigned as a member of each committee in contemplation of his appointment as our President and Chief Operating Officer effective January 1, 2010.

 

The Audit Committee is responsible for assisting our Board of Directors with oversight of: (1) the integrity of our financial statements; (2) our compliance with legal and regulatory requirements; (3) our independent auditor’s qualifications and independence; and (4) the performance of our internal accounting function and independent auditors. Our Audit Committee has the direct authority and responsibility to appoint, compensate, oversee and retain the independent auditors, and is an “audit committee” for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. We have placed a current copy of the Charter of the Audit Committee on our web site located at www.strattec.com.

 

The Compensation Committee, in addition to such other duties as may be specified by our Board of Directors: (1) oversees and reviews the compensation and benefits of our senior managers (including determining the compensation of our Chief Executive Officer); (2) makes appropriate recommendations to our Board of Directors with respect to our incentive compensation plans and equity-based plans; (3) administers our incentive compensation plans and equity-based plans in accordance with the responsibilities assigned to the Committee under any and all such plans, including under our Economic Value Added Plan for Executive Officers and Senior Managers and our Stock Incentive Plan; and (4) reviews and makes recommendations to our Board of Directors

with respect to the compensation of our outside directors. We have placed a current copy of the Charter of the Compensation Committee on our web site located at www.strattec.com.

 

The Nominating and Corporate Governance Committee is responsible for assisting our Board of Directors by: (1) identifying individuals qualified to become members of our Board of Directors and its committees; (2) recommending guidelines and criteria to the Board of Directors to determine the qualifications of potential directors; (3) making recommendations to the Board of Directors concerning the size and composition of the Board and its committees; (4) recommending to our Board of Directors nominees for election to the Board at the annual meeting of shareholders; (5) developing and recommending to our Board of Directors a set of corporate governance principles applicable to STRATTEC; and (6) assisting our Board of Directors in assessing director performance and the effectiveness of the Board of Directors. We have placed a current copy of the Charter of the Nominating and Corporate Governance Committee on our web site located at www.strattec.com.

 

Our Board of Directors has reviewed the independence of our continuing directors and the nominee for election to the Board at the 2010 Annual Meeting of Shareholders under the applicable standards of the NASDAQ Stock Market. Based on this review, our Board of Directors determined that each of the following directors is independent under those standards:

 

(1) Robert Feitler                 (3) David R. Zimmer

 

(2) Michael J. Koss

 

Based on such standards, Harold M. Stratton II and Frank J. Krejci are the only directors who are not independent because Mr. Stratton is our Chief Executive Officer and Mr. Krejci is our President and Chief Operating Officer.

 

We currently have the same person serving as our Chief Executive Officer and as Chairman of our Board of Directors. Harold M. Stratton II has served as our Chief Executive Officer and Chairman of the Board since February 1999. We do not currently have a lead independent director. Although our Board of Directors does not have a formal policy with respect to its leadership structure, we believe that currently combining the positions of Chief Executive Officer and Chairman serves as an effective link between management’s role of identifying, assessing and managing risks and the Board of Directors’ role of risk oversight. Mr. Stratton possesses in-depth knowledge of the issues, opportunities and challenges we face, and is thus best positioned to develop agendas and highlight issues that ensure that the Board of Directors’ time and attention are focused

on the most critical matters. In addition, our Board of Directors has determined that this leadership structure is optimal because it believes that having one leader serving as both the Chairman and Chief Executive Officer provides decisive, consistent and effective leadership, as well as clear accountability. Having one person serve as Chairman and Chief Executive Officer also enhances our ability to communicate our message and strategy clearly and consistently to our shareholders, employees, and business partners, particularly during times of turbulent economic and industry conditions. Although we believe that the combination of the Chairman and Chief Executive Officer roles is appropriate under current circumstances, we will continue to review this issue periodically to determine whether, based on the relevant facts and circumstances, separation of these offices would serve our best interests and the best interests of our shareholders.

 

The role of our Board of Directors in STRATTEC’s risk oversight process includes receiving reports from members of our senior management on areas of material risk to STRATTEC, including operational, financial, legal and regulatory, and strategic and reputational risks. The Board has authorized the Audit Committee to oversee and periodically review STRATTEC’s enterprise risk assessment and enterprise risk management policies.

 

We have a standing Nominating and Corporate Governance Committee. Based on the review described under “Corporate Governance Matters — Director Independence,” our Board of Directors has determined that each member of the Nominating and Corporate Governance Committee is independent under the applicable standards of the NASDAQ Stock Market.

 

The Nominating and Corporate Governance Committee will consider director nominees recommended by shareholders. A shareholder who wishes to recommend a person or persons for consideration as a nominee for election to the Board of Directors must send a written notice by mail, c/o Secretary, STRATTEC SECURITY CORPORATION, 3333 West Good Hope Road, Milwaukee, Wisconsin 53209, that sets forth: (1) the name, address (business and residence), date of birth and principal occupation or employment (present and for the past five years) of each person whom the shareholder proposes to be considered as a nominee; (2) the number of shares of our Common Stock beneficially owned (as defined by section 13(d) of the Securities Exchange Act of 1934) by each such proposed nominee; (3) any other information regarding such proposed nominee that would be required to be disclosed in a definitive proxy statement to shareholders prepared in connection with an election of directors pursuant to section 14(a) of the Securities Exchange Act of 1934; and (4) the name and address (business and residential) of the shareholder making the recommendation and the number of shares of our Common Stock beneficially owned (as defined by section 13(d) of the Securities Exchange Act of 1934) by the shareholder making the recommendation.

 

We may require any proposed nominee to furnish additional information as may be reasonably required to determine the qualifications of such proposed nominee to serve as a director. Shareholder recommendations will be considered only if received no less than 120 days nor more than 150 days

before the date of the proxy statement sent to shareholders in connection with the previous fiscal year’s annual meeting of shareholders.

 

The Nominating and Corporate Governance Committee will consider any nominee recommended by a shareholder in accordance with the preceding paragraph under the same criteria as any other potential nominee. The Nominating and Corporate Governance Committee believes that a nominee recommended for a position on our Board of Directors must have an appropriate mix of director characteristics, experience, diverse perspectives and skills. Qualifications of a prospective nominee that may be considered by the Nominating and Corporate Governance Committee include:

 

 

We do not have a formal policy for the consideration of diversity by the Nominating and Corporate Governance Committee in identifying nominees for director. Diversity is one of the factors the Nominating and Corporate Governance Committee may consider and in this respect diversity may include race, gender, national origin or other characteristics.

 

Our shareholders may communicate with the Board or any individual director by directing such communication to our Secretary at the address of our corporate headquarters, 3333 West Good Hope Road, Milwaukee, Wisconsin 53209. Each such communication should indicate that the sender is a shareholder of the Corporation and that the sender is directing the communication to one or more individual directors or to the Board as a whole.

 

All communications will be compiled by our Secretary and submitted to the Board of Directors or the individual directors on a monthly basis unless such communications are considered, in the reasonable judgment of our Secretary, to be improper for submission to the intended recipient(s). Examples of shareholder communications that would be considered improper for submission include, without limitation, customer complaints, solicitations, communications that do not relate directly or indirectly to STRATTEC or our business or communications that relate to improper or irrelevant topics. Our Secretary may also attempt to handle a communication directly where appropriate, such as where the communication is a request for information about STRATTEC or where it is a stock-related matter.

 

We expect that all of our directors and nominees for election as directors at our annual meeting of shareholders will attend the annual meeting, absent a valid reason, such as a schedule conflict. All of our directors attended the annual meeting of shareholders held on October 6, 2009.

 

We have adopted a Code of Business Ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Business Ethics is available on our web site which is located at www.strattec.com. We also intend to disclose any amendments to, or waivers from, the Code of Business Ethics on our web site.

 

The Audit Committee is comprised of three members of our Board of Directors. Frank J. Krejci was a member of the Audit Committee during fiscal 2010 until his resignation from the Committee effective December 9, 2009. Based upon the review described above under “Corporate Governance Matters — Director Independence,” our Board of Directors has determined that each member of the Audit Committee is independent as defined in the applicable standards of the NASDAQ Stock Market and the Securities and Exchange Commission (the “Commission”).

 

The Audit Committee has:

 

 

Based on such review and discussions with management and with the independent auditors, the Audit Committee recommended to our Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2010, for filing with the Commission.

 

AUDIT COMMITTEE:

 

David R. Zimmer — Chairman
Robert Feitler
Michael J. Koss

 

On February 23, 2010, STRATTEC dismissed Grant Thornton LLP as its independent public accountants and appointed Deloitte & Touche LLP as its new independent public accountants. The decision to dismiss Grant Thornton LLP and to retain Deloitte & Touche LLP was approved by our Audit Committee on February 23, 2010.

 

Grant Thornton’s reports on our consolidated financial statements for each of the fiscal years ended June 28, 2009 and June 29, 2008 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principals.

 

During our fiscal years ended June 28, 2009 and June 29, 2008 and through February 23, 2010, there were no disagreements with Grant Thornton LLP on any matters of accounting principles or practices, financial statement disclosures or auditing scope or procedures which, if not resolved to Grant Thornton LLP’s satisfaction would have caused them to make reference to the subject matter in connection with their report on our consolidated financial statements for such years; and there were no reportable events, as listed in 304(a)(i)(v) of Commission Regulation S-K.

 

During our fiscal years ended June 28, 2009 and June 29, 2008 and through February 23, 2010, we did not consult with Deloitte & Touche LLP regarding any of the matters or events set forth in Items 304(a)(2)(i) and (ii) of Commission Regulation S-K.

 

The following table summarizes the fees we were billed for audit and non-audit services rendered by our independent auditors, Deloitte & Touche LLP and Grant Thornton LLP, during fiscal 2010 and 2009:

 

 

 

 

 

The Audit Committee of our Board of Directors considered that the provision of the services and the payment of the fees described above are compatible with maintaining the independence of Deloitte & Touche LLP and, formerly, Grant Thornton LLP.

 

The Audit Committee is responsible for reviewing and pre-approving any non-audit services to be performed by our independent auditors. The Audit Committee has delegated certain of its pre-approval authority to the Chairman of the Audit Committee to act between meetings of the Audit Committee. Any pre-approval given by the Chairman of the Audit Committee pursuant to this delegation is presented to the full Audit Committee at its next regularly scheduled meeting. The Audit Committee or Chairman of the Audit Committee reviews and, if appropriate, approves non-audit service engagements, taking into account the proposed scope of the non-audit services, the proposed fees for the non-audit services, whether the non-audit services are permissible under applicable law or regulation and the likely impact of the non-audit services on the independence of the independent auditors.

 

Since the effective date of the Commission rules requiring pre-approval of non-audit services on May 6, 2003, each new engagement of our independent auditors to perform non-audit services has been approved in advance by our Audit Committee or the Chairman of our Audit Committee pursuant to the foregoing procedures.

 

Our Board of Directors, upon recommendation of our Audit Committee, will select our independent registered public accounting firm for the 2011 fiscal year. It is expected that a representative of Deloitte & Touche LLP will be present at the Annual Meeting and will have the opportunity to make a statement if such representative desires to do so and will be available to respond to appropriate questions.

 

Our Board of Directors has determined that at least one of the members of our Audit Committee qualifies as an “audit committee financial expert” as defined by the rules of the Commission. David Zimmer, the Chairman of the Audit Committee, qualifies as an “audit committee financial expert” based on his work experience and education.

 

The following table sets forth the name, age (as of the date of this Proxy Statement), current position and principal occupation and employment during the past five years of our executive officers who are not nominees for or incumbent directors:

 

 

The following table sets forth information regarding the beneficial ownership of shares of our common stock as of August 17, 2010 by (i) each director and named executive officer (as defined below), (ii) all directors and executive officers as a group, and (iii) each person or other entity known by us to beneficially own more than 5% of our outstanding common stock.

 

The following table is based on information supplied to us by the directors, officers and shareholders described above. We have determined beneficial ownership in accordance with the rules of the Commission. Shares of common stock subject to options that are either currently exercisable or exercisable within 60 days of August 17, 2010 are treated as outstanding and beneficially owned by the option holder for the purpose of computing the percentage ownership of the option holder. However, these shares are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The table lists applicable percentage ownership based on 3,322,074 shares outstanding as of August 17, 2010.

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the Commission initial reports of beneficial ownership on Form 3 and reports of changes in beneficial ownership of our equity securities on Form 4 or 5. The rules promulgated by the Commission under Section 16(a) of the Exchange Act require those persons to furnish us with copies of all reports filed with the Commission pursuant to Section 16(a). Based solely upon a review of such forms actually furnished to us, and written representations of certain of our directors and executive officers that no forms were required to be filed, all directors, executive officers and 10% shareholders have filed with the Commission on a timely basis all reports required to be filed under Section 16(a) of the Exchange Act during Fiscal 2010, except Dennis Kazmierski filed a Form 4 report on November 20, 2009 disclosing a transaction occurring on November 16, 2009.

 

Overview

 

This Compensation Discussion and Analysis addresses our compensation philosophy, objectives, process and actions specific to fiscal 2010, and the first part of fiscal 2011 prior to the date of this proxy statement, for our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers based on their total compensation in fiscal 2010. Throughout this proxy statement, we refer to these five executive officers as our “named executive officers.” Responsibility for establishing, implementing and monitoring the total compensation of our executive officers rests with the Compensation Committee of our Board of Directors.

 

Our Compensation Philosophy

 

We believe it is important to provide compensation that at a minimum reflects base levels which are competitive with executive officers in other industrial public companies of similar structure and size. We further believe that it is appropriate and desirable to have meaningful incentive plans for our executive officers to help attract and retain high performing individuals and drive positive economic performance and enhanced shareholder value. Further, these performance based incentive plans should provide opportunities for our executive officers to significantly augment their base compensation on a short term and long term basis. This philosophy is the foundation for the following objectives.

 

Our Compensation Objectives

 

The objectives of the Compensation Committee in establishing compensation arrangements for our executive officers are to:

 

 

The compensation program that has been developed and is being implemented by our Compensation Committee to achieve these objectives has the following features:

 

 

 

The above noted compensation program features are described in detail in the following sections of this Compensation Discussion and Analysis, entitled “Our Compensation Process,” “Components of Executive Compensation” and “Change of Control and Severance Benefits.”

 

Our Compensation Process

 

Compensation for our executive officers and other key employees is evaluated and determined by the Compensation Committee of our Board of Directors. Our Compensation Committee consists of three independent directors under the applicable standards of the NASDAQ Stock Market. Michael J. Koss is the Chairman of our Compensation Committee and the other members of the Compensation Committee are David R. Zimmer and Robert Feitler. Frank J. Krejci was a member of our Compensation Committee until December 9, 2009 when he voluntarily resigned in contemplation

of his appointment as our President and Chief Operating Officer effective January 1, 2010. Additional information regarding our Compensation Committee is disclosed under “Directors’ Meetings and Committees — Compensation Committee” on pages 6 and 7 of this Proxy Statement.

 

Many key compensation decisions are made during the first quarter of the fiscal year as the Compensation Committee meets to review performance for the prior year under our Economic Value Added Bonus Plan for Executive Officers and Senior Managers, determine awards under our Stock Incentive Plan and set compensation targets and objectives for the coming year. However, our Compensation Committee also views compensation as an ongoing process and may convene special meetings in addition to its regularly scheduled meetings throughout the year for purposes of evaluation, planning and appropriate action. The Compensation Committee held two meetings during fiscal 2010 as well as meetings held on July 22, 2010 and August 17, 2010 to review performance for fiscal 2010. At each meeting, the Compensation Committee held an executive session (without management present). The Compensation Committee receives and reviews materials in advance of each meeting, including materials that management believes will be helpful to the Committee as well as materials specifically requested by members of the Committee.

 

Our management assists the Compensation Committee in its oversight and determination of compensation. Management’s role includes assisting the Compensation Committee with evaluating employee performance, assisting with establishing individual and company-wide performance targets and objectives, recommending salary levels and option and other equity incentive grants, providing financial data on company performance, providing calculations and reports on achievement of performance objectives and furnishing other information requested by the Committee. Our Chief Executive Officer works with the Compensation Committee in making recommendations regarding our overall compensation policies and plans as well as specific compensation levels for our other executive officers and key employees. Members of management who were present during portions of Compensation Committee meetings held in fiscal 2010 and 2011 to date, included the Chief Executive Officer and the Chief Financial Officer. The Compensation Committee makes all decisions regarding the compensation of the Chief Executive Officer without the Chief Executive Officer or any other member of management present.

 

The Compensation Committee’s charter authorizes the Committee to engage any compensation consultants and other advisers as the Committee may deem appropriate, and requires that we provide the Committee with adequate funding to engage any advisers. During fiscal 2010 and 2011 to date, the Compensation Committee did not engage any consultants to assist it in reviewing our compensation practices and levels. In prior fiscal years, our Compensation Committee has periodically engaged RSM McGladrey to prepare for the Compensation Committee a comparative compensation report of a broad group of organizations within the durable goods manufacturing industry. This report is based upon industry-wide studies, and not necessarily companies in the automotive parts industry. Our Compensation Committee believes this industry-wide report represents a better cross section from which to draw executive talent and compare compensation levels. Our Compensation Committee last engaged RSM McGladrey in May 2008 and reviewed the results of their report and analysis during meetings held at the beginning of fiscal 2009. Given our performance and the economic outlook for the automotive industry during fiscal 2009, as noted below, our Compensation

Committee chose to reduce base salaries for our executive officers to their fiscal 2008 levels (and even lower in the case of Mr. Stratton). Additional information regarding our Compensation Committee’s actions with respect to setting the base salaries of our executive officers is shown below. Our Compensation Committee decided not to engage RSM McGladrey to prepare a similar analysis and report for fiscal 2010 and 2011. Our Compensation Committee, however, expects to continue to periodically engage RSM McGladrey and use their report and analysis in future fiscal years in connection with reviewing and establishing our compensation practices.

 

Components of Executive Compensation

 

For executive officers, the primary components of total compensation continue to be:

 

 

We evaluate targeted total compensation levels for our executive officers as well as how each component fits within the targeted total compensation levels. This evaluation is guided by our compensation objectives described above. A large portion of potential compensation for our executive officers is performance-based. For performance-based compensation, we combine annual cash incentive bonuses that are tied to both short-term, company-wide measures of operating performance and individual performance goals with long-term equity compensation in the form of awards of stock options that are subject to time-based vesting criteria and shares of restricted stock that vest on the three year anniversary of the date of grant. The long-term equity compensation awards promote our executive retention objectives and provide an incentive for long-term appreciation in our stock price.

 

Base Salary.  Base salary is a key component of our executive compensation. In determining base salaries, our Compensation Committee considers the executive officer’s qualifications and experience, the executive officer’s responsibilities, the executive officer’s past performance, the executive officer’s goals and objectives, and salary levels for comparable positions. Our Compensation Committee typically establishes base salaries for the new fiscal year for our executive officers at its regular meeting in August of each year where it reviews the prior fiscal years’ results.

 

The base salaries of the named executive officers were initially set by their respective employment agreements and were initially determined by evaluating the responsibilities of the position, the experience of the individual and the salaries for comparable positions in the competitive marketplace based upon a report prepared for the Compensation Committee by RSM McGladrey, as referenced above. Each executive officer’s employment agreement contains an evergreen renewal feature that automatically extends the agreement for an additional year each June 30, unless advance notice is provided. The base salary, as provided in the employment agreement, may not be decreased from the prior year’s level without the consent of the executive officer, but can be increased in the discretion of the Compensation Committee. In general, we have historically set the base salaries at or

near the median level derived from the RSM McGladrey report for similar positions. In determining salary adjustments for executive officers, our Compensation Committee considers various factors, including the individual’s performance and contribution, our performance, and the pay level for similar positions as reflected in the RSM McGladrey report. The Compensation Committee, where appropriate, also considers non-financial performance measures such as improvements in product quality, manufacturing efficiency gains and the enhancement of relations with our customers and employees. The Compensation Committee exercises discretion in increasing the base salaries of our executive officers from the prior fiscal year within the guidelines discussed above.

 

As noted above, we do not provide any standard annual raises in the base salaries of our executive officers. Instead, our Compensation Committee periodically reviews the base salaries of our executive officers based on the individual and company-wide performance criteria described above. During fiscal 2009, we reduced the base salaries of our executive officers to their fiscal 2008 levels, except with respect to Mr. Stratton. Mr. Stratton’s base salary was reduced from $409,000 to $327,000 on May 16, 2009, which was less than the base salary paid Mr. Stratton during fiscal 2008. The salary reductions were made at the discretion of our Compensation Committee based upon our company performance and the economic outlook for the automotive industry and continued during the first half of fiscal 2010. Effective January 1, 2010, our Compensation Committee re-evaluated our financial performance for the first part of fiscal 2010 and the performance and outlook in general for the automotive industry. Based upon the updated analysis, our Compensation Committee restored our officers’ base salaries to their September 1, 2008 levels. Accordingly, effective as of January 1, 2010, our named executive officers were paid the following base salaries:

 

 

The foregoing base salaries are expected to continue at the same levels through the end of fiscal 2011.

 

Annual Incentive Bonuses.  Executive officers and other full-time employees are eligible to receive annual incentive cash bonuses under our Economic Value Added Bonus Plan for Executive Officers and Senior Managers (EVA Bonus Plan). While we principally rely on this Bonus Plan for annual cash incentive bonuses, in some years the Compensation Committee may decide to grant discretionary cash bonuses outside of the EVA Bonus Plan based on special circumstances such as the acquisition or disposition of a business. See “Discretionary Bonuses” below.

 

Participants under our EVA Bonus Plan for Executive Officers and Senior Managers include our executive officers and other senior managers determined by our Compensation Committee based upon recommendations from our Chief Executive Officer. The purpose of using Economic Value Added as a non-GAAP measure is to drive for continuous improvement year over year, enhance shareholder value and provide a framework for determining incentive compensation for our

executive officers that financially rewards them for increases in our shareholder value. We believe that Economic Value Added improvement is the financial performance measure most closely correlated with increases in our shareholder value.

 

In general, Economic Value Added (EVA) is our net operating profit after cash basis taxes, less a capital charge. The capital charge is intended to represent the return expected by the providers of our capital. The capital charge is determined by our weighted average debt and equity capital structure as defined by Stern, Stewart & Co., a management consultant firm that originated the concept of Economic Value Added. The amount of bonus which a participant is entitled to earn is derived from a Company Performance Factor and from an Individual Performance Factor. We determine the Company Performance Factor by reference to our financial performance relative to a targeted cash-based return on capital established by our Compensation Committee, which is intended to approximate our weighted cost of capital. We determine the Individual Performance Factor by reference to the level of attainment of certain quantifiable and non-quantifiable company or individual goals which contribute to increasing our value to our shareholders.

 

At the beginning of each fiscal year, we calculate STRATTEC’s cost of capital and expected Company EVA Performance Target. In fiscal 2010, the cost of capital was determined to be at 10.0% and the Company EVA Performance Target was a negative $7.5 million. Actual Company EVA Performance in fiscal 2010 was a negative $4.9 million. See below (in millions of dollars):

 

 

Average Net Capital Employed in the business is generally calculated by averaging the net amount of operating assets (i.e. operating assets less operating liabilities) used in our business during a particular period. In fiscal year 2008, our EVA Bonus Plan was modified to include cash and cash equivalents as part of our net capital employed in the business. Because cash and cash equivalents are a significant component of the capital employed in the business it can significantly increase our capital charge. This effect contributed to our negative EVA in fiscal 2010, 2009 and 2008.

 

EVA performance can be negative when the calculated capital charge (cost of capital X net monthly average capital employed in the business) exceeds our Net Operating Income After Cash-Basis Taxes. For purposes of our EVA Bonus Plan, the EVA, whether positive or negative, is compared to the Company EVA Performance Target for that particular year to determine whether any bonuses are earned under the plan.

 

As noted above, we determine our Cost of Capital at the beginning of each fiscal year. Our Compensation Committee reviews and sets the Cost of Capital based upon the methodology described below, but under the EVA Bonus Plan it retains the discretion to set the Cost of Capital at a level different than determined under the following methodology. The EVA Bonus Plan provides that our Cost of Capital shall be determined based upon averaging our cost of equity and our cost of

debt assuming a weighted average value for the equity of 80% and 20% for the debt. The cost of the equity is calculated by multiplying a market risk premium rate, using a methodology established by Stern, Stewart, by a transportation industry risk index (which is established by an independent third party for the transportation industry) and then adding that product to the average effective interest rate during the month of April each year that would be earned by investing in ten year U.S. Treasury Notes. The cost of our debt is calculated based upon our expected weighted average interest cost on our available borrowing base with our lender on an after tax basis. As a result, our Cost of Capital is predominantly affected by changes in interest rates and an evaluation of the risks and economic climate in the transportation industry that influence the determination of the market premium and the industry index rate.

 

Individual Target Incentive Awards under the EVA Bonus Plan for fiscal 2010 range from 75% of base compensation for our Chief Executive Officer to 65% of base compensation for our President and Chief Operating Officer to 35%-45% of base compensation for other officers. The formula for calculating bonuses under the EVA Bonus Plan is: Base Salary x Target Incentive Award x (50% of the Company Performance Factor + 50% of the Individual Performance Factor). A portion of this bonus amount, however, is subject to an at risk “Bonus Bank” described below.

 

The EVA Bonus Plan for Executive Officers and Senior Managers provides the powerful incentive of an uncapped bonus opportunity, but also uses a “Bonus Bank” to ensure that significant Economic Value Added improvements are sustained before significant bonus awards are paid out. Pursuant to the terms of the EVA Bonus Plan, the Bonus Bank feature applies to those participants determined by the Compensation Committee to be “Executive Officers,” which includes all of our named executive officers. Each year, any accrued bonus in excess of 125% of the target bonus award is added to the outstanding Bonus Bank balance for the named executive officer. The bonus actually paid to a participant for a year is equal to the accrued bonus for the year, up to a maximum of 125% of the target bonus, plus 33% of the Bonus Bank balance at the end of that year.

 

Because we use the Bonus Bank feature, we must experience significant Economic Value Added improvements for several years to ensure full payout of the accrued bonus to the executive officer. A Bonus Bank account is considered “at risk” in the sense that in any year the accrued bonus is negative, the negative bonus amount is subtracted from the outstanding Bonus Bank balance. A participant’s Bonus Bank balance may not be negative. On termination of employment due to death, disability or retirement or by us without cause, any balance in the Bonus Bank will be paid to the terminating executive officer or his or her designated beneficiary or estate. Executive officers who voluntarily leave to accept employment elsewhere or who are terminated for cause will forfeit any Bonus Bank balance.

 

During fiscal years (2006-2009) our actual performance did not exceed our fiscal year EVA targeted goals, and consequently no incentive bonus compensation was awarded to our associates or executive officers during those periods. However, during fiscal 2010 our actual performance exceeded the fiscal 2010 targeted goals and, accordingly, bonuses were awarded to our executive

officers and our executive officers increased their Bonus Bank accounts under our EVA Bonus Plan in the following amounts:

 

 

At the Compensation Committee’s regular meeting held August 17, 2010, the Committee reviewed the data and calculation for the Company’s fiscal 2011 EVA Performance Target and subsequently approved an EVA Performance Target of a negative $4.6 million for fiscal 2011. Pursuant to the terms of the EVA Bonus Plan, the fiscal 2011 EVA Performance Target is determined by averaging the prior year performance target (i.e. the performance target for fiscal 2010) and the prior year actual EVA amount (i.e. actual EVA for fiscal 2010) and then adding an expected improvement amount set by our Board of Directors. For fiscal 2011, our Board of Directors set the expected improvement amount at $1.5 million.

 

Discretionary Bonuses.  While we have principally relied on our formula-based cash incentive plans, our named executive officers are eligible to receive discretionary cash bonuses awarded by our Compensation Committee. These discretionary bonuses allow us to recognize extraordinary performance by our named executive officers and to have the flexibility to maintain competitive compensation when needed. When determining whether to grant a discretionary bonus to a named executive officer, the Compensation Committee reviews performance for the prior fiscal year and considers specific performance metrics for STRATTEC for the fiscal year, such as stock performance or financial performance in key areas outside of the performance measures used for formula cash incentives, and other specific achievements during the fiscal year such as completed acquisitions or other significant strategic transactions or initiatives. No discretionary bonuses were awarded to our named executive officers for 2010.

 

Equity Based Compensation.  We believe that equity compensation is an effective means of aligning the long-term interests of our employees, including our executive officers, with our shareholders. Our Stock Incentive Plan authorizes the Compensation Committee to issue both stock options and restricted stock, as well as other forms of equity incentive compensation. We are proposing that our shareholders approve an amendment to our Stock Incentive Plan at the Annual Meeting to include our outside directors as eligible participants in the plan. To date, awards to our executive officers under the Stock Incentive Plan have consisted solely of leveraged stock options, traditional nonqualified stock options and shares of restricted stock.

 

In determining the total size of equity awards, the Compensation Committee considers various factors such as the outstanding number of options and shares of restricted stock, the amount of additional shares available for issuance under the Stock Incentive Plan, the level of responsibility of

the proposed recipient and his or her performance and the percent of the outstanding shares of our common stock represented by outstanding options and shares of restricted stock.

 

Prior to fiscal 2006, we primarily made grants of stock options in the form of leveraged stock options pursuant to our leveraged stock option program. The method of calculating the number of leveraged stock options granted to each executive officer and the method of determining their exercise price is set forth in our EVA Bonus Plan and the Stock Incentive Plan and generally is equal in value to the executive officer’s total bonus payout under the EVA Bonus Plan. Awards of leveraged stock options typically have an exercise price that simulates a stock purchase with 10:1 leverage. Essentially, the exercise price equals the product of 90% of the fair market value of our common stock on the date of grant, multiplied by the sum (taken to the 5th power) of (a) 1, plus (b) the Estimated Annual Growth Rate. The Estimated Annual Growth Rate equals the average daily closing 10-year U.S. Treasury note yield rate for the month of April immediately preceding the relevant plan year, plus 2%. All leveraged stock option grants to executive officers incorporate the following terms:

 

 

The maximum aggregate number of leveraged stock options to be granted each year is 40,000. If the total bonus payout under our Economic Value Added program produces more than 40,000 leveraged stock options in any fiscal year, then the leveraged stock options granted for that year will be reduced pro-rata based on proportionate total bonus payouts under the EVA Bonus Plan. The amount of any such reduction shall be carried forward to subsequent years and awarded in leveraged stock options to the extent the annual limitation is not exceeded in future years.

 

Based upon fiscal year 2010 performance, our Compensation Committee on August 17, 2010, made grants of leveraged stock options for 14,360 shares to Mr. Stratton, 5,320 shares to Mr. Krejci, 5,290 shares to Mr. Hansen, 3,470 shares to Mr. Kazmierski and 3,300 shares to Mr. Guillot. All of these options granted to our named executive officers have an exercise price of $22.47 per share (the closing price of our stock on August 17, 2010 was $19.53), a five-year term and vest on the third anniversary of the date of grant. The options had a grant date fair value per option of $7.48 as determined pursuant to FASB Accounting Standards Codification Topic 718.

 

In addition to leveraged stock options, our Compensation Committee, in its discretion, periodically approves grants of nonqualified stock options to our executive officers. The nonqualified stock option grants incorporate the following terms:

 

 

In fiscal 2010, our Compensation Committee approved grants of nonqualified stock options to Frank J. Krejci for 12,000 shares, Patrick J. Hansen for 6,000 shares and Rolando J. Guillot for 6,000 shares. Our Compensation Committee awarded the nonqualified stock options to Mr. Krejci as an inducement grant upon him being appointed our President and Chief Operating Officer and awarded the nonqualified stock options to each of Mr. Hansen and Mr. Guillot in connection with their assumption of additional responsibilities due to the departure of a former executive officer. The options granted to Mr. Krejci had a grant date fair value per option of $9.47 and the options granted to Mr. Hansen and Mr. Guillot had a grant date fair value per option of $8.86, in each case as determined pursuant to FASB Accounting Standards Codification Topic 718.

 

As noted above, since 2005 our Compensation Committee has annually granted awards of shares of restricted stock to our named executive officers. The shares of restricted stock awarded under the Stock Incentive Plan vest three years after the grant date and have all the rights of our shares of common stock, including voting and dividend rights.

 

Our Compensation Committee awarded to each of our executive officers a grant of shares of restricted stock on August 18, 2009 based upon both our financial performance and each respective named executive officer’s individual performance for fiscal 2009. Mr. Stratton was awarded 1,000 shares of restricted stock. Mr. Hansen was awarded 600 shares of restricted stock and each of Mr. Kazmierski and Mr. Guillot were awarded 400 shares of restricted stock on August 18, 2009. Mr. Krejci was not awarded any shares of restricted stock. The shares of restricted stock all vest on the third anniversary of the grant date and have all the rights of our shares of common stock, including dividend and voting rights. The shares of restricted stock had a grant date fair value per share of $14.75 as determined pursuant to FASB Accounting Standards Codification Topic 718.

 

On August 17, 2010, the Compensation Committee also made specified grants of shares of restricted stock based upon fiscal 2010 performance of 2,000 shares to Mr. Stratton, 1,500 shares to Mr. Krejci, 1,200 shares to Mr. Hansen and 800 shares to each of Mr. Kazmierski and Mr. Guillot. The shares of restricted stock all vest on the third anniversary of the grant date and have all the rights of our shares of common stock, including dividend and voting rights. The shares of restricted stock had a grant date fair value per share of $19.53 as determined pursuant to FASB Accounting Standards Codification Topic 718.

 

Based upon our review and analysis of our director compensation and our desire to include an equity component in the outside (non-employee) director compensation to align their compensation with our overall compensation philosophy, we have proposed for approval at the Annual Meeting an amended and restated Stock Incentive Plan. We are proposing that our shareholders approve an amendment to the plan to expand the class of participants eligible to receive awards under the Stock Incentive Plan to include our outside directors. See “Proposal 2: Approval of Amended and Restated Stock Incentive Plan” for more information.

 

Perquisites and Other Compensation.  Our named executive officers participate in other benefit plans generally available to all employees on the same terms as similarly situated employees, including participation in medical, health, dental, disability, life insurance and 401(k) plans. In addition, our executive officers each receive at least two times their base salary up to $500,000 of

group term life insurance coverage and Mr. Kazmierski receives automobile allowance payments of $800 per month. These benefits are included in the Summary Compensation Table in the “All Other Compensation” column.

 

Retirement Benefits.  We maintain a defined benefit retirement plan that covers substantially all of our United States employees, including our executive officers. Under this retirement plan our employees receive an annual pension payable on a monthly basis at retirement equal to 1.6% of the employee’s average of the highest 5 years of compensation during the last 10 calendar years of service prior to retirement multiplied by the number of years of credited service, with an offset of 50% of Social Security benefits (prorated if years of credited service are less than 30). Compensation under this retirement plan includes the compensation as shown in the Summary Compensation Table under the headings “Salary,” “Bonus” and “Non-Equity Incentive Plan Compensation” subject to a maximum compensation amount set by law ($245,000 in 2010). Effective January 1, 2010, an amendment to the defined benefit retirement plan discontinued the benefit accruals for salary increases and credited service rendered after December 31, 2009.

 

Our executive officers also participate in a program which supplements benefits under the defined benefit retirement plan described above. Under our Supplemental Executive Retirement Plan, executive officers are provided with additional increments of (a) 0.50% of the employee’s average of the highest 5 years of compensation (as limited under the defined benefit retirement plan) per year of credited service over the benefits payable under the defined benefit retirement plan to nonbargaining unit employees and (b) 2.1% of the compensation exceeding the defined benefit retirement plan dollar compensation limit per year of credited service. We have created a Rabbi Trust for deposit of the aggregate present value of the benefits described above for our executive officers.

 

Change of Control and Severance Benefits

 

We have entered into an employment agreement and a change of control agreement with each of our named executive officers. The employment agreements set forth the current terms and conditions for employment of the executive officers, and include severance benefits, and noncompetition and confidentiality covenants restricting the executive’s activities both during and for a period of time after employment. The change of control employment agreements guarantee the employee continued employment following a “change of control” on a basis equivalent to the employee’s employment immediately prior to such change in terms of position, duties, compensation and benefits, as well as specified payments upon termination following a change in control. These change of control agreements become effective only upon a defined change in control of STRATTEC, or if the employee’s employment is terminated upon, or in anticipation of such a change in control, and automatically supersede any existing employment agreement. These agreements are summarized in more detail below under “Employment Agreements” and “Post-Employment Compensation.”

 

The employment agreements with the named executive officers provide for continuation of salary and dental and health coverage benefits for a period after termination of employment because of the death or disability of the executive officer or because of a termination of employment by us other than for cause (as defined in the employment agreements). We believe that these severance

benefits are important as a recruiting and retention device and represent reasonable consideration in exchange for the noncompetition, confidentiality and other restrictions applicable to the executive officers under the employment agreements. The terms of these arrangements and the amount of benefits available to the named executive officers are described below under “Post-Employment Compensation.”

 

Under the change of control agreements, if during the employment term (three years from the change in control) the employee is terminated other than for cause (as defined in the agreements) or if the employee voluntarily terminates his employment for good reason (as defined in the agreements) or during a 30-day window period one year after a change in control, the employee is entitled to specified severance benefits, including a lump sum payment of three or two (depending upon which executive officer) times the sum of the employee’s annual salary, a payment equal to the executive officer’s annual bonus (determined as provided in the agreement) and the continuation of certain benefits. Again, we believe that these severance benefits are important as a recruiting and retention device.

 

Additionally, under our Stock Incentive Plan, all outstanding stock options immediately vest upon a change of control and all forfeiture or other restrictions on the shares of restricted stock lapse upon a change of control.

 

Benchmarking

 

We do not believe that it is appropriate to establish compensation levels primarily based on benchmarking. However, the Compensation Committee does periodically review information regarding pay practices at other companies to evaluate whether our compensation practices are competitive in the marketplace and as one of several factors that it considers in assessing the reasonableness of compensation. As part of our Compensation Committee’s review of our compensation policies and practices, the committee has in prior fiscal years engaged RSM McGladrey to prepare a report of a broad peer group of organizations within the durable goods manufacturing industry that are similar in size to STRATTEC showing median compensation for executive officers with comparable positions as our executive officers.

 

Tax and Accounting Considerations

 

Deductibility of Executive Compensation.  Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public corporation for non-performance-based compensation over $1,000,000 paid for any fiscal year to each of the individuals who were, at the end of the fiscal year, the corporation’s chief executive officer and the four other most highly compensated executive officers. Through the end of fiscal 2010, we do not believe that any of the compensation paid to our executive officers exceeded the limit on deductibility in Section 162(m). Our Stock Incentive Plan is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, including the requirement that such plan be approved by our shareholders. As a result, we believe that awards under this plan satisfy the requirements for “performance-based compensation” under Section 162(m) and, accordingly, do not count against the $1,000,000 limit and are deductible by us. Other compensation paid or imputed to

individual executive officers covered by Section 162(m) may not satisfy the requirements for “performance-based compensation” and may cause non-performance-based compensation to exceed the $1,000,000 limit, and would then not be deductible by us to the extent in excess of the $1,000,000 limit. Although the Compensation Committee designs certain components of executive compensation to preserve income tax deductibility, it believes that it is not in the shareholders’ interest to restrict the Compensation Committee’s discretion and flexibility in developing appropriate compensation programs and establishing compensation levels and, in some instances, the Compensation Committee may approve compensation that is not fully deductible.

 

Timing of Equity Incentive Grants

 

We have a practice of making leveraged stock option grants (if any) to employees annually on the date of the quarterly meeting of our Board of Directors held in August of each year, after we announce earnings for the prior fiscal year. The Compensation Committee may, at its discretion, periodically approve grants of nonqualified stock options and/or shares of restricted stock to executive officers and other key employees. Typically, these grants are made for retention purposes. The grant date for all classes of stock options and restricted stock (other than inducement grants to new employees) is always the date of approval of the grant by our Board of Directors or the Compensation Committee, as applicable, and the grant date for inducement grants to new employees is the first date of employment. During fiscal 2010, the Compensation Committee approved awards to our executive officers and certain key employees of restricted stock grants at the Board of Directors regular meeting held August 18, 2009 and nonqualified stock option grants at the Board of Directors regular meeting held on December 9, 2009. Additionally, the Compensation Committee approved leveraged stock option grants and restricted stock grants to our executive officers and certain key employees at the Board of Directors regular meeting held August 17, 2010.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth in this proxy statement with our management and, based on such review and discussions with management, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

COMPENSATION COMMITTEE:

 

Michael J. Koss (Chairman)
David R. Zimmer
Robert Feitler

 

The following table provides information for fiscal 2010 concerning the compensation paid by us to the person who served as our principal executive officer in fiscal 2010, the person who served as our principal financial officer in fiscal 2010 and our three other most highly compensated executive officers based on their total compensation in fiscal 2010. We refer to these five executive officers as our “named executive officers” in this proxy statement.

 

 

Explanatory Notes for Summary Compensation Table:

 

1. These amounts represent awards of discretionary bonus payments made by our Compensation Committee. For fiscal years 2010, 2009 and 2008, the Compensation Committee decided not to award any discretionary bonus payments. See “Compensation Discussion and Analysis.”

 

2. The amounts in this column reflect the dollar value of long-term equity based compensation awards pursuant to our Stock Incentive Plan in the years indicated in the table. These amounts equal the grant date fair value of stock options, computed in accordance with FASB Accounting Standards Codification Topic 718. Assumptions used in the calculation of the grant date fair value are included under the caption “Accounting for Stock Based Compensation” in the Notes to our Consolidated Financial Statements in the fiscal year 2010 Annual Report on Form 10-K filed with the Commission on September 1, 2010 and such information is incorporated herein by reference.

3. The amounts in this column reflect the dollar value of long-term equity based compensation awards pursuant to our Stock Incentive Plan in the years indicated in the table. These amounts equal the grant date fair value of shares of restricted stock, computed in accordance with FASB Accounting Standards Codification Topic 718. Assumptions used in the calculation of the grant date fair value are included under the caption “Accounting for Stock Based Compensation” in the Notes to our Consolidated Financial Statements in the fiscal year 2010 Annual Report on Form 10-K filed with the Commission on September 1, 2010 and such information is incorporated herein by reference.

 

4. This column discloses the dollar value of all amounts earned by the named executive officers under our Economic Value Added Bonus Plan for Executive Officers and Senior Managers for performance in the applicable fiscal year which where tied to long-term incentive performance targets. Amounts added to each named executive officer’s Bonus Bank with respect to the applicable fiscal year under the Economic Value Added Bonus Plan, but not paid with respect to that fiscal year, are not included in this column. Accordingly, amounts in this column include one-third of the Bonus Bank amount for fiscal 2010 that was paid to the name executive officer with respect to that fiscal year. No amounts were earned or paid under our Economic Value Added Bonus Plan for Executive Officers and Senior Managers for fiscal years 2009 and 2008. See “Compensation Analysis and Discussion.”

 

5. “Change in Pension Value and Non-Qualified Deferred Compensation Earnings” includes for the applicable fiscal year the aggregate increase in the actuarial present value of each named executive officer’s accumulated benefit under our defined benefit pension plan and supplemental executive retirement pension plan, using the same assumptions and measurement dates used for financial reporting purposes with respect to our audited financial statements for the applicable fiscal year. Based on changes in market rates, our actuary changed the assumed discount rate as of the end of fiscal 2010 to 5.41% from 6.86% at the end of fiscal 2009 (a decrease of 1.45 percentage points in the discount rate). This change in assumed discount rate caused a significant increase in the actuarial present value of the accumulated benefits over the prior year. See the caption “Retirement Plans and Post Retirement Costs” in the Notes to our Consolidated Financial Statements in the fiscal year 2010 Annual Report on Form 10-K filed with the Commission on September 1, 2010 for more information.

6. The table below shows the components of this column, which include our match for each individual’s 401(k) plan contributions, the cost of premiums paid by us for term life insurance under which the named executive officer is a beneficiary and perquisites consisting of an automobile allowance for Mr. Kazmierski and, with respect to fiscal 2009, a gift card in the amount of $2,000 and for Mr. Guillot, with respect to fiscal 2010, a gift card in the amount of $1,000. Additionally, for fiscal 2010 amounts for Mr. Krejci include director fees and the bonus paid to Mr. Krejci under our Economic Value Added Bonus Plan for Non-Employee Members of the Board of Directors prior to his becoming our President and Chief Operating Officer. See “Director Compensation” for additional information.

 

 

 

 

The following table sets forth information regarding all incentive plan awards that were granted to the named executive officers during fiscal year 2010, including incentive plan awards (equity-based and non-equity based) and other plan-based awards. Disclosure on a separate line item is provided for each grant of an award made to a named executive officer during the year. Non-equity incentive plan awards are awards that are not subject to FASB Accounting Standards Codification Topic 718 and are intended to serve as an incentive for performance to occur over a specified period, and include performance bonus awards under our Economic Value Added Bonus Plan for Executive Officers and Senior Managers. We have not granted any equity incentive-based awards, which are equity awards subject to a performance condition or a market condition as those terms are defined by FASB Accounting Standards Codification Topic 718.

 

 

 

 

The following table sets forth information on outstanding option and restricted stock awards held by the named executive officers at June 27, 2010, including the number of shares underlying both exercisable and unexercisable portions of each stock option as well as the exercise price and expiration date of each outstanding option and the number of shares of restricted stock held at fiscal year end that have not yet vested.

 

 

 

The following table sets forth information relating to the number of stock options exercised and the restricted stock awards that vested during fiscal 2010 for each of the named executive officers on an aggregate basis.

 

 

 

 

The following table sets forth the actuarial present value of each named executive officer’s accumulated benefit under each defined benefit plan, assuming benefits are paid at normal retirement age based on current levels of compensation. The valuation method and all material assumptions applied in quantifying the present value of the current accumulated benefit for each of the named executive officers are included under the caption “Retirement Plans and Postretirement Costs” included in the Notes to Consolidated Financial Statements in the fiscal year 2010 Annual Report on Form 10-K filed with the Commission on September 1, 2010, and such information is incorporated herein by reference. The table also shows the number of years of credited service under each plan, computed as of the same pension plan measurement date used in STRATTEC’s audited financial statements for the year ended June 27, 2010. The table also reports any pension benefits paid to each named executive officer during the year.

 

 

Each of our named executive officers has signed an employment agreement with STRATTEC. The term of each employment agreement automatically extends for one year each June 30 unless either party gives 30 days’ notice that the agreement will not be further extended. Under the agreement, the officer agrees to perform the duties currently being performed in addition to other

duties that may be assigned from time to time. We agree to pay the officer a salary of not less than that of the previous year and to provide fringe benefits that are provided to all of our other salaried employees who are in comparable positions.

 

The terms of these employment agreements generally include the following:

 

 

401(k) Plan Benefits

 

Our U.S.-based executive officers are eligible to participate in our 401(k) plan on the same terms as our other U.S.-based employees. Historically, in any plan year, we normally contributed to each participant a matching contribution equal to 50% on the first 6% of an employee’s annual wages. However, due to economic conditions, the salaried match in our 401(k) plan was reduced to 20% on the first 6% of an employee’s annual wages, effective January 1, 2009. Effective as of January 1, 2010, the salaried match in our 401(k) plan was increased to 100% on the first 5% of an employee’s annual wages. All of our executive officers participated in our 401(k) plan during fiscal 2010 and received matching contributions in accordance with the foregoing methodology.

 

Retirement Plan and Supplemental Executive Retirement Plan

 

We maintain a defined benefit retirement plan covering all executive officers and substantially all other employees in the United States. Under the defined benefit retirement plan, nonbargaining unit employees receive an annual pension payable on a monthly basis at retirement equal to 1.6% of the employee’s average of the highest 5 years of compensation during the last 10 calendar years of service prior to retirement multiplied by the number of years of credited service, with an offset of 50% of Social Security benefits (prorated if years of credited service are less than 30). Compensation

under the defined benefit retirement plan includes the compensation as shown in the Summary Compensation Table under the headings “Salary,” “Bonus,” and “Non-Equity Incentive Plan Compensation” subject to a maximum compensation amount set by law ($245,000 in 2010). Effective January 1, 2010, an amendment to the defined benefit retirement plan discontinued the benefit accruals for salary increases and credited service rendered after December 31, 2009.

 

Executive officers also participate in a program which supplements benefits under the defined benefit retirement plan. Under the Supplemental Executive Retirement Plan, executive officers are provided with additional increments of (a) 0.50% of the employee’s average of the highest 5 years of compensation (as limited under the defined benefit retirement plan ) per year of credited service over the benefits payable under the defined benefit retirement plan to nonbargaining unit employees and (b) 2.1% of the compensation exceeding the defined benefit retirement plan dollar compensation limit per year of credited service. A Rabbi Trust has been created for deposit of the aggregate present value of the benefits described above for executive officers.

 

The following table shows total estimated annual benefits payable from the defined benefit retirement plan and the Supplemental Executive Retirement Plan to executive officers upon normal retirement at age 65 at specified compensation and years of service classifications calculated on a single life basis and adjusted for the projected Social Security offset:

 

 

 

 

The above table does not reflect limitations imposed by the Internal Revenue Code of 1986, as amended, on pensions paid under federal income tax qualified plans. However, an executive officer covered by our program will receive the full pension to which he or she would be entitled in the absence of such limitations.

Potential Payments Upon Termination or Change of Control

 

We have entered into employment agreements and change of control employment agreements with each of our named executive officers that provide for severance benefits following a termination of employment, as well as provide employment benefits in connection with a change of control (as defined in the change of control agreements).

 

The employment agreements with our named executive officers provide that if the executive officer’s employment is terminated as a result of the death or disability of such executive officer, then the executive officer (or his or her beneficiary) is entitled to continuation of the executive officer’s then effective base salary for a period of six months after termination and continuation of medical and dental coverage for such six month period after termination of employment. If the executive officer’s employment is terminated by us without cause (as defined the employment agreements), then the executive officer will be entitled to continuation (1) of the executive officer’s then effective base salary for twelve months in the case of Mr. Stratton and Mr. Krejci and, for each other executive officer, for a minimum of six months after termination or a maximum of twelve months with each executive officer receiving one month credit for each year of service as an officer of STRATTEC and (2) of medical and dental coverage for such six to twelve month period, as applicable.

 

Each of our named executive officers has also signed a change of control employment agreement which guarantees the employee continued employment following a change in control (as defined in the agreements) on a basis equivalent to the employee’s employment immediately prior to such change in terms of position, duties, compensation and benefits, as well as specified payments upon termination following a change in control. Such agreements become effective only upon a defined change of control of STRATTEC, or if the employee’s employment is terminated upon, or in anticipation of such a change of control, and automatically supersede any existing employment agreement once they become effective. Under these agreements, if during the employment term (three years from the change in control), the employee is terminated other than for cause (as defined in the agreements) or if the employee voluntarily terminates his or her employment for good reason (as defined in the agreements) or during a 30-day window period one year after a change of control, then the executive officer is entitled to specified severance benefits, including (1) a lump sum payment of three (with respect to Mr. Stratton and Mr. Krejci) or two (with respect to each other executive officer) times the employee’s annual salary, (2) a payment equal to the executive’s officer’s highest annual bonus (determined as provided in the agreement) and (3) continuation of certain fringe and other benefits.

The following table sets forth the compensation that each of our named executive officers would have been eligible to receive if the applicable executive officer’s employment had been terminated as of June 27, 2010 under circumstances requiring payment of severance benefits as described above other than in connection with a change of control.

 

Potential Severance Under Employment Agreements

 

 

 

 

The following table sets forth the compensation that each of our named executive officers would have been eligible to receive if the applicable executive officer’s employment had been terminated as of June 27, 2010 under circumstances requiring payment of severance benefits as described above in connection with a change of control.

 

Potential Severance Payments Under Change of Control Agreements
Following a Change of Control

 

 

 

 

As described above, our Stock Incentive Plan also provides for immediate vesting of all outstanding options and the lapse of any forfeiture provisions or other restrictions on outstanding shares of restricted stock upon a change of control of STRATTEC. The following table sets forth the

unvested stock options and shares of restricted stock of our named executive officers as of June 27, 2010 that would become vested in the event of a change of control of STRATTEC.

 

 

 

 

Each of our nonemployee directors receives an annual retainer fee of $18,000, a fee of $1,500 for each Board meeting attended and a fee of $1,000 for each committee meeting attended. The respective chairmen of the Board committees receive an additional retainer fee of $4,000 for the Audit Committee and $2,000 for the Compensation Committee and the Nominating and Corporate Governance Committee. Effective June 30, 1997, we implemented an Economic Value Added Bonus Plan for Non-Employee Members of the Board of Directors. The purpose of the Economic Value Added Bonus Plan for Non-Employee Members of the Board of Directors is to maximize long-term shareholder value by providing incentive compensation to non-employee directors in a form which relates the financial reward to an increase in our value to our shareholders and to enhance our ability to attract and retain outstanding individuals to serve as nonemployee directors. The Economic Value Added Bonus Plan for Non-Employee Members of the Board of Directors provides for the payment of a potential cash bonus to each non-employee director equal to the product of (a) 40% of the director’s retainer and meeting fees for the fiscal year, multiplied by (b) a Company Performance Factor. In general, the Company Performance Factor is determined by reference to our financial performance relative to a targeted cash-based return on capital, which is intended to approximate our weighted cost of capital (which was 10.0% for fiscal 2010).

 

Our Board of Directors retained RSM McGladrey in May 2008 to compile a survey of board of director compensation data from a peer group of companies. RSM McGladrey compiled board of

director pay practices data form six similar industry peer companies to STRATTEC. The selected organizations included Badger Meter, Inc., Gehl Company, Koss Corporation, Ladish Co., Inc., Twin Disc, Inc. and Weyco Group, Inc. The data compiled by the survey included an analysis of retainer fees for board and committee service, meeting fees, chairperson fees and incentive compensation. Based upon the survey results, the compensation levels of our directors was at or near the median compensation of the directors of the companies included in the survey. Our Board of Directors and our Compensation Committee discussed the results of this survey at meetings held in fiscal 2008 and subsequently formally approved matters relating to the compensation of our directors. Based upon this survey, effective for fiscal 2009, each of our nonemployee directors received an annual retainer of $18,000. At a meeting held on May 19, 2009, the Board of Directors approved a reduction in their annual retainer by 4%, effective with the bi-annual retainer payment to be made in October, 2009. At a meeting held on February 23, 2010, the Board of Directors approved restoring their annual retainer fee back to the $18,000 level. The action taken by the Board at its May 19, 2009 meeting reducing the Board retainer fee, and the action taken by the Board at its February 23, 2010 meeting restoring the current retainer fee, corresponded with similar actions taken by the Compensation Committee of the Board relating to temporary decreases in our executive officers’ base salaries. The temporary decreases were in response to our recent company performance and the economic outlook for the automotive industry.

 

Subject to shareholder approval of the amended and restated Stock Incentive Plan, on August 17, 2010, the Compensation Committee also approved specified grants of shares of restricted stock based upon fiscal 2010 performance of 600 shares to each of Mr. Koss, Mr. Feitler and Mr. Zimmer. If our shareholders approve the amendments to our Stock Incentive Plan at the Annual Meeting, these shares of restricted stock will be granted as of October 5, 2010, will all vest on the third anniversary of that grant date and will have all the rights of our shares of common stock, including dividend and voting rights. If the shareholders do not approve the amended and restated Stock Incentive Plan at the Annual Meeting, then these shares of restricted stock will not be granted.

 

The following table summarizes the director compensation for fiscal year 2010 for all of our non-employee directors. Mr. Stratton does not receive any additional compensation for his services as a director beyond the amounts previously disclosed in the Summary Compensation Table. Mr. Krejci received compensation as an outside (non-employee) director through December 31, 2009. Commencing as of January 1, 2010, Mr. Krejci was appointed one of our executive officers and subsequently stopped receiving any additional compensation for his services as a director. See the Summary Compensation Table for additional amounts paid to Mr. Krejci during or with respect to fiscal 2010.

 

 

 

 

During fiscal 2010, other than as described above under Executive Compensation, the Company did not engage in any related party transactions within the meaning of the rules of the Commission.

 

The charter for our Audit Committee provides that one of the responsibilities of our Audit Committee is to review and approve related party transactions in accordance with the listing requirements of the NASDAQ Stock Market. Although we do not currently have a formal written set of policies and procedures for the review, approval or ratification of related person transactions, we do have written procedures in place to identify related party transactions that may require Audit Committee approval. These procedures include annual submission of director and officer questionnaires. Where a related party transaction is identified, the Audit Committee reviews and, where appropriate, approves the transaction based on whether it believes that the transaction is at arms length and contains terms that are no less favorable than what we could have obtained from an unaffiliated third party.

 

The following table summarizes share information, as of June 27, 2010, for the Stock Incentive Plan. This plan has been approved by STRATTEC’s shareholders.

 

 

Proposed Adoption.  Subject to shareholder approval, our Board of Directors has approved amending and restating the Stock Incentive Plan to expand the eligible class of participants under the Stock Incentive Plan to include our outside (non-employee) directors. If the proposal is approved at the Annual Meeting by the shareholders, then we will be able to grant stock options, stock appreciation rights and shares of restricted stock under the Stock Incentive Plan to our outside directors. The Stock Incentive Plan was last amended and restated in 2005 at the annual meeting of our shareholders, and other than the inclusion of our outside directors as participants in the plan, the current proposed amendment does not materially alter the 2005 restated Stock Incentive Plan.

 

Purpose of the Amended and Restated Stock Incentive Plan.  As discussed in “Compensation Discussion and Analysis,” the objectives of our compensation arrangements include (1) attracting and retaining key service providers through competitive compensation arrangements, (2) providing strong financial incentives, at a reasonable cost to our shareholders, for performance that creates value for shareholders by generating returns in excess of our cost of capital and (3) linking compensation to corporate performance through equity-based awards that reward executives and other service providers for both gains in our stock price and meeting long-term EVA growth goals.

 

Our management and Board of Directors believe there are significant benefits to STRATTEC and our shareholders by aligning the performance incentives of the outside (non- employee) directors with those of our senior managers and executive officers. Including our outside directors as eligible participants in the Stock Incentive Plan accomplishes this alignment while remaining consistent to our compensation philosophy and arrangements designed by the Compensation Committee.

 

The proposed amended and restated Stock Incentive Plan reflects changes in our equity compensation programs that our Compensation Committee and Board of Directors plan to implement beginning in fiscal 2011. Under the amended and restated Stock Incentive Plan, we will be able to grant equity awards to our outside (non-employee) directors. In light of the current economic environment, our Board of Directors believes that restricted stock awards are a good way to provide significant equity compensation to our service providers, including officers, directors and key employees that is less subject to market volatility. In addition, we believe that restricted stock awards result in less compensation expense under applicable accounting standards than stock options exercisable for the same number of shares.

 

A brief description of the Stock Incentive Plan, as proposed to be amended and restated, appears below. The following description is qualified in its entirety by reference to the text of the Stock Incentive Plan, as proposed to be amended and restated, which is attached as Appendix A to this Proxy Statement.

General.  The Stock Incentive Plan authorizes our Compensation Committee to grant stock incentive awards to our officers, directors and other key employees, including our subsidiaries and affiliates. Approximately 60 individuals participate in the Stock Incentive Plan. Our Compensation Committee administers the Stock Incentive Plan and has complete discretion, subject to the terms of the Stock Incentive Plan, to determine, among other things, which individuals will receive awards, the type, number and frequency of and the number of shares subject to such awards, and, to the extent not otherwise expressly provided in the Stock Incentive Plan, the terms and conditions of the awards.

 

Awards.

 

1. Stock Options.  Options granted under the Stock Incentive Plan may be incentive stock options (“ISOs”), as defined under and subject to Section 422 of the Internal Revenue Code (the “Code”), or non-qualified stock options (“NSOs”).

 

The options will be exercisable at such times and subject to such terms and conditions as the Compensation Committee may determine. All options will expire no later than ten years from the date of grant in the case of ISOs and ten years and one day from the date of grant in the case of NSOs. Generally, options will expire upon an optionee’s termination of service status for cause, one year following the termination of service status due to death, three years following termination due to retirement or disability, or three months after the termination of service status for any other reason; provided, however, that options will expire prior to said times if and at such time that the original option exercise term otherwise expires. Generally, options may be exercised only to the extent exercisable on the date of termination, death, disability or retirement. To the extent options are ISOs, they will retain such status, in general, only if exercised within three months following termination of employment. ISOs may not be granted to our outside (non-employee) directors.

 

The option price for any option will not be less than 100% of the fair market value of our common stock as of the date of grant and will be paid in cash, or, in certain circumstances, shares of our common stock (including restricted stock), at the time of exercise. When using shares of common stock in payment of the exercise price, an optionee may receive, in one transaction or a series of essentially simultaneous transactions, without making any out-of-pocket cash payment, shares equivalent in value to the excess of the fair market value of the shares subject to exercised option rights over the exercise price specified for such shares in the option.

 

Upon notice of exercise of a stock option, our Compensation Committee may, at its sole discretion, elect to cash out all of any portion of such option by paying a per share amount equal to the excess of the fair market value of the common stock on the exercise date over the option exercise price. Such payment may be in cash or common stock, which stock may, in certain circumstances, take the form of restricted stock.

 

Stock options are not transferable except by will or the laws of descent and distribution.

 

Shares of common stock available for distribution by our Compensation Committee under the Stock Incentive Plan may also be issued pursuant to our leveraged stock option (“LSO”) program. LSOs granted under the Stock Incentive Plan may be either ISOs or NSOs. The LSOs may be exercisable no earlier than three nor more than five years from the date of grant. The exercise price of LSOs shall be the

product of 90% of fair market value on the date of grant, multiplied by the sum (taken to the 5th power) of (a) 1, plus (b) the Estimated Annual Growth Rate, but in no event may the exercise price be less than fair market value on the date of grant. The Estimated Annual Growth Rate is intended to represent an annual percentage stock appreciation and equals the average daily closing 10 year U.S. Treasury note yield rate for the month of April immediately preceding the relevant plan year, plus 2%.

 

2. Stock Appreciation Rights.  Our Compensation Committee may also award stock appreciation rights (“SARs”) under the plan. SARs may be granted in conjunction with all or part of any stock option, will be exercisable only at such times as and to the extent the underlying stock option is exercisable and upon exercise is paid in cash, common stock or a combination thereof, at the discretion of our Compensation Committee, in a per share amount equal to the excess of the fair market value of the common stock on the exercise date over the related exercise price.

 

3. Restricted Stock.  Restricted stock may be granted contingent upon the attainment of specified performance goals or such other factors as our Compensation Committee may determine and, during the period of restriction, the holder of restricted stock may not sell, transfer, pledge or assign the restricted stock. In general, except for an award of restricted stock in lieu of cash compensation, the period of restriction for any grant of restricted stock will be based on the recipient’s continued status as a service provider to STRATTEC and will not be less than three years. Restricted stock may vest immediately or in installments over time following the minimum period of restriction, as determined by our Compensation Committee. The maximum number of shares of restricted stock that may be granted to all recipients in any year is 20,000 shares and the maximum number of shares of restricted stock that may be granted to any one individual in any year is 20% of the total number of shares of restricted stock granted in that year.

 

Change in Control Provisions.  Upon the occurrence of a “change in control” of STRATTEC, as defined in the Stock Incentive Plan, any outstanding SARs and stock options which are not then exercisable will become fully exercisable and vested. Likewise, the restrictions applicable to restricted stock will lapse and such shares and awards will be free of all restrictions and deemed fully vested under the terms of the original grant.