701 Cool Springs Blvd

Franklin, Tennessee 37067

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Stockholders of Healthways, Inc.:

 

The Annual Meeting of Stockholders of Healthways, Inc., a Delaware corporation (the “Company”), will be held at the Franklin Marriott Cool Springs, 700 Cool Springs Boulevard, Franklin, Tennessee, 37067 at 9:00 a.m., Central time, on Thursday, January 29, 2009 for the following purposes:

 

(1) To elect three (3) directors to hold office for a term of three (3) years and until their successors have been elected and qualified;

 

(2) To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2009;

 

(3) To transact such other business as may properly come before the meeting, or any adjournment or postponement thereof.

 

In accordance with new rules adopted by the Securities and Exchange Commission, we are mailing to many of our stockholders a Notice of Internet Availability instead of a paper copy of the Proxy Statement and our 2008 Annual Report. The Notice of Internet Availability contains instructions on how stockholders can access the proxy documents over the Internet as well as how stockholders can receive a paper copy of our proxy materials, including the Proxy Statement, the 2008 Annual Report and a form of proxy card. The proxy statement and form of proxy accompanying this notice are being furnished to stockholders on or about December 19, 2008. Only stockholders of record at the close of business on December 4, 2008 are entitled to notice of and to vote at the meeting or any adjournment or postponement thereof.

 

Your attention is directed to the proxy statement accompanying this notice for a more complete statement regarding the matters to be acted upon at the meeting.

 

We hope very much that you will be able to attend the meeting. If you do not plan to attend the meeting in person, you are requested to complete, sign and date the proxy card and return it promptly or to vote by toll-free telephone or internet as described in the proxy card.

 

By Order of the Board of Directors,

 

 

Thomas G. Cigarran

Chairman

 

December 19, 2008

Healthways, Inc.
Proxy Statement
Table of Contents

 

HEALTHWAYS, INC.
701 Cool Springs Boulevard
Franklin, Tennessee 37067

 

Thursday, January 29, 2009

 

The proxy is solicited by the Board of Directors on behalf of Healthways, Inc. for use at the Annual Meeting of Stockholders to be held on Thursday, January 29, 2009, at 9:00 a.m., Central time, at the Franklin Marriott Cool Springs, 700 Cool Springs Boulevard, Franklin, Tennessee, 37067, and at all adjournments or postponements thereof, for the purposes set forth in the foregoing Notice of Annual Meeting of Stockholders. In accordance with new rules adopted by the Securities and Exchange Commission, we are mailing to many of our stockholders a Notice of Internet Availability instead of a paper copy of the Proxy Statement and our 2008 Annual Report. The Notice of Internet Availability contains instructions on how stockholders can access the proxy documents over the Internet as well as how stockholders can receive a paper copy of our proxy materials, including the Proxy Statement, the 2008 Annual Report and a form of proxy card. Copies of the proxy, this proxy statement and the attached notice are being furnished to stockholders on or about December 19, 2008.

 

In addition to solicitations by mail or internet, certain of our directors, officers and employees, without additional remuneration, may solicit proxies by telephone, facsimile, email and personal interviews, but may reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to beneficial owners. We will bear all costs of this solicitation, including expenses in connection with preparing, assembling and furnishing this proxy statement.

 

In the election of directors, you may vote “FOR” all of the nominees or your vote may be to “WITHHOLD AUTHORITY” with respect to one or more of the nominees. For the ratification of the selection of Ernst & Young LLP, you may vote “FOR”, “AGAINST” or “ABSTAIN.” If you “ABSTAIN”, it has the same effect as a vote “AGAINST.” Shares represented by such proxies will be voted in accordance with the choices specified thereon. If you sign your proxy card without giving specific voting instructions, the shares represented by such proxies will be voted FOR the election of the director nominees set forth under Proposal No. 1 and FOR the ratification of Ernst & Young LLP as the independent registered public accounting firm for fiscal 2009 set forth under Proposal No. 2. We recently changed our fiscal year to December 31 beginning in 2009. The Board of Directors does not know of any other matters which will be presented for action at the meeting, but the persons named in the proxy intend to vote or act with respect to any other proposal which may be properly presented for action according to their best judgment in light of the conditions then prevailing.

 

The quorum requirement for holding the Annual Meeting and transacting business is a majority of the outstanding shares entitled to be voted. The shares may be present in person or represented by proxy at the Annual Meeting. Both abstentions and broker non-votes are counted as present for the purpose of determining the presence of a quorum.

 

Votes are counted by an independent third party. In the election for directors, the three persons receiving the highest number of “FOR” votes will be elected. The proposal to ratify the selection of the auditors requires the affirmative “FOR” vote of a majority of those shares present and entitled to vote.

 

Generally, broker non-votes occur when shares held by a broker in “street name” for a beneficial owner are not voted with respect to a particular proposal because (1) the broker has not received voting instructions from the beneficial owner and (2) the broker lacks discretionary voting power to vote those shares. A broker is entitled to vote shares held for a beneficial owner on routine matters, such as the election of the Company’s directors and the

ratification of the appointment of Ernst & Young LLP as independent auditors, without instructions from the beneficial owner of those shares. On the other hand, a broker may not be entitled to vote shares held for a beneficial owner on certain non-routine items, absent instructions from the beneficial owner of such shares. Broker non-votes count for purposes of determining whether a quorum exists but do not count as entitled to vote with respect to individual proposals.

 

A proxy may be revoked by a stockholder at any time before its exercise by attending the meeting and electing to vote in person, by filing with the Secretary of the Company a written revocation, by duly executing a proxy bearing a later date or by casting a new vote by toll-free telephone or the internet.

 

Each share of our common stock, $.001 par value (the “Common Stock”), issued and outstanding on the record date, December 4, 2008, will be entitled to one vote on all matters to come before the meeting. Cumulative voting is not permitted. As of December 4, 2008, there were outstanding 33,614,758 shares of Common Stock.

 

The following table sets forth certain information with respect to those persons that we know to be the beneficial owners (as defined by certain rules of the Securities and Exchange Commission (the “Commission”)) of more than five percent (5%) of our Common Stock, our only voting security, and with respect to the beneficial ownership of our Common Stock by all directors and nominees, each of the executive officers named in the Summary Compensation Table and all of our executive officers and directors as a group. The information set forth below is based on ownership information we received as of December 4, 2008. Unless specified otherwise, the shares indicated are presently outstanding, and each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned.

 

 

 

 

 

 

Board of Directors Information

 

Our Board of Directors held twelve meetings during fiscal 2008. All of the members of the Board of Directors, except Messrs. Cigarran, Herr, Leedle, and Lytle are “independent,” as defined by applicable law and the NASDAQ Global Select Market (“NASDAQ”) listing standards. The Board of Directors has a Nominating and Corporate Governance Committee, an Audit Committee and a Compensation Committee.

 

Each of our incumbent directors attended at least 75% of the aggregate of the total number of meetings held during fiscal 2008 by the Board of Directors and each committee of which such director was a member for the entire fiscal year.

 

Committees of the Board of Directors

 

Compensation Committee

 

During fiscal 2008, the Compensation Committee consisted of Mr. Ballantine (through February 2008) and Drs. Bisgard, England, Neel and Taunton-Rigby and was chaired by Dr. Bisgard. As discussed in “Compensation Discussion and Analysis”, all of the directors on the Compensation Committee are “non-employee directors” as defined in Rule 16b-3 of the rules promulgated under the Securities Exchange Act of 1934, as amended, “outside directors” for purposes of regulations promulgated pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, and “independent directors” as defined in the NASDAQ corporate governance listing standards, in each case as determined by our Board of Directors. The Compensation Committee is responsible for overseeing our overall compensation strategies and policies, evaluating the performance of our executive officers and recommending to the independent directors the compensation of each of our executive officers and administering our equity-based incentive plans, among other things. The Compensation Committee’s Charter, which is reviewed annually by the Compensation Committee and is available on our website at www.healthways.com, provides a detailed description of its duties and responsibilities. The Compensation Committee held seven meetings during fiscal 2008.

 

Nominating and Corporate Governance Committee

 

During fiscal 2008, the Nominating and Corporate Governance Committee consisted of Messrs. O’Neil, Wickens (through February 2008), and Ballantine (after February 2008) and Drs. England and Taunton-Rigby and was chaired by Dr. England. All of the directors on the Nominating and Corporate Governance Committee are independent directors as defined under applicable law and NASDAQ listing standards. The Nominating and Corporate Governance Committee’s responsibilities include identifying individuals qualified to become members of the Board of Directors and recommending such individuals to the Board of Directors for election to the Board of Directors and developing and recommending to the Board of Directors corporate governance principles applicable to the Company. The Nominating and Corporate Governance Committee Charter, which is reviewed annually by the Nominating and Corporate Governance Committee and is available on the Company’s website at www.healthways.com, provides a detailed description of the Nominating and Corporate Governance Committee’s responsibilities and sets forth the director nomination process. The Nominating and Corporate Governance Committee held five meetings during fiscal 2008.

Audit Committee

 

During fiscal 2008, the Audit Committee consisted of Messrs. O’Neil, Ballantine and Wickens (after February 2008) and Drs. Bisgard and Neel, each of whom is independent as defined by applicable law and the NASDAQ listing standards, and was chaired by Mr. Ballantine. We have, and will continue to have, at least one member of the Audit Committee who has past employment experience in finance or accounting and requisite professional certification in accounting or other comparable experience which results in the individual’s financial sophistication. The Audit Committee meets with our independent registered public accounting firm and management to review our consolidated financial statements, the quality and integrity of our accounting, auditing and financial reporting process, and our systems of internal controls. The Board of Directors has determined that Messrs. O’Neil and Ballantine and Drs. Bisgard and Neel each qualify as an “audit committee financial expert,” as defined by the regulations of the Commission. The Audit Committee held thirteen meetings during fiscal 2008. The Audit Committee has adopted a Charter that provides a detailed description of its responsibilities, which is reviewed annually by the Audit Committee, is available on our website at www.healthways.com, and is attached hereto as Appendix A.

 

Corporate Governance Guidelines

 

The Board of Directors has adopted Corporate Governance Guidelines to assist the Board of Directors in the exercise of its duties and responsibilities and to serve the best interests of the Company and its stockholders. These Corporate Governance Guidelines, which are available on our website at www.healthways.com, provide a framework for the conduct of the business of the Board of Directors.

 

Code of Conduct

 

We have a code of conduct that applies to all colleagues (including officers) and directors. The purpose of the code is to provide written standards that are reasonably designed to promote: honest and ethical conduct; full, fair, accurate, timely and understandable disclosure in reports and documents we file with the Commission and other public communications we make; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of violations of the code; and accountability for adherence to the code, and to deter wrongdoing. A copy of our code of conduct, as well as any amendments thereto, can be obtained from our website at www.healthways.com.

 

Stockholder Nominees

 

The policy of the Nominating and Corporate Governance Committee is to consider properly submitted stockholder nominations for director candidates as described below under “Identifying and Evaluating Nominees for Directors.” Any stockholder nominations proposed for consideration by the Nominating and Corporate Governance Committee should be addressed to: Secretary, Healthways, Inc., 701 Cool Springs Boulevard, Franklin, Tennessee 37067. To be timely, director nominations for the Annual Meeting of Stockholders to be held in 2010 must be submitted within the time limits for stockholder proposals as set forth on page 52 of this Proxy Statement.

 

Director Qualifications

 

Under our Board of Directors’ Corporate Governance Guidelines and the Nominating and Corporate Governance Committee Charter, the Nominating and Corporate Governance Committee is responsible for determining the criteria for membership on our Board of Directors. Under such criteria, at least a majority of the members of the Board of Directors should be independent, and all members should have the highest professional

and personal ethics and values consistent with our values and standards. Other criteria that will be considered are prior experience as a director, knowledge of our business and industry and broad experience at the operational, financial or policy making level in business. Diversity, age and skills in the context of the needs of the Board of Directors are also a consideration. The members should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. As such, in order to be active participants and perform all director duties responsibly, directors’ service on other boards of public companies is limited to three public boards (excluding the Company).

 

Identifying and Evaluating Nominees for Directors

 

The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board of Directors, and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current Board of Directors members, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee and may be considered at any point during the year. As described above, the Nominating and Corporate Governance Committee considers properly submitted stockholder nominations for candidates for the Board of Directors. In evaluating nominations, the Nominating and Corporate Governance Committee uses the same criteria for all nominees, and the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience and expertise on the Board of Directors.

 

There are no nominees for election to the Board of Directors who have not previously been elected by the stockholders.

 

Directors’ Attendance at Annual Meetings of Stockholders

 

Although directors are invited and are always encouraged to attend the annual stockholder meetings, we do not require their attendance. All of the directors attended the 2008 Annual Meeting of Stockholders held on February 14, 2008.

 

Communications With the Board of Directors

 

Stockholders may communicate with the Board of Directors by submitting a letter in writing addressed to: Chairman of the Board of Directors, Healthways, Inc., 701 Cool Springs Boulevard, Franklin, Tennessee 37067. If the communication relates to the Company’s ethics or conduct, financial statements, accounting practices or internal controls, the communication may be submitted in writing addressed to: Audit Committee Chairman, Healthways, Inc., 701 Cool Springs Boulevard, Franklin, Tennessee 37067. Stockholder communications may be submitted confidentially or anonymously.

 

Stock Retention Guidelines

 

To further align officers’ interests with stockholders’ interests, in August 2005, our Board of Directors adopted stock retention guidelines for officers. As amended, the guidelines require officers to maintain a minimum ownership in the Company’s stock based on a multiple of their base salary (at least 2.5 times base salary for executive officers and 4 times base salary for the Chief Executive Officer). Officers must retain 75% of the net

number of shares acquired (after payment of exercise price, if any, and taxes) upon the exercise of stock options and vesting of restricted stock units granted on or after August 24, 2005 until they reach the required multiple of base salary. Officers who do not comply with the guidelines may not be eligible for future equity awards.

 

In addition, in August 2005, the Board of Directors adopted stock ownership guidelines that require directors to retain at least 75% of the net number of shares acquired (after payment of exercise price, if any, and taxes) upon exercise of stock options and vesting of restricted stock awards granted in and after August 2005 until the required minimum ownership is achieved.

 

Evaluations of Board and Committee Performance

 

Each year the Nominating and Corporate Governance Committee of our Board of Directors conducts an evaluation process focusing on the effectiveness of the Board of Directors as a whole, the performance of each committee of the Board of Directors and the performance of each individual Board member. The manner of the evaluation is determined annually by the Nominating and Corporate Governance Committee in order to ensure the procurement of accurate and relevant information. The evaluation process is designed to facilitate ongoing, systematic examination of the Board of Directors, each committee’s effectiveness and accountability, and each individual’s performance, and to identify opportunities for improvement. The Nominating and Corporate Governance Committee designed and coordinated the Board of Directors, committee, and individual director evaluations, and the Chair of the Nominating and Corporate Governance Committee reported the results to each committee, the full Board of Directors, and each individual director.

 

Certain Relationships and Related Transactions

 

Since the beginning of the last fiscal year, we are aware of the following related party transactions between us and our directors, executive officers, 5% stockholders or their family members which require disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934.

 

 

Pursuant to its written charter, the Audit Committee reviews and either ratifies, approves or disapproves all “Interested Transactions,” which are generally defined to include any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which:

 

 

 

For purposes of the policy, a “Related Party” is any:

 

 

In determining whether to approve or ratify an Interested Transaction under the policy, the Audit Committee considers the relevant information and facts available to it regarding the Interested Transaction and takes into account factors such as the Related Party’s relationship to the Company and interest (direct or indirect) in the transaction, the terms of the transaction and the benefits to the Company of the transaction. No director participates in the approval of an Interested Transaction for which he or she is a Related Party or otherwise has a direct or indirect interest.

 

Our Certificate of Incorporation provides for a staggered Board of Directors. Each director serves a three-year term or until his/her successor is elected and qualified. The directors to be elected at the 2009 Annual Meeting of Stockholders will serve until the Annual Meeting of Stockholders in 2012 (the “Class III” directors). Four directors currently serving on the Board of Directors will continue to serve until the Annual Meeting of Stockholders in 2010 (the “Class I” directors), and three directors currently serving on the Board of Directors will continue to serve until the Annual Meeting of Stockholders in 2011 (the “Class II” directors).

 

Unless contrary instructions are received, shares of our Common Stock represented by duly executed proxies will be voted in favor of the election of the nominees named below. If for any reason a nominee is unable to serve as a director, it is intended that the proxies solicited hereby will be voted for such substitute nominee as our Board of Directors may propose. The Board of Directors has no reason to expect that the nominees will be unable to serve, and therefore, at this time does not have any substitute nominees under consideration.

 

A nominee for election must receive a plurality of the votes cast to be elected as a director. Stockholders have no right to vote cumulatively for directors, but rather each stockholder shall have one vote for each share of Common Stock held by such stockholder for each director.

 

The following persons are the nominees for election to serve as Class III directors. All nominees are presently directors of the Company and were previously elected by the stockholders. Certain information relating to the nominees, which the individuals named have furnished to us, is set forth below. Mr. Herr, who has served on the Company’s Board of Directors since 1988, is retiring from the Board of Directors effective on the date of the 2009 Annual Meeting of Stockholders. The Board of Directors recommends a vote FOR each nominee.

 

 

The following seven persons currently are members of the Board of Directors and will continue in their present positions after the Annual Meeting. The following persons are not nominees, and stockholders are not being asked to vote for them. Certain information relating to the following persons has been furnished to us by the individuals named.

 

 

Executive Compensation

 

This section explains the compensation of our Named Executive Officers for fiscal 2008, who are:

 

 

The Compensation Committee (the “Committee”) of our Board sets and administers the policies that govern compensation of our executive officers, including:

 

 

The Committee seeks to assure that compensation paid to the executive officers is fair, reasonable and competitive, and is linked to increasing long-term stockholder value. Only independent directors serve on the Committee.

 

Compensation Philosophy.  The Committee reviews its compensation philosophy periodically, and at least on an annual basis. The Committee has determined that the best course of action at this time is to align

compensation with the unique talent and business needs of Healthways. We believe this is best accomplished through the following objectives:

 

 

We use the following compensation vehicles to meet these objectives:

 

 

The Committee reviews annually our executive compensation policies in light of our financial performance, annual budget, and the compensation policies of similar companies, including the peer group companies discussed below. The compensation of individual executives is then reviewed annually by the Committee in light of such executive’s performance and the Committee’s executive compensation policies for that year. The Committee believes that our compensation strategies have been effective in promoting retention and are aligned with the Committee’s compensation philosophy and our company culture, which places a significant value on highly-performing individuals.

 

Overview of Compensation Process.  The Committee annually reviews the compensation of the Chief Executive Officer and the other executive officers to ensure they are rewarded appropriately for their contributions to the Company. This same review is conducted for all Section 16 officers and direct reports of the Chief Executive Officer. The Committee conducts this review and compensation determination through a comprehensive process involving a series of meetings typically occurring in the last fiscal quarter of the preceding fiscal year and the first fiscal quarter of the current fiscal year.

 

Compensation Benchmarking Process.  As stated above, with respect to annual salary and the various short-term and long-term incentive awards available to the Named Executive Officers, the Committee considers the external competitiveness, the internal equity and the executive’s performance in determining the compensation awarded. As part of the executive compensation process, the Committee reviews the Named Executive Officers’ compensation against external references to ensure that the compensation is appropriate. These external comparisons only provide a point of reference as we do not use specific formulas to determine compensation levels

reflecting the responsibilities of a particular officer position. The external references used in setting fiscal 2008 compensation consisted of the following publicly-traded peer group:

 

 

In April 2007, the Committee worked with Towers Perrin (“Towers Perrin”), an independent executive compensation consultant, and management to select this peer group. As the industry leader in a relatively new market, the health and care support services industry, the Committee believed that an industry peer group would not necessarily create a satisfactory and meaningful comparison group due to the relatively small number of publicly-traded competitors in our industry and the relative size of such competitors. Absent an industry peer group, the Committee concluded that the most comparable companies with respect to executive pay are companies whose business size, growth and complexity are similar to ours. As a result, the companies above were selected as peers for compensation comparison purposes because of their similarity to the Company in terms of size (revenues, market capitalization, number of employees, and/or operating income), their industry classification, growth and financial performance and/or the existence of publicly available data.

 

Role of External Consultants.  During each of fiscal 2005 and fiscal 2007, the Committee engaged Towers Perrin, and together with the Board, examined the Company’s overall compensation and benefits program, and in particular, our long-term incentive compensation programs. At the Committee’s request, Towers Perrin performed several analyses, including peer group and market comparisons, internal pay equity, updating of the executive salary structure and modeling of executive compensation levels at different levels of Company performance. These analyses assisted the Committee in determining if such compensation programs were advisable based on our current and expected financial position and strategic goals, as well as informing the Committee of developments in corporate governance and compensation design. Following the Committee’s examination of our long-term incentive compensation structure, the Committee determined that, in order to maintain a competitive position in the healthcare services industry and continue to attract and retain qualified colleagues, it was appropriate to adjust the long-term compensation program so that the Named Executive Officers would be eligible to receive a combination of stock options, restricted stock units and performance-based cash awards. The aggregate amounts of such awards would vary with Company and individual performance and with the level of responsibility. The intent was to deliver long-term incentive awards that, when combined with base salaries and annual short-term incentive awards, would result in total compensation levels that were internally equitable and externally competitive.

 

At the completion of fiscal 2008, the Committee initiated a request for proposal (RFP) process in connection with engaging an independent executive compensation consultant to review the Company’s executive

compensation program. Following the RFP process, the Committee selected Hewitt Associates, Inc. (“Hewitt”) to serve as the Committee’s independent executive consultant.

 

Role of Management.  As part of the compensation process, the Committee solicits the views and recommendations of our Chief Executive Officer when determining the compensation of each of our Named Executive Officers, given his insight into their key contributions and performance. The Chief Executive Officer summarizes his assessment of the performance during the previous year of each of his direct reports, including each of the Named Executive Officers, based on the established performance objectives that were previously approved by the Committee for that fiscal year. The Chief Executive Officer also provides his recommendations on any compensation adjustments for each of his direct reports, including each of the Named Executive Officers. Following the Chief Executive Officer’s presentation and Committee discussion, the Committee meets to review the performance of each Named Executive Officer, discuss, and recommend to the independent directors any compensation adjustments for each of the Named Executive Officers, based on such factors as the competitive compensation analysis, the Chief Executive Officer’s and the Committee’s assessment of individual performance, and the Company’s performance.

 

The process is similar for determining any compensation adjustments for the Chief Executive Officer, except that the Chief Executive Officer does not provide the Committee with a recommendation.

 

CEO Compensation Determination.  The Chief Executive Officer presents a self-assessment of his performance during the year to the Committee based on the performance objectives previously approved by the Committee. For fiscal 2008, these performance objectives were based on maximizing stockholder value by producing strong revenue and earnings growth; maintaining our company culture; recruiting and retaining highly qualified individuals necessary to support our growth; and effective short, intermediate and long-term strategic planning. During the first quarter of each fiscal year, the Committee meets in executive session to review the Chief Executive Officer’s performance and discuss and recommend to the independent directors any compensation adjustment, based on the competitive compensation analysis, its assessment of the Chief Executive Officer’s performance in light of the pre-approved performance objectives, the Company’s performance and the level of Chief Executive Officer compensation relative to our other Named Executive Officers.

 

Compensation Decisions for Fiscal 2008.  In determining the compensation for the Named Executive Officers for fiscal 2008, the Committee utilized the executive compensation structure established with the assistance of Towers Perrin as a guideline, together with its own assessment of (i) the performance, responsibilities, expectations and contribution of each Named Executive Officer with the assistance of management as described above, (ii) the competitiveness of the Company’s executive compensation and (iii) internal pay equity. The specific analysis regarding the components of total executive compensation for fiscal 2008 is described in detail below.

 

Base Salary.  As discussed above, each year the Committee reviews and approves a revised annual salary plan for our Named Executive Officers, taking into account several factors, including prior year salary, responsibilities, performance against the individual objectives previously approved by the Committee, salaries paid by comparable companies for comparable positions, internal pay equity within the Company’s overall pay scale, and the Company’s recent financial performance. In determining whether an increase in base compensation for the Named Executive Officers (other than the Chief Executive Officer) was appropriate for fiscal 2008, the Committee reviewed recommendations of and consulted with the Chief Executive Officer. The Committee determined on the basis of discussions with the Chief Executive Officer and the experience of its members in business generally and with the Company specifically what it viewed to be appropriate levels of base compensation after taking into consideration the factors discussed above. Taking all of these factors into account, the Committee approved and

recommended to the independent directors conservative base salary adjustments for our Named Executive Officers in the following amounts:

 

 

Short-Term Incentive Plan Compensation.  As stated above, short-term incentive awards are offered to the Named Executive Officers to align their annual compensation with the interests of our stockholders. For fiscal 2008, our Named Executive Officers were eligible to earn cash bonuses provided that our actual earnings per share for our domestic business (“Domestic EPS”) exceeded our targeted Domestic EPS. The Committee chose Domestic EPS as the performance measure because it believes there is a strong correlation between Domestic EPS growth and growth in stockholder value. The Committee excluded the impact of the Company’s international operations on the short-term incentive targets as a result of the relative newness of the Company’s international operations. For fiscal 2008, as discussed below, no short-term incentive plan compensation was awarded to the Company’s Named Executive Officers based on the Company not meeting its Domestic EPS targets.

 

The 2008 short-term incentive plan is structured as a “self-funded” plan in that, upon achievement of a minimum level of Domestic EPS, which was set at $1.92 for fiscal 2008, 100% of all incremental earnings would fund the short-term incentive plan until the short-term incentive awards for Named Executive Officers were 50% funded. In order to fully fund the short-term incentive awards for Named Executive Officers for fiscal 2008, the Company would have been required to reach a target level of Domestic EPS of $1.95, provided that the short-term incentive awards were funded only to the extent that the Company’s overall Domestic EPS (after taking into account the funding of the short-term incentive awards) remained at or above the Domestic EPS target. Thereafter, 50% of all incremental earnings would continue to fund the short-term incentive plan.

 

The Committee established the minimum and target levels of Domestic EPS of $1.92 and $1.95, respectively, during the first quarter of fiscal 2008 after consulting with our senior management regarding our expected financial performance for fiscal 2008.

 

For fiscal 2008, all of our Named Executive Officers (other than the Chief Executive Officer) were eligible to receive a target award of 45% of their base salary, and the Chief Executive Officer was eligible to receive a target award of 60% of his base salary, provided that the Named Executive Officers could receive awards in excess of such amounts in the event the Company substantially exceeded its Domestic EPS target.

 

For fiscal 2008, based on our actual Domestic EPS of $1.61 not meeting our minimum level of Domestic EPS of $1.92, no short-term incentive plan compensation was awarded to our officers, including our Named Executive Officers. However, based on the structure of the short-term incentive plan, which funds short-term incentive awards for non-officers before funding any awards for our officers, we awarded a portion of the target awards for non-officers for fiscal 2008.

 

Long-Term Incentive Compensation.  As described above, one of our key compensation philosophies is that long-term incentive compensation should strengthen and align the interests of our Named Executive Officers with our stockholders. To meet our objectives, the Committee determined that long-term incentive compensation for

fiscal 2008 for our Named Executive Officers should utilize a combination of stock options, restricted stock units and performance-based cash awards:

 

 

The Committee believes that our long-term incentive compensation program is a key component of our retention strategy and is integral to our ability to achieve our performance goals. The Committee also believes this mix of long-term compensation will reduce the dilutive impact of equity grants to management compared to equity grants consisting solely of stock options.

 

Long-term incentive awards are generally granted to eligible employees, including our Named Executive Officers, on an annual basis. That award is generally made during the first fiscal quarter after the Committee has had the opportunity to review the full year results for the prior year. The Committee may also approve additional equity-based awards in certain special circumstances, such as upon an officer’s initial employment with the Company, the promotion of an officer to a new position or in recognition of special contributions made by an officer. We anticipate that due to the recent change in the Company’s fiscal year, the annual long-term incentive awards for fiscal 2008 performance will be made in early calendar 2009.

 

Equity Awards.  On October 8, 2007, the date of the Committee’s approval of such awards, non- qualified options for the purchase of the Company’s common stock and restricted stock units of the Company’s common stock were granted to our Named Executive Officers for fiscal 2007 performance pursuant to our 2007 Stock Incentive Plan (the “2007 Plan”). The aggregate grant date fair value of the option awards (valued in accordance with Statement of Financial Accounting Standards No. 123R (“FAS 123R”)) and restricted stock units (based on the aggregate fair market value of the Company’s common stock on the date of grant) granted to the Named Executive Officers was equal to 210% of fiscal 2007 base salary for Mr. Leedle and 120% of fiscal 2007 base salary for each of the other Named Executive Officers. The amount of long-term incentive awards for each of the Named Executive Officers, as a percentage of base salary, was consistent with the long-term incentive guidelines approved in fiscal 2005. Following are the equity awards granted to the Named Executive Officers in fiscal 2008, including the performance awards granted in October 2007 for fiscal 2005, 2006 and 2007 performance, which were not paid in cash but rather replaced with equity awards having equivalent value:

 

 

 

 

 

The nonqualified options are subject to the terms of the 2007 Plan and the individual award agreements. The Committee believes equity grants should be reflective of the long-term strategy of the Company and should have maximum retention value. To achieve this objective, a four-year vesting schedule was put in place on each equity award. Specifically, each of the options vests 100% on the fourth anniversary of the grant date, has a seven-year term, and an exercise price equal to the fair market value of our common stock at the time of the grant, as determined by the closing price of our common stock on the NASDAQ on the grant date. The restricted stock units are subject to the terms of the 2007 Plan and the individual award agreements. Each of the restricted stock units vests 100% on the fourth anniversary of the grant date. Generally, all equity awards granted to Named Executive Officers fully vest in the event of a Change in Control (as defined in the 2007 Plan) of the Company. In addition, as provided in the employment agreements of our Named Executive Officers (other than Mr. Kelliher), in the event of a termination without cause or resignation by the executive for good reason, the equity awards would accelerate and fully vest. For a detailed discussion of potential severance and change of control benefits, see “Potential Payments Upon Termination or Change in Control of the Company,” beginning on page 35 of this Proxy Statement.

 

Performance Awards.  To closely align the Named Executive Officers’ compensation to the Company’s financial goals, beginning in August 2005 the Committee implemented performance cash awards to supplement the equity awards described above to its Named Executive Officers based on the Company’s EPS growth over a three-year period. The performance cash awards were designed to represent approximately 25% of the total long-term incentive award made to each executive officer. Specifically, these performance cash awards are based on the Company’s average EPS growth (excluding the impact of the long-term incentive awards) over a three-year period. In calculating the average three-year EPS growth, the Company excluded the impact of long-term incentive awards in order to account for the adoption of FAS 123R in September 2005 so as to make meaningful comparisons of EPS growth both before and after adoption of FAS 123R. For fiscal 2008, the performance awards for the Named Executive Officers were based on the following formula:

 

Performance Award ⁽¹⁾ = (average base salary for such executive over the most recent three fiscal years) times (the Company’s average EPS growth (excluding the impact of the long-term incentive awards) over the most recent three fiscal years).

 

⁽¹⁾ Our Chief Executive Officer is paid an amount equal to 2 times the performance cash award (calculated above). The additional amount of performance award that may be paid to our Chief Executive Officer is intended to

make his total compensation externally competitive while maintaining a significant percentage of his total compensation in performance-based compensation.

 

Based on the above formula, the following performance cash awards for performance in fiscal 2006, 2007 and 2008 were awarded to our Named Executive Officers in November 2008:

 

 

Although the performance awards granted in October 2007 for fiscal 2005, 2006 and 2007 performance were paid in equity awards (split equally between stock options and restricted share units) rather than cash, the Committee determined that, based on the limited number of shares available for grant under the 2007 Plan, the fiscal 2008 performance awards should be paid in cash.

 

Long-Term Performance Award for Mr. Kelliher.  The Committee believes Healthways’ international business represents a substantial growth opportunity for the Company. In order to properly align and incentivize Mr. Kelliher to develop the Company’s international business operations in a profitable manner, on September 29, 2006, the Committee granted a long-term performance award to Mr. Kelliher under the Company’s 1996 Stock Incentive Plan, as amended (the “1996 Plan”). This award provides Mr. Kelliher a cash-based incentive to develop the Company’s international business by entering into signed contracts with respect to foreign countries (“Signed Contracts”) during the four-year period beginning on September 1, 2006 and ending on August 31, 2010. The amount that Mr. Kelliher may earn under this award while employed as head of the Company’s international operations will depend on (1) Signed Contracts entered into with respect to new foreign countries, (2) the Company’s net revenue derived from Signed Contracts, (3) the achievement of adjusted operating margins in excess of targeted levels derived from Signed Contracts, and (4) the expansion of the Company’s international commercial relationships. The maximum amount that Mr. Kelliher may earn under this long-term performance award during any fiscal year within the four-year performance period is $1,000,000. This is in addition to long-term incentives he receives for being an executive officer. For fiscal 2008, Mr. Kelliher was granted a long-term performance award of $308,204 based upon achieving certain targets discussed above with respect to the Company’s international business operations.

 

Earned amounts generally vest on August 31, 2010 based on continued eligible employment during the performance period and are eligible to be paid to Mr. Kelliher after vesting. Accelerated vesting will result if (1) Mr. Kelliher terminates employment due to disability, death, or an event that entitles him to severance benefits under his employment agreement, or (2) Mr. Kelliher remains an eligible employee on a Change in Control (as defined under the 1996 Plan) or a sale of the Company’s international business operations. Except as described below, earned and vested amounts will be paid as soon as practicable following the performance period or, if earlier, an event described in (2) above.

 

As consideration for this award, Mr. Kelliher extended his non-competition and non-solicitation obligations to the Company from one to two years after terminating employment with the Company. Mr. Kelliher also agreed that otherwise earned and vested amounts under this award will not be payable if Mr. Kelliher materially breaches any of these obligations.

Stock Retention Guidelines.  To further align officers’ interests with stockholders’ interests, in August 2005, our Board of Directors adopted stock retention guidelines for officers. As amended, the guidelines require officers to maintain a minimum ownership in the Company’s stock based on a multiple of their base salary (at least 2.5 times base salary for Named Executive Officers and 4 times base salary for the Chief Executive Officer). Officers must retain 75% of the net number of shares acquired (after payment of exercise price, if any, and taxes) upon the exercise of stock options and vesting of restricted stock units granted on or after August 24, 2005 until they reach the required multiple of base salary. Officers who do not comply with the guidelines may not be eligible for future equity awards.

 

Retirement Plans.  The Committee believes that an important aspect of attracting and retaining qualified individuals to serve as Named Executive Officers involves providing methods for those individuals to save for retirement. As part of the 401(k) Plan, which is based on a calendar year, we have provided a matching contribution of 52 cents for each dollar of the participant’s voluntary salary contributions up to 6% of base salary. The annual maximum participant voluntary salary contributions for calendar 2007 and 2008, as established by the Internal Revenue Service, was $15,500, plus for fiscal 2008, a $5,000 “catch-up contribution limit (only for those over 50 years old). Approximately 29% of the Company matching contribution is in the form of Company Common Stock. All matching Company contributions to the 401(k) Plan vest after five years of service with the Company and are payable pursuant to the provisions of the 401(k) Plan.

 

Under our Capital Accumulation Plan, which is based on a calendar year, we make contributions to the Capital Accumulation Plan on behalf of all of our officers, including the Named Executive Officers, that for calendar 2008 are based on (a) the officer’s voluntary salary deferrals into the Capital Accumulation Plan and (b) performance against targeted Company Domestic EPS for fiscal 2008 established prior to the start of the Capital Accumulation Plan year (calendar year 2008) by the Committee. Under the Capital Accumulation Plan, the Committee has discretion to modify the performance target. As discussed below, in fiscal 2008, the Committee exercised this discretion by resetting the performance target for fiscal 2008 to reflect the Company’s publicly stated guidance, as revised in February 2008. The Committee determined to reset the CAP targets in order to continue to incentivize the participants to deliver on the reset financial expectations established in February 2008. In making this determination, the Committee considered the fact that the car allowance previously available to all officers of the Company had been discontinued for all officers, no performance award was made under the Capital Accumulation Plan for fiscal 2007 performance, and no short-term incentive award was paid to officers for fiscal 2007 performance or would likely be paid for fiscal 2008 performance.

 

For fiscal 2008, the portion of the Company’s contribution that was based on the officer’s voluntary salary deferrals provided that to the extent the officer could not defer at least 6% of his/her base salary under the 401(k) Plan because of Internal Revenue Service maximum contribution limits, then the officer could defer the difference between his/her actual deferral and 6% of his/her annual base salary into the Capital Accumulation Plan, and the Company would provide a matching contribution of up to 52% of the amount deferred. Each officer was also eligible to contribute up to an additional 4% of base salary into the Capital Accumulation Plan, but no matching contribution will be made by the Company for this portion of the salary deferral.

 

With respect to the portion of the Capital Accumulation Plan contribution that is based on performance criteria for fiscal 2008 established by the Committee, officers were eligible to receive a Company contribution of between 3.5% and 18.5% of base salary for calendar 2008, based on our actual Domestic EPS as compared to the Domestic EPS target. For fiscal 2008, the Domestic EPS target at which contributions begin was initially set at $1.88, and was adjusted to reflect the Company’s publicly stated Domestic EPS guidance of $1.61, as revised in February 2008. Awards are made as of December 31 of each year but are based on performance criteria for the fiscal year ended August 31 during that year. Based on the Company’s Domestic EPS for fiscal 2007, no performance award under the

Capital Accumulation Plan was credited to officers during fiscal 2008. Based on the Company’s EPS for fiscal 2008 a performance award of 7.8% of base salary earned during calendar 2008 under the Capital Accumulation Plan will be made to our officers on December 31, 2008, including our Named Executive Officers, for fiscal 2008 financial performance.

 

The Company’s contributions to the Capital Accumulation Plan vest equally over four years from the beginning of the plan year, and vested amounts are paid out upon the earliest of (1) one year following an officer’s termination of employment, (2) one year following normal or early retirement, (3) 90 days following death or disability, or (4) a date selected prior to the beginning of each Capital Accumulation Plan year by the officer, but in no event will this selected date be earlier than four years from the beginning of the Capital Accumulation Plan year. In certain instances, payments upon termination of service may be delayed six months pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Capital Accumulation Plan account balances earn interest at a rate equal to the prevailing prime rate of interest plus 1% as of November 1 of each year for the succeeding calendar year. The Capital Accumulation Plan is not funded and is carried as an unsecured obligation of the Company. Each of the Named Executive Officers participated in the Company’s Capital Accumulation Plan during fiscal 2008.

 

Severance and Change of Control Benefits.  The Committee believes that reasonable severance and change in control benefits are necessary in order to recruit and retain effective senior managers. These severance benefits reflect the fact that it may be difficult for such executives to find comparable employment within a short period of time, and are a product of a generally competitive recruiting environment within our industry. The Committee also believes that a change in control arrangement provides an executive security that will likely reduce the reluctance of an executive to pursue a change in control transaction that could be in the best interests of our stockholders. Although the Committee independently reviewed the potential severance and change in control payments in light of their reasonableness as part of negotiating the employment agreements with our Named Executive Officers, the Committee typically does not consider the value of potential severance and change in control payments when assessing annual compensation as these payouts are contingent and have primary purposes unrelated to ordinary compensation matters. In connection with the amended and restated employment agreements entered into with the Named Executive Officers in February 2006, the Committee assessed the reasonableness of the potential severance and change in control payments. For a detailed discussion of potential severance and change of control benefits as well as an estimate of the amounts that would have been payable had they been triggered as of the end of fiscal 2008, see “Potential Payments Upon Termination or Change in Control of the Company,” beginning on page 35 of this Proxy Statement.

 

Perquisites and Other Benefits.  The Company has previously paid relocation expenses, either in the form of reimbursement or a lump sum payment, to the Named Executive Officers who have relocated to the Nashville, Tennessee area in order to assume their positions with the Company, and has made tax gross up payments to such officers to cover income tax associated with such payments. The Named Executive Officers are also eligible for benefits generally available to and on the same terms as the Company’s employees who are exempt for purposes of the Fair Labor Standards Act, including health insurance, disability insurance, dental insurance, and life insurance. All officers of the Company, including the Named Executive Officers, received a car allowance of $300 per month. However, effective June 1, 2008, the car allowance was discontinued for all officers, including the Named Executive Officers. In addition, pursuant to Mr. Stone’s employment agreement, the Company paid life insurance premiums on behalf of Mr. Stone in fiscal 2008 in an amount equal to $11,004.

 

Tax Deductibility of Compensation.  Section 162(m) of the Internal Revenue Code of 1986 limits the deductibility on our tax return of compensation over $1.0 million to the Chief Executive Officer, Chief Financial Officer, or any of the other three most highly compensated Named Executive Officers serving at the end of the fiscal

year unless, in general, the compensation is paid pursuant to a plan which is performance-related, non-discretionary, and has been approved by our stockholders. The Committee considered the impact of Section 162(m) in setting compensation for fiscal 2008 with the goal of providing for compensation that was deductible to the extent permitted while simultaneously providing compensation consistent with the Company’s philosophy. The Committee intends to structure performance-based compensation awarded in the future to Named Executive Officers who may be subject to Section 162(m) in a manner that satisfies the relevant requirements. The Committee, however, reserves the authority to award non-deductible compensation as deemed appropriate. Further, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and related regulations, no assurance can be given that compensation intended to satisfy the requirements for deductibility under Section 162(m) will in fact do so.

 

Compensation Decisions for fiscal 2009.  In evaluating how best to implement our compensation philosophy for fiscal 2009, the Committee reviewed with management and its independent compensation consultant our long-term incentive compensation strategy. The Committee determined that a long-term incentive compensation strategy utilizing a mix of stock options, restricted stock units and performance-based cash compensation as part of our overall compensation strategy continues to be a key component of our ability to attract, retain and motivate our management team. The significant decline in our stock price has resulted in our outstanding stock options being significantly out of the money as a result of the exercise price of these options being significantly in excess of the current trading prices of our stock. As a result, we do not believe these outstanding options provide the retentive and incentive value that was the basis for their grant, yet we continue to incur the ongoing compensation cost related to these options as measured at their grant dates. In addition, we do not have a sufficient number of shares available under our 2007 Stock Incentive Plan to include equity based awards as a component of our long-term incentive compensation strategy consistent with our compensation philosophy. After considering this situation with management and the Committee’s independent compensation consultant, the Committee and the Board of Directors determined that it was in the best interests of our stockholders to offer to purchase from our employees (other than our chief executive officer) options granted between September 1, 2004 and August 15, 2008 granted under our stock incentive plans. These options have exercise prices ranging from $25.31 to $66.97 per share. The per option cash amount that we are offering to pay for each eligible option that is tendered to us ranges from $0.29 to $2.10. At the commencement of the offer, there were options to purchase 1,321,502 shares of our common stock that were outstanding and subject to the offer. Shares underlying any options purchased pursuant to the offer will increase the shares available for grant under the 2007 Stock Incentive Plan. The Committee intends to meet following the expiration of the offer to review the pool of shares available under the 2007 Stock Incentive Plan and to determine the appropriate mix of stock options, restricted stock units and performance-based cash compensation as part of our long-term incentive compensation for our management team.

Compensation Committee Report

 

The following Report of the Compensation Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

 

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

 

Respectfully submitted,

 

Jay C. Bisgard, M.D., Chairman
Alison Taunton-Rigby, Ph.D.
C. Warren Neel, Ph.D.
Mary Jane England, M.D.

 

Compensation Committee Interlocks and Insider Participation

 

During fiscal 2008, the Compensation Committee of the Board of Directors was composed of Mr. Ballantine (through February 2008) and Drs. Bisgard, Neel, England, and Taunton-Rigby. None of these persons has at any time been an officer or employee of the Company or any of our subsidiaries. In addition, there are no relationships among our executive officers, members of the Compensation Committee or entities whose executives serve on the Board of Directors or the Compensation Committee that require disclosure under applicable Commission regulations.

 

The following table provides information regarding the compensation to our Chief Executive Officer, Chief Financial Officer, and three other most highly compensated executive officers (the “Named Executive Officers”) during fiscal 2008 and 2007.

 

The Named Executive Officers were not entitled to receive payments that would be characterized as “Bonus” payments for fiscal 2008 or 2007. As described under “Compensation Discussion and Analysis,” no payments that would be characterized as “Non-Equity Incentive Plan Compensation” were made to the Named Executive Officers pursuant to the terms of the 2008 Annual Incentive Award Plan or the 2007 Short-Term Incentive Plan.

 

Based on the dollar amounts recognized for financial statement reporting purposes for equity incentives and the base salary of the Named Executive Officers, “Salary” accounted for approximately 24% of the total compensation of the Named Executive Officers in fiscal 2008 and 2007; equity-based incentive compensation accounted for 62% and 74% of total compensation in fiscal 2008 and 2007, respectively; and other compensation accounted for 14% and 2% of total compensation in fiscal 2008 and 2007, respectively.

 

 

 

 

For fiscal 2008, the amounts in the table represent the performance cash awards only as there were no annual incentive awards to executive officers for fiscal 2008 for the reasons described in the following paragraph. The performance awards were awarded in October 2008 for fiscal 2006, 2007 and 2008 performance. The performance awards that were awarded in October 2007 for fiscal 2005, 2006 and 2007 performance were not paid in cash but rather replaced with equity awards having equivalent value. Therefore, they were excluded from the Summary Compensation table above but were included in the “Grants of Plan-Based Awards in Fiscal 2007” table in the fiscal 2007 proxy statement.

 

Based on Domestic EPS for fiscal 2008 and total EPS for 2007, the Named Executive Officers did not earn any awards under the 2008 Annual Incentive Award Plan or the 2007 Short-Term Incentive Plan, respectively. Cash awards under these plans were based upon a comparison of our actual EPS and targeted earnings per share as approved by the Compensation Committee at the beginning of the respective fiscal year, as well as meeting certain individual qualitative goals and objectives. For fiscal 2008 and 2007, the Chief Executive Officer was eligible to receive an award up to 60% of his base salary, and the other Named Executive Officers were eligible to receive awards up to 45% of their base salary. Had our performance materially exceeded our targeted earnings per share and the Named Executive Officer met his or her individual goals and objectives, awards to Named Executive Officers could have exceeded the percentages set forth in the preceding sentence.

 

 

Based on a prime rate of interest of 8.25% and 7.5% at November 1, 2006 and 2007, respectively, interest on the CAP account balances during fiscal 2008 exceeded 120% of the applicable federal long-term rate. The above-market portion of earnings was calculated as the excess of the actual earnings during fiscal 2008 over what the earnings would have been using a weighted average of the applicable Federal long-term rate at November 1, 2006 and 2007.

 

Based on a prime rate of interest of 7% and 8.25% at November 1, 2005 and 2006, respectively, interest on the CAP account balances during fiscal 2007 exceeded 120% of the applicable federal long-term rate. The above-market portion of earnings was calculated as the excess of the actual earnings during fiscal 2007 over what the earnings would have been using a weighted average of the applicable Federal long-term rate at November 1, 2005 and 2006.

 

 

For fiscal 2008, the table includes estimated performance awards to be made to the CAP by the Company on behalf of the Named Executive Officers on December 31, 2008 based on the Company’s fiscal 2008 Domestic

EPS as compared to EPS targets set forth for the CAP. The amounts are as follows: Mr. Leedle ($53,430); Ms. Chaput ($29,263); Dr. Pope ($31,543); Mr. Stone ($27,568); and Mr. Kelliher ($27,174).

 

No performance awards under the Capital Accumulation Plan were made to our officers on December 31, 2007, including our Named Executive Officers, for fiscal 2007 financial performance based on the Company’s EPS for fiscal 2007 not meeting our EPS target.

 

The table above does not include performance awards made in fiscal 2007 to the CAP by the Company on behalf of the Named Executive Officers on December 31, 2006. These awards were based on the Company’s fiscal 2006 performance and were reported as compensation in the 2006 Summary Compensation Table. The amounts were as follows: Mr. Leedle ($57,660); Ms. Chaput ($31,611); Dr. Pope ($33,167); and Mr. Stone ($31,202).

 

 

The following table sets forth the plan-based awards granted to our Named Executive Officers during fiscal 2008.

 

 

 

 

Compensation Programs for Fiscal 2008

 

As reflected in the above Summary Compensation Table and Grants of Plan-Based Awards Table, the primary components of our fiscal 2008 compensation programs were base salary, short-term incentive plan compensation, equity awards, performance cash awards and awards under retirement plans. For a detailed discussion of each of these components, see the “Compensation Discussion and Analysis” section of this Proxy Statement.

 

The following tables provide information with respect to outstanding stock options and restricted stock units held by the Named Executive Officers as of August 31, 2008.

 

 

 

 

 

 

 

The following table provides information on stock option exercises by our Named Executive Officers during fiscal 2008. No restricted stock units held by our Named Executive Officers vested during fiscal 2008.

 

 

 

 

Our Capital Accumulation Plan, which is based on a calendar year, is a nonqualified deferred compensation plan that allows highly compensated employees, including the Named Executive Officers, to defer up to 10% of their base salary. For a further discussion of the CAP, please see the “Compensation Discussion and Analysis” section beginning on page 15.

 

The following table shows the activity and ending balance in the CAP for each Named Executive Officer as of and for the year ended August 31, 2008.

 

 

 

 

Employment Agreements

 

We have employment agreements with Mr. Leedle, Ms. Chaput, Dr. Pope, and Mr. Stone that each began on September 1, 2005 and have a continuous term of two years thereafter. The agreements provide for an annual base salary as well as participation in all benefit plans maintained by the Company for officers. Base salary payable under each employment agreement is subject to annual review and may be increased by the Board of Directors, or a committee thereof, as it may deem advisable. Under the agreements, short-term incentive plan awards, if any, and long-term incentive awards will be determined by the Board of Directors, or a committee thereof comprised solely of independent directors. The agreements also provide for potential severance and change of control benefits, which are discussed in detail under “Potential Payments Upon Termination or Change in Control of the Company” of this Proxy Statement.

 

We have an employment agreement with Mr. Kelliher that began on September 5, 2003 with an initial term of two years and a continuous term of one year thereafter. The agreement provides for an annual base salary as well as participation in all benefit plans maintained by the Company for officers. Base salary payable under the agreement

is subject to annual review and may be increased by the Board of Directors or the Chief Executive Officer in its discretion. The agreement also provides for potential severance and change of control benefits, which are discussed in detail under “Potential Payments Upon Termination or Change in Control of the Company” of this Proxy Statement.

 

On September 29, 2006, the Company granted a long-term performance award to Mr. Kelliher under the Company’s 1996 Stock Incentive Plan, as amended (the “1996 Plan”). This award provides Mr. Kelliher a cash-based incentive to develop the Company’s international business operations by entering into signed contracts with respect to foreign countries (“Signed Contracts”) during the four-year period beginning on September 1, 2006 and ending on August 31, 2010. The amount that Mr. Kelliher may earn under this award while employed as head of the Company’s international operations will depend on (1) Signed Contracts entered into with respect to new foreign countries, (2) the Company’s net revenue derived from Signed Contracts, (3) the achievement of adjusted operating margins in excess of targeted levels derived from Signed Contracts, and (4) the expansion of the Company’s international commercial relationships. Mr. Kelliher may earn a bonus with respect to each fiscal year within the four-year period. The maximum amount that Mr. Kelliher may earn during any fiscal year within the four-year performance period is $1,000,000.

 

Earned amounts generally vest on August 31, 2010 based on continued eligible employment during the performance period and are eligible to be paid to Mr. Kelliher upon vesting. Accelerated vesting will result if (1) Mr. Kelliher terminates employment due to disability, death, or an event that entitles him to severance benefits under his employment agreement, or (2) Mr. Kelliher remains an eligible employee on a Change in Control (as defined under the 1996 Plan) or a sale of the Company’s international business operations. Except as described below, earned and vested amounts will be paid as soon as practicable following the performance period or, if earlier, an event described in (2) above.

 

As consideration for this award, Mr. Kelliher extended his non-competition and non-solicitation obligations to the Company from one to two years after terminating employment with the Company. Mr. Kelliher also agreed that otherwise earned and vested amounts under this award will not be payable if Mr. Kelliher materially breaches any of these obligations.

 

We have employment agreements with each of our Named Executive Officers. These agreements contain restrictive provisions relating to the use of confidential information, competing against the Company and soliciting any customers or employees of the Company during the term of employment and for a period of 12-24 months thereafter. The agreements provide that employment may be terminated at any time by the mutual written agreement of the Company and the executive. The Named Executive Officers’ employment (excluding Mr. Kelliher) can also be terminated for any of the following reasons. Please see page 36 for information regarding Mr. Kelliher’s employment agreement.

 

1) Involuntary without Cause — the Board may at any time terminate employment of an executive by delivery of a written notice of termination to the executive;

 

2) Involuntary for Cause — the executive may be terminated for continued failure to perform his/her duties or for violation of company policies and procedures;

3) Voluntary without Good Reason — the executive may terminate employment at any time by delivery of a written notice of resignation to the Company no less than 60 days and no more than 90 days prior to the effective date of the executive’s resignation;

 

4) Voluntary for Good Reason — the executive may resign by delivery of a written notice of resignation to the Company within 60 days of an occurrence of any of the following events:

 

a. a reduction in the executive’s base salary (unless such reduction is part of an across the board reduction affecting all Company executives with a comparable title), title, or responsibilities;

 

b. a requirement by the Company to relocate the executive to a location that is more than 25 miles from the location of the executive’s current office; or

 

c. a change in control that results in a change in his/her employment agreement with adverse effects in his/her status;

 

5) Involuntary without Cause or Voluntary for Good Reason within 12 Months of a Change in Control — the executive may terminate employment within twelve months of a change in control without cause or for good reason.

 

Change in Control is defined as (i) when any person or entity other than the Company becomes the beneficial owner of the Company’s securities having 35% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company, (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company’s securities entitled to vote generally in the election of the directors of the Company immediately prior to such transaction, or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company’s stockholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period;

 

6) Disability — any physical or mental disability entitling the executive to long-term disability or if the executive is unable to perform essential functions of his/her regular duties and responsibilities with or without reasonable accommodations due to a medically determined physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months; or

 

7) Death.

 

Mr. Kelliher’s employment agreement contains restrictive provisions relating to the use of confidential information, competing against the Company and soliciting any customers or employees of the Company during the term of employment and for a period of 12-24 months thereafter. The agreement provides that employment may be terminated at any time by the mutual written agreement of the Company and Mr. Kelliher. Mr. Kelliher’s employment can also be terminated for any of the following reasons:

 

1) Involuntary without Cause — the Company may at any time terminate Mr. Kelliher’s employment by delivery of a written notice of termination to Mr. Kelliher;

 

2) Involuntary for Cause — Mr. Kelliher may be terminated for continued failure to perform his duties or for violation of company policies and procedures;

3) Voluntary without Good Reason — the executive may terminate employment at any time by delivery of a written notice of resignation to the Company no less than 60 days prior to the effective date of the executive’s resignation;

 

4) Voluntary for Good Reason — Mr. Kelliher may resign by delivery of a written notice of resignation to the Company upon the occurrence of any of the following events:

 

a. a material diminution in Mr. Kelliher’s duties and responsibilities or the assignment to Mr. Kelliher of duties and functions materially inconsistent with his titles and duties without his written consent. Mr. Kelliher must deliver written notice of resignation within 12 months of occurrence of a change in responsibility; or

 

b. a breach by the Company of the provisions of Mr. Kelliher’s employment agreement that is not cured within 30 days of written notice to the Company.

 

5) Voluntary for Good Reason within 12 Months of a Change in Control — the executive may terminate employment within twelve months of a change in control.

 

Change in Control is defined as (i) a transaction or series of transactions (occurring within 24 months of each other) in which all or any substantial (defined as more than 50% of the assets of the Company) portion of Company assets have been acquired through a merger, business combination, purchase or similar transaction by any entity or person, other than an entity controlled by the Company; or, (ii) a transfer or series of transfers (occurring within 24 months of each other) in which securities representing control of the Company (“control” being defined as greater than fifty percent (50%) of the outstanding voting power of the outstanding securities of the Company) are acquired by or otherwise are beneficially owned, directly or indirectly, by any corporation, person or “group” (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934).

 

6) Disability — any physical or mental illness resulting in (a) Mr. Kelliher’s being absent from his duties hereunder on a full time basis for more than 90 consecutive days; or (b) Mr. Kelliher’s being absent from his duties hereunder for more than 120 days in any consecutive six-month period; or (c) a determination by the Board of Directors that Mr. Kelliher is permanently and totally disabled from performing his duties.

 

7) Death.

 

Following are the potential payments to be made by the Company to each of the Named Executive Officers upon termination or a change in control of the Company. These benefits are in excess of those usually provided to salaried employees. The payment amounts assume an effective termination date of August 31, 2008. These amounts include earnings through August 31, 2008 and are estimates of compensation that would be paid to the Named Executive Officers at the time of termination. The exact amounts of compensation can only be determined on the actual date that each executive separates from the Company.

 

Vested equity and CAP balances are excluded from the tables below as they are payable at the time of termination. None of the Named Executive Officers were eligible for normal or early retirement at August 31, 2008 based on such definitions in the equity award agreements and the CAP plan document.

 

In addition to the Company compensation outlined in the tables below, third party insurance companies will provide life insurance and disability benefits if the executives separate for reasons of death or disability. If the Named Executive Officers had terminated as of August 31, 2008 due to death, Mr. Leedle’s beneficiaries would have received $1,050,000 in a lump sum payout from a third party insurance provider. Ms. Chaput and Dr. Pope’s beneficiaries would have received $750,000, Mr. Stone’s beneficiaries would have received $1,008,000, and Mr. Kelliher’s beneficiaries would have received $998,000. If the Named Executive Officers had terminated as of August 31, 2008 due to disability, each of the Named Executive Officers would have been entitled to receive a

monthly benefit of $20,000 until age 67. This benefit could be offset by other sources of income, such as Social Security or other disability benefits. In addition, if in connection with a change in control of the Company compensation to or for the benefit of the executives from the Company constitutes an “excess parachute payment” under section 280G if the Internal Revenue Code (IRC), the Company shall pay the executives a cash sum equal to the amount of excise tax due under section 4999 of the IRC. This provision does not apply to Mr. Kelliher.

 

Ben R. Leedle, Jr., Chief Executive Officer

 

The following table shows the potential payments upon termination or a change in control of the Company for Mr. Leedle.

 

(Continued)

 

 

 

Mary A. Chaput, EVP and Chief Financial Officer

 

The following table shows the potential payments upon termination or a change in control of the Company for Ms. Chaput.

 

 

(Continued)