UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant  þ

Filed by a Party other than the Registrant  o

Check the appropriate box:

 

o   Preliminary Proxy Statement

 

o   Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

þ   Definitive Proxy Statement

 

o   Definitive Additional Materials

 

o   Soliciting Material Pursuant to Rule 14a-12

 

WRIGHT MEDICAL GROUP, INC.

(Name of Registrant as Specified in Its Charter)

 

Not Applicable

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ   No fee required.

 

 

 

 

 

 

 

 

 

NOTICE OF
2008 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14, 2008

 

 

To Our Stockholders:

 

The 2008 Annual Meeting of Stockholders of Wright Medical Group, Inc. will be held at the Doubletree Hotel, located at 5069 Sanderlin Avenue, Memphis, Tennessee, on May 14, 2008, beginning at 9:00 a.m. (Central Time). At the meeting, our stockholders will vote on the following proposals to:

 

1. Elect directors to serve on our Board of Directors for a term of one year;

 

2. Ratify the selection of KPMG LLP as our independent auditor for 2008; and

 

3. Approve the amendment to our Fourth Amended and Restated 1999 Equity Incentive Plan to (a) increase by 700,000 the number of shares of common stock available for awards thereunder and (b) make certain administrative changes to the plan.

 

Stockholders also will transact any other business that properly comes before the meeting.

 

OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL THE PROPOSALS.

 

Only stockholders of record at the close of business on March 24, 2008, are entitled to receive notice of, and to vote at, the meeting and any postponement or adjournment thereof. A list of such stockholders will be available for inspection by any stockholder at the office of our legal counsel, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, 165 Madison Avenue, 22nd Floor, Memphis, Tennessee, during ordinary business hours beginning May 2, 2008, as well as at the Doubletree Hotel during the meeting on May 14, 2008.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders To Be Held on May 14, 2008. The Proxy Statement and 2007 Annual Report are available at www.wmt.com/proxy.

 

YOUR VOTE IS IMPORTANT.  REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY VOTE BY TELEPHONE OR COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. NO ADDITIONAL POSTAGE IS NECESSARY IF THE PROXY IS MAILED IN THE UNITED STATES OR CANADA. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE MEETING.

 

By Order of the Board of Directors,

 

 

Jason P. Hood

Secretary

 

April 14, 2008

 

TABLE OF CONTENTS

 

 

 

 

At the meeting, our stockholders will vote on the following proposals to:

 

 

 

In addition, our management may report on our performance during 2007 and will respond to appropriate questions from stockholders.

 

The record date for the meeting is March 24, 2008. Only stockholders of record at the close of business on March 24, 2008, are entitled to receive notice of the meeting and to vote at the meeting the shares of our common stock that they held on that date. Each outstanding share of common stock entitles its holder to one vote on each matter voted on at the meeting. At the close of business on March 24, 2008, there were 37,162,420 outstanding shares of common stock.

 

If you are the beneficial owner of shares held in “street name” by a brokerage firm, bank, or other nominee, such entity, as the record holder of the shares, is required to vote the shares in accordance with your instructions. If you do not give instructions to your nominee, it will nevertheless be entitled to vote your shares on “discretionary” items but will not be permitted to do so on “non-discretionary” items. Both Proposal 1 (election of directors) and Proposal 2 (ratification of the selection of the independent auditor) are discretionary items on which your nominee will be entitled to vote your shares even in the absence of instructions from you. However, Proposal 3 (approval of the amendment of the 1999 Equity Incentive Plan) is a “non-discretionary” item for which a nominee will not have discretion to vote in the absence of voting instructions from you.

 

A quorum must be present at the meeting in order for any business to be conducted. The presence at the meeting, in person or by proxy, of the holders of a majority of the shares of our common stock outstanding on the record date of March 24, 2008, will constitute a quorum. Abstentions and broker non-votes will be included in the number of shares considered present at the meeting for the purpose of determining whether there is a quorum.

 

If a quorum is not present at the scheduled time of the meeting, the holders of a majority of the shares present in person or represented by proxy at the meeting may adjourn the meeting to another place, date, or time until a quorum is present. The place, date, and time of the adjourned meeting will be announced when the adjournment is taken, and no other notice will be given unless the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting.

 

If you are a registered stockholder, you may vote by telephone.   If you are a registered stockholder ( i.e. , your shares are held in your own name), you may vote by telephone by following the instructions included on the proxy card. You do not need to return your proxy card if you vote by telephone.

 

If your shares are held in “street name,” you may be eligible to provide voting instructions to your nominee by telephone or on the Internet.   If you are a beneficial owner of shares held in “street name” ( i.e. , your shares are held in the name of a brokerage firm, bank, or other nominee), you may be eligible to provide voting instructions to your nominee by telephone or on the Internet. A large number of brokerage firms, banks, and other nominees participate in a program provided through Broadridge Investor Communications Solutions (Broadridge) that offers telephone and Internet voting options. If your shares are held in “street name” by a brokerage firm, bank, or other nominee that participates in the Broadridge program, you may provide voting instructions to your nominee by telephone or on the Internet by following the instructions set forth on the voting instruction form provided to you. You do not need to return your proxy card if you provide voting instructions to your nominee by telephone or on the Internet.

 

You may vote by mail.   If you are a registered stockholder, you may vote by properly completing, signing, dating, and returning the accompanying proxy card. The enclosed postage-paid envelope requires no additional postage if it is mailed in the United States or Canada. If you are a beneficial owner of shares held in “street name,” you may provide voting instructions to the brokerage firm, bank, or other nominee that holds your shares by properly completing, signing, dating, and returning the voting instruction form provided to you by your nominee.

 

You may vote in person at the meeting.   If you are a registered stockholder and attend the meeting, you may deliver your completed proxy card in person. In addition, we will pass out written ballots to registered stockholders who wish to vote in person at the meeting. If you are a beneficial owner of shares held in “street name” and wish to vote at the meeting, you will need to obtain a proxy form from the brokerage firm, bank, or other nominee that holds your shares.

 

Yes, you can revoke your proxy and change your vote at any time before the polls are closed at the meeting in any of the following ways: (1) by voting again by telephone, because only your latest telephone vote will be counted; (2) by properly completing, signing, dating, and returning another proxy card with a later date; (3) if you are a registered stockholder, by voting in person at the meeting; (4) if you are a registered stockholder, by giving written notice of such revocation to our Corporate Secretary prior to or at the meeting; or (5) if you are a beneficial owner of shares held in “street name,” by following the instructions given by the brokerage firm, bank, or other nominee that holds your shares. Your attendance at the meeting itself will not revoke your proxy unless you give written notice of revocation to our Secretary before the polls are closed.

 

American Stock Transfer & Trust Company (AST), the registrar and transfer agent for our common stock, will tabulate and certify the stockholder votes submitted by proxy. A representative of AST will serve as the inspector of election at the meeting.

 

Our Board of Directors recommends that you vote:

 

1. FOR the election of the director nominees to serve on our Board of Directors for a term of one year;

 

2. FOR the ratification of the selection of KPMG LLP as our independent auditor for 2008; and

 

 

If you submit a proxy but do not indicate any voting instructions, your shares will be voted FOR each of the proposals.

 

As of the date hereof, the Board of Directors knows of no business that will be presented at the meeting other than the proposals described in this Proxy Statement. However, if any other proposal properly comes before the stockholders for a vote at the meeting, the proxy holders will vote your shares in accordance with their best judgment.

 

Election of Directors.   The director nominees will be elected to serve on the Board of Directors for a term of one year if they receive a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter. This means that the director nominees will be elected if they receive more votes than any other person at the meeting. If you vote to “Withhold Authority” with respect to the election of one or more director nominees, your shares will not be voted with respect to the person or persons indicated, although they will be counted for the purpose of determining whether there is a quorum at the meeting.

 

Ratification of Selection of Independent Auditor.   The selection of KPMG LLP as our independent auditor for 2008 will be ratified if a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter are voted in favor of the proposal.

 

Approval of Amendment to 1999 Equity Incentive Plan.   The proposed amendment to our Fourth Amended and Restated 1999 Equity Incentive Plan to (a) increase by 700,000 the number of shares of common stock available for awards thereunder, and (b) make certain administrative changes to the plan will be approved if a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter are voted in favor of the proposal.

 

You do not have the option of abstaining from voting on Proposal 1 (election of directors), but you may abstain from voting on Proposal 2 (ratification of the selection of the independent auditor), and Proposal 3 (approval of the amendment of the 1999 Equity Incentive Plan). With respect to Proposal 1, because the directors are elected by a plurality vote, an abstention will have no effect on the outcome of the vote and, therefore, is not offered as a voting option on the proposal. In the case of an abstention on Proposal 2 or 3, your shares would be included in the number of shares considered present at the meeting for the purpose of determining whether there is a quorum. Because your shares would be voted but not in favor of Proposal 2 or 3, your abstention would have the same effect as a negative vote in determining the outcome of the vote on the proposal.

 

A “broker non-vote” occurs when a brokerage firm, bank, or other nominee does not vote shares that it holds in “street name” on behalf of a beneficial owner, because the beneficial owner has not provided voting instructions to the nominee with respect to a non-discretionary item. Proposal 3 (approval of the amendment of the 1999 Equity Incentive Plan) is a non-discretionary item for which a nominee will not have discretion to vote in the absence of voting instructions from the beneficial owner. Proposal 1 (election of directors) and Proposal 2 (ratification of the selection of the independent auditor), on the other hand, are discretionary items for which a nominee will have discretion to vote even without voting instructions from the beneficial owner. Accordingly, it is possible for there to be broker non-votes with respect to Proposal 3, but there will not be broker non-votes with regard to Proposals 1 and 2. In the case of a broker non-vote, your shares would be included in the number of shares considered present at the meeting for the purpose of determining whether there is a quorum. A broker non-vote, being shares not entitled to vote, would not have any effect on the outcome of the vote on Proposal 3, the approval of which requires the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter.

 

The following table provides information about the beneficial ownership of our common stock as of February 29, 2008, by each of our directors, each of our existing and former executive officers named in the “Summary Compensation Information” table in this Proxy Statement, all of our directors and existing and former executive officers as a group, and each person known to our management to be the beneficial owner of more than 5% of the outstanding shares of common stock.

 

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that our directors and executive officers and the beneficial owners of more than 10% of the our registered equity securities (the reporting persons) file with the Securities and Exchange Commission (SEC) initial reports of, and subsequent reports of changes in, their beneficial ownership of our equity securities. The reporting persons are required to furnish us with copies of all such Section 16(a) reports. Based solely on our review of the copies of such Section 16(a) reports and written representations from certain reporting persons furnished to us, we believe that the reporting persons complied with all applicable Section 16(a) filing requirements during 2007, except that Mr. F. Barry Bays was inadvertently one day late filing a Form 4 report for the exercise of an employee stock option and sale of underlying stock on December 12, 2007.

 

Our Board of Directors currently consists of nine directors. Our directors are F. Barry Bays, Martin J. Emerson, Lawrence W. Hamilton, Gary D. Henley, John L. Miclot, Robert J. Quillinan, David D. Stevens, Thomas E. Timbie, and James T. Treace. The directors are elected at each annual meeting of stockholders and serve for a term of one year until the next annual meeting of stockholders and until their respective successors are elected and qualified, subject to their prior death, resignation, retirement, disqualification, or removal from office. Each of our directors was elected by our stockholders at the 2007 annual meeting of stockholders. F. Barry Bays and Thomas E. Timbie have notified us that they will not stand for reelection and will retire from the Board of Directors at this meeting.

 

It is the policy of the Board of Directors that a majority of the directors be independent as defined in the listing standards of the Nasdaq Global Select Market (Nasdaq). The Board of Directors has determined that six directors — Martin J. Emerson, Lawrence W. Hamilton, John L. Miclot, Robert J. Quillinan, David D. Stevens, and Thomas E. Timbie — are independent as defined in Nasdaq’s listing standards. Beverly A. Huss, our former director, who did not stand for reelection at the 2007 Annual Meeting of Stockholders, and Gary D. Blackford and Amy S. Paul, nominees for director, were also determined to be independent as defined in Nasdaq’s listing standards.

 

The Board of Directors holds meetings on a quarterly basis and on other occasions as necessary or appropriate. The Board of Directors met nine times in 2007. The Board of Directors has three standing committees — the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee. The Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee met eleven, thirteen, and nine times, respectively, in 2007. Director attendance at all Board of Directors and committee meetings in 2007 was in excess of 94%. Each director attended at least 78% of the total number of meetings of the Board of Directors and its committees on which he or she served in 2007.

 

Our independent directors have regularly scheduled meetings at which only they are present. Our independent directors met four times in 2007. Pursuant to our Corporate Governance Principles, the chairman of our Nominating and Corporate Governance Committee or another independent director selected by a majority of the independent directors presides at these meetings.

 

Our directors are encouraged to attend our annual meeting of stockholders absent exceptional cause. In 2007, seven directors attended the annual meeting of stockholders.

 

Our Board of Directors delegates certain of its functions to its standing Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Information regarding the responsibilities of these committees and their members is provided below.

 

Audit Committee.   The Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. In this role, the Audit Committee monitors and oversees the integrity of our financial statements and related disclosures, the qualifications, independence, and performance of our independent auditor, the performance of our internal auditing function, and our compliance with applicable legal requirements and our business conduct policies. The Audit Committee has a written charter, which was revised by the Board of Directors on April 21, 2005. A copy of the charter is posted on our website at http://www.wmt.com/Corporate/AuditCommitteeCharterReviseApril212005.pdf . The information on our website, however, is not a part of this Proxy Statement. The Audit Committee is composed of three directors who are appointed by the Board of Directors. The members of the Audit Committee are Thomas E. Timbie (chairman), Martin J. Emerson, and Robert J. Quillinan, all of whom are independent as defined in Nasdaq’s listing standards and meet the independence criteria set forth in the SEC’s rules. Our Board of Directors has determined that each member of the Audit

Committee is an audit committee financial expert as defined in the SEC’s regulations. The report of the Audit Committee appears beginning on page 10 of this Proxy Statement.

 

Compensation Committee.   The Compensation Committee oversees our general programs of compensation and benefits for all employees and determines the compensation of our executive officers and directors. The Compensation Committee has a written charter, which was revised by the Board of Directors on October 23, 2006. A copy of the charter is posted on our website at http://www.wmt.com/Corporate/CompensationCommitteeCharter102306.pdf . The information on our website, however, is not a part of this Proxy Statement. The Compensation Committee is composed of three directors who are appointed by the Board of Directors. The members of the Compensation Committee are David D. Stevens (chairman), Martin J. Emerson, and Lawrence W. Hamilton, all of whom are independent as defined in Nasdaq’s listing standards and meet the independence criteria set forth in the SEC’s rules. Beverly A. Huss, our former director who did not stand for reelection at the 2007 Annual Meeting of Stockholders, was independent as defined in Nasdaq’s listing standards, met the independence criteria set forth in the SEC’s rules, and was also a member of the Compensation Committee during 2007. The report of the Compensation Committee appears beginning on page 11 of this Proxy Statement.

 

Nominating and Corporate Governance Committee.   The Nominating and Corporate Governance Committee oversees our corporate governance processes. In this role, the Nominating and Corporate Governance Committee identifies and recommends individuals qualified to become members of the Board of Directors, makes recommendations regarding the establishment and membership of the Board of Directors’ committees, develops and reviews corporate governance principles applicable to us, and leads the annual review of the performance of the Board of Directors and its committees. The Nominating and Corporate Governance Committee has a written charter, which was revised by the Board of Directors on February 27, 2007. A copy of the charter is posted on our website at http://www.wmt.com/Corporate/CorporateGovernanceCommitteeCharterReviewv5.pdf . The information on our website, however, is not a part of this Proxy Statement. The Nominating and Corporate Governance Committee is composed of three directors who are appointed by the Board of Directors. The members of the Nominating and Corporate Governance Committee are John L. Miclot (chairman), Lawrence W. Hamilton, and Thomas E. Timbie, all of whom are independent as defined in Nasdaq’s listing standards and meet the independence criteria set forth in the SEC’s rules. Beverly A. Huss, our former director who did not stand for reelection at the 2007 Annual Meeting of Stockholders, was independent as defined in Nasdaq’s listing standards, met the independence criteria set forth in the SEC’s rules, and was also a member of the Nominating and Corporate Governance Committee during 2007.

 

The Board of Directors will consider all potential candidates for nomination by the Board of Directors for election as directors who are recommended by our stockholders, directors, officers, and employees. All director recommendations must be made in accordance with the provisions of Article II, Section 5 of our bylaws, which sets forth requirements concerning the information about the candidate to be provided and the timing for the submission of the recommendations. All director recommendations should be sent to the Nominating and Corporate Governance Committee, c/o Corporate Secretary, Wright Medical Group, Inc., 5677 Airline Road, Arlington, Tennessee 38002. The Nominating and Corporate Governance Committee will screen all potential director candidates in the same manner, regardless of the source of their recommendation. The Nominating and Corporate Governance Committee’s review typically will be based on the written materials provided with respect to a potential director candidate. The Nominating and Corporate Governance Committee will evaluate and determine whether a potential candidate meets our minimum qualifications and specific qualities and skills for directors and whether requesting additional information or an interview is appropriate.

 

The Board of Directors has adopted the following series of minimum qualifications and specific qualities and skills for our directors, which will serve as the basis upon which potential director candidates are evaluated by the Nominating and Corporate Governance Committee:

 

 

 

In making our determinations regarding director nominees, the Board of Directors will consider whether a potential candidate has previously served as our director. The Board of Directors does not believe, however, that directors should expect to be automatically renominated on an annual basis. Instead, the annual self-assessment of the performance of the Board of Directors and its committees is an important determinant of director tenure.

 

In furtherance of our goal of providing effective governance of our business and affairs for the long-term benefit of our stockholders, the Board of Directors has approved and adopted Corporate Governance Principles. The Corporate Governance Principles are posted on our website at http://www.wmt.com/Corporate/CorporateGovernancePrinciplesv4a.pdf . The information on our website, however, is not a part of this Proxy Statement. In addition to other matters, our Corporate Governance Principles require that any director up for election at our annual meeting of stockholders, who fails to receive at least a majority of the votes cast for election, shall offer to resign from the Board of Directors. The Nominating and Corporate Governance Committee then makes a recommendation to the Board of Directors whether to accept, reject, or take other action regarding the offered resignation. The Board of Directors must review the recommendation of the Nominating and Corporate Governance Committee and act promptly to accept, reject, or take other action it deems appropriate under the circumstances. The affected director does not take part in the deliberations or actions of the Nominating and Corporate Governance Committee or the Board of Directors in this matter.

 

The Board of Directors has adopted a written Related Persons Transactions Policy (the Policy) for monitoring, reviewing, approving and ratifying transactions with related persons. The Policy applies to all financial transactions, arrangements, or relationships or any series of similar transactions, arrangements or relationships in which we were, are or will be a participant and in which a related person had or will have a direct or indirect material interest.

 

Transactions that are subject to the Policy must be approved by the Audit Committee. The Audit Committee is authorized to approve those transactions with related persons that are in, or are not inconsistent with, our best interests and our stockholders’ best interests and that are consistent with our Code of Business Conduct. The Audit Committee chairman, acting alone, may approve those transactions with related persons that meet the foregoing criteria and that are valued at $25,000 or less. All approvals made by the Audit Committee chairman are required to be reported to the entire Audit Committee at the next available opportunity.

 

The Audit Committee or its chairman will consider all relevant factors, including as applicable, (i) the benefits of the transaction to us, (ii) whether the transaction is material to us, (iii) the effect, if any, of the transaction on a director’s independence in the event the related person is a director or an immediate family member or affiliate of a director, (iv) the availability of other sources for comparable products or services, (v) the terms of the transaction

and whether they are fair and reasonable to us, (vi) the terms available to or from unrelated third parties or to employees generally, (vii) the role of the related person in arranging the transaction, (viii) the interests of the related person, and (ix) whether the potential transaction with a related person is consistent with our Code of Business Conduct. The Audit Committee will annually review and consider any previously approved or ratified transaction with a related person that remains ongoing to determine whether the transaction requires additional or continuing approval if conditions should be imposed with response to the transaction.

 

We are not currently and have not been engaged in any transactions with related persons since January 1, 2007.

 

Stockholders may communicate with the Board of Directors or any individual director regarding any matter relating to us that is within the responsibilities of the Board of Directors. Stockholders, when acting solely in such capacity, should send their communications to the Board of Directors or an individual director c/o Corporate Secretary, Wright Medical Group, Inc., 5677 Airline Road, Arlington, Tennessee 38002. The Corporate Secretary will discuss with the Executive Chairman of the Board or the individual director whether the subject matter of a stockholder communication is within the responsibilities of the Board of Directors. The Corporate Secretary will forward a stockholder communication to the Executive Chairman of the Board or the individual director if such person determines that the communication meets this standard.

Audit Committee Report

 

Management is responsible for our accounting and financial reporting processes, including our internal control over financial reporting, and for preparing our consolidated financial statements. KPMG LLP (KPMG), our independent auditor, is responsible for performing an audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and for expressing an opinion on the conformity of our audited consolidated financial statements to accounting principles generally accepted in the United States of America. In this context, the responsibility of the Audit Committee of the Board of Directors is to oversee our accounting and financial reporting processes and the audits of our consolidated financial statements.

 

In the performance of its oversight function, the Audit Committee reviewed and discussed with management and KPMG our audited consolidated financial statements as of and for the year ended December 31, 2007, and management’s assessment of our internal control over financial reporting. Management and KPMG represented to the Audit Committee that our audited consolidated financial statements as of and for the year ended December 31, 2007, were prepared in accordance with accounting principles generally accepted in the United States of America. Management and KPMG also represented to the Audit Committee that our internal control over financial reporting were effective as of December 31, 2007. The Audit Committee also discussed with KPMG the matters required to be discussed by Statement on Auditing Standards (SAS) Nos. 89, 90 and 114 issued by the Auditing Standards Board of the American Institute of Certified Public Accountants. SAS Nos. 89, 90 and 114 set forth requirements pertaining to the independent auditor’s communications with the Audit Committee regarding the conduct of the audit.

 

The Audit Committee received the written disclosures and the letter from KPMG required by Independence Standards Board (ISB) Standard No. 1, Independence Discussions with Audit Committees , as amended. ISB Standard No. 1 requires the independent auditor to disclose in writing to the Audit Committee all relationships between the auditor and us that, in the auditor’s judgment, reasonably may be thought to bear on independence and to discuss the auditor’s independence with the Audit Committee. The Audit Committee discussed with KPMG its independence and considered in advance whether the provision of any non-audit services by KPMG is compatible with maintaining their independence.

 

The members of the Audit Committee are not professionally engaged in the practice of accounting or auditing and, therefore, rely without independent verification on the information provided to them and on the representations made by management and KPMG. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting processes or appropriate internal controls and procedures designed to assure compliance with the accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s reviews and discussions referred to above do

not assure that the audit of our financial statements has been carried out in accordance with the standards of the Public Company Accounting Oversight Board, that our audited consolidated financial statements are presented in accordance with generally accepted accounting principles, or that KPMG is in fact independent.

 

Based on the reviews and discussions of the Audit Committee described above, in reliance on the unqualified opinion of KPMG dated February 26, 2008, regarding our audited consolidated financial statements as of and for the year ended December 31, 2007, and subject to the limitations on the responsibilities of the Audit Committee discussed above and in the Audit Committee’s charter, the Audit Committee recommended to the Board of Directors, and the Board of Directors approved, that such financial statements be included in our annual report on Form 10-K for the year ended December 31, 2007, to be filed with the SEC.

 

* * *

 

The foregoing report is provided by the members of the Audit Committee of the Board of Directors.

 

Thomas E. Timbie (chairman)

Martin J. Emerson

Robert J. Quillinan

Compensation Committee Report

 

The Compensation Committee of the Board of Directors has the primary authority for determining our compensation philosophy and establishing compensation for our executive officers. The Compensation Committee sets performance goals and objectives for the President and Chief Executive Officer (CEO) and the other executive officers, evaluates their performance with respect to those goals and sets their compensation based upon the evaluation of their performance. In evaluating executive officer compensation, the Compensation Committee considers recommendations from our CEO with respect to goals and compensation of the other executive officers and assesses the information that it receives. The Compensation Committee recommends the compensation of the CEO for approval by the independent directors of the Board of Directors. The Compensation Committee also periodically reviews director compensation. From time to time we may engage consultants with specific expertise related to executive officer or director compensation and benefits. All decisions with respect to executive officer and director compensation are approved by the Compensation Committee.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis for the year ended December 31, 2007 with management. In reliance upon the reviews and discussions referred to above, the Compensation Committee recommended to the Board of Directors, and the Board of Directors has approved, that the following Compensation Discussion and Analysis be included in the Proxy Statement for the year ended December 31, 2007 to be filed with the SEC.

 

* * *

 

The foregoing report is provided by the members of the Compensation Committee of the Board of Directors. Beverly A. Huss, our former director who did not stand for reelection at the 2007 Annual Meeting of Stockholders, was also a member of the Compensation Committee during 2007.

 

David D. Stevens (chairman)

Martin J. Emerson

Lawrence W. Hamilton

 

In the following Compensation Discussion and Analysis, we describe the material elements of compensation awarded to our chief executive officer, our chief financial officer and our three other most highly compensated executive officers during 2007. We focus primarily on the 2007 information contained in the tables and related footnotes and narrative under the heading “Executive Compensation” below, but also describe compensation actions taken during other periods to the extent it enhances the understanding of our executive compensation disclosure for 2007. In this discussion, we refer to each “named executive officer” identified in the tables as an “executive officer.”

General Philosophy.   We compensate our executive officers through a mix of base salary, performance incentive bonuses, long-term equity incentives, and employee benefits and perquisites designed to:

 

 

We believe that a portion of our executive officers’ compensation potential on an annual basis should be at risk based on our performance. If our performance does not meet the criteria established by the Compensation Committee, incentive compensation will be adjusted accordingly. The Compensation Committee oversees our general programs of compensation and benefits for all employees and determines the compensation of our executive officers and directors. Our compensation setting process consists of establishing (i) a base salary, (ii) a performance incentive bonus, and (iii) long-term equity compensation for each executive officer. The Compensation Committee designs the performance incentive bonus to reward executive officers for our performance through linking their compensation to revenue and earnings growth targets, as well as certain other corporate objectives. Additionally, certain of our executive officers’ performance incentive bonuses are also based upon achieving specific operational goals within areas under their control.

 

The total cash compensation ( i.e. , base salary plus performance incentive bonus) paid to our executive officers is intended to be competitive with the total cash compensation paid to executive officers in similar positions at companies engaged primarily in the orthopaedic medical device industry with revenues similar to ours, as well as comparable to other companies with performance similar to ours. The Compensation Committee reviews the targeted total compensation ( i.e. , the aggregate level of compensation that we will pay if performance goals are fully met) to ensure the total compensation is aligned with our goals of comparability and incentivizing performance. We also provide our executive officers with a variety of other benefits that we make available generally to all salaried employees.

 

The Role of the Compensation Committee.   The Compensation Committee has the primary authority to determine our compensation philosophy and to establish compensation for our executive officers. In determining the appropriate level of compensation, the Compensation Committee reviews a variety of sources to determine and set compensation.

 

The Compensation Committee reviews the performance and compensation for our CEO annually and recommends the compensation level for approval by the independent directors of the Board of Directors. The performance of our executive management team as a group is reviewed annually by the Compensation Committee.

 

Our CEO assists the Compensation Committee by providing annual recommendations regarding the compensation of all other executive officers. Each executive officer participates in annual performance reviews with the CEO to provide input about their contributions to our success for the period being assessed. With respect to equity compensation awarded to all other executive officers, the Compensation Committee grants options and/or restricted stock, generally based upon the recommendation of the CEO, and a comparison of our peer group companies.

 

The Compensation Committee also has the power and authority to hire outside advisors or consultants to assist the Compensation Committee in fulfilling its responsibilities. In 2007, the Compensation Committee hired Watson Wyatt Worldwide, Inc. to review the current compensation offered to our executive officers, benchmark it against the industry and our peers, and offer suggestions.

 

Total Compensation.   The total compensation package offered to each named executive officer is comprised of four elements, which are described in more detail below:

 

 

To determine whether our executive compensation is comparable to our competitors and other companies with performance similar to ours, the Compensation Committee compares the compensation of executive officers at similar companies, taking into consideration the company’s size, industry, and geographic locality, as well as the comparable named executive officer’s level of responsibility and years of experience. The criteria used to select companies similar to us include companies: (1) in the medical equipment and device industry; (2) with revenues between $200 million and $700 million; (3) whose current enterprise market value is between $500 million and $2.1 billion, with one exception; and (4) whose number of employees is between 300 and 3,500. These companies are considered comparable to us and generally recruit individuals to fill executive positions that have similar skills and background to those we recruit. The list of such companies included the following (with us listed simply to show our relative position among the peer companies) based on information available at the time of the compensation review:

 

 

We can review in detail only those individuals for whom compensation information is publicly disclosed. This is typically only the five most highly compensated officers at each company. Generally, this correlates to our CEO, Executive Vice President and Chief Financial Officer (CFO), and certain other executive officers. The Compensation Committee has the authority to engage consultants with specific expertise related to executive officer or director compensation and benefits.

 

The overall result of this review provides the starting point for the analysis of the Compensation Committee. The Compensation Committee looks more extensively at a number of other factors, including the total compensation, the median, mean, minimum, and maximum for each executive officer position. The Compensation Committee strongly believes in retaining the best talent among our executive management team. In the case of our CEO, the Compensation Committee also considered our performance since he began working for us, and the anticipated level of difficulty of replacing him with someone of comparable experience and skill.

 

The Compensation Committee believes that the compensation of our executive officers — those having the greatest ability to influence our performance — should include greater levels of performance-based incentive compensation, while other levels of management should receive a greater portion of their compensation in base salary. The Compensation Committee’s review of the comparable companies chosen, although each had a different compensation structure, indicated that all appear to provide their executive officers with median base salaries of approximately 20% to 40% of overall compensation, median targeted bonus compensation of up to 18% of overall compensation and median equity compensation of approximately 35% to 65% of overall compensation.

We have entered into employment agreements with four of our named executive officers — Gary D. Henley, John K. Bakewell, F. Barry Bays, and Paul R. Kosters. The terms of the employment agreements began and will end on the dates shown below, subject to earlier termination under specified circumstances.

 

 

 

 

Effective April 5, 2007, Mr. Roberts left his position as Senior Vice President and Chief Technology Officer. In connection with his departure, we entered into a severance agreement with Mr. Roberts, which is discussed further below under “Severance Benefits.”

 

We have not entered into an employment agreement with Mr. Stookey.

 

Base Salaries.   We want to provide our executive officers with a level of assured cash compensation in the form of base salary to compensate them for the services they provide and their level of professional experience and knowledge. The Compensation Committee considers the input of the CEO with respect to the base salaries of our other executive officers. The Compensation Committee reviews executive officer compensation annually. In establishing base salaries, the Compensation Committee seeks relevant compensation information including: (1) scope of the position; (2) responsibilities of the position; (3) experience and length of service with our Company, the industry, and the community; (4) effort and performance; (5) team building skills; (6) observance of our ethics and compliance programs; (7) salaries paid by competitive companies to officers in similar positions; and (8) base salaries paid to our other executive officers. Increases in base salary from year to year are based upon the performance of the executive officers, as well as market positioning considerations, as assessed by the CEO and reviewed and approved by the Compensation Committee. The Compensation Committee assesses these factors with respect to the CEO. The Compensation Committee recommends the compensation of the CEO for approval by the independent directors of the Board of Directors. The Compensation Committee estimates that the salary levels of our executive officers approximate the 25th percentile of the salary levels in effect for comparable executive officer positions at companies in our peer group. It is the Compensation Committee’s goal that the “total compensation” levels of our executive officers (cash compensation plus the value of restricted shares) range between the 50th and 75th percentile of the “total compensation” levels in effect for comparable executive officers positions at our peer group companies. The Compensation Committee estimates that the “total compensation” levels of our executive officers approximate the 50th percentile for comparable executive officer positions at companies in our peer group. Our executive officers have a significant level of valuable industry specific knowledge and experience. We believe they are a key factor in our future success.

Employment agreements establish the initial annual base salary of certain of our named executive officers, with the exception of Messrs. Roberts and Stookey, and provide that the Compensation Committee will review compensation annually and may make such increases in base salary as are merited based on the named executive officer’s performance and are consistent with our compensation policies. The base salaries of our named executive officers are set forth below.

 

 

 

 

These salaries reflect levels that the Compensation Committee concluded were appropriate based upon the executive officers’ general experiences and the review of comparable salaries at comparable companies.

 

Performance Incentive Bonus.

 

Executive Performance Incentive Plan.   We implemented an Executive Performance Incentive Plan (the Bonus Plan) for all of our United States of America-based officers, including named executive officers, in 2005. The Bonus Plan, which is administered by the Compensation Committee, provides that each year the Compensation Committee will establish a method for determining the total amount of performance incentive bonuses available to be paid to all officers under the Bonus Plan (Bonus Pool). The Bonus Pool is established based upon specific measures of our financial performance, which may include sales, operating income, pre-tax income, net income, and earnings per share. For 2007, the Bonus Pool was established based upon our performance relative to a specific operating income target. One of our objectives is to consistently achieve market leading revenue growth while achieving operating income growth in excess of that revenue growth. Specifically, the Compensation Committee established objectives of revenue growth ranging from 15% to 20% and earnings growth in excess of the revenue growth. The Bonus Plan also provides for the Compensation Committee to establish individual performance goals, which include financial and operational performance measures for each executive officer based upon his or her responsibility. After the end of each quarter, the Compensation Committee determines the amount of the performance incentive bonus for each executive officer by multiplying such executive officer’s percentage achievement of his or her individual performance goals by their allocable portion of the Bonus Pool. The Compensation Committee, in its sole and absolute discretion, may determine that the amount of an executive officer’s actual performance incentive bonus is less than or more than the amount earned by the officer under the Bonus Plan. The amount of the performance incentive bonus payable to an executive officer may vary from zero to 200% of his or her annual target.

 

The Compensation Committee established the following targeted bonus levels for our executive officers:

 

 

Our performance goals are not calculated using generally accepted accounting principles (GAAP) measures. Instead, our performance goals are calculated using non-GAAP measures as more fully described in our Form 8-Ks

that are filed in connection with our quarterly earnings releases. For the year ended December 31, 2007, our non-GAAP financial measures did not include: restructuring expenses, non-cash, stock-based compensation expenses, an unfavorable arbitration ruling, non-cash inventory step-up amortization, and the income tax effects of the foregoing.

 

Our executive officers have performance goals for their bonuses based upon corporate objectives which are described in the table below. All of our executive officers’ objectives are based upon global objectives, and certain of our executive officers’ objectives also include operational objectives associated with their respective areas of responsibility. Where an executive officer has responsibility for a particular business unit or division, the performance goals are heavily weighted toward the performance of those units. However, our overall earnings performance is at least a 40% factor in all management performance goals.

 

 

 

 

As our business is highly capital intensive and requires large investments in inventory, we believe that establishing a DOH objective would ensure the appropriate communication and teamwork to ultimately achieve those revenue objectives. As DSO is a product of not just company performance and management decisions, but also market factors outside the control of our executive officers, we concluded that this performance should be given less weight than operating income or revenue growth.

 

Our executive officers’ bonus objectives for 2008 include the following global objectives:

 

 

Our executive officers will earn 100% of their targeted bonuses if our operating income growth, EPS growth and revenue growth objectives noted above are met, and DOH and DSO targets and other operational objectives are also reached. Our executive officers can receive 200% of their targeted bonus if the rates of operating income growth, EPS growth, and revenue growth exceed 79%, 51%, and 27%, respectively. The operating income growth target must be met for the executive officers to receive their targeted performance incentive bonus. Under-achievement of the operating income growth target would result in a reduced performance incentive bonus. Failure to achieve the threshold operating income target could result in no performance incentive bonus. Additionally, the executive officers will receive bonuses at prorated levels if the operating income growth target is achieved but the other targets are not met. These percentages were selected because of their correlation at the 100% level, to our strategic plan, and at the 200% level, to a level that we subjectively concluded was an appropriate “stretch” goal.

The performance incentive bonus paid under the Bonus Plan for 2007 to each named executive officer is set forth below. Additionally, for 2007, the Compensation Committee authorized the discretionary payment of performance incentive bonuses under the Bonus Plan, which are set forth below for each named executive officer.

 

 

The Compensation Committee approved the payment of a discretionary bonus of approximately 24% of each executive officers’ target based, in part, upon the over-achievement of certain of our corporate earnings objectives during 2007, as well as the accomplishment of certain initiatives including the acquisition and integration of three businesses acquired and the issuance of $200 million of convertible senior notes.

 

EMEA Corporate Management Incentive Plan.   We implemented the EMEA Corporate Management Incentive Plan (the EMEA Bonus Plan) for our European corporate employees, including Paul R. Kosters, President, Europe, Middle East, and Africa, in 2006. The EMEA Bonus Plan, which is administered by the Compensation Committee, provides that each year the Compensation Committee establishes a method for determining the total amount of performance incentive bonuses available to be paid under the EMEA Bonus Plan (EMEA Bonus Pool). The EMEA Bonus Pool is established based upon specific measures of our financial performance in Europe, the Middle East, and Africa (EMEA), which may include sales, operating income, pre-tax income, and net income. For 2007, the bonus pool was established based upon performance relative to a specific operating income target. The Compensation Committee selected this specific operating income target to align EMEA executive officers’ objectives with the interests of our stockholders. The EMEA Bonus Plan also provides for the Compensation Committee to establish individual performance goals, which include financial and operational performance measures for Mr. Kosters based upon his responsibility. After the end of each quarter, the Compensation Committee determines the amount of the performance incentive bonus to be paid to Mr. Kosters by multiplying the percentage achievement of his individual performance goals by his allocable portion of the EMEA Bonus Pool. The Compensation Committee, in its sole and absolute discretion, may determine that the amount of his actual performance incentive bonus is less than or more than the amount earned under the EMEA Bonus Plan.

 

The Compensation Committee established the following targeted bonus levels for Mr. Kosters:

 

 

Mr. Kosters’ performance goals for his bonus are based upon operational objectives, which are described in the table below.

 

 

As our business is highly capital intensive and requires large investments in inventory, we believe that establishing an EDOH objective would ensure the appropriate communication and teamwork to ultimately achieve those revenue objectives. As EDSO is a product of not just company performance and management decisions within EMEA, but also market factors outside the control of our EMEA executive officers, we concluded that this performance should be given less weight than operating income or revenue growth.

Mr. Kosters’ performance incentive bonus objectives for 2008 include EMEA revenue growth of 20% and an EMEA operating income growth of approximately 400 basis points. Mr. Kosters will earn 100% of his targeted bonus if EMEA operating income growth and EMEA revenue growth objectives noted above are met, as well as EDOH and EDSO targets for the EMEA region. He can receive 200% of his targeted bonus if the rates of EMEA operating income growth and EMEA revenue growth exceed 670 basis points and 28%, respectively. The EMEA operating income growth target must be met for Mr. Kosters to receive his target performance incentive bonus. Under-achievement of the EMEA operating income growth target would result in a reduced performance incentive bonus. Failure to achieve the threshold operating income target could result in no performance incentive bonus. Additionally, Mr. Kosters will receive his bonus at a prorated level if the operating income growth target is achieved but the other targets are not met. These percentages were selected because of their correlation at the 100% level to our strategic plan, and at the 200% level to a level that we subjectively concluded was an appropriate “stretch” goal.

 

For 2007, we paid Mr. Kosters a performance incentive bonus of $27,913. Mr. Kosters’ compensation is paid in Euros. The exchange rate used to determine the U.S. Dollar equivalent of his compensation was 1.3708 U.S. Dollars per Euro.

 

Long-Term Equity Incentive Awards.   We may grant long-term, equity-based incentive awards to our named executive officers under our 1999 Equity Incentive Plan, as amended and restated (1999 Equity Incentive Plan). Under the 1999 Equity Incentive Plan, which is administered by the Compensation Committee, we may grant awards in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, phantom stock units, performance share units, and stock bonuses. Based on an assessment of competitive factors, the Compensation Committee determines an award that is suitable for providing an adequate incentive for the performance and retention of each named executive officer.

 

The Compensation Committee’s prevailing practice has been to award stock options in order to closely align the interests of the named executive officers with those of our stockholders. To encourage retention, the stock options may be granted with a vesting period of one or more years. The Compensation Committee has taken the position that stock options should be granted with an exercise price that is equal to the fair market value of the common stock on the grant date, which is calculated as the average of the highest and lowest reported sale prices on the trading day immediately prior to the grant date. The actual value of stock option compensation, therefore, depends on the market value of the common stock increasing after the grant date.

 

Beginning in 2006, the accounting treatment for stock options changed as a result of Statement of Financial Account Standards No. 123(R), making the accounting treatment of stock options less attractive. As a result, the Compensation Committee assessed the desirability of granting shares of restricted stock to employees, particularly our named executive officers, and concluded that restricted stock would provide an equally motivating form of incentive compensation while permitting us to issue fewer shares, thereby reducing potential dilution. The Compensation Committee may still award a limited number of stock options to foreign employees (because of foreign tax law considerations), to named executive officers upon starting employment, and in other special situations. However, beginning January 2007, the primary form of equity compensation has been the issuance of shares of restricted stock. The restricted stock will generally vest in equal annual installments over four years. In the future, we many issue other forms of equity compensation allowed under the 1999 Equity Incentive Plan upon approval by the Compensation Committee.

 

Guidelines for the number of stock options and restricted stock awards granted to each executive officer are determined using a procedure approved by the Compensation Committee based upon several factors, including the executive officer’s level of responsibility, salary grade, performance, and the value of the stock at the time of grant. We determine the fair market value based upon the average of the high and the low price of the stock on the day prior to the grant date. With the exception of promotions and new hires, we generally grant these awards effective as of the date of our annual meeting of stockholders. This timing was selected because it enabled us to consider our prior performance as well as that of the potential recipients, and our expectations for the current year. Also, it follows our annual performance evaluations. The awards also are made as early as practicable in the year in order to optimize the time-period for the incentives associated with the awards. The Compensation Committee’s schedule is determined several months in advance, and the proximity of any awards to earnings announcements or other market events is coincidental.

The benchmark for these grants is the median level of annual stock option grants and restricted stock awards for similar positions at our peer group companies, adjusted using the above factors and taking into consideration such equivalency factors as our number of shares outstanding and market capitalization, compared to the peer group companies.

 

Each stock option allows the executive officer to acquire shares of common stock at the market price on the grant date over a specified period of time, up to ten years. Stock option awards will provide a return to the executive officer only if the market price of the shares appreciates over the term of the award. Each restricted stock award allows the executive officer to acquire shares of common stock upon vesting. Restricted stock will provide a return to the executive officer upon vesting.

 

The long-term equity incentive awards granted in 2007 to each of our named executive officers is set forth below.

 

 

Other Elements of Compensation and Perquisites.   In order to attract and retain employees while paying market levels of compensation, we provide our executive officers the following benefits and perks.

 

Medical Insurance.   We provide to each executive officer and the executive officer’s spouse and children such health, dental, and vision insurance coverage as we may from time to time make available to our other employees. We pay a portion of the premiums for this insurance for all employees.

 

Life and Disability Insurance.   We provide to each executive officer such life and/or disability insurance, as we, in our sole discretion, may from time to time make available to our other executive employees of the same level of employment.

 

Housing Allowance & Relocation Costs.   In order to attract and retain management talent, we provide relocation benefits, including a housing allowance, to certain executive officers upon their employment with us. The allowance is intended to partially defray the additional cost of housing while the employee relocates.

 

Defined Contribution Plan.   We, and our designated affiliates, offer the Section 401(k) Savings/Retirement Plan (401(k) Plan), a tax-qualified retirement plan, to our eligible employees. The 401(k) Plan permits eligible employees to defer from 1% to 100% of their annual eligible compensation, subject to certain limitations imposed by the Internal Revenue Code. The employees’ elective deferrals are immediately vested and non-forfeitable in the 401(k) Plan. We currently match up to 4% of contributions to the 401(k) Plan. For our EMEA executive officer, we sponsor a defined contribution program in which we contribute up to 12% of employees’ eligible compensation.

 

Stock Purchase Plan.   Our 2002 Employee Stock Purchase Plan (ESPP), which qualifies under Section 423 of the Internal Revenue Code, permits participants to purchase our common stock on favorable terms. ESPP participants are granted a purchase right to acquire shares of common stock at a price that is 85% of the stock price on either the first day of the plan period or the stock price on the last day of the plan period, whichever is lower. The purchase dates occur on the last business day of June and December of each year. To pay for the shares, each participant may authorize periodic payroll deductions from their cash compensation, subject to certain limitations imposed by the Internal Revenue Code. All payroll deductions collected from the participant in a period are automatically applied to the purchase of common stock on that period’s purchase date provided the participant remains an eligible employee and has not withdrawn from the ESPP prior to that date. Our ESPP is available to U.S. employees only.

Other.   We make available certain other perquisites or fringe benefits to certain executive officers, such as a car allowance or use of a company-provided automobile, travel insurance, airline club dues, professional society dues and food, and recreational fees incidental to official company functions, including board meetings.

 

Severance Benefits.   We believe that companies should provide their executive officers with reasonable severance benefits, which should reflect the fact that it may be difficult for them to find comparable employment within a short period of time. In the event of the termination of our executive officers’ employment, the post-employment pay and benefits, if any, to be received by the executive officers will vary according to the basis for their termination. The following benefits are provided in our U.S.-based executive officers’ employment agreements:

 

 

The definition of “cause” will be deemed to exist (i) where the individual has intentionally failed to perform his responsibilities (ii) upon the death of the individual, (iii) where the individual has engaged in conduct materially injurious to us, (iv) where the individual has been convicted of a felony, crime involving moral turpitude, or (v) where the individual has violated their non-competition or confidentiality obligations.

 

While it is possible to provide salary continuation to an executive officer during the job search process, which in some cases may be less expensive than a lump-sum severance payment, we prefer to pay in accordance with our customary payroll practice but with a final payment not later than March 15 of the year following the year in which the termination occurred. This may result in a lump-sum severance payment just prior to March 15 for tax reasons.

 

If we terminate Mr. Kosters’ employment for any reason, we are obligated to provide a notice period of six months, and we are required to continue to provide all aspects of Mr. Kosters’ compensation over such period.

 

Additionally, if we terminate the executive officer’s employment without cause, all unexercised options with grant dates on or after March 1, 2004, will immediately vest.

 

In each case, the executive officer’s right to receive post-employment pay and benefits is subject to his compliance with the non-competition and non-interference covenants contained in their respective employment agreements.

 

Effective April 5, 2007, we entered into a severance agreement with Jeffrey G. Roberts, our former Senior Vice President and Chief Technology Officer. Under the agreement, in exchange for certain releases and covenants by Mr. Roberts, we agreed to provide him with severance consisting of (a) his base salary with respect to a period of 12 months after his resignation at his base salary on the resignation date, (b) the base salary equivalent of his earned and unused vacation for 2007, (c) paid continuation coverage under our group medical, dental and vision insurance plans for a period of 12 months after his resignation, (d) professional outplacement services, and (e) $200 to be applied to his legal costs for review of the agreement.

 

Change in Control Benefits.   Our executive officers and other employees have built us into the successful enterprise that we are today, and the Compensation Committee believes that it is important to protect them in the

event of a change in control. Further, it is our belief that the interests of stockholders will be best served if the interests of our executive officers are aligned with them, and providing change in control benefits should at least reduce the reluctance of executive officers to pursue potential change in control transactions that may be in the best interests of stockholders. Relative to our overall value, these potential change in control benefits are relatively minor. The cash components of any change in control benefits are paid as severance above is paid and are based upon a multiple of base salary of up to 24 months but not less than 12 months. These change in control benefits are “double trigger,” which requires (1) a change in control and (2) a termination without cause within 12 months of the expiration of their employment agreement before the executive officer receives their change in control benefit.

 

In the event of a change in control, we also continue health and other insurance benefits for between one and two years corresponding to termination benefits and immediately vest all equity compensation. In addition, terminated employees would be entitled to receive any benefits that they otherwise would have been entitled to receive under our 401(k) Plan. Additionally, upon a change in control, all unexercisable options will immediately vest and become exercisable and all restrictions on restricted stock will lapse. The Compensation Committee believes that these levels of benefits are consistent with the general practice among our peers, although we have not conducted a study to confirm this.

 

As a result of the so-called “parachute” tax imposed by Internal Revenue Code Section 280G, we have agreed to reimburse certain of our executive officers for any taxes imposed as a result of change in control benefits. This payment will be equal to an amount such that after the named executive officer timely pays this tax payment to the appropriate taxing authority(ies), their liability for all taxes would be the same as if this tax had not applied. This payment would not be deductible by us.

 

 

 

 

For purposes of these benefits, a change in control is deemed to occur, in general, if (a) a stockholder or group of stockholders acquires 50% or more of the total fair market value or the total voting power of our outstanding capital stock, or (b) a majority of the members of the Board of Directors are replaced in any twelve month period by directors whose election is not endorsed by a majority of the members of the Board of Directors prior to the date of the election.

 

Compensation of Chief Executive Officer.   Gary D. Henley was elected President and Chief Executive Officer on April 4, 2006. Mr. Henley has an employment agreement with us covering his services as our President and Chief Executive Officer. Pursuant to the agreement, we paid Mr. Henley a base salary of $416,250 for the year ended December 31, 2007. Mr. Henley also received a performance incentive bonus of $129,624 and a discretionary bonus of $74,906 under the Bonus Plan for 2007. In addition, on May 17, 2007, we granted Mr. Henley an option to purchase 50,000 shares of common stock under the 1999 Equity Incentive Plan and 22,500 shares of restricted stock. The exercise price of the stock option is $24.08 per share, which was the fair market value of the common stock on the grant date as determined under the 1999 Equity Incentive Plan. Both the stock option and the restricted stock will vest in equal annual installments over a period of four years after the grant date. The Compensation Committee considers that the compensation paid to Mr. Henley for 2007 was reasonable and appropriate under the circumstances.

Summary Compensation Information

 

The table below sets forth summary compensation information for each of the last two fiscal years for our principal executive, our principal financial officer, our three other most highly compensated executive officers who were serving in such capacities on December 31, 2007 and one former executive officer who is no longer serving in such capacity on December 31, 2007, who we refer to collectively as our named executive officers.

 

 

 

 

See Compensation Discussion and Analysis above for a complete description of compensation plans pursuant to which the amounts listed under the Summary Compensation Table were paid or awarded and the criteria for such payment.

 

All stock options vest and restricted stock awards vest upon a change in control, as defined in the 1999 Equity Incentive Plan.

All Other Compensation — Supplemental

 

The table below sets forth other compensation information during 2007 for our named executive officers.

 

 

 

Grants of Plan-Based Awards

 

The table below sets forth information concerning grants of plan based awards in 2007 to our named executive officers.

 

 

 

 

See Compensation Discussion and Analysis above for a complete description. All the stock options granted to the named executive officers were granted under the 1999 Equity Incentive Plan. The Compensation Committee, which administers the 1999 Equity Incentive Plan, has general authority to accelerate, extend, or otherwise modify the benefits under the stock options in certain circumstances within overall plan and other limitations. The Compensation Committee has no present intention to exercise that authority with respect to these stock options.

 

All stock options and restricted shares vest upon a change in control, as defined in the 1999 Equity Incentive Plan. All of the stock options and restricted shares granted to our named executive officers in 2007 vest in 25% increments on the first through fourth anniversaries of the grant date.

Outstanding Equity Awards

 

The table below sets forth information regarding the outstanding equity awards held by our named executive officers at December 31, 2007.

 

 

 

Option Exercises and Stock Vested During 2007

 

The following table provides information on stock option exercises and vesting of restricted stock during 2007 for the named executive officers.

 

DIRECTOR COMPENSATION

 

We compensate our directors for their services as members of the Board of Directors and committees with a combination of annual retainers and stock options. Directors who are not employees are eligible to receive compensation for their services as directors, while directors who are our employees are ineligible to receive separate director compensation. The following table sets forth a summary of the compensation we paid to our non-employee directors in 2007: