UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

 

(RULE 14a-101)

 

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:

 

 

Manor Care, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manor Care, Inc.

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
and
PROXY STATEMENT

 

MEETING DATE
MAY 8, 2007

 

YOUR VOTE IS IMPORTANT!
Please vote your shares using one of the three alternatives
described on your proxy card with respect to each nominee for director.

 

Table of Contents

Notice of Annual Meeting of Stockholders
PROXY STATEMENT
ITEM 1 — ELECTION OF DIRECTORS
SECURITY OWNERSHIP OF CERTAIN MANAGEMENT AND BENEFICIAL OWNERS
AUDIT COMMITTEE DISCLOSURE
AUDIT COMMITTEE REPORT
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
COMPENSATION COMMITTEE REPORT
Summary Compensation Table
Grants of Plan-Based Awards for 2006
Outstanding Equity Awards at December 31, 2006
Option Exercises and Stock Vested for 2006
Pension Benefits at December 31, 2006
Nonqualified Deferred Compensation for 2006
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
COMPENSATION OF DIRECTORS
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
OTHER BUSINESS
GENERAL INFORMATION

 

Manor Care, Inc.

 

Notice of Annual Meeting of Stockholders
May 8, 2007

 

Manor Care, Inc. will hold its annual meeting of stockholders on Tuesday, May 8, 2007 at 2:00 p.m. in the auditorium of One SeaGate, Toledo, Ohio. At the meeting, we will:

 

 

Only stockholders of record at the close of business on March 16, 2007 will be entitled to notice of and to vote at this meeting.

 

By Order of the Board of Directors,

 

Richard A. Parr II

Secretary

 

April 6, 2007

 

***************

 

Whether or not you plan to attend the annual meeting of stockholders in person, please vote your shares using one of the three alternatives offered on your proxy card with respect to each nominee for director to ensure your representation and the presence of a quorum at the annual meeting. If you attend the meeting, you may vote your shares in person, even though you have previously voted by proxy.

 

MANOR CARE, INC.
333 N. Summit St.
Toledo, Ohio 43604

 

 

PROXY STATEMENT

 

This proxy statement and the accompanying proxy card are being mailed to our stockholders in connection with the solicitation of proxies by our Board of Directors for the 2007 annual meeting of stockholders to be held on Tuesday, May 8, 2007, beginning at 2:00 p.m., at One SeaGate, Toledo, Ohio, in the auditorium adjacent to the lobby, and any adjournment or postponement thereof. The mailing commenced on or about April 6, 2007.

 

What information does this document contain?

 

This proxy statement describes the items to be voted on by our stockholders at the annual meeting, the voting process, the compensation of our directors and most highly paid executive officers, and certain other required information. Accompanying this proxy statement is a proxy card, a copy of our 2006 Annual Report (which includes our 2006 Form 10-K), and a brochure with a letter from our Chairman, President and Chief Executive Officer and information about our company and the services we provide.

 

Who can vote?

 

You can vote if you were a stockholder at the close of business on the record date, March 16, 2007. We had 73,141,745 shares of common stock outstanding on March 16, 2007.

 

What am I voting on?

 

You are voting on:

 

 

How do I vote?

 

If you hold your shares directly in your own name, you are a “stockholder of record.” As a stockholder of record, you can vote in person at the meeting or you can vote by mail, by internet, or by telephone following the instructions on your proxy card. If you hold your shares indirectly in the name of a bank, broker, or other nominee, these proxy materials are being forwarded to you by your nominee with instructions describing how to vote your shares.

 

What is a “quorum?”

 

A quorum is the number of shares that must be present to have the annual meeting. The quorum requirement for the annual meeting is a majority of the outstanding shares as of the record date, present in person or represented by proxy. If you submit a valid proxy card or attend the annual meeting, your shares will be counted to determine whether there is a quorum. Abstentions and broker non-votes count toward the quorum. A “broker non-vote” occurs when a nominee (such as a bank or broker) holding shares for a beneficial owner does not have discretionary voting power and does not receive voting instructions from the beneficial owner before the meeting.

 

How are broker non-votes or abstentions counted in the voting results?

 

Although abstentions and broker non-votes count for quorum purposes, they do not count as votes for or against a proposal.

 

Can I change my vote after I return my proxy card?

 

Yes, you can revoke your proxy card by:

 

 

If you hold your shares indirectly in the name of a bank, broker, or other nominee, the revocation must be performed by your nominee by submitting a new proxy card or giving us written notice of the revocation.

 

Who counts the votes?

 

Our transfer agent, National City Bank, tabulates the votes and acts as inspector of the election.

 

Is my vote confidential?

 

Yes. All proxy cards and vote tabulations identifying individual stockholders are handled in a manner that protects your voting privacy.

 

How do I vote my 401(k) shares?

 

If you hold shares through the HCR Manor Care Stock Purchase and Retirement Savings 401(k) Plan, you will receive a separate proxy card which describes the three alternative methods for voting. Use one of these alternatives to instruct the plan trustee how to vote the shares allocated to your plan account. If you do not vote by one of these methods (or you submit an unclear voting designation or no voting designation at all), the plan trustee will vote the shares in your account the same way as the majority of the other plan participants voted their shares. Any revocation of your vote must be submitted to the plan trustee, and you are not entitled to vote your shares in person at the meeting. The common stock outstanding on the record date included 2,095,669 shares held by the plan trustee. The Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan trustee has the exclusive right to vote the shares held in this plan.

 

What vote is required to approve each item?

 

Election of Directors. Each director shall be elected by the vote of the majority of the votes cast with respect to the director. A majority of the votes cast means that, of the shares represented in person or by proxy and entitled to vote on the election of directors, the number of shares voted “for” a director must exceed the number of votes cast “against” that director. If you “withhold” authority to vote for all or certain nominees, your proxy will not be voted with respect to the nominee or nominees indicated, although it will be counted for purposes of determining whether there is a quorum.

 

Our Corporate Governance Guidelines provide that if a nominee for director (who is an incumbent director) does not receive a majority of the votes cast for that director, the director shall offer to tender his or her resignation to the Board. The Governance Committee will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Governance Committee’s recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of certification of the election results. The director who tenders his or her resignation will not participate in the Board’s decision. Each of the nominees for election this year has agreed to abide by such provisions.

 

Other Items. Approval of any other item requires the affirmative vote of a majority of the shares represented in person or by proxy and entitled to vote on the item.

 

Can I attend the meeting in person?

 

Yes. If you were a stockholder of record at the close of business on March 16, 2007, you or your designated proxy may attend the meeting. We may ask that you or your proxy present valid identification for admission.

 

ITEM 1 — ELECTION OF DIRECTORS

 

Item 1 is the election of nine directors to the Board of Directors for one-year terms. Prior to May 2004, our Board of Directors was divided into three classes. Directors held office for staggered terms of three years. One of the three classes was elected each year to succeed the directors whose terms were expiring. At our 2004 annual stockholders meeting, the stockholders approved an amendment to our Certificate of Incorporation which eliminated the classified board prospectively. Class I is the last remaining class of directors. The three-year terms of the current members of Class I, William H. Longfield and Paul A. Ormond, expire at the 2007 annual meeting. Upon the recommendation of our Governance Committee, each of these incumbent directors has been nominated by the Board of Directors to serve additional one-year terms. The one-year terms of Mary Taylor Behrens, Joseph F. Damico, John T. Schwieters, Richard C. Tuttle, Gail R. Wilensky, and Thomas L. Young, and the term of Stephen L. Guillard, who was elected in December 2006 to fill the vacancy created by the retirement of M. Keith Weikel, also expire at the 2007 annual meeting. Upon the recommendation of our Governance Committee, each of these other seven incumbent directors has also been nominated by the Board of Directors to serve additional one-year terms.

 

The Board of Directors expects all nominees named above to be available for election, and each has consented to be named as a nominee. The proxies will vote your shares to elect these nine nominees, unless you vote against a nominee or withhold the proxies’ authority to do so on the accompanying proxy card. In case any nominee is not available, the proxies can vote your shares for a substitute nominee designated by the Board of Directors, or the vacancy will be filled in accordance with our by-laws. Pursuant to our Corporate Governance Guidelines, each nominee has agreed to offer to submit his or her resignation from the Board in the event such nominee receives less than a majority of the votes cast in the election. A majority of the votes cast means that, of the shares represented in person or by proxy and entitled to vote on the election of directors, the number of shares voted “for” a director must exceed the number of votes cast “against” that director.

 

Information as to each nominee follows.

 

The Board of Directors unanimously recommends a vote FOR each nominee.

 

Nominees for Director: One-Year Term Expiring at the 2008 Annual Meeting of Stockholders

 

Mary Taylor Behrens, age 46, has been one of our directors since November 2004. From February 2003 until the present, Ms. Behrens has been engaged in private consulting and since November 2004 has been President, Newfane Advisors, Inc., a consulting firm. From February 1998 until January 2001, she was a Senior Vice President of Merrill Lynch & Co., serving as Head of Human Resources and a member of its Executive Committee. She served as Head or Co-Head of Merrill Lynch Investment Managers, Americas Region, from February 2001 until January 2003. Ms. Behrens is a member of our Compensation and Quality Committees.

 

Joseph F. Damico, age 53, has been one of our directors since February 2003. Mr. Damico is the founding partner of RoundTable Healthcare Partners, a position he has held since February 2001. He was Executive Vice President of Cardinal Health, Inc. from March 1999 to February 2001. Mr. Damico was President and Chief Operating Officer of Allegiance Corporation from October 1995 to February 1999. Mr. Damico is a member of our Compensation and Governance Committees. He is also a director of Wintrust Financial Corp.

 

Stephen L. Guillard, age 57, has been our Executive Vice President and Chief Operating Officer since January 2007 and one of our directors since December 2006. He was Executive Vice President from June 2005 to December 2006. From 1988 to May 2005, he was Chairman and Chief Executive Officer of Harborside Healthcare Corporation. He is a member of our Quality Committee.

 

William H. Longfield, age 68, has been one of our directors since September 1998. He served as a director of the former Manor Care, Inc., now one of our subsidiaries known as Manor Care of America, Inc., from 1989 to September 1998. He was Chairman and Chief Executive Officer of C.R. Bard, Inc. from

September 1995 until August 2003. Mr. Longfield is a member of our Compensation and Governance Committees. He is also a director of Applera Corporation; Horizon Healthcare Corporation; and West Pharmaceutical Services, Inc.

 

Paul A. Ormond, age 57, has been our President and Chief Executive Officer and a director since August 1991. He was Chairman of the Board from August 1991 until September 1998 and from September 2001 to the present. Mr. Ormond is also a director of National City Corporation.

 

John T. Schwieters, age 67, has been one of our directors since April 2000. Mr. Schwieters has been Vice Chairman of Perseus, LLC since March 2000. He was managing partner of Arthur Andersen’s Mid-Atlantic Market Circle from 1989 to March 2000. Mr. Schwieters is a member of our Audit and Quality Committees. He is also a director of Choice Hotels International; Danaher Corporation; Smithfield Foods, Inc.; and Union Street Acquisition Corp.

 

Richard C. Tuttle, age 51, has been one of our directors since November 2004. Mr. Tuttle is a founding principal of Prospect Partners, LLC, a private equity investment firm, a position he has held since 1998. He is a member of our Audit and Governance Committees.

 

Gail R. Wilensky, Ph.D., age 63, has been one of our directors since September 1998. Since January 1993, Ms. Wilensky has been a Senior Fellow at Project HOPE, a not-for-profit international health education foundation. She is a member of our Governance and Quality Committees. Ms. Wilensky is also a director of Cephalon, Inc.; Gentiva Health Services, Inc.; Quest Diagnostics Incorporated; SRA International; and United HealthCare Corporation.

 

Thomas L. Young, age 63, has been one of our directors since August 1991. He is President, Titus Holdings Ltd., a private investment company. Mr. Young was Executive Vice President and Chief Financial Officer of Owens-Illinois, Inc. from 2004 until his retirement in March 2005. He previously served Owens-Illinois as Co-Chief Executive Officer (2004) and Executive Vice President, Administration and General Counsel (1998-2004). He is a member of our Audit and Compensation Committees. Mr. Young is also a director of Franklin Electric Co., Inc. and Owens-Illinois, Inc.

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines

 

We have adopted a comprehensive set of Corporate Governance Guidelines, the current, printable full text of which may be found on our website at www.hcr-manorcare.com/investor/governanceguide.asp and is available in print to any stockholder upon request. Among other provisions, the Corporate Governance Guidelines provide for executive sessions of the non-management directors, chaired on a rotating basis by the chairs of the Board’s standing committees.

 

Independence of Directors

 

The Board of Directors has affirmatively determined that Ms. Behrens, Ms. Wilensky and Messrs. Damico, Longfield, Schwieters, Tuttle, and Young are independent directors within the meaning of the rules of the New York Stock Exchange, and with respect to members of our Audit Committee, also within the meaning of the applicable rules of the Securities and Exchange Commission. The Board has determined that none of the independent directors has a relationship with us other than as a director or a stockholder. In addition, the Board has determined that none of the independent directors falls within any of the categories listed in Section 303A.02(b) of the New York Stock Exchange Listed Company Manual that would otherwise preclude such directors from being considered independent. The independent directors comprise our non-management directors.

 

Nominations for Directors

 

The Governance Committee considers candidates for board membership suggested by committee members, other board members, stockholders, and management. A stockholder wishing to propose a nominee for our Board of Directors should submit a notice in writing to the company’s Secretary whose name and address appear in the last paragraph of this proxy statement, setting forth the following information for each person whom the stockholder proposes to nominate:

 

 

In addition, as to the stockholder giving notice and the beneficial owner, if any, on whose behalf the nomination is made, the following information should be provided:

 

 

The notice should comply with the timing requirements set forth in the last paragraph of this proxy statement.

 

After our Governance Committee has identified a prospective nominee, the Committee makes an initial determination whether to conduct a full evaluation of the candidate. This determination is based primarily on the need for additional board members to fill vacancies or expand the size of the Board and the likelihood that the individual will meet the minimum qualification of prior senior management or equivalent experience in an organization that is comparable to us in size, scope of services, and other operating characteristics. If the Committee determines that further consideration is warranted, it will undertake to gather additional information about the prospective nominee’s background, experience, and skills. The Committee will evaluate the nominee based on a variety of factors it deems appropriate which will include: (1) the skills, talent, and expertise of the nominee; (2) the ability of the nominee to devote sufficient time, energy, and attention to the diligent performance of his or her duties on the Board; (3) the independence of the nominee under applicable standards; (4) the nominee’s reputation for integrity and honesty; (5) the Board’s need for particular expertise, such as financial expertise for our Audit Committee; (6) diversity; and (7) similar factors. In making this evaluation, the Committee, through one or more of its members or other directors, may interview the candidate in person or by telephone. After completing this evaluation process, the Committee will make a report and recommendation to the Board regarding the nominee. The Board shall then determine the nominees after considering the report and recommendation of the Committee.

 

Communications with the Board

 

Stockholders and other interested parties who desire to communicate directly with our Board of Directors or with any non-management director may do so by directing correspondence to the company’s Secretary whose name and address appear in the last paragraph of this proxy statement. The Board has adopted a process for collecting and organizing communications from stockholders and other interested parties. Summaries of all correspondence will be forwarded periodically to the full Board along with copies of specific correspondence which deals with the functions of the Board or its committees or which, in the judgment of the

company’s Secretary, addresses material issues which require the attention of the Board. The directors may at any time review the summary of correspondence received and request copies of any such correspondence.

 

Codes of Ethics and Standards of Business Conduct

 

The current, printable full text of our code of ethics for our directors, our code of ethics for our chief executive officer and senior financial officers, and our standards of business conduct applicable to all employees may be found on our website at www.hcr-manorcare.com/investor/governance.asp and is available in print to any stockholder upon request.

 

Certain Relationships and Related Transactions

 

Our Governance Committee is responsible for reviewing and evaluating potential conflicts of interest and with reviewing and approving any related party transactions.

 

During 2006, National City Corporation and certain of its subsidiaries provided us and certain of our officers with commercial banking, private banking, and trust services. Mr. Ormond was a director of National City during 2006.

 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

 

Our Compensation Committee is comprised entirely of independent directors. No member of the Committee has ever served as one of our officers or employees. None of our executive officers serves on the compensation committee of any other company that has an executive officer serving on our Board of Directors. None of our executive officers serves as a member of the board of directors of any other company that has an executive officer serving as a member of our Compensation Committee.

 

BOARD MEETINGS AND COMMITTEES OF THE BOARD

 

Board Meetings

 

Our Board of Directors met five times during 2006. Executive sessions of the non-management directors were held in conjunction with four of the regular Board meetings in 2006. Each director attended more than 75 percent of the total number of meetings of the Board and the committees on which each served. In addition, our directors are strongly encouraged to attend our annual stockholders meeting. In 2006, all directors except Ms. Wilensky attended the annual stockholders meeting.

 

Board Committees

 

Our Board of Directors currently has four standing committees: Audit; Compensation; Governance; and Quality. Each standing committee’s current charter is available in a printable version on our website at www.hcr-manorcare.com/investor/governance.asp and is available in print to any stockholder upon request.

 

Audit Committee. Our Audit Committee consists of three independent directors, Messrs. Schwieters, Tuttle, and Young. During the year, the Board confirmed that all members of the Committee were independent within the meaning of the New York Stock Exchange’s listing standards and the applicable rules of the Securities and Exchange Commission. The Board has determined that Messrs. Schwieters and Young are financial experts and that Mr. Tuttle possesses financial literacy within the meaning of the rules of the New York Stock Exchange and the Securities and Exchange Commission. Mr. Schwieters currently serves on the audit committees of three other public companies. Our Governance Committee and Board of Directors have determined that such service does not impair Mr. Schwieters’s ability to continue to serve on our Audit Committee. During 2006, the Committee met formally on seven occasions and conferred by telephone conference on other occasions as necessary. The Committee’s functions and its major activities during fiscal year 2006 are described below under Audit Committee Disclosure beginning on page 10 and in the Audit Committee Report on pages 11-12.

 

Compensation Committee. Our Compensation Committee consists of four independent directors, Ms. Behrens and Messrs. Damico, Longfield, and Young. None of the Committee members is eligible to

participate in any of our executive compensation programs. During 2006, the Committee met on three occasions. The Committee’s functions and its major activities during fiscal year 2006 are described below under Executive Compensation beginning on page 12 and in the Compensation Committee Report on page 20.

 

Governance Committee. Our Governance Committee consists of four independent directors, Ms. Wilensky and Messrs. Damico, Longfield, and Tuttle. The Committee is responsible for developing and recommending to the Board the corporate governance principles applicable to us. The Committee is also responsible for developing policies and practices designed to implement the governance principles adopted by the Board, and thereafter monitoring compliance with those policies and periodically reviewing them. In addition, the Committee identifies individuals qualified to become board members, develops and reviews background information on the candidates, and makes recommendations to the Board regarding such candidates. The Committee annually makes recommendations for committee assignments for directors. The Committee also prepares, summarizes, and reports on the Board’s annual self-evaluation and reviews, makes recommendations regarding director compensation, reviews and evaluates potential conflicts of interest, and reviews and approves any related party transactions. During 2006, the Committee met on three occasions.

 

Quality Committee. Our Quality Committee consists of three independent directors and one management director, Ms. Behrens, Ms. Wilensky, Mr. Schwieters, and Mr. Guillard. The Committee meets regularly with our Chief Medical Officer and our Vice President, Director of Clinical Services and reviews information regarding the quality of care provided in our nursing centers and other facilities and operations. In fulfilling this function, the Committee regularly reviews our performance on state and federal surveys, information regarding quality indicators, and information regarding clinical initiatives relating to quality of care. The Committee receives and evaluates information regarding changes in the industry, including changes in the regulatory environment. The Committee also makes on-site visits to selected facilities, tours the facilities, and meets with key staff. During 2006, the Committee held one formal meeting and conferred in person and by telephone conference on other occasions as necessary.

 

SECURITY OWNERSHIP OF CERTAIN MANAGEMENT AND BENEFICIAL OWNERS

 

Security Ownership of Directors and Executive Officers

 

The following table shows, as of March 16, 2007, except as indicated by the notes to the table, information concerning beneficial ownership of shares of our common stock by our directors individually, the persons named in the Summary Compensation Table, and our executive officers and directors as a group. Except as indicated by the notes to the table, the holders listed below have sole voting and investment power over the shares beneficially owned by them.

 

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth, as of December 31, 2006, information with respect to any person we know to be the beneficial owner of more than 5 percent of our common stock. The information presented is based upon filings made pursuant to the Securities Exchange Act of 1934 and received by us.

 

 

 

AUDIT COMMITTEE DISCLOSURE

 

Our Audit Committee consists of three independent directors appointed by our Board of Directors. The Committee operates under a written charter first adopted and approved by the Board in May 2000. A copy of the current Audit Committee Charter is available in a printable version on our website at www.hcr-manorcare.com/investor/governance.asp and is available in print to any stockholder upon request.

 

The Committee met formally on seven occasions during 2006, conferred by telephone conference on other occasions as necessary, and received and reviewed written information related to the Committee’s functions. During the past year, the Committee held discussions with management, our independent registered public accounting firm Ernst & Young LLP (Registered Accountant), our internal auditors, our legal counsel, representatives of our Corporate Compliance Committee, and others.

 

Among many other activities as noted in the Committee’s charter, the Committee, on behalf of the Board, monitors our financial reporting process and our system of internal control. Management prepares our financial statements and implements our financial reporting process, including our system of internal control. Our Registered Accountant annually performs an audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and issues a report on its audit and an opinion with respect to the financial statements. Our internal auditors review and evaluate our system of internal control and conduct audits of selected units to ensure that they operate in compliance with these controls. Our Registered Accountant and the internal auditors report directly to the Committee regarding their activities. Our Corporate Compliance Committee administers our corporate compliance program and also reports directly to the Committee.

 

As a result of Section 404 of the Sarbanes-Oxley Act of 2002, our Registered Accountant is required to attest to and report on, management’s assessment of the effectiveness of our internal control structure and procedures for financial reporting. Accordingly, the audit conducted by our Registered Accountant for 2006 was an integrated audit designed to express: (1) an opinion on the consolidated financial statements as of, and for the year ended, December 31, 2006; (2) an opinion on management’s assessment of internal control over financial reporting as of December 31, 2006; and (3) an opinion on the effectiveness of internal control over financial reporting as of December 31, 2006.

 

Prior to the beginning of the integrated audit for 2006, the Committee discussed with our Registered Accountant and our internal auditors the overall scope and plans for their respective audits. These discussions focused on the principal areas of audit emphasis, the objectives related to the audits, the key accounting and reporting developments that would affect the audit plans, and the primary personnel who would be involved in the audits. Following completion of the integrated audit by our Registered Accountant, the Committee received written reports from the Registered Accountant regarding the results of its integrated audit of the financial statements and internal control over financial reporting. Our internal auditors similarly submitted a written report regarding the internal audits which were conducted throughout the year. The Committee then met separately with both our Registered Accountant and our internal auditors, with and without management present, to discuss the results of their examinations. Among other things, the Committee discussed with our Registered Accountant its judgments as to the quality of our accounting principles and such other matters as are required to be discussed with the Committee by Statement on Auditing Standards No. 61 (as amended), other standards of the Public Company Accounting Oversight Board (United States), rules of the Securities and Exchange Commission, and other applicable regulations. The Committee also reviewed and discussed the audited consolidated financial statements with management and our Registered Accountant. Management represented to the Committee that our financial statements were prepared in accordance with U.S. generally accepted accounting principles, and that our internal control over financial reporting was effective as of December 31, 2006. The Registered Accountant advised the Committee that it was prepared to issue unqualified opinions as of and for the year ended December 31, 2006 with respect to the consolidated financial statements, management’s assessment of internal control over financial reporting, and the effectiveness of our internal control over financial reporting. The Committee also received a satisfactory report from the Corporate Compliance Committee concerning compliance activities during 2006.

 

In addition, the Committee discussed with the Registered Accountant its independence from us and our management, reviewed a report from the Registered Accountant on that firm’s internal quality control procedures, reviewed in detail the audit and non-audit fees paid to the Registered Accountant during 2006, and considered the compatibility of the non-audit services with the Registered Accountant’s independence. The Committee concluded that such services did not compromise the independence of the Registered Accountant.

 

Fees to Independent Registered Public Accounting Firm

 

Upon the recommendation of our Audit Committee, our Board of Directors selected Ernst & Young LLP as our Registered Accountant for the fiscal year ending December 31, 2007. Representatives of Ernst & Young LLP will attend the annual meeting to respond to appropriate questions and convey to stockholders other relevant information.

 

The fees billed to us by Ernst & Young LLP for the last two fiscal years were:

 

 

Audit fees include professional services for the annual audit of our financial statements, audit of our internal control over financial reporting, review of our financial statements included in our quarterly reports on Form 10-Q, audits of financial statements of certain affiliated entities or partnerships, comfort letters to underwriters, consents, assistance with and review of documents filed with the SEC, and consultation on financial and accounting matters necessary for the issuance of an opinion.

 

Audit-related fees include audits of our employee benefit plans. Tax fees include professional services for tax compliance, tax advice, and tax planning. Our Audit Committee concluded that the engagement of Ernst & Young LLP on these non-audit matters did not affect the independence of Ernst & Young LLP.

 

Audit Committee Pre-Approval Policy

 

Our Audit Committee has adopted a policy requiring pre-approval of the engagement of Ernst & Young LLP on any non-audit matter and, in compliance with Sections 201 and 202 of the Sarbanes-Oxley Act, providing that certain activities specified in Section 201 may not be undertaken regardless of Committee approval. Requests for pre-approval of permitted non-audit services are submitted to the Committee by management, together with estimated fees for such services and the time frame for the completion of the work. The Committee may request input from Ernst & Young LLP on the nature, scope, and costs of such services. The Committee considers any such request at a meeting of the Committee and advises management whether the Committee approves the requested engagement. Management reports periodically to the Committee regarding the actual amounts spent for such approved engagements compared to the amounts approved by the Committee.

 

AUDIT COMMITTEE REPORT

 

In connection with the company’s financial statements for the fiscal year ended December 31, 2006:

 

 

 

In reliance on the reviews and discussions referenced above and the report of the Registered Accountant, including its opinion with respect to the audited financial statements, we have recommended to the Board of Directors that the audited consolidated financial statements be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on February 21, 2007.

 

The Audit Committee:

Thomas L. Young, Chairman

John T. Schwieters

Richard C. Tuttle

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview of Compensation Program

 

Our Compensation Committee administers and regularly evaluates our executive compensation program to ensure its appropriateness in the context of our business and in the context of its competitiveness with the compensation practices of other companies. From time to time, the Committee seeks the advice of independent experts in evaluating plan design, compensation levels, and administration.

 

Each year the Committee reviews and approves corporate goals and objectives relevant to our Chief Executive Officer’s (CEO) compensation, evaluates the CEO’s performance in light of those goals and objectives, and establishes the CEO’s compensation levels based on this evaluation. The Committee then annually reviews and approves, for the CEO and the other executive officers, (a) annual base salary level, (b) annual incentive awards, (c) long-term incentive awards, (d) employment agreements, severance arrangements, and change in control agreements/provisions, in each case as, when, and if appropriate, and (e) any special or supplemental benefits or perquisites. The Committee approves retirement, savings, deferred compensation and similar plans and all perquisites for the executive officers. The Committee also administers our Equity Incentive Plan and other incentive compensation plans, including approving participation in these plans and reviewing and making awards.

 

Throughout this Proxy Statement, we refer to our Chief Executive Officer, together with those individuals serving as our Chief Operating Officer, Chief Financial Officer, and General Counsel during 2006, and our Group Vice President, Hospice and Home Health Care, all of whom are included in the Summary Compensation Table on page 21, as the “named executive officers”.

 

Compensation Philosophy and Objectives

 

Our Compensation Committee believes that compensation paid to executive officers should be closely aligned with our performance on both a short-term and long-term basis, should be linked to specific, measurable results intended to create value for our stockholders, and should assist us in attracting and retaining key executives critical to our long-term success.

 

The primary objective of our executive compensation program continues to be to enhance stockholder value over the long term. To achieve this primary objective, our Compensation Committee believes that our executive compensation program should:

 

 

The Committee believes that our performance, as measured by annualized and cumulative total shareholder return in recent years and over an even longer term horizon, has validated the performance-driven character of our executive compensation programs.

 

Consistent with our performance-based philosophy, we provide a base salary to our executive officers supplemented with a significant incentive based component. For our senior executive management team, comprised of the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and General Counsel we reserve the largest potential compensation awards for performance- and incentive-based programs. These programs include annual and long-term awards based on our financial performance as measured by key performance criteria. These programs include compensation in the form of both cash and equity, to provide incentives to reward both our short-term and long-term performance.

 

Stock Ownership Guidelines

 

To further tie compensation to performance, our Compensation Committee has established stock ownership guidelines for executive officers. The guidelines are based upon a multiple of salary, depending upon the executive’s position in the organization. Although the guidelines are effective immediately, an executive generally has two years to accumulate shares to reach his or her goal. Our CEO has exceeded the stock ownership guidelines by a significant margin. Although each of our other current senior executive officers has served in his current position for less than two years, each is taking appropriate steps to be in compliance with the stock ownership guidelines and anticipates being in compliance within the required time frame.

 

Policy Related to Deductibility of Compensation.

 

Section 162(m) of the Internal Revenue Code of 1986 denies a deduction to any publicly held corporation for compensation paid to the CEO and the other four most highly compensated officers, as of the end of a fiscal year, to the extent that the compensation exceeds $1 million in any such year, subject to an exception for “performance-based compensation.” Our Compensation Committee intends to take the necessary steps, including appropriate plan amendments, to qualify compensation paid to executive officers for deductibility to the extent that so qualifying the compensation is not inconsistent with our fundamental compensation policies. In furtherance of this policy, the Performance Award Plan and the Equity Incentive Plan described below are designed to satisfy Section 162(m)’s performance-based compensation requirements. The Committee continues to monitor developments on this subject and will take further action as may be appropriate.

 

Accounting for Stock-Based Compensation

 

Commencing January 1, 2006, we began accounting for stock-based compensation in accordance with the requirements of Financial Accounting Standards Board (FASB) Statement No. 123R, “Share-Based Payment” (Statement 123R). Prior to January 1, 2006, we accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by FASB Statement No. 123 “Accounting for Stock-Based Compensation.” Based on our method of adoption, we have not restated our stock-based compensation expense recorded in prior years. A detailed discussion of the effect of our adoption of Statement 123R appears beginning on page 67 of our 2006 Annual Report on Form 10-K as filed with the

Securities and Exchange Commission that is included within our 2006 Annual Report that accompanies this proxy statement.

 

Practices with Respect to Equity Compensation Awards

 

Our Compensation Committee routinely makes equity compensation awards at the first meeting of the Committee each calendar year. The Committee may also make equity compensation awards during the year in connection with the hiring of new executive officers or in connection with other special circumstances. We price all equity incentive awards based on the fair market value on the date of the award, which is defined, since the January 2007 amendment to our Equity Incentive Plan, as the closing price of our stock on the date of the award. Prior to the amendment, fair market value had been defined as the closing price of our stock on the day before the date of the award. We do not grant equity-based awards at other than the fair market value. Consistent with this practice, the exercise price for stock option grants and similar awards is now set at the closing price of our stock on the date of the award.

 

Determination of Compensation Awards; Role of Executive Officers in Compensation Decisions

 

Our Compensation Committee annually reviews the performance of our executive officers and determines the compensation awarded to each. To aid the Committee in making its determinations, our CEO provides recommendations annually to the Committee regarding the compensation of all executive officers other than himself. Each named executive officer, in turn, participates in an annual performance review with the CEO to provide input about his contributions to our success during the year.

 

Compensation Benchmarking and Peer Group

 

Consistent with prior years, our Compensation Committee retained Deloitte Consulting LLP as independent compensation consultant to advise the Committee regarding the key elements of our compensation programs for 2006. The compensation consultant provided analysis and recommendations to the Committee with respect to competitive practices and the amounts and nature of compensation paid to executive officers in our healthcare industry peer group. For 2006, our peer group consisted of the following companies: Apria Healthcare Group Inc.; Community Health Systems, Inc.; Coventry Health Care, Inc.; DaVita Inc.; Genesis HealthCare Corporation; Health Management Associates, Inc.; Kindred Healthcare, Inc.; Laboratory Corporation of America; Omnicare, Inc.; Sun Healthcare Group, Inc.; Tenet Healthcare Corporation; Triad Hospitals, Inc.; and Universal Health Services, Inc.

 

The compensation consultant also advised on, among other things, structuring our various compensation programs, the appropriate mix of restricted stock and stock options, the appropriate split between time-vested and performance-vested restricted stock, and the appropriate levels of salary, bonus, and other awards payable to our named executive officers.

 

Our Compensation Committee thoroughly evaluated the compensation consultant’s advice, analysis, and recommendations in the context of the Committee’s primary objective of enhancing stockholder value over the long term. As a result, the Committee has structured our executive compensation package to consist of a fixed base salary and variable cash and stock-based incentive awards, with a significant portion weighted towards the variable components to ensure that total compensation reflects our overall success and to motivate executive officers to meet appropriate performance measures, thereby maximizing total return to stockholders.

 

2006 Executive Compensation Components

 

For the fiscal year ended December 31, 2006, the principal components of compensation for the named executive officers were fixed compensation in the form of base salary, performance-based cash and equity incentive compensation, deferred compensation, legacy pension benefits for certain named executive officers, and certain perquisites.

 

Our Compensation Committee noted our achievement of high quality of care indicators and our strong overall financial performance for 2006, as well as the fact that we had exceeded both our 2006 budget and

2005 results by a substantial margin. The Committee noted further that our 2006 earnings per share were $2.14, versus $1.89 for 2005. The Committee also reviewed several unusual items which had negatively affected our 2006 financial results and discussed the unusual nature of each item. Finally, the Committee noted that our stock had increased in value during 2006 (price appreciation plus dividend) by nearly 20%, a performance significantly better than almost all major market and health care services indices.

 

With the primary objective of our executive compensation program in mind, and based on the compensation consultant’s advice, analysis, and recommendations, the Committee determined to use the 75th percentile of peer companies initially selected by the consultant and approved by the Committee as a reference point for setting the target compensation of the named executive officers. Individual officers’ actual compensation may vary based on individual factors such as industry experience, tenure, and job responsibilities. The Committee recognized that the superior performance, leadership skill, and experience of the named executive officers, and the potential of these executives to continue to enhance stockholder value in the future, made them potential targets of competitive offers, and the Committee felt that setting the target compensation at the 75th percentile was necessary in order to provide strong incentives for these executives to remain with us and to continue to perform at high levels.

 

With respect to equity long-term incentive awards (LTI) to the named executive officers, the Committee determined that the equity LTI value should generally be awarded through approximately 65% restricted stock and 35% stock options. In an effort to further align executive compensation with recognized measures of stockholder value, the Committee determined that approximately 70% of the restricted stock awards would contain performance criteria controlling the vesting of the award over a three-year period. Accordingly, a portion of these performance-vested shares are eligible to vest annually based on performance in that year against a two-part financial metric tied to stockholder value. In addition, the performance shares are subject to a threshold target for a minimum payout and a maximum payout for performance above the target. The performance-vested restricted stock, when issued, will remain restricted until the termination of employment of the executive. The Committee also determined that the stock option value would be based on a Black-Scholes methodology.

 

Of the named executive officers, this compensation structure was applied in 2006 to our CEO Mr. Ormond and to our current and former Chief Operating Officers, Messrs. Guillard and Weikel. Messrs. Cavanaugh and Parr were named as executive officers upon the May 2006 retirements, respectively, of Mr. Meyers as Chief Financial Officer and Mr. Bixler as General Counsel. Mr. Weikel retired in December 2006. Mr. Cavanaugh’s compensation package in 2006 included a promotional salary increase and restricted stock units. Mr. Parr’s initial compensation package was separately negotiated and for 2006 included base salary, bonus, and restricted stock units, as well as certain benefits in accordance with our policy related to his relocation from Dallas, Texas. Mr. Graham’s compensation package in 2006 included restricted stock units.

 

Fixed Compensation

 

Base Salary. Our Compensation Committee approved annual salary increases for the named executive officers and certain other corporate officers effective in September 2005. In making these adjustments, the Committee considered past individual performance as measured by both qualitative and quantitative factors, the individual’s potential for making significant contributions to our future performance, the 75th percentile benchmark as described above and national inflation trends. In January 2006, the Committee decided that all significant compensation decisions, including annual salary adjustments, should be consolidated for evaluation and decision at one time, which the Committee determined should be in conjunction with the first committee meeting of the calendar year. Accordingly, in order to implement this determination for 2006, the Committee approved prorated salary adjustments effective January 1, 2006, and determined that no further annual adjustments in salary would be considered until January 2007.

 

Performance-Based Compensation

 

Our Compensation Committee structures our compensation programs to reward executive officers based on our performance and on the individual executive’s ability to contribute to that performance. Accordingly, executive officers receive cash and equity incentive compensation based on their position with us and our

achievement of performance measures determined by the Committee. The determination of the applicable performance measures for each element of performance-based compensation are described below. If specified threshold performance measures are exceeded, our executive officers earn awards that vary in proportion to the amount by which target levels are not met, achieved, or exceeded, up to a maximum level in each case. The Committee may determine or adjust performance-based awards to account for unusual events, such as changes in reimbursement, extraordinary transactions, and asset acquisitions and dispositions, if, and to the extent, the Committee does not consider the effect of such events indicative of our performance. Payments under each of the programs are contingent upon continued employment, although we will pay pro rata annual incentive amounts in the event of death or disability.

 

Annual Incentive Plan. Our Compensation Committee believes that the payment of this portion of our annual performance-based compensation in cash provides incentives necessary to retain executive officers and reward them for short-term company performance. The Committee determines the level of payouts under our Annual Incentive Plan based on its assessment of quality, financial, and individual performance metrics. In making that determination for 2006, the Committee recognized that the quality of care in our operations, as measured by survey compliance and other quality indicators, remained at a high level during 2006. The Committee also recognized the many ongoing challenges facing the senior management team in leading us to deliver superior performance in a heavily regulated, reimbursement-dependent industry. These challenges included the continued need for operating adjustments to address changes in Medicare reimbursement levels, Medicaid funding issues for many states, maintaining strong cost controls, and effectively managing general and professional liability costs. In this context, the Committee considered several specific accomplishments during the year that greatly enhanced stockholder value. These achievements included the following: (1) earnings per share (EPS) exceeding budgeted EPS; (2) strong cash flow from operations of approximately $275 million which enabled continued share repurchases and ongoing investment in facility maintenance, upgrades, and expansions; (3) our stock’s increase in value during 2006 (price appreciation plus dividend) by nearly 20%; (4) revenue growth of approximately 6% over 2005; (5) quality-mix revenue increased to 72%; (6) financial structure improvements which included an additional issuance of low-coupon, high-premium convertible debt, accelerated share repurchases, and the amendment of and increase in our revolving credit facility; (7) significant improvement in our hospice and home health care business; and (8) maintaining a solid balance sheet and investment grade ratings from both of the major rating agencies. The Committee determined that these achievements in the current health care services environment justified awards under the Annual Incentive Plan significantly above target levels, as reflected in column (d) of the Summary Compensation Table on page 21.

 

The following table sets forth the target and maximum award potential as a percentage of year-end base salary for each current named executive officer who received cash performance-based compensation under our Annual Incentive Plan for 2006, as well as the actual 2006 award percentage approved by the Committee for each:

 

Annual Incentive Plan

 

 

Equity Incentive Plan. Our Compensation Committee believes that the payment of this portion of our annual performance-based compensation in the form of equity-based awards provides incentives necessary to

retain executive officers and reward them for short-term company performance, while creating long-term incentives to sustain performance.

 

Our Equity Incentive Plan was initially approved by the stockholders in 2001, and an amendment and restatement of the plan was approved in 2004. This plan provides for stock-based awards to a broad group of our employees including the named executive officers. These awards may be in the form of stock options, restricted stock, or stock appreciation rights. In 2005, our Compensation Committee approved a further amendment to the Equity Incentive Plan allowing the Committee to issue restricted stock units (RSUs). The plan provides that the exercise price of a stock option or stock appreciation right shall be equal to the fair market value of our stock on the date of grant. Restricted stock granted or sold to a participant cannot be sold or otherwise transferred by the participant until the restrictions lapse or expire.

 

In 2006, consistent with its determinations regarding equity LTI awards as described above, the Committee made awards of RSUs, stock options, and a target number of 2006-2008 performance-vested restricted stock to certain named executive officers, based on the formula adopted by the Committee, including the split between time-vested and performance-vested shares.

 

 

The 2006 RSU awards, stock option awards, and the performance-vested restricted stock are reflected, respectively, in column (i), column (j), and columns (f)-(h) of the Grants of Plan-Based Awards for 2006 table on page 24. The actual 2006 restricted stock awards are reflected in column (i) of the Outstanding Equity Awards at December 31, 2006 table on page 26.

 

2005-2007 and 2006-2008 Performance-Vested Restricted Stock

 

Our Compensation Committee certifies annual results for earnings per share and free cash flow performance measures, adjusted for unusual items, and approves award levels for each performance measure and in the aggregate, as a percentage of the target number of performance-vested restricted shares for that year, based on a comparison of the certified results to target levels for each performance measure. The earnings per share award level and the free cash flow award level are each calculated by determining the percentage amount by which our results certified by the Committee are greater or less than the target amount for that applicable performance measure, multiplying that percentage amount by 2.5, and, as applicable, adding the resulting product to or subtracting it from 100%, to arrive at the award level for that performance measure, to a maximum of 150% and a minimum of 50% for each performance measure. If for

any year the award level calculation for either performance measure would not result in at least a 50% award level for that performance measure (i.e., more than a 20% negative variance from target), no shares would be awarded for that year. The earnings per share award level is multiplied by the free cash flow award level to arrive at an aggregate award level. The actual number of shares awarded for the year is then calculated by multiplying the aggregate award level by the year’s target number of shares.

 

The following table sets forth the performance measures and 2006 target levels established in the third quarter of 2004 by our Compensation Committee for the 2005-2007 performance-vested restricted stock, as well as the 2006 results certified and award levels approved by the Committee for each performance measure, and in the aggregate:

 

2005-2007 Performance-Vested Restricted Stock

 

Aggregate 2006 Award Level Approved: 194.86% of Target Number of Shares

 

 

Performance Award Plan. Our Performance Award Plan (PAP) links cash incentives to long-term increases in financial measures of stockholder value. Under the PAP, eligible employees receive a cash award payable at the end of the three-year period specified in the award. At the end of the award period, our Compensation Committee certifies results for an earnings per share performance measure established at the beginning of the period, adjusted for unusual items, and approves PAP payouts as a percentage of target award, based on the performance measure level achieved. For the 2004-2006 award period, the Committee approved PAP payouts in early 2007 based on adjusted earnings per share during the performance period, as described below. The amounts of these payouts for certain named executive officers appear below in column (g) of the Summary Compensation Table on page 21. Although the Committee believes that the PAP has been an important component of overall long-term compensation for certain senior executives, during 2005, the Committee determined, with input and advice from the compensation consultant, that the PAP should not be extended beyond the named executive officers who historically participated in this plan, and as to those senior executives the plan would be phased out as such executives retired. In January 2006, Messrs. Ormond and Weikel were granted PAP Awards for the 2006-2008 award period, with payouts to be based on

achievement of earnings per share goals during the performance period, which appear below in columns (c)-(e) of the Grants of Plan-Based Awards for 2006 table on page 24. The Committee is currently reviewing the continuation of the PAP program and alternatives to its continuation. No 2007-2009 PAP Awards have yet been granted by the Committee.

 

The following tables set forth: (1) the performance measure levels established by our Compensation Committee in 2003 for the 2004-2006 performance award plan; (2) the compound annual growth rate in our earnings per share resulting from achievement of the performance measure levels; (3) the PAP payouts earned upon the achievement of the performance measure levels; and (4) the achievement level certified and PAP payout approved by the Committee for the 2004-2006 performance period:

 

2004-2006 Performance Award Plan

 

2006 Achievement Level Certified: Adjusted Earnings Per Share of $2.35

2006 PAP Approved: 150% of Target Award

 

Deferred Compensation

 

Certain of our officers, including the named executive officers, may defer up to 100% of salary, bonus, and PAP awards pursuant to our Senior Management Savings Plan for Corporate Officers. We match amounts deferred up to three percent of total salary and bonus. Our matching contributions are fully vested after a participant completes four years of service. Our Compensation Committee believes that our Senior Management Savings Plan for Corporate Officers provides incentives necessary to retain executive officers and reward them for short-term company performance, while creating long-term incentives to sustain performance. Our Senior Management Savings Plan for Corporate Officers is described more fully under Nonqualified Deferred Compensation for 2006 on pages 30-31.

 

Pension Benefits

 

Of our current named executive officers, Messrs. Ormond, Cavanaugh, and Graham participated in a qualified defined benefit pension plan with previously frozen benefits that was terminated on December 31, 2006 (Qualified Plan), and our Senior Executive Retirement Plan (SERP), a nonqualified plan with a continuation of substantially identical benefits to the Qualified Plan, both of which are described more fully under Pension Benefits at December 31, 2006 on pages 28-30. The named executive officers who joined us after 2004 do not currently participate in the Qualified Plan or the SERP.

 

Perquisites

 

Pursuant to our company aircraft use policy, our CEO and such other of our senior executives as our CEO may designate may use company aircraft for personal purposes. In addition to personal use of company aircraft, our CEO until December 31, 2006, received certain other perquisites, including automobile allowance, tax and estate planning services, and personal residence security. Effective January 1, 2007, our Compensation Committee discontinued all such CEO perquisites except for personal use of company aircraft. The Committee and Board of Directors mandated that our CEO continue to use company aircraft whenever possible, including for personal travel, in view of the national geographic dispersion of our facilities and operations and as a key part of our security plan for our CEO. When our CEO or another senior executive uses company aircraft for primarily personal purposes in accordance with our company aircraft use policy, the executive is taxed on the value of such use as “imputed income” in accordance with applicable Internal Revenue Service rules and

regulations. We report this imputed income on the executive’s Form W-2, and, in addition, “gross up” this amount by paying and withholding additional compensation to the executive in an amount sufficient to defray all resulting federal, state, local, and employment taxes on such imputed income and additional compensation.

 

Compensation of Chief Executive Officer

 

The compensation policies described above also apply to the compensation of our CEO Mr. Ormond. Our Compensation Committee determines our CEO’s salary level and all awards and grants to him under our compensation program’s incentive components. The Committee believes that Mr. Ormond bears primary responsibility for increasing the value of stockholder investments and that, therefore, a substantial portion of his compensation should be incentive-based, providing greater compensation as direct and indirect financial measures of stockholder value increase. The Committee also believes that the complex and volatile health care environment in which we operate requires a high degree of leadership, innovation, and prudent risk-taking in order to meet and sustain corporate objectives for increasing stockholder value. Accordingly, the Committee structures and administers our CEO’s compensation to motivate and reward his successful exercise of these skills.

 

Our Compensation Committee and the other independent directors on our Board of Directors believe that our performance in 2006 again continued at the very high level it has achieved in the past several years when measured not only against internal goals and criteria as described above, but also against the performance of others in our primary industries. As reflected in the Performance Graph that appears in the inside back cover of our Annual Report to Shareholders that accompanies this Proxy Statement, the total return to our stockholders for at least the last five years has far outpaced that of key competitors in our industry. Our performance in 2006 continued this trend, as we finished the year with significantly stronger financial results and operating performance than any other major organization in our industry. The Committee’s decisions with respect to our CEO recognize his continued strong leadership in achieving these outstanding results in 2006 as well as his ongoing efforts in implementing strategic initiatives to enhance long-term investor value and in achieving the high quality of care maintained throughout our organization. Finally, during 2006, we successfully completed the transition to new executive officers in key positions, primarily as a result of our CEO’s leadership and the succession planning and implementation he successfully undertook and completed. Accordingly, the Committee believes that our CEO’s compensation for 2006 was directly related to our overall performance as measured by the several factors identified above. Finally, as noted above under Performance Award Plan, the Committee has not yet made a 2007-2009 PAP Award to our CEO and is currently reviewing continuation of the PAP program and alternatives to its continuation.

 

COMPENSATION COMMITTEE REPORT

 

We have reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K, and, based on such review and discussions, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into the company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on February 21, 2007.

 

The Compensation Committee:

Joseph F. Damico, Chairman

Mary Taylor Behrens

William H. Longfield

Thomas L. Young

Summary Compensation Table

 

The following table shows the compensation for 2006 of each of our named executive officers (as determined pursuant to the SEC’s disclosure requirements for executive officer compensation in Item 402 of Regulation S-K), consisting of our Chief Executive Officer, our Chief Financial Officer, our former Chief Financial Officer who retired during 2006, our three other most highly compensated executive officers who were serving at the end of 2006, and two other executive officers who are among our three most highly compensated executive officers for 2006 but who were not serving at the end of 2006, because they retired during the year.

 

During 2006, we employed certain of our executive officers, including each of the named executive officers, pursuant to employment and/or severance agreements. The agreements entitle the officers to receive their base salaries, to participate in our designated benefit and compensation plans, and to receive certain post-termination benefits. Each agreement also provides that the officer’s base salary may be adjusted periodically and that we may at any time adjust or terminate benefit plans in which the officer is entitled to participate, so long as no vested or accrued benefit is adversely affected. Each agreement provides that the officer’s employment is not for any specified term and may be terminated at any time. Each agreement also contains non-competition and non-solicitation obligations on the officer’s part, for three years in the case of Messrs. Ormond and Guillard (and in the case of Messrs. Weikel, Meyers, and Bixler, who retired during 2006), for two years in the case of Messrs. Cavanaugh and Parr, and for one year in the case of Mr. Graham. Additional information with respect to our post-termination payment obligations under the employment and severance agreements is set forth under Potential Payments Upon Termination or Change in Control — Employment and Severance Agreements on pages 31-33 of this proxy statement.

 

 

 

 

Mr. Cavanaugh was awarded SARs prior to becoming an executive officer. Upon adoption of Statement 123R, our SAR liability was required to be calculated under the fair-value method instead of the intrinsic-value method. The cumulative effect of this change is not included in the table, but the increase in value under the fair-value method is included for the year ended December 31, 2006.

 

Stock options awarded prior to 2005 include a reload feature. The reload feature allows the holder to exercise an option by delivering shares of our common stock to cover the option’s exercise price and withholding taxes. The holder is automatically granted an additional option for the shares of common stock delivered. Stock options granted under the reload feature are vested and expensed immediately. The amounts in this column related to stock options granted as a result of the reload feature are as follows: Mr. Ormond — $2,576,189; and Mr. Graham — $57,221.

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards for 2006

 

 

 

 

Outstanding Equity Awards at December 31, 2006

(a)			(b)					(c)					(e)					(f)					(g)					(h)					(i)					(j)
								Option Awards																				Stock Awards
																																						Equity
																																						Incentive
																																	Equity					Plan Awards:
																																	Incentive					Market or
																																	Plan Awards:					Payout
																																	Number of					Value of
			Number of					Number of																				Market Value					Unearned					Unearned
			Securities					Securities															Number of					of Shares					Shares,					Shares,
			Underlying					Underlying					Option										Shares or					or Units					Units or					Units or
			Unexercised					Unexercised					Exercise					Option					Units of Stock					of Stock					Other Rights					Other
			Options					Options (#)					Price					Expiration					That Have					That Have					That Have					Rights That Have
Name			(#) Exercisable					Unexercisable					($)					Date					Not Vested (#)					Not Vested ($)(1)					Not Vested (#)					Not Vested ($)(1)
Ormond									250,000	(2)				39.38					2/1/13					38,524	(3)			$	1,807,546					339,907	(4)			$	15,948,436
				215,800										35.22					3/16/15
				180,000										34.30					2/5/14
				209,938										41.35					2/6/13
				400,000										19.22					2/6/12
				365,000										38.22					2/2/11
				220,000										28.33					6/17/10
				300,000										32.44					9/26/08
				75,000										52.85					12/3/07
Guillard									50,000	(2)				39.38					2/1/13					35,138	(5)				1,648,675					32,243	(6)				1,512,842
									50,000	(7)				38.86					6/2/15
Weikel (8)				100,000										39.38					3/1/07															54,209	(9)				2,543,486
				88,300										35.22					3/1/07
				72,000										34.30					3/1/07
				42,940										33.74					3/1/07
				57,925										27.99					3/1/07
				100,000										32.44					3/1/07
				30,000										39.44					3/1/07
Cavanaugh									10,000	(10)				34.30					2/5/14					7,603	(11)				356,733
				10,000	(12)									18.75					2/6/13
				10,000	(12)									19.22					2/6/12
				10,000										19.25					2/2/11
				8,000	(12)									7.00					6/17/10
				1,500										31.75					12/2/08
				2,000										39.44					12/3/07
Meyers				—					—					—					—					—					—					—					—
Parr																								7,574	(13)				355,372
Bixler (14)				50,000										18.75					5/1/07
				15,000										19.22					5/1/07
Graham				25,000										35.22					3/16/15					5,069	(15)				237,837
				20,000										34.30					2/5/14
				10,000										18.75					2/6/13
				5,460										40.70					2/6/12