Chindex International 10-K 2008
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2008
Commission File No. 0-24624
CHINDEX INTERNATIONAL, INC.>
(Exact name of registrant as specified in its charter)
4340 East West Highway, Suite 1100
Bethesda, Maryland 20814
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ x ] Non-accelerated filer [ ] Smaller reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of September 30, 2007 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $160,486,048.
The number of shares outstanding of each of the registrant’s class of common equity, as of May 21, 2008, was 13,197,203, shares of Common Stock and 1,162,500 shares of Class B Common Stock.
Chindex International, Inc. (the “Company,” “Chindex,” “we,” “us” or “our”) is filing this Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year ended March 31, 2008 (the “Report”) for the purpose of including information that was to be incorporated by reference from our definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will not file our proxy statement within 120 days of our fiscal year ended March 31, 2008, and are, therefore, setting forth Items 10, 11, 12, 13 and 14 of Part III of the Report. We anticipate filing our definitive proxy statement in August 2008 for our 2008 Annual Stockholder Meeting, which is currently scheduled to be held on September 16, 2008. In addition, in connection with the filing of this Amendment and pursuant to Rules 12b-15 and 13a-14 under the Exchange Act, we are including with this Amendment currently dated certifications. Except as described above, no other amendments are being made to the Report. This Form 10-K/A does not reflect events occurring after the June 16, 2008 filing of the Report, as amended by our June 23, 2008 amendment number one to such Report, or modify or update the disclosure contained in the Report as amended in any way other than as required to reflect the amendments discussed above and reflected below.
The directors and executive officers of the Company and their present positions with the Company are as follows:
All directors of the Company hold office until the next annual meeting of the stockholders and until their successors have been elected and qualified. The officers of the Company are elected by the Board of Directors at the first meeting after each annual meeting of the Company’s stockholders and hold office until their death, until they resign or until they have been removed from office.
Set forth below is certain information with respect to each director:
ROBERTA LIPSON>, 53, co-founded the Company in 1981. Ms. Lipson served as the Chairman of the Board of Directors from 1981 until 2004 and has served as the Chief Executive Officer since 1981. From 1979 until founding the Company in 1981, Ms. Lipson was employed in China by Sobin Chemical, Inc., a worldwide trading company, as Marketing Manager, coordinating marketing and sales of various equipment in China. Ms. Lipson was employed by Schering-Plough Corp. in the area of product marketing until 1979. Ms. Lipson received a B.A. degree in East Asian Studies from Brandeis University and an MBA degree from Columbia University Graduate School of Business.
ELYSE BETH SILVERBERG>, 51, co-founded the Company in 1981. Ms. Silverberg has served as the Company’s Executive Vice President and Secretary and as a Director since that time. Prior to founding the Company, Ms. Silverberg worked with Ms. Lipson at Sobin Chemical, Inc. from 1980 to 1981 and was an intern in China with the National Council for U.S.-China Trade from 1979 to 1980. Ms. Silverberg received a B.A. degree in Chinese Studies and History from the State University of New York at Albany.
LAWRENCE PEMBLE>, 51, joined the Company in 1984 and has served as Executive Vice President, Treasurer and Chief Financial Officer since January 1996. From 1986 until 1996, Mr. Pemble served as Vice President of Marketing. From 1986 through April 1992 and September 1993 to the present, Mr. Pemble has also served as a Director of the Company. Prior to joining the Company, Mr. Pemble was employed by China Books and
Periodicals, Inc. as Manager, East Coast Center. Mr. Pemble received a B.A. degree in Chinese Studies and Linguistics from the State University of New York at Albany.
A. KENNETH NILSSON>, 75, has served as a Director of the Company since January 1996 and the Chairman of the Board of the Company since October 2004. Mr. Nilsson formerly served as President of Cooper Laboratories, Inc.; President of Cooper Lasersonics, Inc.; Managing Director of Pfizer Taito Ltd.; President of Max Factor, Japan; and Chairman of the Monterey Institute of International Studies. Mr. Nilsson received a B.A. degree from the University of Southern California and an M.A. degree from the University of California.
HOLLI HARRIS>, 41, has served as a Director of the Company since August 2004. Ms. Harris worked for the U.S. State Department at the U.S. Embassy in Moscow, and has since served in financial and strategic management positions in the energy, banking, biotech and automotive industries. In 2003, Ms. Harris was a Financial Analyst with Amgen Inc., an international biotechnology and pharmaceutical firm. From 2004 to 2008, Ms. Harris was a Financial Manager at Corbis Corporation, an international visual and image solutions provider. Ms. Harris currently is an independent business strategy and process consultant. Ms. Harris has a dual degree in Russian Language and International Relations from the University of California - Davis and an MBA in Finance from the University of Michigan.
CAROL R. KAUFMAN>, 59, has served as a Director of the Company since November 2000. Ms. Kaufman has been Vice President and Chief Administrative Officer of The Cooper Companies, Inc., a medical device company, since October 1995 and was elected Vice President of Legal Affairs in March 1996 and was elected Senior Vice President in October 2004. From January 1989 through September 1995, she served as Vice President, Secretary and Chief Administrative Officer of Cooper Development Company, a healthcare and consumer products company that was a former affiliate of The Cooper Companies, Inc. Ms. Kaufman received her undergraduate degree from Boston University.
JULIUS Y. OESTREICHER>, 78, has served as a Director of the Company since January 1996. Mr. Oestreicher has been a partner with the law firm of Oestreicher & Ennis, LLP and its predecessor firms for more than thirty years, engaging primarily in estate, tax and business law. Mr. Oestreicher received a B.S. degree in Business Administration from City College of New York and a J.D. degree from Fordham University School of Law.
ANNE MARIE MONCURE>, 52, has served as President of United Family Hospitals and Clinics since May 2006. From August 2004 to April 2006, she served as Managing Director of Indraprastha Medical Corporation Ltd. in New Delhi, India. From 1998 to 2004, she served as Vice President and Executive Director of Providence Hospital Northeast for Sisters of Charity Providence Hospitals in Columbia, South Carolina.
The system of governance practices followed by the Company is memorialized in the Company’s Governance Guidelines and the charters of the three committees of the Board of Directors. The Governance Guidelines and charters are intended to ensure that the Board will have the necessary authority and practices in place to review and evaluate the Company’s business operations and to make decisions that are independent of the Company’s management. The Governance Guidelines also are intended to align the interests of directors and management with those of the Company’s stockholders. The Governance Guidelines establish the practices the Board will follow with respect to board composition and selection, board meetings and involvement of senior management, chief executive officer performance evaluation, succession planning, board committees and director compensation. The Board annually conducts a self-evaluation to assess compliance with the Governance Guidelines and identify opportunities to improve Board performance.
The Governance Guidelines and committee charters are reviewed periodically and updated as necessary to reflect changes in regulatory requirements and evolving oversight practices. The Board has three committees: an Audit Committee, a Compensation Committee and a Governance and Nominating Committee. The Governance Guidelines, as well as the charter for each committee of the Board, may be viewed at www.chindex.com.
We believe that independent directors play a critical role in governing the Company, and we are committed to ensuring that a majority of our directors are independent. Currently four of our seven directors satisfy the independence requirements of the Nasdaq Stock Market’s listing standards. Under these standards, a director is not independent if he or she has certain specified relationships with the Company or any other relationship that in the opinion of the Board of Directors would interfere with his or her exercise of independent judgment as a director or that are enumerated under such standards. The independent directors are: Ms. Harris, Ms. Kaufman, Mr. Nilsson and Mr. Oestreicher.
The Board has determined that each member of our Audit Committee, our Governance and Nominating Committee and our Compensation Committee is independent under these standards. These determinations were made after reviewing all relevant transactions and relationships between each director and any of his or her family members, on one hand, and the Company, our senior management and our independent auditor, on the other hand.
Board Committees and Procedures
Our full Board of Directors considers all major decisions. However, we have established a Governance and Nominating Committee, an Audit Committee and a Compensation Committee so that some matters can be addressed in more depth than may be possible in a full board meeting.
Governance and Nominating Committee. The current members of the Governance and Nominating Committee are Mr. Nilsson (Chair) and Mr. Oestreicher. The Governance and Nominating Committee considers candidates for Board membership suggested by its members and other Board members and management. This Committee will consider Director candidates from stockholders for election at the Annual Meeting if such nominees are submitted in accordance with the procedures set forth in the Company’s bylaws. During fiscal 2008, the Governance and Nominating Committee held two meetings.
The principal responsibilities of the Governance and Nominating Committee include: (a) determining the slate of director nominees for election to the Company’s Board of Directors; (b) identifying and recommending candidates to fill vacancies occurring between annual shareholder meetings; (c) reviewing the composition of Board committees; (d) monitoring compliance with, reviewing, and recommending changes to the Company’s Governance Guidelines; and (e) reviewing the Company’s policies and programs that relate to matters of corporate responsibility, including public issues of significance to the Company and its stakeholders. The Governance and Nominating Committee’s role includes periodically reviewing the compensation paid to non-employee directors, and making recommendations to the Board for any adjustments. The Governance and Nominating Committee regularly reviews the charters of Board committees and, after consultation with the respective committee chairs, makes recommendations, if necessary, about changes to the charters. The specific responsibilities and functions of the Governance and Nominating Committee are delineated in the Governance and Nominating Committee Charter.
The Governance and Nominating Committee annually reviews with the Board the applicable skills and characteristics required of Board nominees in the context of current Board composition and Company circumstances. In making its recommendations to the Board, the Governance and Nominating Committee considers, among other things, the qualifications of individual director candidates. The Governance and Nominating Committee works with the Board to determine the appropriate characteristics, skills, and experiences for the Board as a whole and its individual members with the objective of having a Board with diverse backgrounds and experience in business, government, education, and public service. In evaluating the suitability of individual Board members, the Board takes into account many factors, including general understanding of marketing, finance, and other disciplines relevant to the success of a large publicly traded company in today’s business environment; understanding of the Company’s business and technology; educational and professional background; and personal accomplishment. The Board evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of the Company’s business and represent shareholder interests through the exercise of sound judgment, using its diversity of experience. In determining whether to recommend a director for re-election, the Governance and Nominating Committee also considers the director’s past attendance at meetings and participation in and contributions to the activities of the Board.
The Committee will consider stockholder recommendations for candidates for the Board. The name of any recommended candidate for director, together with a brief biographical sketch, a document indicating the candidate’s willingness to serve, if elected, and evidence of the nominating stockholder’s ownership of Company stock should be sent to the attention of the Secretary of the Company.
Audit Committee. The current members of our Audit Committee are Ms. Harris (Chair), Ms. Kaufman, Mr. Oestreicher and Mr. Nilsson, each of whom meets the independence requirements for audit committee members under Section 10A(m)(3) of the Securities Exchange Act of 1934 and the listing standards of The Nasdaq Stock Market. Additionally, the Board has determined that each of Ms. Harris, Ms. Kaufman and Mr. Nilsson is an audit committee financial expert as defined by the Securities Exchange Commission rules. The Audit Committee meets at least annually to review the results of the annual audit and discuss the financial statements. The Audit Committee also meets with the Company’s independent registered public accounting firm quarterly to discuss the results of the their quarterly reviews as well as quarterly results and quarterly earnings releases. The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company and such other duties as directed by the Board. The Audit Committee’s purpose is to oversee the accounting and financial reporting processes of the Company and the audits of the Company’s financial statements. The Committee’s role includes a particular focus on the qualitative aspects of financial reporting to stockholders, and on the Company’s processes to manage business and financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements. The Committee is directly responsible for the appointment, compensation, and oversight of the independent registered public accounting firm engaged to prepare or issue an audit report on the financial statements of the Company. The Audit Committee reviews and reassesses its charter annually and recommends any changes to the Board of Directors for approval. The specific responsibilities in carrying out the Audit Committee’s oversight role are set forth in the Audit Committee’s Charter. During fiscal 2008, the Audit Committee held five meetings.
Compensation Committee. The current members of our Compensation Committee are Mr. Oestreicher (Chair), Ms. Kaufman and Mr. Nilsson, each of whom meets the independence requirements of The Nasdaq Stock Market. The functions of the Compensation Committee include reviewing the competitiveness of the Company’s executive compensation programs, reviewing the performance of the CEO and the executive management team, reviewing and approving CEO goals and objectives and setting CEO compensation levels, approving salaries, bonus and other compensation for all corporate officers at the level of executive vice president and above, reviewing and approving awards made under any executive officer bonus plan, reviewing and making recommendations concerning long-term incentive compensation plans, including the use of stock options and other equity-based awards, administering the Company’s equity compensation plans, producing an annual Report of the Compensation Committee on Executive Compensation for the Company’s annual proxy statement in compliance with applicable Commission rules and regulations, and attending to such other matters relating to compensation as may be prescribed by the Board of Directors. The Committee’s charter grants the Committee the authority, without consulting or obtaining the approval of any officer in advance, to retain and terminate any consultant that it uses to assist in the Committee’s evaluation of director or executive officer compensation, and the Committee may elect to obtain such an engagement in the future. The Compensation Committee reviews and reassesses its charter annually and recommends any changes to the Board of Directors for approval. The specific responsibilities in carrying out the Compensation Committee’s role are set forth in the Compensation Committee’s Charter. A report of the Compensation Committee appears at “Executive Compensation – Compensation Committee Report” below. During fiscal 2008, the Compensation Committee held five meetings.
Board Meetings and Attendance
The full Board of Directors met nine times during fiscal 2008. Each incumbent director attended each of our board meetings and the meetings of the board committees on which he or she served.
Code of Business Conduct
The Company has adopted a Code of Business Conduct, which is applicable to all of its directors, officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer. Certain sections of the Code are also applicable to the Board of Directors. The Code is available on the Company’s website at www.chindex.com. The Company intends to post amendments to or waivers from the Code to the extent applicable to its chief executive officer, principal financial officer or principal accounting officer.
Stockholder Communications with the Board of Directors
The Board of Directors has adopted the following policy concerning stockholder communications: Any stockholder wishing to contact the Board of Directors, any committee of the Board, or any individual director regarding bona fide issues or questions about the Company may do so by sending a written communication to the Board of Directors or the appropriate committee or director c/o the Secretary at the following address: Chindex International, Inc., 4340 East West Highway, Suite 1100, Bethesda, MD 20814.
The Secretary will review all such correspondence and forward it (or a summary) to the appropriate parties. Where the Secretary deems it appropriate, such forwarding will take place on an expedited basis. Communications raising concerns relating to the Company’s accounting, internal controls, or audit matters will immediately be brought to the attention of the chairman of the Audit Committee and will be handled in accordance with the procedures established by the Audit Committee for such matters.
The Company believes that it is important for directors to directly hear concerns expressed by stockholders. Accordingly, Board members are encouraged to attend the Annual Meeting of Stockholders. All of the members of the Board of Directors at the time of the annual meeting of stockholders in 2007 attended such meeting.
Compensation Committee Interlocks and Insider Participation
The members of the Company’s Compensation Committee are Mr. Oestreicher (Chair), Ms. Kaufman and Mr. Nilsson. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.
Directors who are also employees of the Company are not separately compensated for their services as directors.
Cash Compensation to Board Members. Effective October 1, 2006, each director who is not an employee of the Company is paid, for serving on the Board of Directors, a retainer at the rate of $10,000 per annum and an additional $2,500 for each meeting of the Company’s stockholders attended, $1,000 for each meeting of the Board of Directors attended and $750 for each meeting of a committee of the Board of Directors attended.
Equity Compensation to Board Members. The Company has granted restricted stock to its outside directors on an annual basis. During fiscal 2008, each outside director was granted 6,000 shares of restricted stock for service on the Board of Directors and an additional 2,000 shares of restricted stock for service as chair of the Board of Directors or of a committee thereof. These shares vest ratably on the date of grant and the six month anniversary of the date of grant.
Other. Board members are reimbursed for reasonable expenses in attending meetings of the Board of Directors and for expenses incurred in connection with their complying with our corporate governance policies. The Company also provides directors’ and officers’ liability insurance for our directors and has entered into indemnity agreements with them.
Non-management Directors’ Compensation for Fiscal 2008
The following table shows the compensation received by each of our non-employee directors for the fiscal year ended March 31, 2008.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s Common Stock, to file with the Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company during fiscal 2008, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% stockholders were complied with, except: three filings by Ms. Moncure reflecting four transactions; two filings by Ms. Chartier reflecting two transactions; two filings by Ms. Silverberg reflecting three transactions; one filing by Mr. Oestreicher reflecting one transaction; three filings by Mr. Pemble reflecting fifteen transactions; and two filings by Ms. Lipson reflecting three transactions.
Compensation Discussion and Analysis
Overview of Compensation Program and Philosophy
Our compensation program is intended to:
The ultimate objective of our compensation program is to improve shareholder value. In furtherance of that objective, we evaluate both performance and compensation of employees to ensure that we maintain our ability to attract and retain employees and that compensation provided to employees remains competitive relative to the compensation paid to similarly situated employees of perceived comparable companies in the marketplace. The Company historically has not believed that it can reasonably identify peer issuers on an industry or line-of-business basis principally due to the Company’s size and unique combination of two business segments: the operation of Western medicine healthcare facilities in China and the marketing, distribution and sales of medical equipment in China on behalf of manufacturers. As such, we do not believe that we have such a peer group against which to compare and from which to directly and empirically derive a basis for our compensation program. We do, however, generally consider entities with similar equity market capitalizations in making compensation decisions.
The above policies guide the Compensation Committee of our Board of Directors (the “Committee”) in assessing the compensation to be paid to our executive officers. The Committee endeavors to ensure that the total compensation paid to executive officers is fair, reasonable and competitive, consistent with our compensation policies. The above policies also guide the Committee as to the proper allocation between long-term compensation, current cash compensation, and short-term bonus compensation.
In determining the particular elements of compensation that will be used to implement our overall compensation policies, the Committee also takes into consideration a number of factors related to our performance, such as earnings per share, profitability and revenue growth, with particular focus on operating income.
Role of Executive Officers in Compensation Decisions
The Committee reviews and approves the compensation paid to our President and Chief Executive Officer. With regard to the compensation paid to each executive officer other than the President and Chief Executive Officer, the President and Chief Executive Officer reviews, on an annual basis, the compensation paid to each such executive officer during the past year and submits to the Committee her recommendations regarding the compensation to be paid to such persons during the next year. Following a review of such recommendations, the Committee approves compensation for such officers in an amount the Committee deems reasonable and appropriate.
Management plays a significant role in the compensation-setting process for executive officers, other than the President and Chief Executive Officer, by:
Management also prepares meeting information for most Committee meetings, and the President and Chief Executive Officer participates in Committee meetings at the Committee’s request to provide:
Setting Executive Compensation
Based on the foregoing objectives, the Committee has structured our annual and long-term incentive-based cash and non-cash executive compensation to motivate executive officers to achieve our business goals and reward executive officers for achieving such goals.
In making compensation decisions, the Committee believes that information regarding pay practices at other companies is useful, but not determinative, because the Committee recognizes that our compensation practices must be competitive in the marketplace in general.
In fiscal 2008, the Committee did not engage a consultant to provide advice regarding compensation matters. However, the Company subscribes to an internet-based service that provides cost-of-living differentials around the world and comparable position compensation in a variety of industries, which service was used by the Compensation Committee in its decision-making during fiscal 2008. The information provided by this service allowed for a comparison of the compensation generally paid to similarly situated executive officers at similar size companies.
The Committee relies upon its judgment and, when appropriate, management’s judgment, of each individual executive officer in determining the amount and mix of compensation elements and whether each particular payment or award provides an appropriate incentive and reward for performance that sustains and enhances stockholder value. Key factors affecting this judgment include:
In addition, in fiscal 2008 the Committee considered each executive officer’s current salary and prior-year bonus, the appropriate balance between incentives for long-term and short-term performance, the compensation paid to the executive officer’s peers, if any, within the Company, the self evaluations of each of the executive officers and the recommendations by the CEO as to each other executive officer.
2008 Executive Compensation Components
For the fiscal year ended March 31, 2008, the principal components of compensation for the executive officers were:
We provide executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. In setting base salaries, the Committee periodically reviews published compensation survey data for similar size companies. The base salary for each of the executive officers is guided by the salary levels for perceived comparable positions in the marketplace, as well as the individual’s personal performance and
internal alignment considerations. The relative weight given to each factor varies with each individual at the Committee’s discretion.
Each executive officer’s base salary is typically reviewed every year and is adjusted from time to time on the basis of:
Our overall anticipated and actual performance and profitability also have been factors in determining the base salaries for the executive officers.
On December 17, 2007, based on consideration of the foregoing matters, the Committee increased, effective January 1, 2008, the base salaries of Ms. Lipson, Ms. Silverberg, Mr. Pemble and Ms. Moncure by $50,000, $45,000, $45,000 and $85,000, respectively, to $300,000, $270,000, $270,000 and $240,000, respectively.
Performance-Based Annual Incentive Bonus
The Committee considers each year whether a performance-based annual incentive bonus plan should be established for the year and, if so, approves the group of executives eligible to participate in such plan for that year. For fiscal 2008, the Committee determined that annual incentive compensation would be paid partly in cash and partly in stock options, in each case with the amounts contingent on meeting performance goals set by the Committee. As such, the Committee adopted a performance-based annual Executive Management Incentive Program (the “EMI Program”), designed to motivate and reward performance for the year for eligible executive officers. The EMI Program for fiscal 2008 was modeled on the program from 2007, with certain adjustments. The EMI Program for fiscal 2008 was applied to each of the Company’s four executive officers.
Cash Bonus. For fiscal 2008, the cash bonus portion of the EMI Program included various financial performance targets (described below) based on the participant’s position, with the payout targets for executives ranging from 10% to 35% of base salary based on achievement of those targets. The Committee has discretion to award an additional bonus of 20% of base salary for achievement of various non-financial objectives, such as developmental and transformational projects, human resources and successor development and other objectives developed by the Committee at the beginning of or during the applicable fiscal year, or if the Committee determines that payment of a bonus is otherwise appropriate, such as for example if events beyond the control of the executives prevent complete achievement of quantified goals. The cash bonuses under the EMI Program are designed to link a significant portion of the executive officer’s total cash compensation to overall Company and/or business segment performance and to position the executive’s cash compensation generally within a perceived range for comparable positions at similar size companies when superior performance is achieved, without empirical reference to any specific peer group.
The Committee sets minimum, target and maximum levels for our financial objectives each year and the payment and amount of any bonus is generally dependent upon whether we achieve those performance goals. For 2008, the objectives were based primarily upon our achievement of specified results with respect to corporate operating income (COI). In making the determination of minimum, target and maximum levels, the Committee considered the specific circumstances facing us during the year and our strategic plan for the year. These levels were based on our confidential internal performance goals and not on any published or analyst estimates. The Committee generally establishes financial objectives that it believes can be reasonably achieved with strong individual performance over the fiscal year.
If the minimum, target or maximum performance objectives are met, participants are eligible to receive a bonus payment under the EMI Program based on attainment of that performance level, but adjusted to reflect his or her individual performance. Individual performance is based upon the Committee’s evaluation of the individual employee’s performance and contribution for the fiscal year. For example, if an executive officer has a target bonus amount of 25% of his or her base salary and we meet the target financial objectives for the fiscal year, the executive officer will receive a cash incentive bonus payment under the plan equal to 25% of his or her current annual base salary if the executive officer has also met his or her individual target goals for the fiscal year. If we meet the target financial objectives for the year and the executive officer’s performance exceeds his or her individual target goals for the fiscal year, his or her bonus payment for the year may be increased by up to 20% of annual base salary. If,
on the other hand, we meet the target financial objectives for the year but the executive officer’s individual performance is below his or her individual goals for the fiscal year, his or her bonus payment for the year will be less than 25% of his or her annual base salary. If we do not meet the minimum financial objectives for the fiscal year, generally no bonus payments will be made under the EMI Program, although it is possible that the Committee may in its discretion award a bonus of up to 20% of annual base salary under the additional bonus provision of the EMI Program, based on the achievement of non-financial objectives.
For fiscal year 2008, the cash amount that could have been received by each of the four executive officers covered by the EMI Program ranged from 0% (assuming the minimum objectives were not met) of annual base salary to up to 55% of annual base salary, with a targeted bonus amount of 25% of base salary at attainment of target level performance. For the President and Chief Executive Officer and the Chief Financial Officer, the target bonus was based solely on attainment of targeted COI. For the Executive Vice President and Secretary, the target bonus was based 40% on the attainment of targeted COI, 40% on attainment of targeted operating income of the Company’s Medical Products division, and 20% on non-financial performance criteria. For the President of United Family Hospitals and Clinics, the target bonus was based solely on attainment of targeted operating income of the Company’s Healthcare Services division. The table entitled “Grants of Plan-Based Awards in Fiscal 2008” in this report sets forth the estimated range of cash payouts to executive officers under the EMI Program assuming minimum, target or maximum performance objectives were met for fiscal year 2008.
Potential Cash Bonus Under EMI Program. The following table provides the potential cash bonus payable under the EMI Program for fiscal 2008:
In determining whether and the extent to which applicable target amounts had been achieved, the Committee met promptly following the availability of the audited financial statements of the Company for fiscal 2008 to consider those financial statements. In addition, the Committee instructed management to provide calculations demonstrating such achievement. Following the review of those financial statements and calculations, the Committee concluded that each of Roberta Lipson, Lawrence Pemble and Anne Marie Moncure had earned the maximum objective awards of 35% of their respective base salaries and that Elyse Beth Silverberg had earned the maximum objective award of 35% on that 40% portion of her incentive compensation that was pegged to consolidated Company performance. Further, the Committee determined that significant adverse circumstances over which Ms. Silverberg had no control, including in particular significant delays in governmental approvals of product registrations, had prevented achievement by the Medical Products division of the target amounts to which another 40% of Ms. Silverberg’s incentive compensation was pegged. Acknowledging the effort and results of Ms. Silverberg’s performance in light of such circumstances, the Committee awarded to Ms. Silverberg one-half of the non-financial discretionary bonus provided for in the EMI Program with respect to divisional performance. The Committee also considered the non-financial discretionary awards authorized by the EMI Program for up to 20% of base salary and, after consideration of various non-financial factors, awarded the full amount of such award to each executive officer. Consequently, the named executive officers received the following payments in July 2008 under the EMI Program for fiscal year 2008 performance:
The Committee retains wide discretion to interpret the terms of the EMI Program and to interpret and determine whether our financial objectives or an individual’s performance objectives have been met in any particular fiscal year. The Committee also retains the right to exclude extraordinary charges or other special circumstances in determining whether our financial objectives were met during any particular fiscal year. Further, the Committee may consult with the Board of Directors or seek ratification from the Board of Directors with respect to interpretations of the terms of the EMI Program.
Although the Committee may approve cash bonuses outside of the EMI Program for all of our executive officers to reward accomplishments or milestones not covered by the EMI Program, other than as described above, no such bonuses were awarded for fiscal 2008 to the executives that participated in that program.
Equity Awards. In addition to the cash bonuses payable under the EMI Program for fiscal 2008, the EMI Program also provided for the grant of options to purchase shares of the Company’s Common Stock in order to provide equity-based incentive compensation to motivate and reward performance for the year for eligible executive officers. These options were granted under our 2007 Stock Incentive Plan (the “2007 Plan”).
If the target or maximum performance objectives were met, participants were eligible to receive an award of stock options under the EMI Program and pursuant to the 2007 Plan, with the specific amount that such participant receives dependent on his or her individual performance. Achievement of only the minimum performance level would not entitle the executives to a stock option award. As with the cash bonuses, an individual’s stock options award under the EMI Program was based on achievement of performance objectives, adjusted to reflect the evaluation of the individual employee’s performance and contribution for the fiscal year.
For fiscal year 2008, the stock options that could have been received by each of our executive officers under the EMI Program was: 0 options (assuming the target objectives were not met), 22,500 options (assuming only target objectives were met), or 30,000 options (assuming maximum objectives were met), giving effect to the Company’s three-for-two stock split having a record date of April 1, 2008 and assuming that individual performance targets were satisfied.
Based on the same financial information and calculations as used with respect to the cash amounts, the Committee concluded that each of Ms. Lipson, Mr. Pemble and Ms. Moncure had earned the maximum objective awards of stock options to purchase 30,000 shares of common stock and that Ms. Silverberg had earned 40% of such maximum (amounting to options to purchase 12,000 shares of common stock). The following table shows the foregoing grants of stock options, which have an exercise price per share of $19.81, a term of ten years, and vest ratably (subject to acceleration) on the first three anniversaries of June 17, 2008.
Equity Awards for Fiscal Year 2007. In June 2007, the Committee determined that each of Ms. Lipson, Ms. Silverberg and Mr. Pemble had earned the right to a grant of 4,500 shares of restricted stock (as adjusted to reflect the stock split) under the Company’s 2004 Stock Incentive Plan (the “2004 Plan”), under the Company’s EMI Program for fiscal 2007. The Committee granted such awards to Ms. Silverberg and Mr. Pemble in June 2007.
However, at that time, there were insufficient shares available under the Company’s 2004 Plan to grant Ms. Lipson her full award. As a result, the Committee granted Ms. Lipson 3,000 shares of restricted stock under the 2004 Plan in June and made up the shortfall by a grant of an additional 1,500 shares under the 2007 Plan in September, after shareholders had approved the 2007 Plan.
Long-Term Equity Incentive Compensation
The Board has delegated to the Committee the authority to make grants of stock options, shares of restricted stock, and restricted stock units (“RSUs”) to executive officers and other employees under our 2007 Plan. In fiscal year 2008, our equity compensation program consisted primarily of grants of shares of restricted stock and stock options. Grants of equity compensation were designed to:
Stock option, restricted stock and RSU grants are designed to align the interests of the executive officers with those of our shareholders and provide each executive officer with a significant incentive to manage the company from the perspective of an owner with an equity stake in the business.
Each stock option grant allows the executive officer to acquire shares of common stock at an exercise price equal to the closing price of our common stock on the grant date over a specified period of time not to exceed 10 years. Generally, shares subject to the option grant become exercisable in a series of installments over a four-year period, contingent upon the executive officer’s continued employment. Accordingly, the option grant will provide a positive return to the executive officer only if he or she continues to provide services to us during the vesting period, and then only if the market price of the shares appreciates over the option term. Each grant of shares of restricted stock vests in installments over a period specified at the time of grant, thus incentivizing the executive officer to remain employed by us during the vesting period.
The size of the grants of stock options, shares of restricted stock, and RSUs to each executive officer is or will be set by the Committee at a level that is intended to create a meaningful opportunity for stock ownership and participation in the increases in our equity value, based upon the individual’s current position, the individual’s personal performance in recent periods and his or her potential for future responsibility and promotion over the term of the particular grants. The size of the grants is also determined with reference to equity-based awards made to executive officers by perceived comparable companies, to the extent reasonably determinable. The relevant weight given to each of these factors can vary from individual to individual.
As to its annual grants for fiscal 2008, in September 2007 the Committee granted to each executive officer both shares of restricted stock and stock options. See the table entitled “Grants of Plan-Based Awards in Fiscal 2008” in this report for detailed information about the stock options and restricted shares granted to the executive officers during fiscal year 2008.
Perquisites and Other Personal Benefits
We provide certain executive officers with perquisites and other personal benefits that the Committee believes are reasonable and consistent with its overall compensation program to better enable us to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to executive officers.
As described below, certain of our executive officers have employment agreements that expressly entitle them to perquisites and other personal benefits. In particular, each of Ms. Lipson and Mr. Pemble receives an annual tuition allowance, each of Ms. Lipson and Ms. Silverberg receives a monthly housing allowance in connection with their residence outside the United States and Mr. Pemble receives a monthly allowance relating to remote office expenses. In addition, Ms. Moncure receives an annual housing allowance in connection with her residence outside the United States and an annual travel allowance.
On October 31, 2006, the Committee approved new employment agreements for each of Ms. Lipson, Ms. Silverberg and Mr. Pemble, retroactive to March 1, 2006. The agreements were intended to ensure that the Company would be able to maintain a continuous, stable and competent team. The Committee believes that the future success of the Company will depend to a significant degree on the skills and competence of the executive officers. Each employment agreement has an eight-year term. The employment agreements provide for annual base salaries, which will be reviewed annually. In December 2007, the Committee reviewed the salaries and increased them, effective January 1, 2008, to $300,000, $270,000 and $270,000 for Ms. Lipson, Ms. Silverberg and Mr. Pemble, respectively, following due consideration of relevant factors. Also, effective January 1, 2008, Ms. Lipson’s and Ms. Silverberg’s salaries were converted to be denominated in Chinese Renminbi (“RMB”) at the rate of 7.37 RMB to $1.00. The conversion was in response to the decline in the value of the U.S. Dollar (“USD”) relative to Chinese RMB and in consideration of the fact that because they are living in China, most of their expenses are in Chinese currency. The employment agreements provide for the payment of annual bonus compensation to the executive officer based on the success of business operations and the pre-tax profits of the Company as well as upon the performance of the executive officer, which bonus has been implemented pursuant to the EMI Program. In addition, the employment agreements provide that the Company may grant stock options and/or other long-term equity incentive compensation to the executive officer, although such compensation is not quantified in the employment agreements. The employment agreements further provide for the payment of annual allowances for the tuition for minor children of Ms. Lipson and Mr. Pemble, for certain housing expenses of Ms. Lipson and Ms. Silverberg and for certain remote office expenses of Mr. Pemble in amounts approved from time to time by the Committee. Currently, such amounts as most recently approved by the Committee are reimbursement for actual tuition expenses incurred up to $90,000 per year, $5,000 per month for the housing expenses and $5,000 per month for the remote office expenses.
For a description of the provisions of the employment agreements relating to termination of employment, see the section titled “Potential Payments Upon Termination or Change of Control.”
Anne Marie Moncure has a three-year employment agreement with Beijing Chindex Hospital Management Consulting Co., Ltd., a subsidiary of the Company, pursuant to which she serves as President of United Family Hospitals and General Manager of the Beijing United Family Hospitals & Clinics. The employment agreement provides for an annual base salary of $155,000 and the payment of annual bonus compensation of up to $35,000, based upon mutually determined performance criteria. In December 2007, the Committee reviewed Ms. Moncure’s salary and increased it, effective January 1, 2008, to $240,000 (converted to be denominated as 1,935,636 RMB) following due consideration of relevant factors. In addition, the employment agreement provides an annual housing expense of up to $30,000, an annual travel allowance of $10,000 for spouse/family travel and home leave (both also converted to be denominated in RMB) and an annual allowance for professional membership and conferences. The employment agreement provides for termination of Ms. Moncure’s employment with or without “cause” at any time, and in the event that the employment agreement is terminated prior to expiration without renewal or extension, Ms. Moncure is entitled to severance payments equal to one month salary for every year worked. For purposes of Ms. Moncure’s employment agreement, “cause” means continuation for a period of four months of mental or physical disability which prevents Ms. Moncure from satisfactorily performing her duties, unauthorized disclosure of confidential information under certain circumstances, abuse or neglect of a patient, professional or personal misconduct, demonstrated incompetence or persistent negligence in the performance of duties; and violation or breach of employment agreement under certain circumstances. The employment agreement also provides that Ms. Moncure will not work with a competing medical facility within the People’s Republic of China during a two-year period following termination of her employment with United Family Hospitals for any reason and that Ms. Moncure will maintain in confidence confidential information relating to United Family Hospitals’ or the Company’s business and all matters relating to any of the United Family Hospitals’ patients during the term of the agreement and for one year thereafter.
In making decisions with respect to any element of an executive officer’s compensation, the Committee considers the total compensation that may be awarded to the officer, including salary, annual bonus and long-term incentive compensation. In addition, in reviewing and approving the employment agreements for executive officers, the Committee considers the other benefits to which the officer is entitled by the agreement, including compensation payable upon termination of the agreement under a variety of circumstances. The Committee’s goal is to award compensation that is reasonable when all elements of potential compensation are considered.
Tax and Accounting Implications
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code, as amended, disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that such compensation exceeds $1.0 million per covered officer in any fiscal year. The limitation applies only to compensation that is not considered to be performance-based. Non-performance based compensation paid to the executive officers for the fiscal year ended March 31, 2008 did not exceed the $1.0 million limit for any executive officer. The Company’s stock incentive plans have been structured so that awards under these plans may qualify as performance-based compensation for purposes of Section 162(m), depending on the terms of the award. To date, the stock options granted to the executive officers qualified as performance-based.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with the Company’s management. Based on the review and discussions, the Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this report.
THE COMPENSATION COMMITTEE
Julius Y. Oestreicher (Chair)
Carol R. Kaufman
A. Kenneth Nilsson
Summary Compensation Table
All share numbers and exercise prices have been adjusted to reflect the three for two stock split effective April 1, 2008.
Grants of Plan-Based Awards in Fiscal 2008
The following table provides information about equity awards granted to the named executives in the fiscal year ended March 31, 2008. All share numbers and exercise prices have been adjusted to reflect the three for two stock split effective April 1, 2008.
Outstanding Equity Awards at 2008 Fiscal Year-End
The following table provides information on the holdings of stock options and unvested restricted stock by the named executives as of March 31, 2008. All share numbers and exercise prices have been adjusted to reflect the three for two stock split effective April 1, 2008.
Option Exercises and Stock Vested in Fiscal 2008
Potential Payments Upon Termination or Change of Control
The Company has entered into employment agreements with Ms. Lipson, Ms. Silverberg, Mr. Pemble and Ms. Moncure. The agreements with Ms. Lipson, Ms. Silverberg and Mr. Pemble provide that in the event of the executive’s termination by the Company for “cause” or the executive’s voluntary resignation without “good reason,” the executive would only be entitled to earned but unpaid salary, earned but unpaid bonus for a previously completed fiscal year, reimbursement for business expenses, payment for unused vacation and any amounts payable under Company benefit plans or policies. Under the agreements, “cause” means willful misconduct or gross negligence, dishonesty or misappropriation of assets, certain absences from work, unauthorized disclosure of confidential or proprietary information under certain circumstances, a conviction for certain crimes or a violation of certain laws, or the failure to attempt to perform the executive’s duties, most of which events are subject to opportunities to cure.
The agreements also provide that in the event of the executive’s termination by the Company without “cause” or by the executive for “good reason,” the executive would be entitled to all of the above amounts and benefits plus (i) a lump sum payment equal to three times the sum of the ensuing year’s salary plus the prior year’s bonus, (ii) a pro rata portion of the current year’s bonus (based on the greater of the executive’s average bonus for the two prior years or 30% of salary); (iii) continuation of specified medical benefits for life (unless the executive reaches the age of 65, or becomes eligible for Medicare or corresponding benefits with a new employer); (iv) vesting of all equity awards, and (v) continuation of any tuition reimbursements, remote office or housing allowances for three years. The executive is also entitled to a tax gross-up to the extent amounts payable to the executive in the event of a change of control are subject to excise tax. Under the employment agreements, “good reason” means any reduction in the executive’s authority, duties or responsibilities; an adverse change in the executive’s position, title or responsibilities (except for changes solely by virtue of the Company being acquired by another entity); the assignment of duties to the executive that are inconsistent with his or her position and status; a reduction in the executive’s annual salary or bonus opportunity; the failure to cure a material breach of the executive’s employment agreement by the Company; or relocation of the executive without his or her consent, all but the last of which events are subject to an opportunity to cure.
The agreements also provide that in the event of the executive’s death or becoming disabled their employment would terminate immediately and automatically. The executive would only be entitled to earned but unpaid salary, earned but unpaid bonus for a previously completed fiscal year, reimbursement for business expenses, payment for unused vacation, any amounts payable under Company benefit plans or policies, and a pro rata portion of the current year’s bonus. For purposes of the agreement, “disability” is defined as physical or mental incapacity of a nature which prevents the executive, in the good faith judgment of the Company’s Board of Directors, from performing the executive’s duties under the agreement for a period of 180 consecutive days or 270 days during any year.
The agreements also provide that the executive’s employment would terminate immediately and automatically upon the expiration of the term of the agreement. The executive would be entitled to earned but unpaid salary, earned but unpaid bonus for a previously completed fiscal year, reimbursement for business expenses, payment for unused vacation, any amounts payable under Company benefit plans or policies, and a pro rata portion of the current year’s bonus; provided, however, that if the executive’s employment was terminated at the expiration of the term and the Company had not previously offered to renew the employment agreement on commercially reasonable terms, then the Company would also pay or provide (i) group life, disability, sickness, hospitalization and accident insurance benefits equivalent to those to which the executive would have been entitled if continued working for the Company for an additional twelve month period, and (ii) the annual salary to the same extent to which the executive would have been entitled if he or she continued working for the Company for an additional twelve month period.
The employment agreements have non-competition, confidentiality and non-solicitation provisions. The non-competition provision states that the executive officer will not compete with the Company through the end of one year after cessation of employment, with certain exceptions. The confidentiality provision states that the executive officer will maintain the confidential information of the Company in confidence during and after employment, with certain exceptions. The non-solicitation provision states that, for one year after cessation of employment, the executive officer will not solicit for employment or hire any person who was employed by the Company during the term of such person’s employment, with certain exceptions.
The agreements provide for immediate expiration as of the termination date of any unvested equity incentive awards (stock options or restricted stock) in the event the agreement is terminated for “cause,” voluntary termination by the executive, death or disability. The agreements provide that any unvested equity incentive awards granted to the executive prior to the termination date shall become immediately vested and exercisable in the event termination is without “cause” or for “good reason.” In such cases, the executive has a period of ninety (90) days following the date of termination (or such longer period as may be provided in the respective option grant, but in no event past the respective expiration term of the option grant) to exercise all options granted under any of the Company’s plans.
Ms. Moncure’s employment agreement provides for termination of Ms. Moncure’s employment with or without “cause” at any time, and in the event that the employment agreement is terminated prior to expiration without renewal or extension, Ms. Moncure is entitled to severance payments equal to one month salary for every year worked. For purposes of Ms. Moncure’s employment agreement, “cause” means continuation for a period of four months of mental or physical disability which prevents Ms. Moncure from satisfactorily performing her duties,
unauthorized disclosure of confidential information under certain circumstances, abuse or neglect of a patient, professional or personal misconduct, demonstrated incompetence or persistent negligence in the performance of duties; and violation or breach of the employment agreement under certain circumstances.
The following table provides an estimate of the potential payments and benefits that each of the named executives would be entitled to receive upon termination of employment under various circumstances and upon a change of control. In each case, the table assumes the executive’s termination or the change of control occurred on March 31, 2008. The table does not include payments the executive would be entitled to receive in the absence of one of these specified events, such as from the exercise of previously-vested stock options (which amount can be calculated from the Outstanding Equity Awards at 2008 Fiscal Year-End Table). The table also does not include benefits that are provided on a non-discriminatory basis to salaried employees generally, including amounts payable under the Company’s 401(k) Plan.
Security Ownership Table
The following table sets forth information as to the ownership of shares of the Company’s Common Stock and Class B Common Stock as of July 25, 2008 with respect to (i) holders known to the Company to beneficially own more than five percent (5%) of the outstanding Common Stock or Class B Common Stock, (ii) each director, (iii) the Company’s named executive officers for fiscal 2008 and (iv) all directors and executive officers of the Company as a group. All share numbers have been adjusted to reflect the three for two stock split effective April 1, 2008.
and Federated Global Investment Management Corp., which act as investment advisors to registered investment companies and separate accounts that own shares of our common stock. The Investment Advisors are wholly owned subsidiaries of FII Holdings, Inc., which is a wholly owned subsidiary of Federated Investors, Inc., the Parent. All of the Parent’s outstanding voting stock is held in the Voting Shares Irrevocable Trust for which John F. Donahue, Rhodora J. Donahue and J. Christopher Donahue act as trustees. We have no independent knowledge of the accuracy or completeness of the information set forth in the Schedule 13G, but have no reason to believe that such information is not complete or accurate.
Since April 1, 2007, there has not been any transaction, and there is no currently proposed transaction, involving the Company and any of its directors, executive officers, 5% stockholders or any members of the immediate family of any of the foregoing persons, which transaction would be disclosable pursuant to Item 404 of Regulation S-K promulgated pursuant to the Securities Act of 1933.
The following table shows the fees we paid to BDO Seidman, LLP during the last two fiscal years:
The Audit Committee has determined that the provision by BDO Seidman, LLP of non-audit services is compatible with maintaining the independence of BDO Seidman, LLP. In accordance with its charter, the Audit Committee approves in advance all audit and non-audit services to be provided by BDO Seidman, LLP. In certain cases, the Audit Committee may delegate authority to pre-approve non-audit services on a preliminary basis to one or more members of the Audit Committee, provided that such pre-approvals are communicated to the full Committee at its next meeting. During fiscal 2008, all services were pre-approved by Audit Committee in accordance with this policy.
The following exhibits are filed as part of this Report:
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.