UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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1850 Parkway Place

Marietta, Georgia 30067

 

NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS

 

To be Held on June 5, 2007

 

NOTICE IS HEREBY GIVEN THAT the 2007 Annual Meeting of Stockholders of Matria Healthcare, Inc. (the “Company” or “Matria”), will be held on Tuesday, June 5, 2007, at 10:00 a.m. local time at 1850 Parkway Place, Suite 600A, Marietta, Georgia 30067, for the following purposes:

 

(1) To elect three Class III directors of the Company for a three-year term expiring at the 2010 Annual Meeting and one Class I director of the Company for a one-year term expiring at the 2008 Annual Meeting, and until their respective successors are duly elected and qualified.

 

(2) To approve the amendment and restatement of the Matria Healthcare, Inc. Long-Term Stock Incentive Plan.

 

(3) To ratify the appointment of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2007; and

 

(4) To transact such other business as properly may come before the Annual Meeting and any adjournment or postponement thereof.

 

Your vote is important regardless of the number of shares you own. Each stockholder, even those who plan to attend the annual meeting, are requested to sign, date and return the enclosed proxy card without delay in the enclosed postage-paid envelope. You may revoke your proxy at any time prior to its exercise. Any stockholder present at the Annual Meeting or any adjournment or postponement thereof may revoke his or her proxy and vote personally on each matter brought before the meeting.

 

I look forward to welcoming you at the meeting.

 

Very truly yours,

 

Roberta L. McCaw

Secretary

 

Marietta, Georgia

May 2, 2007

MATRIA HEALTHCARE, INC.

1850 Parkway Place

Marietta, Georgia 30067

 

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 5, 2007

 

GENERAL INFORMATION

 

This proxy statement and the accompanying proxy card are being furnished to stockholders in connection with the solicitation of proxies by the Board of Directors of Matria Healthcare, Inc., a Delaware corporation (the “Company”), for use at the 2007 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Tuesday, June 5, 2007, at 10:00 a.m. local time at 1850 Parkway Place, Suite 600A, Marietta, Georgia 30067, and at any adjournment or postponement thereof.

 

At the Annual Meeting, stockholders will consider and vote upon proposals to elect three Class III directors and one Class I director, approve the amendment and restatement of the Company’s Long-Term Stock Incentive Plan, ratify the appointment of KPMG LLP as the Company’s independent auditors, and such other matters as properly may come before the Annual Meeting. The Board unanimously urges stockholders to vote FOR the re-election of the Class III directors and Class I director, FOR the amendment and restatement of the Company’s Long-Term Stock Incentive Plan and FOR the ratification of the appointment of KPMG LLP.

 

It is anticipated that this proxy statement, the accompanying proxy and the 2006 Annual Report to Stockholders will first be mailed to the Company’s stockholders on or about May 2, 2007.

 

Record Date

 

The Board of Directors has fixed the close of business on April 13, 2007, as the record date (the “Record Date”) for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting and at any adjournment or postponement thereof. At the close of business on the Record Date, 21,593,661 shares of Common Stock were issued and outstanding.

 

Proxies

 

When a proxy card is returned, properly signed and dated, the shares represented thereby will be voted in accordance with the instructions on the proxy card. If a stockholder does not attend the Annual Meeting and does not return the signed proxy card, such stockholder’s shares will not be voted. If a stockholder returns a signed proxy card but does not indicate how his or her shares are to be voted, such shares will be voted FOR the election of the Class III directors and Class I director named herein, FOR approval of the amendment and restatement of the Company’s Long-Term Stock Incentive Plan and FOR the ratification of the appointment of KPMG LLP. As of the date of this proxy statement, the Board of Directors does not know of any other matters that are to come before the Annual Meeting. If any other matters are properly presented at the Annual Meeting for consideration, the persons named in the enclosed form of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment.

 

Any proxy given may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Secretary of the Company, at or before the taking of the vote at the Annual Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later dated proxy relating to the same shares of Common Stock and delivering it to the Secretary of the Company at or before the taking of the vote at the Annual Meeting or (iii) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent so as to be delivered to Matria Healthcare, Inc., 1850 Parkway Place, Marietta, Georgia 30067, Attention: Secretary, or hand delivered to the Secretary of the Company at or before the taking of the vote at the Annual Meeting.

 

The Company will bear the cost of the solicitation of proxies from its stockholders. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of the Company in person or by telephone or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for out-of-pocket expenses incurred in connection with such solicitation. Arrangements also will be made with custodians, nominees and fiduciaries for the forwarding of proxy solicitation materials to beneficial owners of shares held of record by such custodians, nominees and fiduciaries, and the Company will reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. In addition, D. F. King & Co., Inc. will assist in the solicitation of proxies by the Company for a fee of $6,500, plus reimbursement of reasonable out-of-pocket expenses.

 

Quorum

 

The presence, either in person or by properly executed proxies, of the holders of a majority of the outstanding shares of the Company’s Common Stock is necessary to constitute a quorum at the Annual Meeting. Abstentions and shares held by a broker as nominee (i.e., in “street name”) that are represented by proxies at the Annual Meeting, but that the broker fails to vote on one or more matters as a result of incomplete instructions from the beneficial owner of the shares (“broker non-votes”), also will be treated as present for quorum purposes.

 

Vote Required

 

The Company’s stockholders are entitled to one vote at the Annual Meeting for each share of Common Stock held of record by them on the Record Date. The affirmative vote of the holders of a plurality of the shares of Common Stock present in person or represented by proxy at the Annual Meeting is required to elect the Class III and Class I directors. The affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the Annual Meeting is required to approve the amendment and restatement of the Long-Term Stock Incentive Plan and to ratify the appointment of KPMG LLP as the Company’s independent auditors for fiscal 2007. Votes may be cast for or withheld from each nominee for Class III and Class I directors and for, against or abstain as to the amendment and restatement of the Long-Term Stock Incentive Plan and the ratification of the appointment of KPMG LLP. Under applicable Delaware law, broker non-votes represented at the meeting, but with respect to which such broker or nominee is not empowered to vote on a particular proposal, and abstentions will have no effect on the vote for the election of Class III and Class I directors. Abstentions will have the effect of a vote against the approval of the amendment and restatement of the Long-Term Stock Incentive Plan and the ratification of the appointment of KPMG LLP, while broker non-votes will have no effect on the outcome of such proposals.

 

I.  PROPOSALS

 

PROPOSAL 1.

 

ELECTION OF DIRECTORS

 

Background

 

Under the Company’s Certificate of Incorporation, the Board of Directors is divided into three classes, with approximately one-third of the directors standing for election each year. The three Class III nominees for election this year are Parker H. Petit, Joseph G. Bleser, and Myldred H. Mangum. Each has consented to serve for a term expiring in 2010. In addition, the one Class I nominee for election this year is Donald J. Lothrop. Mr. Lothrop has consented to a term expiring in 2008. If any director is unable to stand for election, the Board of Directors may, by resolution, provide for a lesser number of directors or designate a substitute. In the latter event, shares represented by proxies may be voted for a substitute director.

 

CLASS III NOMINEES FOR THE TERM EXPIRING IN 2010

 

Parker H. Petit, age 67, has served as Chairman of the Board of the Company since the formation of the Company through the merger (the “Merger”) of Healthdyne Maternity Management, a division of Healthdyne, Inc. and Tokos Medical Corporation on March 8, 1996 (the “Merger Date”), and as Chief Executive Officer since

October 5, 2000, and as President and Chief Executive Officer from October 5, 2000, to February 22, 2003. In addition, he served as a member of the three-person Office of the President during a brief period in 1997. Mr. Petit was the founder of Healthdyne and served as its Chairman of the Board of Directors and Chief Executive Officer from 1970 until the Merger. Mr. Petit is also a director of Intelligent Systems Corp. and Logility, Inc.

 

Joseph G. Bleser, age 61, has served as a director of the Company since October 19, 2004. Mr. Bleser became a financial consultant serving public and private companies in the healthcare and technology industries in 1998, most recently acting as interim Chief Financial Officer, Treasurer and Secretary of Transcend Services, Inc., a provider of medical transcription services, from January 1, 2004, to April 6, 2005. Prior to 1998, Mr. Bleser served for over 15 years as Chief Financial Officer for several public companies in the healthcare and technology industries, including HBO & Company, Allegiant Physician Services, Inc., and Healthcare.com Corporation. Mr. Bleser also formerly served on the Board of Directors of Healthcare.com Corporation and Quovadx, Inc. Mr. Bleser is a licensed Certified Public Accountant with ten years of public accounting experience at an international public accounting firm. Mr. Bleser is also a director of Transcend Services, Inc.

 

Myldred H. Mangum, age 58, has served as a director of the Company since September 21, 2006. Ms. Mangum has served as Chief Executive Officer of IBT Enterprises, LLC (formerly International Banking Technologies), a private retail environment developer, since October 2003. Prior to this, Ms. Mangum served as Chief Executive Officer of True Marketing Services, LLC from July 2002 to October 2003. She served as Chief Executive Officer of MMS Incentives, Inc. from 1999 to 2002. From 1997 to 1999, she served as President-Global Payment Systems and Senior Vice President-Expense Management and Strategic Planning for Carlson Wagonlit Travel. From 1992 to 1997, she served as Executive Vice President-Strategic Management for Holiday Inn Worldwide. Ms. Mangum was previously employed with BellSouth Corporation as Director-Corporate Planning and Development from 1986 to 1992. She is a director of Barnes Group, Inc., Emageon, Inc., Haverty Furniture Companies, Inc., Payless ShoeSource, Inc. and Respironics, Inc.

 

CLASS I NOMINEE FOR THE TERM EXPIRING IN 2008

 

Donald J. Lothrop, age 47, has served as a director of the Company since May 31, 2006. Mr. Lothrop has been a General Partner of Delphi Management Partners II, L.P. since July 1994, a Managing Member of Delphi Management Partners III, L.L.C. since March 1995, a Managing Member of Delphi Management Partners, IV, L.L.C. since October 1997 and a Managing Member of Delphi Management Partners V, L.L.C. since April 2000, all of which are venture capital firms. From January 1991 to June 1994, Mr. Lothrop was a Partner of Marquette Venture Partners, a venture capital firm, where he focused on the healthcare industry. From 1989 to 1990, Mr. Lothrop worked at Bain & Company, Inc., a management consulting firm. Mr. Lothrop currently serves on the Board of Directors of The TriZetto Group.

 

CLASS II NOMINEES CONTINUING IN OFFICE UNTIL 2009

 

J. Terry Dewberry, age 63, has served as a director of the Company since May 31, 2006. Mr. Dewberry is a private investor. He served as Vice Chairman of Healthdyne from March 1992 until the Merger Date. Mr. Dewberry served as a director of Healthdyne from 1981 until the Merger. From September 1987 until March 1992 he was President and Chief Operating Officer of Healthdyne and was Executive Vice President of Healthdyne from August 1984 to September 1987. Mr. Dewberry is a member of the Board of Directors of Respironics, Inc.

 

Richard M. Hassett, M.D., age 51, has served as a director of the Company since May 31, 2006. Dr. Hassett has been President and Chief Operating Officer of the Company since November 7, 2005 and previously served as Executive Vice President and Chief Strategic Officer of the Company from November 14, 2004 to November 6, 2005. From August 2002 to April 2004, Dr. Hassett was Chief Executive Officer and served on the board of Coordinated Care Solutions, a provider of medical care management services, and from September 2000 to July 2002, he was President and Chief Executive Officer and served on the board of Vivra Asthma & Allergy, Inc., a specialty disease management company. From 1997 to August 2000, Dr. Hassett held executive positions with Accordant Health Services, a healthcare services and technology company, where he last served as Executive Vice President and Chief Medical Officer and as a member of the board.

 

Kaaren J. Street, age 60, has served as a director of the Company since June 1, 2005. Ms. Street is the President of “K” Street Associates, Inc., a business development consulting practice in Washington, D.C. From August 2001 to August 2003, Ms. Street served as the Associate Deputy Administrator for Entrepreneurial Development at the U.S. Small Business Administration. From April 2001, to August 2003, Ms. Street served as Vice President of Enterprise Florida, Inc., a public private partnership responsible for economic development and international trade in Florida, and from January 1997 to January 2001, Ms. Street was Vice President for Diversity Business Enterprise at the Burger King Corporation. Ms. Street is a director of AssuranceAmerica Corporation.

 

Wayne P. Yetter, age 61, was elected to the Board on June 3, 2004. Since September, 2005, Mr. Yetter has been Chief Executive Officer of Verispan, LLC, a joint venture health information and market research company founded by McKesson Corp. and Quintales Transnational Corp. in 2002. He was the founder of BioPharm Advisory, LLC in 2003 and served as the President and Chief Executive Officer of Odyssey Pharmaceuticals, Inc., the specialty pharmaceuticals business of Pliva d.d., a Croatia-based pharmaceuticals group, from November 2004 to September 2005. Mr. Yetter served as Chairman of the Board of Directors and Chief Executive Officer of Synavant Inc., a pharmaceutical customer relationship management solutions company, from 2000 to July 2003. From 1999 to 2000, Mr. Yetter served as Chief Operating Officer at IMS Health, Inc., which provides information services for the healthcare industry. From 1997 to 1999, he served as President and Chief Executive Officer of Novartis Pharmaceuticals Corporation. From 1994 to 1997, he served as President and Chief Executive Officer of Astra Merck, Inc. From 1991 to 1994, Mr. Yetter served as General Manager and then President of Astra Merck, a division of Merck & Co. Mr. Yetter currently serves on the Board of Directors of Noven Pharmaceuticals, Inc, Epicept Corporation, Alteon, Inc. and HAPC, Inc.

 

CLASS I NOMINEES CONTINUING IN OFFICE UNTIL 2008

 

Guy W. Millner, age 70, has been a director of the Company since October 4, 2000. Mr. Millner is Chairman of AssuranceAmerica Corporation, a public non-standard auto insurance company. Until the fall of 1997, he was Chairman of Norrell Corporation, a staffing services and outsourcing firm, which he founded in 1961. He served as a director of Norrell Corporation from 1997 until July 1999, at which time Norrell Corporation merged with Spherion Corporation.

 

Thomas S. Stribling, age 63, has served as a director of the Company since May 18, 2000. Mr. Stribling is retired and was formerly President and Chief Executive Officer of Therics, Inc., a tissue engineering specialist offering a variety of orthobiologic products from May 2003 to July 2005. From September 1, 2001, to April 30, 2003, Mr. Stribling was President and Chief Executive Officer of DermaCo, Inc., a development stage dermatology company, and was an entrepreneur and private investor from September 1999 to September 2001. From 1998 to September 1999, he was President, Chief Executive Officer and a board member of Scandipharm, Inc., a privately held pharmaceutical company. From 1997 to 1998, he was Vice Chairman and Chairman of the Advisory Board of Legacy Securities Corporation, an investment banking and securities group, and from 1994 to 1996, he was President of UCB Pharma, Inc., a division of a Belgian-based pharmaceutical company.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF PARKER H. PETIT, JOSEPH G. BLESER, MYLDRED H. MANGUM, AND DONALD J. LOTHROP.

 

PROPOSAL 2.

 

APPROVAL OF AMENDMENTS TO THE LONG-TERM STOCK INCENTIVE PLAN

 

The Board of Directors has approved and recommends that the stockholders of the Company approve the amendment and restatement of the Company’s Long-Term Stock Incentive Plan (the “LTSI Plan”), including amendments to (i) increase the number of authorized shares of Common Stock which may be issued under the LTSI Plan from 1,610,000 to 2,510,000 shares, (ii) to extend the termination date with respect to grants of incentive stock options under the LTSI Plan to April 25, 2017, (iii) to provide that awards, other than stock options, stock appreciation rights (“SARs”) and other awards requiring payment of fair market value for the stock underlying the award, will be counted against the LTSI Plan maximum number of shares available at a 1.52-to-1 ratio, and (iv) to remove certain net share counting provisions whereby if any shares are tendered to pay the exercise price of options,

to settle SARs or are withheld for taxes, the full number of shares as to which the option, SAR or other award was exercised (counted in accordance with amended provision (iii) above) will still be counted against the number of shares available for future issuance under the LTSI Plan. A copy of the LTSI Plan, as it is proposed to be amended and restated, is attached to this proxy statement as Appendix A. Approval of the LTSI Plan by the stockholders is intended, among other things, to qualify options, stock grants (including restricted stock) and SARs granted under the LTSI Plan to certain executive officers of the Company as “performance-based compensation,” which is not subject to the limits on deductibility of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), described further below, and to enable the Company to grant incentive stock options (“ISOs”) under Section 422 of the Code. In addition, the Nasdaq Global Market, on which shares of the Company’s Common Stock are listed, requires stockholder approval of a plan pursuant to which stock may be acquired by officers or directors.

 

The LTSI Plan was adopted by the Board of Directors and stockholders in 2004 and amended and restated pursuant to approval of the Board of Directors and stockholders in 2005. Of the 1,610,000 shares previously authorized to be issued under the LTSI Plan, only 79,588 shares remain available for future issuance under the plan. Under stock incentive plans adopted by Matria prior to 2004, 187 shares remain available to be granted under those plans.

 

Purpose of the LTSI Plan

 

The Board of Directors believes that stock-based incentives are an important element of the Company’s compensation package, particularly for senior employees. The purpose of the LTSI Plan is to attract and retain selected individuals, motivate them to achieve the Company’s long and short-term financial and operational goals, reward such achievement and align the interests of our stockholders and employees. Persons eligible to participate in the plan are such employees, officers, independent contractors and consultants of the Company or one of its subsidiaries (or future parent companies) as the Compensation Committee of the Board of Directors (the “Committee”), in its discretion, shall designate from time to time. As of March 1, 2007, the Company employed 1,771 full-time persons.

 

The Board of Directors has determined that it is in the best interest of the Company and its stockholders to amend and restate the LTSI Plan in order to provide that an additional 900,000 shares of the Company’s Common Stock may be issued pursuant to the LTSI Plan and to make other changes in order to further the purposes of the LTSI Plan. The additional shares represent approximately 4.1% of the Common Stock outstanding on a fully diluted basis as of March 31, 2007. In addition, the Board of Directors has proposed amendments to extend the termination date of the LTSI Plan as to grants of incentive stock options to April 25, 2017, to provide that awards other than stock options and SARs will be counted against the LTSI Plan maximum number of shares available at a 1.52-to-1 ratio, and to remove certain net share counting provisions whereby if any shares are tendered to pay the exercise price of options, to settle SARs or are withheld for taxes, the full number of shares as to which the option, SAR or other award was exercised will still be counted against the number of shares available for future issuance under the LTSI Plan.

 

Summary of the LTSI Plan

 

The LTSI Plan has three components: a stock option component, a stock bonus/stock purchase (restricted stock) component and a stock appreciation rights component. The stock option component of the LTSI Plan provides a means whereby participants are given an opportunity to purchase shares of the Company’s Common Stock pursuant to: (i) options that may qualify as ISOs under Section 422 of the Code, or (ii) nonqualified stock options (“NQSOs”). ISOs may be granted only to persons who are employees of the Company or any of its subsidiaries. ISOs may not be granted to any person who, at the time that the ISO is granted owns stock possessing more than 10% of the combined voting power of all classes of the Company’s stock or any of the Company’s subsidiaries stock (“10% Stockholders”), unless the exercise price of the shares of the Company Common Stock covered by the option is at least 110% of the fair market value of such shares at the date of grant and such ISO by its terms is not exercisable after the expiration of five years from the date of grant.

 

The SARs component of the LTSI Plan provides a means whereby participants may receive compensation based on appreciation in value of the Company’s Common Stock after the date of grant. SARs may be granted either separately or in tandem with stock options, as determined by the Committee.

 

Except for ISOs granted to 10% stockholders, options and SARs may be granted under the LTSI Plan for terms up to ten years from the date of grant. Except for ISOs granted to 10% stockholders, the exercise price of ISOs granted under the LTSI Plan must be at least equal to 100% of the fair market value of the Company’s Common Stock as of the date of grant. The exercise price of NQSOs and SARs granted under the LTSI Plan must also have an exercise price which is not less than the fair market value of the shares covered by the option or SAR on the date the option or SAR is granted.

 

The stock bonus/stock purchase (restricted stock) component of the LTSI Plan provides a means whereby participants in the LTSI Plan may receive grants or bonuses of shares of the Company’s Common Stock or the right to purchase shares of the Company’s Common Stock, subject to the restrictions, if any, imposed by the Committee. The purchase price for rights to purchase shares of the Company’s Common Stock granted under the LTSI Plan will be at a price determined by the Committee. Restricted stock grants or stock bonuses may be granted under the LTSI Plan with such terms and provisions and for such consideration, if any, as may be determined by the Committee.

 

The LTSI Plan is administered by the Committee. The Committee has broad discretion, subject to the terms of the LTSI Plan to determine the persons entitled to receive options, SARs, bonuses of or the right to purchase shares (including restricted stock) of the Company’s Common Stock, the timing, terms and conditions thereof, and the number of shares for which such options, SARs, bonuses of and the right to purchase stock (including restricted stock) may be granted. Payment of the purchase price and any withholding amounts upon the exercise of an option or SAR granted under the LTSI Plan shall be made in cash or by personal check, certified check, bank draft, or postal or money order; provided that such payment may, in the case of options, at the discretion of the Committee, consist of: (i) shares of the Company’s Common Stock; (ii) an irrevocable direction to a broker to sell shares of the Company’s Common Stock and deliver all or a portion of the proceeds to the Company in payment of the exercise price; (iii) a promissory note with such terms as the Committee shall approve (provided, however, no promissory note may be accepted from an optionee that would be in violation of the Sarbanes-Oxley Act of 2002 or any other federal or state law); or (iv) any combination of the foregoing. Grants made under the LTSI Plan to Covered Employees (as defined in Section 162(m) of the Code) may be made only by a subcommittee (referred to herein as the “Section 162(m) Subcommittee”) of the Committee which is composed solely of two or more “outside directors,” as such term is defined in Section 162(m) of the Code and the regulations thereunder.

 

The Company also has the discretion to provide in any stock option, SARs, restricted stock, stock bonus or stock purchase agreement under the LTSI Plan that, in the event of a change of control or a corporate transaction (or in some cases, the disposition of a subsidiary), any such option or SAR will become immediately exercisable and any stock covered by a restricted stock, stock bonus or stock purchase award will become released from any restrictions on transfer and repurchase or forfeiture rights. Under the LTSI Plan, a “change of control” occurs upon (i) the acquisition of more than 50% of the voting power of the Company by any person or more than one person acting as a group, or (ii) a change in the composition of the members of the Board over a three-year period or less to include a majority of persons not serving on the Board at the beginning of the period or nominated by such persons. Under the LTSI Plan, a “corporate transaction” consists of approval by the stockholders of (i) a merger or consolidation in which the Company is not the surviving entity, (ii) the sale of all or substantially all of the assets of the Company, or (iii) any reverse merger or other acquisition or business combination in which the Company is the surviving entity in which holders of the Company’s voting securities prior to the merger do not own at least 50% of the voting power in the Company after the merger.

 

Options, restricted stock, and other stock bonuses and rights to purchase the Company’s Common Stock may be granted under the LTSI Plan to exercise or purchase an aggregate of not more than 2,510,000 shares of the Company’s Common Stock (subject to adjustment to reflect certain transactions). The LTSI Plan contains a $100,000 limitation on the aggregate fair market value of ISOs which first become exercisable by an optionee in any calendar year. In addition, under the LTSI Plan, the maximum number of shares of Stock with respect to which SARs or options to acquire Stock may be granted, or sale or bonus grants of Stock, including grants of restricted

stock (counted, as described below, as 1.52 shares for every one share awarded), may be made, to any individual per calendar year shall not exceed 100,000 shares (subject to adjustment to reflect certain corporate transactions).

 

Awards under the LTSI Plan will be based on guidelines that take salary level, tenure, individual performance rating and importance to the Company into account. Accordingly, future awards (“new plan benefits”) under the LTSI Plan are not determinable at this time. However, current benefits granted to the Company’s executive officers and other employees would not have been increased if they had been made under the LTSI Plan as it is proposed to be amended and restated. Reference is made to the Summary Compensation table, the Grants of Plan-Based Awards table, the Outstanding Equity Awards at 2006 Fiscal Year-End table, the Option Exercises and Stock Vested in Fiscal Year 2006 table and the discussion under “Compensation Discussion and Analysis” for detailed information on stock incentive awards to, and exercises of such awards by, the named executive officers under former and existing stock incentive plans. In addition, during 2006, options to purchase 40,000 shares and 75,000 shares of restricted stock were granted to the Company’s current executive officers as a group (6 persons) and options to purchase 270,000 shares and 157,500 shares of restricted stock were granted to all employees other than the Company’s current executive officers. The number of options awarded to the Company’s directors in 2006 is set forth under “Director Compensation in Fiscal Year 2006.”

 

The Board of Directors may at any time amend, suspend or terminate the LTSI Plan as it deems advisable without stockholder approval (subject to applicable law), but no such amendment, suspension or termination may impair any option or SAR previously granted, and the LTSI Plan cannot be amended without stockholder approval to (i) increase the maximum number of shares of Common Stock that may be granted to any individual per calendar year, (ii) to materially increase the number of shares of Common Stock available under the plan or to increase the number of shares of Common Stock available for grant of ISOs under the plan, (iii) to materially modify the eligibility requirements for participation in the plan, (iv) to reprice any option by lowering the option exercise price of a previously granted award, or cancel outstanding options with subsequent replacement, or regrants of options with lower exercise prices, or (v) to otherwise materially increase the benefits to participants under the plan.

 

Description of the Changes to the LTSI Plan

 

Increase in Number of Shares.  The LTSI Plan that the stockholders are being asked to approve includes an increase in the maximum number of shares of Company Common Stock available for issuance from 1,610,000 to 2,510,000. As of March 31, 2007, only 79,588 shares are available for future issuance under the LTSI Plan.

 

Termination Date.  The LTSI Plan that the stockholders are being asked to approve includes a change in the termination date with respect to the grant of incentive stock options from April 11, 2015, to April 25, 2017.

 

Share Counting Provisions.  If the LTSI Plan is approved by the stockholders, the maximum number of shares of Common Stock available for future issuance under the plan will be 2,510,000. The LTSI Plan includes share counting provisions that govern how shares are counted against the maximum number of shares reserved for future issuance under the plan. Under the terms of the LTSI Plan, any shares issued in connection with awards (other than options, SARs and other awards requiring payment of fair market value for the stock underlying the award) granted on or after June 5, 2007 will be counted against the 2,510,000 maximum as 1.52 shares for every one share actually issued in connection with such award. Any shares issued in connection with the grant of options, SARs and other awards requiring payment of fair market value for the stock will be counted against the maximum as one share for every share issued in connection with such award.

 

To the extent any shares of Common Stock covered by an option are not delivered to an optionee because the option is surrendered, forfeited, canceled or for any other reason ceases to be exercisable in whole or in part, such shares will continue to be available under the LTSI Plan and will not be deemed to have been delivered for purposes of determining the maximum number of shares available under the plan. In addition, any shares of Common Stock forfeited to the Company pursuant to the terms of agreements evidencing the awards will not be deemed to have been delivered for purposes of determining the maximum number of shares available under the plan. However, if any shares of Common Stock are tendered as payment for the exercise price of an option or the settlement of a SAR or are withheld for the payment of taxes, under the amended LTSI Plan the full number of shares as to which the option, SAR or other award was exercised (counted as described above) will still be counted against the maximum number of shares to be issued under the plan.

 

In order to address potential shareholder concerns regarding the number of options, SARs or restricted stock awards that we intend to grant in a given year, the Board of Directors commits to the stockholders that for fiscal years 2007, 2008 and 2009, the Company will limit grants during such three fiscal years to a number of shares of Common Stock subject to options or other awards to employees or non-employee directors (whether under the LTSI Plan or other stock incentive plans and whether or not approved by stockholders) so that the average number of shares granted during such three fiscal years (the “burn rate”) will not exceed 4.19% of the average number of shares of Common Stock outstanding at the end of each of the three fiscal years. For purposes of calculating the number of shares granted in a year, awards under the LTSI Plan, other than options, SARs and other awards requiring payment of fair market value for the stock underlying the award, will count as equivalent to (1) 1.5 option shares, if the Company’s annual stock price volatility is 53% or higher, (2) 2.0 option shares if the Company’s annual stock price volatility is between 25% and 52%, and (3) 4.0 option shares if the Company’s annual stock price volatility is less than 25%.

 

The table below sets forth certain information regarding the outstanding grants under the Company’s equity compensation plans and shares remaining available for grant thereunder as of December 31, 2006 and March 31, 2007. For more information regarding outstanding shares under the Company’s equity compensation plans as of December 31, 2006, see “Equity Compensation Plans.”

 

 

 

 

Income Tax Consequences

 

Incentive Stock Options.  If an option under the LTSI Plan is treated as an ISO, the optionee generally recognizes no regular taxable income as the result of the grant or exercise of the option. However, an amount equal to the difference between the fair market value of the stock on the date of exercise and the exercise price is classified as an item of alternative minimum taxable income in the year of exercise for purposes of the alternative minimum tax, if applicable to the participant.

 

The Company will not be allowed a deduction for federal income tax purposes in connection with the grant or exercise of an ISO, regardless of the applicability of the alternative minimum tax to the optionee. The Company will be entitled to a deduction, however, to the extent that ordinary income is recognized by the optionee upon a disqualifying disposition (see below).

 

Upon a sale or exchange of the shares at least two years after the grant of an ISO and one year from exercise of the option, gain or loss will be recognized by the optionee equal to the difference between the sale price and the exercise price. Such gain or loss will be characterized for federal income tax purposes as long-term capital gain or loss. The Company is not entitled to any deduction under these circumstances.

 

If an optionee disposes of shares acquired upon exercise of an ISO prior to completion of either of the above holding periods, the optionee will have made a “disqualifying disposition” of the shares. In such event, the optionee

will recognize ordinary income at the time of disposition equal to the difference between the exercise price and the lower of the fair market value of the stock at the date of the option exercise or the sale price of the stock. The Company generally will be entitled to a deduction in the same amount as the ordinary income recognized by the optionee on a disqualifying disposition if the optionee’s total compensation is deemed reasonable in amount.

 

The optionee also will recognize capital gain or loss on such disqualifying disposition in an amount equal to the difference between (i) the amount realized by the optionee upon such disqualifying disposition of the stock and (ii) the exercise price, increased by the total amount of ordinary income, if any, recognized by the optionee upon such disqualifying disposition (as described in the second sentence of the preceding paragraph). Any such capital gain or loss resulting from a disqualifying disposition of shares acquired upon exercise of an ISO will be long-term capital gain or loss if the shares with respect to which such gain or loss is realized have been held for more than 12 months.

 

Nonqualified Stock Options.  An optionee generally recognizes no taxable income as the result of the grant of an NQSO, assuming that the option does not have a readily ascertainable fair market value at the time it is granted (which is usually the case with plans of this type). Upon exercise of an NQSO, an optionee will normally recognize ordinary compensation income for federal tax purposes equal to the excess, if any, of the then fair market value of the shares over the exercise price. Optionees who are employees will be subject to withholding with respect to income recognized upon exercise of a NQSO.

 

The Company will be entitled to a tax deduction to the extent and in the year that ordinary income is recognized by the exercising optionee, so long as the optionee’s total compensation is deemed reasonable in amount.

 

Upon a sale of shares acquired pursuant to the exercise of an NQSO, any difference between the sale price and the fair market value of the shares on the date of exercise will be treated as capital gain or loss, and will qualify for long-term capital gain or loss treatment if the shares have been held for more than 12 months.

 

Stock Bonus/Stock Purchase (Restricted Stock).  The federal income tax treatment of individuals who receive property in connection with the performance of services is governed by Section 83 of the Code. That section requires that the recipient of the property recognize income from the transfer in an amount equal to the excess of the fair market value of the property received over the amount (if any) paid for the property. Income is recognized by the recipient in the first year in which the rights of the recipient to the property become “vested,” i.e., are transferable or are no longer subject to a substantial risk of forfeiture, whichever occurs first. The income is taxable at ordinary income rates and (in the case of participating individuals who are employees) is subject to withholding of income and applicable employment taxes at the time of vesting.

 

Under the LTSI Plan, participating individuals may or may not pay any consideration for stock transferred to them under the stock bonus/stock purchase (restricted stock) component of the Plan, and the stock transferred may or may not be subject to restrictions. If stock is granted to a recipient without restrictions, the recipient will recognize ordinary income (calculated as described in the preceding paragraph) in the recipient’s taxable year in which the stock is granted.

 

If stock granted under the LTSI Plan is nontransferable and subject to a substantial risk of forfeiture, then (unless an election is made under Section 83(b) of the Code, as described in the next paragraph), recipients of stock will recognize taxable income as of each date on which they become vested in stock received under the LTSI Plan in the amount of the fair market value of the stock then vesting (less the amount, if any, paid for such stock).

 

Participating individuals may elect under Section 83(b) of the Code to report as taxable income in the year of award an amount equal to the stock’s fair market value at the date of award (less the amount, if any, paid for such stock). If such an election is made, the electing employee is not required thereafter to report any further compensation income upon becoming vested in the stock covered by the election. Such an election must be made within 30 days of receipt of the stock. Such election may not be revoked except with the consent of the Internal Revenue Service. Participating individuals making this election who are employees will be subject to withholding with respect to the taxable income they recognize at the time the stock is awarded to them.

 

The Company will be entitled to a tax deduction to the extent and in the year that ordinary income is recognized by the participating individuals, so long as the individual’s total compensation is deemed reasonable in amount.

Dividends paid on stock transferred under the LTSI Plan are generally treated as additional compensation prior to vesting, but are treated as true dividends after vesting (or after a Section 83(b) election). Dividends are not deductible by the Company.

 

Participating individuals will recognize gain upon the disposition of their stock equal to the excess of (a) the amount realized on such disposition over (b) the ordinary income recognized with respect to their stock under the principles set forth above (plus the amount, if any, paid for such stock). That gain will be taxable as long or short term capital gain depending on the period held.

 

If a participating individual disposes of his or her stock for an amount less than the amount of ordinary income recognized with respect to the stock (plus the amount, if any, paid with respect to the stock), he or she will generally recognize a capital loss (long or short-term, depending on the holding period) equal to the difference between any ordinary income recognized with respect to the stock under the principles described previously (plus the amount, if any, paid for the stock) and the amount realized upon disposition of the stock. If a participating individual forfeits unvested stock with respect to which no Section 83(b) election has been made upon termination of employment, he or she will generally recognize ordinary income or loss equal to the difference between the amount, if any, paid by the employee for the stock and the amount received as a result of the forfeiture. If a participating individual forfeits unvested stock with respect to which a Section 83(b) election has been made upon termination of employment, he or she will generally recognize a capital gain or loss equal to the difference between the amount, if any, paid by the employee for the stock and the amount received as a result of the forfeiture, but no loss or deduction is allowed with respect to the amount previously included in income as a result of the Section 83(b) election.

 

SARs.  Recipients of SARs generally should not recognize income until such rights are exercised. Upon exercise, the participating individual will normally recognize ordinary compensation income for federal income tax purposes equal to the amount of cash and the fair market value of stock, if any, received upon such exercise. Participating individuals who are employees will be subject to withholding with respect to income recognized upon exercise of SARs.

 

The Company will be entitled to a tax deduction to the extent and in the year that ordinary income is recognized by the participating individual, so long as the individual’s total compensation is deemed reasonable in amount.

 

Participating individuals will recognize gain upon the disposition of any stock received on exercise of SARs equal to the excess of (a) the amount realized on such disposition over (b) the ordinary income recognized with respect to such stock under the principles set forth above. That gain will be taxable as long or short term capital gain depending on whether the stock was held for at least 12 months.

 

Section 162(m) of the Code.  Under Section 162(m) of the Code, compensation paid to any Covered Employee is potentially nondeductible by the Company to the extent that it exceeds $1,000,000. However, certain “performance-based compensation” is exempt from the $1,000,000 cap on deductibility. The LTSI Plan contains provisions designed to qualify options and SARs granted thereunder to Covered Employees as “performance-based compensation” under Section 162(m). These provisions include the following: (1) grants to Covered Employees are made only by the Section 162(m) Subcommittee; (2) the LTSI Plan states a maximum number of shares with respect to which options or SARs may be granted to any individual per calendar year; (3) in the case of grants to Covered Employees, the option exercise price must be at least equal to the fair market value of the stock on the date the option is granted; and (4) the effectiveness of grants to Covered Employees is contingent upon stockholder approval of the LTSI Plan.

 

Section 409A of the Code.  The LTSI Plan that the stockholders are being asked to approve provides that awards under the plan are intended to be exempt from the requirements of Section 409A of the Code, which places various restrictions on nonqualified deferred compensation.

 

Accounting Treatment.  Stock Option grants or stock issuances made to employees or directors under the LTSI Plan before January 1, 2006, were accounted for under the recognition and measurement principles of APB Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. Under those rules, no stock-based employee compensation was reflected in the Company’s net earnings, as long as options granted had an exercise price equal to the market value of the underlying stock at the date of grant. Stock option grants or stock issuances on or after January 1, 2006, are analyzed under the fair value recognition provisions of Statement of

Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). Under the fair value recognition provisions of SFAS 123R, total compensation expense related to such stock options or stock issuances is determined using the fair value of the stock options or stock issuances on the date of grant. Total compensation expense is recognized on a straight-line basis over the vesting period of the applicable stock option or stock grant.

 

Market Price of the Common Stock

 

The closing price of the Company’s Common Stock as reported on the Nasdaq Global Market was $26.36 per share on March 30, 2007. As of such date, the aggregate market value of the 2,510,000 shares of Common Stock issuable under the LTSI Plan was $66,163,600.

 

Text of the Plan

 

The preceding summary of the LTSI Plan is qualified in its entirety by reference to the complete text of the LTSI Plan, as it is proposed to be amended and restated, as set forth in Appendix A to this proxy statement.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE
AMENDMENTS TO THE LONG-TERM STOCK INCENTIVE PLAN

 

PROPOSAL 3.

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Company’s Audit Committee has appointed the firm of KPMG LLP as the Company’s independent auditors for the fiscal year ending December 31, 2007. If the stockholders fail to ratify the appointment of KPMG, LLC, other independent auditors will be considered by the Audit Committee. The Company expects representatives of KPMG LLP to be present at the Company’s annual meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2007.

 

II.  SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND
PRINCIPAL STOCKHOLDERS

 

The following table presents the number of shares of the Company’s Common Stock owned beneficially as of March 31, 2007, by the Company’s Chief Executive Officer and the Chief Financial Officer, the three other most highly compensated executive officers for the fiscal year ended December 31, 2006, the Company’s directors, the Company’s directors and executive officers as a group, and all other persons known by the Company to beneficially own more than 5% of the Company’s Common Stock.

 

 

 

 —  Less than 1%

 

 

 

III.  CORPORATE GOVERNANCE AND RELATED MATTERS

 

Governance of the Company

 

We have established corporate governance practices designed to serve the best interests of the Company and our stockholders. The Company is in compliance with the current corporate governance requirements imposed by the Sarbanes-Oxley Act of 2002, the rules and regulations of the Securities and Exchange Commission (“SEC”) and the listing requirements of the Nasdaq Global Market (“Nasdaq”). The Company has adopted a Code of Conduct that applies to all of its directors, executive officers and employees. If any waiver of this Code is granted to an

executive officer or director, the waiver will be disclosed in an SEC filing on Form 8-K. The Company’s current Code of Conduct was filed as an exhibit to the Company’s Current Report on Form 8-K filed October 25, 2005. Copies of the Code of Conduct and the charters of the Corporate Governance and Nominating, Audit and Compensation Committees are available on the Company’s website at www.matria.com.

 

Corporate Governance Guidelines

 

The Company’s Corporate Governance Guidelines provide that a majority of the members of the Board must meet the criteria for independence as required by the listing standards of Nasdaq. The Corporate Governance and Nominating Committee reviews annually the relationships that each director has with the Company. Following such annual review, only those directors who the full Board of Directors affirmatively determines have no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company) are considered independent directors, subject to additional qualifications prescribed under the listing standards of Nasdaq. In this regard, the Board of Directors has determined that Messrs. Bleser, Dewberry, Lothrop, Millner, Stribling and Yetter, Ms. Mangum and Ms. Street, constituting a majority of the directors, are independent in accordance with applicable law and Nasdaq rules.

 

In addition, each member of the Company’s three standing committees of the Board of Directors is independent under the rules of Nasdaq, and each member of the Audit Committee also meets the independence requirements set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934.

 

Set forth below is information regarding the meetings of the Board of Directors during fiscal year 2006 and a description of the Board’s standing committees.

 

BOARD COMMITTEES, ATTENDANCE AND COMMUNICATIONS WITH

BOARD OF DIRECTORS

 

In addition to an executive committee and other single purpose committees established from time to time to assist the Board of Directors with particular tasks, the Company’s Board of Directors has the following standing committees: a Compensation Committee, an Audit Committee and a Corporate Governance and Nominating Committee.

 

The Compensation Committee (the “Compensation Committee”) is composed of Kaaren J. Street, Thomas S. Stribling and Wayne P. Yetter. All members of the Compensation Committee are independent as required by Nasdaq. Pursuant to its charter, the Compensation Committee is responsible for establishing the Company’s overall compensation philosophy and programs and exercising the authority of the Board of Directors in the administration of all compensation plans and programs. The Compensation Committee also is charged with reviewing and recommending to the full Board for approval contractual arrangements with, compensation of and evaluation processes for executive officers and all equity-based compensation plans. The Compensation Committee held nine meetings during the year ended December 31, 2006.

 

The Audit Committee (the “Audit Committee”) is composed of Joseph G. Bleser, J. Terry Dewberry and Guy W. Millner. The Board of Directors has determined that all members of the Audit Committee are independent in accordance with the listing standards of Nasdaq and SEC rules governing audit committees. The Board of Directors has determined that Joseph G. Bleser has the accounting and related financial management expertise to be an “audit committee financial expert” as that term is defined by the SEC and has designated Mr. Bleser as a financial expert. Pursuant to its charter, the Audit Committee appoints and oversees the work of the Company’s independent auditors and monitors their independence and performance, and monitors the integrity of the Company’s financial reporting process and its policies and procedures relating to internal accounting functions and controls and is responsible for the oversight of the Company’s internal audit function. The Audit Committee held eleven meetings during the year ended December 31, 2006.

 

The Corporate Governance and Nominating Committee (the “Governance Committee”) is composed of Donald J. Lothrop, Myldred H. Mangum and Wayne P. Yetter. The Board of Directors has determined that all of the members of the Governance Committee are independent in accordance with the Nasdaq listing standards governing

governance committees. Pursuant to its charter, the Governance Committee identifies, screens and recommends candidates for appointment to the Board of Directors for consideration by the full Board of Directors and by the stockholders of the Company, evaluates and makes recommendations to the full Board of Directors concerning the number and accountability of Board committees and assignments to such committees, develops and recommends to the Board of Directors for its approval a set of corporate governance guidelines, periodically reviews and makes recommendations to the full Board of Directors compensation, orientation, continuing education and retirement policies for directors, reviews issues and developments relating to corporate governance and makes recommendations related thereto to the full Board of Directors and conducts an annual assessment of the performance of the Board of Directors and the Company’s Chief Executive Officer. The Governance Committee will consider a candidate for director proposed by a stockholder. A candidate must be highly qualified and be both willing and expressly interested in serving on the Board of Directors. A stockholder wishing to propose a candidate for the Governance Committee’s consideration should forward the candidate’s name and information about the candidate’s qualifications to Matria Healthcare, Inc., 1850 Parkway Place, Marietta, Georgia 30067, Attention: Corporate Secretary. Additional information concerning nomination procedures is included under “Corporate Governance and Nominating Committee” below. The Governance Committee held eight meetings during the year ended December 31, 2006.

 

During the year ended December 31, 2006, the Board of Directors held nine meetings. Each of the incumbent directors who served as directors during 2006 attended more than 75% of the total number of Board meetings and meetings of committees of which he or she was a member during 2006. The Board of Directors has adopted a policy that all directors on the Board of Directors are expected to attend annual meetings of its stockholders. All members of the Company’s Board of Directors at the time of the 2006 Annual Meeting of Stockholders attended the 2006 Annual Meeting of Stockholders.

 

The Company encourages communication with the Board and the Board provides a process for stockholders to send communications to the full Board or any of the individual directors. Any stockholder who wishes to communicate with the Board or with any particular director, including any non-management director, may send a letter to the Secretary of the Company at 1850 Parkway Place, 12^th Floor, Marietta, Georgia 30067. Any communication should indicate that the sender is a stockholder of the Company and clearly specify that it is intended to be made to the entire Board or to one or more particular director(s). After receipt by the Secretary, correspondence will be forwarded to the Board or to the particular individual director indicated for review and consideration.

 

DIRECTOR COMPENSATION IN FISCAL YEAR 2006

 

The directors who are employees of the Company receive no additional compensation for serving on the Board of Directors. In calendar year 2006, Directors who were not employees of the Company received a retainer of $6,250 per quarter, plus $1,000 for each Board and committee meeting attended, and were reimbursed for any travel expenses incurred. The following directors also received additional quarterly retainers for serving as Chairperson’s of Board Committees: Mr. Bleser received $2,500 quarterly for serving as Chairman of the Company’s Audit Committee, Mr. Stribling received $1,250 quarterly for serving as Chairman of the Compensation Committee, and Mr. Yetter received $625 quarterly for serving as Chairman of the Corporate Governance and Nominating Committee.

 

In addition, under the 2005 Directors’ Non-Qualified Stock Option Plan, all non-employee directors are entitled to receive an initial grant of options to purchase 6,000 shares of the Company’s Common Stock and at each annual meeting of stockholders after their first full year serving as a director, an additional grant of options to purchase 6,000 shares of Common Stock. The option price for all such options is the fair market value of the underlying common stock on the date of grant. Options have a ten year term and vest monthly over 12 months. On May 31, 2006, each Non-Employee Director other than Ms. Mangum was awarded an option to purchase 6,000 shares of Common Stock at a price of $28.86 per share under the 2005 Directors’ Non-Qualified Stock Option Plan. Ms. Mangum was not eligible for the May 31, 2006, grant because she was elected to the Board of Directors on September 21, 2006, whereupon she received an initial option to purchase 6,000 shares of Common Stock at a price of $27.53.

 

The following table sets forth a summary of the compensation paid to non-employee directors in fiscal year 2006.

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Philosophy

 

Our executive compensation philosophy is based on the belief that competitive compensation is essential to attract and retain highly-qualified executives and motivate them to achieve the Company’s operational and financial goals. Our policy is to provide total compensation that is competitive with our peers. The compensation program includes both motivational and retention-related compensation components. Cash bonuses are included to encourage and reward effective performance relative to our near term plans and objectives. Equity incentives are included to promote longer-term focus, to help retain key contributors and to align the interests of our executives and our shareholders.

 

Overview of Compensation and Process

 

Historically, our Compensation Committee of the Board of Directors (for purposes of this analysis, the “Compensation Committee” or the “Committee”) has been responsible for reviewing and approving compensation for all of the Company’s executive officers, including all of our named executive officers.

 

The principal components of compensation for our named executive officers are: base salary, cash bonuses, long-term equity incentives, perquisites and other personal benefits. Generally, base salaries have been set for our executive officers at the regularly-scheduled February meeting of the Compensation Committee. At this meeting, the Compensation Committee also approves and adopts a management incentive plan (annual cash bonus plan) for the new fiscal year and considers for approval equity-based awards to our executive officers and other eligible employees.

 

In making compensation decisions, the Compensation Committee considers recommendations of Parker H. Petit, Chairman of the Board and Chief Executive Officer, and Thornton A. Kuntz, Jr., Senior Vice President and Chief Administrative Officer. The Committee also has, from time to time, retained the advice of an independent consultant and/or commissioned compensation studies or surveys as the need arose. While compensation survey

data are useful guides for comparative purposes, we believe that a successful compensation program also requires the application of judgment and subjective determinations of individual performance. In that regard, the Compensation Committee applies its judgment in reconciling the program’s objectives with the realities of retaining valued employees.

 

In 2006, the Compensation Committee engaged Wachovia Employer Solutions Group, an independent, outside compensation consultant, to benchmark the major components of total executive compensation against a peer group of 12 publicly-traded companies in the health care and technology sectors with annual revenues between $291 million and $936 million. The 12 companies selected were those deemed by the Committee, after input from senior management, to be the most comparable to the Company.

 

In order to compete effectively for top executive-level talent, our Compensation Committee’s philosophy is to target total direct compensation for executive officers at the 75th percentile of total direct compensation paid to similarly-situated executives of the companies comprising the peer group. Specific elements of compensation were targeted at the percentile of compensation paid to the peer group as set forth below:

 

 

Because our Compensation Committee believes that a significant portion of our total executive compensation should be tied to the annual and long-term performance of the Company, they set the targeted mix of total direct compensation for executives as follows:

 

 

Base Salary

 

In setting annual base salaries for our executive officers for fiscal 2006, the Compensation Committee reviewed compensation for comparable positions in the peer group. They also took into account the scope of the executives’ responsibilities, their skills and experience, and their performance. With respect to the CEO, the Committee considered the annual performance evaluation conducted by the Corporate Governance and Nominating Committee (the “Governance Committee”) of the Board, which had concluded that Mr. Petit’s performance in 2005 had been outstanding. Their conclusion was based on the CEO’s foresight and vision in focusing the Company’s business on disease management and strides taken toward achieving the Company’s stated strategic goal of being a “pure play” disease management company. Not only had the Company succeeded in growing its own disease management business, but it had made a bold acquisition of CorSolutions Medical, Inc., one of its chief competitors. The Governance Committee believed these strategic actions would be instrumental in creating shareholder value. With respect to the other executive officers, the Compensation Committee considered the CEO’s evaluation of the performance of each.

 

Cash Bonuses

 

Our bonus programs consist of a management incentive plan adopted near the beginning of each fiscal year and discretionary bonuses as may be awarded by the Compensation Committee from time to time for outstanding performance.

 

In February of 2006, the Compensation Committee approved a special bonus to be awarded to certain members of the Company’s management team for their efforts in connection with the divestitures of Facet Technologies and the Company’s German operations, which were key components of the Company’s strategy to reduce debt and become a “pure play” in the disease management sector of healthcare. The Committee established a bonus pool of $450,000 and determined that $200,000 of the pool would be awarded to Mr. Petit, who would have the discretion to determine the recipients of the remaining bonus pool and the amounts awarded to each. Richard M. Hassett, M.D., President and Chief Operating Officer, Roberta L. McCaw, Senior Vice President, General Counsel and Corporate

Secretary, and Yvonne V. Scoggins, Senior Vice President-Business Analysis, received payments of $30,000 each. The bonuses were paid in October 2006, following completion of the divestitures.

 

Each year, our Compensation Committee adopts a management incentive plan, which is a broad-based cash bonus plan that is designed to incentivize and reward achievement of the current year’s financial and operational goals. The participants in the plan and the applicable performance goals, which vary from year to year, are established at the time the plan is adopted. The 2006 Management Incentive Plan (the “MIP”) was adopted in February 2006. All of the Company’s management team at the director level and above (approximately 125 employees) were entitled to participate in the MIP. In the case of the Company’s Chairman of the Board and Chief Executive Officer and President and Chief Operating Officer, the amount of and entitlement to bonuses under the MIP were based solely upon the Company’s financial performance in comparison to its operating budgets. For 2006, the Compensation Committee wanted to reward and incentivize not just revenue growth, but also the cost effective achievement of that growth. Accordingly, there were two components to the financial performance measures for these executives. Seventy-five percent of the bonus was based on the Company’s 2006 earnings per share from continuing operations (excluding share-based compensation expense) and the remaining 25% of the bonus was based on the Company’s 2006 net revenue from continuing operations. For the other executive officers, 50% was based on earnings per share from continuing operations (excluding share-based compensation expense), 20% was based on net revenue from continuing operations and 30% of the bonus was based on individual performance goals. Individual performance goals for our executive officers were established by the Chief Executive Officer and were primarily operational, rather than financial, in nature.

 

For each participant in the MIP, the Compensation Committee established a target base bonus equal to a percentage of year-end base salary. The target range for named executive officers was 40% to 70% of year-end base salary, with Ms. McCaw, Ms. Scoggins, and Mr. Mengert, the Company’s former Senior Vice President and Chief Financial Officer, having a target base bonus of 40%, Jeffrey L. Hinton, the Company’s Senior Vice President and Chief Financial Officer, having a target base bonus of 45%, Dr. Hassett having a target base bonus of 60%, and Mr. Petit having a target base bonus of 70%. For the executive officers, the earnings per share and net revenue performance targets were set at the low end of the range set forth in the Company’s 2006 forecast issued on January 6, 2006. Achievement of at least 85% of the earnings per share target was a condition to any payment based on earnings per share, net revenue or individual performance goals. The Compensation Committee believes that an important aspect of the MIP is that it is “self-funding,” in that performance against the targets is measured after the deduction of bonuses. Executives participating in the MIP had an opportunity to earn a base bonus as follows:

 

Earnings Per Share Performance

 

 

Net Revenue Performance

 

 

Individual Objectives Performance

 

 

 

In addition, if earnings per share were between 100% and 115% of the target, participants would earn an excess bonus equal to between 100% and 200% of the base bonus earned.

 

For 2006, the Company did not achieve the financial performance measures required for payment of the bonuses under the MIP attributable to financial performance goals and no such bonuses were awarded. Additionally, the Company did not achieve 85% of the earnings per share target, the achievement of which was a condition to payment of the portion of the bonus under the MIP attributable to individual performance goals. However, the Compensation Committee authorized the payment of the portions of the bonus attributable to individual performance goals, effectively waiving the earnings per share threshold. The decision to pay this portion of the bonuses was based, in part, on the fact that the earnings per share shortfall resulted largely from the difficulty of forecasting the effect of the CorSolutions acquisition on the Company’s 2006 results. Additionally, the Committee wanted to recognize and reward the Company’s notable achievements during 2006, including the integration of CorSolutions, WinningHabits and Miavita into the Company’s legacy business and the divestiture of non-core businesses, creating a cohesive, health, wellness and disease management business. The bonuses paid to the named executive officers included $31,200 to each of Ms. McCaw and Ms. Scoggins and $27,844 to Mr. Hinton.

 

The Company’s Chief Executive Officer, President and Chief Operating Officer and division presidents were not eligible for the individual performance component of the 2006 MIP. In recognition of the significant contribution those individuals made to the strategic transformation of the Company during 2006, in the first quarter of 2007, the Compensation Committee approved discretionary bonuses for these officers totaling $260,000, which was approximately the same percent of the target bonus under the MIP as was authorized for participants in the MIP who had individual performance objectives. Of this amount, Mr. Petit received a discretionary bonus of $115,000 and Dr. Hassett received a discretionary bonus of $75,000.

 

Long-Term Equity Incentives

 

Our stock option and restricted stock award programs are designed to align the interests of our executive officers and our shareholders. We also regard these programs as key retention tools. Historically, we granted only stock options to our executive officers. Primarily due to adoption of SFAS No. 123R effective January 1, 2006, however, beginning in February 2006, we began to grant restricted stock in lieu of option grants, as we believed this was a more efficient way to reward and motivate superior performance. We continue to issue some stock options, however, in circumstances the Compensation Committee deems appropriate. For example, since our restricted shares vest based on calendar year performance measures, grants of restricted shares late in the year could vest, or not, shortly after grant, rendering them less effective as a motivational and retention tool. In that circumstance, an option grant may be more appropriate. Options also may be used as a competitive recruiting tool.

 

In 2006, all equity-based awards were issued under plans previously approved by our shareholders. In fiscal year 2006, a total of 93 employees received awards of 232,500 shares of restricted stock and options to purchase 314,000 shares of the Company’s Common Stock. In January 2006, Dr. Hassett received an option grant to purchase 25,000 shares and Ms. Scoggins received an option grant to purchase 10,000 shares. In October 2006, the Compensation Committee granted Mr. Hinton an option to purchase 5,000 shares of the Company’s Common Stock. Additionally, the Company made a broad-based annual grant of restricted stock to its management employees, including the named executive officers. Because of discussions surrounding the granting of restricted stock as opposed to stock options to certain of our employees, the fiscal 2006 annual awards were delayed and not granted until April 2006. It is the Compensation Committee’s intention to return to the practice of granting annual awards at the time of the Compensation Committee’s February meeting. Grants of restricted stock to the named executive officers were as follows: Mr. Petit, 37,500 shares, Dr. Hassett, 15,000 shares, Mr. Hinton, 12,500 shares, Ms. McCaw, 5,000 shares and Ms. Scoggins, 5,000 shares.

 

In determining the level of equity grants, the Compensation Committee considered the Company’s overall option “overhang,” the employee’s level of responsibility and performance, prior equity awards, comparative compensation information and the anticipated expense to the Company. Although the Committee’s philosophy is to

target long-term equity incentive awards at the 75% percentile of awards to similarly-situated executives of companies in the peer group, because of the relatively few shares available for issuance under the Company’s long-term incentive plans and the expense that would be associated with grants at that level, the actual awards were only between 54% and 79% of that target. In the case of Mr. Hinton, the size of the grant of restricted stock was negotiated in connection with his hire.

 

The Company made additional grants of restricted stock and stock options throughout the year to newly-hired managers and to existing management, other than executive officers, to attract new management talent, to reward specific performance, in connection with promotions and to address specific retention concerns.

 

Vesting of awards under our equity ownership programs is established by the Committee at the time of the grant. To optimize the retention value of the awards and to orient recipients to the achievement of longer-term goals, objectives and success, all 2006 awards included time-based vesting periods. Generally, employees who terminate their employment prior to completion of these vesting periods forfeit the unvested portions of these awards. Options granted in 2006 vest over a period of three years from the date of grant. The restricted stock awards issued in 2006 also vest over three years, but generally are subject to additional vesting criteria based on the Company’s earnings per share (excluding share-based compensation or expense) during the fiscal year immediately preceding each of the first three anniversaries of the grant date. The earnings per share target for each of the three years was $1.35, $1.50 and $1.75, respectively. In the case of the award to Mr. Hinton, the additional vesting criteria is based on 15% year-over-year growth in operating earnings from continuing operations. In all cases, one-third of the shares vest upon achieving each year’s target. Shares that do not vest in one period may vest in a subsequent period if the earnings per share target for that subsequent period is met. Shares not vested as of the third anniversary of the date of grant are forfeited.

 

In 2006, the Compensation Committee granted equity incentives only at the meetings of the Committee that coincided with Board meetings. Grants to newly-hired employees whose employment has not yet commenced are effective on the employee’s first day of employment. Grants to current employees are effective on the date of the Committee meeting at which the grant is approved unless that date is coincident with the date of a Board meeting at which our quarterly financial results are presented or action is taken on other matters involving material non-public information, in which case the effective date of the grant is the date the press release related to such matter is issued, assuming the press release is released prior to the opening of the market of such day or, if the press release is issued after the opening of the market, on the following day. All options are priced at the closing price of our Common Stock on the effective date of the grant.

 

Perquisites

 

To better enable the Company to attract and retain superior employees for key positions, the Company provides executive officers with perquisites and other personal benefits that the Company and the Committee believe are reasonable, competitive and consistent with its overall compensation program. The Committee periodically reviews the levels of perquisites and other personal benefits provided to executive officers.

 

The executive officers are provided automobile allowances (which, for some executives, include reimbursement for gasoline and provision of insurance coverage) and financial planning assistance. Also, we pay business club dues for some of our executive officers. Mr. Petit and Ms. Scoggins retain perquisites that were made available to them from a predecessor company. These include $5,000 annual medical spending accounts and supplemental life and disability insurance coverages.

 

Retirement and Other Benefits

 

Savings Plan — The 401(k) savings plan is a broad-based tax-qualified retirement savings plan to which all employees, including the executive officers, may make contributions on a before-tax basis, subject to limitations contained in the Plan and prescribed by law. In 2006, the maximum contribution allowed was the lesser of 50% of the participant’s annual salary and $220,000. The Company matches the participants’ voluntary salary contributions, with the Company’s match being limited to the lesser of 3% of the participant’s salary and $6,600. All matching Company contributions to the 401(k) plan vest over five years.

 

Supplemental Executive Retirement Plan — Ms. McCaw participates in a Supplemental Executive Retirement Plan. This plan was established in 2003 as a replacement for a predecessor plan. Only executives who participated in the predecessor plan were entitled to participate in the Supplemental Executive Retirement Plan. The plan is described in “Termination of Employment and Change-in-Control Arrangements” in this Proxy Statement.

 

Severance Arrangements — In April 2006, the Company entered into new or amended severance and change-in-control severance agreements with each of the executive officers to provide for severance compensation should their employment be terminated under certain defined circumstances. The terms of these agreements are described in “Termination of Employment and Change-in-Control Arrangements” in this Proxy Statement. The new and revised agreements were entered into to enhance the benefits payable under the prior agreements so as to make them more competitive and to extend benefits payable outside the context of a change in control of the Company to certain executive officers who did not previously have severance agreements for that circumstance. The Compensation Committee deems the severance arrangements to be key components of a competitive compensation package and in line with that of companies in the peer group. In addition, the Compensation Committee believes that the change-in-control severance arrangements will help the Company retain its executive leadership in the event of a possible change in control and should such change in control occur, will help retain executive talent for the new organization.

 

Tax and Accounting Implications

 

Accounting for Equity-Based Compensation

 

Since January 1, 2006, all equity awards to our employees, including executive officers, have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance, at fair market value on the grant date in accordance with SFAS No. 123R. Information about outstanding options held by our named executive officers and directors is contained in the “Outstanding Equity Awards at December 31, 2006” table in this Proxy Statement.

 

Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits to $1 million the tax deductions a public company can take for compensation paid to each of the corporation’s chief executive officer and the four other most highly paid executive officers. Qualifying performance-based compensation will not be subject to the deduction limitation if certain requirements are met. Since all of our equity incentive programs in 2006 were under plans approved by our stockholders and were linked to the financial performance of the Company, we do not believe our executive compensation payments will be subject to the limitations of Section 162(m). We reserve the right, however, to use our judgment to authorize compensation payments that would trigger non-deductibility under Section 162(m) when the Committee believes such payments are appropriate and in the best interests of the shareholders.

 

Deferred Compensation

 

Amounts that are deferred or which become vested under nonqualified deferred compensation programs after December 31, 2004 are subject to Internal Revenue Code Section 409A, which governs when elections for deferrals of compensation may be made, the form and timing permitted for payment of such deferred amounts, and the ability to change the form and timing of payments initially established. Section 409A imposes sanctions for failure to comply, including accelerated income inclusion, a 20% penalty and an interest penalty. The Company believes it is operating in good faith compliance with the statutory provisions of Section 409A. The final regulations under Section 409A have just recently become effective and the Company will be conducting a review of its applicable deferred compensation arrangements to assess the compliance of such arrangements with the final regulations.

 

COMPENSATION COMMITTEE REPORT

 

The Committee has reviewed the Compensation Discussion and Analysis and discussed it with management. Based on its review and discussions with management, the Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2007 proxy statement. This report is provided by the following independent directors, who comprise the Committee:

 

Kaaren J. Street
Thomas S. Stribling
Wayne P. Yetter

 

Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, the Compensation Committee Report described above shall not be incorporated by reference into any such filings.

 

Summary Compensation Table

 

The following table sets forth compensation earned by the following persons during the fiscal year ended December 31, 2006 for services rendered in all capacities to the Company:

 

 

 

 

 

All Other Compensation

 

 

 

 

PENSION BENEFITS

 

In 2003, the Company adopted a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain executives who were participants in a predecessor plan. Under the SERP, individual trust accounts were established for each participant and funded in an amount equal to the net present value of the participant’s targeted benefit under the predecessor plan. The only named executive officer still participating in the SERP is Ms. McCaw. The initial funding for Ms. McCaw’s account was $536,000. The assets of the trusts are subject to the claims of the Company’s creditors. Benefits payable under the SERP are variable, based on the performance of the investment earnings of the trust funds, and include future tax mitigation payments of approximately 44% of the amounts initially contributed to the trust accounts. Benefits under the SERP vest based on age and years of service, with 100% vesting and the right to withdraw funds obtained at age 55 and 15 years of service. Earlier vesting may occur upon a change-in-control or other events as defined in the SERP. See “Termination of Employment and Change-in-Control Arrangements”.

 

 

 

 

Grants of Plan-Based Awards

 

The following table contains information about grants of cash and equity awards during fiscal year 2006 for the named executive officers.

 

 

 

 

Outstanding Equity Awards at 2006 Fiscal Year-End

 

The following table contains information with respect to shares of common stock that may be issued to the named executive officers upon the exercise of options and other awards or vesting of restricted shares under the Company’s equity compensation plans as of the end of fiscal year 2006.