The following table sets forth certain information regarding the shares of common stock beneficially owned as of March 28, 2007April 24, 2008 by: (i) each person known to us to be the beneficial owner of more than 5% of our common stock, (ii) each of our directors, (iii) each executive officer named in the Summary Compensation Table set forth in the Executive Compensation section, and (iv) all such directors and officers as a group:
| (5) | | Based on information provided on Schedule 13G filed with the SEC on February 14, 2007,8, 2008, by Fred Knoll, individually and as president of Knoll Capital Management LP, 237 Park Avenue, 9th Floor, New York, New York 10166. |
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| (6) | Based on information provided on Schedule 13G filed with the SEC on January 10, 2008 by Aberdeen Asset Management PLC, 10 Queens Terrace, Aberdeen, Scotland. |
| (7) | Includes 751,566 shares and 187,892 warrants held by CPS Opportunities, LLC, 167,015 shares and 41,754 warrants held by GPC LX1 LLC, 73,069 shares and 18,267 warrants held by Prime Logic 1 LLC, 52,192 shares and 13,048 warrants held by GPC 78 LLC, for which Mr. Cummins serves as investment manager and 317,047 shares held by Prime Logic Capital LLC, for which Mr. Cummins serves as managing partner. Additionally, 100,000 shares are held of record by Bexley Partners, L.P., 23,000 by Cummins Children’sChildren's Trust, 22,000 by C.F. Partners, L.P., and 35,000 by Mr. Cummins’Cummins' wife Lisa Cummins. Mr. Cummins disclaims beneficial ownership of such shares. |
Section | (8) | As of May 9, 2008, Mr. LaMacchia is no longer employed by the Company. |
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than 10% of our outstanding common stock, to file with the SEC, initial reports of ownership and reports of changes in ownership of our equity securities of the Company.securities. Such persons are required by SEC regulations to furnish us with copies of all such reports they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written or oral representations that no other reports were required for such persons, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners have been complied with, except for a single Form 4 filing for Mr. Sabnani inadvertently filed nine days late on May 10, 2006.with.
COMPENSATIONCOMPENSATION DISCUSSION AND ANALYSIS
The following discussion and analysis contains statements regarding future individual and Companycompany performance targets and goals. These targets and goals are disclosed in the limited context of our compensation programs and should not be understood to be statements of management’smanagement's expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
We believe our long term success is dependent on a leadership team with the integrity, skills, and dedication necessary to oversee a growing organization on a day-to-day basis. In addition, the leadership must have the vision to anticipate and respond to future market and regulatory developments. Our executive compensation program is designed to enable us to attract, motivate and retain a senior management team with the collective and individual abilities to meet these challenges. The program’sprogram's primary objective is to align executives’executives' efforts with the long term interests of stockholders by enhancing our reputation, financial success and capabilities.
GeneralGeneral executive compensation philosophy
We compensate our executives, including the named executive officers who are identified in the Summary Compensation Table, through a combination of base salary, annual cash bonus incentives, long term equity incentive compensation, and related benefits. These components are designed, in aggregate, to be competitive with comparable organizations and to align the financial incentives for the executives with the short and long term interests of stockholders.
The compensation committee of the board of directors receives the Company’sCompany's management recommendations and then discusses, reviews and considers management’smanagement's recommendations with respect to the compensation of those members of senior management whose compensation the committee considers. The committee then makes its recommendation to the board which discusses and then decides raises, bonuses and options. Although their advice may be sought and they may be questioned by the committee, executive members of the board do not participate in the committee’scommittee's or the board’sboard's discussion and vote. Prior to the committee making its recommendations, the members of the committee have several discussions among themselves and meet to discuss, among other things, the performance and contributions of each of the members of senior management whose compensation they are considering as well as expectations (of the individual for the year and the future and those of the Company), results, responsibilities, and desire to retain such executive. In addition, the committee may have conversations with certain others before making its recommendations.
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The Company’sCompany's philosophy is to provide a compensation package that attracts, motivates and retains executive talent, and delivers rewards for superior performance as well as consequences for underperformance. Specifically, our executive compensation program is designed to:
| • | | provide a competitive total compensation package that is competitive within the healthcare management and substance abuse treatment industries in which we compete for executive talent, and will assist in the retention of our executives and motivate them to perform at a superior level |
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| • | | link a substantial part of each executive’s compensation to the achievement of our financial and operating objectives and to the individual’s performance |
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| • | | provide long-term incentive compensation that focuses executives’ efforts on building stockholder value by aligning their interests with our stockholders |
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| • | | provide incentives that promote executive retention. |
provide a competitive total compensation package that is competitive within the healthcare management and substance abuse treatment industries in which we compete for executive talent, and will assist in the retention of our executives and motivate them to perform at a superior level
link a substantial part of each executive's compensation to the achievement of our financial and operating objectives and to the individual's performance
provide long-term incentive compensation that focuses executives' efforts on building stockholder value by aligning their interests with our stockholders
provide incentives that promote executive retention.
Each year, the management and the board approve financial and non-financial objectives for the Company and the executive officers, that arewhich may be reflected in the Company’sCompany's executive employment agreements and incentive compensation plans. We design our annual and long term incentive compensation plans to reward company-wide performance. In addition, we also consider the individual performance of each executive officer and other relevant criteria, such as the accomplishments of the management team as a whole. In designing and administering our executive compensation programs, we attempt to strike an appropriate balance among these elements.
The major compensation elements for our named executive officers are base salary, annual performance-based bonuses, stock options, insurance benefits and perquisites. Each of these elements is an integral part of and supports our overall compensation objectives. Base salaries (other than increases), insurance benefits and perquisites form stable parts of our executive officers’officers' compensation packages that are not dependent on our performance during a particular year. We set these compensation elements at competitive levels so that we are able to attract, motivate and retain highly qualified executive officers. Consistent with our performance-based philosophy, we reserve the largest potential compensation awards for performance- and incentive-based programs. These programs include annual and long-term awards that are based on our financial performance and provide compensation in the form of both cash and equity to provide incentives that are tied to both our short-term and long-term performance. Our performance-based bonus program rewards short-term and long-term performance, while our equity awards, in the form of stock options, reward long-term performance and align the interests of management with our stockholders.
Board determination of compensation awards
The compensation committee recommends and the board determines the compensation awards to be made to our executive officers. The compensation committee recommends and the board annually determines the total compensation levels for our executive officers by considering several factors, including each executive officer’sofficer's role and responsibilities, how the executive officer is performing against those responsibilities, our performance, and the competitive market data applicable to eachthe executive officer’s position.officers’ positions.
In arriving at specific levels of compensation for executive officers, the board has relied on
| • | | the recommendations of management; |
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| • | | benchmarks provided by generally available compensation surveys; |
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| • | | the experience of board members and their knowledge of compensation paid by comparable companies or companies of similar size or generally engaged in the healthcare services business; and |
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the recommendations of management;
benchmarks provided by generally available compensation surveys; and
the experience of board members and their knowledge of compensation paid by comparable companies or companies of similar size or generally engaged in the healthcare services business.
The Company seeks an appropriate relationship between executive pay and corporate performance. Executive officers are entitled to customary benefits generally available to all Company employees, including group medical, dental and life insurance and a 401(k) plan. The Company has employment agreements and(which include severance arrangementsarrangements) with three (3) of our key executive officers to provide them with the employment security and severance deemed necessary to retain them.
ComponentsComponents of executive compensation
Base salary.Base salaries provide our executive officers with a degree of financial certainty and stability. We seek to provide base salaries sufficient to attract and retain highly qualified executives. TheWhenever management proposes to enter into a new employment agreement or to renew an existing employment agreement, the compensation committee annually reviews and recommends, and the board determines, the base salaries offor such persons, including our chief executive officer and our other executive officers. Salaries are also reviewed in the case of executive promotions or other significant changes in responsibilities. In each case, the compensation committee and the board each take into account competitive salary practices, scope of responsibilities, the results previously achieved by the executive and his or her development potential.
On an individual basis, oura base salary increase, policywhere appropriate and as contemplated by the individual's employment agreement, is designed to reward performance consistent with our overall financial performance in the context of competitive practice. Annual performancePerformance reviews, including changes in an executive officer’sofficer's scope of responsibilities, in combination with general market trends determine individual salary increases. Aside from contractually provided minimum cost of living adjustments, no formulaic base salary increases are provided to the named executive officers.
In addition to complying with the executive compensation policy and to the requirements of applicable employment agreements, compensation for each of the executive officers for 20062007 was based on the executive’sexecutive's performance of his or her duties and responsibilities, the performance of the Company, both financial and otherwise, and the success of the executive in managing, developing and executing our business development, sales and marketing, financing and strategic plans, as appropriate. With the exception of one $60,000 bonus for a senior executive vice president, no merit raises or bonuses were approved or recommended for our executive officers for 2008.
Bonus.Executive officers are eligible to receive cash bonuses based on the degree of the Company’sCompany's achievement of financial and other objectives and the degree of achievement by each such officer of his or her individual objectives. Within such guidelines the amount of any bonus is discretionary.
The primary purpose of our annual performance incentive awards is to motivate our executives to meet or exceed our company-wide short-term performance objectives. Our annual cash bonuses are designed to reward management-level employees for their contributions to individual and corporate objectives. Regardless of our performance, the board retains the discretion to adjust the amount of our executives’executives' bonus based upon individual performance or circumstances.
At the beginning of 2006,2007, the management and the board established performance objectives for the payment of annual incentive awards to each of the named executive officers and other senior management employees. Performance objectives were based on corporate objectives established as part of the annual operating plan process. Year end bonus awards were based on attainment of these performance objectives as adjusted to reflect changes in our business and industry throughout the year. The compensation committee recommended and the board determined that bonuses in the amounts set forth in the total compensation chart below were appropriate. Each individual’sindividual's bonus was determined based upon the individual’sindividual's attainment of performance objectives pre-established for that participant by the board, senior management, or the executive’sexecutive's supervisor. The management and the board established the chief executive officer’sofficer's performance objectives.
In general, each participant set for himself or herself (subject to his or her supervisor’ssupervisor's review and approval or modification) a number of objectives for 20062007 and then received a performance evaluation against those objectives as a part of the year-end compensation review process. The individual objectives varied considerably in detail and subject matter depending on the executive’sexecutive's position. By accounting for individual performance, we were able to differentiate among executives and emphasize the link between individual performance and compensation.
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Stock options.Equity participation is a key component of the Company’sCompany's executive compensation program. Under the incentive compensation plan, the Company is permitted to grant stock options to officers, directors, employees and consultants. To date, stock options have been the sole means of providing equity participation.participation to executive officers. Stock options are granted to executive officers primarily based on the officer’sofficer's actual and expected contribution to the Company’sCompany's development. Options are designed to retain executive officers and motivate them to enhance stockholder value by aligning their financial interests with those of the stockholders. Stock options are intended to enable the Company to attract and retain key personnel and provide an effective incentive for management to create stockholder value over the long term since the option value depends on appreciation in the price of the Company’sCompany's common stock.
Our employees, including our executive officers, are eligible to participate in the award of stock options under our 20032007 Incentive Compensation Plan, as amended. Option grant dates for newly hired or promoted officers and other eligible employees have typically been the on the first board meeting date following the date of employment or in the new position. Employees who have demonstrated outstanding performance during the year aremay be awarded options during or following the year end. During 2006, approximately 73 employees received option grants.year. Such grants provide an incentive for our executives and other employees to increase our market value, as represented by our market price, as well as serving as a method for motivating and retaining our executives.
In determining to provide long-term incentive awards in the form of stock options, the board considered cost and dilution impact, market trends relating to long-term incentive compensation and other relevant factors. The board determined that an award of stock options more closely aligns the interests of the recipient with those of our stockholders because the recipient will only realize a return on the option if our stock price increases over the term of the option.
Perquisites and Other Benefits.We also provide other benefits to our executive officers that are not tied to any formal individual or Company performance criteria and are intended to be part of a competitive overall compensation program. For 2006,2007, these benefits included payment of term life insurance premiums, club dues, and automobile allowances. We also offer 401(k) retirement plans, and medical plans, for which executives are generally charged the same rates as all other employees.
ChiefChief executive officer compensation
The compensation committee, at least annually, reviews and recommends to the board of directors the compensation of Terren S. Peizer, chief executive officer, in accordance with the terms of his employment agreement, as well as any variations in his compensation the committee feels are warranted. Mr. Peizer, as a member of the board, does not participate in and abstains from all discussions and decisions of the board with regard to his compensation. The board believes that in the highly competitive healthcare industry in which the Company operates, it is important that Mr. Peizer receive compensation consistent with compensation received by chief executive officers of competitors and companies in similar stages of development. Mr. Peizer received a base salary of approximately $433,000$450,000 in 2006 and was awarded a bonus of $400,000, payable in 2007. He also received a special bonus of $265,000 in April 2006. His base salary for 20072008 is currently $450,000. See “Executive"Executive employment agreements”agreements" for a description of the material terms and conditions of Mr. Peizer’sPeizer's employment agreement.
SeveranceSeverance and change of control arrangements
We have entered into change of control employment agreements with certain of our named executive officers, as described in “Executive"Executive employment agreements.”" These agreements provide for severance payments to be made to the executive officers if their employment is terminated under specified circumstances following a change of control. We also provide benefits to these executive officers upon qualifying terminations. The agreements are designed to retain our executive officers and provide continuity of management in the event of an actual or threatened change of control and to ensure that our executive officers’officers' compensation and benefits expectations would be satisfied in such event.
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InternalInternal Revenue Code limits on deductibility of compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a federal income tax deduction to public companies for certain compensation in excess of $1 million paid to a corporation’scorporation's chief executive officer or any of its four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. The board is of the opinion that the Company’sCompany's incentive compensation plan has been structured to qualify the compensation income deemed to be received upon the exercise of stock options granted under the plans as performance-based compensation. The board will review with appropriate experts or consultants as necessary the potential effects of Section 162(m) periodically and in the future may decide to structure additional portions of compensation programs in a manner designed to permit unlimited deductibility for federal income tax purposes.
The Company is not currently subject to the limitations of Section 162(m) because no executive officers received cash payments during 20062007 in excess of $1 million. To the extent that the Company is subject to the Section 162(m) limitation in the future, the effect of this limitation on earnings may be mitigated by net operating losses, although the amount of any deduction disallowed under Section 162(m) could increase alternative minimum tax by a portion of such disallowed amount. For information relating to the Company’sCompany's net operating losses, see the consolidated financial statements included in the 2006 Annual Report to Stockholders.stockholders.
All members of the compensation committee qualify as outside directors. The board considers the anticipated tax treatment to the Company and our executive officers when reviewing executive compensation and our compensation programs. The deductibility of some types of compensation payments can depend upon the timing of an executive’sexecutive's vesting or exercise of previously granted rights. Interpretations of and changes in applicable tax laws and regulations, as well as other factors beyond the board’sboard's control, also can affect the deductibility of compensation.
While the tax impact of any compensation arrangement is one factor to be considered, such impact is evaluated in light of the Company’sCompany's overall compensation philosophy. The board will consider ways to maximize the deductibility of executive compensation, while retaining the discretion it deems necessary to compensate officers in a manner commensurate with performance and the competitive environment for executive talent. From time to time, the board may award compensation to our executive officers which is not fully deductible if it determines that such award is consistent with its philosophy and is in our and our stockholders’stockholders' best interests, or as part of initial employment offers, such as grants of nonqualified stock options.
Sections 280G and 4999 of the Internal Revenue Code impose certain adverse tax consequences on compensation treated as excess parachute payments. An executive is treated as having received excess parachute payments for purposes of Sections 280G and 4999 of the Internal Revenue Code if he or she receives compensatory payments or benefits that are contingent on a change in the ownership or control of a corporation, and the aggregate amount of such contingent compensatory payments and benefits equal or exceeds three times the executive’sexecutive's base amount. If the executive’sexecutive's aggregate contingent compensatory payments and benefits equal or exceed three times the executive’sexecutive's base amount, the portion of the payments and benefits in excess of one times the base amount are treated as excess parachute payments. Treasury Regulations define the events that constitute a change in ownership or control of a corporation for purposes of Sections 280G and 4999 of the Internal Revenue Code and the executives subject to Sections 280G and 4999 of the Internal Revenue Code.
An executive’sexecutive's base amount generally is determined by averaging the executive’sexecutive's Form W-2 taxable compensation from the corporation and its subsidiaries for the five calendar years preceding the calendar year in which the change in ownership or control occurs. An executive’sexecutive's excess parachute payments are subject to a 20% excise tax under Section 4999 of the Internal Revenue Code, in addition to any applicable federal income and employment taxes. Also, the corporation’scorporation's compensation deduction in respect of the executive’sexecutive's excess parachute payments is disallowed under Section 280G of the Internal Revenue Code. If we were to be subject to a change of control, certain amounts received by our executives (for example, amounts attributable to the accelerated vesting of stock options) could be excess parachute payments under Sections 280G and 4999 of the Internal Revenue Code. We provide our chief executive officer with tax gross up payments in event of a change of control.
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Section 409A of the Internal Revenue Code imposes distribution requirements on nonqualified deferred compensation plans and arrangements. If a nonqualified deferred compensation plan or arrangement fails to comply with Section 409A of the Internal Revenue Code, an executive participating in such plan or arrangement will be subject to adverse tax consequences (including an additional 20% income tax on amounts deferred under the plan or arrangement). Our nonqualified deferred compensation plans and arrangements for our executive officers are intended to comply with Section 409A of the Internal Revenue Code, or to be exempt from the requirements of Section 409A of the Internal Revenue Code.
Compensation committee retention of compensation consultant
The compensation committee engaged Mercer Human Resource Consulting to advise the compensation committee with respect to the amount and form of non-employee director compensation. The consultant reports directly to the compensation committee, through its chairperson, and the compensation committee retains the right to terminate or replace the consultant at any time.
Compensationensation committee interlocks and insider participation
No member of the compensation committee was at any time during the past fiscal year an officer or employee of the Company, was formerly an officer of the Company or any of our subsidiaries, or had any employment relationship with us.
During the last fiscal year, none of our executive officers served as:
a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our compensation committee;
a director of another entity one of whose executive officers served on our compensation committee; or
a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company.
PROPOSAL 2: INCREASING SHARES UNDER 2007 STOCK INCENTIVE PLAN
2007 Stock Incentive Plan
Our 2007 Stock Incentive Plan was adopted by our board of directors and approved by our stockholders on June 17, 2007. A copy of the plan is included in our Revised Definitive Proxy on Form DEFR 14A filed with the Securities and Exchange Commission on May 11, 2007.
The purpose of the plan is to attract and retain the services of key management, employees, outside directors and consultants, and to align long-term pay-for-performance incentive compensation with stockholders’ interests. Fixed-price stock options align employees’ interests with those of our stockholders, because an increase in stock price after the date of award is necessary for employees to realize any value, thus rewarding employees only upon improved stock price performance. Stock option grants under the 2007 plan may be intended to qualify as incentive stock options under Section 422 of the Tax Code or may be non-qualified stock options governed by Section 83 of the Tax Code. Subject to earlier termination by our board of directors, the plan will remain in effect until all awards have been satisfied or terminated under the terms of the plan.
There are currently 2,000,000 shares of common stock authorized for issuance under the plan. Options to purchase approximately 1,952,000 shares were outstanding as of May 2, 2008. Subject to approval of this Proposal 2, the board of directors intends to grant options for an additional 2,474,000 shares under the plan as set forth below.
| • | | a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our compensation committee; |
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| • | Number of | a director of another entity one of whose executive officers served on our compensation committee; or |
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| •Name and Position | | a member of the compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers servedOptions to be granted | |
Terren S. Peizer, Chairman and Chief Executive Officer | | | 540,000 | |
Richard A. Anderson, Senior Executive Vice President | | | 344,500 | |
Christopher S. Hassan, Senior Executive Vice President | | | 230,000 | |
Chuck Timpe, Chief Financial Officer | | | 207,000 | |
Executive Officers as a director of the Company.Group | | | 1,321,500 | |
Non-Executive Directors as a Group | | | 595,000 | |
Non-Executive Employees as a Group | | | 557,500 | |
Total | | | 2,474,000 | |
COMPENSATION
Amendment to Increase Shares
Subject to approval by our stockholders, our board has approved a 6,000,000 share increase in the maximum number of shares of our common stock issuable under the plan, from 2,000,000 to 8,000,000. We are requesting that the stockholders vote in favor of increasing the number of shares available under the 2007 Stock Incentive Plan.
We believe that a broad-based stock option program is a powerful employee incentive and retention tool that benefits all of our stockholders, and that an increase in the number of available shares is necessary in order to provide appropriate incentives for achievement of company performance objectives and to continue to attract and retain the most qualified employees, directors and consultants in light of our ongoing growth and expansion. Without sufficient stock options available for grant, we may be forced to consider cash replacement alternatives to provide a market-competitive total compensation package necessary to attract, retain and motivate the employee talent critical to the future success of the company. These cash replacement alternatives would then reduce the cash available for investment in innovation and technology.
We intend to continue to use stock options as our primary means of providing equity compensation to our employees. Although we believe that employee stock ownership is a significant contributing factor in achieving superior corporate performance, we recognize that increasing the number of available shares under the plan may lead to an increase in our stock overhang and potential dilution.
We strongly believe that our stock option plan will be integral to our ability to achieve superior performance by attracting, retaining and motivating the employee talent critical to attaining long-term improved company performance and stockholder returns.
Recommendation of the Board
The board of directors unanimously recommends that you vote “FOR” Proposal 2, increasing by 6,000,000 shares the number of shares available for issuance under the 2007 Stock Incentive Plan.
PROPOSAL 3: INCREASING SHARES AVAILABLE FOR INCENTIVE STOCK OPTIONS UNDER 2007 STOCK INCENTIVE PLAN
Amendment to increase shares available for incentive stock options
The 2007 Stock Incentive Plan is administered by our board of directors or by a committee appointed from time to time by our board of directors and will be referred to in this description as the "committee." Among other things, the committee has the authority to select individuals to whom awards may be granted, to determine the type of award, and to determine the terms and conditions of any such awards.
The committee is authorized to grant participants incentive stock options and non-qualified stock options under the plan. Incentive stock options are required to satisfy certain criteria established under the Internal Revenue Code. Non-qualified options are not required to satisfy these criteria. The type of option that the committee grants determines the tax consequences to the participant. The exercise price of incentive options may not be less than 100% of the fair market value of the stock underlying the options on the date of grant and may not remain exercisable for more than ten years from the date such options are granted. Otherwise, the date of grant, vesting schedule, terms and pricing of options under the plan is subject to the committee's discretion.
The following discussion is intended only as a brief summary of the material U.S. federal income tax rules that are generally relevant to the options that will be granted pursuant to the plan. The laws governing the tax aspects of awards are complex and such laws are subject to change.
Upon the grant of a nonqualified option, the participant will not recognize any taxable income and we will not be entitled to a deduction. Upon the exercise of such an option or related stock appreciation right ("SAR"), the excess of the fair market value of the shares acquired upon the exercise of the option or SAR over the exercise price of the option or the cash paid under an SAR will constitute compensation taxable to the participant as ordinary income. In computing our U.S. federal income tax, we will generally be entitled to a deduction in an amount equal to the compensation taxable to the participant. Upon the sale of common stock acquired upon exercise of an option or SAR, the participant will recognize long or short term capital gain or loss, depending on whether the participant has held the stock for more than one year from the date of exercise.
The participant will not recognize taxable income upon the grant or exercise of an incentive stock option. However, the spread at exercise will be includible in alternative minimum taxable income, and, thereby, may subject participants to the alternative minimum tax. The participant will recognize long term capital gain or loss, measured by the difference between the stock sale price and the exercise price, when the shares are sold. In order to qualify for the incentive option tax treatment described in the preceding paragraph, the participant must be employed by the corporation continuously from the time of the option’s grant until three months before the option’s exercise and the participant must not sell the shares until more than one year after the option’s exercise date and more than two years after its grant date. If the participant does not satisfy these conditions, the participant will recognize taxable ordinary income when the participant sells the shares in an amount equal to the difference between the option exercise price and the fair market value of the stock on the exercise date. If the sale price exceeds the fair market value on the exercise date, the excess will be taxable to the participant as long term or short term capital gain depending on whether the participant held the stock for more than one year. We will have no tax consequences from the grant or exercise of an incentive stock option. In the event the participant recognizes ordinary income on a sale or other disposition of the shares acquired on the exercise of an incentive stock option, we are generally entitled to a deduction equal to the amount of such ordinary income reorganized by the participant.
Primarily due to the favorable treatment incentive stock options are accorded under the Internal Revenue Code, we believe that incentive stock options are more attractive to employees eligible for grants than non-qualified options. As a result, the majority of awards granted to date under the plan have been inventive stock options. We believe that the ability to continue to grant incentive stock options is important to achieve the goals of the plan described above.
The plan currently sets the maximum number of shares pursuant to which incentive stock options may be granted to 1,750,000 shares. 851,000 incentive stock options currently available under the plan have been granted and the board of directors intends to grant an additional 1,880,000 incentive stock options under the plan subject to stockholder approval of this Proposal 3.
Subject to approval by our stockholders, our board has approved a 6,000,000 share increase in the maximum number of shares available for incentive stock options from 1,750,000 to 7,750,000. We are requesting that the stockholders vote in favor of increasing the number of shares available for incentive stock options under the 2007 Stock Incentive Plan.
Recommendation of the Board
The board of directors unanimously recommends that you vote “FOR” Proposal 3, increasing by 6,000,000 shares the number of shares available for incentive stock options under the 2007 Stock Incentive Plan. Even if the requisite stockholder approval is received, this Proposal 3 will not become effective unless Proposal 2: Increasing Shares Under 2007 Stock Incentive Plan is approved.
PROPOSAL 4: INCREASING SHARES AVAILABLE FOR AWARDS IN ANY CALENDAR YEAR UNDER 2007 STOCK INCENTIVE PLAN
Amendment to increase maximum number of shares available for awards in any calendar year
The plan currently sets the maximum number of shares with respect to which awards may be granted in any calendar year at 1,000,000. We believe that in order to best achieve the goals of the plan described above, such annual limit should be increased.
Subject to approval by our stockholders, our board has approved a 5,000,000 share increase in the maximum number of shares with respect to which awards may be granted in any calendar year, from 1,000,000 to 6,000,000. We are requesting that the stockholders vote in favor of increasing the number of shares with respect to which awards may be granted in any calendar year to 6,000,000.
Recommendation of the Board
The board of directors unanimously recommends that you vote “FOR” Proposal 4, increasing to 6,000,000 shares the maximum number of shares with respect to which awards may be granted under the 2007 Stock Incentive Plan in any calendar year. Even if the requisite stockholder approval is received, this Proposal 4 will not become effective unless Proposal 2: Increasing Shares Under 2007 Stock Incentive Plan is approved.
PROPOSAL 5: INCREASING SHARES AVAILABLE FOR AWARDS TO ANY PARTICIPANT IN ANY FISCAL YEAR
UNDER 2007 STOCK INCENTIVE PLAN
Amendment to increase maximum number of shares available for awards to any participant in any fiscal year
The plan currently sets the maximum number of shares with respect to which awards may be granted for options or SAR's to any participant in any fiscal year at 500,000. We believe that in order to best achieve the goals of the plan described above, such participant limit should be increased.
Subject to approval by our stockholders, our board has approved a 2,000,000 share increase in the maximum number of shares with respect to which awards may be granted to any participant in any fiscal year, from 500,000 to 2,500,000. We are requesting that the stockholders vote in favor of increasing the number of shares with respect to which awards may be granted to any participant in any fiscal year to 2,500,000.
Recommendation of the Board
The board of directors unanimously recommends that you vote “FOR” Proposal 5, increasing to 2,500,000 shares the maximum number of shares with respect to which awards may be granted to any participant in any fiscal year under the 2007 Stock Incentive Plan. Even if the requisite stockholder approval is received, this Proposal 5 will not become effective unless Proposal 2: Increasing Shares Under 2007 Stock Incentive Plan is approved.
COMPENSATION COMMITTEE REPORT
The following report of the compensation committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of our other filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis set forth in this proxy with management and based on such discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis section be included herein.
Submitted by the compensation committee:
Ivan M. Lieberburg, Ph.D., M.D., Chairman
Leslie F. Bell
Dated: MarchMay 28, 20072008
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Our executive officers are elected annually by the board of directors and serve at the discretion of the board of directors. There are no family relationships among any of our directors, executive officers or key employees. We consider Terren S. Peizer, Richard A. Anderson, Christopher S. Hassan, Anthony M. LaMacchia,and Chuck Timpe and Sanjay Sabnani to be our executive officers. Sanjay Sabnani was an executive officer until December 2007, and Anthony M. LaMacchia was an executive officer until May 2008.
The following sets forth certain information with respect to our executive officers (other than such information regarding Terren S. Peizer, Richard A. Anderson and Anthony M. LaMacchiaChristopher S. Hassan which was disclosed under “Corporate Governance”"Corporate Governance" above):
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Name | | Age | | Position |
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Christopher S. Hassan | | | 46 | | | Senior Executive Vice President |
| | | 60 | | | |
Sanjay Sabnani | | | 36 | | | Executive Vice President — Strategic Development |
Christopher S. Hassanis a senior healthcare executive who, prior to joining the Company in July 2006, served as vice president, sales for Reckitt Benckiser Pharmaceuticals from October 2003 until July 2006. From 2000 to October 2002, he served as director of sales, North America for Drugabuse Sciences, Inc. a bio-pharmaceutical company. From 1996 to 2000, Mr. Hassan served as area business manager for Parke-Davis/Pfizer. From 1989 to 1996 he served as district sales manager for Bayer Pharmaceuticals. From 1986 to 1989, he was a director and vice president sales and acquisitions for Grammco Computer Sales. Mr. Hassan received a B.B.A. in Accounting from University of Texas, Austin.
Chuck Timpeis a senior healthcare financial executive with over 35 years experience in the healthcare industry. Since March 1998, he has served as a director and since June 2002 as chairman of the audit committee for IPC-The Hospitalist Company, a $150$190 million physician specialty practice business.Nasdaq Global Market listed company. Prior to joining the companyus in June 2003, Mr. Timpe was chief financial officer, from its inception in February 1998, of Protocare, Inc., a clinical research and pharmaceutical outsourcing company which merged with Radiant Research, Inc. in March 2004, creating one of the country’scountry's largest clinical research site management organizations. Previously, he was a principal in private healthcare management consulting firms he co-founded, chief financial officer of National Pain Institute, treasurer and corporate controller for American Medical International (now Tenet Healthcare Corp., an NYSE company)), and a member of Arthur Andersen, LLP’sLLP's healthcare practice, specializing in public company and hospital system audits. Mr. Timpe received his B.S. from University of Missouri, School of Business and Public Administration, and is a certified public accountant.
Sanjay Sabnani,prior to joining the Company in April 2004, was acting director of business development and strategy at OSI Systems, Inc., where he was part of a senior team that delivered significant growth in revenues and market capitalization. Prior to joining OSI Systems, from May 1999 to December 2000, Mr. Sabnani was president and director at Venture Catalyst, Inc., where he spearheaded the company’s venture capital division, as well as managed the company’s web services business. Mr. Sabnani has authored or co-authored numerous articles and served as an expert speaker on topics as diverse as mergers and acquisitions, homeland security, entrepreneurship and internet strategy. He received his B.A. in English from University of California, Los Angeles.
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EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for our named executive officers during the 2006 and 2007 fiscal year.years.
Summary Compensation Table | | | | | | | | | | | | | | | | | | | | | | | | |
Name & Principal | | Fiscal | | | | | | | | | | Option | | All other | | |
Position | | year | | Salary | | Bonus | | awards (1) | | compensation (2) | | Total |
Terren S. Peizer, Chairman & Chief Executive Officer | | | 2006 | | | $ | 432,667 | | | $ | 400,000 | | | $ | 9,241 | | | $ | 319,869 | (3)(4) | | $ | 1,161,777 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Richard A. Anderson, Senior Executive Vice President | | | 2006 | | | | 278,800 | | | | 80,000 | | | | 469,937 | | | | 1,986 | | | | 830,723 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Anthony M. LaMacchia Senior Executive Vice President | | | 2006 | | | | 278,800 | | | | 58,000 | | | | 129,183 | | | | 549 | | | | 466,532 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Chuck Timpe, Chief Financial Officer | | | 2006 | | | | 215,700 | | | | 60,000 | | | | 96,887 | | | | 3,085 | | | | 375,672 | |
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Sanjay Sabnani, Executive VP — Strategic Development | | | 2006 | | | | 215,700 | | | | 60,000 | | | | 299,673 | | | | 2,132 | | | | 577,505 | |
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Monica Alfaro Welling Senior Vice President Marketing | | | 2006 | | | | 206,217 | | | | — | | | | 612,707 | | | | 175,974 | (5) | | | 994,898 | |
Name & Principal Position | Fiscal year | | Salary | | | Bonus | | | Option awards (1) | | | All other compensation (2) | | | Total | |
Terren S. Peizer, | | | | | | | | | | | | | | | | |
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Note to Summary Compensation Table:
(1) | | Amounts reflect the compensation expense recognized in the Company’sCompany's financial statements in 2007 and 2006 for stock option awards granted in 20062007 and in previous years to the executive officers in accordance with SFAS No. 123(R). The dollar value for Mr. Peizer’sPeizer's stock option award relates to an award granted in 2003. Mr. Peizer was not awarded any stock option grants during 2004, 2005, 2006 and 2006.2007. The grant-date fair values of stock options are calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected volatility, expected dividend yield, expected life and applicable interest rates. See Note 911 —Share-Based Compensationto the December 31, 20062007 consolidated financial statements in our Annual Report on Form 10-K for further information on the assumptions used to value stock options granted to executive officers. |
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(2) | | Includes group life insurance premiums and health club membership fees for each officer. |
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(3) | | Includes $49,869 in 2007 and $51,864 in 2006 and 2005 and $8,244 in 2004 for automobile allowance, including gross-up for taxes.tax gross-ups. |
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(4) | | On April 27, 2006 the board of directors awarded Mr. Peizer a special bonus of $265,000$265,000. |
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(5) | Mr. Hassan’s employment commenced on July 27, 2006. |
(6) | Includes $173,992 of severance payments$240,492 for relocation expenses, including tax gross-ups, in 2007, and $38,694 for relocation expenses, including tax gross-ups, in 2006. |
(7) | Includes $35,972 for vacation paid out or accrued upon voluntary termination and conversion to a consultant on November 30, 2006December 31, 2007. |
18
Executive employment agreements
Chief executive officer
We entered into a five-year employment agreement with our chairman and chief executive Officer, Terren S. Peizer, effective as of September 29, 2003. Mr. Peizer currently receives an annual base salary of $450,000, with annual bonuses targeted at 100% of his base salary established by mutual agreement between Mr. Peizer and the board. His base salary and bonus target will be adjusted each year to not be less than the median compensation of similarly positioned CEO’s of similarly situated companies. Mr. Peizer receives executive benefits including group medical and dental insurance, term life insurance equal to 150% of his salary, accidental death and long-term disability insurance, and a car allowance of $2,500 per month, grossed up for taxes. He was also granted options to purchase 1,000,000 shares of our common stock at ten percent above the fair market value on the date of grant, vesting 20% each year over five years. The options vest immediately in the event of a change in control, termination without good cause or resignation with good reason. In the event that Mr. Peizer is terminated without good cause or resigns with good reason prior to the end of the term, he will receive a lump sum equal to the remainder of his base salary and targeted bonus for the year of termination, plus three years of additional salary, bonuses and benefits. If any of the provisions above result in an excise tax, we will make an additional “gross up” payment to eliminate the impact of the tax on Mr. Peizer.
Senior executive vice presidents
We entered into a four-year employment agreement with each of our senior executive vice presidents, Richard A. Anderson and Christopher S. Hassan and Anthony M. LaMacchia effective April 13, 2005 and July 27, 2006, and September 29, 2003, respectively. Mr. Anderson and Mr. LaMacchia each currently receives an annual base salary of $288,000, and Mr. Hassan receives an annual base salary of $278,800, each with annual bonuses targeted at 50% of his base salary based on achieving certain milestones. Their compensation will be adjusted each year by an amount not less than the CPI. They each receive executive benefits including group medical and dental insurance, term life insurance, accidental death and long-term disability insurance. Mr. Anderson was granted options to purchase 280,000 shares of our common stock, in addition to the 120,000 options previously granted to him as a non-employee member of our board of directors. Messrs.Mr. Hassan and LaMacchia were eachwas granted options to purchase 400,000 shares of our common stock. Each of the options was granted at the fair market value on the date of grant, vesting 20% each year over five years. The options will vest immediately in the event of a change in control, termination without cause or resignation with good reason. In the event of termination without good cause or resignation with good reason prior to the end of the term, upon execution of a mutual general release, Messrs. Anderson and Hassan each executive will receive a lump sum equal to one year of salary and bonus, and will receive continued medical benefits for one year unless he becomes eligible for coverage under another employer’semployer's plan. If he is terminated without cause or resigns with good reason within twelve months following a change in control, upon execution of a general release he will receive a lump sum equal to eighteen months salary, 150% of the targeted bonus, and will receive continued medical benefits for eighteen months unless he becomes eligible for coverage under another employer’semployer's plan.
��Chief financial officer
Confidentiality agreements
We entered into a four-year employment agreement with our chief financial officer, Chuck Timpe, effective as of September 29, 2003. Mr. Timpe currently receives an annual base salary of $278,800, with annual bonuses targeted at 50% of his base salary based on achieving certain milestones. His compensation will be adjusted each year by an amount not less than the CPI. Mr. Timpe receives executive benefits including group medical and dental insurance, $300,000 of term life insurance, accidental death and long-term disability insurance. In 2003 he was granted options to purchase 300,000 shares, and in March 2007 he was granted options to purchase an additional 100,000 shares of our common stock at or above the fair market value on the dates of grant, vesting 20% each year over five years. The options vest immediately in the event of a change in control, termination without cause or resignation with good reason. In the event that Mr. Timpe is terminated without good cause or resigns with good reason prior to the end of the term, upon execution of a general release he will receive a lump sum equal to one year of salary and bonus, and will receive continued medical benefits for one year unless he becomes eligible for coverage under another employer’s plan. If Mr. Timpe is terminated without cause or resigns with good reason within twelve months following a change in control, upon execution of a general release he will receive a lump sum equal
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to eighteen months salary, 150% of the targeted bonus, and will receive continued medical benefits for eighteen months unless he becomes eligible for coverage under another employer’s plan.
Executive vice president
We entered into a one-year letter of employment agreement with our executive vice president of strategic development, Sanjay Sabnani, effective as of April 15, 2004, which continues at will. Mr. Sabnani currently receives an annual base salary of $250,000, with annual bonuses targeted at 30% of his base salary based on performance. Mr. Sabnani receives executive benefits including group medical and dental insurance, and long-term disability insurance. Through December 31, 2006 he had been granted options to purchase 300,000 shares, and in March 2007 he was granted options to purchase an additional 50,000 shares of our common stock, at or above the fair market value on the dates of grant, vesting 20% each year over five years from the dates of grant.
Confidentiality agreements
Each employee is required to enter into a confidentiality agreement. These agreements provide that for so long as the employee works for us, and after the employee’semployee's termination for any reason, the employee may not disclose in any way any of our proprietary confidential information.
Limitation on liability and indemnification matters
Our certificate of incorporation and bylaws limit the liability of directors and executive officers to the maximum extent permitted by Delaware law. The limitation on our directors’directors' and executive officers’officers' liability may not apply to liabilities arising under the federal securities laws. Our certificate of incorporation and bylaws provide that we shall indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to our directors and executive officers pursuant to our certificate of incorporation and bylaws, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
At present, there is no pending material litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
GRANTS OF PLAN-BASED AWARDS IN 20062007
The table below sets forth the information with respect to options granted to our named executive officers during 2006.2007.
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| | | | | | Number of | | | | | | |
| | | | | | securities | | | | | | Grant Date |
| | | | | | underlying | | Exercise | | Fair Value |
| | Grant | | options | | price | | of Option |
Name | | date | | granted (1) | | ($/Sh) (2) | | Awards (3) |
Terren S. Peizer | | | | | | | — | | | $ | — | | | | — | |
Richard A. Anderson | | | 7/27/2006 | | | | 25,000 | | | | 4.77 | | | | 79,034 | |
Anthony M. LaMacchia | | | | | | | — | | | | — | | | | — | |
Chuck Timpe | | | | | | | — | | | | — | | | | — | |
Sanjay Sabnani | | | 1/26/2006 | | | | 20,000 | | | | 6.42 | | | | 84,253 | |
| | | 4/27/2006 | | | | 20,000 | | | | 8.56 | | | | 113,449 | |
Monica Alfaro Welling | | | 11/15/2006 | | | | 116,000 | | | | 7.89 | | | | 310,731 | |
Name | Grant date | | Number of securities underlying options granted (1) | | | Exercise price ($/Sh) (2) | | | Grant Date Fair Value of Option Awards (3) | |
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Note
Notes to Grants of Plan-based Awards Table:
(1) | | These options vest annually over a five-year period from the date of grant. |
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(2) | | All options to purchase our common stock are exercisable at a price equal to the closing price of our common stock on the date of grant. |
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(3) | | The grant date fair value of stock options is calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected volatility, expected life of the options and applicable interest rates. See Note 911 —Share-Based Compensationto the December 31, 20062007 consolidated financial statements in our Annual Report on Form 10-K for further information on the assumptions used to value stock options granted to executive officers. |
OUTSTANDING
OUTSTANDING EQUITY AWARDS AT LAST FISCAL YEAR-END
The following table sets forth all outstanding equity awards held by our named executive officers as of December 31, 2006.2007.
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| | Number of shares underlying | | | | |
| | unexercised options | | Option | | Option |
| | Exercisable | | Unexercisable | | exercise | | expiration |
Name | | (#) | | (#) | | price | | date |
Terren S. Peizer | | | 600,000 | | | | 400,000 | | | $ | 2.75 | | | | 9/29/2008 | |
Richard A. Anderson | | | 90,000 | | | | 30,000 | | | | 2.50 | | | | 9/29/2013 | |
| | | 51,000 | | | | 204,000 | | | | 7.34 | | | | 4/28/2015 | |
| | | — | | | | 25,000 | | | | 4.77 | | | | 7/27/2016 | |
Anthony M. LaMacchia | | | 240,000 | | | | 160,000 | | | | 2.50 | | | | 9/29/2013 | |
Chuck Timpe | | | 180,000 | | | | 120,000 | | | | 2.50 | | | | 9/29/2013 | |
Sanjay Sabnani | | | 60,000 | | | | 90,000 | | | | 2.80 | | | | 7/2/2014 | |
| | | 20,000 | | | | 30,000 | | | | 4.25 | | | | 10/1/2014 | |
| | | 4,000 | | | | 16,000 | | | | 5.72 | | | | 1/20/2015 | |
| | | 4,000 | | | | 16,000 | | | | 7.34 | | | | 4/28/2015 | |
| | | 4,000 | | | | 16,000 | | | | 5.78 | | | | 7/28/2015 | |
| | | — | | | | 20,000 | | | | 6.42 | | | | 1/26/2016 | |
| | | — | | | | 20,000 | | | | 8.56 | | | | 4/27/2016 | |
Monica Alfaro Welling | | | 86,000 | | | | 114,000 | | | | 2.80 | | | | 2/28/2007 | |
| | | 20,000 | | | | 30,000 | | | | 4.25 | | | | 2/28/2007 | |
| | | 10,000 | | | | 40,000 | | | | 5.72 | | | | 2/28/2007 | |
| | | — | | | | 116,000 | | | | 7.89 | | | | 11/15/2009 | |
| | Number of shares underlying | | | |
| | unexercised options | | | Option | | Option |
| | Exercisable | | | Unexercisable | | | exercise | | expiration |
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OPTIONS EXERCISED IN 20062007 On September 20, 2007, Mr. Timpe exercised options to purchase 20,000 shares of common stock at a price $2.50 per share. The total value realized on the exercise of stock options amounted to $81,200 and was calculated based on the difference between the market price of the common stock on the date of exercise and the exercise price of the underlying option. There were no other options exercised by any of our named executive officers, and no restricted stock held or vested, in 2006.2007.
POTENTIALPOTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN CONTROLCHANGE-IN-CONTROL
Potential payments upon termination
The following summarizes the payments that the named executive officers would have received if their employment had terminated on December 31, 2006.2007.
If Mr. Peizer’sPeizer's employment had terminated due to disability, he would have received insurance and other fringe benefits for a period of one year thereafter, with a value equal to $5,600. If Mr. Peizer had been terminated without good cause or resigned for good reason, he would have received a lump sum payment of $2,717,000, based upon: (i) three years of additional salary at $450,000 per year; (ii) three years of additional bonus of $450,000 per year; and (iii) three years of fringe benefits, with a value equal to $17,000. In addition, his unvested stock options would have vested with a value of $2,596,000.$36,000.
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If any of the other named executive officerseither Mr. Hassan or Mr. Anderson had been terminated without good cause or resigned for good reason, he would have received a lump sum of $432,000 for Mr. Anderson and $418,200 for Mr. Hassan, $432,000 for Mr. LaMacchia, and $418,200 for Mr. Timpe, based upon one year’syear's salary plus the full targeted bonus of 50% of base salary. In addition, medical benefits would continue for up to one year, with a value equal to $17,000 each. In addition, his
If either Mr. LaMacchia or Mr. Timpe had been terminated without good cause or resigned for good reason, unvested stock options would have vested with values of $701,550 for Mr. Anderson, $1,788,000 for Mr. Hassan, $1,078,400$34,400 for Mr. LaMacchia and $808,000$25,800 for Mr. Timpe.
Monica Alfaro Welling, our former Senior Vice President Marketing, was terminated on November 30, 2006. She received $173,992 of severance payments and accrued or paid out vacation, and received an additional grant of 116,000 stock options with a value of $157,000 as of December 31 2006.
Potential payments upon change in control
Upon a change in control, the unvested stock options of each of our named executive officers would have vested, with the values set forth above.
If Mr. Peizer had been terminated without good cause or resigned for good reason within twelve months following a change in control, he would have received a lump sum payment of $2,717,000, as described above, plus a tax gross up of $713,000.
In addition, had an executive officer other than our CEOeither Mr. Hassan or Mr. Anderson been terminated without good cause or resigned for good reason within twelve months following a change in control, he would have received a lump sum of $648,000 for Mr. Anderson and $627,300 for Mr. Hassan, $648,000 for Mr. LaMacchia, and $627,300 for Mr. Timpe, based upon one-and-a-half year’syear's salary plus one-and-a-half the full targeted bonus of 50% of base salary. In addition, medical benefits would continue for up to one-and-a-half years, with a value equal to $25,000 each.
DIRECTORDIRECTOR COMPENSATION
The following table provides information regarding compensation that was paid to the individuals who served as non-employee directors during the year ended December 31, 2006.2007. Except as set forth in the table, during 2006,2007, directors did not earn nor receive cash compensation or compensation in the form of stock awards, option awards or any other form.
DIRECTOR COMPENSATION TABLE
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| | | | | | | | | | | | | | | | | | Change in | | | | |
| | | | | | | | | | | | | | | | | | Pension | | | | |
| | | | | | | | | | | | | | | | | | Value and | | | | |
| | Fees | | | | | | | | | | Non-Equity | | Nonqualified | | | | |
| | Earned or | | | | | | | | | | Incentive | | Deferred | | All | | |
| | Paid in | | Stock | | Option | | Plan | | Compensation | | Other | | |
| | Cash | | Awards | | Awards(1)(3) | | Compensation | | Earnings | | Compensation | | Total |
| | ($) | | ($) | | ($) | | ($) | | ($) | | ($) | | ($) |
Leslie F. Bell | | | — | | | | — | | | $ | 124,453 | | | | — | | | | — | | | | — | | | $ | 124,453 | |
Hervé de Kergrohen, M.D. | | | — | | | | — | | | | 38,255 | | | | — | | | | — | | | | — | | | | 38,255 | |
Ivan M. Lieberburg, Ph.D., M.D. | | | — | | | | — | | | | 124,453 | | | | — | | | | — | | | | — | | | | 124,453 | |
Marc G. Cummins (2) | | | — | | | | — | | | | 154,471 | | | | — | | | | — | | | | — | | | | 154,471 | |
Andrea Grubb Barthwell, M.D.(2) | | | — | | | | — | | | | 113,674 | | | | — | | | | — | | | | — | | | | 113,674 | |
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| | Fees Earned or Paid in Cash | | | Stock Awards | | | Option Awards (1)(3) | | | Non-Equity Incentive Plan Compensation | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | | All Other Compensation | | | Total | |
| | $ | | | | | - | | | | | | | | - | | | | - | | | | - | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ivan M. Lieberburg, PhD, MD | | | | | | | - | | | | | | | | | | | | | | | | | | | | | |
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Andrea Grubb Barthwell, MD | | | | | | | - | | | | | | | | - | | | | - | | | | - | | | | | |
Honorable Karen Freeman-Wilson(2) | | | | | | | - | | | | | | | | - | | | | - | | | | - | | | | | |
Notes to Director Compensation Table:
(1) | | Amounts reflect the compensation expense recognized in the Company’sCompany's financial statements in 20062007 for non-employee director stock options granted in 20062007 and in previous years, in accordance with SFAS No. 123(R). As such, these amounts do not correspond to the compensation actually realized by each director for the period. See Note 911 —Share-Based Compensationto the Company’sCompany's December 31, 20062007 consolidated financial statements in its Annual Report on Form 10-K for further information on the assumptions used to value stock options granted to non-employee directors. |
(2) | | In January 2006,On August 2, 2007 the board granted options to purchase 50,000100,000 shares each to Mr. Cummins and Dr. Barthwell, eachJudge Freeman-Wilson with a grant date fair value of $207,513.$464,586. The stock options were granted pursuant to the 2003 Stock Incentive Plan and vest 25% per year over four years. |
(3) | | There were a total of 750,000 stock options granted to non-employee directors outstanding at December 31, 20062007 with an aggregate grant date fair value of $1,327,000,$1,744,000, the last of which will vest in January 2010.August 2011. The grant date fair value of stock option awards is calculated based on the Black-Scholes stock option valuation model utilizing the assumptions discussed in Note 911 —Share-Based Compensationto the December 31, 20062007 consolidated financial statements in our Annual Report on Form 10-K. Outstanding equity awards, by non-employee director as of December 31, 20062007 were as follows: |
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| | | | | | Aggregate |
| | | | | | Grant Date |
| | | | | | Fair Market |
| | Options | | Value |
| | Outstanding | | Options |
Name | | (#) | | Outstanding |
Leslie F. Bell | | | 150,000 | | | $ | 224,227 |
Herve de Kergohen | | | 100,000 | | | | 46,974 |
Ivan M. Lieberburg, Ph.D.,M.D. | | | 250,000 | | | | 271,200 |
Marc G. Cummins | | | 150,000 | | | | 377,667 |
Andrea Grubb Barthwell, M.D. | | | 100,000 | | | | 406,716 |
CERTAINName | | Options Outstanding (#) | | | Aggregate Grant Date Fair Market Value Options Outstanding | |
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Ivan M. Lieberburg, PhD, MD | | | | | | | | |
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Andrea Grubb Barthwell, MD | | | | | | | | |
Honorable Karen Freeman-Wilson | | | | | | | | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Andrea Grubb Barthwell, M.D., a director, is the founder and chief executive officer of EMGlobal LLC, a healthcare and policy consulting firm providing consulting services to us. In 2005, 2006 and 2006,2007, we paid or accrued approximately $83,000, $189,000 and $189,000,$156,000, respectively, in fees to the consulting firm.
David E. Smith, M.D. who served as our senior vice presidentLawrence Weinstein, M.D. is the sole shareholder of The PROMETA Center, Inc., a California professional corporation. Under the terms of a management services agreement with the PROMETA Center, we provide and perform all non-medical management and administrative services for the medical group. We also agreed to provide a working capital loan to the PROMETA Center up to a maximum of $2.5 million to allow for the medical group to pay for its obligations, including our management fees, equipment, leasehold build-out and start-up costs. As of March 28, 2007,31, 2008, the amount of loan outstanding was approximately $2.3$6.2 million, with interest at the prime rate plus 2%. Payment of our management fee is subordinate to payments of the obligations of the medical group, and repayment of the working capital loan is not guaranteed by the stockholder or other third party.
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of BDO Seidman, LLP served as our independent registered public accounting firm forsince the 20062003 fiscal year, and will continue to serve as our independent registered public accounting firm for the 20072008 fiscal year unless the audit committee deems it advisable to make a substitution. We anticipate that representatives of BDO Seidman will attend the annual meeting, will have the opportunity to make a statement if they desire, and will be available to respond to appropriate questions.
Aggregate fees billed to us for the fiscal years ended December 31, 20052006 and 20062007 by BDO Seidman and its affiliates are as follows:
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| | 2005 | | 2006 | | 2006 | | 2007 |
Audit fees (1) | | $ | 563,000 | | $ | 525,000 | | | | | | | | |
Audit-related fees (2) | | $ | 10,000 | | $ | 5,900 | | | | | | | | |
Tax fees (3) | | $ | 34,000 | | $ | 65,000 | | | | | | | | |
All other fees | | $ | — | | $ | — | | | | | | | | |
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(1) | | This amount includes fees paid by us in connection with the annual audit of our consolidated financial statements, the review of our quarterly financial statements, registration statements and other filings with the SEC and approximately $240,000 in 2005 and $235,000 in 2006 and $305,000 in 2007 in fees related to the audit of internal control over financial reporting performed in relation to Section 404 of the Sarbanes-Oxley Act of 2002. |
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(2) | | This amount relates to consulting on financial accounting research and reporting standards, consultation on accounting transactions.transactions and fees related to our stock offering. |
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(3) | | Amounts are for tax return preparation. |
The audit committee has considered whether the provision of non-audit services by BDO Seidman is compatible with maintaining BDO Seidman’sSeidman's independence.
Audit committee pre-approvals
All auditing and non-auditing services provided to us by the independent auditors are pre-approved by the audit committee or in certain instances by the chair of the audit committee pursuant to delegated authority. Each year the audit committee discusses and outlines the scope and plan for the audit and reviews and approves all known audit and non-audit services and fees to be provided by and paid to the independent auditors. During the year, the specific audit and non-audit services or fees not previously negotiated or approved by the audit committee are negotiated or approved in advance by the audit committee or by the chair of the audit committee pursuant to delegated authority. In addition, during the year the chief financial officer and the audit committee monitor actual fees to the independent auditors for audit and non-audit services.
All of the services provided by BDO Seidman described above under the captions “Audit-related fees”"Audit-related fees", “Tax fees”"Tax fees", and “All"All other fees”fees" were approved by our audit committee pursuant to our audit committee’scommittee's pre-approval policies.
20062007 ANNUAL REPORT ON FORM 10-K
We will mail with this proxy statement a copy of our annual reportAnnual Report on Form 10-K to each stockholder of record as of May 4, 2007.2, 2008. If a stockholder requires an additional copy of our annual report, we will provide one, without charge, on the written request of any such stockholder addressed to us at 11150 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025, Attn: Investor Relations.
We know of no other business to be brought before the annual meeting. If, however, any other business should properly come before the annual meeting, the persons named in the accompanying proxy will vote proxies as in their discretion they may deem appropriate, unless they are directed by a proxy to do otherwise.
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STOCKHOLDERSTOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Stockholders interested in presenting a proposal for consideration at our 20082009 annual meeting of stockholders may do so by following the procedures prescribed in Rule 14a-8 under the Securities Exchange Act of 1934, as amended. To be eligible for inclusion in our proxy statement and form of proxy relating to the meeting, stockholder proposals must be received in writing by our corporate Secretary,secretary, Hythiam, Inc., 11150 Santa Monica Blvd., Suite 1500, Los Angeles, California 90025, no later than January 25, 2008.28, 2009.
In order for a stockholder proposal not intended to be subject to Rule 14a-8 (and thus not subject to inclusion in our proxy statement) to be considered “timely”"timely" within the meaning of Rule 14a-4 under the Securities Exchange Act of 1934, as amended, notice of any such stockholder proposals must be given to us in writing not less than 45120 calendar days prior to the date on which we first mailed our proxy materials for the 20072008 meeting, which is set forth on page 1 of this proxy statement (or within a reasonable time prior to the date on which we mail our proxy materials for the 20082009 annual meeting if the date of that meeting is changed more than 30 days from the prior year).
A stockholder’sstockholder's notice to us must set forth for each matter proposed to be brought before the annual meeting (a) a brief description of the matter the stockholder proposes to bring before the meeting and the reasons for conducting such business at the meeting, (b) the name and recent address of the stockholder proposing such business, (c) the class and number of shares of our stock which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business.
If a stockholder proposal is received after April 15, 2008,January 28, 2009, we may vote in our discretion as to the proposal all of the shares for which we have received proxies for the meeting.
Our 20082009 annual meeting of stockholders is expected to be held on Friday, June 20, 2008.26, 2009. If the date of next year’syear's annual meeting is changed by more than 30 days, then any proposal must be received not later than ten days after the new date is disclosed in order to be included in our proxy materials.
| /s/ TERREN S. PEIZER |
| |
| Terren S. Peizer |
| Chairman of the Board and Chief Executive Officer |
Los Angeles, California
May 28, 2008
LOS ANGELES, CA 90025 | VOTE BY INTERNET - www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE STOCKHOLDER COMMUNICATIONS If you would like to reduce the costs incurred by Hythiam, Inc. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access stockholder communications electronically in future years. VOTE BY PHONE -1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided and return it to Hythiam, Inc., c/o Broadridge, 51 Mercedes Way. Edgewood, NY 11717. |
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: | HYTHM1 | KEEP THIS PORTION FOR YOUR RECORDS |
| | DETACH AND RETURN THIS PORTION ONLY |
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
HYTHIAM, INC. | | | | For All | | Withhold All | | For All Except | | To withhold authority to vote for any individual nominee(s), mark "For All Except" and write the number(s) of the nominee(s) on the line below. | | | | | |
| Vote on Directors |
| 1. | ELECTION OF DIRECTORS |
| | | | | | £ | | £ | | £ | | | | | | | |
| | Nominees: | | |
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| | 01) | Terren S. Peizer | | | |
| | 02) | Richard A. Anderson | | | |
| | 03) | Andrea Grubb Barthwell, M D | | 07) | |
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Vote on Proposals | | | For | Against | Abstain | |
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| 2. | | INCREASING SHARES UNDER THE 2007 STOCK INCENTIVE PLAN: | | £ | £ | £ | |
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| 3 | | INCREASING SHARES AVAILABLE FOR INCENTIVE STOCK OPTIONS UNDER THE 2007 STOCK INCENTIVE PLAN: | | £ | £ | £ | |
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| 4. | | INCREASING MAXIMUM NUMBER OF SHARES AVAILABLE FOR AWARDS IN ANY CALENDAR YEAR UNDER THE 2007 STOCK INCENTIVE PLAN: | | £ | £ | £ | |
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| 5. | | INCREASING MAXIMUM NUMBER OF SHARES AVAILABLE FOR AWARDS TO ANY PARTICIPANT IN ANY FISCAL YEAR UNDER THE 2007 STOCK INCENTIVE PLAN: | | £ | £ | £ | |
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| THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL DIRECTORS, APPROVAL OF INCREASE IN SHARES UNDER THE 2007 STOCK INCENTIVE PLAN, APPROVAL OF INCREASE IN SHARES AVAILABLE FOR INCENTIVE STOCK OPTIONS UNDER THE 2007 STOCK INCENTIVE PLAN, APPROVAL OF INCREASE IN SHARES AVAILABLE FOR AWARDS IN ANY CALENDAR YEAR UNDER THE 2007 STOCK INCENTIVE PLAN AND APPROVAL OF INCREASE IN SHARES AVAILABLE FOR ANY PARTICIPANT IN ANY FISCAL YEAR UNDER THE 2007 STOCK INCENTIVE PLAN. | |
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| And upon such matters which may properly come before the meeting or any adjournment or adjournments thereof. |
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| For address changes and/or comments, please check this box and write them on the back where indicated. Please note that changes to the registered name(s) on the account may not be submitted via this method. | | £ | | | | | | | | |
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| This Proxy will be voted as directed or, if no contrary direction is indicated, will be voted FOR the election of all directors, FOR Proposal 2: Increasing shares under the 2007 Stock Incentive Plan, FOR Proposal 3: Increasing shares available for incentive stock options under the 2007 Stock Incentive Plan, FOR Proposal 4: Increasing maximum number of shares available for awards in any calendar year under the 2007 Stock Incentive Plan, FOR Proposal 5: Increasing maximum number of shares available for awards to any participant in any fiscal year under the 2007 Stock Incentive Plan, and as said proxies deem advisable on such other matters as may come before the meeting. | |
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| PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE. | |
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| (NOTE: Please sign exactly as your name(s) appear(s) hereon. All holders must sign. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. If a corporation, please sign in full corporate name, by authorized officer. If a partnership, please sign in partnership name by authorized person.) | |
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| Signature (PLEASE SIGN WITHIN BOX) | Date | | | | Signature (Joint Owners) | | | | | |
ANNUAL MEETING OF STOCKHOLDERS
Please Sign, Date and Mail the Proxy Card in the Envelope Provided as Soon As Possible. Please detach along perforated line and mail in the envelope provided. |
2008 ANNUAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned stockholder of HYTHIAM, INC., a Delaware corporation (the "Company"), hereby acknowledges receipt of the notice of annual meeting of stockholders and proxy statement of the Company, each dated May 28, 2008, and hereby appoints Terren S. Peizer and Chuck Timpe, and each of them, proxies and attorneys-in-fact, with full power to each of substitution, on behalf and in the name of the undersigned, to represent the undersigned at the 2008 annual meeting of stockholders of the Company, to be held on Friday, June 20, 2008, at 10:00 a.m., local time, at 11150 Santa Monica Blvd., Los Angeles, California 90025, and at any adjournment or adjournments thereof, and to vote all shares of the Company's common stock that the undersigned would be entitled to vote if then and there personally present, on the matters set forth on the reverse side. This Proxy will be voted as directed or, if no contrary direction is indicated, will be voted FOR the election of all directors, FOR Proposal 2: Increasing shares under the 2007 Stock Incentive Plan, FOR Proposal 3: Increasing shares available for incentive stock options under the 2007 Stock Incentive Plan, FOR Proposal 4: Increasing maximum number of shares available for awards in any calendar year under the 2007 Stock Incentive Plan, FOR Proposal 5: Increasing maximum number of shares available for awards to any participant in any fiscal year under the 2007 Stock Incentive Plan, and as said proxies deem advisable on such other matters as may come before the meeting. A majority of such proxies or substitutes as shall be present and shall act at the meeting or any adjournment or adjournments thereof (or if only one shall be present and act, then that one) shall have and may exercise all of the powers of said proxies hereunder. |
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| Address Changes/ Comments | | | |
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| Terren S. Peizer (If you noted any Change/Comments above, please mark corresponding box on the reverse side) | |
| Chairman of(Continued and to be signed and dated on the Board and
Chief Executive Officerother side.) | |
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Los Angeles, California
March 28, 2007
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HYTHIAM, INC.
2007 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of HYTHIAM, INC., a Delaware corporation (the “Company”), hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy Statement of the Company, each dated March 28, 2007, and hereby appoints Terren S. Peizer and Chuck Timpe, and each of them, proxies and attorneys-in-fact, with full power to each of substitution, on behalf and in the name of the undersigned, to represent the undersigned at the 2007 Annual Meeting of Stockholders of the Company, to be held on Friday, June 15, 2007, at 10:00 a.m., local time, at the PROMETA Center, 1315 Lincoln Blvd. Suite 250, Santa Monica 90401, California 90025, and at any adjournment or adjournments thereof, and to vote all shares of the Company’s common stock that the undersigned would be entitled to vote if then and there personally present, on the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no contrary direction is indicated, will be voted FOR the election of directors, FOR approval of the Incentive Compensation Plan, and as said proxies deem advisable on such other matters as may come before the meeting.
A majority of such proxies or substitutes as shall be present and shall act at the meeting or any adjournment or adjournments thereof (or if only one shall be present and act, then that one) shall have and may exercise all of the powers of said proxies hereunder.
(Continued and to be signed and dated on the other side.)
HYTHIAM, INC.
Sign, Date, and Return the Proxy Card Promptly Using the Enclosed Envelope.
oVotes must be indicated (x) in Black or Blue ink.
| | | | | | |
1. ELECTION
OF
DIRECTORS: | | oFORall
nominees
listed below. | | oWITHHOLD
AUTHORITYto
votefor all nominees listed
below. | | o
*EXCEPTIONS |
| | |
Nominees: | | Terren S. Peizer, Anthony M. LaMacchia, Leslie F. Bell, Hervé de Kergrohen, M.D., Richard A. Anderson, Ivan M. Lieberburg, Ph.D., M.D., Andrea Grubb Bathwell, M.D. and Marc G. Cummins |
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the “Exceptions” box and write that nominee’s name in the space provided below.)
* Exceptions
and upon such matters which may properly come before the meeting or any adjournment or adjournments thereof.
To change your address, please mark this box.o
To include any comments, please mark this box.o
(This Proxy should be dated, signed by the stockholder(s) exactly as his or her name appears hereon, and returned promptly in the enclosed envelope. Persons signing in a fiduciary capacity should so indicate. If shares are held by joint tenants or as community property, both stockholders should sign.)
Date
Share Owner sign here
Co-Owner sign here