| • | | The director is, or has been within the last three years, an employee of the Company or any of its subsidiaries, or an immediate family member of the director is, or has been within the last three years, an employee of the Company or any of its subsidiaries, or an immediate family member of the director is, or has been within the last- 13 -
| | | three years, an executive officer of the Company (but employment as an interim executive officer will not disqualify a director from being considered independent following that employment). | | | | • | | The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 per year in direct compensation from the Company or its subsidiaries, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). | | | | • | | (A) The director or an immediate family member of the director is a current partner of a firm that is the internal or external auditor of the Company or any of its subsidiaries; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the audit of the Company or any of its subsidiaries within that time. | | | | • | | The director or an immediate family member of the director is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executives at the same time serves or served on that company’s compensation committee. | | | | • | | The director is a current employee, or an immediate family member of the director is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeded the greater of $1 million, or 2% of such other company’s consolidated gross revenues. | | | | • | | The director owns, or is affiliated with the owner of, a controlling amount of voting stock of the Company. |
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The director owns, or is affiliated with the owner of, a controlling amount of voting stock of the Company. To assist in the Board’s determinations, each director completed materials designed to identify any relationships that could affect the director’s independence, and the General Counsel and Secretary of the Company conducted follow up interviews with certain directors. On the basis of these materials and the standards described above, the Board determined that each of Rolf A. Classon, Charles E. Golden, Ray J. Hillenbrand, Mark D. Ketchum, Eduardo R. Menascé, Anne Griswold Peirce and Joanne C. Smith and Peter H. Soderberg is independent. With respect to each of Messrs. Ketchum Menascé and SoderbergMenascé and Dr. Peirce, the Board determined that they were independent because no relationship was identified that would automatically bar them from being characterized as independent, no other relationship between any of them and the Company or any of its subsidiaries, whether or not material, was identified and none of them beneficially owns more than 1% of the Company’s outstanding common stock. With respect to Charles E. Golden,Rolf A. Classon, the Board considered the fact that Mr. Classon served as Interim President and Chief Executive Officer of the Company from May 11, 2005 to March 20, 2006 and received compensation from the Company for serving in that capacity. In determining that this relationship was not material, the Board considered that Mr. Classon served as Interim President and Chief Executive Officer for a period of only approximately ten months and received compensation that the Board believed was reasonable and appropriate for his service in that capacity. Further, the Board noted that the NYSE listing standards and the Company’s Corporate Governance Standards expressly acknowledge that service as an executive officer in an interim capacity, and compensation received for that service, do not disqualify a director from being considered independent. The Board considered that Charles E. Golden is a member of the Board of Directors of Clarian Health Partners, which purchased approximately $4.8 million, $3.7 million, $6.6 million and $6.6$3.0 million of products and services from the Company in the fiscal years 2003, 2004, 2005 and 2005,2006, respectively. In determining that this relationship was not material, the Board considered that Mr. Golden is not an executive officer of Clarian Health Partners and that the amount of products and services purchased from the Company by Clarian Heath Partners in the last three years has been substantially below 2% of the consolidated gross revenues of Clarian Health Partners in those years. - 14 -
With respect to Ray J. Hillenbrand, the Board considered the fact that the Board determined that Mr. Hillenbrand’s brother, John A. Hillenbrand II, who is also a Board member, is not independent under the standards described above. The Board determined that Mr. Hillenbrand had exercised in the past and could be expected to exercise in the future business judgment independent from John A. Hillenbrand II. The Board also considered that its determination that John A. Hillenbrand II was not independent was based on a consideration by the Board of all the facts and circumstances and not because a finding of independence was automatically or technically barred under NYSE listing standards. With respect to Joanne C. Smith, the Board considered the fact that the Rehabilitation Institute of Chicago, of which Dr. Smith served as Senior Vice President of Strategy and Business Development from April 2002 through November 2005 and now serves as President of its National Division from November 2005 through October 2006 and as President and Chief Executive Officer since October 4, 2006, has purchased approximately $280,000, $140,000, $206,000 and $206,000$50,000 of -17-
products and services from the Company in fiscal years 2003, 2004, 2005 and 2005,2006, respectively. In evaluating this relationship, the Board considered that the amount of purchases by the Rehabilitation Institute of Chicago in the last three years constituted less than one-quarter of one percent of the gross revenues of the Rehabilitation Institute of Chicago in those years and that Dr. Smith had no authority with respect to the purchasing decisions of the Rehabilitation Institute of Chicago in those yearsprior to November 2005 and has no direct authority for purchasing decisions in her new capacity.since November 2005. On the basis of these factors, the Board determined that this relationship was not material. The Board concluded that, based on all of the relevant facts and circumstances, none of these relationships constituted a material relationship with the Company that represents a potential conflict of interest or otherwise interferes with the exercise by any of these directors of his or her independent judgment from management and the Company. The Board determined that Rolf A. Classon is not independent because of his current service as Interim President and Chief Executive Officer of the Company. Mr. Classon does not serve on the Audit, Compensation and Management Development or Nominating/Corporate Governance Committees of the Board, having left the Compensation and Management Development and Nominating/Corporate Governance Committees upon his appointment as Interim President and Chief Executive Officer in May 2005. The Board expects that Mr. Classon will qualify as independent again once he ceases to be Interim President and Chief Executive Officer. Also on the basis of the standards described above and the materials submitted by the directors, the Board determined that neither W August Hillenbrand nor John A. Hillenbrand II meets the standards for independence. Peter H. Soderberg also does not meet the independence standards because of his current service as President and Chief Executive Officer of the Company. Accordingly, neithernone of these non-independent directors serves on the Audit, Compensation and Management Development or Nominating/Corporate Governance Committees of the Board of Directors. Meetings and Committees of the Board of Directors It is the general policy of the Company that all significant decisions be considered by the Board as a whole. As a consequence, the committee structure of the Board is limited to those committees considered to be basic to, or required for, the operation of a publicly owned company. Currently these committees are the Compensation and Management Development Committee, Finance Committee, Audit Committee and Nominating/Corporate Governance Committee, each of which has a written charter adopted by the Board of Directors. The Nominating/Corporate Governance Committee recommends the members and chairs of these committees to the Board. The Audit Committee, Compensation and Management Development Committee and Nominating/Corporate Governance Committee are made up of only independent directors. The current charter for each of the Board’s standing committees is available on the Company’s website atwww.hillenbrand.com and is available in print to any shareholder who requests it through the Company’s Investor Relations office. In furtherance of its policy of having significant decisions made by the Board as a whole, the Company has an orientation and continuing education process for Board members that includes extensive materials, - 15 -
meetings with key management, visits to Company facilities and Company and industry events. Moreover, as part of directors’ education, which includes, among other things, regular dedicated sessions regarding the Company’s businesses and operations, Audit Committee sponsored financial literacy and legal and regulatory compliance training, and participation in Company and industry trade events, the Board requires each director to attend an outside governance or director related seminar at least once every three years. During the fiscal year ended September 30, 2005,2006, the Board of Directors of the Company held ninefifteen meetings. During this period, no member of the Board of Directors attended fewer -18-
than 75% of the aggregate of the number of meetings of the full Board of Directors and the number of meetings of the committees on which he or she served. TheFinance Committeeassists the Board of Directors in matters related to the capital structure of the Company and is responsible for overseeing the investment of the Company’s assets pending utilization in the Company’s operations. The Finance Committee of the Board of Directors consists of John A. Hillenbrand II (Chairman), Mark D. Ketchum (Vice Chairman), W August Hillenbrand and Anne Griswold Peirce. During the fiscal year ended September 30, 2005,2006, the Finance Committee held four meetings. TheAudit Committeehas general oversight responsibilities with respect to the Company’s financial reporting and financial controls. It annually reviews the Company’s financial reporting process, its system of internal controls regarding accounting, legal and regulatory compliance and ethics that management or the Board has established and the internal and external audit processes of the Company. The Audit Committee consists of Charles E. Golden (Chairman), Eduardo R. Menascé (Vice Chairman) and Ray J. Hillenbrand. Ray J. Hillenbrand replaced Joanne C. Smith.Smith on the Audit Committee effective March 20, 2006. During the fiscal year ended September 30, 2005,2006, the Audit Committee held nineten meetings. Each member of the Audit Committee is independent under Rule 10A-3 of the Securities and Exchange Commission and NYSE listing standards and meets the financial literacy guidelines established by the Board in the Audit Committee Charter. The full text of the Audit Committee Charter as approved and revised by the Board of Directors is attached to this proxy statement as Appendix B. The Board interprets “financial literacy” to mean the ability to read and understand audited and unaudited consolidated financial statements (including the related notes) and monthly operating statements of the sort released or prepared by the Company, as the case may be, in the normal course of its business. The Board of Directors has determined that each member of Charles E. Golden and Eduardo R. Menascéthe audit committee is an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K of the Securities and Exchange Commission. TheCompensation and Management Development Committeeassists the Board in ensuring that the officers and key management of the Company are effectively compensated in terms of salaries, supplemental compensation and other benefits that are internally equitable and externally competitive. The Committee is also responsible for reviewing and assessing the talent development and succession management actions concerning the officers and key employees of the Company. Effective May 11, 2005, theThe Compensation and Management Development Committee consists of Mark D. Ketchum (Chairman), Anne Griswold Peirce and Joanne C. Smith (Vice Chair). Joanne C. Smith replaced Peter H. Soderberg (Vice Chairman) and Anne Griswold Peirce. Prior to May 11, 2005,on the Compensation and Management Development Committee consisted of Rolf A. Classon (Chairman), Mark D. Ketchum (Vice Chairman), Anne Griswold Peirce and Peter H. Soderberg.effective March 20, 2006. During the fiscal year ended September 30, 2005,2006, the Compensation and Management Development Committee held tennine meetings.Each member of the Compensation and Management Development Committee is independent as defined by the New York Stock Exchange listing standards. Effective May 11, 2005,March 20, 2006, theNominating/Corporate Governance Committeeconsists of Joanne C. Smith (Chairperson), Rolf A. Classon (Vice Chairman), Charles E. Golden, Ray J. Hillenbrand and Eduardo R. Menascé. Prior to March 20, 2006, the Nominating/Corporate Governance Committee consisted of Peter H. Soderberg (Chairman), Joanne C. Smith (Vice Chairperson), Charles E. Golden and Eduardo R. Menascé. Prior to May 11, 2005, Rolf A. Classon also was a member of the Committee. The Nominating/Corporate Governance Committee held fivethree meetings during the fiscal year ended September 30, 2005.2006. Each member of the Nominating/Corporate Governance Committee is independent as defined by the New York Stock Exchange listing standards. - 16 --19-
The charter for the Nominating/Corporate Governance Committee of the Board of Directors provides that the primary function of this Committee is to assist the Board of Directors in ensuring that the Company is operated in accordance with prudent and practical corporate governance standards, ensuring that the Board achieves its objective of having a majority of its members be independent in accordance with New York Stock Exchange and other regulations and identifying candidates for the Board of Directors. The charter provides that this Committee must consist of at least three members of the Board of Directors, all of whom must be independent. The charter provides that, to fulfill its duties and responsibilities, the Committee must: | • | | Review from time to time and, if appropriate, recommend to the Board changes to the corporate governance standards for the Board of Directors of the Company and its committees, including committee charters; | | | • | | Review from time to time, and, if appropriate, make changes to the statement setting forth the responsibilities of directors and the qualifications for new nominees for election to the Board; | | | • | | Review from time to time, and, if appropriate, make changes to the statement setting forth the responsibilities of and the qualifications for the Chairman of the Board and the Vice Chairperson of the Board; | | | • | | Annually assess the Board’s effectiveness as a whole as well as the effectiveness of the individual directors and the Board’s various committees, including a review of the mix of skills, core competencies and qualifications of members of the Board; | | | • | | Assess, at least annually, the compensation package for the members of the Board of Directors and, if appropriate, recommend changes to the Board of Directors; | | | • | | Make recommendations with respect to the composition of Board committees; | | | • | | If deemed necessary, select and retain an executive search firm to identify qualified candidates to serve as members of the Board, considering effectiveness, responsiveness and other relevant factors, and approve the fees and other compensation to be paid to the executive search firm; | | | • | | Review the performance of the executive search firm and approve any proposed discharge of the executive search firm when circumstances warrant; | | | • | | Select and recommend to the Board director nominees for election at each annual meeting of shareholders, as well as director nominees to fill vacancies arising between annual meetings of shareholders; | | | • | | When deemed necessary or appropriate, make recommendations to the Board regarding the appointment or replacement of the Chairman of the Board and the Vice Chairperson of the Board; | | | • | | Recommend to the Board annually, based on a consideration of all relevant facts and circumstances, whether each director is independent (as that term is defined in the Corporate Governance Standards for the Board of Directors). | | | • | | Assess the adequacy of and make recommendations to the Board regarding directors’ and officers’ insurance coverage; | | | • | | Review and make recommendations to the Board regarding any shareholder proposals; | | | • | | Pre-approve any related party transactions between the Company or any of its subsidiaries and any director or executive officer; | | | • | | Determine requirements for, and means of, director orientation and training; and | | | • | | Review the charter for the Committee and assess the performance of the members of the Committee at least annually and recommend updates and changes to the Board as conditions warrant. |
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Review the charter for the Committee and assess the performance of the members of the Committee at least annually and recommend updates and changes to the Board as conditions warrant. The Board of Directors has adopted position specifications applicable to members of the Board of Directors, and nominees for the Board of Directors recommended by the Nominating/Corporate Governance Committee must meet the qualifications set forth in these position specifications. The specifications provide that a candidate for director should not ever (i) have been the subject of a Securities and Exchange Commission enforcement action in which he or she consented to the entry of injunctive relief, a cease and desist order, or a suspension or other limitation on the ability to serve as a corporate officer or supervisor, (ii) had any license - 17 -
suspended or revoked due to misconduct of any type or (iii) violated any fiduciary duty to the Company or its Code of Ethical Business Conduct, and should exhibit the following characteristics: | • | | Have a reputation for industry, integrity, honesty, candor, fairness and discretion; | | | • | | Be an acknowledged expert in his or her chosen field of endeavor, which area of expertise should have some relevance to the Company’s businesses or operations; | | | • | | Be knowledgeable, or willing and able to become so quickly, in the critical aspects of the Company’s businesses and operations; and | | | • | | Be experienced and skillful in serving as a competent overseer of, and trusted advisor to, senior management of a substantial publicly held corporation. |
In addition, as specified in the charter for the Nominating/Corporate Governance Committee, nominees for the Board of Directors recommended by the Nominating/Corporate Governance Committee should contribute to the mix of skills, core competencies and qualifications of the Board through expertise in one or more of the following areas: accounting and finance, product and technology development, strategic oversight, healthcare, death care or other low growth industry, manufacturing, serviceservices businesses, sales and market development, international operations, mergerinternational governance, mergers and acquisitionacquisitions related business development, strategic oversight, government relations, investor relations, executive leadership development, sales and marketing development, compensation design and processes, public company governance, and international governance.executive compensation design and processes. The Nominating/Corporate Governance Committee reviews incumbent directors against the position specifications applicable to members of the Board of Directors and independence standards set forth in the New York Stock Exchange Listing Standards. Additionally, since 2003, the Board as a whole, the Board committees and individual incumbent directors are formally evaluated annually by the Nominating/Corporate Governance Committee, whose findings are reviewed with the Board. The Nominating/Corporate Governance Committee retains a nationally recognized consulting firm to assist it with the evaluation process and retainedretains a nationally recognized executive search firm to assist it with the identification and evaluation of the two directors added to the Board in September 2004, Mark D. Ketchum and Eduardo R. Menascé.new directors. The Nominating/Corporate Governance Committee’s policy with respect to the consideration of director candidates recommended by shareholders is that it will consider such candidates. Any such recommendations should be communicated to the Chairman of the Nominating/Corporate Governance Committee in the manner described above in “— -21-
“Communications with Directors” and should be accompanied by substantially the same types of information as are required under the Company’s Code of By-laws for shareholder nominees. The Company’s Code of By-Laws provides that nominations of persons for election to the Board of Directors of the Company may be made at any meeting of shareholders by or at the direction of the Board of Directors or by any shareholder entitled to vote for the election of members of the Board of Directors at the meeting. For nominations to be made by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Company and any nominee must satisfy the qualifications established by the Board of Directors of the Company from time to time as contained in the proxy statement of the Company for the immediately preceding annual meeting or posted on the Website of the Company at www.hillenbrand.com. To be timely, a shareholder’s nomination must be delivered to or mailed and received by the Secretary not later than (i) in the case of the annual meeting, 100 days prior to the anniversary of the date of the immediately preceding annual meeting which was specified in the initial formal notice of such meeting (but if the date of the forthcoming annual meeting is more than 30 days after such anniversary date, such written notice will also be timely if received by the Secretary by the later of 100 days prior to the forthcoming meeting date and the close of business 10 days following the date on which the Company first makes public disclosure of the meeting date) and (ii) in the case of a special meeting, the close of business on the tenth day following the date on which the Company first makes public disclosure of the meeting date. The notice given by a shareholder must set forth: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record, setting forth the shares so held, and - 18 -
intends to appear in person or by proxy as a holder of record at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between such shareholder and each nominee proposed by the shareholder and any other person or persons (identifying such person or persons) pursuant to which the nomination or nominations are to be made by the shareholders; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; (v) the consent in writing of each nominee to serve as a director of the Company if so elected, and (vi) a description of the qualifications of such nominee to serve as a director of the Company. Compensation of Directors Of the Company’s current Board members, only Mr. ClassonSoderberg is a salaried employee of the Company. Mr. Soderberg received compensation for Board service prior to his appointment as President and Chief Executive Officer of the Company effective March 20, 2006. All other directors receive separate compensation for Board service. Mr. Classon received separate employee compensation for Board service for the period prior toof his appointment as Interim President and Chief Executive Officer onbetween May 11, 2005.2005 and March 20, 2006. In 2004,The details of the Board of Directors approved a revised compensation program for non employee directors, which was in effect for the 20052006 fiscal year. The details of this programyear, are as follows: | • | | Directors receive an annual retainer of $25,000 for their service as directors, together with a $3,500 fee for each Board meeting attended. The Chairman of the Board of Director’sDirectors’ annual retainer is $150,000. | |
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| • | | For any Board meeting lasting longer than one day, each director who attends receives $1,000 for each additional day. | | | • | | Directors who attend a Board meeting or standing committee meeting by telephone receive fifty percent (50%) of the usual meeting fee. | | | • | | Each director who is a member of the Nominating/Corporate Governance, Finance, Audit or Compensation and Management Development Committee receives a fee of $1,500 for each committee meeting attended. | | | • | | The Chairs of the Audit, Compensation and Management Development, Nominating/Corporate Governance and Finance Committees receive an additional $10,000, $8,000, $7,000 and $5,000 annual retainer, respectively. | | | • | | Directors who attend meetings of committees of which they are not members receive no fees for their attendance. | | | • | | Notwithstanding the foregoing, for any meeting of an ad hoc committee or team of the Board that requires attendance in person or by telephone, the directors who attend each receive a meeting fee of $1,500, except when such meetings occur before, during or after a meeting of the Board or a standing committee of the Board that also is attended by such directors. | | | • | | Board and committee retainers are paid in quarterly installments and the meeting fees are paid following the meeting. | | | • | | Each director is reimbursed for expenses incurred as a result of attendance at Board or committee meetings. The Company also makes its aircraft available to directors for attendance at Board meetings. | | | • | | Each director is awarded on the first trading day following the close of each annual meeting of the Company’s shareholders 1,800 restricted stock units (otherwise known as deferred stock awards) under |
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| | • | | the Company’s Stock Incentive Plan. Delivery of shares underlying such restricted stock units occurs on the later to occur of one year and one day from the date of the grant or the six month anniversary of the date that the applicable director ceases to be a member of the Board of Directors of the Company. In the case of the Chairman of the Board of Directors, his or her annual grant of restricted stock units is 3,500. | | | • | | Non-employee directors are also eligible to participate in the Company’s group term life insurance program in which the Company pays premiums. Death benefits, which are age related, range from $97,500$60,000 to $150,000. |
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Anne Griswold Peirce received approximately $120 of above market interest on Board of Director fees deferredThe following table sets forth the compensation paid to our non-employee directors during fiscal 2006. The compensation paid to Messrs. Soderberg and Classon for their service President and Chief Executive Officer and Interim President and Chief Executive Officer, respectively, is reported in the year ended September 30, 2005.Summary Compensation Table under the caption “Executive Compensation” below. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Director Compensation for the Fiscal Year Ending September 30, 2006 | | | | | | (a) | | | | (b) | | | | | (c) | | | | (f) | | | (g) | | | (h) | | | | | | | | | | | | | | | | Above Market | | | | | | | | | | | | | | | | | | | | Nonqualified Deferred | | | | | | | | | | | | Fees Earned or | | | | | | Compensation | | | All Other | | | | | | | | | Paid in Cash | | | Stock Awards | | | Earnings | | | Compensation | | | Total | | | Name | | | ($) | | | ($)(1) | | ($) | | | ($)(2) | | | ($) | | | Rolf A. Classon - Chairman | | | $ | 137,250 | | | | $ | 177,981 | | | | | N/A | | | | $ | 4,437 | | | | $ | 319,668 | | | | Charles E. Golden | | | $ | 87,500 | | | | $ | 92,610 | | | | | N/A | | | | | None | | | | $ | 180,110 | | | | John A. Hillenbrand II | | | $ | 70,000 | | | | $ | 92,610 | | | | | N/A | | | | $ | 247 | | | | $ | 162,857 | | | | Ray J. Hillenbrand | | | $ | 112,250 | | | | $ | 99,916 | | | | | N/A | | | | | None | | | | $ | 212,166 | | | | W August Hillenbrand | | | $ | 71,000 | | | | $ | 92,610 | | | | $ | 69,626 | | | | $ | 839,964 | | | | $ | 1,073,200 | | | | Mark D. Ketchum | | | $ | 79,750 | | | | $ | 92,610 | | | | | N/A | | | | $ | 516 | | | | $ | 172,876 | | | | Eduardo R. Menascé | | | $ | 79,000 | | | | $ | 92,610 | | | | | N/A | | | | $ | 792 | | | | $ | 172,402 | | | | Anne G. Peirce | | | $ | 83,250 | | | | $ | 92,610 | | | | $ | 525 | | | | $ | 516 | | | | $ | 176,901 | | | | Joanne C. Smith | | | $ | 79,500 | | | | $ | 92,610 | | | | | N/A | | | | $ | 180 | | | | $ | 172,290 | | | | Peter H. Soderberg | | | $ | 33,500 | | | | | N/A | | | | | N/A | | | | $ | 396 | | | | $ | 33,896 | | | |
(1) | | These amounts represent awards of restricted stock units (otherwise known as deferred stock awards), which will be issued in shares of common stock of the Company. Delivery of shares underlying such restricted stock units occurs on the later to occur of one year and one day from the date of the grant or the six month anniversary of the date that the applicable director ceases to be a member of the Board of Directors of the Company. | | (2) | | Consists of the value of Company provided term life insurance. In the case of Rolf A. Classon, limited one time use of Company aircraft is included. Moreover, amounts disclosed for W August Hillenbrand also include Company provided supplemental pension; life insurance including gross up for tax purposes; personal benefits including an assistant and office; security; and limited use of Company aircraft. For more information about the compensation paid to W August Hillenbrand, see “— Certain Relationships and Related Transactions” below. |
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Certain Relationships and Related Transactions In September 2005, the Board amended theThe Corporate Governance Standards for the Board to reflect the Board’s policyrequire that all new proposed related party transactions involving executive officers or directors must be reviewed and approved by the Nominating/Corporate Governance Committee in advance. As previously disclosed, during 2000, W August Hillenbrand and the Company entered into an agreement relating to Mr. Hillenbrand’s retirement as Chief Executive Officer of the Company on December 2, 2000. Under that agreement, Mr. Hillenbrand agreed to render consulting services to, and refrain from competing with, the Company through September 18, 2005. In addition to his consulting fee of approximately $872,800, received duringDuring the fiscal year ended September 30, 2005,2006, Mr. Hillenbrand also received $231,329$69,626 of above market interest on deferred compensation; $12,056,299 for payment of deferred cash compensation and $9,303,598$36,745 for payment of deferred stock. Mr. Hillenbrand is also entitled to receive a package of benefits from the Company, including payment of life and health insurance premiums which are grossed up for tax purposes, reimbursement of medical expenses not covered by insurance, an office, a secretary, an automobile, reimbursement of miscellaneous expenses, supplemental pension fund benefit payments and limited use of the Company’s corporate aircraft for individual personal purposes on the same basis as the Company’s Chief Executive Officer’s personal use,i.e., up to fifty hours per year.Officer. During the fiscal year ended September 30, 2005,2006, these benefits aggregated approximately $582,700.$816,745. Additionally, during fiscal year 20052006 the Company paid $58,100$21,695 for legal and security measures to address certain security threats to Mr. Hillenbrand and the Company. During the fiscal year ended September 30, 2004, the Board of Directors of the Company authorized a contribution of $500,000, which was paid in 2005, to The John A. Hillenbrand Foundation, a public charitable foundation formed in 1950 to promote religious, educational and/or charitable activities in the City of Batesville and the County of Ripley, Indiana. The Foundation has contributed to a variety of projects involving the local churches, schools and hospital. W August Hillenbrand, a director of the Company, is an officer and director of the Foundation, and John A. Hillenbrand II is a director of the Foundation. Ray J. Hillenbrand resigned from all positions held with the Foundation on August 1, 2002.
The Rehabilitation Institute of Chicago, of which Joanne C. Smith, a director of the Company, was Senior Vice President of Strategy and Business Development through November 2005 and now serves as President of its National Division from November 2005 to October 2006 and is now President and Chief Executive Officer, is a customer of the Company. During the fiscal year ended September 30, 2005,2006, the Company sold approximately $206,000$50,000 of products and services to the Rehabilitation Institute of Chicago. The Rehabilitation Institute of Chicago is a voluntary member, among thousands of members, of one of the group purchasing organizations with which the Company has a contract. Accordingly, the Company expects to continue to sell products to this customer, although the amounts of future sales are not fixed and are not currently determinable. Sales to this customer are on terms consistent with those of sales to the Company’s other customers. During fiscal year 20052006 Dr. Smith had no direct authority with respect to the purchasing decisiondecisions of the Rehabilitation Institute of Chicago. - 20 -
In 2003 the Company’s Batesville Casket subsidiary entered into a contract with Nambé Mills, Inc. pursuant to which Batesville Casket purchases urn products from Nambé Mills. Purchases during the fiscal year ended September 30, 20052006 were approximately $321,000,$305,000, and purchases during fiscal 20062007 are projected to total approximately $262,000.$225,000. John A. Hillenbrand II, a director of the Company, servedserves as the Chairman of the BoardEmeritus of Nambé Mills until January 2005, when he became its Chairman Emeritus.Mills. Mr. Hillenbrand’s children own substantially all of the equity of Nambé Mills. The Company believes that these purchases will be on terms similar to those the Company could obtain from an unrelated third party for these products. - 21 --25-
EXECUTIVE COMPENSATION The following tabulation and notes set forth the compensation paid or accrued by the Company during the fiscal years ended September 30, 2006, 2005 2004 and 20032004 to each person who served as Chief Executive Officer during fiscal 2006 and each of the other four most highly compensated executive officers and two other individuals who would have been included in the foregoing category but for the fact that they were not serving as an(the “named executive officer at the end of the fiscal year.officers”). Summary Compensation Table | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long Term Compensation | | | | | | | | | Annual Compensation | | Awards | | | | | | | | | | | | | | | | | | | | | Restricted | | Securities | | | | | | | | | | | | | | | | | Other Annual | | Stock | | Underlying | | All Other | Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Compensation ($)(1) | | Awards ($)(2) | | Options (#)(3) | | Compensation ($)(4) | Rolf A. Classon(6) | | | 2005 | | | $ | 330,685 | | | $ | 0 | | | $ | 123,603 | | | $ | 1,103,221 | | | | 0 | | | $ | 306,627 | | Interim President and Chief | | | 2004 | | | | N/A | | | | N/A | | | | N/A | | | $ | 95,095 | | | | 0 | | | $ | 76,516 | | Executive Officer | | | 2003 | | | | N/A | | | | N/A | | | | N/A | | | $ | 0 | | | | 4,000 | | | $ | 72,008 | | | Frederick W. Rockwood(7) | | | 2005 | | | $ | 642,689 | | | $ | 0 | | | | (5) | | | $ | 827,753 | | | | 90,000 | | | $ | 173,002 | | Former President and | | | 2004 | | | $ | 1,039,767 | | | $ | 0 | | | $ | 142,048 | | | $ | 919,144 | | | | 100,000 | | | $ | 494,809 | | Chief Executive Officer | | | 2003 | | | $ | 996,354 | | | $ | 1,882,188 | | | $ | 170,603 | | | $ | 540,350 | | | | 100,000 | | | $ | 11,650 | | | Gregory N. Miller(8) | | | 2005 | | | $ | 258,586 | | | $ | 0 | | | | (5) | | | $ | 83,370 | | | | 8,000 | | | $ | 28,939 | | Senior Vice President and | | | 2004 | | | $ | 241,696 | | | $ | 21,688 | | | | (5) | | | $ | 58,240 | | | | 5,000 | | | $ | 19,631 | | Chief Financial Officer | | | 2003 | | | $ | 226,072 | | | $ | 216,913 | | | | (5) | | | $ | 81,053 | | | | 5,500 | | | $ | 6,000 | | | Scott K. Sorensen(9) | | | 2005 | | | $ | 388,475 | | | $ | 0 | | | | (5) | | | $ | 197,865 | | | | 18,000 | | | $ | 56,221 | | Former Vice President and | | | 2004 | | | $ | 457,591 | | | $ | 0 | | | | (5) | | | $ | 282,056 | | | | 24,000 | | | $ | 50,029 | | Chief Financial Officer | | | 2003 | | | $ | 427,882 | | | $ | 769,811 | | | | (5) | | | $ | 270,175 | | | | 25,000 | | | $ | 6,660 | | | Patrick D. de Maynadier | | | 2005 | | | $ | 318,300 | | | $ | 0 | | | | (5) | | | $ | 181,747 | | | | 18,000 | | | $ | 38,803 | | Vice President, General | | | 2004 | | | $ | 312,325 | | | $ | 0 | | | | (5) | | | $ | 218,866 | | | | 18,000 | | | $ | 31,788 | | Counsel and Secretary | | | 2003 | | | $ | 290,510 | | | $ | 348,280 | | | | (5) | | | $ | 108,070 | | | | 15,000 | | | $ | 6,508 | | | Kenneth A. Camp Senior Vice President of the | | | 2005 | | | $ | 391,914 | | | $ | 0 | | | | (5) | | | $ | 220,097 | | | | 24,000 | | | $ | 97,575 | | Company and President | | | 2004 | | | $ | 384,375 | | | $ | 0 | | | | (5) | | | $ | 252,936 | | | | 20,000 | | | $ | 86,681 | | and Chief Executive Officer, Batesville Casket Company, Inc. | | | 2003 | | | $ | 359,448 | | | $ | 474,280 | | | | (5) | | | $ | 270,175 | | | | 20,000 | | | $ | 6,906 | | | R. Ernest Waaser(10) Former President and Chief | | | 2005 | | | $ | 346,174 | | | $ | 0 | | | | (5) | | | $ | 197,865 | | | | 24,000 | | | $ | 56,003 | | Executive Officer, Hill-Rom | | | 2004 | | | $ | 407,398 | | | $ | 0 | | | | (5) | | | $ | 282,056 | | | | 24,000 | | | $ | 50,575 | | Company, Inc. | | | 2003 | | | $ | 379,355 | | | $ | 522,067 | | | $ | 55,604 | | | $ | 270,175 | | | | 25,000 | | | $ | 6,975 | | | Bruce J. Bonnevier(11) | | | 2005 | | | $ | 250,000 | | | $ | 0 | | | | (5) | | | $ | 170,631 | | | | 16,000 | | | $ | 48,019 | | Former Vice President, Human | | | 2004 | | | $ | 97,678 | | | $ | 0 | | | | (5) | | | $ | 110,770 | | | | 15,000 | | | $ | 38,979 | | Resources | | | 2003 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long Term Compensation | | | | | | | | | | | | Annual Compensation | | Awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted | | | Securities | | | Grant Date | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Annual | | | Stock | | | Underlying | | | Value of | | | All Other | | | Total | | | | | | | | | | | Salary | | | Bonus | | | Compensation | | | Awards | | | Options | | | Options | | | Compensation | | | Compensation | | | Name and Principal Position | | | Year | | | ($) | | | ($) | | | ($)(1) | | | ($)(2) | | | (#)(3) | | | ($)(3) | | | ($)(4) | | | ($) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Peter H. Soderberg(6) | | | | 2006 | | | | $ | 425,205 | | | | $ | 678,960 | | | | $ | 115,285 | | | | $ | 2,300,029 | | | | | 58,815 | | | | $ | 801,970 | | | | $ | 188,543 | | | | $ | 4,509,992 | | | | President and Chief Executive | | | | 2005 | | | | | N/A | | | | | N/A | | | | | N/A | | | | $ | 97,821 | | | | | 0 | | | | $ | 0 | | | | $ | 79,750 | | | | $ | 177,571 | | | | Officer; Member Board of | | | | 2004 | | | | | N/A | | | | | N/A | | | | | N/A | | | | $ | 95,095 | | | | | 0 | | | | $ | 0 | | | | $ | 59,500 | | | | $ | 154,595 | | | | Directors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Rolf A. Classon(7) | | | | 2006 | | | | $ | 398,219 | | | | $ | 765,000 | | | | $ | 182,639 | | | | $ | 177,981 | | | | | 0 | | | | $ | 0 | | | | $ | 146,050 | | | | $ | 1,669,889 | | | | Chairman, Board of Directors | | | | 2005 | | | | $ | 330,685 | | | | $ | 0 | | | | $ | 123,603 | | | | $ | 1,103,221 | | | | | 0 | | | | $ | 0 | | | | $ | 306,627 | | | | $ | 1,864,136 | | | | and Former Interim President | | | | 2004 | | | | | N/A | | | | | N/A | | | | | N/A | | | | $ | 95,095 | | | | | 0 | | | | $ | 0 | | | | $ | 76,516 | | | | $ | 171,611 | | | | and Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gregory N. Miller(8) | | | | 2006 | | | | $ | 344,041 | | | | $ | 178,463 | | | | | (5 | ) | | | $ | 250,503 | | | | | 18,200 | | | | $ | 217,937 | | | | $ | 36,041 | | | | $ | 1,026,985 | | | | Senior Vice President and Chief | | | | 2005 | | | | $ | 258,586 | | | | $ | 0 | | | | | (5 | ) | | | $ | 83,370 | | | | | 8,000 | | | | $ | 105,513 | | | | $ | 28,939 | | | | $ | 476,408 | | | | Financial Officer | | | | 2004 | | | | $ | 241,696 | | | | $ | 21,688 | | | | | (5 | ) | | | $ | 58,240 | | | | | 5,000 | | | | $ | 77,832 | | | | $ | 19,631 | | | | $ | 419,087 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Kenneth A. Camp(9) | | | | 2006 | | | | $ | 400,869 | | | | $ | 322,671 | | | | | (5 | ) | | | $ | 1,212,657 | | | | | 20,000 | | | | $ | 239,491 | | | | $ | 98,733 | | | | $ | 2,274,421 | | | | Senior Vice President of the | | | | 2005 | | | | $ | 391,914 | | | | $ | 0 | | | | | (5 | ) | | | $ | 220,097 | | | | | 24,000 | | | | $ | 316,538 | | | | $ | 97,575 | | | | $ | 1,026,124 | | | | Company and President and | | | | 2004 | | | | $ | 384,375 | | | | $ | 0 | | | | | (5 | ) | | | $ | 252,936 | | | | | 20,000 | | | | $ | 311,326 | | | | $ | 86,681 | | | | $ | 1,035,318 | | | | Chief Executive Officer, Batesville Casket Company, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Patrick D. de Maynadier(10) | | | | 2006 | | | | $ | 327,997 | | | | $ | 162,396 | | | | | (5 | ) | | | $ | 205,954 | | | | | 14,820 | | | | $ | 177,464 | | | | $ | 38,080 | | | | $ | 911,891 | | | | Vice President, General Counsel | | | | 2005 | | | | $ | 318,300 | | | | $ | 0 | | | | | (5 | ) | | | $ | 181,747 | | | | | 18,000 | | | | $ | 237,404 | | | | $ | 38,803 | | | | $ | 776,254 | | | | and Secretary | | | | 2004 | | | | $ | 312,325 | | | | $ | 0 | | | | | (5 | ) | | | $ | 218,866 | | | | | 18,000 | | | | $ | 280,193 | | | | $ | 31,788 | | | | $ | 843,172 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Kimberly K. Dennis(11) | | | | 2006 | | | | $ | 248,226 | | | | $ | 136,325 | | | | | (5 | ) | | | $ | 205,954 | | | | | 14,820 | | | | $ | 177,464 | | | | $ | 15,822 | | | | $ | 783,791 | | | | Vice President of the Company | | | | 2005 | | | | $ | 198,395 | | | | $ | 0 | | | | | (5 | ) | | | $ | 170,631 | | | | | 16,000 | | | | $ | 211,026 | | | | $ | 11,937 | | | | $ | 591,989 | | | | and Senior Vice President, Post | | | | 2004 | | | | $ | 186,858 | | | | $ | 0 | | | | | (5 | ) | | | $ | 131,506 | | | | | 15,000 | | | | $ | 233,495 | | | | $ | 10,156 | | | | $ | 562,015 | | | | Acute Care (North America) and Information Technology of Hill- Rom Company, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | | Consists of the cost of aircraft usage, cash perquisites, home security expenses, automobile allowances,payment for unused vacation, tax gross-up payments, reimbursement for relocation expenses and professional services for tax preparation and financial planning services, and other personal benefits provided by the Company. | | | | Included in 20052006 for Peter H. Soderberg is $109,707 for Mr. Soderberg’s personal use of the Company’s jet aircraft. The Company’s employment agreement with Mr. Soderberg allows him to use the Company’s aircraft for travel between Batesville, Indiana and his primary and secondary residences up to a maximum of 100 occupied hours of flight time per calendar year. |
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| | | | | Included in 2006 for Rolf A. Classon is $123,603$135,153 for Mr. Classon’s use of the Company’s jet aircraft. The Company’s arrangements with Mr. Classon relating to his service as Interim President and Chief Executive Officer permitpermitted use of the Company’s aircraft by Mr. Classon and, on limited occasions approved in advance by the Chairman of the Board, his family for travel between the Company’s Batesville, Indiana headquarters and their permanent residence and by Mr. Classon for travel relating |
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| | | | | to Mr. Classon’s business activities not related to the Company, such as travel to meetings of other boards of directors on which Mr. Classon serves. Included in the above amount is $3,645 for one time personal use of the Company’s aircraft approved in advance by the Vice Chairperson of the Board subsequent to the termination of Mr. Classon’s service as Interim President and Chief Executive Officer. The Company will makehas made $18,063 gross-up payments in fiscal 2006 to Mr. Classon for any income taxes payable by him as a result of the use of the Company’s aircraft for these purposes. | | | | The Company also has adopted a policy permitting the Chief Executive Officer, but not other executive officers, to use the Company’s aircraft for personal purposes up to fifty hours per year. While the Company does not charge for the personal use of its aircraft, and for purposes of its policy on use of Company aircraft does not regard these as personal uses of Company aircraft by Mr. Classon, it does reportreports amounts related to suchMr. Classon’s and Mr. Soderberg’s aircraft use as taxable income to the Internal Revenue Service. The value of the use of Company aircraft disclosed in the Summary Compensation Table is based upon the incremental cost of $1,424$1,402 per flight hour to the Company and not the values reported to the IRS. | | (2) | | These amounts represent awards of shares of deferred stock and restricted stock units (otherwise known as deferred stock awards), pursuant to which an equal number of shares of common stock of the Company will be issued upon satisfaction of certain vesting conditions and deferral elections. As of September 30, 20052006 the number of shares and value of deferred stock and shares underlying restricted stock units held are as follows: |
| | | | | | | | | | | | | | | | | | | Restricted Stock Units and | | | Restricted Stock Units and | | | Deferred Stock | | | Deferred Stock | Name | | Shares (#) | | Value ($) | | | Shares (#) | | Value ($) | Peter H. Soderberg | | | 37,848 | | $ | 2,156,579 | | Rolf A. Classon | | 23,399 | | $ | 1,100,923 | | | 27,323 | | $ | 1,556,865 | | Frederick W. Rockwood | | 19,442 | | $ | 914,746 | | | Gregory N. Miller | | 2,573 | | $ | 121,060 | | | 7,644 | | $ | 435,555 | | Scott K. Sorensen | | 2,613 | | $ | 122,942 | | | Kenneth A. Camp | | | 30,328 | | $ | 1,728,089 | | Patrick D. de Maynadier | | 6,983 | | $ | 328,550 | | | 10,407 | | $ | 592,991 | | Kenneth A. Camp | | 8,208 | | $ | 386,186 | | | R. Ernest Waaser | | 5,602 | | $ | 263,574 | | | Bruce J. Bonnevier | | 5,200 | | $ | 244,660 | | | Kimberly K. Dennis | | | 8,923 | | $ | 508,433 | |
Rolf A Classon was awarded 20,000 restricted stock units on June 20, 2005, which will vest 100% on the earlier of May 10, 2006 or the day immediately preceding the date the Board of Directors of the Company elects an individual to succeed Mr. Classon as Chief Executive Officer and President of the Company. Mr. Classon was also awarded 1,800 restricted stock units on February 11, 2005 with respect to which the underlying shares of common stock of the Company will be issuable 100% on the later of February 12, 2006 or within 75 days after the date Mr. Classon ceases to be a member of the Board of Directors of the Company. Mr. Classon was also awarded 1,400 restricted stock units on February 13, 2004 with respect to which the underlying shares of common stock of the Company will be issuable 100% on the later of February 14, 2005 or within the six month anniversary of the date Mr. Classon ceases to be a member of the Board of Directors of the Company.Frederick W. Rockwood was awarded 14,893 restricted stock units on December 15, 2004, which were forfeited as of May 11, 2005. Mr. Rockwood was also awarded 14,000 restricted stock units on December 3, 2003, which vested 100% on May 11, 2005. Mr. Rockwood was also awarded 1,782 restricted stock units on December 3, 2003, which vested 100% on December 4, 2004. Mr. Rockwood was also awarded 10,000 restricted stock units on August 25, 2003, which vested 50% on August 26, 2004 and vested 50% on May 11, 2005. Mr. Rockwood was also awarded 20,000 restricted stock units on October 5, 1999, which vested 100% on October 5, 2002.
Gregory N. Miller was awarded 1,500 restricted stock units on December 15, 2004, which will vest 20% on December 16, 2006; 25% on December 16, 2007; 25% on December 16, 2008; and 30% on December 16, 2009. Mr. Miller was also awarded 1,000 restricted stock units on December 3, 2003, which vested 20% on December 4, 2005; and will vest 25% on December 4, 2006; 25% on December 4, 2007; and 30% on December 4, 2008. Mr. Miller was also awarded 1,500 restricted stock units on August 25, 2003, which vested 50% on August 26, 2004 and August 26, 2005, respectively.
Scott K. Sorensen was awarded 3,560 restricted stock units on December 15, 2004, which were forfeited as of July 31, 2005. Mr. Sorensen was also awarded 4,500 restricted stock units on December 3, 2003, which were forfeited as of July 31, 2005. Mr. Sorensen was also awarded 343 restricted stock units on December 3, 2003, which vested 100% on December 4, 2004. Mr. Sorensen was also awarded 5,000 restricted stock units on August 25, 2003, which vested 50% on August 26, 2004 and 50% which were forfeited as of July 31, 2005. Mr. Sorensen was also awarded 10,000 restricted stock units on March 1, 2001, which vested 50% on January 1, 2002 and January 1, 2003, respectively.
| | | | | Peter H. Soderberg was awarded 23,740 deferred stock shares on March 20, 2006, which vested 33.3% on September 21, 2006, and which will vest 33.3% on March 21, 2007 and 2008 respectively. Mr. Soderberg was also awarded 18,262 deferred stock shares on March 20, 2006 which will vest 20%; 25%; 25%; and 30% on March 21, 2008; 2009; 2010; and 2011 respectively. Mr. Soderberg was also awarded 1,800 and 1,400 deferred stock shares on February 11, 2005 and February 13, 2004 respectively, which are fully vested. | | | | Rolf A. Classon was awarded 20,000 deferred stock shares on June 20, 2005, which vested 100% on February 6, 2006. Mr. Classon was also awarded 1,559; 1,800; 1,800 and 1,400 deferred stock shares on March 20, 2006; February 13, 2006; February 11, 2005 and February 13, 2004 respectively, which are fully vested. | | | | Gregory N. Miller was awarded 4,810 deferred stock shares on November 30, 2005, which will vest 20%; 25%; 25%; and 30% on December 1, 2007; 2008; 2009; and 2010 respectively. Mr. Miller was also awarded 307 deferred stock shares on November 30, 2005, which vested 100% on December 1, 2006. Mr. Miller was also awarded 1,500 deferred stock shares on December 15, 2004, which vested 20% on December 16, 2006, and which will vest 25%; 25%; and 30% on December 16, 2007; 2008; and 2009 respectively. Mr. Miller was also awarded 1,000 deferred stock shares on December 3, 2003, which vested 20% and 25% on December 4, 2005 and 2006 respectively; and which will vest 25% and 30% on December 4, 2007 and 2008 respectively. Mr. |
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Patrick D. de Maynadier was awarded 3,000 restricted stock units on December 15, 2004, which will vest 20% on December 16, 2006; 25% on December 16, 2007; 25% on December 16, 2008; and 30% on December 16, 2009. Mr. de Maynadier was also awarded 270 restricted stock units on December 16, 2004, which vested 100% on December 16, 2005. Mr. de Maynadier was also awarded 3,500 restricted stock units on December 3, 2003, which vested 20% on December 4, 2005; and will vest 25% on December 4, 2006; 25% on December 4, 2007; and 30% on December 4, 2008. Mr. de Maynadier was also awarded 258 restricted stock units which vested 100% on December 4, 2004. Mr. de Maynadier was also awarded 2,000 restricted stock units | | | | | Miller was also awarded 1,500 deferred stock shares on August 25, 2003, which vested 50% on August 26, 2004 and August 26, 2005, respectively. | | | | Kenneth A. Camp was awarded 18,671 deferred stock shares on March 16, 2006, which will vest 15%; 15%; 15%; and 55% on March 17, 2007; 2008; 2009; and 2010 respectively. Mr. Camp was also awarded 3,700 deferred stock shares on November 30, 2005, which will vest 20%; 25%; 25%; and 30% on December 1, 2007; 2008; 2009; and 2010 respectively. Mr. Camp was also awarded 409 deferred stock shares on November 30, 2005, which vested 100% on December 1, 2006. Mr. Camp was also awarded 3,600 deferred stock shares on December 15, 2004, which vested 20% on December 16, 2006, and which will vest 25%; 25%; and 30% on December 16, 2007; 2008; and 2009 respectively. Mr. Camp was also awarded 360 deferred stock shares on December 15, 2004, which vested 100% on December 16, 2005. Mr. Camp was also awarded 4,000 deferred stock shares on December 3, 2003, which vested 20% and 25% on December 4, 2005 and 2006 respectively; and will vest 25% and 30% on December 4, 2007 and 2008 respectively. Mr. Camp was also awarded 343 deferred stock shares on December 3, 2003 which vested 100% on December 4, 2004. Mr. Camp was also awarded 5,000 deferred stock shares on August 25, 2003, which vested 50% on August 26, 2004 and 2005, respectively. Mr. Camp was also awarded 1,500 deferred stock shares on January 17, 2001, which vested 100% on January 17, 2004. | | | | Patrick D. de Maynadier was awarded 3,900 deferred stock shares on November 30, 2005, which will vest 20%; 25%; 25%; and 30% on December 1, 2007; 2008; 2009; and 2010 respectively. Mr. de Maynadier was also awarded 307 deferred stock shares on November 30, 2005, which vested 100% on December 1, 2006. Mr. de Maynadier was also awarded 3,000 deferred stock shares on December 15, 2004, which vested 20% on December 16, 2006, and which will vest 25%; 25%; and 30% on December 16, 2007; 2008; and 2009 respectively. Mr. de Maynadier was also awarded 270 deferred stock shares on December 15, 2004, which vested 100% on December 16, 2005. Mr. de Maynadier was also awarded 3,500 deferred stock shares on December 3, 2003, which vested 20% and 25% on December 4, 2005 and 2006 respectively; and will vest 25% and 30% on December 4, 2007 and 2008 respectively. Mr. de Maynadier was also awarded 258 deferred stock shares on December 3, 2003 which vested 100% on December 4, 2004. Mr. de Maynadier was also awarded 2,000 deferred stock shares on August 25, 2003, which vested 50% on August 26, 2004 and 2005, respectively. | | | | Kimberly K. Dennis was awarded 3,900 deferred stock shares on November 30, 2005, which will vest 20%; 25%; 25%; and 30% on December 1, 2007; 2008; 2009; and 2010 respectively. Ms. Dennis was also awarded 307 deferred stock shares on November 30, 2005, which vested 100% on December 1, 2006. Ms. Dennis was also awarded 2,800 deferred stock shares on December 15, 2004, which vested 20% on December 16, 2006, and which will vest 25%; 25%; and 30% on December 16, 2007; 2008; and 2009 respectively. Ms. Dennis was also awarded 270 deferred stock shares on December 15, 2004, which vested 100% on December 16, 2005. Ms. Dennis was also awarded 2,000 deferred stock shares on December 3, 2003, which vested 20% and 25% on December 4, 2005 and 2006 respectively; and will vest 25% and 30% on December 4, 2007 and 2008 respectively. Ms. Dennis was also awarded 258 deferred stock shares on December 3, 2003 which vested 100% on December 4, 2004. Ms. Dennis was also awarded 1,500 deferred stock shares on August 25, 2003, which vested 50% on August 26, 2004 and 2005, respectively. | | | | Dividends paid on the Company common stock will be deemed to have been paid with regard to the restricted stock units awarded and deemed to be reinvested in Company common stock at the market value on the date of such dividend, and will be paid in additional shares on the vesting date of the underlying award. |
-28- Kenneth A. Camp was awarded 3,600 restricted stock units on December 15, 2004, which will vest 20% on December 16, 2006; 25% on December 16, 2007; 25% on December 16, 2008; and 30% on December 16, 2009. Mr. Camp was also awarded 360 restricted stock units on December 16, 2004, which vested 100% on December 16, 2005. Mr. Camp was also awarded 4,000 restricted stock units on December 3, 2003, which vested 20% on December 4, 2005; and will vest 25% on December 4, 2006; 25% on December 4, 2007; and 30% on December 4, 2008. Mr. Camp was also awarded 343 restricted stock units, which vested 100% on December 4, 2004. Mr. Camp was also awarded 5,000 restricted stock units on August 25, 2003, which vested 50% on August 26, 2004 and August 26, 2005, respectively. Mr. Camp was also awarded 1,500 restricted stock units on January 17, 2001, which vested 100% on January 17, 2004.
R. Ernest Waaser was awarded 3,560 restricted stock units on December 15, 2004, which were forfeited as of July 31, 2005. Mr. Waaser was also awarded 4,500 restricted stock units on December 3, 2003, which were forfeited as of July 31, 2005. Mr. Waaser was also awarded 343 restricted stock units on December 3, 2003 which vested 100% on December 4, 2004. Mr. Waaser was also awarded 5,000 restricted stock units on August 25, 2003, which vested 50% on August 26, 2004 and 50% which were forfeited as of July 31, 2005. Mr. Waaser was also awarded 1,500 restricted stock units on March 8, 2001, which vested 100% on January 1, 2003.
Bruce J. Bonnevier was awarded 2,800 restricted stock units on December 15, 2004, which will vest 20% on December 16, 2006; 25% on December 16, 2007; 25% on December 16, 2008; and 30% on December 16, 2009. Mr. Bonnevier was also awarded 270 restricted stock units on December 16, 2004, which vested 100% on December 16, 2005. Mr. Bonnevier was also awarded 2,000 restricted stock units on May 11, 2004, which will vest 20% on May 12, 2006; 25% on May 12, 2007; 25% on May 12, 2008; and 30% on May 12, 2009.
Dividends paid on the Company common stock will be deemed to have been paid with regard to the restricted stock units awarded and deemed to be reinvested in Company common stock at the market value on the date of such dividend, and will be paid in additional shares on the vesting date of the underlying award.
| | | (3) | | Options were granted pursuant to the Company’s Stock Incentive Plan for the fiscal years ended September 30, 2006, 2005 and 2004, respectively. The weighted average fair value of options granted to the named executive officers during the fiscal year ended September 30, 2006 was $12.65 under the Binomial model using the following assumptions: (i) risk-free interest rate of 4.522 percent; (ii) expected dividend yield of 2.027 percent; (iii) expected volatility factor of 0.2269; and 2003, respectively.(iv) expected term of 7.93 years. The weighted average fair value of options granted during the fiscal year ended September 30, 2005 was $13.19 under the Binomial model using the following assumptions: (i) risk-free interest rates of 2.64-4.09 percent; (ii) expected dividend yields of 1.70-2.08 percent; (iii) expected volatility factors of 0.2023-0.2592; and (iv) expected term of 6.82 years. The weighted average fair value of options granted during the fiscal year ended September 30, 2004 was $15.55 under the Black-Scholes model using the following assumptions: (i) risk-free interest rates of 3.73 percent; (ii) expected dividend yields of 1.76 percent; (iii) expected volatility factor of 0.2634; and (iv) expected term of 6.0 years. The actual value realized by an officer from exercise of the options will depend on the market value of the Company’s common stock on the dates the options are exercised. | | (4) | | All Other Compensation earned or allocated in the fiscal year ended September 30, 20052006 is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Board of | | | | | | | | | | | | | | | | | | | | | Directors | | | | | | | | | Supplemental | | | | | | | | | | Fees | | | | | 401(k) | | 401(k) | | Supplemental | | Executive Life | | Earned or | | | Name | | Contributions | | Contributions | | Retirement | | Insurance | | Paid | | Total | Peter H. Soderberg | | $ | 7,569 | | | $ | 72,474 | | | $ | 75,000 | | | $ | 0 | | | $ | 33,500 | | | $ | 188,543 | | | | | | | | | | | | | | | | | | | | | | | | | | | Rolf A. Classon | | $ | 8,800 | | | $ | 0 | | | | | | | $ | 0 | | | $ | 137,250 | | | $ | 146,050 | | | | | | | | | | | | | | | | | | | | | | | | | | | Gregory N. Miller | | $ | 15,171 | | | $ | 20,870 | | | | | | | $ | 0 | | | | | | | $ | 36,041 | | | | | | | | | | | | | | | | | | | | | | | | | | | Kenneth A. Camp | | $ | 9,316 | | | $ | 35,551 | | | | | | | $ | 53,866 | | | | | | | $ | 98,733 | | | | | | | | | | | | | | | | | | | | | | | | | | | Patrick D. de Maynadier | | $ | 6,600 | | | $ | 22,981 | | | | | | | $ | 8,499 | | | | | | | $ | 38,080 | | | | | | | | | | | | | | | | | | | | | | | | | | | Kimberly K. Dennis | | $ | 7,447 | | | $ | 4,641 | | | | | | | $ | 3,734 | | | | | | | $ | 15,822 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental | | | | | | | | | | Board of | | | | | 401(k) | | 401(k) | | Signing | | Executive Life | | Directors | | | Name | | Contributions | | Contributions | | Bonus | | Insurance | | Fees | | Total | Rolf A. Classon | | $ | 4,085 | | | $ | 0 | | | $ | 250,000 | | | $ | 792 | | | $ | 51,750 | | | $ | 306,627 | | Frederick W. Rockwood | | $ | 6,300 | | | $ | 11,675 | | | | | | | $ | 155,027 | | | | | | | $ | 173,002 | | Gregory N. Miller | | $ | 17,162 | | | $ | 11,777 | | | | | | | | | | | | | | | $ | 28,939 | | Scott K. Sorensen | | $ | 6,300 | | | $ | 38,667 | | | | | | | $ | 11,254 | | | | | | | $ | 56,221 | | Patrick D. de Maynadier | | $ | 6,300 | | | $ | 24,004 | | | | | | | $ | 8,499 | | | | | | | $ | 38,803 | | Kenneth A. Camp | | $ | 6,300 | | | $ | 37,409 | | | | | | | $ | 53,866 | | | | | | | $ | 97,575 | | R. Ernest Waaser | | $ | 6,300 | | | $ | 33,841 | | | | | | | $ | 15,862 | | | | | | | $ | 56,003 | | Bruce J. Bonnevier | | $ | 17,741 | | | $ | 24,080 | | | | | | | $ | 6,198 | | | | | | | $ | 48,019 | |
The value of life insurance is the annual premium paid for whole or term life insurance for calendar year 2005, except for the amount reported for Frederick W. Rockwood which also includes the conversion of the cash surrender value, including gross-up for taxes due, of the former Split Dollar Life Insurance policies to whole life
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insurance. The conversion was accomplished by a release of assignment of the split dollar collateral assignment by the Company.
| | | | | The value of life insurance is the annual premium paid for variable universal life insurance during fiscal year 2006. | | (5) | | Amounts do not exceed disclosure thresholds established under SEC rules. | | (6) | | Mr. Classon became InterimSoderberg was elected President and Chief Executive Officer of the Company on May 11, 2005.effective March 20, 2006. Prior to that time, he was a director of the Company but was not an employee of the Company. | | (7) | | Mr. Rockwood retired fromClasson currently serves as Chairman of the Board of Directors of the Company onand was elected to that position effective March 20, 2006. Prior to that time, he was Interim President and Chief Executive Officer of the Company from May 11, 2005.2005 until March 20, 2006 and was Vice Chairman of the Board from December 4, 2003 until his election as Interim President and Chief Executive Officer. | | (8) | | Mr. Miller was elected Senior Vice President and Chief Financial Officer of the Company effective July 14, 2005. Prior to that time, he was Vice President, Controller and Chief Accounting Officer of the Company. | | (9) | | Mr. Sorensen resigned fromCamp was elected Senior Vice President of the Company effective July 14, 2005. In 2004, Mr. Sorensen was appointed to the Boardon October 1, 2006, having been a Vice President of Directors and the Audit Committee of GMP Companies, Inc., a privately held company in which the Company had previously made a minority equity investment. Mr. Sorensen received from GMPsince October 8, 2001, and was elected President and Chief |
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| | | | | Executive Officer of Batesville Casket Company on May 1, 2001. He has been employed by the compensation paid to all of GMP’s non-management directors, including fees for attendance at board and committee meetings and stock option grants. He resigned from GMP’s Board in 2005.Company since 1981. | | (10) | | Mr. Waaser resigned fromde Maynadier was elected Vice President, General Counsel and Secretary of the Company effective July 14, 2005.on January 28, 2002. | | (11) | | Mr. Bonnevier was electedMs. Dennis has served in various Company Vice President Human Resources effective May 12, 2004. Priorroles related to that date, he was not employed by the Company. Mr. Bonnevier resigned from the Company effective December 31, 2005.shared services and information technology since August 5, 2003 and has been Senior Vice President, North America Post Acute Care and Information Technology of Hill-Rom since October 1, 2006. |
Option Grants in Last Fiscal Year (for fiscal year ended September 30, 2005)2006) The following table sets forth certain information concerning stock option grants to the named executive officers during the fiscal year ended September 30, 2005.2006. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individual Grants | | Individual Grants | | | Number of Securities | | Percent of Total Options | | | | | | | Number of Securities | | Percent of Total Options | | | | | | | Underlying Options | | Granted to | | Exercise or | | Grant Date Present | | Underlying Options | | Granted to | | Exercise or | | Grant Date Present | Name | | Granted (#)(1) | | Employees in Fiscal Year | | Base Price ($/Share) | | Expiration Date | | Value ($)(2) | | Granted (#)(1) | | Employees in Fiscal Year | | Base Price ($/Share) | | Expiration Date | | Value ($)(2) | Peter H. Soderberg | | | 58,815 | | | 13.23 | % | | $ | 54.76 | | 3/20/2016 | | $ | 801,970 | | | | | Rolf A. Classon | | None | | | None | | | | | Frederick W. Rockwood | | 90,000 | | | 15.89% | | | $ | 55.58 | | 12/15/14 | | $ | 1,187,019 | | | | | | Gregory N. Miller | | 8,000 | | | 1.41% | | | $ | 55.58 | | 12/15/14 | | $ | 105,513 | | | 18,200 | | | 4.09 | % | | $ | 48.955 | | 11/30/2015 | | $ | 217,937 | | | | | Scott K. Sorensen | | 18,000 | | | 3.18% | | | $ | 55.58 | | 12/15/14 | | $ | 237,404 | | | Kenneth A. Camp | | | 20,000 | | | 4.50 | % | | $ | 48.955 | | 11/30/2015 | | $ | 239,491 | | | | | Patrick D. de Maynadier | | 18,000 | | | 3.18% | | | $ | 55.58 | | 12/15/14 | | $ | 237,404 | | | 14,820 | | | 3.33 | % | | $ | 48.955 | | 11/30/2015 | | $ | 177,464 | | | | | Kenneth A. Camp | | 24,000 | | | 4.24% | | | $ | 55.58 | | 12/15/14 | | $ | 316,538 | | | | | | R. Ernest Waaser | | 24,000 | | | 4.24% | | | $ | 55.58 | | 12/15/14 | | $ | 316,538 | | | | | | Bruce J. Bonnevier | | 16,000 | | | 2.83% | | | $ | 55.58 | | 12/15/14 | | $ | 211,026 | | | Kimberly K. Dennis | | | 14,820 | | | 3.33 | % | | $ | 48.955 | | 11/30/2015 | | $ | 177,464 | |
| | | (1) | | All options were granted pursuant to the Company’s Stock Incentive Plan. The options were granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant. The options were granted for terms of ten years, and vest one-third on each of the first three anniversaries of the date of grant. On September 7, 2005 the Board of Directors accelerated and immediately vested the above options held by employees on September 7, 2005, subject to certain exercise and hold restrictions, during the period between September 7, 2005 and the original vesting dates. | | (2) | | The weighted average fair value of options granted during the fiscal year ended Septemberon November 30, 2005 was $13.19$11.97 under the Binomial model using the following assumptions: (i) risk-free interest rates of 2.64-4.094.432 percent; (ii) expected dividend yields of 1.70-2.082.027 percent; (iii) expected volatility factors of 0.2023-0.2592;0.2277; and (iv) expected |
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| | | | | term of 6.87.78 years. The weighted average fair value of options granted on March 20, 2006 was $13.64 under the Binomial model using the following assumptions: (i) risk-free interest rates of 4.653 percent; (ii) expected dividend yields of 2.027 percent; (iii) expected volatility factors of 0.2257; and (iv) expected term of 8.16 years. The actual value realized by an officer from exercise of the options will depend on the market value of the Company’s common stock on the dates the options are exercised. |
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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values (for fiscal year ended September 30, 2005)2006) The following table sets forth certain information concerning option exercises during the fiscal year ended September 30, 20052006 by the named executive officers and unexercised options held by such officers as of September 30, 2005:2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Securities Underlying | | Value of Unexercised In-the- | | | Number of Securities Underlying | | Value of Unexercised In-the- | | | Unexercised Options at | | Money Options at | | | Unexercised Options at | | Money Options at | | | Shares Acquired | | Fiscal Year-End | | Fiscal Year-End | | | Shares Acquired | | Fiscal Year-End | | Fiscal Year-End | Name | | On Exercise | | Value Realized | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | | | On Exercise | | Value Realized | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | Peter H. Soderberg | | | 0 | | $ | 0 | | 8,000 | | 58,815 | | $ | 33,880 | | $ | 130,569 | | | | | Rolf A. Classon | | 0 | | $ | 0 | | 8,000 | | 0 | | $ | 0 | | $ | 0 | | | 0 | | $ | 0 | | 8,000 | | 0 | | $ | 33,880 | | $ | 0 | | | | | Frederick W. Rockwood | | 7,500 | | $ | 187,216 | | 395,834 | | 0 | | $ | 579,984 | | $ | 0 | | | | | | Gregory N. Miller | | 0 | | $ | 0 | | 23,167 | | 1,833 | | $ | 0 | | $ | 0 | | | 0 | | $ | 0 | | 25,000 | | 18,200 | | $ | 89,345 | | $ | 146,055 | | | | | Scott K. Sorensen | | 91,667 | | $ | 188,611 | | 0 | | 0 | | $ | 0 | | $ | 0 | | | Kenneth A. Camp | | | 0 | | $ | 0 | | 138,500 | | 20,000 | | $ | 902,931 | | $ | 160,500 | | | | | Patrick D. de Maynadier | | 10,000 | | $ | 95,100 | | 56,000 | | 5,000 | | $ | 0 | | $ | 0 | | | 0 | | $ | 0 | | 61,000 | | 14,820 | | $ | 72, 650 | | $ | 118,931 | | | | | Kenneth A. Camp | | 7,500 | | $ | 175,141 | | 131,834 | | 6,666 | | $ | 172,616 | | $ | 0 | | | | | | R. Ernest Waaser | | 31,667 | | $ | 50,736 | | 0 | | 0 | | $ | 0 | | $ | 0 | | | | | | Bruce J. Bonnevier | | 0 | | $ | 0 | | 31,000 | | 0 | | $ | 0 | | $ | 0 | | | Kimberly K. Dennis | | | 0 | | $ | 0 | | 44,166 | | 14,820 | | $ | 134,316 | | $ | 118,931 | |
Life Insurance During the fiscal year ended September 30, 2005,2006, the Company, paid premiums on executive owned Whole Life Insurancevariable universal life insurance policies, covering Frederick W. Rockwood, Scott K. Sorensen,Kenneth A. Camp, Patrick D. de Maynadier, Kenneth A. Camp, R. Ernest Waaser, and Bruce J. Bonnevier,Kimberly K. Dennis, in which premiums are to be paid by the Company for the participant until age 65. The policies provide for pre-retirement employee death benefits that range from $600,000 to $5,000,000.$1,500,000. At retirement, death benefit coverage will be reduced, and will range from $400,000 to $2,500,000.$750,000. Effective June 1, 2006, the Company made its last premium payments for the variable universal life policies for the above participants. The participants may at their own expense continue to keep these policies in force. All named executive officers will participate in the Company’s group term life insurance program which provides death benefit coverage of up to two times base salary or $500,000, whichever is lesser. In addition, beginning January 1, 2007 the named executive officers may participate in the optional supplemental group term life insurance program in which participants may purchase up to the lesser of five times their base annual salary or $600,000 of additional term life insurance at their own expense. Agreements with Named Executive Officers The Company has entered into Change in Control Agreements (the “Change in Control Agreements”) with certain current officers, including Rolf A. Classon,Peter H. Soderberg, Gregory N. Miller, Kenneth A. Camp and Patrick D. de Maynadier and Kenneth A. Camp.Maynadier. The Change in Control Agreements are intended to encourage continued employment by the Company of its key management personnel and to allow such personnel to be in a position to provide assessment and advice to the Board of Directors regarding any proposed Change in Control without concern that such personnel might be unduly distracted by the uncertainties and risks created by a proposed Change in Control. The Change in Control Agreements provide for payment of specified benefits upon the Company’s termination of the executive’s employment (other than on account of death, disability, retirement or “cause”) in anticipation of or within two years (three years in the case of the Chief Executive Officer) after a Change in Control, or upon the executive’s termination of employment for “good reason” within two years (three years in the case of the Chief Executive Officer) after a -31-
Change in Control. The Chief Executive Officer’s Change in Control Agreement also provides for the payment of the specified benefits in the event the Chief Executive Officer terminates employment for any reason during the 30-day period following the first anniversary of the Change in Control. The benefits to be provided by the Company upon a Change in Control under any of the above circumstances are: (i) a lump sum payment in cash equal to two times (three times in the case of the Chief Executive Officer) the executive’s annual base salary; (ii) continued health and medical insurance for the -26-
executive and his dependents and continued life insurance coverage for the executive for 24 months (36 months in the case of the Chief Executive Officer), with the right to purchase continued medical insurance (at COBRA rates) from the end of this period until the executive reaches retirement age; (iii) a cash payment in lieu of certain perquisites, such as accrued and unpaid vacation; and (iv) an increase to the defined benefit and defined contribution pension benefit otherwise payable to the executive calculated by giving him equivalent credit for two additional years of age and service (or, in the case of the Chief Executive Officer, three additional years of age and service credit). In addition, upon a Change in Control, whether or not the executive’s employment is terminated, all outstanding stock options, restricted stock and restricted stock units will become fully vested and the executive will be deemed to have earned all outstanding short-term incentive compensation and performance share compensation awards to the extent such awards would have been earned if all performance targets for the relevant period were achieved 100%. The Chief Executive Officer’s Change in Control Agreement provides that if the Chief Executive Officer receives payments that would be subject to the excise tax on excess parachute payments imposed by Section 4999 of the Internal Revenue Code, the Chief Executive Officer will be entitled to receive an additional “gross-up” payment in an amount necessary to put the Chief Executive Officer in the same after-tax position as if such excise tax had not been imposed. The Change in Control Agreements for the other above named executive officers provide for a similar “gross-up” payment, except that if the value of all “parachute payments” to an executive does not exceed 120% of the maximum “parachute payment” that could be paid to him without giving rise to the excise tax, the payments otherwise called for by the Change in Control Agreement will be reduced to the maximum amount which would not give rise to the excise tax. Assuming a Change in Control had occurred on September 30, 2005,2006, the above named executive officers would have received cash severance lump sum payments upon a termination of employment covered by the Change in Control Agreements in approximately the following amounts: Rolf A. ClassonPeter H. Soderberg — $3,348,000,$3,151,000, Gregory N. Miller — $825,000,$888,000, Kenneth A. Camp — $1,141,000 and Patrick D. de Maynadier — $808,000, and Kenneth A. Camp – $1,108,000.$840,000. The preceding amounts do not take into account the “gross-up” payments, enhanced pension benefits, insurance benefits, and the vesting of stock options, restricted stock and restricted stock units. Under the Change in Control Agreements, a “Change in Control” is defined generally as (i) the acquisition of beneficial ownership of 35% or more of the voting power of all Company voting securities by a person or group at a time when such ownership is greater than that of the members of the Hillenbrand Family; (ii) the consummation of certain mergers or consolidations; (iii) the failure of a majority of the members of the Company’s Board of Directors to consist of Current Directors (defined as any director on the date of the Change in Control Agreements and any director whose election was approved by a majority of the then-Current Directors); (iv) the consummation of a sale of substantially all of the assets of the Company; or (v) the date of approval by the shareholders of the Company of a plan of complete liquidation of the Company. -32-
On June 20, 2005,February 7, 2006, the Company and Rolf A. ClassonPeter H. Soderberg entered into an Employment Agreement relating to Mr. Classon’sSoderberg’s employment as Interim President and Chief Executive Officer of the Company. The agreement provides that the term of Mr. Classon’sSoderberg’s employment began effective May 11, 2005 and shall continue thereafter until the Board of Directors of Hillenbrand has elected a successor President and Chief Executive Officer unless earlier terminated in accordance with the Agreement.March 20, 2006. The agreement provides that Mr. ClassonSoderberg is entitled to receive a base salary of $850,000$800,000 per year pro rated for the period in which he serves, and has the opportunity to earn an incentive compensation bonus. The amountFor 2006, the agreement provided that Mr. Soderberg would have an incentive compensation opportunity under the Company’s Short-Term Incentive Compensation Plan of 90% of base salary on a full year of performance for fiscal 2006, with payout ranging from 0% to 200% of the bonus will equal the sum of (i) $382,500 guaranteed bonus plus (ii) an amount up to $382,500 to be determinedincentive compensation opportunity based on financial and non-financial criteria established by the Compensation and Management Development Committee of the Board of Directors based on the achievement by the Company during Mr. Classon’s term of employment of certainDirectors. These objectives established byare summarized in the Compensation and Management Development Committee. These objectives include matters relating to the progress and success of the Company’s restructuring initiatives, the hiring of and transition to a permanent President and Chief Executive Officer and quarterly financial performance in line with the Company’s 2006 business plan and announced guidance.Committee Report below. Pursuant to the agreement, Mr. ClassonSoderberg received 20,000a signing award of 23,740 restricted stock units (otherwise known as deferred stock awards) on March 20, 2006 under the Company’s Stock Incentive Plan, which will vest one yearin equal one-third increments six months, twelve months and twenty-four months after the commencement of Mr. Classon’s employment or on the dateSoderberg’s employment. Mr. Soderberg also received an individual succeeds him as President and Chief -27-
Executive Officer, whichever is earlier. One halfadditional award of the18,262 restricted stock units on March 20, 2006 which will convert into 10,000 sharesvest in twenty percent, twenty-five percent, twenty-five percent and thirty percent increments on the day after the dates of the Company’s common stock on each of the firstsecond, third, fourth and secondfifth anniversaries of the vesting dateMr. Soderberg’s employment. In addition, Mr. Soderberg received 58,815 stock options to purchase common stock of the restricted stock units. Mr. Classon also received a $250,000 signing bonus to compensate himHillenbrand Industries. The options have an exercise price of $54.76 and will vest in one-third increments for compensation from other sources foregone by Mr. Classon as a result of his full-time dedication to the Company.exercise purposes on March 20, 2007; 2008; and 2009 respectively. The options will expire on March 20, 2016. The agreement provides that Mr. Classon shall beSoderberg is eligible to participate in Hillenbrand’s 401(k) savings program upon satisfying any applicable eligibility requirements butSavings Plan and Supplemental Executive Retirement Plan consistent with plans, programs and policies available to other executive officers of the Company. He will not participate, and has waived any rights toalso participate in anya nonqualified deferred compensation plan established for the benefit of Mr. Soderberg, pursuant to which Mr. Soderberg was credited with $75,000 within 30 days after March 20, 2006 and will be credited with $75,000 on each anniversary thereafter during Mr. Soderberg’s employment. Amounts credited to Mr. Soderberg’s account under this plan bear interest at a prime rate in effect from time to time or at other Hillenbrand employee benefit plans. Duringrates determined by the termCompensation and Management Development Committee. Mr. Soderberg will be fully vested in all amounts credited to his account under this plan and will be entitled to receive the balance of histhe account in a lump sum cash payment on or as soon as possible after the date that is six months after the date of the termination of Mr. Soderberg’s employment with Hillenbrand. Mr. ClassonSoderberg may also use the Company’s aircraft for travel to and from Mr. Soderberg’s primary and secondary residences up to a maximum of 100 occupied hours of flight time per calendar year. In fiscal 2006, the incremental cost to the Company was approximately $1,402 per hour. Mr. Soderberg will notalso be entitledprovided such additional compensation, benefits and perquisites, including participation in the Company’s health and welfare plans, as are available to other executive officers of the Company and as the Board of Directors may deem appropriate.
Mr. Soderberg ceased to receive compensation for service on Hillenbrand’s Board of Directors. Key termination benefits under the agreement are summarized as follows: | • | | If the agreement is terminated due to death or disability, Mr. Classon or his estate will be entitled to receive his base salary accrued through the date of his termination and a pro rata portion of his guaranteed bonus for his service period, and a pro rata portion of the restricted stock units previously issued shall immediately vest. | | | • | | If the agreement is terminated with or without cause (as defined) by the Company or voluntarily on the part of Mr. Classon, the Company shall only be obligated to pay Mr. Classon his base salary accrued but unpaid as of the date of termination. | | | • | | Mr. Classon will be precluded from competing against Hillenbrand while employed by Hillenbrand and for a period of eighteen months (subject to reduction in certain circumstances) after his employment is terminated, regardless of the reason for such termination. |
The Company’s arrangements with Mr. Classon also permit use of the Company’s aircraft by Mr. Classon and, on limited occasions approved by the Chairman of the Board, his family for travel between the Company’s Batesville, Indiana headquarters and their permanent residence and by Mr. Classon for travel relating to his business activities not related to the Company, such as travel to meetings of other boards of directors on which Mr. Classon serves. The Company will make gross-up payments to Mr. Classon for any income taxes payable by him as a result of the use of the Company’s aircraft for these purposes.
Between August 5 and August 8, 2005, after review by and approval from the Compensation and Management Development Committee of the Board of Directors based on a compensation study performedafter his Start Date and did not receive the 2006 annual retainer payment and annual restricted stock unit award for nonemployee Directors but did receive and retain fees for 2006 Board and committee meetings up to and including March 20, 2006.
The employment agreement is terminable by an independent and nationally recognized compensation consulting firm retained by that Committee,either the Company or Mr. Soderberg on sixty days’ notice, or pay in lieu of notice if terminated by the Company, and is terminable at any -33-
time by the Company for “cause” (as defined in the employment agreement). If Mr. Soderberg is terminated by the Company other than for cause, including a termination by Mr. Soderberg for “good reason” (as defined in the employment agreement), the Company is required to pay severance to Mr. Soderberg in an amount equal to twelve months of Mr. Soderberg’s base salary, with payments commencing six months after the time of termination, and the signing award restricted stock units described above immediately will become fully vested. The employment agreement also contains a limited non-competition and non-solicitation agreement of Mr. Soderberg, which continues generally for a period of two years after the termination of Mr. Soderberg’s employment. The employment agreement also required the Company to pay Mr. Soderberg’s costs of entering into the employment agreement, including the reasonable fees and expenses of his legal counsel. The Company has also entered into new employment agreements with other senior executives, including Gregory N. Miller, Kenneth A. Camp, Gregory N. Miller, Patrick D. de Maynadier and Bruce J. Bonnevier. Under the new agreements, Mr. Miller’s annual base salary was increased from $246,000 to $325,000, and Messrs. Camp’s, de Maynadier’s and Bonnevier’s annual base salaries remained unchanged from those in effect under their prior employment agreements: $392,000, $318,000 and $250,000, respectively. As described below, bonus compensation under the Company’s Short-Term Incentive Compensation Program is determined by first establishing a performance base (“Performance Base”) and a target (“Target”) for the Company and each subsidiary. Short-term incentive compensation opportunity for each of Messrs. Miller and de Maynadier is equal to, and for Mr. Bonnevier was equal to, 50% of base salary upon achievement of the Performance Base and up to 100% of base salary upon achievement of the Target. Mr. Camp’s opportunity is 75% of his base salary upon achievement of the Performance Base and up to 150% of base salary upon achievement of the Target. The revised employment agreements are substantially similar to those previously entered into between the Company and Messrs. Camp, Bonnevier and de Maynadier.Kimberly K. Dennis. The employment agreements set forth the basic duties of the officers and provide that each officer is entitled to receive, ain addition to base salary, incentive compensation payable in the Company’s discretion and such additional compensation, benefits and perquisites as the Company may deem appropriate. The employment agreements are terminable by either the Company or the executive on sixty days’ notice, or pay in lieu of notice, and are terminable at any time by the Company for cause, as defined in each employment agreement. If an executive is terminated other than for cause, the Company is required to pay severance to the executive in an amount equal to twelve months of the executive’s base salary, with payments commencing six months after the time of termination. Until theMarch 20, 2007 (the first anniversary of the election of a permanent President and -28-
Chief Executive Officer to replace Rolf A. Classon,of the Company), such severance amount will be in an amount equal to twenty-four months of the executive’s base salary. For the twelve months after the one-year anniversary of the employment of the permanent President and Chief Executive Officer,March 20, 2007, the additional severance will be reduced each month, returning the total severance benefit to twelve months of the executive’s base salary upon the second anniversary of the employment of the permanent President and Chief Executive Officer.on March 20, 2008. The employment agreements also contain limited non-competition and non-solicitation agreements of the executives, which continue generally for a period of two years after the termination of the executive’s employment. Effective May 11, 2005, Frederick W. Rockwood retired as PresidentThe Compensation and Chief Executive Officer ofManagement Development Committee has established the Company and resigned from its Board of Directors. On July 12, 2005, Mr. Rockwood andannual base salaries set forth in the Company entered into a Separation and Release Agreement. The terms and benefits provided in this agreement are substantially consistent withfollowing table for the terms of the previously existing Executive Employment Agreement between Mr. Rockwood and the Company. Under the Separation and Release Agreement:named executive officers effective December 25, 2006: | • | | Name and Position | | Mr. Rockwood received severance pay paid in a lump sum payment in the gross amount of $1,051,935, consistent with the terms of the previously existing Executive Employment Agreement. | 2007 Annual Base Salary | | • | | Peter H. Soderberg, President and Chief Executive Officer | | The Company paid $2,000 of professional fees incurred in the review and negotiation of the Separation and Release Agreement. | $840,000 | | • | | Gregory N. Miller, Senior Vice President and Chief Financial Officer | | Mr. Rockwood was provided with payment of earned but unused vacation as of May 11, 2005. | $378,000 | | • | | Kenneth A. Camp, Senior Vice President of Hillenbrand Industries and President and Chief Executive Officer of Batesville Casket Company, Inc. | | Mr. Rockwood is entitled to receive life insurance coverage for a period of twelve months beginning May 11, 2005. | $430,400 | | • | | Patrick D. de Maynadier, Vice President, General Counsel and Secretary | | Mr. Rockwood is eligible for extended healthcare coverage under the current terms of the Hillenbrand Industries Healthcare Plan until the age of 65. The agreement provides that the Company will pay for full cost of such extended healthcare coverage until Mr. Rockwood reaches 65 years of age. | $352,300 | | • | | In accordance with the terms of the Company’s Stock Incentive Plan, all stock options, stock awards and restricted stock units issued to Mr. Rockwood more than one year prior to May 11, 2005 were deemed fully vested, and Mr. Rockwood will have three years from May 11, 2005 to exercise any such stock options. All stock options, stock awards and restricted stock units issued within a year prior to May 11, 2005 were forfeited. | | | •Kimberly K. Dennis, Vice President, Information Technology of Hillenbrand Industries and Senior Vice President, Post Acute Care (North America) and Information Technology of Hill-Rom Company, Inc. | | Mr. Rockwood and the Company agreed to reduce the term of the non-compete period provided for in the previously existing Executive Employment Agreement between Mr. Rockwood and Hillenbrand from two years to one year. |
Effective July 14, 2005, R. Ernest Waaser resigned as President and Chief Executive Officer of Hill-Rom. Effective July 31, 2005, Mr. Waaser and Hill-Rom entered into a Separation and Release Agreement. The terms and benefits provided in this agreement are substantially consistent with the terms of the previously existing Executive Employment Agreement between Mr. Waaser and Hill-Rom. Under the Separation and Release Agreement:
| • | | Mr. Waaser will receive severance pay paid in a lump sum payment in the gross amount of $415,636.52, consistent with the terms of the previously existing Executive Employment Agreement. | | | • | | Mr. Waaser was provided with payment of earned but unused vacation as of July 31, 2005.$288,000 |
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| | • | | Mr. Waaser is entitled to receive life insurance coverage for a period of twelve months beginning July 31, 2005. | | | • | | Mr. Waaser is eligible for extended healthcare coverage under the current terms of the Hillenbrand Industries Healthcare Plan for twelve months after July 31, 2005 or until he becomes eligible for coverage through a subsequent employer. The agreement provides that Hill-Rom will pay for the employer’s share of such extended healthcare coverage. |
In addition to the Separation and Release Agreement, on August 19, 2005 Mr. Waaser and Hill-Rom entered into a consulting agreement pursuant to which, for a twelve-month period, Mr. Waaser will provide consulting services to Hill-Rom relating to certain litigation matters in exchange for a monthly consulting fee of $8,333.33. Following the twelve-month period, Hill-Rom has the option to continue to engage Mr. Waaser’s services for an hourly fee.
Effective July 14, 2005, Scott K. Sorensen resigned as Vice President and Chief Financial Officer of the Company. Effective July 31, 2005, Mr. Sorensen and the Company entered into a Separation and Release Agreement. The terms and benefits provided in this agreement are substantially consistent with the terms of the previously existing Executive Employment Agreement between Mr. Sorensen and the Company. Under the Separation and Release Agreement:
| • | | Mr. Sorensen will receive severance pay in a lump sum payment in the gross amount of $466,424.92, consistent with the terms of the previously existing Executive Employment Agreement. | | | • | | Mr. Sorensen was provided with payment of earned but unused vacation as of July 31, 2005. | | | • | | Mr. Sorensen is entitled to receive life insurance coverage for a period of twelve months beginning July 31, 2005. | | | • | | Mr. Sorensen is eligible for extended healthcare coverage under the current terms of the Hillenbrand Industries Healthcare Plan until for twelve months after July 31, 2005. The agreement provides that the Company will pay for the employer’s share of such extended healthcare coverage. |
Pension Plan The Hillenbrand Industries, Inc. Pension Plan (the “Pension Plan”) covers officers of the Company and other employees. Directors of the Company who are not employees of the Company or one of its subsidiaries are not eligible to participate in the Pension Plan. Contributions to the Pension Plan by the Company are made on an actuarial basis, and no specific contributions are determined or set aside for any individual. Effective June 30, 2003, the Pension Plan was closed to new participants. Existing participants, effective January 1, 2004 were given the choice of remaining in the Pension Plan and to continue earning credited service or to freeze their accumulated benefit as of January 1, 2004 and to participate in an enhanced defined contribution savings plan, as described below. The Internal Revenue Code limits the amount of benefits that may be paid under the Pension Plan. A supplemental pension benefit that makes up for the Internal Revenue Code limitations is provided under the SERP described below. Benefits under the Pension Plan are not subject to deductions for Social Security or other offset amounts. Employees, including officers of the Company, who retire under the Pension Plan, receive fixed benefits calculated by means of a formula that takes into account the highest average annual calendar year eligible compensation earned over five consecutive years and the employee’s years of service. The following table shows approximate representative pension benefits under the Pension Plan and the pension benefit under the SERP based on a single life annuity commencing at age 65 for the compensation and years of service indicated: -30-
Approximate Annual Pension Upon Retirement At Age 65 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Highest Average Eligible | | | | | | | | | | | | | | | | | | | | | | | | | | Compensation for any | | | | | | | | | | | | | | | | | | | | | | | | | | Period of | | | 5 Years | | | 10 Years | | | 15 Years | | | 20 Years | | | 25 Years | | | 30 Years | | | 35 Years | | | 40 Years | | 5 Consecutive Years | | | of Service | | | of Service | | | of Service | | | of Service | | | of Service | | | of Service | | | of Service | | | of Service | | $ | | | 100,000 | | | $ | 5,000 | | | $ | 11,000 | | | $ | 16,000 | | | $ | 21,000 | | | $ | 27,000 | | | $ | 32,000 | | | $ | 37,000 | | | $ | 43,000 | | $ | | | 200,000 | | | $ | 13,000 | | | $ | 27,000 | | | $ | 40,000 | | | $ | 53,000 | | | $ | 67,000 | | | $ | 80,000 | | | $ | 93,000 | | | $ | 107,000 | | $ | | | 300,000 | | | $ | 21,000 | | | $ | 43,000 | | | $ | 64,000 | | | $ | 85,000 | | | $ | 107,000 | | | $ | 128,000 | | | $ | 149,000 | | | $ | 171,000 | | $ | | | 400,000 | | | $ | 29,000 | | | $ | 59,000 | | | $ | 88,000 | | | $ | 117,000 | | | $ | 147,000 | | | $ | 176,000 | | | $ | 205,000 | | | $ | 235,000 | | $ | | | 500,000 | | | $ | 37,000 | | | $ | 75,000 | | | $ | 112,000 | | | $ | 149,000 | | | $ | 187,000 | | | $ | 224,000 | | | $ | 261,000 | | | $ | 299,000 | | $ | | | 600,000 | | | $ | 45,000 | | | $ | 91,000 | | | $ | 136,000 | | | $ | 181,000 | | | $ | 227,000 | | | $ | 272,000 | | | $ | 317,000 | | | $ | 363,000 | | $ | | | 700,000 | | | $ | 53,000 | | | $ | 107,000 | | | $ | 160,000 | | | $ | 213,000 | | | $ | 267,000 | | | $ | 320,000 | | | $ | 373,000 | | | $ | 427,000 | | $ | | | 800,000 | | | $ | 61,000 | | | $ | 123,000 | | | $ | 184,000 | | | $ | 245,000 | | | $ | 307,000 | | | $ | 368,000 | | | $ | 429,000 | | | $ | 491,000 | | $ | | | 900,000 | | | $ | 69,000 | | | $ | 139,000 | | | $ | 208,000 | | | $ | 277,000 | | | $ | 347,000 | | | $ | 416,000 | | | $ | 485,000 | | | $ | 555,000 | | $ | | | 1,000,000 | | | $ | 77,000 | | | $ | 155,000 | | | $ | 232,000 | | | $ | 309,000 | | | $ | 387,000 | | | $ | 464,000 | | | $ | 541,000 | | | $ | 619,000 | | $ | | | 1,100,000 | | | $ | 85,000 | | | $ | 171,000 | | | $ | 256,000 | | | $ | 341,000 | | | $ | 427,000 | | | $ | 512,000 | | | $ | 597,000 | | | $ | 683,000 | | $ | | | 1,200,000 | | | $ | 93,000 | | | $ | 187,000 | | | $ | 280,254 | | | $ | 373,000 | | | $ | 467,000 | | | $ | 560,000 | | | $ | 653,000 | | | $ | 747,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Highest Average Eligible | | | | | | | | | | | | | | | | | Compensation for any | | | | | | | | | | | | | | | | | Period of | | 5 Years | | 10 Years | | 15 Years | | 20 Years | | 25 Years | | 30 Years | | 35 Years | | 40 Years | 5 Consecutive Years | | of Service | | of Service | | of Service | | of Service | | of Service | | of Service | | of Service | | of Service | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ 100,000 | | $ | 5,000 | | | $ | 10,000 | | | $ | 16,000 | | | $ | 21,000 | | | $ | 26,000 | | | $ | 31,000 | | | $ | 37,000 | | | $ | 42,000 | | $ 200,000 | | $ | 13,000 | | | $ | 26,000 | | | $ | 40,000 | | | $ | 53,000 | | | $ | 66,000 | | | $ | 79,000 | | | $ | 93,000 | | | $ | 106,000 | | $ 300,000 | | $ | 21,000 | | | $ | 42,000 | | | $ | 64,000 | | | $ | 85,000 | | | $ | 106,000 | | | $ | 127,000 | | | $ | 149,000 | | | $ | 170,000 | | $ 400,000 | | $ | 29,000 | | | $ | 58,000 | | | $ | 88,000 | | | $ | 117,000 | | | $ | 146,000 | | | $ | 175,000 | | | $ | 205,000 | | | $ | 234,000 | | $ 500,000 | | $ | 37,000 | | | $ | 74,000 | | | $ | 112,000 | | | $ | 149,000 | | | $ | 186,000 | | | $ | 223,000 | | | $ | 261,000 | | | $ | 298,000 | | $ 600,000 | | $ | 45,000 | | | $ | 90,000 | | | $ | 136,000 | | | $ | 181,000 | | | $ | 226,000 | | | $ | 271,000 | | | $ | 317,000 | | | $ | 362,000 | | $ 700,000 | | $ | 53,000 | | | $ | 106,000 | | | $ | 160,000 | | | $ | 213,000 | | | $ | 266,000 | | | $ | 319,000 | | | $ | 373,000 | | | $ | 426,000 | | $ 800,000 | | $ | 61,000 | | | $ | 122,000 | | | $ | 184,000 | | | $ | 245,000 | | | $ | 306,000 | | | $ | 367,000 | | | $ | 429,000 | | | $ | 490,000 | | $ 900,000 | | $ | 69,000 | | | $ | 138,000 | | | $ | 208,000 | | | $ | 277,000 | | | $ | 346,000 | | | $ | 415,000 | | | $ | 485,000 | | | $ | 554,000 | | $1,000,000 | | $ | 77,000 | | | $ | 154,000 | | | $ | 232,000 | | | $ | 309,000 | | | $ | 386,000 | | | $ | 463,000 | | | $ | 541,000 | | | $ | 618,000 | | $1,100,000 | | $ | 85,000 | | | $ | 170,000 | | | $ | 256,000 | | | $ | 341,000 | | | $ | 426,000 | | | $ | 511,000 | | | $ | 597,000 | | | $ | 682,000 | | $1,200,000 | | $ | 93,000 | | | $ | 186,000 | | | $ | 280,000 | | | $ | 373,000 | | | $ | 466,000 | | | $ | 559,000 | | | $ | 653,000 | | | $ | 746,000 | |
The credited years of service under the Pension Plan and the SERP as of December 31, 20052006 for thecertain officers named in the table are as follows: Frederick W. Rockwood – 28 years; Gregory N. Miller – 4 years; Scott K. Sorensen – 9 years; Patrick D. de Maynadier – 4 years;5 years (in February 2007); Kenneth A. Camp – 2526 years; R. Ernest WaaserKimberly K. Dennis – 5 years; and Bruce J. Bonnevier – 217 years. The Company has agreed that Messrs.Mr. de Maynadier, Bonnevier and Waaser will be treated as a vested participantsparticipant for purposes of the Company’s qualified plans and the SERP prior to achieving five years of vested service should theyhe leave the Company for any reason except a termination for cause. Accordingly,Gregory N. Miller has two years credited service in the Pension Plan, in which his accumulated benefit was frozen as of January 1, 2004. Mr. WaaserMiller participates in the Savings Plan and the Savings Plan portion of the -35-
SERP and has accumulated five years of vested service in those plans. Mr. Bonnevier, who resigned fromSoderberg does not participate in the CompanyPension Plan since the plan was closed to new participants effective June 30, 2003. Mr. Soderberg participates in 2005, arethe Savings Plan and the Savings Plan portion of the SERP and has accumulated one year of vested participants.service in those plans. Savings Plan The Company maintains the Hillenbrand Industries, Inc. Savings Plan (the “Savings Plan”), which covers substantially all employees, including senior management. Under the Savings Plan, a tax-qualified retirement savings plan, participating employees may contribute up to 40 percent of compensation on a before-tax basis. The Company contributes a matching contribution to the Savings Plan for only those participants who are not active participants in the Pension Plan in an amount equal to fifty cents for each dollar contributed by participating employees on the first six percent of their compensation. Additionally, the Company annually contributes to the Savings Plan, (i) for employees who are active participants in the Pension Plan, an amount equal to three percent of such employees’ compensation and, (ii) for employees who are not active employees in the Pension Plan, an amount equal to four percent of such employees’ compensation. During 2005,2006, the Savings Plan limited the “additions” that can be made to a participating employee’s account to $42,000$44,000 per year. “Additions” include all Company contributions and the before-tax contributions made by the Company at the request of the participating employee under Section 401(k) of the Internal Revenue Code. Of those additions, the current maximum before-tax contribution made by a participating employee is $14,000$15,000 per year (or $18,000$20,000 per year for certain participants age 50 and over). In addition, no more than $210,000$220,000 of annual compensation may be taken into account in computing benefits under the Savings Plan. A supplemental savings plan benefit that makes up for these limitations is provided under the SERP (see below). Supplemental Executive Retirement Plan The Company maintains the Hillenbrand Industries, Inc. Supplemental Executive Retirement Plan (the “SERP”). The SERP provides additional retirement benefits to certain employees selected by the Compensation Committee or the Chief Executive Officer of the Company whose retirement benefits under the Pension Plan and/or Savings Plan are reduced, curtailed or otherwise limited as a result of certain limitations under the Internal Revenue Code. The additional retirement benefits provided by the SERP are (i) for certain Pension Plan participants chosen by the Committee, in an amount equal to the benefits under the Pension Plan which are -31-
so reduced, curtailed or limited by reason of the application of such limitation and/or (ii) for certain Savings Plan participants chosen by the Committee, in an amount equal to the benefits under the Savings Plan which are so reduced, curtailed or limited by reason of the application of such limitation. Additionally, certain participants in the SERP who are selected by the Compensation and Management Development Committee may annually accrue an additional benefit of a certain percentage of such participants’ Compensation (as defined below) for such year (the current percentage is three), and the amount of the retirement benefit shall equal the sum of such annual accruals plus additional earnings factor. “Compensation” under the SERP shall mean the corresponding definition of compensation under the Pension Plan and the Savings Plan plus a percentage of a participant’s eligible compensation as determined under the Company’s Short-Term Incentive Compensation Program. -36-
The retirement benefit to be paid under the SERP is from the general assets of the Company, and such benefits are generally payable at the time and in the manner benefits are payable under the Pension Plan and Savings Plan. On March 16, 2006, the Company agreed to provide supplemental benefits to Kenneth A. Camp, Senior Vice President of the Company and President and Chief Executive Officer of Batesville Casket Company, under the SERP. The agreement provides that if Mr. Camp remains employed by the Company or Batesville for the entire four-year period beginning on March 16, 2006 and his employment is not thereafter terminated for “cause” (as defined in the employment agreement between Batesville and Mr. Camp), then for benefit calculation purposes under the SERP, Mr. Camp will be credited with an additional four years of service earned under the Pension Plan portion of the SERP (in addition to the years of service Mr. Camp otherwise would earn under the SERP during such period). Also under this agreement, if during the four-year period beginning March 16, 2006 (i) Mr. Camp’s employment with the Company or Batesville is terminated after March 16, 2007 due to disability or death, (ii) Mr. Camp’s employment with the Company or Batesville is terminated after March 16, 2007 without “cause” (as defined in Mr. Camp’s employment agreement) or by Mr. Camp for “good reason” (as defined in Mr. Camp’s employment agreement), (iii) a “change in control” (as defined in the SERP) of the Company occurs, or (iv) a sale, transfer or disposition of substantially all of the assets or capital stock of Batesville occurs, then Mr. Camp will be credited with one additional year of service under the Pension Plan portion of the SERP for each full year worked during the four-year period beginning March 16, 2006 (in addition to the years of service Mr. Camp otherwise would earn under the SERP during such period). Stock Incentive Plan Under the Hillenbrand Industries, Inc. Stock Incentive Plan (the “Stock Incentive Plan”), employees and directors of the Company may be granted stock options, stock appreciation rights, stock awards (including restricted stock awards and bonus stock awards, which may or not be performance-based) and deferred stock awards (otherwise known as restricted stock units). The Compensation and Management Development Committee makes all determinations under the Stock Incentive Plan, including who is to receive an award, the number of shares of common stock to be covered by each award granted and the terms and conditions of any award granted (including vesting). Short-Term Incentive Compensation Plan The Company maintains the Hillenbrand Industries, Inc. Short-Term Incentive Compensation Plan (the “STIC Plan”), which is a performance-based award plan whereby certainavailable for key employees of the Company who are selected byand its subsidiaries, including the Compensation and Management Development Committee or Chief Executive Officerexecutive officers of the Company. Participants receive a payment in cash of up to a predetermined percentage of eligible compensation based upon the Company achieving certain business criteria and upon the individual employee attaining certain individual performance goals. Effective September 30, 2005,November 29, 2006, the Compensation and Management Development Committee decided onapproved the general terms of the STIC Plan available for key employees, including executive officers other than the Company’s Interim President and Chief Executive Officer, for fiscal year 2006.2007. For fiscal year 2006,2007, the Compensation and Management Development Committee established specific short-term financial performance objectives which will be measured in terms of revenue and income before taxes for each of the Company, -37-
Hillenbrand Industries, Hill-Rom Company, and its Homecare/Surgical Divisioncertain business units within Hill-Rom, and Batesville Casket Company. The STIC Plan pool for each of those businesses will be funded between thirty30% and one hundred and fifty percent150% of the sumamount equal to the product of the incentive compensation opportunity (expressed as a percentage of their base salary) for each STIC Plan participant in each of those businesses times their base salary. Each such STIC Plan pool will be funded seventy fiveseventy-five percent by income before taxes and twenty fivetwenty-five percent by revenues generated within each applicable business. As in past years, certain nonrecurring special charges and amounts will be excluded from the calculation of applicable revenue and income before tax targets for purposes of funding STIC Plan pools. Each participant may participate in up to three pools. Each of the named executive officers will be a member of only one pool; provided that participants who are employees of Hill-Rom’s Homecare/Surgical Division willparticipate in and be eligible for STIC Plan payouts under only the Hillenbrand Industries pool, except that Kenneth A. Camp, Senior Vice President of sixty percent based on the -32-
STIC Plan pool funding of that division’s pool and forty percent based on Hill-Rom’s STIC Plan pool funding; and provided, further, that certain executives, including the Company’s permanentCompany and President and Chief Executive Officer of Batesville Casket Company, will participate in both the Hillenbrand Industries pool and the Batesville Casket Company pool and be eligible for payouts based 25% on the funding of the Hillenbrand Industries pool and 75% on the funding of the Batesville Casket Company pool, and Kimberly K. Dennis, Vice President, Information Technology of the Company and Senior Vice President, Post Acute Care (North America) and Chief Financial Officer, Vice PresidentInformation Technology of Hill-Rom Company, will participate in the Hill-Rom Company pool and General Counselthe pool related to Hill-Rom’s Post Acute Care business unit and Vice President of Human Resources will be eligible for STIC Plan payouts based fifty percent50% on the STIC Plan pool funding of each of the Company, on a consolidated basis, and Hill-Rom.these pools.
Under the terms of the STIC Plan, at applicable revenue and income before tax targets, the short term incentive compensation opportunity is equal to up to 90% of base salary for the permanentPresident and Chief Executive Officer and President of the Company; 75% of base salary in the case of the Chief Executive Officer of Batesville Casket Company; 50% of base salary in the case of the Chief Financial Officer of the Company; and 50% of base salary for the Chief Financial Officer and all other corporate and subsidiary senior executives.executives of the Company. The STIC Plan provides for individual short term incentive compensation payouts ranging from 0%up to 200%a maximum of two times the executive’s short term incentive compensation opportunity set forth above depending upon achievement of applicable pool funding and personal performance objectives determined, in the case of the permanent President and Chief Executive Officer of the Company, by the Compensation and Management Development Committee, and, in the case of the other executives, by the President and Chief Executive Officer of the Company and approved by the Compensation and Management Development Committee. Short-term incentive compensation is calculated for each senior executive participant at the end of each fiscal year. Short-term incentive compensation is payable in cash. All or a portion of short term incentive compensation may be deferred by the executive and invested either in cash or common stock to be paid at the end of the deferral period. Executive Deferred Compensation Program Under the Hillenbrand Industries, Inc. Executive Deferred Compensation Program (the “Deferred Compensation Program”) certain executives of the Company who are chosen by the Compensation Committee may elect to defer all or a portion of their base compensation, payments under the Short-Term Incentive Compensation Program and certain other benefits to be paid in years later than when such amounts are due. -38-
Anticipated Amendments The American Jobs Creation Act of 2004 significantly changed the tax rules for nonqualified deferred compensation plans including the Company plans and executive contracts as described above, which have deferral or other delayed payment features. The new rules wereinitially became effective December 31, 2004.January 1, 2005, and final rules will be effective January 1, 2008. The Company has made changes to Board plans, executive plans and executive contracts where appropriate to comply with the new rules as adopted and will continue to evaluate its plans and contracts and make any additional required and appropriate amendments following the anticipated release of Treasury Regulations implementing the new rules.as required. -33--39-
EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information concerning the Company’s equity compensation plans as of September 30, 2005:2006: | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of securities remaining | | | Number of securities remaining | | | | Number of securities to be | | available for issuance under | | | Number of securities to be | | available for issuance under | | | | issued upon exercise of | | Weighted-average exercise price | | equity compensation plans | | | issued upon exercise of | | Weighted-average exercise price | | equity compensation plans | | | | outstanding options, | | of outstanding options, warrants | | (excluding securities reflected in | | | outstanding options, | | of outstanding options, warrants | | (excluding securities reflected in | | | | warrants and rights | | and rights ($) | | column (a)) | | | warrants and rights | | and rights ($) | | column (a)) | | Plan Category | | (a) | | (b) | | (c) | | | (a) | | (b) | | (c) | | Equity compensation plans approved by security holders | | 2,543,057 | | $ | 45.457 | | 3,617,281 | | | 2,875,762 | | $ | 43.95162 | | 3,100,931 | | | | | Equity compensation plans not approved by security holders(1)(2) | | 18,054 | | $ | 0.00 | | 0 | | | 14,424 | | $ | 0.00000 | | 0 | | | | | | | | | | | | | | | | | | | | | | | Total | | 2,561,111 | | $ | 45.136 | | 3,617,281 | | | 2,890,186 | | $ | 43.73227 | | 3,100,931 | |
| | | (1) | | Under the Hillenbrand Industries Stock Award Program, which has not been approved by security holders, shares of common stock have been granted to certain key employees. All shares granted under this program are contingent upon continued employment over specified terms. During 1999, 45,000 shares were granted under this program, 20,000 of which were canceled for lack of continued employment. During 2001, an additional 56,500 shares were granted under this program, 10,500 of which have been canceled. Dividends, payable in stock accrue on the grants and are subject to the same specified terms as the original grants. Shares granted in 1999 had a fair value of $27.81 per share and those in 2001 had a range of fair values from $49.76 to $50.85. Of these grants, 5,000 shares became vested on January 1, 2002; 25,000 shares vested on October 5, 2002; 1,500 shares vested on December 6, 2002; 6,500 shares vested on January 1, 2003 and 33,000 shares vested on January 17, 2004. Accrued dividends related to the grants also vested accordingly. A total of 16,25112,010 deferred shares were vested as of September 30, 20052006 under this program and will be issuable at a future date. | | (2) | | Members of the Board of Directors may elect to defer fees earned and invest them in common stock of the Company under the Hillenbrand Industries Directors’ Deferred Compensation Plan, which has not been approved by security holders. A total of 1,8032,414 deferred shares were vested as of September 30, 20052006 under this program and will be issuable at a future date. |
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COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE’S REPORT The information contained in this report shall not be deemed to be “soliciting material" or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934. The primary function of the Compensation and Management Development Committee (the “Committee”) is to assist the Board of Directors of Hillenbrand Industries, Inc. (the “Company”) in fulfilling its responsibility for assuring that the officers and key management personnel of the Company are effectively compensated in terms of salaries,base salary, supplemental compensation and other benefits which are internally equitable, externally competitive and advance the long term interests of the Company’s shareholders. From time to time, the Committee obtains recommendations and information from Ernst & Young, the Committee’s independent compensation consultant, the Board of Directors, and the Company’s Chief Executive Officer and other executive officers and key management personnel of the Company, including the Vice President of Human Resources and Vice President and General Counsel, regarding compensation and benefits matters, but makes all final decisions regarding the compensation of officers and key management personnel. The Committee reports its decisions to the Board of Directors. The Committee is also responsible to review and assess the talent development and succession management actions concerning the officers and key employees of the Company. The Committee has regularly engaged nationally recognized independent compensation and benefits consulting firms to independently and objectively evaluate the effectiveness of and assist with implementation of the Company’s compensation and benefit programs and to provide the Committee with additional expertise in the evaluation of the Company’s compensation practices and of the recommendations developed by management and firms engaged by the Company. The Consultants also provide information and insights relative to current and emerging compensation and benefits practices. Specifically, for the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company, Ernst & Young provided peer group proxy and survey data regarding the amount, form and mix of compensation at the twenty-fifth percentile, median and seventy fifth percentile, which was used as one reference point by the Committee in its decision making around compensation packages. Compensation Philosophy and Objectives DuringIn 2003, the Company engaged an internationally recognized compensation and benefits consulting firm to review the Company’s compensation and benefits philosophy, practices, and competitive position. The Company reaffirmed its long-standing philosophy of shareholder value creation and performance-orientation as the foundation of its compensation and benefit practices. During each of 2004, 2005 and 2005,2006, the Committee, with advice from an independent internationally recognized compensation and benefits consulting firm,firms, re-evaluated and made adjustments to various elements of the Company’s compensation and benefit practices. In April 2005, the Committee changedrotated the Committee’s independent consulting firm in orderto Ernst & Young to refresh the Committee’s perspective on compensation and benefit practicespractices. -41-
The Company’s compensation and benefits program is designed to reward for individual performance relative to predefined duties and responsibilities (which may appropriately change as circumstances change), for business performance at enterprise and business unit levels, and for long term shareholder value creation. During 2005,2006, the Company continued to follow the guiding principles, as outlined below, for the Company’s compensation and benefit programs,program, which support the policy of the CommitteeCommittee’s commitment to maintain a compensation program that maximizesfosters performance and the creation of long-term shareholder value. These principles are:include: | • | | Aligning management’s interests with those of shareholders | | | • | | AligningMotivating and motivatingproviding incentive for employees to achieve superior results | | | • | | Assuring clear accountabilities and providing rewards for producing results | | | • | | Ensuring competitive compensation in order to attract and retain superior talent | | | • | | SimplicityEnsuring simplicity and transparency in compensation structure |
The Company’s total compensation generally is targeted at the 50th percentile of the applicable market, with provision for paying above the 50th percentile when pre-established business and/or personal criteria targets are met or exceeded. When those targets are not achieved, the Company’s total compensation is paid below the 50th percentile of the applicable market. The applicable peer group marketplace comparators include medical and laboratory device and equipment manufacturers, as well as a broad sample of Fortune 1000 manufacturing companies. In combination, these comparators provide benchmarks reflective of the Company’s portfolio mix of healthcare and funeral services businesses.business. During 2005, the Committee evaluated the Company’s compensation and benefits practices, including compensation paid and benefits provided to the named executive officers, supported by a -35-
compensation study performed by the Committee’s independent compensation consulting firm. That study included a comparison of the Company’s compensation and benefits practices against the marketplace comparators described above. Compensation Components and Process The three major components of the Company’s executive officer compensation are: (i) base salary, (ii) variable cash incentive awards and (iii) long-term, equity-based incentive awards. Each component of the program was developed with the objective of developing a competitive total direct compensation package based on each element being competitive, based on peer group proxy statement and survey data. As described above, the Committee has regularly engaged nationally recognized independent compensation and benefits consulting firms to evaluatethat work directly for the effectiveness of the Company’s compensation and benefit programs and to provide the Committee with additional expertise in the evaluation of the Company’s compensation practices and recommendations developed by management and the firms engaged by the Company.Committee. . The Committee’s compensation consultants evaluate proposals made by executive management of the Company to the Committee to assure independence in the review, approval or rejection of compensation changes recommended by executive management of the Company. These firms work directly for the Committee and, othermanagement. Other than past assistance to the Nominating/Corporate Governance Committee in connection with the annual Board and director evaluation process by a former consulting firm and the Board of Director compensation analysis, the compensation advisors perform no other services to the Company other than those -42-
directed by the Committee. Other offices within these firms provide other services to the Company including tax related services. The Committee also considers internal equity comparisons in making its decisions with regard to compensation and benefits provided to executives, including the named executive officers. The elements of compensation provided to the Company’s Chief Executive Officer and other executive officers were compared with those of their counterparts in the markets described above to determine appropriate levels of base salary, target incentives and total cash compensation. In addition, the compensation practices concerning stock-based awards were reviewed and compared. In connection with the hiring of the Company’s Interim Chief Executive Officer in 2005 and permanent Chief Executive Officer in 2006, the Committee engaged Ernst & Young to provide market data with respect to compensation and benefits based on compensation peer group proxy statement and survey data, as well as research to include relative lost value of compensation/benefits and sign-on benefits. Similar information was evaluated for the other named executive officers in connection with the restructurings of the executive management team under the Interim Chief Executive Officer and in connection with the hiring of the permanent Chief Executive Officer. For the lost value of compensation/benefits from the prior employer and sign-on benefits of the interim and permanent Chief Executive Officer, Ernst & Young performed a proxy statement search of companies within the Company’s primary and secondary SIC codes, and then for companies outside of these SIC codes (due to lack of significant relevant recent market data) within a similar revenue range who hired an interim CEO and/or permanent CEO in the last two years to assess not only the amount and form of the compensation and benefits provided, including base, salary, annual incentive, long-term incentives, and special sign on cash payments or equity grants, but also the rationale, if provided, for such compensation and benefits, and provided advice based on its experience in working with other companies in similar situations. 1. Base Salary The primary purpose of base salary, which is the sole element of compensation that is fixed, is to attract and retain talent in a competitive marketplace. Base pay is generally designed to compensate an individual for his or her responsibilities based on years of experience and other relevant factors, including internal equity of pay for similar level jobs, tenure, role, and reporting relationships. Creation of shareholder value and performance-orientation are supported by the Company’s base salary levels because total compensation generally is targeted at the 50th percentile of the applicable market, with provision for paying above the 50th percentile, through variable cash and long-term, equity-based incentive awards only when pre-established business targets and individual performance objectives are exceeded. The Committee reviews the base salaries of the executive officers on an annual basis.basis during the first fiscal quarter. Adjustments to base salaries result primarily from an assessment of the performance contributions of each executive in relationship to that executive’s scope of responsibility. Executive officers of the Company, including the President and Chief Executive Officer, were not awarded base salary merit increases in December 2004 for the 2005 fiscal year based upon results that failed to achieve the revenue and profit growth objectives established by the Committee at the beginning of 2004 for the fiscal year ended September 30, 2004. In connection with the Company’s August 2005 consolidation and restructuring of its Hill-Rom and corporate operations, the Committee reevaluated the base salaries of the named executive officers in light of a compensation study performed by the Committee’s independent compensation consulting firmErnst & Young and changes in the scope and nature of their responsibilities. WithEffective on December 26, 2005 all named executive officers except for the exception of Gregory N. Miller,Interim President and Chief Executive Officer received -43-
salary increases ranging from 3.0% to 7.7%. Recently, the Committee concluded that no changes inevaluated the base salaries of each of the named executive officers’ base salaries were warranted.officers in light of a compensation study performed by Ernst & Young, the scope and nature of each executive’s responsibilities, inflation and performance against fiscal year 2006 individual objectives. The named executive officers received salary increases ranging from 0 to 5.7% to be effective as of December 25, 2006. Mr. Soderberg’s salary increase was 5%. Executive officers may elect to defer all or a portion of their base salary to be paid at the end of the deferral period in cash with interest accrued at the prime rate. Prior to fiscal 2004, executive officers of the Company were eligible for perquisite compensation in an amount equal to 10% of the participant’s base salary (or such other limits as may be imposed by the Committee). During fiscal 2004, that perquisite compensation was eliminated and replaced by restricted stock units or adjustments to base salary, annual physical examinations, financial planning reviews and limited income tax preparation assistance. Effective for fiscal 2007 the restricted stock units granted in lieu of perquisites will be replaced with a one time salary adjustment, in addition to the annual salary increases discussed above. The amount of that adjustment for each of the named executive officers other than Kenneth A. Camp is $8,000. For Mr. Camp, the amount of the adjustment is $10,400. Mr. Soderberg did not receive a salary adjustment for the elimination of the restricted stock unit grants because he did not previously receive these grants. Additionally, the Company has adopted a policy allowingagreed to allow the President and Chief Executive Officer, but not other executive officers, tolimited use of Company aircraft for personal purposes for up to fiftyone-hundred occupied flight hours per year.year for commuting purposes. In determining the base salary for the Chief Executive Officer, the Committee considered a competitive base salary range and reached agreement with the Chief Executive Officer which took into consideration the approximate incremental cost to the Company of the hours of Company aircraft use. -36-
2. Variable Incentive Awards Performance based Variable incentive awards (or cash bonuses) are designed to motivate executives to perform and meet Company and individual objectives, with significant compensation at risk. The program provides a mechanism to pay amounts above the market median (50th percentile) total cash compensation when the Company experiences above average financial success and is designed to encourage high individual and group performance and is based on the philosophy that employees should share in the success of the Company if above average value is created for Company shareholders. The potential to be paid significant awards plays an important role in the attraction and retention of executives. Under the terms of the Short-Term Incentive Compensation Program,Plan, the Committee establishes specific financial objectives, and may also establish non-financial objectives. Short-term financial performance objectives are established annually at levels that typically reflect strong financial performance under then existing conditions. Fiscal year 20052006 financial performance objectives were measured primarily in terms of shareholder value creation based on revenue and profit growth. Effective for fiscal 2006, financial performance objectives will be measured in terms of revenuerevenues and income before taxes.taxes for each of the Company, Hill-Rom Company (excluding its Homecare/Surgical Division), Hill-Rom’s Homecare/Surgical Division and Batesville Casket Company. The STIC Plan pool for each of those businesses was funded between thirty and one hundred and fifty percent of the sum equal to the product of the incentive compensation opportunity (expressed as a percentage of their base -44-
salary) for each STIC Plan participant in each of those businesses times their base salary (“Pool Funding”). Each such STIC Plan pool was funded seventy five percent by income before taxes and twenty five percent by revenues generated within each applicable business. The Committee established these objectives to maintain the appropriate balance between the short and long-term performance expectations of shareholders.shareholders and to incorporate both a top line growth and bottom line profitability measure to the plan. The amountEach participant was a member of short-term incentive compensation is determined by first establishing a performance base (“Performance Base”) and a target (“Target”) for the Company and each subsidiary. The Performance Base and Target foronly one pool, except that certain executives, including the Company’s President and Chief Executive Officer, Senior Vice President and Chief Financial Officer and Vice PresidentsPresident and chief executive officersGeneral Counsel, were eligible for STIC Plan payouts based fifty percent on the STIC Plan pool funding of the subsidiaries are recommended by the Chief Executive Officereach of the Company, on a consolidated basis, and approved byHill-Rom (excluding its Homecare/Surgical Division). As in past years and consistent with the Committee. The Performance BaseSTIC Plan’s intent, certain nonrecurring special charges and Targetamounts were excluded from the calculation of applicable revenue and income before tax targets for the Chief Executive Officerpurposes of the Company are directly related to shareholder value creation. Shareholder value creation was based on revenues, profit growth and customer satisfaction objectives established by the Committee for fiscal 2005.funding STIC Plan pools. Under the terms of the ProgramPlan for fiscal 2005,2006, short term incentive compensation opportunity, based on Company or business unit performance, was equal to 90% of base salary for the Chief Executive Officer and President of the Company; 75% of base salary in the case of the Chief Executive Officer of the Batesville Casket Company; and 50% of base salary the Chief Financial Officer and other senior executives of the Company. The STIC Plan provides for individual short term incentive compensation payouts ranging up to a maximum of two times the executive’s short term incentive compensation opportunity set forth above depending upon achievement of applicable Pool Funding and personal performance objectives determined, in the case of the President and Chief Executive Officer of the Company and chiefother named executive officers, by the Committee, and, in the case of the subsidiaries; and 50% of base salary for other corporate and subsidiary senior executives. For executive officers of the Company during the fiscal year ended September 30, 2005, the plan provided for short term incentive compensation rangingemployees (measured by a personal performance multiplier from 0% ofto 150%), by the above scale upon achievement of the Performance Base up to 200% of the above scale upon achievement of the Target, according to a formula recommended by thePresident and Chief Executive Officer of the Company and approved by the Committee. The Committee’s determinations regarding short-term incentive compensation for 20062007 are described in this proxy statement under the heading “—“Executive Compensation—Short-Term Incentive Compensation Plan.” Short-term incentive compensation is calculated for each senior executive participant at the end of each fiscal year based on individual performance against specific areas of responsibility and achievement of the Performance Base. Short-term incentive compensation is payable in cash. All or a portion of short term incentive compensation may be deferred by the executive and invested either in cash or common stock to be paid at the end of the deferral period. ExecutiveAs described in the Summary Compensation Table, executive officers of the Company were not awardedpaid in December 2006 variable incentive awards in December 2005for fiscal year 2006 performance based upon results that failed to achieveachievement of the minimum revenue and profit growthincome before taxes objectives established by the Committee at the beginning of 20052006 for the fiscal year ended September 30, 2005.2006. The performance goals established by the Committee for evaluation of Mr. Soderberg in connection with that incentive compensation, each of which Mr. Soderberg was judged by the Committee to have successfully achieved, included: establishing the long term strategic direction for the Company and Hill-Rom, successfully executing the Hill-Rom turnaround (as demonstrated by the Company’s 2006 financial results), establishing a competent and effective operating leadership team, engaging associates and senior leaders within the Company and increasing the visibility and attractiveness of the Company with the investment community. -45-
In addition to the payments under the STIC Plan described above, the Committee approved the payment of a bonus to Rolf A. Classon in connection with the end of Mr. Classon’s term as Interim President and Chief Executive Officer of Hillenbrand. As previously disclosed, the employment agreement between Mr. Classon and the Company provided that Mr. Classon would be entitled to receive a bonus at the end of the term of his employment as Interim President and Chief Executive Officer of (i) $382,500 (the “Guaranteed Bonus”) plus (ii) up to $382,500 based upon the achievement by the Company during Mr. Classon’s employment of certain objectives determined by the Committee (the “Incentive Bonus Opportunity”). The performance goals established by the Committee for evaluation of Mr. Classon in connection with the Incentive Bonus Opportunity included: • Progress in line with plans with respect to the restructuring activities announced by the Company in the fourth quarter of fiscal 2005; • Timely completion of the search for a permanent President and Chief Executive Officer; • Financial performance in line with the Company’s business plans and guidance; and • Other subjective goals relating to the business of the Company and its Hill-Rom subsidiary. Based upon the Company’s performance with respect to these performance goals during the term of Mr. Classon’s employment as Interim President and Chief Executive Officer, the Committee approved the payment to Mr. Classon of a bonus of $765,000, representing the full amount of the Incentive Bonus Opportunity plus the Guaranteed Bonus. �� 3. Long-Term, Equity-Based Incentive Awards and Stock Ownership Guidelines The Company’s Stock Incentive Plan, which was approved by the Company’s shareholders in 2002, provides for the opportunity to grant stock options and other equity-based incentive awards to officers, other key employees and non-employee directors to help align those individuals’ interests with those of shareholders, to motivate executives to make strategic long-term decisions, and to better enable the Company to attract and retain capable directors and executive personnel. Equity based awards are generally granted to executive officers annually at a target level with potential grants up to 200% of target contingent upon personal performance. While equity based awards are focused primarily on motivating future performance, to the extent that the executive officers’ personal performance objectives for the most recently completed fiscal year have not been achieved, those individuals’ equity based grants may be made at levels that are lower on the standard range of grants available. Officers and other key employees were granted stock options during the fiscal year ended September 30, 2005.2006. As initially granted, these options vested over a three-year period. On September 7, 2005, the Board of Directors ratified the Committee’s decision to accelerate the vesting of theseoptions granted in fiscal 2005 and certain other “underwater” stock options that had exercise prices of $50.48 or higher. In order to maintain the highest standards of -37-
integrity and governance, executive officers are restricted from performing exercise and sell transactions -46-
with such newly vested options until the prior vesting date of the affected options. The primary purpose of the accelerated vesting of these options was to reduce the Company’s future reported compensation expense upon the planned adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share Based Payment,” in the first fiscal quarter of 2006. In connection with its evaluation of the Stock Incentive Plan, the Committee utilized the services of an independent compensation consulting firm to provide marketplace competitive information. An executive’s accumulated retirement benefits have not been considered as a factor in the decision as to the annual grant size of long-term incentives. Based on the review of compensation performed during 2003, and to better align the interests of executive officers with those of the Company’s shareholders, the Committee began in 2004 to substitute restricted stock units (otherwise known as deferred stock awards under the Company’s Stock Incentive Plan) for a significant portion of the stock option grants that would have previously been granted to executivesexecutives. In September of 2005, after considering the Company’s Stock Incentive Plan burn rate, number of participants and has approvedpotential aggregate target awards for participants, the Committee decided that the total value of equity based grants should be divided equally between stock ownership guidelinesoptions and restricted stock units because the Committee wanted to provide long term equity based incentives balanced between higher risk and opportunity stock options, which are more dilutive to the Company’s Stock Incentive Plan and outstanding equity with less risky and less dilutive restricted stock units, which are effective executive retention vehicles. An option’s value to an executive upon exercise of the option and sale of the underlying shares is tied to corporate performance because higher corporate performance leads to higher share price and options have no value if equity value does not increase over the grant date stock price. Restricted stock units provide for recipientslong-term incentive opportunities that differ from stock options. Restricted stock units can have value to the executive even if the Company’s share price declines prior to vesting, increasing their value as a retention device. While there is still value in the event of those deferreda declining stock awards.price and less exposure to downside equity performance, there is less opportunity related to upside equity performance with restricted stock units when compared to stock options because a lower number of restricted stock units is awarded to provide comparable grant date fair value to stock options. Restricted stock units and stock options typically vest in increments over five and three years, respectively. Therefore, if an executive does not perform and is terminated before full vesting, he or she loses the value of unvested awards full potential award value, subject to certain early vesting events, such as a change in control, death, disability or retirement. All employees whoexecutive officers and designated members of management are awarded restrictedexpected to own shares of the Company’s common stock or restricted stock units with respect to sharesstock. Specifically, the Chief Executive Officer of the Company’s common stockCompany, his executive officer direct reports, including the named executive officers, from and after December 2003the later to occur of (i) February 13, 2006 or (ii) the date on which any such individual first became an officer of the Company or any of its subsidiaries (“Start Date”) are be required to hold shares of the Company’s common stock or equivalents described below at a level equal to at least 400% of their initial annual restricted stock or restricted stock unit grantthe following levels (“Required Ownership Level”). Until, but not after, the Required Ownership Level is achieved, if annual grants subsequent to the first annual grant are less than the initial annual grant, then the Required Ownership Level will be adjusted downward based on the annual average grant amount.: -47-
| | | | | | | | | | | Required Ownership Level (Expressed as | | | Position | | | Base Annual Salary Multiple) | | | Company Chief Executive Officer | | | 4 x Base Annual Salary | | | Named Executive Officers | | | 2 x Base Annual Salary | | |
Shares owned outright (including vested deferred shares) and restricted stock units, (whetherwhether vested or unvested) and restricted shares (whether vested or unvested) willunvested, count as share equivalents towards the Required Ownership Level. The Required Ownership Level must be achieved within five years from the date of the first annual restricted stock grant.Start Date. Failure to achieve or maintain the Required Ownership Level willmay result in (i) the applicable individual being required to hold all after tax vested restricted stock units and after-tax shares acquired upon exercise of stock options or (ii) suspension of future restricted stock or restricted stock unit grants until the Required Ownership Level is achieved. The Compensation and Management Development Committee (or its designee) may make exceptions, in its (his or her) sole discretion, in the event of disability or great financial hardship. Consistent with the Company’s long term practices, stock options and restricted stock units are granted by only the Committee and are typically granted annually in November or December, following certification of the Company’s financial results from the immediately preceding fiscal year, regardless of the current trading price of the Company’s equity. Individual grants may be made at other times during the year for new hires or in connection with promotions. Stock option exercise prices are the average of high and low equity price on the date of grant. Stock options are typically granted for terms of ten years, and vest one-third on each of the first three anniversaries of the date of grant and restricted stock units typically vest in twenty percent, twenty-five percent, twenty-five percent and thirty percent increments on the day after the dates of each of the second, third, fourth and fifth anniversaries of grant. In response to recent publicity regarding improper stock option granting and pricing practices by certain companies, the Company’s internal audit function recently audited stock option award practices and found no evidence to suggest that the Company’s stock option grants had been subject to grant date or strike price manipulation. From time to time, the Company has made deferred stock awards to executives of the Company for various reasons, as presented in footnote 2 of the Summary Compensation Table. Section 162(m) of the Internal Revenue Code limits tax deductibility of certain executive compensation in excess of $1 million per year unless certain requirements are met. The Stock Incentive Plan is designed to provide for the grant of awards that meet these requirements and also enables the Committee to grant awards that do not satisfy the performance based pay exemption under the Section 162(m) requirements. For example, time-based vested restricted stock unit awards do not satisfy the performance-based exception under 162(m) and therefore are subject to 162(m) and included in the $1 million dollar compensation cap in the year the awards are included in taxable income of the recipient. -48-
Compensation of the Chief Executive Officer Frederick W. Rockwood retired as President and Chief Executive Officer of the Company on May 11, 2005. Since that date,During fiscal 2006 Rolf A. Classon has served as Interim President and Chief Executive Officer. The Board of Directors is currently conducting a search for a new permanentOfficer until March 20, 2006 on which date Peter H. Soderberg became President and Chief Executive Officer. This report discusses the 20052006 compensation for each of Mr. RockwoodClasson and Mr. ClassonSoderberg separately. The Committee expects that when a new permanent President and Chief Executive Officer is elected by the Board of Directors, the compensation package for this person will reflect the compensation philosophy of the Committee as set forth above. Mr. Rockwood’s annual base salary in 2005 was $1,051,935, which was the same base salary level earned by Mr. Rockwood since December 2003. Based on a review of the Company’s and Mr. Rockwood’s performance, the Committee determined in December 2004 not to offer Mr. Rockwood a merit-based increase to his fiscal year 2005 base salary. Mr. Rockwood was awarded stock options and restricted stock units in 2005 under the Company’s Stock Incentive Plan in line with previously established policies. All options and restricted stock units awarded to Mr. Rockwood in 2005 were forfeited in connection with his retirement from the Company. Mr. Rockwood did not earn any compensation for 2005 under the Company’s Short-Term Incentive Compensation Program. The Committee reviewed all elements of Mr. Rockwood’s compensation for
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2005, including base salary, short-term incentive compensation opportunity, long-term, equity based compensation, compensation under other benefit plans, perquisites and other personal benefits, including use of Company aircraft for personal purposes, and potential payouts under severance and change-in-control scenarios. Based upon this review, the Committee believes that the total compensation for Mr. Rockwood for 2005 was reasonable and not excessive.
Mr. Classon was hiredserved as President and Chief Executive Officer of the Company on an Interim basis.interim basis from May 11, 2005 to March 2006. In arriving at the compensation package reflected in Mr. Classon’s employment agreement, the Committee relied in part on the services of its independent compensation consulting firm to determine the appropriate level of compensation for an Interiminterim chief executive officer. The Committee also considered competitive peer group proxy and survey data, anticipated tenure, expected role as Interiminterim Chief Executive Officer, lost or forfeited compensation from other opportunities, and internal pay equity to other executives and the permanent Chief Executive Officer to be hired, together with Mr. Classon’s unique qualifications to serve as Interim President and Chief Executive Officer, including his healthcare industry experience, tenure on the Board and service as Vice Chairman of the Board of the Company. Based on the Committee’s review of all elements of Mr. Classon’s compensation as Interim President and Chief Executive Officer, the Committee believes that his compensation was reasonable and not excessive. Mr. Soderberg was hired as President and Chief Executive Officer of the Company on March 20, 2006. In arriving at the compensation package reflected in Mr. Soderberg’s employment agreement, the Committee relied in part on the services of its independent compensation consulting firm to determine the appropriate level of compensation for the chief executive officer position. The Committee also considered competitive peer group proxy and survey data, anticipated tenure, expected role as permanent Chief Executive Officer, lost or forfeited compensation from other opportunities, and internal pay equity to other executives, together with Mr. Soderberg’s unique qualifications to serve as President and Chief Executive Officer, including his healthcare industry experience and tenure on the Board. Based on the Committee’s review of all elements of Mr. Soderberg’s compensation as President and Chief Executive Officer, the Committee believes that his compensation is reasonable and not excessive. Submitted by the Compensation and Management Development Committee (as constituted on November 29, 2005)December 14, 2006) Mark D. Ketchum (Chairman)
Peter H. SoderbergJoanne C. Smith (Vice Chairman)Chair) Anne GriswoldG. Peirce COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended September 30, 2005,2006, the Compensation and Management Development Committee consisted of Mark D. Ketchum, Anne GriswoldG. Peirce, and Joanne C. Smith. Peter H. Soderberg. Rolf A. ClassonSoderberg also was a member of the Committee until May 11, 2005.March 20, 2006. -39--49-
COMPANY STOCK PERFORMANCE The following graph for the fiscal yearsyear ended on the Saturday closest to November 30, 2000 and 2001, the ten-month period ended September 30, 2002 and the fiscal years ended September 30, 2003, 2004, 2005 and 20052006 compares the cumulative total return for common stock of the Company with the S&P 500, andthe S&P 500 Health Care Equipment Index.Index and the Company Peer Group. The Company Peer Group is comprised of Apria Healthcare Group, Inc.; Bard (C.R.), Inc.; Beckman Coulter, Inc.; Becton Dickinson & Co.; Conmed Corporation; Dade Behring Holdings, Inc.; Hospira, Inc.; Invacare Corporation; Kinetic Concepts, Inc.; Mettler-Toledo International, Inc.; Respironics, Inc.; Steris Corporation; and Viasys Healthcare, Inc. After evaluating many potential peer companies against various criteria, including, among others, participation in similar market segments to the Company’s medical device business, comparable revenue size with the Company’s medical device business, comparable number of employees, total equity value, and comparable published operating and financial metrics, the Company elected to use the Company Peer Group during fiscal year 2006 and going forward. The graph assumes $100 invested in November 2000.2001. Total return assumes that all dividends are reinvested when received. -40--50-
AUDIT COMMITTEE’S REPORT The Audit Committee of the Board of Directors (the “Committee”) is composed of three directors, each of whom is independent under Securities and Exchange Commission Rule 10A-3 and the NYSE’s Listing Standards. The Committee operates under a written charter adopted by the Board of Directors. Management is responsible for the Company’s internal controls, financial reporting process and compliance with laws and regulations and ethical business standards. The independent auditors areregistered public accounting firm is responsible for performing an integrated audit of the Company’s consolidated financial statements and its internal control over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (PCAOB) and the issuance of a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. In this regard, the Committee meets separately at most regular committee meetings with management, the Director of Internal Audit and the Company’s outside independent auditors.registered public accounting firm. The Committee has the authority to conduct or authorize investigations into any matters within the scope of its responsibilities and the authority to retain such outside counsel, experts, and other advisors as it determines appropriate to assist it in the conduct of any such investigation. In addition, the Committee approves, subject to shareholder ratification, the appointment of the Company’s outside independent auditors,registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”), and pre-approves all audit and non-audit services to be performed by the auditor.firm. In this context, the Committee has reviewed and discussed the consolidated financial statements with management and PwC. Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles. PwC discussed with the Committee matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended by SAS No. 90 Audit Committee Communications. Management and the auditorsindependent registered public accounting firm also made presentations to the committee throughout the year on specific topics of interest, including: (i) current developments and best practices for audit committees; (ii) updates on the substantive requirements of the Sarbanes-Oxley Act of 2002, including management’s responsibility for assessing the effectiveness of internal control over financial reporting; (iii) key elements of anti-fraud programs and controls; (iv) transparency of corporate financial reporting; (v) the Company’s critical accounting policies; (vi) the applicability of several new and proposed accounting releases; and (vii) numerous SEC accounting developments. PwC also provided to the Committee the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). PwC informed the Audit Committee that it was independent with respect to the Company within the meaning of the securities acts administered by the Securities and Exchange Commission and the requirements of the Independence Standards Board, and PwC discussed with the Committee that firm’s independence with respect to the Company. In addition, the Committee considered whether non-auditnon- -51-
audit consulting services provided by the auditors’ firm could impair the auditors’ independence and concluded that such services have not impaired the auditors’ independence. Based upon the Committee’s discussions with management and PwC and the Committee’s review of the representations of management and the report of PwC to the Committee, the Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.2006. In addition, the Committee has discussed with the Chief Executive Officer and the Chief Financial Officer of the Company the certifications required to be given by such officers in connection with the Company’s Annual Report on Form 10-K pursuant to the Sarbanes-Oxley Act of 2002 and Securities and -41-
Exchange Commission rules adopted thereunder,there under, including the subject matter of such certifications and the procedures followed by such officers and other management in connection with the giving of such certifications. Submitted by the Audit Committee (as constituted on November 29, 2005)30, 2006) Charles E. Golden (Chairman) Eduardo R. Menascé (Vice Chairman)
Joanne C. SmithRay J. Hillenbrand (Each of whom the Board of Directors has determined is an independent director under applicable standards) RATIFICATION OF APPOINTMENT OF AUDITORSTHE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Subject to shareholder ratification, the Audit Committee of the Board of Directors of the Company has appointed the firm of PricewaterhouseCoopers LLP (“PwC”), certified public accountants, as the independent auditorsregistered public accounting firm to make an examination of the consolidated financial statements of the Company for its fiscal year ending September 30, 2006.2007. PwC served as the independent auditorsregistered public accounting firm of the Company for year ended September 30, 2005.2006. A representative of PwC will be present at the annual meeting with an opportunity to make a statement, if he or she so desires, and will be available to respond to appropriate questions. The Audit Committee has adopted a policy requiring that all services from the outside independent auditorsregistered public accounting firm must be pre-approved by the Audit Committee or its delegate (Chairperson) and has adopted guidelines that non-audit related services, including tax consulting, tax compliance and tax preparation fees, should not exceed the total of audit and audit related fees. During fiscal 2005,2006, PwC’s fees for non-audit related services fell within these guidelines. Audit Fees Aggregate fees billed by PwC for professional services rendered for the integrated audit of the Company’s annual consolidated financial statements included in the annual report on Form 10-K and the review of interim consolidated financial statements included in quarterly reports on -52-
Form 10-Q and the review and audit of the application of new accounting pronouncements, SEC releases and accounting for unusual transactions were $1,942,550$3,737,387 and $3,737,387$2,877,380 for the years ended September 30, 20042005 and September 30, 2005,2006, respectively. Audit-Related Fees Aggregate fees billed by PwC for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and that are not disclosed under “—Audit Fees” above were $1,974,254$445,224 and $445,224$313,313 for the years ended September 30, 20042005 and September 30, 2005,2006, respectively. These audit related services include primarily the statutory audits of European and financial services entities in both years, and review and assistance with the implementation of a Sarbanes-Oxley compliance project in 2004.years. Tax Fees Aggregate fees billed by PwC for professional services rendered to the Company for tax compliance, tax advice and tax planning were $1,160,319$15,551 and $15,551$53,966 for the years ended September 30, 20042005 and September 30, 2005,2006, respectively. -42-
All Other Fees Aggregate fees billed by PwC for all other products and services provided to the Company were $1,500 and $1,500 for the years ended September 30, 20042005 and September 30, 2005,2006, respectively. These fees were for a subscription to PwC’s online accounting research tool. The Board of Directors recommends that the shareholders vote FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the independent auditorsregistered public accounting firm of the Company. COST OF SOLICITATION The entire cost of solicitation of proxies by the Board of Directors will be borne by the Company. In addition to the use of the mails, proxies may be solicited by personal interview, facsimile, telephone, electronic communication and telegram by directors, officers and employees of the Company. The Company expects to reimburse brokers or other persons for their reasonable out-of-pocket expenses in forwarding proxy material to beneficial owners. SHAREHOLDER PROPOSALS In order for shareholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 to be presented at the Company’s 20072008 annual meeting of shareholders and included in the Company’s proxy statement and form of proxy relating to that meeting, such proposals must be submitted to the Secretary of the Company at the Company’s principal offices in Batesville, Indiana not later than September 14, 2006.5, 2007. In addition, the Company’s Amended and Restated Code of By-laws provides that for business to be brought before a shareholders’ meeting by a shareholder or for nominations to the Board of Directors to be made by a shareholder for consideration at a shareholders’ meeting, -53-
notice thereof must be received by the Secretary of the Company at the Company’s principal offices not later than 100 days prior to the anniversary of the immediately preceding annual meeting, or not later than November 2, 20062007 for the 20072008 annual meeting of shareholders. The notice must also provide certain information set forth in the Amended and Restated Code of By-laws. INCORPORATION BY REFERENCE Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that incorporates this proxy statement by reference, the Audit Committee’s Report, the Compensation and Management Development Committee’s Report and the graph Comparison of Five Year Cumulative Total Return shall not be incorporated by reference into any such filings. Patrick D. de Maynadier Secretary January 12, 20063, 2007 -43--54-
Appendix A HILLENBRAND INDUSTRIES, INC.
(the “Company”)
CORPORATE GOVERNANCE STANDARDS
FOR
BOARD OF DIRECTORS
(As approved by Board of Directors on September 1, 2005)
The following corporate governance standards established by the Board of Directors provide a structure within which directors and management can effectively pursue the Company’s objectives for the benefit of its shareholders and other constituencies. The Company’s business is managed under the direction of the Board, but the conduct of the Company’s business has been delegated by the Board to the Company’s senior management team.
1. The Board will consider all major decisions of the Company. However, the Board has established the following standing Committees so that certain important areas can be addressed in more depth than may be possible in a full Board meeting: Audit Committee, Nominating/Corporate Governance Committee, Compensation and Management Development Committee and Finance Committee. Each standing Committee has a specific written charter that has been approved by the Board.
2. At all times, at least a majority of the directors of the Company shall be independent, as determined pursuant to numbered paragraph 3 below.
3. The Board, after receiving a recommendation from the Nominating/Corporate Governance Committee, must determine annually, based on a consideration of all relevant facts and circumstances, whether each director is independent. A director does not qualify as independent unless the Board has affirmatively determined that the director has no material relationship with the Company1 (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company). In assessing the materiality of a director’s relationship with the Company and each director’s independence, the Board shall consider the issue of materiality not only from the standpoint of the director but also from that of the persons or organizations with which the director has an affiliation and shall consider whether
| | | 1 | | For purposes of this numbered paragraph 3, all references to the Company include the Company’s subsidiaries. |
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the relationship represents a potential conflict of interest or otherwise interferes with the director’s exercise of his or her independent judgment from management and the Company. Material relationships can include, among others, commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. In assessing a director’s independence, the Board shall also consider the director’s ownership, or affiliation with the owner, of less than a controlling amount of voting securities of the Company. The basis for the Board’s determination that a relationship is not material shall be disclosed in the Company’s annual proxy statement.
Further, the Board cannot conclude that a director is independent if:
| • | | The director is, or has been within the last three years, an employee of the Company, or an immediate family member2 of the director is, or has been within the last three years, an executive officer of the Company. Employment as an interim Chairman or CEO or other executive officer shall not disqualify a director from being considered independent following that employment. | | | • | | The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 per year in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service). Compensation received by a director for former service as an interim Chairman or CEO or other executive officer need not be considered in determining independence under this test. Compensation received by an immediate family member for service as an employee of the Company (other than an executive officer) need not be considered in determining independence under this test. | | | • | | The director or an immediate family member of the director is a current partner of a firm that is the Company’s internal or external auditor; (B) the director is a current employee of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (D) the director or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company’s audit within that time. | | | • | | The director or an immediate family member of the director is, or has been within the last three years, employed as an executive officer of another company where |
| | | 2 | | As used in these Corporate Governance Standards, “immediate family member” includes a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home. When applying the three-year lookback provisions described in this numbered paragraph 3, the Board need not consider individuals who are no longer immediate family members of the director as a result of legal separation or divorce, or those who have died or become incapacitated. |
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| | | any of the Company’s present executives at the same time serves or served on that company’s compensation committee. | | | • | | The director is a current employee, or an immediate family member of the director is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues. The look-back provision for this test applies solely to the financial relationship between the Company and the director or immediate family member’s current employer; the Board need not consider former employment of the director or immediate family member. Contributions to tax exempt organizations shall not be considered “payments” for purposes of this provision, but the Company shall disclose in its annual proxy statement any such contributions made by the Company to any tax exempt organization in which any independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year exceeded the greater of $1 million, or 2% of such tax exempt organization’s consolidated gross revenues. In addition, the Board must consider the materiality of any such relationship in making its determination of independence. | | | • | | A director who owns, or is affiliated with the owner, of a controlling amount of voting stock of the Company may not be considered independent. |
The disqualification of one director from being independent pursuant to these provisions shall not automatically disqualify any other director on the Board who is an immediate family member of such disqualified director but the disqualification of an immediate family member shall be one of the facts and circumstances considered by the Board in assessing such other director’s independence.
Moreover, the Board discourages the following types of transactions with or on behalf of non-officer directors:
| • | | the making of substantial charitable contributions to any organization in which a director is affiliated; | | | • | | the entering into of consulting contracts with (or providing other indirect forms of compensation to) directors; or | | | • | | the entering into of other compensatory arrangements with directors that may raise questions about their independence. |
4. The Audit Committee, the Nominating/Corporate Governance Committee and the Compensation and Management Development Committee of the Board will consist entirely of independent directors.
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5. Each member of the Board will act in accordance with the criteria for selection and discharge the responsibilities set forth in the Position Specifications3 for a director of the Company.
6. In addition to evaluations to be performed by the Compensation and Management Development Committee, the Board will evaluate the performance of the Company’s Chief Executive Officer and certain other senior management positions at least annually in meetings of independent directors that are not attended by the Chief Executive Officer. As a general rule, the Chief Executive Officer should not also hold the position of Chairman of the Board. However, if, with the Board’s approval, the Chief Executive Officer also holds the position of Chairman of the Board, the Board will elect a non-executive Vice Chairman (or a non-executive director who is the Lead Director). The Vice Chairman or Lead Director will preside at meetings to evaluate the performance of the Chief Executive Officer.
7. Every year the Board will engage management in a discussion of the Company’s strategic direction and, based on that discussion, set the Company’s strategic direction and review and approve a three-year strategic framework and a one-year business plan.
8. On an ongoing basis during each year, the Board will monitor the Company’s performance against its annual business plan and against the performance of its peers. In this connection, the Board will assess the impact of emerging political, regulatory and economic trends and developments on the Company. The Board will hold periodic meetings devoted primarily to the review of the Company’s strategic plan and business plan and its performance against them.
9. The Nominating/Corporate Governance Committee will annually assess the Board’s effectiveness as a whole as well as the effectiveness of the individual directors and the Board’s various Committees, including a review of the mix of skills, core competencies and qualifications (including independence under applicable standards) of members of the Board and its various committees, which should reflect expertise in one or more of the following areas: accounting and finance, healthcare, international business, mergers and acquisitions, leadership, business and management, strategic planning, government relations, investor relations, executive leadership development, and executive compensation. In order to make these assessments, the Nominating/Corporate Governance Committee shall solicit annually the opinions of each director regarding the foregoing matters. The Nominating/Corporate Governance Committee shall present its findings and recommendations to the Board of Directors for appropriate corrective action by the Board. Ineffective directors shall be replaced as promptly as practicable and inefficient Committees of the Board shall be restructured or eliminated promptly.
10. Directors are expected to own shares of common stock of the Company. The Board of Directors may from time to time adopt, revise or terminate director stock ownership guidelines. Specifically, any non-employee director who from and after October 1, 2003 is awarded restricted shares of the Company’s common stock or restricted stock units (otherwise known as deferred stock awards) with respect to shares of the Company’s common stock shall be required to hold any vested shares of the Company’s common stock under such awards until at
| | | 3 | | See Position Specification for Member of Board of Directors of Hillenbrand Industries, Inc. |
A-4
least the six month anniversary from the date such director ceases to be a director of the Company.
Directors are encouraged to limit the number of directorships that they hold in public companies so that they can devote sufficient time to the discharge of their responsibilities to each public company for which they serve as a director, including the Company. The Nominating/Corporate Governance Committee shall make recommendations to the Board regarding the membership of the several Board committees and the chairs of such committees. The members of the several Board committees shall be elected by the Board, after consideration of the recommendation of the Nominating/Corporate Governance Committee, at the annual meeting of the Board to serve until the next annual meeting of the Board or until their successors shall be duly elected and qualified. Unless the Chair of any Committee is elected by the Board, after consideration of the recommendation of the Nominating/Corporate Governance Committee, the members of the Committee may designate a Chair by majority vote of the Committee membership. The several Committee Chairs will periodically report the Committee’s findings and conclusions to the Board. When any director intends to become a director of another board of directors, that director shall provide advance notice to the Chairman of the Board and the Secretary. Upon termination of or significant change in a member of the Board’s principal employment or acceptance of a position as a director on a public company board that results in a director serving on more than four more public company boards he or she shall notify the Chairman of the Board and tender his or her resignation from the Board, which may be rejected by the Board if the change in status is satisfactory and the Board believes that the director will continue to be a valuable contributor to the Board. No more than half the members of the Board may be over seventy years of age.
11. Succession planning and management development will be reviewed annually by the Chief Executive Officer with the Board. The Board will review at least annually the succession plan for the Company’s Chief Executive Officer.
12. All executive officers are expected to own shares of the Company’s common stock, in addition to options to purchase common stock. Specifically, all executives who are awarded restricted shares of the Company’s common stock or restricted stock units (otherwise known as deferred stock awards under the Company’s Stock Incentive Plan) with respect to shares of the Company’s common stock from and after December 2003 shall be required to hold shares of the Company’s common stock or equivalents described below at a level equal to at least 400% of their initial annual restricted stock or restricted stock unit grant (“Required Ownership Level”). Until, but not after, the Required Ownership Level is achieved, if annual grants subsequent to the first annual grant are less than the initial annual grant, then the Required Ownership Level will be adjusted downward based on the annual average grant amount. Shares owned outright, restricted stock units (whether vested or unvested) and restricted shares (whether vested or unvested) will count as share equivalents towards the Required Ownership Level. The Required Ownership Level must be achieved within five years from the date of the first annual restricted stock grant. Failure to maintain the Required Ownership Level will result in suspension of future restricted stock or restricted stock unit grants until the Required Ownership Level is achieved.
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13. Incentive compensation plans will link executive compensation directly and objectively to measured financial and non-financial goals set in advance by the Compensation and Management Development Committee.
14. Shareholders of the Company will be given an opportunity to vote on the adoption of all equity-compensation plans and any material revisions to such plans. Brokers may not vote a customer’s shares on any equity compensation plan unless the broker has received that customer’s instructions to do so.
15. Subject to limited exceptions permitted by law, the Company will not directly or indirectly grant loans to executive officers or directors of the Company that are not available to outsiders.
16. Stock options will not be repriced, that is, the exercise price for options will not be lowered even if the current fair market value of the underlying shares is below their exercise price.
17. Analyses and empirical data that are important to the directors’ understanding of the business to be conducted at a meeting of the Board or any Committee will be distributed, to the extent practicable, in writing to all members in advance of the meeting. Management will make every reasonable effort to assure that this material is both concise and in sufficient detail to provide a reasonable basis upon which directors may make an informed business decision. In many cases, significant items requiring Board or Committee approval may be reviewed in one or more meetings, with the intervening time being used for clarification and discussion of relevant issues. Outside directors shall be encouraged to provide input into the development of Board and Committee meeting agenda.
18. Directors shall have complete access to the Company’s management. It is assumed that directors will exercise reasonable judgment to assure that contact of this sort is not distracting to the business operations of the Company and that any such contact, if in writing, will be copied to the Chief Executive Officer and the Chairman of the Board. Furthermore, the Board encourages the Chief Executive Officer to bring managers into Board meetings from time to time who: (a) can provide additional insight into the items being discussed because of personal involvement in these areas, and/or (b) represent potential members of future senior management that the Chief Executive Officer believes should be given exposure to the Board.
19. The Nominating/Corporate Governance Committee shall assess, at least annually, the adequacy and suitability of the compensation package for members of the Company’s Board of Directors in relation to competitive market and sound corporate governance practices. The Chief Executive Officer or other members of the senior management team or other persons appointed by the Nominating/Corporate Governance Committee shall report to the Nominating/Corporate Governance Committee once a year regarding the adequacy and suitability of the Company’s Board compensation package in relation to other comparable U.S. companies. Changes in Board compensation, if any, should be suggested by the Nominating/Corporate Governance Committee and approved only after a full discussion among the members of the Board.
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20. While the Board, with the recommendation of the Nominating/Corporate Governance Committee, will review from time to time the compensatory arrangements with the Company’s non-officer, non-employee directors, the Board believes that the form and amount of the Company’s current compensatory arrangements with its non-officer, non-employee directors summarized below are both customary and appropriate:
| • | | Directors shall receive an annual retainer of $25,000 for their service as directors, together with a $3,500 fee for each Board meeting attended. The Chairman of the Board of Director’s annual retainer shall, however, be $150,000. | | | • | | For any Board meeting lasting longer than one day, each Director who attends will receive $1,000 for each additional day. | | | • | | Directors who attend a Board meeting or standing committee meeting by telephone will receive fifty percent (50%) of the usual meeting fee. | | | • | | Each Director who is a member of the Nominating/Corporate Governance, Finance, Audit or Compensation and Management Development Committee receives a fee of $1,500 for each committee meeting attended. | | | • | | The Chairmen of the Audit, Compensation and Management Development, Nominating/Corporate Governance and Finance Committees shall receive an additional $10,000, $8,000, $7,000 and $5,000 annual retainer, respectively. | | | • | | Directors who attend meetings of committees of which they are not members shall receive no fees for their attendance. | | | • | | Notwithstanding the foregoing, for any meeting of an ad hoc committee or team of the Board that requires attendance in person or by telephone, the Directors who attend shall each receive a meeting fee of $1,500, except when such meetings occur before, during or after a meeting of the Board or a standing committee of the Board that also is attended by such Directors. | | | • | | Board and committee retainers shall be paid in quarterly installments and the meeting fees shall be paid following the meeting. | | | • | | Each Director shall be reimbursed for expenses incurred as a result of attendance at Board or committee meetings. | | | • | | Each Director shall be awarded on the first trading day following the close of each annual meeting of the Company’s shareholders 1,800 restricted stock units (otherwise known as deferred stock awards) under the Corporation’s Stock Incentive Plan in lieu of the stock option grant contemplated by Section 12 of the Corporation’s Stock Incentive Plan. Vesting for such restricted stock units will occur on the later to occur of one year and one day from the date of the grant or the six month anniversary of the date that a the applicable Director ceases to be a member of the Board of Directors of the Corporation. |
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In the case of the Chairman of the Board of Directors, his or her annual grant of restricted stock units shall be 3,500.
21. The Board is responsible for the enactment and approval of changes in the Company’s Code of Business Conduct and Ethics (“Policy Statement”). The Board’s Audit Committee has responsibility for the oversight of the implementation and administration of the Policy Statement, the review and assessment at least annually of the effectiveness of the Policy Statement and the recommendation to the Board of suggested changes in the Policy Statement.
22. The Board will consider from time to time its optimum size and will increase or decrease from time to time, as appropriate, the number of its members.
23. Proposed agendas for each regularly scheduled Board meeting shall be developed by the Chairman of the Board, Chief Executive Officer and Secretary, revised, as appropriate after joint review by those individuals together with the Chairs of each Board committee, and revised again, as appropriate after review by each member of the Board. Likewise, proposed agendas for each regularly scheduled Board committee meeting shall be developed by the Chair of the applicable Board committee, management liaison and Secretary, revised, as appropriate after joint review by those individuals together with the Chairman of the Board and Chairs of each other Board committee, and revised again, as appropriate after review by each member of the Board.
24. The Board is committed to the continuing orientation and training of new and incumbent directors at the Board and Committee levels.
25. Any related party transactions between the Company or any of its subsidiaries and any director or executive officer of the Company shall be reviewed and preapproved by the Nominating/Corporate Governance Committee.
26. The non-management directors regularly shall conduct executive sessions without participation by any employees of the Company. The Chairman of the Board, or, in his or her absence, the Vice Chairman of the Board, shall preside over such executive sessions at each regularly scheduled meeting of the Board of Directors. The Chairman of each of the Nominating/Corporate Governance, Compensation and Management Development and Audit Committees of the Board, or, in his or her absence, the Vice Chairman of each of those committees, shall preside over executive sessions of those committees without participation by any employees of the Company at each regularly scheduled meeting of those committees. The names of the directors who will preside at those regularly scheduled executive sessions shall be publicly disclosed.
27. While the information needed for the Board’s decision making generally will be found within the Company, from time to time the Board may seek legal or other expert advise from sources independent of management. Generally such advice will be sought with the knowledge and concurrence of the Chief Executive Officer. Accordingly, the Board shall have the sole authority to engage, compensate, oversee and terminate external independent consultants, counsel and other advisors as it determines necessary to carry out its responsibilities.
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The Company shall provide appropriate funding (as determined by each committee) for payment of compensation to advisors engaged by the Board.
28. Likewise, each committee of the Board shall have the sole authority to engage, compensate, oversee and terminate external independent consultants, counsel and other advisors as it determines necessary to carry out its duties, including the resolution of any disagreements between management and the auditor regarding financial reporting. The Company shall provide appropriate funding (as determined by each committee) for payment of compensation to advisors engaged by the committees.
29. These Corporate Governance Standards have been developed and approved by the Board. The Board will review at least annually the practices incorporated into these Corporate Governance Standards by comparing them to the standards identified by leading governance authorities and the evolving needs of the Company and determine whether these Corporate Governance Standards should be updated. These Corporate Governance Standards shall be published on the Company’s website.
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Appendix B
HILLENBRAND INDUSTRIES, INC. (THE “COMPANY”) AUDIT COMMITTEE CHARTER (As approved by Board of Directors on September 1, 2005)14, 2006) I. Mission Statement The Audit Committee (“Committee”) shall assist the Board of Directors of the Company (“Board”) in fulfilling its oversight responsibilities regarding financial reports and financial controls of the Company. In discharging that role, the Committee shall review the Company’s financial reporting process, its system of internal controls regarding accounting, legal and regulatory compliance and ethics that management or the Board, as the case may be, have established and the internal and external audit processes of the Company. The Committee will endeavor to maintain effective working relationships with the Board, management, and the internal and external auditors. Each Committee member will maintain an understanding of the requirements of membership which are necessary to meet and fulfill Committee responsibilities. II. Organization The Board shall arrange that: 1. | | The Committee shall be comprised of at least three members of the Board, each of whom must meet the independence criteria set forth in the Company’s Corporate Governance Standards for the Board of Directors and as required by the New York Stock Exchange, the Securities Exchange Act of 1934 and the rules and regulations of the Securities Exchange Commission at all times during his or her tenure on the Committee. No member of the Committee may, other than in his or her capacity as a member of the Committee, the Board or any other committee of the Board, |
The Committee shall be comprised of at least three members of the Board, each of whom must meet the independence criteria set forth in the Company’s Corporate Governance Standards for the Board of Directors and as required by the New York Stock Exchange, the Securities Exchange Act of 1934 and the rules and regulations of the Securities Exchange Commission at all times during his or her tenure on the Committee. No member of the Committee may, other than in his or her capacity as a member of the Committee, the Board or any other committee of the Board, (a) accept, directly or indirectly41, any consulting, advisory or other compensatory fee from the Company or any of its subsidiaries, provided that, unless the rules of the New York Stock Exchange provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service); or | | | 41 | | Payments by the Company of the following sort will be deemed to constitute indirect acceptance of compensatory payments and accordingly will render a member of the Board ineligible for service on the Committee: (a) payments to an entity in which the member is a partner, member, officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the Company) and which provides accounting, consulting, legal, investment banking or financial advisory services to the Company or any of its subsidiaries; and (b) payments to the member’s spouse, minor child or stepchild or adult child or stepchild sharing the member’s home. |
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compensation) for prior service with the Company (provided that such compensation is not contingent in any way on continued service); or
(b) be an affiliated person52 of the Company or any of its subsidiaries. 2.• | | All members of the Committee should possess, at a minimum, basic financial literacy, as such qualification is interpreted by the Board, or acquire such literacy within a reasonable period of time from joining the Committee. At the present time, the Board interprets “financial literacy” to mean the ability to read and understand audited and unaudited consolidated financial statements (including the related notes) and monthly operating statements of the sort released or prepared by the Company, as the case may be, in the normal course of its business. The Chair of the Committee shall be available, capable, qualified and competent in dealing with financial and related issues. |
3.
| • | | At least one member of the Committee shall be an “audit committee financial expert” (as defined by the Securities and Exchange Commission) who shall have all of the following attributes: | |