UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/ Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
KENDLE INTERNATIONAL INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies:........................................................
(2) Aggregate number of securities to which transaction
applies:........................................................
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and
state how it was determined): ..................................
(4) Proposed maximum aggregate value of transaction:................
(5) Total fee paid:.................................................
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:.........................................
(2) Form, Schedule or Registration Statement No.:...................
(3) Filing Party:...................................................
(4) Date Filed:.....................................................
[Kendle Logo]
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 10, 2007
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TO THE SHAREHOLDERS OF KENDLE INTERNATIONAL INC.:
The Annual Meeting of Shareholders of Kendle International Inc. (the
"Company") will be held Thursday, May 10, 2007, at 9:30 a.m. Eastern Time
in the Green Room at the Aronoff Center for the Arts, 650 Walnut Street,
Cincinnati, Ohio for the following purposes:
1. To elect seven directors to hold office for the ensuing year or
until their respective successors are elected and qualified;
2. To approve the 2007 Stock Incentive Plan;
3. To ratify the appointment of Deloitte & Touche LLP as the Company's
registered public accounting firm for 2007; and
4. To consider and act upon any other matters that may properly come
before the meeting or any postponement or adjournment thereof.
The Board of Directors of the Company has designated March 19, 2007, as
the record date for the determination of shareholders entitled to receive
notice of, and to vote at, the meeting or any postponement or adjournment
thereof. Only shareholders of record of the Company's Common Stock at the
close of business on that date will be entitled to vote.
You are cordially invited to attend the Annual Meeting. Whether or not
you plan to be present in person at the meeting, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed
envelope. If you later desire to revoke your proxy, you may do so at any
time before it is exercised.
By Order of the Board of Directors,
/s/ Karl Brenkert III
Karl Brenkert III
Secretary
DATED: APRIL 6, 2007
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WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE VOTE, SIGN
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AND PROMPTLY RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE. A PROXY MAY
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BE REVOKED BY WRITTEN NOTICE OF REVOCATION, BY SUBMISSION OF A LATER
PROXY OR BY ATTENDING THE MEETING AND VOTING IN PERSON (ALTHOUGH PRESENCE
AT THE ANNUAL MEETING WILL NOT IN AND OF ITSELF CONSTITUTE REVOCATION OF
THE PROXY).
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[Kendle Logo]
1200 CAREW TOWER
441 VINE STREET
CINCINNATI, OHIO 45202
PROXY STATEMENT
INTRODUCTION
Kendle International Inc. (the "Company"), on behalf of its Board of
Directors, is requesting your proxy for use at the Annual Meeting of
Shareholders on May 10, 2007, and at any postponement or adjournment
thereof (the "Annual Meeting"). The Notice, this Proxy Statement and the
accompanying proxy card are being mailed to shareholders with the Company's
2006 Annual Report to Shareholders on or about April 9, 2007.
VOTING AT THE ANNUAL MEETING
RECORD DATE
As of March 19, 2007, the record date for determining shareholders
entitled to notice of and to vote at the Annual Meeting, the Company had
14,463,842 shares of Common Stock, no par value ("Common Stock"), issued
and outstanding. Only shareholders of record at the close of business on
March 19, 2007, will be entitled to vote at the Annual Meeting.
VOTING
Each share is entitled to one vote. Shareholders may vote in person or
by proxy at the Annual Meeting. As a shareholder, you may receive more than
one proxy or voting card depending on how you hold your shares. Shares
registered in your name are covered by one card. If you hold shares through
someone else, such as a broker, you may get material from them asking how
you want to vote. Shareholders are not entitled to cumulate votes.
Shares of Common Stock represented by properly executed proxies
received in the accompanying form will be voted in accordance with the
instructions contained in those proxies. In the absence of contrary
instructions, such shares will be voted to: (1) elect the director nominees
named in this Proxy Statement; (2) approve the 2007 Stock Incentive Plan;
and (3) ratify the appointment of Deloitte & Touche LLP as the Company's
registered public accounting firm. If any other matters properly come
before the Annual Meeting, each proxy will be voted at the discretion of
the individuals named as proxies on the proxy card.
REVOKING OR CHANGING YOUR VOTE
Proxies given may be revoked at any time prior to the Annual Meeting by
filing with the Company's Secretary, Karl Brenkert III, either a written
revocation or a duly executed proxy card bearing a later date, or by
appearing at the Annual Meeting and voting in person (although presence at
the Annual Meeting will not in and of itself constitute revocation of the
proxy). If your shares are held in the name of a bank, broker or other
holder of record, you must obtain a proxy, executed in your favor, from the
institution that holds your shares to be able to vote at the Annual
Meeting.
SOLICITATION OF PROXIES
The costs of soliciting proxies will be borne by the Company. In
addition to this solicitation by mail, directors, officers and other
employees of the Company may solicit proxies in person or by telephone,
facsimile or otherwise, make additional requests for the return of proxies
and may receive proxies
on behalf of the Company. Brokers, nominees, fiduciaries and other custodians
will be requested to forward soliciting material to the beneficial owners of
Common Stock and will be reimbursed for their expenses.
QUORUM FOR THE MEETING; VOTES REQUIRED TO ELECT DIRECTORS AND APPROVE EACH
PROPOSAL
A quorum is necessary to conduct business at the Annual Meeting. To
reach a quorum at the Annual Meeting, at least a majority of the
outstanding shares of Common Stock eligible to vote must be represented
either in person or by proxy. Abstentions from voting and broker non-votes
will be included in determining the presence of a quorum but will not count
for voting purposes. A "broker non-vote" occurs when a broker, bank,
custodian, nominee or other record holder of shares indicates on a proxy
that it does not have discretionary authority to vote certain shares on a
particular matter.
The proposals require the following vote:
PROPOSAL NO. DESCRIPTION VOTE REQUIRED
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1 Election of Directors Plurality*
2 Approval of 2007 Stock Incentive Plan Majority
3 Ratification of Registered Public Accounting Firm Majority
<FN>
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* Under plurality voting, a director nominee with the most votes for a particular slot is elected for that
slot.
SECURITIES OWNERSHIP
PRINCIPAL SHAREHOLDERS
The following shareholders are the only persons known by the Company to
own beneficially at least five percent (5%) of its outstanding Common Stock
as of March 1, 2007:
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS(1)
- -------------- ------------------------------------ -------------------- -----------
Common Stock Candace Kendle(2)................................ 944,382 6.55%
1200 Carew Tower
441 Vine St.
Cincinnati, OH 45202
Common Stock Christopher C. Bergen(3)......................... 768,251 5.33%
1200 Carew Tower
441 Vine St.
Cincinnati, OH 45202
Common Stock Independence Investments LLC(4).................. 934,900 6.49%
160 Federal Street
Boston, MA 02110
Common Stock Thompson, Siegel & Walmsley, Inc.(4)............. 791,567 5.49%
5000 Monument Avenue
Richmond, VA 23230
Common Stock Nicholas Applegate Capital Management LLC(4)..... 721,304 5.00%
600 West Broadway, 29th Floor
San Diego, CA 92101
<FN>
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(1) For each of Dr. Kendle and Mr. Bergen, percentages for each such owner are based on the following: (i)
14,426,610 shares of Common Stock issued and outstanding as of March 1, 2007; plus (ii) shares of Common
Stock that such owner has the right to acquire within 60 days of March 1, 2007, pursuant to the exercise
of stock options. For the other beneficial owners listed in the table, the percentages listed reflect
disclosures in the Schedule 13G filed by each respective beneficial owner.
2
(2) Dr. Kendle's beneficial ownership includes: (i) 17,490 shares for which Dr. Kendle holds options
exercisable within 60 days of March 1, 2007; (ii) restricted stock awards in the amount of 20,000 shares
of Common Stock, 3,333 of which have not vested; (iii) 292,160 shares pledged as collateral with U.S.
Bank, and (iv) 4,000 shares held by the CK Family Foundation, Inc. under which Dr. Kendle serves as sole
trustee. Beneficial ownership for Dr. Kendle does not include Common Stock beneficially owned by Mr.
Bergen, Dr. Kendle's husband.
(3) Mr. Bergen's beneficial ownership includes: (i) 17,240 shares for which Mr. Bergen holds options
exercisable within 60 days of March 1, 2007; (ii) restricted stock awards in the amount of 9,500 shares
of Common Stock, 1,666 of which have not vested; (iii) 239,040 shares pledged as collateral with U.S.
Bank; and (iv) 4,000 shares held by the CCB Family Foundation, Inc. under which Mr. Bergen serves as
sole trustee. Beneficial ownership for Mr. Bergen does not include Common Stock beneficially owned by
Dr. Kendle, Mr. Bergen's wife.
(4) The information provided of Independence Investments LLC and Thompson, Siegel & Walmsley, Inc. is taken
from a Schedule 13G filed by such beneficial owner(s) with the Securities and Exchange Commission to
report Common Stock ownership as of December 31, 2006. The information provided of Nicholas Applegate
Capital Management LLC is taken from a Schedule 13G filed by such beneficial owner with the Securities
and Exchange Commission to report Common Stock ownership as of December 31, 2005. The Schedule 13G for
each respective beneficial owner(s) also included the following information with respect to the nature
of ownership of the Common Stock:
SOLE VOTING SHARED VOTING SOLE DISPOSITIVE SHARED DISPOSITIVE
BENEFICIAL OWNER POWER POWER POWER POWER
---------------- ----------- ------------- ---------------- ------------------
Thompson, Siegel & Walmsley, 650,367 141,200 791,567 0
Inc..............................
Independence Investments, LLC...... 744,100 0 934,900 0
Nicholas Applegate Capital
Management LLC................... 454,400 266,904 454,400 0
SECURITIES OWNERSHIP OF MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of Common Stock as of March 1, 2007,
by each director and Named Executive (defined in the "Executive
Compensation" section below) and by all directors and Named Executives as a
group.
NUMBER OF OPTIONS
COMMON SHARES EXERCISABLE TOTAL
BENEFICIALLY WITHIN 60 BENEFICIAL PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNED DAYS OWNERSHIP CLASS(1)
- -------------- ------------------------ ------------- ----------- ---------- ----------
Common Stock Christopher C.
Bergen(2)............... 751,011 17,240 768,251 5.33%
Common Stock Karl Brenkert III(3)...... 5,309 12,000 17,309 *
Common Stock Robert R. Buck............ 8,721 20,000 28,721 *
Common Stock G. Steven Geis............ 11,908 20,000 31,908 *
Common Stock Donald C. Harrison........ 4,351 30,000 34,351 *
Common Stock Simon S.
Higginbotham(4)......... 1,309 0 1,309 *
Common Stock Timothy E. Johnson........ 34,400 25,000 59,400 *
Common Stock Candace Kendle(5)......... 926,892 17,490 944,382 6.55%
Common Stock Frederick A. Russ......... 3,928 25,000 28,928 *
Common Stock Robert C. Simpson(6)...... 6,345 30,000 36,345 *
Common Stock All Directors and Named
Executives as a group
(10 persons)............ 1,950,904 13.52%
<FN>
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* Less than 1%
3
(1) Percentage of beneficial ownership is based on 14,426,610 shares of Common Stock outstanding as of March
1, 2007.
(2) Shares of Common Stock beneficially owned excludes: (i) Common Stock held by Dr. Kendle, Mr. Bergen's
spouse; (ii) Common Stock held by the Kendle Bryan and Mark Brettschneider Irrevocable Stock Trusts, the
beneficiaries of which are Dr. Kendle's children; and (ii) 18,236 shares of Common Stock held directly
by Hazel Kendle, Dr. Kendle's mother. Neither Dr. Kendle nor Mr. Bergen exercise voting or investment
control over the trusts for Dr. Kendle's children. This amount includes: (i) 4,000 shares of Common
Stock donated to the CCB Family Foundation, Inc.; (ii) 1,666 unvested restricted shares of Common Stock;
and (iii) 239,040 shares pledged by Mr. Bergen as security for a loan.
(3) Includes 1,000 unvested shares of Common Stock. Mr. Brenkert, 59, joined the Company in October 2002
and, upon Timothy M. Mooney's retirement effective December 31, 2002, was appointed Senior Vice
President, Chief Financial Officer and Treasurer. Mr. Brenkert was appointed as the Company's Secretary
upon Douglas W. Campbell's departure in June 2005 and formerly served as the Company's Secretary from
November 2003 until May 2004. Mr. Brenkert served as Treasurer through September 2005. Prior to Mr.
Brenkert's employment with the Company, he served as Vice President, Finance at Ryobi Technologies, Inc.
in 2001. From 1995 through 2000, Mr. Brenkert served as the Chief Financial Officer-Public
Transportation Services Division at Ryder Systems, Inc.
(4) Mr. Higginbotham, 46, joined the Company in January 2004 as Vice President and Chief Marketing Officer.
Prior to joining the Company, Mr. Higginbotham was employed by Quintiles Transnational Corp. from 1998
through 2003 in director-level roles in marketing and new business development. Prior to joining
Quintiles Transnational Corp., Mr. Higginbotham held senior-level marketing and product management
positions with Proctor & Gamble Pharmaceuticals and Schering Healthcare, Ltd.
(5) Shares of Common Stock beneficially owned excludes: (i) Common Stock held by Mr. Bergen, Dr. Kendle's
spouse; (ii) Common Stock held by the Kendle Bryan and Mark Brettschneider Irrevocable Stock Trusts, the
beneficiaries of which are Dr. Kendle's children; and (ii) 18,236 shares of Common Stock held directly
by Hazel Kendle, Dr. Kendle's mother. Neither Dr. Kendle nor Mr. Bergen exercise voting or investment
control over the trusts for Dr. Kendle's children. This amount includes: (i) 4,000 shares of Common
Stock donated to the CK Family Foundation, Inc.; (ii) 3,333 unvested shares of Common Stock; and (iii)
292,160 shares pledged by Dr. Kendle as security for a loan.
(6) Includes 400 shares of Common Stock held by Mr. Simpson's spouse. On March 7, 2007, Mr. Simpson informed
the Company of his intention not to stand for re-election at this year's Annual Meeting of Shareholders.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who beneficially own more than
ten percent (10%) of the Company's Common Stock to file reports of
ownership with the Securities and Exchange Commission (the "Commission")
and to furnish the Company with copies of these reports. Based solely upon
its review of reports received, or upon written representation from certain
reporting persons that no reports were required, the Company believes that
during 2006 all filing requirements were met.
GOVERNANCE OF THE COMPANY
BOARD OF DIRECTORS
The Board of Directors is the ultimate decision-making body of the
Company, except for matters reserved for the shareholders. The Board
selects the Company's officers to conduct the Company's business, monitors
their performance and acts as an advisor and counselor to them. The Board
also oversees succession planning efforts for senior management positions
and receives succession planning reports from management.
4
In accordance with Nasdaq rules, the Board affirmatively determines the
independence of each director and nominee for election as a director in
accordance with guidelines it has adopted, which guidelines mirror the
elements of independence set forth in Nasdaq and Securities Exchange Act
rules. The Company's Director Independence Standards are available on the
Company's Web site at www.kendle.com. Based on these standards, at its
meeting held on March 9, 2007, the Board determined that each of the
following non-employee directors is independent and has no relationship
with the Company, except as a director and shareholder of the Company:
(1) Robert R. Buck (4) Timothy E. Johnson
(2) G. Steven Geis (5) Frederick A. Russ
(3) Donald C. Harrison (6) Robert C. Simpson
The Company also maintains a Policy Statement for the Board of
Directors (the "Board Policy Statement"), which includes expectations for
Board members and a position description for Board members. All directors
are elected to one-year terms and must be re-elected by shareholders
annually.
During 2006, the Board of Directors held seven meetings and acted by
unanimous written consent on two occasions. The independent directors are
required to hold at least two executive sessions per year under the Board
Policy Statement. However, the Board's practice has been to hold executive
sessions after every quarterly Board meeting, and the Board did so in 2006.
Under the Board Policy Statement, the Chairman of the Nominating and
Corporate Governance Committee serves as Chairman of these executive
sessions. In addition to meetings and executive sessions, the Board members
participate with the Company's executive officers in a quarterly
teleconference that precedes each of the Company's quarterly earnings
releases. Directors are expected to attend the Annual Meeting of
Shareholders and all Board of Directors meetings and meetings of committees
on which they serve. During the last fiscal year, each director attended at
least seventy-five percent (75%) of the aggregate of the total number of
meetings of the Board of Directors and all committees on which he or she
served. Seven of the eight directors attended the Annual Meeting of
Shareholders in May 2006.
The Board of Directors has established three committees that assist the
Board in discharging its responsibilities: Audit Committee, Management
Development and Compensation Committee, and Nominating and Corporate
Governance Committee. The table below provides committee membership in
2006. The committees and their functions are discussed after the table. The
Board of Directors does not have an executive committee.
MANAGEMENT NOMINATING AND
DEVELOPMENT CORPORATE
NAME AUDIT AND COMPENSATION GOVERNANCE
- ---- ----- ---------------- --------------
Mr. Buck............................... X (Chair)*
Dr. Geis............................... X (Chair) X
Dr. Harrison........................... X
Dr. Johnson............................ X
Dr. Russ............................... X X (Chair)
Mr. Simpson**.......................... X X
<FN>
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* Board-designated "Audit Committee financial expert" as defined by rules of the Securities and Exchange
Commission.
** On March 7, 2007, Mr. Simpson informed the Company of his intention not to stand for re-election at this
year's Annual Meeting of Shareholders.
AUDIT COMMITTEE
During 2006, the Audit Committee met nine times. The Audit Committee is
responsible for:
* Engagement and oversight of the registered public accounting firm;
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* Supervision of matters related to audit functions;
* Review of internal policies and procedures regarding audit,
accounting and other financial controls;
* Establishment and maintenance of procedures for receipt, retention
and treatment of complaints related to accounting, internal
accounting controls or auditing matters;
* Review and, if appropriate, approval of related party transactions;
and
* Other specific responsibilities and duties that are set forth in its
Charter, which is available on the Company's Web site at
www.kendle.com.
The Audit Committee reviews and reassesses the adequacy of the Charter on
an annual basis.
Each of the members of the Audit Committee is an independent director
as defined by the Nasdaq listing standards and in accordance with the
Company's Independence Standards. Each Audit Committee member is able to
read and understand fundamental financial statements as required by Nasdaq
listing standards.
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE
During 2006, the Management Development and Compensation Committee (the
"Compensation Committee") met three times and took action by unanimous
written consent three times. Each of the Compensation Committee's members
is an independent director as defined by the Nasdaq listing standards and
in accordance with the Company's Independence Standards.
The Compensation Committee is responsible for:
* Monitoring the performance of executive officers;
* Reviewing the Company's compensation plans and policies and approving
compensation packages for executive officers;
* Approving all awards under the 1997 Stock Option and Stock Incentive
Plan;
* Administering the Company's stock-related benefit plans;
* Monitoring succession plans for senior management; and
* Addressing and discharging other responsibilities and duties that are
set forth in its Charter, which is available on the Company's Web
site at www.kendle.com.
The Compensation Committee has sole authority to approve compensation
packages for executive officers and approve awards to any Company employee
under the 1997 Stock Option and Stock Incentive Plan. The Compensation
Committee generally considers all aspects of executive officer compensation in
connection with the annual compensation review process applicable to all
Company employees, except when circumstances require additional reviews for
the executive officers. The annual review process takes place early in each
calendar year with compensation adjustments becoming effective on or about
April 1 of each year. In reviewing and approving executive officer
compensation, the Compensation Committee receives management recommendations,
which are prepared by the Company's internal compensation specialists and
reviewed by the Chief Executive Officer and the Vice President of Human
Resources. The Compensation Committee historically has worked with the
Company's internal compensation specialists and has not engaged compensation
consultants from outside the Company. The Compensation Committee also reviews
and approves all awards under the 1997 Stock Option and Stock Incentive Plan.
Management recommends these awards to the Compensation Committee, which
considers the awards on a case-by-case basis.
In overseeing the Company's compensation plans, the Compensation
Committee may delegate authority for day-to-day administration and
interpretation of such plans, including selection of participants,
determination of award levels within plan parameters, and approval of award
documents, to officers
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of the Company subject to the terms and conditions of the plan documents.
However, the Committee may not delegate any authority under those plans for
matters affecting the compensation and benefits of the executive officers.
Additional disclosure regarding the process and procedures for setting
executive compensation can be found in the section titled "Compensation
Discussion and Analysis" beginning on page 21 of this proxy statement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Management Development and Compensation Committee in
2006 were G. Steven Geis, Frederick A. Russ and Robert C. Simpson. None of
these members:
* Has ever been an officer or employee of the Company;
* Is or was a participant in any "related person" transaction in 2006
(see the following section for a description of our policy on related
person transactions); or
* Is an executive officer of another entity, at which one of our
executive officers serves on the board of directors.
No Named Executive Officer of the Company serves as a director or as a
member of a committee of any company of which any of the Company's
non-employee directors are executive officers.
REVIEW AND APPROVAL OF TRANSACTION WITH RELATED PERSONS
Kendle's Code of Ethics and Conduct requires directors and officers to
provide full disclosure of transactions involving the Company and "related
persons" (directors and executive officers or their immediate family
members, or shareholders owning five percent or greater of the company's
outstanding stock) to Kendle's Audit Committee Chairman, and all other
employees to provide full disclosure to their immediate supervisor. Certain
of Kendle's officers and other employees participate in a process involving
the periodic internal reporting of whether any related person transactions
exist. In addition, Kendle's Board follows procedures for review, approval
and monitoring of related person transactions. These procedures cover any
related person transaction that meets the minimum threshold for disclosure
in the proxy statement under the relevant Securities and Exchange
Commission rules (generally, transactions involving amounts exceeding
$120,000 in which a related person has a direct or indirect material
interest).
Related person transactions must be approved by the Board or by a
committee of the Board consisting solely of independent directors, who will
approve the transaction only if they determine that it is in the best
interests of the company. In considering the transaction, the Board or
committee may consider all relevant factors, including as applicable (i)
the Company's business rationale for entering into the transaction; (ii)
the alternatives to entering into a related person transaction; (iii)
whether the transaction is on terms comparable to those available to third
parties, or in the case of employment relationships, to employees
generally; (iv) the potential for the transaction to lead to an actual or
apparent conflict of interest and any safeguards imposed to prevent such
actual or apparent conflicts; and (vi) the overall fairness of the
transaction to the Company.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
During 2006, the Nominating and Corporate Governance Committee (the
"Nominating Committee") met two times. Each of the members of the Nominating
Committee is an independent director as defined by the Nasdaq listing
standards and in accordance with the Company's Independence Standards. The
Nominating Committee advises and makes recommendations to the Board of
Directors with respect to:
* Director candidates for election by shareholders;
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* Candidates to fill vacancies on the Board of Directors;
* Committee assignments on the Board of Directors;
* Changes in Board compensation;
* Board's director education policy; and
* Other duties that are described in more detail in its Charter, which
is available on the Company's Web site at www.kendle.com.
The Nominating Committee, in fulfilling its duties outlined above, conducts
annual evaluations to assess the effectiveness of the Board and each of its
committees.
The Nominating Committee is authorized by its charter to advise on
changes in Board compensation. The Committee reviews all factors it deems
relevant in connection with any changes in director compensation it may
recommend.
The Nominating Committee considers all potential candidates to serve on
the Board, including those potential candidates recommended for nomination
by shareholders. The Nominating Committee identifies candidates through a
variety of sources and, with Board approval, could engage a third party to
identify and evaluate candidates. Shareholders desiring to submit
recommendations for nominations by the Committee should direct them to the
Chairman of the Nominating Committee in care of the Company at its address
shown on the cover page of this Proxy Statement. Each shareholder may
nominate one candidate for election as a director at next year's Annual
Meeting of Shareholders provided the shareholder (i) is a shareholder of
the Company of record at the time of the giving of notice for the meeting,
(ii) is entitled to vote at the meeting in the election of directors, and
(iii) has given timely written notice of the nomination to the Company's
Secretary.
The Nominating Committee will assess the qualifications of all
candidates for the Board on an equal basis. In identifying and considering
candidates for nomination to the Board of Directors, the Nominating
Committee considers, among other factors, quality of experience, the needs
of the Company and the range of talent and experience currently represented
on the Board.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company are not separately
compensated for serving as directors. Directors who are not employees of
the Company receive compensation in the form of cash retainers, shares of
Common Stock and options to purchase shares of Common Stock, all of which
are described in more detail below. The Nominating Committee reviews and
makes recommendations with respect to Director compensation.
Non-employee directors are paid retainers of $3,000 for each Board
meeting attended and $1,500 for each committee meeting attended. Their
compensation is paid quarterly, in arrears, in the form of cash and shares
of Common Stock in lieu of cash under the 2003 Directors' Compensation
Plan. This plan specifies that non-employee directors will receive cash for
fifty percent (50%) of the total retainer owed and shares of Common Stock
in lieu of cash for the balance of the retainer owed.
In addition to compensation under the 2003 Directors' Compensation Plan,
directors are eligible to receive non-qualified, immediately exercisable
options to purchase shares of Common Stock under the Company's 1997 Stock
Option and Stock Incentive Plan. Under this plan, each non-employee director
is granted an option to purchase 5,000 shares of Common Stock on the date of
the director's first election or appointment to serve on the Board. Upon each
annual election to the Board thereafter, a director will receive an option to
purchase such number of shares of Common Stock, if any, as determined by the
Board. In 2006, the Board approved a grant of options to purchase 5,000 shares
of Common Stock to each non-employee director who was elected to the Board at
the 2006 Annual Meeting of Shareholders. The exercise price for these options
is the fair market value of Common Stock on the grant date. The 1997
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Stock Option and Stock Incentive Plan expires in August 2007. The Nominating
Committee expects to make a recommendation for this component of Director
compensation in connection with an ongoing review of Director compensation and
proposed adoption of a new plan.
2006 DIRECTOR COMPENSATION
CHANGE IN
PENSION VALUE
AND
FEES NONQUALIFIED
EARNED OR NON-EQUITY DEFERRED
PAID IN STOCK OPTION INCENTIVE PLAN COMPENSATION ALL OTHER
CASH AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
NAME ($) ($)(1)(2) ($)(3) ($) ($) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H)
---- --------- --------- ------- -------------- ------------- ------------ --------
Robert R. Buck...... $17,250 $17,250 $99,762 $134,262
G. Steven Geis...... $14,250 $14,250 $99,762 $128,262
Donald C.
Harrison............ $10,500 $10,500 $99,762 $120,762
Timothy E.
Johnson............. $17,250 $17,250 $99,762 $134,262
Frederick A. Russ... $12,750 $12,750 $99,762 $125,262
Robert C. Simpson
(4)................. $18,750 $18,750 $99,762 $137,262
<FN>
- ---------------
(1) The amounts shown in this column represent the dollar amount expensed at fair value for financial
statement reporting purposes with respect to fiscal year 2006, as determined pursuant to FAS 123R. Under
the 2003 Directors' Compensation Plan and its predecessor plan, director's fees are paid with a
combination of cash and shares of Company stock in lieu of cash. Aggregate stock awards at December 31,
2006, were the following:
DIRECTOR NAME AGGREGATE STOCK AWARDS
------------- ----------------------
Robert R. Buck................. 4,417
G. Steven Geis................. 3,533
Donald C. Harrison............. 4,276
Timothy E. Johnson............. 4,276
Frederick A. Russ.............. 3,828
Robert C. Simpson.............. 5,230
<FN>
(2) The grant date fair value of equity awards granted in 2006 computed in accordance with FAS 123R is set
forth in the table below. Under the 2003 Directors' Compensation Plan, these shares are issued
quarterly, in arrears, at a price equal to the average last sale price for the last ten trading days of
the quarter (e.g., "Q1 Fair Value"). The "grant date fair value" for purposes of this table is
calculated by multiplying the number of shares awarded per quarter with the closing market price of the
Company's stock on the date of grant.
9
BUCK GEIS HARRISON JOHNSON RUSS SIMPSON
---- --------- --------- --------- --------- ---------
Q1 Fair Value.......... $3,000.00 $3,000.00 $2,250.00 $3,000.00 $3,000.00 $3,750.00
Q1 Grant Date
Fair Value............. $3,044.16 $3,044.16 $2,283.12 $3,044.16 $3,044.16 $3,805.20
------------------------------------------------------------------------------------------------------
Q2 Fair Value.......... $7,500.00 $6,000.00 $4,500.00 $7,500.00 $4,500.00 $7,500.00
Q2 Grant Date
Fair Value............. $7,463.39 $5,963.57 $4,463.75 $7,463.39 $4,463.75 $7,463.39
------------------------------------------------------------------------------------------------------
Q3 Fair Value.......... $3,000.00 $2,250.00 $1,500.00 $3,000.00 $2,250.00 $3,750.00
Q3 Grant Date
Fair Value............. $2,808.60 $2,114.00 $1,419.40 $2,808.60 $2,114.00 $3,533.40
------------------------------------------------------------------------------------------------------
Q4 Fair Value.......... $3,750.00 $3,000.00 $2,250.00 $3,750.00 $3,000.00 $3,750.00
Q4 Grant Date
Fair Value............. $3,782.00 $3,050.00 $2,287.50 $3,782.00 $3,050.00 $3,782.00
<FN>
(3) The amounts shown in this column represent the dollar amount recognized for financial statement
reporting purposes with respect to fiscal year 2006, as determined pursuant to FAS 123R. A discussion of
the assumptions used in calculating these values may be found in Note 1 on page F-10 to the Company's
Annual Report on Form 10-K filed March 16, 2007. Aggregate option awards outstanding at December 31,
2006, were the following:
DIRECTOR NAME AGGREGATE OPTION AWARDS
------------- -----------------------
Robert R. Buck................ 20,000
G. Steven Geis................ 20,000
Donald C. Harrison............ 30,000
Timothy E. Johnson............ 25,000
Frederick A. Russ............. 25,000
Robert C. Simpson............. 30,000
<FN>
(4) On March 7, 2007, Mr. Simpson informed the Company of his intention not to stand for re-election at this
year's Annual Meeting of Shareholders.
PROPOSALS REQUIRING A SHAREHOLDER VOTE
ELECTION OF DIRECTORS
(ITEM 1 ON THE PROXY CARD)
The Board is nominating for election seven nominees. Each of these
nominees served as a member of the Company's Board of Directors in 2006.
All of the nominees, except Dr. Kendle and Mr. Bergen, are independent
directors as defined by Nasdaq listing standards and in accordance with the
Company's Independence Standards. All directors elected at the Annual
Meeting will hold office until the next Annual Meeting or until their
successors are elected and qualified.
Proxies will be voted in favor of election of the nominees named herein
unless authority to vote is withheld. If any of the nominees becomes unable
to accept election or declines to serve, neither of which the Board
anticipates, it is intended, in the absence of contrary direction, that the
proxies will be voted for the balance of those named above and for
substitute nominee(s) as the Board may designate. The proxies will in no
event be voted for a greater number of nominees than seven. The seven
nominees receiving the highest number of votes will be elected.
Information about the nominees is set forth below. THE BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE NOMINEES.
CANDACE KENDLE, PHARM.D., 60, co-founded the business in 1981 and has
served as the Company's Chief Executive Officer since its incorporation.
Dr. Kendle has been Chairman of the Board since 1991.
10
From 1979 through 1981, she served as Clinical Associate Professor of
Pediatrics at The University of Pennsylvania School of Medicine; Clinical
Assistant Professor at Philadelphia College of Pharmacy and Sciences; and
Director, Department of Pharmacy, The Children's Hospital of Philadelphia. She
serves as a director of H. J. Heinz Company, a food products manufacturer. She
has published more than 15 scientific articles. She is the wife of Christopher
C. Bergen, President and Chief Operating Officer of the Company.
CHRISTOPHER C. BERGEN, 56, co-founded the business in 1981 and since
the Company's incorporation has served as a director and its President and
Chief Operating Officer. From 1977 to 1981, Mr. Bergen served in various
capacities at The Children's Hospital of Philadelphia, most recently as
Associate Vice President. He is the husband of Candace Kendle, Chairman and
Chief Executive Officer of the Company.
ROBERT R. BUCK, 59, has served as a director of the Company since June
2003 and formerly served as a director of the Company from 1998 through
August 2002. Mr. Buck currently serves as President and Chief Executive
Officer of Beacon Roofing Supply, Inc. and Chairman of its Board of
Directors. From 1982 through January 2003, he served in a number of
management and senior management positions with Cintas Corporation, most
recently as President of its Uniform Rental Division. He serves as a
director of Multi-Color Corporation, a provider of decorating solutions and
packaging services.
G. STEVEN GEIS, PH.D., M.D., 55, has served as a director of the
Company since November 2002. Now retired, Dr. Geis served in a number of
management and senior management positions with Pharmacia & Upjohn Company
from 1985 to July 2002. He most recently served as Group Vice President:
Arthritis, Cardiovascular and Oncology Clinical Development from March 2001
to July 2002 and Vice President: Arthritis Clinical Development from August
1998 through March 2001. He has authored or co-authored numerous journal
articles covering several therapeutic areas.
DONALD C. HARRISON, M.D., 73, has served as a director of the Company
since November 2001. Dr. Harrison is Senior Vice President and Provost for
Health Affairs Emeritus at University of Cincinnati. He formerly served as
the Senior Vice President and Provost for Health Affairs at University of
Cincinnati from 1986 through 2002 and also served as the Chief Executive
Officer of the University of Cincinnati Medical Center. He serves as a
director of AtriCure, Inc., a medical device company. He also is a
practicing cardiologist on a part-time basis and since 2004 has been a
general partner in Charter Life Sciences, a California-based venture
capital firm for which he manages the Cincinnati office. His professional
experience includes 26 years at Stanford University School of Medicine and
Stanford University Hospital, where he was Chief of Cardiology from 1967 to
1986. He is past national President of the American Heart Association and
has served as a director for several not-for-profit organizations. He also
serves as a director for several start-up, privately owned medical device
and biotechnology companies.
TIMOTHY E. JOHNSON, PH.D., 64, has served as a director of the Company
since November 2002. Dr. Johnson is a financial and investment consultant
and has served as President of Johnson Investment Counsel, Inc. since 1965.
Johnson Investment Counsel, Inc. is a registered investment adviser and
manages portfolio assets for endowments, foundations, corporations,
individuals and pension and profit sharing plans. He also serves as a
Professor of Finance at University of Cincinnati where he has taught since
1970. He serves as a director or trustee for several civic and nonprofit
organizations. He has written several articles on investment and financial
management.
FREDERICK A. RUSS, PH.D., 62, has served as a director of the Company
since November 2002. Dr. Russ has served as the Senior Vice Provost for
University of Cincinnati since October 1, 2004. From 1994 through September
2004, he served as the Dean of the College of Business Administration at
University of Cincinnati. He serves on the Board of Directors of Charles &
Colvard, Ltd., a manufacturer and supplier of specialty jewelry, and
formerly served as its non-executive Chairman of the Board. He also serves
as a director for the Economics Center for Education & Research. He has
co-authored three textbooks and has written numerous articles on marketing
strategy and the behavior of consumers and sales personnel.
On March 7, 2007, after almost seven years as a member of the Board,
Mr. Simpson informed the Company of his intention not to stand for
re-election at this year's Annual Meeting of Shareholders. No successor to
Mr. Simpson's director position has been appointed at this time. Mr.
Simpson will continue to
11
serve as a Director and as a member of the Management Development and
Compensation Committee and the Audit Committee for the remainder of his
current term. Mr. Simpson's decision not to stand for re-election is not
attributable to any disagreement with the Company on any matter relating to
the Company's operations, policies or practices. Information about Mr. Simpson
is set forth below:
ROBERT C. SIMPSON, 75, has served as a director of the Company since
July 2001. Now retired, Mr. Simpson has more than 40 years of global drug
development experience. Most recently, he was Group President and Director
of West Pharmaceutical Services, Inc., a manufacturer of specialty
packaging products for the healthcare industry. He worked for West
Pharmaceutical from 1978 to 1991. Prior to 1978, he spent 20 years with
Pfizer Inc., serving in a number of senior management positions, including
Executive Vice President of European Operations.
APPROVAL OF 2007 STOCK INCENTIVE PLAN
(ITEM 2 ON THE PROXY CARD)
The Board recommends that shareholders approve the Company's 2007 Stock
Incentive Plan (which we refer to as the "2007 Plan"). The 2007 Plan would
govern grants of stock-based awards to employees. The Company intends that
the 2007 Plan would substantially replace the Company's 1997 Stock Option
and Stock Incentive Plan (the "1997 Plan") which expires by its terms this
year. If shareholders do not approve the 2007 Plan, Kendle intends to
continue to grant awards pursuant to the 1997 Plan until the 1997 Plan
expires. Because Kendle estimates that the 1997 Plan will expire with
approximately 1,100,000 unawarded shares, Kendle believes that the
1,000,000 shares to be reserved for issuance under the 2007 Plan will not
result in any net additional shares having to be reserved and that the
total cost to shareholders for Kendle's equity plans will not increase as a
result of the adoption of the 2007 Plan. If the 2007 Plan is approved, it
is the intention of the Board of Directors that no more than 100,000 shares
would be granted under the 1997 Plan before the Company would stop granting
awards under that plan.
All employees of the Company and its subsidiaries will be eligible to
receive awards under the 2007 Plan. The 2007 Plan is an "omnibus" stock
plan that provides for a variety of equity award vehicles to maintain
flexibility. The 2007 Plan will permit the grant of stock options, stock
appreciation rights, restricted stock awards, restricted stock units and
stock awards.
A maximum of 1,000,000 shares will be available for grants of all
equity awards under the 2007 Plan. The Board believes that this number
represents a reasonable amount of potential equity dilution and provides a
powerful incentive for employees to increase the value of the Company for
all shareholders.
The 2007 Plan does not permit the repricing of options or stock
appreciation rights without the approval of shareholders and does not
contain an "evergreen" provision to automatically increase the number of
shares issuable under the 2007 Plan, except for certain adjustments
resulting from stock splits and other specified events.
The following is a summary of the 2007 Plan. The full text of the 2007
Plan is attached as Annex I to this proxy statement, and the following
summary is qualified in its entirety by reference to Annex I.
PLAN ADMINISTRATION
The selection of employee participants in the 2007 Plan, the level of
participation of each participant and the terms and conditions of all awards
will be determined by the Compensation Committee. It is intended that each
member of the Compensation Committee will be an "independent director" for
purposes of the Nasdaq Stock Market listing requirements, a "non-employee
director" within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934 and an "outside director" within the meaning of Section 162(m) of the
Internal Revenue Code. Currently, the Compensation Committee is comprised of
three directors, each meeting all of these independence criteria. The
Compensation Committee will have the discretionary authority to interpret the
2007 Plan, to prescribe, amend and rescind rules and regulations relating to
the 2007 Plan, and to make all other determinations necessary or advisable for
12
the administration of the 2007 Plan. The Committee may delegate authority to
administer the 2007 Plan as it deems appropriate, subject to the express
limitations set forth in the 2007 Plan.
LIMITS ON PLAN AWARDS
The Board has reserved a maximum of 1,000,000 shares for issuance
pursuant to stock options, stock appreciation rights, restricted stock
awards, restricted stock units and stock awards under the 2007 Plan. A
participant may receive multiple awards under the 2007 Plan.
In 2005, 2006 and the first quarter of 2007, the Company granted
employee stock options to purchase approximately 51,500, 46,000 and 5,000
shares, respectively, under the Company's existing stock option plan. In
2006 the Company also granted awards of stock for a total of approximately
10,950 shares. In each of these years, the aggregate grant represented less
than 1% of the Company's shares outstanding at the end of each such period.
Shares delivered under the 2007 Plan will be authorized but unissued
shares of Company common stock, treasury shares or shares purchased in the
open market or otherwise. To the extent that any award payable in shares is
forfeited, cancelled, returned to the Company for failure to satisfy
vesting requirements or upon the occurrence of other forfeiture events, or
otherwise terminates without payment being made, the shares covered thereby
will no longer be charged against the maximum share limitation and may
again be made subject to awards under the 2007 Plan. Any awards settled in
cash will not be counted against the maximum share reserve under the 2007
Plan. Any shares exchanged by a participant or withheld from a participant
as full or partial payment to the Company of the exercise price or the tax
withholding upon exercise or payment of an award will not be returned to
the number of shares available for issuance under the 2007 Plan.
ELIGIBILITY AND PARTICIPATION
All of the approximately 3,050 employees of the Company and its
subsidiaries will be eligible to participate in the 2007 Plan, subject to
local requirements and restrictions in the jurisdictions in which the
Company conducts business.
TYPES OF PLAN AWARDS
The 2007 Plan would provide for a variety of equity instruments to
preserve flexibility. The types of securities that may be issued under the
2007 Plan are described below.
Stock Options
Stock options granted under the 2007 Plan may be either non-qualified
stock options or incentive stock options qualifying under Section 422 of
the Code. The price of any incentive stock option granted may not be less
than the fair market value of the Company common stock on the date the
option is granted. The option price may be paid in cash, shares of Company
common stock, through a broker-assisted cashless exercise or as otherwise
permitted by the Compensation Committee.
The Compensation Committee determines the terms of each stock option
grant at the time of the grant. Generally, all options will terminate after
a ten-year period from the date of the grant. The Committee specifies at
the time each option is granted the time or times at which, and in what
proportions, an option becomes vested and exercisable. Vesting may be based
on the continued service of the participant for specified time periods or
on the attainment of specified performance goals established by the
Committee or both. The Committee may accelerate the vesting of options at
any time.
In general, unless otherwise determined by the Committee, a stock
option expires (i) 12 months after termination of employment, if employment
ceases due to death (ii) immediately, upon the violation of any written
employment, confidentiality or noncompetition agreement between the Company
and the participant, (iii) after specified periods up to two years,
depending upon the term of service of the participant
13
with the Company and its subsidiaries, upon disability or retirement, or (iv)
90 days from the date of termination of employment for other reasons as
described in the 2007 Plan.
Stock Appreciation Rights
A stock appreciation right (which we refer to as an SAR) entitles the
participant, upon settlement, to receive a payment based on the excess of
the fair market value of a share of Common Stock on the date of settlement
over the base price of the right, multiplied by the applicable number of
shares of Company common stock. SARs may be granted on a stand-alone basis
or in tandem with a related stock option. The base price may not be less
than the fair market value of a share of Company common stock on the date
of grant. The Compensation Committee will determine the vesting
requirements and the payment and other terms of an SAR, including the
effect of termination of service of a participant. Vesting may be based on
the continued service of the participant for specified time periods or on
the attainment of specified performance goals established by the Committee
or both. The Committee may accelerate the vesting of SARs at any time.
Generally, all SARs will terminate after the ten-year period from the date
of the grant. SARs may be payable in cash or in shares of Company common
stock or in a combination of both.
Restricted Stock
A restricted stock award represents shares of Company common stock that
are issued subject to restrictions on transfer and vesting requirements as
determined by the Compensation Committee. Vesting requirements may be based
on the continued service of the participant for specified time periods or
on the attainment of specified performance goals established by the
Committee or both. Subject to the transfer restrictions and vesting
requirements of the award, the participant will have the same rights as one
of the Company's shareholders, including all voting and dividend rights,
during the restriction period, unless the Committee determines otherwise at
the time of the grant.
Stock Units
An award of stock units provides the participant the right to receive a
payment based on the value of a share of Common Stock. Stock units may be
subject to such vesting requirements, restrictions and conditions to
payment as the Compensation Committee determines are appropriate. Vesting
requirements may be based on the continued service of the participant for a
specified time period or on the attainment of specified performance goals
established by the Committee or both. A stock unit award also may be
granted on a fully vested basis, with a deferred payment date. Stock unit
awards are payable in cash or in shares of Common Stock or in a combination
of both. Stock units also may be granted together with related dividend
equivalent rights.
Stock Awards
A stock award represents shares of Common Stock that are issued free of
restrictions on transfer and free of forfeiture conditions and as to which
the participant is entitled to all the rights of a shareholder. A stock
award may be granted for past services, in lieu of bonus or other cash
compensation, or for any other valid purpose as determined by the
Compensation Committee.
Director Awards
The 2007 Plan grants the Committee the discretion to determine the nature
and amount of awards under the 2007 Plan that may be granted to directors who
are not otherwise employees of the Company from time to time and at the
following times: upon the date on which a person first becomes a director
whether by election or appointment; and upon each annual election as a
director thereafter.
14
EFFECT OF CHANGE IN CONTROL
Awards under the 2007 Plan are generally subject to acceleration,
becoming exercisable in full upon the occurrence of a "change in control"
(as defined in the 2007 Plan) transaction with respect to the Company.
LIMITED TRANSFERABILITY
Except as otherwise provided in the 2007 Plan, all awards granted under
the 2007 Plan are nontransferable except upon death or under a qualified
domestic relations order, or in the case of nonqualified options only,
during the participant's lifetime to immediate family members of the
participant and others as may be approved by the Compensation Committee.
ADJUSTMENTS FOR CORPORATE CHANGES
In the event of recapitalizations, reclassifications or other specified
events affecting the Company or shares of Common Stock, appropriate and
equitable adjustments may be made to the number and kind of shares of
Common Stock available for grant, as well as to other maximum limitations
under the 2007 Plan, and the number and kind of shares of Common Stock or
other rights and prices under outstanding awards.
TERM, AMENDMENT AND TERMINATION
The 2007 Plan will have a term expiring on the tenth anniversary of its
effective date, unless terminated earlier by the Board of Directors. The
Board may at any time and from time to time and in any respect amend or
modify the Plan. The Board may seek the approval of any amendment or
modification by the Company's shareholders to the extent it deems necessary
or advisable in its sole discretion for purposes of compliance with Section
162(m) or Section 422 of the Code, the listing requirements of the Nasdaq
Stock Market or another exchange or securities market or for any other
purpose. No amendment or modification of the 2007 Plan will adversely
affect any outstanding award without the consent of the participant or the
permitted transferee of the award.
PLAN BENEFITS
Future benefits under the 2007 Plan are not currently determinable.
During fiscal 2006, the Named Executive Officers received no stock options
under the 1997 Plan and awards of Common Stock as set forth in the table
captioned "Grants of Plan-Based Awards" on page 28 below. Stock options
were granted to all other employees of the Company as a group to purchase
16,000 shares of Common Stock at an weighted average exercise price of
$30.39 per share.
15
NEW PLAN BENEFITS
Because awards under the 2007 Plan will be made in the sole discretion
of the Management Development and Compensation Committee, it cannot be
determined at this time what benefits or amounts, if any, will be received
by or allocated to any person or group of persons under the 2007 Plan.
NEW PLAN BENEFITS
2007 STOCK INCENTIVE PLAN
NUMBER OF UNITS
-------------------------------
NAME AND POSITION DOLLAR VALUE ($)(1) STOCK OPTIONS STOCK AWARDS
----------------- ------------------- ------------- ------------
Dr. Candace Kendle, Chairman and Chief
Executive Officer............................ $131,817 0 4,200
Christopher C. Bergen, President and Chief
Operating Officer............................ $ 78,463 0 2,500
Simon S. Higginbotham, Vice President and Chief
Marketing Officer............................ $ 62,770 0 2,000
Karl Brenkert, III, Senior Vice President,
Chief Financial Officer and Secretary........ $ 62,770 0 2,000
Executive Group................................ $335,820 0 10,700
Non-Executive Director Group................... -- 30,000 0
Non-Executive Officer Employee Group........... $ 7,846 16,000 250
<FN>
- ---------------
(1) The amounts to be paid for 2007 are undeterminable. The above represents amounts awarded for 2006. The
dollar value of the benefits or amounts received by the eligible participants from stock options under
the Plan cannot be determined at this time because that value will be determined on the date the options
are exercised.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (A)(1) (B) (C)
------------- -------------------------- -------------------- -------------------------
Equity compensation plans
approved by security
holders.................... 797,597 $11.55 1,216,975
Equity compensation plans not
approved by security
holders.................... -- -- --
Total................... 797,597 $11.55 1,216,975
<FN>
- ---------------
(1) Excludes the 2003 Directors' Compensation Plan under which no options, warrants or rights are granted.
This plan has been approved by shareholders for up to 75,000 shares.
TAX TREATMENT OF AWARDS
Incentive Stock Options
An incentive stock option results in no taxable income to the optionee
or deduction to the Company at the time it is granted or exercised.
However, the excess of the fair market value of the shares acquired
over the option price is an item of adjustment in computing the alternative
minimum taxable income of the optionee. If the optionee holds the stock
received as a result of an exercise of an incentive stock option for
16
at least two years from the date of the grant and one year from the date of
exercise, then the gain realized on disposition of the stock is treated as a
long-term capital gain. If the shares are disposed of during this period,
however, (i.e., a "disqualifying disposition"), then the optionee will include
in income, as compensation for the year of the disposition, an amount equal to
the excess, if any, of the fair market value of the shares, upon exercise of
the option over the option price (or, if less, the excess of the amount
realized upon disposition over the option price). The excess, if any, of the
sale price over the fair market value on the date of exercise will be a
capital gain. In such case, the Company will be entitled to a deduction, in
the year of such a disposition, for the amount includible in the optionee's
income as compensation. The optionee's basis in the shares acquired upon
exercise of an incentive stock option is equal to the option price paid, plus
any amount includible in his or her income as a result of a disqualifying
disposition.
Non-Qualified Stock Options
A non-qualified stock option results in no taxable income to the
optionee or deduction to the Company at the time it is granted. An optionee
exercising such an option will, at that time, realize taxable compensation
in the amount of the difference between the option price and the then
market value of the shares. Subject to the applicable provisions of the
Code, a deduction for federal income tax purposes will be allowable to the
Company in the year of exercise in an amount equal to the taxable
compensation recognized by the optionee.
The optionee's basis in such shares is equal to the sum of the option
price plus the amount includible in his or her income as compensation upon
exercise. Any gain (or loss) upon subsequent disposition of the shares will
be a long-term or short-term gain (or loss), depending upon the holding
period of the shares.
If a non-qualified option is exercised by tendering previously-owned
shares of the Company's common stock in payment of the option price, then,
instead of the treatment described above, the following generally will
apply: a number of new shares equal to the number of previously owned
shares tendered will be considered to have been received in a tax-free
exchange; the optionee's basis and holding period for such number of new
shares will be equal to the basis and holding period of the previously-
owned shares exchanged. The optionee will have compensation income equal to
the fair market value on the date of exercise of the number of new shares
received in excess of such number of exchanged shares; the optionee's basis
in such excess shares will be equal to the amount of such compensation
income; and the holding period in such shares will begin on the date of
exercise.
Stock Appreciation Rights
Generally, the recipient of a stand-alone SAR will not recognize
taxable income at the time the stand-alone SAR is granted. If an employee
receives the appreciation inherent in the SARs in cash, the cash will be
taxed as ordinary income to the employee at the time it is received. If an
employee receives the appreciation inherent in the SARs in stock, the
spread between the then current market value and the base price will be
taxed as ordinary income to the employee at the time it is received. In
general, there will be no federal income tax deduction allowed to the
Company upon the grant or termination of SARs. However, upon the settlement
of an SAR, the Company will be entitled to a deduction equal to the amount
of ordinary income the recipient is required to recognize as a result of
the settlement. The federal income tax treatment of SARs may be effected
beginning in 2007 by recently enacted changes in the Internal Revenue Code.
Other Awards
The current United States federal income tax consequences of other awards
authorized under the 2007 Plan are generally in accordance with the following:
(i) restricted stock is generally subject to ordinary income tax at the time
the restrictions lapse, unless the recipient elects to accelerate recognition
as of the date of grant; (ii) stock unit awards are generally subject to
ordinary income tax at the time of
17
payment, and (iii) unrestricted stock awards are generally subject to ordinary
income tax at the time of grant. In each of the foregoing cases, the Company
will generally be entitled to a corresponding federal income tax deduction at
the same time the participant recognizes ordinary income.
Section 162(m)
Compensation of persons who are "covered employees" of the Company is
subject to the tax deduction limits of Section 162(m) of the Code. Awards
that qualify as "performance-based compensation" are exempt from Section
162(m), thus allowing the Company the full federal tax deduction otherwise
permitted for such compensation. If approved by the Company's shareholders,
the 2007 Plan is intended to enable the Compensation Committee to grant
awards to covered employees that will be exempt from the deduction limits
of Section 162(m). However, no assurances can be made in this regard.
Section 409A
Section 409A to the Internal Revenue Code ("Section 409A") applies to
compensation vested or deferred after December 31, 2004. Generally
speaking, an amount is "vested" on the date that the employee's right to
receive the amount is no longer conditioned on the employee's performance
of substantial future services, and "deferred compensation" is compensation
earned currently, the payment of which is deferred to a later taxable year.
Although final IRS regulations regarding Section 409A are not yet
available, Section 409A may apply to non-qualified stock options,
restricted stock units, performance share awards and other awards under the
2007 Plan. The provisions of the 2007 Plan have been drafted to be in good
faith compliance with Section 409A as interpreted under the guidance
currently available. However, no assurances can be made in this regard as
the Compensation Committee shall have discretion under the 2007 Plan to
grant awards to which Section 409A may apply.
On March 22, 2007, the closing price of our common stock traded on the
Nasdaq Global Select Market was $32.59 per share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
RESOLVED, that the Company be and hereby is authorized and directed
to adopt the 2007 Stock Incentive Plan in the form provided to
Shareholders at the 2007 Annual Meeting of Shareholders.
RATIFICATION OF APPOINTMENT OF REGISTERED PUBLIC ACCOUNTING FIRM
(ITEM 3 ON THE PROXY CARD)
The Audit Committee of the Company's Board of Directors reappointed
Deloitte & Touche LLP as the Company's registered public accounting firm
for 2007. Although not required by law, the Board of Directors is seeking
shareholder ratification of this appointment. If ratification is not
obtained, the Board of Directors intends to continue the engagement of
Deloitte & Touche LLP at least through 2007. However, the Audit Committee,
in its discretion, may engage a different registered public accounting firm
at any time during the year if the Audit Committee determines that a change
would be in the best interest of the Company. The affirmative vote of a
majority of shares voting at the Annual Meeting is required for
ratification.
Representatives of Deloitte & Touche LLP are expected to be present at
the Annual Meeting and will be given an opportunity to comment, if they so
desire, and to respond to appropriate questions that may be asked by
shareholders.
FEES PAID TO REGISTERED PUBLIC ACCOUNTING FIRM
The Company incurs costs for professional services rendered by its
registered public accounting firm as follows:
18
* AUDIT FEES - These are fees for professional services rendered by the
Company's registered public accounting firm for its audit of the
Company's consolidated annual financial statements; statutory audits
of the Company's foreign operations; and reviews of the unaudited
quarterly consolidated financial statements contained in the
Quarterly Reports on Form 10-Q filed by the Company during those
years.
* AUDIT-RELATED FEES - These are fees for assurance and related
services that are reasonably related to the performance of the audit
or review of the Company's financial statements. Audit-related
services primarily include audits of the Company's employee benefit
plans.
* TAX FEES - These are fees for services related to tax compliance, tax
advice and tax planning, including compliance, planning and advice
with respect to both domestic and foreign subsidiaries of the
Company.
* ALL OTHER FEES - These are fees for permissible services other than
those in the three categories previously described.
The table below sets forth fees paid by the Company for professional
services billed by the registered public accounting firm for each of the
last two fiscal years. These fees are described in more detail following
the table.
2006 2005
---------- --------
Audit Fees.................................................. $ 976,692 $783,698
Audit-Related Fees.......................................... $ 13,500 $ 12,000
Tax Fees(1)................................................. $ 61,339 $ 61,412
All Other Fees(2)........................................... $ 113,014 $ 17,250
---------- --------
Total................................................... $1,164,545 $874,360
========== ========
<FN>
- ---------------
(1) In 2005 and 2006, tax compliance services comprised $56,126 and $61,339,
respectively, of the tax fees billed.
(2) In 2005, these fees primarily related to compliance with local
requirements for the Company's non-U.S. subsidiaries. In 2006,
approximately $32,000 related to acquisition-related advice, and the
remainder related to compliance with local requirements for the Company's
non-U.S. subsidiaries.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee pre-approves all audit, audit-related, tax and
other permissible services that will be provided by the registered public
accounting firm. To manage the pre-approval process, the Audit Committee in
2004 adopted a Policy on Approval of Audit and Non-Audit Services Provided
by Outside Auditors (the "Pre-Approval Policy"). One hundred percent (100%)
of services rendered by the registered public accounting firm in 2006 were
pre-approved by the Audit Committee.
Under the Pre-Approval Policy, the registered public accounting firm is
required to provide the Audit Committee with detailed documentation about the
specific services that will be provided. In reviewing the request for
pre-approval, the Audit Committee will consider, among other things, whether
the proposed services are consistent with the rules on auditor independence. A
service pre-approved by the Audit Committee is valid for a term of 12 months
unless the Committee considers a different approval term and approves
otherwise. Any services exceeding pre-approved cost levels or budgeted amounts
will require separate pre-approval by the Audit Committee. The Pre-Approval
Policy prohibits the Audit Committee from engaging the registered public
accounting firm to render services that are prohibited by the Public Companies
Accounting Oversight Board or the applicable rules and regulations promulgated
by the Securities and Exchange Commission.
19
The Pre-Approval Policy permits the Audit Committee to appoint a
designated committee member to approve certain services. A designated
member's pre-approval of services is required to be reported to the Audit
Committee at the ensuing Audit Committee meeting. The Pre-Approval Policy
prohibits the Audit Committee from delegating its pre-approval
responsibilities to the Company's management.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee ("we" or "the committee"), in accordance with its
written charter adopted by the Company's Board of Directors, assists the
Board in fulfilling its responsibility for oversight of the quality and
integrity of the accounting, auditing and financial reporting practices of
the Company. During 2006, we met and held discussions with management and
the independent auditors. Management represented to us that the company's
consolidated financial statements were prepared in accordance with
generally accepted accounting principles, and we have reviewed and
discussed the audited financial statements and related disclosures with
management and the independent auditors, including a review of the
significant management judgments underlying the financial statements and
disclosures.
We also discussed with management and the registered public accounting
firm the quality and adequacy of the Company's internal controls. In a
meeting with the registered public accounting firm, we reviewed the audit
plans and audit scope and identified audit risks.
The Audit Committee discussed and reviewed with the independent
auditors the matters required to be discussed by the statement of Auditing
Standards No. 61, as amended, ("Communication with Audit Committees"),
including the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity of
the disclosures in the financial statements. In addition, we have received
the written disclosures and the letter from the independent auditors
required by the Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and have discussed with the independent
auditors the auditors' independence from the Company and its management. In
concluding that the auditors are independent, we determined, among other
things, that the nonaudit services provided by Deloitte & Touche LLP were
compatible with their independence.
Based on the above-mentioned review and discussions with management and
the independent auditors, the committee recommended to the Board that the
Company's audited consolidated financial statements be included in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for
filing with the Securities and Exchange Commission. The committee also
reappointed Deloitte & Touche LLP as the Company's registered public
accounting firm for 2007. The Board concurred with both of these
recommendations.
Submitted by the Audit Committee of the
Board of Directors
Robert R. Buck
Timothy E. Johnson
Robert C. Simpson
The Audit Committee Report does not constitute soliciting material and
shall not be deemed to be filed or incorporated by reference into any other
Company filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent the
Company specifically incorporates the Audit Committee Report by reference
therein.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL:
RESOLVED, that the Audit Committee's appointment of Deloitte & Touche
LLP as the Company's registered public accounting firm to conduct the
annual audit of the Company's financial statements for the fiscal year
ending December 31, 2007, be and hereby is ratified and approved.
20
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
OBJECTIVES
The Company's executive compensation program is designed to attract and
retain highly qualified officers and to maximize shareholder value through
rewarding and recognizing the Named Executive Officers listed in the
Summary Compensation Table for both individual contributions and overall
Company performance. The program, which includes objective and subjective
criteria, aligns compensation for Named Executive Officers with the
achievement of strategic business goals that promote the long-term
financial growth of the Company.
Under the direction of the Company's Chief Executive Officer, the
Company has implemented and continues to refine the Kendle Performance
System. The Kendle Performance System includes a performance tracking
system that measures the Company's business performance against
pre-established corporate imperatives in four functional areas - finance,
customer, operations and personnel - and several metrics and indicators
within each of these functional areas. The Named Executive Officers and all
other employees throughout the Company maintain responsibility for
scorecards created using the metrics within each of the functional areas.
Scorecard results from lower management levels impact the scorecards for
the Named Executive Officers and the top-level scorecard, for which the
Chairman and CEO is responsible. The Company's management believes that
success in each of the functional areas is interrelated and that the
metrics tracked under each of the functional areas are designed to promote
success in the functional area and enhance achievement of metrics in other
functional areas. For example, employee retention promotes customer
satisfaction and sales growth and affects operating margin through
efficiency. With respect to the top-level scorecard, for which the Chairman
and CEO is responsible, sample metrics under each of the functional areas
are as follows:
FUNCTIONAL AREA SAMPLE METRICS AND INDICATORS FOR 2006*
- --------------- ------------------------------------------------------------
Finance........ Revenue Growth, Overhead, Operating Margin, Earnings Per
Share
Customer....... Sales Growth, Proposal Hit Rate, Sales per Therapeutic Area
Operations..... Utilization, Milestone Achievements for Customers, Standards
Compliance, Customer Satisfaction, Customer Loyalty
Personnel...... Employee Recruitment, Employee Retention, Development
Training, Organizational Development, Career/Succession
Planning
<FN>
- ---------------
* Metrics and indicators are revised as necessary to track business
performance against imperatives in the four functional areas.
The Board, as well as the Management Development and Compensation
Committee (the "Compensation Committee"), regularly reviews the scorecards
for the Named Executive Officers. During these reviews, the Named Executive
Officers report on action plans to address any metrics that are not being
achieved. Achievement by a Named Executive Officer of any or all applicable
metrics does not result directly in any specific compensation adjustments,
cash bonus or equity awards. However, achievement of metrics is considered
with other factors when the Compensation Committee considers compensation
adjustments, cash bonus or other awards.
ELEMENTS OF NAMED EXECUTIVE OFFICER COMPENSATION
The key elements of the Company's executive compensation program consist
of base salary and bonus. Named Executive Officers also are eligible for
equity awards, including stock options and awards of Common Stock, under the
1997 Stock Option and Stock Incentive Plan and receive awards under this plan
from time to time. Each of these elements is discussed below.
21
Base Salary
The Company's management and the Compensation Committee believe that
base compensation is an important component in attracting and retaining key
talent that contributes to the long-term success of the Company. The
Compensation Committee may determine to adjust base compensation of Named
Executive Officers for performance reasons or due to market factors. The
Company competes in a highly-competitive market for talent, so market
pressures are monitored regularly. The competition includes a wide range of
companies in the biopharmaceutical industry, including the Company's
competitors and biopharmaceutical companies. Qualified employees and Named
Executive Officers to lead the Company are imperative to meet Company
objectives and manage growth. Company objectives and growth management
issues including the following:
* Pursuit of larger project awards from customers who are seeking
worldwide capabilities from service providers;
* Continued expansion of the Company's geographic coverage to meet
customer demands;
* Expansion of the Company's workforce from approximately 1,900
employees at December 31, 2005 to approximately 3,050 employees at
December 31, 2006;
* Continued growth in Company sales and revenues; and
* Emphasis on continued improvement in the Company's operating margins
through process improvements.
The Compensation Committee generally reviews compensation, including
base salary, of the Named Executive Officers at a meeting held in February
or March of each year with adjustments, if any, becoming effective with the
pay period beginning on or about April 1. This schedule aligns with the
Company-wide compensation review process. During these reviews, the
Compensation Committee considers both merit increases and potential market
adjustments and reviews management's recommendations against the pay
practices for executive officers of comparable companies, including
available data from the Company's direct competitors. The Compensation
Committee and management over the past several reviews identified a
shortfall between the Company's compensation practices, including
specifically base compensation, versus pay practices indicated through
market data. In early 2006, the Compensation Committee met with management
for the annual compensation review and discussed the historical and ongoing
shortfall affecting the ability to attract and retain Named Executive
Officers. The Compensation Committee and management further discussed how
this shortfall created a Company-wide salary compression issue that
negatively affected hiring and retention of key employees and managers
necessary to achieve the Company's growth and objectives discussed above.
At that meeting, the Compensation Committee agreed to address the matter
later in 2006 and, at meetings held in August and November 2006, reviewed
the following compensation data provided by compensation specialists from
the Company's Human Resources department:
* Median base salary data reported for approximately 114 biotech
companies with 150-499 employees;
* Median base salary data reported for approximately 157 biotech
companies with 500 or more employees;
* Median base salary data reported for biotech companies with revenues
from $200 million to $999 million; and
* Publicly available information from the Company's direct competitors,
which include Covance, Inc., Omnicare, Inc., Pharmaceutical Product
Development, Inc., Parexel, and PRA International.
The Compensation Committee and management selected the above data for two
primary reasons. First, the biotech industry represents the source of a
majority of the Company's employee candidates, including the Named Executive
Officers. The Company's primary business is clinical drug development,
22
and a substantial number of the Company's employees must have experience in
this area. The Named Executive Officers are expected to attract, manage and
retain employees in this particular line of business. Second, the data cuts
are chosen based on available data cuts from the third party source of the
data. The Company has approximately 3,050 employees, a number greater than the
smaller data cut of 150-499 employees, but management and the Compensation
Committee recognized that the Company's employee base is not as large as many
of the companies included in the data cut for companies with greater than 500
employees. Management and the Compensation Committee then examined an average
of the median compensation for the two data cuts. Management and the
Compensation Committee did not feel that the number of reporting companies in
the data cut based on revenue and the number of direct competitors that
publicly report compensation data yielded a statistically meaningful number.
However, management and the Compensation Committee used this data as an
additional source of information.
During the Compensation Committee's 2006 compensation review, the
Committee also reviewed all components of compensation, including base pay,
cash bonus opportunities, and other incentives in the form of stock
options, and other equity awards, and considered performance factors,
including information from the performance scorecards. During this review,
the Compensation Committee determined that the performance metrics were
being substantially achieved by each of the Named Executive Officers and
approved market adjustments to the salaries of the Named Executive Officers
to increase base salaries to the average of the median salaries reported in
the salary survey. The Compensation Committee determined that this
adjustment addressed issues related to recruitment and retention of Named
Executive Officers and eased salary compression issues. The Compensation
Committee further determined that this adjustment maintained incentives for
the Named Executive Officers to perform at a high level to achieve
performance bonus awards based on Company performance.
Bonus
The Company's management believes that incentive compensation through
cash bonuses creates a powerful incentive for the Company's employees,
including the Named Executive Officers, to achieve goals that promote the
long-term success of the Company. The Company's management designed a bonus
opportunity that requires both Company success and individual performance.
As discussed in more detail below, Company success is defined by operating
margin. Achievement of a target operating margin is a prerequisite to the
determination of a bonus pool and bonus availability for any of the
Company's employees, including Named Executive Officers. However,
individual contributions of the Named Executive Officers are an important
factor in determining such individual's bonus awards.
The Company's employees are assigned target awards, expressed as a
percentage of base salary, that are payable upon achievement of applicable
performance criteria and subject to the discretion of the Company's
management or, with respect to Named Executive Officers, the Compensation
Committee. The Chairman and Chief Executive Officer and the President and
Chief Operating Officer have target bonus opportunities of 45% and 40% of
base salary, respectively. The remaining Named Executive Officers have
target bonus opportunities of 30% of base salary. Employees throughout the
Company also
23
are assigned target bonus opportunities based on position level. The
aggregate, maximum bonus opportunity for all Company employees for a full
fiscal year represents the target bonus pool for the Company. The Company's
operating margin determines the actual bonus pool as follows:
PERIOD-END OPERATING % OF TARGET BONUS POOL
MARGIN(1) AVAILABLE(2)
- -------------------- ----------------------
10%................. 30%
11%................. 40%
12%................. 50%
13%................. 60%
14%................. 70%
15%................. 80%
16%................. 90%
17%................. 100%
<FN>
- ---------------
(1) At the discretion of the Company and the Board, bonuses may be made
available at only year-end or at other increments, such as semi-annually
as discussed below. Additionally, the period-end operating margin may be
adjusted at the discretion of the Board of Directors, with
recommendations from management, based on certain one-time charges.
(2) The target bonus pool represents the aggregate, maximum bonus opportunity
for all Company employees for a full fiscal year. If bonuses are made
available in other increments, such as semi-annually, the target bonus
pool is adjusted for each payout.
The Company's management selected operating margin as the primary
factor for the actual bonus pool because operating margin is a primary
indicator of the financial success of the Company's operations, and allows
the Company to compare its financial performance to the financial
performance of its competitors. These operating margin targets were
selected after reviewing performance of the Company's competitors and the
past performance of the Company. Management believes that achievement of a
17% operating margin would make the Company's performance consistent with
or better than the top-performing companies in the industry. However, no
bonus awards are available if the operating margin is less than 10%, which
management deems to be outside the range of acceptable performance. The
Company's management intends to reevaluate and, if necessary, adjust these
operating margin targets as suggested by competitor performance and Company
performance.
After the actual bonus pool is calculated and approved by the Board,
the Company's management awards cash bonuses to each of the Company's
employees, and the Compensation Committee reviews and approves cash bonus
awards to the Named Executive Officers. Using performance scorecards and
other subjective factors, management awards a bonus to any given employee
subject to the performance of that employee's business unit and based on
that employee's performance. For Named Executive Officers, the Chairman and
Chief Executive Officer prepares bonus recommendations based on criteria
used to award bonuses to Company employees. The Compensation Committee
reviews these recommendations and determines whether to approve the
recommended bonuses after reviewing both Company performance and individual
performance. In all cases, a bonus payout to any employee, including any
Named Executive Officer, is discretionary. Named Executive Officers have no
separate bonus pool and are paid out of the actual bonus pool. The Company
does not have a plan that mandates any particular bonus payouts for any of
the Named Executive Officers.
In 2005 and 2006, the Company's management with the approval of the Board
determined to make bonus opportunities available to employees, including the
Named Executive Officers, twice per year to reward employees closer to the
time of performance. Mid-year bonuses are based on the same criteria discussed
above and subject to Company performance through the first six months of the
calendar year. Payouts for mid-year bonuses occur in August or September.
Full-year bonuses are based on individual and Company performance for the
entire calendar year and are paid after the close of the calendar year. If
24
mid-year bonuses are paid, the bonus pool for each payout is adjusted by
dividing the target bonus pool by two. The mid-year bonus is not intended to
materially increase the yearly bonus pool. However, none of the Company's
employees, including the Named Executive Officers, is required to disgorge any
mid-year bonus compensation if the Company's performance during the second
half of the year would be insufficient for a year-end bonus payout. The
Company is under no obligation to employees, including the Named Executive
Officers, to make a mid-year or other bonus opportunity available.
Stock Options, Restricted Stock Awards and Other Performance Awards
Under the Company's 1997 Stock Option and Stock Incentive Plan, the
Compensation Committee may grant stock options, restricted and unrestricted
stock awards and other performance awards to the Company's employees,
including the Named Executive Officers. Neither this plan nor any other
compensation arrangements mandate any specific awards for Named Executive
Officers. Because this plan expires in August 2007, Kendle is asking
shareholders to adopt the 2007 Stock Incentive Plan described above.
The Compensation Committee believes that equity and option awards align
the focus of employees, including the Named Executive Officers, with the
interests of shareholders. On the recommendation of management on a
case-by-case basis, the Compensation Committee has made equity awards and
granted stock options to Named Executive Officers for recruiting and
retention purposes. In particular, the Compensation Committee has approved
awards in connection with the recruitment of Mr. Brenkert and Mr.
Higginbotham. Furthermore, the Compensation Committee approved restricted
stock and other equity awards to the Named Executive Officers to make their
compensation packages competitive. The Compensation Committee and
management also recognize that each of Dr. Kendle and Mr. Bergen hold over
5% of the outstanding shares of the Company and that their interests
inherently are aligned with shareholders. Therefore, the Compensation
Committee and management have not made stock option grants and other equity
awards a substantial component of compensation for these two individuals.
Generally, the practice of the Compensation Committee is to make stock
option awards to the Named Executive Officers once per year, and to other
eligible employees once per quarter. The date of the award corresponds with
the date of the Committee meeting, or if no meeting is scheduled, the date
by which the last signature of an action by written consent is received.
Under the current plans, stock options are granted with an exercise price
equal to the average of the high and low trading prices on the date of the
award.
Tax Considerations
Section 162(m) of the Internal Revenue Code places a limit of
$1,000,000 on the amount of compensation that the Company may deduct in any
one year with respect to each Named Executive Officer. There is an
exception to the $1,000,000 limitation for performance-based compensation
meeting certain requirements. The Company's 1997 Stock Option and Stock
Incentive Plan is designed to qualify under the compensation requirements
of this provision. The Compensation Committee believes that compensation
paid to the Named Executive Officers for 2006 is properly deductible under
Section 162(m); however, no assurance can be made in this regard.
Except to the extent specifically provided otherwise by the Compensation
Committee, compensation paid to the Company's Named Executive Officers is
intended to satisfy the requirements of Section 409A (and the Treasury
Department guidance and regulations issued thereunder) to avoid the imposition
of any additional taxes or penalties under Section 409A. If the Compensation
Committee determines that an award, award agreement, payment, distribution,
deferral election, transaction or any other action or arrangement would, if
undertaken, cause a recipient to become subject to any additional taxes or
other penalties under Section 409A, then unless the Compensation Committee
specifically provides otherwise, such award, award agreement, payment,
distribution, deferral election, transaction or other action or arrangement
shall not be given effect to the extent it causes such result and the related
provisions of the award agreement will be deemed modified, or, if necessary,
suspended in order to comply with the
25
requirements of Section 409A to the extent determined appropriate by the
Compensation Committee, in each case without the consent of or notice to the
recipient.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with
management. Based on these reviews and discussions, the Compensation
Committee recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in the Company's proxy statement on
Schedule 14A.
Submitted by the Management Development and
Compensation Committee of the Board of Directors
G. Steven Geis
Frederick A. Russ
Robert C. Simpson
26
SUMMARY COMPENSATION TABLE
The following table summarizes the aggregate compensation paid or
earned by each of the named executive officers for the fiscal year ended
December 31, 2006. Such compensation includes amounts paid by the Company
for the years indicated. Bonuses are for the year shown, regardless of when
paid.
ALL
OTHER
STOCK OPTION COMPEN-
SALARY BONUS AWARDS AWARDS SATION(4) TOTAL
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(2) ($)(2) ($) ($)
(A) (B) (C) (D) (E) (F) (I) (J)
--------------------------- ---- -------- ----- -------- ------- --------- --------
Dr. Candace Kendle............... 2006 $383,259 (1) $141,038 $17,162 -- $541,459
Chairman and Chief Executive
Officer (Principal Executive
Officer)
Christopher C. Bergen............ 2006 $328,083 (1) $ 83,075 $17,162 $16,616(3) $444,936
President and Chief Operating
Officer
Simon S. Higginbotham............ 2006 $240,596 (1) $ 62,770 $13,631 -- $316,997
Vice President and Chief
Marketing Officer
Karl Brenkert III................ 2006 $230,065 (1) $ 65,537 $11,853 -- $307,455
Senior Vice President,
Chief Financial Officer and
Secretary (Principal Financial
Officer)
<FN>
- ---------------
(1) The amounts to be shown in the Bonus column are the amounts earned, but which have not been determined
by the Compensation Committee at the time of the preparation of this table. We expect that the amounts
to be shown in the Bonus column will be determined in the beginning of the second quarter of 2007, and
we will then disclose such amounts on a Current Report on Form 8-K within four business days of the
determination.
(2) The amounts in columns (e) and (f) reflect the dollar amount recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123R, for stock
awards and stock option awards, respectively. Assumptions used in the calculation of these amounts are
included in Note 1 to the Company's audited financial statements for the fiscal year ended December 31,
2006, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 16, 2007.
(3) Amount represents the expense to the Company for life insurance premiums.
27
GRANTS OF PLAN-BASED AWARDS
ALL ALL OTHER
ESTIMATED FUTURE ESTIMATED FUTURE OTHER OPTION
PAYOUTS UNDER PAYOUTS UNDER STOCK AWARDS:
NON-EQUITY INCENTIVE EQUITY INCENTIVE AWARDS: NUMBER OF EXERCISE GRANT DATE
PLAN AWARDS PLAN AWARDS NUMBER SECURITIES OR BASE FAIR VALUE
---------------------- ---------------------- OF SHARES UNDER- PRICE OF OF STOCK
THRESH- MAXI- THRESH- MAXI- OF STOCK LYING OPTION AND
GRANT OLD TARGET MUM OLD TARGET MUM OR UNITS OPTIONS AWARDS OPTION
NAME DATE ($) ($) ($) ($) ($) ($) (#) (#) ($/SH) AWARDS
(A) (B) (C) (D) (E) (F) (G) (H) (I)(1) (J) (K) (L)
---- -------- ------- ------ ----- ------- ------ ----- --------- ---------- -------- ----------
Dr. Candace Kendle... 03/13/06 4,200 $131,817
Christopher C.
Bergen............... 03/13/06 2,500 $ 78,463
Simon S.
Higginbotham......... 03/13/06 2,000 $ 62,770
Karl Brenkert III.... 03/13/06 2,000 $ 62,770
<FN>
- ---------------
(1) These unrestricted stock awards were made to the Named Executive Officers on March 13, 2006, pursuant to
the 1997 Stock Option and Stock Incentive Plan, and are shown in this year's Summary Compensation Table
in the column titled "Stock Awards."
28
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table shows the number of shares covered by exercisable
and unexercisable options, unvested stock, and equity incentive plan awards
for each of the named executive officers as of December 31, 2006.
OPTION AWARDS STOCK AWARDS
-------------------------------------------------------------------- -----------------------
EQUITY
INCENTIVE
PLAN AWARDS: NUMBER MARKET
NUMBER NUMBER NUMBER OF OF SHARES VALUE OF
OF SECURITIES OF SECURITIES SECURITIES OR UNITS SHARES OR
UNDERLYING UNDERLYING UNDERLYING OF STOCK UNITS OF
UNEXERCISED UNEXERCISED UNEXERCISED THAT HAVE STOCK THAT
OPTIONS OPTIONS UNEARNED OPTION OPTION NOT HAVE NOT
(#) (#) OPTIONS EXERCISE EXPIRATION VESTED VESTED
NAME EXERCISABLE UNEXERCISABLE (#) PRICE DATE (#) ($)
(A) (B) (C) (D) (E)(1) (F) (G) (H)(2)
---- ------------- ------------- ------------ -------- ---------- --------- -----------
Candace
Kendle............... 2,250 $ 14.00 08/22/2007 3,333(6) $104,822.85
200 $ 23.56 09/01/2008
200 $ 10.53 09/01/2009
300 $ 8.70 09/01/2010
300 $20.425 09/01/2011
8,000 2,000(3) $ 9.625 07/16/2012
240 60(4) $ 8.30 09/01/2012
4,500 3,000(5) $ 3.945 04/01/2013
Christopher
C. Bergen............ 2,000 $ 14.00 08/22/2007 1,666(6) $ 52,395.70
200 $ 23.56 09/01/2008
200 $ 10.53 09/01/2009
300 $ 8.70 09/01/2010
300 $20.425 09/01/2011
8,000 2,000(3) $ 9.625 07/16/2012
240 60(4) $ 8.30 09/01/2012
4,500 3,000(5) $ 3.945 04/01/2013
Simon S.
Higginbotham......... -- 9,000(7) $ 7.67 06/18/2014 -- --
Karl
Brenkert III......... 6,000 4,000(8) $ 7.725 02/07/2013 1,000(6) $ 31,450
3,000 2,000(5) $ 3.945 04/01/2013
STOCK AWARDS
---------------------
EQUITY
INCENTIVE
EQUITY PLAN
INCENTIVE AWARDS:
PLAN MARKET OR
AWARDS: PAYOUT
NUMBER OF VALUE OF
UNEARNED UNEARNED
SHARES, SHARES,
UNITS OR UNITS OR
OTHER OTHER
RIGHTS RIGHTS
THAT THAT
HAVE NOT HAVE NOT
VESTED VESTED
NAME (#) ($)
(A) (I) (J)
---- --------- ---------
Candace
Kendle...............
Christopher
C. Bergen............
Simon S.
Higginbotham.........
Karl
Brenkert III.........
<FN>
- ---------------
(1) Under the 1997 Stock Option and Stock Incentive Plan, the exercise price of the option is based upon the
average of the highest and lowest quoted selling prices on the Nasdaq Global Select Market on the date
of grant.
(2) The market value of unvested stock is based on the closing market price of $31.45 for the Company's
Common Stock on December 29, 2006, multiplied by the number of shares listed in column (g).
(3) The shares underlying this portion of the option vest on July 16, 2007.
(4) The shares underlying this portion of the option vest on September 1, 2007.
(5) The shares underlying this portion of the option vest in 1/2 increments on April 1 of 2007 and 2008.
(6) These shares vest on May 1, 2007.
(7) The shares underlying this portion of the option vest in 1/3 increments on June 18 of 2007, 2008 and
2009.
(8) The securities underlying this portion of the option vest in 1/2 increments on February 7 of 2007 and
2008.
29
OPTION EXERCISES AND STOCK VESTED
OPTION AWARDS STOCK AWARDS
--------------------- ---------------------
NUMBER OF NUMBER OF
SHARES VALUE SHARES
ACQUIRED REALIZED ACQUIRED VALUE
ON ON ON REALIZED
EXERCISE EXERCISE VESTING ON
NAME (#) ($) (#) VESTING
(A) (B) (C) (D) ($)(E)
---- --------- -------- --------- --------
Candace Kendle.............. 0 0 7,533 $255,005
Christopher C. Bergen....... 0 0 4,167 $140,075
Simon S. Higginbotham....... 6,000 $154,829 2,000 $ 62,770
Karl Brenkert III........... 0 0 3,000 $ 99,730
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The Company has entered into Protective Compensation and Benefit
Agreements with certain employees, including each of the Named Executive
Officers of the Company. These agreements are subject to annual review by
the Company's Board of Directors and, upon their respective termination
dates, automatically will be extended in one-year increments unless
cancelled by the Company at the direction of the Board. With respect to the
Named Executive Officers, the "double-trigger" agreements provide for
specified benefits, including two years' compensation and other benefits
described below, upon a change in control followed by certain other events.
A change in control includes the following: acquisition of 33 1/3% of the
Company's outstanding voting securities; certain changes to the composition
of the Company's incumbent Board of Directors such that at least two-thirds
of the Board is not comprised of the incumbent Board or individuals
approved by the incumbent Board; and merger, consolidation or
reorganization unless the incumbent Board comprises two-thirds of the
combined corporation's Board and the Company's shareholders comprise at
least 67% of the voting power of the combined corporation. Upon a change in
control, one of the following events would be required to occur before a
Named Executive Officer would be entitled to any benefits from a Protective
Compensation and Benefit Agreement:
* Within 12 months of the change in control, a Named Executive Officer
voluntarily resigns for "good reason." Good Reason includes the
following: (1) circumstances render the Named Executive Officer
unable to carry out performance of the officer's authorities, powers,
functions, responsibilities or duties, and the circumstances are not
remedied within 10 days; (2) the Named Executive Officer's salary is
reduced; (3) the Named Executive Officer's bonus opportunity is
reduced or targets are changed in a manner that negatively affects
bonus opportunity; (4) the Named Executive Officer is required to
work in a place that is greater than 30 miles from the place of
business prior to the change in control; (5) the Named Executive
Officer's business-related travel materially increases; (6) the Named
Executive Officer receives a reduced number of annual vacation days;
and (7) the Company or a successor materially breaches the Protective
Compensation and Benefit Agreement or refuses to assume obligations
under the agreement.
* Within 24 months of the change in control, a Named Executive Officer
is terminated for any reason, except death, "disability" or "cause".
Under the agreement, disability requires a Named Executive Officer to
be unable to perform his or her job on a full-time basis for a period
of 12 consecutive months. Under the agreement, a termination for
cause means that the officer was convicted of a felony, committed an
act of fraud or embezzlement against the Company, or committed a
willful and substantial violation of established written policy.
The following table describes the potential payments and benefits to
which the Named Executive Officers would be entitled upon the happening of
the following events: (i) voluntary retirement, (ii) involuntary
termination, and (iii) voluntary resignation from employment for "good
reason" within 12
30
months of a change in control, or involuntarily terminated by the Company,
other than due to death, "disability," or "cause," within twenty-four
months of a change in control.
ACCELERATION AND
CONTINUATION OF
EQUITY AWARDS
CASH CONTINUATION OF (UNAMORTIZED
SEVERANCE MEDICAL/ OUTPLACEMENT EXPENSED AS OF EXCISE TAX TOTAL TERMINATION
NAME PAYMENT(1) WELFARE BENEFITS(2) BENEFITS(3) 12/31/2006)(4) GROSS-UP(5) BENEFITS
---- ------------- ------------------- ------------ ---------------- ----------- -----------------
Candace Kendle
* Voluntary retirement 0 0 0 $20,298.07 0 $ 20,298.07
* Involuntary
termination 0 0 0 $20,298.07 0 $ 20,298.07
* Resign w/ good reason $1,110,170.00 $21,413.76 $15,000.00 $20,298.07 $372,503.00 $1,539,384.83
w/n 12 months of change
in control (CIC), or
w/o cause termination
w/n 24 months of CIC
Christopher C. Bergen
* Voluntary retirement 0 0 0 $15,686.03 0 $ 15,686.03
* Involuntary termination 0 0 0 $15,686.03 0 $ 15,686.03
* Resign w/ good reason $ 838,647.00 $21,413.76 $15,000.00 $15,686.03 0 $ 890,746.79
w/n 12 months of CIC,
or w/o cause
termination w/n 24
months of CIC
Simon S. Higginbotham
* Voluntary retirement 0 0 0 0 0 0
* Involuntary termination 0 0 0 0 0 0
* Resign w/ good reason $ 581,344.00 $21,413.76 $15,000.00 $34,079.25 0 $ 651,837.01
w/n 12 months of CIC,
or w/o cause
termination w/n 24
months of CIC
Karl Brenkert III
* Voluntary retirement 0 0 0 0 0 0
* Involuntary termination 0 0 0 0 0 0
* Resign w/ good reason $ 620,197.00 $21,413.76 $15,000.00 $16,795.60 $245,698.00 $ 919,104.36
w/n 12 months of CIC,
or w/o cause
termination w/n 24
months of CIC
<FN>
- ---------------
(1) Cash severance payment equals: 2.0 times the sum of (a) annual base salary (including any deferrals)
immediately preceding the date of the change in control, and (b) a bonus amount that equals the average
bonus for the two fiscal years immediately preceding the fiscal year in which the change in control
occurs. This amount is paid in a cash lump sum no later than 30 days after the date of the termination
of such officer's employment.
(2) This amount is an estimate based on 2006 employee costs for family coverage under the Company's medical
plan plus employee costs for dental insurance. The estimate reflects that the employee is entitled to
receive this benefit for two years from the date of termination.
(3) This amount represents the maximum benefit that a recipient is entitled to receive under the agreement.
(4) The amount in this column represents the previously unamortized expense that could be recognized in
connection with the acceleration of unvested stock options and other equity awards. Acceleration of such
awards could occur in two ways: (i) the officer's retirement qualifies for immediate vesting under the
1997 Stock Option and Stock Incentive Plan (the "1997 Plan"), and (ii) the Compensation Committee
approves the immediate vesting in the event of a change in control. Under the 1997 Plan, all employees
are entitled to immediate vesting of options and other awards upon the retirement of the employee.
"Retirement" is defined as any employee who is at least 65 years of age, or 55 years of age with at
least 10 years of service. Dr. Kendle and Mr. Bergen would qualify for immediate vesting
31
of their options and other awards upon their retirement because they each meet the definition of
retirement under the 1997 Plan. As Messrs. Higginbotham and Brenkert do not presently meet the definition
of retirement under the Plan, the amounts recognized for each of them in this column are based on the
assumption that the Compensation Committee would approve immediate vesting of the awards held by such
officer in the event of a change-in-control.
(5) Upon a change in control, Named Executive Officers may be subject to certain excise taxes under Section
280G of the Internal Revenue Code. The Company has agreed to reimburse such officers for those excise
taxes, if any, as well as any income and excise taxes payable by the executive as a result of any
reimbursements for the 280G excise taxes. The amounts in the table are based on the following
assumptions: (i) for all Named Executive Officers, a 280G excise tax rate of 20 percent, a statutory 35
percent federal income tax rate, and a 1.45 percent Medicare tax rate, (ii) a 6.87 percent state income
tax rate for Mr. Brenkert (an Ohio resident), and no state income tax rate for Dr. Kendle (a Florida
resident), and (iii) accelerated vesting of stock options and other equity awards as further described
in footnote 4 above.
The Protective Compensation and Benefit Agreements for Named Executive
Officers also include the following terms and conditions:
* The Company is required to pay legal fees and related expenses
incurred by a Named Executive Officer seeking or enforcing his or her
rights under the agreement.
* Named Executive Officers will receive a lump sum cash payment for any
accrued but unused vacation time.
* Named Executive Officers will be eligible for pro-rata portion of any
bonus amounts for the year in which the termination occurs.
* Named Executive Officers will not be entitled to severance payments
under Company severance policies in addition to the benefits set
forth in the Protective Compensation and Benefit Agreement.
Each Named Executive Officer also entered into a Non-Disclosure,
Proprietary Rights and Non-Compete Agreement ("Non-Compete Agreement") in
connection with the Protective Compensation and Benefit Agreement. The
Non-Compete Agreements restrict Named Executive Officers from certain
activities that could harm the Company due to the sensitive information
learned by a Named Executive Officer in connection with his or her
services. In particular, following a voluntary or involuntary termination,
a Named Executive Officer:
* For 12 months, will not perform directly or indirectly services for a
competitor of the Company;
* For 24 months, will not solicit the Company's customers or induce any
customer to stop doing business with the Company;
* Will not disclose confidential information;
* For 24 months, will not solicit Company employees or induce employees
to leave the Company; and
* For 24 months, will not induce medical professionals or patients
involved with the Company's contract research to cease working with
the Company or work with a competitor of the Company.
None of the foregoing limitations, except the obligation of
confidentiality, will apply to a Named Executive Officer who voluntarily
terminates his or her employment for "good reason". Under a Non-Compete
Agreement, the definition of "good reason" is substantially similar to the
definition of the same term under the Protective Compensation and Benefit
Agreements.
32
OTHER MATTERS
The Board knows of no other matters which will be presented at the
Annual Meeting. If, however, any other matter is properly presented at the
Annual Meeting, it will require the affirmative vote of a majority of
shares voting for approval.
OTHER INFORMATION
SHAREHOLDER COMMUNICATIONS WITH BOARD
Shareholders may communicate with the full Board or individual
directors on matters concerning the Company by mail to the attention of the
Company's Secretary. All mail addressed to a particular Director will be
forwarded or delivered to that Director. Mail addressed to the "Board of
Directors" will be forwarded or delivered to the Chairman of the Board.
SHAREHOLDER PROPOSALS
Shareholders who desire to have proposals included in the notice for
the Annual Meeting of Shareholders to be held in spring 2008 must submit
their proposals in writing by December 11, 2007, to the Company, Attention:
Karl Brenkert III, Secretary, 1200 Carew Tower, 441 Vine Street,
Cincinnati, Ohio 45202.
The form of Proxy for this meeting grants authority to the designated
proxies to vote in their discretion on any matters that come before the
meeting except those set forth in the Company's Proxy Statement and except
for matters as to which adequate notice is received. For notice to be
deemed adequate for the 2008 Annual Meeting of Shareholders, it must be
received prior to February 24, 2008. If there is a change in the
anticipated date of next year's Annual Meeting of Shareholders or in the
notice deadline by more than 30 days, the Company will notify you of this
change through its Form 10-Q filings.
FINANCIAL STATEMENTS AVAILABLE
The Company's Annual Report to Shareholders for the year 2006 is
enclosed with this mailing. A copy of the Annual Report to the Commission
on Form 10-K is available without charge upon written request to: Investor
Relations, Kendle International Inc., 1200 Carew Tower, 441 Vine Street,
Cincinnati, Ohio 45202. The Company's Annual Report on Form 10-K and
certain other recent filings with the Commission are available at the
Company's Web site at www.kendle.com. The Company's Annual Report on Form
10-K and its other filings with the Commission are also available at the
Commission's Web site at www.sec.gov. Additionally, these filings may be
read or copied at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549.
By Order of the Board of Directors,
/s/ Karl Brenkert III
Karl Brenkert III
Secretary
April 6, 2007
33
ANNEX I
-------
KENDLE INTERNATIONAL INC.
2007 STOCK INCENTIVE PLAN
ARTICLE 1
OBJECTIVES
----------
The objectives of this 2007 Stock Incentive Plan (the "Plan") are to
enable KENDLE INTERNATIONAL INC. (the "Company") to compete successfully in
retaining and attracting key employees of outstanding ability, to stimulate
the efforts of such employees toward the Company's objectives and to
encourage the identification of their interests with those of the Company's
shareholders.
ARTICLE 2
DEFINITIONS
-----------
For purposes of this Plan, the following terms shall have the following
meanings:
2.1. "Award" means an award of a Stock Option, Stock Appreciation
Right, Restricted Stock Award, Stock Unit Award or Stock Award granted
under the Plan.
2.2. "Award Agreement" means a written or electronic agreement entered
into between the Company and a Participant setting forth the terms and
conditions of an Award granted to a Participant.
2.3. "Board" means the Board of Directors of the Company.
2.4. "Code" means the Internal Revenue Code of 1986, as amended, or
any successor legislation.
2.5. "Committee" means a committee designated by the Board of the
Company. The Committee shall be comprised of three or more directors, each
of whom shall be (1) a "non-employee director" as defined in Rule 16b-3
promulgated under the Exchange Act, (2) an "outside director" under Section
162(m) of the Code ("Section 162(m)") and (3) an "independent director"
under rules adopted by the Nasdaq Stock Market, in each case as such rules
and sections may be amended, superseded or interpreted hereafter.
2.6. "Common Stock" means the Company's common stock, no par value.
2.7. "Disability" means a Participant being considered "disabled"
within the meaning of Section 409A(a)(2)(C) of the Code, unless otherwise
provided in an Award Agreement.
2.8. "Eligible Employee" means any individual who performs services
for the Company or any Subsidiary of the Company and is treated as an
"employee" for federal income tax purposes or any individual or firm who
performs services for the Company as a consultant.
2.9. "Exchange Act" means the Securities Exchange Act of 1934.
2.10. "Fair Market Value" of a Share as of a given date shall, if the
Common Stock is quoted on the Nasdaq Stock Market, be the reported closing
price for a Share on the date as of which Fair Market Value is to be
determined. If Common Stock is not quoted on the Nasdaq Stock Market on the
date as of which Fair Market Value is to be determined, the Committee shall
determine in good faith the Fair Market Value in whatever manner it
considers appropriate.
2.11. "Grant Date" means the date designated by the Committee as the
date upon which an Award is granted.
2.12. "Incentive Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422
of the Code or any successor provision.
I-1
2.13. "Non-Qualified Option" means any Stock Option that is not an
Incentive Option.
2.14. "Option Price" or "Exercise Price" means the price per Share at
which Common Stock may be purchased upon the exercise of an Option.
2.15. "Participant" means a person to whom an Award has been granted
pursuant to this Plan.
2.16. "Restricted Stock Award" means a grant of Shares to an Eligible
Employee under Article 7 that are issued subject to such vesting and
transfer restrictions as the Committee shall determine and set forth in an
Award Agreement.
2.17. "Retirement" means any termination of employment (other than by
death or Disability) by an employee who is at least 65 years of age, or 55
years of age with at least ten years of employment with the Company or a
Subsidiary of the Company.
2.18. "Share" means one share of the Common Stock.
2.19. "Stock Appreciation Right" means a contractual right granted to
an Eligible Employee under ARTICLE 6 entitling such Eligible Employee to
receive a payment, representing the difference between the base price per
Share of the right and the Fair Market Value of a Share, at such time, and
subject to such conditions, as are set forth in the Plan and the applicable
Award Agreement.
2.20. "Stock Award" means a grant of Shares to an Eligible Employee
under Article 9 that are issued free of transfer restrictions and
forfeiture conditions.
2.21. "Stock Option" or "Option" means the right to purchase Shares
granted pursuant to this Plan.
2.22. "Stock Unit Award" means a contractual right granted to an
Eligible Employee under Article 8 representing notional unit interests
equal in value to a Share to be paid or distributed at such times, and
subject to such conditions, as set forth in the Plan and the applicable
Award Agreement.
2.23. "Subsidiary" has the meaning set forth in Section 424(f) of the
Code.
2.24. "Term" means the period beginning on a Grant Date and ending on
the expiration date of such Award.
2.25. "Transfer" means sale, assignment, pledge, encumbrance,
alienation, attachment, charge or other disposition, whether or not for
consideration; and the terms "Transferred" or "Transferable" have
corresponding meanings.
ARTICLE 3
ADMINISTRATION; PARTICIPATION AND AWARDS
----------------------------------------
3.1. The Committee. This Plan shall be administered and interpreted by
-------------
the Committee.
3.2. Committee Authority. The Committee shall have such powers and
-------------------
authority as may be necessary or appropriate for the Committee to carry out
its functions as described in the Plan. Subject to the express limitations
of the Plan, the Committee shall have authority in its discretion to
determine, after considering management's recommendations with respect to
Eligible Employees excluding the Company's executive officers, the Eligible
Employees to whom, and the time or times at which, Awards may be granted,
the number of Shares, units or other rights subject to each Award, the
exercise, base or purchase price of an Award (if any), the time or times at
which an Award will become vested, exercisable or payable, the performance
goals and other conditions of an Award, the duration of the Award, and all
other terms of the Award. The Committee shall determine the terms and
conditions of all Awards granted to Participants. Subject to the terms of
the Plan, the Committee shall have the authority to amend the terms of an
Award in any manner that is not inconsistent with the Plan, provided that
no such action shall adversely affect the rights of a Participant with
respect to an outstanding Award without the Participant's consent. The
Committee shall also have discretionary authority to interpret the Plan, to
make factual determinations under the Plan, and to make all other
determinations necessary or advisable for Plan
I-2
administration, including, without limitation, to correct any defect, to
supply any omission or to reconcile any inconsistency in the Plan or any
Award Agreement hereunder. The Committee may prescribe, amend, and rescind
rules and regulations relating to the Plan. The Committee's determinations
under the Plan need not be uniform and may be made by the Committee
selectively among Participants and Eligible Employees, whether or not such
persons are similarly situated. The Committee shall, in its discretion,
consider such factors as it deems relevant in making its interpretations,
determinations and actions under the Plan including, without limitation,
the recommendations or advice of any officer or employee of the Company or
such attorneys, consultants, accountants or other advisors as it may
select. All interpretations, determinations and actions by the Committee
shall be final, conclusive, and binding upon all parties.
3.3. Delegation of Authority. The Committee shall be permitted to
-----------------------
delegate to any appropriate officer or employee of the Company
responsibility for performing certain ministerial functions under the Plan.
In the event that the Committee's authority is delegated to officers or
employees in accordance with the foregoing, all provisions of the Plan
relating to the Committee shall be interpreted in a manner consistent with
the foregoing by treating any such reference as a reference to such officer
or employee for such purpose. Any action undertaken in accordance with the
Committee's delegation of authority hereunder shall have the same force and
effect as if such action was undertaken directly by the Committee and shall
be deemed for all purposes of the Plan to have been taken by the Committee.
3.4. Designation of Participants. All Eligible Employees are eligible
---------------------------
to be designated by the Committee to receive Awards and become Participants
under the Plan. The Committee has the authority, in its discretion, to
determine and designate from time to time those Eligible Employees who are
to be granted Awards, the types of Awards to be granted and the number of
Shares or rights subject to Awards granted under the Plan. In selecting
Eligible Employees to be Participants and in determining the type and
amount of Awards to be granted under the Plan, the Committee shall consider
any and all factors that it deems relevant or appropriate.
ARTICLE 4
SHARES SUBJECT TO PLAN
----------------------
4.1. Shares. Subject to adjustment as provided in Section 4.2, the
------
number of Shares which may be issued under this Plan shall not exceed One
Million (1,000,000) Shares. Shares issued and sold under the Plan may be
either authorized but unissued Shares or Shares held in the Company's
treasury. To the extent that any Award involving the issuance of Shares is
forfeited, cancelled, returned to the Company for failure to satisfy
vesting requirements or other conditions of the Award, or is otherwise
terminated without an issuance of Shares being made thereunder, the Shares
covered thereby will no longer be counted against the foregoing maximum
Share limitations and may again be made subject to Awards under the Plan
pursuant to such limitations. Any Awards or portions thereof that are
settled in cash and not in Shares shall not be counted against the
foregoing maximum Share limitations.
4.2. Adjustment Provisions. If there shall occur any change with
---------------------
respect to the outstanding Shares by reason of any recapitalization,
reclassification, stock dividend, extraordinary dividend, stock split,
reverse stock split or other distribution with respect to the Shares, or
any merger, reorganization, consolidation, combination, spin-off or other
similar corporate change, or any other change affecting the Common Stock,
the Committee may, in the manner and to the extent that it deems
appropriate and equitable to the Participants and consistent with the terms
of the Plan, cause an adjustment to be made in (i) the maximum number and
kind of Shares provided in Section 4.1 hereof, (ii) the number and kind of
Shares, units or other rights subject to then outstanding Awards, (iii) the
exercise or base price for each Share, unit or other right subject to then
outstanding Awards, and (iv) any other terms of an Award that are affected
by the event. Notwithstanding the foregoing, in the case of Incentive Stock
Options, any such adjustments shall, to the extent practicable, be made in
a manner consistent with the requirements of Section 424(a) of the Code.
I-3
ARTICLE 5
STOCK OPTIONS
-------------
5.1. Grants. Each Option granted shall be designated as either a
------
Non-Qualified Option or an Incentive Option. One or more Stock Options may
be granted to any Eligible Employee.
5.2. Incentive Options. Any Option designated by the Committee as an
-----------------
Incentive Option will be subject to the general provisions applicable to
all Options granted under the Plan plus the following specific provisions:
5.2.1 If an Incentive Option is granted to a person who owns,
directly or indirectly, stock representing more than 10% of (i) the total
combined voting power of all classes of stock of the Company and its
Subsidiaries, or (ii) a corporation that owns 50% or more of the total
combined voting power of all classes of stock of the Company, then
5.2.1.1 the Option Price must equal at least 110% of
the Fair Market Value on the Grant Date; and
5.2.1.2 the term of the Option shall not be greater
than five years from the Grant Date.
5.2.2 The aggregate Fair Market Value of Shares, determined at
the Grant Date, with respect to which Incentive Options that may become
exercisable for the first time during any calendar year under this Plan or
any other plan maintained by the Company and its Subsidiaries shall not
exceed $100,000 determined in accordance with Section 422(d) of the Code.
To the extent that the aggregate Fair Market Value of Shares with respect
to which Incentive Options become exercisable for the first time by any
individual during any calendar year, under all plans of the Company and its
Subsidiaries, exceeds $100,000, such Options shall be treated as
Non-Qualified Options.
5.2.3 Notwithstanding anything in this Plan to the contrary,
no term of this Plan relating to Incentive Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under
this Plan be exercised, so as to disqualify this Plan under Section 422 of
the Code, or, without the consent of the Participants affected, to
disqualify any Incentive Option under Section 422 of the Code.
5.3. Terms of Options. Except as otherwise required by Sections 5.2
----------------
and subject to Section 5.5.2 and ARTICLE 11, Options granted under this
Plan shall be subject to the following terms and conditions and shall be in
such form and contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem
desirable:
5.3.1 The Option Price shall be determined by the Committee at
the Grant Date, except that no Incentive Option may be granted for an
Option Price less than 100% of Fair Market Value on the Grant Date.
5.3.2 The Option Term shall be fixed by the Committee, but no
Option shall be exercisable more than ten years after its Grant Date.
5.3.3 An Option shall be exercisable at such time or times and
subject to such terms and conditions as shall be specified in the Award
Agreement, provided, however, that an Option may not be exercised as to the
lesser of 100 Shares at any one time or the total number available for
exercise at that time.
5.3.4 Stock Options shall terminate in accordance with Section
5.5.2.
5.4. Vesting of Stock Options. The Committee shall, in its discretion,
------------------------
prescribe the time or times at which, or the conditions upon which, a Stock
Option or portion thereof shall become vested and/or exercisable, and may
accelerate the vesting or exercisability of any Stock Option at any time.
The requirements for vesting and exercisability of a Stock Option may be
based on the continued employment
I-4
of a Participant with the Company or a Subsidiary of the Company for a
specified period (or periods) or on the attainment of performance goals
established by the Committee in its sole discretion.
5.5. Exercise of Options. Any Participant entitled to exercise an
-------------------
Option in whole or in part, may do so by delivering a written notice of
exercise to the Company at its principal office. The written notice shall
specify the number of Shares for which an Option is being exercised and the
Grant Date of the Option being exercised and shall be accompanied by full
payment in cash or by check of the Option Price for the Shares being
purchased and any withholding taxes. In addition, at the discretion of the
Committee, either as set forth in an Option Agreement or determined at the
time of exercise, the exercise price and withholding taxes may be paid:
5.5.1 By tender to the Company of Shares owned by the
Participant having a Fair Market Value not less than the exercise price
(the Committee shall have the discretion to require that the Participant
own such shares for six (6) months);
5.5.2 By the assignment of the proceeds of a sale or loan with
respect to some or all of the Shares being acquired upon the exercise of
the Option;
5.5.3 By such other consideration as may be approved by the
Committee from time to time to the extent permitted by applicable law; or
5.5.4 By any combination of the methods described above in
Sections 5.5.1 to 5.5.3.
5.6. Limited Transferability of Non-Qualified Options. Except as
------------------------------------------------
otherwise provided in Section 13.4, no Stock Option shall be Transferable
or exercisable by any person other than the Participant except (i) upon the
Participant's death, in accordance with Sections 5.7.3 and 5.7.5 hereof or
(ii) in the case of Non-Qualified Stock Options only, for the Transfer of
all or part of the Stock Option to a Participant's "family member" (as
defined for purposes of the Form S-8 registration statement under the
Securities Act of 1933), as may be approved by the Committee in its sole
and absolute discretion at the time of proposed Transfer. The Transfer of a
Non-Qualified Stock Option may be subject to such terms and conditions as
the Committee may in its discretion impose from time to time. Subsequent
Transfers of a Non-Qualified Stock Option shall be prohibited other than in
accordance with Sections 5.7.3, 5.7.4 and 5.7.5 hereof.
5.7. Termination of Stock Options. All Stock Options issued under this
----------------------------
Plan shall terminate as follows:
5.7.1 During any period of continuous employment or business
relationship with the Company or any Subsidiary of the Company, a Stock
Option will be terminated only if it is fully exercised or if it has
expired by its terms or by the terms of this Plan, including this Section
5.7.1. For purposes of this Plan, any leave of absence approved by the
Company or the Subsidiary of the Company shall not be deemed to be a
termination of employment.
5.7.2 If a Participant violates any terms of any written
employment, confidentiality or noncompetition agreement between the Company
or any Subsidiary of the Company and the Participant, all existing Stock
Options granted to such Participant will terminate. In addition, if at the
time of such violation such Participant has exercised Stock Options but has
not received certificates for the Shares to be issued, the Company may void
the Award and its exercise. Any such actions by the Company shall be in
addition to any other rights or remedies available to the Company or the
Subsidiaries of the Company in such circumstances. In the event Section
5.7.2 and 5.7.4 both apply to a situation, the provisions of Section 5.7.2
shall take precedence over the provisions of Section 5.7.4 and govern the
situation.
5.7.3 If a Participant's employment by the Company or any
Subsidiary of the Company terminates by reason of death, unless otherwise
determined by the Committee, all Stock Options shall be fully vested and
may thereafter be exercised by the Participant's beneficiary or legal
representative, for a period of one year or such longer period as the
Committee may specify at or after grant in all cases other than Incentive
Options, or until the expiration of the stated term of such Stock Option,
whichever period is shorter.
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5.7.4 If Participant's employment by the Company or a
Subsidiary of the Company terminates by reason of Disability or Retirement,
unless otherwise determined by the Committee based upon, among other
factors, the Participant's contributions to, and longevity with, the
Company or any Subsidiary, all Stock Options shall terminate (i) on the
date which is 90 days after the date of such termination of employment or
on the expiration of the stated term of the Stock Option, whatever shall
first occur, in the case of a Participant which has been employed by the
Company or any of its subsidiaries for ten full years or less, (ii) on the
date which is one year after the date of such termination of employment or
on the expiration of the stated term of the Stock Option, whichever shall
first occur, in the case of a Participant who has been employed by the
Company or any of its Subsidiaries for more than ten full years, but less
than twenty full years, or (iii) on the date which is two years after the
date of termination of employment or on the expiration of the stated term
of the Stock Option, whichever shall first occur, in the case of a
Participant who has been employed by the Company or any of its Subsidiaries
for twenty full years or more.
5.7.5 Unless otherwise determined by the Committee at or after
grant, if a Participant's employment by the Company or any Subsidiary of
the Company terminates for any reason other than death, Disability or
Retirement, the Stock Option will terminate on the earlier to occur of the
stated expiration date or 90 days from the date of termination of the
employment. For purposes of clarity, if a Participant's employment
terminates on April 1, such 90 day period shall expire at the close of
business, Cincinnati Ohio time, on June 29. If a Participant dies during
such 90 day period following the termination of the employment or business
relationship, any unexercised Stock Option held by the Participant, or
Transferred by the Participant in accordance with Section 5.6, shall be
exercisable, to the full extent that such Stock Option was exercisable at
the time of death, for a period of one year after the date of death of the
Participant or until the expiration of the stated term of the Stock Option,
whichever occurs first.
5.8. Repricing Prohibited. Subject to the anti-dilution adjustment
--------------------
provisions contained in Section 4.2 hereof, without the prior approval of
the Company's shareholders, evidenced by a majority of votes cast, neither
the Committee nor the Board shall cause the cancellation, substitution or
amendment of a Stock Option that would have the effect of reducing the
exercise price of such a Stock Option previously granted under the Plan, or
otherwise approve any modification to such a Stock Option that would be
treated as a "repricing" under the then applicable rules, regulations or
listing requirements adopted by the Nasdaq Stock Market.
5.9. Awards to Non-Employee Directors. Notwithstanding any other
--------------------------------
provisions herein, members of the Board of Directors who are not otherwise
employees of the Company shall be entitled to receive Awards (other than
Incentive Options) in forms and amounts as determined by the Committee in
its discretion under this Plan from time to time and at the following
times:
5.9.1 On the date on which a person first becomes a member of
the Board of Directors, whether by election or appointment; and
5.9.2 On each annual election as a member of the Board of
Directors therafter.
ARTICLE 6
STOCK APPRECIATION RIGHTS.
--------------------------
6.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right
----------------------------------
may be granted to any Eligible Employee selected by the Committee. Stock
Appreciation Rights may be granted on a basis that allows for the exercise
of the right by the Participant or that provides for the automatic payment
of the right upon a specified date or event. Stock Appreciation Rights
shall be exercisable or payable at such time or times and upon conditions
as may be approved by the Committee, provided that the Committee may
accelerate the exercisability or payment of a Stock Appreciation Right at
any time.
6.2. Freestanding Stock Appreciation Rights. A Stock Appreciation
--------------------------------------
Right may be granted without any related Stock Option and may be subject to
such vesting and exercisability requirements as specified
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by the Committee in an Award Agreement. Such vesting and exercisability
requirements may be based on the continued service of the Participant with
the Company or its Subsidiaries for a specified time period (or periods) or
on the attainment of specified performance goals established by the
Committee in its discretion. A Stock Appreciation Right will be exercisable
or payable at such time or times as determined by the Committee, provided
that the maximum term of a Stock Appreciation Right shall be ten years from
the Grant Date. The base price of a Stock Appreciation Right granted
without any related Stock Option shall be determined by the Committee in
its sole discretion; provided, however, that the base price per Share of
any such freestanding Stock Appreciation Right shall not be less than 100%
of the Fair Market Value of the Shares on the Grant Date.
6.3. Tandem Stock Option/Stock Appreciation Rights. A Stock
---------------------------------------------
Appreciation Right may be granted in tandem with a Stock Option, either at
the time of grant or at any time thereafter during the term of the Stock
Option. A tandem Stock Option/Stock Appreciation Right will entitle the
holder to elect, as to all or any portion of the number of Shares subject
to such Stock Option/Stock Appreciation Right, to exercise either the Stock
Option or the Stock Appreciation Right, resulting in the reduction of the
corresponding number of Shares subject to the right so exercised as well as
the tandem right not so exercised. A Stock Appreciation Right granted in
tandem with a Stock Option hereunder shall have a base price per Share
equal to the Exercise Price of the Stock Option, will be vested and
exercisable at the same time or times that a related Stock Option is vested
and exercisable, and will expire no later than the time at which the
related Stock Option expires.
6.4. Payment of Stock Appreciation Rights. A Stock Appreciation Right
------------------------------------
will entitle the holder, upon exercise or other payment of the Stock
Appreciation Right, as applicable, to receive an amount determined by
multiplying: (i) the excess of the Fair Market Value of a Share on the date
of exercise or payment of the Stock Appreciation Right over the base price
of such Stock Appreciation Right, by (ii) the number of Shares as to which
such Stock Appreciation Right is exercised or paid. Subject to the
requirements of Section 409A of the Code, payment of the amount determined
under the foregoing may be made, as approved by the Committee and set forth
in the Award Agreement, in Shares valued at their Fair Market Value on the
date of exercise or payment, in cash, or in a combination of Shares and
cash, subject to applicable tax withholding requirements.
6.5. Repricing Prohibited. Subject to the anti-dilution adjustment
--------------------
provisions contained in Section 4.2 hereof, without the prior approval of
the Company's shareholders, evidenced by a majority of votes cast, neither
the Committee nor the Board shall cause the cancellation, substitution or
amendment of a Stock Appreciation Right that would have the effect of
reducing the base price of such a Stock Appreciation Right previously
granted under the Plan, or otherwise approve any modification to such a
Stock Appreciation Right that would be treated as a "repricing" under the
then applicable rules, regulations or listing requirements adopted by the
Nasdaq Stock Market.
ARTICLE 7
RESTRICTED STOCK AWARDS
-----------------------
7.1. Grant of Restricted Stock Awards. A Restricted Stock Award may be
--------------------------------
granted to any Eligible Employee selected by the Committee. The Committee
may require the payment by the Participant of a specified purchase price in
connection with any Restricted Stock Award.
7.2. Vesting Requirements. The restrictions imposed on Shares granted
--------------------
under a Restricted Stock Award shall lapse in accordance with the vesting
requirements specified by the Committee in the Award Agreement, provided
that the Committee may accelerate the vesting of a Restricted Stock Award
at any time. Such vesting requirements may be based on the continued
employment of the Participant with the Company or its Subsidiaries for a
specified time period (or periods) or on the attainment of specified
performance goals established by the Committee in its discretion. If the
vesting requirements of a Restricted Stock Award shall not be satisfied,
the Award shall be forfeited and the Shares subject to the Award shall be
returned to the Company.
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7.3. Restrictions. Shares granted under any Restricted Stock Award may
------------
not be transferred, assigned or subject to any encumbrance, pledge, or
charge until all applicable restrictions are removed or have expired,
unless otherwise allowed by the Committee. Failure to satisfy any
applicable restrictions shall result in the subject shares of the
Restricted Stock Award being forfeited and returned to the Company. The
Committee may require in an Award Agreement that certificates representing
the shares granted under a Restricted Stock Award bear a legend making
appropriate reference to the restrictions imposed, and that certificates
representing the shares granted or sold under a Restricted Stock Award will
remain in the physical custody of an escrow holder until all restrictions
are removed or have expired.
7.4. Rights as Shareholder. Subject to the foregoing provisions of
---------------------
this Section 8 and the applicable Award Agreement, the Participant shall
have all rights of a shareholder with respect to the Shares granted to the
Participant under a Restricted Stock Award, including the right to vote the
Shares and receive all dividends and other distributions paid or made with
respect thereto. The Committee may provide in an Award Agreement for the
payment of dividends and distributions to the Participant at such times as
paid to shareholders generally or at the times of vesting or other payment
of the Restricted Stock Award.
7.5. Section 83(b) Election. If a Participant makes an election
----------------------
pursuant to Section 83(b) of the Code with respect to a Restricted Stock
Award, the Participant shall file, within 30 days following the Grant Date,
a copy of such election with the Company and with the Internal Revenue
Service, in accordance with the regulations under Section 83 of the Code.
The Committee may provide in an Award Agreement that the Restricted Stock
Award is conditioned upon the Participant's making or refraining from
making an election with respect to the Award under Section 83(b) of the
Code.
ARTICLE 8
STOCK UNIT AWARDS
-----------------
8.1. Grant of Stock Unit Awards. A Stock Unit Award may be granted to
--------------------------
any Eligible Employee selected by the Committee. The value of each stock
unit under a Stock Unit Award is equal to the Fair Market Value of a Share
on the applicable date or time period of determination, as specified by the
Committee. A Stock Unit Award shall be subject to such restrictions and
conditions as the Committee shall determine. A Stock Unit Award may be
granted together with a dividend equivalent right with respect to the
Shares subject to the Award, which may be accumulated and may be deemed
reinvested in additional stock units, as determined by the Committee in its
discretion.
8.2. Vesting of Stock Unit Awards. On the Date of Grant, the Committee
----------------------------
shall in its discretion determine any vesting requirements with respect to
a Stock Unit Award, which shall be set forth in the Award Agreement,
provided that the Committee may accelerate the vesting of a Stock Unit
Award at any time. Vesting requirements may be based on the continued
employment of the Participant with the Company or its Subsidiaries for a
specified time period (or periods) or on the attainment of specified
performance goals established by the Committee in its discretion. A Stock
Unit Award may also be granted on a fully vested basis, with a deferred
payment date.
8.3. Payment of Stock Unit Awards. A Stock Unit Award shall become
----------------------------
payable to a Participant at the time or times determined by the Committee
and set forth in the Award Agreement, which may be upon or following the
vesting of the Award. Payment of a Stock Unit Award may be made, at the
discretion of the Committee, in cash or in Shares, or in a combination
thereof, subject to applicable tax withholding requirements. Any cash
payment of a Stock Unit Award shall be made based upon the Fair Market
Value of the Common Stock, determined on such date or over such time period
as determined by the Committee.
8.4. No Rights as Shareholder. The Participant shall not have any
------------------------
rights as a shareholder with respect to the shares subject to a Stock Unit
Award until such time as Shares are delivered to the Participant pursuant
to the terms of the Award Agreement.
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ARTICLE 9
STOCK AWARDS
------------
9.1. Grant of Stock Awards. A Stock Award may be granted to any
---------------------
Eligible Employee selected by the Committee. A Stock Award may be granted
for past services, in lieu of bonus or other cash compensation or for any
other valid purpose as determined by the Committee. A Stock Award granted
to an Eligible Employee represents Shares that are issued without
restrictions on transfer and other incidents of ownership and free of
forfeiture conditions, except as otherwise provided in the Plan and the
Award Agreement. The Committee may, in connection with any Stock Award,
require the payment of a specified purchase price.
9.2. Rights as Shareholder. Subject to the foregoing provisions of
---------------------
this ARTICLE 9 and the applicable Award Agreement, upon the issuance of the
Shares under a Stock Award the Participant shall have all rights of a
shareholder with respect to the Shares, including the right to vote the
shares and receive all dividends and other distributions paid or made with
respect thereto.
ARTICLE 10
EXTRAORDINARY EVENTS
--------------------
10.1. In the event of the dissolution or liquidation of the Company or
any merger, other than a merger for the purpose of the redomestication of
the Company not involving a change in control, consolidation, exchange or
other transaction in which the Company is not the surviving corporation or
in which the outstanding Shares of the Company are converted into cash,
other securities or other property, each outstanding Award shall
automatically become fully vested and fully exercisable immediately prior
to such event. Thereafter the holder of any Option shall, upon exercise of
the Option, receive, in lieu of the stock or other securities and property
receivable upon exercise of the Option prior to such transaction, the stock
or other securities or property to which such holder would have been
entitled upon consummation of such transaction if such holder had exercised
such Option immediately prior to such transaction.
10.2. All outstanding Awards shall become fully vested and immediately
exercisable in full if a change in control of the Company occurs. For
purposes of this Agreement, a "change in control of the Company" shall be
deemed to have occurred if:
10.2.1 there occurs an event or series of events by which any
person or group of persons become the "beneficial owners" as defined in
Rule 13d-3 under the Exchange Act of at least 25% of the Common Stock; or
10.2.2 during any period of one year after January 1, 2007,
individuals who at the beginning of such period constitute the Board and
any new director whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
thereof.
ARTICLE 11
FORFEITURE EVENTS
-----------------
11.1. General. In addition to the termination provisions applicable to
-------
Stock Options as provided in Section 5.5.2, the Committee may specify in an
Award Agreement at the time of the Award that the Participant's rights,
payments and benefits with respect to an Award shall be subject to
termination, reduction, cancellation, forfeiture or recoupment upon the
occurrence of certain specified events, in addition to any otherwise
applicable vesting or performance conditions of an Award. Such events shall
include, but shall not be limited to, termination of employment for cause,
violation of material Company policies, breach of noncompetition,
confidentiality or other restrictive covenants that may apply to the
Participant, or other conduct by the Participant that is detrimental to the
business or reputation of the Company.
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11.2. Termination for Cause. Unless otherwise provided by the Committee
---------------------
and set forth in an Award Agreement, if a Participant's employment with the
Company or any Subsidiary of the Company shall be terminated for cause, the
Company may, in its sole discretion, immediately terminate such
Participant's right to any further payments, vesting or exercisability with
respect to any Award in its entirety. In the event a Participant is party
to an employment (or similar) agreement with the Company or any Subsidiary
of the Company that defines the term "cause," such definition shall apply
for purposes of the Plan. The Company shall have the power to determine
whether the Participant has been terminated for cause and the date upon
which such termination for cause occurs. Any such determination shall be
final, conclusive and binding upon the Participant. In addition, if the
Company shall reasonably determine that a Participant has committed or may
have committed any act which could constitute the basis for a termination
of such Participant's employment for cause, the Company may suspend the
Participant's rights to exercise any options, receive any payment or vest
in any right with respect to any Award pending a determination by the
Company of whether an act has been committed which could constitute the
basis for a termination for "cause" as provided in this Section 11.2.
ARTICLE 12
TERMINATION OR AMENDMENT OF THIS PLAN
-------------------------------------
12.1. The Board may at any time amend, suspend, or terminate the Plan;
provided, however, that no amendments by the Board shall, without further
approval of the shareholders of the Company:
12.1.1 Change the definition of Eligible Employees;
12.1.2 Except as provided in ARTICLE 4 hereof, increase the
number of Shares which may be subject to Awards granted under the Plan; or
increase the maximum number of Shares with respect to which Awards may be
granted to any Participant during any fiscal year;
12.1.3 Cause the Plan or any Award granted under the Plan that
would otherwise meet the conditions for exclusion of application of the $1
million deduction limitation imposed by Section 162(m) of the Code to fail
to meet such conditions;
12.1.4 Cause any Option granted as an Incentive Stock Option
to fail to qualify as an "Incentive Stock Option" as defined by Section 422
of the Code; or
12.2. Where, as determined by the Board, the approval by the
shareholders may be necessary or advisable for purposes of compliance with
Section 162(m) or Section 422 of the Code, the listing requirements of the
Nasdaq Stock Market or other exchange or market or for any other purpose,
amendments to the Plan shall be approved by the shareholders.
12.2.1 No amendment or termination of the Plan shall impair
any Award granted under the Plan without the consent of the holder thereof.
12.2.2 This Plan shall continue in effect until the expiration
of all Awards granted under the Plan unless terminated earlier in
accordance with this ARTICLE 12; provided, however, that it shall otherwise
terminate and no options shall be granted after May 10, 2017.
ARTICLE 13
GENERAL PROVISIONS
------------------
13.1. Shareholder Approval. This Plan shall become effective following
--------------------
its adoption by the Board and its approval by the Company's shareholders on
the date of the 2007 Annual Meeting of Shareholders.
13.2. Award Agreements. An Award under the Plan shall be evidenced by
----------------
an Award Agreement in a written or electronic form approved by the
Committee setting forth the number of Shares, units or rights subject to
the Award, the exercise price, base price, or purchase price of the Award,
the time or times at which an Award will become vested, exercisable or
payable and the term of the Award. The Award Agreement may also set forth
the effect on an Award of termination of employment under certain
I-10
circumstances. The Award Agreement shall be subject to and incorporate, by
reference or otherwise, all of the applicable terms and conditions of the
Plan, and may also set forth other terms and conditions applicable to the
Award as determined by the Committee consistent with the limitations of the
Plan. Award Agreements evidencing Incentive Stock Options shall contain
such terms and conditions as may be necessary to meet the applicable
provisions of Section 422 of the Code. The grant of an Award under the Plan
shall not confer any rights upon the Participant holding such Award other
than such terms, and subject to such conditions, as are specified in the
Plan as being applicable to such type of Award (or to all Awards) or as are
expressly set forth in the Award Agreement. The Committee need not require
the execution of an Award Agreement by a Participant, in which case,
acceptance of the Award by the Participant shall constitute agreement by
the Participant to the terms, conditions, restrictions and limitations set
forth in the Plan and the Award Agreement as well as the administrative
guidelines of the Company in effect from time to time.
13.3. Deferrals. The Committee may permit recipients of Awards to defer
---------
the distribution of all or part of any Award in accordance with such terms
and conditions as the Committee shall establish.
13.4. Transfer; Assignment. Except as otherwise provided in Sections
--------------------
5.6, 5.7.3, 5.7.4 and 5.7.5 hereof solely with respect to Options and
except as otherwise provided below, Awards under the Plan shall not be
Transferable by the Participant or exercisable by any person other than the
Participant, and Awards under the Plan shall not be subject in any manner
to assignment, alienation, pledge, encumbrance or charge:
13.4.1 During the lifetime of a Participant, an Award is not
transferable voluntarily or by operation of law and may be exercised only
by such individual;
13.4.2 Upon the death of a Participant, an Award may be
transferred to the beneficiaries or heirs of the Participant or by will or
the laws of descent and distribution;
13.4.3 An Award may be transferred pursuant to a qualified
domestic relations order as defined by the Code or Title I of ERISA.
Notwithstanding the above, the Committee may, with respect to
particular Awards, establish or modify the terms of the Award to allow the
Award to be transferred at the request of a Participant to trusts
established by a Participant or as to which a Participant is a grantor or
to lineal descendants of a Participant or otherwise for personal and tax
planning purposes of a Participant. If the Committee allows such transfer,
such Awards shall not be exercisable for a period of six months following
the action of the Committee.
13.5. Securities Laws. No Shares will be issued or transferred pursuant
---------------
to an Award unless and until all then applicable requirements imposed by
Federal and state securities and other laws, rules and regulations and by
any regulatory agencies having jurisdiction, and by any exchanges upon
which the Shares may be listed, have been fully met. As a condition
precedent to the issuance of Shares pursuant to the grant or exercise of an
Award, the Company may require the Participant to take any reasonable
action to meet such requirements. The Committee may impose such conditions
on any Shares issuable under the Plan as it may deem advisable, including,
without limitation, restrictions under the Securities Act of 1933, under
the requirements of any exchange upon which such shares of the same class
are then listed, and under any blue sky or other securities laws applicable
to such shares. The Committee may also require the Participant to represent
and warrant at the time of issuance or transfer that the Shares are being
acquired only for investment purposes and without any current intention to
sell or distribute such shares.
13.6. No Right to Continued Employment. Neither the establishment of
--------------------------------
the Plan nor the granting of any Award hereunder shall confer upon any
Eligible Employee any right to continue in the employ of the Company or any
Subsidiary of the Company, or interfere in any way with the right of the
Company or any Subsidiary of the Company to terminate such employment at
any time.
I-11
13.7. No Rights as Shareholder. Except as otherwise provided in Section
------------------------
7.4, Participant shall have no rights as a holder of Shares with respect to
any unissued securities covered by an Award until the date the Participant
becomes the holder of record of such securities.
13.8. Other Plans. The value of, or income arising from, any Awards
-----------
issued under this Plan shall not be treated as compensation for purposes of
any pension, profit sharing, life insurance, disability or other retirement
or welfare benefit plan now maintained or hereafter adopted by the Company
or any Subsidiary of the Company, unless such plan specifically provides to
the contrary.
13.9. Unfunded Plan. The adoption of the Plan and any reservation of
-------------
Shares or cash amounts by the Company to discharge its obligations
hereunder shall not be deemed to create a trust or other funded
arrangement. Except upon the issuance of Common Stock pursuant to an Award,
any rights of a Participant under the Plan shall be those of a general
unsecured creditor of the Company, and neither a Participant nor the
Participant's permitted transferees or estate shall have any other interest
in any assets of the Company by virtue of the Plan. Notwithstanding the
foregoing, the Company shall have the right to implement or set aside funds
in a grantor trust, subject to the claims of the Company's creditors or
otherwise, to discharge its obligations under the Plan.
13.10. Withholding of Taxes. The Participant shall be responsible for
--------------------
payment of any taxes or similar charges required by law to be withheld from
an Award or an amount paid in satisfaction of an Award, which shall be paid
by the Participant on or prior to the payment or other event that results
in taxable income in respect of an Award. The Award Agreement may specify
the manner in which the withholding obligation shall be satisfied with
respect to the particular type of Award.
13.11. Compliance with Section 409A of the Code. Except to the extent
----------------------------------------
specifically provided otherwise by the Committee, Awards under the Plan are
intended to satisfy the requirements of Section 409A of the Code (and the
Treasury Department guidance and regulations issued thereunder) so as to
avoid the imposition of any additional taxes or penalties under Section
409A of the Code. If the Committee determines that an Award, Award
Agreement, payment, distribution, deferral election, transaction or any
other action or arrangement contemplated by the provisions of the Plan
would, if undertaken, cause a Participant to become subject to any
additional taxes or other penalties under Section 409A of the Code, then
unless the Committee specifically provides otherwise, such Award, Award
Agreement, payment, distribution, deferral election, transaction or other
action or arrangement shall not be given effect to the extent it causes
such result and the related provisions of the Plan and/or Award Agreement
will be deemed modified, or, if necessary, suspended in order to comply
with the requirements of Section 409A of the Code to the extent determined
appropriate by the Committee, in each case without the consent of or notice
to the Participant.
13.12. Severability. If any provision of the Plan or any Award Agreement
------------
shall be determined to be illegal or unenforceable by any court of law in
any jurisdiction, the remaining provisions hereof and thereof shall be
severable and enforceable in accordance with their terms, and all
provisions shall remain enforceable in any other jurisdiction.
13.13. Liability. No employee of the Company and no member of the
---------
Committee or the Board shall be liable for any action or determination
taken or made in good faith with respect to the Plan or any Award granted
hereunder and, to the fullest extent permitted by law, all employees and
members of the Committee or the Board shall be indemnified by the Company
for any liability and expenses which may occur through any claim or cause
of action arising under or in connection with this Plan or any Awards
granted under this Plan.
13.14. Governing Law. This Plan and actions taken in connection with it
-------------
shall be governed by the laws of Ohio, without regard to the principles of
conflict of laws.
As adopted by the Board of Directors on March 9, 2007.
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THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION Mark Here [ ]
IS INDICATED, WILL BE VOTED "FOR" THE PROPOSALS. for Address
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. Change or
Comments
PLEASE SEE
REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
1. Authority to elect as directors the following seven (7) nominees:
01-Candace Kendle, For Withhold For All
02-Christopher C. Bergen, All All Except
03-Robert R. Buck, / / / / / /
04-G. Steven Geis,
05-Donald C. Harrison,
06-Timothy E. Johnson, &
07-Frederick A. Russ
(INSTRUCTION: Write the number(s) of any nominee(s)
for whom authority to vote is withheld.)
--------------------------------------------------
2. To approve the 2007 Stock Incentive Plan. For Against Abstain
/ / / / / /
3. To ratify the appointment of Deloitte & Touche LLP For Against Abstain
as the Company's registered public accounting / / / / / /
firm for 2007.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders dated April 6, 2007 and the Proxy Statement furnished
therewith. Any proxy heretofore given to vote said shares is hereby revoked.
Dated: , 2007
-------------------------------
- ------------------------------------------------------------------------------
(Signature)
- ------------------------------------------------------------------------------
(Signature)
(Important: Please sign exactly as name appears hereon indicating, where
proper, official position or representative capacity. In the case of joint
holders, all should sign.)
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
WE ENCOURAGE YOU TO TAKE ADVANTAGE OF INTERNET OR TELEPHONE VOTING,
BOTH ARE AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK.
INTERNET AND TELEPHONE VOTING IS AVAILABLE THROUGH 11:59 PM EASTERN TIME
THE DAY PRIOR TO THE MEETING DAY.
YOUR INTERNET OR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR
SHARES IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
- ------------------------------------- -----------------------------------
INTERNET TELEPHONE
http://www.proxyvoting.com/kndl 1-866-540-5760
Use the internet to vote your proxy. Use any touch-tone telephone to
Have your proxy card in hand when OR vote your proxy. Have your proxy
you access the website. card in hand when you call.
- ------------------------------------- -----------------------------------
If you vote your proxy by Internet or by telephone, you do NOT
need to mail back your proxy card.
To vote by mail, mark, sign and date your proxy card and return it in the
enclosed postage-paid envelope.
PROXY KENDLE INTERNATIONAL INC. PROXY
1200 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Karl Brenkert III and Jarrod B. Pontius,
or either of them, proxies of the undersigned, each with the power of
substitution, to vote all shares of Common Stock that the undersigned would
be entitled to vote on the matters specified below and in their discretion
with respect to such other business as may properly come before the Annual
Meeting of Shareholders of Kendle International Inc. to be held on May 10,
2007 at 9:30 A.M. Eastern Time in the Green Room at the Aronoff Center for
the Arts, 650 Walnut Street, Cincinnati, Ohio or at any postponement or
adjournment of such Annual Meeting.
THIS PROXY WILL BE VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS UNLESS A
CONTRARY CHOICE IS SPECIFIED.
PLEASE DATE, SIGN AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
(This proxy is continued and is to be signed on the reverse side.)
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ADDRESS CHANGE/COMMENTS (MARK THE CORRESPONDING BOX ON THE REVERSE SIDE)
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FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE DATE, SIGN AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.