SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No.      )

 

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

 

HEALTHCARE REALTY TRUST INCORPORATED

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

April 4, 2007

TO OUR SHAREHOLDERS:

 

You are cordially invited to attend the 2007 annual meeting of shareholders of Healthcare Realty Trust Incorporated, to be held on Tuesday, May 15, 2007, at 10:00 a.m. (local time) at the Company’s executive offices at 3310 West End Avenue, Suite 700, Nashville, Tennessee.

 

Please read the enclosed 2006 Annual Report to Shareholders and Proxy Statement for the 2007 annual meeting. Whether or not you plan to attend the meeting, please sign, date and return the enclosed proxy, which is being solicited by the Board of Directors, as soon as possible so that your vote will be recorded. If you attend the meeting, you may withdraw your proxy and vote your shares personally.

 

Sincerely,

 

David R. Emery
Chairman and Chief Executive Officer

 

 

IMPORTANT

 

COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY

AND RETURN IT PROMPTLY.

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

To Be Held May 15, 2007

 

TO OUR SHAREHOLDERS:

 

The annual meeting of shareholders of Healthcare Realty Trust Incorporated (the “Company”) will be held on Tuesday, May 15, 2007, at 10:00 a.m. (local time) at 3310 West End Avenue, Suite 700, Nashville, Tennessee, for the following purposes:

 

(1) To elect three nominees as Class 2 directors for three-year terms;

 

(2) To act on a proposed Healthcare Realty Trust Incorporated 2007 Employees Stock Incentive Plan;

 

 

(4) To transact any other business that properly comes before the meeting or any adjournment thereof.

 

Holders of the Company’s Common Stock of record at the close of business on March 15, 2007 are entitled to vote at the meeting or at any adjournment of the meeting.

 

By order of the Board of Directors

 

David R. Emery
Chairman and Chief Executive Officer

 

Dated: April 4, 2007

 

 

IMPORTANT

 

 

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, TO ASSURE THE PRESENCE OF A QUORUM, PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY AS SOON AS POSSIBLE. IF YOU ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE THE PROXY IS EXERCISED.

 

 

3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203

 

PROXY STATEMENT

 

This Proxy Statement contains information related to the annual meeting of shareholders to be held at 3310 West End Avenue, Suite 700, Nashville, Tennessee, on Tuesday, May 15, 2007, at 10:00 a.m. (local time) for the purposes set forth in the accompanying notice, and at any adjournment thereof. This Proxy Statement and the accompanying proxy are first being mailed or given to shareholders on or about April 4, 2007.

 

If the enclosed proxy is properly executed, returned and not revoked, it will be voted in accordance with the instructions, if any, given by the shareholder, and if no instructions are given, it will be voted (a) FOR the election as directors of the nominees described in this Proxy Statement, (b) FOR the approval of the Healthcare Realty Trust Incorporated 2007 Employees Stock Incentive Plan, (c) FOR ratification of the appointment of the firm BDO Seidman, LLP as independent auditors of the Company and its subsidiaries and (d) FOR the recommendation of the Board of Directors on any other proposal that may properly come before the meeting. The Corporate Governance Committee of the Company’s Board of Directors selected the persons named as proxies in the enclosed proxy.

 

Shareholders who sign proxies have the right to revoke them at any time before they are voted by written request to the Company, and the giving of the proxy will not affect the right of a shareholder to attend the meeting and vote in person.

 

The close of business on March 15, 2007 has been fixed as the record date for the determination of shareholders entitled to vote at the meeting. As of the close of business on such date, the Company had 150,000,000 authorized shares of common stock, $.01 par value (the “Common Stock”), of which 47,820,217 shares were outstanding and entitled to vote. The Common Stock is the Company’s only outstanding class of voting stock.

 

Each share of Common Stock will have one vote on each matter to be voted upon at the meeting.

 

ELECTION OF DIRECTORS

 

The Board of Directors is divided into three classes having three-year terms that expire in successive years. The current three-year term of the Class 2 directors expires at the 2007 annual meeting. The Board of Directors proposes that the nominees described below, all of whom have been nominated by the Board of Directors upon the recommendation of the Company’s Corporate Governance Committee and are currently serving as Class 2 directors, be re-elected to Class 2 to serve until the annual meeting of shareholders in 2010 or until their successors have been elected and take office. Each nominee has consented to be a candidate and to serve, if elected.

 

According to Maryland law, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. The Company’s Articles of Incorporation do not provide for cumulative voting and, accordingly, each shareholder may cast one vote per share of Common Stock for each nominee.

 

Unless a proxy specifies otherwise, the persons named in the proxy will vote the shares covered thereby for the nominees designated by the Board of Directors listed below. Should any nominee become unavailable for election, shares covered by a proxy will be voted for a substitute nominee selected by the Board of Directors upon the recommendation of the Corporate Governance Committee of the Board.

 

Class 2 Nominees

 

The nominees for election as Class 2 directors are:

 

 

Continuing Directors

 

The persons named below will continue to serve as directors until the annual meeting of shareholders in the year indicated and until their successors are elected and take office. Shareholders are not voting on the election of the Class 1 and Class 3 directors.

 

 

posted on the Company’s website (www.healthcarerealty.com) and is available in print free of charge to any shareholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Investor Relations, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Company’s principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions by posting such information on its website.

 

Committee Duties

 

 

 

 

 

 

 

 

 

 

Meeting Attendance

 

The Board of Directors held a total of five meetings in 2006. Each director attended at least 75% of the meetings of the Board and committees of the Board on which such director served. The Company has not adopted a formal policy regarding director attendance at annual meetings of shareholders, but encourages each member of the Board of Directors to attend. Two members of the Board attended the 2006 annual meeting of shareholders.

 

Non-Management Executive Sessions

 

Periodically, and no less frequently than semi-annually, the non-management directors meet in executive session. The non-management directors have appointed Edwin B. Morris III to preside over the non-management executive sessions. During 2006, the non-management directors held four executive sessions. Shareholders and other parties interested in communicating with the non-management directors as a group may do so by contacting Mr. Morris in writing c/o Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203.

 

Director Education

 

The Corporate Governance Committee has adopted a set of guidelines that encourages all directors to pursue ongoing education and development studies on topics that they deem relevant given their individual backgrounds and committee assignments on the Board of Directors. Each director is expected to attend at least one ISS-accredited director education program during his or her three-year term as director. The Company pays for each director’s expenses incurred to attend accredited director education programs. Two directors attended ISS-accredited programs in 2006 and three directors attended ISS-accredited programs in 2005.

 

Security Holder Communication with the Board of Directors

 

Shareholders and other parties interested in communicating directly with the Board of Directors or an individual director may do so by writing to Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203, Attention: Secretary. The Secretary of the Company will review all such correspondence and will regularly forward to the Board a summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deals with the functions of the Board or committees thereof or that she otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board and request copies of any such correspondence.

 

Independence of Directors

 

The Board of Directors has adopted a set of Corporate Governance Principles, addressing, among other things, standards for evaluating the independence of the Company’s directors. The full text of the Principles can be found in the Corporate Governance section of the Company’s website (www.healthcarerealty.com). A copy may also be obtained upon request from the Company’s Secretary.

 

Pursuant to the Principles, the Board undertook its annual review of director independence in January 2007. During this review, the Board considered transactions and relationships during the prior year between each director or any member of his or her immediate family and the Company and its subsidiaries, affiliates and equity investors. The Board also examined transactions and relationships between directors or their affiliates and members of the senior management or their affiliates. As provided in the Principles, the purpose of this review was to determine whether any such relationship or transaction was inconsistent with a determination that a director is independent.

 

To aid in making its annual review of director independence, the Board has adopted categorical standards for determining independence. A director is independent unless:

 

 

As a result of this review, the Board affirmatively determined that all of the directors are independent of the Company and its management under the standards adopted pursuant to the Principles with the exception of David R. Emery, who is employed by the Company as its Chief Executive Officer and is therefore not independent.

 

Director Nominee Evaluation Process

 

The Corporate Governance Committee is responsible for developing and implementing policies and practices relating to corporate governance. As part of its duties, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. A copy of the Corporate Governance Committee’s charter can be found in the Corporate Governance section of the Company’s website (www.healthcarerealty.com).

 

Once the Corporate Governance Committee has identified a prospective nominee, the Committee reviews the information provided to the Committee with the recommendation of the prospective candidate, as well as the Committee’s own knowledge of the prospective candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional Board members to fill vacancies or expand the size of the Board and the likelihood that the prospective nominee can satisfy the evaluation factors described below. The Committee then evaluates the prospective nominee against the following standards and qualifications:

 

 

 

The Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the need for Audit Committee expertise and the evaluations of other prospective nominees. In connection with this evaluation, the Committee determines whether to interview the prospective nominee, and if warranted, one or more members of the Committee, and others as appropriate, interview prospective nominees in person or by telephone. After completing this evaluation and interview, the Committee makes a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board determines after considering the recommendation and report of the Committee.

 

Shareholder Recommendation or Nomination of Director Candidates

 

The Company has not received any shareholder recommendations of director candidates with regard to the election of directors covered by this Proxy Statement or otherwise. The Corporate Governance Committee has not specifically adopted a policy regarding the consideration of shareholder nominees for directors, but its general policy is to welcome and consider any recommendations for future nominees. The Corporate Governance Committee will consider for nomination as director of the Company any director candidate recommended or nominated by shareholders in accordance with the process outlined below.

 

Shareholders wishing to recommend candidates for consideration by the Corporate Governance Committee may do so by providing the candidate’s name, qualifications and other pertinent information in writing to the Corporate Governance Committee, c/o Secretary, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203.

 

Such information should include:

 

 

The Bylaws of the Company provide that any shareholder who is entitled to vote for the election of directors at a meeting called for such purpose may nominate persons for election to the Board of Directors subject to the following notice requirements. This is the procedure to be followed for direct nominations, as opposed to recommendation of nominees for consideration by the Corporate Governance Committee. To be timely for the 2008 annual meeting, such notice must be received by the Company at its executive offices no earlier than November 4, 2007 nor later than December 4, 2007.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

 

The following table sets forth as of January 31, 2007 the beneficial ownership of the Company’s equity securities in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. This means that all Company securities over which the directors, nominees and executive officers directly or indirectly have or share voting or investment power are listed as beneficially owned.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than 10% of the Company’s Common Stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Common Stock. These officers, directors and greater than 10% shareholders of the Company are required by SEC rules to furnish the Company with copies of all Section 16(a) reports they file. There are specific due dates for these reports and the Company is required to report in this Proxy Statement any failure to file reports as required during 2006.

 

During 2006, based upon a review of these filings and written representations from the Company’s directors and executive officers, the Company believes that all reports required to be filed with the SEC by Section 16(a) during the most recent fiscal year have been timely filed.

 

2007 EMPLOYEES STOCK INCENTIVE PLAN

 

The Company is asking the shareholders to approve the Healthcare Realty Trust Incorporated 2007 Employees Stock Incentive Plan (the “Incentive Plan”). The Board, upon the recommendation of the Compensation Committee, adopted the Incentive Plan on January 23, 2007, subject to shareholder approval. The existing 2003 Employees Restricted Stock Incentive Plan will be superseded by the Incentive Plan.

 

Reasons for the Incentive Plan

 

The purpose of the Incentive Plan is to advance the Company’s interests and the interests of its shareholders by attracting, retaining, and motivating employees who will be responsible for the long-term success and development of the Company. The Incentive Plan offers such employees incentives to put forth maximum efforts for the success of the business and affords them the opportunity to acquire a proprietary interest in the Company through stock ownership and other performance-based rights.

 

The Company recently announced the planned sale of its senior living assets, which will result in a reset of the quarterly dividend to a lower amount that will be commensurate with the remaining, smaller asset base. Because the Company’s current incentive stock plan benchmarked a dividend payment that corresponded to the larger portfolio that existed in 2004, the Company believes that the current program will not fulfill its intended purpose to create long-term incentives to Company employees. Accordingly, the Company has designed a new plan that it believes will provide meaningful incentives to its employees to put forth maximum efforts to grow the Company’s business.

 

Description of the Plan

 

A copy of the Incentive Plan is attached to this Proxy Statement as Annex A and is incorporated herein by reference. The description below is a summary and not intended to be a complete description of the Incentive Plan. Please read the Incentive Plan for more detailed information.

 

Plan Administration and Eligibility

 

The Incentive Plan is administered by the Compensation Committee. In administering the Incentive Plan, the Compensation Committee will determine, among other things: (i) individuals to whom grants of awards will be made; (ii) the type and size of awards; and (iii) the terms of an award which may include a vesting schedule, restrictions or performance criteria, and deferral opportunity. The Compensation Committee may also construe and interpret the Incentive Plan.

 

All employees of the Company, or any subsidiary, partnership or limited liability company in which the Company owns a majority interest, and any director, consultant or other independent contractor providing services to the Company are eligible to receive awards under the Incentive Plan. At December 31, 2006, the Company had 201 employees.

 

Shares Available for Issuance

 

The Incentive Plan provides that 2,390,272 shares of Common Stock, in the aggregate, will be available for the granting of awards under the Incentive Plan. The Common Stock subject to the Incentive Plan will be authorized but unissued shares or issued shares that have been reacquired by the Company. Pursuant to the Incentive Plan, the number and kind of shares to which awards are subject may be appropriately adjusted in the event of certain changes in capitalization of the Company, including stock dividends and splits, reclassifications, recapitalizations, reorganizations, mergers, consolidations, spin-offs, split-ups, combinations or exchanges of shares, and certain distributions and repurchases of shares. With respect to any award under the Incentive Plan which expires or terminates without having been exercised in full or is forfeited, the shares (including restricted stock) associated with such award will again become available for issuance pursuant to other awards under the Incentive Plan.

 

Awards under the Plan

 

Restricted Stock and Restricted Stock Units

 

Subject to the limitations of the Incentive Plan, the Compensation Committee may grant restricted stock or restricted stock units to eligible employees. Restricted stock awards are shares of Common Stock that are subject to restrictions on transfer or other incidence of ownership and forfeiture conditions which lapse based solely on continued employment with the Company for specified periods or based on the achievement of specified performance standards, in either case, as determined by the Compensation Committee. Restricted stock units are awards denominated in units of Common Stock that are non transferable and subject to forfeiture until specific conditions established by the Compensation Committee are satisfied. Grantees of restricted stock will have voting rights with respect to the restricted stock and shall receive dividends thereunder. Grantees of restricted stock units do not have shareholder voting rights and do not receive dividend payments. Forfeiture conditions of restricted stock awards or restricted stock units may be performance or nonperformance based, or a combination thereof, at the sole discretion of the Compensation Committee.

 

Performance Awards

 

The Compensation Committee may grant performance awards to eligible employees. Each performance award will specify the performance goals, performance period and the number of performance units granted. The performance units will also be subject to such other restrictions and conditions as the Compensation Committee deems appropriate. The performance period will not be more than ten years, as determined by the Compensation Committee. If the Compensation Committee determines that the performance goals have been met, the employee will be entitled to the appropriate payment provided in the award. At the option of the Compensation Committee, payment may be made in shares of Common Stock, in cash, or a combination of cash and shares of Common Stock. The award of performance units does not create any rights in such employee as a shareholder of the Company.

 

Unless the Compensation Committee determines otherwise, if an employee’s employment terminates by reason of death or disability prior to the expiration of the performance period applicable to any performance unit then held by the employee, all restrictions pertaining to such performance units shall lapse and the employee will be entitled to the full amount of any award of performance units. Unless the Compensation Committee determines otherwise, upon termination for any other reason, all performance units are terminated.

 

Change in Control

 

Generally, in the event of a Change in Control (as defined in the Incentive Plan or in the agreement evidencing an award under the Incentive Plan) of the Company, all restrictions on restricted stock and restricted stock units lapse and outstanding performance units become fully vested and immediately payable to the employee, unless the surviving entity assumes the Company’s obligations under the awards.

 

Amendments and Termination

 

The Board may at any time, terminate, and from time to time, amend or modify the Incentive Plan. Any such action of the Board generally may be taken without the approval of the shareholders, but the Board may make any material revision to the Plan only if shareholder approval is not required by applicable law or the rules of the New York Stock Exchange. In no event may an amendment to the Incentive Plan increase the number of shares of Common Stock reserved for issuance thereunder or change the class of persons eligible to receive awards under the Incentive Plan without the approval of the shareholders.

 

The Incentive Plan will continue until terminated by the Board.

 

Federal Income Tax Considerations

 

The following discussion briefly describes the federal income tax consequences generally applicable to employees and the Company with respect to awards under the Incentive Plan. It is not intended to be a complete discussion of the federal income tax consequences of participation in the Incentive Plan and is qualified in its

entirety by reference to the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations adopted under the Code.

 

Restricted Stock

 

In the absence of an election under Section 83(b) of the Code (a “Section 83(b) election”), an employee who receives restricted stock will recognize no income at the time of issuance. When the restriction period expires with respect to shares of restricted stock, an employee will recognize ordinary income equal to the fair market value of the Common Stock as of the date the restrictions expire over the amount paid for such Common Stock (if any). The employee’s basis for the Common Stock is equal to the amount included in income on the expiration of the restriction period plus the amount paid (if any), and the holding period begins just after the restriction period ends. Any disposition of the Common Stock will result in a long-term or short-term capital gain or loss (depending upon the time the shares are held after the end of the restriction period). Dividends received by an employee on restricted stock constitute ordinary income in the year received. The Company will be entitled to a deduction equal to the amount of ordinary income recognized by an employee at the time such income is included in the employee’s income, and is also entitled to a deduction for dividends paid to the employee on shares of Common Stock which remain subject to restrictions.

 

If a Section 83(b) election is made within 30 days of the initial award of restricted stock, the restricted stock is treated, for tax purposes, as though the restriction period did not apply. Thus, the employee must include the excess of the fair market value of the Common Stock (computed without regard to the restrictions) on the date of the issuance over the amount paid for the Common Stock, if any, as ordinary income and the holding period begins just after such award date. The Company is entitled to a corresponding deduction for the grant, but dividends on the restricted stock would not be deductible. Any subsequent disposition of the Common Stock by the employee, other than by forfeiture, would result in capital gain or loss, which would be long-term or short-term depending upon the holding period. No deduction is permitted to an employee who has made the Section 83(b) election and who subsequently forfeits the restricted stock, other than a deduction for the amount (if any) the employee paid for the restricted stock, which is treated as a long-term or short-term capital loss, depending upon the holding period. In such case, the Company would be required to include as ordinary income the amount of the deduction it claimed with respect to the restricted stock.

 

Performance Awards

 

Generally, performance awards granted to an employee will be taxable to the employee in the amount of cash and the fair market value of Common Stock received. The Company will be entitled to a deduction for such amount at the time it is includable in the income of the employee.

 

Treatment as Deferred Compensation

 

Restricted stock units or other awards under the Incentive Plan may, in some cases, result in the deferral of compensation that is subject to the requirements of Section 409A of the Code. Section 409A requirements include the timing of elections to defer, the timing of distributions and certain prohibitions on the acceleration of distributions. If these requirements are not met, the amounts deferred will generally be subject to immediate tax in the year the amounts are vested, imposition of an additional 20% income tax in addition to ordinary income taxes and interest at the underpayment rate plus 1%. The Compensation Committee has authority to interpret the Incentive Plan in favor of compliance with Section 409A.

 

Adoption of Incentive Plan

 

The affirmative vote of a majority of the votes cast on the proposal is required to approve the Incentive Plan; provided that the number of votes cast on the proposal represents at least 50% of the shares entitled to vote thereon.

 

The inspectors of election will treat shares represented by proxies that reflect abstentions as shares that are present and entitled to vote for purposes of determining the presence of a quorum. Under New York Stock Exchange rules, the proposal to shareholders to approve the Incentive Plan is a “non-discretionary” item. This means brokerage firms that have not received voting instructions from their clients on this item may not vote on the Incentive Plan. These so-called “broker non-votes” will be included in the calculation of the number of votes considered to be present at the meeting for purposes of determining a quorum. With respect to the proposal of the

adoption of the Incentive Plan, abstentions and broker non-votes will not be counted as votes cast so they could prevent the Company from satisfying the requirement that the number of votes cast with respect to the Incentive Plan represents at least 50% of the shares entitled to vote thereon.

 

The Board of Directors recommends a vote FOR the approval of the Healthcare Realty Trust Incorporated
2007 Employees Stock Incentive Plan.

 

SELECTION OF AUDITORS

 

The Audit Committee has appointed BDO Seidman, LLP, Certified Public Accountants, as the Company’s independent auditors for the fiscal year 2007. Representatives of this firm are expected to be present at the meeting and will have an opportunity to make a statement if they desire and will be available to respond to appropriate questions.

 

The affirmative vote of a majority of the votes cast at the meeting is needed to ratify the appointment of BDO Seidman, LLP as the Company’s independent auditors for the fiscal year 2007. If the appointment is not ratified, the matter will be referred to the Audit Committee for further review. Abstentions as to this proposal will have no effect on the outcome of the vote.

 

Audit and Non-Audit Fees

 

The following tables present fees for professional audit services rendered by BDO Seidman, LLP and related expenses in 2006 and 2005 for the audit of the Company’s annual Consolidated Financial Statements for the last two years.

 

 

 

 

All services provided by the Company’s independent auditor were approved by the Audit Committee, which concluded that the provision of such services by BDO Seidman, LLP was compatible with the maintenance of such accounting firm’s independence in the conduct of its auditing functions.

 

For the purpose of insuring the continued independence of BDO Seidman, LLP, the Company determined that its independent auditors will not provide consulting services to the Company. Additionally, the charter of the Audit Committee provides that the Audit Committee must pre-approve all services to be provided by the auditor. Proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee.

 

Change in Independent Auditors

 

On July 11, 2005, BDO Seidman, LLP was engaged as the Company’s independent auditors to audit the Company’s Consolidated Financial Statements for each of the three years ended December 31, 2002, 2003 and 2004, and was subsequently engaged to audit the Company’s Consolidated Financial Statements for the year ended December 31, 2005. BDO Seidman, LLP has completed each of these financial statement audits and has issued an unqualified opinion on the Consolidated Financial Statements for each of those years. With respect to BDO Seidman, LLP’s responsibility to audit management’s assessment and opinion on Management’s Report on Internal

Control Over Financial Reporting as of December 31, 2004, BDO Seidman, LLP was unable to express an opinion on either management’s assessment of, or on the effectiveness of, the Company’s internal control over financial reporting as of December 31, 2004, because its engagement to audit management’s assessment commenced subsequent to December 31, 2004. As a result, BDO Seidman, LLP was unable to obtain sufficient contemporaneous evidence necessary to express an opinion. BDO Seidman, LLP has issued an opinion, and attested to management’s assessment, that the Company’s system of internal control over financial reporting was effective as of December 31, 2005 and 2006.

 

During the years ended December 31, 2005 and 2006, there were no disagreements with BDO Seidman, LLP on matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of BDO Seidman, LLP, would have caused it to make reference thereto in its reports on the Company’s Consolidated Financial Statements for such years. The Company did not consult BDO Seidman, LLP prior to its engagement regarding the application of accounting matters or principles, or the type of audit opinion that might be rendered on the Company’s Consolidated Financial Statements, or any other matters or reportable events of the type set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. Prior to the engagement of BDO Seidman, LLP, the Company authorized the Company’s previous auditors Ernst & Young LLP, and KPMG LLP to discuss with BDO Seidman, LLP any and all matters relating to the independent auditor relationships between the Company and Ernst & Young LLP and KPMG LLP and to respond fully to their inquiries.

 

The Company had an 11-year relationship with Ernst & Young LLP as the Company’s auditors. Following the 2003 audit by Ernst & Young LLP, the Audit Committee decided to interview other accounting firms, along with Ernst & Young LLP, with regard to audit services for 2004 and selected KPMG LLP to audit the Consolidated Financial Statements as of and for the year ended December 31, 2004. KPMG LLP was appointed by the Audit Committee as the Company’s independent auditors on March 17, 2004 and was subsequently dismissed by the Audit Committee on June 7, 2005. KPMG LLP did not complete its audit of the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2004, and, therefore, has not issued an audit report with respect to that audit.

 

During the year ended December 31, 2004 and through June 7, 2005, the date of dismissal, there were no disagreements with KPMG LLP on matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make reference thereto in its reports on the Company’s Consolidated Financial Statements for such year.

 

KPMG LLP raised certain issues with respect to the accounting for two properties managed by a single operator. KPMG LLP advised the Company that it believed that these transaction structures created two variable interest entities, or “VIEs,” within the meaning of FIN 46R, which would require operations of the VIEs to be consolidated into the Company’s Consolidated Financial Statements. Upon re-examination of the transaction and subsequent to KPMG LLP’s dismissal, the Company concluded that the transaction structures are VIEs and restated its previously issued Consolidated Financial Statements to reflect the consolidation of the operations of these entities.

 

On May 25, 2005, the Audit Committee received a letter from KPMG LLP informing the committee that, as a result of its findings concerning the VIE’s, KPMG LLP no longer had confidence in the ability of current financial management, who sign the management representation letter, to determine that the Company’s Consolidated Financial Statements are fairly presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”). KPMG LLP further informed the Audit Committee that its assertion was based on competence and not integrity. At that point, in May 2005, KPMG LLP advised the Company that it was ceasing work on the audit for the year ended December 31, 2004 until appropriate remedial action was taken to provide assurance to KPMG LLP that the Company’s Consolidated Financial Statements are fairly presented in conformity with GAAP. The Company and its Audit Committee disagree with KPMG LLP’s characterization regarding the competence of financial management. At no time have Ernst & Young LLP or BDO Seidman, LLP made any similar assertions with respect to the Company’s financial management.

 

KPMG LLP also informed the Company that it believed that it had identified material weaknesses in the Company’s internal control over financial reporting as of December 31, 2004. Management of the Company agreed

with this assessment and concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2004.

 

The Board recommends that the shareholders vote FOR ratification of the

appointment of BDO Seidman, LLP as the Company’s independent auditors.

 

AUDIT COMMITTEE REPORT

 

The following Report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

 

The Audit Committee of the Board of Directors of the Company consists entirely of directors who meet the independence and experience requirements of the New York Stock Exchange. Audit Committee members may serve on the audit committees of no more than three public companies.

 

Pursuant to the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC, the Company must disclose which members, if any, of the Audit Committee are “audit committee financial experts” (as defined in the SEC’s rules). The Company’s Board of Directors has determined that Bruce D. Sullivan, the chairman of the Audit Committee, meets the criteria to be an “audit committee financial expert.”

 

 

The Company’s management has primary responsibility for preparing the Company’s Consolidated Financial Statements and implementing internal controls over financial reporting. The Company’s 2006 independent auditors, BDO Seidman, LLP, are responsible for expressing an opinion on the Company’s Consolidated Financial Statements and on the effectiveness of its internal control over financial reporting.

 

The role and responsibilities of the Audit Committee are set forth in its charter which has been approved by the Board and is available on the Company’s website.

 

As more fully described in its charter, the Audit Committee reviews the Company’s financial reporting process on behalf of the Board. Management has the primary responsibility for the Consolidated Financial Statements and the reporting process. The Company’s independent auditors are responsible for performing an audit of the Company’s Consolidated Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States of America) and expressing an opinion on the conformity of the Consolidated Financial Statements to accounting principles generally accepted in the United States of America The internal auditor is responsible to the Audit Committee and the Board for testing the integrity of the financial accounting and reporting control systems and such other matters as the Audit Committee and Board determine.

 

To fulfill its responsibilities, the Audit Committee has met and held discussions with management and the independent auditors concerning the Consolidated Financial Statements for the fiscal year ended December 31, 2006. Management represented to the Audit Committee that the Company’s Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the Consolidated Financial Statements with management and the independent auditors. The Audit Committee discussed with the independent auditors all communications required by generally accepted auditing standards.

 

In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standard No. 1 (“Independence Discussions with Audit Committees”).

 

In addition, the Audit Committee reviewed major initiatives and programs aimed at strengthening the effectiveness of the Company’s internal control structure. The Audit Committee discussed with the internal auditor the Company’s internal controls and reporting procedures. As part of this process, the Audit Committee continued to monitor the scope and adequacy of the Company’s internal auditing program, reviewing staffing levels and steps taken to implement recommended improvements in internal procedures and controls.

 

Based on the Audit Committee’s review of the audited Consolidated Financial Statements and discussions with management and BDO Seidman, LLP, as described above and in reliance thereon, the Audit Committee recommended to the Company’s Board of Directors that the audited Consolidated Financial Statements for the fiscal year ended December 31, 2006 be included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

Members of the Audit Committee:

 

Bruce D. Sullivan (Chairman)

Marliese E. Mooney

Errol L. Biggs, Ph.D.

Batey M. Gresham, Jr.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Compensation Committee, which is composed entirely of non-employee, independent directors, administers the Company’s executive compensation programs. In performing its duties, the Compensation Committee:

 

 

Comprehensive Compensation Policy

 

The Company’s principal measures of corporate success are growth in funds from operations (“FFO”) and funds available for distribution (“FAD”) and reducing the percentage of FFO and FAD used to pay dividends (the “Dividend Payout Percentage”).

 

The Company’s long-term incentive compensation program is designed to link compensation to the Company’s overall performance in achieving these goals. Since inception, the Company has used restricted stock grants as the primary means of delivering long-term incentive compensation to its officers. The Company has not granted stock options or similar rights to its management group. The program does not consider individual performance in setting compensation, although the Compensation Committee could choose to reward outstanding individual performances. All elements of officer compensation are, to the greatest extent possible, formula based, which management believes reduces the acrimony that differences in compensation among individuals can produce and concentrates the attention of the management group on Company-wide performance goals. Awards under the Company’s restricted stock plans have reflected the Company’s evolving status into an operating entity with greater emphasis on managing and replacing a maturing portfolio by providing incentives to all of its officers who will direct their individual and collective efforts toward insuring the continued successful delivery of dividends to shareholders.

 

The Compensation Committee believes that the compensation of the Company’s officers, including the Named Executive Officers, should provide a competitive level (but less than top of the market) of total compensation necessary to attract and retain talented and experienced officers, and motivate them to contribute to the Company’s success. To date, the Compensation Committee believes that this approach has been successful in retaining officers. Officers share in the Company’s success through increasing stock ownership.

 

The Company’s compensation program for its officers consists of three key elements:

 

 

Compensation Methodology

 

Compensation Committee’s Governance.  The Compensation Committee approves salaries and makes other compensation decisions for the Named Executive Officers and the Company’s directors. Salaries and other compensation decisions for all other officers and employees are made by management within the parameters of the Company’s compensation policies and plans.

 

The Compensation Committee meets four times a year in conjunction with the quarterly meetings of the full Board of Directors and more often if necessary. Prior to each regular meeting, members of the Company’s management send material to each of the Compensation Committee members, including minutes of the previous meeting, an agenda and recommendations for the upcoming meeting, and other materials relevant to the agenda items. During 2006, the Company’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, General Counsel, and outside legal counsel also attended the Compensation Committee meetings. These officers provide information to the Compensation Committee concerning the employees of the Company, discuss performance measures relating to officer compensation and discuss with the Compensation Committee the Company’s compensation of its officers. After every quarterly meeting, the Compensation Committee holds an executive session consisting only of the committee members and frequently holds executive sessions with the Chief Executive Officer.

 

The Compensation Committee retains a compensation consultant, who advises it regarding market trends and practices in executive compensation and with respect to specific compensation decisions. The consultant also provides, at the Compensation Committee’s request, a market survey containing data on the levels of compensation at comparable real estate companies. The consultant may also attend Compensation Committee meetings at the Committee’s request. The consultant attended one of the committee’s five meetings in 2006.

 

In 2006, management began a practice of using comprehensive executive compensation spreadsheets (“tally sheets”) that set forth the Company’s total compensation obligations to its Named Executive Officers under various scenarios. The tally sheets for each Named Executive Officer are distributed to the members of the Compensation Committee for discussion and are used in the preparation of the compensation tables in this Proxy Statement.

 

The Compensation Committee reviews and approves, in advance, employment, severance or similar arrangements or payments to be made to any Named Executive Officer. The Compensation Committee receives reports from the Company’s management pertaining to compensation for all other officers. The Compensation Committee annually reviews all of the perquisites paid to the Named Executive Officers, as well as their compliance with the Company’s policies regarding perquisites.

 

Compensation Consultant.  In May, 2006, the Compensation Committee engaged Ernst & Young LLP, Atlanta, Georgia, as an outside compensation consultant to provide the following consulting services:

 

 

The 2006 Ernst & Young study was the first comprehensive market study of Named Executive Officer compensation performed for the Company since 2003. In performing its services, Ernst & Young LLP interacted collaboratively with the Compensation Committee and senior management. Ernst & Young LLP performed its services as follows:

 

 

 

At the same time, Company management separately retained Ernst & Young LLP to identify market competitive compensation levels to determine salary ranges for the Company’s officers, other than the Named Executive Officers. The Compensation Committee’s policy is to meet annually with the compensation consultant to discuss executive compensation trends. Historically, Ernst & Young LLP has also provided services related to the compensation of the Company’s Board of Directors, but it did not provide such services during 2006.

 

Ernst & Young LLP received total compensation of $80,700 for its services in 2006.

 

Components of Compensation

 

Annual Base Compensation.  Annual base compensation is determined by a market-based formula based upon the total cash compensation (including bonuses) paid by comparable companies for similar positions. The Compensation Committee reviewed the Ernst & Young LLP market compensation salary survey described above and found that annual cash compensation paid to the Named Executive Officers in 2006 was substantially less than cash compensation paid for similar positions within the peer group of companies surveyed.

 

In November 2006, based on the findings of Ernst & Young, the Compensation Committee determined annual base compensation for its Named Executive Officers for 2007 equal to the median (50th percentile) total cash compensation (including annual incentive bonuses) of comparable positions in the Ernst & Young peer group survey, and added a tenure adjustment to the median amount based on the officer’s length of service. The tenure adjustment is calculated as 1/20th of the difference between the median total cash compensation and the 75th percentile total cash compensation for the position for each year of the officer’s service to the Company. The Compensation Committee intends that the Ernst & Young 2006 peer group survey will serve as the benchmark for annual base compensation for the Named Executive Officers for 2007, 2008, and 2009. Of the increase in annual base compensation for 2007 over 2006, twenty-five percent will be paid to each Named Executive Officer in cash and seventy-five percent will be paid in the form of a restricted stock grant having an eight-year vesting period. These restricted stock grants, in lieu of cash, allow the Company to amortize the restricted stock value in accordance with accounting principles generally accepted in the United States versus recording an immediate compensation expense in 2007. The grants of restricted stock are subject to shareholder approval of the Incentive Plan at the 2007 annual meeting of shareholders.

 

For 2008, annual base compensation for the Named Executive Officers will increase over the 2007 amounts by the tenure adjustment increment described in the preceding paragraph. In addition, fifty percent of the difference between the annual base compensation for 2008, as compared with annual base compensation for 2006, will be paid in the form of a restricted stock grant and the remaining fifty percent of the difference will be paid in cash. For 2009, annual base compensation for the Named Executive Officers will increase over the 2008 amounts by the tenure adjustment increment described in the preceding paragraph. In addition, twenty-five percent of the difference between the annual base compensation for 2009, as compared with annual base compensation for 2006, will be paid in the form of a restricted stock grant and the remaining seventy-five percent of the difference will be paid in cash. It is expected that the peer group survey will be performed again in 2009, the median and 75th percentile comparables

will be re-calculated and each officer’s salary will be adjusted based on the new information using the same methodology.

 

While the Compensation Committee recognizes that determining base salaries based solely on market competitiveness data does not directly tie this component to the achievement of the Company’s overall measures of business success, it believes that having a cash compensation system which is completely market driven reduces the acrimony and politicization of the compensation process. The Company’s officer group is small enough that they should be totally focused on the Company’s performance. Officers who are not so focused are mentored or, if necessary, terminated. Moreover, the Compensation Committee views cash compensation as one element of overall compensation and not necessarily as the principal instrument to provide incentive to the officers.

 

Bonuses.  While the Company has not typically awarded cash bonuses to Named Executive Officers, it may do so at its discretion. The Compensation Committee believes that annual cash bonuses may not provide effective incentives to employees to further the Company’s long-term goals. As a result, the Company included bonus levels in peer companies in its base salary formula.

 

Stock Ownership.  The Compensation Committee believes that it is in the Company’s best interest to encourage all employees, especially the Named Executive Officers, to increase their equity position in the Company to promote share ownership and further align officer and shareholder interests. The Company, however, does not have any policies requiring minimum stock ownership of its Named Executive Officers or directors.

 

Awards under the Company’s restricted stock plans have reflected the Company’s evolving status into an operating entity with greater emphasis on managing and replacing a maturing portfolio by providing incentives to all of its officers who will direct their individual and collective efforts toward insuring the continued successful delivery of dividends to shareholders. The Compensation Committee also believes that by increasing and broadening the officers’ ownership stake in the Company, future awards under its restricted stock plans should be an effective tool in retaining this broader group of officers. The Compensation Committee periodically reviews the Company’s stock plans and retains the authority to make changes to those plans as deemed necessary. During 2006, the Company had three stock programs whereby its officers might be granted restricted shares of stock of the Company.

 

The Company’s existing Performance Based Restricted Stock Implementation (the “Stock Plan”) is comprised of two distinct programs: the Salary Deferral Plan and the Long-Term Incentive Plan. A third program, the Optional Restricted Stock Vesting Deferral Plan (the “Optional Deferral Plan”), allows an officer to further defer receipt of restricted shares awarded under the Salary Deferral Plan and the Long-Term Incentive Plan. The three programs summarized below are discussed in detail under the heading “Grants of Plan Based Awards” in the section of this Proxy Statement entitled “EXECUTIVE COMPENSATION.”

 

Salary Deferral Plan.  Under the Salary Deferral Plan, officers may elect to defer up to 40% of their base salary in the form of restricted shares of stock. The number of shares can be increased by a multiple of the deferred amount depending on the length of the vesting period selected by the officer. This program is designed to provide the Company’s officers with an incentive to remain with the Company long-term.

 

Long-Term Incentive Plan.  Pursuant to the Long-Term Incentive Plan, all officers, including the Named Executive Officers, can receive restricted shares of stock based upon the Company’s achieving certain performance benchmarks. The Company designates an amount each quarter to a memorandum account for each officer equal to 25% of the officer’s base salary for the preceding quarter. Restricted shares are issued from the available balance in the memorandum account based on achievement of performance measures. If the performance measures are not met, no shares are granted to the employees and the memorandum account balance continues to build up until such performance measures are met.

 

Since its commencement in 2004, 7,819 restricted shares of Common Stock have been granted to the Company’s officers under the Long-Term Incentive Plan, including 3,612 restricted shares to its Named Executive Officers. The aggregate balances of the memorandum accounts totaled $2,719,572 at December 31, 2006, of which $1,059,561 was attributable to the Named Executive Officers.

 

The formula allowing release of restricted shares under the Long-Term Incentive Plan assumed a dividend of $0.63 per share per quarter beginning with the 1st quarter of 2004 and increasing by one-half cent each quarter thereafter. Beginning with the second quarter of 2005, the Company discontinued the practice of increasing its dividends each quarter, and has maintained its quarterly cash dividend at $0.66 per share of Common Stock.

 

The Company recently announced the planned sale of its senior living assets, which will result in a reset of the quarterly dividend to a lower amount that will be commensurate with the remaining, smaller asset base. Because the Long-Term Incentive Plan benchmarked a dividend payment that corresponded to the larger portfolio that existed in 2004, the Company believes that the program will not fulfill its intended purpose to create long-term incentives to Company employees. Accordingly, the Company has designed a new plan that it believes will provide meaningful incentives to its employees to put forth maximum efforts to grow the Company’s business. The terms of this proposed plan are discussed under the section entitled “2007 EMPLOYEES STOCK INCENTIVE PLAN” in this Proxy Statement.

 

Optional Deferral Plan.  Under the Optional Deferral Plan, officers may elect to extend the vesting period of certain restricted shares prior to the original vesting date. This incentive, which helps secure the officer’s allegiance to the Company, is also provided because the vesting period subjects the shares and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

 

In addition to the three stock programs mentioned above, all employees meeting minimum service requirements, including the Company’s officers, are eligible to purchase shares pursuant to the Company’s 2000 Employee Stock Purchase Plan (the “Purchase Plan”). As further discussed under the heading “Grants of Plan Based Awards” in the section entitled “EXECUTIVE COMPENSATION” in this Proxy Statement, each participant is given an option on January 1 of each year to purchase up to $25,000 of the Company’s Common Stock.

 

Perquisites

 

The Compensation Committee’s policy on the provision of executive perquisites with respect to the Named Executive Officers is to allow each of them to receive perquisites up to an amount equal to 10% of their annual base compensation. If the executive receives benefits that would otherwise be considered perquisites in excess of this amount (generally calculated based on the associated tax value), he is required to reimburse the Company the amount of such excess.

 

The Company provides its executive officers with perquisites that it believes are reasonable, competitive and consistent with the Company’s overall executive compensation program. The Company believes that such perquisites help the Company to retain its executive personnel and allows them to operate more effectively. These perquisites include:

 

Use of the Company’s aircraft for personal travel.  The Compensation Committee believes that allowing the Company’s Named Executive Officers to use Company aircraft for personal travel provides the officers with significant convenience, safety, and security at a relatively low incremental cost to the Company.

 

Supplemental life and disability insurance.  The Company also offers to its Named Executive Officers an opportunity to purchase supplemental term life insurance and supplemental disability insurance at the Company’s expense, subject to cost reimbursement pursuant to the perquisite policy discussed above.

 

Internal Revenue Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1 million paid to a corporation’s chief executive officer and the four other most highly compensated executive officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. Restricted stock issued under the 1993 and 2003 Employees Restricted Stock Incentive Plan and associated dividends are not subject to the performance-based compensation deduction under Section 162(m). Consequently, compensation expense in the amount of $1,613,371 in 2006 was not deductible. As a qualifying REIT, the Company does not pay federal income tax; therefore, the unavailability of the Section 162(m)

compensation deduction to these amounts did not result in any increase in the Company’s federal income tax obligations. The Compensation Committee has not adopted a policy requiring all compensation to be deductible.

 

Employment Agreements

 

Each of the Named Executive Officers has an employment agreement. See the heading “Termination and Change in Control Arrangements with Named Executive Officers” under the section entitled “EXECUTIVE COMPENSATION” in this Proxy Statement for further details of these agreements.

 

Retirement Benefits

 

The Company has an Executive Retirement Plan under which an officer designated by the Compensation Committee may receive a specified percentage of the officer’s final average earnings. See the heading ‘‘Post-Employment Compensation” under the section entitled “EXECUTIVE COMPENSATION” in this Proxy Statement for details of the Executive Retirement Plan.

 

All Named Executive Officers are eligible to participate in the Company’s 401(k) plan, pursuant to which each participant may contribute up to the annual maximum allowed under IRS regulations ($15,000 for 2006, $15,500 for 2007). Named Executive Officers over the age of 50 may also contribute an additional $5,000 per year to the plan. The Company provides a matching contribution for the first three percent of base salary contributed in the plan, up to a maximum of $2,800 per year.

 

Compensation of Non-Employee Directors

 

Compensation of non-employee directors is set by the Compensation Committee, based upon a peer review prepared by the Company the findings of which were confirmed by Ernst & Young LLP and approved by the committee.

 

Cash Compensation.  Each non-employee director receives an annual retainer and meeting fee, respectively, with chairpersons of Committees receiving additional annual retainers. See the section entitled “DIRECTOR COMPENSATION” in this Proxy Statement for a complete discussion of the cash compensation given to non-employee directors.

 

Stock Awards.  The Company awards non-employee directors an annual grant of 2,000 restricted shares of Company Common Stock. See the section entitled “DIRECTOR COMPENSATION” in this Proxy Statement for a complete discussion of the terms of the restricted shares granted to non-employee directors.

 

Retirement.  The Company has a retirement plan for outside directors under which a director may receive upon normal retirement an annual payment for a period equal to the number of years of service as a director but not exceeding 15 years. See the section entitled “DIRECTOR COMPENSATION” in this Proxy Statement for a complete discussion of the retirement compensation given to non-employee directors.

 

COMPENSATION COMMITTEE REPORT

 

The following Report of the Compensation Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with Company management and based on such review and discussions, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Members of the Compensation Committee:

 

Edwin B. Morris III (Chairman)

Charles Raymond Fernandez, M.D.

John Knox Singleton

 

EXECUTIVE COMPENSATION

 

The following Summary Compensation Table reflects the total compensation of the Company’s Named Executive Officers.

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The Company has one plan under which performance-based awards may be made to its officers. All of the Company’s officers, including the Named Executive Officers, are eligible to receive performance-based compensation under the Stock Plan, under which shares of Common Stock can be issued based upon the Company’s achieving certain dividend payout percentage benchmarks. The Stock Plan is comprised of two distinct programs, the Salary Deferral Plan discussed on p. 26 and the Long-Term Incentive Plan discussed below.

 

Under the Long-Term Incentive Plan, the Company designates an amount each quarter to a memorandum account for each officer equal to 25% of the officer’s base salary for the preceding quarter. The Company then calculates the dividend payout percentage (adjusted for certain non-cash items) for the four previous quarters. Based on a sliding scale of the dividend payout percentage between 75% and 95% (assuming an increasing dividend at the rate of $.005 per quarter), the Company uses a percentage of the amount in each officer’s memorandum account to issue restricted shares of Common Stock. The price of the shares is based on the market price of the Company’s Common Stock at the time of issuance. The lower the dividend payout percentage, the higher the percentage of the amount in the officer’s memorandum account used to issue shares and, consequently, the greater the number of restricted shares issued to such officer. If the performance measures are not met, no shares are granted to the officers and the memorandum account balance continues to build until when or if the performance measures are met. Restricted shares granted to an officer will have a vesting period of ten years subject to the officer’s continued employment with the Company during that vesting period. Additionally, the Company’s employment agreements with its Named Executive Officers entitle them to receive a cash award equal to their respective memorandum account balances, whether or not earned, upon the officers’ retirement, death, disability, or termination without cause or change in control. Since its commencement in 2004, 7,819 restricted shares of Common Stock have been granted to the Company’s officers under the Long-Term Incentive Plan, including 3,612 restricted shares to its Named Executive Officers. Beginning with the second quarter of 2005, the Company discontinued the practice of increasing its dividends each quarter, and has maintained its quarterly cash dividend at $0.66 per share of Common Stock.

 

No shares were granted during the last fiscal year under the Long-Term Incentive Plan.

 

The following table supplements the Summary Compensation Table by providing more detailed disclosure of equity compensation received by the Named Executive Officers during 2006.

 

 

 

 

 

 

 

 

The Named Executive Officers, with the exception of Mr. Emery, are eligible to receive non-performance-based equity awards under the Company’s Optional Deferral Plan. Under the Optional Deferral Plan certain officers may elect to extend the vesting period of certain restricted shares prior to their original vesting date. An officer who elects to extend the vesting date of his shares will receive additional shares at no additional cost to the officer according to the formula described on p. 27.

 

Pursuant to the Salary Deferral Plan, officers may elect to defer receipt of cash up to 40% of their base salary in the form of shares of restricted stock. The officer must elect his or her participation level and vesting period for the coming year by the end of the current fiscal year. The restricted shares, granted on January 1 of each year, are priced

on the closing market price of the Company’s Common Stock on the last trading day of the year preceding the year in which the shares are issued. Pursuant to the Salary Deferral Plan, the number of shares can be increased by a multiple of the deferred amount depending on the length of the vesting period selected by the officer. Each officer who makes this election will be awarded additional shares at no additional cost to the officer according to the following multiple-based formula:

 

 

This program is designed to provide the Company’s officers with an incentive to remain with the Company long-term. The vesting period subjects the shares obtained by the cash deferral and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

 

Under the Optional Deferral Plan, officers may elect to extend the vesting period of certain restricted shares prior to their original vesting date. An officer who elects to extend the vesting date of his or her shares will receive additional shares at no additional cost to the officer according to the following multiple-based formula:

 

 

This incentive, which helps secure the officer’s allegiance to the Company, is also provided because the vesting period subjects the shares and the restriction multiple to the risk of forfeiture in the event an officer voluntarily terminates employment or who is terminated for cause from employment with the Company. Accordingly, if an officer voluntarily leaves or is terminated for cause, that officer would lose all such shares that had not yet vested.

 

In addition, all employees, are eligible to purchase shares pursuant to the Purchase Plan. Each participant is granted an option on January 1 of each year to purchase up to $25,000 of the Company’s Common Stock. The number of shares is determined by dividing $25,000 by the closing market price of the Company’s Common Stock on December 31 of the preceding year. Participants may purchase shares at a price equal to the lesser of (i) 85% of the grant price or (ii) 85% of the closing market price of the Company’s Common Stock on the purchase date. No option can be exercised for more than $25,000 worth of Common Stock for the life of the option. Each option expires 27 months after it is granted.

Outstanding Equity Awards at Fiscal Year-End

 

The following table discloses the number of securities underlying options and the number and market-based value of restricted shares outstanding that have not vested as of December 31, 2006.

 

 

 

 

Option Exercises and Stock Vesting

 

The following table shows the amounts received by the Named Executive Officers upon the exercise of options or the vesting of restricted stock during the most recent fiscal year.

 

 

POST-EMPLOYMENT COMPENSATION

 

Retirement Plan Potential Annual Payments and Benefits

 

The Company has an Executive Retirement Plan in which currently only Mr. Emery and three other founding officers of the Company have been designated to participate. The Executive Retirement Plan is an unfunded, defined benefit plan in that the amount of a retiree’s pension is calculated using compensation and years of service as an employee, rather than by the market value of the plan’s assets as in defined contribution plans.

 

Under the Executive Retirement Plan, an officer designated to participate by the Compensation Committee may receive upon normal retirement (defined to be when the officer reaches age 65 and has completed five years of service with the Company) an amount equal to 60% of the officer’s Final Average Annual Compensation, as defined below, plus 6% of Final Average Annual Compensation for each year of service (but not more than five years) after age 60. Plan benefits are reduced by certain other retirement benefits received by the officer, such as Social Security and the Company’s contributions to the participant’s 401(k) plan. “Final Average Compensation,” calculated as the average of the officer’s highest three, not necessarily consecutive, years’ earnings, is based upon annual cash compensation, including deferrals (but not including incentive-based stock awards or cash bonuses for officers whose annual salary exceeds $200,000).

 

The annual pension benefits are to be paid in monthly installments over a period not to exceed the greater of the life of the retired officer or his or her surviving spouse. Assuming the officers currently eligible for retirement retire at the normal retirement date, the Company would begin making benefit payments (other than the $83,000 currently being paid annually to one eligible retiree) of approximately $1.1 million per year, based on assumptions at December 31, 2006, which would increase annually based on CPI. Rather than receiving monthly payments, the retiring officer has the option to request a lump sum retirement payment, equal to the present value of the total expected payments.

 

The following table discloses the material terms and estimated benefits payable to David R. Emery under the Company’s Executive Retirement Plan:

 

 

 

 

Nonqualified Deferred Compensation Plan

 

 

 

 

All employees may participate and receive post-employment compensation under a 401(k) plan, pursuant to which each employee may contribute up to 45% of his salary, to an annual maximum of $15,000. As these contributions are made by the employees out of their respective cash salaries, such contributions do not appear in the Summary Compensation Table as additional compensation for the Named Executive Officers. Additionally, participants in the 401(k) plan receive matching contributions from the Company of up to 3% of their salary,

to an annual maximum of $2,800. Where applicable, the matching contributions are included in the All Other Compensation section of the Summary Compensation Table.

 

Termination and Change in Control Arrangements with Named Executive Officers

 

    David R. Emery

 

Mr. Emery’s employment agreement, pursuant to which he serves as Chairman of the Board, President and Chief Executive Officer of the Company, has a one-year term that is automatically extended on January 1 of each year for an additional year. If Mr. Emery’s employment agreement is terminated for any reason other than for cause or upon Mr. Emery’s voluntary termination, he is entitled to receive his unpaid salary, earned bonus, vested, released, granted, or reserved stock awards, vested deferred compensation, including the full release of his memorandum account under the Stock Plan (other than plan benefits which will be paid in accordance with the applicable plan), and other benefits accrued through the date of termination. In addition, Mr. Emery will receive as severance compensation his base salary for a period of three years following the date of termination and an amount equal to twice his average annual bonus during the two years immediately preceding his termination. Mr. Emery may elect to receive a lump sum severance amount equal to the present value of such severance payments (using a discount rate equal to the 90-day treasury bill interest rate in effect on the date of delivery of such election notice).

 

If a “change-in-control” (as defined in the employment agreement) occurs, Mr. Emery may terminate his agreement and receive his accrued base salary and other benefits described above through the remaining term of the agreement and an amount equal to three times his average annual bonus during the two years immediately preceding the termination. Mr. Emery would also receive as severance compensation his base salary for a period of five years following the date of termination and may elect to receive from the Company the present value of such payments as a lump sum severance payment (calculated as provided above), which may not be less than three times his base salary. In such event, Mr. Emery is entitled to receive a tax gross-up payment as compensation for any excise tax imposed by Section 280(g) of the Internal Revenue Code which would be required to be paid.

 

The Company may terminate Mr. Emery’s agreement for “cause,” which is defined to include acts of dishonesty on Mr. Emery’s part constituting a felony which has resulted in material injury to the Company and which is intended to result directly or indirectly in substantial gain or personal enrichment to Mr. Emery at the expense of the Company or Mr. Emery’s material, substantial and willful breach of the employment agreement which has resulted in material injury to the Company. In the event of Mr. Emery’s termination for cause, he shall receive all accrued salary, earned bonus compensation, vested deferred compensation (other than plan benefits which will be payable in accordance with the applicable plan), and other benefits through the date of termination, but shall receive no other severance benefits.

 

Mr. Emery’s agreement may also be terminated if Mr. Emery dies or becomes disabled and his disability continues for a period of 12 consecutive months. In the event of termination of the employment agreement because of Mr. Emery’s death or disability, Mr. Emery (or his estate) shall receive his unpaid salary, earned bonus, vested, released, granted or reserved stock awards, vested deferred compensation (other than plan benefits which will be paid in accordance with the applicable plan) and other benefits through the date of termination, but no additional severance except that, if Mr. Emery becomes disabled, the Company will maintain his insurance benefits for the remaining term of his employment agreement.

 

The Company has agreed to indemnify Mr. Emery for certain liabilities arising from actions taken within the scope of his employment. Mr. Emery’s employment agreement contains restrictive covenants pursuant to which Mr. Emery has agreed not to compete with the Company during the period of Mr. Emery’s employment and any period following termination of his employment during which he is receiving severance payments except in the event of a change-in-control of the Company.

 

     Other Executive Officers

 

The Company’s other officers — Scott W. Holmes, Senior Vice President and Chief Financial Officer; J.D. Carter Steele, Senior Vice President and Chief Operating Officer (retired effective March 1, 2007); John M. Bryant, Jr., Senior Vice President and General Counsel; and B. Douglas Whitman, II, Senior Vice President, Real

Estate Investments — have employment agreements with the Company. B. Douglas Whitman, II, was not a Named Executive Officer during 2006. If an employment agreement is terminated for any reason other than for cause or upon the officer’s voluntary termination, he is entitled to receive his unpaid salary, earned bonus, vested, released, granted, or reserved stock awards, vested deferred compensation, including the full release of his memorandum account under the Stock Plan (other than plan benefits which will be paid in accordance with the applicable plan), and other benefits through the date of termination. In addition, the officer will receive as severance compensation his base salary for a period of 18 months following the date of termination and an amount equal to twice his average annual bonus during the two years immediately preceding his termination.

 

If a “change-in-control” (as defined in the employment agreement) occurs, the officer may terminate his agreement and receive his accrued base salary and other benefits described above through the termination date, an amount equal to 1.5 times his base salary through the remaining term of the agreement, and an amount equal to two times his average annual bonus during the two years immediately preceding the termination. Each officer may elect to receive from the Company the present value of such payment (calculated in the same manner as for Mr. Emery) as a lump sum severance payment, which may not be less than 1.5 times the base salary. In such event, the officer is entitled to receive a tax gross-up payment as compensation for any excise tax imposed by Section 280(g) of the Internal Revenue Code which would be required to be paid.

 

The Company may terminate the officer’s agreement for “cause,” which is defined to include material, substantial and willful dishonesty towards, fraud upon, or deliberate injury or attempted injury to, the Company or the officer’s material, substantial and willful breach of the employment agreement which has resulted in material injury to the Company. In the event of the officer’s termination for cause, he shall receive all accrued salary, earned bonus compensation, vested deferred compensation (other than plan benefits which will be payable in accordance with the applicable plan), and other benefits through the date of termination, but shall receive no other severance benefits.

 

Each agreement may also be terminated if the officer dies or becomes disabled and his disability continues for a period of 12 consecutive months. In the event of termination of the employment agreement because of the officer’s death or disability, the officer (or his estate) shall receive his unpaid salary, earned bonus, vested, released, granted or reserved stock awards, vested deferred compensation (other than plan benefits which will be paid in accordance with the applicable plan) and other benefits through the date of termination, but no additional severance except that, if the officer becomes disabled, the Company will maintain his insurance benefits for the remaining term of his employment agreement.

 

The Company has agreed to indemnify each of the officers for certain liabilities arising from actions taken within the scope of his employment. Each employment agreement contains restrictive covenants pursuant to which such officer has agreed not to compete with the Company during the period of employment and any period following termination of his employment during which he is receiving severance payments except in the event of a change-in-control of the Company.

 

The tables below illustrate the compensation that would be received by each of the Named Executive Officers in the event of termination as of December 31, 2006.

 

 

 

 

 

 

 

 

 

DIRECTOR COMPENSATION

 

Directors who are employees of the Company receive no additional compensation for their services as directors. David R. Emery is the only employee director on the Company’s Board. Each non-employee director receives the following compensation from the Company:

 

 

Stock Awards

 

Each non-employee director receives an automatic grant, at the conclusion of each annual meeting, of 2,000 restricted shares of the Company’s Common Stock. Such shares are restricted for three years from the date of grant and are granted as of the annual meeting date. Such shares are subject to forfeiture upon the occurrence of certain events. Restricted shares may not be sold, assigned, pledged or otherwise transferred. Subject to the risk of forfeiture and transfer restrictions, directors shall have all rights as shareholders with respect to restricted shares, including the right to vote and receive dividends or other distributions on such shares. As of January 31, 2007, non-employee directors had received an aggregate of 43,173 restricted shares, of which 25,050 remain restricted.

 

Retirement Plan

 

The Company has a Retirement Plan for Outside Directors under which a non-employee director may receive upon normal retirement (defined to be when the director reaches age 65 and has completed at least five years of service as a director) payment annually, for a period equal to the number of years of service as a director (but not to exceed 15 years), an amount equal to the director’s annual retainer and meeting fee compensation for the plan year immediately preceding retirement from the Board of Directors. Currently this amount would range between $33,000 and $46,750, based upon the 2006 plan year. Such benefit payments are to be made to the retired director, his or her beneficiary, or his or her estate in equal quarterly installments for the duration of the applicable payment period. The beneficiary or estate of an active director who becomes deceased prior to retirement will receive benefits as if the director had retired from the Board of Directors on the day before his or her death.

 

Director Compensation Table

 

The following table sets forth the 2006 annual compensation for non-employee directors: