APOL Apollo Education Grp., Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14C

(RULE 14c-101)

 

SCHEDULE 14C INFORMATION

 

Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934

 

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o   Preliminary information statement.

o   Confidential, for use of the Commission only (as permitted by Rule 14c-5(d)(2))

þ   Definitive information statement.

 

APOLLO GROUP, INC.

(Name of Registrant as Specified In Charter)

 

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TABLE OF CONTENTS

 

ANNUAL MEETINGS OF CLASS A AND CLASS B SHAREHOLDERS
December 30, 2009

 

To the holders of Class A Common Stock and Class B Common Stock of Apollo Group:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of the holders of Class B Common Stock (the “Class B Shareholders”) of Apollo Group, Inc. (the “Company”), an Arizona corporation, will be held on Thursday, February 18, 2010 at 2:30 P.M., local time, by telephone, and the Annual Meeting of holders of Class A Common Stock (the “Class A Shareholders”) of the Company will be held on Monday, February 22, 2010 at 9:30 A.M., local time, in Rooms 101 and 102 on the first floor of the Company’s principal executive offices located at 4025 South Riverpoint Parkway, Phoenix, Arizona, 85040 (together, the “Annual Meetings”) and such meetings are to be held for the following purposes:

 

 

 

 

 

Only Class B Shareholders of record at the close of business on December 15, 2009 are entitled to notice of, and to attend and vote at, the Annual Meeting of Class B Shareholders or any adjournment or postponement thereof, and only Class A Shareholders of record at the close of business on December 15, 2009 are invited to attend the Annual Meeting of Class A Shareholders and any adjournment or postponement thereof.

 

Sincerely,

 

Brian L. Swartz

Senior Vice President, Chief Financial

Officer and Treasurer

Phoenix, Arizona

 

December 30, 2009

 

 

INFORMATION STATEMENT

 

ANNUAL MEETINGS OF CLASS A SHAREHOLDERS AND CLASS B SHAREHOLDERS
OF
APOLLO GROUP, INC.

 

To be held on February 22, 2010 and February 18, 2010, respectively.

 

 

QUESTIONS AND ANSWERS REGARDING THE INFORMATION

STATEMENT, ANNUAL REPORT AND ANNUAL MEETINGS

 

 

 

 

 

 

 

 

 

COMPENSATION DISCUSSION & ANALYSIS

 

 

The overarching principle governing the Company’s compensation philosophy for its executive officers is to maintain a pay-for-performance approach that ties a significant portion of each executive officer’s compensation to the Company’s financial performance, as measured in terms of both pre-established financial objectives for the fiscal year and the value of the Company’s Class A Common Stock. In implementing this philosophy, the Compensation Committee of the Board of Directors utilizes a combination of cash and equity incentive programs under which the total direct compensation of the executive officers will vary with the Company’s performance and the market price of the Class A Common Stock. Accordingly, the general objective of the Company is to target cash compensation (base salary plus a performance-based annual target bonus) per executive officer position to the 50 ^th  percentile of the comparable position at an identified peer group and to target total direct compensation (which includes the grant-date fair value of the executive officer’s long-term equity awards, annualized for any multi-year award) to the 75 ^th percentile of the comparable position at the peer group. However, the actual compensation provided a particular named executive officer may vary from those targeted percentiles based on individual circumstances, such as the officer’s level of experience, the employment agreement negotiated in connection with his hiring and the long-term incentives that may be needed to retain his services. In structuring the various components of total direct compensation, the Company utilizes a balanced risk/reward approach through a predominant long-term equity incentive component that allows the executive officers to share in the appreciation in the market price of the Class A Common Stock with its stock option component but also discourages them from excessive risk-taking through the use of restricted stock unit awards that provide varying levels of compensation as the market price of the Class A Common Stock fluctuates over time.

 

The Company’s compensation philosophy is further designed to develop, implement and administer compensation programs that will:

 

 

This compensation philosophy is also reflected in the employment agreements the Company has negotiated with several of the named executive officers in connection with their commencement of employment with the Company. Except as will be discussed in Section III.C below for Mr. Wrubel, those contracts in general position the total cash compensation of each officer at the 50 ^th percentile and bring total direct compensation to the 75 ^th  percentile through a more heavily-weighted long-term equity incentive component.

 

 

 

From September 1, 2008 to March 25, 2009, the Compensation Committee was comprised of the following four independent members of the Board of Directors: Dr. Herberger, the Chair, Mr. DeConcini, Dr. Kirschner and Ms. Redman. On March 26, 2009, Mr. Rivelo replaced Ms. Redman as a member of the Compensation Committee. No further changes to the composition of the Compensation Committee have subsequently occurred.

The primary responsibilities of the Compensation Committee include the formulation and implementation of the Company’s compensation philosophy, the review and approval of the compensation of the Company’s executive officers, including base salaries, performance-based annual cash incentive programs and long-term equity incentive awards, and the administration of other executive benefit programs in which the executive officers participate. The Company’s executive officers are listed on pages 12 through 15 of this Information Statement. The Compensation Committee, in consultation with the independent compensation consulting firm it has retained, analyzes the reasonableness and competitiveness of the various components of compensation paid to the executive officers and evaluates the effectiveness of each of those components in achieving the compensation objectives stated above. The Compensation Committee also obtains legal advice regarding executive compensation matters from the Company’s outside legal counsel.

 

The Compensation Committee also seeks input from each of the Company’s Co-Chief Executive Officers and other senior executive officers with respect to certain items of compensation, including their recommendations regarding the parameters of the annual cash incentive program and their proposals regarding long-term equity incentive awards. Accordingly, the Company’s Co-Chief Executive Officers and other senior executive officers may, from time to time, attend the meetings of the Compensation Committee at which compensation issues involving executive officers are discussed and present proposals and recommendations regarding executive officer compensation. However, all final decisions regarding executive officer compensation are made solely by the Compensation Committee and are based on a number of factors, including its independent evaluation of management proposals, its own internal deliberations and the input provided by its independent compensation consultant. The Compensation Committee meets in executive session to approve all decisions relating directly to the individual compensation of each of the Co-Chief Executive Officers. Decisions regarding the other executive officers are typically made by the Compensation Committee after considering the joint recommendations of the Co-Chief Executive Officers and the market data analysis provided by the independent compensation consultant (whose role is described in the next section).

 

The duties and responsibilities of the Compensation Committee are more fully set forth in its formal charter, as approved by the Company’s Board of Directors. The corporate governance provisions of the charter were revised in September 2009 to reflect the new Co-Chief Executive Officer management structure that was implemented in April 2009. The revised charter may be viewed, together with any future changes that may occur, on our website at www.apollogrp.edu at “INVESTOR RELATIONS — Corporate Governance.”

 

 

In making its determinations with respect to executive officer compensation, the Compensation Committee has historically engaged the services of an independent compensation consulting firm. Beginning with the 2006 fiscal year and continuing through the current 2010 fiscal year, the Compensation Committee has retained the services of Pearl Meyer & Partners, LLC (“Pearl Meyer & Partners”) to assist with its periodic review of existing compensation programs for the Company’s executive officers and the formulation and implementation of new executive compensation arrangements. In addition, Pearl Meyer & Partners has assisted the Compensation Committee with related projects, such as establishing share ownership guidelines for the executive officers and non-employee directors, evaluating non-employee director compensation levels and providing advice and relevant market data with respect to the design of various cash and equity-based executive compensation programs.

 

The Compensation Committee retains Pearl Meyer & Partners directly, although in carrying out its assignments, Pearl Meyer & Partners may also interact with Company management to the extent necessary and appropriate. However, Pearl Meyer & Partners has not been retained to perform any consulting or advisory services for Company management, except in a few limited situations where market-level compensation data was provided to management in connection with new hire equity awards for certain non-executive officer positions. For assistance with more significant compensation projects, the Company management has retained the services of its own independent compensation consulting firm. For its compensation consulting services rendered for the 2009 fiscal year, Pearl Meyer & Partners was paid $469,236 in the aggregate, of which less than $10,000 was attributable to the ancillary services provided Company management during the 2009 fiscal year.

 

 

Co-Chief Executive Officers.   On April 24, 2009, the Company’s Board of Directors authorized the establishment of a Co-Chief Executive Officer management structure. As a result, the office of Chief Executive Officer is now shared by Mr. Edelstein, the Company’s former Chief Executive Officer, and Mr. Cappelli, who previously served as Executive Vice President of Global Strategy and Assistant to the Executive Chairman. Under the revised structure, Mr. Cappelli has primary responsibility for business operations, global strategy, external communications and management of Apollo Global, Inc., the Company’s majority-owned subsidiary, for which he will continue to serve as Chairman. Mr. Edelstein focuses on the areas of finance, corporate development, human resources and legal. As part of this new management structure, the Compensation Committee approved an increase in Mr. Cappelli’s annual base salary from $500,000 to $600,000, effective as of April 24, 2009.

 

President and Chief Operating Officer.   On June 24, 2008, Mr. D’Amico was appointed the Company’s President in addition to his then current status as Chief Financial Officer. In March 2009, Mr. D’Amico was appointed to the office of Chief Operating Officer in addition to his continuing role as the President of the Company, and Mr. Swartz was appointed to replace him as Chief Financial Officer. In recognition of his increased duties and responsibilities in these new positions, Mr. D’Amico received, during the course of the 2009 fiscal year, additional equity awards, in the form of stock option grants and restricted stock unit awards covering a total of 67,471 shares of the Company’s Class A Common Stock, that were designed to increase his total direct compensation to approximately the 75 ^th percentile for the president/chief operating officer position at those companies in the Company’s comparator peer group that have such an executive officer position.

 

New Chief Financial Officer.   Mr. D’Amico continued to serve as the Company’s Chief Financial Officer until March 26, 2009, when Brian Swartz was appointed to that position as well as Treasurer. In connection with such appointment, Mr. Swartz’s base salary was increased from $300,000 to $375,000, and he was provided with the opportunity to earn a supplemental bonus for the balance of the 2009 fiscal year based on his performance as Chief Financial Officer. Such bonus would be in addition to any bonus he earned for such year as a participant in the Executive Officer Incentive Bonus Plan with a target bonus equal to 50% of his base salary for the 2009 fiscal year, as measured as of the start of that year. In addition to such adjustments to his cash compensation, Mr. Swartz also received an equity award in the combined form of a stock option grant and restricted stock unit award covering a total of 8,432 shares. As a result, Mr. Swartz’s total direct compensation was brought to a level that was above the 50 ^th percentile but below the 75 ^th percentile for chief financial officers at the Company’s comparator group.

 

 

The Compensation Committee utilizes three main components in structuring the compensation program for the executive officers:

 

 

Except for the long-standing deferred compensation arrangement with Dr. Sperling, the Compensation Committee has not implemented any supplemental retirement income programs or other special deferred compensation arrangements for the executive officers. To date, the primary source for wealth creation and the accumulation of retirement income for the Company’s executive officers has been in the form of long-term equity incentive awards.

 

The Compensation Committee believes that the particular elements of compensation identified above provide a well-proportioned mix of compensation that includes a level of economic security (base salary), provide a meaningful incentive for long-term retention (equity awards) and have a significant performance-based component (annual cash incentive program in addition to the equity awards). Accordingly, the overall objective of the structure is to create short-term and long-term performance incentives and rewards that are designed to accomplish the Company’s major compensation objectives. By applying this portfolio approach to total direct compensation, the Compensation Committee provides each executive officer with a measure of security in the minimum level of compensation he or she is to receive through base salary, while the annual cash and long-term equity incentive components provide variable levels of compensation with no economic guarantees. The incentive components are primarily designed to motivate the executive officer to focus on the attainment of specific business goals that will advance the Company’s strategic objectives and promote a high level of Company performance, with corresponding increases in shareholder value and long-term wealth creation opportunities for the executive officer.

 

The various components of the compensation packages for the executive officers are described in more detail below. Those components are weighted heavily toward performance-based pay. The same approach has been applied in those instances where the Company has negotiated employment agreements with several of the named executive officers in connection with their commencement of employment. Under the employment agreements with Messrs. Edelstein, Cappelli, D’Amico and Moya, total cash compensation was in general set at less than the 50 ^th  percentile for the comparable position at the comparator group, and total direct compensation was weighted more heavily in terms of long-term equity incentives to reach in general the 75 ^th percentile objective for each of them.

 

The 2009 fiscal year total direct compensation for Dr. Sperling and Messrs. Edelstein, Cappelli, D’Amico, Moya and Swartz was within the following percentages above or below the 75 ^th percentile of market level compensation for the comparable position:

 

 

Such market level compensation for each position was developed through review of compensation levels for the comparable position at the comparator group companies, through an analysis of representative survey data for such position or through a combination of both. The Committee believed that the level of Mr. Moya’s compensation at 23% above the 75 ^th percentile for general counsel positions at the comparator group was warranted because the additional duties and responsibilities he has undertaken are beyond those typically associated with the general counsel position, such as his management responsibilities in the areas of facilities, corporate security and compliance.

 

Mr. Wrubel’s total direct compensation is also heavily weighted in long-term equity incentive awards, primarily in the form of stock option grants. During the 2009 fiscal year, the Compensation Committee made a special multi-year option grant to Mr. Wrubel as a long-term retention vehicle with a substantial upside potential tied to the appreciation in value of the Company’s Class A Common Stock. The grant is divided into three distinct tranches, each with an exercise price of $69.51 per share, the fair market value per share of the Company’s Class A Common Stock on the grant date. The first tranche covers 52,500 shares and will vest and become exercisable in four successive equal annual installments over his period of continued employment with the Company measured from the grant date. The remaining two tranches are special performance-based options that will not vest or become exercisable unless the market price of the Company’s Class A Common Stock substantially appreciates in value. For the first performance-based tranche covering 62,000 shares, the market price of the Class A Common Stock must

remain at or above $100 per share for a thirty — day period within the first four years of the option term. For the second performance-based tranche, the market price of the Class A Common Stock must remain at or above $120 per share for a thirty — day period that must also occur within the first four years of the option term. If the stock price objective for the first performance tranche is attained, then that tranche will become exercisable in three successive equal annual installments over Mr. Wrubel’s period of continued employment with the Company measured from the first anniversary of the grant date. If the stock price objective for the second performance tranche is attained, then that tranche will become exercisable in two successive equal annual installments over Mr. Wrubel’s period of continued employment with the Company measured from the second anniversary of the grant date. Mr. Wrubel’s total direct compensation would be within ten percent of the 75 ^th percentile of the comparable position at the Company’s comparator group, if only the service-vesting tranche of his multi-year option were taken into account and annualized over the three-year horizon for which the grant was made. However, when the two performance-based tranches of the multi-year grant are also taken into account and annualized over that same three-year horizon, Mr. Wrubel’s total direct compensation would be approximately $950,000 above the 75 ^th percentile. However, there is no certainty that the stock price targets in effect for the two performance-based tranches will ever be attained, and Mr. Wrubel may not actually derive any economic value from this component of his compensation package.

 

Long-term equity incentives also form a predominant part of Mr. Swartz’s total direct compensation. However, as noted above, the adjustments that the Compensation Committee made to Mr. Swartz’s total direct compensation in connection with his promotion to Chief Financial Officer has positioned his compensation between the 50 ^th and 75 ^th percentile of market level compensation for chief financial officers.

 

The following summary analysis reflects the performance-based nature of the compensation packages provided the Company’s executive officers when their base salary is compared to their total direct compensation, including the performance-based components comprised of their annual cash incentive potential and their long-term equity incentives. In presenting such analysis, the grant-date fair value of the multi-year grants made to Messrs. Edelstein, Cappelli, D’Amico, Moya and Wrubel, whether in the 2009 fiscal year or any earlier fiscal year, have been annualized over the applicable time horizon for which each of those grants was made. In addition, such analysis does not include the grant-date fair value of the “make-whole” restricted stock unit awards made to Messrs. Edelstein, Cappelli and D’Amico to compensate them for the compensation opportunities they forfeited when they left their former employers.

 

2009 Fiscal Year.   The aggregate base salary for Dr. Sperling and Messrs. Edelstein, Cappelli, D’Amico, Swartz, Moya and Wrubel for fiscal year 2009 comprised on average approximately 13% of the aggregate value of their total direct compensation for that year (base salary, annual cash incentive at target level and grant-date fair value of long-term equity incentives). That percentage was in contrast to approximately the 23% level that base salary represented as a portion of the market levels of total direct compensation for comparable positions based on 2008 calendar year market data derived from proxy statement disclosures and other relevant survey data. For each such position, total direct compensation was calculated at the median level. With respect to the Company’s other executive officers, base salary comprised approximately 24% of their aggregate total direct compensation for the 2009 fiscal year. This was in contrast to approximately the 35% level that base salary represented as a portion of the market levels of total direct compensation for their comparable positions based on the same market data used for the named executive officer analysis.

 

2010 Fiscal Year Compensation.   The aggregate base salary for Dr. Sperling and Messrs. Edelstein, Cappelli, D’Amico, Swartz, Moya and Wrubel for fiscal year 2010 is also projected to comprise on average approximately 13% of the aggregate value of their total direct compensation targeted for that year. With respect to the Company’s other executive officers, base salary comprises approximately 25% of their total direct compensation for the 2010 fiscal year.

 

Accordingly, the pay mix for both the 2009 and 2010 fiscal years is consistent with the overall pay-for-performance philosophy for the executive officers.

 

The overall compensation level for each executive officer is determined by a number of factors, including the individual’s duties and responsibilities within the Company, his or her experience and expertise, the compensation levels for peers within the Company, compensation levels in the marketplace for similar positions, performance of the individual and the Company as a whole, and the level of compensation necessary to retain the individual or to recruit such individual in the case of a new hire. In determining the appropriate compensation package for each executive officer, the Compensation Committee considers all the various items of executive compensation and employee benefit programs provided by the Company.

 

In order to determine competitive compensation practices, the Compensation Committee relies on compensation data provided by Pearl Meyer & Partners. The data is derived principally from surveys of compensation practices of comparable companies, including general survey data and data developed from public filings by selected companies that the Compensation Committee considers appropriate comparators for the purposes of developing executive compensation benchmarks.

 

During the 2007 fiscal year, the Compensation Committee worked with its independent compensation consultant to formulate a new comparator group of companies for the purpose of benchmarking executive compensation. The comparator group that resulted replaced the prior peer group comprised solely of publicly-held for-profit educational institutions. That industry peer group was no longer considered an adequate benchmark for executive officer compensation, because the institutions that comprised that group were significantly smaller than the Company in terms of revenue and market capitalization. However, the Compensation Committee continues to review market data for publicly-held for-profit educational institutions in order to track compensation levels in the education industry and assure that the Company’s compensation remains highly competitive in such industry.

 

The comparator group that was formed as a result of the 2007 study was comprised of companies in other industries that were similar in size to the Company in revenue and market capitalization and that were likely to have, on the basis of their business models, executive officers with the skill sets that the Compensation Committee believed were important for the Company’s executive officers to possess. The Compensation Committee periodically reviews the comparator group to determine whether new companies should be added or existing companies removed. In performing such reviews, the Compensation Committee’s objective is to maintain a comparator group comprised of similarly-sized, highly-successful service-based businesses that meet one or more of the following criteria: sophisticated brand management experience; significant marketing/advertising experience (including the use of Internet marketing); experience with large employee populations; Internet-related content and transaction experience; nationwide retail presence; or consumer, rather than business, service experience.

 

The initial comparator group formed in 2007 was comprised of companies selected from the consumer, commercial and financial-services industries based on revenue (generally between $1 and $3 billion), market capitalization (generally between $7 and $14 billion) and high price-to-sales multiples. In April 2008, the Compensation Committee reviewed the appropriateness of the peer group and decided to eliminate Sabre Holdings Corp. (because it had been acquired) and E*Trade Financial Corp (because of the financial difficulties it was experiencing at the time). To the ten remaining companies in the comparator group, the Compensation Committee decided to add several other companies in order to limit the influence of companies whose compensation levels might not be truly indicative of the market. The Compensation Committee reviewed companies whose revenue, market capitalization and price to sales ratio were similar to the Company and then selected seven of those companies on the basis of the criteria described above for the initial comparator group companies.

 

The revised comparator group was accordingly comprised of companies with market capitalizations ranging from $5 billion to $20 billion, annual revenue ranging from $1 billion to $6.5 billion and price to sales ratios ranging from 1.5 to 7. The Company was at approximately the 50 ^th percentile of the revised comparator group, when

measured in terms of such metrics. This comparator group was used by the Compensation Committee for benchmarking 2009 fiscal year compensation through March 2009 and was comprised of the following companies:

 

 

The Company’s financial performance, when compared to that of the comparator group, may be summarized as follows. For the fiscal year ended August 31, 2009, the Company’s performance was approximately at or above the comparator group median for one-year and five-year average operating margins and for five-year revenue, operating income and net income growth. The Company’s one-year revenue growth was the highest among the comparator group companies, and for one-year operating income and net income growth was at the 94 ^th and 88 ^th  percentiles, respectively. The Company’s total shareholder return for the one — year and three-year periods ended August 29, 2009 was at the 88 ^th and the 94 ^th percentiles, respectively. However, for the five-year period ended August 29, 2009, the Company’s annualized total shareholder return was 5% below the comparator group median.

 

In March 2009, the Compensation Committee performed another review of the comparator group with the assistance of its independent compensation consultant. As a result of the Company’s recent financial performance in terms of market capitalization and price to sales ratio, the Company ranked second among the companies in the comparator group, and the Company’s revenue for the 2008 fiscal year was at the 65 ^th percentile of comparator group revenue. In order to re-position the Company at approximately the 50 ^th percentile of the comparator group in terms of market capitalization, revenue and price to sales ratios, the Compensation Committee decided to adjust the peer group by eliminating American Capital Ltd and The E.W. Scripps Company and adding Activision Blizzard. As a result of those adjustments, the Company was repositioned to the 59 ^th percentile of the revised comparator group when measured in terms of current revenue and market capitalization measured over a two hundred-day period, and its price to sales ratio was at the 53 ^rd percentile, when measured over the same two-hundred day period. The March 2009 revised comparator group was used for benchmarking any 2009 fiscal year compensation decisions made after March 25, 2009.

 

The Company’s financial performance, when compared to that of the revised comparator group, may be summarized as follows. For the fiscal year ended August 31, 2009, the Company’s performance was approximately at or above the revised comparator group median for one-year and five-year average operating margins and for five-year revenue, operating income and net income growth. The Company’s one-year revenue growth was at the 94 ^th  percentile of the revised comparator group, and for one-year operating income and net income growth was at the 93 ^rd and 85 ^th percentiles, respectively. The Company’s total shareholder return for the one — year and three-year periods ended August 29, 2009 was at the 94 ^th and the 87 ^th percentiles, respectively. However, for the five-year period ended August 29, 2009, the Company’s annualized total shareholder return was 8% below the revised comparator group median.

 

For benchmarking purposes, the Compensation Committee examined the relationship of each executive officer’s base salary, target annual incentive bonus and long-term equity incentive awards to the comparable market data at the 50 ^th and 75 ^th percentiles. Accordingly, in making compensation decisions for the named executive officers, the Compensation Committee’s general objective was to set target total cash compensation (base salary plus annual cash incentive at target level) at approximately the 50 ^th percentile of the survey data and target total direct compensation (which includes the grant-date fair value of long-term equity awards or the annualized grant-date fair value of any multi-year award), at approximately the 75 ^th percentile of the survey data.

 

Actual compensation decisions for the named executive officers were, however, influenced by a variety of additional factors, including the internal pay relationships within the Company’s executive officer group, individual performance and experience level, the need to attract, motivate and retain an experienced and effective management

team and the negotiations that led to the hiring of several of the named executive officers. For example, when Mr. Swartz was promoted to the Chief Financial Officer position, his total compensation, after adjustment for his increased rate of base salary and promotional equity awards, remained below the 75 ^th percentile of the market level of total direct compensation for chief financial officers, but above the 50 ^th percentile. The Compensation Committee believed that such positioning was warranted in light of (i) Mr. Swartz’s strong accounting skills and expertise and (ii) the relevant market data indicating that newly-promoted chief financial officers were not immediately positioned at the 75 ^th percentile but advanced over time toward that percentile as they gained experience in their chief financial officer role.

 

Also as noted above, Mr. Wrubel’s target total direct compensation for the 2009 fiscal year is at approximately the 75 ^th percentile of the market level of total direct compensation for the comparable position if only the annualized grant-date fair value of the first tranche of the multi-year option grant made to him in fiscal year 2009 is taken into account. However, when the annualized grant-date fair value of the two performance-based tranches with their stock price hurdles are also considered, then his total direct compensation would be approximately $950,000 above the 75 ^th percentile of such market level compensation. The Compensation Committee believed that this exception to the general 75 ^th percentile standard for total direct compensation was warranted in order to provide a meaningful retention vehicle for Mr. Wrubel’s services in light of his prior employment experience with high technology start-up enterprises that typically offer more highly leveraged equity vehicles than those normally awarded by the Company.

 

While the total direct compensation of each of the Company’s named executive officers is in general targeted at the 75 ^th percentile of the market level of total direct compensation for the comparable position (except as noted for Mr. Wrubel), the total direct compensation for the Company’s five highest-paid named executive officers on an aggregate basis is at approximately the 88 ^th percentile of the total direct compensation determined on an aggregate basis for the named executive officers at the comparator group. The higher aggregate level of compensation is due to the fact that the executive officer structure of the Company, with an executive chairman of the board, co-chief executive officers, a president and chief operating officer and two executive vice presidents, differs from the organizational structure of the companies in the comparator group. However, it remains the stated compensation philosophy of the Compensation Committee to maintain the total direct compensation of each individual executive officer at approximately the 75 ^th percentile of the market level of total direct compensation for his or her comparable position.

 

 

The compensation programs and practices for the named executive officers are structured in a manner that does not encourage unnecessary or excessive risk-taking and are not reasonably likely to create a material risk to the Company. Such conclusion is based on the following considerations:

 

1. The predominant component of the Company’s compensation structure for executive officers is in the form of long-term equity awards tied to the price of the Company’s Class A Common Stock, and increasing levels of compensation are derived from those awards as the stock price appreciates and shareholder value is thereby created. Accordingly, the Company’s overall compensation program is structured so as to encourage long-term growth and appreciation in the value of the Company’s business and stock price. In addition, the increasing use of restricted stock unit awards in lieu of option grants has reduced the risk element associated with the equity awards. Stock option grants have a higher risk/reward nature because they only have value to the extent the market price of the underlying shares appreciates over the grant date market price that serves as the exercise price. Restricted stock units, on the other hand, continue to provide value and serve as a meaningful retention vehicle even in periods of declining stock prices, because there is no exercise price or other cash consideration to be paid for the underlying shares. Restricted stock units cover a smaller number of shares when compared to a stock option grant with the same grant-date fair value, and the significant downside protection they afford lowers the overall risk profile of the total compensation package.

 

2. The special performance-based stock option grants made to Mr. Wrubel were a departure from the more risk-balanced approach utilized by the Company in structuring its equity incentive awards in the combined form of stock options and restricted stock units. The grants were recommended by senior

management based on its belief that such a high risk/high reward structure was essential to the retention of Mr. Wrubel’s services in light of his prior experiences with start-up enterprises where such highly leveraged grants were more predominant. The retention concern was particularly important since Mr. Wrubel had a valuable change in control severance benefit package under the contract in effect with his prior employer, Aptimus, Inc. that was partially to expire at the time the new stock option grants were under consideration. Accordingly, on the basis of management’s recommendation and the retention concerns surrounding Mr. Wrubel, the Compensation Committee determined that the special performance-based grants were warranted under the circumstances. In addition, the Compensation Committee was cognizant of the fact that the total number of shares utilized for those special grants was immaterial in amount and involved only 124,000 shares (or approximately 0.08% of the total outstanding shares of Class A Common Stock) over the combined four-year performance and service-vesting period.

 

3. The Company’s variable performance-based annual cash incentive plan for the executive officers is subject to a dollar limitation per participant tied to a percentage of annual base salary that cannot in any instance exceed 200%. The target bonuses for the named executive officers for the 2009 fiscal year ranged from 75% (or 50% for Mr. Swartz for the first half of the fiscal year and 75% for the second half) to 100% of annual base salary, and their actual bonuses for that year ranged from 150% to 200% of base salary. For other individuals who participated in the 2009 executive officer cash incentive plan, their target bonuses ranged from 65% to 100% of base salary, and their actual bonus amounts ranged from 130% to 200% of their base salary. The actual bonus amount was in each instance higher than the corresponding target bonus because the Company attained its pre-established performance goals at above-target, maximum levels and the executive officer satisfactorily achieved his or her personal performance goals for the 2009 fiscal year.

 

4. The performance goals for the 2009 cash incentive plan for the named executive officers were based on strategic objectives vital to the Company’s long-term financial success. The first performance goal was tied to revenue, and the second and equally weighted performance goal was tied to operating profit. Revenue growth and increasing levels of operating profit represent financial metrics that are in alignment with the Company’s overall objective to create long-term shareholder value.

 

5. The wealth creation opportunities for the named executive officers and other senior management are primarily in the form of their long-term equity incentive awards. The Company does not have retirement plans or other meaningful sources of wealth creation provided under its cash compensation programs. Excessive risk-taking would not only jeopardize the financial viability of the Company but would also subject the named executive officers and other senior management to substantial economic loss were the Company’s Class A Common Stock to become worthless or drop substantially in price. For that reason, there is a substantial alignment between the structure of the Company’s compensation programs and the creation of shareholder value.

 

6. Finally, the Company has instituted share ownership guidelines pursuant to which the executive officers, certain other officers and each non-employee member of the Board of Directors are expected to attain a substantial ownership interest in the Company during their period of employment or Board service, thereby further aligning their interests with those of the shareholders and mitigating the potential for excessive risk taking. Although there are no specific time limits by which such individuals must attain their ownership level, there are restrictions and limitations on their ability to sell the shares of the Company’s Class A Common Stock they acquire under the Company’s various compensation programs, as noted in Section 8 below, until such ownership level is attained.

 

 

 

Base salaries are set at levels that are intended to reflect the individual’s position within the Company and his or her current and sustained performance results. However, certain named executive officers have employment agreements with the Company in which their base salary levels were established through negotiation in the hiring process. Base salary, whether set by the Compensation Committee or by the terms of an existing employment agreement, is designed primarily to provide a level of economic security from year to year. Each executive officer’s

base salary level is reviewed annually by the Compensation Committee, and adjustments may be made (subject to the terms of the existing employment agreements) on the basis of such factors as the overall performance of the individual and his or her areas of responsibility, any new duties and/or responsibilities assumed by such individual, his or her impact on strategic goal attainment and his or her length of service with the Company. However, there is no specific weighting applied to any one factor in setting the level of base salary, and the process ultimately relies on the Compensation Committee’s consideration of management’s recommendations and the subjective exercise of its own judgment. Although salaries are generally targeted at market median, based on the comparator group and other relevant compensation survey data (as discussed above), the Compensation Committee may also take into account the individual’s current level of base salary, duties that may go beyond such individual’s title and position, his or her potential as a key contributor, and any special recruitment or retention circumstances.

 

The following named executive officers have employment agreements that specify their minimum level of annual base salary:

 

Dr. John G. Sperling .   In December 1993, the Company entered into an employment agreement with Dr. John G. Sperling. The initial term of the employment agreement was for four years, but the agreement automatically renews for successive one-year periods thereafter. Effective March 1, 2006, the Compensation Committee increased Dr. Sperling’s annual base salary to $850,000. His annual base salary is subject to annual review by the Compensation Committee and was not increased for either the 2009 or the 2010 fiscal year.

 

Charles B. Edelstein .   Mr. Edelstein is the Company’s Co-Chief Executive Officer. His employment agreement, which became effective on August 26, 2008, has a term of four years and provides for a minimum annual base salary of $600,000. No adjustment was made to Mr. Edelstein’s base salary for either the 2009 or 2010 fiscal year.

 

Gregory W. Cappelli .   Mr. Cappelli was initially hired as the Company’s Executive Vice President, Global Strategy and Assistant to the Executive Chairman. He was employed in such position pursuant to an employment agreement which became effective on March 31, 2007 and has a term of four years. The annual base salary level of $500,000 originally provided under the agreement was increased to $600,000 in April 2009 in connection with his appointment as Co-Chief Executive Officer. No further adjustment was made for the 2010 fiscal year.

 

Joseph L. D’Amico .   Mr. D’Amico was initially hired as Executive Vice President, Chief Financial Officer and Treasurer pursuant to an employment agreement with the Company which became effective on June 15, 2007. The contract has a term of three years and provides for a minimum annual base salary of $500,000. In June 2008, Mr. D’Amico was promoted to the position of President, and in March 2009 he was appointed to the additional office of Chief Operating Officer. No adjustments to his base salary were made during the 2009 fiscal year to reflect those changes to his duties and responsibilities. However, his annual rate of base salary was increased to $525,000 for the 2010 fiscal year.

 

P. Robert Moya .   Mr. Moya is the Company’s Executive Vice President, General Counsel and Secretary. His employment agreement with the Company, which became effective on September 1, 2007, has a term of four years and provides for a minimum annual base salary of $400,000. No adjustment was made to Mr. Moya’s base salary for either the 2009 or the 2010 fiscal year.

 

Robert W. Wrubel .  Mr. Wrubel is the Company’s Executive Vice President and Chief Marketing and Product Development Officer. He entered into an employment agreement with the Company on August 6, 2007 in connection with the Company’s acquisition of Aptimus, Inc., his employer at that time. Pursuant to that contract, Mr. Wrubel was initially employed as Chief Executive Officer of Aptimus, Inc. with a minimum annual base salary of $275,000. The contract had a two-year term that expired on October 29, 2009, and his employment pursuant to the contract is now on an “at will” basis. On November 26, 2008, in connection with his promotion to Senior Vice President, Marketing, the Compensation Committee increased Mr. Wrubel’s base salary for the 2009 fiscal year from $300,000 to $350,000, retroactive to the September 1, 2008 start date of that fiscal year. For the 2010 fiscal year, Mr. Wrubel’s base salary was increased to $375,000.

Brian L. Swartz .   Mr. Swartz does not have an employment agreement with the Company. However, in connection with his promotion to the Company’s Chief Financial Officer in March 2009, his annual rate of base salary was increased from $300,000 to $375,000, retroactive to March 1, 2009.

 

In making each of the foregoing adjustments to base salary, the Compensation Committee took into account recommendations from senior management and input with respect to those recommendations from its own compensation consultant. Such input, among other things, allowed the Compensation Committee to compare the proposed levels of base salary to market data with respect to comparable positions. The final levels of base salary that emerged as a result of such deliberative process were generally in the 50 ^th percentile range (or lower) of market level base salary for comparable positions.

 

 

Cash Incentive Plan for the 2009 Fiscal Year

 

At its November 26, 2008 meeting, the Compensation Committee approved the executive officer cash incentive plan to be in effect for the 2009 fiscal year. Annual cash incentive payments under the plan were tied to the Company’s attainment of certain revenue and operating profit targets for the year. The target cash incentive for each named executive officer was set at 100% of base salary, except in the case of Mr. Wrubel whose target cash incentive was set at 75% of base salary and Mr. Swartz whose target cash incentive was set at 50% of base salary (Mr. Swartz was at the time serving as the Company’s Chief Accounting Officer and had not yet been appointed to the Chief Financial Officer position). The target cash incentives established for Messrs. Edelstein, Cappelli, D’Amico and Moya under the plan were in accordance with the target bonus levels (100% of base salary) set forth in their respective employment agreements. Other executive officers participated in the plan at varying target percentages tied to their base salary.

 

The actual cash incentive which each named executive officer could earn for the 2009 fiscal year ranged from 0 to 200% of his target level. The actual percentage was determined on the basis of the Company’s attainment of the revenue and operating profit goals (as adjusted) that the Compensation Committee established for the 2009 fiscal year at the November 2008 meeting.

 

Specifically, the target, threshold, and maximum goals were set at the following levels:

 

 

The goals represented revenue growth of approximately 12% at threshold, 18% at target, and 21% at maximum level, and operating profit growth of 11.4% at threshold, 16.4% at target, and 21.4% at maximum level, when compared to the Company’s financial performance for the 2008 fiscal year.

 

To illustrate how the 2009 fiscal year cash incentive plan functioned, assume that the executive officer’s base salary for that year was $400,000 and the target cash incentive was 100% of base salary. $200,000 of that individual’s potential cash incentive would be based on attainment of the revenue target, and the other $200,000 would be based on attainment of the operating profit target. If the revenue target were attained at threshold level (so only 50% of the revenue component of his cash incentive were payable at that level) and the operating profit objective were attained at maximum level (so that 200% of the profit component of his cash incentive were payable at that level), the executive officer would be entitled to a potential cash incentive payment of $500,000 ($100,000 plus $400,000). In no event, would any cash incentive be awarded for a particular component unless there was at least threshold level attainment of that component. For attainment between threshold and maximum, the payout would be determined by straight-line interpolation.

 

The plan provided for certain adjustments in computing revenue and operating profit for the 2009 fiscal year. Revenue attributable to companies acquired during the 2009 fiscal year was excluded from the calculation of the revenue target. With respect to the operating profit component, the following amounts were excluded: stock-based compensation expense charged pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004)

(“SFAS 123(R)”) “Share Based Payment” and any other GAAP expense for the 2009 fiscal year related to equity compensation awards; all expense accrued for the 2009 fiscal year with respect to bonuses that become payable for such year under the Company’s various bonus plans, including the executive officer annual cash incentive plan; all acquisition costs expensed for the 2009 fiscal year; income or loss attributable to entities acquired during the 2009 fiscal year; any extraordinary, nonrecurring items as determined in accordance with APB Opinion No. 30; and all amounts (including judgments, settlement payments, legal fees, costs and other litigation/settlement expenses) expensed during the 2009 fiscal year in connection with the litigation matters referred to in Item 3 of the Company’s 10-K for fiscal year 2008.

 

In addition, the Compensation Committee reserved the discretion to reduce the potential cash incentive otherwise payable to each named executive officer by an amount up to 20% based on whether he had accomplished his personal performance goals for the year and whether one of the performance metrics had been achieved at less than threshold. The relevant performance goals for the named executive officers were established by the Chief Executive Officer, except that for Messrs. D’Amico and Swartz the Compensation Committee established a separate additional goal that there be no material weaknesses identified with respect to the Company’s internal controls over financial reporting. The goals established by the Chief Executive Officer were primarily of a qualitative and subjective nature, with no quantifiable measures of threshold or target level performance and no percentage weighting assigned to the individual goals. The goals were established in part to afford the Compensation Committee the opportunity to make a general subjective assessment of each named executive officer’s performance for the 2009 fiscal year based on the determination made by the Co-Chief Executive Officers as to whether or not that officer had satisfactorily accomplished his personal goals for the 2009 fiscal year. There were no objective standards by which the difficulty of each goal could be measured, although it was not the Compensation Committee’s intent to have the Chief Executive Officer set performance goals for which there was no reasonable expectation of attainment in light of the individual’s experience, level of responsibility and expertise. The personal performance goals established by the Chief Executive Officer included the following:

 

Mr. Sperling:   provide insight and direction to the senior management team and assist and support their endeavors to accomplish key corporate objectives.

 

Mr. Edelstein:   demonstrate corporate-wide leadership and establish a positive and focused corporate culture; successfully integrate the executive management team, including both existing and new members; assume primary responsibility for communication with key constituents.

 

Mr. Cappelli:   provide leadership in identifying opportunities for international expansion; assume primary responsibility for strategic planning and the development of action plans to meet the Information Technology needs of the Company and its Learner Management Systems.

 

Mr. D’Amico:   develop and implement plans to expand the Company’s corporate relationships nationwide; assure the allocation of appropriate resources to manage Title IV funding risks; provide leadership and oversight to the marketing group to assure a proper balance between investment return and risk; assure that there are no material weaknesses in the Company’s internal controls over financial reporting.

 

Mr. Swartz:   assure that there are no material weaknesses in the Company’s internal controls over financial reporting; manage the growth and development of the internal tax department, including the development of an organizational structure, hire additional tax personnel and initiate a strategic tax risk review process.

 

Mr. Moya:   expand the structure of the internal legal department to accommodate the Company’s compliance needs on both a national and international level; hire a high-quality chief compliance officer; demonstrate leadership in other management areas, such as management of facilities, real estate and security.

 

Mr. Wrubel:   develop a media and marketing management strategy that focuses on enrollment growth in targeted areas; achieve annual growth in the Company’s website traffic; improve the marketing perception of the University of Phoenix; coordinate marketing efforts with the Company’s other business units.

 

Based on the determination made by the Co-Chief Executive Officers and its own overall general assessment that each of the named executive officers had accomplished his personal performance goals, the Compensation

Committee found no reason to exercise its discretion to reduce the cash incentive payment of any named executive officer who participated in the plan for the 2009 fiscal year, except that Mr. Wrubel’s payment under the plan was reduced by $62,625 solely to take into account the quarterly bonus payment in the same amount made to him for the fiscal quarter ended November 30, 2009 under the bonus program in which he was participating at that particular time pursuant to the terms of his existing employment agreement. Mr. Wrubel was not selected for participation in the 2009 executive officer cash incentive plan until November 26, 2008.

 

The Company’s revenue and operating income (subject to the adjustments summarized above) for the 2009 fiscal year were each above the maximum level established under the 2009 fiscal year cash incentive plan. Revenue for such fiscal year was above $3.96 billion, when compared to the $3.80 billion maximum level established under the plan, and the Company’s operating income was $1.244 billion, when compared to the $1.037 billion maximum level set under the plan. Accordingly, each named executive officer who participated in the executive officer cash incentive plan for the 2009 fiscal year received a bonus payment for that year equal to 200% of his target amount (including, for Mr. Wrubel, the non-plan quarterly bonus payment made to him for the first quarter of that fiscal year under the bonus plan in effect pursuant to his employment agreement).

 

In March 2009, a supplemental bonus plan was established for Mr. Swartz and one other executive officer in connection with their promotions, including Mr. Swartz’s promotion to Chief Financial Officer. The supplemental plan provided Mr. Swartz with a bonus potential ranging from $0 at threshold level to $65,635 at target level and $131,250 at maximum level. At target level, the supplemental bonus would, when added to Mr. Swartz’s potential cash incentive at target level under the executive officer cash incentive plan, provide him with a potential cash incentive opportunity for the second half of the 2009 fiscal year equal to 75% of his base salary for such period. The actual amount of Mr. Swartz’s supplemental bonus was to be determined in the sole discretion of the Compensation Committee after taking into account his performance as Chief Financial Officer and the Company’s financial performance for the 2009 fiscal year, measured in terms of such financial metrics that the Compensation Committee deemed appropriate. In deciding to award Mr. Swartz a supplemental discretionary bonus at the maximum $131,250 level, the Compensation Committee took into account the Company’s attainment of both the revenue and operating profit goals under the 2009 fiscal year executive officer bonus plan at maximum level and Mr. Swartz’s successful transition into the position of Chief Financial Officer and his sound and efficient management of the Company’s financial operations and the timely and accurate filing of all required financial reports.

 

Cash Incentive Plan for the 2010 Fiscal Year

 

At its November 24, 2009 meeting, the Compensation Committee approved the executive officer cash incentive plan for the 2010 fiscal year and set the performance targets that will be in effect for that plan. The structure is basically the same as the 2009 fiscal year plan, except for the new performance targets set for 2010 fiscal year revenue and operating profit and an increase in the potential reduction factor based on the exercise of Committee discretion.

 

Accordingly, with respect to the Company’s named executive officers, the cash incentive plan for the 2010 fiscal year is tied to the Company’s attainment of the established revenue and operating profit targets for that year. As was the case with the 2009 fiscal year plan, the target cash incentive for the named executive officers other than Messrs. Swartz and Wrubel was set at 100% of base salary. The target cash incentive for both Messrs. Swartz and Wrubel were set at 75% of base salary.

 

The actual cash incentive which each of these officers may earn will range from 0 to 200% of his target level. The actual percentage will be determined based on the level at which the Company attains the revenue and operating profit goals (as adjusted) that the Compensation Committee established for the 2010 fiscal year at the November 2009 meeting. Specifically, the target, threshold, and maximum goals were set at the following levels, with each such level expressed in $000s:

 

The goals are based on approximate revenue growth of 11% at threshold, 15% at target, and 18% at maximum level, and operating profit growth of 4% at threshold, 9% at target, and 14% at maximum level, when compared to the Company’s financial performance for the 2009 fiscal year. The specified growth rates exclude any growth attributable to the Company’s recent acquisition of BPP Holdings plc. The goals have been set solely for purposes of compensating the named executive officers under a program consistent with the Company’s pay for performance philosophy and do not necessarily reflect the Company’s anticipated or projected financial results for the 2010 fiscal year and are not intended to serve as guidance to the market.

 

The 2010 fiscal year cash incentive plan provides for certain adjustments to the calculation of the applicable revenue and operating profit targets. With respect to the revenue target, revenue attributable to companies acquired during the 2010 fiscal year and revenue attributable to Western International University will be excluded.

 

With respect to the operating profit component, the following amounts will be excluded: all expense recorded for the 2010 fiscal year with respect to the bonuses that become payable under the Company’s various bonus plans, including the 2010 fiscal year executive officer cash incentive plan; all acquisition costs expensed for such fiscal year; operating income or loss attributable to entities acquired during the 2010 fiscal year; any operating income or loss realized by Western International University for such fiscal year; all amounts relating to judgments, settlements or verdicts in connection with certain litigation matters listed in Note 18 to the Company’s Consolidated Financial Statements for the fiscal year ended August 31, 2009 and incorporated by reference into Item 3 of the Company’s 10-K for that fiscal year; and any impairment charges relating to goodwill, intangible assets or other long-lived assets.

 

In addition, the Compensation Committee has reserved discretion to reduce the cash incentive otherwise payable to the named executive officers by up to 20% based on its overall assessment of their individual performance for the 2010 fiscal year and by up to an additional 30% based on its overall assessment of the Company’s performance in terms of academic and educational excellence initiatives.

 

In assessing the individual performance of each of the Co-Chief Executive Officers, the Compensation Committee will also take into account the evaluation of their respective performance for the 2010 fiscal year made by the independent members of the Company’s Board of Directors. In assessing the performance of the named executive officers other than Messrs. Edelstein and Cappelli, the Compensation Committee will take into account the annual performance evaluations submitted by Messrs. Edelstein and Cappelli with respect to those individuals.

 

For the other executive officers participating in the 2010 fiscal year cash incentive plan, the financial metrics and other parameters are substantially the same, and the Committee may also reduce the amount of their potential cash incentives by up to 20% based on its overall general assessment of their individual performance based on the performance evaluations conducted by the Co-Chief Executive Officers and by an additional 30% based on its assessment of the Company’s performance measured in terms of academic and educational excellence initiatives.

 

For both Messrs. Swartz and Iverson, the amount of their potential cash incentive may be reduced by up to 20% for personal performance if there are any material weaknesses identified in the independent auditor’s assessment of the Company’s internal controls over financial reporting.

 

 

 

During 2007 the Compensation Committee undertook an extensive examination of the relative advantages and disadvantages of using stock options as the exclusive long-term equity incentive vehicle for executive officers. The Compensation Committee determined that several features made it desirable to introduce restricted stock units (“RSUs”) as a substantial component of the long-term equity incentive program. Those factors included:

 

(i) the significant accounting charges that result from stock options and the lack of a direct correlation between those accounting charges and the actual value delivered to the executive officers,

 

(ii) the failure of stock options to serve as a meaningful retention vehicle should the market price of the Company’s Class A Common Stock drop to a level below the exercise price, and

(iii) the downside protection afforded by the restricted stock units during periods of declining stock prices reduces the overall risk profile of the Company’s equity compensation programs.

 

Such considerations led the Compensation Committee to conclude that long-term equity incentives should be delivered to executive officers through a combination of stock options and RSU awards. Accordingly, beginning with the grants made for the 2008 fiscal year, the equity incentive awards made to the named executive officers have been primarily in the combined form of stock options and RSU awards. For the grants made to the named executive officers in the 2009 fiscal year, the total grant-date fair value of each award was in general divided equally between stock options (based on their Black-Scholes grant-date fair value) and RSU awards (based on their grant-date fair value),

 

For the grants made in July 2007, the Compensation Committee decided to structure the long-term equity incentive awards as multi-year grants for the 2008 and 2009 fiscal year in lieu of two separate successive annual grants over that time horizon. The Compensation Committee thought such multi-year awards were appropriate in the light of certain significant events that had occurred over the 18-month period preceding those grants, including the need to restate the Company’s prior financial statements and delay the release of current financial statements, the commencement of significant litigation against the Company, and the resignation of several non-employee Board members and executive officers associated with those events. Under such circumstances, the Compensation Committee concluded that a multi-year grant was both a proper form of long-term incentive and an important indication that the Company had transitioned to a more stable environment. A multi-year grant was also considered more consistent with the structure of the stock option grant made to Mr. Cappelli under the terms of his employment agreement.

 

Mr. D’Amico’s initial equity award in the combined form of stock options and restricted stock units was determined as part of the negotiation process surrounding his hiring as Chief Financial Officer. The grant was structured as a multi-year grant tied to the initial three-year term of his employment agreement. The grants that were made to Messrs. Edelstein and Moya in connection with their commencement of employment with the Company were also structured as multi-year grants, measured over a four-year period for Mr. Edelstein and a two-year period for Mr. Moya, and were comprised of stock option and RSU components.

 

In determining the size of the multi-year grants made to each executive officer, the Compensation Committee took into account the market levels of long-term equity incentive compensation and total direct compensation for the comparable position. The Compensation Committee also considered it important in sizing the grants that no pension benefit programs or any other retirement benefits were provided to the executive officers (except Dr. Sperling), other than the 401(k) Savings Plan available to all Company employees, and that for most of the Company’s executive officers the long-term equity incentive awards were intended to serve as the primary source of wealth creation. In addition, the executive officers are required to retain a significant portion of the shares acquired through their long-term awards in order to comply with the stock ownership policy discussed in Section VIII below.

 

Because of the multi-year grants made to the named executive officers in June 2007 for the 2008 and 2009 fiscal years, no new equity awards were made to them during the 2008 fiscal year. However, on September 4, 2007, Mr. Moya received, as part of his negotiated employment package, a multi-year grant comprised of a stock option grant for 110,000 shares of the Company’s Class A Common Stock with an exercise price of $58.67 per share, the fair market value per share on the grant date, and a RSU award covering an additional 17,000 shares of Class A Common Stock.

 

 

The following equity awards were made to Mr. Edelstein in connection with his commencement of employment with the Company:

 

Option Grant .  Mr. Edelstein was granted an option for 1,000,000 shares of the Company’s Class A Common Stock on his August 26, 2008 start date. The option has an exercise price of $62.51 per share.

 

RSU Awards .   On October 31, 2008, Mr. Edelstein received (i) a RSU award for an additional 71,213 shares of Class A Common Stock that was intended to compensate him for certain equity-based awards he forfeited upon termination of employment with his former employer, with the exact number of those

shares determined pursuant to the formula provisions of his employment agreement with the Company, and (ii) a second RSU award for another 8,000 shares of the Company’s Class A Common Stock to compensate him for the loss of certain employee benefits provided by his former employer.

 

 

The Compensation Committee authorized the following long-term equity awards for the named executive officers during the 2009 fiscal year: (i) a special equity incentive award for Dr. Sperling, (ii) the promotional equity awards to Mr. D’Amico to compensate him for the increased level of responsibility he assumed in connection with his promotion to President in June 2008 and his assumption of the duties of Chief Operating Officer in March 2009, (iii) the promotional equity award made to Mr. Swartz in March 2009 in connection with his appointment as Chief Financial Officer and (iv) the special multi-year stock option grants to Mr. Wrubel. Those awards may be summarized as follows:

 

Dr. Sperling .   In recognition of the significant contributions made by Dr. Sperling to the Company’s financial success and management stability over the past several challenging years, the Compensation Committee authorized a long-term equity incentive award for him with an aggregate value of $1.425 million, based in part on a Black-Scholes valuation formula for the option component calculated as of October 17, 2008. The actual award was made on October 31, 2008, the third business day following the filing of the Company’s Form 10-K for the fiscal year ended August 31, 2008, and was comprised of both stock options and RSU components. Dr. Sperling’s stock options cover 25,820 shares of the Company’s Class A Common Stock with an exercise price of $69.51 per share, the fair market value per share on the October 31, 2008 grant date, and have a maximum term of 6 years. The options will vest and become exercisable in three (3) successive equal annual installments upon his completion of each year of service with the Company over the three-year period measured from September 1, 2008. In addition, Dr. Sperling was also awarded on October 31, 2008, RSUs covering an additional 10,251 shares of Class A Common Stock. The RSU award had both performance-vesting and service-vesting components. Accordingly, none of the RSUs would have vested had the Company’s adjusted net income for the 2009 fiscal year been less than $250 million. Since the performance goal was in fact achieved, Dr. Sperling will vest in his award in three (3) successive equal annual installments upon his completion of each year of service with the Company over the three-year period measured from September 1, 2008. However, all the RSUs will immediately vest upon certain changes in control or ownership of the Company.

 

It should be noted that the actual SFAS 123(R) accounting cost of Dr. Sperling’s award, together with the award described below for Mr. D’Amico, was measured on the October 31, 2008 grant date and was based on the Black-Scholes valuation of the stock option component calculated as of that grant date. The October 17, 2008 valuation formula was utilized solely for purposes of sizing the option grant component of the awards made to Dr. Sperling and Mr. D’Amico and had no impact on the SFAS 123(R) accounting cost of those awards.

 

The grant-date fair value of the October 31, 2008 equity awards made to Dr. Sperling brought his total direct compensation for the 2009 fiscal year to approximately 3% above the 75 ^th percentile for executive chairman positions at the companies surveyed by the Compensation Committee’s independent consultant.

 

Mr. D’Amico .   During the first quarter of fiscal 2009, the Compensation Committee authorized an equity award for Mr. D’Amico in recognition of his appointment as President in June 2008 and the additional duties and responsibilities he undertook in that new role. The equity award had an aggregate value of $1.525 million, based in part on a Black-Scholes valuation formula for the option component calculated as of October 17, 2008. The actual award was made on October 31, 2008 and was comprised of both stock options and RSU components. The stock options cover 42,519 shares of the Company’s Class A Common Stock with an exercise price of $69.51 per share and have a maximum term of 4 years. Half of the options vested and became exercisable upon Mr. D’Amico’s continuation in the Company’s employ through June 15, 2009, and the remaining fifty percent will vest and become exercisable upon his continuation in the Company’s employ through June 15, 2010. Mr. D’Amico’s RSU award covers an additional 7,314 shares of Class A Common Stock. The RSU award had both performance-vesting and service-vesting components. Accordingly, none of

the RSUs would have vested had the Company not attained the same $250 million adjusted net income target that was in effect for Dr. Sperling’s RSU award. Since that performance goal was achieved, Mr. D’Amico vested in one half of the RSU award on August 31, 2009, and he will vest in the balance of the RSU award upon his continuation in the Company’s employ through June 15, 2010. However, all the RSUs will immediately vest upon certain changes in control or ownership of the Company.

 

On June 24, 2009 following his assumption of the office and duties of Chief Operating Officer, the Compensation Committee authorized an additional stock option grant for Mr. D’Amico in order to bring his total direct compensation for the 2009 fiscal year to the 75 ^th percentile of chief operating officer compensation at the comparator group. The option grant had a value of $400,000 based on a Black-Scholes valuation formula calculated as of June 22, 2009. The actual award was made on July 2, 2009 and covered 17,638 shares of the Company’s Class A Common Stock with an exercise price of $67.90 per share, the fair market value per share on the effective date, and with a maximum term of 4 years. The option will vest and become exercisable upon Mr. D’Amico’s continuation in the Company’s employ through June 15, 2010.

 

Mr. Swartz .   In March 2009, the Compensation Committee authorized an equity award for Mr. Swartz in recognition of his appointment as Chief Financial Officer. The equity award had an aggregate value of $333,000, based in part on a Black-Scholes valuation formula for the option component calculated as of March 24, 2009. The actual award was made on April 2, 2009 and was comprised of both stock option and RSU components. The stock options cover 6,032 shares of the Company’s Class A Common Stock with an exercise price of $68.75 per share and have a maximum term of 6 years. The options will vest and become exercisable in four successive equal annual installments upon Mr. Swartz’s completion of each year of employment with the Company over the four-year period measured from the April 2, 2009 effective date of the award. Mr. Swartz’s RSU award covers an additional 2,400 shares of Class A Common Stock and has both performance-vesting and service-vesting requirements. Accordingly, none of the RSUs will vest unless the Company’s adjusted net income for the 2010 fiscal year is at least $350 million. Upon the attainment of that performance goal, Mr. Swartz would vest in one-fourth of his RSU shares, and the balance would vest in a series of three successive equal annual installments upon his completion of each additional year of employment with the Company over the three-year period measured from the first anniversary of the award date.

 

Mr. Wrubel .   On October 31, 2008, the Compensation Committee made a special multi-year option grant to Mr. Wrubel as a long-term retention vehicle with a substantial upside potential tied to the appreciation in value of the Company’s Class A Common Stock. The grant was divided into three distinct tranches. The first tranche covers 52,500 shares and will vest and become exercisable in four successive annual installments over his period of continued employment with the Company measured from the grant date. The remaining two tranches of 62,000 shares each are special performance-based options that will not vest or become exercisable unless the market price of the Company’s Class A Common Stock attains a specified dollar amount within the first four years of the option term: $100 per share for the first performance tranche and $120 per share for the second performance tranche. If the stock price objective for the first performance tranche is attained, then that tranche will become exercisable in three successive equal annual installments over Mr. Wrubel’s period of continued employment with the Company measured from the first anniversary of the grant date. If the stock price objective for the second performance tranche is attained, then that tranche will become exercisable in two successive equal annual installments over Mr. Wrubel’s period of continued employment with the Company measured from the second anniversary of the grant date.

 

The following chart summarizes the long-term equity incentive awards made to the named executive officers during the 2009 fiscal year, whether in connection with their commencement of employment in such year, their promotion to new positions during such year or in the course of the Company’s regular annual grant process.

 

The chart indicates the grant date fair value of each award, as determined in accordance with SFAS 123(R) standards, as of the actual effective date of that award. The grants made on July 2, 2009 represented the regular annual grants for the 2010 fiscal year. The grants for an upcoming fiscal year are typically made during the final quarter of the current fiscal year.

 

 

 

As indicated above, equity awards were made on July 2, 2009 to the following named executive officers as part of their total direct compensation for the 2010 fiscal year: Dr. Sperling and Messrs. D’Amico, Moya and Swartz. The objective of those awards was in general to maintain the total direct compensation of each such named executive officer at the 75 ^th percentile (other than Mr. Swartz whose total direct compensation remained between the 50 ^th and 75 ^th percentile of market level total direct compensation for chief financial officers). Each of the awards became effective on July 2, 2009, the third business day following the Company’s filing of the 10Q for the quarter ended May 31, 2009.

 

Each equity award was sized in terms of a fixed dollar amount, with one half the dollar amount of each award representing the Black-Scholes value of the stock option component (as calculated as of a fixed date prior to the actual award date), and the other half representing the fair market value of the shares of the Company’s Class A Common Stock subject to the RSU component. The principal terms of those awards may be summarized as follows:

 

Stock Option Component

 

The stock option component will vest in four successive equal annual installments over a four-year period of service measured from the effective date of the grant and will have a maximum term of six years. The option will immediately vest in full upon certain changes in control or ownership of the Company, and the options awarded to Messrs. D’Amico and Moya also have partial vesting acceleration provisions that would be triggered should their employment terminate by reason of death or disability. Otherwise, the unvested portion of the option will be forfeited upon the executive officer’s cessation of employment prior to the completion of the applicable vesting schedule.

 

RSU Component

 

Each awarded RSU represents the right to receive a share of the Company’s Class A Common Stock when the vesting requirements for that unit have been satisfied. The RSUs have both performance-vesting and service-vesting components. Accordingly, none of the awarded RSUs will vest unless the Company’s net income for the 2010 fiscal year is at least $350 million, as adjusted to exclude stock-based compensation expense, litigation costs and expenses

(including judgments, verdicts and settlement amounts) and any extraordinary and non-recurring items. If that performance-vesting target is attained, then one-fourth of the RSU award will vest upon the executive officer’s continuation in employment through the end of the 2010 fiscal year. The balance of the RSUs will then vest in three successive equal annual installments on the second, third and fourth anniversaries of the effective date of the award, provided the executive officer continues in the Company’s employ through each such vesting date. All of the RSUs will immediately vest upon certain changes in control or ownership of the Company, and the RSUs awarded to Messrs. D’Amico and Moya also have partial vesting acceleration provisions that would be triggered should their employment terminate by reason of death or disability.

 

 

Executive officers are, in general, entitled to the same employee benefits available to all other full-time employees (subject to the satisfaction of applicable minimum service and other eligibility requirements). Such benefits include vacation accruals, health and welfare benefits and participation in the Company’s 401(k) Savings Plan and Employee Stock Purchase Plan. However, pursuant to a policy approved by the Compensation Committee in September 2008, executive officers who first join the Company on or after August 26, 2009 will be fully reimbursed, on a tax gross-up basis, for the COBRA costs they incur for continued health care coverage for themselves and their spouses and eligible dependents under their prior employer’s group health plan for the period preceding their coverage under the Company’s group health care plan, up to a maximum period of three months of such reimbursed coverage.

 

In addition, certain perquisites are made available to one or more executive officers, including the personal use of Company-provided automobiles (including reimbursement of registration fees, insurance costs and fuel and maintenance expenses), reimbursement of expenses incurred for personal tax planning, personal use of administrative assistants, housing allowances, reimbursement of certain personal travel expenses, limited use of Company-chartered aircraft for personal travel by the executive officer and his or her family members and limited personal use of the Company-owned condominium in Phoenix. AZ. The Company has adopted formal policies governing the personal use of Company-chartered aircraft and the Company-owned condominium. The policies are designed to assure that all personal use of Company-provided aircraft or the Company-owned condominium is carefully monitored and properly recorded and that any taxable income to the executive officer resulting from such personal use is accurately reported, with the requisite tax withholdings collected, and any reportable perquisites associated with such use is properly disclosed in accordance with applicable securities law regulations. In addition, the policies require a quarterly report to the Compensation Committee with respect to all personal or non-business use of Company-chartered aircraft or the Company-owned condominium during the period covered by the report.

 

The Company has also entered into a stadium naming rights agreement with the Arizona Cardinals Football Club of the National Football League. The Company believes that such agreement provides a valuable marketing tool that substantially increases the Company’s visibility and name recognition on a national level to an important segment of the potential market for its educational course offerings. The agreement also serves as an important vehicle in enhancing the Company’s community relations efforts in the Greater Phoenix area. The contract has a twenty-year term with a fixed schedule of annual fees payable by the Company over that term. A number of ancillary benefits are provided to the Company under the contract, including access to a private stadium loft for a limited number of guests for all Cardinals home football games and certain other entertainment events held at the stadium, additional tickets to all home games played by the Arizona Cardinals at the stadium, fully-paid expenses (transportation, food and lodging) to three away games for a limited number of guests per trip, fully paid expenses (transportation, food and lodging) to the Super Bowl and NFL Pro Bowl each year for up to 4 guests per trip, a specified number of tickets to each Super Bowl held at the stadium and the right to buy a fixed number of additional tickets to each Super Bowl held at the stadium and up to a specified number of seats to Super Bowls held at other locations.

 

The tickets provided the Company under the contract are allocated first to those executive officers and other employees who will use them for business entertainment or business development purposes or to establish or strengthen ties with representatives of local community organizations. To the extent the tickets are not to be used for such purposes, they are generally made available first to the executive officers and other members of senior

management as an additional reward for their services to the Company and then to the general employee population on a random basis.

 

There is no separate cost allocation under the naming rights agreement for the tickets provided to the Company for the use of the private stadium loft, nor are there any separate charges for the fully-paid trips to away games sponsored by the Arizona Cardinals football team or to the Super Bowl or Pro Bowl events covered under the contract. As a result, there is no incremental cost to the Company in providing those tickets or trips, or access to the private stadium loft, to one or more named executive officers. However, when the Company does purchase additional tickets to any event, any reportable executive officer perquisites with respect to that event are determined on an average cost per ticket basis. Such average cost is determined by dividing the aggregate cost incurred by the Company for the additional tickets by the total number of tickets available to the Company for that event, including the no-cost tickets provided under the contract.

 

The Company believes that the perquisites available to the executive officers, taking into account the limitations and restrictions of the aircraft and condominium policies and the ticket allocation process under the stadium naming rights agreement, have been set at a reasonable and appropriate level commensurate with their duties and responsibilities and are among the personal benefits typically provided to senior executive officers of companies with which the Company competes for executive talent. In addition, the reimbursement of certain personal expenses (such as travel costs and housing allowances) in lieu of salary increases to cover those recurring expenses avoids the additional costs the Company might otherwise incur with respect to certain other compensation or employee benefit programs that are tied directly or indirectly to the level of an executive officer’s base salary. Accordingly, the Company believes that the overall structure of the executive perquisite program serves as a valuable recruiting and retention mechanism for its executive officers and enables the Company to compete more successfully for qualified executive talent.

 

Further details regarding executive perquisites and other personal benefits are contained in the Summary Compensation Table and accompanying footnotes that appear later in this Information Statement.

 

 

Both the level and mix of compensation that the Compensation Committee authorized for the named executive officers for the 2009 fiscal year were considered within the context of objective market data derived from its competitive assessment of compensation and performance at the comparator group. The Compensation Committee believes that the total compensation package for each of the named executive officers represents a competitively sized and valued package that is based primarily on objective comparative data, even in those instances where subjective factors may have influenced the Committee with respect to certain compensation decisions.

 

 

The Compensation Committee Charter imposes a number of limitations on the dates on which equity awards may be made and expressly precludes the repricing of outstanding stock options. Specifically, the charter currently provides:

 

 

The Committee will not authorize the reduction of the exercise price of any outstanding stock options (other than to reflect changes in the Company’s capitalization effected without the receipt of consideration) or the exchange of outstanding stock options for new options with lower exercise prices.

 

 

The Company has no specific policies to adjust or recoup prior bonus payments or equity awards. However, under Section 304 of the Sarbanes-Oxley Act of 2002, should the Company be required to restate its financials due to material noncompliance with any financial reporting requirements as a result of misconduct, the Securities and Exchange Commission may bring enforcement actions against the Company’s Co-Chief Executive Officers and Chief Financial Officer to require them to reimburse the Company for (1) any bonus or other incentive-based or equity-based compensation received by them during the 12-month period following the first public issuance of the non-complying document, and (2) any profits realized by them from sales of Company securities during that 12-month period.

 

 

The Company’s philosophy is to reward the executive officers for future performance. Accordingly, compensation realized by the executive officers from prior-year equity awards (such as gains realized from the exercise of prior-year option grants or value derived from the vesting of prior-year restricted stock unit awards) are not considered in setting current compensation levels.

 

VII.   Employment Agreements and Post-Termination Payments

 

 

The Company has employment agreements with the following named executive officers: Dr. Sperling and Messrs. Edelstein, Cappelli, D’Amico, Moya and Wrubel. These agreements are summarized in the section of the Information Statement below entitled “Employment Agreements,” and the severance arrangements contained in those agreements are summarized in the section of the Information Statement below entitled “Potential Payments upon Termination or Change in Control.” The Company does not maintain employment agreements or severance arrangements with any executive officers other than those named above.

 

The employment agreement with Dr. Sperling was originally executed in December 1993, when he was serving in the roles of President, Chief Executive Officer and Chairman of the Board, and has been continually renewed through successive one-year extensions since the expiration date of the original term in December 1997. The employment agreements with Messrs. Edelstein, Cappelli, D’Amico and Moya were each the result of arm’s-length negotiation between the Company and the executive officer in connection with his commencement of employment. The compensation package provided under each of those agreements was determined by the Compensation Committee to be fair and reasonable on the basis of the comparative compensation data provided by its independent compensation consultant. The employment agreement with Mr. Wrubel was negotiated in connection with the Company’s acquisition of his then employer, Aptimus, Inc. Because the position in which Mr. Wrubel was initially employed pursuant to that contract was not an executive officer position, the Compensation Committee was not actively involved in the negotiation or execution of that contract. The initial term of the contract expired on October 29, 2009, and Mr. Wrubel remains employed under the contract on an “at will” basis. There are no longer any severance benefits payable to Mr. Wrubel under his current “at will” arrangement.

 

 

To date, the principal program maintained by the Company to provide retirement income for the named executive officers and other Company employees is the Company’s broad-based 401(k) Savings Plan, a defined contribution plan. However, the Company has also maintained a special defined-benefit type retirement

arrangement with Dr. Sperling for a number of years. That arrangement is described below in the section entitled “Executive Compensation, Pension Benefits.”

 

 

The Company’s equity compensation plans provide for accelerated vesting of all outstanding options and RSUs in the event of certain changes in control or ownership of the Company. The Compensation Committee believes that such single-trigger accelerated vesting is appropriate for the following reasons:

 

(i) There have been a number of instances in which outstanding equity awards of the target company have been cancelled in connection with the change in control event, and the immediate acceleration of those awards was necessary in order to preserve their existing economic value.

 

(ii) The Company relies primarily on long-term equity incentive awards to provide the named executive officers with the opportunity for wealth creation and the accumulation of substantial resources to fund their retirement income, and the Compensation Committee accordingly believes that a change in control event is an appropriate liquidation point for awards designed for such purposes.

 

(iii) By protecting the most significant component of their total direct compensation, the acceleration feature mitigates any potential conflicts of interest that might otherwise arise between the named executive officers and the shareholders and serves as a substantial incentive for those officers to obtain the highest possible value for the shareholders, should the Company become an acquisition target. It also allows the named executive officers to remain focused on the Company’s business operations and strategic objectives without undue concern over their own financial security during periods when substantial disruptions and distractions might otherwise prevail should the Company become the subject of acquisition overtures.

 

The Compensation Committee periodically reviews tally sheets prepared by its independent consultant indicating the severance benefits to which certain of the named executive officers (Messrs. Edelstein, Cappelli, D’Amico and Moya) would be entitled under their existing employment agreements were their employment to be terminated under various scenarios, such as an involuntary termination without cause or a resignation for good reason. The tally sheets indicate the total dollar amount of cash severance under each scenario, the intrinsic value of accelerated equity awards at various assumed stock prices and any other special benefits that would be triggered by the termination event. The Compensation Committee last performed such a periodic review in March 2009 and determined that the severance benefits for those named executive officers, as reflected in the tally sheets, were at or below competitive levels compared to market practice. In conducting such review, the Committee noted (i) the absence of any meaningful wealth accumulation opportunities afforded by the Company’s compensation programs to date, because of the relatively short periods those individuals have been with the Company, (ii) the perceived value of the severance benefit package as an important element of economic security and (iii) the significant retention vehicle such package provides.

 

Calculations and further explanation of the payments due the named executive officers upon termination of employment and/or a change in control event are found under the portion of the Executive Compensation section of this document entitled “Potential Payments Upon Terminations or Change in Control.”

 

VIII.  Stock Ownership Guidelines and Hedging Policies

 

The Company originally adopted share ownership guidelines for its executive officers in May 2007 and effected certain revisions in January and September 2009. The principal features of the policy as so revised may be summarized as follows:

 

Ownership Levels.   Each covered executive officer is expected to attain and retain beneficial ownership of shares of the Company’s Class A Common Stock with an aggregate value on each periodic measurement

date equal to the applicable multiple of annual base salary. The applicable multiples for the named executive officers are as follows:

 

 

Measurement Date.   Ownership levels will be measured periodically (usually prior to the start of each quarterly trading window), and the fair market value per share of the Company’s Class A Common Stock on any such measurement date will be calculated at the average of the closing selling prices per share over the two-hundred (200)-day period ending with such measurement date.

 

Measurable Ownership.   The following shares of the Company’s Class A Common Stock will be taken into account in calculating a covered individual’s level of share ownership on that date:

 

 

Sale Restrictions.   Until the ownership level is attained, a covered individual will be subject to the following limitations on the number of shares of the Class A Common Stock that he or she will be permitted to sell:

 

 

However, none of the shares directly owned by the covered individual as of March 26, 2009 or (if later) as of the date he or she first becomes a covered individual may be sold until the required level of share ownership is attained.

 

Exceptions.   The Compensation Committee may allow exceptions or deviations from the foregoing sale restrictions and limitations in hardship situations.

 

The Company does not have any policies prohibiting executives from holding Company securities in margin accounts, pledging Company securities as collateral for loans or entering into pre-paid variable forward sale contracts covering the Company’s securities. However, executive officers are not permitted to engage in short sales of Company securities.

 

 

As a general matter, the Compensation Committee takes into the account the various tax and accounting implications of the compensation programs maintained for the Company’s executive officers.

 

When determining the amount of the long-term equity incentive awards to be made to the executive officers and other employees, the Compensation Committee considers the accounting cost associated with those grants. Under Statement of Financial Accounting Standard No. 123 (revised 2004) (“SFAS 123(R)”), stock option grants and RSU awards result in an accounting charge for the Company. The accounting charge is equal to the grant-date fair value of those securities. For RSUs the accounting cost is generally equal to the fair market value of the

underlying shares of Class A Common Stock on the award date. That cost is then amortized over the requisite service period. With respect to stock options, the Company generally calculates the grant-date fair value of the option based on the Black-Scholes formula (with an adjustment for possible forfeitures) and amortizes that value as a compensation expense over the vesting period. However, as noted with respect to certain equity awards made to the executive officers, the Compensation Committee may size those awards based on a Black-Scholes valuation calculated prior to the actual grant date, but the actual SFAS 123(R) accounting cost for those awards will be determined by the Black-Scholes valuation of those awards on the actual grant date. The Compensation Committee believes that the use of an earlier Black-Scholes valuation solely for sizing purposes is appropriate in order to facilitate the orderly administration and implementation of those awards and to assure the timely filing of the appropriate public reports, including Form 4 reports, with respect to those awards.

 

Section 162(m) of the Internal Revenue Code disallows an income tax deduction to publicly-traded companies such as the Company for compensation paid to certain executive officers to the extent that compensation exceeds $1 million per officer in any taxable year and does not otherwise qualify as performance-based compensation. The Company’s existing equity compensation plans, including the 2000 Stock Incentive Plan, are structured so that the compensation deemed paid to an executive officer in connection with the exercise of stock options granted under those plans should qualify as performance-based compensation that is not subject to the $1 million limitation. However, the Company has had to apply revised measurement dates to certain stock option grants for financial accounting purposes, and the options with those revised measurement dates may not qualify as performance-based compensation for purposes of Section 162(m). As a result, the compensation deemed paid when those options are exercised may be subject to the Section 162(m) limitation. In addition, other awards made under those plans may or may not qualify as performance-based compensation. However, it is expected that the RSU awards made during the 2008 and 2009 fiscal years will qualify as performance-based compensation because none of those awards would have vested unless the Company attained the pre-established net income target applicable to each such award.

 

The cash incentive plan implemented for the named executive officers for the 2009 fiscal year (exclusive of the supplemental discretionary bonus program in effect for Messrs. Cappelli and Swartz) was designed to provide cash incentive payments that would qualify as performance-based compensation under Section 162(m) and should be fully deductible by the Company. The supplemental bonuses paid to Messrs. Cappelli and Swartz did not result in the Company’s loss of any income tax deductions because the total amount of non-performance-based compensation paid to those two individuals for the 2009 fiscal year did not exceed the $1 million limitation per named executive officer and, in addition, because Mr. Swartz is not currently subject to such limitation in his capacity as Chief Financial Officer.

 

The Compensation Committee will continue to consider steps that might be in the Company’s best interests to comply with Section 162(m). However, in establishing the cash and equity incentive compensation programs for the executive officers, the Compensation Committee believes that the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole or primary factor. The Compensation Committee believes that cash and equity incentive compensation must be maintained at the requisite level to attract and retain the executive officers essential to the Company’s financial success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.

 

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on such review and discussion with management, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2009.

 

Submitted by:

 

Dr. Roy A. Herberger, Jr., Chair
Dino J. DeConcini
Dr. Ann Kirschner
Manuel F. Rivelo*

 

 

* Mr. Rivelo joined the Compensation Committee on March 26, 2009. He replaced K. Sue Redman, who served on the Compensation Committee from December 6, 2006 to March 26, 2009.

SUMMARY COMPENSATION INFORMATION

 

The following table provides certain summary information concerning the compensation earned for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended August 31, 2009, August 31, 2008 and August 31, 2007, respectively, by the Company’s Principal Executive Officers, Principal Financial Officer, former Principal Financial Officer, and each of the Company’s three other most highly compensated executive officers whose total compensation for the fiscal year ended August 31, 2009 was in excess of $100,000 and who were serving as executive officers at the end of that fiscal year. No other executive officers who would have otherwise been includable in such table on the basis of total compensation for the 2009 fiscal year have been excluded by reason of their termination of employment or change in executive officer status during that year. The listed individuals shall be hereinafter referred to as the “named executive officers.”

 

 

 

 

 

 

 

 

 

 

 

Executive Officer Incentive Bonus Plan

 

On November 26, 2008, the Compensation Committee implemented the Executive Officer Incentive Bonus Plan for the 2009 fiscal year. For each of the named executive officers (other than Messrs. Swartz and Wrubel), the target bonus was set at 100% of base salary for such fiscal year. For Mr. Wrubel, the target bonus was set at 75% of his base salary for the 2009 fiscal year, and for Mr. Swartz, the target bonus was set at 50% of the rate of base salary in effect for him at the time of his selection as a participant. The actual bonus which each participant could earn for the 2009 fiscal year ranged from 0 to 200% of his annual target bonus. The actual percentage was to be determined based on the level at which the revenue and operating profit goals (as adjusted) for the 2009 fiscal year were in fact attained. Three separate levels of potential attainment were established by the Compensation Committee at the time the plan was implemented. Further information concerning such target, threshold, and maximum levels of attainment and the pre-authorized adjustments to the revenue and operating profit goals may be found in the “2009 Fiscal Year Bonus Plan” section of “Compensation Discussion and Analysis” above.

 

The Compensation Committee reserved the discretion to reduce by up to 20% the bonus amount otherwise payable to a participant on the basis of the Company’s attained level of revenue and operating profit. The potential factors that could be taken into account in determining whether to reduce any named executive officer’s bonus amount included the Committee’s overall assessment of his performance for the 2009 fiscal year, including any failure to attain one or more of the personal performance goals that the Chief Executive Officer set for him for the 2009 fiscal year and whether one of the performance metrics had been achieved at less than threshold.

 

The actual incentive bonus earned under the plan by each named executive officer is set forth in the Summary Compensation Table. For further information concerning the Executive Officer Incentive Compensation Plan, please see “Compensation Discussion and Analysis” above.

 

In addition to the incentive bonuses they received for the 2009 fiscal year under the Executive Officer Incentive Bonus Plan, Messrs. Cappelli and Swartz were also awarded discretionary bonuses for such year in the respective amounts of $66,667 and $131,250 in recognition of the increased responsibilities they assumed in connection with their promotion to Co-Chief Executive Officer and Chief Financial Officer, respectively.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table provides certain summary information concerning outstanding equity awards held by the named executive officers as of August 31, 2009.