UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

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Check the appropriate box:
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o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12

NCI BUILDING SYSTEMS, INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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January [ • ], 2010

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of NCI Building Systems, Inc. to be held at 10:00 a.m. on Friday, February 19, 2010, at the NCI Conference Center located at 7313 Fairview, Houston, Texas. At this meeting you will be asked to:

 

(1) Proposal 1:  Elect the three (3) Class II directors named in the accompanying proxy statement to serve until the 2013 Annual Meeting of Stockholders or until their respective successors have been elected and shall have qualified;

 

(2) Proposal 2:  Approve the amendment and restatement of the 2003 Long-Term Stock Incentive Plan;

 

(3) Proposal 3:  Approve an amendment to the Company’s Restated Certificate of Incorporation to effect a reverse stock split of the common stock of the Company;

 

(4) Proposal 4:  Approve certain other amendments to the Company’s Restated Certificate of Incorporation;

 

(5) Proposal 5:  Ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2010; and

 

(6) Transact such other business as may properly come before the Annual Meeting of Stockholders or any reconvened meeting following any adjournment or postponement thereof.

 

It is important that your shares be represented at the Annual Meeting of Stockholders. Therefore, whether or not you expect to attend in person, please sign and date the enclosed proxy and return it in the enclosed envelope or submit your proxy using the telephone or Internet procedures that may be provided to you at your earliest convenience. Please note that using any of these methods will not prevent you from attending the meeting and voting in person.

 

Very truly yours,

 

Norman C. Chambers
Chairman of the Board, President
and Chief Executive Officer

NCI BUILDING SYSTEMS, INC.
10943 North Sam Houston Parkway West
Houston, Texas 77064

 

 

 

 

NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 19, 2010

 

 

 

 

The Annual Meeting of Stockholders of NCI Building Systems, Inc. will be held at the NCI Conference Center located at 7313 Fairview, Houston, Texas, on Friday, February 19, 2010, at 10:00 a.m. The Annual Meeting of Stockholders will be held for the following purposes:

 

1. Proposal 1:  The election of the three (3) Class II directors named in the accompanying proxy statement to serve until the 2013 Annual Meeting of Stockholders or until their respective successors have been elected and shall have qualified;

 

2. Proposal 2:  Approval of the amendment and restatement of the 2003 Long-Term Stock Incentive Plan;

 

3. Proposal 3:  Approval of an amendment to the Company’s Restated Certificate of Incorporation to effect a reverse stock split of the common stock of the Company;

 

4. Proposal 4:  Approval of certain other amendments to the Company’s Restated Certificate of Incorporation;

 

5. Proposal 5:  Ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2010; and

 

6. The transaction of such other business as may properly come before the Annual Meeting of Stockholders or any reconvened meeting following any adjournment or postponement thereof.

 

Only stockholders of record at the close of business on January 4, 2010 are entitled to notice of, and to vote at, the meeting or any reconvened meeting following any adjournment or postponement thereof.

 

We believe that it is desirable that as large a proportion as possible of the stockholders’ interests be represented at our Annual Meeting. Whether or not you plan to attend our Annual Meeting request that you properly date and sign the enclosed form of proxy and promptly return it to us using the enclosed addressed and stamped envelope or submit your proxy using the telephone or Internet procedures that may be provided to you. If you are present at the meeting and wish to do so, you may revoke the proxy and vote in person. If, however, you hold your shares through a nominee or broker, you must obtain a signed proxy from the broker in order to be able to vote in person.

 

By order of the Board of Directors,

 

Todd R. Moore

Executive Vice President, General Counsel

and Secretary

 

Important Notice Regarding the Availability of
Proxy Materials for the Annual Stockholder Meeting to be Held February 19, 2010

 

The proxy statement and annual report to shareholders are available at www.ncilp.com/proxy.

PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
To Be Held February 19, 2010

 

Table of Contents

 

NCI BUILDING SYSTEMS, INC.
10943 North Sam Houston Parkway West
Houston, Texas 77064
(281) 897-7788

 

PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 19, 2010

 

This proxy statement is furnished to stockholders of NCI Building Systems, Inc. (“NCI,” the “Company,” “we,” and “us”) in connection with the solicitation of proxies to be used at our Annual Meeting of Stockholders (the “Annual Meeting”) to be held Friday, February 19, 2010. Your proxy in the form enclosed will be voted at the meeting if properly executed by you, returned to us and not revoked by you before the Annual Meeting. If you give a proxy on the enclosed form, or by telephone or the Internet, you may revoke it at any time before it is voted by delivering written notice of revocation to the Secretary of NCI, by delivering a later dated proxy or by attending the Annual Meeting, withdrawing your proxy and voting your shares personally. Your attendance at the Annual Meeting will not constitute automatic revocation of your proxy. If you hold your shares through a nominee or broker, you must obtain a signed proxy from the broker in order to be able to vote in person.

 

We are first sending this proxy statement and the enclosed proxy form to stockholders on or about January [ • ], 2010.

 

When you have appropriately specified how your proxy should be voted, the proxy will be voted accordingly. Unless you otherwise specify in your proxy, your proxy will be voted (1) FOR Proposal 1, the election as directors of the nominees listed under “Election of Directors”; (2) FOR Proposal 2, the approval of the amendment and restatement of our 2003 Long-Term Stock Incentive Plan; (3) FOR Proposal 3, the amendment to the Company’s Restated Certificate of Incorporation (the “Certificate of Incorporation”) to effect a reverse stock split of the common stock of the Company, par value $0.01 (the “Common Stock”); (4) FOR Proposal 4A; (5) FOR Proposal 4B; (6) FOR Proposal 4C; (7) FOR Proposal 4D; (8) FOR Proposal 4E; (9) FOR Proposal 4F; (10) FOR Proposal 4G; (11); FOR Proposal 5, the ratification of Ernst & Young LLP as the Company’s independent registered public accountants for the fiscal year scheduled to end on October 31, 2010 (“Fiscal 2010”); and (12) at the discretion of the proxy holders, either FOR or AGAINST any other matter or business that may properly come before the Annual Meeting. Our board of directors is not currently aware of any other such matter or business.

 

Our board of directors is soliciting the accompanying proxy. We will bear the entire cost of soliciting proxies and no other person or persons will bear those costs either directly or indirectly. We hired Morrow & Co., LLC to assist in the solicitation of proxies from stockholders at a fee of approximately $22,000 plus reimbursement of reasonable out-of-pocket expenses. In addition to the use of the mails, proxies may be solicited by personal interview, telephone and email by our directors, officers and employees, none of whom will receive additional compensation. We will also reimburse brokerage houses and other nominees for their reasonable expenses in forwarding proxy materials to beneficial owners of our Common Stock.

 

Affiliates of certain of our directors have an interest in Proposal 3, which would amend our Certificate of Incorporation to effect a reverse stock split of the Common Stock of the Company. James G. Berges, Nathan K.

Sleeper and Jonathan L. Zrebiec are directors of the Company and employees of Clayton, Dubilier & Rice, LLC (“CD&R, LLC”), a private equity fund that is the manager and an affiliate of Clayton, Dubilier & Rice Fund VIII, L.P. and CD&R Friends & Family Fund VIII, L.P. (together, the “Investors”). The Investors own 250,000 shares of a class of convertible preferred stock, par value $1.00 per share, of the Company, designated the Series B Cumulative Convertible Participating Preferred Stock (the “Preferred Stock” and shares thereof the “Preferred Shares”). As of December 8, 2009, the Preferred Shares are fully convertible into 196,109,194 shares of Common Stock, but there are only 100,000,000 shares of Common Stock authorized under our Restated Certificate of Incorporation, of which 90,419,147 are already issued and outstanding. In connection with the Investors’ acquisition of the Preferred Shares, the Investors entered into the Stockholders Agreement, dated as of October 20, 2009 (the “Stockholders Agreement”), with the Company, which includes a requirement that we seek stockholder approval to make available a number of shares of Common Stock that is sufficient to permit the Investors to fully convert the Preferred Shares. If Proposal 3 is approved, we may undertake a reverse stock split that will increase the number of available shares of Common Stock and permit the Investors to fully convert the Preferred Shares. The current conversion price per share of the Preferred Stock is $1.2748. If Proposal 3 is not approved, beginning June 30, 2010 and continuing until we receive stockholder approval for an increase in the number of shares available for conversion of the Preferred Shares, the Investors will receive a higher dividend rate per share of Preferred Stock owned by them than the rate that is currently payable on the Preferred Stock.

 

Article TENTH of our Restated Certificate of Incorporation requires that certain business combinations between the Company and an “interested stockholder” (which generally is defined to include the beneficial owner of 10% or more of the voting power of the Company) receive one of several special approvals. One such approval is the approval of a majority of the “disinterested directors” on our board of directors. “Disinterested directors” are defined as members of the board of directors who are unaffiliated with the interested stockholder who were either members of the board of directors immediately before the time that the interested stockholder became an interested stockholder or unaffiliated successors of such directors recommended by a majority of disinterested directors in office prior to the taking of office by the successor director.

 

The reverse stock split may be a business combination under Article TENTH of our Restated Certificate of Incorporation. Pursuant to Article TENTH of our Restated Certificate of Incorporation, a committee of “disinterested directors” has unanimously approved the reverse stock split.

 

The Investors also have an interest in the following proposals, which benefit them as the beneficial owners of 68.4% of our voting power and the holders of Preferred Stock:

 

 

At the Annual Meeting, stockholders are being asked to approve the amendment and restatement of our 2003 Long-Term Stock Incentive Plan, pursuant to which directors and employees may be granted different types of awards, including stock options and restricted stock awards. As a result, senior executives and directors have personal interests in the outcome of this proposal that are different from the interests of other stockholders.

 

The record date for stockholders entitled to notice of, and to vote at, the Annual Meeting is January 4, 2010. At the close of business on that date we had [ • ] shares of Common Stock and 250,000 shares of Preferred Stock issued and outstanding and entitled to be voted at the Annual Meeting. Each of the 250,000 shares of Preferred Stock is entitled to vote on an as-converted basis, and the Preferred Shares together have a number of votes equivalent to 196,109,194 shares of Common Stock.

 

Unless otherwise noted, the following tables set forth, as of December 8, 2009 (the “Ownership Date”), the number of shares of our equity securities beneficially owned by (1) each person or group known by us to own beneficially more than 5% of the outstanding shares of any class of our equity securities, (2) each director and nominee for director including all directors in office during and after the fiscal year ended November 1, 2009 (“Fiscal 2009”), (3) each of our executive officers identified under the caption “Executive Compensation” and (4) all directors and director nominees including all directors in office during and after Fiscal 2009 and executive officers as a group. Except as otherwise indicated, each of the persons or groups named below has sole voting power and investment power with respect to the Common Stock and Preferred Stock.

 

 

 

 

 

 

 

 

 

On October 20, 2009, we completed a financial restructuring that resulted in a change of control of the Company. Pursuant to the Investment Agreement, dated as of August 14, 2009 (as amended, the “Investment Agreement”), between the Company and Clayton, Dubilier & Rice Fund VIII, L.P., the Company issued and sold to the Investors, for an aggregate purchase price of $250 million, an aggregate of 250,000 shares of Preferred Stock, convertible into 196,109,194 shares of Common Stock based on the initial conversion price (or approximately 68.4% of our voting power) (such purchase and sale, the “Equity Investment”). The purchase price for the Preferred Shares was funded with capital contributions of the partners of each of the Investors.

 

In connection with the closing of the Equity Investment, among other things, we:

 

 

The terms of the Preferred Stock held by the Investors entitle the holders thereof to vote on an as-converted basis (without taking into account any limitations on convertibility that may then be applicable) with the holders of Common Stock. As the holder of a majority voting position, the Investors will be able to significantly influence or control matters submitted to shareholders for vote. In addition, certain actions by the Company, including, upon the occurrence of certain specified defaults, the adoption of an annual budget, the hiring and firing, or the changing of the compensation, of executive officers and the commitment, resolution or agreement to effect any business combination, among others, require the prior affirmative vote or written consent of the holders representing at least a majority of the then-outstanding Preferred Shares.

 

 

Pursuant to the Investment Agreement, we are subject to covenants with regards to our use of the proceeds of the Equity Investment and the payment of certain taxes pursuant to the Equity Investment. We are also subject to certain post-closing indemnity obligations.

In connection and concurrently with the closing of the Equity Investment, we entered into a Stockholders Agreement with the Investors, setting forth certain terms and conditions regarding the Equity Investment and the Investors’ ownership of the Preferred Shares. Pursuant to the Stockholders Agreement, subject to certain ownership and other requirements and conditions, the Investors have the right to appoint a number of directors to our board of directors and to all committees (other than the Affiliate Transactions Committee, whose composition is further described in “Board of Directors — Affiliate Transactions Committee” below) that is proportionate to their percentage voting interest in the Company at the relevant time. For so long as the Investors hold a voting interest of 20% or more, they have the right to designate the “Lead Director” or Chairman of the Executive Committee of our board of directors. For so long as the Investors hold a voting interest of 25% or more, they have consent rights over a variety of significant corporate and financing matters, including, subject to certain customary exceptions and specified baskets, sales and acquisitions of assets, issuances and redemptions of equity, incurrence of debt, the declaration or payment of extraordinary distributions or dividends and changes to the Company’s line of business.

 

Pursuant to the Investment Agreement and the Stockholders Agreement, for so long as we qualify as a “controlled company” within the meaning set forth in the Listed Company Manual of the New York Stock Exchange (“NYSE”) or any similar provision in the rules of a stock exchange on which the securities of the Company are quoted or listed for trading, we have agreed to use our reasonable best efforts to take advantage of the exemptions afforded such controlled companies. Accordingly, effective as of the closing of the Equity Investment, we took all corporate action and filed all election notices and other documentation with the NYSE necessary to elect to qualify for the exemptions to the requirements of sections 303A.01, 303A.04 and 303A.05 of the NYSE Listed Company Manual. As long as we qualify for those exemptions, we will not be subject to the requirements that NYSE listed companies have (1) a majority of independent directors, (2) a nominating/corporate governance committee and a compensation committee, in each case, composed entirely of independent directors, and (3) charters for the nominating/corporate governance committee and the compensation committee, in each case, addressing certain specified matters.

 

Pursuant to the Stockholders Agreement, effective as of the closing of the Equity Investment on October 20, 2009, William D. Breedlove, Philip J. Hawk, Larry D. Edwards, Ed L. Phipps, W. Bernard Pieper, John K. Sterling and Max L. Lukens resigned from our board of directors. Gary L. Forbes and George Martinez have remained on the board. Also on October 20, 2009, the board of directors appointed three individuals designated by the Investors, James G. Berges, Lawrence J. Kremer and Nathan K. Sleeper, as directors. Effective as of November 10, 2009, the board of directors appointed John J. Holland as a director unaffiliated with both the Investors and the Company and appointed two directors designated by the Investors, Kathleen J. Affeldt and Jonathan L. Zrebiec, as directors. As a result, the Investors have the ability, subject to the fiduciary duties of the individual directors, to control the decisions of the board of directors.

 

In connection and concurrently with the closing of the Equity Investment, we entered into the following agreements:

 

 

In connection with and prior to the launch of the Exchange Offer, we entered into the Lock-Up and Voting Agreement, dated as of August 31, 2009 (as amended, the “Lock-Up and Voting Agreement”), with the holders of the Notes that were signatories thereto (the “Lock-Up Holders”), pursuant to which, among other things, the board of directors agreed to appoint one individual designated by certain Lock-Up Holders to our board of directors. Those Lock-Up Holders designated John J. Holland as a director and our board of directors appointed him as a director effective as of November 10, 2009.

 

The presence in person or by proxy of the holders of a majority of the voting power of the stock entitled to vote at an Annual Meeting is necessary to constitute a quorum at the Annual Meeting. Each outstanding share of Common Stock is entitled to one vote. Each share of Preferred Stock will be entitled to vote on an as-converted basis with the holders of the Common Stock on all matters submitted to the Annual Meeting, voting as a single class, except as to Proposal 4A, which is subject to a class vote by the holders of the Common Stock.

 

Those nominees receiving a plurality of all of the votes cast at the Annual Meeting shall be elected to our board of directors. All routine matters will be decided by the vote of a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote on the matter, a quorum being present. Certain matters to be voted upon have specific voting requirements as follows.

 

The total number of votes cast on Proposal 2, to amend and restate our 2003 Long-Term Stock Incentive Plan, must represent a majority of the shares of all securities of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting, in accordance with NYSE rules. The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have expressed their intention to vote in favor of the amendment and restatement of our 2003 Long-Term Stock Incentive Plan.

 

The total number of votes cast on Proposal 3, to amend the Company’s Restated Certificate of Incorporation (the “Certificate of Incorporation”) to effect a reverse stock split, must represent a majority of the outstanding shares of capital stock of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting. The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have expressed their intention to vote in favor of this proposal.

 

The total number of votes cast on Proposal 4A, to amend the Certificate of Incorporation to enable holders of a majority of the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors to approve proposals increasing or decreasing (but not below the number of shares outstanding) the number of authorized shares of any class or classes of stock of the Company (except the number of shares of Preferred Stock or any series thereof), without requiring an additional class vote of the holders of any such class of capital stock, must include the affirmative vote of (1) stockholders holding at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting and (2) stockholders holding at least a majority of the outstanding shares of Common Stock entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The total number of votes cast on Proposal 4B, to amend the Certificate of Incorporation to provide for removal of directors, with or without cause, must represent at least 80% of the outstanding voting power of the Company entitled to vote on the proposal, voting together as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting.

The total number of votes cast on Proposal 4C, to amend the Certificate of Incorporation to provide for the calling of special meetings by stockholders holding at least 25% of the voting power of the Company, must represent at least 80% of the outstanding voting power of the Company entitled to vote on the proposal, voting together as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The total number of votes cast on Proposal 4D, to amend the Certificate of Incorporation to permit stockholder action by written consent, must represent at least 80% of the outstanding voting power of the Company entitled to vote on the proposal, voting together as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The total number of votes cast on Proposal 4E, to amend the Certificate of Incorporation to eliminate board discretion to grant pre-emptive rights and preferential rights, must represent at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The total number of votes cast on Proposal 4F, to amend the Certificate of Incorporation to remove special approval rights over certain business combinations, must represent at least 80% of the outstanding voting power of the Company entitled to vote on the proposal, voting together as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The total number of votes cast on Proposal 4G, to amend the Certificate of Incorporation to provide for the proportional voting of directors, must represent at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote in favor of Proposals 4A, 4B, 4C, 4D, 4E, 4F and 4G.

 

The total number of votes cast on Proposal 5, to ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending October 31, 2010 must represent a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote on the matter, a quorum being present.

 

Abstentions are counted for the purpose of determining the presence of a quorum and have the same effect as a negative vote on matters other than the election of directors. Brokers holding shares must vote according to specific instructions they receive from the beneficial owners. The NYSE precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. These proposals include the election of directors. Broker non-votes occur when brokers do not have discretionary voting authority to vote certain shares held in “street name” on particular proposals under the rules of the New York Stock Exchange, and the “beneficial owner” of those shares has not instructed the broker to vote on those proposals. If you are a beneficial owner, your bank, broker, dealer, custodian or other nominee is permitted to vote your shares only with regard to the proposal to ratify the appointment of the independent registered public accounting firm, even if the holder does not receive voting instructions from you. A broker non-vote is treated as “present” for purposes of determining the existence of a quorum.

 

Our Certificate of Incorporation and Second Amended and Restated By-Laws (“By-Laws”) provide that the number of directors on our board of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of our board of directors. The number of members constituting our board of directors is currently fixed at ten.

 

In accordance with our Certificate of Incorporation and By-laws, our board of directors is divided into three classes, as nearly equal in number as reasonably possible, and members are elected for a term of office expiring at the third succeeding annual stockholders’ meeting following their election to office or until a successor is duly elected and qualified. In addition, there is one vacancy on the board of directors which can be filled at any time by the Investors. Except as otherwise provided by the Stockholders Agreement, under our By-Laws, newly created

directorships resulting from any increase in the authorized number of directors or any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled only by a majority of the votes that can be cast by directors then in office, though less than a quorum, and directors so chosen hold office until the Annual Meeting of stockholders at which the term of office of the class to which the director has been elected expires. The terms of office of each of the Class II directors expire at this Annual Meeting and the terms of office of each of the Class III and Class I directors expire at the Annual Meeting in 2011 and 2012, respectively.

 

Three Class II directors are to be elected at the Annual Meeting for a term expiring at the Annual Meeting to be held in 2013, or until their respective successors are duly elected and qualified. If, at the time of or prior to our Annual Meeting, any of the nominees should be unable or decline to serve, the discretionary authority provided in the proxy may be used to vote for a substitute or substitutes designated by our board of directors. Our board of directors has no reason to believe that any substitute nominee or nominees will be required. No proxy will be voted for a greater number of persons than the number of nominees named herein.

 

Set forth below is information concerning the persons nominated for election as directors.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THESE NOMINEES.

 

Class II Directors Who Serve Until The Annual Meeting To Be Held In 2013:

 

Gary L. Forbes

 

Mr. Forbes, age 65, has served as a director since December 1991. Mr. Forbes serves on the Executive Committee, Affiliate Transactions Committee and Nominating and Corporate Governance Committee and is the Chairman of the Audit Committee of our board of directors. In addition, Mr. Forbes is our designated audit committee financial expert. Mr. Forbes has been a Senior Vice President of Equus Total Return, Inc., an investment company, since November 1991. Mr. Forbes is also a director of Consolidated Graphics, Inc., a commercial printing company. Mr. Forbes earned a B.B.A. in Accounting from the University of Texas at Austin and is a certified public accountant.

 

George Martinez

 

Mr. Martinez, age 68, has served as a director since March 2003. He serves on the Audit Committee of our board of directors. Mr. Martinez is Chief Executive Officer of Allegiance Bank Texas, a Houston commercial bank that opened for business in October 2007. He has been active as a bank executive in Houston for over 30 years and is the former Chairman of Sterling Bancshares, Inc., a publicly-traded bank holding company, having served as Chairman of the Board from 2001 to 2004. Mr. Martinez has served as President of Chrysalis Partners, LLC, a performance consulting firm, since 1999 and currently serves as Senior Partner of the firm. He serves his community on the board of directors and as Chairman of the Center for Houston’s Future. Mr. Martinez has a B.A. in Business Administration and Economics from Rice University.

 

Jonathan L. Zrebiec

 

Mr. Zrebiec, age 29, has served as a director since November 2009. Mr. Zrebiec is a financial principal of CD&R, LLC, the successor to the investment management business of CD&R, Inc., which he joined in 2004. Prior to joining CD&R, Inc., he was employed by Goldman, Sachs & Co. in the Investment Banking Area. Mr. Zrebiec holds a B.S. in Economics from the University of Pennsylvania and holds an M.B.A. from Columbia University.

 

Class I Directors Who Serve Until The Annual Meeting To Be Held In 2012:

 

James G. Berges

 

Mr. Berges, age 62, has served as a director since October 2009. Mr. Berges is the Chairman of the Executive Committee and Nominating and Corporate Governance Committee of our board of directors. Mr. Berges is a partner of CD&R, LLC, having become a partner of CD&R, Inc. in 2006. Prior to that, he was President of Emerson Electric Co. from 1999 until his retirement in 2005. Emerson Electric Co. is a global manufacturer of products, systems and services for industrial automation, process control, HVAC, electronics and communications, and appliances and tools. He is also Chairman of HD Supply, Inc. and Sally Beauty Holdings, and a Director of PPG Industries, Inc. and Diversey, Inc. Mr. Berges holds a B.S. in electrical engineering from the University of Notre Dame.

 

Lawrence J. Kremer

 

Mr. Kremer, age 68, has served as a director since October 2009. Mr. Kremer serves on the Affiliate Transactions Committee of our board of directors. Mr. Kremer retired in 2007 from Emerson Electric Co. Prior to that, Mr. Kremer was employed by Whirlpool Corporation, a worldwide producer of appliances, as Senior Vice President of International Operations and Global Materials. Mr. Kremer currently serves as Director of Fifth Third Bank Southern Region, George Koch Sons LLC, a privately held company producing a wide variety of components for the automotive and mining industries, and St. Mary’s Hospital System, a Midwest Regional Hospital. Mr. Kremer serves as the Vice Chairman of the Board of Trustees of the University of Evansville. Mr. Kremer holds a B.S. and M.B.A from the University of Evansville.

 

John J. Holland

 

Mr. Holland, age 59, has served as a director since November 2009. Mr. Holland serves on the Affiliate Transactions Committee, Audit Committee, and Compensation Committee of our board of directors. Mr. Holland has been the President of Greentree Advisors, LLC since 2004. Mr. Holland was the President, Chief Operating Officer and Chief Financial Officer of MMFX Technologies Corporation from 2008 until 2009. Prior to that, Mr. Holland was the Executive Vice President and Chief Financial Officer of Alternative Energy Sources, Inc., an Ethanol producer, from August 2006 until June 2008. Mr. Holland previously was employed by Butler Manufacturing Company, a producer of pre-engineered building systems, supplier of architectural aluminum systems and components and provider of construction and real estate services for the nonresidential construction market, from 1980 until his retirement in 2004. Prior to his retirement from Butler, Mr. Holland served as Chairman of the Board from 2001 to 2004, as Chief Executive Officer from 1999 to 2004, and as President from 1999 to 2001. Mr. Holland is a Director of Cooper Tire & Rubber Co. and of Saia, Inc. (formerly SCS Transportation, Inc.). Mr. Holland holds B.S. and M.B.A. degrees from the University of Kansas and is a certified public accountant.

 

Class III Nominees For Election As Directors Who Serve Until The Annual Meeting To Be Held In 2011:

 

Norman C. Chambers

 

Norman C. Chambers, age 60, has served as our Chairman of the Board since January 2008 and as our President and Chief Executive Officer since January 2007. He served as our President and Chief Operating Officer from April 2004 to January 2007 and has served as one of our directors since May 2003. Mr. Chambers serves on the Executive Committee of our board of directors. Mr. Chambers was a director and President of Comfort Systems USA, Inc., a provider of heating, ventilation and air conditioning services, from November 2002 until April 2004 and also served as Chief Operating Officer from February 2003 until April 2004. From November 2001 to October 2002, Mr. Chambers was Chief Operating Officer of Capstone Turbine Corporation, a distributive generation technology company. From April 2000 to September 2001, Mr. Chambers served as President and Chief Executive Officer of Petrocosm Corporation, a privately held e-commerce business serving the energy industry. From June 1985 to April 2000, Mr. Chambers served in various executive positions with Halliburton Company, a provider of energy services and related engineering and construction services, and its subsidiaries. Mr. Chambers has over

twenty-five years of experience in the engineering and construction industry. Mr. Chambers earned a B.A. from Springfield College and a M.B.A. from Boston College.

 

Kathleen J. Affeldt

 

Ms. Affeldt, age 61, has served as a director since November 2009. Ms. Affeldt is the Chairperson of the Compensation Committee of our board of directors. Ms. Affeldt retired from Lexmark International, a developer, manufacturer and supplier of printing and imaging solutions for offices and homes, in February 2003, where she had been Vice President of Human Resources since July 1996. She joined Lexmark when it became an independent company in 1991 as the Director of Human Resources. Ms. Affeldt began her career at IBM in 1969, specializing in sales of supply chain systems. She later held a number of human resources management positions. Ms. Affeldt has served as a Director of SIRVA, Inc. and as chair of that board’s Compensation Committee. She currently serves as a Director of BTE, Inc. and as a Director of Sally Beauty Holdings where she serves as the Chair of that board’s Compensation Committee. Ms. Affeldt attended the State University of New York and Hunter College in New York City, majoring in Business Administration.

 

Nathan K. Sleeper

 

Mr. Sleeper, age 36, has served as a director since October 2009. Mr. Sleeper serves on the Compensation Committee, Nominating and Corporate Governance Committee and Executive Committee of our board of directors. Mr. Sleeper is a partner of CD&R, LLC, having joined CD&R, Inc. in 2000. Prior to joining CD&R, Inc., he was employed by Goldman, Sachs & Co. in the Investment Banking Area. He has also been employed by Tiger Management. Mr. Sleeper has served as a Director of Hertz Global Holdings, Inc. from August to September 2005, as a Director of Hertz Global Holdings, Inc. and The Hertz Corporation since December 2005, as a Director of Culligan Ltd. since October 2004 and as a Director of U.S. Foodservice, Inc. since July 2007. Mr. Sleeper holds a B.A. from Williams College and an M.B.A. from Harvard Business School.

 

 

Our board of directors has unanimously adopted a resolution to submit to a vote of our shareholders a proposal to approve the amendment and restatement of our 2003 Long-Term Stock Incentive Plan (the “Amended Incentive Plan”), as set forth in Annex A to this proxy statement. The amendment and restatement of the Incentive Plan will increase the number of shares of Common Stock reserved for issuance under the Incentive Plan by 28,340,000 shares of Common Stock (before giving effect to the reduction in shares that would result if Proposal 3, recommending a reverse stock split of the Common Stock of the Company, is approved and effected), increase the maximum number of shares that may be granted to an individual in any fiscal year and provide for extension of the effective date of the Amended Incentive Plan to 10 years after the date the Compensation Committee or Board of Directors approves the amendments, subject to approval by the shareholders of NCI. For information on the deductibility of compensation related to awards granted under the Incentive Plan, see “— Federal Income Tax Consequences — Certain Tax Code Limitations on Deductibility” below. There are currently 3,660,000 shares of Common Stock reserved for awards under the Incentive Plan. If the proposal is approved, 32,000,000 shares of Common Stock will be reserved for awards under the Amended Incentive Plan.

 

The plan’s purposes remain unchanged and are to:

 

 

Our shareholders originally approved the Incentive Plan at the annual meeting of shareholders held on March 14, 2003, and our shareholders approved the plan as amended and restated at the annual meeting of shareholders held on March 12, 2008. Our board of directors believes that the Incentive Plan is achieving its objectives and believes that it continues to carry out its objectives. At December 16, 2009, we had 527,913 shares

remaining under the Incentive Plan. Therefore, our board of directors believes it is necessary to increase the number of shares of common stock reserved for issuance under the Amended Incentive Plan.

 

 

The following summary of the Amended Incentive Plan is qualified by reference to the full text thereof, which is attached as Annex A to this proxy statement.

 

General

 

The Compensation Committee of our board of directors administers the Amended Incentive Plan. In the future, the board of directors or other committees may be allocated some or all of the Compensation Committee’s duties. The Compensation Committee consists solely of two or more directors who are independent in accordance with the Internal Revenue Code and Rule 16b-3 under the Securities Exchange Act. The Compensation Committee is authorized to:

 

 

Our officers and other employees, directors and consultants, in addition to those of our subsidiaries, are eligible to be selected to participate in the Amended Incentive Plan. Incentive stock options may be granted only to our employees and employees of our subsidiaries in which we own directly or indirectly more than a 50% voting equity interest. The Compensation Committee has the sole discretion to select participants from among the eligible persons. It is estimated that the total number of persons who are eligible to receive awards under the Amended Incentive Plan at present would not exceed approximately 200.

 

Before giving effect to this amendment and restatement, the aggregate number of shares of Common Stock which may be issued under the Incentive Plan with respect to awards may not exceed 3,660,000. The Amended Incentive Plan would increase this number of shares to 32,000,000, before giving effect to the reduction in shares that will result if Proposal 3, a reverse stock split of the Common Stock of the Company, is approved and effected. All awards relating to any of these additional shares will be subject to shareholder approval of the Amended Incentive Plan. The proposed 32,000,000 share limit is subject to adjustment for certain transactions affecting the Common Stock, including, but not limited to, the reverse stock split of the Common Stock of the Company, if effected. Each share issued pursuant to awards of stock options, restricted stock units or stock appreciation rights under the Incentive Plan (whether issued prior to or following the date of stockholder approval) will be counted against the share limit as one full share. If an award is cancelled, forfeited or expires unexercised, the number of shares of Common Stock under such award will be added back to the shares available for grant under the Amended Incentive Plan. The number of shares available for grant under the Amended Incentive Plan shall not be increased by (a) any shares not issued or delivered as a result of a net settlement of an award, (b) any shares withheld to pay an exercise price or withholding taxes related to an award, or (c) shares of our Common Stock repurchased on the open market with the proceeds of an option exercise. No individual may be granted, in any fiscal year, awards under the Amended Incentive Plan covering or relating to an aggregate of more than 4,500,000 shares of our Common Stock. No individual shall receive payment for cash awards made under the Amended Incentive Plan during any fiscal year aggregating in excess of $5,000,000. The shares issued under the Amended Incentive Plan may be issued from shares held in treasury or from authorized and unissued shares.

 

The Amended Incentive Plan provides for the grant of:

 

 

 

The Compensation Committee may grant awards individually, in combination, or in tandem.

 

All awards will be evidenced by award agreements, as determined by the Compensation Committee. The award will be effective on the date of grant unless the Compensation Committee specifies otherwise.

 

The exercise or measurement price will be at least equal to the fair market value of our Common Stock. The fair market value generally is determined to be the closing sales price quoted on The New York Stock Exchange on the day of the grant of the award.

 

Awards will normally terminate on the earlier of (i) ten years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or retirement, (iii) one year after death or (iv) one year (for incentive stock options) or five years (for other awards) after disability or retirement.

 

Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee may approve.

 

The Compensation Committee may authorize the assumption of awards granted by other entities that are acquired by us or otherwise.

 

Awards may be paid in cash, shares of our Common Stock or a combination, in a lump sum or installments, as determined by the Compensation Committee.

 

A participant’s breach of the terms of the Amended Incentive Plan or the award agreement will result in a forfeiture of the award.

 

Options

 

Options granted under the Amended Incentive Plan may be:

 

 

The Compensation Committee selects the recipients of options and sets the terms of the options, including:

 

 

The Compensation Committee determines how an option may be exercised, whether for cash or securities. The exercise price of an option may not be less than the fair market value of a share of our Common Stock on the grant date, and the option term may be no longer than ten years. Arrangements may also be made, if permitted by law, for same-day-sale and margin account transactions through NASD dealers.

 

An option agreement or the Compensation Committee’s procedures may set forth conditions respecting the exercise of an option. The Compensation Committee may in its discretion waive any condition respecting the exercise of any option and may accelerate the time at which any option is exercisable.

Stock Appreciation Rights

 

A stock appreciation right is a grant entitling the participant to receive an amount in cash or shares of Common Stock or a combination thereof, as the Compensation Committee may determine, in an amount equal to the increase in the fair market value between the grant and exercise dates of the shares of Common Stock with respect to which the stock appreciation right is exercised. The exercise price of a stock appreciation right may not be less than the fair market value of a share of our Common Stock on the grant date, and the term of a stock appreciation right may be no longer than ten years. Stock appreciation rights may be granted separately or in tandem with the grant of an option.

 

A stock appreciation right granted in tandem with a nonqualified option may be granted either at or after the time of the grant of the nonqualified option. A stock appreciation right granted in tandem with an incentive stock option may be granted only at the time of the grant of the incentive stock option. A stock appreciation right granted in tandem with an option terminates and is no longer exercisable upon the termination or exercise of the related option. The Compensation Committee may set the terms and conditions of stock appreciation rights, subject to the limitations set forth in the Amended Incentive Plan. At any time it may accelerate the exercisability of any stock appreciation right and otherwise waive or amend any conditions to the grant of a stock appreciation right.

 

Restricted Stock

 

A restricted stock grant entitles the recipient to acquire, at no cost or for a purchase price determined by the Compensation Committee on the date of the grant, shares of our Common Stock subject to such restrictions and conditions as the Compensation Committee may determine at the time of the grant. The recipient may have all the rights of a shareholder with respect to the restricted stock. These rights include voting and dividend rights, and they are effective as soon as:

 

 

A grant of restricted stock will be subject to non-transferability restrictions, repurchase and forfeiture provisions and such other conditions (including conditions on voting and dividends) as the Compensation Committee may impose at the time of grant.

 

Any restricted shares cease to be restricted stock and will be deemed “vested” after the lapse of all restrictions. Restrictions lapse, and restricted stock becomes vested, ratably over a specified period of time or upon the participant’s death, disability or retirement, the occurrence of a change of control, or other appropriate event as determined by the Compensation Committee.

 

If a participant’s employment or service is terminated for any reason prior to shares of restricted stock becoming vested, we have the right, in the discretion of the Compensation Committee, to:

 

 

Restricted Stock Unit Awards

 

A restricted stock unit award is an award denominated in units evidencing the right to receive shares of our Common Stock, subject to vesting or such other terms and conditions as determined by the Compensation Committee. Prior to vesting, the recipient has no voting or dividend rights with respect to the shares evidenced by a restricted stock unit award, however, the Compensation Committee may award cash dividend equivalents with respect to a restricted stock unit award. Upon vesting or satisfaction of any other conditions established by the Compensation Committee, the recipient of a restricted stock unit award becomes entitled to receive a share of our Common Stock with respect to each restricted stock unit.

 

Performance Share Awards

 

The Compensation Committee may grant performance share awards, which are rights to receive shares of our Common Stock or their cash equivalent based on the attainment of pre-established performance goals and such

other conditions, restrictions and contingencies as the Compensation Committee may determine. Performance measures may include future performance by the grantee, us or any subsidiary, division or department.

 

Payment will be made after the performance period based on the achievement of the performance measures as determined by the Compensation Committee.

 

Phantom Stock Awards

 

The Compensation Committee may grant phantom stock awards, which are rights to receive the fair market value of shares of our Common Stock, or the increase in the fair market value, during a period of time. The award may vest over a period of time specified by the Compensation Committee. Payment will be made following the prescribed period and may be made in cash, shares of our Common Stock or a combination as the Compensation Committee determines.

 

Cash Awards

 

The Compensation Committee may grant cash awards, which are bonuses paid in cash that are based solely upon the attainment of one or more performance goals that have been established by the Compensation Committee. The terms, conditions and limitations applicable to any cash awards will be determined by the Compensation Committee.

 

Performance Awards

 

At the discretion of the Compensation Committee, any of the above-described awards may be designated a performance award. Cash awards may only be designated as performance awards. Performance awards will be contingent upon performance measures applicable to a particular period, as established by the Compensation Committee, based upon any one or more of the following:

 

 

 

Such performance measures may apply to the grantee, to one or more business units, divisions or subsidiaries of the Company or the applicable sector of the Company, or to the Company as a whole. Goals may also be based upon performance relative to a peer group of companies. The Compensation Committee may modify or waive the performance goals or conditions to the granting or vesting of a performance award unless the performance award is intended to qualify as performance-based compensation under Section 162(m) of the Code. Section 162(m) of the Code generally disallows deductions for compensation in excess of $1 million for some executive officers unless the awards meet the requirements for being performance-based. Please see “Compensation Discussion & Analysis — Deductibility of Compensation” for more information regarding Section 162(m) of the Code.

 

Provisions Relating To A Change In Control, Death, Disability And Retirement

 

The Incentive Plan provides certain benefits in the event of a change in control. A change in control is deemed to have occurred if:

 

 

However, a change in control would not be deemed to occur if a person that already controls us acquires more of our voting securities. Upon the occurrence of a change in control, or a participant’s death, disability or retirement, all outstanding awards will immediately vest or become exercisable or payable, and all forfeiture restrictions will lapse, unless the related agreements provide otherwise.

 

Other Modifications

 

In the event of specified changes in our capital structure, the Compensation Committee will have the power to adjust the number and kind of shares authorized by the Amended Incentive Plan (including any limitations on individual awards) and the number, option price or kinds of shares covered by outstanding awards. The Compensation Committee will also have the power to make other appropriate adjustments in awards under the Amended Incentive Plan. If Proposal 3, a reverse stock split of the Common Stock of the Company, is approved and effected, the Compensation Committee will make such adjustment(s) to the number of shares authorized by the Amended Incentive Plan and the number of shares covered by outstanding awards as it deems appropriate.

Federal Income Tax Consequences

 

The Internal Revenue Code provides that a participant receiving a nonqualified option ordinarily does not realize taxable income upon the grant of the option. A participant does, however, realize compensation income taxed at ordinary income tax rates upon the exercise of a nonqualified option to the extent that the fair market value of the Common Stock on the date of exercise exceeds the option price. Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we are entitled to a federal income tax deduction for compensation in an amount equal to the ordinary income so realized by the participant. When the participant sells the shares acquired pursuant to a nonqualified option, any gain or loss will be capital gain or loss. This assumes that the shares represent a capital asset in the participant’s hands, although there will be no tax consequences for us.

 

The grant of an incentive stock option does not result in taxable income to a participant. The exercise of an incentive stock option also does not result in taxable income, provided that the circumstances satisfy the employment requirements in the Internal Revenue Code. However, the exercise of an incentive stock option may give rise to alternative minimum tax liability for the participant. In addition, if the participant does not dispose of the Common Stock acquired upon exercise of an incentive stock option during the statutory holding period, then any gain or loss upon subsequent sale of the Common Stock will be a long-term capital gain or loss. This assumes that the shares represent a capital asset in the participant’s hands.

 

The statutory holding period lasts until the later of:

 

 

If the employment and statutory holding period requirements are satisfied, we may not claim any federal income tax deduction upon either the exercise of the incentive stock option or the subsequent sale of the Common Stock received upon exercise. If these requirements are not satisfied (a “disqualifying disposition”), the amount of ordinary income taxable to the participant is the lesser of:

 

 

Any excess is long-term or short-term capital gain or loss, assuming the shares represent a capital asset in the participant’s hands. Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, in the case of a disqualifying disposition, we are entitled to a federal income tax deduction in an amount equal to the ordinary income realized by the participant.

 

The exercise of an option through the exchange of previously-acquired stock will generally be treated as a non-taxable like-kind exchange as to the number of shares given up and the identical number of shares received under the option. That number of shares will take the same tax basis and, for capital gain purposes, the same holding period as the shares that are given up. The value of the shares received upon such an exchange which are in excess of the number given up will be taxed to the participant at the time of the exercise as ordinary income, taxed as compensation. The excess shares will have a new holding period for capital gains purposes and a tax basis equal to the value of such shares determined at the time of exercise. If the tendered shares were acquired through the prior exercise of an incentive stock option and do not satisfy the statutory two-year and one-year holding periods (“disqualified shares”), then the tender will result in compensation income to the optionee taxed as ordinary income equal to the excess of the fair market value of the disqualified shares, determined when the prior incentive stock option was exercised, over the exercise price of the disqualified shares. The optionee will increase his tax basis in the number of shares received on exercise equal to the number of shares of disqualified shares tendered by the amount of compensation income recognized by the optionee with respect to the disqualified shares. Generally, the federal income tax consequences to the optionee are similar to those described above relating to the exercise of an option through the exchange of non-disqualified shares.

 

If an optionee exercises an option through the cashless exercise method by authorizing a broker designated by NCI to sell a specified number of the shares to be acquired through the option exercise having a market value equal to the sum of the option exercise plus any transaction costs (the “cashless shares”), the optionee should be treated as

constructively receiving the full amount of option shares, followed immediately by a sale of the cashless shares by the optionee. In the case of an incentive stock option, the cashless exercise method would result in the cashless shares becoming disqualified shares and taxed in a manner described above for disqualified shares.

 

In the case of a nonqualified option, the cashless exercise method would result in compensation income to the optionee with respect to both the cashless shares and remaining option shares as discussed above relating to nonqualified options. Since the optionee’s tax basis in the cashless shares that are deemed received and simultaneously sold on exercise of the option is equal to the sum of the exercise price and the compensation to the optionee, no additional gain should be recognized by the optionee upon the deemed sale of the cashless shares.

 

Under Section 83(b) of the Internal Revenue Code, an employee may elect to include in ordinary income, as compensation at the time restricted stock is first issued, the excess of the fair market value of the stock at the time of issuance over the amount paid, if any, by the employee. In this event, any subsequent change in the value of the shares will be recognized for tax purposes as capital gain or loss upon disposition of the shares, assuming that the shares represent a capital asset in the hands of the employee. An employee makes a Section 83(b) election by filing the election with the IRS no later than 30 days after the restricted stock is transferred to the employee. If a Section 83(b) election is properly made, the employee will not be entitled to any loss deduction if the shares with respect to which a Section 83(b) election was made are later forfeited. Unless a Section 83(b) election is made, no taxable income will generally be recognized by the recipient of a restricted stock award until the shares are no longer subject to the restrictions or the risk of forfeiture. When either the restrictions or the risk of forfeiture lapses, the employee will recognize ordinary income, taxable as compensation, in an amount equal to the excess of the fair market value of the Common Stock on the date of lapse over the amount paid, if any, by the employee for the stock. Absent a Section 83(b) election, any cash dividends or other distributions paid with respect to the restricted stock prior to the lapse of the restrictions or risk of forfeiture will be included in the employee’s ordinary income as compensation at the time of receipt and subsequent appreciation or depreciation will be recognized as capital gain or loss, assuming that the shares represent a capital asset in the hands of the employee.

 

Generally, an employee will not recognize any taxable income upon the grant of stock appreciation rights, performance shares, restricted stock units, phantom stock or a cash award. At the time the employee receives the payment for the stock appreciation right, performance shares, restricted stock units, phantom stock or cash award, the fair market value of shares of Common Stock or the amount of any cash received in payment for such awards generally is taxable to the employee as ordinary income.

 

Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we or one of our subsidiaries will be entitled to a deduction for federal income tax purposes at the same time and in the same amount that an employee recognizes ordinary income from awards under the Amended Incentive Plan.

 

The exercisability of an option or a stock appreciation right, the payment of performance share or phantom stock awards or the elimination of restrictions on restricted stock, may be accelerated, and special cash settlement rights may be triggered and exercised, as a result of a change in control. If any of the foregoing occurs, all or a portion of the value of the relevant award at that time may be a parachute payment. This is relevant for determining whether a 20% excise tax (in addition to income tax otherwise owed) is payable by the participant as a result of the receipt of an excess parachute payment pursuant to the Internal Revenue Code. We will not be entitled to a deduction for that portion of any parachute payment which is subject to the excise tax.

 

Certain Tax Code Limitations on Deductibility

 

Section 162(m) of the Internal Revenue Code generally disallows a federal income tax deduction to any publicly held corporation for compensation paid in excess of $1.0 million in any taxable year to the chief executive officer or any of the four other most highly compensated executive officers who are employed by the corporation on the last day of the taxable year, but does not disallow a deduction for performance-based compensation the material terms of which are disclosed to and approved by shareholders. We have structured and intend to implement the Amended Incentive Plan so that resulting compensation would be performance-based compensation. To allow us to qualify the compensation, we are seeking shareholder approval of the Amended Incentive Plan and the material terms of the related performance goals. However, we may, in our sole discretion, determine that in one or more cases it is in our best interests not to satisfy the requirements for the performance-based exception. Please see

“Compensation Discussion & Analysis — Deductibility of Compensation” for more information regarding Section 162(m) of the Code.

 

Golden Parachute Tax and Section 280G of the Internal Revenue Code

 

The Incentive Plan provides for immediate vesting of all then outstanding unvested awards upon a Change of Control. If the vesting of the award is accelerated as the result of a Change of Control, all or a portion of the value of the award at that time might be a “parachute payment” under Section 280G of the Internal Revenue Code for certain employees. Section 280G of the Internal Revenue Code generally provides that if compensation received by the grantee that is contingent on a Change of Control equals or exceeds three times the grantee’s average annual compensation for the five taxable years preceding the Change of Control (a “parachute payment”), the Company will not be entitled to a deduction, and the recipient will be subject to a 20% excise tax with respect to that portion of the parachute payment in excess of the grantee’s average annual compensation. Section 280G of the Code generally applies to employees or other individuals who perform services for the Company if, within the 12-month period preceding the Change of Control, the individual is an officer of the Company, a shareholder owning more than 1% of the stock of the Company, or a member of the group consisting of the lesser of the highest paid 1% of the employees of the Company or the highest paid 250 employees of the Company. No parachute payments are expected to be made in connection with the recent Equity Investment which constituted a Change of Control under the Incentive Plan.

 

Code Section 409A

 

The Incentive Plan permits the grant of various types of incentive awards that may or may not be exempt from Section 409A of the Code. If an award is subject to Section 409A, and if the requirements of Section 409A are not met, the award could be subject to tax at an earlier time than described above and could be subject to additional taxes and penalties. We intend that awards under the Amended Incentive Plan either be exempt from, or satisfy the requirements of, Section 409A and the Amended Incentive Plan shall be administered and interpreted in accordance with Section 409A.

 

THE ABOVE SUMMARY OF THE EXPECTED EFFECT OF THE FEDERAL INCOME TAX UPON PARTICIPANTS IN THE AMENDED INCENTIVE PLAN IS NOT COMPLETE, AND WE RECOMMEND THAT THE PARTICIPANTS CONSULT THEIR OWN TAX ADVISORS FOR COUNSELING. MOREOVER, THE ABOVE SUMMARY IS BASED UPON CURRENT FEDERAL INCOME TAX LAWS, WHICH ARE SUBJECT TO CHANGE. THE TAX TREATMENT UNDER FOREIGN, STATE OR LOCAL LAW IS NOT COVERED IN THE ABOVE SUMMARY.

 

New Plan Benefits

 

Participation in the Amended Incentive Plan is determined on an individual basis by the Compensation Committee from time to time. Accordingly, except for the 2010 grants disclosed below in the New Plan Benefits Table, which were approved by the Compensation Committee on December 11, 2009, subject to shareholder approval, future benefits under the equity plan are not determinable. The Compensation Committee has adopted a policy under which it grants awards under the Incentive Plan on December 15 of each year. That policy will also apply to grants under the Amended Incentive Plan unless the Compensation Committee elects to adopt a different policy.

 

Equity grants to each of our Named Executive Officers for Fiscal 2009 are set forth in the Grants of Plan-Based Awards Table. For Fiscal 2009, (i) executive officers as a group acquired 94,773 shares of our restricted Common Stock; (ii) non-executive employees as a group acquired 178,724 shares of our restricted Common Stock; (iii) non-executive directors as a group acquired 27,216 shares of our restricted Common Stock; and (iv) retired executives as a group acquired 10,126 shares of our restricted stock.

 

The following table sets forth the awards approved by the Compensation Committee on December 11, 2009 pursuant to the Amended Incentive Plan (before giving effect to the reduction in shares that would result if Proposal 3, recommending a reverse stock split, is approved and effected). All of these awards are subject to shareholder approval of the Amended Incentive Plan and will be forfeited if shareholder approval of the Amended Incentive Plan is not obtained.

 

 

 

 

The following table sets forth the number of shares of our Common Stock reserved for issuance under our equity compensation plans as of the end of Fiscal 2009:

 

 

 

 

Required Vote

 

The affirmative vote of stockholders holding at least a majority of the shares of all securities of the Company entitled to vote on the proposal on the record date for determining stockholders entitled to vote at the Annual Meeting, in accordance with NYSE rules is required for approval of this Proposal 2. All abstentions and failures to return a proxy card would have the same effect as a vote against this Proposal.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have expressed their intention to vote “for” this Proposal 2.

 

Recommendation of the Board of Directors

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE PROPOSAL TO ADOPT THE AMENDED INCENTIVE PLAN.

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to effect a reverse stock split of the Common Stock at one of three reverse stock split ratios, 1-for-5, 1-for-7 or 1-for-9 (the “Reverse Stock Split”), as may be selected by the board of directors following stockholder approval thereof and prior to the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware (the “Effective Time”). Under Section 6.2 of the Stockholders Agreement, we are required to use our best efforts and take all corporate actions necessary to obtain stockholder approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of Common Stock. The Investors have

agreed to waive such requirement, such waiver being subject to us having used our best efforts and taken all corporate actions to obtain stockholder approval of the Reverse Stock Split. The precise ratio of the Reverse Stock Split from among the range of ratios provided for in this Proposal would be determined in the sole discretion of the board of directors, while abandoning the other ratios. The board of directors may also in its discretion determine not to proceed with the Reverse Stock Split. If the Reverse Stock Split is implemented, the number of issued and outstanding shares of Common Stock would be reduced in accordance with the ratio of the Reverse Stock Split that the board of directors selects. Except for the treatment of fractional share interests described in further detail below, each stockholder would hold the same percentage of Common Stock outstanding immediately following the Reverse Stock Split as such stockholder held prior to the Reverse Stock Split. Similarly, each holder of Preferred Stock would hold the same percentage of Common Stock on an as-converted basis immediately following the Reverse Stock Split as such stockholder held prior to the Reverse Stock Split.

 

By approving this Proposal, stockholders would give the board of directors authority, but not the obligation, to effect the Reverse Stock Split and full discretion to approve one of the ratios at which shares of Common Stock shall be reclassified. If this Proposal is approved by the stockholders, the board of directors may, after its adoption but prior to its effectiveness, without further action of the stockholders, abandon the amendment contemplating the Reverse Stock Split.

 

If this Proposal is approved by the stockholders and the board of directors does implement a Reverse Stock Split, it will become effective at the Effective Time. The form of the Certificate of Amendment is provided below under “Text of the Amendment.” The following discussion is qualified in its entirety by the full text of the form of Certificate of Amendment.

 

Purposes of the Reverse Stock Split

 

Under Section 6(a)(iii) of the Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Participating Preferred Stock (the “Certificate of Designations”), we are required to reserve and keep available for issuance a number of shares of Common Stock equal to 110% of the number of shares of Common Stock issuable upon conversion of all outstanding shares of Preferred Stock to the extent and for so long as shares of Series B Preferred Stock are convertible. If there are insufficient authorized and unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock into Common Stock, then we are required to take all action permitted by law, including calling stockholder meetings and soliciting proxies for any necessary vote of the stockholders of the Company, to amend our Certificate of Incorporation to increase the number of authorized and unissued shares of Common Stock to permit such reservation or conversion. If we fail to comply with our obligations under Section 6(a)(iii) of the Certificate of Designations after June 30, 2010, we would be in default under the terms of the Certificate of Designations and the applicable dividend rate on the Preferred Stock would consequently increase by an additional 3.0% per annum prior to June 30, 2011 and 6.0% per annum after June 30, 2011.

 

As noted above in “Introduction”, the Investors have agreed to waive the requirement in Section 6.2 of the Stockholders Agreement to use our best efforts to obtain stockholder approval of an amendment to our Certificate of Incorporation to increase the number of authorized shares of Common Stock, subject to us having used our best efforts to obtain stockholder approval of the Reverse Stock Split.

 

Currently, the Company does not have a sufficient number of shares of Common Stock reserved as required by Section 6(a)(iii) of the Certificate of Designations. As of December 8, 2009, there are 100,000,000 shares of Common Stock authorized under our Certificate of Incorporation, of which 90,419,147 shares are issued and outstanding. As of December 8, 2009, shares of Preferred Stock are fully convertible into 196,109,194 shares of Common Stock. Approval of the Reverse Stock Split would enable us to comply with our obligations under the Certificate of Designations and the Stockholders Agreement.

 

Another purpose of the Reverse Stock Split is to increase the market price of the Common Stock. Certain institutional investors are prohibited from investing in shares priced below certain dollar thresholds. Therefore, effecting a Reverse Stock Split may make our stock more attractive to institutional and other investors by increasing the per share price above such thresholds.

An increase in the market price of the Common Stock would also facilitate continued compliance with the applicable listing rules of the NYSE, on which the Common Stock currently trades. The NYSE Listed Company Manual has several continued listing criteria that companies must satisfy in order to remain listed on the NYSE. One of these criteria is that a company’s common stock have an average trading price over a consecutive 30-day period that is greater than or equal to $1.00 per share. Currently, we meet all of the NYSE continued listing criteria, including the minimum trading price requirement. However, given the trading behavior of our Common Stock over the past year, the volatility of the capital markets and the current macroeconomic environment, we believe that approval of this Proposal is prudent as a preemptive measure in the event our Common Stock trades under $1.00 per share for an extended period of time.

 

The board of directors believes that approval of a range of ratios for the Reverse Stock Split as opposed to an exact ratio of the Reverse Stock Split provides it with flexibility to achieve the purposes of the Reverse Stock Split. In making its determination of the precise ratio of the Reverse Stock Split, the board of directors will consider a number of factors, including marketability and liquidity of the Common Stock, historical trading prices and volumes of the Common Stock, prevailing market and economic conditions and anticipated market reaction to the Reverse Stock Split, among other factors that it may consider relevant.

 

Text of the Amendment

 

“A new subsection shall be added to the end of Article FOURTH, Section 1 of the Certificate of Incorporation, such subsection to read in its entirety as set forth below:

 

Upon the filing and effectiveness (the “Effective Time”) pursuant to the General Corporation Law of the State of Delaware of this Certificate of Amendment to the Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware, each five (5), seven (7), or nine (9) shares of the Corporation’s Common Stock, issued and outstanding immediately prior to the Effective Time shall automatically be reclassified, combined and converted into one (1) validly issued, fully paid and non-assessable share of Common Stock without any further action by the Corporation or the holder thereof, subject to the treatment of fractional share interests as described below (the “Reverse Stock Split”). No fractional shares of Common Stock or certificates representing fractional shares of Common Stock shall be issued in connection with the Reverse Stock Split. Stockholders who otherwise would be entitled to receive fractional shares of Common Stock shall be entitled to receive cash (without interest or deduction) from the Corporation’s transfer agent in lieu of such fractional share interests (i) without any further action by a stockholder that holds shares of Common Stock immediately prior to the Effective Time in book-entry form, or (ii) where a stockholder holds shares of Common Stock in certificated form immediately prior to the Effective Time, upon receipt by the Corporation’s transfer agent of a properly completed and duly executed transmittal letter by such stockholder and the surrender of such stockholder’s Old Certificates (as defined below), in each case, in an amount equal to their pro rata share of the proceeds attributable to the sale of such fractional shares following the aggregation and sale by the Corporation’s transfer agent of all fractional share interests otherwise issuable. Each certificate that immediately prior to the Effective Time represented shares of Common Stock (“Old Certificates”), shall thereafter represent that number of shares of Common Stock into which the shares of Common Stock represented by the Old Certificate shall have been combined, subject to the treatment of fractional share interests as described above.”

 

Effects of the Reverse Stock Split

 

The Reverse Stock Split, if effected, will impact all holders of Common Stock uniformly and will not affect the proportionate ownership interest or voting power of any individual holder of Common Stock, except to the extent the Reverse Stock Split would result in any stockholder holding fractional share interests of Common Stock (see below).

 

The principal effects of the Reverse Stock Split would be:

 

 

 

The Reverse Stock Split would not affect the par value, nor any of the terms of the Common Stock. After the Reverse Stock Split, all shares of Common Stock would have the same voting rights, and rights to dividends and other distributions by the Company.

 

At the Effective Time, all shares of Common Stock other than fractional shares (whose treatment is described below in “Fractional Shares”) would be reclassified and combined, automatically and without further action on the stockholders’ part, into the number of shares determined according to the Reverse Stock Split ratio determined by the board of directors.

 

After the Effective Time, the Common Stock would have a new Committee on Uniform Securities Identification Procedures (“CUSIP”) number, which is a number used to identify the Company’s equity securities, and stock certificates representing shares of Common Stock with the older CUSIP number would need to be exchanged for stock certificates with the new CUSIP number by following the procedures described below.

 

After the Effective Time, the Company would continue to be subject to periodic reporting and other requirements of the Exchange Act.

 

After effecting the Reverse Stock Split, the number of authorized and unissued and unreserved shares of Common Stock (as of December 8, 2009) would increase from 8,374,521 to 38,530,881.5 (based on a five for one Reverse Stock Split ratio and subject to adjustments for fractional shares), to 56,093,486.8 (based on a seven for one Reverse Stock Split ratio and subject to adjustments for fractional shares) or to 65,850,489.7 (based on the maximum nine for one Reverse Stock Split ratio and subject to adjustments for fractional shares). The board of directors may issue these shares in its discretion. If the Company issues additional shares subsequent to the Reverse Stock Split, the dilution to the ownership interest of the Company’s existing stockholders may be greater than would otherwise occur had the Reverse Stock Split not been effectuated.

The following table illustrates the principal effects of a five-to-one, seven-to-one and nine-to-one Reverse Stock Split as of December 8, 2009:

 

 

 

 

Although the increased proportion of authorized and unissued shares to issued shares could, under certain circumstances, have an anti-takeover effect (for example, management could use the additional shares to resist or frustrate a third-party transaction providing an above-market premium that is favored by a majority of the independent stockholders or permit issuances that would dilute the stock ownership of a person seeking to effect a change in the composition of the board of directors or by contemplating a tender offer or other transaction for the combination of the Company with another company), the Reverse Stock Split is not being proposed in response to any effort of which the Company is aware to accumulate shares of the outstanding Common Stock or obtain control of the Company.

 

Certain Risks Associated with the Reverse Stock Split

 

Effecting the Reverse Stock Split is intended, absent other factors, to increase the per share price of the Common Stock. However, factors such as the Company’s financial performance and overall market conditions may adversely effect the price of the Common Stock, independent of the impact of the Reverse Stock Split. Due to such factors, there can be no assurance that the Reverse Stock Split, if implemented, would result in the intended benefits described in “Purposes of the Reverse Stock Split” above. Similarly, if the per share price of the Common Stock does increase due to the effect of the Reverse Stock Split, there is no assurance that the increase would be in proportion to the reduction in the number of shares outstanding before the Reverse Stock Split, or that the market price of the Common Stock, after any such increase, would not decrease in the future.

 

Finally, the Reverse Stock Split may result in some stockholders holding “odd lots” of less than 100 shares of Common Stock. Odd lot shares may be more difficult to sell and may lead to increased brokerage/transaction costs relative to “round lots” of multiples of 100 shares.

 

Fractional Shares

 

We will not issue any fractional shares. Stockholders who would otherwise hold fractional shares as a result of the Reverse Stock Split will be entitled to receive cash (without interest) in lieu of such fractional shares from our transfer agent without any further action by any stockholder who holds shares in book-entry form, and where shares

are held in certificated form, upon receipt by our transfer agent of a properly completed and duly executed transmittal letter and the surrender of all old stock certificate(s) (“Old Certificate(s)”), in each case, in an amount equal to the proceeds attributable to the sale of such fractional shares following the aggregation and sale by our transfer agent of all fractional shares otherwise issuable. The Reverse Stock Split will not impact the market value of the Company as a whole, although the market value of the Common Stock may move up or down once the Reverse Stock Split is effective.

 

Effect on Beneficial Holders of Common Stock (holders in “street name”)

 

After the Effective Time, shares of Common Stock interests held by stockholders through a bank, broker, dealer, custodian or other nominee would be treated in the same manner as shares held by stockholders whose shares are registered in their own names. These brokers, dealers, banks and other nominees may have other procedures for processing the Reverse Stock Split and making payment for fractional share interests. Stockholders holding their shares of Common Stock in street name should contact their bank, broker, dealer, custodian or other nominee if they have any questions.

 

Effect on Registered “Book-Entry” Holders of Common Stock (holders who are registered on the transfer agent’s books and records but do not hold stock certificates representing shares of Common Stock)

 

After the Effective Time, holders of Common Stock registered in book-entry form with our transfer agent who do not hold certificated shares would not need to take any action to receive whole shares of Common Stock after the Reverse Stock Split or payment in lieu of fractional shares, as applicable.

 

Effect on Certificated Shares

 

After the Effective Time, holders of Common Stock in certificated form would be sent a letter of transmittal by our transfer agent. The letter of transmittal would contain instructions on how a stockholder should surrender his or her Old Certificates to our transfer agent in exchange for certificates representing the split-adjusted whole shares of Common Stock (the “New Certificates”). No New Certificates would be issued until a stockholder has surrendered all Old Certificates, together with a properly completed and executed letter of transmittal to our transfer agent. Stockholders would not be required to pay a transfer or other fee to exchange Old Certificates. Until surrendered, the Company would deem outstanding Old Certificates held by stockholders to be cancelled and to represent only the number of whole shares of post-Reverse Stock Split Common Stock to which these stockholders are entitled. Any Old Certificates submitted for exchange, whether because of a sale, transfer or other disposition of stock, would automatically be exchanged for New Certificates. If an Old Certificate contains a restrictive legend, the New Certificate would be issued with the same restrictive legend. If a stockholder is entitled to a payment in lieu of any fractional share interest it would be made as described above.

 

STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) REPRESENTING SHARES OF COMMON STOCK AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) TO THE COMPANY OR TRANSFER AGENT UNTIL REQUESTED TO DO SO.

 

Accounting Matters

 

Since the Reverse Stock Split would not affect the par value of a share of Common Stock, as of the Effective Time, the stated capital attributable to Common Stock on our balance sheet would be reduced proportionately based on the Reverse Stock Split ratio (including a retroactive adjustments of prior periods), and the additional paid-in capital account would be credited with the amount by which the stated capital is reduced. Reported per share net income or loss would be higher because there would be fewer shares of Common Stock outstanding.

 

No Appraisal Rights

 

Under the Delaware General Corporation Law, stockholders are not entitled to appraisal rights with respect to the Reverse Stock Split, and the Company would not independently provide stockholders with any such right.

Certain U.S. Federal Income Tax Consequences of the Reverse Stock Split

 

The following discussion is a general summary of certain U.S. federal income tax consequences of the Reverse Stock Split that may be relevant to Holders (as defined below) that hold Common Stock as a capital asset for U.S. federal income tax purposes. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated or proposed thereunder and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect, or to different interpretation. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to specific Holders in light of their particular circumstances or to Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, dealers in securities or other persons that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities, retirement plans, regulated investment companies, real estate investment trusts, certain former citizens or residents of the United States, persons who hold Common Stock as part of a straddle, hedge, conversion or other integrated transaction or U.S. Holders that have a “functional currency” other than the U.S. dollar). This discussion does not address any U.S. state or local or non-U.S. tax consequences or any alternative minimum tax consequences.

 

As used in this discussion, the term “U.S. Holder” means a beneficial owner of Common Stock that is, for U.S. federal income tax purposes, treated as (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (y) that has in effect a valid election under applicable U.S. Treasury regulations to be treated as a United States person.

 

The term “Non-U.S. Holder” means a beneficial owner of Common Stock that is neither a U.S. Holder nor a partnership for U.S. federal income tax purposes. The term “Holder” means a U.S. Holder or a Non-U.S. Holder.

 

If an entity treated as a partnership for U.S. federal income tax purposes holds Common Stock, the U.S. federal income tax consequences of the Reverse Stock Split will depend in part upon the status and activities of the partnership and its partners. A Holder that is treated as a partnership for U.S. federal income tax purposes should consult its own tax advisor regarding the U.S. federal income tax consequences of the Reverse Stock Split.

 

We have not sought, and will not seek, a ruling from the Internal Revenue Service (“IRS”) regarding the U.S. federal income tax consequences of the Reverse Stock Split, and there can be no assurance that the IRS will not challenge the statements and conclusions set forth below or that a court would not sustain any such challenge. Holders of Common Stock should consult their own tax advisors with respect to the particular tax consequences to them of the Reverse Stock Split.

 

U.S. Holders

 

Reduction of Shares of Common Stock.  A U.S. Holder generally should not recognize gain or loss upon the Reverse Stock Split, except with respect to cash received in lieu of a fractional share of Common Stock, as discussed below. A U.S. Holder’s aggregate tax basis in the shares of Common Stock held by such U.S. Holder immediately after the Reverse Stock Split should equal the aggregate tax basis of the shares of Common Stock held by such U.S. Holder immediately before the Reverse Stock Split (excluding any portion of such basis that is allocated to any fractional share of Common Stock), and such U.S. Holder’s holding period in the shares of Common Stock held by such U.S. Holder immediately after the Reverse Stock Split should include the holding period in the shares of Common Stock held by such U.S. Holder immediately before the Reverse Stock Split. Holders of shares of Common Stock acquired on different dates and at different prices should consult their own tax advisors regarding the allocation of the tax basis and holding period of such shares.

 

A U.S. Holder that receives cash in lieu of a fractional share of Common Stock pursuant to the Reverse Stock Split generally should recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the U.S. Holder’s tax basis in such fractional share of Common Stock. Such capital gain or loss

generally should be long-term capital gain or loss if the U.S. Holder’s holding period for Common Stock exceeded one year at the Effective Time.

 

Information Reporting and Backup Withholding.  Information returns generally will be required to be filed with the IRS with respect to the receipt of cash in lieu of a fractional share of Common Stock pursuant to the Reverse Stock Split in the case of certain U.S. Holders. In addition, U.S. Holders may be subject to a backup withholding tax (at the current applicable rate of 28%) on the payment of such cash if they do not provide their taxpayer identification numbers in the manner required or otherwise fail to comply with applicable backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld from a U.S. Holder under the backup withholding rules may be refunded or allowed as a credit against the U.S. Holder’s federal income tax liability, if any, provided the required information is timely furnished to the IRS.

 

Non-U.S. Holders

 

Reduction of Shares of Common Stock.  The U.S. federal income tax consequences of the Reverse Stock Split to a Non-U.S. Holder generally should be the same as those described above under “U.S. Holders — Reduction of Shares of Common Stock,” except that any gain recognized by a Non-U.S. Holder as a result of receiving cash in lieu of a fractional share of Common Stock generally will not be subject to U.S. federal income tax unless:

 

 

Generally, a corporation is a “United States real property holding corporation” if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). The Company does not believe that it is currently, or has been at any time over the past five years, a United States real property holding corporation.

 

Information Reporting and Backup Withholding.  In general, backup withholding and information reporting generally will not apply to the payment of cash in lieu of a fractional share of Common Stock to a Non-U.S. Holder pursuant to the Reverse Stock Split if the Non-U.S. Holder certifies in the manner required that it is a Non-U.S. Holder and neither the Company nor our transfer agent has actual knowledge to the contrary. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the Non-U.S. Holder’s U.S. federal income tax liability, if any, provided that certain required information is timely furnished to the IRS.

 

Required Vote

 

The affirmative vote of stockholders holding at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the Proposal on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 3. All abstentions and failures to return a proxy card would have the same effect as a vote against this Proposal.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have expressed their intention to vote “for” this Proposal 3.

Approval by Disinterested Directors Committee

 

Pursuant to Article TENTH of our Certificate of Incorporation, a committee of “disinterested directors” has unanimously approved the Reverse Stock Split.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to enable holders of a majority of the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors to approve proposals increasing or decreasing (but not below the number of shares outstanding) the number of authorized shares of any class or classes of stock of the Company (except the number of shares of Preferred Stock or any series thereof), without requiring an additional class vote of the holders of any such class of capital stock pursuant to Section 242 of the Delaware General Corporation Law, as described below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Under Section 6(a)(iii) of the Certificate of Designations, we are required to reserve and keep available for issuance a number of shares of Common Stock equal to 110% of the number of shares of Common Stock issuable upon conversion of all outstanding shares of Preferred Stock to the extent and for so long as shares of Series B Preferred Stock are convertible. If there are insufficient authorized and unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock into Common Stock, then we are required to take all action permitted by law, including calling stockholder meetings and soliciting proxies for any necessary vote of the stockholders of the Company, to amend our Certificate of Incorporation to increase the number of authorized and unissued shares of Common Stock to permit such reservation or conversion. If we fail to comply with our obligations under Section 6(a)(iii) of the Certificate of Designations after June 30, 2010, we would be in default under the terms of the Certificate of Designations and the applicable dividend rate on the Preferred Stock would consequently increase by an additional 3.0% per annum prior to June 30, 2011 and 6.0% per annum after June 30, 2011.

 

We are also required under Section 6.2 of the Stockholders Agreement to use our best efforts and take all corporate actions necessary to obtain stockholder approval of this Proposal 4A.

 

Approval of this Proposal 4A, coupled with the approval by the stockholders of Proposal 4D to allow stockholder action by written consent, would enable us to comply promptly with our obligations under Section 6(a)(iii) of the Certificate of Designations in the future and avoid triggering a default under it. Specifically, if there are insufficient authorized and unissued shares of Common Stock to permit conversion of all outstanding shares of Preferred Stock into Common Stock, we may seek the written consent of the Investors (who own or beneficially own a majority of the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors) to approve an increase in the number of authorized shares of Common Stock, thereby allowing us to comply with Section 6(a)(iii) of the Certificate of Designations without having to call a meeting of the stockholders or to seek written consents from numerous stockholders. While, as noted below, approval of this Proposal 4A will require the affirmative vote of stockholders holding at least a majority of the outstanding shares of

Common Stock, if enacted, this Proposal would eliminate a separate class vote by the Common Stock holders, in accordance with Section 242 of the Delaware General Corporation Law, prior to any future increase in the number of authorized shares of Common Stock.

 

Approval of this Proposal 4A would not permit the holders of Common Stock to vote on any proposals that relate solely to increasing or decreasing the number of authorized shares of any series of Preferred Stock.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

The second paragraph of Article Fourth, Section 1 of our Certificate of Incorporation would be amended and restated as follows:

 

“Each holder of shares of capital stock of the Corporation shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock of the Corporation held by the stockholder, unless otherwise specifically provided pursuant to this Restated Certificate of Incorporation. Subject to the rights, if any, of the holders of any outstanding series of Preferred Stock, the number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote generally in the election of directors irrespective of the provisions of Section 242(b)(2) of the DGCL. The holders of the Common Stock, as such, shall not be entitled to vote on any amendment to this Amended and Restated Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Amended and Restated Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) or pursuant to the General Corporation Law of the State of Delaware.”

 

The amendment contemplated by this Proposal 4A would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4A is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the certificate of amendment.

 

Required Vote

 

The affirmative vote of (1) stockholders holding at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the Proposal on the record date for determining stockholders entitled to vote at the Annual Meeting and (2) stockholders holding at least a majority of the outstanding shares of Common Stock entitled to vote on the Proposal on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 4A. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4A.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4A.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

PROPOSAL 4B: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
PROVIDE FOR REMOVAL OF DIRECTORS, WITH OR WITHOUT CAUSE, BY VOTE OF AT
LEAST 80% OF OUTSTANDING VOTING POWER

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to provide for removal of directors, with or without cause, by the affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company, as described below. The following discussion is qualified in its entirety by the full text of the amendment, which is provided below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Currently, Article Fifth, Section 4 of our Certificate of Incorporation provides that a director, or the entire board of directors, may be removed only for cause and by the affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company, voting together as a single class. As a result of the amendment contemplated by this Proposal 4B, stockholders holding at least 80% of the voting power of the Company may remove any director or the entire board of directors, with or without cause. Consequently, this amendment would make it easier for stockholders to remove some or all of the members of the board of directors.

 

Under Section 6.2 of the Stockholders Agreement, we are required to use our best efforts and take all corporate actions necessary to obtain stockholder approval of the amendment contemplated by this Proposal 4B.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4B will cause Article Fifth, Section 4 of our Certificate of Incorporation to be amended and restated as set forth below:

 

“Section 4. Removal. Any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the affirmative vote of the holder or holders of 80 percent of the outstanding voting power of the Corporation.”

 

The amendment contemplated by this Proposal 4B would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4B is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the certificate of amendment.

 

Required Vote

 

The affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company entitled to vote on the Proposal, voting together as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 4B. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4B.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4B.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

PROPOSAL 4C: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO PROVIDE FOR CALLING OF SPECIAL MEETINGS BY STOCKHOLDERS HOLDING AT
LEAST 25% OF VOTING POWER

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to provide for the calling of special meetings of stockholders by the chief executive officer, the board of directors pursuant to a resolution approved by a majority of the entire board of directors, or by the secretary of the Company at the written request of stockholders holding at least 25% of the outstanding voting power of the Company, as described below. The following discussion is qualified in its entirety by the full text of the amendment, which is provided below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Currently, our Certificate of Incorporation provides that a special meeting of stockholders may only be called by the chief executive officer or by the board of directors pursuant to a resolution approved by a majority of the entire board of directors. As a result of the amendment contemplated by this Proposal 4C, stockholders representing at least 25% of the outstanding voting power of the Company may cause the secretary of the Company to call such special meetings. This amendment may help bring important matters before stockholders for their consideration and approval on a more timely basis.

 

Under Section 6.2 of the Stockholders Agreement, we are required to use our best efforts and take all corporate actions necessary to obtain stockholder approval of the amendment contemplated by this Proposal 4C.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4C will cause Article Fifth, Section 5 of our Certificate of Incorporation to be amended and restated as follows:

 

“Section 5. Stockholders’ Meetings. Meetings of stockholders of the Corporation may be called by the Chief Executive Officer, by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, or by the Secretary of the Corporation at the written request of the holder or holders of at least 25 percent of the outstanding voting power of the Corporation.”

 

The amendment contemplated by this Proposal 4C would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4C is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the certificate of amendment.

 

Required Vote

 

The affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company entitled to vote on the Proposal, voting together as a single class, on the record date for determining the stockholders entitled to vote at the meeting is required for approval of this Proposal 4C. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4C.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4C.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

PROPOSAL 4D: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO
PERMIT STOCKHOLDER ACTION BY WRITTEN CONSENT

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to remove the prohibition on stockholder action by written consent, as described below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Under Section 228 of the Delaware General Corporation Law, unless otherwise restricted by a corporation’s Certificate of Incorporation, any action which may be taken at any annual or special meeting of the stockholders may be taken without a meeting; without prior notice and without a vote by the holders of shares of capital stock having at least the minimum number of votes that would be necessary to take the action at a meeting of stockholders, executing a consent or consents in writing setting forth the action so taken. Currently, our Certificate of Incorporation expressly prohibits stockholder action by written consent. The amendment contemplated by this Proposal 4D would remove the prohibition on stockholder action by written consent, thereby permitting stockholder action by written consent as provided under Section 228 of the Delaware General Corporation Law.

 

Benefits of permitting stockholder action by written consent include:

 

 

Under Section 6.2 of the Stockholders Agreement, we are required to use our best efforts and take all corporate actions necessary to obtain stockholder approval of the amendment contemplated by this Proposal 4D.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4D will cause Article Fifth, Section 6 of our Certificate of Incorporation to be deleted in its entirety. The amendment contemplated by this Proposal 4D would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4D is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the certificate of amendment.

 

Required Vote

 

The affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company entitled to vote on the Proposal, voting on a single class, on the record date for determining stockholders entitled to vote at the meeting is required for approval of this Proposal 4D. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4D.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4D.

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

 

PROPOSAL 4E: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO ELIMINATE BOARD DISCRETION TO GRANT PREEMPTIVE RIGHTS AND PREFERENTIAL RIGHTS

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to delete the express prohibition of preemptive or preferential rights of stockholders and the exception to such prohibition as may be granted by the board of directors in its discretion, as described below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Under Section 102(b)(3) of the Delaware General Corporation Law, no stockholder may have any preemptive right to subscribe to an additional issue of stock or to any security convertible into such stock unless expressly granted to the holders of stock of the Company, or the holders of any class or series thereof, in the certificate of incorporation. Currently, our Certificate of Incorporation expressly provides that no stockholder will by reason of holding shares of the Company be entitled to any preemptive or preferential right to purchase or subscribe for any shares of stock or other securities of the Company, except that the board of directors may nonetheless provide for such rights in its discretion. The amendment contemplated by this Proposal 4E would remove the discretion of the board of directors to grant preemptive or preferential rights, and the only means by which preemptive rights or preferential rights may be granted is through a future amendment to our Certificate of Incorporation to expressly provide for such rights.

 

We believe that this amendment is in the best interests of the Company because permitting the grant of preemptive rights could restrict our flexibility in seeking to raise new capital.

 

We are required under Section 6.2 of the Stockholders Agreement to use our best efforts and take all corporate actions necessary to obtain stockholder approval of this Proposal 4E.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4E will cause Article Seventh of our Certificate of Incorporation to be deleted in its entirety. The amendment contemplated by this Proposal 4E would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4E is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the Certificate of Amendment.

 

Required Vote

 

The affirmative vote of stockholders holding at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the Proposal on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 4E. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4E.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4E.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

PROPOSAL 4F: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO REMOVE SPECIAL APPROVAL RIGHTS OVER CERTAIN BUSINESS COMBINATIONS

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to delete the requirement that certain business combinations be subject to special approval rights or price and procedure requirements, as described below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Article TENTH of our Certificate of Incorporation provides in general that a “business combination” with an “interested stockholder” be subject either to, in addition to any vote required by law or our Certificate of Incorporation, (1) approval of a majority of “disinterested directors” or compliance with certain minimum price criteria and procedures, or (2) the affirmative vote of holders of at least 80% of the voting power of the Company.

 

An “interested stockholder” is defined to include a holder of 10% or more of the outstanding voting power of the Company, or a person who within the past two years was a holder of 10% or more of the outstanding voting power of the Company.

 

A “business combination” includes:

 

 

“Disinterested directors” means members of the board of directors who are unaffiliated with the interested stockholder who were either members of the board of directors immediately before the time that the interested stockholder became an interested stockholder or unaffiliated successors of such directors recommended by a majority of disinterested directors in office prior to the taking of office by the successor director.

 

We believe that this amendment may encourage transactions that could benefit all stockholders, as it makes certain transactions easier to consummate without the time and costs involved with obtaining disinterested director approval or the approval of holders of at least 80% of the voting power of the Company.

 

Further, following the Equity Investment, transactions between the Company, on the one hand, and the Investors and their affiliates, on the other hand, are subject to review and approval by the Affiliate Transactions Committee, which is comprised of (1) the unaffiliated stockholder directors then in office and (2) one director nominated or designated by the Investors who is independent of both the Company and the Investors if there is such a director, and otherwise, the chief executive officer. Each Investor is an “interested stockholder” under Article TENTH of our Certificate of Incorporation.

We are required under Section 6.2 of the Stockholders Agreement to use our best efforts and take all corporate actions necessary to obtain stockholder approval to delete the foregoing provisions from our Certificate of Incorporation.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4F will cause Article TENTH of our Certificate of Incorporation to be deleted in its entirety. The amendment contemplated by this Proposal 4F would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4F is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the certificate of amendment.

 

Required Vote

 

The affirmative vote of stockholders holding at least 80% of the outstanding voting power of the Company entitled to vote on the Proposal, voting as a single class, on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 4F. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4F.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4F.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

 

PROPOSAL 4G: APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION TO PROVIDE FOR PROPORTIONAL VOTING OF DIRECTORS

 

Introduction

 

The board of directors has unanimously approved, and is hereby soliciting approval of, an amendment to our Certificate of Incorporation to provide for proportional voting of directors, as described below. The following discussion is qualified in its entirety by the full text of the amendment, which is provided below under “Text of the Amendment and Legal Effectiveness of the Amendment.”

 

Purposes and Effects of the Amendment

 

Under Section 3.1 of the Stockholders Agreement, so long as the Investors hold 10% or more of the voting power of the Company held by the Investors immediately following the closing of the Equity Investment, the Investors are entitled to designate a number of directors (“Investor Directors”) proportionate to their percentage of the outstanding voting power of the Company at the relevant time, subject to any applicable legal and regulatory limitations.

 

The amendment contemplated by this Proposal 4G would automatically reallocate the number of votes held by each director on the board of directors in the event that the proportion represented by the Investor Directors on the board of directors deviates from the Investors’ proportionate interest in the outstanding voting power of the Company. The percentage of the total votes of all directors held by the Investor Directors would be adjusted to equal approximately the Investors’ interest in the outstanding voting power of the Company. However, to the extent that assigning more than one vote to any such Investor Director would result in any violation of law or rules of any applicable stock exchange imposing independence requirements, these votes would be further reallocated among the Investor Directors to such Investor Directors who meet these independence requirements. Each Non-Investor Director will continue to have one vote.

The amendment contemplated by this Proposal 4G would allow the Company to automatically comply with its obligations under Section 3.1 of the Stockholders Agreement without requiring the immediate appointment to or resignation from the board of directors.

 

Pursuant to Section 6.2 of the Stockholders Agreement, we have agreed to use our best efforts and take all corporate actions to obtain stockholder approval of the amendment contemplated by this Proposal 4G.

 

Text of the Amendment and Legal Effectiveness of the Amendment

 

Approval of this Proposal 4G will cause a new Article Eleventh to be added to our Certificate of Incorporation as follows:

 

“Section 1. At any time the Stockholders Agreement, dated as of October 20, 2009, by and among the Corporation, Clayton, Dubilier & Rice Fund VIII, L.P. and CD&R Friends & Family Fund VIII, L.P., as amended from time to time (the “Stockholders Agreement”), is in effect, if the number of Investor Directors (as defined in the Stockholders Agreement) then serving on the Board of Directors is not equal to the Investor Director Number (as defined in the Stockholders Agreement), then (x) each CD&R Director (as defined in the Stockholders Agreement) then serving on the Board of Directors shall have, on all matters, that number of votes equal to (i) the Investor Director Number less the number of Investor Independent Directors (as defined in the Stockholders Agreement) and Other Investor Directors (as defined in the Stockholders Agreement) divided by (ii) the number of CD&R Directors then serving on the Board of Directors and (y) each director then serving on the Board of Directors other than a CD&R Director shall have one vote on all matters; provided, that, if there is no CD&R Director then serving on the Board of Directors, then (a) each Investor Director then serving on the Board of Directors shall have, on all matters, that number of votes equal to (i) the Investor Director Number divided by (ii) the number of Investor Directors then serving on the Board of Directors and (b) each director then serving on the Board of Directors other than an Investor Director shall have one vote on all matters. In the event that the limitations and requirements imposed by law, regulation or the rules of a stock exchange on which the securities of the Corporation are quoted or listed for trading impose independence requirements on the directors then serving on the Board of Directors, or on the composition of the Board of Directors, would be violated if the Investor Directors have more than one vote pursuant to the preceding sentence of this Article [Eleventh], Section 1, then (a) each Investor Director then serving on the Board of Directors that meets the independence requirements imposed by such law, regulation or rule shall have, on all matters, that number of votes equal to (i) the Investor Director Number less the number of Investor Directors then serving on the Board of Directors who do not meet the independence requirements imposed by such law, regulation or rule divided by (ii) the number of Investor Directors then serving on the Board of Directors who meet the independence requirements imposed by such law, regulation or rule shall have one vote on all matters and (b) each director then serving on the Board of Directors other than the Investor Directors then serving on the Board of Directors that meets the independence requirements imposed by such law, regulation or rule shall have one vote on all matters.

 

Section 2. At any time that any Investor Director has more than one vote pursuant to this Article [Eleventh], all references in this Restated Certificate of Incorporation, the Bylaws of the Corporation and any other charter document of the Corporation, as each may be amended from time to time, to “a majority of the directors,” “a majority of the directors then in office,” “a majority of the remaining directors,” “a majority of the entire Board of Directors,” “a majority of the total number of directors “ and similar phrases shall be interpreted to give effect to the proportional voting provisions of this Article [Eleventh] on all matters such that (a) the references to “directors” or “Board of Directors” shall mean a number of directors equal to the number of directors that are not Investor Directors then serving on the Board of Directors, plus the then applicable Investor Director Number and (ii) the references to “majority” shall mean a majority of the aggregate number of votes to which each director is entitled pursuant to this Article [Eleventh].”

 

The amendment contemplated by this Proposal 4G would be effective as of the time the amendment to our Certificate of Incorporation is filed with the Delaware Secretary of State which, assuming this Proposal 4G is approved, will be filed promptly after the results of the stockholder vote are certified or at such effective time specified, in accordance with applicable law, in the Certificate of Amendment.

Required Vote

 

The affirmative vote of stockholders holding at least a majority of the outstanding shares of capital stock of the Company entitled to vote on the Proposal on the record date for determining stockholders entitled to vote at the Annual Meeting is required for approval of this Proposal 4G. All abstentions and failures to return a proxy card will have the same effect as a vote against this Proposal 4G.

 

The Investors, which own or beneficially own shares of Preferred Stock representing approximately 68.4% of our outstanding voting power, have agreed to vote “for” this Proposal 4G.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THIS PROPOSAL.

 

The Audit Committee has appointed Ernst & Young LLP as the Company’s independent registered public accounting firm for Fiscal 2010 subject to ratification by the Company’s stockholders. Ernst & Young LLP has served as the Company’s independent registered public accounting firm since our initial public offering. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting and will have an opportunity to make a statement, if they desire to do so, and to respond to appropriate questions from those attending the meeting.

 

If a majority of the votes cast in person or by proxy at the 2010 Annual Meeting are voted in favor of this proposal, the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the Fiscal 2010 will be ratified. If the appointment of Ernst & Young LLP is not ratified, the Audit Committee will reconsider the appointment.

 

THE AUDIT COMMITTEE RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” RATIFICATION OF ERNST & YOUNG LLP’S APPOINTMENT AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL 2010, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED THEREON.

 

Our executive officers are as follows:

 

 

Information concerning the business experience of Mr. Norman C. Chambers is provided under the section titled “Election of Directors.”

 

Mark E. Johnson, age 43, has served as our Chief Financial Officer and Treasurer since March 2008. He has served as our Chief Accounting Officer since August 2006, as our Executive Vice President and Controller since December 2007 and as our Vice President and Controller since February 2006. Before joining NCI in February 2006, Mr. Johnson was employed by Vector ESP, Inc., a company providing information technology services, where he served as a Corporate Controller from 2000 to 2003 and Chief Financial Officer and Senior Vice President from 2002 to August 2005, when the company was acquired. From 1989 to 2000, Mr. Johnson was employed by Ernst & Young LLP. Mr. Johnson has been a CPA since 1991 and earned his B.B.A. in Accounting from the University of Texas at Austin.

 

Mark W. Dobbins, age 51, has served as Executive Vice President and Chief Operating Officer since March 31, 2008. Mr. Dobbins served as President of the Engineered Building Systems Division from September 2006 until March 2008 and as Vice President, Operations of the Metal Components Division from October 2000 until September 2006. Mr. Dobbins served as President of the American Building Components Division from January 2000 until October 2000. During 1999, he served as the Senior General Manager of Manufacturing of the Metal Components Division. Before joining NCI in 1998, Mr. Dobbins was employed by MBCI for over 10 years. Mr. Dobbins has over 20 years of experience in the metal building industry. Mr. Dobbins has a B.S. from Angelo State University and has completed the Advanced Management Program at Harvard Business School and the Operations Management Program at Kellogg School of Management.

 

Charles W. Dickinson, age 58, has served as President of the Metal Components Division since December 2006. Mr. Dickinson served as Executive Vice President, Sales of the Metal Components Division and President of the ABC Division from October 2000 until December 2006. Mr. Dickinson served as Vice President, Sales of the Metal Components Division from May 1998 until October 2000. Before joining NCI in 1998, Mr. Dickinson served as Vice President of Sales of MBCI for over ten years. Mr. Dickinson has over 27 years of experience in the metal building and components industry. Mr. Dickinson studied Business Administration at Louisiana State University and William Carey College.

 

Bradley D. Robeson, age 47, has served as President of the Engineered Building Systems Division since March 2008 and as President of the Robertson-Ceco Division since November 2009. Mr. Robeson served as President of the Metal Coil Coating Division from February 2006 until March 2008 and as the Vice President of Operations of the Metal Coaters Division from October 2005 until February 2006. From February 2001 until October 2005, Mr. Robeson served as Vice President and General Manager of Metal Prep, a Metal Coaters Division entity. From March 1996 until February 2001, Mr. Robeson served as Plant Manager for the NCILP Buildings Division. Prior to March 1996, Mr. Robeson served in various managerial positions with component companies ultimately acquired by NCI. Mr. Robeson has over 19 years industry experience. Mr. Robeson studied Business Administration at Linfield College and completed the Advanced Management Program at the Harvard Business School.

John L. Kuzdal, age 44, has served as President of the Metal Coil Coating Division since March 2008. He has served as Vice President of Operations for the Metal Coil Coating Division from December 2006 until March 2008. From June 2002 to December 2006, he served as Vice President and General Manager of Metal Coaters of California Division. Mr. Kuzdal has been with the Metal Coaters Division since 1998 and has worked in the metal coil industry since 1986. Mr. Kuzdal earned his B.S. in Metallurgical Engineering from the University of Michigan.

 

Todd R. Moore, age 50, has served as our Executive Vice President and General Counsel since December 2007 and as our Vice President and General Counsel since March 2003. Mr. Moore has served as a Vice President and General Counsel of all NCI divisions since January 1999 and as our Corporate Secretary since March 2005. Before joining NCI in January 1999, Mr. Moore was employed by Gardere Wynne Sewell LLP, a Dallas law firm, for over nine years, during the last two years of which he was a partner. Mr. Moore has a B.A. in Political Science from Southern Methodist University and a J.D. from the University of Tulsa College of Law. He is licensed to practice law in the State of Texas.

 

Eric J. Brown, age 52, has served as our Executive Vice President and Chief Information Officer since December 2007 and Vice President and Chief Information Officer since June 2004. Before joining NCI, Mr. Brown was Chief Information Officer of the Punahou School in Honolulu, Hawaii from 2002 until he joined NCI. From 2000 to 2002, Mr. Brown was Chief Information Officer of Petrocosm Corporation. From 1992 to 2000, Mr. Brown was a Director at KPMG Consulting LLC. Mr. Brown has a B.B.A. from the University of Hawaii.

 

Mark T. Golladay, age 47, has served as our Vice President of Strategic Management, Mergers and Acquisitions since December 2007 and as our Vice President of Corporate Purchasing since March 2006. Before joining NCI, Mr. Golladay was employed by Butler Manufacturing Company, a company that produces metal building systems and architectural products for the non-residential construction market, where he served as Finance Director for Butler Europe from 1999 to 2002, Director of Business Development from 2002 to 2003, Finance Director for Butler De Mexico from 2003 to 2004, and Managing Director for Butler De Mexico from 2004 to 2006. Mr. Golladay has a B.S. in Accounting and Business Administration from the University of Kansas.

 

Richard Allen, age 34, has served as our Vice President of Finance and Corporate Controller since December 2008. Mr. Allen previously served as our Corporate Controller since January 2008 and as our Director of Corporate Accounting Services since April 2007. Before joining NCI, Mr. Allen was employed by Deloitte & Touche LLP, where he served as an Audit Senior Manager from 2004 to 2007 and Audit Manager from 2002 to 2004. Mr. Allen has a B.A. in Accounting from Stephen F. Austin State University and a M.B.A. from the University of Houston.

 

This Compensation Discussion & Analysis provides information regarding NCI’s compensation programs for our Named Executive Officers for Fiscal 2009 and certain compensation actions taken in Fiscal 2010. Because the members of our Compensation Committee were all appointed on or after the consummation of the Equity Investment, the decisions made for Fiscal 2009 were not decisions made by our current Compensation Committee. Matters acted upon with regard to the new equity awards described below reflect our analysis and decisions of our current Compensation Committee. See “Compensation Discussion & Analysis — Long-Term Incentive Compensation — After the Equity Investment.”

 

During Fiscal 2009 and in the first quarter of Fiscal 2010, the Compensation Committee examined NCI’s compensation programs and employment agreements in light of the declining financial condition of NCI, the consummation of the Equity Investment and NCI’s continuing restructuring efforts and made a number of changes. With the exception of the new employment agreements for Messrs Dobbins and Dickinson, all of these changes became effective on or after the consummation of the Equity Investment. In addition, many of these changes were required to be made pursuant to the Investment Agreement. The Compensation Committee evaluated these changes and determined that they were necessary to (1) facilitate the restructuring efforts of NCI, and (2) in the case of Mr. Chambers, NCI’s Chief Executive Officer, encourage Mr. Chambers to remain with NCI past his normal retirement age. The principal changes required by the Investment Agreement were the following:

 

 

In addition, independent of these changes, in an effort to adapt our compensation structure to a challenging economic environment and to retain and motivate management, the Compensation Committee made the following principal changes to its compensation arrangements:

 

 

 

The objectives of our executive compensation programs have been established by the Compensation Committee. NCI believes that the quality, skill and dedication of its executive officers are critical factors affecting the long-term success of NCI. Our key compensation goals are to attract, retain and motivate exceptional executives, to reward past performance measured against established goals and provide incentives for future performance, and to align executives’ long-term interests with the interests of our shareholders.

 

In designing its compensation programs, NCI uses a combination of short- and long-term incentive compensation to reward near-term excellent performance and to encourage executives’ commitment to NCI’s long-range, strategic business goals. The Compensation Committee believes the financial condition of NCI, the decreased stock price and the current restructuring efforts, including the consummation of the Equity Investment, are challenges to retention that both long-and short-term incentives can address. Long-term incentives balance the emphasis on long-term versus short-term business objectives and reinforce that one should not be achieved at the expense of the other. We believe that long-term incentive compensation helps to further NCI’s compensation objectives, including the retention of high-performing, experienced executives whose interests are strongly aligned with the interests of shareholders. The combination of performance components and vesting over time help to ensure that the value received by executives depends on the strong performance of NCI over time.

 

The principal elements of compensation provided to executives historically have consisted of a base salary supplemented with the opportunity to earn a bonus under NCI’s annual cash bonus program (the “Bonus Program”) and long-term incentive compensation in the form of stock options and restricted stock under NCI’s 2003 Long-Term Stock Incentive Plan (the “Incentive Plan”). We have also adopted a Deferred Compensation Plan under which executives can elect to defer a portion of their base salary and bonus. In addition, we provide limited perquisites that enhance our ability to be competitive in attracting and retaining talented executive officers and allow executive officers more time to focus on business objectives.

 

Decisions regarding executive compensation are based primarily on the assessment of the Compensation Committee of each executive’s leadership and operational performance and potential to enhance long-term value to NCI’s shareholders. In addition, certain changes made during Fiscal 2009 were required by the Investors as a condition to the Investment Agreement. In Fiscal 2009, the Compensation Committee determined not to use the services of any compensation consultants. The Compensation Committee relied on its judgment and the judgment of our Chief Executive Officer about each individual in determining the number and combination of compensation elements and whether each payment or award appropriately encourages and rewards performance. Key factors affecting the Compensation Committee’s judgment include:

 

 

 

The Compensation Committee also considered each executive’s current salary and prior-year bonus, the appropriate balance between incentives for long-term and short-term performance, and internal “pay equity” — in other words, the relative differences among the compensation of the executive officers.

 

The Compensation Committee meets regularly in separate executive sessions without management personnel present and also requests periodically that our officers or employees attend meetings. During Fiscal 2009, Mr. Chambers and other senior executives attended some Compensation Committee meetings at its request to advise the committee regarding our performance and to recommend proposed modifications to our compensation and benefits. The Compensation Committee also relied to a certain extent on Mr. Chambers’ evaluations of other executive officers whose day-to-day performance is not as visible to the committee as that of Mr. Chambers.

 

During the fiscal year ended October 29, 2006, the Compensation Committee retained Pearl Meyer & Partners and Clark Consulting (collectively referred to as the “consultants”) to assist it in its review of our executive compensation program. The consultants conducted a compensation study at the Compensation Committee’s request, and also made recommendations with respect to changes in our compensation programs as well as individual compensation levels for executive officers. The results of this comprehensive study formed the basis of our current compensation policies and practices. See “Compensation Discussion & Analysis — Role of Management and Independent Advisors” in NCI’s proxy statement for the fiscal year ended November 2, 2008. While NCI has not engaged a compensation consultant since the 2006 study, we expect to engage one at periodic intervals in the future to re-evaluate NCI’s compensation practices and policies. The Compensation Committee’s charter provides it sole authority to retain advisors, including compensation consultants.

 

Certain compensation arrangements of NCI include provisions that relate to a change of control of NCI, which is defined to include among other events, the acquisition by a third party of beneficial ownership of a specified percentage of NCI’s voting control. The consummation of the Equity Investment resulted in a change of control of NCI on October 20, 2009 for purposes of the agreements and plans described below, which entitled our executive officers to the accelerated payments and benefits described below.

 

Vesting of Equity Compensation.  All outstanding and unvested stock options to acquire shares of our Common Stock vested in full as of October 20, 2009 and, except with respect to the 2004 Long-Term Restricted Stock Awards granted to Messrs. Chambers, Dobbins and Dickinson (See “Compensation Discussion & Analysis-Introduction”), all restricted shares of our stock vested in full as of October 20, 2009. The number of unvested stock options that vested (each, with an exercise price of $44.00 per share) held by each of Messrs. Dobbins, Dickinson, Fisher and Robeson (who are our only Named Executive Officers with unvested options) were 341, 341, 341 and 228, respectively. The number of unvested shares of restricted Common Stock held by each of Messrs. Chambers, Johnson, Dobbins, Dickinson, Fischer and Robeson that vested and became free of restrictions was 51,423, 26,125, 25,404, 23,988, 23,988 and 23,709, respectively. The number of unvested shares of restricted Common Stock includes grants to these individuals in December, 2008 and October, 2009. See “Compensation Discussion & Analysis-Long Term Incentive Compensation — Prior to the Equity Investment.”

 

Vesting of Deferred Compensation.  Pursuant to the terms of our Deferred Compensation Plan (“DCP”), participants are generally fully vested in amounts credited to their DCP accounts, except for employer matching contributions. Any unvested matching contributions in a participant’s DCP account became vested upon consummation of the Equity Investment on October 20, 2009. Messrs. Chambers and Johnson became vested in $24,056 and $18,752, respectively, of matching contributions. Effective March 2, 2009, NCI notified participants it was indefinitely suspending the matching contributions due to declining economic conditions. The DCP also permits participants to elect to have their account balances paid out upon a change of control. Messrs. Dobbins, Dickinson and Robeson are the only Named Executive Officers who had elected to have their account balances paid out upon a change of control and, as such, Messrs. Dobbins, Dickinson and Robeson received a payout of their account balance

under the DCP in the amount of $437,029, $196,491 and $268,638, respectively, in connection with the consummation of the Equity Investment.

 

The Compensation Committee annually reviews base salaries and makes adjustments, in light of the executive’s responsibilities, experience and performance levels relative to other executives as well as the potential for making significant contributions in the future, to ensure that salary levels remain appropriate and competitive. Because the rate of any increase in base salary levels helps to provide incentives for continuous improvement in individual performance, we view individual factors as more significant than overall Company performance in a particular year when determining base salary levels. Base salary also provides the foundation for calculating other benefits such as annual cash bonus so the executive’s individual performance has a significant impact on both salary and the benefits derived from salary.

 

For Fiscal 2009, the Compensation Committee determined that no Named Executive Officer should receive an adjustment in base salary with the exception of Mr. Robeson who was appointed President of NCI’s Robertson-Ceco Buildings Division, effective on November 17, 2009. Upon his promotion, Mr. Robeson’s base salary increased from $275,000 to $290,500. For Fiscal 2010, the Compensation Committee has determined for the time being to hold executives’ base compensation level at the Fiscal 2009 level, with the exception of increases reflecting promotions or other extraordinary circumstances.

 

Short-term annual cash incentive compensation is provided through our Bonus Program, under which annual cash bonuses are granted to executives to reward their contributions to our business during the year, and helps to emphasize that contributions in any year have an impact on future years. Our Bonus Program is tied to the specific performance metrics of return on operating assets (“ROA”) and increase in earnings per share (“EPS Growth”) for NCI, which builds cooperation and allows all business units comparable visibility into the achievement of those goals. We believe that the Bonus Program allows us to provide base salaries to our management group near the median of comparable rates paid by other companies in exchange for above median bonuses when warranted by our performance. We also believe that EPS Growth as an additional bonus criterion for top management provides incentives to maximize stockholder value and growth, while ROA provides incentives to aggressively manage assets in relation to income and expenses. The calculations of ROA and EPS Growth generally exclude non-cash, non-recurring expenses. The Bonus Program provides that ROA is calculated by dividing (a) earnings before interest and taxes (“EBIT”) plus deferred financing costs and other approved non-recurring expenses by (b) assets, excluding cash, deferred taxes and goodwill. We believe that the Bonus Program’s calculation of ROA rewards employees and management for the underlying operational performance of NCI, without regard to accounting requirements over which most employees have no control.

 

During Fiscal 2009, executive-level participants were eligible for annual cash bonuses equal to a percentage of their respective base salaries, contingent upon our achievement of a minimum ROA or a minimum EPS Growth for the fiscal year. Under the Bonus Program, senior executives receive a bonus percentage of salary that is 1.5 times the percentage of salary for executives, while the CEO receives a bonus percentage of salary that is 2.0 times the percentage of salary for executives. This reflects our belief that, as an executive becomes more senior, an increasing percentage of his or her total compensation should be tied to NCI’s performance. Under the Bonus Program as in effect for Fiscal 2009, no bonuses would be paid unless either (i) ROA was at least 15% or (ii) EPS Growth was at least 10%. The percentage of base salary payable as a bonus increased proportionately with increases in the ROA and EPS Growth achieved.

 

There is no cap on the amount of an individual bonus. However, total bonuses for all employees, including non-management employees, may not exceed 15% of NCI’s adjusted pre-tax profit, calculated in accordance with the Bonus Program, before accrual for bonuses and before stock compensation expense under the Incentive Plan. The Bonus Plan provides for a minimum bonus pool for non-management employees, to be paid if NCI’s adjusted pre-tax profit is equal to or greater than a specified amount.

The following table illustrates the effects of varying levels of ROA and EPS Growth for executives:

 

 

For Fiscal 2009, NCI did not achieve ROA of 15%, or EPS Growth of 10%, thus we paid no bonuses.

 

Prior to the Equity Investment.  Our long-term incentive compensation is provided under the Incentive Plan, a shareholder-approved equity-based compensation plan that allows NCI to grant a variety of awards, including stock options, restricted stock, stock appreciation rights, performance share awards, phantom stock awards and performance-based and other cash awards.

 

We believe that equity awards must be sufficient in size to provide a strong, long-term performance and retention incentive for executives and to increase their vested interest in NCI. The value of the equity awards granted to executives is based on Company results and individual performance assessments. We believe that annual grants at a competitive level, along with significant vesting requirements, are effective rewards for long-term commitment. In addition, annual grants of equity reinforce ownership levels and alignment with shareholder interests.

 

Four-year Vesting Grants.  Historically, NCI’s practice has been to make annual awards of restricted stock vesting over four years to executives and other senior management personnel. The total number of shares granted under this approach is substantially less than the number that would be required under an option program designed to deliver equivalent levels of compensation. However, the alternative of using options is retained under the Incentive Plan.

 

Each December, the Compensation Committee determined, based on the recommendations of the CEO for all executives other than himself, a target restricted stock award value for each executive. We believe that a portion of each senior executive’s total restricted stock award should be based on NCI’s performance. Accordingly, a portion of each senior executive’s target restricted stock award was a fixed amount and the remaining portion was contingent upon performance, as measured by the average rate of growth in NCI’s earnings per share over the trailing three fiscal years ended prior to the award date. We believed that the multi-year approach was appropriate in light of the cyclical nature of the building industry. However, in light of the fact that the hurdles in NCI’s Bonus Program were sufficiently high such that there have been in the past and are expected to be in the future years where no bonuses have been or will be paid, we believed that it was important to provide at least a minimum long-term incentive award each year.

 

For Fiscal 2009, target restricted stock awards for each of Messrs. Chambers, Dobbins and Johnson were 50% fixed and 50% contingent, and for all other senior executives, restricted stock awards were 60% fixed and 40% contingent. The contingent portion of restricted stock awards may be adjusted to a maximum of 150% or decreased to zero, depending on the average growth rate in NCI’s earnings per share over the most recent three fiscal years. For Fiscal 2009, a minimum “floor” average earnings per share growth for the preceding three-year period of 5% was required to receive any of the contingent portion of the target award. If 5% growth were achieved, the executive would receive 15% of the contingent portion of the target award. The target payout of 100% of the contingent portion would be awarded if 35% earnings per share growth were achieved, and a maximum of 150% of the contingent portion of the target award would be made if 50% earnings per share growth were achieved, with incremental adjustments for intermediate results.

On the grant date, the number of shares awarded was equal to the dollar value approved in advance by the Compensation Committee (after adjustment with regard to the variable portion) divided by the closing price of our stock on the day before the grant date. Restricted stock awards vested in four equal annual installments beginning on the first anniversary of the grant date, and total awards were subject to an annual share limitation equal to 7% of the adjusted pre-tax profit (calculated as provided for under the amended Bonus Program) for the preceding fiscal year.

 

In Fiscal 2009, in determining the target value of equity-based awards, we considered the 2006 compensation study, the number of shares available for distribution under the program and the overall dilutive effect of the equity-based grants. We also considered the market overhang and burn rate resulting from equity compensation levels as compared to peers. See “Compensation Discussion & Analysis-Role of Management and Independent Advisors” in NCI’s proxy statement for the fiscal year ended November 2, 2008. In determining whether to make equity-based awards in Fiscal 2009 to executives, we also considered other factors, including an executive’s total compensation and then current ownership stake in NCI, the degree to which increasing that ownership stake would provide the executive with additional incentives for future performance, the likelihood that the grant of an award would encourage the executive to remain with NCI and the value of the executive’s service to NCI. Taking into account those factors, in December 2008 the Compensation Committee approved equity-based awards for Fiscal 2009 with a target value of $800,000 for Mr. Chambers and within a range from $175,000 to $200,000 for other named executives. Based on three-year growth in earnings per share of 21%, the variable portion of all awards would have been made at a payout level of 53.3%. However, because the number of shares of Common Stock remaining available for grant under our Incentive Plan was insufficient to cover the full payout level indicated by the target grants and growth in earnings per share, the Compensation Committee approved the grant of the maximum allowable number of shares available under the Incentive Plan, which was equal to 75% of the awards that otherwise would have been made in December 2008. NCI originally intended to grant the remaining 25% of the awards that would have otherwise been made in December 2008, in June 2009, provided that shareholder approval was obtained. Although shareholder approval was obtained at the March 12, 2009 shareholder meeting, as a result of the restructuring efforts and the Equity Investment, the remaining 25% of the Fiscal 2009 annual grant was not made to the named executive officers until October 15, 2009, with the exception of Mr. Chambers’ remaining 25%. Mr. Chambers waived his right to receive this portion of his award. In connection with the consummation of the Equity Investment, all outstanding and unvested stock options vested in full and, except for the 2004 Long-Term Restricted Stock Awards granted to Messrs. Chambers, Dobbins and Dickinson, all restricted shares vested in full. See “Compensation Discussion & Analysis-Change of Control.”

 

After the Equity Investment.  On the consummation of the Equity Investment, with the exception of certain shares of restricted stock held by Messrs. Chambers, Dobbins and Dickinson, all of the equity compensation held by the named executives officers vested. See “Compensation Discussion & Analysis-Change of Control and Long-Term Incentive Compensation — Prior to Equity Investment.” While some of the named executives continue to hold vested stock options, the exercise price of these options is significantly greater than the current share price, and, accordingly, the Compensation Committee does not believe these options provide a meaningful long term incentive to the named executives. As such, the named executive officers held no meaningful exposure to our Common Stock following the consummation of the Equity Investment. For this reason, in November 2009, the Compensation Committee determined that new equity awards were necessary to again align the executives’ interests with those of our shareholders, while at the same time providing an incentive for the executives’ commitment to NCI’s long term strategic goals. On December 11, 2009, the Compensation Committee approved the following equity grants to the named executive officers for Fiscal 2010:

 

 

 

The awards of the equity grants are conditioned on obtaining shareholder approval of the Amended Incentive Plan. If shareholder approval is not obtained, no restricted stock grants will be made and the option awards will be forfeited. The Investors, who hold a majority of our outstanding voting power, have expressed their intention to vote in favor of the Amended Incentive Plan.

 

In determining the value of the 2010 equity-based awards, we considered the overall dilutive effect of the awards, the executives’ total compensation, the percentage of base salary the award represents, and the incentive it would provide for future performance, including whether the award would encourage the executive to remain with NCI.

 

Each of the 2010 awards will vest in four equal annual installments, commencing on the first anniversary of the date the awards were approved by the Compensation Committee. However, the special restricted stock award and the special non-qualified stock option grant will include additional provisions prohibiting the grantees under such awards from selling, transferring, pledging, encumbering or otherwise disposing of such awards, to the extent determined appropriate by the Compensation Committee in consultation with the Chief Executive Officer. The specific terms of these awards will be set forth in the individual award agreements evidencing the grants. See “New Plan Benefits Table” for more information on these awards.

 

Deferred Compensation Plan

 

We believe that benefit programs that address the unique circumstances of executives in light of limitations imposed on benefits payable from qualified welfare, profit-sharing and retirement plans are critical in attracting and retaining quality executives. Therefore, we have adopted the DCP that allows our officers and key employees to defer up to 80% of their annual salaries and up to 90% of their bonuses, and allows NCI’s directors to defer up to 100% of their annual fees and meeting attendance fees, until a specified date in the future, including at or after retirement. Amounts deferred are deemed invested in one or more phantom investment funds and additional amounts are credited to participants’ accounts based on the hypothetical earnings of such investments. In November 2009, the Compensation Committee approved the addition of an employer stock fund as an investment option.

 

The DCP also permits us to make contributions on behalf of our executives affected by compensation limits under the federal tax laws governing NCI’s 401(k) plan. Prior to December 31, 2008, NCI would match between 4% and 6% of compensation in excess of those limits, depending on NCI’s performance (“Restoration Match”). Certain Restoration Match payments were made in Fiscal 2009 based on accruals in fiscal 2008. On March 6, 2009, NCI notified participants that it was indefinitely suspending the Restoration Match. In addition, the plan allows discretionary matching contributions to provide a supplemental retirement benefit to executives. For Fiscal 2009, we determined to make discretionary matching contributions provided that NCI achieved ROA for Fiscal 2009 of 25%, as calculated under the Bonus Program. If target ROA was achieved, we would match the percentage of an executive officer’s salary and bonus that he has voluntarily deferred under the plan, up to a maximum of 12.5%. Discretionary contributions were made during Fiscal 2009 for amounts accrued based on performance during fiscal and calendar 2008. Because our ROA calculated under the Bonus Program was less than 25%, no discretionary contribution was made for Fiscal 2009. For Fiscal 2010, we have determined to make discretionary contributions if ROA as calculated under the Bonus Program is 25%. Executives generally become vested in the Restoration Match in a manner consistent with NCI’s match in the NCI 401(k) plan, which generally vests ratably over a five-year period. Discretionary matching contributions vest ratably over a three-year period. However, effective on October 20, 2009 on consummation of the Equity Investment, all matching contributions then allocated to a participant’s account under the DCP became 100% vested. See “Compensation Discussion & Analysis — Change of Control.”

 

Executives who have received the 2004 Long-Term Restricted Stock Awards will not receive discretionary matching contributions under the DCP until the value of the contributions that would otherwise have been made, with attributed earnings, exceed the value of the restricted stock grants as determined by the Compensation Committee.

We have also established a rabbi trust (to provide for NCI’s obligations under the DCP) and have formed an administrative committee to manage the DCP and its assets.

 

Pursuant to the Investment Agreement, effective on October 20, 2009, the DCP was amended to eliminate the right to appoint a third-party administrator of the DCP after October 20, 2009. Similarly, the rabbi trust that is the source of funding for obligations under the DCP was amended so that certain administrative protections that would have gone into effect following a change of control did not apply as a result of the Equity Investment. In addition, as a result of the amendment, the requirement to fully fund the rabbi trust upon a change of control did not apply as a result of the Equity Investment.

 

Termination and Change of Control Agreements

 

Mr. Chambers has an agreement with NCI which provides that if he is terminated without cause or resigns for good reason, he will continue to receive payments due for the remaining term of the agreement. Effective on October 20, 2009, Mr. Chambers’ severance entitlement was amended to be the greater of (i) two times his then current base salary and (ii) his base salary as then in effect through April 30, 2014. Further, Mr. Chambers’ agreement provides that if he is terminated without cause or resigns for good reason within two years after a change in control, then he will be entitled to, within seven days of such termination, a lump-sum payment equal to the present value of his severance entitlements. Further, the terms of his 2004 Long Term Restricted Stock Award were also amended to provide that his restricted shares would not vest upon a change in control. The restricted shares will continue vest upon retirement at or after age 65 or if earlier, upon a termination without cause or for good reason. See “Executive Compensation — Employment Agreements — Chambers Employment Agreement” for more information regarding the circumstances under which those payments would be made.

 

In fiscal 2007, we also approved entering into employment agreements with each executive officer who did not already have a change of control benefit by virtue of a long-term restricted stock award or other agreement that provided benefits upon a change of control. We believe that these change of control benefits provide our executives an incentive to act in the shareholders’ best interests during a takeover despite the risk of losing their jobs or a significant change in the nature of their benefits and responsibilities. We also believe that, in some cases, our change of control benefits are necessary to attract and retain certain executives. For a description of the terms of these employment agreements, see “Executive Compensation — Employment Agreements.”

 

On March 12, 2009, the Compensation Committee approved entering into employment agreements with each of Messrs. Dobbins and Dickinson. The agreements which are substantially the same as the employment agreements entered into with the executive officers in fiscal 2007, provide for payments to each executive if he is terminated without cause or resigns for good reason within 24 months after a change of control of NCI. At the time the 2007 agreements were entered into, the Compensation Committee believed the 2004 Long-Term Restricted Stock Awards would be sufficient compensation in the event of a change of control. However, given the decline in NCI’s share price in Fiscal 2009, the value of these awards was significantly reduced. Accordingly, the Compensation Committee determined it was important to provide Messrs. Dobbins and Dickinson with a benefit similar to the other executive officers and to eliminate any potential distractions and uncertainties associated with possible transactions NCI might undertake by providing them with payments upon certain termination events following a change of control. See “Executive Compensation-Employment Agreements.”

 

Effective as of October 26, 2009, Mr. Fischer resigned his position as President of the Robertson-Ceco Buildings Division. Mr. Fischer experienced a qualifying termination and, upon his execution and non-revocation of a release of claims against NCI, he received his severance amount of $597,755. See “Executive Compensation-Employment Agreements.”

 

Perquisites and Personal Benefits

 

The Company offers only de minimis perquisites or personal benefits.

Gross-Ups

 

NCI does not provide for any tax assistance or “gross-ups” for its executives.

 

The Compensation Committee is directly responsible for determining the salary level of the CEO and all awards and grants to the CEO under the Bonus Program, Incentive Plan and DCP. We believe that NCI in recent years has experienced challenges caused by depressed economic conditions, increased competition and extreme volatility in the price of steel. Accordingly, the overall compensation package for the CEO is designed to motivate and reward the CEO for driving NCI to strengthen its competitive position in the nonresidential construction market, and a significant portion of the CEO’s compensation is incentive-based, providing greater compensation as direct and indirect measures of shareholder value increase. The CEO’s overall compensation package has also been set at a level that we believe provides appropriate differentiation between CEO compensation and the compensation of other executive officers hired from time to time. Mr. Chambers’ compensation has been and will be determined by the Compensation Committee in accordance with the principles described above. Information on Mr. Chambers’ compensation for Fiscal 2009 is set forth in the compensation tables. Although Mr. Chambers’ compensation was increased for fiscal 2008 when he became the chairman of the board, as noted above, Mr. Chambers did not receive an increase in compensation for Fiscal 2009.

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s chief executive officer or any of the company’s four other most highly compensated executive officers employed as of the end of the year. This limitation does not apply to compensation that is paid only if the executive’s performance meets pre-established objective goals based on performance criteria approved by stockholders. We have taken action, where possible and considered appropriate, to preserve the deductibility of compensation paid to NCI’s executive officers. NCI generally will be entitled to deduct compensation relating to cash incentives, option awards under the Amended Incentive Plan, matching under our deferred compensation plan and other performance-based awards. We have also awarded compensation that might not be fully tax deductible if we determined that grants were nonetheless in the best interests of NCI and its shareholders. While NCI seeks to take advantage of favorable tax treatment for executive compensation where appropriate, we believe that the primary drivers for determining the amount and form of executive compensation must be the retention and motivation of superior executive talent.

 

We will continue to review NCI’s executive compensation practices and will seek to preserve tax deductions for executive compensation to the extent consistent with our objective of providing compensation arrangements necessary and appropriate to foster achievement of NCI’s business goals.

 

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

 

KATHLEEN J. AFFELDT

(Chair)

JOHN J. HOLLAND

NATHAN K. SLEEPER

 

GARY L. FORBES*

 

 

 

The following table shows information regarding compensation paid for Fiscal 2009 to NCI’s Chief Executive Officer, Chief Financial Officer and each of the other three most highly compensated executive officers plus one additional individual (Mr. Fischer) for whom disclosure would have been required but for the fact he was not an executive officer on November 1, 2009 (collectively, the “Named Executive Officers”).

 

 

 

 

 

 

 

The following table sets forth information concerning grants of awards to each of the Named Executive Officers under the Bonus Plan and the Incentive Plan during Fiscal 2009:

 

 

 

 

 

The consummation of the Equity Investment on October 20, 2009 constituted a change of control, as applicable, for purposes of our Incentive Plan. As such, all outstanding and unvested stock options vested in full on October 20, 2009 and, except for the 2004 Long-Term Restricted Stock Awards granted to Messrs. Chambers, Dobbins and Dickinson, all restricted shares of stock vested in full on October 20, 2009, including the grants made to the Named Executive Officers on December 15, 2008 and October 15, 2009.

 

In addition to the foregoing, in connection with the Equity Investment, the Investment Agreement required that the Named Executive Officers’ employment agreements be amended, effective as of October 20, 2009. In general, the amendment agreements modify the “good reason” definition in each executive’s employment agreement. In addition, the amendment agreement for Mr. Chambers revises the Chambers’ employment agreement to provide that he will be entitled to cash severance equal to the greater of (1) two times his base salary and (2) his base salary through April 30, 2014, upon a termination of his employment without “cause” or for “good reason.” (Prior to this amendment, Mr. Chambers was entitled to receive his base salary through April 30, 2014 upon a termination under certain circumstances.)

 

The amendment agreements required each of Messrs. Chambers, Dobbins and Dickinson to waive his right to accelerated vesting of 64,516, 25,000 and 25,000 restricted shares, respectively, as a result of the Equity Investment. These restricted shares will continue to vest in accordance with their terms or, if earlier, upon a termination of the executive’s employment without “cause” or resignation for “good reason.”

 

Effective as of October 26, 2009, Mr. Fischer resigned his position as President of the Robertson-Ceco Division. Mr. Fischer experienced a qualifying termination under his employment agreement and, upon his execution and non-revocation of a release of claims against NCI, Mr. Fischer received his severance entitlement pursuant to his employment agreement of $597,755.

 

Except for the 2004 Long-Term Restricted Stock Awards held by Messrs. Chambers, Dobbins and Dickinson, all outstanding equity vested in connection with the consummation of the Equity Investment. The following table sets forth information concerning unexercised stock options and unvested restricted stock held by each of our Named Executive Officers as of November 1, 2009: