UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

SCHEDULE 14F-1

 

 

INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER

 

 

Commission File No. 0-25121

 

 

 

 

NCI BUILDING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s telephone number, including area code: (281) 897-7788

 

 

 

TABLE OF CONTENTS

 

 

10943 North Sam Houston Parkway West
Houston, Texas 77064

 

 

 

 

INFORMATION STATEMENT PURSUANT TO SECTION 14(f) OF THE

SECURITIES EXCHANGE ACT OF 1934 AND RULE 14f-1 THEREUNDER

NOTICE OF ANTICIPATED CHANGE IN MAJORITY OF DIRECTORS

 

October 30, 2009

 

 

 

 

This Information Statement is being transmitted on October 30, 2009, to the holders of shares of common stock, par value $0.01 per share, of NCI Building Systems, Inc., a Delaware corporation (the “Common Stock” and shares thereof, the “Common Shares”), in accordance with the requirements of Section 14(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14f-1 promulgated thereunder. As used in this Information Statement, the terms “we,” “us,” “our,” the “Company” and “NCI” mean NCI Building Systems, Inc.

 

We are not asking you to take any action in this Information Statement. You are receiving this Information Statement in connection with the designation by Clayton, Dubilier & Rice Fund VIII, L.P. (“CD&R Fund VIII”) and CD&R Friends & Family Fund VIII, L.P. (“CD&R FF Fund VIII”, and together with CD&R Fund VIII, the “CD&R Funds”), funds managed by Clayton, Dubilier & Rice, Inc. (“CD&R, Inc.”), of five (5) individuals representing a majority of our Board of Directors (the “Board”), pursuant to the terms of the Stockholders Agreement, dated as of October 20, 2009 (the “Closing Date”), among the Company and the CD&R Funds (the “Stockholders Agreement”). Because the directors so designated by the CD&R Funds pursuant to the Stockholders Agreement will have been elected by our Board, rather than at a meeting of our stockholders, we are required by federal securities law to provide this Information Statement to our stockholders.

 

As of October 23, 2009, there were 90,556,040 outstanding shares of Common Stock. Each Common Share is entitled to one vote on each matter on which Common Stock is entitled to vote.

 

NO VOTE OR OTHER ACTION BY OUR SHAREHOLDERS IS REQUIRED IN RESPONSE TO THIS INFORMATION STATEMENT. NO PROXIES ARE BEING SOLICITED AND YOU ARE NOT BEING REQUESTED TO SEND A PROXY TO THE COMPANY.

 

 

 

 

 

You are receiving this Information Statement in connection with the appointment of three (3) new directors to our Board, as more fully described below.

 

Pursuant to the Investment Agreement, dated as of August 14, 2009 (as amended, the “Investment Agreement”), between the Company and CD&R Fund VIII, on the Closing Date, the Company issued and sold to the CD&R Funds, for an aggregate purchase price of $250 million, an aggregate of 250,000 shares of a newly created 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”), convertible into 196,109,194 Common Shares based on the initial conversion price (or approximately 68.4% of our voting power)(such purchase and sale, the “Equity Investment”).

In connection with the closing of the Equity Investment, the Company, among other things, took the following actions:

 

 

The Investment Agreement required us to cause all directors serving on our Board immediately prior to the closing of the Equity Investment (other than our Chief Executive Officer and two other directors) to resign from our Board, effective as of the closing of the Equity Investment, and to cause vacancies on our Board to be filled by persons nominated or designated by the CD&R Funds. Accordingly, on the Closing Date, William D. Breedlove, Philip J. Hawk, Larry D. Edwards, Ed L. Phipps, W. Bernard Pieper, John K. Sterling and Max L. Lukens resigned from the Board and the Board appointed three individuals designated by the CD&R Funds, James G. Berges, Lawrence J. Kremer and Nathan K. Sleeper, as directors, effective as of the closing of the Equity Investment.

 

In connection with and concurrently with the closing of the Equity Investment, on the Closing Date, the Company entered into the Stockholders Agreement, setting forth certain terms and conditions regarding the Equity Investment and the ownership of the Preferred Shares, including certain restrictions on the transfer of the Preferred Shares and the Common Shares issuable upon conversion thereof and on certain actions of the CD&R Funds and their controlled affiliates with respect to the Company, and to provide for, among other things, preemptive rights, corporate governance rights and consent rights and other obligations and rights. Pursuant to the Stockholders Agreement, the Board will appoint two (2) additional individuals designated by the CD&R Funds, Kathleen J. Affeldt and Jonathan L. Zrebiec, as directors, effective on or after the eleventh day following the mailing by us of this Information Statement.

 

Three persons serving as directors on our Board prior to the Closing Date, Norman C. Chambers, Gary L. Forbes and George Martinez, did not resign in connection with the closing of the Equity Investment. However, with the appointment of the two (2) additional directors designated by the CD&R Funds, directors designated by the CD&R Funds will become a majority of the Board.

 

In addition, in connection with and prior to the launch of the Exchange Offer, the Company entered into the Lock-Up and Voting Agreement, dated as of August 31, 2009 (as amended, the “Lock-Up and Voting Agreement”), among the Company and the holders of the Notes that were signatories thereto (the “Lock-Up Holders”), pursuant to which, among other things, in accordance with the terms and conditions thereof, each Lock-Up Holder irrevocably agreed to tender in the Exchange Offer all Notes held by or beneficially owned by it, or with respect to which it served as a manager or investment advisor having the unrestricted power to vote or dispose thereof. Pursuant to the Lock-Up and Voting Agreement, the Board will appoint one (1) individual designated by certain Lock-Up Holders, John J. Holland, as director, effective on or after the eleventh day following the mailing by us of this Information Statement.

 

On the Closing Date, the CD&R Funds received, in the aggregate, 250,000 Preferred Shares convertible into 196,109,194 Common Shares based on the initial conversion price (or approximately 68.4% of our voting power). The terms of the Preferred Stock 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 CD&R Funds 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.

 

Furthermore, pursuant to the Stockholders Agreement, the CD&R Funds have substantial governance and other rights. Pursuant to the Stockholders Agreement, subject to certain ownership and other requirements and conditions, the CD&R Funds have the right to appoint a majority of directors to our Board, including the “Lead Director” or Chairman of the Executive Committee of our Board, and 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. Following the appointment of the additional CD&R Funds’ designees to the Board effective on or after the eleventh day following the mailing by us of this Information Statement, the CD&R Funds will have the ability, subject to the fiduciary duties of the individual directors, to control the decisions of the Board.

 

Pursuant to the Investment Agreement, for so long as we qualify as a “controlled company” within the meaning set forth in the New York Stock Exchange (“NYSE”) Listed Company Manual 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.

 

Unless otherwise noted, the following table sets forth, as of October 23, 2009, the number of shares of Common Stock beneficially owned by (1) each person or group known by us to own beneficially more than 5% of the outstanding shares of Common Stock, (2) each director and director designee, (3) each of our executive officers identified under the caption “Executive Compensation” and (4) all directors, director designees 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. Beneficial ownership of shares of Preferred Stock is reported below on an as-converted basis.

 

 

 

 

 

 

 

 

Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than 10% of our Common Stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the “SEC”) and the NYSE. These persons are required by the Exchange Act to furnish us with copies of all Section 16(a) forms they file.

 

Based solely on our review of the copies of the forms received by us with respect to fiscal 2008, or written representations from the reporting persons, none of these reporting persons was late with respect to any required filings except a filing on behalf of Mr. Forbes with respect to his stock grant of December 15, 2008.

 

To the best of the Company’s knowledge, there is no material proceeding to which any director, director designee or executive officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or any associate of such director, nominated director, officer, affiliate of the Company, or security holder is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

 

Information about Directors

 

Our directors are as follows:

 

Norman C. Chambers

 

Mr. 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 a director since May 2003. Mr. Chambers serves on the Executive Committee of our Board. 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.

 

Gary L. Forbes

 

Mr. Forbes, age 65, has served as a director since December 1991. Mr. Forbes serves on the Affiliate Transactions Committee, Executive Committee and Compensation Committee and is the Chairman of the Audit Committee of our Board. 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.

 

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. He became a partner in CD&R, Inc., a private equity investment firm and the manager of the CD&R Funds, 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 is a Director of PPG Industries, Inc.

 

Lawrence J. Kremer

 

Mr. Kremer, age 68, has served as a director since October 2009. Mr. Kremer serves on the Audit Committee and Affiliate Transactions Committee of our Board. 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.

 

George Martinez

 

Mr. Martinez, age 67, has served as a director since March 2003. Mr. Martinez serves on the Affiliate Transactions Committee, Audit Committee and the Nominating and Corporate Governance Committee of our Board. 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.

 

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. Mr. Sleeper is a partner of CD&R, Inc., which he joined 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. He 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.

 

Board Classes

 

The Board is divided into three (3) classes, as nearly equal in number as reasonably possible, and directors 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. The terms of office of each of the “Class I” directors expires at the annual stockholders’ meeting in 2012 and the terms of office of each

of the “Class II” and “Class III” directors expire at the annual stockholders’ meeting in 2010 and 2011, respectively. The classes of the Board are composed as follows:

 

 

As is further discussed in “Background” above, the Board will appoint two (2) additional individuals designated by the CD&R Funds, Kathleen J. Affeldt and Jonathan L. Zrebiec, and one (1) additional individual designated by the Lock-Up Holders, as directors on or after the eleventh day following the mailing by us of this Information Statement. Ms. Affeldt and Messrs. Zrebiec and Holland will serve on classes of the Board as follows:

 

 

Executive Officers

 

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. 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 51, 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.

 

The Board will appoint two (2) additional individuals designated by the CD&R Funds as directors, effective on or after the eleventh day following the mailing by us of this Information Statement. The additional director designees of the CD&R Funds are as follows:

 

Kathleen J. Affeldt.  Ms. Affeldt, age 60, 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 will be a Class III Director.

 

Jonathan L. Zrebiec.  Mr. Zrebiec, age 29, is a financial principal 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. Mr. Zrebiec will be a Class II Director.

 

The Board will appoint one (1) individual designated by the Lock-Up Holders as director, effective on the eleventh day following the mailing by us of this Information Statement. The director designee of the Lock-Up Holders is as follows:

 

John J. Holland.  Mr. Holland, age 59, 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 preengineered 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. Mr. Holland will be a Class I Director.

 

 

 

 

The Compensation Discussion and Analysis (the “CD&A”) and the tables and narrative disclosures that follow the CD&A provide information relating to the compensation awarded to, earned by and paid to (or potentially payable to) our Chief Executive Officer, our Chief Financial Officer and our other Named Executive Officers (as defined in “Executive Compensation” below), in each case as of November 2, 2008, which was the last day of our most recently ended fiscal year. The CD&A and the tables and narrative disclosures that follow the CD&A should be read in conjunction with the additional information contained in the section of this Information Statement entitled, “Update to Executive Officer Compensation Matters” on page 27 of this Information Statement.

 

Objectives of NCI’s Compensation Program

 

NCI believes that the quality, skill and dedication of its executive officers are critical factors affecting the long-term success of the Company. Our key compensation goals are to attract and retain exceptional executives, to reward past performance and provide incentives for future performance, and to align executives’ long-term interests with the interests of our shareholders.

 

NCI operates in an intensely competitive industry and has experienced challenges caused by volatility in the price of steel, industry cyclicality and seasonality, fluctuations in demand and general economic conditions affecting the construction industry. We use 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. We believe that the generational changes and potential mobility currently available to employees 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 strong Company performance over time.

 

Elements of Executive Compensation

 

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 provided supplemental retirement benefits to certain of our executives and have adopted a deferred compensation program under which we may make matching and other contributions to participants’ accounts based on their deferrals and contributions to the Company’s 401(k) plan. We also 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.

 

Determination and Administration of Compensation Programs and Amounts

 

Decisions regarding executive compensation are based primarily on the assessment of NCI’s compensation committee (the “Compensation Committee”) of each executive’s leadership and operational performance and potential to enhance long-term value to NCI’s shareholders. The Compensation Committee relies 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 considers 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. In addition, the Compensation Committee periodically reviews tally sheets setting forth all components of the Named Executive Officers’ compensation and, based on current service and under several potential severance and change-in-control scenarios, the total compensation and benefits potentially payable to each, including (1) estimated total retirement benefits, (2) current value of outstanding equity-based grants, (3) estimated payouts under long-term equity grants, (4) perquisites and other personal benefits, (5) current deferred compensation balances and accruals on the deferred amounts and (6) benefits payable under individual agreements with NCI. We believe that changes in compensation programs and levels must be made in the context of our past compensation decisions, and that it is appropriate to observe whether the intended effects of the compensation programs are being achieved over time and take those observations into account with respect to future compensation decisions.

 

Role of Management and Independent Advisors

 

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 2008, 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.

 

In developing NCI’s current compensation policies and practices, we have in the past sought and intend in the future to seek input from compensation consultants to measure comparability with industry and other peers. We believe that using outside consultants is an efficient way for us to keep current regarding competitive compensation practices, although we do not believe that we should accord undue weight to the advice of outside professional advisors. We expect to engage a compensation consultant at periodic intervals to re-evaluate NCI’s compensation practices and policies to assist us in maintaining our compensation goals. In addition, the Compensation Committee’s charter provides it sole authority to retain advisors, including compensation consultants. During fiscal 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. Neither of the consultants advises our management or receives any other compensation from us. 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 compensation study included a review of NCI’s base salaries, bonus levels, equity compensation program and nonqualified retirement programs, comparing them to the compensation structures of companies in an industry peer group, as well as to benchmarking studies conducted by other compensation consultants. In addition, the study surveyed director compensation among the peer group. The peer group, which was selected with the assistance of Mr. Chambers, consisted of: American Standard Companies Inc., American Woodmark Corporation, Ameron International Corporation, Apogee Enterprises, Inc., Drew Industries, Inc., ElkCorp, Gibraltar Industries, Inc., Griffon Corporation, Lennox International Inc., Louisiana-Pacific Corporation, Masco Corporation, Ryland Group Inc., Simpson Manufacturing, Inc., Universal Forest Products Inc., Weyerhaeuser Company and Worthington Industries Inc. The companies included in the peer group are companies that manufacture materials used in residential and commercial buildings, some of which are also included in the industry index against which the Company’s total stockholder return is compared in the stock performance chart included in our annual report to stockholders.

 

Base Salary

 

In establishing base salaries for our executives in 2006, we considered the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions as well as salaries paid to the executives’ peers within the Company and at companies within the peer group. Since that time, the Compensation Committee has reviewed base salaries annually and made adjustments, in light of

experience and performance levels among executives as well as 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 and matching under the deferred compensation plan, so the executive’s individual performance has a significant impact on both salary and the benefits derived from salary. In addition, we believe it is appropriate to set base salaries for our executives to be within a range near the median of its peer group, while avoiding rigid adherence to a narrow competitive target. This allows us to respond better to changing business conditions, manage salaries more evenly over a career, and minimize the potential for automatic ratcheting up of salaries that could occur with overemphasis on benchmarked companies.

 

The compensation study compared the Company to the peers based on comparative revenues because in the consultants’ views, revenue is the metric that is most closely correlated to base pay, but did not take into account incumbent performance levels of the benchmarked positions at the peer companies. The compensation study indicated that our base salaries at the time were slightly below the median at the 40th percentile. In approving increases in annual base salary for our executive officers as part of the overall revision of our compensation program during 2006, we took into account the median salaries for companies in the peer group reviewed in the 2006 compensation study but we also considered the other factors discussed above and the impact of the Robertson-Ceco acquisition on our executive officers’ responsibilities. Although for fiscal 2008 the Compensation Committee approved increases in base salaries for executive officers ranging from 3.75% to 11%, the Compensation Committee has determined for the time being to hold executive compensation level for fiscal 2009, with the exception of increases reflecting promotions or other extraordinary circumstances.

 

Annual Bonus

 

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 help 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 the Company, 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 generous 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 nonrecurring 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 the Company, without regard to accounting requirements over which most employees have no control.

 

During fiscal 2008, 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 company performance. Under the Bonus Program as in effect for fiscal 2008, 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 the Company’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 the Company’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:

 

 

In addition, middle management participants are eligible under the Bonus Program for cash bonuses equal to a percentage of their respective base salaries, depending on our achievement of a minimum 15% ROA for the fiscal year. For fiscal 2008, the Company achieved ROA of 24.13%, and EPS Growth of 32.29%, and we paid bonuses of 65.5%, 98.3% and 131.2% of base salary, to executives, senior executives and Mr. Chambers, respectively.

 

Long-Term Incentive Compensation

 

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 the Company. 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.  NCI’s current practice is 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. In 2006, we set grant levels for equity compensation at a level intended to bring such compensation levels to a total direct compensation level that was near the middle of the market for the peer group. Any changes to the 2007 and 2008 grants were due to promotions.

 

Each December, the Compensation Committee determines, 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 is a fixed amount and the remaining portion is 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 believe that the multi-year approach is appropriate in light of the cyclical nature of the building industry. However, in light of the fact that the hurdles in the company’s Bonus Program are 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 believe that it is important to provide at least a minimum long-term incentive award each year.

Target restricted stock awards for each of Messrs. Chambers, Dobbins and Johnson are 50% fixed and 50% contingent, and for all other senior executives, restricted stock awards are 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 2008, 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 is 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 grant date. Restricted stock awards vest in four equal annual installments beginning on the first anniversary of the grant date, and total awards are 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 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. In determining whether to make equity-based awards to executives, we also considered other factors, including an executive’s total compensation and current ownership stake in the Company, 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 the Company and the value of the executive’s service to the Company. Taking into account those factors, in December 2007 the Compensation Committee approved equity-based awards for fiscal 2008 with a target value of $800,000 for Mr. Chambers and within a range from $100,000 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 75% of the awards that would have otherwise been made in December 2008. The Compensation Committee determined that it would be prudent to change its policy for equity compensation going forward so that awards would be made semi-annually in December and June of each year, rather than annually only in December. Accordingly, in June 2009 the Compensation Committee intends to grant the remaining 25% of the awards that would have otherwise been made in December 2008, provided that the Company’s stockholders approve an increase in the number of shares available for issuance under the Incentive Plan.

 

Long-Term Restricted Stock Grants.  We have awarded long-term restricted stock grants to certain of our executives whose contributions are particularly critical to the Company’s performance. These awards provide significant incentives to the executives to remain with us until retirement, and they further align the executives’ interests with those of our shareholders.

 

The following named executive officers have received special long-term restricted stock awards:

 

 

Because of his role as our CEO, we recommended the award to Mr. Chambers to align his interests with those of our shareholders and to provide an incentive for Mr. Chambers to remain in our employ until he retires.

Non-compete covenants.  The terms of both the four-year vesting and long-term restricted stock awards provide that grantees must comply with a covenant not to compete with us for five years immediately following the receipt of any vested shares under the award. If an executive breaches the covenant not to compete, he must either return all awarded shares to us, or, if he no longer owns them, pay us the current market value of the number of shares awarded under the agreement.

 

Timing of Equity Grants.  Our policy for fiscal 2008 provides for an annual grant of restricted stock on December 15th of each year, which is usually shortly after the release of our annual financial results to the public. Under our new policy, beginning in fiscal 2009, we will grant equity awards in December and June starting in June 2009. We believe that the timing of such grants allows our annual and quarterly financial results to be fully reflected in the market value of NCI’s Common Stock on the date of grant, and lessens the possibility that there will be material nonpublic information that is not reflected in the market price of our Common Stock on the date of grant.

 

Retirement Benefits

 

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 a deferred compensation plan and the long-term restricted stock awards discussed above.

 

Deferred Compensation Plan

 

Our deferred compensation plan 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.

 

The plan 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. NCI will match between 4% and 6% of compensation in excess of those limits, depending on the Company’s performance (“Restoration Match”). In addition, the plan allows discretionary matching contributions to provide a supplemental retirement benefit to executives. For fiscal 2008, we determined to make discretionary matching contributions provided that NCI achieved ROA for fiscal 2008 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%. Because our ROA calculated under the Bonus Program was less than 25%, no discretionary contribution was made for 2008. For fiscal 2009, we have determined to make discretionary contributions if ROA as calculated under the Bonus Program is 25%. Executives become vested in the Restoration Match in a manner consistent with the Company 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.

 

All NCI executives, including those with long-term restricted stock awards, are eligible for the portion of the plan designed to provide matching contributions not available under NCI’s 401(k) plan. However, because the long-term restricted stock awards effectively provide a retirement benefit, executives who have received long-term restricted stock awards will not receive discretionary matching contributions under the amended and restated plan 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 deferred compensation plan) and have formed an administrative committee to manage the deferred compensation plan and its assets.

Other Compensation

 

Termination and Change-in-Control Agreements

 

Mr. Chambers has an agreement with the Company providing 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. 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 all future payments of base salary as then in effect owed to him under the employment agreement. Further, the terms of the Company’s long-term restricted stock awards provide that the restricted shares will vest immediately if there is a change in control of NCI or if the employee is terminated without cause or for good reason. Please 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 also adopted a severance policy for middle management personnel. We believe that these change-in-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-in-control benefits are necessary to attract and retain certain executives. For a description of the terms of these employment agreements, please see “Executive Compensation — Employment Agreements — Employment Agreements for Executive Officers.”

 

Perquisites and Personal Benefits

 

The Company offers limited perquisites or personal benefits. However, until his retirement in December 2007, Mr. A.R. Ginn had the right to use Company-owned aircraft for a maximum of 40 hours per year. The incremental cost to the Company of his use of Company aircraft for personal travel was de minimis in fiscal 2008.

 

Gross-Ups

 

NCI does not provide for any tax assistance or “gross-ups” for its executives. In connection with the compensation study, the Committee analyzed the potential costs of any such gross-ups, including for any excise tax potentially payable by an executive under Section 280G of the Internal Revenue Code. The consultant noted that the lack of any gross-up could potentially limit the intended benefit to the executives and that such gross-ups are common among the peer group. However, the Committee has determined that at this time the relative benefits of such a gross-up to the executives are not commensurate with the cost of the gross-up to the Company.

 

CEO Compensation

 

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 deferred compensation plan. 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 the Company 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 2008 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.

 

Deductibility of Compensation

 

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 the Company’s executive officers. The Company generally will be entitled to deduct compensation relating to cash incentives, option awards under the 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 the Company and its shareholders. While the Company 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 the Company’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 the Company’s business goals.

 

Summary Compensation Table

 

The following table shows information regarding compensation paid for fiscal 2008 to the Company’s Chief Executive Officer, Chief Financial Officer and each of the other three most highly compensated executive officers (collectively, the “Named Executive Officers”).

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth information concerning grants of awards to each of the Named Executive Officers under the Incentive Plan during fiscal 2008:

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information concerning unexercised stock options and unvested restricted stock of each of our Named Executive Officers as of November 2, 2008:

 

 

 

 

 

 

 

 

 

Option Exercises and Stock Vested

 

The following table sets forth information concerning exercises of stock options and vesting of restricted stock of each of our Named Executive Officers during fiscal 2008:

 

 

 

 

 

Nonqualified Deferred Compensation Plans

 

The following table sets forth information concerning nonqualified deferred compensation benefits of each of our Named Executive Officers during fiscal 2008:

 

 

 

 

Please see “Compensation Discussion and Analysis — Retirement Benefits — Deferred Compensation Plan” for a description of our Deferred Compensation Plan.

 

Pension Benefits

 

The following table sets forth information concerning supplemental retirement benefits for each of our participating Named Executive Officers as of November 2, 2008:

 

 

We maintain a supplemental retirement plan, which is a nonqualified, unfunded benefit plan under which Mr. Ginn receives monthly benefits at an amount determined by our Board. Mr. Ginn became vested in his retirement benefit under the plan at the rate of 20% for each year of service with us and is fully vested. He has agreed not to compete with us in the ten-year period during which he receives benefits pursuant to the plan.

 

Employment Agreements

 

Chambers Employment Agreement.  On April 12, 2004 we entered into a ten-year employment agreement with Mr. Chambers. The agreement provides for Mr. Chambers to receive: (i) a base salary of not less than $400,000 per year; (ii) an annual bonus calculated pursuant to the terms of our existing bonus program, with Mr. Chambers being considered a “Level I” participant for purposes thereof; (iii) a lump sum payment of $250,000 payable upon commencement of Mr. Chambers’ employment in consideration for sums he would have been entitled to but forfeited upon his termination of his employment with his prior employer; (iv) a grant under the Incentive Plan of 200,000 nonqualified options to purchase our Common Stock at an exercise price of $31.00 per share, subject to the terms and conditions set forth in a separate Nonqualified

Stock Option Agreement; (v) the right to receive semi-annual grants of additional options to purchase our Common Stock as a “Level SE1” participant under the Incentive Plan in the discretion of the compensation committee of our Board; (vi) a grant of 50,000 shares of our Common Stock under the Incentive Plan pursuant to the terms of a separate Restricted Stock Agreement; (vii) a special long-term restricted stock award of a number of shares of our Common Stock having an aggregate fair market value of approximately $2 million, subject to the terms of a separate Restricted Stock Agreement; (viii) health insurance and other benefits available to other members of senior management as well as a car allowance plus reimbursement for automobile insurance and mileage incurred which is related to business use; and (ix) four weeks paid vacation per year.

 

The employment agreement also provides for certain payments to be made upon the termination of Mr. Chambers’ employment with us. If Mr. Chambers is terminated for cause or resigns without good reason (each as defined under the employment agreement), then he will be entitled to receive only salary and benefits earned by him or accrued for his account through the date of his termination. If, however, Mr. Chambers is terminated without cause or resigns for good reason, he will continue to receive his base salary for the term of the employment agreement on the same terms as he received it while an employee. If Mr. Chambers is terminated without cause or resigns for good reason within two years after a change in control (as defined in the employment agreement), then he shall receive, within seven days of such termination, a lump-sum payment equal to the present value of all future payments of base salary owed to him under the employment agreement.

 

Mr. Chambers is subject to certain confidentiality obligations during and after his employment with us. In addition, Mr. Chambers is subject to certain noncompetition and nonsolicitation provisions for a period equal to three years following the longer of (i) the date of his termination of employment with us, and (ii) the end of the period during which Mr. Chambers is entitled to receive compensation payments from us under the employment agreement.

 

A.R. Ginn Separation and Consulting Agreement.  We have entered into a separation and consulting agreement with Mr. A.R. Ginn (the “Consulting Agreement”) that provides, among other things, that from his retirement at December 31, 2007 until December 31, 2017, Mr. A.R. Ginn will serve the Company in a consultant capacity, be paid a salary and will be eligible to participate in our group health and medical benefit programs (including long-term healthcare coverage, if any, which is made available to employees of the Company) on the same terms available to our employees generally.

 

From January 1, 2008 through December 31, 2009, Mr. A.R. Ginn will receive a base salary of $200,000 per annum, and from January 1, 2010 through the Termination Date, a base salary of $100,000 per annum. He is not eligible for a bonus unless it is approved by senior management of our Board in their discretion.

 

Pursuant to the Consulting Agreement, Mr. A.R. Ginn received an award of restricted stock pursuant to our Incentive Plan in December 2007, which vests ratably over four years subject to Mr. A.R. Ginn’s continued service to the Company and has terms consistent with the terms generally applicable to other executive officers of the Company; provided, however, such award does not provide for full vesting solely due to Mr. A.R. Ginn’s attainment of retirement age. All other awards granted to Mr. A.R. Ginn prior to December 31, 2006 vested fully as a result of his retirement, on January 1, 2008.

 

Under the Consulting Agreement, if Mr. A.R. Ginn’s employment is terminated without cause or due to disability, he will be entitled to continued benefits as if no termination had occurred. In the event of his death, salary payments and group health coverage will continue to be provided to his surviving spouse (if any) through the Termination Date. If any successor to all or substantially all of the business or assets of NCI fails to either expressly assume the Consulting Agreement or assume it by operation of law, Mr. A.R. Ginn shall be entitled to an accelerated cash payout of his remaining salary and the value of his health care benefits, without reduction for early payment, subject to limitations on acceleration imposed by applicable tax law.

 

Mr. A.R. Ginn is subject to certain confidentiality obligations during and after his employment with us, and is also subject to certain noncompetition and nonsolicitation provisions until December 31, 2012.

 

Frances P. Hawes Employment Agreement.  On March 27, 2008, we entered into an employment agreement with Ms. Hawes that provides, among other things, that from her retirement on March 31, 2008

until March 31, 2009, Ms. Hawes will continue to serve the Company in an employee capacity, be paid a salary (at a rate of 3 / 12 her prior base salary on an annualized basis, or $83,000), continue to participate in our employee benefit plans and programs and will be eligible to participate in our group health and medical benefit programs, on the same terms available to our employees generally.

 

Kelly R. Ginn Consulting Agreement.  On March 27, 2008, we entered into an consulting agreement with Mr. Kelly Ginn that provides, among other things, that from his retirement on March 31, 2008 until March 31, 2009, Mr. Kelly Ginn will continue to serve the Company in a consulting capacity on an as-needed basis (but no more than twenty (20) hours per month), continue to be paid his base salary and will be eligible to participate in our group health and medical benefit programs, on the same terms available to our employees generally.

 

Mr. Kelly Ginn is subject to certain confidentiality obligations during and after his consulting work with us, and is also subject to certain noncompetition and nonsolicitation provisions until March 31, 2014.

 

Long-Term Restricted Stock Grants.  Several of our executive officers have received special long-term restricted stock awards. The agreements for those awards provide that each such grantee has the right to vote the shares and to receive dividends paid by us, whether in cash or stock, but may not transfer the shares until they are vested. The shares of restricted stock of each grantee vest when such grantee retires from his employment with us at or after attaining age 65. The shares of restricted stock will vest immediately if the grantee dies or becomes disabled while employed by us, is terminated without cause or resigns for good reason (each as defined under the agreement) or if there is a change in control of NCI. The grantee will forfeit the shares of restricted stock if such grantee’s employment with us is terminated for any other reason, including voluntary termination or resignation without good reason (as defined under the agreement) or termination of employment by us with cause. In addition, each grantee must comply with a covenant not to compete with us for the five years immediately following his receipt of any vested shares under his restricted stock award. If the grantee breaches his covenant not to compete, such grantee must either return to us the shares granted to him pursuant to the special long-term grant, if he still owns them, or pay us the then current market value of the shares if he does not then own them. For more information regarding the special long-term restricted stock grants, see “Compensation Discussion and Analysis — Determination and Administration of Compensation Programs and Amounts — Long-Term Incentive Compensation — Long-Term Restricted Stock Grants” and “Executive Compensation — Outstanding Equity Awards at Fiscal Year-End.”

 

Employment Agreements for Executive Officers.  In fiscal 2007, we also adopted employment agreements for 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 also adopted a severance policy for middle management personnel. Pursuant to each of these agreements, we must pay each executive officer party to such an agreement, a base salary at the current annualized rate. Each executive officer party to an employment agreement is also entitled to participate in our Bonus Program. Please refer to “Compensation Discussion and Analysis — Determination and Administration of Compensation Programs and Amounts — Base Salary” and “— Annual Bonus” for more information regarding our payment scheme. Pursuant to these agreements, our executive officers serve in an at-will capacity and we may terminate employment at any time with or without cause. If employment is terminated for any reason other than termination in connection with a change in control, the executive officer will be entitled to receive the portion of such officer’s earned annual base salary through the date of termination and any bonus to which such officer is entitled pursuant to the Bonus Program. Following a change in control or a potential change in control, the executive officer is entitled to receive a certain specified amount times his or her annual base salary and medical and dental coverage for a period of up to 18 months. Each executive officer is further bound by a covenant not to compete with us for the term of his or her employment and, in the event such executive officer receives a change in control payment, for a period of two (2) years following such executive officer’s termination.

Potential Payments upon Termination or Change-in-Control

 

The following table estimates the value of the termination payments and benefits that each of our Named Executive Officers would receive if his or her employment terminated or a change of control occurred on October 31, 2008 (the last business day of fiscal 2008) under the circumstances shown and making the indicated assumptions. The table excludes (i) amounts accrued through fiscal year-end that would be paid in the normal course of continued employment, such as accrued but unpaid salary, (ii) benefits generally available to all of our salaried employees and (iii) excludes stock options as the strike price was below the stock price at October 31, 2008.

 

 

 

 

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation Committee of our Board is responsible for determining executive compensation. Mr. Breedlove, Mr. Edwards, Mr. Forbes, Mr. Hawk, Mr. Pieper and Mr. Sterling were the only members of the Compensation Committee during fiscal 2008. None of the Compensation Committee members were at any time during fiscal 2008, or at any other time, an officer or employee of NCI or any of our subsidiaries. No member on the Compensation Committee serves as a member of the board or compensation committee of any entity that has one or more executive officers serving as a member of our Board or compensation committee.

 

Occurrence of a Change in Control or Change of Control

 

The consummation of the Equity Investment constituted a change of control or change in control, as applicable, for purposes of the agreements and plans described below, which entitled our executive officers to additional or accelerated payments and benefits under these agreements and plans as described below.

 

Vesting of Equity Compensation.  All outstanding and unvested stock options to acquire shares of our Common Stock vested in full as of the consummation of the Equity Investment and, except with respect to the special long term restricted stock awards granted to Messrs. Chambers, Dobbins and Dickinson (as described below), all restricted shares of our stock vested in full as of the consummation of the Equity Investment. The number of unvested stock options that vested as of the consummation of the Equity Investment (each, with an exercise price of $44.00 per share) held by each of Messrs. Dobbins, Dickinson and Fischer (who are our only executive officers named in the compensation tables with unvested options) were 341, 341 and 341, respectively. The number of unvested shares of restricted Common Stock held by each of Messrs. Chambers, Johnson, Dobbins, Dickinson and Fischer that vested as of the consummation of the Equity Investment and became free of restrictions are 51,423, 26,125, 25,404, 23,988, and 23,988, respectively. This number of unvested shares of restricted Common Stock includes grants made to these individuals in December, 2008 and October, 2009.

 

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 “Company

Contribution Amounts” and “Company Restoration Matching Amounts” (each, as defined in the DCP). Any unvested Company Contribution Amounts and Company Restoration Matching Amounts in participants’ DCP accounts became vested upon consummation of the Equity Investment. Messrs. Chambers and Johnson became vested in approximately $24,056 and $18,752, respectively, of Company Restoration Matching Amounts. We have not made any Company Contribution Amounts to participants’ DCP accounts and elected in 2009 to discontinue making Company Restoration Matching Amounts. The DCP also permits participants to elect to have their account balances paid out upon a change in control. Messrs. Dobbins and Dickinson are the only executive officers named in the compensation tables who have their account balances paid out upon a change in control and, as such, their account balances under the DCP has been paid out in connection with the consummation of the Equity Investment.

 

Modification of Management Arrangements

 

Prior to completion of the Equity Investment, we amended the DCP, the rabbi trust that funds the DCP, our severance plan, employment agreements with ten of our senior executives and restricted stock award agreements with three of our senior executives. Below is a brief description of the amendments.

 

Deferred Compensation Plan and Related Trust.  The amendment to the DCP eliminated the right to appoint a third-party administrator of the DCP after the closing. Similarly, the rabbi trust that is a source of funding for obligations under the DCP was amended so that certain administrative protections that would have gone into effect following a change in 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.

 

Employment Agreements with Senior Executives.  We are a party to employment agreements with ten of our senior executives, including Messrs. Chambers, Johnson, Dobbin, Dickinson and Fischer. We and these senior executives have entered into amendment agreements with respect to these employment agreements. 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 Mr. Chambers’ employment agreement to provide that he will be entitled to a cash severance payment 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 the amendment, Mr. Chambers was entitled to receive his base salary through April 30, 2014 upon a termination of his employment without “cause” or for “good reason.”) Assuming that Mr. Chambers experiences a qualifying termination on November 1, 2009, the amount of cash severance to which he would be entitled under his employment agreement is approximately $3.1 million. Assuming that Messrs. Johnson, Dobbins, or Dickinson each experiences a qualifying termination on November 1, 2009, the amount of cash severance to which he would be entitled under his employment agreement is approximately the following: Mr. Johnson, $664,000; Mr. Dobbins, $630,000; Mr. Dickinson $581,000. Effective as of October 26, 2009, Mr. Fischer resigned his position as President of the Robertson-Ceco Division. Mr. Fischer experienced a qualifying termination and, upon his execution and non revocation of a release of claims against the Company, he will be entitled to his severance amount of $581,000. Other than Mr. Fischer, none of these executives has terminated his employment or expressed an intention to terminate his employment with us.

 

Modification to Restricted Stock Vesting.  In addition, pursuant to the amendment agreements, each of Messrs. Chambers, Dobbins and Dickinson has waived his right to accelerated vesting of 64,516, 25,000 and 25,000 restricted shares, respectively, as a result of the Equity Investment, and we have agreed that 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 for “good reason.”

Restricted Stock Grants

 

As described above (see “Compensation Discussion & Analysis” — “Long Term Incentive Compensation”), in December 2008 we granted the following number of shares of restricted stock to our Named Executive Officers:

 

 

However, the figures above represented only 75% of the full number of shares of restricted stock intended to be made to each executive officer. This lesser number was granted because the number of shares of Common Stock available under our equity compensation plan was insufficient to make the full intended grant. At our annual meeting in 2009, our shareholders approved the issuance of an additional 1,060,000 shares of Common Stock under our equity compensation plan. In October, 2009, we granted the remaining 25% of the shares of restricted stock to the intended recipients, including our Named Executive Officers, other than Mr. Chambers, who waived his right to an award. The following chart lists the number of shares of restricted stock granted to our Named Executive Officers other than Mr. Chambers: