UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

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

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

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

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §. 240.14a-12

 

COMMUNITY HEALTH SYSTEMS, INC.

(Name of Registrant as Specified in its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required

o  Fee computed on table below per Exchange Act Rules 14a-6(i) (4) and 0-11.

 

 

 

 

 

 

 

 

 

 

 

o  Fee paid previously with preliminary materials..

 

 

 

 

 

 

 

 

 

 

COMMUNITY HEALTH SYSTEMS, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held on May 22, 2007

 

To Our Stockholders:

 

Notice is hereby given that the Annual Meeting of Stockholders of Community Health Systems, Inc. will be held on Tuesday, May 22, 2007 at 8:00 a.m. (Eastern Daylight Time) at The St. Regis Hotel, 5th Avenue at 55th Street, New York, New York 10022, to consider and act upon the following matters:

 

1. To elect three (3) Class I Directors;

 

2. To approve the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan, as amended and restated on March 30, 2007 (the “Amended and Restated 2000 Stock Option and Award Plan”), which provides eligible participants the opportunity to receive grants of stock options and other awards;

 

3. To ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for our fiscal year ending December 31, 2007;

 

4. To consider a proposal submitted by one of our stockholders; and

 

5. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof.

 

The close of business on March 30, 2007, has been fixed as the record date for the determination of stockholders entitled to notice of and to vote at the meeting and any adjournment or postponement thereof.

 

YOU ARE REQUESTED, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE MEETING, TO MARK, DATE, SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING AND WISH TO VOTE YOUR SHARES PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE THE PROXY IS EXERCISED.

 

By Order of the Board of Directors,

 

Rachel A. Seifert

Senior Vice President, Secretary and

General Counsel

 

Franklin, Tennessee

April 12, 2007

 

ANNUAL MEETING OF STOCKHOLDERS
OF
COMMUNITY HEALTH SYSTEMS, INC.

PROXY STATEMENT

 

Table of Contents

 

ANNUAL MEETING OF STOCKHOLDERS
OF
COMMUNITY HEALTH SYSTEMS, INC.
4000 Meridian Boulevard
Franklin, Tennessee 37067

 

PROXY STATEMENT
April 12, 2007

 

Solicitation

 

This Proxy Statement, the accompanying proxy card and the Annual Report to Stockholders (with Form 10-K) of Community Health Systems, Inc. (the “Company”) are being mailed on or about April 12, 2007. The Board of Directors (the “Board”) of the Company is soliciting your proxy to vote your shares at the 2007 Annual Meeting of Stockholders (the “Meeting”). The Board is soliciting your proxy to give all stockholders of record the opportunity to vote on matters that will be presented at the Meeting. This Proxy Statement provides you with information on these matters to assist you in voting your shares.

 

When and where will the meeting be held?

 

The meeting will be held at 8 a.m. on Tuesday, May 22, 2007 (Eastern Daylight Time) at The St. Regis Hotel, 5th Avenue at 55th Street, New York, New York 10022.

 

What is a proxy?

 

A proxy is your legal designation of another person (the “proxy”) to vote on your behalf. By completing and returning the enclosed proxy card, you are giving the President or the Secretary of the Company the authority to vote your shares in the manner you indicate on your proxy card.

 

Why did I receive more than one proxy card?

 

You will receive multiple proxy cards if you hold your shares in different ways (e.g., joint tenancy, trusts, and custodial accounts) or in multiple accounts. If your shares are held by a broker, bank, or other nominee (i.e., in “street name”), you will receive your proxy card or other voting information from your broker, bank or other nominee, and you will return your proxy card or cards to your broker, bank, or other nominee. You should vote on and sign each proxy card you receive.

 

Voting Information

 

Who is qualified to vote?

 

You are qualified to receive notice of and to vote at the Meeting if you own shares of Common Stock of the Company at the close of business on our record date of Friday, March 30, 2007.

 

How many shares of Common Stock may vote at the Meeting?

 

As of March 30, 2007, there were 94,749,676 shares of Common Stock outstanding and entitled to vote. Each share of Common Stock is entitled to one vote on each matter presented.

 

What is the difference between a “shareholder of record” and a “street name” holder?

 

These terms describe how your shares are held. If your shares are registered directly in your name with Mellon Investor Services, the Company’s transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage, bank, trust or other nominee as a custodian, you are a “street name” holder.

 

How do I vote my shares?

 

If you are a “shareholder of record”, you can vote your proxy by mailing in the enclosed proxy card.

 

Please refer to the specific instructions set forth on the enclosed proxy card.

 

If you hold your shares in “street name”, your broker/bank/trustee/nominee will provide you with materials and instructions for voting your shares, which may allow you to use the Internet or a toll free telephone number to vote your shares.

 

Can I vote my shares in person at the Meeting?

 

If you are a “shareholder of record”, you may vote your shares in person at the Meeting. If you hold your shares in “street name”, you must obtain a proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the Meeting.

 

What are the Board’s recommendations on how I should vote my shares?

 

The Board recommends that you vote your shares as follows:

 

 

 

What are my choices when voting?

 

Proposal 1 — You may cast your vote in favor of electing the nominees as Directors or withhold your vote on one or more nominees.

 

Proposals 2, 3, and 4 — You may cast your vote in favor of or against each proposal, or you may elect to abstain from voting your shares.

 

How would my shares be voted if I do not specify how they should be voted?

 

If you sign and return your proxy card without indicating how you want your shares to be voted, the President or Secretary will vote your shares as follows:

 

 

How are votes withheld, abstentions and broker non-votes treated?

 

Votes withheld and abstentions are deemed as “present” at the Meeting, are counted for quorum purposes, and other than for Proposal 1, will have the same effect as a vote against the matter. Broker non-votes, if any, while counted for general quorum purposes, are not deemed to be “present” with respect to any matter for which a broker does not have authority to vote.

 

Can I change my vote after I have mailed my proxy card?

 

You may revoke your proxy by doing one of the following:

 

 

What vote is required to approve each proposal?

 

Proposal 1 requires a plurality of the votes cast to elect a director.

 

Proposal 2 requires the affirmative vote of a majority of those shares of Common Stock present in person or represented by proxy and entitled to vote thereon at the Meeting.

 

Proposal 3 requires the affirmative vote of a majority of those shares of Common Stock present in person or represented by proxy and entitled to vote thereon at the Meeting.

 

Proposal 4 requires the affirmative vote of a majority of those shares of Common Stock present in person or represented by proxy and entitled to vote thereon at the Meeting.

 

Who will count the votes?

 

Representatives from Mellon Investor Services, our transfer agent, will count the votes and serve as our Inspectors of Election. The Inspectors of Election will be present at the Meeting.

 

Who pays the cost of proxy solicitation?

 

The Company pays the costs of soliciting proxies. Upon request, the Company will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding proxy materials to beneficial owners of shares of the Company’s Common Stock. In addition, certain of our affiliates’, Directors, officers, and employees will aid in the solicitation of proxies. These individuals will receive no compensation in addition to their regular salaries.

 

Is this Proxy Statement the only way that proxies are being solicited?

 

No. As stated above, in addition to mailing these proxy materials, certain Directors, officers or employees of the Company may solicit proxies by telephone, e-mail or personal contact. They will not be specifically compensated for doing so.

 

If you have any further questions about voting your shares or attending the Meeting please call our Secretary and General Counsel, Rachel Seifert, at 615-465-7000.

 

Each year the Board of Directors submits to the stockholders at the Meeting its nominations for election of directors. In addition, the stockholders are requested to ratify the selection of our independent registered public accounting firm. Other proposals may be submitted by the Board of Directors or stockholders for inclusion in the Proxy Statement for action at the Meeting. Any proposal submitted by a stockholder for inclusion in the 2008 Annual Meeting Proxy Statement must be received by the Company in the manner and by the deadline set forth under “Stockholder Proposals and Nominations for Directors” as set forth later in this Proxy Statement. In general, a director nomination, submitted in proper form, must be received no earlier than January 29, 2008, and no later than February 28, 2008. If a stockholder seeks to have a proposal included in our Proxy Statement for the 2008 Annual Meeting, the proposal must be submitted by not later than December 12, 2007.

 

How may I contact the Lead Director of the Board of Directors or other non-management members of the Board of Directors?

 

The Lead Director of the Company’s Board of Directors is Dale F. Frey, who presides at regularly scheduled executive sessions of our Board of Directors. Mr. Frey is also the Chair of the Governance and Nominating Committee of the Board of Directors. He and any of the other non-management directors may be contacted by any stockholder or other interested party in the following manner:

 

c/o Community Health Systems
4000 Meridian Boulevard
Franklin, TN 37067
Attention: Rachel A. Seifert
Corporate Secretary
615-465-7000
Investor  Communications@chs.net

 

In the alternative, stockholders or other interested parties may communicate with our directors or our corporate compliance officer by accessing the Confidential Disclosure Program established under our Code of Conduct:

 

Corporate Compliance and Privacy Officer
Community Health Systems
4000 Meridian Boulevard
Franklin, TN 37067
800-495-9510

 

Our Board of Directors, which consists of eight (8) members, is governed by the Bylaws of the Company and is further guided by the Governance Guidelines for the Board of Directors. Our Governance Guidelines, include independence standards for those directors who are not also members of management. By evaluating the relationships of the Board of Directors with the Company and any members of management, as disclosed

to us by them, against the independence standards of the Governance Guidelines our Board of Directors has affirmatively determined that the following six members are independent:

 

John A. Clerico
Dale F. Frey
John A. Fry
Harvey Klein, M.D.
Julia B. North
H. Mitchell Watson, Jr.

 

Messrs. Wayne Smith and Larry Cash, who are employee-officers of the Company, are not independent. Accordingly, 75% of the members of our Board of Directors are independent.

 

The non-management members of our Board of Directors meets periodically in executive sessions, typically at the end of each regularly scheduled board meeting, but otherwise as needed. A Lead Director, Dale F. Frey, presides over those sessions and is in a position to take a leadership role in certain limited circumstances when leadership by the Chairman, who is also our President and Chief Executive Officer, would not be appropriate. Our Lead Director also provides significant input into Board meeting agendas and presentation topics.

 

Our Board of Directors has three standing committees: Audit and Compliance, Compensation, and Governance and Nominating. Each of these committees is comprised solely of independent directors, and each meets the additional criteria for committee membership. Each committee operates pursuant to a committee charter. The current composition of our Board’s Committees is as follows:

 

 

How many times did your Board and its committees meet in 2006? What was the attendance by the members? What are the duties of the Board’s committees?

 

Directors are encouraged to attend our annual meeting of stockholders; all eight (8) of our then serving directors were present at our 2006 annual meeting of stockholders, which was followed immediately by the annual meeting of the Board of Directors.

 

The Board of Directors is responsible for broad corporate policy and the overall performance of the Company. Members of the Board are kept informed of the Company’s business by various documents sent to them before each meeting and oral reports made to them during these meetings by the Company’s Chairman, President and Chief Executive Officer and other corporate executives. They are advised of actions taken by the various committees of the Board of Directors. Directors have access to all our books, records and reports, and members of management are available at all times to answer their questions.

 

In 2006, the Board of Directors held four (4) regular meetings and three (3) special meetings. Each director attended at least 75% of the Board meetings and meetings of the Board Committees on which he/she served.

 

The Audit and Compliance Committee held eight (8) regular meetings during 2006. The Audit and Compliance Committee’s responsibility is to provide advice and counsel to management regarding, and to assist the Board of Directors in, its oversight of, (i) the integrity of the Company’s financial statements; (ii) the Company’s compliance with legal and regulatory requirements; (iii) the independent registered public accounting firm’s qualifications and independence; and (iv) the performance of the Company’s internal audit function and its independent registered public accounting firm. The Audit and Compliance Committee report is set forth later in this Proxy Statement.

 

The Compensation Committee held four (4) regular meetings during 2006. The primary purpose of the Compensation Committee is to (i) assist the Board of Directors in discharging its responsibilities relating to compensation of the Company’s executives; (ii) approve awards and grants of equity-based compensation arrangements to directors, employees, and others pursuant to the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan; (iii) administer the Community Health Systems, Inc. 2004 Employee Performance Incentive Plan with regard to the employees to whom Section 162(m) of the Internal Revenue Code applies; (iv) assist the Board of Directors by making recommendations regarding compensation programs for directors; and (v) produce an annual report on executive compensation for inclusion in the Company’s proxy statement in accordance with applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Compensation Committee’s report is set forth later in this Proxy Statement.

 

The Compensation Committee’s responsibilities are set forth in the Committee’s charter, which is attached to this Proxy Statement as Annex A and is also included in the Governance section of the Company’s internet website. The primary responsibilities of the Committee are to oversee the elements of the compensation arrangements available to the Company’s subsidiaries that are used to compensate the Company’s executive officers, and in particular, the Chief Executive Officer. The Committee also approves the goals and objectives of the Chief Executive Officer and the other executive officers and determines whether targets have been attained in connection with target based compensation awards and equity grants. Pursuant to the Compensation Committee’s Charter, the Committee has authority to engage its own executive compensation consultants and legal advisors. Since 2005, Mercer Human Resources Consulting has served as the independent executive compensation consultant to the Committee.

 

The Governance and Nominating Committee met two (2) times during 2006. The primary purpose of the Governance and Nominating Committee is to (i) recommend to the Board of Directors a set of corporate governance guidelines applicable to the Company; (ii) review at least annually the Company’s corporate Governance Guidelines and make any recommended changes, additions or modifications; and (iii) identify individuals qualified to become Board members and to select, or recommend that the Board of Directors select, the director nominees for the next annual meeting of stockholders; and (iv) evaluate the qualification and performance of incumbent directors.

 

Who are your Audit Committee Financial Experts?

 

All three of the members of our Audit and Compliance Committee are “audit committee financial experts” as defined by the Exchange Act — John A. Clerico, John A. Fry, and H. Mitchell Watson, Jr.

 

Does the Company have a Code of Conduct?

 

The Company has an internal compliance program, the keystone of which is our Code of Conduct. Our Code of Conduct has been adopted and implemented throughout our organization and is applicable to all members of the Board of Directors, officers, and employees. A variation of this Code of Conduct has been in effect at our Company since 1997.

 

Where can I obtain a copy of your Board of Directors’ organizational documents?

 

A copy of the current version of our Board of Directors Governance Guidelines, including our Independence Standards, along with current versions of our Code of Conduct, the Board of Directors Governance Guidelines and committees’ charters are posted on the Investor Relations section of our Internet Website — www.chs.net. These items are also available in print to any shareholder who requests them by writing to Community Health Systems, Inc., Investor Relations, at 4000 Meridian Boulevard, Franklin, TN 37067.

 

How are your Directors Compensated?

 

Our Board of Directors has approved a compensation program for directors who are not members of management (“eligible directors”), which consists of both cash and equity-based compensation. In 2006,

eligible directors received an annual stipend of $40,000. The Chair of the Audit and Compliance Committee receives an additional annual stipend of $15,000; the Chair of the Compensation Committee receives an additional annual stipend of $10,000; and the Chair of the Governance and Nominating Committee receives an additional stipend of $7,500. Our Lead Director also received an additional stipend of $10,000. Eligible directors also receive $1,500 for each Board meeting attended and $1,000 for each committee meeting attended. On December 15, 2005, the program was modified by our Board of Directors effective January 1, 2006 so that independent directors receive 6,000 shares of restricted stock upon their initial appointment to the Board and 3,000 shares of restricted stock on the first business day after January 1 of each calendar year, provided the eligible director is a director on such date. These awards are made under our Amended and Restated 2000 Stock Option and Award Plan. The restrictions on these shares lapse in equal one-third increments on each of the first three anniversaries of the award date. All directors are reimbursed for their out-of-pocket expenses arising from attendance at meetings of the Board and its committees. Prior to establishing this program in December 2002, some of our directors were granted stock options upon joining our Board of Directors, but received no other compensation other than reimbursement of expenses for attending meetings. Beginning December 2002 until the above mentioned modification on December 15, 2005, our directors received stock options upon joining our Board of Directors along with annual grants of stock options. In addition, our directors received a restricted share grant in February 2005.

 

The following table summarizes the aggregate fees paid or earned and the value of equity-based awards earned by our directors in 2006:

 

 

 

 

At its meeting in December 2006, the Governance and Nominating Committee of the Board of Directors has established a policy to evaluate the elements and levels of the Director Compensation Program on a

biannual basis and to rebalance the compensation awards to attain an allocation of compensation of approximately 50% in cash compensation and 50% in stock-based awards. The Compensation Committee’s outside consultant will be engaged to perform a market analysis and make recommendations to the Governance and Nominating Committee. The Director Compensation Program will next be evaluated for adjustment in December 2007.

 

The Governance and Nominating Committee has responsibility for the director nomination process.

 

The Governance and Nominating Committee believes that the minimum qualifications that must be met by any Director nominee include (i) a reputation for the highest ethical and moral standards, (ii) good judgment, (iii) a positive record of achievement, (iv) if on other boards, an excellent reputation for preparation, attendance, participation, interest and initiative, (v) business knowledge and experience relevant to the Company and (vi) a willingness to devote sufficient time to carrying out his or her duties and responsibilities effectively.

 

The qualities and skills necessary in a director nominee are governed by the specific needs of the Board at the time the Governance and Nominating Committee determines to add a director to the Board. The specific requirements of the Board will be determined by the Governance and Nominating Committee and will be based on, among other things, the Company’s then existing strategies and business, market, regulatory environments, and the mix of perspectives, experience and competencies then represented by the other Board members. The Governance and Nominating Committee will also take into account the Chairman, President and Chief Executive Officer’s views as to areas in which management desires additional advice and counsel.

 

When the need to recruit a director arises, the Governance and Nominating Committee will consult the other directors, including the Chairman, President and Chief Executive Officer and, when deemed appropriate, utilize fee-paid third party recruiting firms to identify potential candidates. The candidate evaluation process may include inquiries as to the candidate’s reputation and background, examination of the candidate’s experiences and skills in relation to the Board’s requirements at the time, consideration of the candidate’s independence as measured by the Company’s Independence Standards, and other considerations as the Governance and Nominating Committee deems appropriate at the time. Prior to formal consideration by the Governance and Nominating Committee, any candidate who passes such screening would be interviewed by the Chair of the Governance and Nominating Committee and the Chairman, President and Chief Executive Officer.

 

The nominees at the Meeting for the three (3) Class I Directors are as follows: W. Larry Cash, Harvey Klein, M.D., and H. Mitchell Watson, Jr., who are incumbents.

 

The Governance and Nominating Committee will consider candidate nominees for election as director who are recommended by stockholders. Recommendations should be sent to the Secretary of the Company and should include the candidate’s name and qualifications and a statement from the candidate that he or she consents to being named in the proxy statement relating to the stockholder’s meeting at which the election of such nominee would take place and will serve as a director if elected. For any candidate to be considered by the Governance and Nominating Committee and, if nominated, to be included in the proxy statement, such recommendation must be received by the Secretary at our principal executive offices (Secretary, Community Health Systems, Inc., 4000 Meridian Boulevard, Franklin, TN 37067) not less than 45 or more than 75 days prior to the first anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting of stockholders. This same time requirement applies to any business a stockholder seeks to bring before an annual meeting of our stockholders. However, if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year’s annual meeting, to be timely, notice by the stockholder must be delivered no later than the close of business on the later of the 90th day prior to the annual meeting or the 10th day following the day on which the public

announcement of the meeting is first made. The by-laws specify certain requirements as to the form and content of a stockholder’s notice.

 

Under SEC regulations, any stockholder wishing to submit a proposal to be included in the proxy materials relating to the 2008 Annual Meeting of Stockholders must submit the proposal in writing no later than December 12, 2007.

 

Our certificate of incorporation provides for a classified Board of Directors consisting of three classes. Each class consists, as nearly as possible, of one-third of the total number of directors constituting the entire Board. At each Annual Meeting of stockholders, successors to the class of directors whose term expires at that Annual Meeting will be elected for a three-year term and until their respective successors are elected and qualified. A director may only be removed with cause by the affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to vote in the election of directors.

 

Class I directors’ terms expire at our 2007 Annual Meeting. Upon the recommendation of the Governance and Nominating Committee, the three (3) persons listed in the table below each of whom is an incumbent director, and is nominated for election to serve as a Class I Director for a term of three (3) years and until their respective successors are elected and qualify.

 

 

 

Mr. Cash serves as the Executive Vice President and Chief Financial Officer. Prior to joining Community Health Systems, he served as Vice President and Group Chief Financial Officer of Columbia/HCA Healthcare Corporation from September 1996 to August 1997. Prior to Columbia/HCA, Mr. Cash spent 23 years at Humana, Inc., most recently as Senior Vice President of Finance and Operations from 1993 to 1996. He is also a director of Cross Country Healthcare, Inc. and serves on its audit (chair) and compensation committees.

 

Governance and Nominating Committee Member

 

Dr. Klein has been an Attending Physician at the New York Hospital since 1992. Dr. Klein serves as the William S. Paley Professor of Clinical Medicine at Cornell University Medical College, a position he has held since 1992. He also has been a Member of the Board of Overseers of Weill Medical College of Cornell University since 1997. Dr. Klein is a member of the American Board of Internal Medicine and American Board of Internal Medicine, Gastroenterology.

 

Compensation Committee Chair

Audit and Compliance Committee Member

 

Mr. Watson is currently retired. From 1982 to 1989, Mr. Watson was a Vice President of IBM, serving from 1982 to 1986 as President, Systems Product Division, and from 1986 to 1989 as Vice President, Marketing. From 1989 to 1992, Mr. Watson was President and Chief Executive Officer of ROLM Company. Mr. Watson is a member of the Board of Directors of Praxair, Inc., and serves on its audit and compensation committee. Mr. Watson is chairman — emeritus of Helen Keller International and the Chairman of the Brevard Music Center.

The remaining incumbent directors, whose terms of office have not expired (Class II directors’ terms will expire in 2008, and Class III directors’ terms will expire in 2009), are set forth below.

 

 

Lead Director

Governance and Nominating Committee Chair

Compensation Committee Member

 

Mr. Frey was elected as our Lead Director in February 2004. Mr. Frey is currently retired. From 1984 until 1997, Mr. Frey was the Chairman of the Board and President of General Electric Investment Corp. From 1980 to 1997, he was also Vice President of General Electric Company. Mr. Frey is also a director of Ambassadors Group, Inc., and K&F Industries Holdings, Inc.

 

Audit and Compliance Committee Member

Governance and Nominating Committee Member

 

Mr. Fry presently serves as President of Franklin & Marshall College. From 1995-2002, he was Executive Vice President of the University of Pennsylvania and served as the Chief Operating Officer of the University and as a member of the executive committee of the University of Pennsylvania Health System. Mr. Fry is a member of (i) the Board of Directors of Allied Security Holdings, LLC, and (ii) the Board of Trustees of Delaware Investments, with oversight responsibility for all of the portfolios in that mutual fund family.

 

Audit and Compliance Committee Chair

 

Since 2000, when Mr. Clerico co-founded ChartMark Investments, Inc., he has served as its chairman and as a registered financial advisor. From 1992 to 2000, he served as an Executive Vice President and the Chief Financial Officer and a Director of Praxair, Inc. From 1983 until its spin-off of Praxair, Inc. in 1992, he served as an executive officer in various financial and accounting areas of Union Carbide Corporation. Mr. Clerico currently serves on the Board of Directors of (i) Educational Development Corporation, and on its audit and executive committees, and (ii) Global Industries, Ltd., and it is audit and finance (chair) committees.

 

Compensation Committee Member

Governance and Nominating Committee Member

 

Julia B. North was appointed to our Board of Directors in December 2004. She is presently retired. Over the course of her career, Ms. North has served in many senior executive positions, including as President of Consumer Services for BellSouth Telecommunications from 1994 to 1997. After leaving BellSouth Telecommunications in 1997, she served as the President and CEO of VSI Enterprises, Inc. She currently serves on the Board of Directors of (i) Acuity Brands, Inc., and on its compensation and governance and nominating committees, and (ii) Simtrol Inc., and on its audit committee.

 

Chairman of the Board

 

Mr. Smith is the Chairman, President and Chief Executive Officer. Mr. Smith joined us in January 1997 as President. In April 1997, we also named him our Chief Executive Officer and a member of the Board of Directors. In February 2001, he was elected Chairman of our Board of Directors. Prior to joining us, Mr. Smith spent 23 years at Humana Inc., most recently as President and Chief Operating Officer, and as a director, from 1993 to mid-1996. He is currently a member of the Board of Directors of (i) Citadel Broadcasting Corporation, and serves on its audit committee, and (ii) Praxair, Inc., and serves on its compensation and governance and nominating committees. Mr. Smith is a member of the board of directors and a past chairman of the Federation of American Hospitals.

 

Upon the recommendation of the Governance and Nominating Committee, the following three (3) persons listed below are nominated for election to serve as Class I Directors for a term of three (3) years and until their respective successors are elected and qualify.

 

The nominees for directors are W. Larry Cash, Harvey Klein, M.D., H. Mitchell Watson, Jr. All nominees are currently serving terms as directors that expire at the Meeting. Each of the nominees has agreed to serve for the three-year term to which they have been nominated. If any of the nominees are unable to serve or refuse to serve as directors, an event which the Board does not anticipate, the proxies will be voted in favor of such other person(s), if any, as the Board of Directors may designate.

 

Required Vote

 

The affirmative vote of a plurality of the shares of our common stock present in person or by proxy at the Meeting is required to elect each of the Class I directors. Abstentions and broker non-votes in connection with the election of directors have no effect on such election since directors are elected by a plurality of the votes cast at the meeting.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE NOMINEES FOR ELECTION AS CLASS I DIRECTORS.

 

 

 

 

 

The Board of Directors proposes that the stockholders approve our 2000 Amended and Restated Stock Option and Award Plan, as amended and restated on March 30, 2007.

 

The Board amended and restated the plan on March 30, 2007 to increase the number of shares available for options and awards by 5,800,000. Prior to its restatement, 4,041,555 shares of our common stock were available for issuance under the plan. Accordingly, if the amended plan is approved, there would be 9,841,555 shares of our common stock available for issuance under the plan.

 

The Board of Directors believes that the plan as amended and restated is necessary to continue its effectiveness in attracting, motivating and retaining officers, employees, directors and consultants with appropriate experience, to increase the grantees’ alignment of interest with the stockholders, to ensure the Company’s compliance with the requirements of Section 162(m) of the Internal Revenue Code, and to facilitate the plan’s operation.

 

SUMMARY OF THE AMENDED AND RESTATED 2000 STOCK OPTION AND AWARD PLAN

 

Our Board of Directors adopted the 2000 Stock Option and Award Plan in April 2000, and the stockholders approved it in April 2000, prior to our initial public offering. The plan was amended and restated

in February 2003 and approved by our stockholders in May 2003, and a further amendment and restatement occurred in February 2005, which was approved by our stockholders in May 2005. The plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, performance units and performance shares, phantom stock awards, and share awards. The plan is also designed to comply with the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 under the Securities Exchange Act.

 

The following is a summary of the material terms of the plan, as further amended and restated on March 30, 2007. The summary is qualified in its entirety by reference to the full text of the plan, a copy of which is attached to this Proxy Statement as Annex B.

 

Purpose.

 

The purpose of the plan is to strengthen the Company and its subsidiaries by providing an incentive to employees, officers, consultants and directors and thereby encouraging them to devote their abilities and industry to the success of our and our subsidiaries’ business enterprises.

 

Administration.

 

The plan is administered by the Compensation Committee of our Board of Directors, which consists of at least two of our independent directors, each of whom must also never have served as an officer of the Company. Members of the Compensation Committee serve at the pleasure of the Board of Directors until they cease to be directors or until removed by our Board of Directors. The Compensation Committee has the authority under the plan, among other things, to select the individuals to whom awards will be granted, to determine the type, size, purchase price and other terms and conditions of awards, and to construe and interpret the plan and any awards granted under the plan. Furthermore, with respect to options and awards that are not intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code, the Compensation Committee may generally delegate to one or more officers of the Company the authority to grant options or awards and/or to determine the number of shares subject to each such option or award. All decisions and determinations by the Compensation Committee in the exercise of its power are final, binding and conclusive.

 

Eligible Individuals.

 

Generally, officers, employees, directors and consultants of the Company or any of our subsidiaries are eligible to participate in the plan. Awards are made to eligible individuals at the discretion of the Compensation Committee and therefore, we cannot determine who will receive a future grant at this time. As of March 30, 2007, there were 20 officers (including all current executive officers), six independent directors, and approximately 450 other employees who were eligible to participate in the plan.

 

Shares Subject to Plan.

 

Prior to the amendment and restatement of the plan, 4,041,555 shares of our common stock remained available for grants under the plan. On March 30, 2007, our Board of Directors amended and restated the plan to, among other things, increase the number of shares available for such grants by an additional 5,800,000. Thus, subject to the approval of our stockholders, the plan as amended and restated will have available a total of 9,841,555 shares for future grants.

 

In no event will an eligible individual in any calendar year receive a grant of options or awards that is in the aggregate in respect of more than 1,000,000 shares, and the maximum dollar amount of cash or fair market value of shares that any eligible individual may receive in any calendar year in respect of performance units denominated in dollars may not exceed $250,000. In addition, no more than 30,000 shares may be issued upon the exercise of incentive stock options under the plan. Prior to this amendment and restatement, the number of shares of our common stock that were available for awards of restricted stock, performance based shares or units, phantom stock or other awards granted as “full value awards” under the plan was limited to a finite

number, 4,500,000. The amendment and restatement of the plan deleted this limitation and, in lieu thereof, provides that in the event any awards granted after March 30, 2007 are made in the form of “full value awards” (including restricted stock, performance based shares or units, and phantom stock), such awards shall reduce the number of shares available under the plan by 2.24 shares for each share awarded. On March 30, 2007, our common stock closed at $35.25 per share on the New York Stock Exchange.

 

Shares subject to awards which expire, are canceled, are forfeited, are settled in cash or otherwise terminate for any reason without having been exercised or without payment having been made in respect of the entire award will again be available for issuance under the plan; with regard to shares that are subject to awards of restricted stock, performance based shares or units, phantom stock, and other awards that are granted after March 30, 2007 as “full value awards,” for each share that is cancelled, forfeited, settled in cash or otherwise terminated, 2.24 shares may again be the subject of options or awards under the plan. In the event of any increase or reduction in the number of shares, or any change (including a change in value) in the shares or an exchange of shares for a different number or kind of shares of the Company or another corporation, in any case by reason of a recapitalization, merger, reorganization, spin-off, split-up, stock dividend or stock split, among other things, the Compensation Committee may generally adjust the maximum number and class of common shares issuable under the plan, the number of common shares which are subject to outstanding awards, and/or the exercise price applicable to any of such outstanding awards.

 

Types of Awards Available.

 

Stock Options

 

The Compensation Committee may grant both nonqualified stock options and incentive stock options within the meaning of Section 422 of the Internal Revenue Code, the terms and conditions of which will be set forth in an option agreement; provided, however, that incentive stock options may only be granted to eligible individuals who are employees of the Company or its subsidiaries. The Compensation Committee has complete discretion in determining the number of shares that are to be subject to options granted under the plan and whether any such options are to be incentive stock options or a nonqualified stock option. Since 2005, all grants of nonqualified stock options have had a duration of eight (8) years.

 

The exercise price of any option granted under the plan will be determined by the Compensation Committee. However, the exercise price of any option granted under the plan may not be less than the fair market value of a share of our common stock on the date of grant. The fair market value of a share of our common stock on any date generally will be the closing sales price of a share of such common stock as reported by the New York Stock Exchange on that date.

 

The duration of any option granted under the plan will be determined by the Compensation Committee. Generally, however, no option may be exercised more than ten (10) years from the date of grant; provided, however, that the Compensation Committee may provide that a stock option may, upon the death of the grantee, be exercised for up to one (1) year following the date of death even if such period extends beyond ten (10) years.

 

The Compensation Committee also has the discretion to determine the vesting schedule of any options granted under the plan and may accelerate the exercisability of any option (or portion of any option) at any time. In the event of a change in control of the Company, each option held by the optionee as of the date of the change in control will become immediately and fully vested and exercisable. In addition, the option will remain exercisable for a period of six (6) months after a change in control, but in no event after the expiration of the stated term of the option.

 

Stock Appreciation Rights

 

The Compensation Committee may grant stock appreciation rights either alone or in conjunction with a grant of an option. In conjunction with an option, a stock appreciation right may be granted either at the time of grant of the option or at any time thereafter during the term of the option, and will generally cover the same shares covered by the option and be subject to the same terms and conditions as the related option. In

addition, a stock appreciation right granted in conjunction with an option may be exercised at such times and only to the extent that the related option is exercisable. Any exercise of stock appreciation rights will result in a corresponding reduction in the number of shares available under the related option. In the event that the related option is exercised instead, a corresponding reduction in the number of shares available under the stock appreciation right will occur.

 

Upon exercise of a stock appreciation right which was granted in connection with an option, a grantee will generally receive a payment equal to the excess of the fair market value of a share of our common stock on the date of the exercise of the right over the per share exercise price under the related option, multiplied by the number of shares with respect to which the stock appreciation right is being exercised.

 

A stock appreciation right may be granted at any time and, if independent of an option, may be exercised upon such terms and conditions as the Compensation Committee, in its sole discretion, imposes on the stock appreciation right. However, the stock appreciation right may generally not have a duration that exceeds ten (10) years; provided, however, that the Compensation Committee may provide that a stock appreciation right may, upon the death of the grantee, be exercised for up to one (1) year following the date of death even if such period extends beyond ten (10) years.

 

Upon exercise of a stock appreciation right which was granted independently of an option, the optionee will generally receive a payment equal to the excess of the fair market value of a share of our common stock on the date of exercise of the right over the fair market value of our common stock on the date of grant, multiplied by the number of shares with respect to which the stock appreciation right is being exercised.

 

Notwithstanding the foregoing, the Compensation Committee may limit the amount payable with respect to a grantee’s stock appreciation right (whether granted in conjunction with an option or not), if any, by including such limit in the agreement evidencing the grant of the stock appreciation right at the time of grant. In addition, in the event of a change in control, each stock appreciation right held as of the change in control will become immediately and fully vested and exercisable and remain exercisable for a period of six (6) months after the date of the change in control, but in no event after the expiration of the stated term of the stock appreciation right.

 

Restricted Stock

 

Restricted stock may be awarded under the plan, which will be evidenced by a restricted stock agreement containing such restrictions, terms and conditions as the Compensation Committee may, in its discretion, determine.

 

Shares of restricted stock will be issued in the grantee’s name as soon as reasonably practicable after the award is made and after the grantee executes the restricted stock agreement, appropriate blank stock powers and any other agreements or documents which the Compensation Committee requires that the grantee execute as a condition to the issuance of such shares. Generally, restricted shares issued under the plan will be deposited together with the stock powers with an escrow agent (which may be us) designated by the Compensation Committee, and upon delivery of the shares to the escrow agent, the grantee will have all of the rights of a stockholder with respect to such shares, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares.

 

Restrictions on shares awarded under the plan will lapse at such time and on such terms and conditions as the Compensation Committee may determine (which may include the occurrence of a change in control), which restrictions will be set forth in the restricted stock award agreement. The Compensation Committee may impose restrictions on any of the shares of restricted stock that are in addition to the restrictions under applicable federal or state securities laws, and may place a legend on the certificates representing such shares to give appropriate notice of any restrictions.

 

Upon the lapse of the restrictions on restricted shares, the Compensation Committee will cause a stock certificate to be delivered to the grantee with respect to such shares (or in other acceptable form, such as electronic), free of all restrictions under the plan.

 

Non-Discretionary Restricted Stock

 

The plan also provides for the grant of non-discretionary restricted stock to our non-employee directors.

 

Upon becoming a director, each director will be granted a restricted stock award in respect of 6,000 shares (the “initial grant”). In addition, each such director will be granted a restricted stock award in respect of an additional 3,000 shares on the first business day after the first day of each calendar year that the plan is in effect provided that he or she is a member of our Board of Directors on such date (an “annual grant”). However, if the initial grant is made after June 30th of any calendar year, the first annual grant to the respective director will be made on the first business day after the first day of the second calendar year following such year in which the initial grant was made, provided that the director is a member of our Board of Directors on such date. The purchase price for such shares subject to the initial grant or an annual grant will be zero.

 

The restrictions on shares subject to these restricted stock awards will lapse in one-third increments on each of the first, second, and third anniversaries of the award date, if the grantee continues to serve as a member of our Board of Directors as of such date. If a director ceases to serve as a director as a result of his or her death, disability or removal from the Board other than for cause, prior to the expiration of his or her term, the restrictions will lapse with respect to 100% of the shares on the date he or she ceases to serve as a director.

 

In the event of change in control, all shares of restricted stock which have not yet vested shall vest, and the restrictions on such shares shall lapse, immediately.

 

Performance Units and Performance Shares

 

The Compensation Committee may grant performance units and performance shares subject to the terms and conditions determined by the Compensation Committee in its discretion and set forth in the agreement evidencing the grant.

 

Performance units represent, upon attaining certain performance goals, a grantee’s right to receive a payment generally equal to (i) in the case of share-denominated performance units, the fair market value of a share of our common stock determined on the date the performance unit was granted, the date the performance unit became vested or any other date specified by the Compensation Committee, (ii) in the case of dollar-denominated performance units, the specified dollar amount or (iii) a percentage (which may be more than 100%) of the amount described in (i) or (ii) above depending on the level of the performance goal attained. Each agreement evidencing a grant of a performance unit will specify the number of performance units to which it relates, the performance goals which must be satisfied in order for performance units to vest and the performance cycle within which such performance goals must be satisfied.

 

The Compensation Committee must establish the performance goals to be attained in respect of the performance units, the various percentages of performance unit value to be paid out upon the attainment, in whole or in part, of the performance goals and such other performance unit terms, conditions and restrictions as the Compensation Committee deems appropriate. Payment in respect of vested performance units will generally be made as soon as practicable after the last day of the performance cycle to which the award relates.

 

Payments may be made entirely in shares of our common stock valued at fair market value, entirely in cash, or in such combination of shares and cash as the Compensation Committee may determine in its discretion. If the Compensation Committee in its discretion determines to make the payment entirely or partially in restricted shares, the Compensation Committee must determine the extent to which such payment will be in restricted shares and the terms of such shares at the time the performance unit award is granted.

 

Performance shares are subject to the same terms as described with respect to restricted stock (described above), except that the Compensation Committee will establish the performance goals to be attained in respect of the performance shares, the various percentages of performance shares to be paid out upon attainment, in

whole or in part, of the performance goals and such other performance share terms, conditions and restrictions as the Compensation Committee deems appropriate.

 

Performance objectives established by the Compensation Committee for performance unit or performance share awards may be expressed in terms of (i) earnings per share, (ii) share price, (iii) pre-tax profits, (iv) net earnings, (v) return on equity of assets, (vi) sales or (vii) any combination of the foregoing. Performance objectives may be in respect of the performance of the Company or any of our subsidiaries or divisions or any combination thereof. Performance objectives may be absolute or relative (to prior performance of the Company or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range. The Compensation Committee may provide for the manner in which performance will be measured against the performance objectives (or may adjust the performance objectives) to reflect the impact of specified corporate transactions, accounting or tax law changes and other extraordinary or nonrecurring events.

 

The agreements evidencing a grant of performance units or performance shares may provide for the treatment of such awards in the event of a change in control, including provisions for the adjustment of applicable performance objectives.

 

Phantom Stock and Other Share-Based Awards

 

The Compensation Committee may grant shares of phantom stock, subject to the terms and conditions established by the Compensation Committee and set forth in the agreement evidencing the award. Upon the vesting of a phantom stock award, the grantee will receive a cash payment in respect of each share of phantom stock. The cash payment will be equal to the fair market value of a share of our common stock as of the date the phantom stock award was granted or such other date as determined by the Compensation Committee at the time of grant. In lieu of a cash payment, the Compensation Committee may settle phantom stock awards with shares of our common stock having a fair market value equal to the cash payment to which the grantee is entitled.

 

The Compensation Committee may also grant any other share-based award on such terms and conditions as the Compensation Committee may determine in its sole discretion.

 

Transferability of Options and Awards.

 

Options and unvested awards, if any, are generally not transferable except by will or under the laws of descent and distribution, and all rights with respect to such options and awards are generally exercisable only by the optionee or grantee during his or her lifetime, except that the Compensation Committee may provide that, in respect of any nonqualified stock option granted to an optionee, the option may be transferred to his or her spouse, parents, children, stepchildren and grandchildren and the spouses of such parents, children, stepchildren and grandchildren. In addition, the Compensation Committee may permit the nonqualified stock option to be transferred to trusts solely for the benefit of the optionee’s family members and to partnerships in which the family members and/or trusts are the only partners.

 

A nonqualified stock option or a stock appreciation right may also be transferred pursuant to a domestic relations order. A stock appreciation right granted in conjunction with an option will not be transferable except to the extent that the related option is transferable.

 

Certain Transactions.

 

In the event of a liquidation, dissolution, merger or consolidation, the plan and the options and awards issued under the plan will continue in accordance with the respective terms and any terms set forth in an agreement evidencing the option or award. Notwithstanding the foregoing, following any such transaction, options and awards will be treated as provided in the agreement entered into in connection with the transaction. If not so provided in that agreement, following any such transaction, the optionee or grantee will be entitled to receive in respect of each share of our common stock subject to his or her option or award, upon the exercise of any such option or upon the payment or transfer related to any such award, the same number

and kind of stock, securities, cash, property, or other consideration that each holder of a share of common stock of the Company was entitled to receive in the transaction in respect of such share. The stock, securities, cash, property, or other consideration will remain subject to all of the conditions, restrictions and performance criteria which were applicable to the option or award prior to the transaction.

 

Amendment or Termination.

 

The plan will terminate on March 30, 2017, the day preceding the 10th anniversary of the Board of Director’s approval of the plan as amended and restated, and no option or award may be granted after such date. In addition, our Board of Directors may sooner terminate the plan and may amend, modify or suspend the plan at any time or from time to time. However, no amendment, suspension or termination may impair or adversely alter the rights of an optionee or grantee with respect to options or awards granted prior to such action, or deprive an optionee or grantee of any shares which may have been acquired under the plan, unless his or her written consent is obtained. To the extent necessary under any applicable law, regulation or exchange requirement, no amendment will be effective unless approved by our stockholders in accordance with such applicable law, regulation or exchange requirement. In addition, no option or stock appreciation right shall be repriced without stockholder approval.

 

No modification of an agreement evidencing an option or award may adversely alter or impair any rights or obligations under the option or award unless the consent of the optionee or grantee is obtained.

 

No Additional Rights.

 

An optionee does not have any rights as a shareholder of the Company with respect to any shares of our common stock issuable upon exercise of an option generally until the Company issues and delivers shares (whether or not certificated) to the optionee, a securities broker acting on behalf of the optionee or other nominee of the optionee.

 

Federal Income Tax Consequences of Options

 

The following discussion is a general summary of the principal United States federal income tax consequences under current federal income tax laws relating to stock options granted under the plan. This information is not a definitive explanation of the tax consequences of such awards nor is this summary intended to be exhaustive as it, among other things, does not describe state, local or foreign income tax and other tax consequences.

 

Generally.

 

An optionee will not recognize any taxable income upon the grant of a nonqualified option, and the Company will not be entitled to a tax deduction with respect to such grant. Generally, upon exercise of a nonqualified option, the excess of the fair market value of the Company’s common stock on the date of exercise over the exercise price will be taxable as ordinary income to the optionee. The Company will generally be entitled to a federal income tax deduction in the amount that the optionee includes in his or her gross income upon exercise and at the same time as he or she recognizes such income, subject to any deduction limitation under Section 162(m) or 280G of the Internal Revenue Code (each of which is discussed below). The optionee’s tax basis for the common stock received pursuant to such exercise will equal the sum of the compensation income recognized by the optionee and the exercise price he or she paid. The holding period with respect to such common stock will commence upon exercise of the option. The optionee’s subsequent disposition of shares acquired upon the exercise of a nonqualified option will ordinarily result in capital gain or loss, which may be long term or short term, depending on how long he or she holds the shares.

 

Subject to the discussion below, the optionee will not recognize taxable income at the time of grant or exercise of an incentive stock option, and the Company will not be entitled to a tax deduction with respect to such grant or exercise. However, the exercise of an incentive stock option may result in an alternative minimum tax liability to the optionee.

 

Generally, if the optionee holds the shares acquired upon the exercise of an incentive stock option for at least one (1) year after the date of exercise and for at least two (2) years after the date of grant of the incentive stock option, upon his or her disposition of the shares, the difference, if any, between the sales price of the shares and the exercise price will be treated as long-term capital gain or loss to the optionee. Generally, upon a sale or other disposition of shares acquired upon the exercise of an incentive stock option within one (1) year after the date of exercise or within two (2) years after the date of grant of the incentive stock option (any such disposition being referred to as a “disqualifying disposition”), any excess of the fair market value of the shares at the time of exercise of the option over the exercise price of such option will constitute ordinary income to the optionee. Subject to any deduction limitation under Section 162(m) or 280G of the Internal Revenue Code, the Company will be entitled to a deduction equal to the amount of such ordinary income included in the optionee’s gross income. Any excess of the amount realized by the optionee on the disqualifying disposition over the fair market value of the shares on the date of exercise will generally be capital gain and will not be deductible by us. If the sale proceeds from a disqualifying disposition are less then the fair market value of the shares on the date of exercise, the amount of the optionee’s ordinary income will be limited to the gain (if any) realized on the sale.

 

If the option is exercised through the use of shares of our common stock previously owned by the optionee, such exercise generally will not be considered a taxable disposition of the previously owned shares and thus no gain or loss will be recognized by the optionee with respect to the use of such shares upon exercise of the option. The basis and the holding period of such shares (for purposes of determining capital gain) will carry over to a like number of shares acquired upon exercise of the option. In the case of any nonqualified stock option, ordinary income (treated as compensation) will be recognized by the optionee on the additional shares of common stock acquired upon exercise of the option and will be equal to the fair market value of such shares on the date of exercise less any additional cash paid. If the previously owned shares of common stock were acquired by the optionee on the exercise of an incentive stock option and the holding period requirement for these shares is not satisfied at the time they are used to pay the exercise price the option, such use will constitute a disqualifying disposition of the previously owned shares resulting in the optionee’s recognition of ordinary income in the amount described in the preceding paragraph. Special rules may apply in computing the amount and character of the optionee’s income (or loss) in connection with the exercise of an incentive stock option where the exercise price is paid by the optionee’s delivery of previously owned shares.

 

Section 162(m) of the Internal Revenue Code.

 

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 $1,000,000 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. However, Section 162(m) provides an exception for “performance-based compensation” if the material terms are disclosed to and approved by the Company’s stockholders. Grants of options, stock appreciation rights and performance awards made under the plan can be made in a manner so as to qualify as “performance-based compensation” for purposes of Section 162(m).

 

Section 280G of the Internal Revenue Code.

 

Under certain circumstances, the accelerated vesting or exercise of options or other share awards in connection with a change in control might be deemed an “excess parachute payment” for purposes of the golden parachute tax provisions of Section 280G of the Internal Revenue Code. To the extent that any such event is considered to have occurred under the plan, the optionee would be subject to a 20% excise tax, and the Company would lose the ability to deduct the excess parachute payment. Under the Change in Control severance agreements (the “CIC Agreements”) entered into on March 1, 2007, between the Company, Community Health Systems Professional Services Corporation (the employer of each of our officers), and each officer of the Company, under certain circumstances the excise tax will be grossed up and paid by the Company.

 

New Plan Benefits.

 

Generally, the grant of options and awards under the Amended and Restated 2000 Stock Option and Award Plan are subject to the discretion of the Compensation Committee and therefore are not determinable at this time. However, non-discretionary restricted stock awards will be made to non-employee directors under the plans as follows:

 

Following their appointment, each non-employee director is to receive a restricted stock award in respect of 6,000 shares. In addition, a restricted stock award in respect of 3,000 shares shall be made to each non-employee director on the first business day after the first day of each calendar year that the plan is in effect, provided that he or she is a director on that date.

 

Required Vote

 

The affirmative vote of a majority of those shares of Common Stock present in person or represented by proxy and entitled to vote thereon at the Meeting is necessary for the approval of the Amended and Restated 2000 Stock Option and Award Plan. Abstentions will be considered a vote against this proposal and broker non-votes will have no effect on such matter since these votes will not be considered present and entitled to vote for this purpose.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE AMENDED AND RESTATED 2000 STOCK OPTION AND AWARD PLAN.

 

 

 

The Board of Directors proposes that the stockholders ratify the appointment by the Board of Directors of Deloitte & Touche LLP as our independent registered public accounting firm for 2007. We expect that a representative of Deloitte & Touche LLP will be present at the Meeting and will be available to respond to appropriate questions submitted by stockholders at the Meeting. Deloitte & Touche LLP will have the opportunity to make a statement if it desires to do so.

 

Fees

 

The following table summarizes the aggregate fees billed to the Company by Deloitte & Touche LLP:

 

 

(a) Fees for audit services billed in 2006 and 2005 consisted of:

 

 

(b) Fees for audit-related services billed in 2006 and 2005 consisted of:

 

 

 

(c) Fees for tax services billed in 2006 and 2005 consisted of:

 

 

(i) Federal, state and local income tax return assistance;

 

(ii) Sales and use, property and other tax return assistance; and

 

(iii) Assistance with tax audits and appeals.

 

 

(d) Fees for all other services billed in 2006 and 2005 consisted of permitted non-audit services, such as:

 

 

In considering the nature of the services provided by the independent registered public accounting firm, the Audit and Compliance Committee determined that such services are compatible with the provision of independent audit services. The Audit and Compliance Committee discussed these services with the independent registered public accounting firm and Company management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as the rules and regulations of the American Institute of Certified Public Accountants.

 

Pre-Approval of Audit and Non-Audit Services

 

On December 10, 2002, the Board of Directors delegated to the Audit and Compliance Committee the sole authority to engage and discharge the Company’s independent registered public accounting firm, to oversee the conduct of the audit of the Company’s consolidated financial statements, and to approve the provision of all auditing and non-audit services. All audit and non-audit services performed by the independent registered public accounting firm during 2006 were pre-approved by the Audit and Compliance Committee prior to the commencement of such services. The Company’s policy does not permit the retroactive approval for “de minimus non-audit services.”

 

Required Vote

 

Approval by the stockholders of the appointment of our independent registered public accounting firm is not required, but the Board believes that it is desirable to submit this matter to the stockholders. If holders of a majority of our common stock present and entitled to vote on the matter do not approve the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2007 at the Meeting, the selection of our independent registered public accounting firm will be reconsidered by the Audit and Compliance Committee. Abstentions will be considered a vote against this proposal and broker non-votes will have no effect on such matter since these votes will not be considered present and entitled to vote for this purpose.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2007.

 

 

 

 

 

The Heavy and General Laborers’ Funds of New Jersey, 700 Raymond Boulevard, Newark, New Jersey 07105, the beneficial owner of 3,000 shares of our common stock, notified us on December 8, 2006 that it intends to submit the following proposal at the Meeting. If properly presented at the Meeting, this proposal will be voted on at that meeting. The stockholder’s proposal is quoted verbatim below.

 

Pay-for-Superior-Performance Proposal

 

Resolved:  That the shareholders of Community Health Systems, Inc. (“Company”) request that the Board of Director’s Executive Compensation Committee establish a pay-for-superior-performance standard in the Company’s executive compensation plan for senior executives (“Plan”), by incorporating the following principles into the Plan:

 

1. The annual incentive of bonus component of the plan should utilize defined financial performance criteria that can be benchmarked against a disclosed peer group of companies, and provide that an annual bonus is awarded only when the Company’s performance exceeds its peers’ median or mean performance on the selected financial criteria;

 

2. The long-term compensation component of the Plan should utilize defined financial and/or stock price performance criteria that can be benchmarked against a disclosed peer group of companies. Options, restricted shares, or other equity or non-equity compensation used in the Plan should be structured so that compensation is received only when the Company’s performance exceeds its peers’ median or mean performance on the selected financial and stock price performance criteria; and

 

3. Plan disclosure should be sufficient to allow shareholders to determine and monitor the pay and performance correlation established in the Plan.

 

Supporting Statement Submitted by the Stockholder Proponent

 

We feel it is imperative that compensation plans for senior executives be designed and supplemented to promote long-term corporate value. A critical design feature of a well-conceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance relative to industry peers. We believe the failure to tie executive compensation to superior corporate performance; that is, performance exceeding peer group performance has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.

 

We believe that common compensation practices have contributed to excessive executive compensation. Compensation committees typically target senior executive total compensation at the median level of a selected peer group, then they design any annual and long-term incentive plan performance criteria and benchmarks to deliver a significant portion of the total compensation target regardless of the company’s performance relative to its peers. High total compensation targets combined with less than rigorous performance benchmarks yield a pattern of superior pay for average performance. The problem is exacerbated when companies include annual bonus payments among earnings used to calculate supplemental executive retirement plan (SERP) benefit levels, guaranteeing excessive levels of lifetime income through inflated pension payments.

 

We believe the Company’s Plan fails to promote the pay-for-superior-performance principle. Our Proposal offers a straightforward solution: The Compensation Committee should establish and disclose financial and stock price performance criteria and set peer group-related performance benchmarks that permit awards or payouts in its annual and long-term incentive compensation plans only when the Company’s performance exceeds the median of its peer group. A senior executive compensation plan based on sound pay-for-superior-performance principles will help moderate excessive executive compensation and create

competitive compensation incentives that will focus senior executives on building sustainable long-term corporate value.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THE STOCKHOLDER PROPOSAL FOR THE FOLLOWING REASONS:

 

The Board of Directors has carefully considered the proposal submitted by the Heavy and General Laborer’s Funds of New Jersey. While the Board of Directors and the Compensation Committee strongly support the concept of performance-based compensation arrangements, and in fact have implemented such features in the Company’s compensation arrangements (see Compensation Discussion and Analysis, p. 28). The Board of Directors believes that the adoption of this proposal is not in our best interests and the best interests of our stockholders.

 

Tying senior executive compensation to peer group stock price performance or financial results is too narrow a focus and not as broad as the programs currently in place and is not in the best interests of our stockholders:

 

 

We have Performance-Based Compensation Arrangements

 

The section of this proxy statement entitled “Compensation Discussion and Analysis” provides a detailed description of our executive compensation program and the efforts to align compensation with our short-term and long-term strategic objectives, while retaining and promoting the best talent available. Compensation alignment with two appropriate peer groups is part of that program.

 

First, as stated in the Compensation Discussion and Analysis, applying a philosophy and methodology developed with the assistance of an independent consultant several years ago, we seek to target base salaries at approximately the 50th percentile (i.e., mean) of a ten company talent peer group (i.e., a group of industry competitors with whom we compete for executive talent). When superior performance is attained (based on our specific financial targets) we seek to target total cash compensation at approximately the 75th percentile of the talent peer group. Total direct compensation, which combines base salary, incentive compensation, and the value of equity grants, is also targeted at approximately the 75th percentile of the talent peer group.

 

Second, the compensation element levels are also gauged against a five-company capital market peer group (i.e., a group of industry competitors with whom we compete for acquisitions and capital), and compensation levels are also very competitive to our peers for all the executive officers, both individually and collectively.

 

The compensation study utilized by the Compensation Committee’s independent consultant also measured the directional alignment of executive compensation with several key performance metrics and concluded that for both the peer group and the capital markets peer group, our senior executive officer compensation is well aligned with our performance.

 

The Compensation Committee is Committed to Performance-Based Compensation

 

The Compensation Committee is charged with oversight of the design and administration of our senior executive compensation program. The Compensation Committee agrees with the proposition that senior executive compensation should be aligned with stockholder value.

 

Our incentive compensation plan requires that internal corporate performance targets be attained for any incentive payment to be made. For our Chief Executive Officer and the Chief Financial Officer, the targets are earnings per share (“EPS”) and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). For our other senior executive officers, our target incentive plans include these elements, but also take into account individual areas of oversight. The overall EPS corporate target was not met at all in 2006 and only 92% of the EBITDA corporate target was met. As a result, our Chief Executive Officer and Chief Financial Officer received less than half of the maximum incentive compensation they would have been entitled to receive had the targets been met. The incentive compensation payments to our other senior executive officers were also reduced as a result of us not achieving our target. These lower incentive payments for 2006 demonstrate that our senior executive compensation is well aligned with performance and stockholder value.

 

A blend of stock options and performance-based restricted shares are used to provide long-term incentive compensation to our senior executive officers. These grants are made in amounts and in a manner that are consistent with and, more importantly, competitive with, our industry peer groups. Stock options are priced at current market price so value is only realized by the senior executive if our stock price increases after the date of grant. Restricted share grants include a forfeiture provision that is triggered if a performance target is not met.

 

The Stockholder Proposal May Award Undeserved Compensation

 

We believe that linking performance goals to our own planning process, as opposed to the financial performance of peers, is the best way for us to execute on our business strategy. Since at any point in time our peer companies can be in different circumstances from us, linking incentives only to a comparison against peer performance could have unintended consequences. For example, at a time when one or more large peer companies are facing challenges unique to them, we may outperform the peer companies but not achieve our own targets for growth and profitability. Our Board of Directors does not want to reward senior executives under these circumstances and believes that the better course is for us, under the oversight of the Board of Directors, to set the correct business goals for ourselves, and then to align senior executive compensation with performance against those goals. Moreover, rather than rewarding an individual on the basis of the performance of the stock market, the industry peer group, or us in relation to that peer group, our incentive compensation policy rewards employees based on our financial performance as well as individual performance.

 

The Stockholder Proposal Disadvantages us at Recruiting, Motivating and Retaining Executives

 

Our success depends on the performance of our employees. The Board of Directors believes that senior executives and other employees are more effectively motivated when their performance-based compensation is directly tied to our performance as to which they have some control rather than tied to the performance of our “peer companies” over which they have no control. Further, if the Board of Directors were to adopt the stockholders proposal, it might be necessary to increase base salaries to a level far above the competitive norm to retain the senior executive officers in their current positions or to recruit new senior executive officers to compensate for the more unpredictable and uncontrollable incentive and long-term compensation elements.

 

Conclusion

 

In summary, we believe that our existing annual bonus and long-term incentive programs adequately and directly align performance and pay. The program includes elements of risk for appropriate portions of the compensation package for each senior executive officer. These elements of risk are based on internal performance, not on the successes or failures of other companies. Imposing the types of risk suggested by the

stockholder proponent are more appropriately utilized in the selection and retention of fund managers than they are for the compensation of the senior managers of operating companies.

 

For all the reasons stated above, the Board of Directors believes that the adoption of the stockholder proposal is unnecessary and in fact could be detrimental to the long-term interests of the Company’s stockholders.

 

Required Vote

 

The affirmative vote of a majority of those shares of Common Stock present in person or represented by proxy and entitled to vote thereon at the Meeting is required for the approval of the Stockholder Proposal. Abstentions will be considered a vote against this proposal and broker non-votes will have no effect on such matter since these votes will not be considered present and entitled to vote for this purpose.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST THIS STOCKHOLDER PROPOSAL BECAUSE IT IS NOT IN THE BEST INTERESTS OF STOCKHOLDERS.

 

 

 

 

 

The following table sets forth information as of March 30, 2007, except as otherwise footnoted, with respect to ownership of our common stock by:

 

 

Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to all shares of common stock beneficially owned by them, except to the extent such power may be shared with a spouse.

 

 

 

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own greater than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. These persons are required by regulation to furnish us with copies of all Section 16(a) reports that they file. Based solely on our review of copies of these reports that we have received and on representations from all reporting persons that no Form 5 report was required to be filed by them, we believe

that during 2006, all of our officers, directors and greater than 10% beneficial owners complied with all applicable Section 16(a) filing requirements.

 

The Company employs Brad Cash, son of W. Larry Cash. In 2006, Brad Cash received compensation of $219,822, including relocation expense of $29,941, while sequentially serving as a Chief Financial Officer of two of our hospitals.

 

In 2005, the Company’s subsidiary, CHS/Community Health Systems, Inc. has established Community Health Systems Foundation, a tax-exempt charitable foundation. One of the purposes of the Foundation is to match charitable contributions made by the Company’s directors and officers up to an aggregate maximum per year of $25,000 per individual. In 2006, the Company contributed $1.5 million to this foundation.

 

The Company believes each of the transactions or financial relationships were on terms as favorable as could have been obtained from unrelated third parties.

 

There were no loans outstanding during 2006 from the Company to any of its directors, nominees for director, executive officer, or any beneficial owner of 10% or more of our equity securities, or any family member of any of the foregoing.

 

The Company applies the following policy and procedure with respect to related person transactions. All such transactions are first referred to the General Counsel to determine if they are exempted or included under the Company’s written policy. If they are included, the transaction must be reviewed by the Audit and Compliance Committee to consider and determine whether the benefits of the relationship outweigh the potential conflicts inherent in such relationships and whether the transaction is otherwise in compliance with the Company’s Code of Conduct and other policies, including for example, the independence standards of the Governance Principles of the Board of Directors. Related person transactions are reviewed not less frequently than annually if they are to continue beyond the year in which the transaction is initiated. “Related person transaction” means those financial relationships involving the Company and any of its subsidiaries, on the one hand, and any person who is a director (or nominee) or an executive officer, any immediate family member of any of the foregoing persons, any person who is a direct or beneficial owner of 5% or more of the Company’s common stock (our only class of voting securities), or is employed by or in a principal position with such an owner, on the other hand. Exempted from related person transactions are those transactions in which the consideration in the transaction during a fiscal year is expected to be less than $120,000 (aggregating any transactions conducted as a series of transactions).

 

The following sets forth information regarding our executive officers as of March 30, 2007. Each of our executive officers holds an identical position with CHS/Community Health Systems, Inc. and Community Health Systems Professional Services Corporation, two of our wholly-owned subsidiaries:

 

 

Wayne T. Smith — The principal occupation and employment experience of Mr. Smith during the last five years is set forth on page 11 above.

 

W. Larry Cash — The principal occupation and employment experience of Mr. Cash during the last five years is set forth on page 9 above.

 

David L. Miller serves as Senior Vice President — Group Operations. Mr. Miller joined us in November 1997 as a Group Vice President, and presently manages hospitals in Alabama, Florida, Louisiana, North Carolina, South Carolina, Virginia, and West Virginia. Prior to joining us, he served as a Divisional Vice President for Health Management Associates, Inc. from January 1996 to October 1997. From July 1994 to December 1995, Mr. Miller was the Chief Executive Officer of a facility owned by Health Management Associates, Inc.

 

Gary D. Newsome serves as Senior Vice President — Group Operations. Mr. Newsome joined us in February 1998 as Group Vice President, and presently manages hospitals in Illinois, Kentucky, New Jersey, and Pennsylvania. Prior to joining us, he was a Divisional Vice President of Health Management Associates, Inc. From January 1995 to January 1996, Mr. Newsome served as Assistant Vice President/Operations and Group Operations Vice President responsible for certain facilities operated by Health Management Associates, Inc.

 

Michael T. Portacci serves as Senior Vice President — Group Operations. Mr. Portacci joined us in 1987 as a hospital administrator and became a Group Director in 1991. In 1994, he became Group Vice President, and presently manages hospitals in Arizona, California, Missouri, New Mexico, Texas, Utah, and Wyoming.

 

William S. Hussey serves as Senior Vice President — Group Operations. Mr. Hussey joined us in June 2001 as a Group Assistant Vice President. In January 2003, he was promoted to Group Vice President to manage our acquisition of seven hospitals in West Tennessee, and in January 2004, he was promoted to Group Senior Vice President and assumed responsibility for additional hospitals. Mr. Hussey presently manages hospitals in Arkansas, Georgia, Kentucky, and Tennessee. Prior to joining us, he served as President and CEO for a hospital facility in Ft. Myers, Florida (1998 to 2001). From 1992 to 1997, Mr. Hussey served as President — Tampa Bay Division, for Columbia/HCA Healthcare Corporation.

 

Rachel A. Seifert serves as Senior Vice President, Secretary and General Counsel. She joined us in January 1998 as Vice President, Secretary and General Counsel. From 1992 to 1997, she was Associate General Counsel of Columbia/HCA Healthcare Corporation and became Vice President-Legal Operations in 1994. Prior to joining Columbia/HCA in 1992, she was in private practice in Dallas, Texas.

 

T. Mark Buford, C.P.A., serves as Vice President and Corporate Controller. Mr. Buford has served as our Corporate Controller since 1986 and as Vice President since 1988.

 

The executive officers named above were appointed by the Board of Directors to serve in such capacities until their respective successors have been duly appointed and qualified, or until their earlier death, resignation or removal from office.

 

Introduction

 

As a leader in the hospital sector of the healthcare industry, the nation’s largest and fastest growing domestic industry, the Company must ensure that it attracts and retains the leadership and managerial talent needed to sustain its position in this rapidly changing industry. To remain competitive in the Company’s financial, capital, and business markets, continued Company growth is a paramount objective of the Company’s strategy. These strategic imperatives are the fundamental point of alignment between shareholder value and the compensation of executive management.

 

The basic purposes of the Company’s executive compensation program are to attract and retain seasoned professionals with demonstrated abilities to capitalize on growth opportunities in both same-store and new markets (both geographic and business line), while also adhering to rigorous expense management in an environment of ethical and compliant behavior. By developing a competitive executive compensation program that incorporates short-term and long-term components, portions of which are keyed to shareholder growth metrics, the Company believes that shareholder value can best be maximized.

 

Oversight of the Executive Compensation Program

 

The Compensation Committee of the Board of Directors oversees the Company’s executive compensation program. The current members of the Compensation Committee are Dale F. Frey, who is also the Company’s Lead Director, Julia B. North, and H. Mitchell Watson, Jr., who serves as the Committee’s chair. Each member of the Committee has served as such since 2004. Each of the Committee members is fully independent of management and has never served as an employee or officer of the Company or its subsidiaries. In addition to meeting the independence requirements of the New York Stock Exchange and the Securities and Exchange Commission (for Section 16(b) purposes), each member of the Committee also meets the independence requirements of IRC§ 162(m).

 

Executive Compensation Philosophy and Core Principles

 

The Company’s executive compensation philosophy is to develop and utilize a combination of compensation elements that rewards current period performance, continued service, and attainment of future goals, and that ensures the retention of executive talent. The key elements of executive compensation are linked either directly or indirectly to preserving and/or maximizing shareholder value. The Company continues to develop its compensation policies, programs, and disclosures to provide transparency and accountability to all of its stakeholders.

 

The core principles applied by the Company in implementing this philosophy are to provide a mix of compensation vehicles that generates a compensation package that is competitive with appropriate peer groups, rewards in both short-term and long-term perspectives the attainment of performance and growth objectives, aligns the interests of executive management with shareholders, and retains valuable executive talent. While consistency of application of these principles is a goal, sufficient flexibility is maintained to ensure that the overall philosophical intent of the executive compensation program is achieved.

 

The tools currently used by the Company are:

 

 

The current executive compensation policy seeks to attain the following targets:

 

 

The Company believes that generally adhering to this policy, with the flexibility to make upward or downward adjustments as needed for individual or unusual market or extraordinary performance considerations, provides consistency and predictability to the Company’s executives and alignment of interests and transparency to the Company’s investors.

 

In establishing performance-based targets for cash incentive compensation to its executives, the Company sets targets that are (a) indexed to the Company’s attainment of its budgeted operating performance, which correspond to its guidance to investors, and (b) linked, if applicable, to an individual executive’s specific area of oversight. In the case of the Chief Executive Officer, the performance-based targets are two-fold — a continuing operations earnings per share target and an EBITDA (earnings before deductions for interest, taxes, depreciation, and amortization) target. (In 2007, a third target, for net revenue, has been added.) The target performance-based incentive compensation plans for each executive provide both underachievement payments, albeit severely reduced, as well as overachievement opportunity. The Company believes that a scaled payout opportunity versus an “all or nothing” approach best fulfills the Company’s objectives in providing these incentives.

 

The executive compensation process is implemented in annual cycles, commencing in the fall of each year with a compensation survey and study prepared by the Compensation Committee’s consultant, Mercer Human Resources Consulting. The consultant’s work includes the identification and review of peer group compensation data, utilizing the most recent proxy statement data, other publicly available data (i.e., Form 8-K data), and the consulting group’s proprietary database of executive compensation information. In addition to reviewing the primary peer group information, potential alternative peer groups are reviewed to the extent their constituent companies may be either talent pools for Company recruitment or that Company executives may be targeted for recruitment to those other industries. The peer group data is analyzed and the competitiveness of the Company’s executive officers is evaluated based on direct compensation and relative performance metrics, and an annual growth rate factor (because the data is approximately one year out-of-date) is computed to formulate proposed adjustments for the Company’s next fiscal year. Management and the Compensation Committee evaluate the information and make joint recommendations for any proposed adjustments to executive compensation levels and elements. The process is a collaborative one, involving the Compensation Committee and its consultant and the Company’s Chief Executive Officer, Chief Financial Officer, and human

resources executives. Recommendations are reviewed in connection with the evaluation, in February, of the attainment of target incentive compensation awards and other performance-based compensation awards for the prior year, which coincides with the completion of the Company’s annual financial statement audit and release of annual earnings. After earnings for the prior year are released to the public in the third week of February, final compensation adjustments are made by the Committee and reviewed and approved by the Board of Directors. At that time, base salaries are adjusted, prior year incentive payments are made, then current year target objectives are established, and equity awards are granted.

 

Employment Contracts; Change in Control Severance Agreements

 

None of the Company’s executive officers has a written employment agreement with the Company or any of its subsidiaries. In February 2007, the Board of Directors, on the recommendation of the Compensation Committee, approved Change in Control severance agreements (the “CIC Agreements”) among the Company, Community Health Systems Professional Services Corporation (the employer of each of our executives), and each officer of the Company (collectively, the “Covered Executives”), effective as of March 1, 2007. The CIC Agreements will remain in effect until February 28, 2009 (or, if later, expiration of the 36 month period following a Change in Control, as defined in the CIC Agreements). Commencing on March 1, 2008 and on each March 1 thereafter, the term of the CIC Agreements will automatically be extended for one year unless notice is given by the prior December 1st.

 

The CIC Agreements provide for certain compensation and benefits in the event of termination of a Covered Executive’s employment during the period following a Change in Control, (A) by the Company, other than as a result of the Covered Executive’s death or disability within thirty-six (36) months of the Change in Control or (B) by the Covered Executive, upon the happening of certain “good reason” events within twenty-four (24) months of the Change in Control including, among other things, (i) certain changes in the Covered Executive’s title, position, responsibilities or duties, (ii) a reduction in the Covered Executive’s base salary, (iii) certain changes in the Covered Executive’s principal location of work or (iv) the failure of the Company to continue in effect any material compensation or benefit plan . The thirty-six (36) and twenty-four (24) month time periods described in the preceding sentence apply to the CIC Agreements for the Company’s President and Chief Executive Officer, the Executive Vice President and Chief Financial Officer, and each Senior Vice President; for the CIC Agreements among the Company, Community Health Systems Professional Services Corporation and each Vice President of the Company, the applicable time periods are twenty-four (24) and twelve (12) months, respectively.

 

Compensation and benefits payable under the CIC Agreements include a lump sum payment equal to the sum of (i) unpaid base pay, (ii) accrued but unused paid vacation or sick pay and unreimbursed business expenses, (iii) any other compensation or benefits in accordance with the terms of the Company’s existing plans and programs, (iv) a pro rata portion of target incentive bonus and (v) three (3) times (two (2) times, in the case of each Vice President of the Company) the sum of base salary and the higher of (A) the highest incentive bonus earned during any of the three (3) fiscal years prior to the fiscal year in which the Covered Executive’s termination of employment occurs or, if greater, the three fiscal years prior to the fiscal year in which Change in Control occurs and (B) the target incentive bonus for the fiscal year in which the Covered Executive’s termination of employment occurs. The Covered Executives shall also be entitled to continuation of certain health and welfare benefits for thirty-six (36) months (twenty-four (24) months in the case of each Vice President) and reimbursement of up to $25,000 for outplacement counseling and related benefits.

 

In addition, the Covered Executives will be entitled to receive certain “gross up” payments to offset any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 (the “Code”) on any payment or distribution by the Company to or for their benefit, including under any stock option, restricted stock or other agreement, plan or program, provided, however, that if a reduction in such payments or distributions by 10% or less would cause no excise tax to be payable, then the payments and distributions to the Covered Executive shall be reduced by that amount and no excise tax gross up payment will be paid.

 

The Company’s executive officers are employees of the Company’s indirect, wholly-owned subsidiary, Community Health Systems Professional Services Corporation and hold the same elected officer titles with their employer as they do with the Company.

 

Components of the Executive Compensation Program

 

In February 2007, the Compensation Committee approved management’s recommendations for compensation levels, performance-based incentive compensation awards for 2006, performance-based incentive compensation targets for 2007, and equity awards (stock options and restricted stock awards) for each of the named executive officers.

 

In accordance with the process described above, the Company utilized a benchmark peer group for the named executive officers. The peer group selected for this analysis included five publicly traded hospital companies and five publicly traded health insurance/managed care providers, which is substantially the same group as used in prior years. The ten companies used for this peer group analysis (the “talent peer group”) were:

 

 

A sensitivity analysis was conducted, eliminating one of the companies, whose compensation practices have come under great scrutiny in the past year, without a significant change in the results.

 

In addition, a separate analysis was conducted of the peer group of hospital companies (the “market peer group”) with whom the Company’s stock trades in unison. This separate analysis was reviewed as an additional check against the suitability of the selected peer group, which confirmed the selection. For Mr. Smith, the Company’s Chairman, President, and Chief Executive Officer, the CEO position at the peer groups was utilized for comparison purposes.

 

For the other named executive officers, because there are no consistent, direct comparison positions at the peer group companies, the following comparisons were used: Mr. Cash, the Company’s Executive Vice President and Chief Financial Officer was compared to the “second most highly compensated officer” at all peer group companies; for the next three most highly compensated named executive officers of the Company, the average of the peer group’s “third, fourth, and fifth most highly compensated named executive officers” compensation figures were utilized to form the comparison.

 

Base Salary

 

Base salary, as its name implies, is the basic element of the employment relationship, designed to compensate the executive for his or her day-to-day performance of duties. The amount of base salary distinguishes individuals’ level and responsibility within the organization. Exceptional performance and contribution to the growth and greater success of the organization are rewarded through other compensation elements, and for this reason, the benchmark target for base salary is generally set to be within a range of 15% of the 50th percentile of the selected peer group executive.

 

Utilizing the benchmarking survey analyses described above, the base salaries of the Chief Executive Officer and the other named executive officers were reviewed. In addition to the benchmarking policies, the Compensation Committee also evaluated each individual’s unique contributions to the organization and overall industry trends. Historically, the Committee has maintained the Chief Executive Officer’s salary below $1,000,000 to ensure deductibility for federal income tax purposes under IRC §162(m) but for 2007 a 4.5% increase in base salary raised the Chief Executive Officer’s salary to $1,035,000. The other named executive officers’ base salaries were adjusted as follows: Chief Financial Officer, 3%; other named executive officers, 5.3% each.

 

Cash Incentive Compensation

 

Cash incentive compensation awards to the named executive officers are made pursuant to the Company’s 2004 Employee Performance Incentive Plan. This plan provides for a wide range of potential awards and is utilized as a compensation vehicle across the Company. Cash incentive compensation awards are intended to align employees’ interests with the goals and strategic initiatives established by the Company and to reward employees for their contributions during the period to which the incentive award relates. Cash incentive compensation awards’ targets are typically expressed as a percentage of the individual’s base salary. Based on the nature of the Company’s business, the periodicity of cash incentive compensation awards for its named executive officers is tied to the attainment of annual performance objectives, however, for other employees, incentives may be linked to goal attainment over shorter or longer periods of time.

 

Cash incentive compensation awards are “at risk” for the attainment of the specific goal, and for each named executive officer, the individual’s target plan includes two or more budgeted goals, and within those goals different award amounts to be earned depending on the level at which that goal is attained, i.e., an underachievement and overachievement opportunity. The risk is substantial. For example, all of the named executive officers’ target plans include a percentage of base salary for total Company EBITDA for the year. For 2006, this target was $620,000,000, and if it had been met, each named executive officer would have received the percentage of their base salary specified in their plan. For each 1% decrease in Company EBITDA achievement, the bonus percentage amount was reduced by 5%, but no bonuses are paid below 90% of target attainment; at 90% of attainment, 50% of the specified bonus percentage would have been paid. If the target for Company EBITDA had been exceeded, as it was for fiscal year 2005, each named executive officer would have received an additional 1% of their base salary for each $1,500,000 over target, up to a plan maximum specified for each named executive.

 

The following chart describes the components of the named executive officers’ targeted cash incentive plan salary percentages for 2007:

 

 

 

 

For 2007, the Corporate EBITDA target is $705 million (with a minimum of $634.5, which will yield a 50% of bonus amount that is linked to this objective), and the Continuing Operations EPS target is $2.30 per share (with a minimum of $2.20, which will yield a 50% of bonus amount that is linked to this objective). All target amounts may be adjusted in the event of a significant acquisition or divestiture.

 

With respect to Mr. Smith and Mr. Cash, who have been designated by the Compensation Committee as “covered employees” under this plan, their awards are limited to those which will be treated as “qualified performance-based compensation” under IRC §162(m), and their awards are administered solely by the Compensation Committee. Awards to other employees, including the other named executive officers, are administered by management, however, the targets and awards are approved and ratified by the Compensation

Committee. Awards to executive officers who are not designated as “covered employees” may be discretionary in nature.

 

For 2006, because the Company did not meet its “Continuing Operations EPS” minimum target and attained only 92% of the “Corporate EBITDA” target, due to a change in accounting estimate for the provision for bad debts, all cash incentive compensation awards for the named executive officers were severely reduced, in terms of both the opportunity for the 2006 payment as well as in comparison to the prior year’s awards, (reductions of 40-60% of the respective award targets were experienced compared to cash incentive compensation payments made in 2005).

 

Long-term Incentives

 

Equity awards are designed to reward the executives for their longer term contributions to the success and growth of the Company and are directly linked to maximizing shareholder value. They also serve as a key retention tool, bridging annual base salary and incentive compensation payments to retirement and other end-of-service compensation benefits. Long-term incentives comprise a very important part of the Company’s executive compensation program, and currently greater than 60% of the pay mix of actual total direct compensation consists of a combination of stock options and restricted stock awards. The Company’s current pay mix is competitive with the talent peer group’s pay mix, which is consistent with the Company’s overall executive compensation philosophy and core principles.

 

Equity based incentive awards are made pursuant to the Company’s Amended and Restated 2000 Stock Option and Award Plan. This plan provides for a wide variety of stock-based compensation awards, including incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance awards, and other share based awards, including phantom stock. The Company has only made awards in the form of nonqualified stock options and restricted shares, as these types of awards are most consistently used by the Company’s talent peer group members and are thus deemed to provide the most competitive compensation element for long-term incentive compensation.

 

Historically, the Company’s named executive officers received only sporadic equity awards subsequent to the date of its IPO in June 2000; significant stock option grants were made in each of years 2000 and 2003, but none in 2001, 2002, and 2004. In 2004, the Compensation Committee reviewed and revised the compensation philosophy and in 2005, began making annual grants of long-term incentives in the form of nonqualified stock options and restricted stock awards. The move away from nonqualified stock options and towards a balance of the two award types was motivated in part by the change in accounting treatment in 2005 (requiring the expensing of stock options), but was also motivated by a desire to balance the relative risk to the executive officers, thus facilitating the retention element of long-term incentives.

 

The Company believes that annual grants that create an appropriate (i.e., market competitive) mix of compensation elements more directly and effectively align the interests of management with shareholder value. Under the Company’s compensation philosophy, all grants of both nonqualified stock options and restricted stock awards vest in one-third increments on the first three anniversary dates of grant date, which further serves to align this compensation program element with the interests of investors. The Compensation Committee reviews and adjusts annually the size and mix of award types. In 2006, the named executive officers’ restricted stock awards were modified to include a component of “qualified performance-based compensation” and would have been forfeited in their entirety if the performance measure, at least 75% of the February 2006 projected earnings per share from continuing operations, had not been attained.

 

In 2007, the named executive officers’ restricted stock awards’ performance criteria was further modified to include an alternative performance measure, the attainment of 90% of the 2007 net operating revenue low-end target range, as projected in February 2007. Thus, these awards will be forfeited in their entirety if neither target is attained; if either is attained, then the performance-based criteria will have been met and the awards’ time-based restrictions will lapse in one-third increments on the first three anniversary dates of the grants.

 

With the 2007 grants in place, the Company’s named executive officers (and other officers and key employees), will have in place three sequential years of grants, each with a three-year vesting schedule, which fulfills the retention and shareholder alignment objective of these awards.

 

Benefits and Perquisites

 

The Company’s named executive officers are each eligible to participate in the Company’s customary qualified benefit plans for health, dental, vision, life insurance, long-term disability, and retirement savings (401(k)). Except as noted below, the named executive officers participate in these plans on the same basis (i.e., benefits, premium amounts, and co-payments deductibles) as all other full-time employees of the Company.

 

Retirement and Deferred Compensation Benefits

 

The Company’s named executive officers also participate in executive compensation arrangements available only to specified officers of the Company and certain key employees of its subsidiaries. These plans, the Supplemental Executive Retirement Plan, the Supplemental 401(k) Plan, and the Deferred Compensation Plan, are all non-qualified plans under ERISA. The benefits under these plans are made available to the named executive officers to encourage and reward their continued service through their most productive years.

 

The provision of a retirement benefit is necessary to remain competitive with the Company’s talent peer groups, and is thus an important element for the recruitment and retention of executives. Effective January 1, 2003, the Company adopted the Supplemental Executive Retirement Plan for the benefit of our officers and key employees. This plan is a non-contributory non-qualified defined benefit plan that provides for the payment of benefits from the general funds of the Company. The Compensation Committee of our Board of Directors administers this plan and all determinations and decisions made by the Compensation Committee are final, conclusive and binding upon all persons. In particular, the defined benefit provided under the Supplemental Executive Retirement Plan is intended to supplement the incentives provided by the other elements of the executive compensation program, for which the maximum term of the effects are limited to three years.

 

The plan generally provides that, when a participant retires after his or her normal retirement date (age 65) he or she will be entitled to an annual retirement benefit equal to (i) the participant’s Annual Retirement Benefit, reduced by (ii) the sum of (a) the actuarial equivalent of the participant’s monthly amount of Social Security old age and survivor disability insurance benefits payable to the participant commencing at his or her unreduced Social Security retirement age, and (b) the annuity which is the actuarial equivalent of the amount contributed to the Deferred Compensation Plan pursuant to the Benefit Exchange Agreement increased by 7% per year commencing January 1, 2003. The Named Executives each entered into a Benefit Exchange Agreement with the Company which provided that, in exchange for the executive’s interest in a split-dollar insurance policy, the Company would contribute certain specified amounts to the executive’s account under the Deferred Compensation Plan.

 

For this purpose the “Annual Retirement Benefit” means an amount equal to the sum of the participant’s compensation for the highest three years out of the last five full years of service preceding the participant’s termination of employment, divided by three, then multiplied by the lesser of 50% or a percentage equal to 2% multiplied by the participant’s years of service. Mr. Smith and Mr. Cash have been credited with two years of service for each year of actual service. Benefits are generally payable over the lifetime of the participant, but may be paid in an alternative form if requested by the participant. The benefit is reduced for the Social Security benefit and the contribution made by the Company to the employee’s Deferred Compensation Plan subaccount in connection with the discontinuation of the Company’s previous executive retirement plan in 2002. Benefits for employees who retire with fewer than 25 years of service (commencing with service in 1997) receive a reduced benefit.

 

In the event of a change in control, all participants who have been credited with five or more years of service will be credited with an additional three years of service. In addition, the benefit of any such participant will become fully vested and be paid out as soon as administratively feasible in a single lump sum payment. Upon such payment to all participants, the plan will terminate.

 

The Company’s named executive officers are also eligible to participate in the Company’s nonqualified deferred compensation plan, as well as the nonqualified supplemental 401(k) plan. Employees’ voluntary contributions to these plans are tax deferred, but are subject to the claims of the general creditors of the Company. These plans do not play a significant role in the Company’s executive compensation program and other than the provision of these plans to allow tax deferred savings by employees, the only participation by the Company is to restore matches limited under the Company’s qualified 401(k) plan.

 

Perquisites

 

The Company provides very little in the way of additional benefits to its named executive officers and operates under the belief that benefits of a personal nature or those which are not available to the other employees of the Company should be funded from the executives’ personal funds. The Company believes that the supplemental benefits that it does provide to the named executive officers are reasonable when compared to the peer group and other companies generally and are appropriate additional items of compensation for these individuals.

 

Group-term life insurance (or a combination of group-term life insurance and individually-owned policies) is provided for each of the named executive officers in an amount equal to four times the individual’s base salary.

 

The Company operates aircraft to facilitate the operation of its business. The Board of Directors has adopted a policy that requires the Chief Executive Officer to use the Company’s aircraft for both his business and personal travel. From time to time, the other named executive officers are also permitted to use the Company’s aircraft for their personal use. The taxable income attributable to each named executive officer’s personal aircraft usage has been included in the Summary Compensation table below and is taxed to the executive without gross-up.

 

Termination of Service and Severance Arrangements

 

As described above, each of the named executive officers is party to a CIC Agreement, which provides benefits only upon both Change in Control and termination of employment, or in the event of certain other adverse changes in the terms of employment. In the event that a named executive officer is entitled to receive payment pursuant to his or her CIC Agreement, that executive officer will not be eligible to participate in the Company’s severance policy. The Company’s severance policy provides that Messrs. Smith and Cash are entitled to receive twenty-four (24) months of their base salary (the other named executive officers are entitled to receive twelve (12) months of their then base salary), and target incentive compensation amounts if they are otherwise terminated by the Company without cause. Also, upon termination without cause, all of the named executive officers are entitled to receive a prorated portion of their cash incentive compensation for the year of termination and under certain of their restricted stock award agreements (those dated 2006 and after), the lapse schedule is accelerated. Upon termination, the named executive officers are entitled to continuation health insurance coverage under COBRA by so electing and paying the then active employee premium amount. The period of this benefit is equal to the number of months of severance payment, i.e., twenty-four (24) months for Messrs. Smith and Cash and twelve (12) months for the other named executive officers.

 

In addition to the benefits payable under the life insurance policy or the long-term disability policy described above, in the event a named executive officer dies or is permanently disabled while in the employ of the Company, vesting for all grants under the Amended and Restated Stock Option and Award Plan is accelerated.

 

Additional Executive Compensation Policies

 

The Community Health Systems Stock Ownership Guidelines align the interests of its directors and executive officers with the interests of stockholders and promote the Company’s commitment to sound corporate governance. The guidelines apply to the following Company leaders, in the indicated multiples of

either an executive officer’s base salary or a non-executive director’s retainer fee at the time the participant becomes subject to the guideline (i.e., for all current directors and officers, May 25, 2005):

 

 

Company leaders subject to these guidelines are expected to achieve their respective guideline within five (5) years of becoming subject to the guideline (and an additional five (5) years in the event of a promotion to a higher guideline). Once achieved, ownership of the guideline amount must be maintained for as long as the individual is subject to these Stock Ownership Guidelines.

 

Stock that counts towards satisfaction of the Company’s Stock Ownership Guidelines includes: (i) shares held outright by the participant or his or her immediate family members living in the same household; (ii) restricted stock issued and held as part of an executive’s or director’s long term compensation, whether or not vested; (iii) shares underlying vested Community Health Systems stock options; and (iv) shares acquired on stock option exercises that the participant continues to hold. The Governance and Nominating Committee of the Board of Directors reviews each participant’s progress and compliance with the applicable guideline and may grant any hardship waivers or exceptions (i.e., in the event of a divorce) as such Committee deems necessary and appropriate.

 

Pursuant to the Company’s Policy Concerning Securities Trading, applicable to all members of the board of directors, officers, and other key employees, any short-term trading, short sales, transactions in puts, calls, or other derivative securities, hedging transactions, and margining or pledging with respect to the Company’s securities are strictly prohibited.

 

Stock Option Dating

 

Immediately following the receipt of reports of concerns at other companies about their historical stock option dating practices, the Compensation Committee and Audit and Compliance Committee of the Board of Directors jointly undertook a review of the Company’s practices in this area. The following is a summary of historical activity and practices at the Company regarding its grant of stock options to the Company’s named executive officers:

 

 

 

 

 

In conclusion, the historical and continuing practices at the Company are in conformity with the best practices of the industry and all current recommendations.

 

Executive Compensation Tables

 

The following table includes information regarding our Named Executive Officers total compensation earned during the year ended December 31, 2006.

 

 

 

 

 

The table disclosed the actual number of stock options and restricted stock awards granted during the year ended December 31, 2006 and the grant date fair value of these awards. There can be no assurance that the grant date fair value of options and restricted stock awards will ever be realized.

 

 

 

 

The following table shows outstanding stock option awards classified as exercisable and unexercisable and unvested restricted stock awards as of December 31, 2006.

 

 

 

 

 

The following table sets forth certain information regarding options exercised for the Named Executive Officers along with the number of stock awards that vested during the year-ended December 31, 2006.

 

 

The table shows the present value of accumulated benefit payable to each of the Named Executive Officers as of December 31, 2006, including the number of years of service credited to each such Named Executive Officer, under the Company’s Supplemental Executive Retirement Plan determined using interest rate and mortality rate assumptions consistent with those described in the footnotes of the Company’s audited financial statements for the year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2007.

 

This plan is a non-contributory non-qualified defined benefit plan that provides for the payment of benefits from the general funds of the Company. The plan generally provides that, when a participant retires after his or her normal retirement age (age 65) he or she will be entitled to an annual retirement benefit equal to (i) the participant’s Annual Retirement Benefit, reduced by (ii) the sum of (a) the actuarial equivalent of the participant’s monthly amount of Social Security old age and survivor disability insurance benefits payable to the participant commencing at his or her unreduced Social Security retirement age, and (b) the annuity which is the actuarial equivalent of the amount contributed to the deferred compensation plan pursuant to the Benefit Exchange Agreement (as described in the Compensation Discussion and Analysis) increased by 7% per year commencing January 1, 2003. For this purpose, the “Annual Retirement Benefit” means an amount equal to the sum of the participant’s compensation for the highest three years out of the last five full years of service preceding the participant’s termination of employment, divided by three, then multiplied by the lesser of 50% or a percentage equal to 2% multiplied by the participant’s years of service.

 

 

 

 

The following table shows the contributions, earnings and account balances for the Named Executive Officers in the Deferred Compensation Plan. Participation in this plan is limited to a selected group of

management or highly compensated employees of the Company. Vesting in the Company match contributions in the deferred compensation plan is 20% per year until fully vested at five (5) years. The participant may select their investment funds in the plan and if no fund is selected by the participant the Company will deposit the contributions into a money market account for the participant.

 

Withdrawals from this plan are paid in equal annual installments over a period of ten (10) years, with the first payment being made on the first business day of the calendar year following the participant’s termination of employment or death unless the participant made an election to receive such distributions in the form of a lump sum payment or in five (5) equal installment payments.

 

 

 

 

The Named Executive Officers would each receive payments upon termination from the Company which vary in amount depending on the reason for termination. Each Named Executive Officer would also receive a specified payment in connection with a Change in Control of the Company. Below is a discussion of the estimated payments and/or benefits under four events:

 

1. Voluntary Termination, which includes resignation and involuntary termination for cause, which includes the Company’s termination of the Named Executive Officers’ employment for reasons such as violation of certain Company policies or for performance related issues, but does not include retirement.

 

2. Involuntary Termination, which includes a termination other than for cause, but does not include a termination related to a Change in Control of the Company.

 

3. Retirement, as defined in the various plans and agreements.

 

4. Change in Control of the Company, as defined in the Change in Control severance agreements previously described in the “Employment Contracts; Change in Control Severance Arrangements” section of the Compensation Discussion and Analysis.

 

General Assumptions

 

Set forth below is a description of payments and/or benefits that would be provided related to each termination event or change in control. Except as noted below, these amounts are the incremental or enhanced amounts that a Named Executive Officer would receive that is in excess of those benefits that the Company would generally provide to other employees under the same circumstances. These amounts are estimates only and are based on the assumption that the terminating event occurred on December 31, 2006, the closing price of the Company’s stock was $36.52, which was its closing price on December 29, 2006, the last trading day of the year and where applicable, a change in control occurred on December 31, 2006. For purposes of determining change in control payments, the assumption was made that the CIC Severance Agreements signed March 1, 2007, were in effect as of December 31, 2006.

 

Severance Benefits

 

Voluntary, or Involuntary for Cause.  No severance amounts are payable in the event of voluntary termination or an involuntary termination for cause.

 

Retirement.  No severance amounts are payable upon retirement.

 

Involuntary Termination.  Mr. Smith would receive $2,772,000, Mr. Cash would receive $1,437,500 and Messrs. Newsome, Miller and Portacci would each receive $730,000.

 

Change in Control.  The Named Executive Officers would receive the following payments: Mr. Smith, $8,670,000; Mr. Cash, $4,575,000; Mr. Newsome, $2,250,000; Mr. Miller, $2,229,000; and Mr. Portacci, $2,250,000.

 

Equity-Incentive Plan Awards

 

Each Named Executive Officer has outstanding long term incentive awards granted under the Company’s equity based plans. See the Grants of Plan-Based Awards and the Outstanding Equity Awards at Fiscal Year-End Tables above. In certain termination events or upon a change in control, there would be an acceleration of the vesting schedule of restricted stock and/or stock options.

 

Voluntary or Involuntary for Cause.  If a Named Executive Officer voluntarily terminates his employment prior to being eligible for retirement, or the Company terminates his employment for cause, his unvested restricted stock and unvested stock options will be forfeited. In addition, any vested but unexercised stock options would be forfeited if not exercised within 90 days of the terminating event.

 

Retirement.  Upon retirement, unvested stock options would automatically become vested. The value of in-the-money unvested stock options for each of the Named Executive Officers is as follows: Mr. Smith, $276,668; Mr. Cash, $179,832; and Messrs. Newsome, Miller and Portacci, $83,000. All other unvested awards would be forfeited.

 

Involuntary Termination.  The value of in-the-money unvested stock options for each of the Named Executive Officers is as follows: Mr. Smith, $276,668; Mr. Cash, $179,832; and Messrs. Newsome, Miller and Portacci, $83,000. The value of unvested restricted stock that would become fully vested for each Named Executive Officers is a follows: Mr. Smith, $3,652,000; Mr. Cash, $2,373,800; and Messrs. Newsome, Miller and Portacci, $1,095,600.

 

Change in Control.  The value of in-the-money unvested stock options for each of the Named Executive Officers is as follows: Mr. Smith, $276,668; Mr. Cash, $179,832; and Messrs. Newsome, Miller and Portacci, $83,000. The value of unvested restricted stock that would become fully vested for each of the Named Executive Officers is as follows: Mr. Smith, $3,652,000; Mr. Cash, $2,373,800; and Messrs. Newsome, Miller and Portacci, $1,095,600.

 

Retirement Benefits

 

The amounts indicated below represent amounts payable if any, under the Supplemental Executive Retirement Plan under each described scenario.

 

Voluntary or Involuntary for Cause.  In the case of voluntary termination the following amounts represent the lump sum value of payments to each of the Named Executive Officers as follows: Mr. Smith, $9,159,000; Mr. Cash, $4,802,000; Mr. Newsome, $0; Mr. Miller, $881,000; and Mr. Portacci, $0. In the event of involuntary termination for cause, no pension benefits are payable.

 

Retirement.  The lump-sum value of payments to each of the Named Executive Officers is as follows: Mr. Smith, $9,159,000; Mr. Cash, $4,802,000; Mr. Newsome, $0; Mr. Miller, $881,000; and Mr. Portacci, $0.

 

Involuntary Termination.  The lump-sum value of payments to each of the Named Executive Officers is as follows: Mr. Smith, $9,159,000; Mr. Cash, $4,802,000; Mr. Newsome, $0; Mr. Miller, $881,000; and Mr. Portacci, $0.

 

Change in Control.  The lump sum value of payments to each of the Named Executive Officers is as follows: Mr. Smith, $12,937,000; Mr. Cash, $7,676,000; Mr. Newsome, $1,995,000; Mr. Miller, $1,527,000; and Mr. Portacci, $1,995,000.

 

Other Benefits

 

In the event of a change in control, the Company provides the continuation of certain health and welfare benefits with an estimated value of $13,825 for each of the Named Executive Officers. Also, in the event of a change in control, the Company provides reimbursement of up to $25,000 for outplacement counseling and related benefits to each of the Named Executive Officers.

 

Excise Tax Gross-Up

 

In the event of a change in control, the value of the “gross up” payments to offset any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986 for each of the Named Executive Officers is as follows: Mr. Smith $5,675,543; Mr. Cash, $0; Mr. Newsome, $1,566,676; Mr. Miller, $0; and Mr. Portacci, $0.

 

The following table includes information in respect of our equity compensation plans (and any individual compensation arrangements under which our equity securities are authorized for issuance to employees or non-employees) as of December 31, 2006.

 

 

 

 

 

The information contained in this Compensation Committee Report shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in any such filing.

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

The Compensation Committee

 

H. Mitchell Watson, Jr., Chair

Dale F. Frey

Julia B. North

 

The Audit and Compliance Committee of the Board of Directors of the Company is composed of three directors each of whom is “independent” as defined by the listing standards of the New York Stock Exchange and Section 10A-3 of the Exchange Act. All of our Audit and Compliance Committee members meet the Securities and Exchange Commission definition of “financial committee audit expert.” The Audit and Compliance Committee operates under a written charter adopted by the Board of Directors, which is posted on our Corporate Website (www.chs.net) and which is reviewed by the Committee annually, in conjunction with the Committee’s annual self-evaluation. The Company’s management is responsible for its internal controls and the financial reporting process. Our independent registered public accounting firm, Deloitte & Touche LLP, is responsible for performing an independent audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue its reports thereon. The Audit and Compliance Committee is responsible for, among other things, monitoring and overseeing these processes, and to recommend to the Board of Directors: (i) the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K; and (ii) the selection of the independent registered public accounting firm to audit the consolidated financial statements of the Company.

 

In keeping with that responsibility, the Audit and Compliance Committee has reviewed and discussed the Company’s audited consolidated financial statements with management and with the independent registered public accounting firm, reviewed internal controls and accounting procedures and provided oversight review of the Company’s corporate compliance program. In addition, the Audit and Compliance Committee has discussed with the Company’s independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, “Communication with Audit Committees.”

 

The Audit and Compliance Committee discussed with the Company’s internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. The Audit and Compliance Committee met with the internal auditors and the independent registered public accounting firm with and without management present to discuss the results of their examinations, their evaluations of the Company’s internal controls and the overall quality of the Company’s financial reporting.

 

The Audit and Compliance Committee has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and has discussed with the independent registered public accounting firm its independence and reviewed the amount of fees paid to the independent registered accounting firm for audit and non-audit services.

 

Based on the Audit and Compliance Committee’s discussions with management and the independent registered public accounting firm and the Audit and Compliance Committee’s review of the representations of management and the materials it received from the independent registered public accounting firm as described above, the Audit and Compliance Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the SEC.

 

This report is respectfully submitted by the Audit and Compliance Committee of the Board of Directors.

 

The Audit and compliance Committee

 

John A. Clerico, Chair

John A. Fry

H. Mitchell Watson, Jr.

 

As of the date of this Proxy Statement, the Board has not received notice of, and does not intend to propose, any other matters for stockholder action. However, if any other matters are properly brought before the meeting, it is intended that the persons voting the accompanying proxy will vote the shares represented by the proxy in accordance with their best judgment.

 

By Order of the Board of Directors,

 

Rachel A. Seifert

Senior Vice President, Secretary and General

Counsel

 

Franklin, Tennessee

April 12, 2007

Annex A

 

AMENDED AND RESTATED
COMPENSATION COMMITTEE CHARTER

 

The Board of Directors of Community Health Systems, Inc. (the “Company”) has established a Compensation Committee (the “Committee”) with general responsibility and specific duties as described below:

 

COMPOSITION

 

 

The Committee shall be comprised solely of independent directors according to independence standards established by the Governance and Nominating Committee consistent with applicable statutes, regulations, and New York Stock Exchange Listing Standards as may be in effect from time to time. Committee members shall be elected by the Board at its annual meeting and shall serve until their successors are duly elected and qualified. The Committee’s chairperson shall be designated by the full Board, or if the Board does not do so, by vote of a majority of the full Committee. The Committee may form and delegate authority to subcommittees where appropriate.

 

RESPONSIBILITY

 

 

The primary purpose of the Committee shall be to (i) assist the Board in discharging its responsibilities relating to compensation of the Company’s executives; (ii) approve awards and grants of equity-based compensation arrangements to directors, employees, and others pursuant to the Community Health Systems Amended and Restated 2000 Stock Option and Award Plan; (iii) administer the Community Health Systems, Inc. 2004 Employee Performance Incentive Plan with regard to the employees to whom Section 162(m) of the Internal Revenue Code applies; and (iv) produce an annual report on executive compensation for inclusion in the Company’s proxy statement, in accordance with applicable rules and regulations.

 

ATTENDANCE

 

 

Members of the Committee should endeavor to be present, in person or by telephone, at all meetings; however, two Committee members shall constitute a quorum.

 

MINUTES OF MEETINGS

 

 

Minutes of each meeting shall be prepared and sent to Committee members and presented to Company Directors who are not members of the Committee.

 

SPECIFIC DUTIES

 

 

The Committee shall:

 

1. In consultation with management, establish the Company’s general policies relating to employee compensation, and oversee the development and implementation of compensation programs.

 

2. Review and make recommendations to the Board with respect to the adoption, amendment and termination of the Company’s management incentive-compensation and equity-compensation plans, oversee their administration and discharge any duties imposed on the Committee by any of those plans.

 

3. Review and approve corporate goals and objectives relevant to the Chief Executive Officer’s (“CEO”) compensation, evaluate the CEO’s performance in light of those goals and objectives, set the CEO’s

compensation level based on this evaluation, and provide to the Board’s Independent Directors the results of such evaluation for the purpose of an Annual Performance Review of the CEO.

 

4. Assess the competitiveness and appropriateness of, determine, and authorize, the salaries, variable compensation, long term incentive plan awards, terms of employment, retirement or severance, benefits, and perquisites of the Executive Officers of the Company, subject to the limitations set forth in the applicable plans pursuant to which such compensation or awards are to be granted or determined.

 

5. Authorize the granting of variable compensation and equity awards to other employees and delegate to the CEO, to the extent the Committee deems appropriate, the authority to allocate such awards among employees other than the Executive Officers, subject to the limitations set forth in the applicable plans pursuant to which such compensation or awards are to be granted.

 

6. As requested by the full Board, review management’s long-range planning for executive development and succession, and develop a CEO succession plan.

 

7. Prepare the Committee’s annual report on executive compensation for inclusion in the Company’s proxy statement, in accordance with applicable rules and regulations, and review and approve, prior to publication, the Compensation sections of the proxy statement and/or annual report.

 

8. Obtain reports from the Company’s General Counsel, if needed, to review Director and Executive Officer transactions in the Company’s stock to evaluate short-swing profit liability under Section 16(b) of the Securities and Exchange Act of 1934. If necessary, assist in recouping such profits from the Director or Officer in question.

 

9. Perform other review functions relating to management compensation and Human Resources policies, as the Committee deems appropriate.

 

10. Conduct an evaluation of the Committee’s performance and charter at least annually, and recommend to the Board such Committee Charter changes as the Committee deems appropriate.

 

11. Regularly report to the Board regarding the Committee’s activities.

 

APPOINTMENT OF ADVISORS

 

The Committee shall have the sole authority to retain, and approve the fees and other retention terms of, executive compensation, legal and other advisors, as it deems necessary for the fulfillment of its responsibilities.

 

APPROVAL AND ADOPTION

 

As adopted by the Compensation Committee on December 9, 2002, and approved by the Board of Directors on December 10, 2002.

 

Revisions reviewed and adopted by the Compensation Committee and approved by the Board of Directors on February 24, 2004.

 

Revisions reviewed and adopted by the Compensation Committee on February 22, 2005 and approved by the Board of Directors on February 23, 2005.

Annex B

 

Community Health Systems, Inc.
2000 STOCK OPTION AND AWARD PLAN
(As Amended and Restated February 25, 2003, February 23, 2005, and March 30, 2007)

 

1. Purpose.

 

The purpose of this Plan is to strengthen Community Health Systems, Inc., a Delaware corporation (the “Company”), and its Subsidiaries by providing an incentive to its and their employees, officers, consultants and directors and thereby encouraging them to devote their abilities and industry to the success of the Company’s and its Subsidiaries’ business enterprises. It is intended that this purpose be achieved by extending to employees (including future employees who have received a formal written offer of employment), officers, consultants and directors of the Company and its Subsidiaries an added long-term incentive for high levels of performance and unusual efforts through the grant of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Performance Units, Performance Shares, Share Awards, Phantom Stock and Restricted Stock (as each term is herein defined).

 

2. Definitions.

 

For purposes of the Plan:

 

2.1 “Affiliate” means any entity, directly or indirectly, controlled by, controlling or under common control with the Company or any corporation or other entity acquiring, directly or indirectly, all or substantially all the assets and business of the Company, whether by operation of law or otherwise.

 

2.2 “Agreement” means the written agreement between the Company and an Optionee or Grantee evidencing the grant of an Option or Award and setting forth the terms and conditions thereof.

 

2.3 “Award” means a grant of Restricted Stock, Phantom Stock, a Stock Appreciation Right, a Performance Award, a Share Award or any or all of them.

 

2.4 “Board” means the Board of Directors of the Company.

 

2.5 “Cause” means, except as otherwise set forth herein,

 

(a) in the case of an Optionee or Grantee whose employment with the Company or a Subsidiary is subject to the terms of an employment agreement between such Optionee or Grantee and the Company or Subsidiary, which employment agreement includes a definition of “Cause”, the term “Cause” as used in this Plan or any Agreement shall have the meaning set forth in such employment agreement during the period that such employment agreement remains in effect; and

 

(b) in all other cases, (i) intentional failure to perform reasonably assigned duties, (ii) dishonesty or willful misconduct in the performance of duties, (iii) involvement in a transaction in connection with the performance of duties to the Company or any of its Subsidiaries which transaction is adverse to the interests of the Company or any of its Subsidiaries and which is engaged in for personal profit or (iv) willful violation of any law, rule or regulation in connection with the performance of duties (other than traffic violations or similar offenses); provided, however, that following a Change in Control clause (i) of this Section 2.5(b) shall not constitute “Cause.”