New SEC Rules Relating to Executive Compensation Disclosure

MEMORANDUM

This memorandum summarizes the rule changes published by the Securities and Exchange Commission (the "SEC") on August 11, 2006 relating to executive and director compensation, related person transactions, director independence and other corporate governance matters and security ownership of officers and directors in Release 33-8732. These new rules and amendments, among other things, are intended to provide investors with a clearer and more complete overview of director and officer compensation in order to permit greater comparability between companies. The regulations represent the first major overhaul of compensation disclosure since 1992. The news rules include:

• A new Compensation Discussion and Analysis section
• Option grant disclosure regarding policies and practices for timing and pricing
• Revised and expanded Summary Compensation Table
• Disclosure concerning perquisites and other personal benefits in excess of $10,000 (decreased from $50,000)
• A changed "named executive officer" definition to include principal financial officer, regardless of compensation and $100,000 threshold based on "total compensation," rather than salary and bonus
• Addition of six new tables to cover:

•     explanations of information included in the Summary Compensation Table;
•     information on exercises and holdings of previously granted equity awards;
•     post-employment compensation; and
•     director compensation information.

• Addition of a Compensation Committee Report that differs from the current report
• Increase in threshold for related-person transaction disclosures to $120,000 from $60,000

The final rules are effective for reports on Form 10-K and Form 10-KSB for fiscal years ending on or after December 15, 2006 and for proxy statements and registration statements (including amendments) under the Securities Act of 1933 (of registrants other than investment companies) containing disclosure for fiscal years ending on or after December 15, 2006 and filed on or after that date. New rules applicable to required disclosure of executive compensation arrangements on Form 8-K, become effective on November 7, 2006. Should you wish to review in more detail the SEC's final adopting release, we would be happy to provide you with a copy. You can also obtain the release from the SEC's web site, www.sec.gov.

Executive and Director Compensation

Option Grant Disclosure

In an effort to provide investors with more information about option compensation, the new rules require disclosure regarding programs, plans or practices concerning the selection of stock option grant dates and exercise prices. Additional disclosure is required if the grant date is different than the date the compensation committee or full board of directors takes action or is deemed to take action to grant an option. Further, if the exercise or base price of an option grant is not the closing market price per share on the grant date, the new rules require a description of the methodology for determining the exercise or base price. Finally, companies must discuss whether their option grants have or are intended to coincide with the release of material non-public information.

Compensation Discussion and Analysis

The cornerstone of the new rules is the Compensation Discussion and Analysis section ("CD&A"). Patterned after the Management's Discussion and Analysis section, the CD&A, which will introduce the compensation disclosure section, requires a discussion of the material factors underlying compensation policies and decisions reflected in the data presented in the tables.

The CD&A must explain for each executive named in the Summary Compensation Table (the "Named Executive Officers"):

• the objectives of the issuer's compensation program;
• what the program is designed to reward;
• the elements of the compensation program;
• why the issuer has selected each element of compensation;
• how the amount of each compensation element is determined; and
• how each compensation element fits into the issuer's overall compensation objectives.

The CD&A requirement is principles-based, in that it is to identify the disclosure concept and provide the following illustrative examples:

• policies for allocating between long-term and currently paid out compensation;
• policies for allocating between cash and non-cash compensation, and among different forms of non-cash compensation;
• for long-term compensation, the basis for allocating compensation to each different form of award;
• how the determination is made as to when awards are granted, including awards of equity-based compensation such as options;
• what specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions;
• how specific elements of compensation are structured and implemented to reflect these items of the issuer's performance and the executive's individual performance;
• the factors considered in decisions to increase or decrease compensation materially;
• how compensation or amounts realizable from prior compensation are considered in setting other elements of compensation (e.g., how gains from prior option or stock awards are considered in setting retirement benefits);
• the impact of accounting and tax treatment of a particular form of compensation;
• the issuer's equity or other security ownership requirements or guidelines and any issuer policies regarding hedging the economic risk of such ownership;
• whether the issuer has engaged in any benchmarking of total compensation or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies);
• the role of executive officers in the compensation process;
• issuer policies and decisions regarding the adjustment or recovery of awards or payments if the relevant issuer performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment; and
• the basis for selecting particular events as triggering payment with respect to post-termination agreements (e.g., the rationale for providing a single trigger for payment in the event of a change-in-control).

This list of disclosure items is non-exclusive. The CD&A should reflect the individual circumstances of an issuer and should avoid boilerplate disclosure. The CD&A will be deemed "filed" and thus subject to liability under Section 18 of the Securities Exchange Act for false or misleading statements.

Unlike the current Board Compensation Committee Report on Executive Compensation, which focuses on compensation for the past fiscal year, the CD&A, to the extent applicable, will also require discussion of post-termination compensation arrangements, on-going compensation arrangements and policies that the issuer will apply on a going-forward basis. In addition, discussion as to prior years may be necessary in order to give context to the disclosure provided.

Issuers are not required to disclose target levels of specific quantitative or qualitative performance-related or other factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm. The standard for issuers to use in making a determination that this information does not have to be disclosed is the same one that would apply when confidential treatment of trade secrets or commercial or financial information otherwise required to be disclosed is requested from the SEC. The instructions to the new rules provide that an issuer must still provide disclosure regarding the significance of the undisclosed target levels.

Compensation Committee Report

The rules require the inclusion of a Compensation Committee Report similar to the current Audit Committee report. It must state whether the Committee has reviewed and discussed the CD&A with management and whether it has recommended the CD&A to the Board of Directors for inclusion in the proxy or information statement and Form 10-K. The Compensation Committee report will be "furnished" rather than "filed." The principal executive and financial officers will be able to rely on the Compensation Committee Report in providing their certifications required in Forms 10-K and 10-Q. The Compensation Committee Report will be required to be included or incorporated by reference into the issuer's Annual Report on Form 10-K.

Compensation Tables

The new rules address compensation by mandating disclosure in three general categories:

• compensation with respect to the last fiscal year (and the two fiscal years preceding it),
• holdings of equity-based interests received as compensation that are potential sources of future gains, and
• retirement and other post-employment compensation and other post-employment benefits.

Revised Summary Compensation Table

The revised Summary Compensation Table shows the compensation of Named Executive Officers, whether or not actually paid, for the last three fiscal years. The amendments add a column to the Table to report the aggregate dollar value of the compensation disclosed in the other columns of the table. Narrative disclosure is to follow the Summary Compensation Table and a new supplemental table disclosing additional information about grants of plan-based awards, which is intended to provide disclosure of material information necessary to an understanding of the information disclosed in the tables.

Options and other awards previously reported in terms of the number of shares or units granted will be reported at the grant date fair value of the award under Financial Accounting Standards No. 123R, "Share-Based Payment" ("FAS 123R"). Any compensation that is currently payable but has been deferred for any reason must be included in the appropriate column in the table. If salary or bonus for the prior fiscal year cannot be calculated as of the most recent practicable date, an issuer will be required to file a Current Report on Form 8-K once the amounts become known. The 8-K will include the revised Total Compensation amount.

Three new columns cover plan-based awards. The Stock Awards column discloses the FAS 123R grant date fair value of stock-related awards other than stock options, such as restricted stock and phantom stock. The Option Awards column gives the FAS 123R value of options, stock appreciation rights and other equity-based compensation instruments that have option-like features. Both the Stock Awards and Option Awards columns disclose the full compensation cost of an award in the fiscal year the grant is made even if the award is subject to vesting and only a portion of the cost of the award will be expensed in the issuer's financial statements for the given fiscal year. The new Non-Equity Incentive Plan Compensation column is to report the dollar value of all amounts earned in respect of awards outside the scope of FAS 123R. This column is to include all other incentive plan awards not included in the stock awards and option awards columns. Compensation awarded under a non-equity incentive plan will be disclosed in the year when the relevant specified performance criteria under the plan are satisfied and the compensation is earned, whether or not payment is actually made in that year.

The new Change in Pension Value and Nonqualified Deferred Compensation Earnings column includes the aggregate increase in actuarial value to the Named Executive Officer of all defined benefit and actuarial plans, including supplemental plans, accrued during the year and earnings on nonqualified deferred compensation. Each element of such compensation is to be identified by footnote.

The new All Other Compensation column includes all compensation not required to be included in any other column. Any item of compensation included in the All Other Compensation column that exceeds $10,000 must be separately identified and quantified in a footnote. With the exception of perquisite and personal benefit amounts, all items of compensation must be included in the All Other Compensation column regardless of how small the amount. If the aggregate amount of perquisites and personal benefits received by a Named Executive Officer for the fiscal year is less than $10,000, then none of such compensation (other than tax reimbursements) is required to be included in the All Other Compensation column. Where perquisites are subject to identification, they must be described in a manner that identifies the particular nature of the benefit received.

Perquisites and Other Personal Benefits

Although the SEC does not provide a definition of "perquisites" or "personal benefits," the release does include examples and interpretive guidance about factors to be considered in determining whether an item is a perquisite or other personal benefit. These include the following:

• An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties.
• Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the issuer, unless it is generally available on a non-discriminatory basis to all employees.

The release includes the following examples of items that would be considered perquisites or personal benefits:

• club memberships not used exclusively for business entertainment purposes,

• personal financial or tax advice,
• personal travel using vehicles owned or leased by the issuer,
• personal travel otherwise financed by the issuer,
• personal use of other property owned or leased by the issuer, housing and other living expenses (including but not limited to relocation assistance and payments for the executive or director to stay at his or her personal residence),
• security provided at a personal residence or during personal travel,
• commuting expenses (whether or not for the issuer's convenience or benefit), and
• discounts on the issuer's products or services not generally available to employees on a non-discriminatory basis.

Perquisites and personal benefits continue to be valued on the basis of aggregate incremental cost. The new rules require footnote disclosure of the methodology for computing the aggregate incremental cost for the perquisites. Perquisites and personal benefits are required to be disclosed for both Named Executive Officers and directors.

Narrative Disclosures Accompanying Tables

The rules require that narrative disclosure following the Summary Compensation Table and Grants of Plan-Based Awards Table provide a description of any additional material factors necessary to an understanding of the information disclosed in the tables. Examples of types of disclosure that may be required include descriptions of the material terms of the Named Executive Officers' employment agreements, material modifications to options, option vesting schedules and descriptions of performance-based conditions applicable to awards. Narrative disclosures also are required to accompany the other new tables.

New Tables

Six new tables will follow the Summary Compensation Table:

• Grants of Plan-Based Awards Table: Provides back-up information for the Summary Compensation Table, such as the number of shares underlying option grants and the exercise price of options granted. Shows the terms of grants made during the current year, including estimated future payouts for both equity incentive plans and non-equity incentive plans, with separate disclosure for each grant.
• Outstanding Equity Awards at Fiscal Year-End Table: Provides information on outstanding awards, such as the number of shares underlying vested and unvested stock options and restricted stock grants, and the market based-value of such awards as of the issuer's most recent fiscal year end.
• Option Exercises and Stock Vested Table: Provides information on the amounts a Named Executive Officer realized upon the exercise of option awards and the vesting of stock awards.
• Pension Benefits Table: Provides disclosure of the estimate of retirement benefits to be payable at normal retirement age and, if available, early retirement for the Named Executive Officers. Requires disclosure of the actuarial present value of accumulated benefits, the number of years of credited service under the plan and the amount of payments made during the last fiscal year.
• Nonqualified Deferred Compensation Table: Discloses contributions, earnings and balances under each plan that provides for the deferral of compensation on a basis that is not tax-qualified for the Named Executive Officers.
• Director Compensation Table: Presents information on director compensation similar to the information for Named Executive Officers provided in the Summary Compensation Table, except that information is required only for the issuer's most recently completed fiscal year.

Post-Employment Benefits

The rules require narrative disclosures regarding written and unwritten arrangements that provide payments in connection with the resignation, severance, retirement or other termination (including constructive termination) of a Named Executive Officer, or a change in the responsibilities of such an officer or a change in control of the issuer. The disclosures must include descriptions of:

• the specific circumstances that would trigger payment(s) or the provision of other benefits (references to benefits include perquisites and health care benefits);
• estimated payments and benefits that would be provided in each covered circumstance, and whether they would or could be lump sum or annual, disclosing the duration and by whom they would be provided;
• how the appropriate payment and benefit levels are determined under the various circumstances that would trigger payments or provision of benefits;
• any material conditions or obligations applicable to the receipt of payments or benefits, including but not limited to non-compete, non-solicitation, nondisparagement or confidentiality covenants; and
• any other material factors regarding each such contract, agreement, plan or arrangement.

For purposes of calculating the amounts (if the triggering event has not yet occurred), triggering events will be assumed to have occurred on the last business day of the issuer's last completed fiscal year and the price per share of the issuer's securities will be assumed to be the closing market price on that date. The rule eliminates the $100,000 threshold that applied to similar disclosures under the current rules.

Named Executive Officers

The rules also amend the definition of "Named Executive Officer," so that it now includes the following:

• The principal executive officer;
• The principal financial officer; and
• The other three most highly compensated executive officers (and up to two former executive officers) whose total compensation for the last fiscal year exceeded $100,000.

The most highly compensated executive officers are determined based on total compensation, less increases in the actuarial value of pension benefits and above-market interest on deferred compensation.

The SEC is requesting additional comments on a possible modification of the rule to require disclosures regarding the most highly compensated employees who exert significant policy influence by having responsibility for significant policy decisions within the issuer, a significant subsidiary of the issuer, or a principal business unit, division or unit of the issuer, including each such employee's total compensation for that year and a description of the employee's job position, without naming the employee. The SEC also is requesting comment on whether the rule should apply only to large accelerated filers.

Directors

An issuer must disclose the compensation of its directors for its most recently completed fiscal year in the Director Compensation Table, accompanied by a narrative discussion. The same instructions as provided in the Summary Compensation Table govern analogous matters in the Director Compensation Table. Director's fees earned or paid in cash are reported separately from fees paid in stock. The "All Other Compensation" column of the Director Compensation Table, includes, but is not limited to:

• all perquisites and other personal benefits if they total greater than $10,000;
• all tax reimbursements;
• the compensation cost, calculated in accordance with FAS 123R, for any security purchased from the issuer or its subsidiary at a discount from the market price on the date of purchase, unless the discount is generally available to all security holders or to all salaried employees of the issuer;
• amounts paid or accrued to any director pursuant to a plan in connection with the resignation, retirement or any other termination of such director or a change in control of the issuer;
• annual issuer contributions to vested and unvested defined contribution and other deferred compensation plans;
• consulting fees;
• awards under director legacy or charitable awards programs; and
• the dollar value of any insurance premiums paid by, or on behalf of, the issuer for life insurance for the director's benefit.

In addition to disclosures specifically required by the columns in the Director Compensation Table, issuers must provide footnote disclosure of the outstanding equity awards at fiscal year end for each director. Issuers must disclose in a footnote each director's aggregate number of stock awards and aggregate number of option awards outstanding at fiscal year end. No disclosure is required in the director compensation discussion of any amounts paid to a Named Executive Officer that are disclosed in the Summary Compensation Table with a footnote indicating the amounts that reflect compensation for services as a director. Directors can be grouped in a single row of the table if all elements and amounts of compensation are identical. Following the table, narrative disclosure will describe any material factors necessary to an understanding of the table. As appropriate, issuer's need to provide disclosure similar to that found in the CD&A, such as with respect to practices related to option grants.

Small Business Issuers

Small business issuers are not required to provide the CD&A or the related Compensation Committee Report. The only tables required of small business issuers are the Summary Compensation Table, the Outstanding Equity Awards at Fiscal Year-End Table and the Director Compensation Table. Information in the Summary Compensation Table will be required for the last two fiscal years and the Named Executive Officers will include only the principal executive officer and the other two most highly compensated executive officers with total compensation exceeding $100,000. Small business issuers will not be required to include pension plan disclosure in the Summary Compensation Table. The new rules also provide for different treatment for foreign private issuers and business development companies.

Performance Graph

The performance graph illustrating stock performance, which had been proposed to be eliminated, is retained, but will be included under Item 201 of Regulation S-K as part of disclosure regarding an issuer's common equity securities entitled "Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters." As retained, the Performance Graph will continue to be "furnished" rather than "filed." The Performance Graph will be required only in the issuer's annual report to security holders that accompanies or precedes a proxy or information statement, and will not be deemed to be soliciting material under the proxy rules or incorporated by reference into any filing, except to the extent that the issuer specifically incorporates it.

Beneficial Ownership Disclosure Requirements

The rules require footnote disclosure of shares pledged as security by the Named Executive Officers, directors and director nominees. They also specifically require disclosure of beneficial ownership of directors' qualifying shares.

Form 8-K Changes

The release consolidates the Form 8-K filing requirements by amending Form 8-K Items 1.01, "Entry into a Material Definitive Agreement," and 5.02, "Departures of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers." The rules eliminate employment compensation arrangements from the scope of Item 1.01 and move them to Item 5.02. In addition, the new rules modify the disclosure requirements relating to management contracts and plans. A new instruction to Item 5.02 also clarifies that the Named Executive Officers for whom disclosure is required are those Named Executive Officers included in the most recent filing with the SEC that required disclosure under Item 402(c) of Regulation S-K or Item 402(b) of Regulation S-B, as applicable. In addition, the rules add a requirement for disclosure of salary or bonus for the most recent fiscal year that was not available at the latest practicable date in connection with disclosure under Item 402 of Regulation S-K or Regulation S-B, as applicable. The rules extend the safe harbors regarding Section 10(b) and Rule 10b-5 and Form S-3 eligibility in the event that an issuer fails to timely file reports required by Item 5.02(e) of Form 8-K. Finally, the rules amend General Instruction D to Form 8-K to permit companies to omit the Item 1.01 heading in a Form 8-K that also discloses any other item, so long as the substantive disclosure required by Item 1.01 is included in the Form 8-K. Similar changes were made to amendment of the exhibit instructions to Form 20-F for foreign private issuers.

Certain Relationships and Related Transactions Disclosure

The rules increase the threshold for disclosing related-person transactions from $60,000 to $120,000. The rules also require disclosures of the policies and procedures of issuers other than small business issuers for the review, approval or ratification of related-person transactions and disclosure of instances where the policies and procedures were not required or were not followed.

Director Independence and Corporate Governance

The rules include a requirement calling for a narrative explanation of the independence status of directors under an issuer"s director independence policies. This requirement is intended to be consistent with recent significant changes to the listing standards of the nation's principal securities trading markets. In addition, the rules consolidate this and other corporate governance disclosure requirements regarding director independence and board committees, including new disclosure requirements about the compensation committee, into a single expanded disclosure item.

Compensation Committee

The rules require similar disclosure regarding compensation committees as is currently required regarding audit and nominating committees. The issuer must disclose if the compensation committee has a charter, and, if so, it must make it available through its website or proxy materials in the same manner that the audit and nominating committee charters may be made available. The issuer must describe the compensation committee's processes and procedures for the consideration and determination of executive and director compensation including:

• The scope of the committee's authority;
• The extent to which and to whom the committee's authority can be delegated;
• The role of executive officers in determining or recommending executive or director compensation; and
• Any role of compensation consultants and details about the relationship.

While an issuer must discuss the role compensation consultants play in the compensation committee's processes and procedures, it is not required to disclose the executive officers contacted by a compensation consultant. The disclosure will cover the material elements of the directions given to the consultants and the scope of their assignment. The rules require disclosure regarding director independence similar to the disclosure requirements under the proxy rules regarding the independence of directors who are members of the audit and nominating committees.

Plain English Disclosure

Most of the disclosure required by the amendments to Items 402, 403, 404 and 407 of Regulation S-K or Regulation S-B, as applicable, are to be provided in plain English.

These are only brief descriptions of the SEC's new rules. This memorandum provides general information only and does not constitute legal advice that may be applied to any particular situation. Please contact the Partners in our Corporate Department for further advice and assistance.