UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

Key Energy Services, 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)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

Dear Stockholder:

 

You are cordially invited to attend the 2009 Annual Meeting of Stockholders of Key Energy Services, Inc. to be held at the Inn at the Ballpark, 1520 Texas Avenue, Houston, Texas at 9:00 a.m. (Central Daylight Time) on Thursday, June 4, 2009.

 

The notice of meeting and proxy statement that follow this letter describe the business to be conducted at the 2009 Annual Meeting, including the election of three Class III directors and adoption of a new 2009 Equity and Cash Incentive Plan.

 

Your vote is important. Whether or not you plan to attend the 2009 Annual Meeting, we strongly encourage you to provide your proxy by telephone, the Internet or on the enclosed proxy card at your earliest convenience.

 

Thank you for your cooperation and support.

 

Sincerely,

Dick Alario
Chairman of the Board,
President and Chief Executive Officer

KEY ENERGY SERVICES, INC.
1301 McKinney Street
Suite 1800
Houston, Texas 77010

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS

To Be Held on June 4, 2009

 

To our stockholders:

 

We invite you to our 2009 Annual Meeting of Stockholders, which will be held at the Inn at the Ballpark, 1520 Texas Avenue, Houston, Texas, on Thursday, June 4, 2009 at 9:00 a.m. local time. At the meeting, stockholders will consider and act upon the following matters:

 

(1) To elect three Class III directors for the ensuing three years;

 

(2) To adopt our 2009 Equity and Cash Incentive Plan;

 

(3) To ratify the selection of Grant Thornton LLP as our independent registered public accounting firm for the current fiscal year; and

 

(4) To transact such other business as may properly come before the meeting or any adjournment thereof.

 

The Board of Directors recommends that you vote FOR each of the Class III director nominees, FOR the adoption of the 2009 Equity and Cash Incentive Plan and FOR the ratification of the selection of Grant Thornton LLP as our independent registered public accounting firm for the current fiscal year.

 

Stockholders of record at the close of business on April 6, 2009, the record date for the 2009 Annual Meeting, are entitled to notice of, and to vote at, the meeting. Your vote is important regardless of the number of shares you own. Whether or not you expect to attend the meeting, we hope you will take the time to vote your shares. If you are a stockholder of record, you may vote over the Internet, by telephone or by completing and mailing the enclosed proxy card in the envelope provided. If your shares are held in “street name,” that is, held for your account by a broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted.

 

Our stock transfer books will remain open for the purchase and sale of our common stock.

 

By Order of the Board of Directors,

Kimberly R. Frye
Corporate Secretary

 

Houston, Texas

April 16, 2009

 

Important Notice Regarding the Availability of Proxy Materials for the 2009 Annual Meeting of Stockholders to Be Held on June 4, 2009:

 

This Proxy Statement, along with the Annual Report to security holders for the fiscal year ended December 31, 2008, are available on the Company’s website at www.keyenergy.com by clicking on “Investor Relations” and then clicking on “2009 Annual Meeting of Stockholders.”

 

TABLE OF CONTENTS

 

 

KEY ENERGY SERVICES, INC.
1301 McKinney Street
Suite 1800
Houston, Texas 77010

Proxy Statement for the 2009 Annual Meeting of Stockholders

To Be Held on June 4, 2009

 

This proxy statement contains information about the 2009 Annual Meeting of Stockholders of Key Energy Services, Inc. We are holding the meeting at the Inn at the Ballpark, 1520 Texas Avenue, Houston, Texas, on Thursday, June 4, 2009 at 9:00 a.m., local time.

 

In this proxy statement, we refer to Key Energy Services, Inc. as “Key,” the “Company,” “we” and “us.”

 

We are sending you this proxy statement in connection with the solicitation of proxies by our Board of Directors (the “Board”) for use at the annual meeting.

 

We are mailing our 2008 Annual Report to Stockholders for the year ended December 31, 2008 with these proxy materials on or about April 16, 2009.

 

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of our proxy statement or annual report to stockholders may have been sent to multiple stockholders in your household, unless we have received contrary instructions. We will promptly deliver a separate copy of either document to you if you request it by writing to or calling us at the following address or telephone number: 1301 McKinney Street, Suite 1800, Houston, Texas 77010, Attention: Investor Relations; 713-651-4300. If you want to receive separate copies of the proxy statement or annual report to stockholders in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and telephone number.

 

This section provides information about the beneficial ownership of our common stock by our directors and executive officers. The number of shares of our common stock beneficially owned by each person is determined under the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock options or other rights. Unless otherwise indicated, each person has sole investment and voting power, or shares such power with his or her spouse, with respect to the shares set forth in the following table. The inclusion in this table of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.

 

The address for each person identified below is care of Key Energy Services, Inc., 1301 McKinney Street, Suite 1800, Houston, Texas 77010.

Throughout this proxy statement, the individuals who served as our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) during fiscal year 2008, and each of our three other most highly compensated executive officers are referred to as the “Named Executive Officers” or “NEOs”.

 

Set forth below is certain information with respect to beneficial ownership of our common stock as of March 16, 2009 by each of our NEOs and each of our directors, as well as the directors and all executive officers as a group:

 

 

 

 

The following table sets forth, as of March 16, 2009, certain information regarding the beneficial ownership of common stock by each person, other than the Company’s directors or executive officers, who is known by the Company to own beneficially more than 5% of the outstanding shares of common stock.

 

 

 

 

 

Our Board is divided into three classes. One class is elected each year and members of each class hold office for three-year terms. The Board has set the number of directors at eleven. There are four Class I directors, four Class II directors and three Class III directors. At this year’s annual meeting, the terms of our Class III directors will expire. The Class III directors elected at this year’s annual meeting will serve three-year terms expiring at the annual meeting in 2012, or until their successors are elected and qualified, or the earlier of their death, resignation or removal. The Class I and Class II directors will serve until the annual meetings of stockholders to be held in 2010 and 2011, respectively, and until their respective successors are elected and qualified, or the earlier of their death, resignation or removal.

 

The persons named in the enclosed proxy will vote to elect as Class III directors Richard J. Alario, Ralph S. Michael, III and Arlene M. Yocum, unless you indicate on your proxy card that your shares should

be withheld from one or more of the nominees. Our Corporate Governance and Nominating Committee has recommended, and the Board has nominated, each of the nominees for election as Class III directors. Each of the nominees is currently a member of the Board. Mr. Alario and Ms. Yocum have been nominated for election as directors for the first time. Mr. Alario was appointed by our Board as a new director in May 2004 upon his promotion to CEO, and he was later elected by the Board as Chairman of the Board in August 2004. Ms. Yocum was appointed to the Board as a new director in October 2007 after having been recommended to the Corporate Governance and Nominating Committee by a non-management director.

 

If they are elected, Mr. Alario, Mr. Michael and Ms. Yocum will each hold office until our annual meeting of stockholders in 2012 and until his or her successor is duly elected and qualified, or the earlier of his or her death, resignation or removal. Each of the nominees has indicated his or her willingness to serve, if elected. However, if any nominee should be unable to serve, the shares of common stock represented by proxies may be voted for a substitute nominee designated by the Board.

 

There are no family relationships between or among any of our officers and our directors. Robert K. Reeves, a Class II director, is an executive officer of one of our customers. For additional information regarding this relationship, see the discussion below under the heading “Certain Relationships and Related Transactions” under “Corporate Governance.”

 

Below are the names, ages and certain other information of each member of the Board, including the nominees for election as Class III directors. Information with respect to the number of shares of common stock beneficially owned by each director as of March 16, 2009 appears above under the heading “Stock Ownership of Certain Beneficial Owners and Management.”

 

Richard J. Alario, age 54, has been a member of the Board since May 2004. Mr. Alario joined the Company as President and Chief Operating Officer effective January 1, 2004. On May 1, 2004, he was promoted to Chief Executive Officer and appointed to the Board. He was elected Chairman of the Board on August 25, 2004. Prior to joining the Company, Mr. Alario was employed by BJ Services Company, where he served as Vice President from May 2002 after OSCA, Inc. was acquired by BJ Services. Prior to joining BJ Services, Mr. Alario had over 21 years of service in various capacities with OSCA, an oilfield services company, most recently serving as its Executive Vice President. He currently serves as director and chairman of the Health, Safety, Security and Environmental Committee of the National Ocean Industries Association. Mr. Alario holds a BA from Louisiana State University.

 

Ralph S. Michael, III, age 54, became a member of the Board in March 2003. Mr. Michael was President and Chief Operating Officer of the Ohio Casualty Insurance Company from July 25, 2005 until its sale on August 24, 2007. From 2004 through July 2005, Mr. Michael served as Executive Vice President and Manager of West Commercial Banking for U.S. Bank, National Association and then as Executive Vice President and Manager of Private Asset Management for U.S. Bank. He also served as President of U.S. Bank Oregon from 2003 to 2005. From 2001 to 2002, he served as Executive Vice President and Group Executive of PNC Financial Services Group, with responsibility for PNC Advisors, PNC Capital Markets and PNC Leasing. He is a director of AK Steel Corporation; Friedman, Billings, Ramsey Group, Inc.; Cincinnati Bengals, Inc.; and Xavier University. He holds a BA from Stanford University and an MBA from the Graduate School of Management of the University of California Los Angeles.

 

Arlene M. Yocum, age 51, joined the Board in October 2007. Ms. Yocum has been Executive Vice President, Managing Executive of Client Service and Distribution for PNC’s Wealth Management and Institutional Investment Groups since 2003. Prior to that she served as an Executive Vice President of PNC’s Institutional Investment Group from 2000 to 2003. Ms. Yocum is a director of Protection One, Inc. She holds a JD from Villanova School of Law and a BA from Dickinson College.

 

Lynn R. Coleman, age 69, has been a member of the Board since October 2007. He was a partner in the energy practice of the law firm of Skadden, Arps, Slate, Meagher and Flom LLP from 1981 until his retirement in 2007. Prior to joining Skadden, Mr. Coleman served as the General Counsel of the U.S. Department of Energy and later as Deputy Secretary. In March 2008, Mr. Coleman was appointed to the Supervisory Board of Lyondell Basell Industries, a Luxembourg entity, which is a large chemical company with operations in the U.S. and internationally. He also serves on the board of directors (non-executive chair) of Total Holdings USA, Inc. He holds an LLB degree from the University of Texas and a BA from Abilene Christian College.

 

Kevin P. Collins, age 58, has been a member of the Board since March 1996. He has been Managing Member of The Old Hill Company LLC since 1997. From 1992 to 1997, he served as a principal of JHP Enterprises, Ltd., and from 1985 to 1992, as Senior Vice President of DG Investment Bank, Ltd., both of which were engaged in providing corporate finance and advisory services. Mr. Collins was a director of WellTech, Inc. from January 1994 until March 1996, when WellTech, Inc. was merged into the Company. Mr. Collins is also a director of The Penn Traffic Company; PowerSecure International, Inc.; Antioch Company LLC; and PNG Ventures, Inc. He holds BS and MBA degrees from the University of Minnesota. Mr. Collins is a CFA Charterholder.

 

W. Phillip Marcum, age 65, has been a member of the Board since March 1996. He was a director of WellTech, Inc. from January 1994 until March 1996, when WellTech was merged into the Company. From October 1995 until March 1996, Mr. Marcum was the non-executory Chairman of the Board of Directors of WellTech. He was Chairman of the Board, President and Chief Executive Officer of Metretek Technologies, Inc., formerly known as Marcum Natural Gas Services, Inc., from January 1991 to April 2007 when he retired. The company is now known as PowerSecure International, Inc. Mr. Marcum also serves on the board of directors of ADA-ES, a Denver, Colorado based company, and PNG Ventures, Inc., a Dallas, Texas based company. He is presently a principal in MG Advisors, LLC. He holds a BBA from Texas Tech University.

 

William F. Owens, age 58, has been a member of the Board since January 2007. He served as Governor of Colorado from 1999 to 2007. Mr. Owens served as a member of the Colorado State House of Representatives from 1982 to 1988, as a member of the Colorado State Senate from 1988 to 1994 and as Colorado State Treasurer from 1994 to 1998. Prior to his public service, Mr. Owens was a consultant with Touche Ross & Co., now Deloitte & Touche, LLP. In addition to his public service, Mr. Owens served for more than 10 years as Executive Director of the Colorado Petroleum Association, which represented 400 energy firms doing business in the Rockies. He is a principal in JF Companies, a Denver-based land and water development firm, and is on the boards of Highland Acquisition (ASE); Vision Logistics (a privately held company operating in the oilfield transportation sector); Great Western Oil and Gas (a private exploration / production firm active in Colorado); and FESCO (a Russian listed company which owns and operates ports, railroads and container ships). Mr. Owens holds a master’s degree in public administration from the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin and an undergraduate degree from Stephen F. Austin State University.

 

David J. Breazzano, age 52, has been a member of the Board since October 1997. He was named Lead Director in August 2004. Mr. Breazzano is President and one of the founding principals of DDJ Capital Management, LLC, an investment management firm established in 1996. He holds a BA from Union College, where he serves on the Board of Trustees, and an MBA from Cornell University.

 

William D. Fertig, age 52, has been a member of the Board since April 2000. He has been Co-Chairman and Chief Investment Officer of Context Capital Management, an investment advisory firm since 2002. Mr. Fertig was a Principal and a Senior Managing Director of McMahan Securities from 1990 through April 2002. Mr. Fertig previously served in various senior capacities at Drexel Burnham Lambert and Credit Suisse First Boston from 1980 through 1990. He holds a BS from Allegheny College and an MBA from the Stern Business School of New York University.

Robert K. Reeves, age 51, has been a member of the Board since October 2007. He is Senior Vice President, General Counsel and Chief Administrative Officer of Anadarko Petroleum Corporation. From 2004 to February 2007, Mr. Reeves served as Senior Vice President, Corporate Affairs & Law and Chief Governance Officer of Anadarko. Prior to joining Anadarko, he served as Executive Vice President, Administration and General Counsel of North Sea New Ventures from 2003 to 2004, and as Executive Vice President, General Counsel and Secretary of Ocean Energy, Inc. and its predecessor companies from 1997 to 2003. Since 2008, Mr. Reeves has served as a director of Western Gas Partners, LP. He holds a BA and JD from Louisiana State University.

 

J. Robinson West, age 62, has been a member of the Board since November 2001. He is the founder, and since 1984 has served as Chairman and a director, of PFC Energy, strategic advisers to international oil and gas companies, national oil companies, and petroleum ministries. Previously, Mr. West served as U.S. Assistant Secretary of the Interior with responsibility for offshore oil leasing policy from 1981 through 1983. He was Deputy Assistant Secretary of Defense for International Economic Affairs from 1976 through 1977 and a member of the White House Staff from 1974 through 1976. He is currently a member of the Council on Foreign Relations and the National Petroleum Council, and serves as Chairman of the Board of the United States Institute of Peace. Mr. West is also a director of Cheniere Energy, Inc. He holds a BA from the University of North Carolina at Chapel Hill and a JD from Temple University Law School.

 

The Board of Directors believes that approval of the election of Richard J. Alario, Ralph S. Michael, III and Arlene M. Yocum to serve as Class III directors is in our best interests and the best interests of our stockholders and therefore recommends a vote FOR each of the nominees.

 

This section describes key corporate governance guidelines and practices that we have adopted. Complete copies of our corporate governance guidelines, committee charters and codes of conduct described below are available on our website at www.keyenergy.com. Alternatively, you can request a copy of any of these documents by writing to: Investor Relations, Key Energy Services, Inc., 1301 McKinney Street, Suite 1800, Houston, Texas 77010. Our Board strongly believes that good corporate governance is important to ensure that Key is managed for the long-term benefit of our stockholders.

 

Our Board has adopted Corporate Governance Guidelines that address significant issues of corporate governance and set forth the procedures by which the Board carries out its responsibilities. Among the areas addressed by the Corporate Governance Guidelines are director qualifications and responsibilities, Board committee responsibilities, director compensation and tenure, director orientation and continuing education, access to management and independent advisors, succession planning and management development, and Board and committee performance evaluations. The Corporate Governance and Nominating Committee is responsible for assessing and periodically reviewing the adequacy of these Guidelines and recommending proposed changes to the Board, as appropriate. The Corporate Governance Guidelines are posted on the Company’s website at www.keyenergy.com. The Company will provide these guidelines in print, free of charge, to stockholders who request them.

 

Under applicable rules of the New York Stock Exchange, or NYSE, a director will only qualify as “independent” if our Board affirmatively determines that he or she has no direct or indirect material relationship with the Company. In addition, all members of the Audit Committee, Compensation Committee

and Corporate Governance and Nominating Committee are also required to meet the applicable independence requirements set forth in the rules of the NYSE and the SEC.

 

The Board has determined that, except for Mr. Alario, who serves as the President and Chief Executive Officer, each of our current directors is independent within the meaning of the foregoing rules. Further, the Board considered Mr. Reeves’ position as an executive officer with one of our customers, Anadarko Petroleum Corporation, or Anadarko, and determined that the relationship between Anadarko and the Company does not affect Mr. Reeves’ independence. For additional information regarding this relationship, see the discussion below under the heading “Certain Relationships and Related Transactions.”

 

In considering whether to recommend any particular candidate for inclusion in the Board’s slate of recommended director nominees, our Corporate Governance and Nominating Committee applies the criteria set forth in the guidelines contained in the Selection Process for New Director Candidates, which are available in the “Corporate Governance” section of our website, www.keyenergy.com. These criteria include the candidate’s integrity, business acumen, a commitment to understand our business and industry, experience, conflicts of interest and the ability to act in the interests of all stockholders. The Corporate Governance and Nominating Committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. Our Board believes that the backgrounds and qualifications of its directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow it to fulfill its responsibilities.

 

Any stockholder entitled to vote for the election of directors may propose candidates for consideration for nomination for election to the Board. If the Board determines to nominate a stockholder-recommended candidate and recommends his or her election, then his or her name will be included in the Company’s proxy card for the next annual meeting. Stockholders also have the right under our bylaws to directly nominate director candidates, without any action or recommendation on the part of the Corporate Governance and Nominating Committee or the Board, by following the procedures set forth under the heading “Stockholder Proposals for the 2010 Annual Meeting” below. Candidates nominated by stockholders in accordance with procedures set forth in the bylaws will not be included in the Company’s proxy card for the next annual meeting.

 

The Board held fourteen meetings, either in person or by teleconference, during the year ended December 31, 2008. During that year, each of our directors, other than Mr. West, attended at least 75% of the aggregate number of Board meetings and meetings held by all committees on which he or she then served. Mr. West attended 59% of the aggregate number of Board meetings and meetings held by all committees on which he then served.

 

Our Corporate Governance Guidelines provide that directors are expected to attend the annual meeting of stockholders. All of our directors attended the 2008 annual meeting, and we expect substantially all of our directors to attend the 2009 Annual Meeting.

 

The Board has established four standing committees — Audit, Compensation, Corporate Governance and Nominating and Executive. Current copies of the charters of each of Audit, Compensation and Corporate Governance and Nominating committees are posted on the “Corporate Governance” section of our website, www.keyenergy.com.

 

The Board has determined that all of the members of each of the Board’s standing committees, other than the Executive Committee, are independent under the NYSE rules, including, in the case of all members of the

Audit Committee, the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

The responsibilities of the Audit Committee include the following:

 

 

The current members of our Audit Committee are Messrs. Collins, Michael and Owens and Ms. Yocum. Mr. Michael is the Chair of the Audit Committee. All members of the Audit Committee would meet the financial literacy standard required by the NYSE rules and at least one member qualifies as having accounting or related financial management expertise under the NYSE rules. In addition, as required by the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring that each public company disclose whether or not its audit committee has an “audit committee financial expert” as a member. An “audit committee financial expert” is defined as a person who, based on his or her experience, satisfies all of the following attributes:

 

 

The Board has determined that Mr. Michael satisfies the definition of “audit committee financial expert,” and has designated Mr. Michael as an “audit committee financial expert.”

 

The Audit Committee held eight meetings in 2008. In addition, members of the Audit Committee speak regularly with our independent registered public accounting firm and separately with the members of management to discuss any matters that the Audit Committee or these individuals believe should be discussed, including any significant issues or disagreements concerning our accounting practices or financial statements. For further information, see “Report of the Audit Committee” below.

The Audit Committee has the authority to retain legal, accounting or other experts that it determines to be necessary or appropriate to carry out its duties. We will provide the appropriate funding, as determined by the Audit Committee, for the payment of compensation to our independent registered public accounting firm and to any legal, accounting or other experts retained by the Audit Committee and for the payment of the Audit Committee’s ordinary administrative expenses necessary and appropriate for carrying out the duties of the Audit Committee.

 

The charter of our Audit Committee can be accessed on the “Corporate Governance” section of our website, www.keyenergy.com.

 

The Compensation Committee has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy. The responsibilities of the Compensation Committee include the following:

 

 

The current members of the Compensation Committee are Messrs. Breazzano, Fertig, Marcum, Reeves and West, all of whom are independent, non-management members of the Board. Mr. Reeves became Chair of the Compensation Committee effective November 1, 2008. Previously, Mr. Breazzano was the Chair. No Compensation Committee member participates in any of the Company’s employee compensation programs other than the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan, and prior grants under the Key Energy Group, Inc. 1997 Incentive Plan. The Compensation Committee held nine meetings in 2008.

 

The Compensation Committee has the sole authority to select, retain, terminate, and approve the fees and other retention terms of special counsel or other experts or consultants, as it deems appropriate, without seeking approval of the Board or management. With respect to compensation consultants retained to assist in

the evaluation of director, CEO or executive officer compensation, this authority is vested solely in the Compensation Committee.

 

The charter of our Compensation Committee can be accessed on the “Corporate Governance” section of our website, www.keyenergy.com.

 

The responsibilities of the Corporate Governance and Nominating Committee include the following:

 

 

The Corporate Governance and Nominating Committee is composed entirely of independent directors, as that term is defined by applicable NYSE rules. On December 5, 2008, the composition of the Corporate Governance and Nominating Committee was reconstituted when Mr. Marcum was appointed to the committee. The current members of the Corporate Governance and Nominating Committee are Messrs. Fertig, Breazzano, Coleman, Marcum and West. Mr. Fertig is the Chair of the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee held four meetings in 2008.

 

The Corporate Governance and Nominating Committee has the authority and funding to retain counsel and other experts or consultants, including the sole authority to select, retain and terminate any search firm to be used to identify director candidates and to approve the search firm’s fees and other retention terms.

 

The charter of our Corporate Governance and Nominating Committee can be accessed on the “Corporate Governance” section of our website, www.keyenergy.com.

 

The Executive Committee’s membership consists of the CEO and Chairman of the Board, the lead director and each chairperson of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee. The Executive Committee only acts in place of the Board in situations where it may be impracticable to assemble the full Board to consider a matter on a timely basis. Any action by the Executive Committee will be promptly reported to the full Board. Currently, Messrs. Alario, Breazzano, Fertig, Michael and Reeves serve on the Executive Committee. Mr. Reeves became a member of the Executive Committee when he replaced Mr. Breazzanno as Chair of the Compensation Committee effective November 1, 2008. Mr. Breazzano, as Lead Director, remains a member of the Executive Committee. The Executive Committee held four meetings in 2008.

 

Our Code of Business Conduct applies to all of our employees, including our CEO, CFO and senior financial and accounting officers. In addition, we have a Code of Business Conduct for Members of the Board of Directors. Among other matters, the Code of Business Conduct and the Code of Business Conduct for Members of the Board of Directors establish policies to deter wrongdoing and to promote both honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest, compliance with applicable laws, rules and regulations, full, fair, accurate, timely and understandable disclosure in public communications and prompt internal reporting of violations of the Code of Business Conduct. We also have an Ethics Committee, composed of members of management, which administers our ethics and compliance program with respect to our employees. In addition, we provide an ethics line for reporting any violations on a confidential basis. Copies of our Code of Business Conduct and the Code of Business Conduct for Members of the Board of Directors are available on our website at www.keyenergy.com. We will post on our Internet website all waivers to or amendments of our Code of Business Conduct and the Code of Business Conduct for Members of the Board of Directors that are required to be disclosed by applicable law and the NYSE listing standards.

 

The Audit Committee has reviewed our audited financial statements for the fiscal year ended December 31, 2008 and has discussed these financial statements with our management and independent registered public accounting firm.

 

The Audit Committee has also received from, and discussed with, Grant Thornton LLP, our independent registered public accounting firm, various communications that our independent registered public accounting firm is required to provide to the Audit Committee, including the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees).

 

Our independent registered public accounting firm also provided the Audit Committee with the written disclosures required by Public Company Accounting Oversight Board Rule 3526 (Communication with Audit Committees Concerning Independence). The Audit Committee has discussed with the independent registered public accounting firm their independence from Key.

 

Based on its discussions with management and the independent registered public accounting firm, and its review of the representations and information provided by management and the independent registered public accounting firm, the Audit Committee recommended to our Board that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

By the Audit Committee of the Board of Directors

 

Ralph S. Michael, III, Chairman
Kevin P. Collins
William F. Owens
Arlene M. Yocum

 

Below are the names, ages and certain other information on each of our executive officers, other than Mr. Alario, whose information is provided above.

 

Newton W. “Trey” Wilson III, age 58, Executive Vice President and Chief Operating Officer. Mr. Wilson was appointed Executive Vice President and Chief Operating Officer on June 25, 2008. He joined the Company as Senior Vice President and General Counsel effective January 24, 2005 and was later appointed Secretary effective January 24, 2005. Previously, Mr. Wilson served as Senior Vice President, General Counsel and Secretary of Forest Oil Corporation, which he joined in November 2000. Prior to joining Forest, Mr. Wilson was a consultant to the oil industry as well as an executive for two oil and gas companies, Union Texas Petroleum and Transco Energy Company. Mr. Wilson received a BBA from Southern Methodist University and a JD from the University of Texas.

 

T. M. “Trey” Whichard III, age 50, Senior Vice President and Chief Financial Officer. Mr. Whichard joined the Company as its Senior Vice President and Chief Financial Officer on March 26, 2009. He was previously an officer with BJ Services Company, serving in various financial capacities since 1989, including as Vice President, Treasurer and Tax Director and most recently, from 2002 until the beginning of 2006, as Vice President and Chief Financial Officer. Mr. Whichard was retired since leaving BJ Services Company in 2006, until joining the Company in 2009. He received a BBA in Accounting from Sam Houston State University in 1981.

 

William M. “Bill” Austin, age 63, Former Senior Vice President and Chief Financial Officer. Mr. Austin served as Senior Vice President and Chief Financial Officer from January 20, 2005 until February 6, 2009, when he resigned from the Company to join the Turnaround and Restructuring Group at Alvarez & Marsal. He also served as the Company’s Chief Accounting Officer from January 20, 2005 to August 22, 2005. Mr. Austin served as an advisor, principally in a financial capacity, to the Company for six months prior to becoming an officer of the Company. Prior to joining the Company, Mr. Austin served as Chief Restructuring Officer of Northwestern Corporation from 2003 to 2004. Mr. Austin served as Chief Executive Officer, U.S. Operations,

of Cable & Wireless/Exodus Communications from 2001 to 2002. He also served as Chief Financial Officer of BMC Software from 1997 to 2001. Prior to that, Mr. Austin spent nearly six years at McDonnell Douglas Aerospace, a subsidiary of McDonnell Douglas Corporation, serving most recently as Vice President and Chief Financial Officer, and 18 years at Bankers Trust Company. Mr. Austin received a BS in Electrical Engineering from Brown University and an MBA from Columbia University.

 

Kim B. Clarke, age 53, Senior Vice President, Administration and Chief People Officer. Ms. Clarke joined the Company on November 22, 2004 as Vice President and Chief People Officer. She was elected as an executive officer in January 2005 and, since January 1, 2006, she has served as our Senior Vice President and Chief People Officer (as of March 25, 2009, her title changed to Senior Vice President, Administration and Chief People Officer). Ms. Clarke previously served as Vice President of Human Resources for GC Services from 1999 to 2004. Prior to that, she served in a number of senior level human resource roles for Browning Ferris Industries (BFI) from 1988 to 1997 and as BFI’s Vice President Human Resources from 1997 to 1999. Ms. Clarke’s 30 years of work experience also includes industry experience with Baker Service Tools and National Oilwell. Ms. Clarke holds a BS degree from the University of Houston.

 

Don D. Weinheimer, age 50, Senior Vice President of Product Development, Strategic Planning and Quality. Mr. Weinheimer joined the Company on October 2, 2006 as Senior Vice President of Business Development, Technology and Strategic Planning (as of October 1, 2008, his title changed to Senior Vice President of Product Development, Strategic Planning and Quality). Previously, Mr. Weinheimer served as Vice President of Technology Globalization within Halliburton’s Energy Services Group from July 2006 to October 2006 and as Vice President of Innovation and Marketing in Halliburton’s Production Optimization Division from July 2004 to June 2006. Prior to that, Mr. Weinheimer served in various capacities within Halliburton and divisions of Halliburton since 1981. Mr. Weinheimer has over 27 years of industry experience, including international operational and business development experience in both the Middle East and Algeria. Mr. Weinheimer holds a BS degree in Agricultural Engineering from Texas A&M University.

 

Kimberly R. Frye, age 40, Senior Vice President, General Counsel and Secretary. Ms. Frye joined the Company in October 2002 as Associate General Counsel and was promoted to her current position as Senior Vice President, General Counsel and Secretary in July 2008. Prior to joining Key, Ms. Frye was an attorney with Porter & Hedges, L.L.P. where her practice focused principally on corporate and securities law. Prior to attending law school, Ms. Frye worked as a federal bank examiner for the Federal Deposit Insurance Corporation. Ms. Frye received her BS in Corporate Finance and Investment Management from the University of Alabama in 1991 and her JD from the University of Houston in 1997.

 

Phil G. Coyne, age 57, Senior Vice President of Wireline Services. Mr. Coyne became Senior Vice President of the Company’s Eastern Region in September 2004 and served in that capacity until October 2008 when he became Senior Vice President of Wireline Services in connection with the Company’s realignment of its U.S. operating segments that was implemented in early 2009. Mr. Coyne joined the Company as Vice President Eastern Region in April of 2004 and was appointed as an executive officer in January 2005. Before joining the Company, Mr. Coyne was Vice President of North America for Owen Oil Tools, an explosives manufacturer and a division of Core Laboratories, from 2001 to 2004. He served as U.S. Operations Support Manager for Wood Group (a British based company) from 2000 to 2001. Mr. Coyne served in various positions with Western Atlas from 1984 to 2000, most recently serving as the District Manager of Atlas’s Broussard, Louisiana offshore operations. Mr. Coyne is a Vietnam era veteran and was in the Air Force stationed primarily in Thailand.

 

John R. Carnett, age 50, Senior Vice President of Pressure Pumping Operations. Mr. Carnett was promoted to Senior Vice President of Pressure Pumping Operations in October 2008 in connection with the Company’s realignment of its U.S. operating segments that was implemented in early 2009. Mr. Carnett joined the Company as Vice President of Pressure Pumping Services in July 2002 in conjunction with the Company’s acquisition of Q Services, Inc., where Mr. Carnett previously worked. Prior to that, Mr. Carnett was one of the founders of Niewoehner, Inc., also known as American Energy Services, where he served as Vice President from July 1996 until that company was acquired by Q Services, Inc. in July 2001.

Dennis C. Douglas, age 55, Senior Vice President of U.S. Marketplace Management. Mr. Douglas was promoted to Senior Vice President of U.S. Marketplace Management in October 2008 in connection with the Company’s realignment of its U.S. operating segments that was implemented in early 2009. Mr. Douglas joined the Company as Operations Manager for the L.A. Basin in California in February 1997 in connection with the Company’s acquisition of Dawson Production Services, Inc. Mr. Douglas was promoted to Sales Manager for the Company’s California Division in May 1998 and served in that capacity until he was promoted to Division Manager for California in October 2000. In June 2008, he was promoted to Group Vice President of the Company’s Western Division until his promotion to Senior Vice President of the Company’s U.S. Marketplace in October 2008. Prior to joining Key, Mr. Douglas worked during 1997 at Dawson Production Services, Inc. as Operations Manager. From 1993 to 1997, he worked at Nabors Well Service as Rig Supervisor. Prior to that, Mr. Douglas managed Homco’s rental and fishing tool division in California from 1989 until Homco merged with Weatherford International in 1993.

 

Thomas R. Pipes, age 53, Senior Vice President of Well Service Rig Operations. Mr. Pipes originally joined Key in 1982 and was recently promoted to Senior Vice President of Well Service Rig Operations in October 2008 in connection with the Company’s realignment of its U.S. operating segments that was implemented in early 2009. From May 2007 until his promotion to Senior Vice President, Mr. Pipes held the position of Vice President of Business Development. Previously, from September 2002 to May 2007, he served as Group Vice President for the Company’s Permian Basin Operations, and from July 1992 to October 1998 was the Company’s Area Manager in Odessa, Texas.

 

Jim D. Flynt, age 64, Former Senior Vice President of Western Region. Mr. Flynt served as Senior Vice President of Western Region from September 2004 until January 2, 2009, when he retired from the Company. Mr. Flynt became an executive officer of the Company effective March 5, 2003 when he was promoted to Senior Vice President of Production Services. From December 1999 to March 2003, Mr. Flynt served as Vice President of Western Operations. Mr. Flynt joined the Company in September 1998 as the President of the Company’s California Division, following the Company’s acquisition of Dawson Production Services, Inc. From February 1997 to September 1998, Mr. Flynt served as the Regional Vice President of Dawson Production Services, Inc. Before joining Dawson Production Services, Inc., he was Vice President, Area Manager, of Pride Petroleum Services, Inc. from January 1996 to February 1997. From June 1995 to January 1996, he served as District Manager of Pool California Production Service, a subsidiary of Pool Energy Services Co. From March 1976 to June 1995, he served as Vice President, Operations, of California Production Services, Inc.

 

J. Marshall Dodson, age 38, Vice President and Chief Accounting Officer. Mr. Dodson joined the Company as Vice President and Chief Accounting Officer on August 22, 2005. From Mr. Austin’s resignation from the Company on February 6, 2009 until Mr. Whichard’s election as the Company’s new Chief Financial Officer on March 26, 2009, Mr. Dodson served in the additional capacity as interim principal financial officer. Prior to joining the Company, Mr. Dodson served in various capacities at Dynegy, Inc. from 2002 to August 2005, most recently serving as Managing Director and Controller, Dynegy Generation since 2003. Mr. Dodson started his career with Arthur Andersen LLP in Houston, Texas in 1993, serving most recently as a senior manager prior to joining Dynegy, Inc. Mr. Dodson is a Certified Public Accountant and received a BBA from the University of Texas at Austin in 1993.

 

D. Bryan Norwood, age 53, Vice President and Treasurer. Mr. Norwood was named Vice President and Treasurer effective October 20, 2006. Mr. Norwood has 30 years of experience, most recently as Eastern Region Controller for the Company, having served in that capacity from September 2005 to October 2006. Prior to joining Key, Mr. Norwood had a consulting company, DBN Norwood Services, Inc., from September 2003 to September 2005. He served as Vice President Finance-Americas for Bredero Shaw Company from January 1998 to September 2003. Mr. Norwood is a Certified Public Accountant and is a graduate of the University of Texas at Austin, where he received his BBA.

 

Effective December 1, 2006, Grant Thornton LLP was engaged as the Company’s independent registered public accounting firm. The following table sets forth the fees for the fiscal period to which the fees relate:

 

 

 

 

Audit fees consist of professional services rendered for the audit of the Company’s annual financial statements, the audit of the effectiveness of the Company’s internal control over financial reporting and the reviews of the quarterly financial statements. This category also includes fees for issuance of comfort letters, consents, assistance with and review of documents filed with the SEC, statutory audit fees, work done by tax professionals in connection with the audit and quarterly reviews and accounting consultations and research work necessary to comply with the standards of the Public Company Accounting Oversight Board. Fees are presented in the period to which they relate versus the period in which they were billed. Other services performed include certain advisory services and do not include any fees for financial information systems design and implementation.

 

The Audit Committee has an Audit and Non-Audit Services Pre-Approval Policy. The policy requires the Audit Committee to pre-approve the audit and non-audit services performed by our independent registered public accounting firm. Under the policy, the Audit Committee establishes the audit, audit-related, tax and all other services that have the approval of the Audit Committee. The term of any such pre-approval is 12 months from the date of pre-approval, unless the Audit Committee adopts a shorter period and so states. The Audit Committee will periodically review the list of pre-approved services and will add to or subtract from the list of pre-approved services from time to time. The Audit Committee will also establish annually pre-approval fee levels or budgeted amounts for all services to be provided by the independent registered public accounting firm. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee.

 

The Audit Committee has delegated to its Chair the authority to pre-approve services, not previously pre-approved by the Audit Committee, that involve aggregate payments (with respect to each such service or group of related services) of $50,000 or less. The Chair will report any such pre-approval to the Audit Committee at its next scheduled meeting.

 

The policy contains procedures for a determination by the CFO that proposed services are included within the list of services that have received pre-approval of the Audit Committee. Proposed services that require specific approval by the Audit Committee must be submitted jointly by the independent registered public accounting firm and the CFO and must include backup statements and documentation regarding the proposed services and whether the proposed services are consistent with SEC and NYSE rules on auditor independence.

 

We have an Affiliate Transaction Policy which requires advance review and approval of any proposed transactions (other than employee or director compensation) between the Company and an affiliate of the Company. For this purpose, affiliates include major stockholders, directors and executive officers and members of their immediate family (including in-laws), nominees for director, and affiliates of the foregoing persons, as determined in accordance with SEC rules. In determining whether to approve an affiliate transaction, the Board will use such processes it deems reasonable in light of the circumstances, such as the nature of the transaction and the affiliate involved, which may include an analysis of any auction process involved, an analysis of market comparables, use of an appraisal, obtaining an investment banking opinion or a review by independent counsel. The policy requires the Board to determine that, under all of the circumstances, the covered transaction is in, or not inconsistent with, the best interests of the Company, and requires approval of covered transactions by a majority of the Board (other than interested directors). The Board, in its discretion, may delegate this authority to the Corporate Governance and Nominating Committee or another committee comprised solely of independent directors, as appropriate.

 

In addition, the Company requires on an annual basis that the directors and executive officers of the Company complete a Directors and Officers Questionnaire to describe certain information and relationships (including those involving their immediate family members) that may be required to be disclosed in our Form 10-K, annual proxy statement and other filings with the SEC. Director nominees and newly appointed executive officers must complete the questionnaire at or before the time they are nominated or appointed. If a change occurs in certain information required to be disclosed in the questionnaire after it is completed, the director or executive officer must immediately report this to the Company throughout the year, including changes in relationships between immediate family members and the Company, compensation paid from third parties for services rendered to the Company not otherwise disclosed, interests in certain transactions, and facts that could affect director independence. Directors are required to disclose in the questionnaire, among other things, any transaction that the director or any immediate family member has entered into with the Company or relationships that a director or an immediate family member has with the Company, whether direct or indirect. This information is provided to the Company’s legal department for review and, if required, submitted to the Board for the process of determining independence.

 

Family Relationships

 

Craig Owen, the son-in-law of Jim Flynt, our former Senior Vice President of Western Region, served, and continues to serve, as Area Director in our Rental Services line of business since August 2008 and, prior to that date during 2008, served as an area manager in our Rocky Mountain Division. For fiscal year ended December 31, 2008, Mr. Owen received approximately $182,283 in salary, bonus and benefits. Mr. Owen has been with Key since 1980. We believe that Mr. Owen’s compensation is comparable to what he would receive absent his relationship to Mr. Flynt.

 

Darren Flynt, the son of Jim Flynt, our former Senior Vice President of Western Region, served, and continues to serve, as a Business Process Manager for the Company. For fiscal year ended December 31, 2008, Darren Flynt received approximately $151,314 in salary, bonus and benefits. We believe that Darren Flynt’s compensation is comparable to what he would receive absent his relationship to Jim Flynt.

 

Lee James, the brother-in-law of Phil Coyne, our Senior Vice President of Wireline Services, served, and continues to serve, as a Technical Advisor for the Company since July 2008 and, prior to that date during 2008, served as a Sales Representative. For fiscal year ended December 31, 2008, Mr. James received approximately $146,808 in salary, bonus and benefits. We believe that Mr. James’ compensation is comparable to what he would receive absent his relationship to Mr. Coyne.

 

The related party transactions with Craig Owen, Darren Flynt and Lee James, all of which had been previously disclosed and approved under the Affiliate Transaction Policy were reaffirmed by the Corporate Governance and Nominating Committee on April 2, 2009.

Board Member Relationships with Other Companies

 

Mr. Reeves joined the Board in October 2007 and is currently an executive officer with Anadarko Petroleum Corporation, or Anadarko, one of our customers. During the fiscal year ended December 31, 2008, Anadarko purchased services from us for approximately $25.9 million, which is less than 2% of our revenue for 2008. This relationship was reviewed and approved under the Affiliate Transaction Policy. The Board does not consider this amount to be material and the relationship between Anadarko and the Company does not otherwise affect Mr. Reeves’ independence.

 

Payments to Board Members for Expired Stock Options

 

In April 2009, the Company entered into a Settlement Agreement and Release of Claims with each of Mr. Collins and Mr. Marcum, two of our current directors. These agreements relate to expired stock options that Messrs. Collins and Marcum held for a total of 140,000 shares of common stock (70,000 shares held by each). The options expired unexercised during the period before the Company became current with its financial statements, when there was not an effective registration statement or available exemption from registration under which to issue such shares. Pursuant to these agreements, the Company paid Messrs. Collins and Marcum cash amounts equal to $194,974 each, and each of Messrs. Collins and Marcum fully released and forever discharged the Company from any and against all claims they had or could have asserted with respect to their expired options.

 

The amount of the payments made to Messrs. Collins and Marcum under these agreements was determined consistent with the settlement calculations that were used in a previously disclosed class action lawsuit brought in September 2007 by a former employee, Belinda Taylor, on behalf of herself and similarly situated former employees who held stock options that expired unexercised during this same period.

 

These payments and each Settlement Agreement and Release of Claims were reviewed and approved under the Affiliate Transaction Policy. The Board does not consider these arrangements to create a material relationship between the Company and either of Mr. Collins or Marcum, or to otherwise affect the independence of either of Mr. Collins or Marcum.

 

Other Related Party Matters

 

On March 4, 2009, Mr. Fertig, one of our current directors, purchased, for $161,950 on the open market, $250,000 face value of our 8.375% senior notes. The 8.375% senior notes were issued by the Company on November 29, 2007 and mature on December 31, 2014. This transaction was an open market purchase to which we do not believe our Affiliate Transaction Policy is applicable, nor does the Company believe it impacts Mr. Fertig’s independence.

 

 

Oversight of Executive Compensation Program

 

As described above under “Corporate Governance — Board Committees — Compensation Committee,” the Compensation Committee of our Board has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy. The Compensation Committee has the sole authority to engage independent compensation consultants, who report directly to the committee, to advise and consult on compensation issues.

 

The Compensation Committee took the following actions during 2008 to improve the links between senior executive pay and performance by:

 

 

 

Compensation Consultant

 

In May 2007, after interviewing several candidates, the Compensation Committee retained Longnecker & Associates, or Longnecker, as its independent compensation consultant to advise the Compensation Committee on all matters related to the senior executives’ compensation and general compensation programs. This relationship with Longnecker continued in 2008.

 

Longnecker assisted the Compensation Committee by providing comparative market data on compensation practices and programs based on an analysis of peer competitors. Longnecker also provided guidance on industry best practices. Longnecker advised the Compensation Committee in (1) determining base salaries for senior executives, (2) recommending long-term incentive initiatives for consideration, (3) designing and recommending individual grant levels for the 2008 long-term incentive awards for the senior executives, and (4) adjusting our compensation and incentive structure for 2009 to respond to the current down market.

 

Compensation ranges for all positions are reviewed annually for adjustment. The last review was completed in April 2008. The only changes in compensation that have occurred subsequent to this review have been in connection with job position changes. The review included total compensation for executives, including base salary, annual incentives, long-term incentives, all other compensation and changes in pension value and nonqualified deferred compensation earnings. The review also assessed the competitiveness of each executive’s compensation as compared to a specific peer group and other pertinent published surveys. Specifically, Longnecker evaluated where the total compensation for each executive stood relative to the 50th and 75th percentile of a group of peer companies.

 

The benchmarks used for executive compensation comparisons include companies in our industry with similar revenue and companies we consider to be competing for the same level of executive talent. The following companies fit either one of those categories and were used in our peer group analysis:

 

 

The recommendations of Longnecker, including the selection of the peer group, were reviewed with management and adjusted by the Compensation Committee as appropriate to provide the most relevant information to the Compensation Committee.

 

Longnecker also reviewed survey data as a reference point to compare the compensation of our executives to those of a broad range of companies. The following published surveys utilized by Longnecker were:

 

 

 

Based on its review of the compensation program, Longnecker recommended to the Compensation Committee that we (1) maintain the target for base salaries near the 50th percentile of the peer group, with some variation for different positions between the 50th and 75th percentiles, (2) maintain the target for annual incentives near the 75th percentile of the peer group in order to emphasize performance and (3) provide targeted long-term incentive awards to align the interest of our executives with those of our stockholders and the long-term goals and objectives of the Company. Longnecker provided recommendations for targeted long-term incentive award amounts and incentive vehicles to deliver the awards. Longnecker’s recommendation was to provide each executive a combination of stock options and restricted stock in addition to base salary and bonus. Longnecker arrived at this long-term incentive award mix based upon (1) the prevalence of similar approaches among the Company’s peer group, (2) the balancing of retention and motivation at the time of granting the awards and (3) modeling that indicated an effective use of awards available for grant and the minimization of dilution to stockholders. In connection with its overall recommendations to the Compensation Committee, Longnecker considered not only the external market, but also the internal environment affecting the Company, including increased flexibility moving into 2009 to allow future adjustments in response to an extensively changing marketplace.

 

There were no changes made during 2008 in director fees and compensation. However, effective April 1, 2009, director fees are being temporarily reduced by 10% in response to the current economic downturn. From time to time, Longnecker has informally reviewed director fees, but has recommended that a formal review of director compensation be performed. The Compensation Committee has requested that Longnecker formally review Board compensation during 2009. See “Director Compensation” below for additional information regarding director fees.

 

In 2007, Longnecker reviewed the NEOs’ employment agreements and severance plans upon a change-in-control. Advice and consulting for all other non-executive compensation is completed by third parties other than Longnecker.

 

Role of Executives in Establishing Compensation

 

The Compensation Committee makes the final determination of all compensation paid to our NEOs and is involved in all compensation decisions affecting our CEO. However, management also plays a role in the determination of executive compensation levels. The key members of management involved in the compensation process are the CEO, CFO, the Chief Operating Officer, the General Counsel and the Administration and Chief People Officer. Management proposes certain corporate and executive performance objectives for executive management. Management also participates in the discussion of peer companies to be used to benchmark NEO compensation, and recommends the overall funding level for cash bonuses and equity incentive awards. All management recommendations are reviewed, modified as necessary by the Compensation Committee, and approved by the Compensation Committee.

 

Compensation Philosophy

 

In order to recruit and retain the most qualified and competent individuals as senior executives, we strive to maintain a compensation program that is competitive in our market and with respect to the general profession of our executives. Further, in response to the severe economic downturn that began in late 2008, we are implementing for 2009 more flexibility in our compensation and incentive structures to provide greater discretion in determining the achievement of incentive targets. We remain committed to hiring and retaining qualified, motivated employees at all levels within the organization while ensuring that all forms of compensation are aligned with business needs. The purpose of our compensation program is to reward exceptional organizational and individual performance. Our compensation system is designed to support the successful attainment of our vision, values and business objectives.

The following compensation objectives are considered in setting the compensation components for our senior executives:

 

 

We want our executives to be motivated to achieve the Company’s short- and long-term goals, without sacrificing our financial and corporate integrity in trying to achieve those goals. While an executive’s overall compensation should be strongly influenced by the achievement of specific financial targets, we believe that an executive must be provided a degree of financial certainty and stability in his or her compensation. The design and operation of the compensation arrangements do not provide the executives with incentives to engage in business or other activities that would threaten the value of the Company or its stockholders.

 

The principal components of our executive compensation program are base salary, cash incentive bonuses and long-term incentive awards in the form of stock options and restricted stock. We blend these elements in order to formulate compensation packages which provide competitive pay, reward the achievement of financial, operational and strategic objectives on a short-and long-term basis, and align the interests of our executive officers and other senior personnel with those of our stockholders. To understand our compensation philosophy, it is important to note that we believe that compensation is not the only manner in which we attract people to Key. We strive to hire and retain talented people who are compatible with our corporate culture, committed to our core values, and who want to make a contribution to our mission.

 

Elements of Compensation

 

The total compensation and benefits program for our senior executives generally consists of the following components:

 

 

Base Salaries

 

We provide base salaries to compensate our senior executives and other employees for services performed during the fiscal year. This provides a level of financial certainty and stability in an industry with historical volatility and cyclicality. The base salaries are designed to reflect the experience, education, responsibilities and contribution of the individual executive officers. This form of compensation is eligible for annual merit increases, and is initially established for each executive through individual negotiation and is reflected in his or her employment agreement. Thereafter, salaries are reviewed annually, based on a number of factors, both quantitative, including detailed organizational and competitive analyses performed by an independent

consultant engaged by the Compensation Committee, and qualitative, including the Compensation Committee’s perception of the executive’s experience, performance and contribution to our business objectives and corporate values.

 

During 2008, each of the NEOs received a salary increase in April 2008 in connection with annual performance evaluations and to provide base salaries consistent with the Company’s peers. Mr. Wilson received an additional salary increase in connection with his promotion to Chief Operating Officer in June 2008. The average salary increase for the NEOs overall during 2008 was 4.8%.

 

As part of our cost reduction efforts in response to the current economic downturn, in February 2009, management recommended, and our Compensation Committee approved, a temporary pay reduction program. In accordance with this program, effective March 1, 2009, Mr. Alario’s salary was reduced by 10%, Mr. Wilson’s, Ms. Clarke’s and Ms. Frye’s salaries were reduced by 7% each, and all other officers, including Mr. Weinheimer, had their salaries reduced by 5%. Mr. Whichard, our new CFO who did not join the Company until March 26, 2009, had his salary reduced by 7% of what it would have otherwise been under his employment agreement. All other corporate office employees’ salaries or hours were also reduced by 5%. We intend for this pay reduction to be temporary and remain in effect until such time as economic conditions improve to allow a return to previous levels. In addition to these salary decreases, our non-employee directors fees have been temporarily reduced by 10% effective April 1, 2009. See “Director Compensation” below for additional information regarding directors’ fees.

 

Cash Bonus Incentive Plan

 

The cash bonus incentive awards are variable cash compensation earned only when established semi-annual performance goals are achieved. It is designed to reward the plan participants, including the NEOs who have achieved certain corporate and executive performance objectives and have contributed to the achievement of certain short- and long-term objectives of the Company.

 

Under this cash compensation program, each executive has the opportunity to earn a cash incentive compensation bonus based on the achievement of pre-determined operating and financial performance measures and other performance objectives established semi-annually by the Compensation Committee. Those goals are financial targets, safety targets, retention targets and some individual job-related targets. Each goal is weighted in terms of percentage of the total program.

 

During 2008, our principal financial performance target was measured by our earnings (or net income) before interest, taxes, depreciation and amortization, or EBITDA, and was tied to our financial business plan, which is approved by the Board. The Compensation Committee establishes a threshold and a target percentage of EBITDA performance for the period. The threshold level of EBITDA performance must be met in order to fund the incentive program. If the EBITDA performance falls short of such threshold, then no incentive bonuses are awarded under the program regardless of goal achievement under the other measures. If EBITDA threshold is achieved, but less than 100% of the target is achieved, then the executive may receive an incremental bonus percentage with respect to the EBITDA target. Assuming that the EBITDA financial threshold is met, the executive can then receive credit in the other bonus measurements. The executive may also receive incremental credit for the other bonus measurements even though 100% of the target goal with respect to each other performance measurement has not been reached. The Compensation Committee reviews these goals at the beginning of the period and authorizes payment following the end of the period.

 

Each executive’s bonus opportunity is initially reflected in the executive’s employment agreement and subsequently reviewed at least annually. For 2008, the Compensation Committee has set the aggregate annual bonus opportunity for each executive as a percentage of base salary at 100%, which is earned on a semi-annual basis. During 2008, the aggregate target participation percentage for all eligible employees ranged from 10% to 100% of base salary. However, if the Company performs above the financial business plan and therefore exceeds the established EBITDA performance measures, additional increments are awarded beyond that amount, which in 2008 could have been up to 140% of the weighted portion of the EBITDA target. Achievement over and above the financial target can occur only when the business plan is exceeded. Inasmuch

as the business plan is our estimate of maximum expected achievement for such six-month period, exceeding the target for this measure is difficult.

 

The following measures, which are discussed in more detail below, determined the size of bonus awards earned by the NEOs during 2008:

 

 

Measurements

 

EBITDA.  The financial target is based on EBITDA; however, certain adjustments are made in the calculation of this performance measure for purposes of determining the financial target achieved. We calculate this financial target as net income before interest, taxes, depreciation and amortization. We also exclude (1) losses or gains on the sale of assets, (2) losses or gains on early extinguishment of debt and (3) net other expenses or other income.

 

Return on Assets.  The return on assets, or ROA, goal was implemented by the Compensation Committee for the second half of 2008. This target is calculated on a consolidated basis as earnings before tax divided by the average net property, plant and equipment on the measurement date. ROA was introduced to provide additional incentives for increasing the utilization of assets among our lines of business and geographic regions.

 

Safety.  The safety target is based on a goal established by the Compensation Committee at the beginning of the period. This goal represents the improvement required or desired result in the Occupational Safety and Health Administration, or OSHA, recordable incident rate. OSHA recordable incident rates are determined by measuring the number of incidents, such as accidents or injuries, involving our employees. Incidents that are recorded include accidents or injuries potentially resulting in a fatality, an employee missing work, an employee having to switch to “light” duty work or an employee needing to have medical treatment.

 

Employee Turnover.  The employee retention goal is used as an incentive to reduce employee turnover. The goals are established by the Compensation Committee at the beginning of the period and represent a specific percentage of improvement or a desired minimum in the number of employees that terminate employment with the Company from the prior period goal.

 

Individual Objectives

 

Individual performance goals are based on individual objectives for each NEO specific to his or her area of expertise and influence, such as the implementation of a new corporate-wide initiative, system or policy. The Compensation Committee sets, to the extent it deems appropriate, the individual targets for the CEO and CFO, while the CEO sets the individual objectives for all other NEOs. The targets for these measures are derived from our 2008 business plan as approved by the Board and are set at or above the levels set within the business plan. As part of our efforts to measure success in a downmarket, future targets for individual objectives during 2009 will focus heavily on cost containment.

 

Under our incentive compensation program, the Compensation Committee has discretion to adjust targets, as well as individual awards, either positively or negatively. The percentage weighting with respect to these target measurements for the first and second half of 2008 are set forth below. The tables also highlight the percentage of target measurements achieved by each of the NEOs for each six-month period for the cash bonus incentive plan. The actual levels achieved, which are expressed as a percentage of base salary for the

corresponding period, are multiplied by 50% of the NEO’s eligible percentage of base salary to calculate the amount earned by the NEO for the respective six-month period (which was 100% during 2008):

 

First Half 2008 Incentive Plan Measures

 

 

Second Half 2008 Incentive Plan Measures

 

 

The percentage targets for the first half of 2008 with respect to each of the NEOs were established by the Compensation Committee in February 2008, and confirmed with respect to Mr. Alario in April 2008. The targets for the second half of 2008 were approved for each of the NEOs in July 2008. Senior management established the standard weighting of bonus targets for all corporate employees, other than NEOs, for the first half and second half of 2008 as follows:

 

 

The standardization by management was implemented to provide consistency in the overall compensation plan. Management wanted to provide a greater percentage weighting to the financial performance target for all participants in the plan. It was management’s belief that the standard weighting of target bonuses aligns the goals of individuals with the success of the Company.

 

In early December 2008, the Compensation Committee reviewed an initial proposed incentive plan for the first half of 2009 that had been developed earlier in the year. However, because of the difficulty in setting target formulas in what had become (and continues to be) a highly volatile and declining market, the Compensation Committee directed management to develop a revised plan for its consideration. In consultation with Longnecker, management developed, and our Compensation Committee approved, a revised incentive plan, both for the NEOs and other employees of the Company, that provides guidelines for the Compensation Committee to use in determining what, if any, bonus should be paid for the first half of 2009. The incentive structure for 2009 will still utilize the same measurement components as the current plan, including EBITDA, safety and turnover. However, due to the inability to gauge future financial performance in the current volatile market, the 2009 cash bonus incentive plan provides the Compensation Committee with greater discretion in

measuring the achievement of the incentive targets. The established targets for financial performance for 2009, such as EBITDA, will be considered a guideline in determining the actual performance of management during the economic downturn. The Compensation Committee will also consider absolute and peer-relative data to assess the performance of the executives in determining whether they achieved the necessary level of performance to be compensated under the cash bonus incentive plan.

 

For 2009, the Compensation Committee also determined to establish each of the executive’s, other than Mr. Alario’s, annual target bonus opportunity, which is measured as a percentage of base salary, at 75%. Mr. Alario’s target is 125%. As noted above, the plan for 2009 will provide increased flexibility for the Compensation Committee to exercise its discretion in adjusting targets — up or down — in response to future changing market conditions.

 

Discretionary Cash Bonuses

 

In addition to cash bonuses under the incentive plan discussed above, from time to time, the Compensation Committee also will approve the payment of discretionary cash bonuses to officers and other employees in recognition of an individual’s achievement beyond established targets. Discretionary cash bonuses paid to the NEOs during 2008 are summarized below in the “2008 Summary Compensation Table” under “Compensation of Executive Officers” below.

 

Long-Term Equity-Based Incentive Compensation

 

The purpose of our long-term incentive compensation is to align the interest of our executives with that of our stockholders. We want our executives to be focused on increasing stockholder value. In order to encourage and establish this focus on stockholder value, during 2008, we used the Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan, or the 2007 Incentive Plan, as a long-term vehicle to accomplish this goal. The 2007 Incentive Plan was approved by our stockholders in December 2007 shortly after the expiration in November 2007 of the Key Energy Group, Inc. 1997 Incentive Plan, or the 1997 Incentive Plan. Accordingly, during 2008, no awards were made under the 1997 Incentive Plan. However, awards that were previously made under the 1997 Incentive Plan remain outstanding.

 

Accompanied by the severe economic downturn, by the end of 2008, the declining market price of our common stock had become significantly lower than the exercise prices on many of our outstanding stock options and stock appreciation rights, or SARs. To allow our employees, including our executive officers, additional potential to realize value from these awards, the Compensation Committee approved the acceleration of the vesting periods on all outstanding stock options and SARs with exercise prices between $12.45 and $19.42 per share. The vesting acceleration took effect on December 17, 2008.

 

Although the Company accelerated the vesting periods on these awards, as of March 16, 2009, 99.8% of outstanding stock options and SARs remain “underwater” (with exercise prices higher than the market price) and therefore constitute a less effective retention and long-term incentive tool. In light of these conditions, in early March 2009, the Compensation Committee approved a grant of 2,190,320 shares of restricted stock to both our executive officers and approximately 200 of our other employees. These grants vest in three equal annual installments, beginning on March 2, 2010. We believe this was an important step to take during the economic downturn to help counteract the effect of the diminished value of underwater awards held by officers and employees who are in a position to make significant long-term contributions to the Company. Also, in connection with his appointment as the Company’s new CFO, the Compensation Committee approved the grant of 90,000 shares of restricted stock to Mr. Whichard, which vest in four equal annual installments, beginning on March 26, 2010.

 

After giving effect to the recent restricted stock grants, there remain only 14,824 shares available for granting of awards under our 2007 Incentive Plan as of April 6, 2009. In light of the number of underwater awards outstanding and the limited number of shares remaining under the 2007 Incentive Plan, we believe that it is crucial to adopt the proposed 2009 Equity and Cash Incentive Plan so that the Company can continue utilizing long-term equity-based incentive awards to promote and maintain alignment of compensation with

long-term stockholder value. For further information regarding the proposed plan, see the discussion below under “Proposal 2 — Adoption of the 2009 Equity and Cash Incentive Plan.”

 

During 2008, based on the recommendation of Longnecker, the Company made long-term equity-based incentive awards to all of its executive officers of stock options and restricted shares. The aggregate amount of the awards were intended to align the executives’ equity-based compensation between the 50th and 75th percentile of the peer group with respect to this component of total compensation. The allocation between stock options and restricted shares was based on Longnecker’s recommendation in consideration of the overall economic benefit to the executives and impact to the Company.

 

Key Energy Services, Inc. 2007 Equity and Cash Incentive Plan

 

During 2008, to promote our long-term objectives, equity awards were made under the 2007 Incentive Plan to directors, executive officers and other employees who were in a position to make a significant contribution to our long-term success. Our 2007 Incentive Plan provides that the Compensation Committee has the authority to grant participants different types of equity awards, including non-qualified and incentive stock options, common stock, restricted stock, restricted stock units, performance compensation awards and stock appreciation rights, or SARs. Since equity awards may vest and grow in value over time, this component of our compensation plan is designed to provide incentives to reward performance over a sustained period. Since its adoption, only stock options and restricted stock have been granted under the 2007 Incentive Plan.

 

The following types of awards are available for grant under the 2007 Incentive Plan:

 

Stock Options.  Stock options represent rights to purchase shares of Key common stock at a set price at some date in the future, not to exceed ten years from the date of grant (except for incentive stock options granted to a stockholder holding 10% or more of our common stock, the term of the option may not exceed five years from the grant date). Stock options are granted with an exercise price equal to the closing stock price on the date of the grant (except for incentive stock options granted to a stockholder holding 10% or more of our common stock, the exercise price for which may not be less than 110% of the fair market value on the date of grant).

 

We believe that awards of stock options provide a significant incentive for senior executives to remain employed and to achieve and maintain high levels of performance over multi-year periods, and strengthen the connection between executive and stockholder interests. Although no performance-vesting criteria are applied to our stock option awards, we believe that stock options represent a powerful performance incentive, as the options become valuable only to the extent that our stock price increases following the date of grant. As mentioned above, because of declines in the Company’s stock price since the third quarter of 2008, during the fourth quarter of 2008, we accelerated the vesting period on certain of our outstanding unvested stock option awards, including stock options granted under the 2007 Incentive Plan.

 

Restricted Stock.  Restricted stock awards represent awards of actual shares of our common stock, earned contingent upon continued employment. Typically the restricted stock we grant to our executives vests at a rate of one-third per year over a three-year term.

 

We believe that awards of restricted stock provide a significant incentive for executives to achieve and maintain high levels of performance over multi-year periods, and strengthen the connection between executive and stockholder interests. We believe that restricted shares are a powerful tool for helping us retain executive talent. The higher value of a share of restricted stock in comparison to a stock option allows us to issue fewer total shares in order to arrive at a competitive total long-term incentive award value. Furthermore, we believe that the use of restricted stock reflects competitive practice among other production service companies with whom we compete for executive talent.

 

Stock Appreciation Rights.  SARs entitle the recipient to receive the difference between the exercise price and the fair market value of a share of the Company’s common stock on the date of exercise, multiplied by the number of shares of common stock for which the SAR was exercised. The exercise

price is equal to the closing stock price on the date of grant. The exercise price for a SAR may be settled in cash, shares of the Company’s common stock or a combination thereof.

 

We believe that SARs provide a significant incentive for executives to achieve and maintain high levels of performance over multi-year periods, and that they strengthen the connection between executive and stockholder interests. We believe that SARs are a creative tool for helping us retain executive talent. Although no SARs have been granted under the 2007 Incentive Plan, SARs granted under the 1997 Incentive Plan remain outstanding. Currently outstanding SARs were granted with three year ratable vesting schedules and 10-year lives. As mentioned above, however, during the fourth quarter of 2008, we accelerated the vesting periods on our outstanding unvested SARs granted under the 1997 Incentive Plan

 

Retirement, Health and Welfare Benefits

 

We offer a variety of health and welfare and retirement programs to all eligible employees. Under the terms of their employment agreements, the NEOs are eligible for the same broad-based benefit programs on the same basis as the rest of the Company’s employees. Our health and welfare programs include medical, pharmacy, dental, vision, life insurance and accidental death and disability.

 

Perquisites

 

In addition to the compensation described above, under the terms of their respective employment agreements, executive officers may also be paid reasonable fees for personal financial advisory counseling, accounting and related services, legal advisory or attorneys’ fees and income tax preparation and tax audit services. We also pay all covered out-of-pocket expenses for healthcare not otherwise covered by insurance. Additional perquisites paid include auto allowances plus reimbursement for reasonable insurance and maintenance expenses and club memberships. The costs to the Company associated with providing these benefits for NEOs in 2008 are reflected in the “Perquisites Table” below.

 

401(k) Plan

 

We maintain a 401(k) plan for our employees. Under the 401(k) plan, eligible employees may elect to contribute up to 100% of their eligible compensation on a pre-tax basis in accordance with the limitations imposed under the Internal Revenue Code of 1986, as amended, or the Code.

 

During 2008, we also matched 100% of each employee’s deferrals up to 4% of the individual’s eligible salary, subject to a cap, which for 2008 was $230,000. Therefore, even if an employee earned more than $230,000 in eligible salary, the contribution match made by the Company could not exceed $9,200.

 

The cash amounts contributed under the 401(k) plan are held in a trust and invested among various investment funds in accordance with the directions of each participant. An employee’s salary deferral contributions under the 401(k) plan are 100% vested. We made employer matching contributions to the 401(k) plan of approximately $11.9 million for the year ended December 31, 2008.

 

As part of the cost reduction efforts that we have implemented in response to U.S. and global declining market conditions, effective March 1, 2009, we amended our 401(k) plan to suspend the Company’s matching contributions to all employees, including our executives, with the intent that such suspension will remain in effect for the remainder of 2009. However, if business conditions improve later in 2009, we have the ability to make discretionary contributions related to the 2009 plan year. At the end of 2009, we will make the determination on whether to re-instate matching contributions for the 2010 plan year, based on the conditions at that time.

 

Severance Payments/Change In Control

 

We have employment agreements in place with each of the NEOs providing for severance compensation for a period of up to three years in the event the executive’s employment is terminated for a variety of reasons, including a change in control of the Company. We have provided more information about these benefits, along with estimates of the value under various circumstances under the heading “Potential Payments upon Termination or Change in Control” below.

Our practice in the case of change in control benefits has been to structure these as “double trigger” benefits. In other words, the change of control does not itself trigger benefits. Rather, benefits are paid only if the employment of the executive is terminated during a specified period after a change of control. We believe a “double trigger” benefit maximizes stockholder value because it prevents an unintended windfall to executives in the event of a friendly change of control, while still providing appropriate incentives to cooperate in negotiating any change of control. In addition, these agreements avoid distractions involving executive management that arise when the Board is considering possible strategic transactions involving a change in control, and assure continuity of executive management and objective input to the Board when it is considering any strategic transaction. For additional information concerning our change in control agreements, see “Potential Payments upon Termination or Change in Control” below.

 

Each of the executive officers is subject to noncompete and non-solicitation provisions pursuant to the terms of their employment contracts.

 

Regulatory Considerations

 

The tax and accounting consequences of utilizing various forms of compensation are considered by the Compensation Committee when adopting new or modifying existing compensation.

 

Under Section 162(m) of the Internal Revenue Code, publicly-held corporations may not take a tax deduction for compensation in excess of $1 million paid to any of the executive officers named in the Summary Compensation Table during any fiscal year. There is an exception to the $1 million limitation for performance-based compensation meeting certain requirements. To maintain flexibility in compensating executives in a manner designed to promote varying corporate goals, the Compensation Committee has not adopted a policy requiring all compensation to be deductible under Section 162(m). However, the Compensation Committee considers deductibility under Section 162(m) with respect to compensation arrangements for executives. The Compensation Committee cannot guarantee that future executive compensation will be fully deductible under Code Section 162(m).

 

Accounting for Equity-Based Compensation

 

We account for equity-based compensation in accordance with the requirements of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment”, or SFAS 123(R).

 

2008 Summary Compensation Table

 

 

 

Perquisites

 

 

 

 

2008 Grants of Plan Based Awards

 

 

 

 

Employment Agreements

 

Each NEO’s employment agreement provides for an initial term of two years and automatically renews for successive one-year extension terms unless terminated by the executive or the Company at least ninety days prior to the commencement of an extension term. Each of the executives receives an annual salary, which can be increased (but not decreased) at the discretion of the Compensation Committee and, in the case of Messrs. Wilson and Weinheimer and Ms. Clarke (and as was the case for Mr. Austin prior to his resignation), at the discretion of the CEO. Each executive is also eligible for an annual incentive bonus of up to 100% of his or her base salary in the case of Messrs. Wilson and Weinheimer or Ms. Clarke (and as was the case for Mr. Austin prior to his resignation), and up to 200% of his base salary in the case of Mr. Alario, and each is entitled to participate in awards of equity-based incentives at the discretion of the Board or the Compensation Committee. The executives also receive comprehensive medical and dental plans available to the Company’s senior management pursuant to which all medical and dental expenses incurred by them and their respective spouses and children will be reimbursed through insurance or, in the absence of insurance, directly by the Company so that the executives have no out-of-pocket cost with respect to such expenses.

 

Mr. Alario receives an allowance of $1,100 per month, plus reimbursement for reasonable insurance and maintenance expenses, in connection with the use of his automobile and is entitled to be reimbursed up to $15,000 in any fiscal year of the Company for personal services provided by certified public accountants and tax attorneys. Mr. Alario is also entitled to be reimbursed for the initiation fee and the annual or other periodic fees, dues and costs to become and remain a member of one club or association for business use, as approved by the Compensation Committee.

 

As noted above, Mr. Austin resigned from the Company effective February 6, 2009. On February 5, 2009, Mr. Austin and the Company executed a letter agreement to address certain matters in connection with his resignation. This letter agreement (1) confirmed that Mr. Austin voluntarily resigned from the Company for other than “Good Reason” (as defined in his employment agreement); (2) based on the position Mr. Austin assumed following his resignation, waived a portion of his employment agreement’s non-compete to allow Mr. Austin to serve in an interim managerial capacity with, or be engaged to provide restructuring advice for, any business that would otherwise be subject to the non-compete; and (3) provided that Mr. Austin will receive the incentive bonus for the second half of the fiscal year ended December 31, 2008, in such amount as determined by the Company (which amount is reported in footnote 5 of the “Summary Compensation Table” above). Under the letter agreement, Mr. Austin also provided a full release of the Company and its officers, employees and affiliates of all claims relating to his employment, compensation and termination. The benefits under this letter agreement were in addition to anything to which Mr. Austin is entitled under the employment agreement and applicable Company plans.

The employment agreements contain a comprehensive non-compete provision that prohibits the executives from engaging in any activities that are competitive with the Company during their employment, and for any period in which each of them is receiving severance compensation from the Company (or if payment of severance compensation is increased due to a change of control, for a period of three years after the termination of employment) or for twelve months following termination if the executive receives no severance compensation from the Company. As mentioned above, we waived a portion of Mr. Austin’s non-compete to allow him to serve in an interim managerial capacity with, or be engaged to provide restructuring advice for, any business that would otherwise be subject to the non-compete.

 

The employment agreements provide for compliance with the provisions of Section 409A of the Internal Revenue Code concerning the payment of potential future benefits to the executives and reimbursement of any tax penalties owed pursuant to Section 409A of the Code on an after-tax basis. If Mr. Alario is subject to the tax imposed by Section 4999 of the Code, he will be reimbursed for such tax on an after-tax basis. If either of Messrs. Austin, Wilson and Weinheimer and Ms. Clarke is subject to the tax imposed by Section 4999 of the Internal Revenue Code, he or she will be reimbursed for such tax on an after-tax basis; provided, however, that the executive has agreed to a reduction of up to 10% of the value the executive would have received if such reduction would avoid the imposition of such tax.

 

The employment agreements also provide for certain severance benefits for each of the NEOs. Please see “Potential Payment Upon Termination or Change in Control” and “Elements of Severance Payments” below for further discussion.

 

2008 Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

 

 

 

2008 Option Exercises and Stock Vested

 

The following table sets forth certain information regarding options and stock awards exercised and vested, respectively, during 2008 for the persons named in the “Summary Compensation Table” above.