ASPM Aspect Medical Systems (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)
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Aspect Medical Systems, Inc.

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TABLE OF CONTENTS

 

ASPECT MEDICAL SYSTEMS, INC.
One Upland Road
Norwood, Massachusetts 02062

 

 

 

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS
To Be Held on June 5, 2009

 

 

 

To our stockholders:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Aspect Medical Systems, Inc. will be held on Friday, June 5, 2009 at 9:00 a.m., local time, at our corporate offices, One Upland Road, Norwood, Massachusetts 02062. We refer to Aspect Medical Systems, Inc. herein as “Aspect,” “we,” or “us.” At the Annual Meeting of Stockholders, our stockholders will consider and vote on the following matters:

 

 

The stockholders will also act on any other business that may properly come before the Annual Meeting of Stockholders or any adjournment thereof.

 

Stockholders of record at the close of business on April 13, 2009, are entitled to notice of, and to vote at, the Annual Meeting of Stockholders or any adjournment thereof. Your vote is important regardless of the number of shares you own. Our stock transfer books will remain open for the purchase and sale of our common stock.

 

We hope that all stockholders will be able to attend the Annual Meeting of Stockholders in person. However, in order to ensure that a quorum is present at the annual meeting, please date, sign and promptly return the enclosed proxy card whether or not you expect to attend the Annual Meeting of Stockholders. A postage-prepaid envelope, addressed to Computershare Trust Company, N.A., our transfer agent and registrar, has been enclosed for your convenience. Sending in your proxy will not prevent you from voting your stock at the Annual Meeting of Stockholders if you desire to do so, as your proxy is revocable at your option.

 

All stockholders are cordially invited to attend the Annual Meeting of Stockholders.

 

By Order of the Board of Directors,

 

 

J. Neal Armstrong
Secretary

 

Norwood, Massachusetts

April 30, 2009

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND PROMPTLY MAIL IT IN THE ENCLOSED ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THE ANNUAL MEETING. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED WITHIN THE UNITED STATES.

 

ASPECT MEDICAL SYSTEMS, INC.
One Upland Road
Norwood, Massachusetts 02062

 

 

PROXY STATEMENT

 

 

for the 2009 Annual Meeting of Stockholders

To Be Held on June 5, 2009

 

This Proxy Statement and the enclosed proxy card are being furnished in connection with the solicitation of proxies by the board of directors of Aspect Medical Systems, Inc. for use at the 2009 Annual Meeting of Stockholders to be held on Friday, June 5, 2009 at 9:00 a.m., local time, at the corporate offices of Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062, and at any adjournment thereof.

 

All proxies will be voted in accordance with the instructions contained in those proxy cards. If no choice is specified, the proxies will be voted in favor of the matters set forth in the accompanying Notice of 2009 Annual Meeting of Stockholders. Any proxy may be revoked by a stockholder at any time before it is exercised by signing another proxy with a later date, by delivery of written revocation to our Secretary or by appearing at the annual meeting and voting in person.

 

Our Annual Report to Stockholders for the fiscal year ended December 31, 2008 is being mailed to stockholders with the mailing of the Notice of Annual Meeting of Stockholders and this Proxy Statement on or about May 5, 2009.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be Held on June 5, 2009: The proxy statement and annual report to stockholders are available at www.edocumentview.com/aspm.

 

A copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as filed with the Securities and Exchange Commission, except for exhibits, will be furnished without charge to any stockholder upon written or oral request to our Investor Relations Department, Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062, telephone: (617) 559-7000.

 

Voting Securities and Votes Required

 

Stockholders of record at the close of business on April 13, 2009 will be entitled to notice of, and to vote at, the 2009 Annual Meeting of Stockholders. On that date, 17,415,429 shares of our common stock were issued and outstanding. Each share of common stock entitles the holder to one vote with respect to all matters submitted to stockholders at the 2009 Annual Meeting of Stockholders. We have no other securities entitled to vote at the meeting.

 

The representation in person or by proxy of at least a majority of the shares of common stock issued, outstanding and entitled to vote at the 2009 Annual Meeting of Stockholders is necessary to establish a quorum for the transaction of business at the 2009 Annual Meeting of Stockholders. If a quorum is not present, the annual meeting will be adjourned until a quorum is obtained.

 

Directors are elected by a plurality of votes cast by stockholders entitled to vote at the 2009 Annual Meeting of Stockholders. To be approved, the one-time stock option exchange program requires the affirmative vote of the holders of a majority of votes cast on the proposal. To be approved, the amendment to our By-Laws requires the affirmative vote of the holders of a majority of our shares issued, outstanding and entitled to vote at the Annual Meeting of Stockholders. To be approved, the ratification of Ernst & Young LLP as our independent registered public accounting firm, requires the affirmative vote of the majority of shares present in person or represented by proxy at the 2009 Annual Meeting of Stockholders. The votes will be counted, tabulated and certified by a representative of Computershare Trust Company, N.A., who will serve as the inspector of elections at the 2009 Annual Meeting of Stockholders.

Shares which abstain from voting as to a particular matter, and shares held in “street name” by banks, brokerage firms or nominees who indicate on their proxy cards that they do not have discretionary authority to vote such shares as to a particular matter, which we refer to as “broker non-votes,” will not be considered as present and entitled to vote with respect to a particular matter and will not be considered a vote cast on such matter. Accordingly, neither abstentions nor broker non-votes will have any effect upon the outcome of voting with respect to any matters voted on at the 2009 Annual Meeting of Stockholders, but will be counted for the purpose of determining whether a quorum exists.

 

Stockholders may vote in person or by proxy. Execution of a proxy will not in any way affect a stockholder’s right to attend the annual meeting and vote in person. Any stockholder voting by proxy has the right to revoke the proxy at any time before it is exercised by giving our Secretary a duly executed proxy card bearing a later date than the proxy being revoked at any time before that proxy is voted, by giving our Secretary written notice that you want to revoke your proxy or by appearing at the annual meeting and voting in person. The shares represented by all properly executed proxies received in time for the annual meeting will be voted as specified in those proxy cards. If the shares you own are held in your name, and you do not specify in the proxy card how your shares are to be voted, they will be voted:

 

 

If the shares you own are held in “street name,” the bank, brokerage firm or nominee, as the record holder of your shares, is required to vote your shares in accordance with your instructions. In order to vote your shares held in “street name,” you will need to follow the directions your bank, brokerage firm or nominee provides you. If you desire to vote your shares held in “street name” at the Annual Meeting by proxy, you will need to obtain a proxy card from the holder of record.

 

Householding of Annual Meeting Materials

 

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 and Annual Report to Stockholders may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of either document to you upon written or oral request to our Investor Relations Department, Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062, telephone: (617) 559-7000. If you want to receive separate copies of our 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 per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and phone number.

 

STOCK OWNERSHIP INFORMATION

 

The following table sets forth information regarding beneficial ownership of our common stock as of January 31, 2009 by:

 

 

The number of shares of common stock beneficially owned by each person or entity is determined in accordance with the applicable rules of the Securities and Exchange Commission, or SEC, which rules require us to include shares of our common stock over which such person or entity has voting or investment power. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Shares of our common stock issuable under stock options exercisable on or before April 1, 2009 are deemed beneficially owned and such shares are used in computing the percentage ownership of the person holding the options, but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under community property laws. Unless otherwise indicated, the address of all directors, nominees and executive officers is c/o Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062.

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and the holders of more than 10% of our common stock to file with the SEC initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of copies of reports filed by the reporting persons furnished to us, or written representations from reporting persons, we believe that during the fiscal year ended December 31, 2008, the reporting persons complied with all Section 16(a) filing requirements, other than with respect to two Forms 4 filed by Mr. Stanski on January 12, 2009 to report purchases of an aggregate of 40,000 shares of common stock made between December 16, 2008 through December 24, 2008 and a Form 4 filed by Mr. Kania on May 29, 2008 to report our grant to Mr. Kania on May 21, 2008 of 2,000 shares of common stock and a stock option to purchase 3,000 shares of common stock.

 

PROPOSAL ONE — ELECTION OF DIRECTORS

 

General Information

 

We have a classified board of directors consisting of nine members: three Class I Directors, three Class II Directors and three Class III Directors. At each Annual Meeting of Stockholders, one class of directors is elected for a full term of three years to succeed those directors whose terms are expiring. Based on the recommendation of the Corporate Governance and Nominating Committee, the board of directors has nominated Jon C. Biro, Nassib G. Chamoun, and Melvin L. Keating to serve as Class III directors. The persons named in the enclosed proxy card will vote to elect, as Class III Directors, Jon C. Biro, Nassib G. Chamoun and Melvin L. Keating, the three director nominees, unless the proxy card is marked otherwise. Each Class III Director will be elected to hold office until the 2012 Annual Meeting of Stockholders and until his successor is elected and qualified. If a stockholder returns a proxy card without contrary instructions, the persons named as proxies will vote to elect as directors the nominees identified below. Mr. Chamoun is the only nominee who is currently a member of our board of directors. The nominees have indicated their willingness to serve if elected. However, if any director nominee should be unable to serve, the shares of common stock represented by proxies may be voted for a substitute nominee designated by our board of directors or our board of directors may reduce the number of nominees. Our board of directors does not believe that any of the nominees will be unable or unwilling to serve if elected.

 

For each member of our board of directors as of the Annual Meeting of Stockholders, including those who are nominees for election as Class III Directors, there follows information given by each such director concerning his age and length of service as a member of our board of directors, principal occupation and business experience during the past five years and the names of other publicly-held companies of which he serves as a director. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer.

 

Pursuant to the terms of our agreement dated April 8, 2009 with First Manhattan Co., First BioMed Management Associates, LLC and First BioMed, L.P., which we collectively refer to as First Manhattan, the following changes will be made to our Board of Directors prior to the Annual Meeting of Stockholders:

 

 

We refer to this agreement as the Agreement. For a further discussion of the Agreement, see “Director Nomination and Election Arrangements” below.

 

Director Nomination and Election Arrangements

 

Pursuant to the Agreement, we have agreed to the following arrangements with respect to the nomination and/or election of directors:

 

 

 

Pursuant to the terms of the Agreement, each of our officers and directors has agreed to vote all of his or her shares for the designated directors.

 

We have the right to terminate the Agreement by delivering a written notice of termination at any time on or after the earlier of:

 

 

The foregoing is not a complete description of the terms of the Agreement. For a copy of the Agreement, and a further description of its terms, please see our Current Report on Form 8-K, which we filed with the SEC on April 9, 2009.

 

Board Recommendation

 

Our board of directors believes that the election of Jon C. Biro, Nassib G. Chamoun, and Melvin L. Keating to serve as Class III directors is in the best interests of Aspect and our stockholders and, therefore, the board of directors unanimously recommends that the stockholders vote “FOR” the nominees.

 

Nominees for Term Expiring at the 2012 Annual Meeting (Class III Directors)

 

Jon C. Biro , age 43, is a director nominee.

 

Jon C. Biro has served as Executive Vice President, Chief Financial and Accounting Officer, Treasurer, Secretary and a director of Consolidated Graphics, Inc., a commercial printer with operations in the United States, Canada and the Czech Republic, since January 2008. Prior to joining Consolidated Graphics, Mr. Biro held several

executive positions with ICO, Inc., a company specializing in the manufacturing of specialty resins and concentrates. From April 2002 to January 2008, Mr. Biro was the Chief Financial Officer and Treasurer of ICO and served as its Interim Chief Executive Officer from July 2003 to February 2004. From September 1996 to April 2002, Mr. Biro was the Senior Vice President, Chief Accounting Officer and Treasurer of ICO. From October 1994 to September 1996, he was the Controller of ICO. Prior to his employment with ICO, Mr. Biro was employed by PriceWaterhouse Coopers LLP. Mr. Biro is a certified public accountant.

 

Nassib G. Chamoun , age 46, became a director in 1987.

 

Nassib G. Chamoun is a founder of Aspect and has served as a director since 1987. Mr. Chamoun has served as President of Aspect since 1996 and Chief Executive Officer since 1995. He also served as Chairman of the board of directors from 1987 to 1996 and as Chief Scientific Officer from 1991 to 1995. Prior to 1995, Mr. Chamoun also served as our President and Chief Executive Officer at various times since founding Aspect in 1987. From 1984 to 1987, Mr. Chamoun was a fellow in cardiovascular physiology at the Lown Cardiovascular Laboratory of the Harvard School of Public Health.

 

Melvin L. Keating , age 62, is a director nominee.

 

Melvin L. Keating was President and Chief Executive Officer of Alliance Semiconductor Corporation, a worldwide manufacturer and seller of semiconductors, from 2005 to 2008. From 2004 to 2005, Mr. Keating served as Executive Vice President, Chief Financial Officer and Treasurer of Quovadx Inc., a healthcare software company. Mr. Keating was employed as a Strategy Consultant for Warburg Pincus Equity Partners from 1997 to 2004, providing acquisition and investment target analysis and transactional advice. Mr. Keating also was President and Chief Executive Officer of Sunbelt Management Company, a private, European-owned real estate development firm, from 1995 to 1997. From 1986 to 1995, Mr. Keating was Senior Vice President, Financial Administration of Olympia & York Companies/Reichmann International, responsible for joint ventures, financial reporting and acquisitions.

 

Directors Whose Terms Expire at the 2010 Annual Meeting (Class I Directors)

 

James J. Mahoney, Jr. , age 65, became a director in 2003.

 

As of the date of this proxy statement, Mr. Mahoney is a Class III director, but is not standing for re-election and will be elected to serve as a Class I director by our board of directors to fill the vacancy created by Dr. Feigal’s resignation. The election will become effective immediately prior to the 2009 Annual Meeting of Stockholders.

 

James J. Mahoney, Jr. joined Aspect as a director in March 2003 and has served as lead director since August 2005. Since January 2004, Mr. Mahoney has served as President and has managed The Mahoney Group, an investment firm. Mr. Mahoney is a founding partner and principal of HLM Management Company, a private equity firm that invested in small entrepreneurially managed growth stocks and in privately-held venture capital backed companies. From January 1999 to March 2002, Mr. Mahoney managed HLM Management Company’s venture capital program and, from April 2002 to April 2004, he acted as a consultant to HLM Management Company. From 1984 to December 1998, Mr. Mahoney co-managed the stock and venture capital portfolios of, and served as Chief Investment Officer of, HLM Management Company. Mr. Mahoney currently serves as Chairman of the Board and a member of the audit committee of NMT Medical, an advisor to four investment firms and a member of investment committees of three charitable organizations.

 

John J. O’Connor, age 61, became a director in 2006.

 

John J. O’Connor joined Aspect as a director in December 2006. Prior to his retirement in November 2006, Mr. O’Connor was a partner at PricewaterhouseCoopers LLP, an independent public accounting firm, from 1982 to November 2006, most recently serving as vice chairman of services from June 2002 to November 2006. Mr. O’Connor served as the leader of the U.S. audit practice at PricewaterhouseCoopers from September 2000 to June 2002, and served as the managing partner of the firm’s Boston office from 1995 to September 2000. Mr. O’Connor also serves as a director for LeMaitre Vascular, Inc.

Donald R. Stanski, M.D. , age 59, became a director in 1996.

 

Donald R. Stanski joined Aspect as a director in 1996.  Since November 2005, Dr. Stanski has served as Vice President and Global Head of Modeling and Simulation, leading a group of scientists who apply quantitative methods to optimize drug developments, at Novartis Pharmaceuticals, a pharmaceutical company. Dr. Stanski has been a Professor in the Department of Anesthesia at Stanford University since 1979 and is trained as an anesthesiologist/clinical pharmacologist. He became professor emeritus at Stanford University in November 2005. From January 2004 until November 2005, Dr. Stanski was on public service duty at the United States Food and Drug Administration as a Scientific Advisor for the Director, Center for Drug Evaluation and Research. He served as Chair of the Department of Anesthesia at Stanford University from 1992 to 1997. From July 1998 to June 2001, Dr. Stanski served as the Vice President of Scientific and Medical Programs for Pharsight Corporation, a company that assists in the development of therapeutic products.

 

Directors Whose Terms Expire at the 2011 Annual Meeting (Class II Directors)

 

J. Breckenridge Eagle , age 59, served as a director from 1988 to 1991 and from 1996 to the present.

 

J. Breckenridge Eagle joined Aspect as a director in 1988 and served in that position until 1991. He became a director again in 1996 and has served as Chairman of the board of directors since that date. Mr. Eagle served as President and Chief Operating Officer of Aspect in 1996 and as a consultant to Aspect in 1995. From 1989 to 1995, he was President of ECS, Inc., a medical practice management company, which he founded in 1989. From 1981 to 1988, Mr. Eagle was Chief Financial Officer, Vice President and General Manager of The Health Data Institute, Inc., a health care services company, which he co-founded.

 

Edwin M. Kania , Jr. age 51, became a director in 1995.

 

Edwin M. Kania, Jr. joined Aspect as a director in 1995. Since 2000, Mr. Kania has served as Managing Partner and Chairman of Flagship Ventures, a venture capital firm, which he co-founded. Previously, Mr. Kania served as the managing partner of OneLiberty Ventures, a venture capital firm, which was formed in 1995, and as a general partner at Morgan Holland Ventures, a predecessor entity of OneLiberty Ventures, which he joined in 1985. Mr. Kania also serves as a director of EXACT Sciences Corporation.

 

Vincent P. Scialli , age 39, will be elected as a director by our board of directors immediately prior to the 2009 Annual Meeting to fill the vacancy created by Mr. Bollen’s resignation.

 

Vincent P. Scialli has been a Managing Director of First Manhattan Co., a privately held investment manager, since 2005. From 2001 to 2005, Mr. Scialli was Vice President and Assistant Portfolio Manager at Lord Abbett & Co. LLC., a privately held money management firm. From 2000 to 2001, Mr. Scialli was a Senior Research Analyst at Bear Stearns & Co., Inc., an investment bank. Prior to joining Bear Stearns, Mr. Scialli had been an Analyst at Prudential Insurance, a multi-line insurance company and asset management firm.

 

Executive Officers of the Corporation

 

Margery Ahearn, age 46, became an executive officer in 2006.

 

Margery Ahearn joined Aspect in April 1998 and has served as Vice President of Human Resources since January 2006. Ms. Ahearn served as our Director of Human Resources from 1998 to December 2005. From 1985 through 1998, Ms. Ahearn held a variety of positions, including Senior Human Resource Representative, at Wang Laboratories, Inc., Director of Human Resources at Boston Business Group and Senior Employment Specialist at GTE.

 

J. Neal Armstrong, age 70, became an executive officer in 2009

 

J. Neal Armstrong has served as our Vice President, Chief Financial Officer and Secretary since January 2009. Mr. Armstrong served as Vice President of Investor Relations of Aspect from 2005 to 2006 and prior to that, served as Vice President, Chief Financial Officer, Secretary and Treasurer of Aspect from 1996 until his retirement from that position in 2005. Mr. Armstrong remained retired until his return to Aspect in January 2009. From 1990 to 1996, Mr. Armstrong served as Vice President of Finance, Chief Financial Officer and as a director of Haemonetics,

Inc., a manufacturer of blood processing systems. Mr. Armstrong serves as a director, Chairman of the Audit Committee and member of the Compensation Committee of deCODE genetics, Inc. and also serves as a member of the Board of Directors and the Audit Committee of TransMedics, Inc., AngioScore, Inc. and Vapotherm, Inc. Mr. Armstrong also serves as a member of the Board of Directors, Audit Committee and Compensation Committee of Salient Surgical Technologies, Inc.

 

John Coolidge , age 48, became an executive officer in 2004.

 

John Coolidge joined Aspect in May 1997 and has served as Vice President of Manufacturing Operations since January 2001. Mr. Coolidge served as our Director of Manufacturing from May 1997 to January 2001. From 1995 to 1997, he served as Engineering Manager and was responsible for product development and manufacturing engineering management for the Interventional Vascular business of Medtronic, Inc., a medical technology company. From 1987 to 1995, Mr. Coolidge held a variety of engineering and manufacturing management positions at Johnson and Johnson Medical, Inc., a manufacturer and provider of health care products and services, the most recent of which was Business Unit Manager.

 

Marc Davidson , age 45, became an executive officer in 2004.

 

Marc Davidson joined Aspect in December 1999 and has served as Vice President of Engineering since November 2001. Mr. Davidson served as our Director of OEM Engineering from December 1999 to November 2001. From 1985 through 1999, Mr. Davidson held a variety of marketing, engineering, sales and management positions at Hewlett-Packard Company, a manufacturer of computers and medical devices.

 

Philip H. Devlin , age 52, became an executive officer in 1994.

 

Philip H. Devlin joined Aspect in 1990 and has served as Vice President of Emerging Technologies and General Manager of Neuroscience since November 2001. From 1994 to November 2001, Mr. Devlin served as Vice President of Research and Development of Aspect, and from 1990 to 1994, he held the position of Director of Product Development of Aspect. From 1984 to 1985 and from 1986 to 1990, Mr. Devlin served as Software Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a medical products and communications company. From 1980 to 1984, he held the position of Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and from 1985 to 1986, he served as Technical Marketing Engineer in the Medical Product Group of Hewlett-Packard Company, a manufacturer of computers and medical devices.

 

William Floyd , age 52, became an executive officer in 2001.

 

William Floyd joined Aspect in May 2001 and has served as Vice President of Sales and Marketing since September 2002. Mr. Floyd served as Vice President of Marketing from May 2001 to September 2002. From May 2000 to May 2001, Mr. Floyd was Principal of Casco Scientific, LLC, a medical device consulting group. From 1992 to 2000, Mr. Floyd held a variety of positions with Boston Scientific Corporation, a manufacturer of medical devices, the most recent of which was Vice President of Marketing, Microvasive Division.

 

Scott D. Kelley, M.D. , age 50, became an executive officer in 2000.

 

Scott D. Kelley joined Aspect in July 2000 and has served as Vice President and Medical Director since that time. Prior to joining Aspect, Dr. Kelley served as an Associate Professor of Clinical Anesthesia and Director of Liver Transplant at the University of California, San Francisco Medical School from 1990 to 2000.

 

Paul J. Manberg, Ph.D. , age 54, became an executive officer in 1991.

 

Paul J. Manberg joined Aspect in 1991 and has served as Vice President of Clinical, Regulatory and Quality Assurance since that time. From 1984 to 1990, Dr. Manberg held a variety of clinical research positions at Serono Laboratories, a pharmaceutical company, including Vice President, Research and Development. From 1979 to 1984, he was employed as a Clinical Research Scientist at Burroughs — Wellcome Company, a pharmaceutical company, and served as an Adjunct Research Scientist at the University of North Carolina.

 

No arrangements or understandings exist between any executive officer and any other person pursuant to which such executive officer is to be selected as an executive officer.

For information relating to shares of our common stock owned by each of our directors, our chief executive officer, chief financial officer and our three most highly compensated executive officers and all directors and executive officers as a group, see the disclosure set forth above under the heading “Stock Ownership Information.”

 

CORPORATE GOVERNANCE

 

Our board of directors has long believed that good corporate governance is important to ensure that Aspect is managed for the long-term benefit of our stockholders. This section describes key corporate governance guidelines and practices that our board of directors has adopted. Complete copies of our corporate governance guidelines, board committee charters and code of conduct described below are available on our website at www.aspectms.com. Alternatively, you can request a copy of any of these documents by contacting: Investor Relations Department, Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062, telephone: (617) 559-7000.

 

Corporate Governance Guidelines

 

Our board of directors has adopted corporate governance guidelines to assist the board of directors in the exercise of its duties and responsibilities and to serve the best interests of Aspect and its stockholders. These guidelines, which provide a framework for the conduct of the board of directors’ business, provide, among other things, that:

 

 

Executive and Director Compensation Processes

 

The Compensation Committee has implemented an annual performance review program for our executives, under which corporate and individual performance goals are determined at the beginning of each performance cycle. Annual salary, bonuses, stock options and restricted stock awards granted to our executives are tied to the achievement of these corporate and individual performance goals.

 

In evaluating each executive officer’s performance, the Compensation Committee generally conforms to the following process:

 

 

The Compensation Committee does not rely on a formula that assigns a pre-determined value to each of the criteria, but instead evaluates an executive officer’s contribution in light of all criteria.

In addition, in accordance with the terms of our corporate governance guidelines, our Compensation Committee is required to annually review the compensation of our directors, consult with the members of the Corporate Governance and Nominating Committee on such findings and then make recommendations to the board of directors with respect to director compensation.

 

Board Determination of Independence

 

Under applicable Nasdaq Marketplace Rules, a director of Aspect will only qualify as an “independent director” if, in the opinion of the board of directors, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The board of directors has determined that none of Jon C. Biro, Michael A. Esposito, David W. Feigal, Jr., Edwin M. Kania, Jr., Melvin L. Keating, James J. Mahoney, Jr., John J. O’Connor or Donald R. Stanski has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors and nominees for director qualifies as an “independent director” as defined under Rule 4200(a)(15) of the Nasdaq Marketplace Rules.

 

Director Nomination Process

 

The process followed by the Corporate Governance and Nominating Committee to identify and evaluate director candidates includes requests to board members and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the Corporate Governance and Nominating Committee and the board of directors. Jon C. Biro and Melvin L. Keating have been nominated to serve on our board of directors pursuant to the terms of the Agreement we entered into with First Manhattan Co., First BioMed Management Associates, LLC and First BioMed, L.P. For a further discussion of the Agreement, see “Director Nomination and Election Arrangements” beginning on page 5.

 

In considering whether to recommend any particular candidate for inclusion in the board of directors’ slate of recommended director nominees, the Corporate Governance and Nominating Committee applies the criteria set forth in our Corporate Governance Guidelines. These criteria include the candidate’s integrity, business acumen, knowledge of Aspect’s business and industry, experience, diligence, 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 Corporate Governance Guidelines also provide that any director who reaches the age of 75 while serving as a director will retire from our board of directors effective at the end of his or her then current term. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow the board of directors to fulfill its responsibilities.

 

Stockholders may recommend individuals to the Corporate Governance and Nominating Committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and a statement as to whether the stockholder or group of stockholders making the recommendation has beneficially owned more than 5% of our common stock for at least a year as of the date such recommendation is made, to Chairman, Corporate Governance and Nominating Committee, c/o Aspect Medical Systems, Inc., One Upland Road, Norwood, Massachusetts 02062. Assuming that appropriate biographical and background material has been provided on a timely basis, the Corporate Governance and Nominating Committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.

 

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 of directors, by following the procedures set forth in the second paragraph under “Stockholder Proposals” below.

 

Communicating with the Independent Directors

 

The board of directors will give appropriate attention to written communications that are submitted by stockholders, and will respond if and as appropriate. The Chairman of the Corporate Governance and Nominating

Committee is primarily responsible for monitoring communications from stockholders and for providing copies or summaries to the other directors as he considers appropriate.

 

Communications will be forwarded to all directors if they relate to important substantive matters and include suggestions or comments that the Chairman of the Corporate Governance and Nominating Committee considers to be important for the directors to know. In general, communications relating to corporate governance and long-term corporate strategy are more likely to be forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we tend to receive repetitive or duplicative communications.

 

Stockholders who wish to send communications on any topic to the board of directors should address such communications to Chairman, Corporate Governance and Nominating Committee, c/o Aspect Medical Systems, Inc., One Upland Road, Norwood, MA 02062.

 

Board Meetings and Attendance

 

The board of directors met nine times during the fiscal year ended December 31, 2008, either in person or by teleconference. During the fiscal year ended December 31, 2008, each director attended at least 75% of the aggregate of the number of board of director meetings and the number of meetings held by all committees on which he or she then served.

 

Director Attendance at Annual Meeting of Stockholders

 

Our corporate governance guidelines provide that directors are encouraged to attend the annual meeting of stockholders in the event that Aspect determines their attendance is warranted. Three directors attended the 2008 Annual Meeting of Stockholders.

 

Board Committees

 

Our board of directors has established three standing committees — Audit, Compensation and Corporate Governance and Nominating — each of which operates under a charter that has been approved by the board of directors. Current copies of each committee’s charter are posted on the “Investors — Corporate Overview” section of our website, www.aspectms.com.

 

Our board of directors has determined that all of the members of each of the board’s three standing committees, including Mr. Biro, Mr. Keating and Mr. Scialli, who will join our standing committees at the time of the Annual Meeting, are independent as defined under Nasdaq Marketplace 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.

 

Audit Committee

 

The Audit Committee’s responsibilities include:

 

 

 

The current members of the Audit Committee are Mr. O’Connor (Chairman), Dr. Feigal and Mr. Mahoney. Dr. Feigal has resigned from the board of directors effective immediately prior to the Annual Meeting. If elected, Mr. Biro will join the Audit Committee. Our board of directors has determined that each of Mr. Mahoney and Mr. O’Connor is an “audit committee financial expert” as defined by applicable SEC rules. The Audit Committee met six times during the fiscal year ended December 31, 2008.

 

Compensation Committee

 

The Compensation Committee’s responsibilities include:

 

 

The processes and procedures followed by our Compensation Committee in considering and determining executive and director compensation are described above under the heading “Executive and Director Compensation Processes”.

 

The current members of the Compensation Committee are Mr. Kania (Chairman), Mr. Esposito and Dr. Stanski. Mr. Esposito is not standing for re-election as a director. If elected, Mr. Keating will join the Compensation Committee. The Compensation Committee met three times during the fiscal year ended December 31, 2008.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee’s responsibilities include:

 

 

The processes and procedures followed by the Corporate Governance and Nominating Committee in identifying and evaluating director candidates are described above under the heading “Director Nomination Process”.

The current members of the Corporate Governance and Nominating Committee are Dr. Stanski (Chairman), Mr. Kania and Mr. O’Connor. Upon his election as a director by the board of directors, Mr. Scialli will join the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee met one time during the fiscal year ended December 31, 2008.

 

Code of Business Conduct and Ethics

 

We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the code on our website, www.aspectms.com. In addition, we intend to post on our website all disclosures that are required by law or Nasdaq stock market listing standards concerning any amendments to, or waivers from, any provision of the code.

 

Audit Committee Report

 

Management is responsible for the preparation of the financial statements and for maintaining an adequate system of disclosure controls and procedures and internal control over financial reporting for that purpose. The Company’s independent registered public accounting firm is responsible for conducting an independent audit of the annual financial statements in accordance with United States generally accepted accounting principles and issuing a report on the results of their audit. The Audit Committee is responsible for providing independent, objective oversight of these processes.

 

In response to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations, management completed the documentation, testing and evaluation of Aspect’s system of internal control over financial reporting for the year ended December 31, 2008. The Audit Committee provided oversight and guidance to management and financial personnel during the testing and evaluation process. In connection with this oversight, both management and the independent registered public accounting firm regularly provided updates to the Audit Committee at Audit Committee meetings. At the conclusion of the process, management presented to the Audit Committee for its review a report on the effectiveness of Aspect’s internal control over financial reporting. The Audit Committee also reviewed the independent registered public accounting firm’s report included in the Annual Report on Form 10-K for the year ended December 31, 2008 related to their audit of the effectiveness of internal control over financial reporting. The Audit Committee will continue to oversee the efforts pertaining to internal control over financial reporting and management’s preparations for the evaluation of internal controls in the fiscal year ending December 31, 2009.

 

The Audit Committee also reviews, evaluates and discusses with management, internal accounting and financial personnel and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures.

 

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

 

The Audit Committee has also received from, and discussed with, 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 (AICPA, Professional Standards, Vol. 1, AU section 380), or SAS 61, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. SAS 61 requires the independent registered public accounting firm to discuss with the Audit Committee, among other things, the following:

 

 

 

The Audit Committee has received the written disclosures and the letter from the Company’s independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the registered public accounting firm’s communications with the audit committee concerning independence, and has discussed with the independent registered public accounting firm the independent registered public accounting firm’s independence.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Company’s board of directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

By the Audit Committee of the Board of Directors of Aspect Medical Systems, Inc.

 

John J. O’Connor (Chairman)
David W. Feigal, Jr., M.D.(1)
James J. Mahoney, Jr.

 

(1) Dr. Feigal has resigned from the board of directors effective immediately prior to the Annual Meeting. If elected, Mr. Biro will join the Audit Committee.

 

Registered Public Accounting Firm’s Fees

 

Ernst & Young LLP audited our financial statements for the fiscal years ended December 31, 2008 and December 31, 2007. The following table summarizes the fees that Ernst & Young LLP billed to us for each of the last two fiscal years for audit services and for other services:

 

 

Audit Fees

 

Audit fees consist of fees for the audit of our financial statements, the audit of our internal control over financial reporting, the review of the interim financial statements included in our Quarterly Reports on Form 10-Q, accounting consultations related to the audited financial statements and other professional services provided in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees

 

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of our financial statements and which are not reported under “Audit Fees.” These services relate to employee benefit audits. None of the audit-related fees billed in the fiscal years ended December 31, 2008 and 2007 related to services provided under the de minimus exception to the Audit Committee pre-approval requirements.

Tax Fees

 

Tax fees consist of fees for tax compliance, tax advice and tax planning services. There were no tax fees billed in the fiscal year ended December 31, 2008. Tax compliance services, which relate to preparation of original and amended tax returns, accounted for $55,000 of the total tax fees paid for 2007. Tax advice and tax planning services relate to assistance with tax planning strategies, tax audits and appeals and employee benefit plans. None of the tax fees billed in for the fiscal year ended December 31, 2007 related to services provided under the de minimus exception to the Audit Committee pre-approval requirements.

 

All Other Fees

 

We did not incur any fees that may be classified as “All Other Fees” during the fiscal years ended December 31, 2008 or 2007.

 

The percentage of hours expended by Ernst & Young LLP on the audit of our financial statements for the fiscal year ended December 31, 2008 attributed to work performed by persons other than Ernst & Young LLP’s full-time, permanent employees did not exceed fifty percent.

 

Pre-Approval Policy and Procedures

 

The Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm. This policy generally provides that Aspect will not engage its independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.

 

From time to time, the Audit Committee may pre-approve specified types of services that are expected to be provided to Aspect by its independent registered public accounting firm during the following 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount.

 

The Audit Committee may also delegate to each individual member of the Audit Committee the authority to approve any audit or non-audit services to be provided to Aspect by its independent registered public accounting firm. Any approval of services by a member of the Audit Committee pursuant to this delegated authority is reported on at the next meeting of the Audit Committee.

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis describes Aspect’s executive compensation program for 2008 and program changes for 2009. We use this program to motivate and reward those individuals whom our Board of Directors has selected to lead our business.

 

Objectives of Our Executive Compensation Program

 

Program Objectives

 

The Compensation Committee of our Board of Directors, which we generally refer to herein as the Committee, oversees our executive compensation program. In this role, the Committee annually reviews and approves all compensation decisions relating to our named executive officers. Our goal is to align executive officers’ compensation with Aspect’s short-term and long-term performance. A significant portion of each executive officer’s total compensation opportunity is directly related to Aspect’s stock price performance as well as to other performance factors measuring our progress towards the goals of our long-term strategic plan.

 

Our executive compensation program is structured to provide the compensation and incentives needed to attract, motivate and retain key executives that are crucial to Aspect’s long-term success.

Compensation Principles

 

Our Compensation Committee arrives at its executive compensation decisions based in part upon its goal of implementing a compensation program that is built upon specific compensation principles. These principles, and the ways in which the Committee draws upon these principles can be summarized as follows:

 

 

Philosophy

 

Our executive compensation philosophy is intended to provide flexible, yet consistent direction and guidance to the Committee to assist in making decisions annually. It is not intended that the philosophy will change dramatically from year to year; however, it may change, where appropriate, as the focus of the business changes.

 

Compensation Mix

 

 

Elements of Total Compensation

 

We are committed to providing an executive compensation program that helps us attract, motivate and retain highly qualified and experienced executives. The primary elements, purpose and determination factors of the three core elements of the executive compensation program are:

 

 

In making recommendations regarding executive compensation, the Committee considers competitive market data as further discussed below, and seeks input from the Chief Executive Officer and the Vice President of Human Resources. The Chief Executive Officer, in turn, assesses each executive officer’s contributions to the business and his or her ability to execute on our long-term strategy when making any recommendations regarding compensation. The Chief Executive Officer does not participate in the determination of his own compensation.

 

Short-Term Performance

 

Base Salary.   Base salary is designed to provide a fixed amount of compensation for performing day-to-day responsibilities. Salaries are used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our executives. When establishing base salaries for 2008, the Compensation Committee considered a variety of factors, including:

 

 

In February 2008, the Board of Directors approved, upon recommendation of the Compensation Committee, an increase to 2007 base salaries to bring salaries paid to our executives up to the 50 ^th  percentile of our peer group.

The peer group is further discussed below. The Compensation Committee has determined not to increase base salaries in 2009.

 

Annual Incentive Plan.   Under the Annual Incentive Plan, we award cash bonuses for achievement of Aspect’s short-term financial goals and other strategic objectives measured over the current year. Bonuses are structured to provide competitively based incentives to our executives to drive company performance. There are two components to our short-term incentive plan:

 

 

The individual performance component is based on the personal performance goals established by the Chief Executive Officer at the beginning of each calendar year after consultation with each executive, other than the CEO. The Chief Executive Officer’s individual performance goals are established at the beginning of a calendar year in collaboration with the Compensation Committee. The annual cash bonus incentive program provides a direct link between the executive’s compensation and our annual financial performance. The program is designed to provide a competitive payout for appropriate levels of performance achievement, which is in line with our compensation philosophy and principles. In addition, the individual performance component recognizes and rewards each executive’s contributions to the success of the business, which is in line with the “fairness” aspect of our compensation principles.

 

In February 2008, the Committee adopted the 2008 Annual Incentive Plan. Under the plan, the portion of each individual executive bonus was calculated by a formula that compares Aspect’s financial performance against the targets that were established for the year. Depending on the executive’s job function, the target bonus that an executive was eligible to receive under the 2008 Annual Incentive Plan ranged between 41% and 75% of his or her then annual base salary when 100% of the corporate plan for both product revenue and profit targets (before bonus and tax), for the year and all individual performance goals were achieved. The table below shows for 2008 (1) the target award as a percentage of base salary assuming achievement of 100% of the corporate plan for revenue and profits and individual performance goals, (ii) actual payouts, based upon the Committee’s assessment of the degree to which corporate and individual performance objectives had been achieved, and (iii) payouts as a percentage of the target level for each of our named executive officers:

 

 

 

 

Each executive achieved 100% of his individual performance goals and 45% of the corporate financial goals were achieved, which would have resulted in a payout of 45% of the target bonus amount for each executive. The Committee in its discretion, however, determined to pay each executive 85% of his target bonus amount after considering the following three important business initiatives:

 

Sales Force Expansion  — In 2008, after Aspect had set revenue and profit targets under the 2008 Plan, we decided to expand the size of our sales force. The costs associated with the sales force expansion had a

significant impact on our profitability. The Committee recommended that these expenses be excluded when assessing Aspect’s financial performance for the purpose of determining bonus payouts;

 

Sales Retention Program  — On March 13, 2008, the New England Journal of Medicine published an article that compared BIS monitoring to an anesthetic regimen based on predetermined dosing levels of volatile anesthetics as a means of reducing the risk of anesthetic awareness. The authors concluded that the study did not support routine BIS monitoring as part of standard practice. Aspect management was concerned that the article could have a potential negative effect on the selling environment and a potential loss of key sales personnel. As a result, Aspect implemented a sales retention program that provided to members of its sales force cash incentives both six months and a year after the article’s release. The Committee recommended that these expenses be included when assessing Aspect’s financial performance for the purpose of determining the actual bonus payouts; and

 

Reduction in Force  — During the 2009 planning process, it was clear that several expenses needed to be reduced or eliminated in order to protect our profitability. Unfortunately, a reduction to our workforce was part of those efforts. Considerable time was spent discussing the timing of the staff reductions and it was determined that, in the best interests of the company, these reductions would take place in December rather than delay them until January 2009. The expenses associated with the staff reductions affected our profitability in the fourth quarter of 2008. The Committee recommended that these costs be excluded when assessing Aspect’s financial performance for the purpose of determining the actual bonus payouts.

 

In February 2009, the Committee adopted the 2009 Annual Incentive Plan (“the 2009 Plan”). In an effort to reduce expenses and drive effective spending behaviors, the Committee recommended, and the Board of Directors adopted, two significant changes to the 2009 Plan. First, as part of our cost reduction efforts, the 2009 target payouts have been reduced such that upon achievement of 100% of both our revenue and profit targets for 2009, participants will receive only 67% of their targeted annual bonus. Second, in prior years, the annual incentive plan gave equal weighting to both revenue and profit achievements. The 2009 Plan will place a 33% weighting on revenue goals and 67% on profit goals to focus on “bottom line” results.

 

Long-Term Performance

 

We currently utilize two long-term incentive instruments: stock options and restricted stock, which are intended to provide alignment with the interests of the shareholders. Stock options and restricted stock encourage executives to focus on share price appreciation and Aspect’s success the long term, while the service-based restrictions serve as a retention tool. The mix of stock options versus restricted stock is determined annually by the Committee based on the needs of the business, including such factors as the business strategy and objectives, corporate governance, retention and dilution requirements. Currently for 2008, the mix of long-term incentive compensation for our named executive officers is 50 percent in stock options and 50 percent in restricted stock. Because almost all previously awarded stock options were significantly underwater, these options offered our executive officers very little value in terms of executive retention and incentives. We believed a blend of both stock options and restricted stock better align the interests of our executives with those of our shareholders.

 

Each element of compensation outlined above is considered both individually and collectively when considering compensation adjustments. In addition, the Committee may apply discretion in determining the specific compensation levels of individual executives. The Committee evaluates compensation programs annually in light of the evolving business strategies and plans of the Company and seeks to ensure the compensation programs align with shareholder interests and current market trends.

 

Competitive Positioning

 

Competitive Market Defined

 

Aspect has retained Pearl Meyers & Partners as an independent consultant to help management and the Committee design the appropriate mix of compensation and the amount of compensation and to evaluate proposed compensation. The Committee relies on Pearl Meyers to annually review and develop a set of appropriate comparator firms called the “peer group” and to identify and use industry-specific compensation survey sources.

The Committee uses this combination of peer group analyses and industry-specific compensation surveys to identify competitive market compensation practices for base salaries, short and long-term incentives and the Company’s overall competitive position. The Committee believes the most relevant talent pool for its executives is specialty medical device and diagnostic companies of similar size in terms of revenue and market capitalization. Companies that meet at least two or more of the selection criteria are included in the peer group.

 

The Committee reviews the peer group every year in order to maintain its appropriateness for compensation comparison purposes. In addition, the Committee reviews and validates the selection criteria every year to ensure it is in line with our business strategies. For 2008, these companies represented our peer group:

 

 

In addition, the Committee also reviews the survey source(s) used for corporate and group positions annually to ensure they appropriately represent size-specific, specialty medical device and diagnostics companies and provide reasonable and reliable compensation data.

 

Positioning of Compensation

 

It is our policy to provide total compensation that is competitive for comparable work and comparable corporate performance among our peer group. Our general executive compensation competitive targeting strategy is to pay each executive officer total direct compensation at the 75 ^th  percentile of our peer group companies’ total direct compensation levels. We target base salary to be at the 50 ^th  percentile of our peer group companies’ total direct compensation levels. We target base salary plus short-term incentive plan payments to be at the 65 ^th  percentile of our peer group companies’ total cash compensation levels. Finally, we target the sum of base salary, short-term incentive plan payments and long-term incentive plan payments to be at the 75 ^th  percentile of our peer group companies’ total direct compensation levels.

 

Actual pay levels can be above or below targeted levels depending on factors such as individual and company performance, tenure and executive potential. In general, the Committee desires to reward executives equitably from both a market perspective and internally, but reserves the right to use discretion to deviate when necessary to recruit executives and/or retain the right executive talent.

 

Individual performance criteria vary for each executive based on his business group or area of responsibility, and may include:

 

 

Subjective performance criteria include:

 

 

 

Other Executive Compensation Programs and Policies

 

Other Employee Benefits

 

Executives are eligible to participate in all of the current benefit plans, in each case on the same basis as other employees, including health and dental insurance, life and disability insurance and eligibility to participate in our 401(k) plan and an employee stock purchase plan.

 

 

We do not provide any supplemental benefits or perquisites to our executive officers, with the exception of a company automobile lease for the Chief Executive Officer.

 

Change in Control Benefits

 

Pursuant to the terms of our stock incentive plans, in the event of a change of control all unvested stock options held by our executive officers will be assumed or equivalent options will be substituted by the acquiring corporation and such awards will become exercisable in full, and all restricted stock awards will become free and clear of all restrictions and conditions, upon the earlier of (1) the executive’s termination without cause by the successor corporation or for good reason by the executive, or (2) one year after such change in control, in the case of our chief executive officer, and 15 months after such change in control, in the case of our other executive officers. This is a so-called “double trigger” change of control arrangement because it provides for change of control benefits only in the event of a change in control, the first trigger, followed by the earlier of the termination of the executive or the passage of a specified period of time, the second trigger.

 

On September 24, 2008, we implemented the Key Employee Change in Control Severance Benefits Plan. This plan was established to offer additional protection in the form of cash severance compensation and continuation of health and welfare benefits for our named executive officers. As described earlier in the Compensation Discussion and Analysis, the March 2008 release of the New England Journal of Medicine article had an immediate adverse impact on our business. During the months following the article’s release, employees became increasingly concerned about job security and the potential corporate actions that could transpire. We implemented a program designed to minimize these distractions and potential turnover caused by the dramatic downturn in our stock price. The Committee believes that the severance benefits payable under these severance arrangements in connection with a change of control align executive and shareholder interests by enabling the executive officers to consider corporate transactions that are in the best interests of our shareholders without undue concern over whether the transactions may jeopardize the officers’ own employment.

 

We have determined to provide for these change of control benefits because we recognize that, as is the case with many publicly-held corporations, the possibility of a change in control of Aspect exists and such possibility, and the uncertainty and questions which it may raise among our executive officers, could result in the departure or distraction of executive officers to the detriment of Aspect and our shareholders. We believe a “double trigger” maximizes shareholder value because it prevents an unintended windfall to executives in the event of a friendly change in control, while still providing them appropriate incentives to cooperate in negotiating any change of

control in which they believe they may lose their jobs. We believe that this plan is reasonable when compared with similar arrangements adopted by other companies in our industry that are of similar size.

 

We do not consider specific amounts payable under these arrangements when establishing annual compensation. We do believe, however, that these arrangements are necessary to offer compensation packages that are competitive.

 

Tax and Accounting Considerations

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our other three named executive officers (other than the chief financial officer) whose compensation is required to be disclosed to our stockholders under the Exchange Act by reason of being among our most highly compensated officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential consequences of Section 162(m), and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the Compensation Committee may, in its judgment, authorize compensation payments that do not qualify for the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent. The Company does not currently have stock ownership or disposition guidelines in place for its executives, nor does it currently seek tax deductibility of performance-based compensation payouts above $1.0 million for the short-term incentive plan under Internal Revenue Code’s section 162(m).

 

We account for equity compensation paid to our employees under the rules of Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, referred to as SFAS No. 123(R), which requires us to measure and recognize compensation expense in our financial statements for all share-based payments based upon an estimate of their fair value over the service period of the award. We record cash compensation as an expense at the time the obligation is accrued. Our Compensation Committee generally assesses the accounting impact of restricted stock grants and option awards to our executives, but has not historically factored such impact into the nature or size of such awards.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the registrant’s proxy statement on Schedule 14A.

 

By the Compensation Committee of the Board of
Directors of Aspect Medical Systems, Inc.

 

Edwin M. Kania, Jr. (Chairman)
Michael A. Esposito(1)
Donald R. Stanski, M.D.

 

(1) Mr. Esposito is not standing for re-election as a director. If elected, Mr. Keating will join the Compensation Committee.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee are Mr. Kania (Chairman), Mr. Esposito and Dr. Stanski. No member of the current Compensation Committee was at any time during the fiscal year ended December 31, 2008, or formerly, an officer or employee of Aspect or any subsidiary of Aspect. No member of the current Compensation Committee had any relationship with us during the fiscal year ended December 31, 2008 requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934.

None of our executive officers has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director of or member of the current Compensation Committee.

 

Summary Compensation Table

 

The table below summarizes information regarding compensation earned by our named executive officers for the years ended December 31, 2008, 2007 and 2006 for our named executive officers.

 

 

 

 

Grants of Plan-Based Awards

 

The table below sets forth information concerning grants of compensation in the form of plan-based awards made to the named executive officers during the fiscal year ended December 31, 2008.

 

 

 

 

All stock option grants referenced in the foregoing table vest ratably on a monthly basis over a four-year period beginning on the last day of each month. Our right to repurchase shares pursuant to restricted stock awards granted in 2008 lapses as to 100% of the shares four years from the date the shares were issued.

 

Pursuant to the terms of our stock incentive plans, in the event of a change in control all then-unexercisable stock options held by our executive officers will be assumed or equivalent options will be substituted by the acquiring corporation and such options will become exercisable in full, and all restricted stock awards will become free and clear of all restrictions and conditions, upon the earlier of (1) the executive’s termination without cause by the successor corporation or for good reason by the executive, or (2) one year after such change in control, in the case of our chief executive officer, and 15 months after such change in control, in the case of our other executive officers.

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows information regarding unexercised stock options and unvested restricted stock held by the named executive officers as of December 31, 2008.

 

 

 

 

 

Option Exercises and Stock Vested

 

The following table shows amounts received by the named executive officers upon exercise of stock options and vesting of restricted stock during 2008.

 

 

 

 

Potential Payments Upon Termination or Change in Control

 

The following tables were prepared as though our named executive officers were terminated on December 31, 2008 using that day’s closing stock price of $3.41. The amounts under the column labeled “Termination by the Company without Cause or by the Executive Officer with Good Reason on or after a Change of Control” assumed a change in control occurred and that the executive was terminated as of December 31, 2008. However, the named executive officers included in this analysis were not terminated and a change in control did not occur on this date. As a result there can be no assurance that a termination of employment, a change in control or both would produce the same or similar results as those described below on any other date or at any other stock price.

 

For the purpose of this analysis, we have made the following assumptions with respect to payments and benefits provided for termination following a change in control for a named executive officer:

 

All the arrangements listed below are per the “Key Employee Change in Control Severance Benefits Plan”, or the Severance Benefits Plan.

Cash Severance

 

 

Benefits Continuation

 

 

Equity

 

 

Golden Parachute (280G Gross-up)

 

The Severance Benefits Plan provides each executive with the same treatment for the “Golden Parachute” excise tax.

 

 

 

 

 

 

Compensation of Directors

 

We reimburse our non-employee directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors or any committee of the board of directors. Non-employee directors also receive:

 

 

No director who also serves as an employee receives compensation for services rendered as a director. If all of our director nominees are elected we will have seven non-employee directors on our board of directors as of the date of the Annual Meeting: Mr. Biro, Mr. Kania, Mr. Keating, Mr. Mahoney, Mr. O’Connor, Mr. Scialli and Dr. Stanski.

 

In addition, our non-employee directors are eligible to receive non-statutory stock options, restricted stock and other stock-based awards under our Amended and Restated 1998 Director Equity Incentive Plan, which we refer to as our 1998 restated director plan. Our 1998 restated director plan was initially adopted by our board of directors and stockholders in February 1998, was amended in December 1999 to increase the number of shares of common stock authorized under the plan from 100,000 to 200,000 shares and was amended and restated in May 2005 to (i) increase the number of shares of common stock authorized under the plan from 200,000 to 350,000 shares, (ii) permit restricted stock grants, and (iii) provide for automatic awards of a fixed number of options upon initial election and subsequent re-election to our board of directors and, in lieu of such automatic awards, permit the board discretion in determining the timing, type of award and number of shares issuable pursuant to awards granted under this plan.

 

Pursuant to our 1998 restated director plan, each non-employee director, on the date of his or her election to the board of directors, is eligible to receive (i) a non-statutory stock option to purchase 8,000 shares of our common

stock, which we refer to as an initial option, and (ii) a restricted stock award to purchase 3,000 shares of our common stock, which we refer to as the initial restricted stock award. The initial option is exercisable as to 50% of the shares underlying such initial option immediately upon such director’s initial election and the remainder becomes exercisable in equal annual installments on each of the first, second and third anniversaries of the date of grant, provided that the holder of the initial option continues to serve as a director on each such anniversary of the grant date. We have a right of repurchase with respect to the shares of common stock subject to the initial restricted stock award, which right of repurchase lapses as to one-third of the shares on each of the first, second and third anniversaries of the date of grant, provided that the holder of the initial restricted stock award continues to serve as a director on each such anniversary of the grant date.

 

Additionally, pursuant to our 1998 restated director plan, each non-employee director serving as a director on the date of our annual meeting of stockholders (provided that such director has served as a director for at least six months prior to such annual meeting), is eligible to receive (i) a non-statutory stock option to purchase 4,000 shares of common stock, which we refer to as an annual option, and, together with an initial option, a director option and (ii) a restricted stock award to purchase 4,500 shares of common stock, which we refer to as an annual restricted stock award, and, together with an initial restricted stock award, a director restricted stock award. The annual option is exercisable in equal annual installments on each of the first, second and third anniversaries of the date of grant, provided that the holder of the annual option continues to serve as a director on each such anniversary of the grant date. We have a right of repurchase with respect to the shares of common stock subject to the annual restricted stock award, which right of repurchase lapses as to one-third of the shares on each of the first, second and third anniversaries of the date of grant, provided that the holder of the annual restricted stock award continues to serve as a director on each such anniversary of the grant date.

 

The following table summarizes the compensation of each of our directors for the year ended December 31, 2008.

 

DIRECTOR COMPENSATION

 

 

 

 

 

The following table shows the aggregate number of outstanding stock options and unvested shares of restricted stock held by each of our directors as of December 31, 2008:

 

 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of December 31, 2008 about the securities authorized for issuance under our equity compensation plans, consisting of our 2001 Stock Incentive Plan, as amended, our 1998 Stock Incentive Plan, as amended, our 1998 director plan, as amended, and our 1999 Employee Stock Purchase Plan. All of our equity compensation plans were adopted with the approval of our stockholders.

 

Equity Compensation Plan Information

 

 

Policies and Procedures for Related Party Transactions

 

In accordance with the terms of the charter of our Audit Committee, our Audit Committee is required to review all related person transactions on an ongoing basis and all such transactions must be approved by the audit committee. A related person transaction, as defined in Item 404(a) of Regulation S-K is any transaction, arrangement or relationship in which Aspect is a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% stockholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.

We have also adopted a policy providing that all material transactions between us and our officers, directors and other affiliates must be:

 

 

PROPOSAL TWO — APPROVAL OF A ONE-TIME STOCK OPTION EXCHANGE PROGRAM

 

Introduction

 

We are seeking stockholder approval of an option exchange program that would allow us to cancel significantly “underwater” stock options currently held by some of our employees, excluding our officers and directors, in exchange for the issuance of new stock options exercisable for fewer shares of our common stock, with a lower exercise price that equals the current fair market value of our common stock and extended vesting terms. Underwater stock options have an exercise price which is greater than the market price of the underlying stock. We are proposing this program because we believe that it will provide a more cost-effective retention and incentive tool to our key contributors than issuing incremental equity or paying additional cash compensation to offset the adverse affect of these underwater stock options. Assuming we receive stockholder approval of our option exchange program, we estimate a reduction in outstanding stock options of approximately 892,163 shares, assuming full participation in the option exchange program.

 

Overview

 

In February 2009, the compensation committee recommended to our board of directors, and our board subsequently authorized, a one-time stock option exchange program, or the Option Exchange Program, subject to stockholder approval.

 

Stock options will be eligible for exchange if they have an exercise price per share greater than or equal to $15.00 and were granted under our 1998 Stock Incentive Plan, as amended, or our 2001 Stock Incentive Plan, as amended, collectively referred to as the Plans. We refer to such options as Eligible Options. The opportunity to participate in the Option Exchange Program will be offered to all of our domestic and certain of our foreign employees, excluding our executive officers and directors, collectively referred to as the Eligible Participants. Eligible Options surrendered for exchange under the Option Exchange Program will, upon the closing of the exchange offer, be exchanged for new options, which we refer to as New Options, granted under the 2001 Stock Incentive Plan, as amended.

 

Under the proposed Option Exchange Program, each New Option will have: (1) an exercise price per share equal to the closing price of our common stock as reported on the Nasdaq Global Market on the day that our exchange offer expires; (2) a new expiration date of six years from the date of grant; and (3) the following vesting schedule:

 

 

The ratio of shares underlying exchanged Eligible Options to shares underlying New Options is expected to fall within a range of 3:1 to 350:1, with the majority of shares underlying exchanged options being within a range of 3:1 to 5:1, based on the relative fair value of the exchanged Eligible Options to the New Options. We intend for the fair value of the New Options to be approximately equal to the fair value of the Eligible Options surrendered based on valuation assumptions made as of the close of the Option Exchange Program. We expect that this exchange should result in no adverse impact on our reported earnings. All New Options will be nonstatutory options regardless of whether the Eligible Options exchanged therefor were incentive stock options or nonstatutory stock

options. Please see “— Description of the Option Exchange Program — Accounting Treatment” and “— US Federal Income Tax Treatment” below for a further discussion of certain accounting and tax aspects of the Option Exchange Program.

 

We believe that, if approved by our stockholders, the Option Exchange Program will permit us to:

 

 

If our stockholders approve this proposal, our board of directors intends to close the exchange offer at 5:00 p.m. on or about July 7, 2009. If we do not obtain stockholder approval of this proposal, we will not be able to implement the Option Exchange Program.

 

Reasons for the Option Exchange Program

 

We believe that an effective and competitive employee incentive program is imperative for the future growth and success of our business. We rely on highly skilled and educated technical and managerial employees to implement our strategic initiatives, expand and develop our business and satisfy customer needs. Competition for these types of employees, particularly in the medical devices industry, is intense and many companies use stock options as a means of attracting, motivating and retaining their best employees. At Aspect, stock options constitute a key part of our incentive and retention programs because our board of directors believes that equity compensation encourages employees to act like owners of the business, motivating them to work toward our success and rewarding their contributions by allowing them to benefit from increases in the value of our shares.

 

Many of our employees now hold stock options with exercise prices significantly higher than the current market price of our common stock. For example, on March 31, 2009, the closing price of our common stock on the Nasdaq Global Market was $4.19 per share and Eligible Participants held outstanding stock options exercisable for approximately 1,147,325 shares of our common stock that had exercise prices of $15.00 or more. These options were generally issued at varying times prior to November 2007. Although we continue to believe that stock options are an important component of our employees’ total compensation, many of our employees view these existing underwater options that have exercise prices in excess of $15.00 per share as having little or no value due to the significant difference between the exercise prices and the current market price of our common stock. As a result, for many employees, these options are ineffective at providing the incentive and retention value that our board believes is necessary to motivate our employees to increase long-term stockholder value. We believe that the opportunity to exchange Eligible Options for New Options exercisable for fewer shares, together with a new minimum vesting requirement, represents a reasonable and balanced exchange program with the potential for a significant positive impact on employee retention, motivation and performance.

 

In addition to the underwater options having little or no retention value, they also would remain outstanding until they are exercised or expire unexercised. These outstanding options expose our stockholders to potential dilution and may place downward pressure on our stock price even if they are underwater and not likely to be exercised. This potential dilution and downward pressure caused by outstanding stock options is referred to as overhang. If approved by our stockholders, the Option Exchange Program will reduce outstanding stock options by eliminating underwater options that are currently outstanding. Under the proposed Option Exchange Program, Eligible Participants will receive stock options covering fewer shares than the options surrendered. As a result, the number of shares subject to all outstanding equity awards will be reduced. If all Eligible Options were exchanged, then based on the number of Eligible Options outstanding on March 31, 2009, options to purchase approximately 1,147,325 shares would be surrendered and cancelled, while New Options covering approximately 255,162 shares would be issued. This would result in a net reduction in outstanding stock options by approximately 892,163 shares, or approximately 5.1% of the number of shares of our common stock outstanding as of March 31, 2009. The actual reduction in the number of stock options outstanding that may result from the Option Exchange Program could vary

significantly and is dependent upon the actual level of participation in the Option Exchange Program. All Eligible Options that are not exchanged will remain outstanding and in effect in accordance with their existing terms.

 

In addition, if we are unable to implement the Option Exchange Program, we may determine it is necessary to issue additional options to our employees at current market prices, thereby increasing the aggregate number of stock options outstanding. These grants would deplete the current pool of options available for future grants under the 2001 Stock Incentive Plan and could also result in decreased reported earnings which could negatively impact our stock price.

 

Consideration of Alternatives

 

Our compensation committee reviewed and evaluated various strategies to address the issue of underwater stock options and concluded, based on the reasons discussed above, that a program under which employees could exchange stock options with an exercise price greater than or equal to $15.00 is the best alternative for both our employees and our stockholders.

 

Description of the Option Exchange Program

 

Implementing the Option Exchange Program.   Eligible Participants will be offered the opportunity to participate in the Option Exchange Program pursuant to an Offer to Exchange which will be filed with the Securities and Exchange Commission, or the SEC on Schedule TO. From the time the Offer to Exchange commences, Eligible Participants will be given at least 20 business days to make an election to surrender all of their Eligible Options in exchange for New Options. The New Options will be granted on the day the Offer to Exchange expires, which we expect will be on or about July 7, 2009. Even if the Option Exchange Program is approved by our stockholders, our board will retain the authority, in its sole discretion, to terminate or postpone the program at any time prior to the closing of the Offer to Exchange or to exclude certain Eligible Options or Eligible Participants from participating in the Option Exchange Program due to tax, regulatory or accounting reasons or because participation would be inadvisable or impractical. Stockholder approval of the Option Exchange Program applies only to this specific exchange program. If we were to implement a different stock option exchange program in the future, we would once again need to seek stockholder approval.

 

Outstanding Options Eligible for the Option Exchange Program.   To be eligible for exchange under the Option Exchange Program, an option must have an exercise price that is greater than or equal to $15.00. As of March 31, 2009, options to purchase approximately 4,674,793 shares of our common stock were outstanding, of which options to purchase approximately 1,147,325 shares would be eligible for exchange under the Option Exchange Program.

 

Eligibility.   The Option Exchange Program will be open to all of our domestic and certain of our foreign employees, excluding our executive officers and directors, who hold Eligible Options. Our directors and executive officers are not eligible to participate in the Option Exchange Program. To be eligible, an employee must be employed by us at the time the Offer to Exchange commences. Additionally, in order to receive the New Options, an Eligible Participant who surrenders his or her Eligible Options for exchange must be an employee on the date the New Options are granted. As of March 31, 2009, approximately 197 employees held Eligible Options.

 

Exchange Ratios.   In the proposed exchange offer, Eligible Participants would be offered a one-time opportunity to exchange all of their Eligible Options for New Options covering a smaller number of shares. The actual number of shares subject to New Options will be determined in accordance with exchange ratios that reflect a value approximately equal to that of the exchanged Eligible Options. We intend for the fair value of the New Options to be approximately equal to the fair value of the Eligible Options surrendered based on a Black-Scholes valuation methodology calculated by an independent third party as of the close of the Option Exchange Program. The ratio of Eligible Options to New Options is expected to be in a range of 3:1 to 350:1, with the majority of the shares underlying exchanged options being within a range of 3:1 to 5:1.

 

The following table shows (a) the number of shares underlying outstanding Eligible Options in each exercise price range above $15.00 per share as of March 31, 2009, (b) a hypothetical example of the exchange ratios that would be applied to calculate the number of shares subject to New Options upon to be granted in exchange for surrendered Eligible Options, and (c) the number of New Options to be issued based up such assumed exchange

ratios. The exchange ratios set forth in the table were determined based upon a Black-Scholes calculation of the assumed fair value of the Exchange Options and New Options. This Black-Scholes calculation takes into account factors that include original grant price, remaining vesting period, remaining option term and volatility.

 

1998 Stock Plan Options

 

 

2001 Stock Plan Options