UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

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INTERDIGITAL, INC.

 

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InterDigital, Inc.

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 4, 2009

 

TO THE SHAREHOLDERS OF INTERDIGITAL, INC.:

 

Our 2009 annual meeting of shareholders will be held on Thursday, June 4, 2009, at 11:00 a.m. Eastern Time, at the Dolce Valley Forge Hotel, 301 West DeKalb Pike, King of Prussia, Pennsylvania 19406-1409. At the meeting, the holders of our outstanding common stock will act on the following matters:

 

 

All holders of record of shares of our common stock (NASDAQ: IDCC) at the close of business on April 7, 2009 are entitled to vote at the meeting and at any postponements or adjournments of the meeting. To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the meeting in person. If you have Internet access, we encourage you to record your vote via the Internet. It is convenient, and it saves us postage and processing costs. In addition, when you vote via the Internet, your vote is recorded immediately, and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted. If you do not vote via the Internet, please vote by telephone or by completing, signing, dating and returning the accompanying proxy card in the enclosed return envelope. Submitting your proxy by Internet, telephone or mail will not affect your right to vote in person if you decide to attend the annual meeting.

 

IF YOU PLAN TO ATTEND THE MEETING:

 

Registration will begin at 9:30 a.m., and seating will begin at 10:30 a.m. Each shareholder will need to bring an admission ticket and valid picture identification, such as a driver’s license or passport, for admission to the meeting. Shareholders holding stock in brokerage accounts (“street name” holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting, and all cellular phones must be silenced during the meeting. We realize that many cellular phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

By Order of the Board of Directors,

 

STEVEN W. SPRECHER

General Counsel and Secretary

 

April 30, 2009

King of Prussia, Pennsylvania

TABLE OF CONTENTS

 

INTERDIGITAL, INC.
781 Third Avenue
King of Prussia, Pennsylvania 19406-1409

 

PROXY STATEMENT

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on June 4, 2009: The proxy statement and annual report to shareholders are available at http://ir.interdigital.com/annuals.cfm

 

This proxy statement contains information relating to our annual meeting of shareholders to be held on Thursday, June 4, 2009, beginning at 11:00 a.m. Eastern Time, at the Dolce Valley Forge Hotel, 301 West DeKalb Pike, King of Prussia, Pennsylvania, and at any postponements or adjournments of the meeting. Your proxy for the meeting is being solicited by our board of directors. This proxy statement and our annual report are being mailed to shareholders beginning on or about April 30, 2009.

 

What is the purpose of the annual meeting?

 

At our annual meeting, shareholders will act upon the matters outlined in the notice of meeting provided with this proxy statement, including: the election of director; adoption and approval of our 2009 Stock Incentive Plan; ratification of the appointment of our independent registered public accounting firm; and such other business as may properly come before the meeting. In addition, management will report on the performance of our company and respond to questions from shareholders.

 

Who may attend the meeting?

 

Subject to space availability, all shareholders as of April 7, 2009, the record date, or their duly appointed proxies, may attend the meeting. Registration will begin at 9:30 a.m., and seating will begin at 10:30 a.m. If you plan to attend the meeting, please note that you will need to bring your admission ticket and valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting, and all cellular phones must be silenced during the meeting. We realize that many cellular phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

Please also note that if you hold your shares in “street name” (that is, through a broker or other nominee), you will need to bring a copy of a brokerage statement reflecting your stock ownership as of the record date.

 

Who is entitled to vote at the meeting?

 

Only shareholders of record at the close of business on April 7, 2009, the record date, are entitled to receive notice of and to participate in the annual meeting. If you were a shareholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting. There were 43,674,346 shares of our common stock outstanding on the record date.

 

What are the voting rights of the holders of the company’s common stock?

 

Each share of our common stock outstanding on the record date will be entitled to one vote on each matter considered at the meeting.

 

What is a quorum?

 

A quorum is the minimum number of our shares of common stock that must be represented at a duly called meeting in person or by proxy in order to conduct business legally at the meeting. For the annual meeting, the presence, in person or by proxy, of the holders of a majority of the shares entitled to vote will be

considered a quorum. If you are a registered shareholder, you must deliver your proxy by Internet, telephone or mail, or attend the annual meeting in person and vote, in order to be counted in the determination of a quorum. If you are a “street name” shareholder, your broker or other nominee will vote your shares pursuant to your proxy directions, and such shares will count in the determination of a quorum. If you do not provide any directions to your broker or other nominee, your shares will still count for purposes of attaining a quorum, and your broker or other nominee may vote your shares in its discretion on proposals 1 and 3.

 

How do I vote?

 

If you are a registered shareholder, you may submit your proxy by Internet, telephone or mail by following the instructions included with your proxy card. The deadline for submitting your proxy by Internet or telephone is 11:59 p.m. Eastern Time on June 3, 2009. The designated proxy will vote according to your instructions. You may also attend the meeting and deliver a proxy card to be voted in the same manner, or you may personally vote by ballot.

 

If you are a “street name” shareholder, your properly signed and returned voting instruction card will be tabulated and voted by your broker or other nominee. Please check your voting instruction card or contact your broker or other nominee to determine whether you will be able to deliver your voting instructions by Internet or telephone. If you are a “street name” shareholder and you want to vote at the meeting, you will need to obtain a signed proxy from the broker or nominee that holds your shares, because the broker or nominee is the legal, registered owner of the shares.

 

If you are a member of a retirement or savings plan or other similar plan, you may submit your voting instructions by Internet, telephone or mail by following the instructions included with your voting instruction card. The deadline for submitting your voting instructions by Internet or telephone is 11:59 p.m. Eastern Time on June 2, 2009. The trustee or administrator of the plan will vote according to your instructions and the rules of the plan.

 

Can I change my vote after I return my proxy or voting instruction card?

 

If you are a registered shareholder, you may revoke or change your vote at any time before the proxy card is voted, by filing with our secretary either a written notice of revocation or a duly executed proxy bearing a later date. If you attend the meeting in person, you may ask the judge of elections to suspend your proxy holder’s power to vote, and you may submit another proxy or vote by ballot. Your attendance at the meeting will not by itself revoke a previously granted proxy.

 

If your shares are held in “street name” or you are a member of a retirement or savings plan or other similar plan, please check your voting instruction card or contact your broker, nominee, trustee or administrator to determine whether you will be able to revoke or change your vote.

 

Will my vote be confidential?

 

It is our policy to maintain the confidentiality of proxy cards, ballots and voting tabulations that identify individual shareholders except as might be necessary to meet any applicable legal requirements and, in the case of any contested proxy solicitation, as might be necessary to allow proper parties to verify proxies presented by any person and the results of the voting.

 

What are the board’s recommendations?

 

The board recommends that you vote:

 

 

What vote is required to approve each proposal?

 

Election of director.  Directors are elected by a plurality of votes cast. This means that the director receiving the most votes cast at the meeting will be elected to serve for the next three years. Only votes cast “for” are counted in determining whether a plurality has been cast in favor of a director. A properly executed proxy marked “withhold authority” with respect to the election of a director will not be voted with respect to the director. Votes to withhold authority, while included for purposes of attaining a quorum, will have no effect on the vote on this matter.

 

Other proposals.  For each other proposal, the affirmative vote of a majority of the votes cast will be required for approval. Abstentions, while included for purposes of attaining a quorum, will have no effect on the outcome of the proposal.

 

Street name shares and broker non-votes.  If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some proposals if you do not provide voting instructions. “Broker non-votes” are shares that a broker or nominee does not vote because it has not received voting instructions and does not have discretionary authority to vote. For this meeting, if you do not give specific instructions, your broker or nominee may cast your vote in its discretion for proposal 1, the election of director, and for proposal 3, the ratification of the appointment of the company’s independent registered public accounting firm. Broker non-votes, if any, are included for purposes of attaining a quorum. On proposals where brokers do not have discretionary voting authority, including proposal 2, the adoption and approval of our 2009 Stock Incentive Plan, broker non-votes will have no effect on the outcome of a proposal.

 

Where can I find information about the governance of the company?

 

The company has adopted corporate governance principles that, along with the charters of the board committees, provide the framework for the governance of the company. The nominating and corporate governance committee is responsible for annually reviewing the principles and recommending any proposed changes to the board for approval. A copy of our corporate governance principles is posted on our website at http://ir.interdigital.com under the heading “Corporate Governance,” along with the charters of our board committees and other information about our governance practices. We will provide to any person without charge a copy of any of these documents upon written request to our secretary at InterDigital, Inc., 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409.

 

Does the company have a code of ethics?

 

We have adopted a Code of Ethics that applies to all directors, officers, employees and consultants. In the event that we make any amendment to, or grant any waiver of, a provision of the Code of Ethics, we will disclose the amendment or waiver as required by applicable rules. The Code of Ethics is available on the company’s website at http://ir.interdigital.com under the heading “Corporate Governance.” We will provide to any person without charge a copy of our Code of Ethics upon written request to our secretary at InterDigital, Inc., 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409.

 

How does the board determine which directors are considered independent?

 

Each year, prior to the annual meeting, the board reviews and assesses the independence of its directors and makes a determination as to the independence of each director based on the recommendation of the nominating and corporate governance committee. During this review, the board considers transactions and relationships between each director or any member of his or her immediate family and our company and its

subsidiaries and affiliates. The board measures these transactions and relationships against the independence requirements of The NASDAQ Stock Market, LLC. As a result of this review, the board affirmatively determined that Messrs. Harry G. Campagna, Steven T. Clontz, Edward B. Kamins and Robert W. Shaner are “independent” in accordance with applicable NASDAQ listing standards. To our knowledge, none of the independent directors has any direct or indirect relationships with our company or its subsidiaries and affiliates, other than serving as a director.

 

On April 27, 2009, the company learned that Robert S. Roath is not an independent director because Mr. Roath has a son who for several years has been a partner at PricewaterhouseCoopers LLP (“PwC”), the company’s independent registered public accounting firm. At a meeting of the board held on April 28, 2009, Mr. Roath resigned from the audit, compensation and nominating and corporate governance committees, effective immediately. In addition, D. Ridgely Bolgiano resigned as a member of the board, effective immediately. Mr. Bolgiano recently retired from his employment as vice president and chief scientist of the company in June 2008 and had planned to step down from his position on the board in the near future. Finally, the board, upon the recommendation of the nominating and corporate governance committee, appointed Mr. Campagna to serve as a member of the audit committee to fill the vacancy caused by Mr. Roath’s resignation. As a result of these actions, a majority of the board is comprised of independent directors and the audit, compensation and nominating and corporate governance committees are comprised entirely of independent directors.

 

Who is the chairman of the board?

 

Mr. Campagna, who is an independent director, has served as chairman of the board since April 1996.

 

How is the board made up?

 

Our articles of incorporation provide for a board consisting of three classes of directors with overlapping three-year terms. One class of directors is elected each year with a term extending to the third succeeding annual meeting after election. Due to the passing of Mr. Shaner and the resignation of Mr. Bolgiano, the board reduced its size to five directors and reduced the size of their respective classes to one on an interim basis while the board actively seeks new director candidates.

 

How often did the board meet during 2008?

 

The board met eight times during 2008. Each director is expected to attend each meeting of the board and those committees on which he or she serves. No director attended less than 75% of the aggregate of all board meetings and meetings of committees on which the director served during 2008. We usually schedule meetings of the board on the day immediately preceding or following our annual meeting, and, when this schedule is followed, it is the policy of the board that directors are expected to attend our annual meeting. All current directors attended the annual meeting of shareholders in June 2008.

 

What is the role of the primary board committees?

 

The board has standing audit, compensation, finance and investment, nominating and corporate governance and executive committees. The audit, compensation and nominating and corporate governance committees are composed entirely of independent directors, as determined by the board in accordance with applicable NASDAQ listing standards. In addition, audit committee members meet additional heightened independence criteria applicable to audit committee members under applicable NASDAQ listing standards. Each of the

committees operates under a written charter that has been approved by the board. The table below provides information about the current membership of the committees and the number of meetings held in 2008.

 

 

Audit Committee

 

The audit committee assists the board in its general oversight responsibilities relating to the company’s corporate accounting, its financial reporting practices and audits of its financial statements. Among other things, the committee:

 

 

All of the audit committee members are financially literate. The board has determined that Mr. Clontz is qualified as an audit committee financial expert within the meaning of applicable Securities and Exchange Commission (“SEC”) regulations and that Mr. Clontz acquired his expertise primarily through his experience as a chief executive officer. The audit committee charter is available on the company’s website at http://ir.interdigital.com under the heading “Corporate Governance.”

 

Compensation Committee

 

The compensation committee assists the board in discharging its responsibilities relating to the compensation of the chief executive officer and other executive officers. Among other things, the committee:

 

 

 

The compensation committee charter is available on the company’s website at http://ir.interdigital.com under the heading “Corporate Governance.”

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee assists the board in identifying qualified individuals to become board and committee members, considers matters of corporate governance and assists the board in evaluating the board’s effectiveness. Among other things, the committee:

 

 

The committee will consider director candidates recommended by our shareholders. Shareholders recommending candidates for consideration by the nominating and corporate governance committee should send their recommendations to our secretary at InterDigital, Inc., 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409. The recommendation must include the candidate’s name, biographical data and qualifications.

 

Any such recommendation should be accompanied by:

 

 

The board endeavors to have members representing diverse experience at policymaking levels in business, finance and technology and other areas that are relevant to the company’s global activities. The selection criteria for director candidates include the following:

 

 

The committee evaluates director candidates recommended by shareholders based on the same criteria used to evaluate candidates from other sources. The nominating and corporate governance committee charter is available on the company’s website at http://ir.interdigital.com under the heading “Corporate Governance.”

 

Finance and Investment Committee

 

The finance and investment committee assists the board by monitoring, providing advice and recommending action with respect to the investment and financial policies and strategies and capital structure of the company.

 

Executive Committee

 

The executive committee holds and is empowered to exercise the authority of the board between board meetings in overseeing the management of the business and affairs of the company.

 

How can shareholders communicate with the board?

 

Shareholders and other parties interested in communicating directly with any individual director, including the chairman, the board as a whole or the non-management directors as a group may do so by writing to Investor Relations, InterDigital, Inc., 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409, or by sending an email to Directors@InterDigital.com. Our corporate communications department reviews all such correspondence and regularly forwards to the board — or specified director — a summary of all such correspondence and copies of all correspondence that deals with the functions of the board or its committees or that otherwise requires their attention. Directors may, at any time, review a log of all correspondence we receive that is addressed to members of the board and request copies of any such correspondence.

 

How can individuals report concerns relating to accounting, internal control or auditing matters?

 

Concerns relating to accounting, internal control or auditing matters may be submitted by writing to Office of the Ombudsman, P.O. Box 60814, King of Prussia, Pennsylvania 19406. All correspondence will be brought to the attention of the chairman of the audit committee and handled in accordance with procedures established by the audit committee with respect to these matters.

 

How are directors compensated?

 

For board participation during fiscal year 2008, our non-management directors each received annual base compensation of $25,000. They each also received committee participation compensation equal to $5,000 annually ($15,000 annually for service as chairman of the executive, compensation, finance and investment and nominating and corporate governance committees and $30,000 annually for service as chairman of the

audit committee). Our chairman of the board receives 10,000 restricted stock units (“RSUs”) (all vesting one year from the grant date) each year on January 15th (or the next preceding trading day if the 15th is not a trading day). In addition, each non-management director receives 2,000 RSUs (all vesting one year from the grant date) at each annual meeting, and all non-management directors who are re-elected at an annual meeting also receive 6,000 RSUs (2,000 vesting each year beginning at the first anniversary of such re-election). All cash payments are based upon service for a full year, and prorated payments are made for service less than a full year. These payments are made on a quarterly basis; however, cash payments and RSU awards may be deferred. An election to defer must be made in the calendar year preceding the year in which services are rendered and the compensation is earned.

 

The compensation committee is responsible for reviewing and making recommendations to the board about compensation for non-management directors. In 2007, the committee retained Compensation Strategies, Inc. (“CSI”), to conduct a market review of the company’s compensation program for non-management directors. CSI reports directly to the compensation committee. CSI assessed the competitiveness of the company’s director compensation as measured against a peer group recommended by CSI and presented its conclusions to the committee in June 2007. After reviewing the information provided by CSI, including CSI’s conclusion that the company’s director compensation was close to the median among companies in the peer group, the compensation committee concluded that no changes were necessary and ratified the company’s annual compensation program for non-management directors effective as of January 1, 2007. In 2008, the compensation committee determined that it was not necessary for CSI to conduct another market review of the company’s compensation program for non-management directors, and no changes were made to the company’s annual compensation program for non-management directors for 2008. In addition to conducting periodic market reviews of the company’s non-management director compensation, CSI discusses major shifts in the marketplace for director compensation with the committee or management, as appropriate, as these shifts occur from time to time. In addition, at least annually, CSI discusses with the chief administrative officer any variables that might affect director compensation to assist the company in its ongoing efforts to provide a compensation program for non-management directors that is competitive. Additional information about CSI appears below under the heading “Role of Compensation Committee, Executive Officers and Compensation Consultant in Compensation Decisions.”

 

To align the interests of directors with those of our shareholders, the company has adopted stock ownership guidelines for directors. Individuals are expected to meet their targets within five years of the date they become subject to the guidelines. Stock ownership guidelines applicable to the non-management directors are set at a target of three times their annual cash retainer. Qualifying ownership includes common stock, restricted stock and RSUs. All non-management directors were in compliance with the guidelines as of March 31, 2009.

 

Non-management Director Compensation Table

 

The following table sets forth the compensation paid to each person who served as a non-management director of the company in 2008:

 

 

 

 

 

 

 

 

 

Which director is nominated for election?

 

Mr. William J. Merritt is nominated for election at the 2009 annual meeting, to serve a three-year term expiring at our annual meeting in 2012.

 

What is his background?

 

Mr. Merritt, 50, has been a director of the company since May 2005. Mr. Merritt has also served as president and chief executive officer of the company since May 2005 and as president of InterDigital Technology Corporation from July 2001 to January 2008. Mr. Merritt served as general patent counsel of the company from July 2001 to May 2005. Under the terms of Mr. Merritt’s employment agreement with the company, Mr. Merritt’s service as a director of the company is conditioned upon his retention as chief executive officer.

 

Who are the remaining directors?

 

Continuing director with term expiring at the 2010 annual meeting

 

Mr. Roath, 66, has been a director of the company since May 1997. Mr. Roath served as chief financial officer and senior vice president of RJR Nabisco, Inc. from April 1995 to April 1997, and he has been a director of Standard Parking, a provider of parking management services, since May 2004. He also serves as chairman of Standard Parking’s audit committee.

 

Continuing directors with terms expiring at the 2011 annual meeting

 

Mr. Campagna, 70, chairman of the board, has been a director of the company since April 1994 and chairman since April 1996. Mr. Campagna has been the chairman of the board of Qualitex Co. for more than five years and has also served as its president and chief executive officer. Qualitex Co. is involved in the manufacturing of items for the garment apparel and textile maintenance industries.

 

Mr. Clontz, 58, has been a director of the company since April 1998. Since January 1999, Mr. Clontz has served as president and chief executive officer of StarHub, Ltd., a Singapore-based info-communications corporation. Mr. Clontz has also served as an executive director of StarHub since 1999 and as an executive director of six of its affiliates. In April 2005, Mr. Clontz was appointed to the board of Equinix, Inc., a leading global provider of network-neutral data centers and Internet exchange services headquartered in California. In February 2004, Mr. Clontz was appointed to the executive committee of the board of Global Crossing Limited, a Bermuda corporation, which provides telecommunications solutions over a global IP-based network.

 

Mr. Kamins, 60, has been a director of the company since December 2003. Until his retirement in February 2009, Mr. Kamins had served as chief operational excellence officer of Avnet, Inc., a business-to-business provider of supply chain management and engineering services, since July 2005 and as Avnet’s corporate senior vice president since July 2003. He has been a principal of UpFront Advisors, LLC, a business consulting services firm, since March 2009.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
EACH OF THE NOMINEES.

 

Overview

 

On April 27, 2009, the board unanimously adopted and approved the company’s 2009 Stock Incentive Plan (“2009 Plan”), and is submitting the 2009 Plan to shareholders for their adoption and approval at the Annual Meeting. The board believes the company’s interests are best advanced by stimulating the efforts of employees, officers, nonemployee directors and service providers, in each case who are selected to be participants, by heightening the desire of such persons to continue working toward and contributing to the success and progress of the company. The 2009 Plan allows grants of incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, any of which may be performance-based, and for incentive bonuses. The board has adopted and approved the 2009 Plan to permit the company to continue to use stock-based compensation to align shareholder and participant interests and to motivate participants providing services to the company. The company’s stock-based compensation program is currently operated under the company’s 1999 Restricted Stock Plan, 2000 Stock Award and Incentive Plan and 2002 Stock Award and Incentive Plan (collectively, the “Prior Plans”). Upon approval of the 2009 Plan by shareholders, the Prior Plans will be frozen with respect to new awards effective as of the date of our 2009 annual meeting of shareholders. As such, if the 2009 Plan is approved by shareholders, no further awards will be made under any of the Prior Plans after the date of the annual meeting.

 

Why You Should Vote For the 2009 Plan

 

The board recommends that the company’s shareholders approve the 2009 Plan because it believes the company’s ability to grant equity-based awards continues to be crucial in allowing the company to effectively compete for and appropriately motivate and reward key talent. It is in the long-term interest of both the company and its shareholders to strengthen the company’s ability to attract, motivate and retain employees, officers, nonemployee directors and certain other service providers and to provide additional incentive for those persons through stock ownership and other incentives to improve financial performance, increase profits and strengthen the mutuality of interest between those persons and the company’s shareholders.

 

Promotion of Good Corporate Governance Practices

 

The board believes the use of stock-based incentive awards promotes best practices in corporate governance by maximizing shareholder value. By providing participants in the 2009 Plan with a stake in the company’s success, the interests of the participants are aligned with those of the company’s shareholders. Specific features of the 2009 Plan that are consistent with good corporate governance practices include, but are not limited to:

 

 

 

Key Data

 

The following table includes information regarding all of the company’s outstanding equity awards and shares available for future awards under the company’s equity plans as of March 31, 2009 (and without giving effect to this proposal 2):

 

 

The company has a three-year historical share utilization rate of 1.1%. A substantial portion of the equity awards granted by the company during the past three years are units attached to specific performance metrics, reflecting a strong link between pay and performance.

 

Section 162(m) of the Code

 

The board believes that it is in the best interests of the company and its shareholders to continue to provide for an equity incentive plan under which compensation awards made to the company’s executive officers can qualify for deductibility by the company for federal income tax purposes. Accordingly, the 2009 Plan has been structured in a manner such that awards granted under it can satisfy the requirements for “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986 (the “Code”). In general, under Section 162(m), in order for the company to be able to deduct compensation in excess of $1,000,000 paid in any one year to the company’s chief executive officer or any of the company’s three other most highly compensated executive officers (other than the company’s chief financial officer), such compensation must qualify as “performance-based.” One of the requirements of “performance-based” compensation for purposes of Section 162(m) is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by the company’s shareholders. For purposes of Section 162(m), the material terms include (i) the employees eligible to receive compensation, (ii) a description of the business criteria on which the performance goal is based and (iii) the maximum amount of compensation that can be paid to an employee under the performance goal. With respect to the various types of awards under the 2009 Plan, each of these aspects is discussed below, and shareholder approval of the 2009 Plan will be deemed to constitute approval of each of these aspects of the 2009 Plan for purposes of the approval requirements of Section 162(m).

 

Plan Summary

 

The following summary of the material terms of the 2009 Plan are qualified in their entirety by reference to the complete statement of the 2009 Plan, which is set forth in Appendix A to this Proxy Statement.

 

Administration

 

The 2009 Plan will be administered by a committee of two or more directors designated by the board which shall initially be the compensation committee. Subject to the express provisions of the 2009 Plan, the administrator is authorized and empowered to do all things that it determines to be necessary or appropriate in connection with the administration of the 2009 Plan. In addition, the compensation committee may delegate any or all aspects of the day-to-day administration of the 2009 Plan to one or more officers or employees of the company or any subsidiary, and/or to one or more agents.

Participants

 

Any person who is a current or prospective officer or employee of the company or of any subsidiary will be eligible for selection by the administrator for the grant of awards under the 2009 Plan. In addition, nonemployee directors and any service providers who have been retained to provide consulting, advisory or other services to the company or to any subsidiary will be eligible for the grant of awards under the 2009 Plan. Options intending to qualify as “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Code may only be granted to employees of the company or any subsidiary. Approximately 280 employees and 5 nonemployee directors currently qualify to participate in the 2009 Plan.

 

Shares Subject to the Plan and to Awards

 

The aggregate number of shares of the company’s common stock issuable pursuant to the 2009 Plan may not exceed 2,114,439, plus (i) any shares that were authorized for issuance under the Prior Plans that, as of the date of the annual meeting, remain available for issuance under the Prior Plans (not including any shares that are subject to outstanding awards under the Prior Plans or any shares that previously were issued pursuant to awards granted under the Prior Plans) and (ii) any shares subject to outstanding awards under the Prior Plans as of the date of the annual meeting that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares), subject to adjustment upon a change in the company’s capitalization. As noted above, as of March 31, 2009, 885,561 shares remained available for issuance under future awards that could be granted under the Prior Plans (which shares will cease to be available for issuance under the Prior Plans upon shareholder approval of the 2009 Plan).

 

As such, if the 2009 Plan is approved by shareholders, approximately 3,000,000 shares will initially be available for awards under the 2009 Plan consisting of 2,114,439 “new” shares and approximately 885,561 shares previously authorized for issuance under the Prior Plans.

 

The aggregate number of shares issued under the 2009 Plan at any time will equal only the number of shares actually issued upon exercise or settlement of an award. The following shares will again be available for issuance under the 2009 Plan: (a) shares subject to awards that expire, terminate or are unexercised, forfeited or settled in cash; (b) shares subject to awards that have been retained or withheld by the company in payment of the exercise price, purchase price or tax withholding obligation of an award; (c) shares subject to awards that otherwise do not result in the issuance of shares in connection with payment or settlement of an award; and (d) shares that have been delivered to the company in payment or satisfaction of the exercise price, purchase price, or tax withholding obligation.

 

In each calendar year a participant may be granted awards under the 2009 Plan denominated in shares relating up to his or her annual share limit. A participant’s annual share limit, in any calendar year, shall equal 300,000 shares of common stock plus the amount of the participant’s unused annual share limit as of the close of the previous year, which number shall be subject in each case to possible adjustment upon a change in the company’s capitalization. In each calendar year a participant may be granted awards under the 2009 Plan denominated in cash (and not shares) relating up to his or her annual cash limit. A participant’s annual cash limit, in any calendar year, shall equal $1.5 million plus the amount of the participant’s unused annual cash limit as of the close of the previous year.

 

Option Awards.

 

The administrator will establish the exercise price per share under each option, which, other than in the event of options granted in connection with a merger or other acquisition, will not be less than the fair market value of a share on the date the option is granted. The administrator will establish the term of each option, which in no case may exceed a period of ten (10) years from the date of grant. Options granted under the 2009 Plan may either be ISOs or options which are not intended to qualify as ISO’s, or nonqualified stock options (“NQSOs”). The 2009 Plan prohibits repricing stock options without shareholder approval.

Stock Appreciation Rights

 

A stock appreciation right provides the right to the monetary equivalent of the increase in value of a specified number of the shares over a specified period of time after the right is granted. Stock appreciation rights may be granted to participants either in tandem with or as a component of other awards granted under the 2009 Plan (“tandem SARs”) or not in conjunction with other awards (“freestanding SARs”). All freestanding SARs will be granted subject to the same terms and conditions applicable to options as set forth above and in the 2009 Plan and all tandem SARs will have the same exercise price, vesting, exercisability, forfeiture and termination provisions as the award to which they relate. The 2009 Plan prohibits repricing stock appreciation rights without shareholder approval.

 

Restricted Stock and Restricted Stock Units

 

Restricted stock is an award or issuance of shares the grant, issuance, retention, vesting and/or transferability of which is subject during specified periods of time to conditions (including continued employment or performance conditions) and terms as the administrator deems appropriate. Restricted stock units are awards denominated in units of shares under which the issuance of shares is subject to conditions (including continued employment or performance conditions) and terms as the administrator deems appropriate. Participants holding shares of restricted stock granted under the 2009 Plan may exercise full voting rights with respect to those shares during the period of restriction. Participants will have no voting rights with respect to shares underlying restricted stock units unless and until such shares are reflected as issued and outstanding shares on the company’s stock ledger. Participants in whose name restricted stock is granted will be entitled to receive all dividends and other distributions paid with respect to those shares, unless determined otherwise by the administrator. shares underlying restricted stock units will be entitled to dividends or dividend equivalents only to the extent provided by the administrator.

 

Incentive Bonuses

 

Each incentive bonus will confer upon the participant the opportunity to earn a future payment tied to the level of achievement with respect to one or more performance criteria established for a performance period specified by the administrator. The administrator will establish the performance criteria and level of achievement versus these criteria that will determine the target and maximum amount payable under an incentive bonus, which criteria may be based on financial performance and/or personal performance evaluations.

 

Deferral of Gains

 

The administrator may, in an award agreement or otherwise, provide for the deferred delivery of shares upon settlement, vesting or other events with respect to restricted stock or restricted stock units, or in payment or satisfaction of an incentive bonus.

 

Qualifying Performance Criteria

 

The administrator may establish performance criteria and level of achievement versus such criteria that will determine the number of shares to be granted, retained, vested, issued or issuable under or in settlement of or the amount payable pursuant to an award, which criteria may be based on “qualifying performance criteria” (as described below) or other standards of financial performance and/or personal performance evaluations. In addition, the administrator may specify that an award or a portion of an award is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, provided that the performance criteria for such award or portion of an award that is intended by the administrator to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code will be a measure based on one or more qualifying performance criteria selected by the administrator and specified at the time the award is granted. The administrator will certify the extent to which any qualifying performance criteria has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting of any award that is intended to satisfy the requirements for “performance-based compensation” under

Section 162(m) of the Code. Notwithstanding satisfaction of any performance goals, the number of shares issued under or the amount paid under an award may be reduced, but not increased, by the administrator on the basis of such further considerations as the administrator in its sole discretion may determine.

 

For purposes of the 2009 Plan, the term “qualifying performance criteria” means any one or more of the following performance criteria, or derivations of such performance criteria, either individually, alternatively or in any combination, applied to either the company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the administrator: (i) net sales; (ii) earnings from operations, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or extraordinary or special items; (iii) net income or net income per common share (basic or diluted); (iv) return on assets (gross or net), return on investment, return on capital, or return on equity; (v) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (vi) interest expense after taxes; (vii) economic value added or created; (viii) operating margin or profit margin; (ix) stock price or total shareholder return; (x) average cash balance or cash position; and (xi) strategic business criteria, consisting of one or more objectives based on meeting specified product development, strategic partnering, licensing, research and development, market penetration, geographic business expansion goals, cost targets, customer satisfaction, employee satisfaction, management of employment practices and employee benefits, supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries, affiliates or joint ventures.

 

To the extent consistent with Section 162(m) of the Code, the administrator (i) may appropriately adjust any evaluation of performance under a qualifying performance criteria to eliminate the effects of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or unusual in nature or related to the disposal of a segment of a business or related to a change in accounting principle all as determined in accordance with standards established by opinion No. 30 of the Accounting Principles Board (APA Opinion No. 30) or other applicable or successor accounting provisions, as well as the cumulative effect of accounting changes, in each case as determined in accordance with generally accepted accounting principles or identified in the company’s financial statements or notes to the financial statements, and (ii) may appropriately adjust any evaluation of performance under a qualifying performance criteria to exclude any of the following events that occurs during a performance period: (a) asset write-downs, (b) litigation, claims, judgments or settlements, (c) the effect of changes in tax law or other such laws or provisions affecting reported results, (d) accruals for reorganization and restructuring programs and (e) accruals of any amounts for payment under the 2009 Plan or any other compensation arrangement maintained by the company.

 

Settlement of Awards

 

Awards, may be settled in shares, cash or a combination thereof, as determined by the administrator.

 

Amendment and Termination

 

The board may amend, alter or discontinue the 2009 Plan and the administrator may amend, or alter any agreement or other document evidencing an award made under the 2009 Plan, except no such amendment may, without the approval of the shareholders of the company (other than in respect of a change in the company’s capitalization): increase the maximum number of shares for which awards may be granted under the 2009 Plan; reduce the exercise price of outstanding options; extend the term of the 2009 Plan; change the class of persons eligible to be participants; otherwise amend the 2009 Plan in any manner requiring shareholder approval by law or under the NASDAQ Global Select Market listing requirements; or increase the individual maximum limits set forth in the 2009 Plan.

 

No amendment or alteration to the 2009 Plan or an award or award agreement may be made which would impair the rights of the holder of an award, without such holder’s consent, provided that no such consent will be required if the administrator determines in its sole discretion and prior to the date of any change in control

that such amendment or alteration either is required or advisable in order for the company, the 2009 Plan or the award to satisfy any law or regulation or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard.

 

Change in Control

 

Unless otherwise expressly provided in an award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a change in control (as defined in the 2009 Plan), the administrator may provide for the acceleration of the vesting and, if applicable, exercisability of any outstanding award, or the lapsing of any conditions of restrictions on or the time for payment in respect of any outstanding award, upon termination of the participant’s employment following a change in control. In addition, unless otherwise expressly provided in an award agreement or another contract, including an employment agreement, or under the terms of a transaction constituting a change in control, the administrator may provide that any or all of the following will occur in connection with a change in control: (i) the substitution for the shares subject to any outstanding award, stock or other securities of the surviving corporation or any successor corporation to the company, in which event the aggregate purchase or exercise price, if any, of such award will remain the same, (ii) the conversion of any outstanding award into a right to receive cash or other property upon or following the consummation of the change in control in an amount equal to the value of the consideration to be received by holders of shares in connection with such transaction for one share, less the per share purchase or exercise price of such award, if any, multiplied by the number of shares subject to such award, and/or (iii) the cancellation of any outstanding and unexercised awards upon or following the consummation of the change in control.

 

Adjustments

 

In the event that any dividend or other distribution (whether in the form of cash, shares, other securities or other property), stock split or a combination or consolidation of the outstanding shares into a lesser number of shares, is declared with respect to the shares, the authorization limits provided in the 2009 Plan may be increased or decreased proportionately, and the shares then subject to each award may be increased or decreased proportionately without any change in the aggregate purchase price of those shares. In the event the shares will be changed into or exchanged for a different number or class of shares of stock or securities of the company or of another corporation, whether through recapitalization, reorganization, reclassification, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the company, issuance of warrants or other rights to purchase shares or other securities of the company, or any other similar corporate transaction or event affects the shares such that an equitable adjustment would be required in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2009 Plan, then the authorization limits provided in the 2009 Plan may be adjusted proportionately, and an equitable adjustment may be made to each share subject to an award such that no dilution or enlargement of the benefits or potential benefits occurs.

 

Transferability

 

Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated by a participant other than by will or the laws of descent and distribution, and each option or stock appreciation right may be exercisable only by the participant during his or her lifetime. Notwithstanding the foregoing, to the extent permitted by the administrator, the person to whom an award is initially granted may make certain limited transfers to certain family members, family trusts, or family partnerships.

 

No Right to Company Employment

 

Nothing in the 2009 Plan or an award agreement will interfere with or limit in any way the right of the company, its subsidiaries and/or its affiliates to terminate any participant’s employment, service on the board or service for the company at any time or for any reason not prohibited by law, nor will the 2009 Plan or an award itself confer upon any participant any right to continue his or her employment or service for any

specified period of time. Neither an award nor any benefits arising under the 2009 Plan will constitute an employment contract with the company, any subsidiary and/or its affiliates.

 

Compliance with Law

 

The 2009 Plan, the grant, issuance, vesting, exercise and settlement of awards thereunder, and the obligation of the company to sell, issue or deliver shares under such awards, will be subject to all applicable foreign, federal, state and local laws, rules and regulations, stock exchange rules and regulations, and to such approvals by any governmental or regulatory agency as may be required. The company will not be required to issue or deliver any certificates for shares prior to the completion of any registration or qualification of such shares under any federal or state law or issuance of any ruling or regulation of any government body which the company will, in its sole discretion, determine to be necessary or advisable.

 

Effective Date and Termination of the 2009 Plan

 

The 2009 Plan will become effective on June 4, 2009, subject to approval by the company’s shareholders. The 2009 Plan will remain available for the grant of awards until the tenth (10th) anniversary of the effective date.

 

Federal Income Tax Treatment

 

The following discussion of the federal income tax consequences of the 2009 Plan is intended to be a summary of applicable federal law as currently in effect. It should not be taken as tax advice by 2009 Plan participants, who are urged to consult their individual tax advisors.

 

Stock Options

 

ISOs and NQSOs are treated differently for federal income tax purposes. ISOs are intended to comply with the requirements of Section 422 of the Code. NQSOs do not comply with such requirements.

 

An optionee is not taxed on the grant or exercise of an ISO. The difference between the exercise price and the fair market value of the shares on the exercise date will, however, be a preference item for purposes of the alternative minimum tax. If an optionee holds the shares acquired upon exercise of an ISO for at least two years following the option grant date and at least one year following exercise, the optionee’s gain, if any, upon a subsequent disposition of such shares is long term capital gain. The measure of the gain is the difference between the proceeds received on disposition and the optionee’s basis in the shares (which generally equals the exercise price). If an optionee disposes of stock acquired pursuant to exercise of an ISO before satisfying these holding periods, the optionee will recognize both ordinary income and capital gain in the year of disposition. The company is not entitled to an income tax deduction on the grant or exercise of an ISO or on the optionee’s disposition of the shares after satisfying the holding period requirement described above. If the holding periods are not satisfied, the company will be entitled to a deduction in the year the optionee disposes of the shares in an amount equal to the ordinary income recognized by the optionee.

 

In order for an option to qualify for ISO tax treatment, the grant of the option must satisfy various other conditions more fully described in the Code. The company does not guarantee that any option will qualify for ISO tax treatment even if the option is intended to qualify for such treatment. In the event an option intended to be an ISO fails to so qualify, it will be taxed as an NQSO described below.

 

An optionee is not taxed on the grant of an NQSO. On exercise, the optionee recognizes ordinary income equal to the difference between the exercise price and the fair market value of the shares acquired on the date of exercise. The company is entitled to an income tax deduction in the year of exercise in the amount recognized by the optionee as ordinary income. The optionee’s gain (or loss) on subsequent disposition of the shares is long term capital gain (or loss) if the shares are held for at least one year following exercise. The company does not receive a deduction for this gain.

Stock Appreciation Rights

 

An optionee is not taxed on the grant of a stock appreciation right. On exercise, the optionee recognizes ordinary income equal to the cash or the fair market value of any shares received. The company is entitled to an income tax deduction in the year of exercise in the amount recognized by the optionee as ordinary income.

 

Restricted Stock and Restricted Stock Units

 

Grantees of restricted stock or restricted stock units do not recognize income at the time of the grant. When the award vests or is paid, grantees generally recognize ordinary income in an amount equal to the fair market value of the stock or units at such time, and the company will receive a corresponding deduction. However, no later than 30 days after a participant receives an award of restricted stock, the participant may elect to recognize taxable ordinary income in an amount equal to the fair market value of the shares at the time of receipt. Provided that the election is made in a timely manner, when the restrictions on the shares lapse, the participant will not recognize any additional income. If the participant forfeits the shares to the company (e.g., upon the participant’s termination prior to vesting), the participant may not claim a deduction with respect to the income recognized as a result of the election. Dividends paid with respect to unvested shares of restricted stock generally will be taxable as ordinary income to the participant at the time the dividends are received.

 

Incentive Bonuses

 

A participant will have taxable income at the time an incentive bonus award becomes payable, and, if the participant has timely elected deferral to a later date, such later date. At that time, the participant will recognize ordinary income equal to the value of the amount then payable.

 

Company Deduction and Section 162(m)

 

For the individual serving as the chief executive officer of the company at the end of the taxable year and for the individuals serving as officers of the company or a subsidiary at the end of such year who are among the three highest compensated officers (other than the chief executive officer and chief financial officer) for proxy reporting purposes, Section 162(m) limits the amount of compensation otherwise deductible by the company and its subsidiaries for such year to $1,000,000 for each such individual except to the extent that such compensation is “performance-based compensation.” The company expects that NQSOs, ISOs and stock appreciation rights should qualify as performance-based compensation. The compensation committee may establish performance conditions and other terms with respect to grants of restricted stock, restricted stock units and incentive compensation awards in order to qualify such grants as performance-based compensation for purposes of Section 162(m).

 

New Plan Benefits.

 

The benefits that will be awarded or paid under the 2009 Plan are not currently determinable. Such awards are within the discretion of the compensation committee, and the compensation committee has not determined future awards or who might receive them. Information about awards granted in fiscal year 2008 under the company’s prior plans to the company’s named executive officers can be found in the table under the heading “Grants of Plan-Based Awards” on page 35 of this proxy statement. As of April 7, 2009, the closing price of a share of the company’s common stock was $25.76.

 

Vote Required and Board Recommendation

 

The affirmative vote of a majority of the votes cast is required for the adoption and approval of the company’s 2009 Stock Incentive Plan.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
ADOPTION AND APPROVAL OF THE COMPANY’S 2009 STOCK INCENTIVE PLAN.

 

 

The audit committee has appointed PwC as the company’s independent registered public accounting firm for the year ending December 31, 2009. PwC has served as the independent registered public accounting firm of the company since 2002.

 

Although ratification of the appointment of PwC is not legally required, the board is submitting it to the shareholders as a matter of good corporate governance. If the shareholders do not ratify the appointment, the audit committee will consider the selection of another independent registered public accounting firm in future years.

 

Representatives from PwC will be present at the annual meeting to make a statement, if they so desire, and will be available to respond to appropriate questions.

 

Fees Paid to Independent Registered Public Accounting Firm

 

Aggregate fees for professional services delivered by PwC for the fiscal years ended December 31, 2008 and 2007 were as follows:

 

 

 

Audit Committee Pre-Approval Policy for Audit and Non-Audit Services
of Independent Registered Public Accounting Firm

 

The audit committee’s policy requires that it pre-approve all audit and non-audit services to be performed by the company’s independent registered public accounting firm. Unless a service falls within a category of services that the audit committee has pre-approved, an engagement to provide the service requires pre-approval by the audit committee. Also, proposed services exceeding pre-approved cost levels require specific pre-approval.

 

Consistent with the rules established by the SEC, proposed services to be provided by the company’s independent registered public accounting firm are evaluated by grouping the service fees under one of the following four categories: Audit Services, Audit-Related Services, Tax Services and All Other Services. All proposed services are discussed and approved by the audit committee. In order to render approval, the audit committee has available a schedule of services and fees approved by category for the current year for reference, and specific details are provided. The audit committee does not pre-approve services related only to the broad categories noted above.

 

The audit committee has delegated pre-approval authority to its chairman for cases where services must be expedited. The company’s management provides the audit committee with reports of all pre-approved services and related fees by category incurred during the current fiscal year, with forecasts of additional services anticipated during the year.

 

All of the services related to fees disclosed above were pre-approved by the audit committee.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2009.

 

As more fully described in the charter, the audit committee oversees the company’s financial reporting processes on behalf of the board. In fulfilling our oversight responsibilities, the audit committee has reviewed and discussed with management the company’s audited consolidated financial statements for the year ended December 31, 2008, including a discussion of the acceptability and appropriateness of significant accounting principles and management’s assessment of the effectiveness of the company’s internal control over financial reporting. Management has represented to us that the company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and considered appropriate in the circumstances to present fairly the company’s financial position, results of operations and cash flows. The audit committee has also reviewed and discussed with PwC, the company’s independent registered public accounting firm, their evaluation of the company’s internal control over financial reporting and other business matters. Further, the audit committee has discussed with PwC the matters required to be discussed with the independent registered public accounting firm by Statement on Auditing Standards No. 61 (communications with audit committees), as amended and adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T.

 

The audit committee has also received and reviewed the written disclosures and the letter from PwC required by applicable requirements of the PCAOB regarding the accountant’s communications with the audit committee concerning independence and has discussed with PwC their independence.

 

Based on the reviews and discussions with management and the independent registered public accounting firm referred to above, we recommended to the board that the audited financial statements be included in the company’s annual report on Form 10-K for the year ended December 31, 2008 for filing with the SEC, and we retained PwC as the company’s independent registered public accounting firm for the year ending December 31, 2009.

 

AUDIT COMMITTEE:

 

Edward B. Kamins, Chairman
Steven T. Clontz
Robert S. Roath(1)

 

 

 

Set forth below is certain information concerning our executive officers as of April 30, 2009:

 

 

There are no family relationships among the individuals serving as our directors or executive officers. Set forth below are the name, office and position held with our company and principal occupations and employment during the past five years of each of our executive officers. Biographical information on Mr. Merritt is discussed under the heading “Election of Director” — “What is his background?” on page 10 of this proxy statement.

 

Scott A. McQuilkin joined the company as chief financial officer in July 2007. Prior to joining the company, Mr. McQuilkin served as executive vice president and chief financial officer of GHR Systems, Inc., a provider of lending automation technology and services, from February 2000 until June 2007, and was responsible for all financial activities, including accounting, budgeting/forecasting, capital planning, cash management, strategic planning, mergers and acquisitions, tax, purchasing and payables. In August 2006, GHR Systems, Inc. was acquired by Metavante Corporation, a wholly owned subsidiary of Marshall & Ilsley Corporation, a diversified financial services company. GHR Systems, Inc. was retained as a wholly owned affiliate of Metavante Corporation, a provider of banking and payment technology solutions.

 

Richard J. Brezski joined the company as controller in May 2003. In February 2007, Mr. Brezski was appointed chief accounting officer and remained controller. In January 2009, in addition to being chief accounting officer and controller, Mr. Brezski was promoted to vice president. Prior to joining the company, Mr. Brezski served as an audit manager for PwC’s technology practice.

 

Gary D. Isaacs joined the company as director of human resources in September 1998. Mr. Isaacs was promoted to vice president of human resources in April 1999. In February 2007, Mr. Isaacs was named chief administrative officer, responsible for overseeing the company’s corporate resources and information systems functions.

 

Brian G. Kiernan was promoted to senior vice president, standards, in July 1997. In February 2007, Mr. Kiernan’s title was revised to executive vice president, standards, without a change in responsibilities.

 

Mark A. Lemmo was the company’s executive vice president, business development and product management, from April 2000 to April 2009. In April 2009, in connection with the company’s decision to expand its technology development and licensing business and realign its SlimChip^TM business, Mr. Lemmo was named executive vice president, corporate development, responsible for overseeing the company’s strategic alliances and merger and acquisition activities.

 

James J. Nolan joined the company in 1996 and, until his election as senior engineering officer in May 2006, held a variety of engineering positions, including vice president of systems engineering. In February 2007, Mr. Nolan’s title was revised to executive vice president, engineering, without a change in

responsibilities. In April 2009, in connection with the company’s decision to expand its technology development and licensing business and realign its SlimChip business, Mr. Nolan was named executive vice president, research and development, responsible for leading the company’s technology development programs.

 

Janet Meenehan Point joined the company in January 2000, as director of investor relations. In January 2006, she was promoted to senior communications officer for the company, responsible for corporate communications, investor relations and marketing. In February 2007, Ms. Point’s title was revised to executive vice president, communications and investor relations, without a change in responsibilities.

 

Lawrence F. Shay joined the company as vice president and general counsel in November 2001 and served as corporate secretary from November 2001 to September 2004. In February 2007, Mr. Shay’s title was revised to chief legal and government affairs officer, without a change in responsibilities. In January 2008, in addition to being chief legal and government affairs officer, Mr. Shay was appointed president of the company’s patent holding subsidiaries and executive vice president, intellectual property, and chief intellectual property counsel of the company. Mr. Shay relinquished the chief legal and government affairs officer title upon the promotion of Steven W. Sprecher to general counsel and government affairs officer in March 2008.

 

Steven W. Sprecher joined the company as deputy general counsel in September 2007, and he was promoted to general counsel and government affairs officer in March 2008. In September 2008, Mr. Sprecher was also appointed secretary of the company. Prior to joining the company, Mr. Sprecher served as vice president, legal, for Mindspeed Technologies, Inc., a semiconductor manufacturer, from April 2004 to August 2007.

 

The company’s executive officers are appointed to the offices set forth above to hold office until their successors are duly elected and qualified.

 

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on its review and discussions, has recommended to the board that the Compensation Discussion and Analysis be included in this proxy statement.

 

COMPENSATION COMMITTEE:

 

Harry G. Campagna, Chairman
Steven T. Clontz
Robert S. Roath(1)

 

 

 

This Compensation Discussion and Analysis focuses on the company’s compensation strategy, programs and practices for 2008 for the executive officers named in the Summary Compensation Table (the “named executive officers”) that follows this discussion.

 

Compensation Objectives and Philosophy

 

The compensation and benefits provided to the company’s named executive officers generally have, as their primary purpose, the attraction, retention and motivation of talented employees who will drive the execution of the company’s strategic plan, encourage stock ownership and create long-term value for shareholders.

The core objectives of the company’s compensation program are to:

 

 

The company’s total compensation program is part of an overall strategy to create an environment of collective effort toward common goals, to give each named executive officer both short- and long-term stakes in the success of the company and to reward named executive officers appropriately when company performance meets or exceeds desired objectives.

 

Factors Considered in Setting Compensation

 

In establishing compensation for the named executive officers, the compensation committee exercises its judgment after considering the following factors:

 

 

In evaluating the accomplishment of 2008 goals and related compensation awards for the named executive officers, the compensation committee considered the company’s strong performance during 2008. During 2008, the company entered into a patent license agreement with Samsung, a top-5 3G handset manufacturer; secured agreements with several other patent and technology licensees; delivered solid financial results; significantly matured the patent licensing business; and secured a product design win for its SlimChip family of mobile broadband modem solutions. The compensation committee also considered the extent to which the company achieved corporate goals established under the company’s Annual Employee Bonus Plan and Long Term Compensation Program (“LTCP”), as well as the chief executive officer’s assessment regarding the company’s achievement of the corporate goals. The committee determined that the company achieved 100% of the 2008 corporate goals under the Annual Employee Bonus Plan.

 

The compensation committee also considered the compensation practices of other companies in the telecommunications/communications industry. Consistent with the core objectives of the company’s compensation program, the compensation committee seeks to provide compensation that is competitive in light of current market conditions and industry practices. Accordingly, the compensation committee reviews data on peer group companies to gain a general perspective on the compensation levels and practices at these companies and to assess the relative competitiveness of the compensation paid to the company’s named executive officers. The peer group data serve as a reference point and guideline for the compensation committee in evaluating competitiveness; the committee does not target compensation for individual named executive officers to specific benchmarks. As discussed above, the compensation committee has engaged CSI to assist it in the process of identifying peer group companies and gathering information on their practices. As part of the market review conducted in 2007, CSI identified a peer group that included 21 companies generally from the technology/communications industry sector, including several companies that had patent/licensing components to their businesses. The peer group companies had annual revenues ranging from $160 million to

$1 billion, with median revenue of approximately $410 million. The companies comprising the peer group were:

 

 

CSI gathered available information about individual positions, elements of compensation and overall compensation at the peer group companies and provided the compensation committee with this data, which the compensation committee reviewed. Although the compensation committee does not specifically target the median in setting compensation for the named executive officers, the company’s practice has been to pay at the median for comparable roles in the marketplace in order to attract, retain and motivate talented leaders. In 2008, the compensation committee determined that it was not necessary for CSI to conduct another market review of the company’s compensation programs, and no significant changes were made to the company’s compensation programs for 2008.

 

The third factor that the compensation committee considered in determining compensation for our named executive officers in 2008 was individual performance, including the chief executive officer’s assessment of the other named executive officers’ individual performance. The compensation committee considered individual performance when setting both base salaries and the amount of the named executive officers’ annual bonuses, which, as discussed below, are based 25% on individual performance. As a result of these factors, base salary and annual bonuses for the named executive officers increased during 2008 as compared to 2007.

 

Role of Compensation Committee, Executive Officers and Compensation Consultant in Compensation Decisions

 

The compensation committee determines the structure and amount of all named executive officer compensation. The committee has final authority with respect to these compensation decisions. The committee considers the recommendations of the chairman of the board in determining the base salary of the chief executive officer and the individual performance component of his annual bonus. As part of the annual performance and compensation review for our named executive officers other than the chief executive officer, the committee considers the chief executive officer’s assessment of each named executive officer’s individual performance, including identification of major individual accomplishments, and his recommendations with respect to their compensation. In addition, the chief executive officer provides an assessment to the compensation committee regarding the extent to which the company achieved corporate goals established under the company’s Annual Employee Bonus Plan and LTCP. From time to time, the compensation committee may also receive information from other executive officers about matters such as compensation trends and changes in the law that might affect the terms of the company’s compensation plans.

 

The compensation committee has retained CSI to assist the committee by providing relevant market data (including peer group benchmarking) and by making recommendations to the committee regarding the structure and amounts of various components of executive compensation. CSI reports directly to the compensation committee. As discussed above under the heading “How are directors compensated?,” CSI conducts periodic market reviews of the company’s non-management director compensation and provides other advice to the committee on director compensation matters. In addition, from time to time, CSI may advise the board and management on an ad hoc basis about discrete compensation-related issues. In June 2007, at the

compensation committee’s direction, CSI conducted a market review of the company’s compensation levels for its senior executives. As discussed in more detail below, CSI assessed the competitiveness of the company’s named executive officer compensation as measured against a peer group recommended by CSI. In 2008, the compensation committee determined that it was not necessary for CSI to conduct another market review of the company’s named executive officer compensation, and no significant changes were made to the company’s named executive officer compensation for 2008.

 

Elements of Executive Compensation — Overview

 

The various elements of our compensation program are designed to promote specific compensation objectives, with a view toward furthering the three core objectives of the program, which are described above. The company’s compensation program for its named executive officers includes a mix of current and long-term compensation, both of which have cash and equity components.

 

The basic components of the named executive officers’ current compensation are:

 

 

Long-term compensation for the named executive officers is paid out under the LTCP, as more fully described below. The LTCP has two components: (i) equity (in the form of time- and performance-based RSUs) and (ii) a long-term incentive cash award based on the achievement of corporate goals after the completion of cycles that are generally three years in length.

 

As a retention incentive, every employee of the company receives a cash supplemental payment equal to 3.5% of the employee’s base salary, as discussed further below under “Supplemental Payment and Profit-Sharing Programs.” In 2008, all executive-level employees, including the named executive officers, declined to participate in the supplemental payment program. For 2009, each executive-level employee, including each named executive officer, received a one-time grant of 1,000 shares of the company’s common stock, which are subject to a one-year restriction on transferability. The named executive officers are also eligible for and participate in a variety of savings, health and welfare plans that are available to all U.S. employees of the company.

 

The company has not established formal goals or policies for allocating between cash and non-cash compensation for our named executive officers. Similarly, the company has not established formal goals or policies for allocating between current and long-term compensation for our named executive officers. Instead, we believe that the structures of the Annual Employee Bonus Plan and the LTCP, as described in more detail below, result in allocations that are market-competitive, fair and reasonable in this regard.

 

Current Compensation

 

Base Salary

 

Base salary is the guaranteed element of a named executive officer’s annual cash compensation. Base salaries for the company’s named executive officers are designed to attract and retain highly qualified individuals. The compensation committee approves base salaries for the named executive officers annually based on the committee’s assessment of each named executive officer’s individual performance during the prior year and his or her experience and scope of responsibilities within the company. The committee also considers salaries paid to similarly situated executives within the company’s peer group and information on changes in the Consumer Price Index provided by management.

 

In 2008, salary adjustments for our named executive officers were based primarily on individual performance and peer group data. Although the compensation committee does not specifically target the median in setting compensation for the named executive officers, the company’s practice has been to pay at

the median for comparable roles in the marketplace in order to attract, retain and motivate talented leaders. Individual adjustments were made after the compensation committee considered the performance of each executive, together with job tenure, individual responsibilities, the unique nature of certain positions and other elements of the individual’s annual cash, total and projected compensation. Salary adjustments for 2008 resulted in increases ranging from 3% to 7% for the named executive officers except Mr. Shay, who received an additional 9.8% increase based on his appointment as president of the company’s patent holding subsidiaries and as executive vice president, intellectual property, and chief intellectual property counsel of the company, with management oversight for the company’s patent litigation, licensing and portfolio matters.

 

Annual Bonuses

 

Bonus awards are designed to reward the achievement of annual business goals and reward the individual accomplishments of the named executive officers. Bonuses are payable to the named executive officers under the company’s Annual Employee Bonus Plan. The targeted annual bonus of each of the company’s named executive officers is set as a percentage of salary. For 2008, that percentage was 57% for Mr. Merritt, 50% for Mr. Shay and 40% for the other named executive officers. The amount awarded is based 75% on achievement of annual corporate goals and 25% on individual performance.

 

In 2008, the primary corporate goals were securing additional patent and technology licenses, securing a meaningful product design win, enhancing the company’s intellectual property portfolio and strengthening the organization. The specific goals, and the relative weights assigned to each, were as follows:

 

 

The annual corporate goals are generally structured to challenge management to achieve results that collectively yield a payout at or about 100% of target. At the end of 2008, the chief executive officer provided his assessment to the compensation committee regarding the extent to which the company achieved the annual corporate goals. The committee considered this assessment and also discussed various other factors that contributed to the company’s successes in areas not identified in the goals enumerated under the plan.

Following discussion among the members, the compensation committee determined that the company achieved 100% of the 2008 annual corporate goals.

 

In determining the annual bonus of the chief executive officer for 2008, the compensation committee considered the recommendations of the chairman of the board and reviewed the individual performance of the chief executive officer in 2008. For the other named executive officers, the compensation committee reviewed the performance assessments provided by the chief executive officer. The compensation committee also has discretion to exercise its judgment based on interactions with each named executive officer. As noted above, the amount awarded as annual bonus is based 75% on achievement of annual corporate goals and 25% on individual performance. The payout under the portion of the annual bonus attributable to individual performance may range from 0% to 150% of the target amount for such portion, depending upon the individual executive’s performance assessment.

 

With respect to the fiscal 2007 annual bonuses paid to the named executive officers in 2008, 30% of each was in the form of shares of the company’s common stock, which are subject to a two-year restriction on transferability. The purpose of paying a portion of the annual bonuses in the form of equity was to enhance senior management stock ownership and foster the alignment of senior management’s interests with those of our shareholders. Due to the restriction on transfer, the officers also received a tax gross-up on the value of the bonus shares, which was intended to ensure that the amount of the officers’ annual bonus equaled what they otherwise would have received if the bonus was paid entirely in cash. The annual bonuses for fiscal 2008 paid to the named executive officers in 2009 were entirely in cash.

 

Savings and Protection (401(k)) Plan

 

The company’s Savings and Protection Plan (the “401(k) Plan”) is a tax-qualified retirement saving plan pursuant to which employees, including the named executive officers, are able to contribute the lesser of 100% of their annual base salary or the limit prescribed by the Internal Revenue Service (“IRS”) on a pre-tax basis. The company provides a 50% matching contribution, paid in shares of company common stock, on the first 6% of an employee’s salary contributed to the 401(k) plan, up to the cap mandated by the IRS.

 

Supplemental Payment and Profit-Sharing Programs

 

The supplemental payment program provides all employees with an annual cash payment equal to 3.5% of their annual base salary, payable quarterly in arrears. This program is designed to reduce the need to provide any perquisites to employees and to serve as a retention incentive. In 2008, all executive-level employees, including the named executive officers, declined to participate in the supplemental payment program. For 2009, each executive-level employee, including each named executive officer, received a one-time grant of 1,000 shares of the company’s common stock, which are subject to a one-year restriction on transferability. The purpose of paying the supplement in the form of equity is to enhance senior management stock ownership, thereby fostering the alignment of senior management’s interests with those of our shareholders.

 

In addition, the compensation committee approved a profit-sharing 401(k) contribution to each employee, including the named executive officers, of 1.5% of the employee’s salary earned in 2008, up to the cap mandated by the IRS, which was paid in shares of company common stock in first quarter 2009.

 

Long-Term Incentives

 

The company’s LTCP is designed to incentivize the named executive officers to achieve strong corporate performance aligned with the company’s long-term strategic plan, to align the interests of the named executive officers with shareholders and to attract and retain highly qualified individuals. The LTCP is comprised of both equity and cash components, which include:

 

 

The LTCP consists of overlapping cycles that are generally three years in length. The first cycle under the program covered the period from April 1, 2004 to January 1, 2006 (“Cycle 1”) and included both RSU and cash components. The second cycle originally covered the period from January 1, 2005 to January 1, 2008 (“Cycle 2”) and also included both RSU and cash components. In second quarter 2005, the compensation committee amended the LTCP to revise only the cash award portion of Cycle 2 to cover a 31/2-year period from July 1, 2005 through December 31, 2008 (“Cycle 2a”). The compensation committee amended the LTCP because it believed that several events, including the conclusion of a major arbitration that would have had a significant one-time effect on achievement of corporate goals, and the appointment of a new chief executive officer, warranted the establishment of new long-term goals, and because the parallel cycles that previously existed resulted in erratic expense patterns for the company every other year. The RSU component of the third cycle (“RSU Cycle 3”) began on January 1, 2007 and runs to January 1, 2010; the cash component of the third cycle (“Cash Cycle 3”) began on January 1, 2008 and runs through December 31, 2010. The RSU component of the fourth cycle (“RSU Cycle 4”) began on January 1, 2009 and runs to January 1, 2012; the cash component of the fourth cycle (“Cash Cycle 4”) will begin on January 1, 2010 and run through December 31, 2012.

 

Participants may earn a pro-rata portion of their awards under the LTCP in the event of death, disability or retirement or if the company terminates their employment without cause. Participants also may earn their full awards in the event of a change in control of the company as defined under the LTCP.

 

Equity Awards

 

Each named executive officer receives RSU awards under the LTCP based on a percentage of their base salary at the time of grant. Awards under the LTCP are paid out at the end of each cycle for all participants. Until 2006, the equity component of the LTCP consisted solely of time-based RSUs. To align management’s compensation with corporate performance more closely, in August 2006 members of senior management were offered the opportunity to exchange 50% of their then-current time-based RSUs (from Cycle 2) for an equal number of performance-based RSUs, with the level of payout tied to the company’s achievement of pre-approved performance goals established by the compensation committee. All the named executive officers participated in this exchange offer, other than Mr. McQuilkin, who joined the company in July 2007 and was therefore not eligible to participate in the equity award portion of Cycle 2. In December 2006, the LTCP was amended so that, beginning with RSU Cycle 3, executives now receive 50% of their RSU grant as performance-based RSUs and 50% as time-based RSUs.

 

Under the performance-based RSU component of the LTCP, 100% achievement of the corporate goals set by the compensation committee results in a 100% payout of the performance-based RSU incentive target amounts. For each 1% change above or below 100% achievement, the actual award amount is adjusted by four percentage points, with a minimum payout of 80% of target and a maximum payout of 300%. For performance that falls below 80% of target, no RSU payout would occur.

 

RSU Cycle 4

 

The amount of RSUs (both time- and performance-based) granted on January 1, 2009 pursuant to RSU Cycle 4 to each named executive officer was based on the following percentages of base salary:

 

 

The goals associated with RSU Cycle 4 are being formulated in light of the company’s recent decision to expand its technology development and licensing business and realign its SlimChip business. The payout may exceed or be less than the targeted percentage of base salary depending on the company’s level of goal

achievement, or there may be no payout at all if the company fails to meet the minimum performance goals for the cycle.

 

Cash Awards

 

The cash portion of the LTCP provides performance-based cash awards to the named executive officers based on the company’s achievement of pre-approved performance goals established by the compensation committee for each program cycle. As with the equity component discussed above, each participant’s target award is established as a percentage of their base salary in effect at the start of each cycle, and the payout is based on the company’s achievement of the applicable long-term goals.

 

Cycle 2a

 

For Cycle 2a, the percentages of July 1, 2005 base salaries used to calculate the LTCP cash awards to the named executive officers were as follows:

 

 

 

 

The objectives underlying the goals established for Cycle 2a were to drive the company’s strategic plan and complement the annual bonus plan goals. The goals associated with Cycle 2a were: (i) achieve patent licensing / technology solutions revenue coverage at a specified target percentage of the 3G market on terms consistent with our strategic plan; (ii) generate a specified amount of free cash flow over the period of the cycle; and (iii) expand the company’s business beyond 3G baseband through the execution of additional agreements.

 

The Cycle 2a goals were structured to challenge management to achieve results that collectively yield a payout at or about 100% of target. The compensation committee reviewed progress toward these goals as of December 31, 2008 and authorized payouts at the 175% level, which reflects the company’s overachievement of the goal relating to free cash flow. The committee also took note that the company was then evaluating a number of strategic options for its modem business, and, therefore, with respect to certain executive officers, including each of the named executive officers, the committee deferred payment of 30% of the amounts due to those executive officers, including each named executive officer, until resolution of the strategic direction of the company’s modem business. Accordingly, 70% of each of the Cycle 2a payout amounts earned by the named executive officers was paid on January 30, 2009. With the announcement on March 30, 2009 that the company plans to cease further product development of its SlimChip HSPA technology and proceed to monetize the product investment through technology licensing, the remaining 30% of each of the amounts due to the named executive officers pursuant to Cycle 2a is expected to be paid in June 2009.

Cash Cycle 3

 

For Cash Cycle 3, the percentages of January 1, 2008 base salaries used to calculate the LTCP cash awards to the named executive officers were as follows:

 

 

The objectives underlying the goals established for Cash Cycle 3 are to drive the company’s strategic plan and complement the annual bonus plan goals. The goals associated with Cash Cycle 3 are: (i) achieve patent licensing / technology solutions revenue coverage at a specified target percentage of the 3G market on terms consistent with our strategic plan and (ii) generate a specified amount of free cash flow over the period of the cycle.

 

The Cash Cycle 3 goals are structured to challenge management to achieve results that collectively yield a payout at or about 100% of target. The payout may exceed or be less than the targeted percentage of base salary depending on the company’s level of goal achievement, or there may be no payout at all if the company fails to meet the minimum performance goals for the cycle.

 

Grant Practices

 

The timing and amount of the grants under the LTCP are formulaic. In the case of the Annual Employee Bonus Plan, as discussed above, for 2008 30% of the annual bonus of each of the named executive officers was paid in the form of shares of the company’s common stock, which are subject to a two-year restriction on transferability. At the direction of the compensation committee, the number of shares awarded is calculated by dividing the applicable dollar amount by the closing fair market value of the company’s common stock on the last business day immediately preceding the payroll date on which bonuses are paid to the named executive officers.

 

The terms and conditions of the LTCP provide that RSU grant values are calculated as a target percentage of the named executive officer’s base salary at either the beginning of the cycle or, if the named executive officer joined the company mid-cycle, his or her date of hire. This amount is then divided by the fair market value of the company’s common stock either at the beginning of the cycle or the date of hire, as applicable, to determine the number of RSUs to be granted. For example, if a named executive officer’s target RSU award value is equal to 90% of his or her $250,000 base salary (i.e., $225,000), and the closing fair market value of our common stock on the last business day of the year prior to the commencement of the cycle is $30, the named executive officer would automatically be granted 7,500 RSUs on the first day of the new cycle. Half of the total award, or 3,750 RSUs, would be time-based, with the remaining half being performance-based.

 

The compensation committee believes that the procedures described above for setting the grant date of equity awards provides assurance that the grant timing does not take advantage of material non-public information.

 

Impact of Tax Treatment

 

Section 162(m) of the Internal Revenue Code generally limits the company’s tax deduction for compensation paid to its chief executive officer and other named executive officers (excluding the chief financial officer) to $1 million per person in any tax year. Qualified performance-based compensation is not subject to the deduction limit if specified requirements are met. The compensation committee has considered the effects of Section 162(m) when implementing compensation plans and taken into account whether preserving the tax deductibility of compensation to named executive officers could impair the operation and effectiveness of the company’s compensation programs. However, the committee believes it is important to maintain flexibility to

make adjustments to the company’s LTCP, despite the fact that in the future certain amounts paid to executives in excess of $1 million may not be deductible. For 2008, there was no compensation paid in excess of the $1 million threshold under Section 162(m).

 

Stock Ownership Guidelines

 

To align the interests of senior officers with those of our shareholders, the company has established minimum stock ownership guidelines for senior officers. Individuals are expected to meet their targets within five years of the date they become subject to the guidelines. The compensation committee established the guidelines with the advice of CSI, and the committee monitors compliance with the guidelines on an annual basis. Qualifying ownership includes common stock, including common stock held through the company’s 401(k) plan, restricted stock and RSUs. The chief executive officer’s target ownership is set at an amount of company common stock equal in value to four times his current annual base salary. In 2008, the compensation committee increased the minimum stock ownership guidelines for some of the company’s other senior officers. As a result, the other named executive officers are expected to own company stock valued at a multiple of at least two or three times their current annual base salary. All of the named executive officers were in compliance with the guidelines as of March 31, 2009.

 

Employment Agreements

 

The company has entered into employment agreements with each of the named executive officers that provide severance payments and benefits in the event of termination of employment under specified circumstances, including termination of the named executive officer’s employment within one year after a change of control of the company as defined in the employment agreement. Severance payments and benefits provided under the employment agreements are used to attract and retain executives in a competitive industry that has experienced ongoing consolidation and to ease an individual’s transition in the event of an unexpected termination of employment due to changes in the company’s needs. Information regarding the nature and circumstances of payouts upon termination is provided under the heading “Potential Payments Upon Termination or Change in Control.”

 

The following table contains information concerning compensation awarded to, earned by or paid to our named executive officers in the last three years. Our named executive officers include our chief executive officer, chief financial officer and our three other most highly compensated executive officers who were serving as executive officers of the company at December 31, 2008. Additional information regarding the items reflected in each column follows the table. All such compensation was attributable to services rendered to the company and its subsidiaries during fiscal 2008.

 

 

 

 

 

 

 

 

The following table summarizes the grants of plan-based awards under Cash Cycle 3 of the LTCP (LTCP), awards of restricted stock (RS) representing the value of 30% of each of the annual bonuses for fiscal 2007 paid in 2008 under the Annual Employee Bonus Plan, cash awards under the Annual Employee Bonus Plan (AEBP) and awards of time-based restricted stock units (RSU) made to the named executive officers during the year ended December 31, 2008. Each of these types of awards is discussed in the Compensation Discussion and Analysis above.

 

 

 

 

The following table sets forth information concerning unexercised options, unvested stock and equity incentive plan awards for the named executive officers outstanding as of December 31, 2008.

 

 

 

 

The following table sets forth information, on an aggregated basis, concerning stock options exercised and stock awards vested during 2008 for the named executive officers.

 

 

 

 

Named Executive Officer Employment Agreements

 

Each of the named executive officers has entered into an employment agreement and is party to various other arrangements with the company that provides severance pay and benefits, among other things, in certain events of termination of employment, as described below.

 

Pursuant to the terms of the LTCP, if the named executive officer’s employment terminates in the event of long-term disability, death or absenteeism or is terminated by the company without cause (each as described below), the named executive officer would be entitled to pro-rata vesting of any time-based RSUs that would have vested at the end of the year during which the termination occurred. Time-based RSUs that would have vested at the end of subsequent years are forfeited entirely. If the named executive officer’s employment terminates for any reason during the first year of an LTCP cycle, the named executive officer forfeits eligibility to receive any cash award and all performance-based RSUs under that cycle. If, however, the named executive officer’s employment terminates during the second or third year of a cycle in the event of long-term disability, death or absenteeism or is terminated by the company without cause, the named executive officer would be eligible to earn a pro-rata portion of the cash award and performance-based RSUs under that cycle. Pursuant to the terms of the Annual Employee Bonus Plan, which require an employee to be working actively at the

time of the payout (unless involuntarily terminated other than for intentional wrongdoing after the end of the plan year, but before the bonus is paid), the named executive officer would not be eligible to receive a bonus under the plan, although we retain the right to make exceptions to the eligibility requirements of the plan and have done so in the past. Any rights that the named executive officers have under these plans in connection with other termination scenarios are discussed below in connection with the relevant scenario.

 

Termination for Long-Term Disability

 

The company may terminate the employment of a named executive officer in the event of his long-term disability (as that term is defined in our Long-term Disability Plan), such that he is not otherwise qualified to perform the essential functions of his job either with or without reasonable accommodation. In the event the named executive officer’s employment terminates due to a long-term disability, the named executive officer is entitled to receive:

 

 

In addition, provided that the named executive officer executes our standard termination letter, which includes, among other things, a broad release of all claims against us and a reiteration of his confidentiality and other post-termination obligations (a “Termination Letter”), he is entitled to receive, for a period of one year (18 months in the case of Mr. Merritt) following termination: (i) regular installments of base salary at the rate in effect at the time of termination, reduced by the amount of payments received for this period pursuant to any Social Security entitlement or any long-term disability or any other employee benefit plan, policy or program maintained to provide benefits in the event of disability, in which the named executive officer was entitled to participate at the time of termination, and (ii) medical and dental coverage on terms and conditions comparable to those most recently provided to him.

 

Termination by Death

 

In the event of the termination of a named executive officer’s employment due to death, the company will pay to the named executive officer’s executors, legal representatives or administrators an amount equal to the accrued but unpaid portion of the named executive officer’s base salary, Benefits and Other Compensation up through the date on which he dies. The named executive officer’s executors, legal representatives or administrators will be entitled to receive the payment prescribed under any death or disability benefits plan in which the named executive officer is a participant as our employee, and to exercise any rights afforded under any compensation or benefit plan then in effect.

 

Termination for Cause

 

The company may terminate a named executive officer’s employment at any time for “cause” upon the occurrence of any of the following: (i) any material breach by the named executive officer of any of his obligations under his employment agreement that is not cured within 30 days after he receives written notification from the company of the breach or (ii) other conduct by the named executive officer involving any type of willful misconduct with respect to the company, including, without limitation, fraud, embezzlement, theft or proven dishonesty in the course of his employment or conviction of a felony. In the event of a termination of the named executive officer’s employment for cause, the named executive officer is entitled to

receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation.

 

Pursuant to the terms of the LTCP, the named executive officer forfeits any rights under the LTCP and Annual Employee Bonus Plan if his employment terminates for cause.

 

Termination Without Cause

 

The company may terminate a named executive officer’s employment at any time, for any reason, without cause upon 30 days prior written notice to the named executive officer. In the event of a termination without cause, the named executive officer is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, provided he executes a Termination Letter, the named executive officer is entitled to receive: (i) severance in an amount equal to his base salary and (ii) medical and dental coverage on terms and conditions comparable to those most recently provided to him for the period of one year (18 months in the case of Mr. Merritt) commencing upon the date of termination. Mr. Merritt’s employment agreement provides that he is also entitled to receive additional severance equal to 50% of his target bonus for the year in which the termination occurs, payable in equal installments over a period of 18 months after the date of termination.

 

Termination for Absenteeism

 

The company may terminate a named executive officer’s employment in the event that he is absent for more than 150 days within any 12-month period. In the event of termination due to absenteeism, the named executive officer is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, provided he executes a Termination Letter, he is entitled to receive, for a period of one year (18 months in the case of Mr. Merritt) following termination: (i) regular installments of base salary at the rate in effect at the time of termination, reduced by the amount of payments received for this period pursuant to any Social Security entitlement or any long-term disability or any other employee benefit plan, policy or program maintained to provide benefits in the event of disability in which the named executive officer was entitled to participate at the time of termination and (ii) medical and dental coverage on terms and conditions comparable to those most recently provided to him. Mr. Merritt’s employment agreement provides that he is also entitled to receive an additional severance amount equal to the 50% of his target bonus for the year in which termination occurs, payable in equal installments over a period of 18 months after the date of termination.

 

Termination by the Named Executive Officer

 

A named executive officer may terminate his employment with us at any time, for “good reason” or without “good reason,” provided that the date of termination is at least 30 days after the date he gives written notice of the termination to the company. For this purpose, “good reason” means: (i) the company’s failure to pay in a timely manner the named executive officer’s base salary or any other material form of compensation or material benefit to be paid or provided to him under his employment agreement or (ii) any other material breach of our obligations under his employment agreement that is not cured within 30 days after the company receives written notification from the named executive officer of the breach. In the event that the named executive officer terminates his employment, either for good reason or without good reason, he is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, solely if the termination is for good reason, and provided that the named executive officer executes a Termination Letter, he is entitled to receive: (a) severance in an amount equal to his base salary and (b) medical and dental coverage on terms and conditions comparable to those most recently provided to him for the period of one year (18 months in the case of Mr. Merritt) commencing upon the date of termination.

 

Mr. Merritt’s employment agreement provides that he is also entitled to receive additional severance equal to 50% of his target bonus for the year in which termination occurs, payable in equal installments over the period of 18 months after the date of termination. Pursuant to the terms of the LTCP and Annual Employee

Bonus Plan, Mr. Merritt forfeits any rights under these plans if he terminates his employment for any reason. If a named executive officer other than Mr. Merritt terminates his employment with us without good reason, the company generally may elect to pay severance of up to one year’s salary and continuation of medical and dental benefits for a period of one year.

 

Termination Following a Change in Control

 

If the company terminates a named executive officer’s employment (except for cause), or the named executive officer terminates his employment with us (whether or not for good reason) within one year following a change in control of the company, he is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, provided that he executes a Termination Letter, the named executive officer is entitled to receive, on the date of termination, an amount equal to two years’ worth of his base salary. For this purpose, “change in control of the company” means the acquisition (including by merger or consolidation, or by our issuance of securities) by one or more persons, in one transaction or a series of related transactions, of more than 50% of the voting power represented by our outstanding stock on the date of the named executive officer’s employment agreement, or a sale of substantially all of our assets.

 

Pursuant to the terms of the LTCP, upon termination of employment following a change in control (except for cause), the named executive officer is entitled to an early payout of his LTCP cash award in an amount that is the greater of either: (i) his target LTCP cash award or (ii) the LTCP cash award that would have been due to him at the end of the relevant LTCP cycle (but for the change in control), assuming the performance level achieved prior to the change in control continues to be the same through the remainder of the cycle. In addition, for each named executive officer, the occurrence of a change in control causes all otherwise unvested performance-based and time-based RSUs (whether granted as an LTCP, promotion or new hire award) and any other unvested equity awards to vest immediately in full. These actions will occur without regard to whether the named executive officer remains employed at the company and without regard to performance during the remainder of the LTCP cycles.

 

Pursuant to the terms of the Annual Employee Bonus Plan, the named executive officer is not eligible to receive a bonus under the Annual Employee Bonus Plan, with the exception of Mr. Shay, who is entitled to receive an amount equal to 100% of his target bonus for the year in which the change in control of the company occurs.

 

Termination Due to Retirement

 

The company’s retirement eligibility age is 70. For purposes of determining eligibility, the company employs a formula that sums the employee’s years of service and age. For each of the named executive officers, successfully meeting this eligibility requirement causes the vesting, on a pro-rata basis, of all otherwise unvested RSUs. For time-based RSUs, the pro-rated amount of RSUs will be determined by multiplying the full time-based award amount by a fraction equal to the portion of the vesting period that had transpired prior to the cessation of employment. For performance-based RSUs, the pro-rated amount will be determined as described above, but not until the LTCP cycle has completed and a determination has been made regarding performance against established goals.

Potential Payments upon Termination or Change in Control

 

The following tables reflect the amount of compensation payable to each of the named executive officers pursuant to their employment agreements, as well as pursuant to the LTCP and Annual Employee Bonus Plan, upon: termination for long-term disability, termination by death, termination for cause, termination without cause, termination for absenteeism, termination by the named executive officer and termination upon a change in control of the company. The amounts shown assume that the termination was effective as of December 31, 2008 and the price per share of the company’s common stock was $27.50, the closing market price as of that date. The amounts reflected are estimates of the amounts that would be paid out to the named executive officers upon their termination. The actual amounts to be paid out can be determined only at the time the events described above actually occur.

 

William J. Merritt

 

Assuming the following events occurred on December 31, 2008, Mr. Merritt’s payments and benefits have an estimated value of:

 

 

 

 

Scott A. McQuilkin

 

Assuming the following events occurred on December 31, 2008, Mr. McQuilkin’s payments and benefits have an estimated value of:

 

 

 

 

 

Mark A. Lemmo

 

Assuming the following events occurred on December 31, 2008, Mr. Lemmo’s payments and benefits have an estimated value of: