UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A
(Rule 14a-101)
Information Required in Proxy Statement
Schedule 14A Information

 

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

 

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Filed by a Party other than the Registrant o

 

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o  Preliminary Proxy Statement

 

 

AUTHORIZE.NET HOLDINGS, INC.

(f/k/a Lightbridge, Inc.)

 

(Name of Registrant as Specified In Its Charter)

 

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUTHORIZE.NET HOLDINGS, INC.
f/k/a Lightbridge, Inc.
293 Boston Post Road West, Suite 220
Marlborough, Massachusetts 01752

 

NOTICE OF SPECIAL MEETING IN LIEU OF 2007 ANNUAL MEETING OF STOCKHOLDERS

 

Dear Stockholder:

 

We invite you to attend our Special Meeting in Lieu of 2007 Annual Meeting of Stockholders, which is being held as follows:

 

 

At the meeting, we will ask you and our other stockholders to:

 

 

You may vote on these matters in person or by proxy. Whether or not you plan to attend the meeting, we ask that you complete and return the enclosed proxy card promptly in the enclosed addressed, postage-paid envelope, so that your shares will be represented and voted at the meeting in accordance with your wishes. If you attend the meeting, you may withdraw your proxy and vote your shares in person. Only stockholders of record at the close of business on May 3, 2007 may vote at the meeting.

 

By order of the Board of Directors,

 

Eugene J. DiDonato

Secretary

 

May 15, 2007

 

PROXY STATEMENT
FOR THE
AUTHORIZE.NET HOLDINGS, INC.
SPECIAL MEETING IN LIEU OF
2007 ANNUAL MEETING OF STOCKHOLDERS

Table of Contents

 

 

The Company’s Special Meeting in Lieu of 2007 Annual Meeting of Stockholders will be held at 10:00 a.m. on Friday, June 29, 2007 at our corporate offices, located at 293 Boston Post Road West, Suite 220, Marlborough, Massachusetts 01752. At the meeting, stockholders who are present or represented by proxy will have the opportunity to vote on the election of one Class II director for a three-year term and on any other business properly presented at the meeting.

 

We have sent you this proxy statement and the enclosed proxy card because our Board of Directors is soliciting your proxy to vote at the meeting (including any adjournment or postponement of the meeting).

 

 

We will pay the cost of soliciting these proxies. Our directors, officers and employees may solicit proxies in person, by telephone or by other means. We will reimburse brokers and other nominee holders of shares for expenses they incur in forwarding proxy materials to the beneficial owners of those shares. At present, we do not plan to retain the services of a proxy solicitation firm to assist us in this solicitation.

 

We are mailing this proxy statement and the enclosed proxy card to stockholders for the first time on or about May 15, 2007. In this mailing, we are including a copy of our 2006 Annual Report, which includes our Annual Report on Form 10-K for the year ended December 31, 2006 (excluding exhibits), as filed with the Securities and Exchange Commission (SEC).

 

You are entitled to one vote at the meeting for each share of common stock registered in your name at the close of business on May 3, 2007. You may vote your shares at the meeting in person or by proxy.

 

 

If you complete all of the proxy card except the voting instructions, then the designated persons will vote your shares FOR the election of the nominated director. If any other business properly comes before the meeting, then the designated persons will have discretion to vote in any manner.

 

If you vote by proxy, you may revoke your proxy at any time before it is exercised by taking one of the following actions:

 

 

If a broker or nominee holds shares of our common stock for you in its name, then this proxy statement may be forwarded to you with a voting instruction card, which allows you to instruct the broker or nominee how to vote your shares on the proposal described herein. To vote by proxy, you should follow the directions provided with the voting instruction card. If your shares are held by a broker and you do not provide timely voting instructions, the broker may have discretionary authority to vote your shares on matters which are considered routine. For non-routine matters, if you do not provide instructions, the broker will not vote your shares, which results in a “broker non-vote.” To vote your shares in person, you must obtain a properly executed legal proxy from the record holder of the shares which identifies you as the beneficial owner of our shares and authorizes you to act on behalf of the record holder with respect to a specified number of shares.

 

At the close of business on April 24, 2007, 28,087,007 shares of common stock were outstanding. Our by-laws require that a majority of our common stock be represented, in person or by proxy, at the meeting in order to constitute the quorum we need to transact business. We will count abstentions and broker non-votes in determining whether a quorum exists.

 

If you and other residents at your mailing address own shares of common stock through a broker or other nominee, you may have received only one copy of this proxy statement and our 2006 Annual Report if you so elected. If you and other residents at your mailing address own shares of common stock in your own names, you may have received only one copy of this proxy statement and our 2006 Annual Report unless you provided our transfer agent with contrary instructions.

 

This practice, known as “householding,” is designed to reduce our printing and postage costs. You may promptly obtain an additional copy of this proxy statement and our 2006 Annual Report by sending a written request to Authorize.Net Holdings, Inc., Investor Relations, 293 Boston Post Road West, Suite 220, Marlborough, Massachusetts 01752, by calling our Investor Relations department at 508-229-3215 or by sending an e-mail to tobrien@lightbridge.com or tobrien@authorize.net. If you hold your shares through a bank or other nominee and wish to discontinue householding or change your householding election, you may do so by calling 1-800-542-1061 or writing to Broadridge Financial Solutions, Inc., 51 Mercedes Way, Englewood, NY 11717. If you hold your shares in your own name and wish to discontinue householding or change your householding election, you may do so by calling 1-800-937-5449 or writing to American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038.

 

The only proposal on the agenda for the meeting is the election of one person to serve as a Class II director for a three-year term beginning at the meeting and ending at our 2010 annual meeting of stockholders. Our Board currently has five members and is divided into three classes. We currently have two Class I directors, one Class II director and two Class III directors. Members of each class of directors serve for three-year terms. We stagger these terms so that the term of only one class expires each year.

 

The nominee for re-election as a Class II Director is Rachelle B. Chong. A brief biography of Ms. Chong as of April 24, 2007 follows. You will find information on Ms. Chong’s holdings of common stock in the Stock Owned by Directors, Executive Officers and Greater-than-5% Stockholders table.

 

 

If for any reason Ms. Chong becomes unavailable for election, the persons designated in the proxy card may vote the shares represented by proxy for the election of a substitute. Ms. Chong has consented to serve as a director if elected, and we currently have no reason to believe that she will be unable to serve.

 

The one person receiving the greatest number of votes cast will be elected as a Class II director.

 

Our Board of Directors recommends that you vote FOR the election of Ms. Chong as a Class II Director.

 

The Class III and Class I directors will continue in office following the meeting, and their terms will expire in 2008 (Class III) and 2009 (Class I). Brief biographies of these directors, as of April 24, 2007, follow. You will find information about their holdings of common stock in the Stock Owned by Directors, Executive Officers and Greater-than-5% Stockholders table.

 

 

On August 1, 2006, David G. Turner resigned as a member of our Board of Directors to focus on his other commitments. Mr. Turner was also a member of our Compensation Committee.

 

A majority of our directors qualify as independent directors under the rules of The NASDAQ Global Market for purposes of their Board and committee services. Our Board has determined that our independent directors for 2006 were Ms. Chong, Mr. Haroian, Mr. Melia, Mr. Mills and Mr. Turner. At least four times a year, the independent directors meet in sessions at which only the independent directors are present.

 

Our Board held twelve meetings and acted by unanimous written consent three times during the year ended December 31, 2006. All of our incumbent directors attended at least 75% of the meetings of the Board and of committees of the Board on which they served in 2006.

 

Our Board has no formal policies and procedures for the review and approval of transactions with related parties. However, the Audit Committee has the responsibility of reviewing and approving transactions with related parties. In connection with the review of any related party transactions, the Audit Committee considers, among other matters, the nature, timing and duration of the transactions, the relationships of the parties to the transactions, whether the transactions are in the ordinary course of the Company’s business, the dollar value of the transactions and whether the transactions are in the interest of the Company. The Audit Committee ratified the related party transactions described below.

 

On December 31, 2004, Wells Fargo & Company (Wells Fargo) acquired certain assets of Strong Capital Management (Strong Capital). Strong Capital, which was an independent money manager that offered mutual funds to individual investors and accounts for institutional clients, owned the Company’s stock on December 31, 2004.

 

The Company has ongoing business relationships with a certain affiliate of Wells Fargo that existed prior to Wells Fargo’s acquisition of Strong Capital. Wells Fargo, together with certain of its affiliates, owns more than 10% of the Company’s outstanding stock as reported on a Schedule 13G filed on February 8, 2007. The relationships, which are independent of each other, consist of (i) payments made by the Company to the affiliate of Wells Fargo for fees associated with the Integrated Payment Solution (IPS), an integrated payment gateway and credit card processing account offered to merchants by Wells Fargo Bank, (ii) payments made by the Company to the affiliate of Wells Fargo for credit card interchange fees related to IPS services provided to the Company’s merchant customers and (iii) payments received by the Company from the affiliate of Wells Fargo in accordance with a non-exclusive agreement in which the affiliate of Wells Fargo resells the Company’s gateway services.

 

Payments made by the Company to the affiliate of Wells Fargo for interchange and bank fees amounted to $2.7 million, and $2.2 million for the years ended December 31, 2006 and 2005, respectively. Payments received by the Company from Wells Fargo and its affiliate amounted to $2.8 million and $2.2 million for the years ended December 31, 2006 and 2005, respectively. Balances due to Wells Fargo and its affiliates were $0.1 million, at December 31, 2006 and 2005. Balances due from Wells Fargo and its affiliates were $0.2 million and $0.3 million, at December 31, 2006 and 2005, respectively. Wells Fargo and its affiliates were not a related party during the year ended December 31, 2004.

 

We have adopted a Code of Ethics that applies to all of our employees, executive officers and directors. Our Code of Ethics includes provisions covering conflicts of interest, business gifts and entertainment, outside activities, compliance with laws and regulations, insider trading practices, antitrust laws, payments to government personnel, bribes or kickbacks, corporate record keeping, accounting records, the reporting of illegal or unethical behavior and the reporting of accounting concerns. Any waiver of any provision of the Code of Ethics granted to an executive officer or director may only be made by the Board. A copy of our Code of Ethics is posted on the Investor Relations section of our web site at www.lightbridge.com or www.authorize.net, and written copies may be requested by contacting Investor Relations, Authorize.Net Holdings, Inc., 293 Boston Post Road West, Suite 220, Marlborough, Massachusetts 01752, by telephone: 508-229-3215, or by sending an e-mail to tobrien@lightbridge.com or tobrien@authorize.net.

 

Our stockholders may communicate directly with the members of our Board or the individual chair of standing Board committees by writing directly to those individuals care of the Company at 293 Boston Post Road West, Suite 220, Marlborough, Massachusetts 01752. Our policy is to forward, and not to intentionally screen, any mail received at our corporate office that is sent directly to an individual.

 

Our directors are expected to attend meetings of the Board and meetings of committees on which they serve. Our directors are expected to spend the time needed at each meeting and to meet as frequently as necessary to properly discharge their responsibilities. It is our policy that the Chairman of the Board or, if the Chairman is unavailable or not independent, another independent director, shall attend every annual meeting of stockholders. Two (2) of our directors at the time, Mr. Donahue and Mr. Melia, attended the Special Meeting in Lieu of 2006 Annual Meeting of Stockholders.

 

The Nominating and Governance Committee, in consultation with our Chief Executive Officer and the Chairman of the Board, identifies and reviews candidates for our Board and recommends to our full Board candidates for election to the Board. In selecting new directors, the committee considers any requirements of applicable law or listing standards, a candidate’s strength of character, judgment, business experience and specific area of expertise, factors relating to the composition of the Board (including its size and structure), principles of diversity, and such other factors as the committee deems to be appropriate. As part of this responsibility, the committee is responsible for conducting, subject to applicable law, any and all inquiries into the background and qualifications of any candidate for the Board and such candidate’s compliance with the independence and other qualification requirements established by the committee or imposed by applicable law or listing standards. The committee has used third-party recruiting firms at times to assist it in identifying nominees for director.

 

The Nominating and Governance Committee will consider director candidates recommended by stockholders. In considering candidates submitted by stockholders, the Nominating and Governance Committee will take into consideration the factors discussed above. The Nominating and Governance Committee may also take into consideration the number of shares held by the recommending stockholder and the length of time that such shares have been held. To have a candidate considered by the Nominating and Governance Committee, a stockholder must submit the recommendation in writing and must include the following information:

 

 

The stockholder recommendation and information described above must be sent to our Secretary and must be received at our corporate offices not less than sixty (60) days prior to the date of our annual meeting of stockholders as specified in our by-laws (the fourth Wednesday in May); provided, however, that if our annual meeting is to be held on a date prior to such specified date, and if less than seventy (70) days’ notice or prior public disclosure of the date of such annual or special meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on which notice of the date of such annual or special meeting was mailed or the day on which public disclosure was made of the date of such annual or special meeting.

 

Mr. Donahue was elected as a director pursuant to the terms of the Donahue Employment Agreement (described below), under which the Company has agreed to nominate him and recommend him for election as a director during the term of his employment.

 

Our Board has three standing committees: the Audit Committee, the Nominating and Governance Committee and the Compensation Committee. All of the members of the Audit Committee, the Nominating and Governance Committee and the Compensation Committee meet the applicable independence requirements of The NASDAQ Global Market for the committees on which they serve. Our Board has adopted written charters for each of these committees. Copies of each of these charters are posted on the Investor Relations section of our web site at www.lightbridge.com or www.authorize.net and written copies may be requested by contacting Investor Relations, Authorize.Net Holdings, Inc., 293 Boston Post Road West, Suite 220, Marlborough, Massachusetts 01752, Telephone: 508-229-3215 or by sending an e-mail to tobrien@lightbridge.com or tobrien@authorize.net.

 

The membership of each committee of our Board for 2006 was as follows:

 

 

 

 

Our Audit Committee is currently composed of Messrs. Haroian, Melia and Mills. The Audit Committee met fourteen times and acted by unanimous written consent three times during the year ended December 31, 2006. Our Audit Committee provides direct contact between our independent registered public accounting firm and members of our Board, and our independent registered public accounting firm reports directly to the committee. The primary role of the Audit Committee is to assist our Board in fulfilling its oversight responsibilities by reviewing the financial information proposed to be provided to shareholders and others, the internal control systems and disclosure controls established by management and the Board, the audit process and the qualifications, independence and performance of our independent registered public accounting firm. The Audit Committee is directly responsible for selecting, compensating, evaluating and, when necessary, replacing our independent registered public accounting firm. Our Audit Committee has adopted procedures for the treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential and anonymous submission by our employees of concerns regarding questionable accounting, internal accounting controls or auditing matters. These procedures are set forth in our Code of Ethics.

 

The Board determined that the members of our Audit Committee are not only independent, but also are “financially literate” for purposes of NASDAQ rules (that is, able to read and understand financial statements).

 

The Board has found that Messrs. Haroian and Melia qualify as “audit committee financial experts.” Mr. Haroian served as a Certified Public Accountant for a major public accounting firm prior to his career as an executive in the technology industry. He was Chief Financial Officer at Bowstreet, Inc., Concord Communications, Inc. and Stratus Technologies, Inc. and currently serves on the Audit Committees of Network Engines, Inc., Aspen Technologies, Inc., Embarcadero Technologies, Inc. and Phase Forward, Inc. Mr. Melia was Chief Financial Officer of Sun Microsystems Corporation from 1992 to 1994. Mr. Melia also serves as a member of the Audit Committees of Iona Technologies PLC and Radisys Corporation.

 

The current members of our Nominating and Governance Committee are Ms. Chong and Messrs. Melia and Mills. Our Nominating and Governance Committee’s responsibilities include providing recommendations to our Board regarding nominees for director and for membership on the committees of our Board. An additional function of the Nominating and Governance Committee is to develop corporate governance practices to recommend to our Board and to assist our Board in complying with those practices. Our Nominating and Governance Committee held four meetings and acted by unanimous written consent once during the year ended December 31, 2006.

 

The members of our Compensation Committee for 2006 were Ms. Chong and Messrs. Turner, Melia and Haroian. The purpose of the Compensation Committee is to discharge the responsibilities of our Board relating to compensation of our directors and executive officers and related matters, to review and make recommendations to the Board regarding employee compensation and benefit plans and programs generally and to administer our stock option plans. The full responsibilities of the Compensation Committee are set forth in its charter, a copy of which is posted on the Company’s website at www.lightbridge.com or www.authorize.net. The Compensation Committee met eleven times and acted by unanimous written consent two times during the year ended December 31, 2006.

 

No member of the Compensation Committee (i) was, during 2006, or had previously been, an officer or employee of the Company or its subsidiaries nor (ii) had any material interest in a transaction of the Company or a business relationship with, or any indebtedness to, the Company, in each case that would require disclosure under applicable rules of the SEC. No other interlocking relationship existed between any member of the Compensation Committee or an executive officer of the Company, on the one hand, and any member of the compensation committee (or committee performing equivalent functions, or the full Board) or an executive officer of any other entity, on the other hand.

 

The following table sets forth certain information as to the total remuneration paid to our non-employee Directors for the year ended December 31, 2006.

 

DIRECTOR COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2006

 

 

 

 

Directors who are not our employees receive $2,000 for each Board meeting they attend and $1,000 for each meeting they attend of a committee of the Board on which they serve. Non-employee Directors (other than the Chairman of the Board) also receive an annual retainer of $20,000 for their services as Directors. In 2006, the Audit Committee Chair received an annual retainer of $10,000, the Compensation Committee Chair received an annual retainer of $6,000. Effective January 1, 2007, the annual retainers for the Audit Committee Chair and Compensation Committee Chair were increased to $15,000 and $10,000, respectively. Other committee chairs receive an annual retainer of $5,000 for their services as chairperson of a committee. Any non-employee Director who also serves as Chairman of the Board receives an annual all-inclusive retainer of $70,000 for the additional services, duties and responsibilities of the Chairman of the Board.

 

It has been our practice that Directors who are not our employees also receive stock option grants. Upon election to the Board of Directors, each non-employee Director receives options to purchase 25,000 shares of common stock, which vest in three equal annual installments. In addition, following each annual meeting of stockholders (or special meeting in lieu thereof), each non-employee Director re-elected to or remaining on the Board is granted fully vested options to purchase 10,000 shares of common stock, provided that:

 

 

The exercise price per share of each option grant is equal to the closing price of our common stock on the date of such grant, as reported by The NASDAQ Global Market. Directors who are our employees are not entitled to receive any separate compensation for serving as Directors.

 

We currently have four executive officers. Mr. Donahue is also a Director and information about him appears above. Brief biographies for our other three executive officers follow. The ages of the executive officers are given as of April 24, 2007. You will find information about their holdings of common stock in the Stock Owned by Directors, Executive Officers and Greater-Than-5% Stockholders table.

 

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based on the Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

Rachelle B. Chong, Chair
Gary E. Haroian
Kevin C. Melia

 

This Compensation Discussion & Analysis (CD&A) outlines our compensation philosophy, objectives and processes, while it sets forth the method for decision-making regarding executive compensation as well as some of the data and reasoning behind the decisions that are made. Elsewhere in this proxy statement are several tables setting forth the actual compensation for our named executive officers, together with associated narratives that explain the data contained in the tables. There is also a section detailing the compensation amounts related to termination of employment of each named executive in several different situations.

 

What person or group is responsible for determining the compensation levels of named executive officers?

 

The Compensation Committee of our Board of Directors determines compensation for the named executive officers and recommends to the Board compensation for Board members. In doing so, the Committee reviews the performance of the Company, assesses the performance of the individuals, and, as needed, confers with an independent compensation consultant about the competitive market for comparable executives. The Committee assesses the performance of the Company in part based on financial and business measures.

 

In 2006, the Committee retained the services of Pearl Meyer & Partners (PM&P), an independent compensation consultant, to prepare peer group and survey data, to assist with the review of overall executive and director compensation programs, to prepare documentation for our proxy statement, to assist us to understand applicable legal and regulatory requirements related to compensation, and to provide general compensation advice.

 

The Compensation Committee retains PM&P directly and relies on it for independent advice. In carrying out assignments, PM&P also works directly with Company management when necessary or appropriate and may seek input and feedback from management about its work product before presentation to the Compensation Committee.

 

What are the objectives of our compensation program for executive officers, and what is it designed to reward?

 

The Compensation Committee seeks to achieve three broad goals in connection with our Company’s executive compensation programs and decisions regarding individual compensation.

 

 

What are the elements of executive compensation?

 

We utilize three main components of compensation.

 

 

Why do we choose to pay each element and how do we decide how much to pay?

 

The Compensation Committee determines the elements and levels of executive compensation. The Committee reviews executive compensation at least annually, although specific matters may be addressed at various times throughout the year. Determining compensation for any given year includes a review of appropriate market data, Company and individual performance, discussions among the Committee members and management, presentations to the Committee of proposed compensation for the year, and a review of the prior year’s compensation. From time to time, the Committee considers and makes off-cycle changes to an individual executive’s compensation as a result of changes in title, duties or responsibilities, or for retention or other business reasons.

 

Compensation elements include:

 

Base Salary

 

The Committee approves base salaries for executive officers based on a recommendation from the CEO (except with respect to the CEO’s base salary), appropriate market data provided by our compensation consultant, consideration of the internal management structure of the Company, and other relevant factors. Pursuant to its charter, our Nominating and Governance Committee, with participation from the Chairman of the Board, oversees the CEO’s annual performance evaluation. The Chairman of the Board of Directors, with the input from the Nominating and Governance Committee and the Board of Directors, recommends the

CEO’s base salary to the Compensation Committee, which approves, or recommends to the Board of Directors the approval of, such base salary. The CEO’s salary determination is considered and voted upon with the CEO absent from the discussion and vote. The Compensation Committee reviews base salaries each year and adjusts them appropriately to reflect market conditions, changes in duties or responsibilities, individual performance, general economic conditions and other relevant factors.

 

Current base salaries for executive officers are generally within the 50th percentile range of the market data (+/- 10%) provided by our compensation consultant. The CFO’s base salary is at the 75th percentile of the market data based on his experience, expertise and individual performance. The market data considered consists of peer group data and compensation survey data described below.

 

Annual Incentive/Bonus

 

Our annual incentive/bonus plan is designed to focus our executive officers on the execution of our business plan and the achievement of specific financial goals and individual management objectives each year. We believe that the annual incentive/bonus program is an effective tool to motivate our executives to achieve their goals and objectives and to create shareholder value.

 

Our annual incentive targets are stated as a percentage of base salary, as follows:

 

 

J. Donald Oldham, the former President of our Telecom Decisioning Services (TDS) business, was not employed for the entire fiscal year and was not eligible for a bonus. His target percentage of base salary would have been 50%.

 

Each year, the Committee works with management to establish appropriate performance measures for the annual incentive plan. The Committee establishes payout targets under the annual incentive plan based on the performance of the Company with regard to the measures determined by the Committee early in the year and the achievement of individual management objectives. In 2006, there were three performance measures that determined the amount of the actual payout. These measures were weighted as follows:

 

 

Individual management objectives vary based upon the positions held, and reflect objectives such as managing costs and expenses, succession planning, management development, improving operating performance, maintaining regulatory compliance or fulfilling designated strategic or tactical business goals. Individual management objectives are designed to be achieved within the year, and it is more likely than not that such objectives will be met by the end of a given year.

 

In 2006, each executive officer other than the CEO had the potential to earn an incremental bonus equal to a percentage of a total pool that was based on corporate operating income in excess of goal. The percentage was the same as the percentage that each executive officer’s regular bonus was of the total bonuses paid to all participants in the pool for the year. The pool was funded if the Company exceeded its operating income goal for the year. In 2006, Messrs. O’Brien, Banks and DiDonato each received incremental bonuses in the respective amounts of $36,459, $23,737 and $17,850.

 

The Committee approved $192,430 of additional bonuses to be paid to the executive officers of the Company other than Mr. Oldham. This was done in recognition of exemplary performance by the executive officers and Company during a year that presented many challenges. For example, in 2006, the Company was

notified that two significant TDS customers were terminating their relationships with the Company. The Company accordingly decided to exit the TDS business. The value of the Company’s stock increased approximately 63% in 2006 in spite of this development. The amount of such additional bonuses paid to each of the executive officers (other than Mr. Oldham) is set forth in the 2006 Summary Compensation Table below under the Bonus column. Mr. Oldham received a $25,000 sign-on bonus when he joined the Company.

 

Compensation under the annual incentive/bonus plan is believed by the Company and the Committee to be “performance based” under Section 162(m) of the Internal Revenue Code. As such, it is exempt from the limitation on deduction of such payments to an executive officer if total compensation exceeds $1.0 million in a fiscal year. However, the additional bonuses described in the preceding paragraph are not considered “performance based” and would not qualify for exemption from this limitation on deduction. However, taxable compensation for individual executive officers for base salary and discretionary bonus in 2006 did not exceed $1.0 million, making all such payments to the executives deductible.

 

Long-Term Incentives

 

The Compensation Committee approves all long-term incentive awards for the executive officers. The Committee’s approach is to keep equity compensation competitive within the 50th percentile of market data, yet reflective of an individual’s performance and long-term value to the Company.

 

Long-term incentives have typically been offered to executives at the Company in the form of time-vested stock options. Because restricted stock awards are generally made for significantly fewer shares of stock than are stock option awards, in 2006, we issued restricted stock awards to the executive officers (except the CEO) in order to help limit the overall equity dilution of the Company. We believe that equity compensation promotes long-term focus, helps to build shareholder value by aligning our executives’ interests with those of our shareholders, and helps us to retain key individuals. Equity awards are made at the fair market value of our common stock on the date of award.

 

Although our long-term incentive stock options have typically been time-vested instruments, Messrs. Donahue and O’Brien have been granted performance-vested stock options tied to our stock trading above certain levels for certain periods of time.

 

 

Other

 

The Company does not provide perquisites to executives. Executives are eligible for the standard benefits and programs available to all employees.

 

The Company does not currently have any program, plan or practice in place to time option or other equity awards to its executives or its other employees in coordination with the release of material non-public information. Typically, annual long-term incentives have been granted during the first quarter of the year. The precise timing of our annual long-term incentive awards may be affected by the availability of benchmark

data, the completion of our evaluation process for a given year, and other circumstances. We plan to continue to approve our annual long-term incentives in the first quarter of a given year. If circumstances necessitate, additional grants may be made during the year. The Committee reserves the right to make awards in special situations and at special times if business circumstances necessitate, such as the hiring or retention of an employee.

 

We utilize base salary, annual incentive/bonus and long-term incentives in our compensation mix because we believe they provide a balanced mix of fixed compensation (base salary) and variable compensation that balances short-term and long-term performance incentives and rewards. We endeavor to achieve employee retention through vesting schedules for long-term incentives. The mix of measures in the annual incentive/bonus plan serves to focus executives’ attention on the near-term performance needs of building the Company, while long-term incentives provide a focus on the long-term shareholder value. We believe this is the appropriate balance between near-term and long-term financial performance.

 

Currently, our pay mix is similar to that found among our peer group. However, we will evaluate the mix each year and may deviate from the peer group practice to incent or retain our executive officers.

 

Decisions with regard to the actual amount or value of compensation paid to each executive officer are based on a number of factors. These factors include objective compensation data representing pay levels in the marketplace, pay levels of other executives at a similar level within the Company, the individual’s title, duties and responsibilities within the Company, the individual’s particular experience and expertise, and the performance of the individual.

 

In determining pay levels, the Compensation Committee looks at all forms of compensation and benefits received by the executive. We have used tools such as tally sheets to assist in the review of the total compensation delivered to each executive officer in a given year. The tally sheets have also quantified the potential future value of the Committee’s current compensation decisions by tracking accumulated values related to stock options and possible termination payments.

 

The Committee assesses competitive market compensation using a number of sources. The primary data sources utilized for executive officer comparisons is the information publicly disclosed by companies within our 2006 peer group as provided by our independent compensation consultant. The peer group is made up of selected companies within our industry that have overall slightly higher revenue and market cap than the Company. We believe it is appropriate to utilize a peer group of larger companies based on our need to retain key executives and our goal to build the Company. We update the peer group as necessary to remain relevant and provide meaningful comparisons.

 

Peer group data is supplemented with published executive compensation surveys, which provide position-based compensation levels. The survey data that we utilize is made up of technology companies of similar size and scope to the Company. In 2006, the Compensation Committee retained PM&P to develop a competitive assessment of executive compensation, which provided the data necessary to assist us to make our compensation decisions.

 

In general, we compare market data for executive officers by similarity of position. While objective data is a good starting point for determining appropriate compensation, we recognize that there may be circumstances that warrant an adjustment or deviation from market data.

 

While the Committee, in making decisions regarding an individual executive officer’s target total compensation, relies heavily on the external competitive levels of compensation, it also considers other

important circumstances that may warrant an adjustment or deviation from the benchmark data, particularly if it is necessary to further our goals of attracting, retaining and motivating an experienced and effective management team. Other factors we may consider include title, individual duties and responsibilities, individual performance, the difficulty of recruiting a new executive, individual experience and expertise, tenure, or the value of institutional knowledge.

 

The amount and mix of compensation that the Committee determines is considered within the context of both the objective data from our competitive assessment of compensation and discussion of the subjective factors as outlined above. We believe that each of the compensation packages for our executives is within the competitive range of pay practices when compared to objective comparative data, even where subjective factors have influenced our compensation decisions.

 

The Company has an employment agreement with Mr. Donahue and executive retention agreements with its named executives.

 

The main provisions of the agreements pertain to termination of employment. Providing severance and benefits continuation allows the executive team to assess business situations objectively and without regard to the personal outcomes of implementing a sound business decision for the Company. For example, the executives may not objectively assess a merger opportunity if it would result in the executives being terminated without the safety of income being provided post-termination, even if the merger would produce very positive shareholder value.

 

The Company believes that the employment and retention agreements provide a reasonable level of security in the case of termination.

 

The Donahue Employment Agreement

 

In January 2005, the Company entered into an employment agreement with Mr. Donahue related to his employment as CEO, which was then amended in January 2007. The agreement does not state a specific term, but either party may terminate Mr. Donahue’s employment at any time with one month’s notice.

 

In the case of termination of employment by the Company without “cause” (as defined in the agreement), Mr. Donahue will continue to receive his base salary for a period of one year (paid on the normal payroll schedule unless such payments are required to be suspended or delayed under Internal Revenue Code (IRC) Section 409A. IRC Section 409A provides for a 6-month suspension of the Company’s obligation to pay such salary during such period, with unpaid salary accruing during such period. In addition, stock options under the First Stock Option (as described below) that would have become vested within one year of the termination become immediately vested at the date of termination and Mr. Donahue has until 90 days following the end of the salary continuation period to exercise the First Stock Option and the Second Stock Option (as described below). The First Stock Option consists of 250,000 options subject to time-based vesting over four years from the date of grant and the Second Stock Option consists of 150,000 options subject to performance-based vesting. In order to receive the salary continuation, Mr. Donahue is required to sign a release and severance agreement.

 

In the case of termination of employment within two years after a change-in-control (CIC) by the Company without cause or by the employee for “good reason” (as defined in the agreement), Mr. Donahue is entitled to (a) a lump-sum payment of 1.5 times his then-current base salary plus 1.5 times his bonus earned for the immediately preceding calendar year (unless that bonus has not been determined, in which case it is equal to 60% of the target bonus); (b) benefits continuation for 18 months, and (c) vesting of all unvested stock options.

 

In the event that the compensation paid to him as a result of a CIC would constitute an excess parachute payment (which triggers an excise tax under IRC Section 280G), Mr. Donahue has the right to cause the Company to reduce his compensation to avoid the tax. We believe this is beneficial to both the Company and the executive and is within the competitive norm of our peer group.

 

Executive Retention Agreements

 

Our executive retention agreements cover each of the current executive officers other than Mr. Donahue. We believe that the terms of the agreements are reasonable and fair to both the Company and the executives and are within the norm when compared to similar companies.

 

The retention agreements are for one-year terms with automatic renewal. Upon termination of employment within two years after a CIC by the Company without cause or by the employee for “good reason” (as defined in the agreements), each executive officer would receive (a) a lump sum payment of one times his then-current base salary plus one-times his bonus earned for the immediately preceding calendar year (unless that bonus has not been determined, in which case it is equal to 60% of the target bonus), (b) benefits continuation for 12 months, and (c) vesting of all unvested stock options.

 

In the event that the compensation paid to any of the executives as a result of a CIC would constitute an excess parachute payment (which triggers an excise tax under IRC Section 280G), he or she has the right to cause the Company to reduce his or her compensation to avoid the tax. Again, we believe this is beneficial to both the Company and the executive and is within the competitive norm of our peer group.

 

Employee benefits received by executive officers are the same as those received by other employees. They include group life, accidental death and long-term disability coverage. The Company also maintains a 401(k) plan and pays matching amounts.

 

The Compensation Committee and the Company consider the accounting and tax (individual and corporate) consequences of the compensation plans prior to making changes to compensation. Section 162(m) of the IRC limits deduction of compensation paid to executive officers to $1,000,000 unless the compensation is “performance-based”. In the Company’s case, base salary, discretionary bonuses and time-vested restricted stock are not considered performance-based. Therefore, any taxable amount transferred or paid to the executives attributable to base salary, discretionary bonus or vesting on time-based restricted stock that is over $1.0 million is not a deductible compensation expense. Although base salaries and discretionary bonuses for our executive officers are not more than $1.0 million, amounts attributable to vesting on time-based restricted stock may result in non-deductibility.

 

When determining amounts of long-term incentive awards to executives and employees, we examine the accounting cost associated with the awards. Under Statement of Financial Accounting Standards No. 123 (revised 2004), grants of stock options, restricted stock, restricted stock units and other share-based payments result in an accounting charge for the Company. The accounting charge is equal to the fair value of the instruments being issued. We consider the prospective compensation expense for our long-term incentive awards to determine whether an accounting charge for them is acceptable in light of our financial situation.

 

While the Committee considers the tax and accounting effect of the compensation programs, there may be times when the Committee accepts a less advantageous tax and accounting outcome in order to achieve other goals, such as incentivizing and retaining executives.

 

The Company does not currently have a formal stock ownership requirement for executives. However, we encourage stock ownership by executives on a voluntary basis. Each of our named executives holds both vested and unvested stock options and, except for Mr. Donahue, vested and unvested restricted stock as shown in our Outstanding Equity Awards at 2006 Year End table. We review the vested and unvested holdings by our named executive officers and evaluate whether there is sufficient ownership or potential ownership to appropriately align the interests of the executives with those of the shareholders. We believe that currently no formal ownership requirement is necessary.

 

2006 SUMMARY COMPENSATION TABLE

 

 

 

Notes:

 

 

2006 GRANTS OF PLAN-BASED AWARDS

 

 

 

Notes:

 

 

OUTSTANDING EQUITY AWARDS AT 2006 YEAR-END

 

 

Notes:

 

 

OPTION EXERCISES AND STOCK AWARDS VESTED DURING 2006

 

 

 

Notes:

 

 

The tables below reflect the compensation and benefits due to each of the named executive officers in the event of termination of employment. The compensation and benefits payable to each named executive officer upon (i) a termination in the normal course of business for cause, upon voluntary resignation or upon retirement, disability or death, (ii) a termination in the normal course of business by the Company without cause, (iii) a termination following a change in control for cause, upon voluntary resignation or upon retirement, disability or death, or (iv) a termination following a change of control by the Company without cause or by the employee for good reason. The amounts shown assume that each termination of employment was effective as of December 31, 2006, and the fair market value of our common stock was $13.54, the closing price of our common stock on The NASDAQ Global Market on December 29, 2006, the last trading day of the year. The amounts shown in the table are estimates of the amounts which would be paid upon termination of employment. The actual amounts to be paid can only be determined at the time of the

termination of employment. Generally, a change in control, as defined in the employment and executive retention agreements and equity plan documents, occurs when a person acquires greater than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities, the stockholders of the Company approve a merger or consolidation other than one which results in the voting securities of the Company prior to such merger or consolidation continuing to represent more than fifty percent (50%) of the voting securities of the surviving entity after such merger or consolidation, or the stockholders of the Company approve a plan of liquidation or sale or disposition of all or substantially all of the Company’s assets. Generally, termination of employment by an executive officer for “good reason” as defined in the employment and executive retention agreements means a significant reduction in an employee’s duties, a reduction in the employee’s base salary, or a relocation of the employee’s primary office of more than 35 miles. Generally, termination of employment by the Company for “cause” as defined in the employment and executive retention agreements means commission of a felony, fraud or theft of Company property, material breach of agreements between the Company and the executive or of Company policies and procedures, or willful refusal or failure by an executive to perform his duties subject to notice and cure.

 

 

 

 

 

 

 

 

 

Notes:

 

 

 

The following table provides information as of December 31, 2006 regarding securities authorized for issuance under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or agreements that were not required to be and were not submitted to our stockholders for approval.

 

 

 

 

The following table sets forth information as of April 24, 2007 with respect to the beneficial ownership of our common stock by (i) each person that we know owns of record or beneficially more than 5% of the outstanding common stock, (ii) the persons named in the Summary Compensation Table, (iii) each director, including each nominee for re-election, and (iv) all current executive officers and directors as a group. As of April 24, 2007, there were 28,087,007 shares of common stock outstanding.