UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

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GREAT WOLF RESORTS, INC.

(Name of Registrant as Specified In Its Charter)

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

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 28, 2008

 

 

 

We cordially invite you to attend our annual meeting of stockholders to be held at 122 West Washington Avenue, Madison, Wisconsin, on Wednesday, May 28, 2008 at 10:00 a.m., Central Time. At this meeting, you and our other stockholders will be able to vote on the following:

 

1. The election of all nine directors to serve on our Board of Directors until our annual meeting of stockholders in 2009, or until their successors have been duly elected and qualified; and

 

2. Any other business that may properly come before our annual meeting, including any adjournments or postponements of our annual meeting.

 

Only stockholders of record at the close of business on Friday, April 25, 2008 will be entitled to vote at our annual meeting or any adjournment of our annual meeting.

 

All company stockholders are cordially invited to attend the meeting in person. Your vote is very important. Whether or not you attend the meeting, please take the time to vote your shares by promptly completing, signing, dating and mailing the proxy card in the postage-paid envelope provided. You retain the right to revoke the proxy at any time before it is actually voted by delivering notice of such revocation to the Secretary of the company in open meeting or by filing with the Secretary of the company either notice of revocation or a duly executed proxy bearing a later date.

 

BY ORDER OF THE BOARD OF DIRECTORS:

 

J. MICHAEL SCHROEDER, Secretary

 

Madison, Wisconsin

May 6, 2008

 

PROXY STATEMENT

FOR THE ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 28, 2008

 

GENERAL INFORMATION

 

Our Board of Directors is soliciting your proxy for use at our annual meeting of stockholders to be held at 122 West Washington Avenue, Madison, Wisconsin, on Wednesday, May 28, 2008 at 10:00 a.m., Central Time., and at any adjournments of our annual meeting. You are invited to attend our annual meeting and vote your shares directly. However, even if you do not attend, you may vote by proxy, which allows you to instruct another person to vote your shares on your behalf at our annual meeting. For this purpose, we enclose one blank proxy card for your use.

 

The mailing address of our principal executive offices is 122 West Washington Avenue, Madison, Wisconsin 53703.

 

This proxy statement and the accompanying proxy card and Notice of Annual Meeting are being mailed to our stockholders on or about May 12, 2008.

 

Purposes of Our Annual Meeting

 

The purposes of our annual meeting are (1) to elect nine directors to serve on our Board and (2) to transact any other business that may properly come before our annual meeting and any adjournments of our annual meeting. Our Board knows of no matters, other than the election of directors, to be brought before our annual meeting.

 

This Proxy Solicitation

 

There are two parts to this proxy solicitation: the proxy card and this proxy statement. The proxy card is the means by which you actually authorize another person to vote your shares in accordance with your instructions. This proxy statement provides you information that you may find useful in deciding how to vote.

 

Proxies are being solicited by and on behalf of our Board, and the solicitation of proxies is being made primarily by the use of the mails. We will bear the cost of preparing and mailing this proxy statement and the accompanying material and the cost of any supplementary solicitations which may be made by mail, telephone or personally by our officers and employees, who will not be additionally compensated for their activities. We have retained Computershare, Inc. to provide administrative and record-keeping assistance in the solicitation of proxies.

 

No person is authorized to give any information or to make any representation not contained in this proxy statement and, if given or made, you should not rely on that information or representation as having been authorized by us. This proxy statement does not constitute the solicitation of a proxy, in any jurisdiction, from anyone to whom it is unlawful to make such proxy solicitation in that jurisdiction. The delivery of this proxy statement shall not, under any circumstances, imply that there has been no change in the information set forth since the date of this proxy statement.

 

VOTING

 

Record Date for Our Annual Meeting; Who Can Vote at Our Annual Meeting

 

Our Board has fixed the close of business on Friday, April 25, 2008, as the record date for determining which of our stockholders are entitled to receive notice of, and to vote at, our annual meeting. You will be entitled to notice of, and to vote at, our annual meeting and any adjournments of our annual meeting, only if you were a stockholder of record at the close of business on the record date. At the close of business on our record date of April 25, 2008, we had issued and outstanding 30,973,311 shares of our common stock, which are entitled to vote at our annual meeting. See “Required Votes.”

 

How to Vote Your Shares and How to Revoke Your Proxy

 

How to Vote.  You may vote your shares at our annual meeting in person, or if you cannot attend our annual meeting in person or you wish to have your shares voted by proxy even if you do attend our annual meeting, you may vote by duly authorized proxy. To vote in person, you must attend the annual meeting and obtain and submit a ballot, which will be provided at the meeting. To vote by proxy, you must complete and return the enclosed proxy card.

 

By completing and returning the proxy card and by following the specific instructions on the card, you will direct the designated persons (known as “proxies”) to vote your shares at our annual meeting in accordance with your instructions. Our Board has appointed James A. Calder and J. Michael Schroeder to serve as the proxies for our annual meeting.

 

Your proxy card will be valid only if you sign, date and return it before our annual meeting. If you complete the entire proxy, then the designated proxies will vote your shares “FOR” the election of the nine nominees for directors or will withhold your vote for one or more nominees if you so specify. If a nominee for election to our Board is unable to serve — which we do not anticipate — or if any other matters are properly raised at the annual meeting, then either Messrs. Calder or Schroeder as the designated proxies will vote your shares in accordance with his best judgment.

 

In voting by proxy as to the election of directors, you may either (1) vote “FOR” the nominees listed or (2) “Withhold” as to one or more of the nominees. Abstentions will be treated as set forth below. You may not vote for persons other than Messrs. Vittoria, Blutinger, Churchey, Hovde, Knetter, Murray, Rensi and Silver and Ms. May in the election of directors using the enclosed proxy card.

 

Even if you plan to attend our annual meeting, we ask you to vote, sign, date and return the enclosed proxy card as soon as possible. If your shares are held in the name of a broker or other intermediary, you may vote and revoke a previously submitted vote only through, and in accordance with, procedures established by the record holder(s) or their agent(s).

 

How to Revoke a Proxy.  If you have already returned your proxy to us, you may revoke your proxy at any time before it is exercised at our annual meeting by any of the following actions:

 

 

If you choose either of the first two means to revoke your proxy, you must submit either your notice of revocation or your new proxy card by mail to us at our principal executive offices located at 122 West Washington Avenue, Madison, Wisconsin 53703.

Required Votes

 

Voting Rights.  You are entitled to one vote for each share of our common stock that you hold. Cumulative voting of our shares is not allowed.

 

Quorum Requirements.  Under Delaware law and our bylaws, a majority of votes entitled to be cast at the annual meeting, represented in person at the annual meeting or by proxy, will constitute a quorum for the consideration of the election of the nominees for directors and for each matter to properly come before our annual meeting.

 

Vote Required.  The nine nominees receiving the highest number of affirmative votes will be elected as directors. This number is called a plurality.

 

Abstentions and Broker Non-Votes.  Abstentions will not be counted “for” or “against” proposals, but will be counted for the purpose of determining the existence of a quorum.

 

Under applicable NASDAQ Global Market, or NASDAQ (the exchange on which our common stock is traded), rules brokers holding shares for beneficial owners in nominee or “street name” must vote those shares according to the specific instructions they receive from the beneficial owners. If you do not provide your broker with specific instructions regarding how to vote your shares, your broker still has authority to vote your shares on certain “routine” matters. However, under NASDAQ’s rules, brokers do not have discretionary voting power on non-routine matters. In these cases, if no specific voting instructions are provided by the beneficial owner, the broker may not vote on non-routine proposals. This results in what is known as a “broker non-vote.” “Broker non-votes” will not be counted “for” or “against” a proposal, but will be counted only for the purpose of determining the existence of a quorum.

 

Because the election of directors is a “routine” matter for which specific instructions from beneficial owners are not required under NASDAQ’s rules, no “broker non-votes” will arise in the context of voting for the nominees for directors.

 

If you do not vote your shares, your brokerage firm may either (1) vote your shares on routine matters, if any, or (2) leave your shares unvoted.

 

To be certain that your shares are voted at our annual meeting, we encourage you to provide instructions to your brokerage firm by signing and returning the enclosed proxy card.

 

THE ELECTION OF DIRECTORS

 

Board of Director Nominees

 

At our annual meeting, our stockholders will vote on the election of nine directors.

 

Our Nominating and Corporate Governance Committee has recommended to our Board as nominees, and our Board has nominated, Joseph Vittoria, Elan Blutinger, Randy Churchey, Eric Hovde, Michael Knetter, Beth May, Richard Murray, Edward Rensi and Howard Silver for election to our Board. If elected, all of these individuals will serve as directors for a one-year term that will expire at our annual meeting of stockholders in 2009, or when their successors are duly elected and qualified. John Emery, a current member of our Board, will not be seeking re-election. You will find below a brief biography of each nominee. See also “Ownership of Our Common Stock” on page 13 for information on their holdings of our common stock.

 

Pursuant to a certain agreement dated May 9, 2008, and following the suggestion of a significant number of our institutional shareholders, the Board has agreed to nominate Eric Hovde and Richard Murray for election to the Board and recommend that our stockholders vote to elect each.

 

If any nominee becomes unavailable or unwilling to serve as a director for any reason, the persons named as proxies in the proxy card are expected to consult with our management in voting the shares represented by them and will vote in favor of any substitute nominee or nominees approved by our Board. Our Board has no reason to doubt the availability of any of the nominees for director. Each of the nominees has expressed his willingness to serve as a director if elected by our stockholders at our annual meeting.

Our Board recommends that you vote FOR the election of each nominee for director.

 

Information Regarding Agreement with Investors

 

In a letter dated January 30, 2008, a group of our stockholders organized by Eric D. Hovde (collectively, the “Hovde Investors”) delivered to us a Notice of Nomination of Candidates for Election to the Board of Directors (the “Hovde Nomination Letter”). The Nomination Letter indicated that Eric D. Hovde together with certain other stockholders, planned to seek representation on our Board by nominating a slate of three candidates (including Eric D. Hovde and Richard T. Murray) for election as directors at our 2008 annual meeting and to solicit proxies on behalf of such nominees.

 

On March 13, 2008, the Hovde Investors filed with the SEC soliciting materials that included a statement of their intention to make a preliminary filing of a proxy statement. On April 4, 2008, the Hovde Investors filed with the SEC a preliminary proxy statement related to the matters set forth in Hovde Nomination Letter.

 

After January 30, 2008, members of our management and our Nominating & Governance Committee had discussions with Eric D. Hovde for the purpose of considering and evaluating the nominees proposed in the Hovde Nomination Letter. We had a number of conversations with Eric D. Hovde to explore a possible agreement to terminate the contest for the election of directors that the Hovde Investors had initiated. On May 8, 2008, we and the Hovde Investors entered into an agreement (the “Agreement”) terminating the pending proxy contest with respect to the election of directors at our annual meeting. Pursuant to the Agreement, we have agreed, among other things:

 

 

Pursuant to the Agreement, the Hovde Investors agreed:

 

 

OUR BOARD OF DIRECTORS

 

Each director serves a one-year term and is subject to annual re-election. Our Board nominees consist of nine directors, eight of whom are independent as determined by our Board under the rules promulgated by the Securities and Exchange Commission, or SEC, and NASDAQ listing standards. At our annual meeting, as discussed above, our stockholders will vote on the nine nominees for director.

 

CORPORATE GOVERNANCE

 

Independence of Our Board of Directors

 

Rules promulgated by the SEC and the listing standards of NASDAQ require that a majority of our directors be independent directors. Our Board has adopted as categorical standards NASDAQ independence standards to provide a baseline for determining independence. Under these criteria, our Board has determined that the following members of our Board are independent: Messrs. Vittoria, Blutinger, Knetter, Rensi and Silver, and Ms. May.

 

Committees and Meetings of Our Board of Directors

 

Board Meetings.  We operate under the general management of our Board as required by our bylaws and the laws of Delaware, our state of incorporation. Our Board held six meetings during 2007. Each director attended 100% of the total number of those meetings of the Board and of any committee of which he was a member. While our Board has not adopted a mandatory attendance policy for our annual meetings, directors are encouraged to attend. In 2007, all of our directors attended our annual meeting.

 

Executive Sessions of Our Non-Management Directors.  The non-management directors of our Board met in regularly scheduled executive sessions that exclude members of the management team at every meeting held in 2007. At each meeting, the non-management directors determine who presides over the meeting’s agenda and related discussion topics. The non-management directors may also choose to appoint a chairman to preside over these meetings, and the chairman may also rotate from time to time. Stockholders and other interested persons may contact our non-management directors in writing by mail c/o Great Wolf Resorts, Inc., 122 West Washington Avenue, Madison, Wisconsin 53703, Attn: Non-Management Directors. All such letters will be forwarded to our non-management directors.

 

Audit Committee.  Our Board has established an Audit Committee, currently consisting of Messrs. Silver, Blutinger and Knetter, with Mr. Silver serving as its chairman. Our Board has determined that each of our Audit Committee members is independent, as that term is defined under the enhanced independence standards for audit committee members in the Securities Exchange Act of 1934 and rules thereunder, as amended, and under the listing standards of NASDAQ. Our Board has also determined that Mr. Silver is an “audit committee financial expert” within the meaning of SEC rules. Our Audit Committee operates under a written charter adopted by our Board. A copy of this charter is available on our Web site at greatwolf.com. Among other duties, this committee:

 

 

 

Our Audit Committee met five times in 2007. For more information, please see “Report of our Audit Committee” on page 44.

 

Compensation Committee.  Our Board has also established a Compensation Committee, currently consisting of Messrs. Rensi, Silver and Vittoria, with Mr. Rensi serving as its chairman. Our Board has determined that each of the Compensation Committee members is independent, as that term is defined by NASDAQ. The Compensation Committee operates under a written charter adopted by our Board. A copy of this charter is available on our Web site at greatwolf.com. Among other duties, this committee:

 

 

The Compensation Committee met three times in 2007. For more information, please see “Report of the Compensation Committee” on page 17.

 

Nominating and Corporate Governance Committee.  Our Board has also established a Nominating and Corporate Governance Committee, currently consisting of Messrs. Blutinger, Knetter and Rensi, with Mr. Blutinger serving as its chairman. Our Board has determined that each of our Nominating and Corporate Governance Committee members is independent, as that term is defined by NASDAQ. The Nominating and Corporate Governance Committee operates under a written charter adopted by our Board. A copy of this charter is available on our Web site at greatwolf.com. Among other duties, this committee:

 

 

The Nominating and Corporate Governance Committee met three times in conjunction with meetings of the board in 2007.

 

The Nominating and Corporate Governance Committee has established a mandatory director education program, adopted a policy that our governance practices will meet or exceed those required by NASDAQ, developed a process for CEO evaluation, and assisted in self-evaluations of the Board and each of its committees. The Nominating and Corporate Governance Committee also has instituted an annual review of the charters of each of the committees of the Board to ensure that each reflects best practices.

 

Other Committees.  From time to time, our Board may form other committees as circumstances warrant. Those committees will have such authority and responsibility as delegated to them by our Board and consistent with Delaware law.

 

Availability of Corporate Governance Materials.  Stockholders may view our corporate governance materials, including the charters of our Audit Committee, our Compensation Committee and our Nominating and Corporate Governance Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, on our Web site under “Investor Relations” at greatwolf.com.

Director Nominations

 

Nominating and Corporate Governance Committee.  Our Nominating and Corporate Governance Committee performs the functions of a nominating committee. The Nominating and Corporate Governance Committee Charter describes the committee’s responsibilities, including identifying, screening and recommending director candidates for nomination by our Board.

 

Director Candidate Recommendations and Nominations by Stockholders.  The Nominating and Corporate Governance Committee’s charter provides that the committee will consider director candidate recommendations by stockholders. Stockholders should submit any such recommendations for the consideration of our Nominating and Corporate Governance Committee through the method described under “Communications With Our Board” below. In addition, any stockholder of record entitled to vote for the election of directors at the applicable meeting of stockholders may nominate persons for election to the Board of Directors if such stockholder complies with the notice procedures summarized in “Stockholder Proposals for Our 2009 Proxy Materials or Annual Meeting” below.

 

Process For Identifying and Evaluating Director Candidates.  The Nominating and Corporate Governance Committee constantly evaluates all director candidates in accordance with the director qualification standards described in our Corporate Governance Guidelines. The committee evaluates any candidate’s qualifications to serve as a member of the Board based on the skills and characteristics of individual Board members, the projected long-term oversight, strategic, financial and industry needs of the company, as well as the composition of the Board as a whole. Directors are also considered in light of their past history and actual experience creating shareholder value in previous companies. In addition, the Nominating and Corporate Governance Committee will evaluate a candidate’s independence and diversity, age, skills and experience in the context of the Board’s needs.

 

Communications with Our Board

 

Our Board has approved unanimously a process for stockholders to send communications to our Board. Stockholders can send communications to our Board and, if applicable, to the Nominating and Corporate Governance Committee or to specified individual directors in writing c/o Great Wolf Resorts, Inc., 122 West Washington Avenue, Madison, Wisconsin 53703, Attn: Corporate Secretary. All such letters will be forwarded to our Board, the Nominating and Corporate Governance Committee or any such specified individual directors.

 

OUR EXECUTIVE OFFICERS

 

Mr. Churchey is an executive officer and director and his biographical information is set forth under “The Election of Directors.” The names, positions, business experience, terms of office and ages of our other executive officers are as follows:

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Under federal securities laws, our directors, executive officers and any persons beneficially owning more than 10% of a registered class of our equity securities are required to report their ownership and any changes in that ownership to the SEC. These persons are also required by SEC rules and regulations to furnish us with copies of these reports. Precise due dates for these reports have been established, and we are required to report in this proxy statement any failure to timely file these reports by those due dates by our directors and executive officers during 2007.

 

Based solely upon our review of the reports and amendments to those reports furnished to us or written representations from our directors and executive officers that these reports were not required from those persons, we believe that all of these filing requirements were satisfied by our directors and executive officers during 2007.

 

OWNERSHIP OF OUR COMMON STOCK

 

We summarize below the beneficial ownership of our common stock, as of March 14, 2008, except where noted, by (1) each person or group known by us to beneficially own more than five percent (5%) of our company’s common stock, (2) each of our directors and nominees for election to the Board, (3) each of our named executive officers and (4) all of our directors and our executive officers as a group. A person generally “beneficially owns” shares if he or she, directly or indirectly, has or shares either the right to vote those shares or dispose of them. Except as indicated in the footnotes to this table, to our knowledge the persons named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned. The number of shares beneficially owned by each person or group includes shares of common stock that such person or group had the right to acquire on or within 60 days after March 14, 2008, including, but not limited to, upon the exercise of options or the vesting of restricted stock. References to options in the footnotes of the table below include only options to purchase shares that were exercisable on or within 60 days after March 14, 2008 and references to restricted stock in the footnotes of the table below include only restricted stock that would vest and settle on or within 60 days after March 14, 2008. For each individual and group included in the table below, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the shares of common stock outstanding on March 14, 2008 plus the number of shares of common stock that such person or group had the right to acquire on or within 60 days after March 14, 2008. Unless otherwise indicated in the accompanying footnotes, all of the shares of our common stock listed below are owned directly, and the indicated person has sole voting and investment power. The address for each individual listed below is: c/o Great Wolf Resorts, Inc., 122 West Washington Avenue, Madison, WI 53703.

 

 

 

 

Equity Compensation Plan Information

 

This table provides certain information as of December 31, 2007 with respect to our equity compensation plans:

 

 

 

 

 

Our 2004 Incentive Stock Plan authorizes us to grant up to 3,380,740 incentive and/or nonqualified stock options, stock appreciation rights or shares of our common stock to our employees and directors.

 

RELATED PERSON TRANSACTIONS

 

In accordance with our Code of Business Conduct and Ethics, all related party transactions known to us are subject to review and approval of our Audit Committee. Since January 1, 2007, we have not been a party to, and we have no plans to be a party to, any transaction or series of similar transactions in which the amount involved exceeded or will exceed $120,000 and in which any current director, executive officer, holder of more than 5% of our capital stock, or any member of the immediate family of any of the foregoing, had or will have a direct or indirect material interest, other than in connection with the transactions described below.

 

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee, on behalf of and in certain instances subject to the approval of the Board of Directors, reviews and approves compensation programs for certain senior officer positions. In this context, the committee reviewed and discussed with our company’s management the “Compensation Discussion and Analysis” required by section 402(b) of Regulation S-K and included in this proxy statement. Based on the review and discussions referred to above, 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 its 2007 fiscal year.

 

The Compensation Committee:

Ed Rensi (Chairman)

Howard Silver

Joseph Vittoria

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Compensation Committee oversees our executive compensation program, including:

 

 

From time to time, the Compensation Committee may retain compensation and other management consultants to assist with, among other things:

 

 

We expect to use these compensation and other management consultants only in circumstances where the consultants have no other business dealings with us.

 

Each member of the Compensation Committee is independent as defined in the Compensation Committee’s charter, as determined by the Board of Directors.

 

General Compensation Policy/Philosophy

 

Our general compensation policy is to devise and implement compensation for our senior officers commensurate with their positions and determined with reference to compensation paid to similarly situated employees and officers of companies that the Compensation Committee, in consultation with our CEO and external compensation consultants, deems to be comparable to us.

 

Our general compensation philosophy is to:

 

 

 

In 2007, our NEOs were:

 

 

Our overall executive compensation philosophy is based on a pay-for-performance model. In general, our executive compensation is structured to reward performance through a combination of competitive base salaries coupled with cash-based and equity-based incentives. The “at risk” components of our executive compensation (cash annual incentives and stock-based long-term incentives) are designed to provide incentives that are predicated on our company and/or the NEOs meeting or exceeding predefined goals.

 

The Compensation Committee occasionally requests that Mr. Emery, our CEO, be present at Compensation Committee meetings where executive compensation and company, individual, business unit and departmental performance are discussed and evaluated. Mr. Emery is free to provide insight, suggestions or recommendations regarding executive compensation if present during these meetings or at other times. Only Compensation Committee members, however, are allowed to vote on decisions made regarding executive compensation.

 

2007 Executive Officer Compensation

 

For 2007, the Compensation Committee engaged FPL Associates Compensation, an independent compensation consultant, to assist the Compensation Committee in determining appropriate fiscal year 2007 compensation for our NEOs. Based upon a study of a competitive peer group of 11 public companies that compete with us for talent, investment dollars and/or business, FPL made recommendations to the Compensation Committee for certain of our NEOs of appropriate levels of:

 

 

The structure and amounts of the executive officer base salary, annual incentives and long-term incentives compensation components for Messrs. Emery, Calder and Martinez and Ms. Schaefer as detailed in the Compensation Discussion and Analysis are based on the final recommendations of FPL.

 

Competitive Peer Groups

 

The competitive peer group FPL used included primarily companies that are focused on operating within the public consumer/leisure sector as the foundation for our compensation practices. Those peer group companies are ones considered to appeal to family-based, consumer leisure activities, including resorts/timeshares, gaming/entertainment and amusement parks. The peer group consisted of the following companies:

 

For additional context and with respect to benchmarking Mr. Martinez’s position only, FPL also gathered market competitive data from a peer group of active private real estate developers. That peer group consisted of ten private companies that may be considered active developers from a real estate perspective.

 

Executive Compensation Structure

 

Utilizing this process and benchmarking data, FPL recommended, and the Compensation Committee approved, total remuneration for executive compensation for Messrs. Emery, Calder and Martinez and Ms. Schaefer for 2007 structured as follows:

 

 

 

 

 

For 2007, the Compensation Committee established both an annual cash incentive plan and long-term incentive compensation plan for Messrs. Emery, Calder and Martinez and Ms. Schaefer that was structured differently than that for Mr. Schroeder, as follows:

 

 

For a further discussion on the details of these annual cash incentives and long-term incentives, see Elements of Compensation below.

 

Elements of Compensation

 

Our compensation for each of our NEOs consists of three components:

 

 

These components provide elements of fixed income and variable compensation that are linked to the achievement of individual and corporate goals and the enhancement of value to our stockholders.

 

Base Salary

 

Base salary represents the fixed annual component of our executive compensation. Executives receive salaries that are within a range established by the Compensation Committee for their respective positions based on the comparative analysis described above. Where each executive’s salary falls within the salary range is based on a determination of the level of experience that the executive brings to the position and how successful the executive has been in achieving set goals. Salary adjustments are based on a similar evaluation and a comparison of adjustments made by competitors and any necessary inflationary adjustments.

 

When reviewing the competitive market data described above, the Compensation Committee considers that the competitive market is comprised of professionals with varying backgrounds, experience and education who may be more junior or senior within the role. As such, the compensation, particularly as it relates to base salaries, provided to these incumbents may, appropriately, vary. In establishing base salary amounts for our NEOs, the Compensation Committee considers the level of responsibility, experience and tenure of our company’s incumbents, relative to those commonly found in the market.

 

We generally review the base salaries of our NEOs each fiscal year. In the event of an NEO’s promotion and/or increased scope of responsibility, we consider base salary adjustments at other points during the year as well.

 

The Compensation Committee reviewed the salaries for John Emery, our CEO, and Messrs. Calder and Martinez and Ms. Schaefer in December 2006. In addition, Mr. Emery reviewed the salary for Mr. Schroeder in March 2007. As a result of these reviews, base salaries established for 2007 and the percentage increase from prior base salaries are shown below:

 

 

Annual Cash Incentive

 

For Messrs. Emery, Calder and Martinez and Ms. Schaefer, annual cash incentives exist in the form of bonuses as a means of linking compensation to objective performance criteria that are within the control of the NEO. At the beginning of each year, the Compensation Committee establishes a range of potential bonus amount for each executive and identifies performance targets for each NEO to meet in order to receive the full bonus. The range incorporates the threshold, target and high (maximum) performance concepts as described above in 2007 Executive Officer Compensation.

 

Our annual incentive program utilizes multiple aspects or dimensions of performance to establish a “line-of-sight” between the individual and the reward. The emphasis on one dimension versus another depends on the level and type of position. Three dimensions we consider in the annual incentive program for our NEOs include:

 

 

The Compensation Committee reviews each executive’s position to determine the proportion or percentage of incentive opportunity that will be attributed to each of the three dimensions, based on the position’s ability to impact performance at each dimension. The benefit to using this three-tier construct is in balancing the required level of

objectivity with the desired level of subjectivity. While corporate and team/unit goals include specific, quantifiable targets, the individual component can often be based on a more subjective assessment of performance or on management discretion.

 

Each of our NEOs participates in our annual cash incentive plan. For the plan designed for Messrs. Emery, Calder and Martinez and Ms. Schaefer, the Compensation Committee establishes financial targets at the beginning of each year that are tied to our annual business plan. Those NEOs generally begin to earn a threshold annual cash incentive award amount once the financial targets are at least 95% attained. The threshold award amount is generally 1/3 of the maximum potential award amount. The potential amount of the annual cash incentive award in excess of the threshold amount is earned ratably from 95% up to 105% of the financial target attained.

 

By way of example, assume that a financial target is $1,000 and an executive’s maximum potential award related to achieving that financial target is $300. The threshold financial amount to begin to achieve annual cash incentive amounts would then equal $950 (that is, 95% of the $1,000 financial target amount). If the actual financial result for the year was $980, the NEO would earn $160 of their potential award under that particular financial target, calculated as the sum of (a) $100 for reaching the threshold level of performance (that is, earning 1/3 of the $300 maximum potential award) plus (b) $60 for 30% of the potential cash incentive award in excess of the threshold amount (that is, 30% multiplied by [$300 maximum award amount less $100 threshold amount]). If the actual financial result for the financial target were less than $950, no annual incentive amount would be earned for that particular financial target. If the actual financial result for the financial target were $1,050 or more, the NEO would earn 100% of the potential under that particular financial target (that is, $300 in this example).

 

The Compensation Committee employs clearly defined objective measures of performance to support the annual cash incentive awards for the company’s employees. Within the annual incentive award component of the compensation program, performance measures are often based on operational/financial initiatives as well as, to a lesser extent, individual/subjective performance, providing a balance with long-term incentive award components, which are generally primarily tied to value creation.

 

Specific written performance objectives for annual cash incentives are established annually and approved by the Compensation Committee, in consultation with our CEO. For each such objective, actual performance is reviewed by the Compensation Committee (generally in February following the performance year) in order to determine the actual payment to occur following release of the corresponding fiscal year financial results. The Compensation Committee has the ability to apply discretion to increase or decrease the actual payout resulting from the relative achievement of performance objectives. Discretion may be applied in the case of significant business disruption, unusual business events or conditions, or other factors the Compensation Committee deems relevant.

 

For 2007, the Compensation Committee established overall threshold, target and maximum annual incentive opportunities for Messrs. Emery, Calder and Martinez and Ms. Schaefer, expressed as a percentage of each executive’s base salary, as follows:

 

 

Additionally, the maximum annual incentive opportunity established for Mr. Schroeder was 50.0% of his base salary.

 

For 2007, the annual cash incentive amount awarded to Messrs. Emery, Calder and Martinez and Ms. Schafer was subject to a number of criteria, including:

 

 

 

The threshold, target and maximum amounts for the two financial measures (Adjusted EBITDA and Adjusted EPS) for 2007 were as follows:

 

 

For 2007, the Compensation Committee, in consultation with our CEO, reviewed and approved the performance criteria and weighting of those criteria for each eligible executive. The weightings of the performance criteria may vary among the eligible executives by position due to functional accountability, responsibility and other factors the Compensation Committee deems relevant. For 2007, weightings for Messrs. Emery, Calder and Martinez and Ms. Schaefer were as follows:

 

 

For Messrs. Emery, Calder and Martinez and Ms. Schaefer, the Compensation Committee reviewed in February 2008 the levels of Adjusted EBITDA and Adjusted EPS we had achieved for 2007 and the success of each of those NEOs in achieving individual, business unit and/or departmental performance goals in 2007. Based that review:

 

 

For Mr. Schroeder, annual cash incentives for 2007 existed in the form of a bonus available based on achieving individual and/or departmental performance goals in 2007, as determined by Mr. Emery. Based on Mr. Emery’s determination, Mr. Schroeder earned a bonus amount of $52,000 for 2007.

 

For 2007 annual cash incentives bonus amounts to be paid in 2008, as an incentive to increase our NEOs’ ownership of our common stock, we offered our NEOs the opportunity to take some or all of their bonus in shares of our common stock in lieu of cash. If an executive elected to receive shares of our common stock in lieu of cash, he or she received shares having a market value equal to 125% of the cash they would have otherwise received. We believe this 25% conversion premium was an appropriate incentive to reward executives who chose to receive shares in lieu of cash. For example:

 

 

 

The Compensation Committee has established a policy of using the average closing price for the company’s common stock for the first and second full calendar weeks of January of the following calendar year (that is, 10 trading days) as the stock price to use for the conversion of the cash value of each NEO’s bonus to a number of shares to be received. For 2007 cash bonus amounts converted to shares, the conversion price used was $7.56, representing the average closing price for the company’s common stock for the period January 7, 2008 through January 18, 2008. Shares issued under this shares-in-lieu-of-cash bonus option are 100% vested when issued.

 

For 2007, cash bonus amounts earned by each of the NEOs under the annual cash incentives program as described above were as follows:

 

 

Messrs. Emery, Calder and Martinez and Ms. Schaefer elected to take all of their earned cash bonus in shares of our common stock, in accordance with the shares-in-lieu-of-cash bonus provisions explained above. As a result, in February and March 2008 we paid cash and shares-in-lieu-of-cash bonus amounts for 2007 to our NEOs as follows:

 

 

Long-Term Incentives

 

For Messrs. Emery, Calder and Martinez and Ms. Schaefer, the long-term incentive component of executive compensation is targeted toward providing rewards for long-term performance. The Compensation Committee believes that long-term incentives are important to motivate and reward our executives and employees for maximizing stockholder value. Long-term incentives are provided primarily by grants of stock options and/or stock under our 2004 Incentive Stock Plan, which is administered by the Compensation Committee. The purpose of our 2004 Incentive Stock Plan is to assist us in recruiting and retaining key employees, by enabling such persons to participate in the future success of our company, and to align their interests with those of our stockholders.

 

Specific written performance objectives for long-term incentives are established annually and approved by the Compensation Committee, in consultation with our CEO. For these objectives, the Compensation Committee reviews actual performance (generally in February following the performance year) in order to determine the actual amount of the long-term incentive grant that has been earned. The Compensation Committee has the ability to apply discretion to increase or decrease the actual amount calculated as earned resulting from the relative achievement of performance objectives. Discretion may be applied in the case of significant business disruption, unusual business events or conditions, or other factors the Compensation Committee deems relevant.

 

For 2007, the Compensation Committee approved maximum long-term stock-based incentive compensation amounts for Messrs. Emery, Calder and Martinez and Ms. Schaefer. The stock-based compensation amounts

consisted of performance-based shares of our common stock. The stock-based incentive compensation total award amounts consisted of two parts:

 

 

We have not issued stock options to any of our NEOs since our IPO in December 2004.

 

Establishing 2007 Award Amounts

 

The process in establishing the number of shares awarded as stock-based compensation to each officer as an annual equity grant amount and multi-year program equity grant amount involved four steps, as follows:

 

 

 

In designing the percentage of base salary used to compute the maximum annual dollar value amount above, the Compensation Committee took into consideration the amount and type of existing equity incentive opportunities for the NEOs, specifically an award grant of 150,000 shares of our common stock to Mr. Martinez in 2006 that has time-based vesting (that is, vests based on continuous employment with us) over the five-year vesting period.

 

 

 

 

 

 

 

Determining Amounts of 2007 Awards Earned

 

The actual long-term incentive compensation award earned by each officer was subject to a number of factors:

 

 

 

Weightings for Messrs. Emery, and Calder and Ms. Schaefer for the 2007 annual equity grant amounts were as follows:

 

 

 

 

 

Weightings for Messrs. Emery, Calder and Martinez and Ms. Schaefer for the 2007-2009 multi-year program equity grant amounts are as follows:

 

 

For the 2007 annual equity grant amounts, based on our common stock’s actual performance and the Compensation Committee’s assessment of each NEO’s achievement of individual/departmental performance goals:

 

 

In February 2008, we issued the following number of shares of our common stock as long-term incentives earned for 2007 under the annual equity grants as described above: Mr. Emery — 9,761 shares; Mr. Calder — 3,273 shares; and Ms. Schaefer — 7,809 shares.

 

Additionally, we awarded 10,000 shares of our common stock to Mr. Schroeder in April 2007. These shares vest based on continued employment with us in 2,000-share increments on April 1 of 2008, 2009, 2010, 2011 and 2012.

 

Vesting of Awards

 

The shares earned under the awards under the 2007 annual equity grant and multi-year program equity grant vest as follows:

 

Shares issued in February 2008 for Messrs. Emery and Calder and Ms. Schaefer, as described above, vest as follows:

 

 

Vesting of the shares awarded under these programs is affected by certain termination events as follows:

 

 

Grant Valuation Parameters

 

When awarding stock to Messrs. Emery, Calder and Martinez and Ms. Schaefer, we first establish a dollar value of the maximum equity-based compensation potential that we want to provide to the employee in the form of stock over the vesting period. On the date of the grant, we divide the total maximum equity-based compensation potential by the per share fair value of our common stock as of the close of the prior fiscal year. Although we use what we consider to be a reasonable approach in determining the number of shares of common stock to award to these NEOs, the ultimate value to these NEOs of the shares awarded only becomes clear when (a) performance conditions related to earning the award are met or not met and (b) the future fair value of the shares earned is known.

 

The shares of stock we award under long-term incentive plans ultimately may be worth much more or less than the maximum equity-based compensation potential we computed when the shares were awarded. As a result, we do not consider realizable gains from prior stock grants when setting new stock grant amounts. We do not believe it is a fair practice to offset current compensation by realized and unrealized gains several years after the grants have been issued. Our goal is that the ultimate value realized by the NEO from stock grants exceeds our initial estimate of total maximum equity-based compensation potential that we awarded, because value realized by the NEO in excess of the award date total maximum equity-based compensation potential is also realized by all of our other stockholders that held our common stock over that time period. We believe that limiting potential upside on stock value gains would undermine incentives for our NEOs when focusing on long-term results.

 

Stock Ownership Guidelines

 

We believe that stock ownership by our NEOs is desirable for aligning management’s long-term interests with those of our stockholders. We have not, however, established formal or fixed stock ownership guidelines for our NEOs.

Other Compensation

 

We offer certain other perquisites and personal benefits to our NEOs. These perquisites and personal benefits are reflected in the relevant tables and narratives which follow. In addition, the executives may participate in company-wide plans and programs such as our 401(k) plan (including a company match); group health and welfare plans; group accidental death and dismemberment insurance and life insurance; and health care and dependent care spending accounts, in accordance with the terms of the programs.

 

We do not provide our NEOs defined benefit or supplemental executive retirement plans.

 

Nonqualified Deferred Compensation Plan

 

In addition to a qualified 401(k) plan, we maintain a deferred compensation plan for certain executives (including our NEOs) by depositing amounts into a trust for the benefit of the participating employees. The deferred compensation plan offers these executives the opportunity to defer payment and income taxation of a portion of their base salary and/or annual cash incentives. The Compensation Committee believes that offering this plan to executives is critical to achieve the objectives of attracting and retaining talent, particularly because we do not offer a defined benefit pension plan.

 

A participant may elect to defer up to 100% of annual base salary and/or annual cash incentives. Participants must make deferral elections in the election period which is prior to the beginning of the plan year in which the related compensation is earned. Such elections are irrevocable for the entire plan year, and the participants may only change the elections for compensation earned in subsequent plan years during the annual election period.

 

We make the following employer contributions to our deferred compensation plan:

 

 

Matching and profit-sharing contributions vest based on a participant’s years of service with us or our predecessor company, with pro-rata vesting over a period of five years of service.

 

Amounts in the deferred compensation plan’s trust earn investment income, which serves to increase the corresponding deferred compensation obligation. Investments, which are recorded at market value, are directed by the participants, and consist of our common stock and mutual funds. The plan provides participants the opportunity for long-term capital appreciation by crediting their accounts with notional earnings (or losses) based on the performance of benchmark investment funds or our common stock from which participants may select. Currently, the plan offers a choice of ten benchmark investment funds which are identified in the narrative following the Nonqualified Deferred Compensation table, below.

 

The market value of a NEO’s deferred compensation account is not considered when setting their other current compensation. The compensation earned and deferred was already reviewed and analyzed based on the above described compensation philosophy and policies at the time the compensation was awarded. Had the executive officer instead elected to receive a payout of the compensation earned, and then invested those amounts externally, we would not have considered external investment experience when considering the amount by which we should compensate the executive officer. Thus, we do not believe it is either proper or necessary to consider the value of the executive officer’s deferred compensation account just because it is held in a plan we sponsor. See the Nonqualified Deferred Compensation table and accompanying narrative below for additional information on our deferred compensation plan.

 

Tax Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code generally limits the deductibility on our tax return of compensation over $1 million to any of our officers unless the compensation is paid pursuant to a plan that is

performance-related, non-discriminatory and has been approved by our stockholders. The Compensation Committee’s policy with respect to Section 162(m) is to make every reasonable effort to ensure that compensation is deductible to the extent permitted. The Compensation Committee has the authority to award compensation in excess of the $1 million limit, regardless of whether that compensation will be deductible, if the Compensation Committee determines in good faith that the compensation is appropriate to incentivize and compensate the recipient.

 

Employment Agreements

 

We have entered into an employment agreement with each of our NEOs. The agreements were entered into on December 20, 2004 and continued through December 20, 2007. Each of the employment agreements provides for a one-year extension at its ending date, unless either we or the NEO provides at least 120 days notice of non-renewal. As a result, each of the NEOs’ employment agreements is in a one-year extension period as of December 31, 2007. The form of employment agreement is substantially identical for all of our NEOs; that form of agreement was filed as Exhibit 10.5 to our Form S-1 filed with the SEC on August 12, 2004.

 

The material terms in each agreement are as follows:

 

 

See “Potential Payment Upon Termination or Change of Control” below for a discussion of certain severance payments applicable under these agreements.

 

Change of Control and Severance Payments

 

Change of control provisions applicable to our NEOs are either “single trigger,” meaning that the change of control event alone triggers either a payment or an acceleration of certain rights, or “double trigger,” meaning that the change of control coupled with either (a) the officer’s termination from service or (b) the officer’s resignation for “good reason” (as that term is defined in the employment agreement) within a certain period of the time before or after the change of control triggers the payment or accelerated right.

 

The change of control provision in each NEO’s employment agreement for the payment of severance is a double trigger. A double trigger for severance payments was selected because, unless the NEO’s employment is terminated after the change of control, his or her cash compensation in the form of salary and annual bonus would continue from the acquiring entity, which is what the severance payment is based upon and intended to replace. See the “Potential Payment Upon Termination or Change of Control” discussion below for additional information on these severance payments. The payment amounts reflect our belief that it is difficult for senior managers to find comparable employment opportunities in a short period of time, particularly after experiencing a termination that was beyond their control.

 

The change of control provisions in our stock option and stock grant agreements with time-based vesting are single trigger, reflecting our intent that the NEOs have the ability to use those shares to vote upon any proposed transaction.

 

Under the employment agreements, we have agreed to make an additional tax gross-up payment to the executive if any amounts paid or payable to the executive would be subject to the excise tax imposed on certain so-

called “excess parachute payments” under Section 4999 of the Internal Revenue Code. However, if a reduction in the payments and benefits of $25,000 or less would render the excise tax inapplicable, then the payments and benefits will be reduced by such amount, and we will not be required to make the gross-up payment.

 

EXECUTIVE COMPENSATION TABLES AND DISCUSSION

 

Summary Compensation Table

 

The following Summary Compensation Table shows the compensation in 2007 and 2006 for our Chief Executive Officer (Principal Executive Officer), our Chief Financial Officer (Principal Financial Officer), and our other three most highly compensated executive officers.

 

 

 

 

 

Under generally accepted accounting principles, the fair value amounts of our grants of stock awards are determined at their grant dates. That fair value amount as of the grant date is then expensed ratably over the vesting period of the stock awards. For stock awards subject to a market condition (for example, having our common stock’s total return meet certain levels relative to a market index or designated absolute performance levels), the amount we record as expense on our financial statements (and which is included as a portion of Stock Awards in the table above) is based on the value assigned to the stock award at its grant date; that value is then recorded as expense regardless of whether each of the stock awards has any intrinsic value to the executive (that is, whether or not the executive earns any portion of the award based on the actual performance of our common stock in relation to the relevant market condition).

 

For example:

 

 

 

The following table details the components of each executive’s All Other Compensation:

 

 

Deferred Compensation

 

Elective deferrals under our deferred compensation plan are reported in the Summary Compensation Table above in the columns that are associated with the type of compensation (that is, Salary or Non-Equity Incentive Plan Compensation) that is deferred. Company matching and profit-sharing contributions are included in the values reported in the All Other Compensation column, and are specifically identified in the Nonqualified Deferred Compensation table below and related text.

2007 GRANTS OF PLAN-BASED AWARDS

 

 

 

 

 

POTENTIAL PAYMENT UPON TERMINATION OR CHANGE OF CONTROL

 

Our NEOs are eligible to receive certain termination and/or change in control payments and acceleration rights under certain of the compensation arrangements that they hold with us. These payments and acceleration rights are contained within the executive officers’ employment agreements, employee stock option stock grant agreements, and deferred compensation plan agreement.

 

Employment Agreements

 

As noted previously, we have entered into employment agreement with our NEOs. The agreements cover the additional payments that would be due to these individuals in the following scenarios:

 

 

The terms are substantially identical in each of the agreements, except with respect to certain multipliers for payouts, as explained below.

 

We do not believe that we should pay our applicable NEOs any incremental compensation upon termination when the termination is by either choice or due to conduct that is potentially detrimental to our company. Thus, we do not provide any of our NEOs any incremental severance benefits other than any amounts already earned and accrued at the date of termination if the termination is voluntary (unless for good reason) or for cause.

 

In the event of a termination by us without cause or by the executive for good reason, we provide severance benefits, as described more fully below. These amounts reflect our belief that it is difficult for senior managers to find comparable employment opportunities in a short period of time, particularly after experiencing a termination that was beyond their control.

 

Termination Events

 

Severance payments under the above termination event scenarios are summarized below.

 

 

 

 

 

 

In the event of a termination by us without cause within 180 days prior to, or 18 months following, a change of control, then the multipliers for the severance benefits are increased to 200% (300% in the case of Mr. Emery). A change of control means the occurrence of any of the following events:

 

 

 

 

In the event of one of these termination events for good reason, the NEO would be entitled to receive the same benefits as for a termination without cause as described above.

 

 

Conditions to Receipt of Payment

 

The covenants within the employment agreements include various non-compete and non-solicitation provisions following a termination event, including the prohibition for a one-year period from:

 

 

In addition, the employment agreements prohibit the executive from using confidential information (meaning any secret, confidential or proprietary information possessed by the company relating to their businesses) that has not become generally available to the public,

 

Summary of Payments Due Under Different Termination Events

 

Assuming a December 31, 2007 termination event by the executive or the company, including before or after a change in control as described above, payments would be as follows: