April 16,
2008
To Our
Shareholders:
Our Board
of Directors joins me in extending to you a cordial invitation to attend our
2008 Annual Meeting of Shareholders of Interactive Intelligence, Inc. The
meeting will be held at our world headquarters located at 7601 Interactive Way,
Indianapolis, Indiana 46278 at 9:00 a.m., Eastern Time, on Friday, May
30, 2008.
In
addition to voting on the matters described in this proxy statement, we will
review our 2007 business results and discuss our plans for 2008 and beyond.
There will also be an opportunity to discuss matters of interest to you as a
shareholder.
Pursuant
to the new rules recently adopted by the Securities and Exchange Commission, we
are providing access to our proxy materials via the Internet. On or about April
16, 2008, we will mail a Notice of Internet Availability of Proxy Materials (the
“Notice”) to certain shareholders of record and street name holders, and on or
about the same date we will mail a printed copy of the proxy statement and a
proxy card to shareholders who have requested to receive them. On the mailing
date of the Notice, all shareholders of record and street name holders will have
the ability to access all of the proxy materials including the proxy
statement.
Regardless
of the number of shares you own, it is important that your shares be represented
whether or not you attend the meeting. Shareholders of record can vote their
shares via the Internet, by using a toll-free telephone number or by traditional
mail. Instructions for using these convenient services appear on the Notice, the
proxy card and in the proxy statement. If you received a printed copy of the
proxy materials, you can also vote your shares by marking your votes on the
proxy card, signing and dating it and mailing it promptly using the envelope
provided. Any shareholder attending our meeting may vote in person even if a
proxy has been returned.
We hope
that you will be able to attend our meeting, and we look forward to seeing
you.
Sincerely,
Donald E.
Brown, M.D.
Chairman
of the Board
INTERACTIVE
INTELLIGENCE, INC.
7601
INTERACTIVE WAY
INDIANAPOLIS,
INDIANA 46278
___________________________________________________________
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS
___________________________________________________________
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TIME
AND DATE
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9:00
a.m., Eastern Time, on Friday, May 30, 2008
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PLACE
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Interactive
Intelligence, Inc. World Headquarters
7601
Interactive Way
Indianapolis,
Indiana 46278
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ITEMS
OF BUSINESS
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1.
To elect two directors to hold office for a term of three years or until
their successors are elected and have qualified;
2.
To approve an amendment to the Interactive Intelligence, Inc. 2006 Equity
Incentive Plan; and
3.
To
transact
any
other business that may be properly brought before our meeting or any
adjournment or postponement thereof.
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RECORD
DATE
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You
can vote if you are a shareholder of record on March 31,
2008.
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ANNUAL
REPORT
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Our
2007 Annual Report, which is not a part of these proxy materials, is
enclosed.
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PROXY
VOTING
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Your
vote is important, regardless of the number of shares you own. If you do
not attend the meeting to vote in person, your vote will not be counted
unless a proxy representing your shares is presented at the meeting. To
ensure that your shares will be voted at the meeting, please vote in one
of these ways:
1.
Go
to
www.proxyvote.com
shown on the Notice of Internet Availability of Proxy Materials or your
proxy card and vote via the Internet;
2.
You
may vote by touchtone telephone by calling 1 (800) 690-6903 (this call is
toll-free in the United States); or
3.
If
you received a printed copy of the proxy card by mail, then MARK, SIGN,
DATE AND PROMPTLY RETURN your proxy card in the postage-paid
envelope.
If you do attend the meeting, you may revoke your proxy and vote by
ballot.
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By
order of the Board of Directors,
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Indianapolis,
Indiana
April
16, 2008
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Stephen
R. Head
Corporate
Secretary
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A-1
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INTERACTIVE INTELLIGENCE, INC.
7601
INTERACTIVE WAY
INDIANAPOLIS,
INDIANA 46278
__________________________________________________
PROXY
STATEMENT
SOLICITATION
OF PROXIES
FOR
ANNUAL
MEETING OF SHAREHOLDERS
TO
BE HELD AT 9:00 A.M., EASTERN TIME, ON MAY 30, 2008
GENERAL
INFORMATION
This
proxy statement and accompanying proxy card are being provided to shareholders
on or about April 16, 2008 in connection with the solicitation by the Board of
Directors of Interactive Intelligence, Inc. (“Interactive,” “we,” “us,” “our” or
the “company”) of proxies to be voted at the 2008 annual meeting of shareholders
on May 30, 2008.
Why
did I receive a Notice of Internet Availability of Proxy Materials?
Instead
of initially mailing a printed copy of the proxy materials to each shareholder,
we may now furnish proxy materials to our shareholders via the Internet under
the new e-proxy rules adopted by the Securities and Exchange Commission (the
“SEC”).
On or
about April 16, 2008, we mailed a Notice of Internet Availability of Proxy
Materials (the “Notice”) to all shareholders of record and street name holders
as of the close of business on March 31, 2008 (the “Record Date”), and we mailed
a printed copy of the proxy materials to shareholders who had so requested. If
you received a Notice by mail, you will not receive a printed copy of the proxy
materials unless you request such a copy in the manner described in the Notice.
The Notice also instructs you as to how you may access and review this proxy
statement and our 2007 Annual Report to Shareholders, and how you may submit
your proxy to vote at the annual meeting.
This
proxy statement, the form of the proxy card and voting instructions are
being made available to our shareholders on or about April 16, 2008 at
www.proxyvote.com
.
Our 2007 Annual Report to Shareholders, including our Annual Report on Form 10-K
for the year ended December 31, 2007, is being made available at the same time
and by the same method. The 2007 Annual Report to Shareholders is not to be
considered as part of the proxy solicitation materials or as having been
incorporated by reference.
What
is a proxy and how do I vote by proxy?
A
proxy is your legal designation of another person (the “proxy”) to vote on your
behalf. If you are a shareholder of record, we encourage you to vote via the
Internet or by telephone. Internet voting information is provided on the Notice
and the proxy card. You may vote by touchtone telephone by calling 1 (800)
690-6903. You will need to have the Notice or, if you received a printed copy of
the proxy materials, your proxy card or voting instruction card, available when
voting via the Internet or by telephone. These methods are convenient and save
us significant postage and processing expense. In addition, when you vote via
the Internet or by telephone prior to the meeting date, your vote is recorded
immediately and there is no risk that postal delays will cause your vote to
arrive late and therefore not be counted.
If
you are a shareholder of record and you received a printed copy of the proxy
materials, you may vote by marking your proxy card, dating and signing it, and
mailing it in the postage-paid envelope. The shares represented will be voted
according to your directions. If your proxy card is signed and returned without
specifying a vote or an abstention on any proposal, it will be voted according
to the recommendation of the Board on that proposal.
If
you are a “street name” holder, you must provide instructions on voting to your
bank, broker, trust or other nominee holder.
What
is the difference between a “shareholder of record” and a “street name”
holder?
These
terms describe how your shares are held. If your shares are registered directly
in your name with our independent transfer agent and registrar, Computershare
Investor Services, LLC, you are a “shareholder of record”. If your shares are
held in the name of a brokerage, bank, trust or other nominee as a custodian,
such as Broadridge Financial Solutions, Inc. (“Broadridge”), you are a “street
name” holder.
How
many proxy cards will I receive?
You will
receive multiple proxy cards if you hold your shares in different ways (e.g.,
joint tenancy, trusts and custodial accounts) or in multiple accounts. If your
shares are held in “street name”, you will receive your proxy card or other
voting information from your broker, and you will return your proxy card or
cards to your broker. You should complete and sign each proxy card you
receive.
VOTING INFORMATION
Who
is qualified to vote?
You are
qualified to receive notice of and to vote at our annual meeting if you own
shares of our common stock at the close of business on the Record Date for our
annual meeting. At the close of business on the Record Date, there were
17,953,516 shares of our common stock issued and outstanding. Each
shareholder will have one (l) vote for each share held.
Is
there a list of shareholders entitled to vote at the annual
meeting?
A list of
shareholders entitled to vote at our annual meeting will be available for
inspection for a purpose germane to our annual meeting by any shareholder during
usual business hours at our world headquarters during the ten days prior to our
meeting date.
How
do I use my shares to cast a vote?
Depending
on whether you hold your shares directly as a “shareholder of record” or you
hold your shares as a “street name” holder, there are several methods you can
choose from to cast your vote.
If
you are a “shareholder of record”, you can vote your proxy in any one of these
methods:
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1.
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Go
to
www.proxyvote.com
shown on the Notice or your proxy card and vote via the
Internet;
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2.
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You
may vote by touchtone telephone by calling 1 (800) 690-6903 (this call is
toll-free in the United States); or
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3.
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If
you received a printed copy of the proxy card by mail, then mark, sign,
date and promptly return your proxy card in the postage-paid
envelope.
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You
will need to have the Notice or, if you received a printed copy of the proxy
materials, your proxy card or voting instruction card, available when voting via
the Internet or by telephone. Therefore, please follow the specific instructions
set forth on the Notice, proxy card or voting instruction card. For security
purposes, our electronic voting system has been designed to authenticate your
identity as a shareholder of our common stock.
If
you hold your shares as a “street name” holder, your
broker/bank/custodian/nominee will provide you with materials and instructions
for voting your shares.
Can
I vote my shares in person at the annual meeting?
If
you decide to join us in person at our annual meeting and you are a “shareholder
of record”, you may vote your shares in person at the meeting. If you hold your
shares as a “street name” holder, you must obtain a proxy from your broker,
banker, trustee or nominee, giving you the right to vote the shares at the
meeting.
Can I
change my vote after I have sent in my proxy card?
Shareholders
who execute a proxy card retain the right to revoke it at any time before it is
voted by attending our annual meeting and voting in person or by notifying our
Corporate Secretary in writing of such revocation prior to our annual meeting.
If you execute more than one proxy card, the proxy card having the latest date
will revoke any earlier proxy cards.
What
constitutes a quorum and why is it required?
The
holders of a majority of our shares of common stock issued and outstanding and
entitled to vote, present in person, or represented by proxy, shall constitute a
quorum at our annual meeting. A quorum is required in order for our
shareholders to conduct business at our annual meeting.
What
is the Board’s recommendation on how I should vote my shares?
Our Board
recommends a vote
“
FOR
”
each of the two director
nominees and
“
FOR
”
the approval of the
amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive Plan (the
“2006 Plan”).
How
would my shares be voted if I do not specify how I would prefer them to be
voted?
If no
choice is specified, your proxy will be voted
“
FOR
”
the election of the two
director nominees and
“
FOR
”
the approval of the
amendment to the 2006 Plan. A proxy or proxy card may indicate that all or a
portion of the shares represented by such proxy or proxy card are not being
voted with respect to a specific proposal. This could occur, for example, when a
broker is not permitted to vote shares held in street name on certain proposals
in the absence of instructions from the beneficial owner. Shares that are not
voted with respect to a specific proposal will be considered as not present and
not entitled to vote on such proposal, even though such shares will be
considered present for purposes of determining a quorum and voting on other
proposals.
What
vote is required to approve a proposal? Also, how are abstentions and broker
non-votes treated?
The
election of the two director nominees will be determined by a plurality of
the shares voting on such election, which means that the director nominees
receiving the most “for” votes will be elected up to the maximum number of
directors to be elected at the annual meeting. Broker non-votes and abstentions
will not affect the determination of whether the proposal to elect the two
director nominees will be approved.
To be
approved, the amendment to the 2006 Plan requires that a majority of the
total votes cast must vote in favor of the amendment. In other words, approval
of the amendment to the 2006 Plan will be determined where the number of shares
voted “for” the amendment exceeds the number of shares voted “against” or
“abstain”.
Abstentions
on a specific proposal will be considered as present, but not as voting in favor
of such proposal. Abstention will be considered a vote against the
approval of the amendment to the 2006 Plan. Broker non-votes will not affect the
determination of whether the amendment to the 2006 Plan will be approved.
Who
will pay for the cost of this proxy solicitation?
This
solicitation will be conducted by mail, except that in a limited number of
instances proxies may be solicited by our officers, directors and regular
employees personally, by telephone, by facsimile or by other electronic
communication. We do not presently anticipate payment of any compensation or
fees of any nature to anyone for the solicitation of these proxies, except that
we may pay persons holding shares in their name, or of
their
nominees, for the expense of sending proxies or proxy cards and proxy material
to principals. The entire cost of solicitation will be borne by us.
Who
will count the votes?
At our
annual meeting, votes will be counted by a representative from Broadridge. Such
representative will be present at the annual meeting to process the votes cast
by our shareholders, make a report of inspection and count the votes cast by our
shareholders and certify as to the number of votes cast on each
proposal.
Where
can I find the voting results of the annual meeting?
We will
announce preliminary voting results at our annual meeting and publish final
results in our Quarterly Report on Form 10-Q for the second quarter of
2008.
How
do I submit a shareholder proposal for next year’s annual meeting?
If you
wish to submit a shareholder proposal to be included in next year’s proxy
statement, you must comply with our advance notice requirements set forth in our
Amended and Restated By-Laws, as currently in effect, as described in
“Date of Receipt of Shareholder
Proposals for Our 2009 Annual Meeting
”
on page
55.
What
if I want to receive a printed copy of the Annual Report to Shareholders and
this proxy statement?
If you
received a Notice, you may request a printed copy of the Annual Report to
Shareholders and proxy statement by any of the following methods: via the
Internet at
www.proxyvote.com
, by
telephone at 1 (800) 579-1639, or by sending an e-mail to
sendmaterial@proxyvote.com
.
Our shareholders may also request an Information Packet, which includes our
most recent Annual Report to Shareholders, Annual Report on Form 10-K and proxy
statement. Please visit our Investor Relations page located on our
website at
http://
investors.inin.com
and click on the “Contact Us” link. You will be asked to provide general contact
information before continuing. Or you may call (317) 872-3000 and press option
“4” to speak with an investor relations
representative.
If
you have any further questions about voting your shares or attending our annual
meeting, please contact our Investor Relations Team via email at
investor.relations@inin.com
or by telephone at (317) 872-3000 and press option “4”.
ELECTION OF DIRECTORS
(ITEM
1 ON PROXY CARD)
Our Board
currently consists of six directors divided into three classes, with the term of
one class of directors expiring each year, pursuant to our Amended and
Restated By-Laws, as currently in effect. Generally, each director serves
until the annual meeting held in the year that is three years after such
director’s election and until such director’s successor is elected and has
qualified.
The terms
of Donald E. Brown, M.D. and Richard A. Reck, two of our six directors, will
expire at this annual meeting. Our Board has nominated each of these individuals
upon recommendation of our Nominating and Corporate Governance Committee to be
elected at this annual meeting for a term of three years to expire at our 2011
Annual Meeting or until their successors are elected and have
qualified.
Unless
proxy cards are otherwise marked, the persons named as proxies will vote the
shares represented by all executed proxies which are received FOR the election
of each of our director nominees.
Our Board
has no reason to believe that the nominees will refuse to act or be unable to
accept election; however, in such event and if any other unforeseen
contingencies should arise, it is the intention of the persons named as proxies
to vote for other nominees selected by our Nominating and Corporate Governance
Committee in accordance with their best judgment.
The
following descriptions set forth certain information, as of March 31, 2008,
about each director, including each person’s business experience for the past
five years. There is no family relationship between any of our directors or
officers.
Nominees
For Term to Expire in 2011
DONALD E.
BROWN, M.D.; Director since 1994; Age 52; Indianapolis, Indiana. Dr. Brown
is our Chairman of the Board and President and Chief Executive Officer and has
held these positions since 1994 in the case of President, since 1995 in the case
of Chief Executive Officer and since 1998 in the case of Chairman of the Board.
Dr. Brown co-founded Interactive Intelligence in 1994. Dr. Brown graduated from
the Indiana University School of Medicine and also holds two additional degrees
from Indiana University, an M.S. in computer science and a B.S. in
physics.
RICHARD
A. RECK; Director since 2005; Age 58; Hinsdale, Illinois. Mr. Reck is the
founder and President of Business Strategy Advisors LLC, a business strategy
consultancy that focuses on serving technology, services and entertainment
companies. Mr. Reck was a partner with KPMG LLP from 1973 through his retirement
in 2002. Mr. Reck also serves on the Board of Directors of two other
high-technology public companies, Merge Technologies, Inc., a public healthcare
software and information company, and Advanced Life Sciences Holdings, Inc., a
public biopharmaceutical company. Mr. Reck received a Bachelor of Arts degree in
mathematics from DePauw University and an M.B.A. in accounting from the
University of Michigan.
The
Board recommends a vote “
FOR
” each of the
nominees listed above.
Directors Whose Present Terms Expire
in 2009
EDWARD L.
HAMBURG, Ph.D.; Director since 2004; Age 56; Chicago, Illinois. Dr. Hamburg is
the former Executive Vice President of Corporate Operations, Chief Financial
Officer and Corporate Secretary of SPSS Inc. (“SPSS”), a multinational computer
software firm that provides predictive analytical technology and services. Dr.
Hamburg held this position from 1992 to 2004 after heading business development
for SPSS from 1986 to 1992. He currently holds an advisory position with SPSS
and serves as a director and audit committee chairman of Interlink Electronics,
Inc., a developer of interface technologies and solutions. He also serves
as a director of four non-public high-technology companies and is a venture
partner with Morgan Stanley Private Equity. Dr. Hamburg received a Ph.D. from
the University of Chicago and both his M.A. and B.A. from the University of
Maryland at College Park.
SAMUEL F.
HULBERT, Ph.D.; Director since 2001; Age 71; Naples, Florida. Dr. Hulbert is the
former President of Rose-Hulman Institute of Technology, an engineering, science
and mathematics college located in Terre Haute, Indiana. Dr. Hulbert held such
position from 1976 until his retirement in 2004. Prior to
Rose-Hulman, Dr. Hulbert held professorships at Tulane University and Clemson
University. Dr. Hulbert has been named to numerous “who's who” lists and has
been honored with a variety of awards for his accomplishments in biomedical
engineering, and he serves on the regional board of directors for Old
National Bancorp. Dr. Hulbert received his B.S. and Ph.D. degrees in Ceramic
Science from Alfred University in Alfred, New York. Dr. Hulbert has also
received honorary degrees from Indiana State University (doctor of law),
Clarkson University (doctor of science), Indiana University (doctor of science),
Rose-Hulman (doctor of engineering) and Kanazawa Institute of Technology (doctor
of engineering).
Directors Whose Present Terms Expire in 2010
MARK E.
HILL; Director since 2004; Age 51; Carmel, Indiana. Mr. Hill is Managing Partner
of Collina Ventures, LLC, a private investment company focusing on technology
companies. In 1983, Mr. Hill co-founded Baker Hill Corporation®, which serves as
a trusted advisor to its banking clients and delivers solutions that address
business process needs. In 2005, Baker Hill was acquired by Experian®, a global
information solutions company. Mr. Hill oversaw the transition through 2006. Mr.
Hill also serves on the board of four non-public technology companies. Mr. Hill
serves Central Indiana in various capacities, including board membership on
the
Central Indiana Corporate Partnership, the Central Indiana Community Foundation,
the United Way of Central Indiana and the TechPoint Foundation. Mr. Hill is an
adjunct professor at the Indiana University School of Informatics and former
chair of its Dean’s Council. Mr. Hill started his career at IBM and holds a
B.B.A. from the University of Notre Dame and an M.B.A. from the Indiana
University Kelley School of Business.
MICHAEL
C. HEIM; Director since 2007; Age 53; Zionsville, Indiana. Mr. Heim is the Vice
President, Information Technology and Chief Information Officer of Eli Lilly and
Company (“Lilly”), a position he has held since January 2004. From November 1999
until January 2004, Mr. Heim was the chief technology officer with
accountability for enterprise architecture and data strategy, the global
implementation of SAP, and global financial and human resources information
technology solutions at Lilly. Mr. Heim joined Lilly in 1979 and has served in
numerous roles including information technology, internal audit, and
engineering. Mr. Heim serves on a number of executive councils including the
Microsoft Pharmaceutical Advisory Council, the SAP Life Sciences Executive
Council, and the Dean’s Advisory Council–Indiana University School of
Informatics. A native of Cincinnati, Ohio, Mr. Heim received a B.A. degree in
business administration from Marian College and an M.B.A. from Bowling Green
State University.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
On June
8, 2007, our Board adopted Corporate Governance Guidelines (the “Guidelines”) to
assist the Board in the exercise of its responsibilities. These Guidelines
reflect the Board’s commitment to monitoring the effectiveness of policy and
decision-making both at the Board and management level, with a view to enhancing
shareholder value over the long term. These Guidelines are in addition to, and
are not intended to change or interpret, any federal or state law or regulation,
including the Indiana Business Corporation Law, or our Restated Articles of
Incorporation or Amended and Restated By-Laws, as currently in effect. The
Guidelines will be reviewed periodically and updated as necessary by our Board
based upon recommendations from our Nominating and Corporate Governance
Committee to reflect changes in regulatory requirements and Board oversight
practices. The Guidelines comply with requirements contained in the
listing standards of The NASDAQ Stock Market LLC (“NASDAQ”) (the exchange on
which our equity securities are registered) and otherwise enhance our corporate
governance policies. We will provide to any person, without charge, a copy of
these Guidelines, upon request to our Corporate Secretary at our world
headquarters. These Guidelines are also available on our website at
http://investors.inin.com
under
“Corporate Governance”
.
We intend to disclose any amendments or updates to these
Guidelines by posting such amendments or updates on our website.
Director Independence and Board
Meetings
Our Board
has determined that Drs. Hamburg and Hulbert and Messrs. Hill, Heim and Reck are
“independent directors”, as defined by the NASDAQ listing standards and the
director independence rules of the SEC. Our Board determined that Mr. McWhirter,
who served as our director through June 8, 2007, was an independent director in
accordance with the NASDAQ listing standards and independence rules of the SEC
until his term expired.
Our Board
has determined that each of Drs. Hamburg and Hulbert and Messrs. Hill, Heim and
Reck has no material direct or indirect relationship with us that would
interfere with the exercise of his independent judgment in carrying out the
responsibilities of a director on our Board. In making its independence
determination with respect to Dr. Hamburg, the Board considered his advisory
position with SPSS, a customer that uses our products and has licensed our
applications through one of our partners. During 2007, we received $90,000 from
our partner that SPSS licenses our applications from, but Dr. Hamburg was not
involved in SPSS’ decision to license our products. After reviewing the terms of
this transaction and the relationship that Dr. Hamburg has with SPSS, the Board
determined that Dr. Hamburg does not have a material direct or indirect interest
in the transaction and that our business relationship with SPSS does not
diminish his ability to exercise his independent judgment on issues affecting
our business. Our Board will continue to monitor this relationship.
In making
its independence determination with respect to Mr. Heim, the Board considered
Mr. Heim’s executive position with Lilly, a customer that uses our products and
has licensed our applications directly through us. Because of Mr. Heim’s
executive position at Lilly, the Board analyzed that relationship and the
customer payments we received from Lilly for our products and applications
during the last three years. As Lilly’s Chief Information Officer, it
is our understanding that Mr. Heim could be involved in Lilly’s decision to
license our products; however, Lilly has licensed our products since December
2001, well before Mr. Heim became Lilly’s Chief Information
Officer. During 2007, 2006 and 2005, Lilly paid us approximately
$162,000 $144,000 and $170,000, respectively, to license our applications, each
less than 5% of our consolidated gross revenues in each of those years. In
addition, Mr. Heim has not received any consulting, advisory or other
compensatory fees from us. After reviewing the terms of this transaction, and
the relationship that Mr. Heim has with Lilly, the Board determined that Mr.
Heim does not have a material direct or indirect interest in the transactions
and that our business relationships with Lilly do not diminish his ability to
exercise his independent judgment on issues affecting our business. Our Board
will continue to monitor this relationship.
Our Board
holds regularly scheduled quarterly meetings. Typically, committee meetings
occur the day prior to the Board meeting so that the evening prior to the Board
meeting and the day of the Board meeting can be devoted to presentations and
discussions with senior management about our short and long-term strategies. In
addition to the quarterly meetings, special meetings may be scheduled at our
Board’s discretion. During 2007, our Board held five meetings. During the period
in 2007 for which he served as a director, each of our current directors
attended or participated in at least 75% of the aggregate of (i) the total
number of meetings of our Board and (ii) the total number of meetings held
by all committees of our Board on which each such director
served.
We have a
policy that states that all directors properly nominated for election are
expected to attend our annual meetings. All of our current directors attended
our 2007 Annual Meeting in person.
Board and Committee Membership
The
responsibility for good corporate governance rests with our Board, whose primary
role is providing oversight, counseling and direction in the best long-term
interests of us and our shareholders. Our Board has three standing committees:
the Audit Committee; the Compensation and Stock Option Committee; and the
Nominating and Corporate Governance Committee (together, our “Standing
Committees”). Each Standing Committee is described below. Individuals who served
on our Board during 2007 are listed in the table below, which also sets forth
information regarding which Standing Committee(s) each individual served on
during 2007:
|
|
|
|
|
STANDING
COMMITTEES OF THE BOARD
|
|
|
|
|
|
|
|
Compensation
and
Stock
Option
Committee
|
|
Nominating
and
Corporate
Governance
Committee
|
|
Donald
E. Brown, M.D. (1)
|
|
Chair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
L. Hamburg, Ph.D.
|
|
X
|
|
Chair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
C. Heim (2)
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
E. Hill (4)
|
|
X
|
|
|
|
Chair
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Samuel
F. Hulbert, Ph.D.
|
|
X
|
|
|
|
X
|
|
Chair
|
|
|
|
|
|
|
|
|
|
|
|
William
E. McWhirter (3)
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Richard
A. Reck (4)
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Total Meetings Held
|
|
5
|
|
14
|
|
4
|
|
1
|
|
(1)
|
Dr.
Brown is our President and Chief Executive Officer and is our only
employee that serves on our Board. Dr. Brown attended Standing Committee
meetings as a member of management, except certain meetings where
management was excluded.
|
|
(2)
|
To
fill the vacancy created by Mr. McWhirter’s departure, as discussed below,
Mr. Heim was elected to our Board by our shareholders at our 2007 Annual
Meeting. Mr. Heim was appointed by our Board, upon nomination from our
Nominating and Corporate Governance Committee, to serve as a member of our
Audit Committee, effective June 8,
2007.
|
|
(3)
|
Mr.
McWhirter served on our Board and as a member of our Audit Committee,
Compensation and Stock Option Committee and Nominating and Corporate
Governance Committee through June 8, 2007, the date of our 2007 Annual
Meeting.
|
|
(4)
|
To
fill the vacancies on our Compensation and Stock Option Committee and our
Nominating and Corporate Governance Committee, which were created by Mr.
McWhirter’s departure, our Board, upon recommendation from our Nominating
and Corporate Governance Committee, appointed Mr. Hill to serve as a
member of our Nominating and Corporate Governance Committee and Mr. Reck
to serve as a member of our Compensation and Stock Option Committee,
effective June 8, 2007.
|
Standing Committees of the Board
Audit
Committee
Our Audit
Committee operates under a written charter adopted by our Board, a copy of which
is available, free of charge, on our website at
http://
investors.inin.com
under “Corporate Governance”
.
Our Audit Committee reviews
and assesses the adequacy of its charter and performance on an annual basis. Our
Board adopted an amended and restated charter for our Audit Committee on June 8,
2007 and adopted additional amendments on August 17, 2007. Our Board established
our Audit Committee in accordance with Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) for the primary purpose of
overseeing our accounting and financial reporting processes and audits of our
annual financial statements and internal control over financial reporting by our
independent registered public accounting firm.
Among its
current primary functions, our Audit Committee has the sole authority to perform
the following:
|
·
|
retain
and terminate our independent registered public accounting
firm;
|
|
·
|
approve
compensation and provide oversight of the work of our independent
registered public accounting firm;
|
|
·
|
evaluate
the qualifications, performance and independence of our independent
registered public accounting firm;
|
|
·
|
pre-approve
all auditing services and permitted non-audit services, including the fees
and terms for such services (subject to the de minimus exception for
non-audit services that are approved by our Audit Committee prior to
completion of the audit) provided by our independent registered public
accounting firm;
|
|
·
|
review
and discuss with our management and our independent registered public
accounting firm our annual and quarterly financial
statements;
|
|
·
|
discuss
with our management and our independent registered public accounting firm
major issues regarding accounting principles and financial statement
presentations and the adequacy of our internal control over financial
reporting; and
|
|
·
|
review
and approve all related person
transactions.
|
All
incumbent members of our Audit Committee have been and currently are
“independent” as such term is defined for audit committee members under the
NASDAQ listing standards and Rule 10A-3 of the Exchange Act. Our Board
determined that Mr. McWhirter was an independent audit committee member in
accordance with these standards and rules until his term expired on June 8,
2007. Our Board has determined that Dr. Hamburg and Mr. Reck meet the definition
of an “audit committee financial expert”, as defined in Item 407(d)(5)(ii) of
Regulation S-K of the Exchange Act.
Compensation
and Stock Option Committee
Our
Compensation and Stock Option Committee (our “Compensation Committee”) operates
under a written charter adopted by our Board, a copy of which is available, free
of charge, on our website at
http://investors.inin.com
under “Corporate Governance”.
On June 8, 2007, our
Board adopted an amended and restated charter for our Compensation Committee.
Our Compensation Committee reviews and assesses the adequacy of its charter and
performance on an annual basis. Among its current primary functions, our
Compensation Committee reviews and determines the annual compensation of our
non-employee directors; the annual base salaries, performance-based cash
incentive awards and other incentive compensation of our executive officers;
administers our stock option plans in which directors, executive officers and
other key employees participate; and discusses with management the Compensation
Discussion and Analysis and, if appropriate, recommends its inclusion in our
Annual Report on Form 10-K and proxy statement. For a description of the role of
management and our compensation consultant in setting compensation, see
“Compensation Discussion and
Analysis—Role of Management in Compensation”
and
“—Compensation Consultant and
Benchmarking”
.
Compensation
Committee Interlocks and Insider Participation
All
members of our Compensation Committee during 2007 were independent directors,
and no member was our employee or former employee. In addition, no member of our
Compensation Committee had any relationship requiring disclosure under the
section
“Certain Relationships
and Related Person Transactions”
beginning
on
page
53.
During 2007, none of our executive officers served on the
compensation committee or board of directors of another
entity.
Nominating
and Corporate Governance Committee
Our
Nominating and Corporate Governance Committee (our “Nominating Committee”)
operates under a written charter adopted by our Board, a copy of which is
available, free of charge, on our website at
http://
investors.inin.com
under “Corporate Governance”
.
Our Nominating Committee
assists our Board in (i) identifying individuals qualified to become Board
members, (ii) developing our Corporate Governance Guidelines, (iii) advising our
Board in the annual review of our Board’s performance and (iv) recommending
directors for each Standing Committee. The current members of our Nominating
Committee have been and currently are “independent”, as defined under the NASDAQ
listing standards.
Our
Nominating Committee considers candidates for membership on our Board who are
recommended by shareholders and/or fellow Board members. In accordance with Rule
14a-8(i)(8) of the Exchange Act, which was amended in December 2007 by the SEC
and became effective on January 10, 2008, certain shareholder proposals related
to the election of directors are no longer permitted. A shareholder
who wishes to recommend a director candidate for consideration by our Nominating
Committee should send such recommendation to our Corporate Secretary addressed
to: Interactive Intelligence, Inc. Nominating Committee, c/o Corporate Secretary
at our world headquarters. Our Corporate Secretary has been instructed by our
Board to forward such shareholder director candidate recommendations to our
Nominating Committee. Any such recommendation should include a description of
the candidate’s qualifications for board service, the candidate’s written
consent to be considered for nomination and to serve if nominated and elected
and the addresses and telephone numbers for contacting the shareholder and the
candidate for more information. A shareholder who wishes to nominate an
individual as a director candidate at an annual meeting, rather than recommend
the individual to our Nominating Committee as a nominee, must comply with our
advance notice requirements set forth in our
Amended
and Restated By-Laws, as currently in effect, as described in
“Date of Receipt of Shareholder
Proposals for Our 2009 Annual Meeting”
on
page 55.
Our
Nominating Committee is responsible, when the need arises, for seeking
individuals qualified to become Board members for recommendation to our Board.
The Nominating Committee identifies any specific needs in terms of industry or
professional background and determines independence standards for nominees. Our
entire Board nominates members for election to our Board. Nominees for director
are selected on the basis of board experience, judgment, integrity, ability to
make independent inquiries, understanding our business and environment and
willingness to devote adequate time to Board duties, while considering such
factors as geographic, occupational, gender, race and age diversity. Our
Nominating Committee’s process for identifying and evaluating nominees for
director will be the same whether the nominee is from our Nominating Committee’s
search for a candidate, or whether the nominee was recommended by a
shareholder.
Shareholder Communications
Our Board
has a process whereby our shareholders may send communications to our Board’s
attention. Any shareholder desiring to communicate with our Board, or one or
more specific members thereof, should communicate in a writing addressed to
Interactive Intelligence, Inc., Board of Directors, c/o Corporate Secretary at
our world headquarters. Our Corporate Secretary has been instructed by our Board
to promptly forward all such communications to the specified
addressees.
Code of
Ethics
We have
adopted a Code of Business Conduct and Ethics (our “Ethics Code”) that applies
to all of our directors, officers and employees. We will provide to any person a
copy of our Ethics Code, free of charge, upon request to our Corporate Secretary
at our world headquarters. Our Ethics Code was amended and restated by our Board
on June 8, 2007 and is available on our website at
http://
investors.inin.com
under “Corporate Governance”
.
We intend to disclose any amendments or updates to our Ethics Code
by posting such amendments or updates on our website. In addition, any waivers
of our Ethics Code for our directors or executive officers will be posted on our
website under “Corporate Governance”. There were no waivers of our
Ethics Code by any of our executive officers or directors during
2007.
DIRECTOR COMPENSATION AND BENEFITS
Only
non-employee directors receive compensation for their services as directors. Our
compensation package for non-employee members of our Board is comprised of cash
(annual retainers and committee meeting fees) and stock option grants. Directors
are also entitled to reimbursement of expenses incurred in connection with
attendance at board and/or committee meetings. Our director pay package is
designed to attract and retain highly-qualified, independent professionals to
monitor the effectiveness of policy and decision-making both at the Board and
management level, with a view to enhancing shareholder value over the long term.
Our Compensation Committee generally reviews our non-employee director
compensation program on an annual basis. Actual annual pay varies
among directors based on committee memberships, committee chair responsibilities
and meeting attendance.
In the
fall of 2006, our Compensation Committee engaged a third party compensation
consulting firm, Frederic W. Cook & Co., Inc. (“Cook”), to compare the cash
retainers, board and committee attendance fees and stock options received by our
non-employee directors to director compensation programs at certain peer
companies (the “peer group”), principally public software companies that,
generally, have similar revenues. The members of the peer group included in
Cook's study are listed on page 18 under
“Compensation Discussion and
Analysis – Compensation Consultant and
Benchmarking”
.
Members
of our Board are eligible to receive automatic stock option grants under our
2006 Plan, which was adopted by our Board in April 2006 and approved by our
shareholders at our 2006 Annual Meeting. Our 2006 Plan replaced our
Outside Directors Stock Option Plan (our “Directors Plan”) which was adopted in
April 1999.
Under our
2006 Plan, the exercise price for option grants is equal to the closing price of
our common stock, as reported by The NASDAQ Global Market, on the business day
immediately preceding the date of grant, rather than on the day of grant under
the terms of the Directors Plan. In addition, for most options granted prior to
2005, the term of each option was ten years from the date of grant. In 2005, we
began issuing options with a term of six years from the date of
grant. Besides these changes, there are no other differences in the
terms of options granted to our non-employee directors.
Our Board
also has the full and complete authority and discretion, except as limited by
our 2006 Plan, to grant additional options to eligible directors from time to
time and to provide the terms and conditions (which need not be identical among
eligible directors), including without limitation the vesting provisions,
thereof. Any option grants previously awarded under our Directors Plan, but not
yet forfeited, cancelled, terminated, exercised or expired, remain subject to
their original terms which are not different from the terms upon which annual
option grants for directors are granted under our 2006 Plan, except as described
above.
2007
Director Stock Options – Changes from 2006
Prior to
2007, our Directors Plan provided that each year on the date of the annual
meeting of shareholders, each eligible non-employee director was automatically
granted an option to purchase 8,000 shares of our common stock multiplied by a
fraction where (a) the numerator was the number of Board and Standing Committee
meetings on which the eligible non-employee director served and attended during
the immediately preceding year and (b) the denominator was the total number of
Board and Standing Committee meetings on which the eligible non-employee
director served and was eligible to attend that were held during the immediately
preceding year. At its February 2007 meeting, our Compensation Committee
approved a revised method such that on the date of the annual meeting of
shareholders, each eligible non-employee director will be granted an annual
stock option to purchase 8,000 shares of our common stock without having to
achieve a meeting attendance requirement. For any newly elected non-employee
director, our Compensation Committee may approve an option award to such
director to purchase an aggregate of 20,000 shares of our common stock for
joining our Board. These options have terms in accordance with our 2006 Plan,
generally vest over four years and expire six years from the anniversary date of
the grant.
Effective
January 1, 2007, our Compensation Committee approved changes to the annual
retainers and meeting fees to be paid to our non-employee directors. In 2007,
each of our non-employee directors was entitled to receive the following
compensation:
|
|
|
|
|
Cash
Retainers:
|
|
|
|
Annual
Cash Retainer (1)
|
|
$
|
25,000
|
|
Annual
Cash Retainer for Committee Chair:
|
|
|
|
|
Audit
Committee (1)
|
|
|
15,000
|
|
Compensation
and Nominating Committees (1)
|
|
|
5,000
|
|
|
|
|
|
|
Board
and Committee Attendance Fee (per meeting attended that was not held in
conjunction with a meeting of our full Board):
|
|
|
|
|
In
person (2)
|
|
$
|
1,500
|
|
By
teleconference (2)
|
|
|
750
|
|
|
|
|
|
|
Stock
Options:
|
|
|
|
|
Annual
Stock Option Retainer (3)
|
|
8,000
shares
|
|
Stock
Option Grant for Newly Elected Directors (4)
|
|
20,000
shares
|
|
(1)
|
All
annual cash retainers were paid in advance in equal quarterly
installments, and at times some have been paid in the immediately
preceding year in preparation for board and/or committee meetings to be
held during the first quarter of the current
year.
|
|
(2)
|
All
attendance fees were paid in arrears, and at times some have been paid in
the following year once meeting attendance results are
known.
|
|
(3)
|
Represents
an annual stock option to purchase shares of our common stock, which will
be granted at each annual meeting. These options were granted to all of
our non-employee directors, except Mr. Heim, on June 8, 2007, the date of
our 2007 Annual Meeting, in accordance with the terms of our 2006
Plan.
|
|
(4)
|
As
a result of being elected to our Board by our shareholders at our 2007
Annual Meeting, our Compensation Committee granted Mr. Heim an option to
purchase 20,000 shares of our common stock. This option was granted in
accordance with the terms of our 2006
Plan.
|
Director Compensation in 2007
The
following table sets forth information regarding the compensation that each
non-employee director earned during 2007. Dr. Brown did not earn any additional
compensation for serving on our Board in 2007.
|
|
|
|
|
Fees
Earned or
Paid
in Cash (1)
($)
|
|
|
|
|
|
Edward
L. Hamburg, Ph.D.
|
|
53,500
|
|
25,449
|
|
78,949
|
|
|
|
|
|
|
|
|
|
Michael
C. Heim (3)
|
|
33,250
|
|
28,737
|
|
61,987
|
|
|
|
|
|
|
|
|
|
Mark
E. Hill
|
|
36,750
|
|
33,497
|
|
70,247
|
|
|
|
|
|
|
|
|
|
Samuel
F. Hulbert, Ph.D.
|
|
36,000
|
|
11,495
|
|
47,495
|
|
|
|
|
|
|
|
|
|
William
E. McWhirter (4)
|
|
14,500
|
|
--
|
|
14,500
|
|
|
|
|
|
|
|
|
|
Richard
A. Reck
|
|
38,250
|
|
26,664
|
|
64,914
|
|
(1)
|
The
amounts in this column include the annual retainer and the amounts earned
by each director for attending board and/or committee meetings in person
and/or by teleconference that were not held in conjunction with a meeting
of our full Board. For the Chairman of each of our Audit Committee, our
Compensation Committee and our Nominating Committee, the additional annual
retainer is also included.
|
|
(2)
|
The
amounts in this column represent the aggregated compensation cost
recognized during the year ended December 31, 2007 in accordance with
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(“SFAS 123R”) (except that the estimated forfeitures related to
service-based vesting conditions were disregarded) of options held by our
non-employee directors and therefore included options granted during and
prior to 2007. For valuation assumptions used to determine these amounts,
refer to Note 6 of Notes to Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31,
2007. The aggregate grant date fair value of option awards
granted during 2007, as of the grant date in accordance with SFAS 123R,
was $203,808 for Mr. Heim and $81,523 each for Drs. Hamburg and Hulbert
and Messrs. Hill and Reck. Our Compensation Committee did not grant any
options to Mr. McWhirter during 2007.
Our
non-employee directors had the following shares of our common stock
underlying stock options outstanding as of December 31, 2007: Dr. Hamburg:
39,556 shares; Mr. Hill: 40,114 shares; Dr. Hulbert: 44,282 shares; Mr.
Heim: 20,000 shares; and Mr. Reck: 36,000 shares. All of the shares
underlying stock options that were held by Mr. McWhirter vested prior to
2007. Following Mr. McWhirter’s decision to
|
|
|
not
stand for re-election to our Board, his options were set to be terminated
one month following his removal from our Board. As a result and prior to
the termination date, Mr. McWhirter exercised all of his stock options
and, therefore, did not own any options as of December 31,
2007.
|
|
(3)
|
Mr.
Heim’s fees represent annual cash retainers and committee meeting fees he
was eligible to earn beginning June 8,
2007.
|
|
(4)
|
Mr.
McWhirter served on our Board through June 8, 2007, the date of our 2007
Annual Meeting. Mr. McWhirter’s fees related to 2007 include
prorated amounts of the annual cash retainer and all Board and/or
committee meeting fees for such meetings that he attended through that
date. As discussed in the preceding footnote of this table, all of Mr.
McWhirter’s stock options were vested and exercisable prior to 2007;
therefore, we did not record any compensation expense related to SFAS 123R
in our 2007 audited consolidated financial statements related to Mr.
McWhirter’s options.
|
Non-Employee Director Change-of-Control
Agreements
On June
7, 2007, we entered into Non-Employee Director Change-of-Control Agreements
(each, a “Director Change-of-Control Agreement”) with Dr. Hamburg and Messrs.
Hill and Reck. Under the terms of each Director Change-of-Control Agreement, in
the event the service on our Board of these directors is terminated for any
reason following an event where a “Change-of-Control” has occurred (as defined
under
“Employment Agreements
and Post-Termination and Change-of-Control Agreements – Change-of-Control and
Retention Agreements”
), any and all outstanding stock options granted
under our 2006 Plan and/or our Directors Plan will vest on an accelerated
pro-rata monthly basis, including full credit for partial months elapsed. In
addition, with respect to stock option vesting, each director will be credited
with one additional month of service for each month of service completed, up to
a maximum of 24 additional months of service credit.
OUR EXECUTIVE OFFICERS
The
following table sets forth information, as of March 31, 2008, about our
executive officers followed by their biographies:
|
Name
|
|
Age
|
|
Position
|
|
Donald
E. Brown, M.D.
|
|
52
|
|
Chairman
of the Board, President and Chief Executive Officer
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
52
|
|
Executive
Vice President, Worldwide Sales
|
|
|
|
|
|
|
|
William
J. Gildea III
|
|
41
|
|
Vice
President, Business Development
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
54
|
|
Chief
Financial Officer, Vice President, Finance and
Administration,
Secretary
and Treasurer
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
46
|
|
Vice
President, Customer Services
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
48
|
|
Senior
Vice President, Worldwide Marketing
|
Donald E. Brown, M.D
.
co-founded Interactive Intelligence in October 1994 and has served as our Chief
Executive Officer since April 1995 and President since inception. This is the
third software company founded by Dr. Brown. Dr. Brown also serves as our
Chairman of the Board, a position he has held since July 1998. Dr. Brown has
been a director since our inception. In March 1988, Dr. Brown co-founded
Software Artistry, Inc. (“Software Artistry”), a developer of customer support
software that became a public company in March 1995 and was subsequently
acquired by IBM in January 1998. At Software Artistry, Dr. Brown served as Chief
Executive Officer and director from inception through September 1994. Dr.
Brown’s first software company was acquired by Electronic Data Systems, Inc. in
September 1987. Dr. Brown graduated from the Indiana
University
School of Medicine. He also holds two additional degrees from Indiana
University, a M.S. in Computer Science and a B.S. in Physics.
Gary R. Blough
has served as
our Executive Vice President, Worldwide Sales since July 2004. Mr. Blough served
as our Vice President of Sales for Europe, the Middle East and Africa from
January 2002 to July 2004 and previously served as our Area Director and Vice
President of Sales for Western U.S. and Latin America since joining us in
February 1997. From January 1992 to February 1997, Mr. Blough held
various sales positions at Software Artistry, including Manager of Western
Region Sales. From January 1990 to December 1991, Mr. Blough was
Director of Sales for On-Line Software, a developer of programmer productivity
tools. Mr. Blough has a B.S. degree in Marketing from Virginia
Polytechnic Institute and State University.
William J. Gildea III
joined us
in March 2008 as our Vice President, Business Development. Prior to
joining us, Mr. Gildea was a sell-side financial analyst covering the
communications technology industry at Janney Montgomery Scott from April 2004 to
February 2008 and an associate analyst at Wachovia Securities from April 2000 to
March 2004. Mr. Gildea started his career as a communications
attorney in private practice in Washington, D.C. from October 1993 to June
1998. Mr. Gildea holds a B.A. from William & Mary, a J.D. from
Catholic University, and an M.B.A. from the University of North
Carolina
.
Stephen R. Head
has served as
our Chief Financial Officer, Vice President of Finance, Secretary and Treasurer
since joining us in November 2003 and our Vice President of Finance and
Administration since February 2004. Mr. Head previously served as Chief
Financial Officer of Gilian Technologies Ltd. (now Breach Security, Inc.), a Web
security applications developer, from 2001 to 2003. Prior to Gilian
Technologies, Mr. Head was Senior Vice President, Finance and Administration
from 1999 to 2001 at planetU, Inc., an e-commerce company serving the consumer
packaged goods industry, which was acquired by Transora in December 2000. Other
financial roles Mr. Head has held in the software industry include Vice
President, Finance and Administration and Chief Financial Officer at Made2Manage
Systems, Inc. (now Consona Corporation), and Vice President, Finance and Chief
Financial Officer of Software Artistry. Mr. Head began his career in public
accounting at KPMG LLP. He has also served in positions in private industry. Mr.
Head is a graduate of Indiana University, where he received both an M.B.A. and
B.S. in Business with a concentration in Accounting.
Pamela J. Hynes
has served as
our Vice President, Customer Services since October 2004. Ms. Hynes served as
our Vice President, Customer Loyalty from September 2003 to October 2004 and our
Vice President, Client Services, the Americas and Europe, Middle East and Africa
from July 2001 until September 2003. Ms. Hynes served as our Vice President,
North American Client Services from September 1999 until July 2001 and prior to
that as our Director of Client Services since joining us in November 1996. Ms.
Hynes was an Account Manager at Software Artistry from July 1996 to October 1996
and the Support Services Manager of Software Artistry from August 1992 to July
1996. Prior to August 1992, she served in a number of technical roles at
Software Artistry, including Application Development, Technical Instructor and
Field Engineer. Before joining Software Artistry, she served as Technical
Support Engineer at American Financial Resources, a software development
company. Ms. Hynes holds a B.S. degree in Management Information Systems from
New Hampshire College.
Joseph A. Staples
has served
as our Senior Vice President, Worldwide Marketing since joining us in January
2005. Prior to joining us, Mr. Staples was the principal of FirstLight
Marketing, a marketing services company, from October 2002 to December 2004. For
the six years prior to that, Mr. Staples was Executive Vice President of
Corporate Marketing at Captaris, Inc., a provider of business communication
solutions. Previously, Mr. Staples was the Vice President of Marketing for
Callware Technologies, Inc., a provider of unified messaging software. He was
also at Novell, Inc., in several management positions for five
years. Mr. Staples earned a B.S. degree from the University of
Phoenix with an emphasis in Marketing.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As
required by Items 403(a) and (b) of Regulation S-K, the following table sets
forth, as of March 31, 2008, information about the beneficial ownership of our
common stock by 5% or greater beneficial owners and ownership of management,
including each of our incumbent directors and director nominees, our named
executive officers and all executive officers and directors as a group. Except
as otherwise indicated below, the individual or entity owns such common stock
directly with sole investment and sole voting power. For each of our named
executive officers and directors, the following table also includes options to
purchase shares of our common stock that are exercisable on or within 60 days
after March 31, 2008.
5%
or Greater Beneficial Owners:
Name
and Address of Beneficial Owner**
|
|
Amount
and Nature of Beneficial Ownership
|
|
|
|
Bares
Capital Management, Inc.
221
W. 6th Street, Suite 1225
Austin,
TX 78701
|
|
1,130,924
|
(1)
|
6.4
|
%
(1)
|
|
|
|
|
|
|
|
|
Essex
Investment Management Co., LLC
125
High Street, 29th Floor
Boston,
MA 02110
|
|
906,993
|
(2)
|
5.4
|
% (2)
|
Officer
and Director Stock Ownership:
Name
of Beneficial Owner
|
|
|
|
|
|
Total
Beneficial Ownership
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
Edward
L. Hamburg, Ph.D.
|
|
--
|
|
26,556
|
|
26,556
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
C. Heim
|
|
--
|
|
--
|
|
--
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
E. Hill
|
|
55,000
|
(5)
|
32,114
|
|
87,114
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samuel
F. Hulbert, Ph.D.
|
|
--
|
|
36,282
|
|
36,282
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
A. Reck
|
|
10,000
|
|
18,000
|
|
28,000
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Named Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
Donald
E. Brown, M.D.**
|
|
3,942,180
|
|
519,200
|
|
4,461,380
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
8,000
|
|
123,037
|
|
131,037
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
46,555
|
|
163,106
|
|
209,661
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming (6)
|
|
60,750
|
|
--
|
|
60,750
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
19,666
|
(7)
|
31,318
|
|
50,984
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
3,000
|
|
45,000
|
|
48,000
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and
Executive Officers as a Group
|
|
|
|
|
|
|
|
|
|
|
All
Directors and Executive Officers as a Group (11 persons)
(8)
|
|
4,084,401
|
|
994,613
|
|
5,079,014
|
|
26.8
|
%
|
|
*
|
Indicates
ownership of less than one percent of the outstanding shares of our common
stock.
|
|
**
|
As
discussed above, Dr. Brown is our Chairman of the Board, President and
Chief Executive Officer and a beneficial owner of more than 5% of our
outstanding common stock. Therefore, information pertaining to his
beneficial ownership of our common stock is presented once as a named
executive officer.
|
|
(1)
|
Information
based solely on a Schedule 13G/A filed by such shareholder with the SEC on
February 15, 2008, indicating beneficial ownership as of December 31,
2007. The shareholder is an investment adviser and has sole power to vote
or direct the vote and dispose or direct the disposition of 2,798 shares,
and shares the power to vote or direct the vote and dispose or direct the
disposition of 1,128,126 shares.
|
|
(2)
|
Information
based solely on a Schedule 13G filed by such shareholder with the SEC on
February 6, 2007, indicating beneficial ownership as of December 31, 2006.
The shareholder is an investment
adviser.
|
|
(3)
|
Represents
the number of shares beneficially owned, excluding shares which may be
acquired through the exercise of stock
options.
|
|
(4)
|
Represents
shares which may be acquired through the exercise of stock options as of
March 31, 2008 or within 60 days after that
date.
|
|
(5)
|
Mr.
Hill has pledged all of these shares as security for a margin
account.
|
|
(6)
|
Mr.
Fleming voluntarily resigned effective March 6,
2007.
|
|
(7)
|
Includes
2,850 shares held by her children, over which Ms. Hynes disclaims
beneficial ownership.
|
|
(8)
|
These
amounts exclude Mr. Fleming’s ownership of our common stock as he was not
an executive officer as of March 31, 2008. Mr. Gildea, who joined our
company in March 2008, is included as an executive officer as of March 31,
2008. In connection with Mr. Gildea’s appointment, he was granted a stock
option under our 2006 Plan to purchase 25,000 shares of our common
stock. As of March 31, 2008, Mr. Gildea did not own any shares of our
common stock and the stock option granted to him was not exercisable
as of or within 60 days after that
date.
|
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Compensation Committee Report
We, the
Compensation Committee, have reviewed and discussed the following
“Compensation Discussion and
Analysis”
section of this proxy statement
with Interactive
Intelligence’s management. Based on our review and discussions, we recommended
to the Board of Directors that the following
“Compensation Discussion and
Analysis”
section be included in this proxy statement on Schedule 14A and
incorporated by reference into Interactive Intelligence’s Annual Report on Form
10-K for the year ended December 31, 2007, as filed with the
SEC.
Submitted by the
Compensation Committee
Mark E.
Hill, Chairman
Samuel F.
Hulbert
Richard
A. Reck
Compensation Discussion and Analysis
Overview
This
Compensation Discussion and Analysis is intended to supplement the more detailed
information concerning executive compensation that appears in the tables and the
narrative discussion that follows the tables. Our goal is to provide
our current and potential shareholders and the investing public with a better
understanding of our executive compensation practices and the decisions made
concerning the compensation payable to our executive officers, including the
persons named in the Summary Compensation Table, or our named executive
officers, that appears on page 26.
The
Compensation Committee of our Board of Directors, referred to in this section as
the committee, plays a key role in designing and administering our executive
compensation program. All principal elements of compensation paid to
our executive officers are subject to approval by the committee. The
report of the committee appears above.
Objectives of Our Compensation
Programs
We
believe we have assembled a superior executive management group comprised of
certain individuals that have been with us for many years and other individuals
that have extensive experience with other companies in the software
industry. This combination of experiences allows us to continue the
innovations that have long been our core competence, while at the same time
positioning us for future growth.
The
purpose of our compensation programs is to retain our executives by designing
compensation programs that are highly competitive with comparable positions and
to align our executive officers’ compensation targets with our overall goals and
shareholder interests. We compensate our executive officers using a
combination of salary, commissions, performance-based cash incentive
compensation and stock option awards. We attempt to combine these
elements of compensation to maximize our executives’ contribution to our company
to ultimately achieve our goal of maximizing shareholder value.
The
committee determines executive compensation with the following objectives in
mind:
|
·
|
Compensation
should be designed to reward employees for their individual performance as
well as that of our company. To achieve this objective, many executives
have compensation aligned with company objectives as well as individual
objectives over which they control.
|
|
·
|
Compensation
should be commensurate with comparable companies in the software
industry. We must attract and retain employees who may be
recruited by other companies, so our compensation package should remain
competitive. We achieve this objective by comparing our
executive officers’ compensation with comparable positions within our
peer group (as defined below) and/or
industry.
|
|
·
|
We
want to reward short-term accomplishments of our executive officers, while
also focusing their efforts on the achievement of our long-term
objectives. We achieve this objective by offering cash incentive
compensation as well as stock option
awards.
|
|
·
|
Our
compensation program should align our executive officers’ objectives with
those of our shareholders. We achieve this objective by setting corporate
objectives based on our operating income targets (excluding the impact of
compensation expense related to SFAS 123R), which we believe is a
performance metric that our shareholders monitor and also rewards our
executive officers for their efforts to attain profitability
goals
.
|
Compensation Consultant and
Benchmarking
In
addition to the committee engaging Cook to compare our non-employee director
compensation to our peer group in the fall of 2006, the committee simultaneously
engaged Cook to compare the salary, performance-based cash incentive
compensation and equity compensation programs of our executive officers to
compensation programs of individuals holding the same or similar positions at
our peer group.
The members of the peer group included in Cook's
study are listed in the following table:
|
8x8,
Inc.
|
|
Datawatch
Corporation
|
|
SoftBrands,
Inc.
|
|
Actuate
Corporation
|
|
Document
Sciences Corporation
|
|
TeleCommunication
Systems, Inc.
|
|
Applix,
Inc.
|
|
Evolving
Systems, Inc.
|
|
Tumbleweed
Communications Corp.
|
|
Art
Technology Group, Inc.
|
|
Intervoice,
Inc.
|
|
Unica
Corporation
|
|
Astea
International Inc.
|
|
Pegasystems
Inc.
|
|
Witness
Systems, Inc.
|
|
AXS-One
Inc.
|
|
RightNow
Technologies, Inc.
|
|
|
|
Captaris,
Inc.
|
|
Smith
Micro Software, Inc.
|
|
|
Cook
presented the results of its study at the committee's November 2006
meeting. Based on the results of this study and the operating results
that we reported in 2006, the committee concluded that our executive officers’
compensation plans were generally competitive, but made changes to all of our
executive officers’ compensation plans for 2007. Those changes are
described in more detail below under the sections
“Annual Base Salary”
and
“Performance-Based Cash Incentive
Compensation”
. Cook also recommended changes to how stock
options were granted to our executive officers, which are described in more
detail below under the section
“Long-Term Stock-Based Incentive
Compensation”
.
Cook did
not advise our management without prior approval from the committee, nor did it
receive any compensation from us other than for its work in advising the
committee, and maintained no other economic relationships with us during or
prior to 2007.
Role of Management in
Compensation
Dr.
Brown, our Chief Executive Officer, provides the committee with recommendations
on the compensation of our executive officers. These recommendations
are presented by Dr. Brown (referred to in this Compensation Discussion and
Analysis as “management”), taking into account such factors as compensation
history, tenure, responsibilities, leadership qualities, market data for
comparable positions at companies within our peer group and/or industry,
retention concerns and the need to maintain consistency within the
organization. The committee gives significant consideration to the
recommendations of Dr. Brown, but also considers the information and advice
provided by Cook. The final compensation decisions affecting our
executive officers, however, are within the committee's
discretion. The committee is also responsible for reviewing the
performance of Dr. Brown, without his participation, and determines his
compensation.
Elements of our Compensation
Programs
Our
compensation programs are comprised of three major elements: (i) annual
base salary; (ii) performance-based cash incentive compensation; and
(iii) long-term stock-based incentive compensation, each of which is
described below.
Annual
Base Salary
We use
base salary to provide an appropriate level of fixed compensation that will
promote executive recruitment and retention. The annual base salary
for each of our named executive officers is set on the basis of business
responsibilities, personal performance during the prior year against established
targets and leadership qualities. In setting base salaries for 2007,
management and the committee also reviewed the market data on comparable
positions at other companies in our peer group provided by Cook and took into
consideration the operating results that we reported in 2006. Based
on their joint reviews, on February 15, 2007, management recommended, and the
committee approved, the following base salaries for our named executive
officers, effective January 1, 2007:
|
|
|
|
|
Percentage
Increase
from 2006
|
|
Donald
E. Brown, M.D.
|
|
325,000
|
|
8.3%
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
215,000
|
|
7.5%
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
200,000
|
|
0.0%
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
175,000
|
|
16.7%
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
215,000
|
|
7.5%
|
Due to
his impending resignation, which became effective on March 6, 2007, the
committee made no adjustments to Mr. Fleming's base salary for 2007. For Mr.
Blough, sales commissions are also to be included in his annual base salary for
2007; however, commissions are not reflected in the table above. The committee
approved Mr. Blough’s commission plan for 2007, which was recommended by Dr.
Brown based on our 2006 performance and 2007 budgeted order growth, on February
15, 2007. These commissions were designed to motivate Mr. Blough to
increase the gross profit dollar amount of orders for our product solutions and
professional and educational services
.
See
the
Summary
Compensation Table on page 26
for
further details
on the 2007 annual base salaries and, where applicable, sales commissions earned
by our named executive officers.
Performance-Based
Cash Incentive Compensation
Each
year, management recommends the targets for each named executive officer and the
company as a whole, which is presented to the committee for its review and
approval. The performance targets for our named executive officers
were developed based on our 2006 financial performance and the expected growth
of our business during 2007. The individual performance targets were aligned
with the named executive officer’s areas of responsibility, within which he or
she has the authority to effect change. The company performance award targets,
set forth below, were designed to align our named executive officers’ objectives
with those of our shareholders and are intended to maximize shareholder
value. Each of our named executive officer’s performance awards (both
individual and company related) are paid to each individual after management’s
determination that, based on our financial results, the respective target has
been achieved, usually within 30 days after the end of each quarter or year, as
appropriate.
The following performance-based cash incentive compensation
awards were established for 2007 for our named executive officers, except for
Mr. Fleming
:
|
·
|
Company Performance Award.
Each named executive officer’s compensation package, except for Mr.
Blough's, included a company performance award. This award was
designed to be paid to our named executive officers for achieving targeted
operating income results (excluding stock option expense related to SFAS
123R). The committee designed this award to align our named
executive officers’ interests with those of our shareholders by rewarding
the named executive officers for their efforts to attain growth and
profitability goals.
|
Prior to
2007, the company performance award was paid quarterly to each of the
participating named executive officers upon achieving the quarterly operating
income target. In 2007, the committee modified Dr. Brown's company
performance award from a quarterly potential to an annual potential of $160,000
if our 2007 annual operating income target was achieved. The
committee determined that, as our Chief Executive Officer, Dr. Brown's
performance was best measured over a full year of company
results. Messrs. Head and Staples and Ms. Hynes were eligible to
receive an award of $10,000, $10,000 and $6,000, respectively, per quarter in
2007, if our quarterly operating income targets were met.
Quarterly
operating income targets, based in part on our 2007 budget, were recommended by
management and submitted to the committee for its review and approval. The
annual target was set based on approximately 30% growth in operating income,
increasing revenue based on the prior year performance and market
potential. The result was an annual target of $10.5 million. There was no
carryover of awards from quarter to quarter if the award was not earned in a
particular quarter.
The quarterly and
annual operating income targets recommended by management and approved by the
committee for 2007 were as follows (in millions):
|
|
|
Operating
Income
Target
($)
|
|
1
st
Quarter
|
|
2.1
|
|
|
|
|
|
2
nd
Quarter
|
|
2.3
|
|
|
|
|
|
3
rd
Quarter
|
|
2.6
|
|
|
|
|
|
4
th
Quarter
|
|
3.5
|
|
|
|
|
|
Annual
|
|
10.5
|
The
quarterly and annual operating income targets were subject to change based on
material external events at the discretion of Dr. Brown, subject to the approval
of the committee, but no such changes were made in 2007. The quarterly
operating income targets for the first, second and third quarters of 2007 were
met. The 2007 annual operating income target was also met.
|
·
|
Superior Achievement
Award.
This annual award was designed to be paid to Dr.
Brown, Messrs. Head, Blough and Staples and Ms. Hynes if we achieved
annual operating income (excluding stock option expense related to SFAS
123R) in excess of the annual operating income target of $10.5 million set
forth above. The committee established this award, based on
management’s recommendation, for Mr. Blough in place of his quota
achievement award that he was eligible to receive during 2006 because
management and the committee believed that this award better aligned
Mr. Blough's interests with those of our shareholders. The committee
designed this award to align our named executive officers’ interests with
those of our shareholders by rewarding our named executive officers for
their efforts to improve efficiency in all aspects of our business and to
attain growth and profitability
goals.
|
Subject
to exceeding the 2007 annual operating income target, Dr. Brown, Messrs. Head,
Blough and Staples and Ms. Hynes each had the opportunity to receive a certain
percentage of the excess amount, as follows:
|
|
|
Superior
Achievement
Award
Excess Percentage
|
|
Donald
E. Brown, M.D.
|
|
2.50%
|
|
|
|
|
|
Stephen
R. Head
|
|
1.00%
|
|
|
|
|
|
Gary
R. Blough
|
|
1.00%
|
|
|
|
|
|
Pamela
J. Hynes
|
|
0.75%
|
|
|
|
|
|
Joseph
A. Staples
|
|
1.00%
|
|
·
|
Expense Control Performance
Award.
In 2007, the committee established this new
award, based on management’s recommendation, for Mr. Head. This
new award replaced the collections performance award Mr. Head was eligible
to receive during 2006. This new award was designed to manage
our overall profitability which, as Chief Financial Officer, is one of Mr.
Head's primary responsibilities. Management and the
committee believed that this new award was a better measure to gauge
Mr. Head's performance than the collections performance award, which only
focused on one component of his
responsibilities.
|
Under
this award, Mr. Head was eligible to receive $5,000 per quarter and $20,000 at
the end of 2007, based upon achieving the following quarterly and annual
percentage targets for operating income (excluding stock option expense related
to SFAS 123R) divided by total revenues:
|
|
|
Expense
Control
Performance
Award
Target
Percentage
|
|
1
st
Quarter
|
|
8.5%
|
|
|
|
|
|
2
nd
Quarter
|
|
9.0%
|
|
|
|
|
|
3
rd
Quarter
|
|
10.0%
|
|
|
|
|
|
4
th
Quarter
|
|
12.0%
|
|
|
|
|
|
Annual
|
|
10.0%
|
The
quarterly expense control performance targets for the first, second and third
quarters of 2007 were met. The 2007 annual expense control performance target
was also met.
|
·
|
Individual Performance Award.
Under this award, Mr. Staples was eligible to receive $10,000 per
quarter if the gross profit on new named customer orders (initial orders
and orders within one year of the initial order but not including add-on
orders or business development activities) for our software solutions
achieved certain targets. There was no carryover of awards from
quarter to quarter if the award was not earned in a particular
quarter. The committee established this award, based on
management’s recommendation, to encourage Mr. Staples to oversee an
innovative and effective marketing campaign targeted towards new customers
to increase our brand recognition and positively increase orders from new
customers and partners. This award differed from the individual
performance award Mr. Staples was eligible to receive in 2006 because it
focused on new orders throughout our worldwide sales organization rather
than only Vonexus orders.
Mr. Staples met
the gross profit on new named customer orders targets for the first,
second and third quarters of 2007.
|
|
·
|
Services Revenue
Award.
In 2007, the committee established this new
award, based on management’s recommendation, for Ms. Hynes, who is
responsible for services revenues and the profitability of those services,
which is a significant portion of our total
revenues. Management and the committee believed that this
new award would focus Ms. Hynes’ efforts on maximizing our services
revenues and profitability. This new award combined the
services revenue award and services gross margin award (two separate
awards) that Ms. Hynes was eligible to receive in 2006.
Under
this new award, Ms. Hynes was eligible to receive $6,000 per quarter if
quarterly targets for services revenues and gross margin (excluding stock
option expense related to SFAS 123R) for maintenance support, professional
services, education and packaged solutions were achieved. There was no
carryover of the awards from quarter to quarter if the award was not
earned in a particular quarter. The quarterly services revenues and
gross margin targets for 2007 were as follows ($ in
millions):
|
|
|
|
Services
Revenues
Target
($)
|
|
Services
Gross
Margin
Target
Percentage
|
|
1
st
Quarter
|
|
11.6
|
|
61.0%
|
|
|
|
|
|
|
|
2
nd
Quarter
|
|
12.4
|
|
61.0%
|
|
|
|
|
|
|
|
3
rd
Quarter
|
|
12.9
|
|
61.0%
|
|
|
|
|
|
|
|
4
th
Quarter
|
|
13.2
|
|
61.0%
|
The
services revenue and gross margin targets were met for the third and fourth
quarters of 2007.
See
the
Summary
Compensation Table on page 26 for further details on the performance-based cash
incentive compensation earned by our named executive officers during 2007 under
each of these awards.
Long-Term
Stock-Based Incentive Compensation
In
addition to granting performance-based cash incentive compensation, management
and the committee continue to view stock options as a way to motivate our
executive officers and retain key employees for the long-term by aligning
their goals with those of our shareholders. Based on the recommendation of
Cook, the committee changed the method of how stock options are granted to our
executive officers. Prior to 2007, stock options were granted to our
executive officers after the performance measure was achieved and/or
exceeded. If the company and/or individual performance targets were met,
as they were in 2006, an executive officer would not recognize any benefit from
our increased stock performance, if any, related to their efforts during that
period because the option was not granted until after the performance measure
was achieved. For 2007, the committee approved the grants of stock options
to our executive officers in February 2007, subject to cancellation if the
specified performance targets for 2007 were not achieved (the “2007 options”).
Management and the committee believe that this approach will serve to
promote superior performance because the holder will benefit from any increase
in the value of underlying shares of the options during the period during which
they met their performance targets. At its February 15, 2007 meeting, the
committee, based on discussions with management, approved the following 2007
option grants to each of our named executive officers related to company and/or
individual performance for 2007:
|
|
|
Number
of Shares
Underlying
Options
|
|
Donald
E. Brown, M.D.
|
|
50,000
|
(1)
|
|
|
|
|
|
|
Stephen
R. Head
|
|
25,000
|
(1)
|
|
|
|
|
|
|
Gary
R. Blough
|
|
35,000
|
(2)
|
|
|
|
|
|
|
Jeremiah
J. Fleming
|
|
--
|
(3)
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
17,500
|
(1)
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
25,000
|
(1)
|
|
(1)
|
The
stock options awarded to Dr. Brown, Messrs. Head and Staples and Ms. Hynes
were subject to full cancellation if we did not achieve the $10.5 million
annual operating income target set forth under
“Performance-Based Cash
Incentive Compensation—Company Performance Award”
. The
annual operating income target for 2007 was met, and none of the stock
options awarded to these named executive officers were
cancelled.
|
|
(2)
|
The
stock options awarded to Mr. Blough were subject to full or partial
cancellation if the following conditions were not
met:
|
|
·
|
5,000
shares per quarter for achieving his quarterly sales quota or his
cumulative year-to-date sales quota;
and
|
|
·
|
1,000
shares for each 1% of actual sales over his annual sales quota up to a
maximum of 15% (the “annual maximum sales
quota”).
|
The first
quarter sales quota target was not met by Mr. Blough and his actual sales only
exceeded his annual sales quota by 3%. As a result, the options to
purchase 17,000 of the 35,000 shares were cancelled.
|
(3)
|
Due
to his impending resignation, which became effective on March 6, 2007, the
committee decided not to grant Mr. Fleming any option awards under his
2007 compensation program.
|
The 2007
options were granted at an exercise price of $17.28 per share, the closing price
of our common stock, as reported by The NASDAQ Global Market, on February 14,
2007, the business day immediately preceding the grant date, in accordance with
the provisions of our 2006 Plan. With respect to the 2007 options
that were not cancelled, the vesting commences in four equal annual installments
beginning on January 1, 2008 with the first 25% vesting on January 1, 2009.
These stock options will expire on January 1, 2014, unless terminated earlier in
accordance with the terms of our 2006 Plan. Dr. Brown was granted nonqualified
stock options because of the level of his stock ownership in our
company. Each of our other named executive officers who received
stock options was granted incentive stock options, up to allowable levels, and
then nonqualified stock options after the maximum incentive stock options were
reached. For more information regarding the stock option awards that
were granted to our named executive officers during 2007, see the Grants of
Plan-Based Awards table on page 29.
The
committee delegated to Dr. Brown the ability to make grants of stock options to
other designated key employees to reward them for their
contributions. Typically, the committee will set the award potential
at the beginning of the year subject to meeting certain objective performance
targets at Dr. Brown's discretion and authorizes Dr. Brown to grant the actual
awards to key employees (other than to himself and our other executive officers)
if such targets are met.
Total Direct
Compensation
In making
executive compensation decisions, the committee focuses on the “total direct
compensation” that an executive officer will receive annually. This
consists of salary, commissions and performance-based incentive compensation,
including the value of option awards granted with respect to performance for
that year. Some of the cash incentives and option awards with respect
to performance in a given year are paid or granted in the following
year. Under the proxy disclosure rules, cash incentive payments
earned in a given year but paid the following year are reflected in the
Summary Compensation
Table. However, option awards earned in one year but granted in a
subsequent year are not reflected in the Summary Compensation
Table. The amounts of total direct compensation paid to our named
executive officers for 2007 and 2006 are shown in the Supplemental Table on page
28. This table illustrates the committee's calculation of total
direct compensation earned during 2007 and 2006, regardless of when the cash
incentive payments were paid or when the option awards were granted and takes
into account any stock option grants in 2007 that were subsequently cancelled in
2008.
Benefits Available to Executive
Officers and All Other Employees
Retirement
and Health and Welfare Benefits
We have
never had a traditional or defined benefit pension plan. We maintain
a 401(k) Savings Plan (the “401(k) Plan”) to provide retirement benefits for
substantially all of our North American
employees. Participants
in the 401(k) Plan may elect to contribute up to 50% of their pre-tax annual
compensation to the 401(k) Plan, subject to applicable Internal Revenue Service
(“IRS”) limits and regulations. Participants may also contribute amounts
representing qualified rollovers from other qualified benefit plans.
At our discretion, we
may also make company matching contributions to the 401(k) Plan. Prior to
December 31, 2007, we did not make any company matching contributions to the
401(k) Plan.
Effective
January 1, 2007, the 401(k) Plan Administrator approved a restated 401(k) Plan
Document (the “New Plan Document”), which included amendments to the 401(k) Plan
since January 1, 2003, including new benefits added to the 401(k) Plan such as a
company matching contribution potential and a Roth 401(k) option.
In
December 2006, we announced to our employees that subject to us achieving a
specified financial performance target, we would make an annual company matching
contribution to eligible participants, including our named executive officers,
up to 25% of the first 4% of the participants’ pre-tax compensation contributed
to the 401(k) Plan. We met the annual performance target during 2007,
and each eligible participant received the applicable company matching
contribution. For an eligible participant who has worked for us for
less than four years at the time of the company matching contribution, the
contribution will vest in equal installments over four years based on the
anniversary date of the participant’s employment. For an eligible participant
who has worked for us for four or more years at the time of contribution, the
contribution is 100% vested. The company matching contributions we made to the
401(k) Plan accounts of our named executive officers are shown in the All Other
Compensation column of the Summary Compensation Table on page
26.
Although
we have not expressed any intent to terminate the 401(k) Plan, we have the
option to do so at any time subject to the provisions of the Employee Retirement
Income Security Act of 1974. Upon termination of the 401(k) Plan, either full or
partial, participants, including our named executive officers, become fully
vested in their entire account balances.
All of
our executive officers, including our named executive officers, are also
eligible to participate in other employee benefit plans that are generally
available to all of our employees, including our Employee Stock Purchase Plan
and life and health insurance programs. The committee believes that
these additional plans are competitive with benefits offered by the other
companies in our peer group.
Perquisites
Certain
of our executive officers and employees may be entitled to receive perquisites,
as defined in their respective employment agreements. There were no perquisites,
individually or in the aggregate, that exceeded $10,000 that were given to any
director or executive officer during 2007.
Employment
Agreements and Change-of-Control Arrangements
We have
employment agreements with Messrs. Head, Staples and Blough and Ms.
Hynes. The employment agreements for Messrs. Head and Staples and Ms.
Hynes provide for severance payments if they are terminated by us for any reason
other than for cause. In addition, we have change-of-control and
retention agreements with Messrs. Head, Staples and Blough and Ms.
Hynes. These change-of-control agreements are intended to maintain
continuity of management, particularly in the context of a transaction in which
we undergo a change of control. These agreements are "double
triggered", which means that an executive officer is only entitled to severance
payments if (1) we experience a change of control, as defined in the agreement,
and (2) the executive officer's employment is terminated by us other than for
cause or the executive officer resigns for good reason. In addition,
in connection with his resignation effective on March 6, 2007, Mr. Fleming
entered into a Separation and Release Agreement, which specified the severance
compensation payable to Mr. Fleming as a result of his
resignation. For a more detailed description of the material terms of
these agreements, see
“Employment Agreements and
Post-Termination and Change-of-Control Arrangements—Employment
Agreements”
,
“—Change-of-Control and Retention
Agreements”
and
“—Severance to Mr. Fleming”
beginning on page 36.
Tax Deductibility Under Code
Section 162(m)
Section
162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) eliminates,
subject to certain exceptions, the deductibility of compensation paid to certain
executives to the extent their compensation for any year exceeds $1,000,000.
Exceptions to amounts included in executive compensation for purposes of Section
162(m) involve various types of “qualifying performance based” compensation
(i.e. compensation paid only if the individual's performance meets
pre-established objective goals based on performance criteria approved by the
committee under plans that have been approved by our shareholders). Currently,
our compensation levels for all of our executive officers fall below $1,000,000.
In the event that in the future the annual remuneration of any of our executive
officers approaches $1,000,000, the committee will consider the various
alternatives to preserving the deductibility of compensation payments to the
extent reasonably practicable and consistent with our compensation
objectives.
Executive Compensation Tables and
Narratives
The
Summary Compensation Table appearing below sets forth information regarding the
compensation paid and/or awarded to each of our named executive officers for the
years ended December 31, 2007 and 2006. For a more thorough discussion of our
executive compensation practices, refer to the
“Compensation Discussion and
Analysis”
beginning on page 17.
SUMMARY COMPENSATION
TABLE
|
Name
and Principal Position
|
|
|
|
|
|
|
|
Non-Equity
Incentive Plan Compensation (3)
($)
|
|
All
Other Compensation
(4)
($)
|
|
|
|
Donald
E. Brown, M.D.
Chairman,
President and
Chief
Executive Officer
|
|
2007
2006
|
|
325,000
300,000
|
|
489,966
261,130
|
|
174,486
224,704
|
|
2,250
--
|
|
991,702
785,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
Chief
Financial Officer,
Vice
President of Finance
and
Administration,
Secretary
and Treasurer
|
|
2007
2006
|
|
215,000
200,000
|
|
232,608
125,418
|
|
70,794
94,298
|
|
2,250
--
|
|
520,652
419,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
Executive
Vice President,
Worldwide
Sales
|
|
2007
2006
|
|
402,127
373,980
|
|
263,476
174,866
|
|
5,794
20,000
|
|
2,250
--
|
|
673,647
568,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming (5)
Vice
President,
Business
Development
|
|
2007
2006
|
|
101,330
347,430
|
|
64,623
134,784
|
|
30,000
20,000
|
|
175,000
--
|
|
370,953
502,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes (5)
Vice
President,
Customer
Services
|
|
2007
|
|
175,000
|
|
130,494
|
|
34,346
|
|
2,250
|
|
342,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
Senior
Vice President,
Worldwide
Marketing
|
|
2007
|
|
215,000
200,000
|
|
220,790
83,500
|
|
65,794
89,384
|
|
2,250
--
|
|
503,834
372,884
|
|
(1)
|
Includes
the base salary and (if applicable) commissions earned by each named
executive officer during the respective
year.
|
|
(2)
|
The
amounts in this column represent the aggregate compensation cost
recognized during the respective year in accordance with SFAS 123R (except
the estimated forfeitures related to service-based vesting conditions are
disregarded) of stock options held by our named executive officers, and
therefore includes options granted during and prior to the respective
year. For the valuation assumptions used to determine these amounts for
2007 and 2006, refer to Note 6 of Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended December
31, 2007 and our Annual Report on Form 10-K for the year ended December
31, 2006, respectively. Certain option awards relating to 2006
fourth quarter and annual performance targets were not granted until the
first quarter of 2007 after our prior quarter and annual financial results
were known and the performance targets were determined to be
met. Therefore, the amounts for 2006 do not include the
aggregate compensation cost related to these fourth quarter and annual
2006 option awards. As discussed in
“Compensation Discussion and
Analysis–Long-Term Stock-Based Incentive Compensation”,
beginning
in 2007, stock options were granted to our named executive officers in
February 2007, subject to cancellation if the specified annual and/or
quarterly performance targets for 2007 were not achieved. As a
result, the aggregate compensation cost related to these options was
included in the amounts for
2007.
|
|
(3)
|
Except
for Mr. Fleming, the amounts in this column represent the aggregate dollar
value of performance-based cash incentives earned with respect to
performance in the respective year, regardless of when actually
paid. Each performance-based cash incentive award for 2007 is
described in more detail in
“Compensation Discussion and
Analysis–Performance-Based Cash Incentive
Compensation”
. The amounts awarded to each named
executive officer under his or her 2007 and, if applicable, 2006
compensation programs include:
|
|
|
|
Company
Performance
Award
($)
|
|
Superior
Achievement
Award
($)
|
|
Individual
Performance
Awards
(a)
($)
|
|
Total
Non-Equity Incentive
Plan
Compensation
($)
|
|
Donald
E. Brown, M.D.
|
|
|
|
|
|
|
|
|
|
2007
|
|
160,000
|
|
14,486
|
|
--
|
|
174,486
|
|
2006
|
|
141,656
|
|
83,048
|
|
--
|
|
224,704
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
|
|
|
|
|
|
|
|
2007
|
|
30,000
|
|
5,794
|
|
35,000
|
|
70,794
|
|
2006
|
|
37,775
|
|
41,523
|
|
15,000
|
|
94,298
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
|
|
|
|
|
|
|
|
2007
|
|
--
|
|
5,794
|
|
--
|
|
5,794
|
|
2006
|
|
--
|
|
--
|
|
20,000
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
|
|
|
|
|
|
|
|
2007
|
|
18,000
|
|
4,346
|
|
12,000
|
|
34,346
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
|
|
|
|
|
|
|
|
2007
|
|
30,000
|
|
5,794
|
|
30,000
|
|
65,794
|
|
2006
|
|
37,775
|
|
16,609
|
|
35,000
|
|
89,384
|
|
|
(a)
Individual performance awards include the
following:
|
|
|
·
|
Mr.
Head received an expense control performance award in 2007, which replaced
the collections performance award he received in
2006.
|
|
|
·
|
Mr.
Blough received a quarterly quota achievement award in 2006, which was
replaced with his superior achievement award in
2007.
|
|
|
·
|
Mr.
Staples received an individual performance award in 2007 based on gross
profits on new named customer orders, which replaced his individual
performance award in 2006 that was based on gross profits on Vonexus
IP-PBX solutions.
|
|
|
·
|
Ms.
Hynes received a services revenue award in
2007.
|
|
|
The
amount for Mr. Fleming in 2007 related to a 2005 individual performance
award that was paid to him in 2007 upon discovery that the award was not
paid to him when it was earned. For further discussion on
payments made to Mr. Fleming during 2007, refer to Mr. Fleming’s
Separation and Release Agreement discussed under
“Employment Agreements and
Post-Termination and Change-of-Control Arrangements–Severance to Mr.
Fleming”
.
|
|
(4)
|
The
amounts in this column include the
following:
|
|
·
|
For
Dr. Brown and Messrs. Head, Blough and Staples and Ms. Hynes, the amount
represents the company matching contribution for 2007 made to each named
executive officer’s account under our 401(k)
Plan.
|
|
·
|
For
Mr. Fleming, the amount represents a single lump sum severance payment we
paid to him in March 2007 as part of his Separation and Release Agreement
discussed under
“Employment Agreements and
Post-Termination and Change-of-Control Arrangements–Severance to Mr.
Fleming”
.
|
|
(5)
|
Pursuant
to Item 402(a)(3)(iv) of Regulation S-K, disclosure is required for Mr.
Fleming, our former Vice President, Business Development, who voluntarily
resigned effective on March 6, 2007. Mr. Fleming met the criteria as one
of our three other most highly compensated executive officers for 2007.
However, as Mr. Fleming did not serve as one of our executive officers as
of December 31, 2007, Ms. Hynes was also included as a named executive
officer.
|
SUPPLEMENTAL TABLE
Total
Direct Compensation Earned (1)
|
|
|
|
|
|
|
|
|
|
Non-Equity
Incentive Plan Compensation (3)
($)
|
|
Total
Direct Compensation
($)
|
|
Donald
E. Brown, M.D.
|
|
2007
|
|
325,000
|
|
473,962
|
|
174,486
|
|
973,448
|
|
|
|
2006
|
|
300,000
|
|
495,284
|
|
224,704
|
|
1,019,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
2007
|
|
215,000
|
|
236,981
|
|
70,794
|
|
522,775
|
|
|
|
2006
|
|
200,000
|
|
275,158
|
|
94,298
|
|
569,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
2007
|
|
402,127
|
|
331,773
|
|
5,794
|
|
739,694
|
|
|
|
2006
|
|
373,980
|
|
302,735
|
|
20,000
|
|
696,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming
|
|
2007
|
|
101,330
|
|
--
|
|
--
|
|
101,330
|
|
|
|
2006
|
|
347,430
|
|
31,318
|
|
20,000
|
|
398,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
2007
|
|
175,000
|
|
197,232
|
|
34,346
|
|
406,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
2007
|
|
215,000
|
|
236,981
|
|
65,794
|
|
517,775
|
|
|
|
2006
|
|
200,000
|
|
275,158
|
|
89,384
|
|
564,542
|
|
(1)
|
Total
direct compensation consists solely of salary, commissions,
performance-based cash incentive compensation and stock-based incentive
compensation and did not include all elements of compensation shown in the
Summary Compensation Table.
|
|
(2)
|
Represents
the aggregate grant date fair value of options awarded with respect to
performance in the respective year, regardless of when actually granted,
in accordance with SFAS 123R. For valuation assumptions used to determine
the value of options granted to each named executive officer during 2007
and 2006, refer to Note 6 of Notes to Consolidated Financial Statements in
our Annual Report on Form 10-K for the year ended December 31, 2007 and
our Annual Report on Form 10-K for the year ended December 31, 2006,
respectively.
|
|
(3)
|
Represents
the aggregate dollar value of performance-based cash incentives earned
with respect to performance in the respective year, regardless of when
actually paid.
|
GRANTS OF PLAN-BASED AWARDS
|
|
|
|
|
|
|
|
Estimated
Possible Payouts Under Non-Equity Incentive
Plan Awards
Target
($)
|
|
Estimated
Possible Payouts Under Equity Incentive Plan
Awards
Target
(#)
|
|
All
Other Option Awards: Number of Securities Underlying
Options
|
|
Exercise
Price of Option Awards (2)
|
|
Grant
Date Fair Value of Option Awards (3)
|
|
Donald
E. Brown, M.D.
|
|
2/16/2006
|
|
2/09/2007
|
|
--
|
|
--
|
|
45,000
|
(4)
|
20.50
|
|
495,284
|
|
|
|
2/15/2007
|
|
2/15/2007
|
|
--
|
|
50,000
|
(5)
|
--
|
|
17.28
|
|
473,962
|
|
|
|
--
|
|
--
|
|
160,000
|
(6)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
51,000
|
(7)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
2/16/2006
|
|
2/09/2007
|
|
--
|
|
|
|
25,000
|
(4)
|
20.50
|
|
275,158
|
|
|
|
2/15/2007
|
|
2/15/2007
|
|
--
|
|
25,000
|
(5)
|
--
|
|
17.28
|
|
236,981
|
|
|
|
--
|
|
--
|
|
40,000
|
(6)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
40,000
|
(8)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
20,000
|
(7)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
2/16/2006
|
|
2/09/2007
|
|
--
|
|
--
|
|
22,500
|
(9)
|
20.50
|
|
247,642
|
|
|
|
2/15/2007
|
|
2/15/2007
|
|
--
|
|
35,000
|
(5)
|
--
|
|
17.28
|
|
331,773
|
|
|
|
--
|
|
--
|
|
20,000
|
(7)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming (10)
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
2/16/2006
|
|
2/09/2007
|
|
--
|
|
--
|
|
15,000
|
(4)
|
20.50
|
|
165,095
|
|
|
|
2/15/2007
|
|
2/15/2007
|
|
--
|
|
17,500
|
(5)
|
--
|
|
17.28
|
|
197,232
|
|
|
|
--
|
|
--
|
|
24,000
|
(6)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
24,000
|
(11)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
15,000
|
(7)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
2/16/2006
|
|
2/09/2007
|
|
--
|
|
|
|
25,000
|
(4)
|
20.50
|
|
275,158
|
|
|
|
2/15/2007
|
|
2/15/2007
|
|
--
|
|
25,000
|
(5)
|
--
|
|
17.28
|
|
236,981
|
|
|
|
--
|
|
--
|
|
40,000
|
(6)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
40,000
|
(12)
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
--
|
|
--
|
|
20,000
|
(7)
|
--
|
|
--
|
|
--
|
|
--
|
|
(1)
|
Prior
to 2007, our Compensation Committee approved the stock option award
potential for each of our named executive officers at the beginning of the
year, which stock options would be granted if certain objective annual
and/or quarterly performance targets were met. The 2006 fourth
quarter and annual
|
|
|
performance
targets were determined to have been met, and stock options were granted
to our named executive officers, in February 2007. As described
in the
“Compensation
Discussion and Analysis”
, for 2007, our Compensation Committee
granted stock options to our named executive officers in February 2007,
subject to cancellation if the specified performance targets for 2007 were
not achieved. As a result, the approval date and the grant date
for the option grants related to 2007 performance were the
same.
|
|
(2)
|
The
exercise price of our stock option awards is the closing price of our
common stock as reported on The NASDAQ Global Market on the business day
immediately preceding the date of grant, in accordance with the provisions
of our 2006 Plan. Due to the terms of our 2006 Plan, it is possible that
the exercise price could be less than the closing price of our common
stock on the date of grant. For 2007, no instances of this
nature occurred.
|
|
(3)
|
Amounts
in this column represent the aggregate grant date fair market value of
each option award in accordance with SFAS 123R. For the valuation
assumptions used to determine the amounts, refer to Note 6 of Notes to
Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31,
2007.
|
|
(4)
|
Amounts
represent the annual stock option granted to our named executive officers
under our 2006 Plan during the first quarter of 2007 with respect to
exceeding the 2006 annual operating income
target.
|
|
(5)
|
Amounts
represent the options granted to our named executive officers on February
15, 2007, which options were subject to cancellation if (a) our 2007
annual operating income target was not met (in the case of Dr. Brown,
Messrs. Head and Staples and Ms. Hynes) or (b) certain sales quotas
targets were not met (in the case of Mr. Blough). The 2007 annual
operating income target was achieved, thus the 2007 options awarded to Dr.
Brown, Messrs. Head and Staples and Ms. Hynes were not cancelled. Mr.
Blough’s first quarter and annual maximum sales quotas were not
met. As a result, the options to purchase 17,000 of the 35,000
shares were cancelled.
|
|
(6)
|
Amounts
represent the aggregate company performance award potential for Dr. Brown
and Messrs. Head and Staples and Ms. Hynes. The quarterly and annual
performance targets for 2007 were met, except for the fourth
quarter. As a result, each named executive officer earned the
following amount related to his or her respective company performance
award for 2007: Dr. Brown: $160,000; Mr. Head: $30,000; Mr. Staples:
$30,000; and Ms. Hynes: $18,000.
|
|
(7)
|
Amounts
represent the estimate of the superior achievement award potential Dr.
Brown and Messrs. Head, Blough and Staples and Ms. Hynes were eligible to
receive in 2007 calculated by taking the 2007 annual budgeted operating
income (excluding stock option expense related to SFAS 123R), less the
2007 annual operating income target, and multiplying the difference by
2.5%, 1.0%, 1.0%, 1.0% and 0.75%, respectively. The 2007 annual operating
income target was exceeded, and therefore, Dr. Brown and Messrs. Head,
Blough and Staples and Ms. Hynes earned their respective percentage of the
excess amount as follows: Dr. Brown: 2.5% or $14,486; Messrs. Head, Blough
and Staples: 1.0% or $5,794, respectively; and Ms. Hynes: 0.75% or
$4,346.
|
|
(8)
|
Amount
represents Mr. Head’s aggregate expense control performance award
potential. The quarterly and annual performance targets for
2007 were met except for the fourth quarter. As a result, Mr.
Head earned $35,000 related to this
award.
|
|
(9)
|
Amount
consists of two option awards granted to Mr. Blough during the first
quarter of 2007: (a) the 2006 fourth quarter option award to purchase
2,500 shares of our common stock and (b) the annual 2006 option award to
purchase 20,000 shares of our common stock. Mr. Blough was entitled to
receive both of these option awards for achieving his 2006 fourth quarter
sales quotas and exceeding his 2006 annual sales
quota.
|
|
(10)
|
Due
to his impending resignation, which became effective on March 6, 2007, our
Compensation Committee decided not to grant Mr. Fleming any option awards
under his 2007 compensation program. Mr. Fleming did not earn any options
under his 2006 compensation program that would have been granted to him in
2007.
|
|
(11)
|
Amount
represents Ms. Hynes’ aggregate services revenue award
potential. The quarterly performance targets for 2007 were met,
except for the first and second quarters. As a result, Ms.
Hynes earned $12,000 related to this
award.
|
|
(12)
|
Amount
represents Mr. Staples’ aggregate individual performance award
potential. The quarterly performance targets for 2007 were met,
except for the fourth quarter. As a result, Mr. Staples earned
$30,000 related to this
award.
|
For
additional information regarding the cash and equity incentive awards reflected
in the Grants of Plan-Based Awards table, see
“Compensation Discussion and
Analysis – Performance-Based Cash Incentive Compensation”
and
“ – Long-Term Stock-Based Incentive
Compensation”
.
NARRATIVE DISCUSSION – OUR STOCK OPTION
PLANS
1995,
1999 and 2006 Plans
Our stock
option plans, adopted in 1995, 1999 and 2006, authorize our Board or our
Compensation Committee, as applicable, to grant incentive and/or nonqualified
stock options, and, in the case of our 2006 Plan, stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units
and other stock-based awards. Our 2006 Plan was adopted at our 2006 Annual
Meeting held in May 2006. After adoption of our 2006 Plan, we no longer issue
grants under any of the previous plans, but any shares subject to awards under
our 1999 Stock Option and Incentive Plan (the “1999 Plan”) and our Directors
Plan (collectively, the “1999 Option Plans”) that were cancelled will
be added to shares available under our 2006 Plan. The number of shares available
under our 2006 Plan is subject to adjustment for certain changes in our capital
structure. The exercise price of stock options granted under our 2006 Plan must
not be less than the fair market value of our common stock at the date of grant,
which is defined in our 2006 Plan as the closing market price of our common
stock, as reported by The NASDAQ Global Market, on the business day immediately
preceding the date of grant. Options granted under our 2006 Plan generally vest
in equal annual installments over four years from the first anniversary of the
grant date and have a life of six years, although vesting and option term is at
the discretion of our Compensation Committee, as further limited by our 2006
Plan provisions.
For most
options granted prior to 2005, the term of each option was ten years from the
date of grant. In 2005, we began issuing options with a term of six years from
the date of grant.
If an
incentive stock option is granted to an employee who, at the time the option is
granted, owns stock representing more than 10% of the voting power of all
classes of our stock, the exercise price of the option may not be less than 110%
of the market value per share on the date the option is granted and the term of
the option shall be not more than five years from the date of
grant.
The plans
may be terminated by our Board at any time.
2000
Employee Stock Purchase Plan
At our
2000 Annual Meeting, our shareholders approved our 2000 Employee Stock Purchase
Plan (our “2000 Purchase Plan”). A total of 500,000 shares of common stock were
reserved for issuance under our 2000 Purchase Plan. At our 2005 Annual Meeting,
our shareholders approved an amendment to our 2000 Purchase Plan, which
increased the number of shares of our common stock available for issuance
and purchase from 500,000 to 750,000. Our 2000 Purchase Plan permits eligible
employees to acquire shares of our common stock
through
periodic payroll deductions of up to 20% of their total compensation up to a
maximum of $1,000 per pay period. Prior to December 31, 2005, the price at which
our common stock could be issued and purchased under our 2000 Purchase Plan
was 85% of the lesser of the fair market value of our common stock on the
first or last business day of the immediately preceding calendar quarter. As of
January 1, 2006, our 2000 Purchase Plan was amended such that the price at which
our common stock may be issued and purchased is 95% of the fair market
value of our common stock on the purchase date of the stock, which is
generally the first business day of the next calendar quarter. An eligible
participant may set aside no more than $25,000 to purchase shares annually. In
addition, participants who are executive officers may not purchase, in the
aggregate, more than 50% of our common stock purchased under our 2000
Purchase Plan during a calendar year. The initial offering period commenced
on April 1, 2000. A total of 12,027 shares of our common stock were issued and
purchased during 2007 at an average price of $19.32. As of December
31, 2007, 222,178 shares were available for issuance under our 2000 Purchase
Plan.
Our 2000
Purchase Plan was modified as of January 1, 2006 to ensure that it is considered
non-compensatory under SFAS 123R. We have not recognized any stock-based
compensation expense related to this plan.
OUTSTANDING EQUITY AWARDS AT FISCAL
YEAR-
END
|
|
|
|
|
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards:
Number
of Securities Underlying Unexercised Unearned Options
(#)
|
|
|
|
Option
Exercise
Price
($)
|
|
|
|
Donald
E. Brown, M.D.
|
|
67,500
|
|
--
|
|
--
|
|
--
|
|
3.00
|
|
9/22/2008
|
|
|
|
5,000
|
|
--
|
|
--
|
|
--
|
|
14.38
|
|
4/2/2011
|
|
|
|
5,000
|
|
--
|
|
--
|
|
--
|
|
8.70
|
|
7/26/2011
|
|
|
|
90,000
|
|
--
|
|
--
|
|
--
|
|
5.99
|
|
12/26/2011
|
|
|
|
12,053
|
|
--
|
|
--
|
|
--
|
|
5.80
|
|
2/11/2014
|
|
|
|
12,500
|
|
--
|
|
--
|
|
--
|
|
3.09
|
|
6/10/2012
|
|
|
|
21,250
|
|
--
|
|
--
|
|
--
|
|
2.51
|
|
7/1/2012
|
|
|
|
21,250
|
|
--
|
|
--
|
|
--
|
|
3.17
|
|
11/12/2012
|
|
|
|
21,250
|
|
--
|
|
--
|
|
--
|
|
3.00
|
|
2/20/2013
|
|
|
|
22,420
|
|
--
|
|
--
|
|
--
|
|
2.90
|
|
8/13/2013
|
|
|
|
26,977
|
|
--
|
|
--
|
|
--
|
|
4.24
|
|
11/19/2013
|
|
|
|
15,000
|
|
--
|
|
--
|
|
--
|
|
3.35
|
|
4/23/2013
|
|
|
|
75,000
|
|
25,000
|
(3)
|
--
|
|
2/13/2004
|
|
5.61
|
|
2/13/2014
|
|
|
|
11,250
|
|
3,750
|
(3)
|
--
|
|
5/19/2004
|
|
5.72
|
|
5/19/2014
|
|
|
|
11,250
|
|
3,750
|
(3)
|
--
|
|
8/18/2004
|
|
3.56
|
|
8/18/2014
|
|
|
|
11,250
|
|
3,750
|
(3)
|
--
|
|
12/14/2004
|
|
4.31
|
|
12/14/2014
|
|
|
|
7,500
|
|
7,500
|
(3)
|
--
|
|
2/17/2005
|
|
4.20
|
|
2/17/2011
|
|
|
|
12,000
|
|
36,000
|
(3)
|
--
|
|
1/27/2006
|
|
5.17
|
|
1/27/2012
|
|
|
|
11,250
|
|
3,750
|
(3)
|
--
|
|
2/11/2004
|
|
5.80
|
|
2/11/2014
|
|
|
|
--
|
|
45,000
|
(2),
(3)
|
--
|
|
2/9/2007
|
|
20.50
|
|
2/9/2013
|
|
|
|
--
|
|
--
|
|
50,000
|
(4)
|
2/15/2007
|
|
17.28
|
|
1/1/2014
|
|
|
|
Option
Awards (1)
|
|
Named
Executive Officer
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
Grant
Date
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Stephen
R. Head
|
|
2,411
|
|
--
|
|
--
|
|
--
|
|
5.80
|
|
2/11/2014
|
|
|
|
60,000
|
|
--
|
|
--
|
|
--
|
|
3.30
|
|
11/3/2013
|
|
|
|
18,750
|
|
6,250
|
(3)
|
--
|
|
2/13/2004
|
|
5.61
|
|
2/13/2014
|
|
|
|
4,688
|
|
1,562
|
(3)
|
--
|
|
5/19/2004
|
|
5.72
|
|
5/19/2014
|
|
|
|
3,750
|
|
1,250
|
(3)
|
--
|
|
8/18/2004
|
|
3.56
|
|
8/18/2014
|
|
|
|
4,688
|
|
1,562
|
(3)
|
--
|
|
11/16/2004
|
|
4.61
|
|
11/16/2014
|
|
|
|
3,126
|
|
3,124
|
(3)
|
--
|
|
2/17/2005
|
|
4.20
|
|
2/17/2011
|
|
|
|
5,000
|
|
15,000
|
(3)
|
--
|
|
1/27/2006
|
|
5.17
|
|
1/27/2012
|
|
|
|
--
|
|
25,000
|
(2),
(3)
|
--
|
|
2/9/2007
|
|
20.50
|
|
2/9/2013
|
|
|
|
--
|
|
--
|
|
25,000
|
(4)
|
2/15/2007
|
|
17.28
|
|
1/1/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
7,500
|
|
--
|
|
--
|
|
--
|
|
3.00
|
|
8/31/2008
|
|
|
|
25,000
|
|
--
|
|
--
|
|
--
|
|
5.99
|
|
12/26/2011
|
|
|
|
4,000
|
|
--
|
|
--
|
|
--
|
|
3.09
|
|
6/10/2012
|
|
|
|
30,211
|
|
--
|
|
--
|
|
--
|
|
5.84
|
|
7/2/2014
|
|
|
|
5,000
|
|
--
|
|
--
|
|
--
|
|
3.15
|
|
4/3/2013
|
|
|
|
55,619
|
|
22,250
|
(5)
|
--
|
|
7/2/2004
|
|
5.84
|
|
7/2/2014
|
|
|
|
6,350
|
|
6,350
|
(3)
|
--
|
|
2/17/2005
|
|
4.20
|
|
2/17/2011
|
|
|
|
1,250
|
|
1,250
|
(3)
|
--
|
|
5/19/2005
|
|
4.84
|
|
5/19/2011
|
|
|
|
1,250
|
|
1,250
|
(3)
|
--
|
|
8/17/2005
|
|
5.48
|
|
8/17/2011
|
|
|
|
1,250
|
|
1,250
|
(3)
|
--
|
|
11/15/2005
|
|
5.19
|
|
11/15/2011
|
|
|
|
6,875
|
|
20,625
|
(3)
|
--
|
|
1/27/2006
|
|
5.17
|
|
1/27/2012
|
|
|
|
625
|
|
1,875
|
(3)
|
--
|
|
4/21/2006
|
|
9.52
|
|
4/21/2012
|
|
|
|
625
|
|
1,875
|
(3)
|
--
|
|
7/21/2006
|
|
12.77
|
|
7/21/2012
|
|
|
|
625
|
|
1,875
|
(3)
|
--
|
|
10/20/2006
|
|
17.21
|
|
10/20/2012
|
|
|
|
--
|
|
22,500
|
(2),
(3)
|
--
|
|
2/9/2007
|
|
20.50
|
|
2/9/2013
|
|
|
|
--
|
|
--
|
|
35,000
|
(4)
|
2/15/2007
|
|
17.28
|
|
1/1/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming (6)
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
--
|
|
Pamela
J. Hynes
|
|
7,000
|
|
--
|
|
--
|
|
--
|
|
5.99
|
|
12/26/2011
|
|
|
|
2,000
|
|
--
|
|
--
|
|
--
|
|
22.25
|
|
1/2/2011
|
|
|
|
2,568
|
|
--
|
|
--
|
|
--
|
|
5.20
|
|
1/2/2014
|
|
|
|
3,750
|
|
11,250
|
(3)
|
--
|
|
1/27/2006
|
|
5.17
|
|
1/27/2012
|
|
|
|
4,500
|
|
1,500
|
(3)
|
--
|
|
1/2/2004
|
|
5.20
|
|
1/2/2014
|
|
|
|
--
|
|
5,000
|
(3)
|
--
|
|
2/17/2005
|
|
4.20
|
|
2/17/2011
|
|
|
|
--
|
|
15,000
|
(2),
(3)
|
--
|
|
2/9/2007
|
|
20.50
|
|
2/9/2013
|
|
|
|
--
|
|
--
|
|
17,500
|
(4)
|
2/15/2007
|
|
17.28
|
|
1/1/2014
|
|
|
|
|
|
|
|
Option
Awards (1)
|
|
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards:
Number
of Securities Underlying Unexercised Unearned Options
(#)
|
|
|
|
Option
Exercise
Price
($)
|
|
|
|
Joseph
A. Staples
|
|
7,500
|
|
37,500
|
(3)
|
--
|
|
1/3/2005
|
|
4.36
|
|
1/3/2011
|
|
|
|
6,250
|
|
18,750
|
(3)
|
--
|
|
1/27/2006
|
|
5.17
|
|
1/27/2012
|
|
|
|
--
|
|
25,000
|
(2),
(3)
|
--
|
|
2/9/2007
|
|
20.50
|
|
2/9/2013
|
|
|
|
--
|
|
--
|
|
25,000
|
(4)
|
2/15/2007
|
|
17.28
|
|
1/1/2014
|
|
(1)
|
Includes
stock options to purchase shares of our common stock, granted at the
closing price of our common stock, as reported on The NASDAQ Global
Market, on (a) the date of grant for stock options granted prior to the
adoption and approval of our 2006 Plan on May 18, 2006 or (b) the business
day immediately preceding the date of grant for stock options granted
under our 2006 Plan.
|
|
(2)
|
Represents
option awards issued under our 2006 Plan for fourth quarter and/or annual
performance targets for 2006. Certain performance targets for
2006 were met and options to purchase the number of shares indicated in
the table were awarded during the first quarter of 2007. See
the Grants of Plan-Based Awards table on page 29 for further
details.
|
|
(3)
|
Options
become exercisable in four equal annual installments each year beginning
on the first anniversary of the grant
date.
|
|
(4)
|
Represents
the stock options granted to our named executive officers on February 15,
2007, which options were subject to cancellation if the specified
performance targets for 2007 were not achieved. See
“Compensation Discussion and
Analysis –Long-Term Stock-Based Incentive Compensation”
beginning
on page 23 for further details. The specified performance targets for Dr.
Brown, Messrs. Head and Staples and Ms. Hynes for 2007 were met, and as a
result none of their options were cancelled. Mr. Blough's first quarter
and annual maximum sales quotas were not met, and as a result, the options
to purchase 17,000 of the 35,000 shares were cancelled, as previously
discussed in footnote 5 to the Grants of Plan-Based Awards table on page
29.
|
|
(5)
|
In
2003, we offered an option exchange program to our employees
whereby they were given the opportunity to cancel certain outstanding
options previously granted to them in exchange for new options to be
granted to them at least six months and one day from the cancellation
date. Mr. Blough participated in this option exchange program and as
a result, these unexercisable options vest on July 2,
2008.
|
|
(6)
|
At
the time of Mr. Fleming’s resignation on March 6, 2007, Mr. Fleming owned
47,247 shares of our common stock underlying stock options, representing
unvested options. These options were cancelled one month following
Mr. Fleming’s
resignation.
|
|
|
|
|
|
|
|
|
Number
of Shares
Acquired
on Exercise
(#)
|
|
Value
Realized on
Exercise
(1)
($)
|
|
Donald
E. Brown, M.D.
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
10,000
|
|
196,396
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
52,500
|
|
844,892
|
|
|
|
|
|
|
|
Jeremiah
J. Fleming
|
|
40,750
|
|
628,453
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
21,091
|
|
511,405
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
25,000
|
|
534,462
|
|
(1)
|
The
amounts in this column represent the pre-tax dollar value realized on
exercise, calculated on the basis of the difference between the option
exercise price and the market price of our common stock, as reported on
The NASDAQ Global Market on the date of exercise, multiplied by the number
of shares of our common stock underlying the stock option. These amounts
do not represent the grant date fair value or recognized stock-based
compensation expense disclosed elsewhere in this proxy
statement.
|
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
Securities
authorized for issuance under our equity compensation plans as of December 31,
2007 are as follows:
|
Plan
Category
|
|
A
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
B
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
|
C
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in Column
A)
|
|
|
Equity
compensation plans approved by security holders
(1)
|
|
|
3,164,983
|
|
|
$
|
8.83
|
|
|
|
993,587
|
(2)
|
|
Equity
compensation plans not approved by security holders (3)
|
|
|
67,500
|
|
|
|
3.00
|
|
|
|
--
|
|
|
Total
|
|
|
3,232,483
|
(4)
|
|
|
8.71
|
|
|
|
993,587
|
(2)
|
|
(1)
|
Amount
includes our 1995 Incentive Stock Option Plan, 1995 Nonstatutory Plan,
1999 Option Plans, 2000 Purchase Plan and 2006
Plan.
|
|
(2)
|
Amount
consists of 771,409 shares available for issuance under our 2006 Plan and
222,178 shares available for issuance and purchase under our 2000 Purchase
Plan.
|
|
(3)
|
Represents
an option granted to Dr. Brown on September 22, 1998 to purchase 67,500
shares of our common stock. Our Board granted this option in consideration
for guarantees by Dr. Brown on some of our commercial lines of credit and
equipment leases at that time. The exercise price for this option is
$3.00, the deemed fair market value of our common stock on the date of
grant, based upon a determination by our Board. The option was immediately
exercisable in full as of the date of grant and can be exercised any time
within 10 years from the date of
grant.
|
|
(4)
|
The
weighted average remaining life of these options was 4.6
years.
|
EMPLOYMENT AGREEMENTS AND POST-TERMINATION AND
CHANGE-OF-CONTROL ARRANGEMENTS
Employment Agreements
On
November 4, 1996, March 1, 1997, November 3, 2003, January 3, 2005 and May
26, 2006, we entered into Employment Agreements with Ms. Hynes and Messrs.
Fleming, Head, Staples and Blough, respectively. Ms. Hynes’ Employment Agreement
was amended on February 23, 2000. Mr. Fleming’s Employment Agreement
was amended on May 14, 1999 and February 23, 2000 and superseded on March
7, 2007 by his Separation and Release Agreement. See
“Severance to Mr. Fleming”
below for further information regarding Mr. Fleming’s Separation and Release
Agreement. As a result, the following discussions will exclude the provisions of
Mr. Fleming’s Employment Agreement.
Each
Employment Agreement contains non-competition, non-solicitation and
non-disclosure provisions, which are in effect during the term of the agreement
and for a defined period after the agreement is terminated. The non-disclosure
provisions continue indefinitely after termination of employment. The
non-competition and non-solicitation provisions continue for a period of
12 months after termination in the case of Mr. Staples, 18 months in the
case of Mr. Head and Ms. Hynes and either 12 or 18 months in the case of Mr.
Blough. If any of the aforementioned executives are terminated for cause or in
the event they resign, they will receive their respective base salary and any
other benefits which have been accrued and to which the executive is entitled,
but will not receive any severance compensation. If any of the aforementioned
executives, other than Mr. Blough, are terminated by us for any reason other
than for cause, in addition to receiving all accrued salary and benefits to
which the executives are entitled, they will also receive the following
severance payments: one month of base salary in the case of Mr. Head and Ms.
Hynes; and three months of base salary in the case of Mr. Staples. If
Messrs. Head and Staples and Ms. Hynes were terminated for any reason other than
for cause as of December 31, 2007 (assuming no Change-of-Control under the
Retention Agreements as discussed below), they would have been entitled to
severance payments as follows: Mr. Head: $17,917; Mr. Staples: $53,750 and Ms.
Hynes: $14,583. Mr. Blough’s Employment Agreement does not provide for any
severance payments.
Change-of-Control and Retention
Agreements
We
entered into Change-of-Control and Retention Agreements (each, a “Retention
Agreement”) on March 13, 2006 with Messrs. Head and Staples and Ms. Hynes and on
May 26, 2006 with Mr. Blough. Under the terms of each Retention Agreement, in
the event of a “Change-of-Control” (as defined below), if employment is
terminated for any reason other than for “Cause” (as defined below) or the
executive officer resigns for “Good Reason” (as defined below), in each case
during the period commencing on the date we publicly announce a definitive
agreement that results in a Change-of-Control and ending on the date which is 18
months after the Change-of-Control, each of Messrs. Head, Staples and Blough and
Ms. Hynes will be entitled (a) to receive a lump sum payment of all salary and
accrued vacation earned through the date of termination, (b) to receive a
lump sum payment for any cash incentive amounts attributable to any completed
period for which a cash incentive was earned but unpaid on the date of
termination and attributable to any uncompleted period for which a potential
cash incentive award exists and was earned based on the level of performance
achieved as of the date of termination, (c) to receive a lump sum cash severance
payment equal to the lesser of his/her annual base salary or the prorated amount
of salary he/she would have received had he/she remained an employee through the
first anniversary date of the Change-of-Control, (d) to have accelerated the
vesting of his/her
unvested
options to purchase our common stock and any other then unvested or restricted
equity grants, in each case that would have become vested based solely on the
passage of time (which excludes grants, the vesting of which is contingent upon
specified performance criteria having been met) during the two year period
following the date of termination of employment, (e) to receive a lump sum cash
stipend equal to 12 times the monthly premiums pursuant to the continuation
coverage requirements of the Consolidated Budget Reconciliation Act of 1985, as
amended (“COBRA”) (whether or not he/she actually elects COBRA continuation
coverage), and (f) to receive coverage under our directors’ and officers’
insurance policy for 24 months following the termination of employment. The
Retention Agreements also provide that if any amounts payable to Messrs. Head,
Staples or Blough or Ms. Hynes under the Retention Agreement or otherwise would
be subject to the excise tax or denial of deduction imposed by Sections 280G and
4999 of the Code, then the amounts payable will be reduced in order to avoid any
such excess parachute payment. The Retention Agreement provides that
in the event the executive receives payments thereunder, he/she shall not be
entitled to any other severance, benefits or other payments from us, including
under his/her Employment Agreement or under our stock option
plans.
The
Retention Agreements provide for a 12-month non-solicitation period following
the executive's termination upon a Change-of-Control. In addition, in
order to receive the severance benefits provided for by the Retention
Agreements, the executive must provide us with a general release of any claims
he/she may have against us, except with respect to any claims the executive may
have to be indemnified by us.
“Change-of-Control”
is generally defined in the Retention Agreements as follows: (a) the acquisition
by any “person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) of the “beneficial ownership” (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of our securities
representing fifty (50%) percent or more of (i) the then outstanding shares of
our common stock, or (ii) the combined voting power of our then outstanding
voting securities; provided, however, that acquisitions from or by us or one of
our employee benefit plans, and acquisitions by Dr. Brown or a person controlled
by him or upon his death, shall not constitute a Change-of-Control; (b) we are a
party to a merger or consolidation which results in our voting securities
outstanding immediately prior thereto failing to continue to represent at least
fifty (50%) percent of the combined voting power of our voting securities or the
surviving entity outstanding immediately after such merger or consolidation; (c)
the sale or disposition of all or substantially all of our assets; (d) a change
in the composition of our Board within any consecutive two-year period, as a
result of which fewer than a majority of the directors are Incumbent Directors
(meaning directors who either (i) were our directors as of the effective date of
the Retention Agreement, or (ii) are elected, or nominated for election, to the
Board with the affirmative votes of a least a majority of those directors whose
election or nomination was not in connection with an actual or threatened proxy
contest related to the election of our directors); or (e) our dissolution or
liquidation.
“Cause”
means a good faith determination, on a reasonable basis, by not less than two
thirds of the members of the Board that the executive:
|
·
|
willfully
failed to follow the lawful written directions of the Board provided to
the executive prior to such failure; provided that no termination for such
Cause shall occur unless the executive: (i) has been provided with notice,
specifying such willful failure in reasonable detail, of our intention to
terminate the executive for Cause; and (ii) has failed to cure or correct
such willful failure within thirty (30) days of receiving such
notice;
|
|
·
|
engaged
in gross misconduct which is materially detrimental to us; provided that
no termination for such Cause shall occur unless the executive: (i) has
been provided with notice, specifying such gross misconduct in reasonable
detail, of our intention to terminate the executive for Cause; and (ii)
has failed to cure or correct such gross misconduct within thirty (30)
days of receiving such notice;
|
|
·
|
willfully
failed to comply in any material respect with our Confidentiality and/or
Proprietary Rights Agreement, insider trading policy, or any of our other
reasonable policies, in each case provided, or reasonably made available,
to the executive prior to such failure, where
non-
|
|
|
compliance
would be materially detrimental to us; provided that no termination for
such Cause shall occur unless the executive: (i) has been provided with
notice, specifying such willful failure in reasonable detail, of our
intention to terminate the executive for such Cause; and (ii) has failed
to cure or correct such willful failure within thirty (30) days of
receiving such notice; or
|
|
·
|
has
been convicted of a felony (other than a felony arising from a violation
of a motor vehicle law) or a crime involving moral turpitude, or it has
been determined by a court that he or she committed a fraud, against us or
a fraud against any other person or entity that is materially detrimental
to us.
|
“Good
Reason” generally means the occurrence of any of the following conditions,
without the executive officer’s written consent:
|
·
|
assignment
to the executive officer of a title, position, responsibilities or duties
that is not a substantive functional equivalent to the title, position,
responsibilities or duties which the executive officer had immediately
prior to the Change-of-Control;
|
|
·
|
a
reduction in the executive officer’s base salary or target cash incentive
opportunity in effect immediately prior to the Change-of-Control (subject
to applicable performance requirements with respect to the actual amount
of cash incentive compensation earned that are similar to the applicable
performance requirements in effect immediately prior to the
Change-of-Control);
|
|
·
|
our
failure (i) to continue to provide the executive officer an opportunity to
participate in any benefit or compensation plans provided to employees who
held positions with us or our successor comparable to the executive
officer’s position immediately prior to the Change-of-Control, or (ii) to
provide the executive officer all other fringe benefits (or the
equivalent) in effect for the benefit of any employee group which includes
any employee who held a position with us or our successor comparable to
the executive officer’s position immediately prior to the
Change-of-Control;
|
|
·
|
requirements
by us of the executive officer to (i) relocate to any office or location
more than 50 miles (one-way) from our office where the executive officer
was based immediately prior to the Change-of-Control, or (ii) to engage in
travel in the performance of services on our behalf at a frequency or for
a duration substantially in excess of such travel required by us prior to
the Change-of-Control;
|
|
·
|
a
material breach of the Retention Agreement by us, including our failure to
obtain the agreement of a successor to perform all of our obligations
under the Retention Agreement; or
|
|
·
|
any
act, set of facts or omissions with respect to the executive officer that
would, under applicable law, constitute a constructive termination of the
executive officer.
|
Notwithstanding
the foregoing, nothing described in any of previous items shall constitute Good
Reason unless the executive officer provides us written notice, in reasonable
detail, of his/her belief that an action or inaction constituting such Good
Reason has occurred and we fail to cure or correct such action or inaction,
within thirty (30) days of our receipt of such written notice, such that the
asserted Good Reason no longer exists.
If
Messrs. Head, Blough and Staples and Ms. Hynes were terminated upon a
Change-of-Control under the Retention Agreement as of December 31, 2007, in
addition to accrued vacation, each would be entitled to severance payments
indicated in the following table:
|
TERMINATION
UPON CHANGE-OF-CONTROL UNDER THE RETENTION AGREEMENT
|
|
Name
|
|
Salary
($)
|
|
Non-Equity
Incentive Plan Compensation (1)
($)
|
|
Health
Benefits Coverage (COBRA)
($)
|
|
Value
Realized on
Stock
Options (2)
($)
|
|
Total
Severance Upon
Change-of-Control
($)
|
|
Stephen
R. Head
|
|
215,000
|
|
25,794
|
|
11,925
|
|
635,104
|
|
887,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
200,000
|
|
5,794
|
|
9,927
|
|
1,177,111
|
|
1,392,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
175,000
|
|
10,346
|
|
14,159
|
|
384,881
|
|
584,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
215,000
|
|
5,794
|
|
14,159
|
|
1,219,188
|
|
1,454,141
|
|
(1)
|
Represents
the aggregate dollar value of performance-based cash incentives that would
have been earned for the fourth quarter and annual performance targets for
2007.
|
|
(2)
|
Represents
the intrinsic value as of December 31, 2007 of the executive’s “in the
money” unvested stock options, the vesting of which would accelerate as a
result of the executive’s termination of employment on December 31, 2007
due to a Change-of-Control (as defined in the Retention Agreement).
The value is calculated on the basis of the difference between the
exercise price and $26.35, the closing price of our common stock as
reported on The NASDAQ Global Market on December 31, 2007, multiplied by
the number of shares of common stock underlying such options. In February
2007, our named executive officers (excluding Mr. Fleming) were
granted stock options to purchase an aggregate of 102,500 shares of our
common stock that were subject to cancellation if certain performance
targets for 2007 were not met. For purposes of this table, these
stock options were considered “in the
money”.
|
Stock Option Plans
Unless
otherwise specifically provided by our Compensation Committee, the 1999
Plan and the 2006 Plan provide for the following treatment of outstanding
options in the event of a termination of employment:
1999
Plan
|
·
|
Termination
for Cause.
Upon the executive’s termination of employment or
service for cause (as defined in the plan), all rights under any options
granted to the executive will terminate immediately, and the executive
will, if the Compensation Committee, in its sole discretion determines, be
obligated to repay to the company within ten (10) days of the
Compensation Committee’s demand the amount of any gain realized by the
executive upon any exercise within the 90-day period prior to the
termination of employment of any options granted to such executive under
the plan.
|
|
·
|
Termination
Due to Retirement or Without Cause or Voluntary
Termination.
If the executive is terminated by reason of
retirement, terminated by the company without cause, or by voluntary
termination, the executive may exercise outstanding options, under the
plan, to the extent that the executive was entitled to exercise the
options at the date of termination, but only within the period of one
(1) month immediately succeeding the executive’s termination, and in
no event after the applicable expiration dates of the options. Any option
that is not exercisable on the date of termination shall terminate and be
forfeited effective on such date.
|
|
·
|
Termination Due to
Death or Disability.
In the event of the executive’s death or
disability, the executive or the executive’s beneficiary, as the case may
be, may exercise outstanding options to the extent that the executive was
entitled to exercise the options at the date of termination, but only
within the one (1)-year period immediately succeeding the executive’s
death or disability, and in no event after the applicable expiration date
of the options. Any option that is not exercisable on the date of
termination shall terminate and be forfeited effective on such
date.
|
|
·
|
Termination
Upon Change-of-Control
.
Upon a
change-of-control (defined in the plan as (i) any third person becoming
the beneficial owner of shares of our common stock with respect to which
25% or more of the total number of votes for the election of our Board may
be cast; (ii) the persons who were our directors ceasing to constitute a
majority of our Board as a result of any cash tender offer, exchange
offer, merger or other business combination, sale of assets or contested
election, or combination of the foregoing; or (iii) our shareholders
approving an agreement providing for a transaction in which we will cease
to be an independent publicly owned entity or for a sale or other
disposition of all or substantially all of our assets), unless the
Compensation Committee shall have otherwise provided in the option
agreement, all outstanding options not fully exercisable
shall become exercisable in full and shall remain so
exercisable in accordance with their terms; provided, however, that no
option which has previously been exercised or otherwise terminated shall
become exercisable.
|
2006
Plan
|
·
|
Termination
for Cause.
Upon the executive’s termination of employment or
service for cause (as defined in the plan), all rights under any options
granted to the executive will terminate immediately, and the executive
will, if the Compensation Committee, in its sole discretion determines, be
obligated to repay to the company within ten (10) days of the
Compensation Committee’s demand the amount of any gain realized by the
executive upon any exercise within the 90-day period prior to the
termination of employment of any options granted to such executive under
the plan.
|
|
·
|
Termination
Due to Retirement or Without Cause or Voluntary
Termination.
If the executive is terminated by reason of
retirement, terminated by the company without cause, or by voluntary
termination, the executive may exercise outstanding options, under the
plan, to the extent that the executive was entitled to exercise the
options at the date of termination, but only within the period of one
(1) month immediately succeeding the executive’s termination, and in
no event after the applicable expiration dates of the
options.
|
|
·
|
Termination
Due to Death or Disability.
In the event of the
executive’s death or disability, the executive or the executive’s
beneficiary, as the case may be, may exercise outstanding options to the
extent that the executive was entitled to exercise the options at the date
of termination, but only within the one (1)-year period immediately
succeeding the executive’s death or disability, and in no event after the
applicable expiration date of the
options.
|
|
·
|
Termination
Upon Change-of-Control.
Except as
otherwise provided in an executive’s award agreement, if an executive’s
employment or service is involuntarily terminated, for any reason, at any
time within 12 months after a change-of-control (which is defined
substantially similar to the definition of Change-of-Control under the
Retention Agreements but does not include a carve out for acquisitions by
Dr. Brown, a person under his control or upon his death), unless otherwise
specifically prohibited by law:
|
|
§
|
any
and all outstanding options with time-based vesting provisions will vest
on a pro rata monthly basis, including full credit for partial months
elapsed; and
|
|
§
|
any
and all outstanding options with performance-based vesting provisions will
vest on a pro rata monthly basis, including full credit for partial months
elapsed, and will
|
|
|
be
paid (A) based on the level of performance achieved as of the date of the
termination, if determinable, or (B) at the target level, if not
determinable. The amount of the vested award may be computed under the
following formula: total award number of shares times (number of full
months elapsed in shortest possible vesting period divided by number of
full months in shortest possible vesting period) times percent performance
level achieved immediately prior to the effective date of the
termination.
|
As stated
above, there may be circumstances that constitute a “change-of-control” under
the 1999 Plan and the 2006 Plan, but not under the Retention Agreements. If Dr.
Brown and Messrs. Head, Blough and Staples and Ms. Hynes had been terminated
upon a change-of-control that does not constitute a Change-of-Control under the
Retention Agreements on December 31, 2007, the value realized with respect to
the options granted under the plans would be as
follows
:
TERMINATION
UPON CHANGE-OF-CONTROL
|
|
|
|
Value
Realized on Options
Under
the 1999 Plan (1)
($)
|
|
|
Value
Realized on Options
Under
the 2006 Plan (1)
($)
|
|
|
|
Donald
E. Brown, M.D.
|
|
1,769,643
|
|
|
125,684
|
|
1,895,327
|
|
|
|
|
|
|
|
|
|
|
Stephen
R. Head
|
|
611,191
|
|
|
69,824
|
|
681,015
|
|
|
|
|
|
|
|
|
|
|
Gary
R. Blough
|
|
1,144,797
|
|
|
84,370
|
|
1,229,167
|
|
|
|
|
|
|
|
|
|
|
Pamela
J. Hynes
|
|
380,750
|
|
|
41,895
|
|
422,645
|
|
|
|
|
|
|
|
|
|
|
Joseph
A. Staples
|
|
1,221,750
|
|
|
69,824
|
|
1,291,574
|
|
(1)
|
Amounts
represent the intrinsic value as of December 31, 2007 of the executive’s
“in the money” unvested stock options, the vesting of which would
accelerate as a result of the executive’s termination of employment on
December 31, 2007 due to a change-of-control (as defined in the applicable
stock option plan). The value is calculated on the basis of the
difference between the exercise price and $26.35, the closing price of our
common stock as reported on The NASDAQ Global Market on December 31, 2007,
multiplied by the number of shares of common stock underlying such
options. In February 2007, our named executive officers (excluding Mr.
Fleming) were granted stock options to purchase an aggregate of
102,500 shares of our common stock that were subject to cancellation if
certain performance targets for 2007 were not met. For purposes
of this table, these stock options were considered “in the
money”.
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On March
5, 2007, Mr. Fleming notified us that he was terminating his employment. On
March 7, 2007, we entered into a Separation and Release Agreement (the
“Separation Agreement”) with Mr. Fleming, whereby Mr. Fleming voluntarily
resigned from his employment with us effective March 6, 2007. Pursuant to the
terms of the Separation Agreement, we paid Mr. Fleming his base salary
(including vacation and sales commissions) and cash incentives earned through
March 6, 2007 of $101,330 and $30,000, respectively. In addition, we paid Mr.
Fleming severance compensation in the amount of $175,000 in a single lump-sum
payment, less applicable payroll tax deductions and withholdings. These payments
were different than what Mr. Fleming would have received under the termination
provisions described in his Employment Agreement. By signing the Separation
Agreement, Mr. Fleming acknowledged that he did not have any continuing rights
under the existing Employment Agreement and that the Separation Agreement
superseded any prior agreements with us except for certain sections of the
Employment Agreement, including but not limited to covenants not to compete or
disclose confidential information and surrender of company records, all of which
remain in effect.
APPROVAL OF THE AMENDMENT TO THE
INTERACTIVE
INTELLIGENCE, INC. 2006 EQUITY INCENTIVE PLAN
(ITEM
2 ON PROXY CARD)
On April
7, 2006, based on the recommendation of our Compensation Committee, the Board of
Directors adopted, and on May 18, 2006, our shareholders approved, the
Interactive Intelligence, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). On
February 22, 2008 and March 4, 2008, the Board of Directors adopted amendments
(collectively, the “Amendment”) to the 2006 Plan and directed that the Amendment
be submitted to our shareholders for consideration at the annual
meeting. The Amendment would increase from 1,250,000 to 2,150,000 the
total number of shares of our common stock available for issuance under the 2006
Plan. The Amendment would also revise certain definitions and payment provisions
to comply with the final IRS regulations under Section 409A of the
Code.
The
following is a summary of the principal features of the 2006 Plan and is
qualified in its entirety by reference to the complete text of the 2006 Plan, as
proposed to be amended, as set forth as Appendix A to this proxy statement.
Shareholders are urged to read the actual text of the 2006 Plan, as proposed to
be amended, as set forth in Appendix A. Capitalized terms used but not defined
herein have the meanings assigned to them in the 2006 Plan.
Objectives
The
objectives of the 2006 Plan are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentives to participants, and to optimize our profitability and growth through
incentives that are consistent with our goals and that link the participants'
personal interests to those of our shareholders.
Eligibility
to Receive Awards
The 2006
Plan provides that awards may be granted to our employees and directors and
those of our subsidiaries, as well as our consultants and other individuals as
determined by the Committee (as defined below). The approximate number of
persons currently eligible to participate in the 2006 Plan is 400, including all
of our directors and executive officers. As of March 31, 2008, our
executive officers held options to purchase 463,000 shares of our common stock
that have been granted under the 2006 Plan at a weighted-average exercise price
of $17.70 per share. As of March 31, 2008, our non-employee directors
held options to purchase 81,512 shares of our common stock that have been
granted under the 2006 Plan at a weighted-average exercise price of $15.56 per
share. As of March 31, 2008, our employees as a group (not including
our executive officers) held options to purchase 841,171 shares of our
common stock that have been granted under the 2006 Plan at a weighted-average
exercise price of $14.38 per share.
Types
of Awards
The 2006
Plan permits the grant of the following types of awards:
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·
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stock
options (incentive and
nonqualified);
|
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|
·
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stock
appreciation rights (“SARs”);
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|
·
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restricted
stock units (“RSUs”);
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·
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other
stock-based awards.
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Duration
of the Plan
No award
may be granted under the 2006 Plan after May 17, 2016.
Administration
The 2006
Plan will be administered by a committee consisting of two or more members of
our Board of Directors (the “Committee”). It is intended that each member of the
Committee will be a “non-employee director” within the meaning of Rule 16b-3 of
the Exchange Act, an “outside director” under regulations promulgated under
Section 162(m) of the Code, and an “independent director” under the NASDAQ
listing standards. Our Compensation Committee will act as the Committee for the
2006 Plan; however, our entire Board of Directors will act as the Committee with
respect to awards to non-employee directors. Subject to applicable law, the
Committee may delegate its authority under the 2006 Plan.
Subject
to the provisions of the 2006 Plan, the Committee has the authority
to:
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·
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select
the individuals to whom awards are to be
granted;
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|
·
|
determine
whether and to what extent awards are to be
granted;
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·
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determine
the size, type, terms and conditions of
awards;
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·
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approve
the form of award agreements for use under the 2006
Plan;
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·
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establish
performance measures for any performance period and determine whether such
goals were satisfied;
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·
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amend
any outstanding award in the event of termination of employment or service
or a change in control, subject to certain
limitations;
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·
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construe
and interpret the 2006 Plan and any award agreement and apply their
provisions; and
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·
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take
any other action consistent with the terms of the 2006 Plan that the
Committee deems appropriate.
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All
decisions, determinations and interpretations of the Committee will be final,
binding and conclusive on all persons, including us and the
participants.
Shares
Subject to the 2006 Plan
The
shares of our common stock presently subject to the 2006 Plan consist of (i)
1,250,000 shares,
plus
(ii) up to
320,000 shares that were available for issuance under the 1999 Option Plans, but
that were not underlying any outstanding stock options or other awards under the
1999 Option Plans as of the effective date of the 2006 Plan,
plus
(iii) any shares
allocable to outstanding stock options or other awards under the 1999 Option
Plans as of the effective date of the 2006 Plan to the extent that on or after
the effective date such stock options or other awards expired, were forfeited or
otherwise terminated unexercised. Approximately 268,000 shares remain available
for issuance as of March 31, 2008. The Amendment would increase from
1,250,000 to 2,150,000 the total number of shares of our common stock available
for issuance under the 2006 Plan, subject to adjustments as provided in the 2006
Plan.
The
source of shares for issuance under the 2006 Plan may be authorized and unissued
shares. No additional awards may be made under the 1999 Option
Plans.
If an
award under the 2006 Plan is forfeited or terminated for any reason before being
exercised, fully vested or settled, as the case may be, then the shares
underlying that award will be added back to the remaining
shares
and will be available for further awards under the 2006 Plan. The number of
shares available for future grants under the 2006 Plan, however, will be reduced
by: (a) any shares subject to an award that are withheld or otherwise not issued
upon the exercise of the award to satisfy the participant's tax withholding
obligations or to pay the exercise price of the award; and (b) shares subject to
an award that is settled in cash in lieu of shares.
Pursuant
to the 2006 Plan, subject to antidilution adjustments:
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·
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the
maximum aggregate number of shares that may be delivered in connection
with stock options intended to be incentive stock options under Section
422 of the Code (“incentive stock options”) may not exceed 1,500,000
shares;
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·
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the
maximum aggregate number of shares that may be granted to an individual
participant during any calendar
year:
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·
|
pursuant
to all forms of awards is 100,000
shares;
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·
|
pursuant
to incentive stock options is 100,000
shares;
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·
|
pursuant
to restricted stock and RSU awards is 50,000 shares;
and
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·
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pursuant
to performance share awards is 50,000 shares;
and
|
|
·
|
the
maximum aggregate compensation that may be paid pursuant to performance
units awarded in any one calendar year to an individual participant is
$250,000, or a number of shares having an aggregate fair market value not
in excess of that amount.
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Further,
no incentive stock option will be granted to a participant if as a result of
such grant the aggregate fair market value of shares with respect to which
incentive stock options are exercisable for the first time in any calendar year
would exceed $100,000.
The
closing sale price of our common stock on March 31, 2008, as quoted on The
NASDAQ Global Market was $11.77 per share.
Adjustments
Upon Changes in Capitalization
In the
event of any change in our capitalization or other corporate event that has a
material effect on the fair market value of our common stock, the Committee will
adjust, as it determines to be appropriate and equitable to prevent dilution or
enlargement of rights:
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·
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the
number and kind of shares that may be delivered under the 2006
Plan;
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·
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the
individual limits set forth in the 2006
Plan;
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·
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the
number and kind of shares subject to outstanding
awards;
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·
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the
exercise price, grant price or other price of shares subject to
outstanding awards;
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·
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any
performance conditions relating to outstanding
awards;
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·
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the
market price of shares, or per-share results;
and
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·
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other
terms and conditions of outstanding
awards.
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Corporate
events that may give rise to adjustments in awards include, but are not limited
to, mergers, reorganizations, consolidations, recapitalizations, liquidations,
stock dividends, split-ups, spin-offs, stock splits, reverse stock splits, share
combinations, share exchanges, any change in the corporate structure that
affects our common stock, and the payment of a dividend or distribution to our
shareholders in a form other than our common stock (except for normal cash
dividends).
No
Repricing Without Shareholder Approval
The 2006
Plan prohibits us from reducing the exercise price or grant price of an
outstanding stock option or SAR or replacing an outstanding stock option or SAR
that has an exercise price or grant price above the value of our common stock
with a new option or SAR that has a lower exercise price or grant price, or with
any other type of new award other than as described under “
Adjustments Upon Changes in Capitalization
”
above, without first obtaining shareholder approval.
Stock
Options
Stock
options granted under the 2006 Plan may be either nonqualified or incentive
stock options. Each option grant will be evidenced by an award agreement between
the participant and us setting forth the terms and conditions of the option. The
Committee will set the exercise price of each option, provided that the exercise
price may not be less than 100% of the fair market value of our common stock on
the date the option is granted. In addition, in the case of an incentive stock
option granted to a participant who, at the time the option is granted, owns
stock representing more than 10% of the voting power of all classes of our
stock, the exercise price of the incentive stock option will not be less than
110% of the fair market value of our common stock on the date the option is
granted.
The
Committee will determine the term of each stock option that it grants under the
2006 Plan; however, the term may not exceed 10 years from the date of grant.
Moreover, in the case of an incentive stock option granted to a participant who,
at the time the option is granted, owns stock representing more than 10% of the
voting power of all classes of our stock, the term of the option may not exceed
five years from the date of grant.
Each
award agreement will specify the date(s) on which a stock option granted under
the 2006 Plan is to become exercisable (based on the passage of time or the
achievement of performance goals).
If a
participant's employment or service terminates due to death or disability, the
participant may exercise any options that were exercisable on the date of
termination, but only within the one year period following termination, and in
no event after the date the options expire in accordance with their terms. Upon
termination by us of a participant's employment or service without cause, or
upon termination of employment or service by the participant for a reason other
than death or disability, or upon a participant's retirement, a participant may
exercise any options that were exercisable on the date of termination, but only
within the one month following termination, and in no event after the date the
options expire in accordance with their terms. Upon termination of employment or
service for cause, a participant will immediately forfeit all of his or her
outstanding options and will, if the Committee in its sole discretion so
determines, repay to us the amount of any gain that the participant had realized
upon any exercise within the 90-day period prior to the
termination.
The
Committee may, in its sole discretion, establish different terms and conditions
pertaining to the effect of a participant's termination of employment or
service, to the extent permitted by applicable law.
Stock
Appreciation Rights
SAR
grants may be either freestanding grants or grants in tandem with option grants.
Each SAR grant will be evidenced by an agreement that will specify the number of
shares to which the SAR pertains, the grant price, the term of the SAR and such
other provisions as the Committee shall determine.
Upon
exercise of a SAR, the holder will receive payment from us in an amount equal to
the product of (i) the difference between the fair market value of our common
stock on the date of exercise over the grant price and (ii) the number of shares
with respect to which the SAR is exercised. At the discretion of the Committee,
payment to the holder of a SAR may be in cash, shares of our common stock or a
combination thereof.
The grant
price of a freestanding SAR will not be less than 100% of the fair market value
of our common stock on the grant date, and the grant price of a tandem SAR will
equal the exercise price of the related option. The Committee will determine the
term of each SAR that it grants under the 2006 Plan; however, the term may not
exceed 10 years from the date of grant.
A tandem
SAR may be exercised only with respect to the shares for which its related
option is then exercisable. The exercise of all or part of a tandem SAR will
result in the forfeiture of the right to purchase a number of shares under the
related option equal to the number of shares with respect to which the SAR is
exercised. The 2006 Plan also contains specified additional conditions on the
exercise of a tandem SAR granted in connection with an incentive stock option.
Freestanding SARs may be exercised upon whatever terms and conditions the
Committee imposes upon them; however, except as otherwise provided upon a
termination of employment or service or in the event of a change in control or
subsidiary disposition, no freestanding SARs may be exercisable prior to one
year from the date of grant.
If the
employment or service of a holder of a SAR is terminated, the SAR will be
treated in the same manner as options are treated, as described above under
“– Stock
Options
.”
Restricted
Stock and Restricted Stock Units
Each
restricted stock or RSU grant will be evidenced by an agreement that specifies
the applicable period of restriction, the number of restricted shares or RSUs
granted, the vesting or settlement date, and such other provisions as the
Committee determines.
The
period of restriction applicable to an award of restricted stock or RSUs will be
at least one year, except as provided upon a termination of employment or
service or upon a change in control or a subsidiary disposition.
Participants
holding restricted stock may exercise full voting rights and will receive all
regular cash dividends paid with respect to those shares. Except as otherwise
determined by the Committee, all other distributions paid with respect to the
restricted stock will be credited to the participant subject to the same
restrictions on transferability and forfeitability as the underlying restricted
stock. A holder of RSUs will not have voting rights or other rights as a
shareholder with respect to such RSUs.
When the
applicable period of restriction on the restricted stock ends, the stock will
become freely transferable, and the participant will be entitled to receive a
certificate evidencing those shares. When the applicable period of restriction
ends, RSUs will be settled and paid. The Committee shall determine whether the
RSUs will be settled by delivery of shares or payment in cash of an amount equal
to the fair market value of the shares on the settlement date, or a combination
thereof.
Except as
otherwise determined by the Committee, upon a participant's death or
disability:
|
·
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with
respect to restricted stock or RSUs with a time-based period of
restriction, the restrictions on the “Ratable Portion” of the award will
lapse on the date of the participant's death or disability (where “Ratable
Portion” means (i) the number of shares of restricted stock or the
number of RSUs awarded to the participant multiplied by the portion
(expressed as a percentage) of the restricted period that expired on the
date of the participant's death or disability, reduced by (ii) the
number of restricted shares or RSUs with respect to which the restrictions
had lapsed as of such date); and
|
|
·
|
with
respect to restricted stock or RSUs with a performance-based period of
restriction, the unvested portion of the award will vest on a pro rata
monthly basis, including full credit for partial
|
|
|
months
elapsed, and will be paid (a) based on the level of performance
achieved as of the date of the termination, if determinable, or (b) at the
target level, if not determinable.
|
Upon a
participant's termination of employment or service for a reason other than death
or disability, except upon a change in control or subsidiary disposition or as
the Committee may otherwise determine, the participant will forfeit all unvested
restricted stock or RSUs immediately after the termination of employment or
service.
Performance
Shares and Performance Units
Each
grant of performance shares and performance units will be evidenced by an
agreement that specifies the number granted, the applicable performance goals
and performance periods, and such other provisions as the Committee determines.
Except as otherwise provided in the applicable award agreement, upon termination
of employment or service or upon a change in control or subsidiary disposition,
the performance period for performance shares and performance units must be at
least one year.
A
participant will not have voting rights or other rights as a shareholder with
respect to the shares subject to an award of performance shares or performance
units until the time, if at all, when shares are issued to the participant
pursuant to the terms of the applicable award agreement.
As soon
as practicable following the completion of the performance period applicable to
outstanding performance shares or performance units, the Committee will certify
in writing the extent to which the applicable performance goals have been
attained and the resulting final value of the award earned by the participant
and to be paid upon its settlement. The Committee, in its sole discretion as
specified in the award agreement, may pay earned performance shares or
performance units by delivery of shares or by payment in cash or a combination
thereof.
Except as
otherwise determined by the Committee, if a participant terminates employment or
service due to death or disability, the performance shares or performance units
will be paid based on a pro rata monthly basis, including full credit for
partial months elapsed, and will be paid (a) based on the level of
performance achieved as of the date of the termination, if determinable, or (b)
at the target level, if not determinable. If a participant terminates employment
or service for any reason other than death or disability, the participant will
forfeit any and all right to payment under the performance shares or performance
units, except as otherwise determined by the Committee.
Other
Stock-Based Awards
The
Committee has the right to grant other stock-based awards that may include,
without limitation, grants of shares based on attainment of performance goals,
payment of shares as a bonus or in lieu of cash based on attainment of
performance goals, and the payment of shares in lieu of cash under other of our
incentive programs.
Except as
otherwise provided in the applicable award agreement, upon a termination of
employment or service or upon a change in control or subsidiary disposition,
other stock-based awards will have a minimum period of restriction of one year,
which period may, in the Committee's discretion, lapse on a pro-rated, graded,
or cliff (i.e., all at once) basis. However, in the Committee's discretion, up
to 5% of the shares available for issuance under the 2006 Plan may have a
shorter period of restriction. Moreover, an award of payment in shares in lieu
of cash under other of our incentive programs will not be subject to the minimum
period of restriction limitation described above and will not be applied against
or included when calculating the 5% limitation.
Performance-Based
Awards
The
Committee may grant awards that are intended to qualify as “performance-based
compensation” for purposes of deductibility under Section 162(m) of the Code.
For any such award, the Committee will establish the goals to be used (which
must be one or more of the “performance measures” specified in the 2006 Plan)
within 90 days after the commencement of the performance period, or, if less,
the number of days equal to 25% of the performance period applicable to such
award. Pursuant to the 2006 Plan, “performance measures” means
any
performance goal that the Committee, in its discretion, may select from among
any of the following performance goals: total shareholder return; stock price;
net customer sales; volume; gross profit; gross margin; operating profit;
operating margin; earnings from continuing operations before income taxes;
earnings from continuing operations; earnings per share from continuing
operations; net operating profit after tax; net earnings; net earnings per
share; return on assets; return on investment; return on equity; return on
invested capital; cost of capital; average capital employed; cash flow; cash
flow from operations; working capital; working capital as a percentage of net
customer sales; asset growth; asset turnover; market share; orders received;
days sales outstanding; and operating unit results.
The
Committee may establish performance measures, in its discretion, on a
corporate-wide basis or with respect to one or more business units, divisions,
subsidiaries, business segments, functions, salary grade levels, or positions,
and in either absolute terms or relative to the performance of one or more
comparable companies or an index covering multiple companies. In addition,
unless otherwise determined by the Committee, measurement of performance
measures will exclude the impact of charges for restructurings, discontinued
operations, extraordinary items, and other unusual or non-recurring items, as
well as the cumulative effects of tax or accounting changes, each as determined
in accordance with generally accepted accounting principles or identified in our
financial statements, notes to the financial statements, management's discussion
and analysis, or other filings with the SEC.
Non-Transferability
of Awards
Awards
granted under the 2006 Plan will not be assignable or transferable by the
participant, except by will or by the laws of descent and distribution. During
the lifetime of a participant, an award may be exercised only by the participant
or the participant's guardian or legal representative.
Tax
Withholding Obligations
The 2006
Plan authorizes us to deduct or withhold, or to require the participant to remit
to us, an amount sufficient to satisfy all applicable tax withholding
requirements prior to the delivery of any shares or cash pursuant to an
award.
Change
in Control, Cash-Out and Subsidiary Disposition
Except as
otherwise provided in the applicable award agreement, if a participant's
employment or service with us is involuntarily terminated, for whatever reason,
at any time within 12 months after a change in control (as defined in the 2006
Plan) of us:
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·
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any
and all outstanding awards granted under the 2006 Plan with time-based
vesting provisions will vest on a pro rata monthly basis, including full
credit for partial months elapsed;
and
|
|
·
|
any
and all outstanding awards granted under the 2006 Plan with
performance-based vesting provisions will vest on a pro rata monthly
basis, including full credit for partial months elapsed, and will be paid
(a) based on the level of performance achieved as of the date of the
termination, if determinable, or (b) at the target level, if not
determinable.
|
In
addition, the Committee may, in its sole discretion, determine that:
(a) all outstanding stock options and SARs will be terminated upon the
occurrence of a change in control and that each participant will receive, with
respect to each share subject to the options or SARs, an amount in cash equal to
the excess of the consideration payable with respect to one share in connection
with the change in control over the option's exercise price or the SAR's grant
price; and (b) options and SARs outstanding as of the date of the change in
control may be cancelled and terminated without payment, if the consideration
payable with respect to one share in connection with the change in control is
less than the option's exercise price or the SAR's grant price. Further, the
Committee has the authority to provide for the automatic full vesting and
exercisability of one or more outstanding unvested awards under the 2006 Plan
and the termination of restrictions on transfer and repurchase or forfeiture
rights on the awards in connection with a disposition of one of our
subsidiaries, but only with respect to those participants who are at the time
engaged primarily in service with the subsidiary involved in the subsidiary
disposition.
Amendment,
Suspension and Termination of the 2006 Plan
The Board
of Directors may amend, suspend or terminate the 2006 Plan at any time;
provided, however, that shareholder approval is required for any amendment to
the extent necessary to comply with the applicable rules of any national
securities exchange or other market system or applicable laws. In addition, no
termination, amendment or modification may adversely impact an award previously
granted in any material way without the consent of the participant to whom such
award was granted unless required by applicable law.
U.S.
Federal Income Tax Treatment
The
following paragraphs are a summary of the material U.S. federal income tax
consequences associated with awards granted under the 2006 Plan. The summary is
based on existing U.S. laws and regulations, and there can be no assurance that
those laws and regulations will not change in the future. The summary does not
purport to be complete and does not discuss the tax consequences upon a
participant's death, or the provisions of the income tax laws of any
municipality, state or foreign country in which the participant may reside. As a
result, tax consequences for any particular participant may vary based on
individual circumstances.
Incentive Stock
Options
.
Except
as described below, an incentive stock option results in no taxable income to
the optionee and no deduction to us at the time it is granted or exercised. The
excess of the fair market value of the shares acquired over the option price,
however, is an item of adjustment in computing the alternative minimum taxable
income of the optionee. If the optionee holds the stock received as a result of
an exercise of an incentive stock option for at least two years from the date of
the grant and one year from the date of exercise, then the gain realized on
disposition of the stock is treated as a long-term capital gain. If the shares
are disposed of during this period (i.e., a “disqualifying disposition”),
however, then the optionee will recognize ordinary income in the year of the
disposition, in an amount equal to the excess, if any, of the fair market value
of the shares upon exercise of the option over the option price (or, if less,
the excess of the amount realized upon disposition over the option price). The
excess, if any, of the sale price over the fair market value on the date of
exercise will be a short-term capital gain. In such case, we will be entitled to
a deduction, in the year of such a disposition, for the amount includible in the
optionee's income as compensation. The optionee's basis in the shares acquired
upon exercise of an incentive stock option is equal to the option price paid,
plus any amount includible in his or her income as a result of a disqualifying
disposition.
Nonqualified
Stock Options
.
A
nonqualified stock option results in no taxable income to the optionee and no
deduction to us at the time it is granted. An optionee exercising such an option
will, at that time, recognize ordinary income, which is treated as compensation,
in the amount of the difference between the option price and the then market
value of the shares. Subject to the applicable provisions of the Code, a
deduction for federal income tax purposes will be allowable to us in the year of
exercise in an amount equal to the taxable compensation recognized by the
optionee. The optionee's basis in such shares is equal to the sum of the option
price plus the amount includible in his or her income as compensation upon
exercise. Any gain (or loss) upon subsequent disposition of the shares will be a
long-term or short-term gain (or loss), depending upon the holding period of the
shares.
If a
nonqualified stock option is exercised by tendering previously owned shares of
our common stock in payment of the option price, then, instead of the treatment
described immediately above, the following generally will apply:
|
·
|
the
optionee will be considered to have received, in a tax-free exchange, a
number of new shares equal to the number of previously owned shares
tendered by the optionee in payment of the option
price;
|
|
·
|
the
optionee's basis and holding period for those new shares will be equal to
the basis and holding period of the previously owned
shares;
|
|
·
|
the
optionee will have compensation income equal to the fair market value on
the date of exercise of the excess shares (that is, the number of new
shares received in total upon the exercise of the nonqualified option,
less the number of previously owned shares that were
tendered);
|
|
·
|
the
optionee's basis in those excess shares will be equal to the amount of
that compensation income;
|
|
·
|
subject
to the applicable provisions of the Code, a deduction for federal income
tax purposes will be allowable to us in the year of exercise in an amount
equal to that compensation income;
and
|
|
·
|
the
holding period of those excess shares will begin on the date of
exercise.
|
Any gain
(or loss) upon subsequent disposition of the new shares or the excess shares
will be a long-term or short-term gain (or loss), depending upon the holding
period of the shares.
Stock
Appreciation Rights
.
Generally, the recipient of a freestanding SAR will not recognize taxable
income at the time the SAR is granted. If a participant receives the
appreciation inherent in the SARs in cash, the participant will recognize
ordinary income, which is treated as compensation, at the time it is received.
If a participant receives the appreciation inherent in the SARs in stock, he or
she will recognize ordinary income, which is treated as compensation, in an
amount equal to the market value of the stock at the time it is received. In
general, there will be no federal income tax deduction allowed to us upon the
grant or termination of SARs. Upon the settlement of a SAR, however, we will be
entitled to a deduction equal to the amount of income the recipient is required
to recognize as a result of the settlement.
Restricted Stock,
Restricted Stock Units, Performance Shares, and Performance Units
.
A participant generally
will not have taxable income upon the grant of restricted stock, RSUs,
performance shares, or performance units. Instead, the participant will
recognize ordinary income, which is treated as compensation, at the time of
vesting equal to the fair market value (on the vesting date) of the shares or
cash received minus any amount paid by the participant for the restricted stock,
RSUs, performance shares or performance units. For restricted stock only, a
participant instead may elect to be taxed at the time of grant, in which event
the participant will not be subject to tax when the shares vest. In each of
these cases, we will generally be entitled to a corresponding federal income tax
deduction at the same time the participant recognizes income. If a participant
elects to be taxed on the value of the restricted stock when received and the
restricted stock is subsequently forfeited, the participant will be entitled to
deduct only the amount, if any, that he paid for the forfeited stock, less the
amount, if any, received in connection with such forfeiture.
Other Stock-Based
Awards
.
A
participant generally will recognize ordinary income, which is treated as
compensation, upon receipt of the shares subject to the award (or, if later, at
the time of vesting of such shares), and we will generally be entitled to a
corresponding federal income tax deduction at the same time.
Section
409A
.
Section 409A of the
Code provides certain requirements for deferred compensation arrangements. If
the requirements of Section 409A are not complied with, the recipient of an
award could be subject to tax on the award, and an additional 20% tax, at the
time the award is granted or vested. The 2006 Plan has been designed so that
certain types of awards (such as options, SARs and restricted stock) will not be
“deferred compensation” for Section 409A purposes and will thereby be exempt
from Section 409A’s requirements. Certain other types of awards, however, may be
deferred compensation under Section 409A, and in those cases, the 2006
Plan is intended to comply with the requirements of Section
409A.
Section
162(m)
.
Special
rules limit the deductibility of compensation paid to the chief executive
officer and to each of the next four most highly compensated executive officers.
Under Section 162(m) of the Code, unless various conditions are met that enable
compensation to qualify as “performance-based,” the annual compensation paid to
any of these specified executives will be deductible only to the extent that it
does not exceed $1,000,000. The 2006 Plan has been designed, however, to permit
the Committee to grant awards that qualify as performance-based for purposes of
satisfying the conditions of Section 162(m) of the Code, thereby permitting us
to receive a federal income tax deduction in connection with such awards even to
the extent that they exceed $1,000,000.
The
Board of Directors recommends a vote “
FOR
” the approval of
the Amendment to the Interactive Intelligence, Inc. 2006 Equity Incentive
Plan.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Relationship With Independent Registered Public
Accounting Firm
KPMG LLP
(“KPMG”), our independent registered public accounting firm, has been engaged to
perform our audits since 2003. KPMG has issued an unqualified opinion for each
of the years that it has been engaged to audit our consolidated financial
statements, including 2007, and there were no disagreements on any matters
regarding accounting principles or practices applied by management, financial
statement disclosure or auditing scope or procedures. Representatives from KPMG
will be present at our annual meeting, and will have the opportunity to make any
statements they desire and are expected to be available to respond to
appropriate questions. Our Audit Committee intends to approve our independent
registered public accounting firm for the year ended December 31, 2008 at its
May 30, 2008 meeting.
Audit Committee Pre-Approval Policy of Audit and
Permissible Non-Audit Services of KPMG
The
Sarbanes-Oxley Act of 2002 and the independence rules of the SEC require all
independent registered public accounting firms that audit issuers to obtain
pre-approval from the issuers’ respective audit committees in order to provide
professional services without impairing independence. As such, our Audit
Committee’s policy is to pre-approve all audit and permissible non-audit
services provided by KPMG. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. KPMG and management are required to periodically report to our
Audit Committee regarding the extent of services provided by KPMG in accordance
with this pre-approval, and the fees for the services performed to date. Our
Audit Committee may also pre-approve particular services on a case-by-case
basis.
Each
year, our Audit Committee discusses and approves the hiring of the independent
registered public accounting firm. Once a resolution is approved, our Audit
Committee Chairman executes an engagement letter for the annual audit and
quarterly reviews. Our Chief Financial Officer may execute an engagement letter
for additional services, such as tax consulting, with the approval of our Audit
Committee. Additionally, from time to time, we may desire additional permitted
professional services. Pre-approval for these services is obtained from the
Audit Committee Chairman prior to such services commencing.
Fees
Paid to KPMG
The
following table presents fees for professional audit services rendered by KPMG
for the audits of our consolidated financial statements for the years ended
December 31, 2007 and 2006, and fees for other services rendered by KPMG during
those periods. All of the services described in the following fee
table were approved in conformity with our Audit Committee’s pre-approval
process
($ in
thousands):
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
370
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
Audit-Related
Fees
|
|
|
20
|
|
|
18
|
|
|
|
|
|
|
|
|
|
Tax
Fees
|
|
|
52
|
|
|
54
|
|
|
|
|
|
|
|
|
|
All
Other Fees
|
|
|
--
|
|
|
--
|
|
Total
|
|
$
|
442
|
|
$
|
532
|
Audit
Fees
Audit
fees consisted of the aggregate fees billed by KPMG for professional services
rendered in connection with the audit of our consolidated financial statements
included in our Annual Report on Form 10-K for each of our last two years,
as well as for the review of our condensed consolidated financial statements
included in our Quarterly Reports on Form 10-Q during each year. In
addition, audit fees included professional services rendered in connection with
KPMG’s separate audit of our internal control over financial reporting as of
December 31, 2007 and 2006.
Pursuant
to Section 404 of the Sarbanes-Oxley Act and due to our public float exceeding
$75 million as of June 30, 2007, we continued to be classified by the SEC as an
accelerated filer as of December 31, 2007. As a result, we were required to
remain in compliance with the provisions of Section 404 of the Sarbanes-Oxley
Act that required: (i) management to assess the effectiveness of our internal
control over financial reporting and (ii) the independent registered public
accounting to perform its own separate audit of our internal control over
financial reporting. Beginning in 2007, KPMG was not required to perform an
audit of our management’s assessment of the effectiveness of our internal
control over financial reporting due to the release of a new auditing standard.
See
“Audit Committee
Report”
below for further details.
Audit-Related
Fees
Audit-related
fees consisted of the aggregate fees billed by KPMG for assurance and related
services rendered in each of our last two years that were not included in “Audit
Fees”, as discussed above. These fees were primarily related to the audit of our
401(k) Plan’s financial statements included in our Annual Report on Form 11-K
for each year, typically filed with the SEC within 180 days after our year
end.
Tax
Fees
Tax fees
consisted of the aggregate fees billed by KPMG for professional services
rendered in connection with tax compliance, tax advice and tax planning for each
of our last two years. These tax services related primarily to preparing our
state and corporate tax returns and providing tax advice and preparing the tax
returns for our expatriate employees.
All
Other Fees
When
applicable, all other fees consist of potential fees that could be billed by
KPMG for other professional and/or assurance services that are not included in
“Audit Fees”, “Audit-Related Fees” and “Tax Fees”. For the years ended
December 31, 2007 and 2006, there were no fees billed by KPMG for other
professional and/or assurance services.
For 2007,
pre-approved non-audit services included only those services described above for
“Audit-Related Fees”, “Tax Fees” and “All Other Fees.” The aggregate amount of
all such non-audit services represented approximately 16% of the total amount of
fees paid to KPMG. Our Audit Committee has concluded that the provision of the
non-audit services listed above is compatible with maintaining the independence
of KPMG.
AUDIT COMMITTEE REPORT
We, the
Audit Committee, oversee Interactive Intelligence’s financial reporting process
on behalf of the Board of Directors. Interactive Intelligence’s
management is responsible for the preparation and integrity of
the consolidated financial statements and notes thereto and the financial
reporting process, including a system of internal control over financial
reporting, and has represented to us that the consolidated financial statements
were prepared in accordance with U.S. generally accepted accounting principles.
The independent registered public accounting firm is responsible for performing
an independent audit of Interactive Intelligence’s consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and expressing an opinion on the
conformity of those audited consolidated financial statements with U.S.
generally accepted accounting principles, as well as expressing an opinion on
the effectiveness of Interactive Intelligence’s internal control over financial
reporting.
In
fulfilling our responsibilities, we have reviewed and discussed Interactive
Intelligence’s audited consolidated financial statements with its management and
the independent registered public accounting firm. We met with the independent
registered public accounting firm to discuss the results of its examinations and
its evaluations of Interactive Intelligence’s internal control over financial
reporting. We reviewed and discussed Interactive Intelligence’s compliance with
Section 404 of the Sarbanes-Oxley Act of 2002, including consideration of the
PCAOB’s Auditing Standard No. 5,
An Audit of Internal Control Over
Financial Reporting That is Integrated with an Audit of Financial
Statements
, which was released during May 2007 and superseded PCAOB
Auditing Standard No. 2,
An
Audit of Internal Control Over Financial Reporting Performed in Conjunction with
an Audit of Financial Statements
.
We also
discussed with the independent registered public accounting firm the matters
required by the American Institute of Certified Public Accountants Statement on
Auditing Standards No. 61,
Communication with Audit
Committees
,
as amended,
as adopted by the PCAOB in Rule 3200T, which include but are not limited
to: (i) the scope and results of the audit, (ii) the responsibility of the
independent registered public accounting firm, (iii) Interactive Intelligence’s
significant accounting policies, (iv) management’s judgments and estimates and
(v) significant audit adjustments. In addition, we have discussed with the
independent registered public accounting firm that firm’s independence from
Interactive Intelligence and its management, including the matters in the
written disclosures and letter which were received by us from the independent
registered public accounting firm as required by Independence Standards Board
Standard No. 1,
Independence Discussions with Audit
Committees,
as adopted by the PCAOB in Rule 3600T.
Based on
the reviews and discussions referred to above, we, the Audit Committee,
recommended to the Board of Directors that the audited consolidated financial
statements be included in Interactive Intelligence’s Annual Report on Form 10-K
for the year ended December 31, 2007, as filed with the SEC.
Submitted by the Audit
Committee
Edward L.
Hamburg, Chairman
Richard
A. Reck
Michael
C. Heim
CERTAIN RELATIONSHIPS AND RELATED PERSON
TRANSACTIONS
On an
annual basis, each director and executive officer is obligated to complete a
director and officer questionnaire which requires disclosure of any transactions
with us in which the director or executive officer, or any member of his or her
immediate family, has an interest. Under our Audit Committee’s charter,
which is
available free of charge on our website at
http://
investors.inin.com
under “Corporate Governance”,
our Audit Committee must review and approve
all related person transactions in which any executive officer, director,
director nominee or more than 5% shareholder of the company, or any of their
immediate family members, has a direct or indirect material
interest. The Audit Committee may not approve a related person
transaction unless (1) it is in or not inconsistent with our best interests and
(2) where applicable, the terms of such transaction are
at least
as favorable to us as could be obtained from an unrelated third
party. No related person transaction in an amount exceeding $120,000
occurred during 2007.
Under our Ethics Code,
which is available free of charge on our website at
http://
investors.inin.com
under
“Corporate Governance”, related person transactions are strictly prohibited
unless approved or ratified by the Audit Committee, and other conflicts of
interest involving our executive officers or directors are prohibited unless
approved by the Audit Committee.
In
November 2007, our Compensation Committee adopted a travel policy for our Chief
Executive Officer wherein Dr. Brown is permitted to utilize his private airplane
for business travel. Dr. Brown will be reimbursed for expenses incurred in the
operation of his private plane only when used for company business. The cost
reimbursement shall occur upon us receiving supporting documentation, at a
practicable date after completion of each trip, of the expenses incurred by Dr.
Brown and that the trip was business related. During 2007, we reimbursed Dr.
Brown for approximately $22,000 in expenses pursuant to this reimbursement
agreement. The hourly reimbursement rate in effect for 2007 was approved by our
Compensation Committee and ratified and approved by our Audit
Committee.
The
hourly reimbursement rate was negotiated by us on an arms-length basis, and was
made on terms no less favorable to us than could be obtained from an
unaffiliated third party.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Pursuant
to Section 16(a) of the Exchange Act, our executive officers, directors and
holders of more than ten percent of the outstanding shares of our common stock
(“Insiders”) are required to file reports (on prescribed forms) of their
beneficial ownership of our common stock and/or shares of our common stock
underlying stock options with the SEC and furnish copies of such forms to us.
Based solely on a review of the copies of such forms furnished to us, or written
representations that no other reports were required to be filed, we believe that
for the year ended December 31, 2007, all Forms 3, 4 and 5 required by
Section 16(a) to be filed by Insiders were filed on a timely basis,
except:
|
|
·
|
one
Form 4 for Dr. Brown, reporting a gift of shares of our common stock, was
inadvertently filed late;
|
|
|
·
|
one
Form 4 for Ms. Hynes, reporting a sale of shares of our common stock, was
inadvertently filed late;
and
|
|
|
·
|
a
sale of shares of our common stock by Mr. Head was inadvertently not
timely reported on a Form 4.
|
A Form 4
or, in the case of Mr. Head, a Form 5 disclosing the transaction described above
for each individual was promptly filed upon discovery that a report covering
such transaction was not filed on time.
OTHER BUSINESS AT OUR ANNUAL MEETING
Our Board
is not aware of any business which properly may be presented for action at our
meeting other than the matters set forth in the Notice of Annual Meeting. Should
any other matter requiring a vote of the shareholders properly arise, the
enclosed proxy gives discretionary authority to the persons named in the proxy
to vote on such matters in accordance with their best judgment.
DATE OF RECEIPT OF SHAREHOLDER PROPOSALS FOR OUR 2009
ANNUAL MEETING
All
shareholder proposals intended for inclusion in our 2009 proxy materials
for presentation at our 2009 Annual Meeting must be received by us (to the
attention of our Corporate Secretary) at our world headquarters no later than
December 17, 2008. As mentioned previously, in accordance with
amended Rule 14a-8(i)(8) of the Exchange Act, certain shareholder proposals
related to the election of directors are no longer permitted. In addition, our
Amended and Restated By-Laws, as currently in effect, established
procedures for shareholder nominations for election of directors and bringing
business before our annual meeting. Among other requirements, to bring business
before our 2009 Annual Meeting or to nominate a person for election as a
director, a shareholder must give written notice to our Corporate Secretary no
less than 90 days or more than 120 days prior to May 30, 2009.
However, in the event our 2009 Annual Meeting is advanced by more than
30 days or delayed by more than 60 days from May 30, 2009, the written
notice must be delivered no earlier than the 120th day prior to such annual
meeting and no later than the close of business on the later of the
90th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. The
notice must contain certain information concerning the proposed business or the
nominee and the shareholder making the proposal. Any shareholder interested in
making a nomination or proposal should request a copy of the applicable By-Law
provisions, as currently in effect, from our Corporate
Secretary.
By order
of the Board of Directors,
Interactive
Intelligence, Inc.
Stephen
R. Head
Corporate
Secretary
Indianapolis,
Indiana
April 16,
2008
Appendix A
INTERACTIVE INTELLIGENCE, INC.
2006
EQUITY INCENTIVE PLAN
(As
Proposed to Be Amended May 30, 2008)
1.
Establishment, Objectives
and Duration.
(a)
Establishment of the
Plan
. Interactive Intelligence, Inc. hereby establishes the 2006 Equity
Incentive Plan (“Plan”). The Plan is effective upon its approval by the
Company’s shareholders at the 2006 Annual Meeting (“Effective
Date”).
(b)
Objectives of the
Plan
. The Plan’s objectives are to attract and retain the best available
personnel for positions of substantial responsibility, to provide additional
incentives to Participants, and to optimize the profitability and growth of the
Company through incentives that are consistent with the Company’s goals and that
link Participants’ personal interests to those of the Company’s
shareholders.
(c)
Duration of the Plan
.
No Award may be granted under the Plan after the day immediately preceding the
10
th
anniversary of the Effective Date. The Plan will remain in effect with respect
to outstanding Awards until no Awards remain outstanding.
2.
Definitions.
As used in
the Plan, the following definitions will apply:
(a)
“
Affiliate
” means any
“parent corporation” or “subsidiary corporation” of the Company, as those terms
are defined, respectively, in Code Sections 424(e) and (f).
(b)
“
Applicable Law
” means
the legal requirements relating to stock incentive plans, if any, under
applicable provisions of federal securities laws, state corporate and securities
laws, the rules and regulations of any governing governmental agencies, the
Code, and the rules of any applicable stock exchange or national market
system.
(c)
“
Award
” means,
individually or collectively, Nonqualified Stock Options, Incentive Stock
Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Shares, Performance Units, and Other Stock-Based Awards granted
under the Plan.
(d)
“
Award Agreement
”
means an agreement entered into by the Company and a Participant setting forth
the terms and provisions applicable to an Award.
(e)
“
Board
” means the
Board of Directors of the Company.
(f)
“
Cashless Exercise
”
means, to the extent permitted by Applicable Law, a program approved by the
Committee in which payment of the applicable Exercise Price of an Option may be
made all or in part by delivery (on a form prescribed by the Committee) of an
irrevocable direction to a securities broker to sell Shares and to deliver all
or part of the sale proceeds to the Company in payment of the aggregate Exercise
Price and, if applicable, the amount necessary to satisfy the Company’s
withholding obligations at the minimum statutory withholding rates, including,
but not limited to, U.S. federal and state income taxes, payroll taxes, and
foreign taxes, if applicable.
(g)
“
Cause
” means, unless
that term or an equivalent term is otherwise defined with respect to an Award by
the Participant's Award Agreement or by a written contract of employment or
service, any of the following: (i) the Participant's theft, dishonesty, willful
misconduct, breach of fiduciary duty for personal profit, or falsification of
any Company documents or records; (ii) the Participant's material failure to
abide by the Company's code of conduct or other policies (including, without
limitation, policies relating to confidentiality and reasonable workplace
conduct); (iii) the Participant's unauthorized use, misappropriation,
destruction or diversion of any tangible or intangible asset or corporate
opportunity of the Company (including, without limitation, the
Participant's
improper
use or disclosure of the Company's confidential or proprietary information);
(iv) any intentional act by the Participant that has a material detrimental
effect on the Company's reputation or business; (v) any material breach by the
Participant of any employment, service, consulting, non-disclosure,
non-competition, non-solicitation or other similar agreement between the
Participant and the Company, which breach is not cured pursuant to the terms of
the applicable agreement; or (vi) the Participant's conviction (including any
plea of guilty or nolo contendere) of any criminal act involving fraud,
dishonesty, misappropriation or moral turpitude, or that impairs the
Participant's ability to perform his or her duties with the
Company.
(h)
“
Change in Control
”
means the occurrence of one or more of the following:
(i)
The
acquisition by any “person” (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act of the “beneficial ownership” (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of
the Company representing fifty (50%) percent or more of (A) the then outstanding
shares of common stock of the Company, or (B) the combined voting power of the
Company’s then outstanding voting securities; provided, however, that the
following acquisitions will not constitute a Change in Control: (I) any
acquisition directly from the Company (excluding an acquisition by virtue of the
exercise of a conversion privilege), (II) any acquisition by the Company,
or (III) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any entity controlled by the
Company;
(ii)
The
Company is party to a merger or consolidation, or series of related
transactions, that results in the voting securities of the Company outstanding
immediately prior thereto failing to continue to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), directly or indirectly, at least
fifty (50%) percent of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation;
(iii)
the sale
or disposition of all or substantially all of the Company’s assets, or
consummation of any transaction, or series of related transactions, having
similar effect (other than to a Subsidiary);
(iv)
A change
in the composition of the Board within any consecutive two-year period, as a
result of which fewer than a majority of the directors are Incumbent Directors;
or
(v)
The
liquidation or dissolution of the Company.
Notwithstanding
the preceding provisions of this Subsection or any other provision of the Plan,
with respect to any provision or feature of the Plan that constitutes or
provides for a deferred compensation plan subject to Code Section 409A, the
term “Change in Control” means a change in the ownership or effective control of
the Company, or in the ownership of a substantial portion of the assets of the
Company, within the meaning of Code Section 409A(a)(2)(A)(v) and interpretive
regulations.
(i)
“
Code
” means the
Internal Revenue Code of 1986, as amended, and its interpretive
regulations.
(j)
“
Committee
” means the
Committee, as specified in Section 3(a), appointed by the Board to
administer the Plan; provided, however, that, where appropriate, “Committee”
also means (i) the Board, which, pursuant to Section 3(b), administers the Plan
with respect to Non-Employee Directors; and (ii) any delegate of the Committee
that, pursuant to Section 3(d), has the authority to grant Awards to
Participants who are not subject to Section 16(b) of the Exchange Act and who
are not (and are not anticipated to be during the term of the Award) “covered
employees” under Code Section 162(m).
(k)
“
Company
” means
Interactive Intelligence, Inc., an Indiana corporation, and any successor
thereto as provided in Section 23.
(l)
“
Continuous Service
”
means an Employee’s provision of services in any capacity to the Company or any
Affiliate that is not interrupted or terminated. Continuous Service will not be
considered interrupted in the
case of
(i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, any Affiliate, or any
successor. A leave of absence approved by the Company may include medical leave,
military leave, or any other personal leave approved by an authorized Company
representative. For purposes of Incentive Stock Options, no such leave may
exceed 90 days, unless reemployment upon expiration of the leave is
guaranteed by statute or contract.
(m)
“
Disability
” means the
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or can be expected to last for a period of not less than 12
months.
(n)
“
Dividend
” means a
dividend declared and paid on Shares subject to an Award.
(o)
“
Employee
” means any
employee of the Company or an Affiliate.
(p)
“
Exchange Act
” means
the Securities Exchange Act of 1934, as amended.
(q)
“
Exercise Price
” means
the price at which a Participant may purchase a Share pursuant to an
Option.
(r)
“
Fair Market Value
”
means, as of any date, the value of a Share determined as follows:
(i)
Where a
public market exists for the Share, the Fair Market Value will be (A) the
closing sales price for a Share for the last market trading day prior to the
time of the determination (or, if no sales were reported on that date, on the
last trading date on which sales were reported) on the New York Stock Exchange,
the Nasdaq National Market or the principal securities exchange on which the
Share is listed for trading, whichever is applicable, or (B) if the Share
is not traded on any such exchange or national market system, the average of the
closing bid and asked prices of a Share on the Nasdaq Small Cap Market, in each
case, as reported in The Wall Street Journal or such other source as the
Committee deems reliable; or
(ii)
In the
absence of an established market for the Share of the type described above, the
Committee will determine the Share’s Fair Market Value in good faith using a
reasonable valuation methodology, and that determination will be conclusive and
binding on all persons.
(s)
“
Freestanding SAR
”
means a SAR that is granted independently of any Options, as described in
Section 8.
(t)
“
Incentive Stock
Option
” or “
ISO
” means an Option
intended to qualify as an incentive stock option within the meaning of Code
Section 422.
(u)
“
Incumbent Directors
”
means directors who either (i) were directors of the Company as of the Effective
Date of this Plan, or (ii) are elected, or nominated for election, to the Board
with the affirmative votes of a least a majority of those directors whose
election or nomination was not in connection with an actual or threatened proxy
contest related to the election of directors to the Company.
(v)
“
Non-Employee
Director
” means any individual who is a member of the Board of Directors
of the Company or an Affiliate and who is not an Employee.
(w)
“
Nonqualified Stock
Option
” means an Option that is not intended to meet the requirements of
Code Section 422.
(x)
“
Option
” means an
Incentive Stock Option or a Nonqualified Stock Option granted under the Plan, as
described in Section 7.
(y)
“
Other Stock-Based
Award
” means a Share-based or Share-related Award granted pursuant to
Section 13.
(z)
“
Participant
” means a
current or former Employee, Non-Employee Director, consultant of the Company or
any other individual who the Committee selects (or selected) to receive an
Award.
(aa)
“
Performance-Based
Exception
” means the performance-based exception from the tax
deductibility limitations of Code Section 162(m).
(bb)
“
Performance Measure
”
means any performance goal that the Committee, in its discretion, may select
from among any of the following performance goals: total shareholder return,
stock price, net customer sales, volume, gross profit, gross margin, operating
profit, operating margin, earnings from continuing operations before income
taxes, earnings from continuing operations, earnings per share from continuing
operations, net operating profit after tax, net earnings, net earnings per
share, return on assets, return on investment, return on equity, return on
invested capital, cost of capital, average capital employed, cash flow, cash
flow from operations, working capital, working capital as a percentage of net
customer sales, asset growth, asset turnover, market share, orders received,
days sales outstanding and operating unit results.
(cc)
“
Performance Period
”
means the period during which a Performance Measure or other performance goal
must be met.
(dd)
“
Performance Share
”
means an Award granted to a Participant pursuant to Section 11.
(ee)
“
Performance Unit
”
means an Award granted to a Participant pursuant to
Section 12.
(ff)
“
Period of
Restriction
” means the period during which Restricted Stock, Restricted
Stock Units or Other Stock-Based Awards are subject to a substantial risk of
forfeiture and are not transferable, as provided in Sections 9, 10 and
13.
(gg)
“
Plan
” means this
Interactive Intelligence, Inc. 2006 Equity Incentive Plan, as amended from time
to time.
(hh)
“
Prior Plans
” means
the Interactive Intelligence, Inc. 1999 Stock Option and Incentive Plan and the
Interactive Intelligence, Inc. Outside Directors Stock Option Plan.
(ii)
“
Restricted Stock
”
means an Award granted to a Participant pursuant to Section 9.
(jj)
“
Restricted Stock
Units
” means an Award granted to a Participant pursuant to
Section 10.
(kk)
“
Retirement
” means,
with respect to an Employee, termination of employment after attaining age 65,
or such other age as the Company specifies in its written policies.
(ll)
“
SEC
” means the United
States Securities and Exchange Commission.
(mm)
“
Section
” means,
except where used in direct reference to a provision of the Code or the Exchange
Act, a provision of this Plan.
(nn)
“
Share
” means a share
of the Company’s common stock, par value $0.01 per share, subject to adjustment
pursuant to Section 18.
(oo)
“
Stock Appreciation
Right
” or “
SAR
” means an Award
granted to a Participant, either alone or in connection with a related Option,
pursuant to Section 8.
(pp)
“
Subsidiary
” means any
corporation in which the Company owns, directly or indirectly, at least 50% of
the total combined voting power of all classes of stock, or any other entity
(including, but not limited to,
limited
liability companies, partnerships and joint ventures) in which the Company owns,
directly or indirectly, at least 50% of the combined equity.
(qq)
“
Subsidiary
Disposition
” means the disposition by the Company of its equity holdings
in any Subsidiary effected by a merger or consolidation involving that
Subsidiary, the sale of all or substantially all of the assets of that
Subsidiary, or the Company’s sale or distribution of substantially all of the
outstanding capital stock of that Subsidiary.
(rr)
“
Tandem SAR
” means a
SAR that is granted in connection with a related Option, as described in
Section 8.
(ss)
“
Voting Securities
”
means voting securities of the Company entitled to vote generally in the
election of directors.
3.
Administration
of the Plan.
(a)
The Committee
. The
Plan will be administered by the Compensation and Stock Option Committee of the
Board or such other committee (“Committee”) as the Board selects consisting of
two or more members of the Board each of whom is intended to be a “non-employee
director” within the meaning of Rule 16b-3 (or any successor rule) of the
Exchange Act, an “outside director” under regulations promulgated under Code
Section 162(m), and an “independent director” under Nasdaq Stock Market or other
applicable exchange listing standards. The members of the Committee will be
appointed from time to time by, and will serve at the discretion of, the
Board.
(b)
Board as the
Committee
. Notwithstanding subsection (a) above, the Board will
constitute the Committee and administer the Plan with respect to Non-Employee
Directors, determine the terms of Awards, and their related Award Agreements, to
Non-Employee Directors, and grant Awards to Non-Employee Directors.
(c)
Authority of the
Committee
. Subject to Applicable Law and the Plan’s provisions, and
except as the Board may provide otherwise, the Committee will have full, final
and discretionary authority to take all actions it determines necessary to
administer the Plan, including, without limitation, the following
actions:
(i)
select
the individuals to whom Awards may from time to time be granted under the
Plan;
(ii)
determine
whether and to what extent Awards are granted under the Plan;
(iii)
determine
the size, type, terms, and conditions of any Awards granted under the
Plan;
(iv)
approve
forms of Award Agreements for use under the Plan;
(v)
establish
Performance Measures or other performance goals for any Performance Period and
determine whether those goals were satisfied;
(vi)
amend the
terms of any outstanding Award granted under the Plan in the event of a
Participant’s termination of employment or service or in the event of a Change
in Control, provided that, except as otherwise provided in Section 19, no
such amendment will reduce the Exercise Price of outstanding Options or the
grant price of outstanding SARs without the approval of the shareholders of the
Company, and provided further, that any amendment that would adversely affect
the Participant’s rights under an outstanding Award will not be made without the
Participant’s written consent;
(vii)
construe
and interpret the terms of the Plan and any Award Agreement entered into under
the Plan, and decide all questions of fact arising in the application of the
Plan and any Award Agreement; and
(viii)
take such
other action, not inconsistent with the Plan’s terms, as the Committee deems
appropriate.
(d)
Delegation of
Authority
. As permitted by Applicable Law, the Committee may delegate, to
one or more officers of the Company, its authority, including the power and
authority to make Awards to Participants who are not subject to Section 16(b) of
the Exchange Act and who are not (and are not anticipated to be during the term
of the Award) “covered employees” under Code Section 162(m), pursuant to such
conditions and limitations as the Committee may establish. The Committee may
delegate authority pursuant to this provision only by resolution or other valid
action it reflects in writing.
(e)
Effect of Committee’s
Decision
. The Committee’s decisions, determinations and interpretations
will be final, binding and conclusive on all persons, including the Company, its
Subsidiaries, Employees, Non-Employee Directors, consultants, other Participants
and their estates and beneficiaries.
4.
Shares
Subject to the Plan; Effect of Grants; Individual Limits.
(a)
Number of Shares Available
for Grants
. Subject to adjustment as provided in Section 18, the
maximum number of Shares that may be issued pursuant to Awards under the Plan
shall be (i) 2,150,000 Shares,
plus
(ii) up to
320,000 Shares available for issuance under the Prior Plans, as previously
approved by the shareholders of the Company, as of the Effective Date, but that
are not underlying any outstanding stock options or other awards under the Prior
Plans as of the Effective Date,
plus
(iii) any Shares
allocable to outstanding stock options or other awards under the Prior Plans as
of the Effective Date to the extent that on or after the Effective Date such
stock options or other awards expire, are forfeited or otherwise terminate
unexercised; provided, however, that in no event shall the maximum number of
Shares issued pursuant to Awards under the Plan exceed 5,850,933 Shares (which
is the sum of 2,150,000 Shares set forth above, plus the number of Shares
available for issuance under the Prior Plans as of the Effective Date, plus the
aggregate number of shares subject to options previously granted and outstanding
under the Prior Plans as of the Effective Date). From and after the Effective
Date, no further grants or awards shall be made under the Prior Plans; however,
grants or awards made under the Prior Plans before the Effective Date shall
continue in effect in accordance with their terms.
(b)
Limit on Awards of Incentive
Stock Options
. Subject to adjustment as provided in Section 18, the
maximum aggregate number of Shares that may be delivered in connection with
Incentive Stock Options under the Plan will not exceed 1,500,000
Shares.
(c)
Limits on Awards to
Individual Participants
. Subject to adjustment as provided in
Section 18, the following rules will apply with respect to Awards to
individual Participants:
(i)
Total Limit
: The
maximum aggregate number of Shares that can be granted to any one Participant in
a particular calendar year pursuant to any and all Awards is 100,000
Shares.
(ii)
Incentive Stock
Options
: The maximum aggregate number of Shares with respect to which
Incentive Stock Options may be granted in any particular calendar year to any
one Participant is 100,000 Shares.
(iii)
Restricted Stock and
Restricted Stock Units
: The maximum aggregate number of Shares of
Restricted Stock and Shares with respect to which Restricted Stock Units may be
granted in a particular calendar year to any one Participant is 50,000
Shares.
(iv)
Performance Shares and
Performance Units
: The maximum aggregate number of Performance Shares
that may be granted in a particular calendar year to any one Participant is
50,000 Shares, and the maximum aggregate compensation that can be paid pursuant
to Performance Units awarded in any one calendar year to any one Participant
is
$250,000 or a
number of Shares having an aggregate Fair Market Value not in excess of that
amount.
(d)
Forfeited Shares
. If
Awards are forfeited or terminated for any reason before being exercised, fully
vested, or settled, then the Shares underlying those Awards will cease to count
against the limitations in subsections (a) and (b) and will become available for
Awards under the Plan.
(e)
Shares for Withholding
Obligations
. Any Shares subject to any Award that are withheld or
otherwise not issued upon exercise of any Award to satisfy the Participant’s
withholding obligations or in payment of any subscription price or the Exercise
Price, and Shares subject to an Award (or any portion of an Award) that is
settled in cash in lieu of settlement in Shares, will reduce the number of
Shares available for grant under the limitations in subsections (a) and
(b).
(f)
Awards Settled in
Cash
. Awards valued by reference to Shares that may be settled in
equivalent cash value will count against the limitations in this Section 4 to
the same extent as if settled in Shares.
5.
Eligibility
and Participation.
(a)
Eligibility
.
Employees, Non-Employee Directors, consultants of the Company and other
individuals are eligible to participate in the Plan.
(b)
Actual Participation
.
Subject to the provisions of the Plan, the Committee may, from time to time,
select from all eligible Employees, Non-Employee Directors, consultants of the
Company and other individuals those to whom Awards will be granted and will
determine the nature and amount of each Award.
(c)
Service as an
Employee
. For purposes of an Employee's participation in the Plan, and
the interpretation of the Plan's provisions, no event will constitute a
termination of employment unless the event is a termination of Continuous
Service.
6.
Types of
Awards.
(a)
Type of Awards
.
Awards under the Plan may be in the form of Options (both Nonqualified Stock
Options and/or Incentive Stock Options), SARs, Restricted Stock, Restricted
Stock Units, Performance Shares, Performance Units and Other Stock-Based
Awards.
(b)
Designation of Award
.
Each Award will be designated in the Award Agreement.
7.
Options.
(a)
Grant of Options
.
Subject to the terms and provisions of the Plan, Options may be granted to
Participants in such number and upon such terms, and at any time and from time
to time, as the Committee determines.
(b)
Award Agreement
. Each
Option grant will be evidenced by an Award Agreement that specifies the Exercise
Price, the duration of the Option, the number of Shares to which the Option
pertains, the Option vesting schedule, and such other provisions as the
Committee determines including, without limitation, repurchase provisions,
rights of first refusal, forfeiture provisions, form of payment (cash, Shares,
or other consideration) upon settlement of the Award, and payment contingencies.
The Award Agreement will also specify whether the Option is intended to be an
Incentive Stock Option or a Nonqualified Stock Option. Options that are intended
to be Incentive Stock Options will be subject to the limitations set forth in
Code Section 422 and will be subject to Section 7(m).
(c)
Exercise Price
.
Except for Options adjusted pursuant to Section 18 and replacement Options
granted in connection with a merger, acquisition, reorganization or similar
transaction, the Exercise Price of each Option will not be less than 100% of the
Fair Market Value of a Share on the date the Option is granted. However, in the
case of an Incentive Stock Option granted to a Participant who, at the time the
Option is granted, owns stock representing more than 10% of the voting power of
all classes of stock of the Company or any Affiliate, the Exercise Price of the
Option will not be less than 110% of the Fair Market Value of a Share on the
date the Option is granted.
(d)
Term of Options
. The
term of an Option granted under the Plan will be determined by the Committee, in
its sole discretion; provided, however, that the term will not exceed ten
(10)
years.
However, in the case of an Incentive Stock Option granted to a Participant who,
at the time the Option is granted, owns stock
representing
more than 10% of the voting power of all classes of stock of the Company or any
Affiliate, the term of the Incentive Stock Option will be five (5) years
from the date of grant or such shorter term as may be provided in the Award
Agreement.
(e)
Vesting of Options
.
Options granted under this Section 7 will be exercisable at such times
(based on the passage of time or the achievement of performance goals) and be
subject to such restrictions and conditions as set forth in the Award Agreement,
which need not be the same for each grant or for each Participant.
(f)
Exercise of Options
.
Options granted under this Section 7 will be exercised by the delivery of a
written notice to the Company, setting forth the number of Shares with respect
to which the Option is to be exercised and specifying the method of payment for
the Exercise Price. An Option’s Exercise Price will be payable to the
Company:
(i)
in cash
or its equivalent;
(ii)
by
tendering (either actually or constructively by attestation) Shares having an
aggregate Fair Market Value at the time of exercise equal to the Exercise Price,
provided that the Committee may, in its sole discretion, require that Shares
tendered for payment have been previously held by the Participant for a minimum
duration;
(iii)
in any
other manner then permitted by the Committee (including Cashless Exercise);
or
(iv)
by a
combination of any of the permitted methods of payment in subsections (i), (ii),
and (iii) above.
The
Committee may limit any method of payment, other than that specified under (i),
for administrative convenience, to comply with Applicable Law or for any other
reason it deems appropriate.
(g)
Restrictions on Share
Transferability
. The Committee may impose such restrictions on any Shares
acquired pursuant to the exercise of an Option granted under this Section 7
as it deems advisable, including, without limitation, restrictions under
applicable federal securities laws, under the requirements of any stock exchange
or market upon which the Shares are then listed and/or traded, and under any
blue sky or state securities laws applicable to the Shares.
(h)
Termination for
Cause
. Upon a Participant’s termination of employment or service for
Cause, all rights under any Options granted to the Participant will terminate
immediately, and the Participant will (if the Committee, in its sole discretion,
exercises its rights under this Section 7(h) within ten (10) days of the
termination) repay to the Company within ten (10) days of the Committee’s
written demand the amount of any gain the Participant had realized upon any
exercise within the 90-day period prior to the termination of any
Options.
(i)
Termination Due to Death or
Disability
. Upon a Participant’s termination of employment or service due
to death or Disability, the Participant or the Participant’s beneficiary, as the
case may be, may exercise outstanding Options to the extent the Participant was
entitled to exercise the Options on the date of termination, but only within the
one (1)-year period immediately following the Participant’s termination due to
death or Disability, and in no event after the date the Options expire in
accordance with their terms.
(j)
Other Terminations
.
Upon the termination of a Participant's employment or service by the Company
without Cause, upon the Participant's voluntary termination of employment or
service for a reason other than death or Disability, or upon the Employee’s
Retirement, the Participant may exercise outstanding Options to the extent that
the Participant was entitled to exercise the Options at the date of termination,
but only within the one (1) month period immediately following the Participant’s
termination, and in no event after the date the Options expire in accordance
with their terms.
(k)
Forfeiture of
Options
. Notwithstanding subsections (i) and (j) above, a Participant or
the Participant’s beneficiary, as the case may be, will, in connection with any
and all terminations of employment or service, forfeit all Options the
Participant was not entitled to exercise on the date of
termination.
(l)
Committee Discretion
.
Notwithstanding the foregoing paragraphs of this Section 7, and subject to
paragraph (m) below, the Committee may, in its sole discretion, establish
different terms and conditions pertaining to the effect of a Participant’s
termination, to the extent permitted by Applicable Law.
(m)
Additional Rules For
Incentive Stock Options
.
(i)
Incentive
Stock Options may be granted only to Participants who are
Employees.
(ii)
No
Incentive Stock Option will be granted to a Participant as a result of which the
aggregate Fair Market Value (determined as of the date of grant) of the Shares
with respect to which Incentive Stock Options under Code Section 422 are
exercisable for the first time in any calendar year under the Plan and any other
stock option plans of the Company or any Affiliate, would exceed $100,000,
determined in accordance with Code Section 422(d). This limitation will be
applied by taking Options into account in the order in which they were
granted.
(iii)
An Award
of an Incentive Stock Option may provide that the Option may be exercised not
later than three (3) months following the Participant’s termination of
employment with the Company and all Subsidiaries, or not later than one (1) year
following death or a permanent and total disability within the meaning of Code
Section 22(e)(3).
(iv)
Notwithstanding
any other provisions of the Plan, if for any reason any Option granted under the
Plan that is intended to be an Incentive Stock Option fails to qualify as an
Incentive Stock Option, that Option will be deemed to be a Nonqualified Stock
Option and fully authorized and validly issued under the Plan.
8.
Stock
Appreciation Rights.
(a)
Grant of SARs
.
Subject to the terms and provisions of the Plan, SARs may be granted to
Participants in such amounts and upon such terms, and at any time and from time
to time, as the Committee determines. The Committee may grant Freestanding SARs,
Tandem SARs, or any combination of these forms of SARs.
(b)
Award Agreement
. Each
SAR grant will be evidenced by an Award Agreement that specifies the number of
Shares to which the SAR pertains, the grant price, the term of the SAR, and such
other provisions as the Committee determines.
(c)
Grant Price
. The
grant price of a Freestanding SAR will not be less than 100% of the Fair Market
Value of a Share on the date of grant of the SAR, and the grant price of a
Tandem SAR will equal the Exercise Price of the related Option; provided,
however, that these limitations will not apply to Awards that are adjusted
pursuant to Section 18.
(d)
Term of SARs
. The
term of a SAR granted under the Plan will be determined by the Committee, in its
sole discretion; provided, however, that the term will not exceed ten (10) years
from the date of grant.
(e)
Exercise of Tandem
SARs
. A Tandem SAR may be exercised only with respect to the Shares for
which its related Option is then exercisable. To the extent exercisable, Tandem
SARs may be exercised for all or part of the Shares subject to the related
Option. The exercise of all or part of a Tandem SAR will result in the
forfeiture of the right to purchase a number of Shares under the related Option
equal to the number of Shares with respect to which the SAR is exercised.
Conversely, upon exercise of all or part of an Option with respect to which a
Tandem SAR has been granted, an equivalent portion of the Tandem SAR will
similarly be forfeited.
Notwithstanding
any other provision of the Plan to the contrary, with respect to a Tandem SAR
granted in connection with an ISO: (i) the Tandem SAR will expire no later
than the expiration of the underlying ISO; (ii) the value of the payout
with respect to the Tandem SAR may be for no more than 100% of the difference
between the Exercise Price of the underlying ISO and the Fair Market Value of
the Shares subject to the underlying ISO at the time the Tandem SAR is
exercised; and (iii) the Tandem SAR may be exercised only when the Fair
Market Value of the Shares subject to the ISO exceeds the Exercise Price of the
ISO.
(f)
Exercise of Freestanding
SARs
. Freestanding SARs may be exercised upon whatever terms and
conditions the Committee, in its sole discretion, imposes upon them and sets
forth in the applicable Award Agreement; provided, however, that except as
otherwise provided upon a termination of employment or service or pursuant to
Section 19 in the event of a Change in Control or Subsidiary Disposition,
no Freestanding SARs may be exercisable prior to one (1) year from the date of
grant.
(g)
Payment of SAR
Amount
. SARs granted under this Section 8 will be exercised by the
delivery of a written notice to the Company setting forth the number of Shares
with respect to which the SAR is to be exercised. Upon exercise of a SAR, a
Participant will be entitled to receive payment from the Company in an amount
determined by multiplying:
(i)
the
difference between the Fair Market Value of a Share on the date of exercise over
the grant price; by
(ii)
the
number of Shares with respect to which the SAR is exercised.
At the
discretion of the Committee as specified in the Award Agreement, the payment
upon SAR exercise may be in cash, in Shares of equivalent value, or in some
combination thereof.
(h)
Termination for
Cause
. Upon a Participant’s termination of employment or service for
Cause, all rights under any SARs granted to the Participant will terminate
immediately, and the Participant will (if the Committee, in its sole discretion,
exercises its rights under this Section 8(h) within ten (10) days of the
termination) repay to the Company within ten (10) days of the Committee’s
written demand the amount of any gain the Participant had realized upon any
exercise within the 90-day period prior to the termination of any
SARs.
(i)
Termination Due to Death or
Disability
. Upon a Participant’s termination of employment or service due
to death or Disability, the Participant or the Participant’s beneficiary, as the
case may be, may exercise outstanding SARs to the extent the Participant was
entitled to exercise the SARs on the date of termination, but only within the
one (1)-year period immediately following the Participant’s termination due to
death or Disability, and in no event after the date the SARs expire in
accordance with their terms.
(j)
Other Terminations
.
Upon the termination of a Participant's employment or service by the Company
without Cause, upon the Participant’s voluntary termination of employment or
service for a reason other than death or Disability, or upon the Employee's
Retirement, the Participant may exercise outstanding SARs to the extent that the
Participant was entitled to exercise the SARs at the date of termination, but
only within the one (1) month period immediately following the Participant’s
termination, and in no event after the date the SARs expire in accordance with
their terms.
(k)
Forfeiture of SARs
.
Notwithstanding subsections (i) and (j) above, a Participant or the
Participant’s beneficiary, as the case may be, will, in connection with any and
all terminations of employment or service, forfeit all outstanding SARs the
Participant was not entitled to exercise on the date of
termination.
(l)
Committee Discretion
.
Notwithstanding the foregoing paragraphs of this Section 8, the Committee may,
in its sole discretion, establish different terms and conditions pertaining to
the effect of a Participant’s termination, to the extent permitted by Applicable
Law.
9.
Restricted
Stock.
(a)
Grant of Restricted
Stock
. Subject to the terms and provisions of the Plan, Restricted Stock
may be granted to Participants in such amounts and upon such terms, and at any
time and from time to time, as the Committee determines.
(b)
Award Agreement
. Each
Restricted Stock grant will be evidenced by an Award Agreement that specifies
the Period(s) of Restriction, the number of Shares of Restricted Stock granted,
and such other provisions as the Committee determines.
(c)
Period of
Restriction
. Except as otherwise provided in subsection (h) below, or
pursuant to Section 19 in the event of a Change in Control or Subsidiary
Disposition, any Period of Restriction for an Award of Restricted Stock will not
be less than one (1) year. Notwithstanding Section 3(c) of this Plan, the
Committee does not have the discretion or authority to (i) grant any Award of
Restricted Stock under a Period of Restriction that is shorter than the minimum
Period of Restriction in this subsection (c), or (ii) shorten the Period of
Restriction of any outstanding grant of Restricted Stock.
(d)
Other Restrictions
.
The Committee may impose such other conditions or restrictions on any Shares of
Restricted Stock granted pursuant to the Plan as it may deem advisable
including, without limitation, a requirement that Participants pay a stipulated
purchase price for each Share of Restricted Stock, a requirement that the
issuance of Shares of Restricted Stock be delayed, restrictions based upon the
achievement of specific performance goals, additional time-based restrictions,
or restrictions under Applicable Law or under the requirements of any stock
exchange or market upon which the Shares are listed or traded, or holding
requirements or sale restrictions placed on the Shares by the Company upon
vesting of the Restricted Stock. The Company may retain in its custody any
certificate evidencing the Shares of Restricted Stock and place on them a legend
and institute stop-transfer orders on the Shares, and the Participant will be
obligated to sign any stock power requested by the Company relating to the
Shares to give effect to the forfeiture provisions of the Restricted
Stock.
(e)
Removal of
Restrictions
. Subject to Applicable Law, Restricted Stock will become
freely transferable by the Participant after the last day of the applicable
Period of Restriction. Once Restricted Stock is released from the restrictions,
the Participant will be entitled to receive a certificate evidencing the
Shares.
(f)
Voting Rights
. Unless
otherwise determined by the Committee and set forth in a Participant’s Award
Agreement, to the extent permitted or required by Applicable Law, as determined
by the Committee, Participants holding Shares of Restricted Stock granted under
the Plan may exercise full voting rights with respect to those Shares during the
Period of Restriction.
(g)
Dividends and Other
Distributions
. Except as otherwise provided in a Participant’s Award
Agreement, during the Period of Restriction, Participants holding Shares of
Restricted Stock will receive all regular cash Dividends paid with respect to
all Shares while they are so held, and, except as otherwise determined by the
Committee, all other distributions paid with respect to the Restricted Stock
will be credited to Participants subject to the same restrictions on
transferability and forfeitability as the Restricted Stock with respect to which
they were paid and paid at such time following full vesting as are paid the
Shares of Restricted Stock with respect to which the distributions were
made.
(h)
Termination Due to Death or
Disability
. Except as otherwise determined by the Committee, upon a
Participant’s termination of employment or service due to death or
Disability:
(i)
With
respect to an Award of Restricted Stock with a time-based Period of Restriction,
the restrictions on the Ratable Portion of the Award will lapse, and those
Shares will be free of restrictions and will not be forfeited. The “Ratable
Portion” of an Award of Restricted Stock is equal to:
(a)
the
number of Shares of Restricted Stock awarded to the Participant multiplied by
the portion (expressed as a percentage) of the Restricted Period that expired on
the date of the Participant’s death or Disability,
reduced by
(b)
the
number of Shares of Restricted Stock awarded with respect to which the
restrictions had lapsed as of the date of the Participant’s death or
Disability.
(ii)
With
respect to an Award of Restricted Stock with a performance-based Period of
Restriction, any unvested portion of the Award will vest on a pro rata monthly
basis, including full credit for partial months elapsed, and will be paid
(A) based on the level of performance achieved as of the date of the
termination, if determinable, or (B) at the target level, if not
determinable. The amount of the vested Award may be computed under the following
formula: unvested number of Shares times (number of full months elapsed in
shortest possible vesting period divided by number of full months in shortest
possible vesting period) times percent performance level achieved immediately
prior to the effective date of the termination of employment or
service.
(i)
Other Terminations of
Employment
. Immediately after a Participant’s termination of employment
or service for a reason other than death or Disability, except as provided in
Section 19 or as the Committee may otherwise determine, a Participant will
forfeit all Restricted Stock that, at the time of termination, remains subject
to the restrictions imposed by paragraph (c) of this Section 9.
10.
Restricted
Stock Units.
(a)
Grant of Restricted Stock
Units
. Subject to the terms and provisions of the Plan, Restricted Stock
Units may be granted to Participants in such amounts and upon such terms, and at
any time and from time to time, as the Committee determines.
(b)
Award Agreement
. Each
grant of Restricted Stock Units will be evidenced by an Award Agreement that
specifies the applicable Period of Restriction, the number of Restricted Stock
Units granted, the settlement date, and such other provisions as the Committee
determines.
(c)
Value of Restricted Stock
Units
. The initial value of a Restricted Stock Unit will equal the Fair
Market Value of a Share on the date of grant; provided, however, that this
requirement will not apply to Awards that are adjusted pursuant to
Section 18.
(d)
Period of
Restriction
. Except as otherwise provided in subsection (g) below, or
pursuant to Section 19 in the event of a Change in Control or Subsidiary
Disposition, any Period of Restriction for an Award of Restricted Stock Units
will not be less than one (1) year. Notwithstanding Section 3(c), the Committee
does not have the discretion or authority to (i) grant any Award of Restricted
Stock Units under a Period of Restriction that is shorter than the minimum
Period of Restriction in this subsection (d), or (ii) shorten the Period of
Restriction of any outstanding grant of Restricted Stock Units.
(e)
Form and Timing of
Settlement
. Except as otherwise provided in Section 19 or a
Participant’s Award Agreement, settlement and payment of Restricted Stock Units
will be made at a specified settlement date that will not be earlier than the
last day of the Period of Restriction. The Committee, in its sole discretion as
specified in the Award Agreement, may settle earned Restricted Stock Units by
delivery of Shares or by payment in cash of an amount equal to the Fair Market
Value of the Shares on the settlement date (or a combination
thereof).
(f)
Voting Rights
. A
Participant will not have voting rights or other rights as a shareholder with
respect to the Shares subject to an Award of Restricted Stock Units granted
under the Plan until the time, if at all, when the Shares are issued to the
Participant pursuant to the terms of the applicable Award
Agreement.
(g)
Termination Due to Death or
Disability
. Except as otherwise determined by the Committee, upon a
Participant’s termination of employment or service due to death or
Disability:
(i)
With
respect to an Award of Restricted Stock Units with a time-based Period of
Restriction, the restrictions on the Ratable Portion of the Award will lapse,
and those Restricted Stock Units will be free of restrictions and will not be
forfeited. The “Ratable Portion” of an Award of Restricted Stock Units is equal
to:
(a)
the
number of Restricted Stock Units awarded to the Participant multiplied by the
portion (expressed as a percentage) of the Restricted Period that expired on the
date of the Participant’s death or Disability
,
reduced by
(b)
the
number of Restricted Stock Units awarded with respect to which the restrictions
had lapsed as of the date of the Participant’s death or Disability.
(ii)
With
respect to an Award of Restricted Stock Units with a performance-based Period of
Restriction, any unvested portion of the Award will vest on a pro rata monthly
basis, including full credit for partial months elapsed, and will be paid
(A) based on the level of performance achieved as of the date of the
termination, if determinable, or (B) at the target level, if not
determinable. The amount of the vested Award may be computed under the following
formula: unvested number of Restricted Stock Units times (number of full months
elapsed in shortest possible vesting period divided by number of full months in
shortest possible vesting period) times percent performance level achieved
immediately prior to the effective date of the termination of employment or
service.
(h)
Other Terminations of
Employment
. Upon a Participant’s termination of employment or service for
a reason other than death or Disability, except as provided in Section 19 or as
the Committee may otherwise determine, a Participant will forfeit all Restricted
Stock Units that, at the time of termination, remain subject to the restrictions
imposed by paragraph (d) of this Section 10.
11.
Performance
Shares.
(a)
Grant of Performance
Shares
. Subject to the terms and provisions of the Plan, Performance
Shares may be granted to Participants in such amounts and upon such terms, and
at any time and from time to time, as the Committee determines.
(b)
Award Agreement
. Each
grant of Performance Shares will be evidenced by an Award Agreement that
specifies the applicable Performance Period(s) and performance goal(s), the
number of Performance Shares granted, and such other provisions as the Committee
determines; provided, however, that except as otherwise provided in a
Participant’s Award Agreement, upon a termination of employment or service or
pursuant to Section 19 in the event of a Change in Control or Subsidiary
Disposition, in no case will a Performance Period be for a period of less than
one (1) year.
(c)
Value of Performance
Shares
. The initial value of a Performance Share will equal the Fair
Market Value of a Share on the date of grant; provided, however, that this
restriction will not apply to Awards that are adjusted pursuant to
Section 18.
(d)
Form and Timing of
Payment
. As soon as practicable following the completion of the
Performance Period applicable to outstanding Performance Shares, the Committee
will certify in writing the extent to which the applicable performance goals
have been attained and the resulting final value of the Award earned by the
Participant and to be paid upon its settlement. By the fifteenth (15th) day of
the third (3rd) month following the completion of the Performance Period
applicable to outstanding Performance Shares, payment will be made to each
eligible Participant of the final value of the Performance Shares. The
Committee, in its sole discretion as specified in the Award Agreement, may pay
earned Performance Shares by delivery of Shares or by payment in cash of an
amount equal to the Fair Market Value of the Shares (or a combination
thereof).
(e)
Voting Rights
. A
Participant will not have voting rights or other rights as a shareholder with
respect to the Shares subject to an Award of Performance Shares granted under
the Plan until the time, if at all, when the Shares are issued to the
Participant pursuant to the terms of the applicable Award
Agreement.
(f)
Termination of Employment or
Service
.
(i)
Except as
otherwise determined by the Committee, upon a Participant’s termination of
employment or service due to death or Disability, the Performance Shares will be
paid based on a pro rata monthly basis, including full credit for partial months
elapsed, and will be paid (A) based on the level of performance achieved as
of the date of the termination, if determinable, or (B) at the target
level, if not determinable. The amount of the Award to be paid may be computed
under the following formula: total Performance Shares times (number of full
months elapsed in shortest possible vesting period divided by number of full
months in shortest possible vesting period) times percent performance level
achieved immediately prior to the effective date of the termination of
employment or service.
(ii)
Except as
otherwise determined by the Committee, if a Participant terminates employment or
service with the Company for any reason other than death or Disability prior to
the end of the Performance Period respecting an Award of Performance Shares, the
Participant will forfeit any and all right to payment under the Performance
Shares.
12.
Performance
Units.
(a)
Grant of Performance
Units
. Subject to the terms and conditions of the Plan, Performance Units
may be granted to Participants in such amounts and upon such terms, and at any
time and from time to time, as the Committee determines.
(b)
Award Agreement
. Each
grant of Performance Units will be evidenced by an Award Agreement that
specifies the number of Performance Units granted, the Performance Period(s) and
performance goal(s), and such other provisions as the Committee determines;
provided, however, that except as otherwise provided in a Participant’s Award
Agreement upon a termination of employment or service or pursuant to
Section 19 in the event of a Change in Control or Subsidiary Disposition,
in no case will a Performance Period be for a period of less than one (1)
year.
(c)
Value of Performance
Units
. The Committee will set performance goal(s) in its discretion that,
depending on the extent to which they are met, will determine the number and/or
value of Performance Units that will be paid to Participants.
(d)
Form and Timing of
Payment
. As soon as practicable following the completion of the
Performance Period applicable to outstanding Performance Units, the Committee
will certify in writing the extent to which the applicable performance goals
have been attained and the resulting final value of the Award earned by the
Participant and to be paid upon its settlement. By the fifteenth (15th) day of
the third (3rd) month following the completion of the Performance Period
applicable to outstanding Performance Units, payment will be made to each
eligible Participant of the final value of the Performance Units. The Committee,
in its sole discretion as specified in the Award Agreement, may pay earned
Performance Units in cash or in Shares that have an aggregate Fair Market Value
equal to the value of the earned Performance Units (or a combination
thereof).
(e)
Voting Rights
. A
Participant will not have voting rights or other rights as a shareholder with
respect to the Shares subject to an Award of Performance Units granted under the
Plan until such time, if at all, as Shares are issued to the Participant
pursuant to the terms of the applicable Award Agreement.
(f)
Termination of Employment or
Service
.
(i)
Except as
otherwise determined by the Committee, upon a Participant’s termination of
employment or service due to death or Disability, the Performance Units will be
paid based on a pro rata
monthly
basis, including full credit for partial months elapsed, and will be paid
(A) based on the level of performance achieved as of the date of the
termination, if determinable, or (B) at the target level, if not
determinable.
The amount of the Award to be paid may be computed under the following formula:
total Performance Units times (number of full months elapsed in shortest
possible vesting period divided by number of full months in shortest possible
vesting period) times percent performance level achieved immediately prior to
the effective date of the termination of employment or service.
(ii)
Except as
otherwise determined by the Committee, if a Participant terminates employment or
service with the Company for any reason other than death or Disability prior to
the end of the Performance Period respecting an Award of Performance Units, the
Participant will forfeit any and all right to payment under the Performance
Units.
13.
Other
Stock-Based Awards.
(a)
Grant
. The Committee
has the right to grant Other Stock-Based Awards that may include, without
limitation, (i) the grant of Shares based on attainment of performance goal(s)
established by the Committee, (ii) the payment of Shares as a bonus or in lieu
of cash based on attainment of performance goal(s) established by the Committee,
and (iii) the payment of Shares in lieu of cash under other Company incentive or
bonus programs.
(b)
Period of
Restriction
. Except as otherwise provided in a Participant’s Award
Agreement, upon a termination of employment or service or pursuant to
Section 19 in the event of a Change in Control or Subsidiary Disposition,
Other Stock-Based Awards granted pursuant to this Section 13 will have a
minimum Period of Restriction of one (1) year, which period may, in the
Committee’s discretion, lapse on a pro-rated, graded, or cliff basis (as
specified in an Award Agreement); provided, however, that in the Committee’s
discretion, up to five percent (5%) of the Shares available for issuance under
the Plan may have a shorter Period of Restriction. Notwithstanding the above, an
Award of payment in Shares in lieu of cash under other Company incentive or
bonus programs will not be subject to the minimum Period of Restriction
limitations described above and will not be applied against or included when
calculating the 5% limitation in the previous sentence.
(c)
Other Company
Programs
. Notwithstanding subsection (b) above, an Award that is payable
in Shares in lieu of cash under another Company incentive or bonus program (and
not this Plan) will not be subject to any Period of Restriction.
(d)
Payment of Other Stock-Based
Awards
. Subject to Section 13(b), payment under or settlement of any such
Awards will be made in such manner and at such times as the Committee
determines. The Committee may provide that settlement of Other Stock-Based
Awards will be deferred, on a mandatory basis or at the election of the
Participant, pursuant to a deferred compensation plan designed to comply with
Code Section 409A.
(e)
Termination of Employment or
Service
. The Committee will determine the extent to which the Participant
will have the right to receive Other Stock-Based Awards following termination of
the Participant’s employment or service with the Company and its Subsidiaries.
Those provisions will be determined in the sole discretion of the Committee, may
be included in an agreement entered into with each Participant, but need not be
uniform among all Other Stock-Based Awards, and may reflect distinctions based
on the reasons for termination of employment or service.
14.
Performance-Based
Exception.
(a)
If the
Committee intends for an Award to qualify for the Performance-Based Exception,
it shall specify that the attainment of one or more Performance Measures will
determine the degree of granting, vesting or payout with respect to the Award.
The Committee may establish Performance Measures, in its discretion, on a
corporate-wide basis or with respect to one or more business units, divisions,
subsidiaries, business segments, functions, salary grade level, or position, and
in either absolute terms or relative to the performance of one or more
comparable companies or an index covering multiple companies.
(b)
Unless
otherwise determined by the Committee, measurement of Performance Measures will
exclude the impact of charges for restructurings, discontinued operations,
extraordinary items, and other unusual or non-recurring items, as well as the
cumulative effects of tax or accounting changes, each as determined in
accordance with generally accepted accounting principles or identified in the
Company’s financial statements, notes to the financial statements, management’s
discussion and analysis, or other filings with the SEC.
(c)
Performance
Measures may differ for Awards granted to any one Participant or to different
Participants.
(d)
Achievement
of Performance Measures in respect of Awards intended to qualify under the
Performance-Based Exception will be measured over a Performance Period specified
in the Award Agreement, and the goals will be established not later than
90 days after the beginning of the Performance Period or, if less than
90 days, the number of days that is equal to 25% of the relevant
Performance Period applicable to the Award.
(e)
The
Committee will have the discretion to adjust the determinations of the degree of
attainment of the pre-established Performance Measures; provided, however, that
Awards that are designed to qualify for the Performance-Based Exception may not
be adjusted upward (the Committee may, in its discretion, adjust the Awards
downward).
15.
Transferability
of Awards; Beneficiaries.
(a)
Awards Not
Transferable
. Except as provided in this Section 15, Awards under the
Plan will not be assignable or transferable by the Participant, except by will
or by the laws of descent and distribution, and will not be subject in any
manner to assignment, alienation, pledge, encumbrance or charge. During the
lifetime of a Participant, an Award will be exercised only by the Participant or
the Participant’s guardian or legal representative.
(b)
Death of Participant
.
Notwithstanding subsection (a), the Committee may provide in an Award Agreement
that the Participant has the right to designate a beneficiary or beneficiaries
who will be entitled to any rights, payments, or other benefits of the Award
following the Participant’s death. In the event of the Participant’s death, the
Participant’s beneficiary may exercise the Award, to the extent the Award
Agreement permits, in the same manner and to the same extent that the
Participant could have exercised the Award on the date of his of her
death.
(c)
Designation of
Beneficiary
. If an Award Agreement provides that a Participant has the
right to designate a beneficiary or beneficiaries, the Participant must
designate his or her beneficiary or beneficiaries in the manner the Committee
prescribes in the Award Agreement.
(d)
Failure to Designate a
Beneficiary
. If a Participant’s Award Agreement allows the Participant to
designate a beneficiary or beneficiaries of the Award, and the Participant dies
without a beneficiary designation valid under subsection (c), the Award may be
exercised, within the limits of subsection (b), by the legatee of the Award
under the Participant’s will, by the Participant’s estate in accordance with the
Participant’s will, or the laws of descent and distribution.
16.
Taxes.
Prior to
the delivery of any Shares or cash pursuant to an Award, the Company has the
right and power to deduct or withhold, or require the Participant to remit to
the Company, an amount sufficient to satisfy all applicable tax withholding
requirements. The Company may permit or require a Participant to satisfy all or
part of the tax withholding obligations in connection with an Award by (a)
having the Company withhold otherwise deliverable Shares, or (b) delivering
to the Company Shares already owned for a period of at least six (6) months (or
such longer or shorter period as may be required to avoid a charge to earnings
for financial accounting purposes), in each case having a value equal to the
amount to be withheld, which will not exceed the amount determined by the
applicable minimum statutory tax withholding rate (or such other rate as will
not result in a negative accounting impact). For these purposes, the value of
the Shares to be withheld or delivered will be equal to the Fair Market Value as
of the date that the taxes are required to be withheld.
17.
Conditions
Upon Issuance of Shares.
(a)
Shares
will not be issued pursuant to the exercise or settlement of an Award, unless
the exercise of the Award and the issuance and delivery of the Shares pursuant
thereto will comply with Applicable Law.
(b)
As a
condition to the exercise or settlement of an Award, the Company may require the
person exercising the Award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute the Shares if, in the opinion of counsel
for the Company, such a representation is required by any Applicable
Law.
18.
Adjustments
Upon Changes in Capitalization.
In the
event of any merger, reorganization, consolidation, recapitalization,
liquidation, stock dividend, split-up, spin-off, stock split, reverse stock
split, share combination, share exchange, or any change in the corporate
structure affecting the Shares, or in the event of payment of a dividend or
distribution to the shareholders of the Company in a form other than Shares
(excepting normal cash dividends) or other corporate event that has a material
effect on the Fair Market Value of the Shares, such adjustment will be made in
the number and kind of Shares that may be delivered under the Plan, the
individual limits set forth in Section 4(c), and, with respect to
outstanding Awards, in the number and kind of Shares subject to outstanding
Awards, the Exercise Price, grant price or other price of Shares subject to
outstanding Awards, any performance conditions relating to Shares, the market
price of Shares, or per-Share results, and other terms and conditions of
outstanding Awards, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of rights;
provided, however, that, unless otherwise determined by the Committee, the
number of Shares subject to any Award will always be rounded down to a whole
number. Adjustments made by the Committee pursuant to this Section 18 will
be final, binding, and conclusive.
19.
Change in
Control, Cash-Out and Termination of Underwater Options/SARs, and Subsidiary
Disposition.
(a)
Change in Control
.
Except as otherwise provided in a Participant’s Award Agreement, if a
Participant’s employment or service is involuntarily terminated, for whatever
reason, at any time within twelve (12) months after a Change in Control, unless
otherwise specifically prohibited under Applicable Law:
(i)
any and
all outstanding Awards granted under the Plan with time-based vesting provisions
will vest on a pro rata monthly basis, including full credit for partial months
elapsed; and
(ii)
any and
all Awards granted under the Plan with performance-based vesting provisions will
vest on a pro rata monthly basis, including full credit for partial months
elapsed, and will be paid (A) based on the level of performance achieved as
of the date of the termination, if determinable, or (B) at the target
level, if not determinable. The amount of the vested Award may be computed under
the following formula: total Award number of Shares times (number of full months
elapsed in shortest possible vesting period divided by number of full months in
shortest possible vesting period) times percent performance level achieved
immediately prior to the effective date of the termination.
(b)
Cash-Out and Termination of
Underwater Options/SARs
. The Committee may, in its sole discretion,
determine that (i) all outstanding Options and SARs will be terminated upon
the occurrence of a Change in Control and that each Participant will receive,
with respect to each Share subject to the Options or SARs, an amount in cash
equal to the excess of the consideration payable with respect to one Share in
connection with the Change in Control over the Option Exercise Price or the SAR
grant price; and (ii) Options and SARs outstanding as of the date of the
Change in Control may be cancelled and terminated without payment if the
consideration payable with respect to one Share in connection with the Change in
Control is less than the Option Exercise Price or the SAR grant
price.
(c)
Subsidiary
Disposition
. The Committee will have the authority, exercisable either in
advance of any actual or anticipated Subsidiary Disposition or at the time of an
actual Subsidiary Disposition and either at the time of the grant of an Award or
at any time while an Award remains outstanding, to provide for the automatic
full vesting and exercisability of one or more outstanding unvested Awards under
the Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on the Awards, in connection with a Subsidiary Disposition,
but only with respect to those Participants who are at the time engaged
primarily in Continuous Service with the Subsidiary involved in the Subsidiary
Disposition. The Committee also will have the authority to condition any such
Award vesting and exercisability or release from limitations upon the subsequent
termination of the affected Participant’s Continuous Service with that
Subsidiary within a specified period following the effective date of the
Subsidiary Disposition. The Committee may provide that any Awards so vested or
released from limitations in connection with a Subsidiary Disposition, will
remain fully exercisable until the expiration or sooner termination of the
Award.
20.
Amendment,
Suspension or Termination of the Plan.
(a)
Amendment, Modification and
Termination
. The Board may at any time and from time to time, alter,
amend, suspend or terminate the Plan in whole or in part; provided, however,
that no amendment that requires shareholder approval, as described in subsection
(b) below, will be effective unless the amendment is approved by the requisite
vote of shareholders of the Company entitled to vote thereon within the
applicable time period.
(b)
Amendments Requiring
Shareholder Approval
. The Board will seek shareholder approval of any
amendment the Board determines would require shareholder approval under the
applicable rules of any national securities exchange or other market system, and
such an amendment will become effective only upon its approval by the Company’s
shareholders. Except for adjustments made pursuant to Section 18, plan
amendments that require shareholder approval include, without limitation, any
amendment that would (i) increase the maximum number of Shares for which Awards
may be granted under the Plan; (ii) reduce the Exercise Price of outstanding
Options or the grant price of outstanding SARs; (iii) extend the term of the
Plan or the maximum term of Options granted under the Plan; or (iv) change the
class of persons eligible for grants of Awards under the Plan. Except as
provided in Section 18, the Committee may not take any action: (1) to
reprice, replace, regrant through cancellation or modify an outstanding Option
or SAR if the effect of such action would be to reduce the Exercise Price of the
Option or the grant price of the SAR; or (2) to cancel an outstanding
Option or SAR having an Exercise Price or grant price above the then-current
Fair Market Value of the Shares in exchange for the grant of another type of
Award, without, in each case, first obtaining approval of the shareholders of
the Company of such action.
(c)
Adjustment of Awards Upon
the Occurrence of Certain Unusual or Nonrecurring Events
. The Committee
may make adjustments in the terms and conditions of, and the criteria included
in, Awards in recognition of unusual or nonrecurring events (including, without
limitation, the events described in Section 18) affecting the Company or
the financial statements of the Company or of changes in Applicable Law,
regulations, or accounting principles, whenever the Committee determines that
such adjustments are appropriate to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan.
With respect to any Awards intended to comply with the Performance-Based
Exception, unless otherwise determined by the Committee, any such exception will
be specified at such times and in such manner as will not cause such Awards to
fail to qualify under the Performance-Based Exception.
(d)
Awards Previously
Granted
. No termination, amendment or modification of the Plan or of any
Award will adversely affect in any material way any Award previously granted
under the Plan without the written consent of the Participant holding the Award,
unless the termination, modification or amendment is required by Applicable Law
and except as otherwise provided under the Plan.
(e)
Compliance with the
Performance-Based Exception
. If an Award is intended comply with the
requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate such that the Awards maintain eligibility for
the Performance-Based Exception. If changes are made to Code Section 162(m) to
permit greater flexibility with respect to any Award or Awards available under
the Plan, the Committee may, subject to this Section 20, make any
adjustments to the Plan or Award Agreements it deems appropriate.
21.
Reservation
of Shares.
(a)
The
Company, during the term of the Plan, will at all times reserve and keep
available a number of Shares sufficient to satisfy the Plan’s requirements.
Shares issued under the Plan may be either authorized but unissued Shares, or
Shares held in the Company’s treasury.
(b)
The
inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company’s counsel to be necessary
to the lawful issuance and sale of any Shares hereunder, will relieve the
Company of any liability in respect of the failure to issue or sell the Shares
as to which the requisite authority is not obtained.
22.
Rights of
Participants.
(a)
Continued Service
.
The Plan will not confer upon any Participant any right to continue employment
or service with the Company, nor will it interfere in any way with his or her
right or the Company’s right to terminate a Participant’s employment or service
at any time, with or without cause.
(b)
Participant
. No
Employee, Non-Employee Director, consultant or other individual will have the
right to be selected to receive an Award under the Plan, or, having been so
selected, to be selected to receive future Awards.
23.
Successors.
All
obligations of the Company under the Plan and with respect to Awards will be
binding on any successor to the Company, whether the existence of the successor
is the result of a direct or indirect purchase, merger, consolidation, or other
event, or a sale or disposition of all or substantially all of the business
and/or assets of the Company, and references to the “Company” in the Plan and in
any Award Agreements will be deemed to refer to such successors.
24.
Legal
Construction.
(a)
Gender, Number and
References
. Except where otherwise indicated by the context, any
masculine term used in the Plan also will include the feminine, the plural will
include the singular, and the singular will include the plural. Any reference in
the Plan to a Section of the Plan either in the Plan or any Award Agreement or
to an act or code or rule or regulation will be deemed to refer to that Section
of the Plan, act, code, rule or regulation, as may be amended from time to time,
or to any successor Section of the Plan, act, code, rule or
regulation.
(b)
Severability
. In the
event any provision of the Plan is held illegal or invalid for any reason, the
illegality or invalidity will not affect the remaining parts of the Plan, and
the Plan will be construed and enforced as if the illegal or invalid provision
had not been included.
(c)
Requirements of Law
.
The granting of Awards and the issuance of Shares or cash under the Plan will be
subject to all Applicable Law and to such approvals by any governmental agencies
or national securities exchanges as may be required.
(d)
Governing Law
. To the
extent not preempted by federal law, the Plan and all Award Agreements under the
Plan will be construed in accordance with and governed by the laws of the State
of Indiana, excluding any conflicts or choice of law rule or principle that
might otherwise refer construction or interpretation of this Plan to the
substantive law of another jurisdiction.
(e)
Non-Exclusive Plan
.
Neither the adoption of the Plan by the Board nor its submission to the
Company’s shareholders for approval will be construed as creating any
limitations on the power of the Board or a committee of the Board to adopt any
other incentive arrangements it may deem desirable.
(f)
Code Section 409A
Compliance
. To the extent applicable, it is intended that this Plan and
any Awards granted hereunder comply with the requirements of Code
Section 409A and any related regulations or other guidance promulgated with
respect to that section by the U.S. Department of the Treasury or the Internal
Revenue Service. Any provision that would cause the Plan or any Award granted
under the Plan to fail to satisfy Code Section 409A will have no force or
effect until amended to comply with Code Section 409A, which amendment may
be retroactive to the extent permitted by Code Section 409A. With respect
to any Award hereunder that constitutes “deferred compensation” within the
meaning of Code Section 409A, notwithstanding any other provision of the Plan or
the applicable Award Agreement, (i) any amount that is payable on account of a
separation from service to a “specified employee, ” as defined in Code Section
409A(a)(2)(B)(i), will not be paid earlier than the date that is six (6) months
following the specified employee’s separation from service; and (ii) an Award
recipient will not be treated as having terminated employment or service until
that individual has incurred a separation from service within the meaning of
Code Section 409A. The determination of which individuals are “specified
employees” will be made in accordance with such rules and practices, consistent
with Code Section 409A and interpretive regulations, as established from time to
time by the Board, or its designee, in its discretion.
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VOTE
BY INTERNET-
www.proxyvote.com
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INTERACTIVE INTELLIGENCE,
INC.
C/O PROXY
SERVICES
P.O. BOX
9142
FARMINGDALE, NY
11735
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Use the Internet to transmit your voting instructions and for electronic
delivery of information up until 11:59 P.M. Eastern Time on May 29,
2008. Have your proxy card
in hand when you access the web site and
follow the instructions to obtain your records and to create an electronic
voting instruction form.
ELECTRONIC
DELIVERY OF FUTURE
SHAREHOLDER
COMMUNICATIONS
If
you would like to reduce the costs incurred by Interactive Intelligence,
Inc. in mailing proxy materials, you can consent to receiving all future
proxy statements, proxy cards and annual reports electronically via e-mail
or the Internet. To sign up for electronic delivery, please follow the
instructions above to vote using the Internet and, when prompted, indicate
that you agree to receive or access shareholder communications
electronically in future years.
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VOTE
BY PHONE- 1 (800) 690-6903
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Use
any touch-tone telephone to transmit your voting instructions up until
11:59 P.M. Eastern Time on May 29, 2008. Have your proxy card in hand when
you call and then follow the instructions.
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VOTE
BY MAIL
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Mark,
sign and date your proxy card and return it in the postage-paid envelope
we have provided or return it to Interactive Intelligence, Inc., c/o
Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
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TO
VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
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KEEP
THIS PORTION FOR YOUR RECORDS
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THIS
PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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DETACH
AND RETURN THIS PORTION ONLY
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INTERACTIVE
INTELLIGENCE, INC.
The Board
of Directors of Interactive Intelligence, Inc. recommends a vote
“
FOR
”
Items 1 and 2.
Vote on Directors
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1.
Election of Directors:
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For
All
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Withhold
All
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For
All
Except
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To
withhold authority to vote for any individual nominee, mark "For All
Except" and write the number(s) of the nominee(s) on the line
below.
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Nominees:
01
- Donald E. Brown, M.D.
02
- Richard A. Reck
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£
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£
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£
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Vote on Proposals
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For
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Against
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Abstain
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2.
To approve the amendment to the Interactive Intelligence, Inc. 2006 Equity
Incentive Plan.
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£
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£
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£
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3.
In their
discretion, upon such other matters that may properly come before the meeting or
any adjournment or adjournments
thereof.
The shares represented by this proxy when properly executed will be voted in the manner directed herein by the undersigned
Shareholder(s).
If
no
direction
is
made,
this
proxy
will
be
voted
FOR
items
1 and
2
.
If any other matters
properly come before the meeting, the persons named in
this
proxy card will vote in their discretion.