UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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INTERDIGITAL, INC.

 

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InterDigital, Inc.

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held June 5, 2008

 

TO THE SHAREHOLDERS OF INTERDIGITAL, INC.:

 

Our 2008 annual meeting of shareholders will be held on Thursday, June 5, 2008, at 11:00 a.m. Eastern Daylight Time, at the Radisson Hotel Valley Forge, 1160 First Avenue, King of Prussia, Pennsylvania, 19406. At the meeting, the holders of our outstanding common stock will act on the following matters:

 

 

All holders of record of shares of our common stock (Nasdaq: IDCC) at the close of business on April 8, 2008 are entitled to vote at the meeting and at any postponements or adjournments of the meeting. To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the meeting in person. If you have Internet access, we encourage you to record your vote via the Internet. It is convenient, and it saves us postage and processing costs. In addition, when you vote via the Internet, your vote is recorded immediately and there is no risk that postal delays will cause your vote to arrive late and therefore not be counted. If you do not vote via the Internet, please vote by telephone or by completing, signing, dating and returning the accompanying proxy card in the enclosed return envelope. Submitting your proxy by Internet, telephone or mail will not affect your right to vote in person if you decide to attend the annual meeting.

 

IF YOU PLAN TO ATTEND THE MEETING:

 

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

 

By Order of the Board of Directors,

 

STEVEN W. SPRECHER

General Counsel & Government Affairs Officer

 

April 29, 2008

King of Prussia, Pennsylvania

 

TABLE OF CONTENTS

 

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

 

PROXY STATEMENT

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to be held on June 5, 2008. The proxy statement and annual report to shareholders are available at http://ir.interdigital.com/phoenix.zhtml?c=116582&p=irol-reportsannual

 

This proxy statement contains information related to our annual meeting of shareholders to be held on Thursday, June 5, 2008, beginning at 11:00 a.m. Eastern Daylight Time, at the Radisson Hotel Valley Forge, 1160 First Avenue, King of Prussia, Pennsylvania 19406, and at any postponements or adjournments of the meeting. Your proxy for the meeting is being solicited by our board of directors. This proxy statement and our annual report are being mailed to shareholders beginning on or about April 29, 2008.

 

What is the purpose of the annual meeting?

 

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

 

Who may attend the meeting?

 

Subject to space availability, all shareholders as of April 8, 2008, the record date, or their duly appointed proxies, may attend the meeting. Registration will begin at 9:30 a.m. and seating will begin at 10:30 a.m. If you plan to attend the meeting, please note that you will need to bring your admission ticket and valid picture identification, such as a driver’s license or passport. Cameras, recording devices and other electronic devices will not be permitted at the meeting and all cellular phones must be silenced during the meeting. We realize that many cellular phones have built-in digital cameras, and while these phones may be brought into the meeting, the camera function may not be used at any time.

 

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

 

Who is entitled to vote at the meeting?

 

Only shareholders of record at the close of business on April 8, 2008, the record date, are entitled to receive notice of and to participate in the annual meeting. If you were a shareholder of record on that date, you will be entitled to vote all of the shares that you held on that date at the meeting, or any postponements or adjournments of the meeting. There were 45,857,629 shares of our common stock outstanding on the record date.

 

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

 

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

 

What is a quorum?

 

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

considered a quorum. If you are a registered shareholder, you must deliver your proxy by Internet, telephone or mail or attend the annual meeting in person and vote in order to be counted in the determination of a quorum. If you are a “street name” shareholder, your broker or other nominee will vote your shares pursuant to your proxy directions and such shares will count in the determination of a quorum. If you do not provide any directions to your broker or other nominee, your shares will still count for purposes of attaining a quorum and your broker or other nominee may vote your shares in its discretion on proposals 1 and 2.

 

How do I vote?

 

If you are a registered shareholder, you may submit your proxy by Internet, telephone or mail by following the instructions included with your proxy card. The deadline for submitting your proxy by Internet or telephone is 11:59 p.m., Eastern Daylight Time, on June 4, 2008. The designated proxy will vote according to your instructions. You may also attend the meeting and deliver a proxy card to be voted in the same manner or you may personally vote by ballot.

 

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

 

If you are a member of a retirement or savings plan or other similar plan, you may submit your voting instructions by Internet, telephone or mail by following the instructions included with your voting instruction card. The deadline for submitting your voting instructions by Internet or telephone is 11:59 p.m., Eastern Daylight Time, on June 2, 2008. The trustee or administrator of the plan will vote according to your instructions and the rules of the plan.

 

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

 

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

 

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

 

Will my vote be confidential?

 

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

 

What are the board’s recommendations?

 

The board recommends that you vote:

 

 

What vote is required to approve each proposal?

 

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

 

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

 

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

 

Where can I find information about the company’s governance?

 

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

 

How does the board determine which directors are considered independent?

 

Each year prior to the annual meeting, the board reviews and assesses the independence of its directors and makes a determination as to the independence of each director based on the recommendation of the nominating and corporate governance committee. During this review, the board considers transactions and relationships between each director or any member of his or her immediate family and our company and its subsidiaries and affiliates. The board measures these transactions and relationships against the independence requirements of The Nasdaq Stock Market LLC (Nasdaq). As a result of this review, the board affirmatively determined that Messrs. Campagna, Clontz, Kamins, Roath and Shaner are “independent” in accordance with applicable Nasdaq listing standards. To our knowledge, none of the independent directors has any direct or indirect relationships with our company or its subsidiaries and affiliates, other than serving as a director.

 

Who is the Chairman of the Board?

 

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

 

How is the board made up?

 

Our articles of incorporation provide for a board consisting of three classes of directors with overlapping three-year terms. One class of directors is elected each year with a term extending to the third succeeding annual meeting after election. The board presently has seven directors.

 

How often did the board meet during 2007?

 

The board met nine times during 2007. Each director is expected to attend each meeting of the board and of those committees on which he serves. No director attended less than 75% of the aggregate of all board meetings and meetings of committees on which the director served during 2007. We usually schedule meetings of the board on a day next to our annual meeting, and when this schedule is followed, it is the policy of the board that directors are expected to attend our annual meeting. All directors attended the annual meeting of shareholders in June 2007, except for Mr. Clontz and Mr. Shaner.

 

The company’s corporate governance guidelines provide that the independent directors meet in executive session at regular intervals or as otherwise appropriate throughout the year. The independent directors met in executive session two times during 2007.

 

What is the role of the primary board committees?

 

The board has standing audit, compensation, finance and investment, nominating and corporate governance and executive committees, which are composed entirely of independent directors, as determined by the board in accordance with applicable Nasdaq listing standards. In addition, audit committee members meet additional, heightened independence criteria applicable to audit committee members under applicable Nasdaq listing standards. Each of the audit, compensation, finance and investment, and nominating and corporate governance committees operates under a written charter, which has been approved by the board. The table below provides information about the current membership of the committees and the number of meetings held in 2007.

 

 

Audit Committee

 

The audit committee assists the board in its general oversight responsibilities relating to the company’s corporate accounting, its financial reporting practices and the integrity of financial reports as well as legal and regulatory compliance. Among other things, the committee:

 

 

 

All of the audit committee members are financially literate. The board has determined that Mr. Roath, the chairman of the audit committee, is qualified as an audit committee financial expert within the meaning of applicable Securities and Exchange Commission (SEC) regulations. The audit committee charter is available on the company’s website at (www.InterDigital.com/investor_relations) under the heading “Corporate Governance.”

 

Compensation Committee:

 

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

 

 

The compensation committee charter is available on the company’s website at (www.InterDigital.com/investor_relations) under the heading “Corporate Governance.”

 

Executive Committee:

 

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

Nominating and Corporate Governance Committee:

 

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

 

 

The committee will consider director candidates recommended by our shareholders. Shareholders recommending candidates for consideration by the nominating and corporate governance committee should send their recommendations to our secretary at 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409. The recommendation must include the candidate’s name, biographical data and qualifications. Any such recommendation should be accompanied by a written statement from the individual of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director.

 

The selection criteria for director candidates include the following:

 

 

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

 

Finance and Investment Committee:  The primary function of the finance and investment committee is to monitor, provide advice and recommend action to the board with respect to the investment and financial policies, strategies, and capital structure of the company.

 

How can shareholders communicate with the board?

 

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

correspondence we receive that is addressed to members of the board and request copies of any such correspondence.

 

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

 

Concerns relating to accounting, internal controls or auditing matters may be submitted by writing to Investor Relations, InterDigital, Inc., 781 Third Avenue, King of Prussia, Pennsylvania 19406-1409 or by sending an email to Directors@InterDigital.com. All correspondence will be immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the audit committee with respect to these matters. Alternatively, such concerns may be submitted confidentially by writing to the Office of Ombudsman, P.O. Box 60814, King of Prussia, Pennsylvania 19406-1409.

 

Does the company have a code of ethics?

 

We have adopted a Code of Business Conduct and Ethics that applies to all employees, officers and directors. In the event that we make any amendment to, or grant any waiver of, a provision of the Code of Business Conduct and Ethics, we will disclose the amendment or waiver as required by applicable rules. The Code of Business Conduct and Ethics is available on the company’s website at (www.InterDigital.com/investor_relations) under the heading “Corporate Governance.”

 

Which directors are up for election?

 

Messrs. Campagna, Clontz and Kamins are nominated for election at the 2008 annual meeting to serve a three-year term expiring at our annual meeting in 2011.

 

What are their backgrounds?

 

Mr. Campagna, 69, chairman of the board, has been a director of the company since April 1996. Mr. Campagna has been the chief executive officer and chairman of the board of Qualitex Co. for more than six years. Qualitex Co. is involved in the manufacturing of items for the garment apparel and textile maintenance industries.

 

Mr. Clontz, 57, has been a director of the company since April 1998. Since January 1999, Mr. Clontz has served as president and chief executive officer of StarHub, Ltd. (StarHub), a Singapore-based info-communications corporation. Mr. Clontz has also served as an executive director of StarHub since 1999 and as an executive director of six of its affiliates. In April 2005, Mr. Clontz was appointed to the board of Equinix, Inc., a leading global provider of network-neutral data centers and Internet exchange services headquartered in California. In February 2004, Mr. Clontz was appointed to the executive committee of the board of Global Crossing Limited, a Bermuda corporation, which provides telecommunications solutions over a global IP-based network.

 

Mr. Kamins, 59, has been a director of the company since December 2003. Mr. Kamins has, since July 2005, served as chief operational excellence officer of Avnet, Inc. (Avnet), a business-to-business provider of supply chain management and engineering services. Mr. Kamins continues to serve as Avnet’s corporate senior vice president, a position he has held since July 2003 when he was promoted to chief information officer. From October 1999, to July 2003, Mr. Kamins served as founder and president of Avnet Applied Computing, which services original equipment manufacturers.

Who are the remaining directors?

 

Continuing directors with terms expiring at the 2009 annual meeting

 

Mr. Bolgiano, 75, has been a director of the company since 1981. Mr. Bolgiano has been a vice president and chief scientist of the company since April 1984, and has served as chairman of the board of InterDigital Technology Corporation, a wholly-owned subsidiary of the company, since May 1996.

 

Mr. Merritt, 49, has been a director of the company since May 2005. Mr. Merritt has also served as president and chief executive officer of the company since May 2005, and as president of InterDigital Technology Corporation from July 2001 to January 2008. Mr. Merritt served as general patent counsel of the company from July 2001 to May 2005. Under the terms of Mr. Merritt’s Employment Agreement, Mr. Merritt’s service as a director of the company is conditioned upon his retention as chief executive officer.

 

Continuing directors with terms expiring at the 2010 annual meeting

 

Mr. Roath, 65, has been a director of the company since May 1997. Mr. Roath served as chief financial officer and senior vice president of RJR Nabisco, Inc. from April 1995 to April 1997, and he has been a director of Standard Parking, a provider of parking management services, since May 2004. He also serves as chairman of Standard Parking’s audit committee.

 

Mr. Shaner, 59, has been a director of the company since December 2003. From January 2004 to present, Mr. Shaner has served as founder and managing partner of Performance Management, LLC, a professional management consulting firm specializing in the optimization of business performance. Following his retirement from Cingular Wireless, LLC in February 2003, from February 2004 until September 2004, Mr. Shaner served as interim chief executive officer of REMEC, Inc., a developer and manufacturer of telecommunications infrastructure products for voice, video and data transfer over wireless networks and sophisticated microwave electronic subsystems for defense radar, communications, and electronic warfare applications. From January 2001 to his retirement in February 2003, Mr. Shaner served as president of wireless operations for Cingular Wireless LLC, a joint venture between the wireless divisions of SBC Communications Inc. and BellSouth Corporation.

 

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

 

The audit committee has appointed PricewaterhouseCoopers LLP (PwC) as the independent registered public accounting firm of the company for the year ending December 31, 2008. PwC has served as the independent registered public accounting firm of the company since 2002.

 

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

 

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

 

Fees Paid to Independent Registered Public Accounting Firm

 

Aggregate fees for professional services delivered by PwC for the fiscal years ending December 31, 2007 and 2006 were as follows:

 

 

 

 

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

 

The audit committee’s policy requires that it pre-approve all audit and non-audit services to be performed by the company’s independent registered public accounting firm so that the provision of such services does not impair the firm’s independence. Unless a service falls within a category of services that the audit committee has pre-approved, an engagement to provide the service requires pre-approval by the audit committee. Also, proposed services exceeding pre-approved cost levels require specific pre-approval.

 

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

 

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

 

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

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2 TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2008.

 

Our audit committee is composed of four directors whom the board has determined meet the independence and financial literacy requirements of Nasdaq, including additional heightened independence criteria applicable to audit committee members under applicable Nasdaq listing standards. The committee has, for many years, been composed entirely of independent directors. We act pursuant to our charter, which was adopted by the board and is subject to annual review.

 

As more fully described in the charter, the committee oversees the company’s financial reporting process on behalf of the board. In fulfilling our oversight responsibilities, the audit committee has reviewed and discussed with management the company’s audited consolidated financial statements for the year ending December 31, 2007, including a discussion of the acceptability and appropriateness of significant accounting principles and management’s assessment of the effectiveness of the company’s internal controls over financial reporting. Management has represented to us that the company’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States and considered appropriate in the circumstances to present fairly the company’s financial position, results of operations and cash flows. The audit committee has also reviewed and discussed with PwC, the company’s independent registered public accounting firm, their evaluation of the company’s internal controls over financial reporting and other business matters. Further, the audit committee has discussed with PwC the matters required to be discussed with the independent registered public accounting firm by Statement on Auditing Standards No. 61 (communications with audit committees), as amended and adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T.

 

This committee has also received and reviewed the written disclosures and the letter from PwC required by the Independence Standards Board standard No. 1 (independence discussions with audit committees), as adopted by the PCAOB in Rule 3600T, which relates to the accountant’s independence from the company and its related entities, and has discussed with PwC their independence from the company.

 

Based on the reviews and discussions with management and the independent registered public accounting firm referred to above, we recommended to the board that the audited financial statements be included in the company’s annual report on Form 10-K for the year ending December 31, 2007 for filing with the SEC and we retained PwC as the company’s independent registered public accounting firm for the year ending December 31, 2008.

 

AUDIT COMMITTEE:

 

Robert S. Roath, Chairman

Steven T. Clontz

Edward Kamins

Robert W. Shaner

 

How are directors compensated?

 

For board participation during fiscal year 2007, our non-management directors each received annual base compensation of $25,000. They each also received committee participation compensation equal to $5,000 annually ($15,000 annually for service as chairman of the executive, compensation, finance and investment, and nominating and corporate governance committees and $30,000 annually for service as chairman of the audit committee). Our chairman of the board receives 10,000 restricted stock units (RSUs) (all vesting one year from the grant date) each year on January 15th (or the next preceding trading day if the 15th is not a trading day). In addition, each non-management director receives 2,000 RSUs (all vesting one year from the grant date) at each annual meeting, except that all non-management directors that are re-elected at an annual meeting receive 6,000 RSUs (2,000 vesting each year beginning at the first anniversary of such re-election). All cash payments are based upon service for a full year and prorated payments are made for service less than a full year. These payments are made on a quarterly basis; however, cash payments and RSU awards may be

deferred. An election to defer must be made in the calendar year preceding the year in which services are rendered and the compensation is earned.

 

The compensation committee is responsible for reviewing and making recommendations to the board about compensation for non-management directors. In 2007, the committee retained Compensation Strategies, Inc. (CSI), to conduct a market review of the company’s compensation program for non-management directors. CSI reports directly to the compensation committee. CSI assessed the competitiveness of the company’s director compensation as measured against a peer group recommended by CSI and presented its conclusions to the committee in June 2007. After reviewing the information provided by CSI, including CSI’s conclusion that the company’s director compensation was close to the median among companies in the peer group, the compensation committee concluded that no changes were necessary for 2007 and ratified the company’s annual compensation program for non-management directors effective as of January 1, 2007. In addition to conducting periodic market reviews of the company’s non-management director compensation, CSI discusses major shifts in the marketplace for director compensation with the committee or management, as appropriate, as these shifts occur from time to time. In addition, at least annually, CSI discusses with the chief administrative officer any variables that may affect director compensation to assist the company in its ongoing efforts to provide a compensation program for non-management directors that is competitive. Additional information about CSI appears below under the heading “Role of Compensation Committee, Executive Officers and Compensation Consultant in Compensation Decisions.”

 

To align the interests of directors with those of our shareholders, the company has adopted stock ownership guidelines for directors. Individuals are expected to meet their targets within five years of the date they become subject to the guidelines. Stock ownership guidelines applicable to the non-management directors are set at a target of three times their annual cash retainer. Qualifying ownership includes common stock, restricted stock and RSUs. All non-management directors were in compliance with the guidelines as of December 31, 2007.

 

The following table sets forth the compensation paid to each non-management director in 2007 for his service as a director:

 

 

 

 

 

 

Set forth below is certain information concerning our executive officers as of March 31, 2008:

 

 

There are no family relationships among the individuals serving as our directors or executive officers. Set forth below is the name, office and position held with our company and principal occupations and employment during the past five years of each of our executive officers. Biographical information on Mr. Merritt is discussed above under the caption “Continuing directors with terms expiring at the 2009 annual meeting.”

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

 

Richard J. Brezski joined the company as controller in May 2003. As of February 8, 2007, Mr. Brezski was appointed chief accounting officer and remained controller. Prior to joining the company, Mr. Brezski served as an audit manager for PwC’s technology practice.

 

Gary D. Isaacs joined the company as director of human resources in September 1998. Mr. Isaacs was promoted to vice president of human resources in April 1999. As of February 8, 2007, Mr. Isaacs was named chief administrative officer responsible for overseeing the company’s corporate resources and information systems functions.

 

Brian G. Kiernan was promoted to senior vice president, standards in July 1997. As of February 8, 2007, Mr. Kiernan’s title was revised to executive vice president, standards without a change in responsibilities.

 

Mark A. Lemmo has been the company’s executive vice president, business development and product management since April 2000.

 

William C. Miller joined the company as senior vice president, programs and engineering in July 2000. As of February 8, 2007, Mr. Miller’s title was revised to executive vice president, programs and customer support without a change in responsibilities.

 

James J. Nolan joined the company in 1996 and, until his election as senior engineering officer in May 2006, has held a variety of engineering positions including vice president of systems engineering. As of February 8, 2007, Mr. Nolan’s title was revised to executive vice president, engineering without a change in responsibilities. Mr. Nolan has led the company’s technology and product development programs for modems, protocol software and radio designs for multiple wireless standards.

 

Janet Meenehan Point joined the company in January of 2000, as director of investor relations. In January 2006, she was promoted to senior communications officer for the company, responsible for corporate communications, investor relations, and marketing. As of February 8, 2007, Ms. Point’s title was revised to executive vice president, communications and investor relations without a change in responsibilities.

 

Lawrence F. Shay joined the company as vice president and general counsel in November 2001, and served as corporate secretary from November 2001 to September 2004. As of February 8, 2007, Mr. Shay’s title was revised to chief legal and government affairs officer without a change in responsibilities. As of January 18, 2008, in addition to being chief legal and government affairs officer, Mr. Shay was appointed president of the company’s patent holding subsidiaries, executive vice president of intellectual property and chief intellectual property counsel. Mr. Shay relinquished the chief legal and government affairs officer title upon the promotion of Mr. Sprecher to general counsel and government affairs officer in March 2008.

 

Steven W. Sprecher joined the company as deputy general counsel in September 2007, and he was promoted to his current position as general counsel and government affairs officer in March 2008. Prior to joining the company, Mr. Sprecher served as vice president, legal for Mindspeed Technologies, Inc. and its former parent company, Conexant Systems, Inc. (semiconductor manufacturers) from December 1999 to August 2007.

 

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

 

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management, and based on its review and discussions has recommended to the board of directors that the Compensation Discussion and Analysis be included in this 2008 proxy statement.

 

COMPENSATION COMMITTEE: 

 

Harry G. Campagna, Chairman

Steven T. Clontz

Robert S. Roath

Robert W. Shaner

 

This Compensation Discussion and Analysis focuses on the company’s compensation strategy, programs and practices for 2007 for the executive officers named in the Summary Compensation Table (named executive officers) that follows this discussion.

 

Compensation Objectives and Philosophy

 

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

 

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

 

 

The company’s total compensation program is part of an overall strategy to create an environment of collective effort towards common goals, to give each named executive officer a short- and long-term stake in the success of the company, and to reward named executive officers appropriately when company performance meets or exceeds desired objectives. It is the compensation committee’s view that each named executive officer plays a key role in the successful execution of the company’s strategy.

 

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

 

The compensation committee determines the structure and amount of all named executive officer compensation. The committee has final authority with respect to these compensation decisions. The committee considers the recommendations of the chairman of the board in determining the base salary of the chief executive officer and the individual performance component of his annual bonus. As part of the annual performance and compensation review for our named executive officers other than the chief executive officer,

the committee considers the chief executive officer’s assessment of each named executive officer’s individual performance, including identification of major individual accomplishments, and his recommendations with respect to their compensation. In addition, the chief executive officer provides an assessment to the compensation committee regarding the extent to which the company achieved corporate goals established under the company’s Annual Employee Bonus Plan and the Long Term Compensation Program (LTCP). From time to time, the compensation committee may also receive information from other executive officers about matters such as compensation trends and changes in the law that may impact the terms of the company’s compensation plans.

 

The compensation committee has retained CSI to assist the committee by providing relevant market data (including peer group benchmarking) and by making recommendations to the committee regarding the structure and amounts of various components of executive compensation. CSI reports directly to the compensation committee. As discussed above under the heading “How are directors compensated?,” CSI conducts periodic market reviews of the company’s non-management director compensation and provides other advice to the committee on director compensation matters. In addition, from time to time, CSI may advise the board and management on ad hoc basis about discrete compensation-related issues. In May 2006, at the compensation committee’s direction, CSI conducted a market review of the company’s compensation levels for its senior executives. As discussed in more detail below, CSI assessed the competitiveness of the company’s named executive officer compensation as measured against a peer group recommended by CSI.

 

Elements of Executive Compensation — Overview

 

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

 

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

 

 

Long-term compensation for the named executive officers is paid out under the LTCP, as more fully described below. The LTCP has two components: (1) equity (in the form of time and performance-based RSUs), and (2) a long-term incentive cash award based on the achievement of corporate goals after the completion of cycles that are generally three years in length.

 

The company does not provide pension or deferred compensation programs to named executive officers, although they have the ability to defer settlement of RSUs. Perquisites (i.e., car allowances, club memberships, etc.) are not paid to any named executive officer. In lieu of perquisites and as a retention incentive, every employee, including the named executive officers, receives a cash supplemental payment equal to 31/2% of the employee’s base salary, as discussed further below under “Cash Supplement and Profit-Sharing Program.” The named executive officers participate in a variety of savings, health and welfare plans which are available to all U.S. employees.

 

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

Current Compensation

 

Base Salary

 

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

 

In 2007, salary adjustments for our named executive officers were based primarily on individual performance and peer group data. Individual adjustments were made after the compensation committee considered the performance of each executive together with job tenure, individual responsibilities, the unique nature of certain positions, and other elements of the individual’s annual cash, total and projected compensation. Salary adjustments for 2007 resulted in an increase of approximately 9% for Mr. Merritt and 4% for each of the other named executive officers, except Mr. McQuilkin, who joined the company in July 2007, and Mr. Shay, whose salary increased by approximately 14% due to a one-time payment of $25,000 in April 2007 based on Mr. Shay’s assumption of management oversight for the company’s patent litigation matters.

 

Annual Bonuses

 

Bonus awards are designed to reward the achievement of annual business goals, reward the individual accomplishments of the named executive officers and encourage stock ownership. Bonuses are payable to named executive officers under the company’s Annual Employee Bonus Plan. The targeted annual bonus of each of the company’s named executive officers is set as a percentage of salary. For 2007, that percentage was 57% for the chief executive officer and 40% for the other named executive officers. The amount awarded is based 75% on achievement of annual corporate goals and 25% on individual performance. Distinctions in compensation among the named executive officers have tended to be reflected in the portion of the bonus award attributable to individual performance.

In 2007, the corporate goals were securing additional patent licenses, securing patent/technology licenses providing a specified amount of revenue, managing cash spending to a specified level, building the product business and enhancing the company’s intellectual property portfolio, and strengthening the organization. The specific goals, and the relative weights assigned to each, were as follows:

 

 

The annual corporate goals are generally structured to challenge management to achieve results that collectively yield a payout at or about 100% of target. However, there tends to be less certainty associated with the company’s ability to achieve goals relating to the execution of patent license and technology agreements consistent with the company’s strategic plan. At the end of 2007, the chief executive officer provided his assessment to the compensation committee regarding the extent to which the company achieved the annual corporate goals. The committee considered this assessment and discussed various other factors that contributed to the company’s successes in areas not identified in the goals enumerated under the plan. These successes included standards submissions well beyond the level anticipated in the annual corporate goals, certain key product development achievements, the company’s 2007 corporate reorganization, proactive litigation management, and management’s overall effective communication with the board. Following discussion among the members, the compensation committee determined that the company achieved 83% of the 2007 annual corporate goals.

 

In determining annual bonuses for 2007, the compensation committee considered the recommendations of the chairman of the board and reviewed the individual performance component of the chief executive officer’s bonus. For the other named executive officers (excluding Mr. Fagan, who did not receive an annual bonus due to his departure), the compensation committee reviewed the performance assessments provided by the chief executive officer. The compensation committee also has discretion to exercise its judgment based on interactions with each named executive officer. As noted above, the amount awarded as annual bonus is based 75% on achievement of annual corporate goals and 25% on individual performance. The payout under the

portion of the annual bonus attributable to individual performance may range from 0 to 150% of the targeted annual bonus amount, depending upon the individual executive’s performance assessment.

 

Since 1999, the compensation committee has determined that 30% of the annual bonus paid to employees at the vice president level and above, including the named executive officers, be paid in the form of shares of the company’s common stock, which are subject to a two-year restriction on transferability. The purpose of paying a portion of the annual bonus in the form of equity is to enhance senior management stock ownership, thereby fostering the alignment of senior management’s interests with those of our shareholders. Due to the restriction on transfer, the officers also receive a tax gross-up on the value of these bonus shares, which is intended to ensure that the amount of the officers’ annual bonus equals what they otherwise would have received if the bonus were payable entirely in cash.

 

Savings and Protection Plan (401(k))

 

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

 

Cash Supplement and Profit-Sharing Program

 

The cash supplemental payment provides all employees, including the named executive officers, with an annual cash payment equal to 31/2% of their annual base salary, payable quarterly. This program is designed to eliminate the need to provide any perquisites to employees and to serve as a retention incentive. Effective January 1, 2008, all executive level employees, including the named executive officers, have elected not to participate in the cash supplemental payment program for 2008.

 

In addition, the compensation committee approved a profit-sharing contribution to each employee, including the named executive officers, of 1% of the employee’s base salary up to a cap of $225,000 for 2007, which has been paid in shares of company common stock in the first quarter of 2008.

 

Long-Term Incentives

 

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

 

 

The LTCP consists of three-year, overlapping cycles. The first cycle under the program covered the period from April 1, 2004 through January 1, 2006 (Cycle 1) and included both RSU and cash components. The second cycle originally covered the period from January 1, 2005 through January 1, 2008 (Cycle 2) and also included both RSU and cash components. In the second quarter of 2005, the compensation committee amended the LTCP to revise only the cash award portion of Cycle 2 to cover a 31/2 year period from July 1, 2005 through January 1, 2009 (Cycle 2a). The compensation committee amended the LTCP because it believed that several events, including the conclusion of a major arbitration that would have had a significant one-time effect on achievement of corporate goals, and the appointment of a new chief executive officer, warranted the establishment of new long-term goals, and because the parallel cycles that previously existed resulted in erratic expense patterns for the company every other year. The RSU component of the third cycle (RSU Cycle 3) began on January 1, 2007 and runs through January 1, 2010; the cash component of the third cycle (Cash Cycle 3) began on January 1, 2008 and runs through January 1, 2011.

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

 

Equity Awards

 

Each named executive officer receives an RSU award under the LTCP based on a percentage of their base salary at the time of grant. Awards under the LTCP are paid out at the end of each three-year cycle for all executive participants. Until 2006, the equity component of the LTCP consisted solely of time-based RSUs. To more closely align management’s compensation with corporate performance, in August 2006, members of senior management were offered the opportunity to exchange 50% of their then-current time-based RSUs (from Cycle 2) for an equal number of performance-based RSUs, with the level of payout tied to the company’s achievement of pre-approved performance goals established by the compensation committee. All the named executive officers participated in this exchange offer, other than Mr. McQuilkin, who joined the company in July 2007 and was therefore not eligible to participate in the LTCP’s Cycle 2 equity award program. In December 2006, the LTCP was amended so that, beginning with the January 1, 2007 grant (RSU Cycle 3), executives now receive 50% of their RSU grant as performance-based RSUs and 50% as time-based RSUs.

 

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

 

Cycle 2

 

The amount of the RSU grant (both time and performance-based) made January 1, 2005 (Cycle 2), for each named executive officer (other than Mr. McQuilkin, who did not join the company until July 2007), was based on the following percentages of base salary:

 

 

 

 

For Cycle 2, in order to receive a payout under the performance-based equity component of the LTCP, the company had to achieve the associated goal, involving the execution of certain agreements providing revenue from 3G terminal units, by January 15, 2008. This goal was structured to challenge management to achieve a sufficient number and type of agreements to result in a payout at or about 100% of target. The compensation committee reviewed progress toward this goal as of January 15, 2008 and authorized a payout at the 20% level. The time-based portion of the Cycle 2 RSU grant vested in full on January 1, 2008.

Cycle 3

 

The amount of the RSU grant (both time and performance-based) made January 1, 2007 (RSU Cycle 3), for each named executive officer was based on the following percentages of base salary:

 

 

 

 

The goals associated with RSU Cycle 3, which began on January 1, 2007, focus on elements of the company’s strategic plan that relate to our technology solutions and fabrication-outsourced products and are comprised of: (1) number of design wins (50% of goal), and (2) the volume of fabrication-outsourced or IP customer unit shipments made within the performance period (50% of goal). The payout may exceed or be less than the targeted percentage of base salary depending on the company’s level of goal achievement, or there may be no payout at all if the company fails to meet the minimum performance goals for the cycle.

 

Effective with his promotion on January 1, 2008, to executive vice president of intellectual property and chief intellectual property counsel, Mr. Shay’s base salary percentage, which will be used for future RSU award calculations, was increased from 90% to 100%. All executive officers (other than Mr. Merritt and Mr. Shay) will have a target RSU award of 90% of base salary in future program cycles once they have served in their respective capacities for three consecutive years. Mr. Merritt’s target RSU award percentage is higher than that of the other named executive officers due to his position as president and chief executive officer of the company.

 

Cash Awards

 

The cash portion of the LTCP provides performance-based cash awards to the named executive officers based on the company’s achievement of pre-approved performance goals established by the compensation committee for each program cycle. As with the equity component discussed above, each participant’s target award is established as a percentage of their base salary in effect at the start of each cycle and a payout is based on the company’s achievement of the applicable long-term goals. For Cycle 2a, the percentages of July 1, 2005 base salaries used to calculate the LTCP cash awards were as follows:

 

 

 

 

The objectives underlying the goals established for the Cycle 2a cash award are to drive the company’s strategic plan and complement the annual bonus plan goals. The goals associated with Cycle 2a are: (1) to achieve patent licensing/technology solution revenue coverage at a specified target percentage of the 3G market on terms consistent with our strategic plan; (2) generate a specified amount of free cash flow over the period; and (3) expand the company’s business beyond 3G baseband through execution of additional agreements.

 

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

 

Factors Considered in Setting Compensation

 

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

 

 

In evaluating the accomplishment of 2007 goals and related compensation awards for named executive officers, the compensation committee considered the company’s strong performance during 2007. During 2007, the company delivered solid financial results, significantly matured the patent licensing business, and successfully brought the SlimChip family of mobile broadband modem solutions to market. The compensation committee also considered the extent to which the company achieved corporate goals established under the company’s Annual Employee Bonus Plan and the LTCP, as well as the chief executive officer’s assessment regarding the company’s achievement of the corporate goals. The committee determined that the company achieved 83% of the 2007 corporate goals under the Annual Employee Bonus Plan.

 

The compensation committee also considered the compensation practices of other companies in the telecommunications/communications industry. Consistent with the core objectives of the company’s compensation program, the compensation committee seeks to provide compensation that is competitive in light of current market conditions and industry practices. Accordingly, the compensation committee reviews data on peer group companies to gain a general perspective on the compensation levels and practices at these companies and to assess the relative competitiveness of the compensation paid to the company’s named executive officers. The peer group data serve as a reference point and guideline for the compensation committee in evaluating competitiveness; the committee does not target compensation for individual named executive officers to specific benchmarks. As discussed above, the compensation committee has engaged CSI to assist it in the process of identifying peer group companies and gathering information on their practices. As part of the market review conducted in 2006, CSI identified a peer group that included 17 companies generally from the technology/communications industry sector, including several companies that had patent/licensing components to their businesses. The peer group companies had annual revenues ranging from $70 million to

$1.1 billion, with median revenue of approximately $235 million, which is slightly larger than the company’s revenues of $163 million for the previous fiscal year. The companies comprising the peer group were:

 

 

CSI gathered available information about individual positions, elements of compensation and overall compensation at the peer group companies and provided the compensation committee with this data, which the compensation committee reviewed. Overall, total compensation for the company’s named executive officers was close to the median (+/− 5%) for companies in the $150 million — $200 million revenue group. Although the compensation committee does not specifically target the median in setting compensation for the named executive officers, the company’s practice has been to pay at the median for comparable roles in the marketplace in order to attract, retain and motivate talented leaders.

 

The third factor that the compensation committee considered in determining compensation for our named executive officers in 2007 was individual performance, including the chief executive officer’s assessment of the other named executive officers’ individual performance. The compensation committee considered individual performance when setting both base salaries and the amount of the named executive officers’ annual bonuses which, as discussed below, are based 25% on individual performance. Specifically:

 

 

 

As a result of these factors, base salary and annual bonuses for the named executive officers increased during 2007 as compared to 2006. Mr. Fagan did not receive an annual bonus for 2007 due to his departure from the company in August 2007.

 

Grant Practices

 

The timing and amount of the grants under the Annual Employee Bonus Plan and the LTCP are formulaic. In the case of the Annual Employee Bonus Plan, as discussed above, the compensation committee has elected, over the past nine years, to award 30% of the annual bonus earned by employees at the vice president level or above, including the named executive officers, in the form of stock, bearing a two-year restriction on transferability. At the direction of the compensation committee, the number of shares awarded is calculated by dividing the applicable dollar amount by the closing fair market value of the company’s common stock on the last business day immediately preceding the payroll date on which bonuses are paid to all employees.

 

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

 

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

 

2008 Compensation Decisions

 

In January 2008, the compensation committee increased the 2008 base salary for all named executive officers, as described below:

 

 

 

The increases in base salaries over 2007 levels are based on the compensation committee’s consideration of the named executive officers’ continued excellent individual performance during 2007, information about compensation levels at peer group companies based on a market review that CSI completed in June 2007, the promotion of Mr. Shay, and changes in the Consumer Price Index. No significant changes were made from 2007 in establishing 2008 performance goals under the Annual Employee Bonus Plan or in the company’s goals for the Cash Cycle 3 under the LTCP, which began on January 1, 2008.

 

Impact of Tax Treatment

 

Section 162(m) of the Internal Revenue Code generally limits the company’s tax deduction for compensation paid to its chief executive officer and other named executive officers (excluding the chief financial officer) to $1 million per person in any tax year. Qualified performance-based compensation is not subject to the deduction limit if specified requirements are met. The compensation committee has considered the effects of Section 162(m) when implementing compensation plans and taking into account whether preserving the tax deductibility of compensation to named executive officers could impair the operation and effectiveness of the company’s compensation programs. However, the committee believes it is important to maintain flexibility to make adjustments in the company’s LTCP, despite the fact that in the future certain amounts paid to executives in excess of $1 million may not be deductible. For 2007, there was no compensation paid in excess of the $1 million threshold under 162(m).

 

Stock Ownership Guidelines

 

To align the interests of senior officers with those of our shareholders, the company has established minimum stock ownership guidelines for senior officers. Individuals are expected to meet their targets within five years of the date they become subject to the guidelines. The compensation committee established the guidelines with the advice of CSI, and the committee monitors compliance with the guidelines on an annual basis. Qualifying ownership includes common stock, including that held through the company’s 401(k) plan, restricted stock and RSUs. The chief executive officer’s target ownership is set at an amount of company common stock equal in value to four times his current annual base salary. Other officers are expected to own company stock approximately equivalent in value to a specified multiple of either one, two or three times their current annual base salary, depending upon their position in the company. All of the named executive officers were in compliance with the guidelines as of December 31, 2007.

 

Employment Agreements

 

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

 

The following table contains information concerning compensation awarded to, earned by, or paid to our named executive officers in the last two years. Our named executive officers include our chief executive officer, chief financial officer and our three other most highly compensated executive officers who served the company during 2007. Additional information regarding the items reflected in each column follows the table. All such compensation was attributable to services rendered to the company and its subsidiaries during fiscal 2007.

 

 

 

 

 

 

 

 

The following table summarizes the grants of plan-based awards of restricted stock units (RSUs), restricted stock (RS), and performance share units (PSUs), and the awards under the cash component of the Annual Employee Bonus Plan (AEBP) made to the named executive officers for the year ending December 31, 2007. Each of these types of awards is discussed in the Compensation Discussion and Analysis above.

 

 

 

 

The following table sets forth information concerning outstanding equity awards for our named executive officers at December 31, 2007. The amounts shown reflect outstanding equity awards granted under one of the following plans: the 1995 Stock Option Plan, the 1999 Restricted Stock Plan or the 2000 Stock Award and Incentive Plan.

 

 

 

 

The following table sets forth information concerning stock options exercised and stock awards vested during 2007 for our named executive officers.

 

 

 

 

Named Executive Officer Employment Agreements

 

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

 

Pursuant to the terms of the LTCP, if the executive’s employment terminates in the event of long-term disability, death, absenteeism or without cause (each as described below), the executive is entitled to a pro-rata portion of any RSU awards (both time-based and performance-based) and cash award. Pursuant to the terms of the Annual Employee Bonus Plan that require an employee to be working actively at the time of the payout (unless involuntarily terminated other than for intentional wrongdoing after the end of the plan year, but before the bonus was paid), the executive would not be eligible to receive a bonus under the plan, although we retain the right to make exceptions to the eligibility requirements of the plan and have done so in the past. Any rights that executives have under these plans in connection with other termination scenarios are discussed below in connection with the relevant scenario.

 

Termination for Long-Term Disability

 

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

 

 

 

In addition, provided that the executive executes our standard termination letter, which includes, among other things, a broad release of all claims against us and a reiteration of his confidentiality and other post-termination obligations (Termination Letter), he is entitled to receive, for a period of one year (18 months in the case of Mr. Merritt) following termination: (1) regular installments of base salary at the rate in effect at the time of termination, reduced by the amount of payments received for this period pursuant to any Social Security entitlement or any long-term disability or any other employee benefit plan, policy or program maintained to provide benefits in the event of disability in which the executive was entitled to participate at the time of termination, and (2) medical and dental coverage on terms and conditions comparable to those most recently provided to him.

 

Termination by Death

 

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

 

Termination for Cause

 

The company may terminate an executive’s employment at any time for “cause” upon the occurrence of any of the following: (1) any material breach by the executive of any of his obligations under his employment agreement that is not cured within 30 days after he receives written notification from the company of the breach, or (2) other conduct of the executive’s involving any type of willful misconduct with respect to the company, including, without limitation, fraud, embezzlement, theft or proven dishonesty in the course of his employment or conviction of a felony. In the event of a termination of the executive’s employment for cause, the executive is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation.

 

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

 

Termination Without Cause

 

The company may terminate an executive’s employment at any time, for any reason, without cause upon 30 days prior written notice to the executive. In the event of a termination without cause, the executive is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, provided he executes a Termination Letter, the executive is entitled to receive: (1) severance in an amount equal to his base salary, and (2) medical and dental coverage on terms and conditions comparable to those most recently provided to him, both for the period of one year (18 months in the case of Mr. Merritt) commencing upon the date of termination. In addition, Mr. Merritt’s employment agreement provides that he is also entitled to receive additional severance equal to the total amount of 50% of his target bonus for the year in which the termination occurs, payable in equal installments over a period of 18 months after the date of termination.

 

Termination for Absenteeism

 

The company may terminate an executive’s employment in the event that he is absent for more than 150 days within any 12-month period. In the event of termination due to absenteeism, the executive is entitled to receive all accrued but unpaid (as of the date of such termination) base salary, Benefits and Other Compensation. In addition, provided he executes a Termination Letter, he is entitled to receive, for a period of

one year (18 months in the case of Mr. Merritt) following termination: (1) regular installments of base salary at the rate in effect at the time of termination, reduced by the amount of payments received for this period pursuant to any Social Security entitlement or any long-term disability or any other employee benefit plan, policy or program maintained to provide benefits in the event of disability in which the executive was entitled to participate at the time of termination, and (2) medical and dental coverage on terms and conditions comparable to those most recently provided to him. In addition, Mr. Merritt’s employment agreement provides that he is also entitled to receive an additional severance amount equal to the total amount of 50% of his target bonus for the year in which termination occurs, payable in equal installments over a period of 18 months after the date of termination.

 

Termination by the Executive

 

An executive may terminate his employment with us at any time, for “good reason” or without “good reason,” provided that the date of termination is at least 30 days after the date he gives written notice of the termination to the company. For this purpose, “good reason” means: (1) the company’s failure to pay in a timely manner the executive’s base salary or any other material form of compensation or material benefit to be paid or provided to him under his employment agreement, or (2) any other material breach of our obligations under his employment agreement that is not cured within 30 days after the company receives written notification from the executive of the breach. In the event that the executive terminates his employment, either for good reason or without good reason, he is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, solely if the termination is for good reason, and provided that the executive executes a Termination Letter, he is entitled to receive: (1) severance in an amount equal to his base salary, and (2) medical and dental coverage on terms and conditions comparable to those most recently provided to him, both for the period of one year (18 months in the case of Mr. Merritt) commencing upon the date of termination.

 

In addition, Mr. Merritt’s employment agreement provides that he is also entitled to receive additional severance equal to the total amount of 50% of his target bonus for the year in which termination occurs, payable in equal installments over a period of 18 months after the date of termination. Pursuant to the terms of the LTCP and Annual Employee Bonus Plan, Mr. Merritt forfeits any rights under these plans if he terminates his employment for any reason. If an executive other than Mr. Merritt terminates his employment with us without good reason, the company generally may elect to pay severance of up to one year’s salary and continuation of medical and dental benefits for a period of one year.

 

Termination Following a Change in Control

 

If the company terminations an executive’s employment (except for cause), or the executive terminates his employment with us (whether or not for good reason) within one year following a “change in control,” he is entitled to receive all accrued but unpaid (as of the effective date of termination) base salary, Benefits and Other Compensation. In addition, (1) provided that he executes a Termination Letter, the executive is entitled to receive, on the date of termination, an amount equal to two years’ worth of his base salary, and (2) all stock options granted by the company that vest upon a change in control pursuant to the terms of the applicable stock option plan. For this purpose “change in control” means the acquisition (including by merger or consolidation, or by our issuance of securities) by one or more persons in one transaction or a series of related transactions, of more than 50% of the voting power represented by our outstanding stock on the date of the executive’s employment agreement, or a sale of substantially all of our assets.

 

Pursuant to the terms of the LTCP, following a change in control (except for cause), the executive is entitled to an early payout of his LTCP cash bonus award in an amount that is the greater of either: (1) his target LTCP bonus, or (2) the LTCP cash bonus that would have been due to him at the end of the relevant LTCP cycle (but for the change in control), assuming performance through the remainder of the cycle prior to the change in control. In addition, for each executive, the occurrence of a change in control causes all otherwise unvested time-based RSUs (whether granted as an LTCP, promotion or new hire award), and any other unvested equity awards, with the exception of performance-based RSU awards, to vest immediately in

full. These actions will occur without regard to whether the executive remains employed at the company and without regard to performance during the remainder of the LTCP cycles.

 

Pursuant to the terms of the Annual Employee Bonus Plan, the executive is not eligible to receive a bonus under the Annual Employee Bonus Plan, with the exception of Mr. Shay, who is entitled to receive 100% of his annual target bonus amount.

 

Termination Due to Retirement

 

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

 

Potential Payments upon Termination or Change in Control

 

The following tables reflect the amount of compensation payable to each of the named executive officers, with the exception of Mr. Fagan, pursuant to each of their employment agreements, as well as pursuant to the LTCP and Annual Employee Bonus Plan upon: (1) termination for long-term disability; (2) termination by death; (3) termination for cause; (4) termination without cause; (5) termination for absenteeism; (6) termination by the executive; and (7) termination upon a change in control of the company. The amounts shown assume that the termination was effective as of December 31, 2007, and thus include amounts earned through that time. The amounts reflected are estimates of the amounts that would be paid out to the executives upon their termination. The actual amounts to be paid out can be determined only at the time the events described above actually occur.

 

The compensation Mr. Fagan received upon his departure from the company is fully reflected in the Summary Compensation Table above. In response to Mr. Fagan’s March 2007 announcement that he would be resigning from the company as chief financial officer no later than August 15, 2007, the company and Mr. Fagan entered into an amended and restated employment agreement to set forth the terms of his continuing employment until that time. The terms of his employment agreement provided for the payment of separation benefits in the event that Mr. Fagan remained with us through August 15, 2007, that his employment ended prior to that date as a result of his disability or death, that we terminated him without cause prior to that date, or that we terminated his employment (except for cause) after a change in control; provided that Mr. Fagan or his estate (if his termination was by reason of his death) executed a Termination Letter. The separation benefits included: (1) regular payments of his base salary through August 15, 2007; (2) payment of our portion of the premiums for his continued participation in our group health insurance (medical, dental, vision) pursuant to COBRA for the period from the last day of his employment through December 31, 2007; (3) a pro rata portion of his RSU awards (both time-based and performance-based) under the LTCP for Cycle 2 (which extended from January 1, 2005 through January 1, 2008); (4) a pro rata portion of any LTCP cash award for Cycle 2; and (5) removal of the restrictions relating to the bonus restricted stock awards that were granted to him for 2005 and 2006 under the Annual Employee Bonus Plan and delivery of the shares as promptly as possible. Mr. Fagan continues to be subject to a one-year covenant-not-to-compete regardless of the reason for termination and independent of any obligation the company may have to pay severance.

William J. Merritt

 

Assuming one of the following events occurred on December 31, 2007, Mr. Merritt’s payments and benefits have an estimated value of: