UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

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

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

 

GREAT WOLF RESORTS, INC.

(Name of Registrant as Specified In Its Charter)

 

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

Payment of Filing Fee (Check the appropriate box):

þ		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON MAY 30, 2007

 

 

 

We cordially invite you to attend our annual meeting of shareholders to be held at the Great Wolf Lodge resort, 2501 Great Wolf Drive, Mason, Ohio, on Wednesday, May 30, 2007 at 9:00 a.m., Eastern Time. At this meeting, you and our other shareholders will be able to vote on the following:

 

1. The election of all eight directors to serve on our Board of Directors until our annual meeting of shareholders in 2008, or until their successors have been duly elected and qualified; and

 

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

 

As part of this Notice of Annual Meeting, we attach a proxy statement containing further information about our annual meeting and the proposal described above.

 

You may either vote in person or by proxy. Please see the attached proxy statement for more details on how you can vote. Even if you plan to attend our annual meeting, we urge you to complete and return promptly the enclosed proxy card in the enclosed self-addressed envelope for your shares to be represented and voted at our annual meeting in accordance with your instructions. Of course, if you attend our annual meeting, you may withdraw your proxy and vote your shares in person.

 

Only shareholders of record at the close of business on Monday, April 30, 2007 will be entitled to vote at our annual meeting or any adjournment of our annual meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS:

 

J. MICHAEL SCHROEDER, Secretary

 

Madison, Wisconsin

May 4, 2007

 

PROXY STATEMENT

FOR THE ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON MAY 30, 2007

 

GENERAL INFORMATION

 

Our Board of Directors is soliciting your proxy for use at our annual meeting of shareholders to be held at the Great Wolf Lodge resort, 2501 Great Wolf Drive, Mason, Ohio, on Wednesday, May 30, 2007 at 9:00 a.m., Eastern Time, and at any adjournments of our annual meeting. You are invited to attend our annual meeting and vote your shares directly. However, even if you do not attend, you may vote by proxy, which allows you to instruct another person to vote your shares on your behalf at our annual meeting. For this purpose, we enclose one blank proxy card for your use.

 

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

 

This proxy statement and the accompanying proxy card and Notice of Annual Meeting are being mailed to our shareholders on or about May 4, 2007.

 

Purposes of Our Annual Meeting

 

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

 

This Proxy Solicitation

 

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

 

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

 

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

 

VOTING

 

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

 

Our Board has fixed the close of business on Monday, April 30, 2007 as the record date for determining which of our shareholders are entitled to receive notice of, and to vote at, our annual meeting. You will be entitled to notice of, and to vote at, our annual meeting and any adjournments of our annual meeting, only if you were a shareholder of record at the close of business on the record date. At the close of business on our record date of April 30, 2007, we had issued and outstanding 30,680,838 shares of our common stock, which are entitled to vote at our annual meeting. See “Required Votes.”

 

How to Vote Your Shares and How to Revoke Your Proxy

 

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

 

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

 

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

 

In voting by proxy as to the election of directors, you may either (1) vote in favor of one or more of the eight nominees or (2) withhold your votes as to one or more of the nominees. Abstentions will be treated as set forth below. You may not vote for persons other than Messrs. Vittoria, Emery, Blutinger, Churchey, Knetter, Rensi and Silver, and Ms. Nolan in the election of directors.

 

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

 

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

 

 

If you choose either of the first two means to revoke your proxy, you must submit either your notice of revocation or your new proxy card to our mailing address listed on page 1 of this proxy statement.

 

Required Votes

 

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

 

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

 

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

 

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

 

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

 

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

 

If you do not vote your shares, your brokerage firm may either (1) vote your shares on routine matters, including this year’s election of directors, or (2) leave your shares unvoted.

 

To be certain that your shares are voted at our annual meeting, we encourage you to provide instructions to your brokerage firm by voting your proxy.

 

THE ELECTION OF DIRECTORS

 

Election of Nominees for Directors

 

At our annual meeting, our shareholders will vote on the election of eight directors.

 

Our Nominating and Corporate Governance Committee has recommended to our Board as nominees, and our Board has nominated, Joseph Vittoria, John Emery, Elan Blutinger, Randy Churchey, Michael M. Knetter, Alissa Nolan, Edward Rensi and Howard Silver for election to our Board. If re-elected, all of these individuals will serve as directors for a one-year term that will expire at our annual meeting of shareholders in 2008, or when their successors are duly elected and qualified. You will find below a brief biography of each nominee. See also “Ownership of Our Common Stock” on page 12 for information on their holdings of our common stock.

 

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

 

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

OUR BOARD OF DIRECTORS

 

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

 

CORPORATE GOVERNANCE

 

Independence of Our Board of Directors

 

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

 

Committees and Meetings of Our Board of Directors

 

Board Meetings.  We operate under the general management of our Board as required by our bylaws and the laws of Delaware, our state of incorporation. Our Board held five meetings during 2006. Each director attended 100% of the total number of those meetings of the Board and of any committee of which he or she was a member, except Mr. Vittoria did not attend the one meeting of the Board that followed his appointment to the board and Mr. Silver did not attend one meeting of the Board. While our Board has not adopted a mandatory attendance policy for our annual meetings, directors are encouraged to attend. In 2006, all of our directors who were then on the board attended our annual meeting.

 

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

 

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

 

 

 

The Audit Committee met five times in 2006. For more information, please see “Report of the Audit Committee” on page 37.

 

Compensation Committee.  Our Board has also established a Compensation Committee, consisting of Messrs. Silver and Vittoria and Ms. Nolan, with Mr. Silver serving as its chairman. As of January 1, 2007 Mr. Churchey exited and Mr. Vittoria was elected to the committee. Our Board has determined that each of the Compensation Committee members is independent, as that term is defined by the NASDAQ. The Compensation Committee operates under a written charter adopted by our Board. A copy of this charter is available on our web site at www.greatwolf.com. Among other duties, this committee:

 

 

The Compensation Committee met three times in 2006. For more information, please see “Report of the Compensation Committee” on page 15.

 

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

 

 

The Nominating and Corporate Governance Committee met three times in conjunction with meetings of the board in 2006.

 

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

 

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

 

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

 

Director Nominations

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee performs the functions of a nominating committee. The Nominating and Corporate Governance Committee’s

Charter describes the Committee’s responsibilities, including seeking, screening and recommending director candidates for nomination by our Board.

 

Director Candidate Recommendations and Nominations by Shareholders.  The Nominating and Corporate Governance Committee’s charter provides that the committee will consider director candidate recommendations by shareholders. Shareholders should submit any such recommendations for the consideration of our Nominating and Corporate Governance Committee through the method described under “Communications With Our Board” below. In addition, any shareholder of record entitled to vote for the election of directors at the applicable meeting of shareholders may nominate persons for election to the Board of Directors if such shareholder complies with the notice procedures summarized in “Shareholder Proposals for Our 2008 Proxy Materials or Annual Meeting” below.

 

Process For Identifying and Evaluating Director Candidates.  The Nominating and Corporate Governance Committee evaluates all director candidates in accordance with the director qualification standards described in our Corporate Governance Guidelines. The committee evaluates any candidate’s qualifications to serve as a member of the Board based on the skills and characteristics of individual Board members as well as the composition of the Board as a whole. In addition, the Nominating and Corporate Governance Committee will evaluate a candidate’s independence and diversity, age, skills and experience in the context of the Board’s needs.

 

Communications with Our Board

 

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

 

Contributions to Charitable Entities

 

During 2006, the company did not make any contributions to charitable entities on which one of our directors or executive officers sits as a board member or serves as an executive officer.

 

THE EXECUTIVE OFFICERS

 

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

 

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Under federal securities laws, our directors, executive officers and any persons beneficially owning more than 10% of a registered class of our equity securities are required to report their ownership and any changes in that ownership to the SEC. These persons are also required by SEC rules and regulations to furnish us with copies of these reports. Precise due dates for these reports have been established, and we are required to report in this proxy statement any failure to timely file these reports by those due dates by our directors and executive officers during 2006.

 

Based solely upon our review of the reports and amendments to those reports furnished to us or written representations from our directors and executive officers that these reports were not required from those persons, we believe that all of these filing requirements were satisfied by our directors and executive officers during 2006.

 

OWNERSHIP OF OUR COMMON STOCK

 

We summarize below the beneficial ownership of our common stock, as of March 21, 2007 except where noted, by (1) each person or group beneficially owning more than five percent (5%) of our company’s common stock, (2) each of our directors, (3) each of our named executive officers and (4) all of our directors and our executive officers as a group. A person generally “beneficially owns” shares if he or she, directly or indirectly, has or shares either the right to vote those shares or dispose of them. Unless otherwise indicated in the accompanying footnotes, all of the shares of our common stock listed below are owned directly, and the indicated person has sole voting and investment power. The address for each individual listed below is: c/o Great Wolf Resorts, Inc., 122 West Washington Avenue, Madison, WI 53703.

 

 

 

 

 

 

Equity Compensation Plan Information

 

This table provides certain information as of December 31, 2006 with respect to our equity compensation plans:

 

 

 

 

 

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

 

RELATED PERSON TRANSACTIONS

 

Our Audit Committee is responsible for overseeing our Code of Business Conduct and Ethics, which included policies relating to conflicts of interest. Although we have not entered into any such transactions that meet the requirements for disclosure in this proxy statement, if there were to be such a transaction, it would need to be approved by our Audit Committee.

 

EXECUTIVE AND DIRECTOR COMPENSATION

 

REPORT OF THE COMPENSATION COMMITTEE

 

The Compensation Committee, on behalf of and in certain instances subject to the approval of the Board of Directors, reviews and approves compensation programs for certain senior officer positions. In this context, the Committee reviewed and discussed with management the Company’s Compensation Discussion and Analysis required by section 402(b) of Regulation S-K. Following the reviews and discussions referred to above, the Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

The Compensation Committee:
Howard Silver (Chairman)
Joseph Vittoria
Alissa N. Nolan

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The Compensation Committee is responsible for:

 

 

From time to time, the Compensation Committee may retain compensation and other management consultants to assist with, among other things, structuring our various compensation programs and determining appropriate levels of salary, bonus and other awards payable to our NEOs, as well as to guide us in the development of near-term individual performance objectives necessary to achieve long-term results.

 

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

 

General Compensation Policy/Philosophy

 

Our committee’s policy is to devise and implement compensation for our senior officers commensurate with their position and determined with reference to compensation paid to similarly situated employees and officers of companies that the Compensation Committee, in consultation with our CEO and external compensation consultants, deems to be comparable to our company. Our company’s philosophy is to design a compensation program for senior executives to attract, retain and motivate key employees and provide incentives for the attainment of short-term operating objectives and strategic long-term performance goals. Our philosophy is to place emphasis on, and reward achievement of, long-term objectives. We consider this desirable given the nature of our company as an enterprise focused on resort unit growth and brand expansion/development over the next several years.

 

In 2006, our NEOs were:

 

 

The overall compensation structure for our NEOs is designed to be based on a pay-for-performance model. The goal is to pay fair base salaries coupled with strong upside potential when the company and its assets perform well.

The “at risk” components (cash annual incentives and stock-based long-term incentives) are designed to provide incentives that are predicated on the company meeting or exceeding predefined goals.

 

2006 Executive Officer Compensation

 

For 2006, the Compensation Committee engaged HVS International, an independent compensation consultant, to assist the Compensation Committee in determining appropriate fiscal year 2006 compensation for our NEOs. The consultant made recommendations to the Compensation Committee of appropriate levels of base salaries, annual incentives and long-term incentives for our NEOs, based upon a study of a competitive peer group of 23 companies that are in our industry and compete for the same talent and investment dollars. The peer group included companies that are involved in the development, ownership and/or management of hotels and resorts. The peer group consisted of the following companies:

 

Ashford Hospitality Trust		Hershey Entertainment
Winston Hotels, Inc.		Highland Hospitality
Bluegreen		Intrawest
Boykin Lodging		LaSalle Hotel Properties
Xantera Parks & Resorts		MeriStar Hospitality Corporation
Westgate Resorts		Outrigger Resorts
Innkeepers USA Trust		Kohler
Destination Hotels & Resorts		Shell Hospitality
Eagle Hospitality Properties Trust		Strategic Hotel Capital, Inc.
Equity Inns, Inc.		Sunstone Hotel Investors
FelCor Lodging Trust, Inc.		Tarsadia Hotels
Hersha Hospitality Trust

 

Utilizing this process, the Committee targeted executive compensation for 2006 as follows:

 

 

For 2006, the Committee established an annual cash incentive plan for Messrs. Emery, Calder and Martinez and Ms. Schaefer that was structured differently than that for Mr. Schroeder. In addition, the Committee established long-term incentive compensation for 2006 for Messrs. Emery, Calder and Martinez and Ms. Schaefer. The Committee designed annual cash incentives and long-term incentives for these four NEOs that creates an overall compensation program that can provide for superior compensation when primary company-wide financial goals are met or exceeded, and, conversely, total compensation below competitive levels when such goals are not met. The Committee believes this is an appropriate structure for these four NEOs due to their broad responsibilities for overseeing our company’s overall performance in financial, development and operating areas. For executive officers other than Messrs. Emery, Calder and Martinez and Ms. Schaefer, the Committee feels a total compensation structure that is less likely to provide total compensation significantly above or below competitive levels, due to other executive officers having less broad overall responsibilities for overseeing our company’s overall performance. For a further discussion on the details of these annual cash incentives and long-term incentives, see Elements of Compensation below.

 

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

 

Elements of Compensation

 

Our compensation methodology for our NEOs consists of three components: (1) base salary, (2) annual cash incentive and, for Messrs. Emery, Calder and Martinez and Ms. Schaefer, (3) long-term incentive compensation. These components provide elements of fixed income and variable compensation that are linked to the achievement of individual and corporate goals and the enhancement of value to our company’s shareholders.

 

Base Salary

 

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

 

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

 

The Committee reviewed the salaries for John Emery, our CEO, and all other NEOs in January 2006. Effective January 1, 2006, Mr. Emery’s base salary was increased to $416,000, a 4.0% base salary increase. The other NEOs received base salary increases effective January 1, 2006 ranging from 0.0% to 4.0%, except for Ms. Schaefer who received a combined base pay increase and pay adjustment for increased scope of responsibility of 17.0%.

 

Annual Cash Incentives

 

For Messrs. Emery, Calder and Martinez and Ms. Schaefer, annual cash incentives exist in the form of bonuses as a means of linking compensation to objective performance criteria that are within the control of the NEO.

 

At the beginning of each year, the Committee establishes a maximum bonus amount for each executive and identifies performance targets for each NEO to meet in order to receive the full bonus.

 

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

 

For 2006, the annual cash incentive amount awarded to each NEO was subject to a number of factors, including:

 

 

Each year, the Committee, in consultation with our CEO, reviews and approves the performance criteria and weighting of the performance objectives for each eligible executive. These criteria and their weighting may vary among the eligible executives by position due to functional accountability and responsibility. For 2006, achievement of financial (that is, Adjusted EBITDA and Adjusted EPS) goals represented 75% of each executive’s total bonus potential and achievement of individual/departmental goals represented 25% of each executive’s total bonus potential. For Messrs. Emery, Calder and Martinez and Ms. Schaefer, the Committee reviewed in January 2007 the levels of Adjusted EBITDA and Adjusted EPS we had achieved for 2006 and the success of each of those NEOs in achieving individual and/or departmental performance goals in 2006.

 

For Mr. Schroeder, annual cash incentives for 2006 existed in the form of a bonus available based on achieving individual and/or departmental performance goals in 2006, as determined by Mr. Emery.

 

In March 2007, we paid cash bonuses to our CEO and other NEOs for 2006 in the following amounts: Mr. Emery — $301,600; Mr. Calder — $188,500; Mr. Martinez — $150,000; Ms. Schaefer — $224,750; and Mr. Schroeder — $50,000.

 

Long-Term Incentives

 

Equity Awards

 

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

 

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

 

For 2006, the Committee approved maximum long-term stock-based incentive compensation amounts for Messrs. Emery, Calder and Martinez and Ms. Schaefer. The stock-based compensation amounts consisted of performance-based shares of our common stock. The actual long-term incentive compensation award to each officer was subject to a number of factors, including:

 

 

In March 2007, we issued the following number of shares of our common stock as long-term incentives earned for 2006 under the plan as described above: Mr. Emery — 39,340 shares; Mr. Calder — 18,441 shares; Mr. Martinez — 20,000 shares; and Ms. Schaefer — 21,987 shares. Shares awarded in March 2007 were vested 100% when issued.

 

In addition to the long-term incentive awards that are designed to cover several of our NEOs (such as the 2006 awards described above), the Committee considers other relevant business factors affecting our company in deciding on the need for additional long-term incentives to individual NEOs. In 2006, the Committee assessed the importance of particular personnel to our company’s achieving certain elements of our long-range business plan, particularly the successful identification and development of new resorts. Based on this assessment, the Committee considered it appropriate to provide additional long-term incentive awards to Mr. Martinez, our President of Development, in order to assure retention of Mr. Martinez in his current role with us. As a result, the Committee awarded 150,000 shares of our common stock to Mr. Martinez. These shares vest based on continued employment with us in 30,000-share increments on January 1 of 2007, 2008, 2009, 2010 and 2011 and was taken into consideration in determining his 2007 long-term incentive package.

 

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

 

Grant Valuation Parameters

 

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

 

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

 

Stock Ownership Guidelines

 

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

 

Other Compensation

 

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

 

Nonqualified Deferred Compensation Plan

 

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

 

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

 

We make annual matching contributions to the plan for each participant equal to the lesser of (a) 4% of the participant’s base salary or (b) the participant’s annual deferrals to the plan. Matching contributions are reduced by the amount of an executive’s matching contributions received in the 401(k) plan. Additionally, we may make annual profit-sharing contributions equal to up to 150% of the annual matching contribution. Matching and profit-sharing contributions vest based on a participant’s years of service with us or our predecessor company, with pro-rata vesting over a period of five years of service.

 

Amounts in the deferred compensation plan’s trust earn investment income, which serves to increase the corresponding deferred compensation obligation. Investments, which are recorded at market value, are directed by the participants, and consist of our common stock and mutual funds. The plan provides participants the opportunity for long-term capital appreciation by crediting their accounts with notional earnings (or losses) based on the

performance of benchmark investment funds or our common stock from which participants may select. Currently, the plan offers a choice of ten benchmark investment funds which are identified in the narrative following the Nonqualified Deferred Compensation table, below.

 

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

 

Tax Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code generally limits the deductibility on our tax return of compensation over $1 million to any of our officers unless the compensation is paid pursuant to a plan that is performance-related, non-discriminatory and has been approved by our stockholders. The Committee’s policy with respect to Section 162(m) is to make every reasonable effort to ensure that compensation is deductible to the extent permitted. The Committee has the authority to award compensation in excess of the $1 million limit, regardless of whether that compensation will be deductible, if the Committee determines in good faith that the compensation is appropriate to incentive and compensate the recipient.

 

Employment Agreements

 

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

 

The material terms in each agreement are as follows:

 

 

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

 

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

 

Change of Control and Severance Payments

 

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

 

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

 

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

 

Under the employment agreements, we have agreed to make an additional tax gross-up payment to the executive if any amounts paid or payable to the executive would be subject to the excise tax imposed on certain so-called “excess parachute payments” under Section 4999 of the Internal Revenue Code. However, if a reduction in the payments and benefits of $25,000 or less would render the excise tax inapplicable, then the payments and benefits will be reduced by such mount, and we will not be required to make the gross-up payment.

 

EXECUTIVE COMPENSATION TABLES AND DISCUSSION

 

Summary Compensation Table

 

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

 

 

 

 

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

 

 

Deferred Compensation

 

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

 

2006 GRANTS OF PLAN-BASED AWARDS

 

 

 

 

The grant date fair value shown is calculated based in the maximum potential future payout number of shares.

 

Narrative Disclosure to Summary Compensation and Grants of Plan-Based Awards Tables

 

2006 Compensation

 

For our NEOs, the cash and non-cash compensation earned in 2006 was in the form of base salary, annual cash incentives and long-term incentive compensation as described in the Compensation Discussion and Analysis.

 

Base Salary

 

Base salaries for our NEOs in 2006 and 2005 were as follows:

 

 

 

 

Annual Cash Incentives

 

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

 

By way of example, assume that a financial target is $100. The threshold to begin to achieve annual cash incentive amounts would then equal $95 (that is, 95% of the $100 target amount). If the actual financial result for the year was $98, the NEO would earn 30% of the potential under that particular financial target. If $95 or less was achieved as the actual result, no annual incentive amount would be earned for that particular financial target. If $105 or greater was achieved as the actual result, the NEO would earn 100% of the potential under that particular financial target.

 

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

 

For 2006, the annual cash incentive amount awarded to each NEO was subject to a number of factors, including:

 

 

The maximum potential annual cash incentive award amount for each NEO is indicated in the “Maximum” column of the Estimated Future Payouts Under Non-Equity Incentive Plan Awards in the 2006 Grants of Plan-Based Awards table above. The relative factors that comprised each NEO’s maximum potential cash incentive for 2006 were as follows:

 

 

Based on our actual financial performance and the Committee’s assessment of the NEOs’ achievement of individual/departmental performance goals:

 

 

Also, based on the Committee’s discretion in assessing relative achievement of overall performance objectives, the Committee limited Mr. Martinez’s total cash incentive to $150,000 for 2006.

 

For Mr. Schroeder annual cash incentives for 2006 existed in the form of a bonus available based on achieving certain individual and/or departmental performance goals in 2006, as determined by Mr. Emery.

 

In March 2007, we paid cash bonuses to our CEO and other NEOs for 2006 in the following amounts: Mr. Emery — $301,600; Mr. Calder — $188,500; Mr. Martinez — $150,000; Ms. Schaefer — $224,750; and Mr. Schroeder — $50,000.

 

Long-Term Incentives

 

For Messrs. Emery, Calder and Martinez and Ms. Schaefer, specific written performance objectives for long-term incentives are established annually and approved by the Committee. For each such objective, actual performance is reviewed by the Committee (generally in February following the performance year) in order to determine the actual amount of the long-term incentive grant that has been earned. The Committee has the ability to apply discretion to increase or decrease the actual payout resulting from the relative achievement of performance objectives. Discretion may be applied in the case of significant business disruption, unusual business events or conditions, or other factors the Committee deems relevant.

 

For 2006, the Committee approved maximum long-term stock-based incentive compensation amounts for Messrs. Emery, Calder and Martinez and Ms. Schaefer. The stock-based compensation amounts consisted of performance-based shares of our common stock. The actual long-term incentive compensation award to each officer was subject to a number of factors, including:

 

 

 

The maximum potential number of shares to be awarded to each NEO for 2006 under this plan was as follows: Mr. Emery — 40,349 shares; Mr. Calder — 18,914 shares; Mr. Martinez — 27,279 shares; and Ms. Schaefer — 22,551 shares. The relative factors that comprised each NEO’s maximum potential long-term incentive under this plan for 2006 were as follows:

 

 

Based on our common stock’s actual performance and the Committee’s assessment of the NEOs’ achievement of individual/departmental performance goals:

 

 

Also, based on the Committee’s discretion in assessing relative achievement of overall performance objectives, the Committee limited Mr. Martinez’s total long-term incentive amount under this plan to 20,000 shares.

 

In March 2007, we issued the following number of shares of our common stock as long-term incentives earned for 2006 under the plan as described above: John Emery — 39,340 shares; James Calder — 18,441 shares; Hernan Martinez — 20,000 shares; and Kimberly Schaefer — 21,987 shares. Shares awarded in March 2007 were vested 100% when issued.

 

In addition to the long-term incentive awards that are designed to cover several of our NEOs (such as the 2006 awards described above), the Committee considers other relevant business factors affecting our company in deciding on the need for additional long-term incentives to individual NEOs. In 2006, the Committee assessed the importance of particular personnel to our company’s achieving certain elements of our long-range business plan, particularly the successful identification and development of new resorts. Based on this assessment, the Committee considered it appropriate to provide additional long-term incentive to Mr. Martinez, our President of Development, in order to assure retention of Mr. Martinez in his current role with us. As a result, the Committee awarded 150,000 shares of our common stock to Mr. Martinez. These shares vest based on continued employment with us in 30,000-share increments on January 1 of 2007, 2008, 2009, 2010 and 2011.

 

POTENTIAL PAYMENT UPON TERMINATION OR CHANGE OF CONTROL

 

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

 

Employment Agreements

 

As noted previously, we have entered into employment agreement with all of our NEOs. The agreements cover the additional payments that would be due to these individuals in the following termination scenarios: by us for (1) death, (2) disability, (3) cause, (4) without cause, or (5) non-renewal; and by the executive for (1) voluntary,

(2) good reason or (3) non-renewal. The terms are identical in each of the agreements, except with respect to certain multipliers for payouts, as explained below.

 

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

 

We provide severance benefits of 100% (200% in the case of Mr. Emery) of the sum of the executive’s then-current annual base salary and most recently paid annual bonus for terminations without cause or by the executive for “good reason” (as defined in the employment agreement), including non-renewal of the employment agreement by us upon the end of its term. In the event of a termination by us without cause or by the executive for good reason within 180 days prior to, or 18 months following, a change of control, then the multipliers for the severance benefits are increased to 200% (300% in the case of Mr. Emery) of the sum of the executive’s then-current annual base salary and most recently paid annual bonus. These amounts reflect our belief that it is difficult for senior managers to find comparable employment opportunities in a short period of time, particularly after experiencing a termination that was beyond their control.

 

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

 

Specifically, severance payments under the above termination event scenarios are summarized below.

 

Termination Events

 

 

 

Assuming a December 31, 2006 termination event for cause, there would be no severance payment required to our NEOs under their employment contracts:

 

 

 

In the event of a termination by us without cause within 180 days prior to, or 18 months following, a change of control, then the multipliers for the severance benefits are increased to 200% (300% in the case of Mr. Emery) of the sum of the executive’s then-current annual base salary and most recently paid annual bonus. A change in control means the occurrence of any of the following events:

 

 

Assuming a December 31, 2006 termination event without cause before or after a change in control as described above, payments would be as follows:

 

 

 

 

 

The applicable NEO would be entitled to receive, in a lump sum payment, an amount equal to 100% (200% in the case of Mr. Emery) of his then-current annual base salary and most recently paid annual bonus. In addition, the executive would be entitled to a lump sum amount equal to 36 times our monthly contribution on behalf of the executive under health and welfare plans in which the executive participates. Assuming a December 31, 2006 termination event due to termination of employment agreement by the executive for good reason, payments would be as follows:

 

 

In the event of a termination by the executive for good reason within 180 days prior to, or 18 months following, a change of control, then the multipliers for the severance benefits are increased to 200% (300% in the case of Mr. Emery) of the sum of the executive’s then-current annual base salary and most recently paid annual bonus. A change in control means the occurrence of any of the following events:

 

 

Assuming a December 31, 2006 termination event by the executive for good reason before or after a change in control as described above, payments would be as follows:

 

 

 

Conditions to Receipt of Payment

 

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

 

 

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

 

Stock Option Agreements

 

We have granted certain of the NEOs stock options pursuant to individual option agreements. Stock options are subject to vesting ratably over a three-year period from the date of grant. These stock options are, however, subject to accelerated vesting under certain termination event scenarios:

 

 

The definitions of “cause” and “good reason” are the same as described in the Employment Agreements discussion above.

 

In the event of one of these termination event scenarios, all of the executive’s unvested stock options will be considered vested. As of December 31, 2006, however, all stock options held by out NEOs had exercise prices in excess of our common stock price of $13.96. As a result, assuming we experienced one of these termination event scenarios on December 31, 2006, the NEOs would not realize any additional market value on the accelerated stock options.

 

Stock Grant Agreements

 

We have granted certain of the NEOs shares of our common stock pursuant to individual grant certificates. These grants provide for an accelerated vesting of all unvested shares in the event of either (a) a termination by us without cause within 180 days prior to, or 18 months following, a change of control or (b) an executive’s resignation for good reason. Assuming we experienced either of those termination events on December 31, 2006, the market value realized on the accelerated stock grants for each of our NEOs would be as follows:

 

 

 

 

Deferred Compensation Plan

 

Under the deferred compensation plan (see the Compensation Discussion and Analysis — Non-Qualified Deferred Compensation Plan above for more information on this plan), all of an NEO’s company matching and profit-sharing contributions from the company are subject to accelerated vesting upon the following termination

events: a change in control of the company, or the NEO’s death or disability. The “change of control” provisions within the deferred compensation plan are equally applicable to all participants within the plan.

 

Assuming a change in control or an executive’s death or disability under the deferred compensation plan at December 31, 2006, the market value to the applicable executive would be equal to the account balances as presented in the Non-Qualified Deferred Compensation table below.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table shows information about outstanding equity awards at December 31, 2006.

 

 

 

 

 

 

OPTION EXERCISES AND STOCK VESTED

 

There were no options exercised or stock vested for any of our NEOs in 2006.

 

PENSION BENEFITS

 

We do not maintain a defined benefit pension plan or supplemental pension plan for our NEOs.

 

NONQUALIFIED DEFERRED COMPENSATION

 

The following table discloses contributions, earnings, balances and distributions under our nonqualified deferred compensation plan for 2006.

 

 

 

 

 

Narrative to the Nonqualified Deferred Compensation Table

 

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

 

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

 

We make annual matching contributions to the plan for each participant equal to the lesser of (a) 4% of the participant’s base salary or (b) the participant’s annual deferrals to the plan. Matching contributions are reduced by the amount of an executive’s matching contributions received in the 401(k) plan. Additionally, we may make annual profit-sharing contributions equal to up to 150% of the annual matching contribution. Matching and profit-sharing contributions vest based on a participant’s years of service with us or our predecessor company, with pro-rata vesting over a period of five years of service.

 

Accounts in the deferred compensation plan are credited with notional earnings based on the market rate of return of the available benchmark investment alternatives offered under the plan. The benchmark investment alternatives are indexed to traded mutual funds or our common stock, and each NEO may elect among the investment alternatives in increments of 1% of his or her account. The executive may make daily changes in his or her investment election for future deferrals, and may make monthly transfers of balances between the available investment alternatives. In 2006, the benchmark investments and their respective notional annual rates of return in the deferred compensation plan were as follows:

 

 

Earnings on deferred amounts solely represent appreciation (depreciation) of the market value of the available benchmark investment alternatives offered in the plan. We do not provide for a minimum return or guarantee a minimum payout amount for deferred amounts. Amounts held in the deferred compensation plan are “at risk” investments.

 

Executives may receive a distribution of the vested portion of their deferred compensation plan accounts upon termination of employment (including retirement or disability) or, in the case of deferrals by the executive (and related notional earnings), upon a specified future date while still employed, as elected by the executive (an “in-service distribution “). Each year’s deferrals may have a separate distribution election. Distributions payable upon termination of employment may be elected as a (i) a lump sum cash payment or (ii) a series of annual cash installments payable over five years. In-service distributions may be elected by the executive as a single lump sum cash payment beginning not earlier than the third calendar year following the calendar year of the deferral. When the executive is a “key employee” for purposes of Section 409A of the Internal Revenue Code, any distribution payable on account of termination of employment will not occur during the six months following termination of employment. Typically, the NEOs are key employees.

 

DIRECTOR COMPENSATION

 

The following table shows the compensation we paid in 2006 to our non-employee directors. Our officers are not paid for their service as directors.

 

 

 

 

The following table shows the vesting dates of the outstanding Stock Awards and Option Awards that were unvested as of December 31, 2006: