SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

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 Rule 14a-11(c) or Rule 14a-12

 

ULTRALIFE BATTERIES, INC.

(Name of Registrant as Specified In Its Charter)

 

Not Applicable

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

to Exchange Act Rule: 0-11:          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ULTRALIFE BATTERIES, INC.

2000 Technology Parkway

Newark, New York 14513

 

May 3, 2007

 

To Our Shareholders:

 

You are cordially invited to attend the Annual Meeting of Shareholders of Ultralife Batteries, Inc. on Wednesday, June 6, 2007 at 10:30 A.M. at our corporate offices, 2000 Technology Parkway, Newark, New York 14513.

 

The accompanying Notice of Annual Meeting of Shareholders and Proxy Statement describe in detail the matters expected to be acted upon at the meeting. This package also contains our 2006 Annual Report to Shareholders, which consists of the Company’s annual report and Form 10-K for the fiscal year ended December 31, 2006, and which sets forth important business and financial information concerning your Company.

 

We hope that you will be able to attend this year’s Annual Meeting.

 

Very truly yours,

 

John D. Kavazanjian

President and Chief Executive Officer

ULTRALIFE BATTERIES, INC.

2000 Technology Parkway

Newark, New York 14513

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

JUNE 6, 2007

 

Notice is hereby given that the 2007 Annual Meeting of Shareholders (the “Meeting”) of Ultralife Batteries, Inc. (the “Company”) will be held on Wednesday, June 6, 2007 at 10:30 A.M. at our corporate offices, 2000 Technology Parkway, Newark, New York 14513 for the following purposes:

 

1. to elect eight directors for a term of one year and until their successors are duly elected and qualified;

 

2. to ratify the selection of BDO Seidman LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007; and

 

3. to transact such other business as may properly come before the Meeting and any adjournments thereof.

 

Only shareholders of record of Common Stock, par value $.10 per share, of the Company at the close of business on April 16, 2007 are entitled to receive notice of, and to vote at and attend the Meeting. If you do not expect to be present, you are requested to fill in, date and sign the enclosed proxy, which is solicited by our Board of Directors, and to return it promptly in the enclosed envelope. In the event you decide to attend the Meeting in person, you may, if you desire, revoke your proxy and vote your shares in person.

 

Our Annual Report to Shareholders for the fiscal year ended December 31, 2006, which includes the Company’s Form 10-K, is enclosed.

 

By Order of the Board of Directors

 

Ranjit C. Singh

Chairman of the Board of Directors

 

Dated: May 3, 2007

 

TABLE OF CONTENTS

 

 

IMPORTANT

 

REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING, WE ENCOURAGE YOU TO COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.

 

ULTRALIFE BATTERIES, INC.

2000 Technology Parkway

Newark, New York 14513

(315) 332-7100

 

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

JUNE 6, 2007

 

INFORMATION CONCERNING SOLICITATION AND VOTING

 

We are furnishing this proxy statement to our shareholders in connection with our Board of Directors’ solicitation of proxies for use at our 2007 Annual Meeting of Shareholders (the “Meeting”) to be held on Wednesday, June 6, 2007, at 10:30 A.M. and at any adjournments thereof. The Meeting will be held at our corporate offices, 2000 Technology Parkway, Newark, New York 14513.

 

The approximate date on which the enclosed form of proxy and this proxy statement are first being sent to our shareholders is May 3, 2007.

 

When a proxy is returned properly signed, the shares represented thereby will be voted in accordance with the shareholder’s directions. If the proxy is signed and returned without choices having been specified, the shares will be voted FOR the election of each director-nominee named herein, and FOR the other proposal identified herein. If for any reason any of the nominees for election as directors shall become unavailable for election, discretionary authority may be exercised by the proxies to vote for substitute nominees proposed by our Board of Directors. A shareholder has the right to revoke a previously granted proxy at any time before it is voted by filing with the Secretary of the Company a written notice of revocation, or a duly executed later-dated proxy, or by requesting return of the proxy at the Meeting and voting in person.

 

Only shareholders of record at the close of business on April 16, 2007 are entitled to notice of, and to vote at, the Meeting. As of April 16, 2007, there were 15,184,296 shares of our Common Stock, par value $.10 per share (“Common Stock”), issued and outstanding, each entitled to one vote per share at the Meeting. A majority of the outstanding shares of Common Stock, represented in person or by proxy at the Meeting, will constitute a quorum for the transaction of all business.

 

Pursuant to the provisions of the General Corporation Law of the State of Delaware, our directors will be elected by a plurality of the votes cast by the holders of shares of Common Stock present in person or represented by proxy at the Meeting and entitled to vote at the Meeting. Because directors are elected by a plurality of the votes cast, withholding authority to vote with respect to one or more nominees will have no effect on the outcome of the election, although such shares would be counted as present for purposes of determining the existence of a quorum. The affirmative vote of holders of a majority of the shares of Common Stock represented at the Meeting and entitled to vote on the proposal to ratify the selection of the Company’s independent registered public accounting firm is required for approval of that proposal. For purposes of the vote on this proposal, abstentions would have the effect of voting against the proposal because they are deemed to be present and entitled to vote but do not count toward the affirmative vote required to approve the proposal. Similarly, when brokers have discretionary authority to vote on a particular proposal, such as the ratification of the selection of our independent registered public accounting firm, shares held by them would be deemed present for quorum purposes and entitled to vote for voting purposes, meaning that a broker abstention would then have the effect of voting against the proposal.

 

We will bear the cost of soliciting proxies. In addition to the solicitation of proxies by use of the mails, some of our officers, directors and regular employees, without extra remuneration, may solicit proxies personally or by telephone, telefax or similar transmission. We will reimburse record holders for expenses in forwarding proxies and proxy soliciting material to the beneficial owners of the shares held by them.

 

Pursuant to the General Corporation Law of the State of Delaware, the state under which we were organized, and our By-laws, our business, property and affairs are managed by or under the direction of our Board of Directors. Members of the Board of Directors are kept informed of Company business through discussions with our Chief Executive Officer and other corporate officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees. Our Board of Directors has four standing committees: an Executive Committee, an Audit and Finance Committee, a Governance Committee and a Compensation and Management Committee. We also have a Mergers and Acquisitions Committee, which is an ad hoc committee formed in 2005 specifically for the purpose of identifying and evaluating acquisition opportunities. During 2006, our Board of Directors held nine meetings and the committees of our Board of Directors, including the Mergers and Acquisition Committee, held a total of 21 meetings.

 

Our Board of Directors has determined that all of our directors (other than Mr. Kavazanjian, who serves as our President and Chief Executive Officer) and the director nominee named in this proxy statement are “independent” for purposes of the listing standards of the Nasdaq Stock Market.

 

Each director attended at least 75% of the aggregate of: (1) the total number of meetings of the Board (held during the period for which such person has been a director); and (2) the total number of meetings held by all committees of the Board on which he or she served.

 

Our Board of Directors has adopted a charter for each of the four standing committees that addresses the composition and function of each committee and has also adopted corporate governance principles that address the composition and function of the Board of Directors. These charters and corporate governance principles are available on our website at www.ultralifebatteries.com under the heading “Investor Relations.”

 

Our Board of Directors has determined that all of the directors who serve on these committees (other than Mr. Kavazanjian who sits on the Executive Committee) are “independent” for purposes of the listing standards of the Nasdaq Stock Market, and that the members of the Audit and Finance Committee are also “independent” for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board of Directors based these determinations primarily on a review of the responses of the directors to questions regarding employment, compensation history, affiliations and family and other relationships, and on follow-up discussions.

 

Executive Committee

 

The current members of the Executive Committee are Ranjit C. Singh (Chair), Patricia C. Barron, Paula H.J. Cholmondeley, Daniel W. Christman and John D. Kavazanjian. This committee is responsible for overseeing such matters as the Board of Directors determines from time to time and takes action in between regularly scheduled meetings of our Board of Directors when it is infeasible to convene the entire Board. The Executive Committee did not meet during 2006.

 

Audit and Finance Committee

 

The current members of the Audit and Finance Committee are Paula H.J. Cholmondeley (Chair), Carole Lewis Anderson, Anthony J. Cavanna and Ranjit C. Singh. This committee selects our independent registered public accounting firm and has oversight responsibility for reviewing the scope and results of the independent registered

public accounting firm’s annual examination of our financial statements and the quality and integrity of those financial statements, the qualifications and independence of the independent registered public accounting firm, meeting with our financial management and the independent registered public accounting firm to review matters relating to internal accounting controls, our accounting practices and procedures and other matters relating to our financial condition. The Audit and Finance Committee met 11 times during 2006.

 

Our Board of Directors has determined that each of the members of the Audit and Finance Committee is “financially literate” in accordance with the listing standards of the Nasdaq Stock Market. In addition, our Board of Directors has determined that Ms. Cholmondeley qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K.

 

Governance Committee

 

The members of the Governance Committee are currently Patricia C. Barron (Chair), Paula H.J. Cholmondeley and Daniel W. Christman. This committee reviews the performance and compensation of our directors, makes recommendations to our Board of Directors for membership and committee assignments and manages the annual evaluation of the performance of our Chief Executive Officer. The Governance Committee met five times during 2006.

 

Compensation and Management Committee

 

The current members of the Compensation and Management Committee are Daniel W. Christman (Chair), Patricia C. Barron and Anthony J. Cavanna. The Compensation and Management Committee has general responsibility for determining the remuneration of officers elected by the Board of Directors, granting stock options and restricted stock and otherwise administering our equity compensation plans, and approving and administering any other compensation plans or agreements. Our Amended and Restated 2004 Long-Term Incentive Plan (the “2004 Plan”) is administered by the Compensation and Management Committee. The Compensation and Management Committee met four times during 2006.

 

Mergers and Acquisition Committee

 

The current members of the Mergers and Acquisition Committee are Carole Lewis Anderson, Anthony J. Cavanna, Paula H.J. Cholmondeley and Ranjit C. Singh. As noted earlier, this committee is an ad hoc committee which is responsible for identifying and evaluating acquisition opportunities. The Mergers and Acquisitions Committee met once during 2006.

 

As noted above, the Governance Committee considers and establishes procedures regarding recommendations for nomination to our Board of Directors, including nominations submitted by shareholders. Such recommendations should be sent to Corporate Secretary, Ultralife Batteries, Inc., 2000 Technology Parkway, Newark, New York 14513. Any recommendations submitted to the Corporate Secretary should be in writing and should include any supporting material the shareholder considers appropriate in support of that recommendation, but must include the information that would be required under the rules of the Securities and Exchange Commission (“SEC”) in a proxy statement soliciting proxies for the election of such candidate and a signed consent of the candidate to serve as a director of the Company, if elected. The Governance Committee evaluates all potential candidates in the same manner, regardless of the source of the recommendation.

 

Based on the information provided to the Governance Committee, it will make an initial determination whether to conduct a full evaluation of a candidate. As part of the full evaluation process, the Governance Committee may conduct interviews, obtain additional background information and conduct reference checks of candidates. The Governance Committee may also ask the candidate to meet with management and other members of our Board of Directors. In evaluating a candidate, the Board, with the assistance of the Governance Committee, takes into account a variety of factors as described in our Corporate Governance Principles.

 

As described above, the Governance Committee considers director nominations submitted by shareholders. During the spring of 2007, the Company received a director nomination from Grace Brothers, Ltd. Grace Brothers holds almost 30% of the Company’s outstanding Common Stock. In its nomination, Grace Brothers presented its managing partner, Bradford T. Whitmore, for consideration as a nominee for election at the Meeting. The Company referred Mr. Whitmore’s nomination to the Governance Committee for consideration. The Governance Committee then evaluated Mr. Whitmore’s candidacy in accordance with our Corporate Governance Principles and recommended that Mr. Whitmore be nominated for election to our Board of Directors at the Meeting.

 

Our policy is that all of the directors, absent special circumstances, should attend the Company’s Annual Meeting of Shareholders. A regular meeting of the Board of Directors is typically scheduled in conjunction with the Annual Meeting of Shareholders. All directors attended last year’s Annual Meeting of Shareholders.

 

Our Corporate Governance Principles require our Board of Directors to meet in executive session regularly by requiring our independent directors to have at least four regularly-scheduled meetings per year without any management present. Our Board of Directors met in executive session five times during 2006. In addition, our standing committees meet in executive session on a regular basis.

 

Shareholders interested in communicating directly with our Board of Directors as a group may do so in writing to the Company’s Corporate Secretary, Ultralife Batteries, Inc., 2000 Technology Parkway, Newark, New York 14513. The Corporate Secretary will review all such correspondence and forward to our Board of Directors a summary of that correspondence and copies of any correspondence that, in his opinion, deals with the functions of the Board of Directors or that he otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company that is addressed to members of the Board of Directors and request copies of any such correspondence. Any concerns relating to accounting, internal controls or auditing matters will be brought to the attention of the Audit and Finance Committee and handled in accordance with the procedures established by the Audit and Finance Committee with respect to such matters.

 

We have a Code of Ethics applicable to all employees, including the Principal Executive Officer and the Principal Financial Officer, and, to the extent it applies to their activities, all members of the Board of Directors. Our Code of Ethics incorporates the elements of a code of ethics specified in Item 406 of Regulation S-K and also complies with the Nasdaq Stock Market requirements for a code of conduct. Shareholders can find a link to this Code of Ethics on the Company’s website at www.ultralifebatteries.com under the heading “Investor Relations.” We intend to post amendments to or waivers (whether expressed or implied) from the Code of Ethics (to the extent applicable to the Principal Executive Officer or Principal Financial Officer) at the same location on our website as the Code of Ethics.

 

Our Board of Directors currently has seven directors, all of whom are running for re-election for a one year term. In addition, Bradford T. Whitmore is being nominated for election to our Board of Directors for the first time. If elected, each director standing for election shall serve until the next annual meeting of shareholders and until his or her successor shall have been elected and qualified. The names of, and certain information with respect to, the persons nominated for election as directors are presented below.

 

 

Our Board of Directors has unanimously approved the above-named nominees for directors. Our Board of Directors recommends a vote FOR all of these nominees.

 

We use a combination of cash compensation and stock-based incentive compensation to attract and retain qualified candidates to serve on our Board. In 2006, we retained an executive compensation consultant to conduct a survey of certain of our peer group companies to ascertain whether our overall executive compensation was appropriate and balanced. At the direction of our Governance Committee, management undertook a review of director compensation at those same peer group companies and provided their conclusions to our Governance Committee. In setting director compensation, we consider the amount of time that directors spend fulfilling their duties to the Company, the skill-level required by the Company of members of our Board of Directors, and, based on an independent review by our external compensation consultant, of the compensation paid to directors in similar sized organizations in our industry. After reviewing the information provided, our Board of Directors approved a new director compensation program in 2006 that became effective July 1, 2006. It remains designed to deliver annual director compensation at approximately the median of companies in similar industries and of similar size. The compensation program was changed to increase the overall competitiveness of the package to market median levels. The cash component of director compensation remained the same, but the stock-based incentive component was revised.

 

Each non-employee director received during 2006 a $3,000 quarterly retainer, and the Chair of the Board received a $5,000 quarterly retainer. Each non-employee director also received $1,000 for each Board meeting attended; subject, however, to the provision that the meeting compensation was reduced by 50% if the director participated by conference call. Each non-employee director also received $750 for each meeting of one of the four standing committee meetings attended, whether in person or by telephone, and $1,000 for each meeting of the Mergers and Acquisition Committee attended, which amount was reduced to $750 if the director participated by conference call. The Chair of the Audit and Finance Committee received a $1,250 quarterly retainer, and the Chairs of the Governance and Compensation and Management Committees received a $625 quarterly retainer. For board and committee service during 2006, we paid our directors an aggregate $169,750.

 

As part of the standard compensation package previously provided to members of the Board of Directors, each calendar quarter the Company had granted each incumbent non-employee director an option to purchase an aggregate of 3,000 shares of Common Stock and granted the Chair of the Board an additional 2,000-share option at the end of each calendar quarter (collectively, the “Quarterly Board Options”). All Quarterly Board Options were fully vested when granted, had a term of seven years from the date of grant and were granted at an exercise price

equal to the closing price of the Company’s Common Stock on the date of grant. Quarterly Board Options were awarded to each non-employee director on March 31, 2006, and again on June 30, 2006, except for Carole Lewis Anderson, who joined the Board in June 2006, and received her Quarterly Board Options in a single award to purchase an aggregate 6,000 shares of Common Stock on June 8, 2006. The Chair of our Board received an additional 2,000 share option on both March 31, 2006 and June 30, 2006. The Quarterly Board Options granted on March 31, 2006 were for an aggregate of 20,000 shares and had an exercise price of $12.85 per share, the Quarterly Board Options granted on June 8, 2006 were for an aggregate of 6,000 shares and had an exercise price of $9.95 per share, and the Quarterly Board Options granted on June 30, 2006 were for an aggregate of 20,000 shares and had an exercise price of $10.13 per share.

 

At their meeting on June 8, 2006, the Board of Directors terminated the Company’s policy of granting Quarterly Board Options, effective as of July 1, 2006. To replace the Quarterly Board Options, the Board of Directors adopted a new equity compensation policy for directors, whereby each director previously eligible to receive Quarterly Board Options will instead receive an annual award of shares of the Company’s Common Stock that are subject to forfeiture restrictions that lapse over time (“Restricted Stock”). For the July 2006 award of Restricted Stock, the Board determined that the aggregate value of the award for each non-employee director should be $40,000. To determine the number of shares of Restricted Stock to award based on this valuation, the $40,000 award value was divided by a presumed share price of $10.00, which represented a slight discount to the closing price of $10.13 of the Common Stock on June 30, 2006. Thus, on July 3, 2006, each incumbent non-employee director received 4,000 shares of Restricted Stock and the Chair of the Board of Directors received an additional 2,668 shares of Restricted Stock. The forfeiture restrictions applicable to the shares of Restricted Stock issued to all directors other than the Board Chair lapsed with respect to 1,000 of the shares on each of August 15, 2006, November 15, 2006 and February 15, 2007 and will lapse with respect to a further 1,000 shares on May 15, 2007. The forfeiture restrictions applicable to the shares of Restricted Stock issued to the Board Chair lapsed with respect to 1,667 of the shares on each of August 15, 2006, November 15, 2006 and February 15, 2007 and will lapse with respect to a further 1,667 shares on May 15, 2007.

 

The Board of Directors took the foregoing actions in order to improve the Company’s annual equity burn rate. Equity burn rate analysis is a measure of dilution that shows how rapidly a company is using its shares reserved for equity compensation plans. This analysis is frequently used by institutional investors to determine whether they should support or reject equity compensation proposals submitted to a company’s shareholders for approval. To calculate a company’s equity burn rate percentage, the sum of the total number of shares represented by stock options granted in a fiscal year, plus two times the total number of shares of restricted stock or other stock awards awarded in that year, is divided by the gross number of shares outstanding at the end of that year. The Company has previously committed to maintaining an average annual equity burn rate for the fiscal years ending December 31, 2006, 2007 and 2008 not exceeding 2.93% per year. This equity burn rate of 2.93% corresponds to the current mean plus one standard deviation of the Standard & Poor’s Global Industry Classification Standards peer group pertinent to the Company and is slightly lower than the Company’s average annual equity burn rate of 3.12% for the fiscal years ended December 31, 2003, 2004 and 2005.

 

Directors also have share ownership guidelines which require them to hold shares at least equal in value to the amount of their annual cash retainer. Directors have three years to achieve the required holdings. Furthermore, until the required shareholding guidelines are met, directors are required to hold at least 50% of all vested after-tax shares and 50% of shares received on exercise of stock options.

 

The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 31, 2006.

 

 

 

 

 

 

The firm of BDO Seidman LLP, independent registered public accountants, served as the independent registered public accounting firm of the Company in connection with the audit of the Company’s financial statements for 2006.

 

The firm of PricewaterhouseCoopers LLP, independent registered public accountants, served as the independent registered public accounting firm of the Company in connection with the audit of the Company’s financial statements for 2005.

 

On June 8, 2006, with the approval of the Company’s Audit and Finance Committee, the Company dismissed its independent registered public accountants, PricewaterhouseCoopers LLP, and subsequently engaged BDO Seidman LLP as its new independent registered public accountants for 2006. The reports of PricewaterhouseCoopers LLP on the Company’s consolidated financial statements for each of 2004 and 2005 did not contain an adverse opinion or a disclaimer of opinion, nor were qualified or modified as to uncertainty, audit scope or accounting principles.

 

During 2004 and 2005, and the subsequent interim period through April 1, 2006, there were no disagreements between the Company and PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference to the subject matter of any such disagreements in connection with their reports on the Company’s financial statements for such years.

 

None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within 2004 or 2005, and the subsequent interim period through April 1, 2006 preceding our determination not to renew the engagement of PricewaterhouseCoopers LLP.

 

During 2004 and 2005, the Company did not consult with BDO Seidman LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters or reportable events required by applicable securities laws.

 

Our Audit and Finance Committee has selected BDO Seidman LLP as our independent registered public accounting firm for 2007. This selection will be presented to our shareholders for their ratification at the Meeting. The Board of Directors recommends a vote in favor of the proposal to ratify this selection, and the persons named in the enclosed proxy (unless otherwise instructed therein) will vote such proxies FOR this proposal. If the shareholders do not ratify this selection, the Audit and Finance Committee will seek to identify and address the reason or reasons why the shareholders did not ratify the committee’s selection.

 

We have been advised by BDO Seidman LLP that a representative will be present at the Meeting and will be available to respond to appropriate questions. In addition, we intend to give such representative an opportunity to make any statements if he or she should so desire.

 

Aggregate fees for professional services rendered for us by PricewaterhouseCoopers LLP for 2005 and part of 2006 and by BDO Seidman LLP for 2006 were:

 

 

Audit Fees

 

Audit Fees for 2005 and 2006, respectively, were for professional services rendered for the audits of the consolidated financial statements of the Company, consents, income tax provision procedures and assistance with review of documents filed with the SEC.

 

Audit Related Fees

 

Audit Related Fees for 2005 and 2006, respectively, were for assurance and related services related to employee benefit plan audits, accounting consultations and audits in connection with internal control reviews, attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards.

 

Tax Fees

 

Tax Fees for 2005 and 2006, respectively, were for services related to tax compliance, including the preparation of tax returns and claims for refund, and tax planning and tax advice.

 

All Other Fees

 

All Other Fees for 2006 for PricewaterhouseCoopers LLP were for the review of registration statements and related consents and for BDO Seidman LLP were for travel expenses incurred in connection with the audit.

 

Our Audit and Finance Committee has not adopted pre-approval policies and procedures for audit and non-audit services. Accordingly, this proxy statement does not include disclosure regarding pre-approval policies and procedures and related information. The engagement of PricewaterhouseCoopers LLP and BDO Seidman LLP for non-audit accounting and tax services during 2005 and 2006, respectively, was limited to circumstances where those services were considered integral to the audit services that it provided or where there was another compelling rationale for using PricewaterhouseCoopers LLP or BDO Seidman LLP. All audit, audit-related and permitted non-audit services for which PricewaterhouseCoopers LLP or BDO Seidman LLP was engaged were pre-approved by our Audit and Finance Committee in compliance with applicable SEC requirements.

 

The names of, and certain information with respect to, our executive officers who are not director nominees are presented below.

 

 

The following table sets forth certain information regarding the beneficial ownership of shares of the Company’s Common Stock as of April 16, 2007 by each person known by the Company to beneficially own more than five percent of the outstanding shares of Common Stock, with percentages based on 15,184,296 shares issued and outstanding.

 

 

 

 

The following table sets forth certain information regarding the beneficial ownership of shares of the Company’s Common Stock as of April 16, 2007 by (1) each director, director nominee and Named Executive Officer of the Company (see “Executive Compensation” on page 17), and (2) all directors, director nominee and executive officers of the Company as a group.

 

 

 

 

 

Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than 10% of our Common Stock to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of Common Stock and other equity securities of the Company. To our knowledge, based solely on review of the copies of such reports furnished to us during 2006, all Section 16(a) filings applicable to our officers, directors and more than 10% beneficial owners were filed in a timely manner, except for the following: in connection with an award of restricted stock on December 21, 2006 to each of the Company’s executive officers, each of the officers was late in reporting the award.

 

Overview of Compensation Program

 

The Compensation and Management Committee of the Board has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. The Committee ensures that the total compensation paid to the Named Executive Officers is fair, reasonable and competitive. The Committee has established a goal of having base salary and cash compensation set at approximately the 50% level of the Company’s peer group, while superior pay performance is leveraged through stock-based incentive compensation. Currently, base salary and cash compensation are below the 50% level, but the Committee intends to increase base salary and cash compensation incrementally during 2007 and 2008 in order to reach the 50% level.

 

Throughout this proxy statement, the individuals who served as the Company’s Principal Executive Officer and Principal Financial Officer during 2006, as well as the other individuals included in the Summary Compensation Table on page 23, are referred to as the “Named Executive Officers.”

 

Compensation Philosophy and Objectives

 

The Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and which aligns executives’ interests with those of the shareholders by rewarding performance to meet and exceed established goals, with the long-term objective of increasing shareholder value.

 

We base our executive compensation policies on the same principles that guide us in establishing all of our compensation programs. We design compensation programs to attract, retain and motivate talented individuals. In particular:

 

 

To this end, the Committee reviews the executive compensation program annually to assess if the Company is able to attract and retain exceptionally talented executives and that our total compensation is linked to our ability to meet our annual financial and non-financial goals, and longer-term to drive strong levels of shareholder return.

 

Setting Executive Compensation

 

Based on the foregoing objectives, the Committee has structured the Company’s annual and long-term incentive-based cash and non-cash executive compensation to motivate executives to achieve the business goals set by the Company and reward the executives for achieving such goals. In furtherance of this, the Committee engaged a compensation consulting firm during 2006 to conduct a review of its total compensation program for the executives. That firm provided the Committee with relevant market data and alternatives to consider when making compensation decisions for the Chief Executive Officer and other executive officers.

 

In making compensation decisions, the Committee compares each element of total compensation against compensation data, compiled by our outside consulting firm, from companies of similar size and industry orientation. A significant percentage of compensation is allocated to incentives in order to link executives’ compensation to the performance of the Company. The Committee reviews information provided by the outside consultant to determine the appropriate level and mix of base salary with incentive compensation and benefits.

 

Executive compensation competitive data is provided by our outside consulting firm and is obtained from two primary sources: a peer group, which was reviewed and approved by the Committee, and an industry standard executive compensation survey. The peer group is a set of 14 US-based, public firms focused in the Power Generation and Storage industry with revenues between $50M and $200M and is comprised of the following companies:

 

 

Role of Executive Officers in Compensation Decisions

 

The Committee makes final compensation decisions relative to base, bonus and equity for the executive officers based on the recommendations of the Chief Executive Officer, with the exception of the Chief Executive Officer, whose compensation is developed by the Compensation and Management Committee, based on input from the Company’s compensation consultant. The Committee approves recommendations regarding equity awards to all executives and other employees of the Company. The Chief Executive Officer makes recommendations with

respect to equity compensation for non-executive officers and decisions regarding the non-equity compensation of non-executive officers.

 

The Chief Executive Officer annually reviews the performance of each executive officer, other than himself, whose performance is reviewed by the Committee. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Committee. The Committee can exercise its discretion in modifying any recommended adjustments or awards to executive officers.

 

Compensation and Management Committee Activity

 

The Committee recognizes the importance of maintaining sound principles for the development and administration of executive compensation and took steps in 2006 to enhance the Committee’s ability to effectively carry out its responsibilities as well as to ensure that there are strong links between executive pay and performance. Examples of actions that the Committee took in 2006 include:

 

 

2006 Executive Compensation Components

 

For the fiscal year ended December 31, 2006, the principal components of compensation for the Named Executive Officers were:

 

 

Base Salary

 

The Company provides Named Executive Officers and other executives with a base salary to compensate them for services rendered during the fiscal year. Base salary ranges for Named Executive Officers are determined for each executive based on his or her position and responsibility by using market data.

 

During its review of base salaries for executives, the Committee primarily considers:

 

 

Salary levels are considered annually as part of the Company’s performance review process as well as upon a change in job responsibility. Merit based increases to salaries of executives are based on the Chief Executive Officer’s recommendation and, where possible, the Committee’s assessment of the individual’s performance. Base salaries, as determined by a study conducted by the Company’s compensation consultant in 2006, were found to be significantly below market norms for comparable companies and, as such, the Committee approved increases during 2006, for the 2007 fiscal year, that made progress towards better aligned executive salaries with the market.

 

Performance-Based Incentive Compensation

 

At the beginning of 2006, the Company implemented a new short-term cash incentive plan (“STIP”) for executive officers.

 

Under the STIP, John D. Kavazanjian, our President and Chief Executive Officer, was eligible to receive for 2006 a cash bonus in an amount equal to up to 100% of his 2006 base compensation. The determination as to whether to pay a cash bonus to Mr. Kavazanjian, as well as the amount of the cash bonus, if any, was made by the Board of Directors, in its sole discretion, based upon the Committee’s recommendation, which, in turn, is based upon our Board of Directors’ assessment of the Company’s performance during the fiscal year.

 

William A. Schmitz, our Chief Operating Officer, was eligible to receive a cash bonus for 2006 in an amount equal to up to 70% of his 2006 base compensation under the officer bonus plan. The determination as to whether to pay a cash bonus to Mr. Schmitz, as well as the amount of the cash bonus, if any, was made by the Board of Directors, in its sole discretion, based upon the Committee’s recommendation, which, in turn, is based upon our Board of Directors’ assessment of the Company’s performance during the fiscal year.

 

The remaining Named Executive Officers, consisting of Robert W. Fishback, our Vice President of Finance and Chief Financial Officer, Nancy C. Naigle, our Vice President of Sales and Marketing, and Peter F. Comerford, our Vice President of Administration and General Counsel, as well as our other executive officers, Julius M. Cirin, Vice President of Corporate Marketing and Technology, Patrick R. Hanna, Jr., Vice President of Corporate Strategy and Business Integration, and Philip M. Meek, Vice President of Manufacturing, were each eligible to receive a cash bonus in an amount equal to up to 50% of their respective 2006 base compensation under the officer bonus plan. The determination as to whether to pay a cash bonus to these Named Executive Officers, as well as the amount of the cash bonus, if any, depended on two factors, each of which was equally important. The first factor was the achievement of the performance goals established for the executive officer. Each executive officer’s performance goals were based upon the particular area for which the executive officer was responsible and related to the achievement of identifiable and largely objective standards. All were based, in part, on the achievement of budgeted financial thresholds. The second factor was the overall assessment by the Board of Directors of the Company’s performance during 2006.

 

Short-term incentive payouts over the last five years have been very modest. In 2002, 2003 and 2004, the payouts averaged approximately 20% of base salary. In 2005 and 2006 there were no short-term incentive payouts to executive officers.

 

For 2007, the Company will continue to refine its STIP. Formal bonus target awards have been established for each executive. Mr. Kavazanjian will have a target award of 50% of his base salary, Mr. Fishback and Mr. Schmitz will have a target award of 40%, and all other executive officers will have a target award of 30%.

 

Mr. Kavazanjian’s, Mr. Schmitz’s and Mr. Fishback’s bonuses will be 100% based on Company financial results. The other executives will have 50% of their targeted bonus amounts based on the Company’s financial performance and the other 50% will be based on the attainment of specified objectives. Payout of the objectives component of the bonus will be subject to a minimum threshold of 90% of Company performance being achieved before this component pays out.

 

Long-Term Incentive Compensation

 

In 2006, the Compensation and Management Committee approved a new approach to long-term incentives for the Company. Historically, only stock options had been granted to executives.

 

The new Long-Term Incentive Plan of the Company consists of three components: (1) stock options, (2) performance-vested restricted shares, and (3) time-vested restricted shares. This plan will increase the link to shareholder value creation, retain key executive talent, and reduce FAS 123(R) expenses. Each component is addressed below.

 

To continue to provide significant upside potential based on increases in the Company’s stock price, 50% of the long-term incentive award is delivered in the form of stock options. In 2006, the Board granted options to purchase shares of Common Stock under the Company’s Long-Term Incentive Plan to its executive officers. The options have

a seven-year term and vest over a three-year period in equal installments. Mr. Kavazanjian received an option to purchase 30,000 shares, Mr. Schmitz and Mr. Fishback each received options to purchase 15,000 shares, and Mr. Comerford received an option to purchase 7,500 shares.

 

In order to strengthen the link to performance while delivering restricted shares to reduce the Company’s FAS 123(R) expense, 25% of the long-term incentive value will be delivered in the form of performance-vested restricted shares. In 2006, the Board granted performance-vested restricted shares of the Company’s Common Stock under the Company’s Long-Term Incentive Plan to its executive officers. These shares vest in three equal installments and become unrestricted only if the Company meets or exceeds the same predetermined target for its operating performance for 2007, 2008 and 2009 as used for determining cash awards pursuant to the non-equity incentive plan. Mr. Kavazanjian was granted a total of 15,000 performance-vested restricted shares, Mr. Schmitz and Mr. Fishback each were granted a total of 7,500 performance-vested restricted shares, and Mr. Comerford was granted a total of 4,500 performance-vested restricted shares. All other executive officers were each granted a total of 3,000 performance-vested restricted shares. The plan also contemplates the ability to apply any excess operating performance to a prior year or a subsequent year for purposes of satisfying the vesting requirements.

 

To increase the retention of key executives, 25% of the long-term incentive value will be delivered in the form of time-based restricted shares. In 2006, the Board granted time-vested restricted shares of the Company’s Common Stock under the Company’s Long-Term Incentive Plan to its executive officers. These shares vest over a three-year period in equal installments, commencing on the first anniversary of the grant date. Mr. Kavazanjian was granted a total of 2,000 time-vested restricted shares, Mr. Schmitz and Mr. Fishback each were granted a total of 2,500 time-vested restricted shares, and Mr. Comerford was granted a total of 1,500 time-vested restricted shares. Other executive officers were each granted a total of 1,000 time-vested restricted shares.

 

Stock Ownership and Retention Guidelines

 

For 2007, the Company has implemented share ownership guidelines in order to increase the alignment of executives and shareholders. The stock ownership requirements for executives are as follows:

 

 

For 2007, the Committee established the presumed share price at $10.50 per share, which was based on a slight discount to the closing price of $10.55 of the Company’s Common Stock on December 21, 2006 when the Committee acted to approve the share ownership guidelines. Each year the Committee will establish a new presumed share price for the following year. Executives have three years to achieve the required holdings. Additionally, there are share holding requirements which require that until the share ownership guidelines are met, executives must hold at least 50% of all vested restricted share grants (on an after tax basis) and 50% of shares received on exercise of stock options.

 

Retirement Benefits

 

Other than the qualified 401(k) Plan with a Company match that the Company may make available to all employees, the Company does not provide its executives with any other retirement benefits. Currently, the Company has suspended the Company match under its 401(k) Plan. See page 29 for more information about the Company’s 401(k) Plan.

 

Perquisites and Other Personal Benefits

 

The Company provides Named Executive Officers with perquisites and other personal benefits that the Company and the Committee believe are reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to Named Executive Officers.

 

In 2004, the Company instituted a program where officers of the Company could take advantage of Company-paid financial planning and tax preparation services offered by an outside provider up to a maximum amount of

$3,000 for financial planning services and $750 for each year covered for the tax preparation services. The financial planning services were not offered in 2006.

 

In 2006, the Compensation and Management Committee approved a flexible supplemental benefits account that will be established for each executive officer beginning in 2007. The amount established for the Chief Executive Officer is $7,500 per annum and $5,000 for the other executive officers. Premiums for supplemental long-term disability insurance for executives will be taken out of these amounts and the Chief Executive Officer will present the Compensation and Management Committee with other offerings that executives can use with their account balances.

 

Attributed costs of the personal benefits described above for the Named Executive Officers for the fiscal year ended December 31, 2006, are included in the “All Other Compensation” column of the Summary Compensation Table on page 23.

 

The Company has entered into employment agreements with certain of its Named Executive Officers that contain change-of-control and severance arrangements. The terms of these agreements are summarized on page 28 under “Employment Arrangements.”

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Company believes that compensation paid under the management incentive plans is fully deductible for federal income tax purposes. However, in certain situations, the Committee may approve compensation that will not meet these requirements in order to ensure competitive levels of total compensation for its executive officers.

 

Nonqualified Deferred Compensation

 

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. The Committee does not believe that the Company currently has any nonqualified deferred compensation arrangements; however the Committee is mindful of the act and its related regulations when making compensation decisions.

 

Accounting for Stock-Based Compensation

 

Beginning on January 1, 2006, the Company began accounting for stock-based payments including its Stock Option Program and Restricted Stock Grant Program in accordance with the requirements of FAS 123(R).

 

Conclusion

 

The Compensation and Management Committee has reviewed all components of the Chief Executive Officer’s and other Named Executive Officers’ compensation, including salary, short-term cash incentive compensation, long-term equity incentive compensation, accumulated vested and unvested stock option and restricted stock, and the dollar value to the executive and cost to the Company of all perquisites and other personal benefits. The elements of the Chief Executive Officer’s and Named Executive Officers compensation are described in the Summary Compensation Table on page 23.

 

Based on this review, the Compensation and Management Committee finds the Chief Executive Officer’s and each Named Executive Officers’ total compensation (including the potential payouts under change-in-control and severance scenarios) in the aggregate to be reasonable.

 

The Compensation and Management Committee believes that the Chief Executive Officer’s and each Named Executive Officer’s compensation are appropriate given the Company’s performance in 2006.

 

Based on the Company’s and the executive team’s financial and non-financial performance in 2006, no bonus or non-equity incentive plan compensation was awarded to any of the Company’s executives.

 

The long-term incentives that were awarded in 2006 are reasonable in light of the market and the fact that the Company and the shareholders benefit from the executive team having an incentive to deliver increased shareholder return.

 

Total direct compensation for the Named Executive Officers remains conservatively positioned versus the market, however, the strides made in 2006 in terms of increases to base salary and bonus targets, and more competitive long-term incentive compensation, will enable the Company to attract and retain executive talent.

 

The Compensation and Management Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation and Management Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

The Compensation and Management Committee:

 

Daniel W. Christman, Chair

 

Patricia C. Barron

 

Anthony J. Cavanna

 

 

The individuals named in the following tables include, as of December 31, 2006, our Principal Executive Officer, our Principal Financial Officer and our other Named Executive Officers.

 

 

The following table sets forth information concerning the annual and long-term compensation of the Named Executive Officers for all services in all capacities to the Company and its subsidiaries during 2006:

 

 

 

 

 

 

The following table sets forth information concerning grants of plan-based awards to the Named Executive Officers during 2006:

 

 

 

 

 

The following table sets forth information concerning the number of shares of exercisable and non-exercisable options outstanding at December 31, 2006 and vested and unvested restricted stock awards outstanding at December 31, 2006 for Named Executive Officers: