SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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Payment Data Systems, Inc.
(Name of the Registrant as Specified in its Charter)
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PAYMENT DATA SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 22, 2006
The annual meeting of stockholders of Payment Data Systems, Inc. will be held at
the Hilton San Antonio Airport located at 611 NW Loop 410, San Antonio, Texas,
78216, on Thursday, June 22, 2006, at 10:00 a.m., Central Time, for the
following purposes:
To elect one director to serve until the 2009 annual meeting of stockholders.
To ratify the appointment of the independent auditors of Payment Data Systems,
Inc.
To transact any other business that properly comes before the meeting.
Stockholders of record at the close of business on April 24, 2006 are entitled
to notice of, and to vote at, the Annual Meeting or any adjournment thereof.
If you cannot attend the Annual Meeting in person, please sign and date the
accompanying Proxy and return it promptly to us. This way, your shares will be
voted as you direct even if you can't attend the meeting.
MICHAEL R. LONG
Chief Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE PROVIDE YOUR PROXY
BY COMPLETING, SIGNING, DATING, AND PROMPTLY MAILING THE ACCOMPANYING PROXY IN
THE ENCLOSED ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED.
PAYMENT DATA SYSTEMS, INC.
PROXY STATEMENT
FOR
THE ANNUAL MEETING OF STOCKHOLDERS
JUNE 22, 2006
PROXY SOLICITATION INFORMATION
General
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Payment Data Systems, Inc. for use at the Annual
Meeting of Stockholders to be held on 10:00 a.m., Central Time, Tuesday, June
22, 2006, at the Hilton San Antonio Airport located at 611 NW Loop 410, San
Antonio, Texas, 78216 and at any adjournments.
Cost of Solicitation
The cost of this solicitation, including expenses in connection with preparing
and mailing this Proxy Statement, will be borne by us. In addition, we will
reimburse brokerage firms and other persons representing beneficial owners of
our Common Stock for their expenses in forwarding proxy material to such
beneficial owners. In addition to solicitation by mail, our officers, directors
and employees, who will receive no extra compensation for their services, may
solicit proxies personally or by telephone or facsimile.
Mailing of Proxy Statement and Proxy
This Proxy Statement and the accompanying Proxy will be mailed on or about May
5, 2006, to all Stockholders entitled to notice of and to vote at our Annual
Meeting.
Form 10-KSB
A copy of our Annual Report for the fiscal year ended December 31, 2005 will be
mailed concurrently with this Proxy Statement to each stockholder entitled to
vote at the Annual Meeting. The Annual Report is not part of the Proxy
Statement. We will provide, without charge, a copy of our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2005 and related financial
statements and financial statement schedules to each stockholder entitled to
vote at the Annual Meeting, who requests a copy of such orally or in writing.
Requests should be made by calling (210) 249-4100 or sent to Payment Data
Systems, Inc., 12500 San Pedro, Suite 120, San Antonio, Texas 78216.
Stockholders Entitled to Vote
The close of business on April 24, 2006 has been fixed as the record date for
determining the Stockholders entitled to notice of and to vote at the Annual
Meeting. As of the close of business on April 24, 2006, there were 41,250,256
shares of Common Stock outstanding and entitled to vote. With respect to all
matters that will come before the Meeting, each stockholder may cast one vote
for each share registered in his or her name on the record date.
Quorum
The presence, in person or by proxy, of the holders of a majority of the shares
of Common Stock issued, outstanding, and entitled to vote must be present to
hold the Annual Meeting. This is referred to as a quorum. Proxies received that
withhold authority to vote for a nominee for election as a director and those
that are marked as abstentions and broker non-votes will be counted for the
purpose of determining whether a quorum is present.
1
Votes Required for Election of Directors
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Annual Meeting is required for the election
of directors. This means that the nominee receiving the highest number of "For"
votes will be elected as director. A properly executed proxy marked "Withhold"
or "For All Except" with respect to the election of a nominee will not be
counted as a vote "cast" or have any effect on the election of such nominee.
Votes Required for Ratification of Auditors
The affirmative vote of the holders of a majority of the votes cast by the
stockholders present or represented by proxy and entitled to vote at the Annual
Meeting is required for the approval of the vote for ratification of auditors. A
properly executed proxy marked "Abstain" with respect to this proposal will be
treated as shares present or represented and entitled to vote on such proposal
and will have the same effect as a vote against the proposal.
Returned Proxy Cards Which Do Not Provide Voting Instructions
Proxies that are signed and returned will be voted in the manner instructed by a
stockholder. If you sign and return your proxy card with no instructions, the
proxy will be voted "For The Nominee" with respect to the election of the
nominee for director named in this Proxy Statement and "For" the proposal set
forth in Item 2.
Broker Non-Votes
If you hold your shares of Common Stock in "street name" (that is, through a
broker, bank or other representative), you are considered the beneficial owner
of the shares held in street name. As the beneficial owner, you have the right
to direct your broker how to vote. Brokers who have not received instructions
from beneficial owners generally have the authority to vote on certain "routine"
matters, including the election of directors and ratification of the selection
of auditors. With respect to a non-routine matter, a broker is not permitted to
vote such shares on your behalf as to such matter. Shares representing such
"broker non-votes" with respect to a non-routine matter will not be voted in
favor of such matter and will also not be counted as votes cast on such matter.
Accordingly, "broker non-votes" will have no effect on the outcome of the vote.
Changing Your Vote
You may revoke the proxy that you give to us at any time before the proxy is
voted at the Annual Meeting. In order to do this, you must:
- send a written notice, stating your desire to revoke your proxy, to
us,
- send us a signed proxy that bears a later date than the one you
intend to revoke, or
- attend the Annual Meeting and vote in person. In this case, you must
notify the Inspector of Elections that you intend to vote
in person.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to our knowledge, certain information concerning
the beneficial ownership of our Common Stock as of April 24, 2006 by each
stockholder known by us to be (i) the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each current director, (iii) each of
the executive officers named in the Summary Compensation Table who were serving
as executive officers at the end of the 2005 fiscal year and (iv) all of our
directors and current executive officers as a group:
AMOUNT AND NATURE OF
NAMED EXECUTIVE OFFICERS AND DIRECTORS BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
Michael R. Long 5,050,980 (3) 11.8 %
Louis A. Hoch 5,391,724 (4) 12.5 %
Larry Morrison 578,990 (5) 1.4 %
Peter G. Kirby 918,500 (6) 2.2 %
All executive officers and
directors as a group (4 people) 11,940,194 (7) 26.2 %
(1) Based on a total of 41,250,256 shares of Common Stock issued and
outstanding on April 24, 2006.
(2) Includes 2,179,121 shares that CheckFree has the right to acquire upon the
exercise of stock warrants.
(3) Includes 1,680,167 shares that Mr. Long has the right to acquire upon the
exercise of stock options.
(4) Includes 1,776,147 shares that Mr. Hoch has the right to acquire upon the
exercise of stock options.
(5) Includes 226,795 shares that Mr. Morrison has the right to acquire upon the
exercise of stock options.
(6) Includes 618,000 shares that Mr. Kirby has the right to acquire upon the
exercise of stock options.
(7) The address of all individual directors and executive officers is c/o
Payment Data Systems, Inc., 12500 San Pedro, Suite 120, San Antonio, Texas
78216.
PROPOSAL 1
ELECTION OF DIRECTOR
As established by our Bylaws, our Directors are divided into three classes
serving staggered three-year terms. As of April 24, 2006, Michael R. Long, Louis
A. Hoch and Peter G. Kirby are the only members of our Board of Directors. Louis
A. Hoch is the only nominee for election to our Board of Directors. Mr. Hoch's
term on the Board of Directors, if elected thereto, will expire on our 2009
Annual Meeting of the Stockholders.
The individuals named as proxies will vote the enclosed Proxy FOR the election
of the nominee unless you direct them to withhold your vote. If the nominee
becomes unable to serve as a Director before the Annual Meeting (or decides not
to serve), the individuals named as proxies may vote for a substitute or may
reduce the number of members of the Board.
Below are the names and ages of the Directors and the nominee for Director, the
years they became Directors, their principal occupations or employment for at
least the past five years and certain of their other directorships, if any.
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CLASS II DIRECTOR NOMINEE FOR ELECTION TO A THREE-YEAR TERM ENDING WITH THE 2009
ANNUAL MEETING OF STOCKHOLDERS
LOUIS A. HOCH. Age 40. Mr. Hoch has been our President, Chief Operating
Officer, and Director since July 1998. Mr. Hoch has more than fifteen years of
management experience in large systems development; earning him national
recognition as an expert in call centers, voice-systems and computer telephony
integration. Mr. Hoch has held various key management positions with U.S. Long
Distance, Billing Concepts, Inc. and Anderson Consulting. Mr. Hoch holds a BBA
in Computer Information Systems and an MBA in International Business Management,
both from Our Lady of the Lake University Business School. In 2000 and 2001, he
served as a board member of Office e-procure, which provides branded office
supply e-commerce sites for businesses.
CLASS III DIRECTOR WITH A THREE-YEAR TERM ENDING WITH THE 2008 ANNUAL MEETING OF
STOCKHOLDERS
PETER G. KIRBY, PH.D. SPHR CM. Age 66. Mr. Kirby has been our Director since
June 2001. Mr. Kirby distinguished himself in professional and community
activities in a career that spans thirty-five years. He is an accomplished
public speaker and has provided consulting services to Fortune 100 firms. Mr.
Kirby has published numerous works in the fields of management, decision-making
and human resources. He has been a director on many university advisory councils
and boards and has served on many charitable committees and foundations. Mr.
Kirby is currently a tenured professor of Management at Our Lady of the Lake
University in San Antonio, Texas, where he has taught for the past sixteen
years.
CLASS I DIRECTOR WITH A THREE-YEAR TERM ENDING WITH THE 2007 ANNUAL MEETING OF
STOCKHOLDERS
MICHAEL R. LONG. Age 61. Mr. Long has been our Chief Executive Officer,
Chairman of the Board and Director since July 1998. In addition, Mr. Long has
been our Chief Financial Officer since September 2003. Mr. Long has more than
thirty years of senior executive management and systems development experience
in six publicly traded companies, as well as operating a systems consulting
business. Before assuming the top position at Payment Data Systems, Mr. Long was
Vice President of Information Technology at Billing Concepts, Inc., the largest
third party billing clearinghouse for the telecommunications industry. Mr.
Long's career experience also includes financial services industry business
development for Anderson Consulting and several executive positions in publicly
traded telecommunications and financial services companies.
RECOMMENDATION OF BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the nominee for election to the
Board of Directors.
COMPENSATION OF DIRECTORS
Mr. Long and Mr. Hoch receive no compensation for serving on our Board of
Directors due to their status as officers.
In 2005, we did not pay any cash compensation to our independent Director for
his services on our Board of Directors. However, on March 28, 2005, we awarded
300,000 shares of restricted stock vesting one-third annually over three years
on the grant date and on December 29, 2005, we granted options to purchase
325,000 shares of our Common Stock with immediate vesting at an exercise price
of $0.082 per share to our independent director, Peter G. Kirby, as compensation
for his service as a Director.
4
PROCEEDINGS WITH DIRECTORS, OFFICERS, AND AFFILIATES
Beginning in December 2000, we pledged as loan guarantees certain funds held as
money market funds and certificates of deposit to collateralize margin loans for
the following executive officers: (1) Michael R. Long, then Chairman of the
Board of Directors and Chief Executive Officer; (2) Louis A. Hoch, then
President and Chief Operating Officer; (3) Marshall N. Millard, then Secretary,
Senior Vice President, and General Counsel; and (4) David S. Jones, then
Executive Vice President. Mr. Millard and Mr. Jones are no longer our employees.
The margin loans were obtained in March 1999 from institutional lenders and were
secured by shares of our common stock owned by these officers. The pledged funds
were held in our name in accounts with the lenders that held the margin loans of
the officers. Our purpose in collateralizing the margin loans was to prevent the
sale of our common stock owned by these officers while we were pursuing efforts
to raise additional capital through private equity placements. The sale of that
common stock could have hindered our ability to raise capital in such a manner
and compromised our continuing efforts to secure additional financing. The
highest total amount of funds pledged for the margin loans guaranteed by us was
approximately $2.0 million. The total balance of the margin loans guaranteed by
us was approximately $1.3 million at December 31, 2002. At the time the funds
were pledged, we believed we would have access to them because (a) our stock
price was substantial and the stock pledged by the officers, if liquidated,
would produce funds in excess of the loans payable, and (b) with respect to one
of the institutional lenders (who was also assisting us as a financial advisor
at the time), even if the stock price fell, we had received assurances from that
institutional lender that the pledged funds would be made available as needed.
During the fourth quarter of 2002, we requested partial release of the funds for
operating purposes, which request was denied by an institutional lender. At that
time, our stock price had fallen as well, and it became clear that both
institutional lenders would not release the pledged funds. In light of these
circumstances, we recognized a loss on the guarantees of $1,278,138 in the
fourth quarter of 2002 and recorded a corresponding payable under related party
guarantees on our balance sheet at December 31, 2002 because it became probable
at that point that we would be unable to recover our pledged funds. During the
quarter ended March 31, 2003, the lenders applied the pledged funds to satisfy
the outstanding balances of the loans. The total balance of the margin loans
guaranteed by us was zero at December 31, 2005. We may institute litigation or
arbitration in collection of the outstanding repayment obligations of Mr. Long,
Mr. Hoch, Mr. Millard, and Mr. Jones, which currently total $1,278,138.
Presently, we have refrained from initiating action to recover these funds from
Mr. Long, Mr. Hoch, and Mr. Millard because they may have offsetting claims that
total $1,445,500 collectively by virtue of the change of control clause in their
respective employment agreements based on our preliminary analysis. We
understand that these individuals may assert such claims based on our sale of
substantially all of our assets to Harbor Payments, Inc. on July 25, 2003. While
Mr. Long and Mr. Hoch agreed, in connection with such sale, to forego any
affirmative recovery of their compensation by virtue of a change of control,
they have maintained the right to claim an offset of that amount in the event we
seek recovery of the loan balances. We have not initiated any formal settlement
negotiations with these individuals because they have been under an extended
employment contract with us or have not been amenable to such an action. We have
not pursued the outstanding repayment obligation of Mr. Jones because we do not
consider a recovery attempt to be cost beneficial. In order to attempt a
recovery from Mr. Jones, we estimate that we would incur a minimum of $20,000 in
estimated legal costs with no reasonable assurance of success in recovering his
outstanding obligation of approximately $38,000. Because of the limited amount
of the obligation, we also anticipate difficulty in retaining counsel on a
contingency basis to pursue collection of this obligation. The ultimate outcome
of this matter cannot presently be determined.
On July 25, 2003, certain of our stockholders (those stockholders being Mike
Procacci, Jr., Mark and Stefanie McMahon, Anthony and Lois Tedeschi, Donna and
James Knoll, John E. Hamilton, III, William T. Hagan, Samuel A. Fruscione, Dana
Fruscione-Penzone, Gia Fruscione, Alicia Fruscione, Joseph Fruscione, Robert
Evans, John Arangio, Gary and JoAnne Gardner, Lee and Margaret Getson, G. Harry
Bonham, Jr., Gary Brewer, Bob Lastowski, Robert Filipe, Mitchell D. Hovendick,
Dr. John Diephold, Joseph Maressa, Jr., and Charles Brennan) commenced legal
action against us, Ernst & Young, LLP, and certain of our current and former
directors (including the executive officers named above) in the District Court
of the 45th Judicial District, Bexar County, Texas. With respect to us and the
current and former directors named in the suit, the plaintiffs alleged that we,
acting through such directors, misstated in our 2000 and 2001 Form 10-Ks our
ability to use for operational purposes the funds pledged as security for margin
loans of certain of our executive officers, as discussed above. The plaintiffs
alleged and sought resulting economic and exemplary damages, rescission,
interest, attorneys' fees and court costs.
5
On November 9, 2005, we entered into a settlement agreement with all the
plaintiffs named in the suit. Under the terms of the settlement, the plaintiffs
dismissed the pending litigation, with prejudice, and released all claims
against us, our current and former officers and directors, and our former
auditors, Ernst & Young, LLP. Additionally, we reset the exercise price of
1,912,400 warrants to purchase our common stock held by the plaintiffs from
$1.80 per share to a new exercise price of $0.20 per share. We also extended the
expiration date of the warrants from November 27, 2006, to November 27, 2007. We
recorded a non-cash expense of $151,309 in the third quarter of 2005 as a result
of the modification of the warrant terms. We are not paying any other economic
consideration to fund this settlement. On balance, we believe the terms of this
settlement to be fair and equitable to our shareholders and us. We will no
longer incur significant expenses associated with defense of the litigation and
the uncertainly inherent in any litigation is now resolved at a reasonable cost.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
THE AUDIT COMMITTEE
The Audit Committee, established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended, is currently comprised of our only
independent director, Mr. Kirby, and it operates under a written charter adopted
by our Board of Directors. Mr. Kirby meets the independence standards for
independent directors under the rules of the Nasdaq Stock Market published in
the Nasdaq Marketplace Rules. The composition of the Audit Committee, the
attributes of its members and the responsibilities of the Committee, as
reflected in its charter, are intended to be in accordance with applicable
requirements for corporate audit committees. The Committee reviews and assesses
the adequacy of its charter on an annual basis.
As set forth in more detail in its charter, the Audit Committee's purpose is to
assist the Board of Directors in its general oversight of our financial
reporting, internal control and audit functions. Management is responsible for
the preparation, presentation and integrity of our financial statements,
accounting and financial reporting principles and internal controls and
procedures designed to ensure compliance with accounting standards, applicable
laws and regulations. Akin, Doherty, Klein & Feuge, P.C., our independent
auditing firm, is responsible for performing an independent audit of the
consolidated financial statements in accordance with standards of the Public
Company Accounting Oversight Board.
The Audit Committee members are not professional accountants or auditors, and
their functions are not intended to duplicate or to certify the activities of
management and the independent auditor, nor can the Audit Committee certify that
the independent auditor is "independent" under applicable rules. The Audit
Committee serves a board-level oversight role, in which it provides advice,
counsel and direction to management and the auditors on the basis of the
information it receives, discussions with management and the auditors and the
experience of the Audit Committee's members in business, financial and
accounting matters.
Among other matters, the Audit Committee monitors the activities and performance
of our internal and external auditors, including the audit scope, external audit
fees, auditor independence matters and the extent to which the independent
auditor may be retained to perform non-audit services. The Audit Committee and
the Board of Directors have ultimate authority and responsibility to select,
evaluate and, when appropriate, replace our independent auditor. The Audit
Committee also reviews the results of the internal and external audit work with
regard to the adequacy and appropriateness of our financial, accounting and
internal controls. Management and independent auditor presentations to and
discussions with the Audit Committee also cover various topics and events that
may have significant financial impact or are the subject of discussions between
management and the independent auditor. In addition, the Audit Committee
generally oversees our internal compliance programs.
In overseeing the preparation of our financial statements, the Audit Committee
has had access to our management to review and discuss all financial statements
prior to their issuance and to discuss significant accounting issues. Management
advised the Audit Committee that all financial statements were prepared in
accordance with U.S. generally accepted accounting principles. The Audit
Committee has met with our independent auditors with regard to the audited
financial statements of the Company for the year ended December 31, 2005. For
the year ended December 31, 2005, the Audit Committee did receive the
independent auditor's letter and written disclosures required by the
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees).
6
For the year ended December 31, 2005, the only member of the Audit Committee was
Mr. Kirby. The Audit Committee met four times in relation to the year ended
December 31, 2005. We do not have an audit committee financial expert serving on
our Audit Committee because we have been unable to replace the independent
director serving as the audit committee financial expert after his resignation
during 2003. We are still seeking an independent director to serve as the audit
committee financial expert.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act or the Securities Exchange Act of 1934, as
amended, that might incorporate future filings, including this Proxy Statement,
in whole or in part, this Compensation Committee Report on Executive
Compensation shall not be incorporated by reference into any such filings.
GENERAL. Our Board of Directors has established a Compensation Committee with
authority to set all forms of compensation of our executive officers, including
the grant of stock options and restricted shares. Mr. Kirby is the sole member
of the Compensation Committee.
COMPENSATION PHILOSOPHY. The Board of Director 's compensation philosophy is to
reward executive officers for the achievement of short and long-term corporate
and individual performance, as measured by the attainment of specific goals for
the creation of long-term shareholder value. Also, to ensure that we are
strategically and competitively positioned for the future, the Compensation
Committee has the discretion to attribute significant weight to other factors in
determining executive compensation, such as maintaining competitiveness,
expanding markets, pursuing growth opportunities and achieving other long-range
business and operating objectives. The level of compensation should also allow
us to attract, motivate, and retain talented executive officers that contribute
to our long-term success. The compensation of our Chief Executive Officer and
other executive officers is comprised of cash compensation and long-term
incentive compensation in the form of base salary, restricted stock awards and
stock options.
TOTAL COMPENSATION FOR EXECUTIVES. For 2005, the Company's total compensation
for executive officers consisted of base salary and common stock awards. In
setting 2005 compensation, the Compensation Committee considered the specific
factors discussed below:
Base Salary. In setting the executive officers base salaries, the
Compensation Committee considers the performance of the executive officers'
respective business units, as well as individual performance. Base salaries are
targeted to approximate the average base salaries paid to executives of similar
companies for each position. To ensure that each executive is paid
appropriately, the Compensation Committee considers the executive's level of
responsibility, prior experience, overall knowledge, contribution to business
results, executive pay for similar positions in other companies, and executive
pay within our company.
Stock Plans. In addition to the foregoing, our executive officers may
be compensated through grants of our Common Stock or options to purchase our
Common Stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Long's annual base salary for 2005 was $190,000. He received a restricted
common stock award of 1,102,000 shares granted on March 28, 2005 vesting
one-third annually over three years. He also received a stock option award of
381,833 options granted on December 29, 2005 vesting immediately.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended December 31, 2005, Mr. Kirby was the only member of the
Compensation Committee. To carry out its responsibilities, the Compensation
Committee met two times during 2005.
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THE NOMINATING COMMITTEE
We consider recommendations for Director candidates from our Directors,
officers, employees, shareholders, customers, and vendors. The Board of
Directors selects the Director candidates slated for election. We do not have a
Nominating Committee in light of resource allocations made by the Board of
Directors in its business judgment.
THE ENTIRE BOARD
During 2005, the entire Board of Directors of the Company met five times for
regular and Annual meetings. During this period, each Director attended all
meetings of the Board of Directors and any committee on which he served. In all
other instances in 2005, the Board of Directors acted by unanimous written
consent.
PROPOSAL 2
RATIFICATION OF AKIN, DOHERTY, KLEIN & FEUGE, P.C. AS INDEPENDENT AUDITORS
The Board of Directors, upon recommendation of its Audit Committee, appointed
Akin, Doherty, Klein & Feuge, P.C. as independent auditors to examine our
consolidated financial statements for the fiscal year ending December 31, 2006
and to render other professional services as required.
We are submitting the appointment of Akin, Doherty, Klein & Feuge, P.C. to
stockholders to obtain your ratification. Representatives of Akin, Doherty,
Klein & Feuge, P.C. will be present at the Annual Meeting, will have the
opportunity to make a statement if they desire to do so, and are expected to be
available to respond to questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Our Board of Directors believes that ratification of Akin, Doherty, Klein &
Feuge, P.C. as our independent auditors for the fiscal year ended December 31,
2006 is in our best interests and those of our stockholders. Accordingly, the
Board recommends a vote FOR the ratification of Akin, Doherty, Klein & Feuge,
P.C. as our independent auditors for the fiscal year ended December 31, 2006.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under U.S. securities laws, directors, certain executive officers and persons
holding more than 10% of our Common Stock must report their initial ownership of
the Common Stock, and any changes in that ownership, to the Securities and
Exchange Commission. The Securities and Exchange Commission has designated
specific due dates for these reports. Based solely on its review of copies of
the reports filed with the Securities and Exchange Commission and written
representations of its directors and executive officers, the Company believes
all persons subject to reporting timely filed the required reports in 2005,
except that Mr. Hoch filed a Form 4 on March 24, 2005 with respect to a stock
sale occurring on March 21, 2005.
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of all of our directors and executive officers, along with
their respective positions, term of office and period such position(s) was held,
is as follows:
NAME POSITION(S) HELD AGE
Michael R. Long Chief Executive Officer, Chief Financial Officer, 61
Chairman of the Board and Director
Louis A. Hoch President and Chief Operating Officer and Director 40
Larry Morrison Vice President, Business Development 46
Peter G. Kirby Director 66
8
BIOGRAPHIES OF OFFICERS AND DIRECTORS
MICHAEL R. LONG. See biography of Mr. Long on page 4.
LOUIS A. HOCH. See biography of Mr. Hoch on page 4.
LARRY MORRISON. Mr. Morrison has been our Vice President, Business Development
since July 2003. Mr. Morrison has over 25 years of experience in all aspects of
sales and sales management. Before joining Payment Data Systems, Inc. to oversee
all sales and marketing functions, Mr. Morrison served as a major accounts
executive for a tier one telecommunications provider and vice president of sales
and operations for a major two-way communications firm. His background also
includes management and implementation of large government communication systems
installations both domestic and abroad.
PETER G. KIRBY. See biography of Mr. Kirby on page 4.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during each of the years
ended December 31, 2005, 2004 and 2003 to our Chief Executive Officer and each
other executive officer that earned over $100,000 during the year ended December
31, 2005.
ANNUAL COMPENSATION (1) LONG-TERM COMPENSATION
--------------------------- -----------------------------------------------------------
AWARDS
---------------------------------------
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS RESTRICTED SECURITIES UNDERLYING ALL OTHER
STOCK AWARDS (2) OPTIONS (#)(3) COMPENSATION (4)
Michael R. Long 2005 $190,000 - $331,590 381,833 $11,529
Chairman, Chief Executive Officer 2004 $220,583 - - - $11,529
and Chief Financial Officer 2003 $190,000 - - 400,000 $11,529
Louis A. Hoch 2005 $175,000 - $370,676 586,147 $ 2,115
President and Chief Operating 2004 $193,103 $15,000 - - $ 900
Officer 2003 $175,000 - - 425,000 $ 900
Larry Morrison 2005 $100,000 - $ 37,803 26,795 $ 846
Vice President, Business 2004 $116,096 - - - $ 360
Development 2003 $ 46,154 - - 200,000 $ 180
(1) In 2004, salary compensation for each of the named executive officers
includes the fair market value of common stock received in lieu of base salary
as follows: Mr. Long, $96,352 in lieu of $65,769; Mr. Hoch, $65,219 in lieu of
$47,115; and Mr. Morrison, $50,712 in lieu of $34,615.
(2) As of December 31, 2005, the named executive officers held an aggregate
of 5,784,614 shares of restricted stock valued at $572,677, including a total of
2,251,950 shares of restricted stock granted on March 28, 2005 that vest
one-third annually on the grant date as follows: Mr. Long, 1,102,000 shares; Mr.
Hoch, 999,950 shares; and Mr. Morrison, 150,000 shares. If any dividends are
declared, they will be paid on the restricted stock held by the named officers.
(3) We did not grant any stock options to any of our named executive
officers during fiscal year 2004.
(4) Reflects premiums paid for term life insurance coverage.
9
OPTION GRANTS
The following table provides information regarding the grant of stock options
during the year ended December 31, 2005 to the named executive officers pursuant
to our Employee Comprehensive Stock Plan.
NUMBER OF SECURITIES % OF TOTAL OPTIONS
NAME UNDERLYING OPTIONS GRANTED GRANTED TO EMPLOYEES IN 2005 EXERCISE PRICE ($/SHARE) EXPIRATION DATE
Michael R. Long 381,833 31% $ 0.082 12/29/15
Louis A. Hoch 586,147 47% $ 0.082 12/29/15
Larry Morrison 26,795 2% $ 0.082 12/29/15
OPTION EXERCISES AND YEAR-END VALUES
The following table provides certain information related to the exercise of
options during the year ended December 31, 2005 by the named executive officers
and the number and value of options held by the named executive officers at
December 31, 2005.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE REALIZED OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
------------------------------ ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Michael R. Long - $ 0 1,680,167 - $ 6,491 -
Louis A. Hoch - $ 0 1,776,147 - $ 9,965 -
Larry Morrison - $ 0 226,795 - $ 1,356 -
(1) Calculated using the year-end per share price of $0.099.
DIRECTORS COMPENSATION
In 2005, we did not pay any cash compensation to our independent directors for
their services on our Board of Directors. However, on March 28, 2005, we awarded
300,000 shares of restricted stock vesting one-third annually over three years
and on December 29, 2005, we granted options to purchase 325,000 shares of our
Common Stock with a one-year vesting period at an exercise price of $0.082 per
share to our independent director, Peter G. Kirby, as compensation for his
service as a Director.
EMPLOYMENT CONTRACTS
On July 25, 2004, our employment agreements with Michael Long, Chief Executive
Officer and Chief Financial Officer, and Louis Hoch, President and Chief
Operating Officer, expired. We intend to enter into new employment agreements
with both of these individuals and are currently negotiating the terms of such
agreements.
10
ANNUAL MEETING ADVANCE NOTICE REQUIREMENTS
A stockholder may recommend a nominee to become a Director by giving Michael R.
Long, our Chief Executive Officer, a written notice mailed to 12500 San Pedro,
Suite 120, San Antonio, Texas, 78216 and setting forth certain information,
including: (1) the name, age, and business and residence addresses of the person
intended to be nominated, (2) a representation that the nominating stockholder
is in fact a holder of record of our Common Stock entitled to vote at the
meeting and that he or she intends to be present at the meeting to nominate the
person specified, (3) a description of all arrangements between the nominating
stockholder, the nominee and other persons concerning the nomination, (4) any
other information about the nominee that must be disclosed in proxy
solicitations under Rule 14(a) of the Securities Exchange Act of 1934, and (5)
the nominee's written consent to serve, if elected. Such nominations must be
made pursuant to the same advance notice requirements for stockholder proposals.
Our 2007 Annual Meeting of Stockholders is currently scheduled for June 2007.
Copies of our Bylaws are available upon written request made to Michael R. Long,
our Chief Executive Officer, at 12500 San Pedro, Suite 120, San Antonio, Texas,
78216. The requirements described above do not supersede the requirements or
conditions established by the Securities and Exchange Commission for stockholder
proposals to be included in our proxy materials for a meeting of stockholders.
The Chairman of the meeting may refuse to bring before a meeting any business
not brought in compliance with applicable law and our Bylaws.
INDEPENDENT PUBLIC ACCOUNTANTS
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
FEES PAID TO THE INDEPENDENT ACCOUNTANTS
The aggregate fees billed to us for professional accounting services, including
the audit of our annual consolidated financial statements by our principal
accountant for the fiscal years ended December 31, 2005 and 2004 included in our
Form 10-KSB, are set forth in the table below.
2005 2004
-------- --------
Audit fees $ 41,500 $ 48,025
Tax fees 1,500 5,125
-------- --------
Total fees $ 43,000 $ 53,150
======== ========
For purposes of the preceding table, the professional fees are classified as
follows:
- Audit Fees-These are fees for professional services billed for the audit of
the consolidated financial statements included in our Form 10-KSB filings, the
review of consolidated financial statements included in our Form 10-QSB filings,
comfort letters, consents and assistance with and review of documents filed with
the SEC. The fees in the 2005 column include amounts billed to us through the
date of this Proxy Statement for the year ended December 31, 2005 and the fees
in the 2004 column include amounts billed to us through the date of this Proxy
Statement for the years ended December 31, 2004.
- Tax Fees-These are fees for professional services rendered by our independent
accountant for tax compliance, tax planning and tax advice. Tax compliance
involves preparation of original and amended tax returns. Tax planning and tax
advice encompass a diverse range of subjects, including assistance with tax
audits and appeals, tax advice related to dispositions, and requests for rulings
or technical advice from taxing authorities.
All of the services performed by our independent accountant described above were
approved in advance by our Audit Committee.
11
FINANCIAL STATEMENTS
The Company's audited financial statements for the fiscal year ended December
31, 2005 and Management's Discussion and Analysis of Financial Condition and
Results of Operations are incorporated herein by reference to the Company's 2005
Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission, which is being mailed to stockholders with this Proxy Statement.
PROPOSALS BY STOCKHOLDERS
In accordance with rules established by the Securities Exchange Commission, any
stockholder proposal submitted pursuant to Rule 14a-8 intended for inclusion in
the proxy statement and form of proxy for next year's Annual Meeting must be
received by us no later than December 31, 2005. Proposals should be submitted to
Michael R. Long, our Chief Executive Officer, at 12500 San Pedro, Suite 120, San
Antonio, Texas 78216. To be included in the proxy statement, the proposal must
comply with the requirements as to form and substance established by the
Securities Exchange Commission and must be a proper subject for stockholder
action under Nevada law. No shareholder proposals will be considered for the
2007 Annual Meeting after December 31, 2006.
OTHER MATTERS
As of the date of this Proxy Statement, our Board of Directors does not know of
any business that will be presented for consideration at the Annual Meeting
other than that specified herein and in the Notice of Annual Meeting of
Stockholders. If other matters are presented, it is the intention of the persons
designated as proxies to vote in accordance with their judgment on such matters.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements including statements
containing the words "believes," "anticipates," "expects," "intends" and words
of similar import. These statements involve known and unknown risks and
uncertainties that may cause our actual results or outcomes to be materially
different from those anticipated and discussed herein. Important factors that we
believe might cause such differences include: (1) concentration of our assets
into one industry segment; (2) the nature of our business (as defined herein);
(3) the impact of changing economic conditions; (4) the actions of competitors,
including pricing and new product introductions; and (5) those specific risks
that are discussed in the cautionary statements accompanying the forward-looking
statements in this Proxy Statement and in the Risk Factors detailed in our
previous filings with the Securities and Exchange Commission. In assessing
forward-looking statements contained herein, stockholders are urged to read
carefully all cautionary statements contained in this Proxy Statement and in
those other filings with the Securities and Exchange Commission.
12
APPENDIX A
PAYMENT DATA SYSTEMS, INC.
12500 SAN PEDRO, SUITE 120
SAN ANTONIO, TEXAS 78216
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael R. Long, Louis A. Hoch, or any one or
more of them, as proxies, each with the power to appoint his or her substitute,
and hereby authorizes each of them to represent and to vote, as designated
below, all the shares of common stock of Payment Data Systems, Inc. (the
"Company") held of record by the undersigned on April 24, 2006 at the Annual
Meeting of Stockholders to be held on June 22, 2006, or any adjournments
thereof.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
ANNUAL MEETING OF STOCKHOLDERS OF
PAYMENT DATA SYSTEMS, INC.
JUNE 22, 2006
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
\/ Please detach along perforated line and mail in the envelope provided. \/
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTOR AND
"FOR" PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE [x]
1. Election of Director:
NOMINEE:
[ ] FOR NOMINEE Louis A. Hoch
[ ] WITHHOLD AUTHORITY
FOR NOMINEE
2. Proposal to ratify the appointment of Akin, Doherty, Klein & Feuge,
P.C., certified public accountants, as the independent auditors of the Company
for the year ending December 31, 2006.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE AS TO A PROPOSAL,
THIS PROXY WILL BE VOTED FOR SUCH PROPOSAL.
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that changes
to the registered name(s) on the account may not be submitted via this method.
[ ]
Signature of Stockholder Date: Signature of Stockholder Date:
-------------------------- ----- -------------------------- -----
NOTE: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
the signer is a corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.